Tom Scott Law Indy

Bankruptcy Attorneys in Indianapolis Since 1980

Chapter 13

Cars and Other Collateral: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 3

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In the previous installment of our series “Basics of Bankruptcy,” we discussed some of the reasons to file a Chapter 13 bankruptcy rather than Chapter 7 as they relate to mortgages.
This post looks at reasons why Chapter 13 might be the better choice for personal bankruptcy than Chapter 7 in relationship to cars and other personal collateral.

Cramming a Car

Summary: Provisions exist that can exclude any vehicle acquired for personal use or any other personal property purchased within 910 days of filing.
The ability to cram a recently purchased vehicle (or other personal property) has been limited by the BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) amendments (11 U.S.C. §§ 526–528 (2006)1), referred to as the 910-Rule). The unnumbered (hanging) paragraph at the end of §1325(a)1 excludes any vehicle acquired for personal use or any other personal property purchased within 910 days of filing from the application of §506.
In short, this means that if the personal automobile was purchased within 910 days of the filing date, the claim may not be bifurcated and the entire payoff balance shall be the secured value. However, because Section 1325(a)(5) gives debtors three options for confirmation of secured claims (creditor’s acceptance of the plan, satisfaction of enumerated terms, or surrender of the collateral), arguably, if the plan provides for the payment of only the fair market value for a 910 claim, and the creditor fails to object, upon confirmation the creditor is deemed to have accepted the plan and is bound by the terms of the plan.
In the past when cramming a car in a plan, it was advisable to include language that required that the title be released upon payment of the value offer. However, pursuant to the revised §1325(a)(d)(B), a secured creditor may object and the plan can not be confirmed unless the secured claim holder retains their lien until the debt is paid in full or the case is discharged.
However, because paragraph (5) gives three options (acceptance, satisfaction of enumerated terms, or surrender), arguably, if the plan specifies that title will be released upon payment of the secured portion of the claim, and the creditor fails to object, upon confirmation the creditor is deemed to have accepted the plan and is bound by the terms of the plan.
If a value agreement cannot be reached at the §341 meeting, the matter will be set over for a hearing before the Court. The Courts have generally favored concrete evidence of the value, but have recently indicated a willingness to look at “book” values, preferring the NADA guide.

Cramming other personal property

Summary: In an attempt to keep personal property, debtors may, within one year of filing, offer the fair market value on virtually any piece of personal property, including furniture, appliances and boats.
Subject to the same hanging paragraph limitation addressed above, debtors may offer the fair market value on virtually any piece of personal property, including furniture, appliances and boats. For any other collateral acquired for the personal use of the debtor, however, the time limitation is lowered from 910 days to one year.

  • If no objections are received, the trustee will pay the value offer with interest, and will treat the remaining balance of the claim as unsecured.
  • Interest should be offered as §1325(a)(5) requires that the creditor must receive “present value” of the collateral.
  • However, it would seem that if interest were not offered and the creditor failed to object, the value could be paid at a flat rate (no interest).

Use caution when “cramming” the debtor’s personal property in a plan however, as the “Best Efforts” test will have some bearing. That is, if the debtors are attempting to retain collateral that is not “reasonable and necessary” as contemplated by §1325(b), the trustee may raise an objection to the utilization of estate funds to retain an unnecessary item. This objection may be resolved by either a surrender of the collateral in question, or by a modification of the plan that will increase the amount offered to general creditors by the amount of funds necessary to retain the property.
Some items that may merit a trustee’s best efforts objection include additional or luxury cars, a big screen TV, a boat, or a baby grand piano.

Lowering Interest Rates on Cars (and other collateral)

Summary: Plans can be set up to lower interest rates on collateral to the “Till rate,” which is determined by the national prime rate plus a risk factor.
Regardless of whether the collateral is eligible to be crammed or not, the plan may lower the interest rate to the Till rate. In re Till, 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004)2 is still assumed to be the appropriate standard for establishing the interest rate to be offered on secured claims.
Till, using the formula approach, established that the interest rate should be the national prime rate plus a risk factor (between 1 and 3%) depending on the circumstances of the particular debtor. A recent decision out of the Southern District of Illinois by Judge Coachys of the Indianapolis Division, In re Rushing (05-37004), applied Till to both cram downs and 910 vehicles. Other judges have since followed suit.
The last article in this series will take an in-depth look at liquidating tax debt, as well as discuss how to protect co-debtors.

Sources:
(links open in new windows)
1. Cornell University Law School Legal Information Institute
2. Bulk.Resources.org

Mortgages: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 2

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In the previous installment of our “Basics of Bankruptcy” series, we discussed some of the reasons to file a Chapter 13 bankruptcy vs. Chapter 7 based on income and assets.
This post looks at reasons, specifically in relationship to mortgages, why Chapter 13 might be the better personal bankruptcy choice for you (the debtor) than Chapter 7.

Curing a mortgage

Summary: Since a debt secured by the debtor’s home (principal residence) cannot be modified, Chapter 13 can give the debtor time to catch up on (cure) mortgage payments, as it provides the debtor three to five years to accomplish the “cure.”
Mortgage creditors are afforded special protection in Chapter 13; a debt secured by a principal residence of the debtor cannot be modified through the filing of a bankruptcy. See 11 U.S.C. §1322(b)(5)1 and Nobleman v. American Savings Bank, 113 S. Ct. 2106 (1993)2, holding that home mortgages secured only by the debtor’s personal residences cannot be modified to discharge any unsecured portion of the claim. With the few exceptions discussed below, a Chapter 13 is useful for curing mortgage arrears, as it provides the debtor three to five years to accomplish the cure.
In Indiana, a sheriffs’ sale is not final until the gavel falls, and many Chapter 13’s are filed on the eve of the sale to save the family home. When curing a mortgage in a plan, the cure runs through the month that the petition is filed and the current mortgage payments begin the following month. When setting up a mortgage cure in a plan, it is important to estimate the amount of the arrears as closely as you can. Beginning on August 1, 2009, the Chapter 13 trustees have become “residential mortgage conduit trusteeships” meaning that all delinquent residential mortgages will be paid through the Chapter 13 trustee (plus statutory fees).

Cramming a mortgage – cross-collateralization

Summary: “Cram” is a word of art in bankruptcy practice. It literally means reducing a secured debt to the fair market value of the subject collateral. It is most often used with regard to automobiles, but it may also be used for household goods or even mobile homes. When cramming in a plan, the debtor offers the fair market value of the collateral with interest; the balance of the debt is treated as an unsecured claim.
In some limited instances, case law has provided circumstances in which a residential mortgage can be crammed. Mortgage cramming is the popular term for court-ordered loan adjustments on investment properties, in which a court order “crams” down the principal of the mortgage to the fair market value of the property. Mortgage cramming is only available as an option in certain situations, and can’t be used by homeowners though courts can order other adjustments to home mortgages if needed.
First, if the mortgage is cross-collateralized with any other collateral, it loses the protection afforded under the Code. §1322(b)(2) provides that secured claim holders may be modified “other than a claim secured only by a security interest in real property that is the debtor’s principal residence” (emphasis added).
Case law has interpreted that to mean if the real estate is income-producing (rental income), if the mortgage includes the residence and commercial property, or if the mortgage includes the residence and equipment, other acreage or anything other than the personal residence, the mortgage can be “crammed” to the fair market value.

  • If you have a mortgage that you wish to cram, valuation becomes the primary issue, and value agreements become more difficult to orchestrate.
  • If you are attempting a mortgage cram, it would be in your best interests to have a recent appraisal of the property available to the creditor to substantiate your offer.
  • Also, remember that you need to deduct the value of the other pledged collateral, and the other pledged collateral must also be provided for in the plan – either with a payment offer or to surrender.

“Stripping” a wholly unsecured junior mortgage

Summary: Some court decisions have allowed the debtor to strip off a junior mortgage if there is absolutely no equity to support the note.
Additionally, there have been some decisions that allow the debtor to strip off a junior mortgage if there is absolutely no equity to support the note. See Matter of Sanders, 202 B.R. 986 (Bankr. D. Neb. 1996), holding that the “creditor must have a secured claim in both the literal and Code sense to have its rights protected by the anti-modification clause,” and In re Geyer, 203 B.R. 726 (Bankr. S.D. Cal. 1996)4, “where the estate’s interest in property is zero, the claim under §506(a)1 is completely unsecured and thus not entitled to §1322(b)(2) protection.” In determining the amount of equity available to support a mortgage, you may not deduct any exemptions to which the debtor may be entitled. Again, an appraisal is vital in attempting this type of cram as the lien holder may object to this severe treatment.
Our next installment of this series will take a look at how cars and other personal collateral can be protected in a Chapter 13 bankruptcy.

Sources:
(links open in new windows)
1. Cornell University Law School Legal Information Institute
2. United States Bankruptcy Court, Northern District of Ohio
3. United States Bankruptcy Court for District of Nebraska
4. United States Bankruptcy Court, Southern District of California

Income & Assets: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 1

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In this second installment of our series “Basics of Bankruptcy,” we discuss reasons to file a Chapter 13 bankruptcy rather than the less complex Chapter 7 bankruptcy.

WHY FILE CHAPTER 13 ANYWAY?

When considering to file bankruptcy, the first decision that probably should be made is whether you should file either a Chapter 7 or Chapter 13 bankruptcy. There are several reasons why a debtor should (or must) file a Chapter 13 bankruptcy, including (but not necessarily limited to):

  1. Not eligible for a Chapter 7 discharge
  2. Above-Median debtor
  3. Debtor does not want to liquidate assets
  4. Curing a mortgage
  5. Cramming a mortgage
  6. Stripping
  7. Cramming a car
  8. Cramming other personal property
  9. Lowering interest rates on cars (and other collateral)
  10. Liquidating tax debts
  11. Protecting a co-debtor

In this post, we will look at the first three reasons above to choose Chapter 13. The remaining reasons will be covered in parts 2-4 of this series.

Not Eligible for a Chapter 7 Discharge.

Summary: A person cannot file for Chapter 7 bankruptcy within eight year of previously filing for Chapter 7 or Chapter 11, or within six years of filing for Chapter 12 or Chapter 13 protection.

Not Eligible for a Chapter 7 Discharge (opens in new window)
Click for US Code, Title 11, Chapter 7, Subchapter II, Section 727

Pursuant to US Code, Title 11, Chapter 7, Subchapter II, Section 727(a)(8)*, you (the debtor) are not eligible for a Chapter 7 discharge if you were granted a discharge in a Chapter 7 or Chapter 11 bankruptcy in a case that began within eight years before the date of the new bankruptcy filing.
Further, Section 727(a)(9) states that the debtor will not be eligible for a Chapter 7 discharge if the debtor was granted a discharge in a Chapter 12 or Chapter 13 bankruptcy filed within six years of the new filing (unless the plan payments paid 100% of allowable claims or paid 70% of such claims and the plan was proposed in good faith and was the debtor’s best effort).
Thus, an individual who received a discharge in a Chapter 7 bankruptcy six years prior would either have to wait two more years or file a Chapter 13 bankruptcy.

Above-Median Debtor

Summary: The court may dismiss an individual consumer debtor’s case filed under Chapter 7 if the debtor’s household income is greater than the median income for a household of the same size.
Filing Chapter 7 would create abuse.
Pursuant to Section 707(b)*, the court may dismiss an individual consumer debtor’s case filed under Chapter 7 if it finds that the granting of relief would be an abuse of the provisions of Chapter 7.

  • If the debtor’s household income is greater than the median income for a household of the same size, then the court shall presume abuse exists if current monthly income minus the means test standardized expenses leaves at least $182.50/mo (or $10,950.00 for 60 months).
  • If the net result is greater than $109.58/mo ($6,575.00 for 60 months), but less than the $182.50 figure, then there shall be a presumption of abuse if the net figure times sixty is at least 25% of the debtor’s general unsecured debts. In other words, if the debtor has incurred large amounts of debt, then the debtor may actually be more likely to get a discharge in a Chapter 7.
  • The presumption of abuse may only be rebutted by demonstrating special circumstances “such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative” [See Section 707(b)(2)(B)(i)].

