Chapter 7 Debtor Uses Investment Mortgage Debts To Pass Means Test

There has been a significant increase in bankruptcies by people facing default in one or more investment real estate mortgages. Many of these bankruptcy debtors are trying to protect themselves from deficiency judgments following foreclosures on investment properties. These debtors usually have household income above median income; their high income enabled them to qualify for several investment mortgages make decent incomes. Absent the debt service for one or more investment mortgages, they would have ample income to pay their ordinary consumer expenses. Many of these cases are raising interesting issues for calculating means test analysis.

These mortgage debtors usually plan to stop paying all their investment property mortgages after filing bankruptcy and allowing the banks to foreclose. Relieved of the debt service of the investment mortgages, these debtors have substantial net monthly income. This creates interesting issues when the debtors calculate their means test analysis. Secured debt requirements help debtors pass the means test. The more secured debt service a debtor has the more likely his net monthly income will justify a Chapter 7 bankruptcy. The question is whether these debtors can include in their means test investment mortgage debt service they plan to stop paying as soon as they file.

I have been calculating means tests including all investment secured debt. The means test asks for secured debt the debtor is contractually obligated to pay when he files bankruptcy. There is not exclusion for debt abandoned after filing. Regardless of the debtors intent to surrender the investment properties there is always the chance they he may sell the properties or change his mind after filing. It seems impractical to wait until the debtor makes up his mind about the mortgage debts and properties after filing. For these reasons, I think the debtor can use all existing investment mortgages to pass the means test even if he intends to keep none of the mortgage debt. I recall a bankruptcy case that reaches the same conclusion but I don’t have the citation.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida