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Bankruptcy Attorneys in Indianapolis Since 1980

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Discharging Property Settlements in Divorce Cases: Chapter 13 and Why to File – Overview of Bankruptcy, Part 8

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Series: #13 0f 13
The previous article in this Overview of Bankruptcy series discussed how stripping off wholly unsecured mortgages is a valuable option in a Chapter 13 case, giving a debtor the opportunity to modify a wholly undersecured second or other junior mortgage. In this last article of the series, we will take a brief look at discharging property settlements during a divorce.

Discharging Property Settlements to Spouse, Ex-Spouse, or Children

Pursuant to 11 U.S.C. § 523*(a)(15), a Chapter 7 filing will not discharge any debt to a spouse, former spouse, or child of the debtor (and not child support) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record.
Certainly an argument can be made that a divorce decree that orders the debtor to pay debts of the marriage or attorney fees incurred in a divorce (which are not in the nature of alimony, maintenance or child support) may not be dischargeable in a Chapter 7 filing. The filing, completion and discharge of a Chapter 13 allow the discharge of such debts and protect the debtor from an angry ex-spouse and/or state court judge.
Oftentimes, the ex-spouse has already filed his or her own Chapter 7 in which case, the debtor may be able to file a Chapter 7. A careful review of the divorce decree and the ex-spouses filing (to determine what debts have been listed and discharged) should be taken before making any determination as to the appropriate chapter.
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As we mentioned at the beginning of this series, there are many reasons in which a debtor may find as much or more “stress-relief” in a Chapter 13 reorganization. The attorney must be careful to analyze all the benefits and risks (as required by 11 U.S.C. § 526(a)(3)(B) and rules of professional responsibility) before making such a determination as to which chapter is appropriate. If a Chapter 13 is appropriate, then the attorney needs to carefully determine whether such a plan is feasible and offered in good faith to the court. If all of these factors are met, confirmation of the plan is likely to follow.

* Source: Cornell University Law School Legal Information Institute

Stripping Off Wholly Unsecured Mortgages: Chapter 13 and Why to File – Overview of Bankruptcy, Part 7

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Series: #12 0f 13
Our last post took a brief look at how to protect a co-debtor in a Chapter 13 bankruptcy. This article will discuss stripping off wholly unsecured mortgages.

Stripping: A Tool to Modify Unsecured Mortgages

One of the most valuable options to a debtor in a Chapter 13 case is the opportunity to modify a wholly undersecured second or other junior mortgage pursuant to 11 USC § 1322 – Contents of plan*(b)(2) which allows a Chapter 13 plan to modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or holders of unsecured claims, or leave unaffected the rights of holders of any class of claims (emphasis added).
In conjunction with 11 USC § 506 – Determination of secured status*(a), a second or other junior mortgage can be avoided in its entirety, be given a value of zero and treated as an unsecured claim. See In Re Goda, Case No. 99-80983 (January 10, 2000), In Re Twyman, Case No. 00-4437-FJO-13 (July 31, 2000), In Re Gyger, Case No. 00-14683-AJM-13 (May 2, 2001) In Re Bailey, Case No. 02-01074-AJM-13.
In order to avoid a second or other junior mortgage, it cannot be supported by any equity whatsoever. The decision rendered by the Court in Kelly vs. Countrywide Home Loans, Inc., Case No. 01-14607, Adv. Pro. 01-572 (June 17, 2002), however, reaffirms earlier decisions that completely unsecured mortgages may not be stripped in chapter 7 cases.
In order to attempt to strip the wholly unsecured junior mortgage, the debtor must know the exact date of filing payoff balance on the first mortgage (including any arrears) as well as at least one walk through appraisal from an expert willing to travel to testify as an expert if there lien strip draws an objection. The lien strip language must be included the plan filed with the court (located in Paragraph 11 of the model plan used in the Indianapolis Division) and the attorney needs to file either a separate motion to strip the second mortgage (if you believe the issue deals with valuation only) or an adversary proceeding (if you believe the issue is to determine the validity, priority or extent of a lien).
An adversary proceeding is likely the best course to choose; however, attorneys in the Indianapolis Division have a general belief that they are not arguing the validity of the debt (conceding that it is a valid debt), but are instead only arguing about the fair market value of the real estate which can be determine without an adversary proceeding.
In order to protect the debtor from potential problems with future transfers of the real estate, the attorney should be vigilant in obtaining proper service, should always make sure that an order avoiding a second mortgage contains the full and exact legal description, and that the order is properly recorded. The debt is not officially discharged until the Chapter 13 plan has been discharged.
Accordingly, large notes should be made on the file that the case cannot be converted to Chapter 7; otherwise the second mortgage is no longer avoided.
Next: Discharging Property Settlements in Divorce or Separation

* Source: Cornell University Law School Legal Information Institute

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