Debtor does not want to Liquidate Assets

Summary: Debtor may protect those assets that they do not want to have liquidated by filing for Chapter 13 bankruptcy protection rather than Chapter 7.
Under a Chapter 7 bankruptcy, the duty of the trustee is to “collect and reduce to money, the property of the estate for which the trustee serves” [Section 704(a)*].
If, after utilizing all applicable exemptions for your client, there remains an asset that may be properly liquidated and your client desires to retain such assets, your client may protect those assets by filing for Chapter 13 bankruptcy protection.
As stated in Section 1325(a)(4)*, the court shall confirm a plan if the value of property to be distributed under the plan is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7 of this title.
In our next post, we will discuss mortgage curing, cramming, and stripping, methods employed to help reduce debt.

* Source: Cornell University Law School Legal Information Institute

Basics of Bankruptcy: Introduction to Chapter 7 and Chapter 13

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This series of posts discusses the basics of Chapter 7 and Chapter 13 bankruptcies and why one should be selected over the other.

Why Choose Bankruptcy?

The goal under any chapter of bankruptcy (at least as far as Congress is concerned) is to try and generate funds to distribute to the unsecured creditors and, in exchange for that attempt, the debtor’s debts will be discharged, other than for for several exceptions including, but not limited to:

  • Certain taxes
  • Student loans
  • Domestic support obligations
  • Criminal fines and restitution
  • Personal injury automobile accidents involving drugs or alcohol

The biggest difference between a Chapter 7 and a Chapter 13 is how the funds are collected.

Basics of Chapter 7 Bankruptcy

A Chapter 7 can be thought of as a “liquidation” bankruptcy. The Chapter 7 trustee appointed to the case will value the debtor’s property and determine whether property may be liquidated and funds distributed on a pro rata basis to the unsecured creditors.
Each state allows debtors to keep property necessary for the “fresh start.” The property that may be kept (which is exempt from liquidation) is called an exemption.
The major exemptions in the State of Indiana are as follows:

  1. Retirement (in a qualified retirement account) is fully exempt
  2. Real or personal property constituting the debtor’s primary residence is exempt up to $17,600.00 in equity ($35,200.00 for a married couple)
  3. Personal property valued up to $9,350.00 is exempt ($18,700.00 for a married couple)
  4. Intangible assets up $350.00 are exempt ($700.00 for a married couple).

While the majority of cases are “no asset” cases, the debtors must honestly and fairly list all assets and cooperate with the trustee in liquidation of assets in order to receive a Chapter 7 bankruptcy discharge.
The entire Chapter 7 bankruptcy takes approximately 120 days from start to finish and is a fairly simply way to obtain a fresh start. This article will focus on the Chapter 13 bankruptcy due to its time and complexity.
Our next post will discuss why to file for Chapter 13 bankruptcy vs. Chapter 7, including income levels and personal assets:
Income & Assets: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 1

If my home has a second mortgage, can I file bankruptcy on just one of the mortgages and still keep the house?

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Thanks for submitting your question. You can accomplish different goals if you declare bankruptcy, so you need to consider all of the details of your lenders’ promissory notes and mortgages, along with your complete financial and credit position, to determine your best course of action.
This answer to your question does not consider your specific case, but covers the general issues involved in a situation like this. You may want to consult with a bankruptcy attorney to ensure your case is handled to meet your goals.
When you purchased your home you signed two pieces of paper with each lender – a promissory note and a mortgage.

  • The promissory note is just that — a promise that you will repay the debt.
  • The mortgage is a "lien" (or encumbrance) that provides a means for the lender to get some or all of its money back, if you do not pay on the promissory note.

When you purchased your home, you very likely made an agreement with the lender which says something like, “I agree to pay you each and every month on the promissory note and if I do not pay, then you can foreclose on my home.”
Foreclosure is the legal action of proving to a judge that you did not keep up your promise and asking permission for the court (through the local sheriff) to sell the real estate to the highest bidder at auction and “foreclose” everyone else’s interest in that real estate.
Please keep these concepts in mind as we very briefly skim the surface of bankruptcy.
There are primarily two chapters of bankruptcy that deal with consumer debts, called Chapter 7 and Chapter 13.
An individual only qualifies for a Chapter 7 if his or her income is low enough. With regard to a house with mortgages in Chapter 7, a debtor can usually do one of two things: 1) keep the home; or 2) surrender the home. If a debtor keeps the home and is current on payments, the debtor will usually “reaffirm” the debt by signing a “reaffirmation agreement.”

  • The reaffirmation agreement keeps the debtor on the hook so to speak, and requires that the debtor continue to make all payments in the normal fashion as though the bankruptcy had never occurred.
  • If the debtor does not sign a reaffirmation agreement then the personal requirement to continue to make payments in the “promissory note” will go away, but the lien rights under the mortgage do not go away. In other words:
    • If you do not sign a reaffirmation agreement and stop paying for your home, the lender can never collect any more money from you on the promissory note as that debt has been eliminated by the bankruptcy.
    • However, the lender could still foreclose on the real estate to try and get some of its money back from the sale.

So to answer your question regarding a Chapter 7 – “Presuming that you do not have significant equity in your home, you are current on your mortgages, and your income is low enough to qualify for a Chapter 7 filing, you would be able to keep your home if you would like. The law requires that we list ALL your creditors, including the first and second mortgage lenders, in the bankruptcy (whether you want to reaffirm the debt or surrender the debt).
You would need to continue making payments on both mortgages if you wanted to keep the home.”
Regarding Chapter 13 – almost any individual can file a Chapter 13 bankruptcy (with certain restrictions that your attorney should know under Section 109e). Individuals must file a Chapter 13 if their income is too high, or if they filed a Chapter 7 in the prior eight years (or a Chapter 13 in the prior 6 years).
BUT, some people file a Chapter 13 for other reasons besides the mandatory ones, including, but limited to:

  1. Saving a home that is in foreclosure
  2. Lowering payments on an auto that does not have favorable lending terms
  3. Paying back taxes without concern for future penalties or IRS levy
  4. Protecting assets from being sold in a Chapter 7
  5. Protecting co-debtors from law-suits

But there is another reason why someone MIGHT want to file a Chapter 13, and that is in limited circumstances we might be able to remove a second mortgage.

  • In a situation where the balance owed on the first mortgage is higher than the value of the home, we can try to strip off a second mortgage. The law allows it, and the only reason that I say “try” to strip off the second mortgage is that the lender may think that the value of the home is higher than we do.
  • So, if the payoff on the first mortgage is $150,000.00 and the fair market value of the home is only $100,000.00 then a Chapter 13 will allow us to strip off the second mortgage and treat it like any other unsecured creditor (like a credit card or medical bills).

In a Chapter 13 bankruptcy, the law requires that you remain in Chapter 13 for 36 to 60 months, depending on your income, but when the case is complete you will only have one mortgage on your home – and yes you get to keep the home.
So, with all that being said, while we are available to answer any of your questions via phone or email, we would suggest instead that we meet in person to go over the details of such a complex issue. Feel free to send us an email or contact our office at 317-255-9915 to schedule a free consultation at one of our three convenient locations.

Are there different types of bankruptcy?

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There are several chapters of bankruptcy including Chapter 7, Chapter 9, Chapter 11, Chapter 12, and Chapter 13. The majority of consumer cases are either Chapter 7 or Chapter 13.
A few of our business clients must file Chapter 11 (which is a business reorganization) or Chapter 12 (which is exclusively for farmers). Chapter 9 is for governments, and you may have heard that Detroit, Michigan recently filed for Chapter 9 bankruptcy protection.
Learn more: Chapter 7 vs. Chapter 13

What is the process to file bankruptcy?

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All you need to do is contact our office and set a free consultation with one of our experienced bankruptcy attorneys. Each of our lawyers has focused almost exclusively on the bankruptcy law for at least 15 years, and we feel confident that we will be able to answer your questions and reduce your stress.
If you decide that bankruptcy will help reduce your stress and make your life happier, then we will discuss the fees (which will depend on the complexity of your case) and go over the information that we will need to put together the bankruptcy petition that will be filed with the Federal Bankruptcy Court. We will be with you every step of the way.

How long does the bankruptcy process take?

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In a Chapter 7 case, once the case is filed we will attend a meeting with the court approximately 30-45 days after the case is filed and the debts will be discharged approximately 60 days later. Therefore, we can expect a total period of approximately four (4) months from filing date to discharge date.
In a Chapter 13 bankruptcy, Congress requires that a plan payment continue anywhere from 36-60 months. Once the plan payments are complete, the court discharges debts approximately 60 days later. However, while you are in bankruptcy you will be protected by the stay (which prohibits creditors from collecting any debts).