Florida Bankruptcy Law Blog

Bill Introduced To Permit Chapter 13 Debtors To Modify "Upside Down" Home Mortgages

Democratic congressman introduced this week a bill (H.B. 7307) to change Chapter 13 bankruptcy law to permit homeowners to modify the terms and principal balance of their home mortgages. This change in the law would mean that people whose mortgages are "upside down" can by filing Chapter 13 bankruptcy cram down the principal balance to their home’s current market value. The bill would also permit reduction of some relatively high interest rates. Obama expressed his support of this change in bankruptcy law during the campaign.

Proponents of the bankruptcy law change argue that the cram down provision in Chapter 13 will help solve the real estate mortgage crisis. Bankruptcy courts, bankruptcy attorneys, and Chapter 13 trustees provide an existing structure to modify a large number of problem real estate mortgages. The federal bailout to date has not made a significant impact. Opponents of the law, including the mortgage lending industry, state that permitting borrowers to write off mortgage principal when their home values decline increases the lender’s risk of future mortgage loans, and that the lender will pass on their risk by raising mortgage rates and tightening credit standards.

In my opinion, a compromise might change the law temporarily to help stabilize the housing market, but establish a firm expiration date of the new cram down law in order to minimize the increased risk to the lending industry and possible effect of the availability and cost of future real estate mortgages.

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

Why Home Loans Should Not Be Reaffirmed

I saw a good blog entry written by San Diego attorney Miachael Doan about reaffirmation of home mortgages.Why Home Loans are not Reaffirmed : Bankruptcy Law Network. I have tried over the years to discourage my bankruptcy clients from reaffirming home mortgages. The problem is that some of the prominent mortgage companies, including Chase Home Mortgage for example, send letters to bankruptcy clients telling them to reaffirm. Some clients report that their mortgage company will not send monthly statements or payoff numbers if the borrower does not reaffirm. Mr. Doan's blog entry explains why reaffirmation of home mortgages is legally not required. If you reaffirm your mortgage after bankruptcy and subsequently are unable to make the mortgage payments you will be personally liable under the mortgage note if you signed a reaffirmation agreement. If you refuse to sign a reaffirmation agreement Chapter 7 bankruptcy eliminates personal liability in the event of future foreclosure.

When Is Chapter 13 Better Than Chapter 7 Bankruptcy

The following post is submitted by attorney Kelly Kilpatrick:

It’s a tough position to find yourself in – you’re way over your head in debt and there seems to be no way out, except to resort to declaring bankruptcy. It’s not an easy decision to make, but when you find yourself staring down the barrel of a gun, the choice is out of your hands, and you may want to start with a clean slate by filing under Chapter 7. This kind of bankruptcy allows you to erase all your debts – your assets, if you have any, are sold and the proceeds used to pay off your lenders. But there are certain circumstances under which you may not be allowed to file for bankruptcy using Chapter 7.

 

When your income exceeds a certain level:

If you have a steady income, one that you’ve been earning for at least six months now, and if Uncle Sam’s rules state that you’re making enough to meet the median income for a family your size in your state, then you’re not allowed to wash your hands off your debts. What you can do in such a situation, is file using Chapter 13 where you’re allowed a grace period in which you can set up a plan and pay off your debts according to the plan.

When you have a sizeable disposable income:

Your disposable income, in case you’re wondering what that is, is the amount you have left after your basic expenses are met, and after you’ve paid off your creditors according to the plan devised under a Chapter 13 bankruptcy.

But don’t let these hurdles get you down; contrary to popular belief, Chapter 13 is a better alternative to Chapter 7, and here are the reasons why:

You don’t lose all your property and assets.

You gain more time to pull yourself together, clean up your act, set a budget and get down to paying your debts.

You have the satisfaction of having paid off your debts rather than having them written off.

You learn the value of spending within your means.

There are some debts that still have to be paid even under Chapter 7, like child support, student loans, alimony and taxes.

You don’t leave your co-debtors in the lurch – filing for Chapter 7 means you’re off the hook, but those who signed on the dotted line with you are not, and your creditors are still free to harass them.

A steady income gives you the luxury of being able to budget wisely and even save some money for a rainy day. So if you’re able to repay your debtors without having to file for bankruptcy, do so rather than taking the easy way out and running away from your problems. Remember, a bankruptcy is a blot on your credit record that stay for between 7 and 10 years, and you don’t want that kind of a sword hanging over your head, not when you’ve decided to get your act straight.

By-line:

This post was contributed by Kelly Kilpatrick, who writes on the subject of corrections officer. She invites your feedback at kellykilpatrick24 at gmail dot com

Can Debtor Avoid Judgment Lien Existing Prior To Homestead Purchase?

A judgment lien automatically and immediately attaches to any real property the debtor owns in any county where the creditor records a certified copy of the lien. If a debtor owns investment property where a judgment lien is recorded the lien attaches to that property. If the debtor subsequently moves into the property as his primary residence the debtor cannot thereafter strip the judgment lien from what is now the debtor's homestead. A lien that has attached to property prior to that property becoming the debtor's homestead defeats the homestead exemption. A recent Florida bankruptcy case considered a different situation where a debtor acquired a property in a county where a judgment lien was previously recorded, and the debtor moved into the property at time of purchase.

The bankruptcy court held that the homestead exemption defeated the judgment lien in this case where the property was acquired simultaneous with occupancy. The court held that where the debtor's homestead rights and prior lien attach simultaneously, as where purchase and occupancy are essentially simultaneous, the priority is accorded to the claimant of the homestead right. Under these facts, the court permitted this debtor to avoid the judgment lien on the homestead. See: in Re:Perez Case No. 08-15023.

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

Interesting Question About Homestead Exemption In Bankruptcy

I enjoy getting challenging questions for readers, especially from other attorneys. I write my blog entries for "people" as opposed to attorneys, so I am flattered that any attorney would find my comments interesting. Here’s an interesting email from a Florida attorney:

I also have a fact pattern that I would like your opinion on. Assume that an individual refinanced a homestead property over three years ago and took the cash from the refinance and used it to purchase and renovate another property. He owns the second property as tenants in common with another unrelated individual. Following the completion of the renovation, the individual moves into the second property and makes it his homestead. He then rents out the original property to cover the costs of the mortgage.

Three years have now passed. He is no longer able to make the adjustable rate payments on the original property that is now rented. He also has other credit card debt that he would like to discharge and he is considering filing for Chapter 13. He would like to discharge the credit card debt as well as to surrender the original property (now $100,000 underwater) to the lender in the 13. He is concerned about protecting the equity in his homestead (approximately $50,000) from creditors in the 13.

Based upon my knowledge (and what I have learned from your analysis in the blog), I would assume that the trustee or the judge would need to find that he intended to file at the time of the transfer and that he knew the asset would not be exempt in the bankruptcy. If the potential debtor had no intention of filing and the asset was exempt at the time of the transfer (a homestead to homestead transfer), the equity would be safe from attack.

This is my opinion for what its worth: If the person sold the first house and put the $50,000 proceeds in a bank account while he searched for a new homestead the money would remain exempt homestead property until the new house was purchased. That’s not what happened. When the person purchased the new house as tenants in common I do not think the new house was protected homestead just because the person may have intended to occupy the house at some point. I think the person’s tenant in common (50%) interest in the new house is protected once he moves in and makes the new home his primary residence.

I do not think a bankruptcy court would deprive the debtor of a homestead exemption in the new home. The bankruptcy petition will have been filed over three years after the debtor moved into his new homestead. He purchased the property over three years ago (the purchase date is not specified in the question) The trustee would have to prove a fraudulent conveyance under Florida’s fraudulent conveyance statutes as opposed to the applicable sections of Bankruptcy Code. because the property became homestead and was purchased over two years before the filing. I do not see a strong case of the debtor’s intent to defraud creditors. Florida law is supposed to apply homestead exemptions liberally for the benefit of the debtor’s family. Also, I do not think there is such thing as a "fraudulent move" so I think the transfer date, for fraudulent conveyance purposes, would date back to the time of purchase of the second property as opposed to the time of occupancy. All things considered, this fact situation should withstand a challenge to the debtor’s homestead exemption.

 

 

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

Make Sure Your The Value Of Your Automobile On Your Bankruptcy Petition Reflects The Depressed Used Car Market

Bankruptcy trustees have in the past determined the value of a debtor’s car by using the average of the wholesale and retail value in the NADA car book (the yellow book). In the past few months car values have plummeted because of the credit problems in the economy and the overall recession. The NADA book has not kept pace with the decline in car values. This week I discovered that some bankruptcy trustees in our division are encouraging debtors to get trade-in appraisals from national car companies such as Carmax. The Trustees are accepting these appraisals in lieu of the NADA values.

For example, one of my clients filed a bankruptcy petition on which he valued a used car at $3,000. There was no lien on the car. The car had, therefore, $2,000 of non-exempt equity. At the creditors meeting the Trustee encouraged the debtor to get a current appraisal. The next day the debtor obtained from Carmax an appraisal of $500 for the same car. Bankruptcy debtors should get market appraisals for their cars before filling out bankruptcy petitions. Your bankruptcy attorney is not a car valuation expert, and he is unlikely to change your valuation of your vehicle. The market for used cars is almost as depressed as the real estate market. Debtors should insist that their vehicle equity is based on current market values rather than slow-changing valuations in used car price books.

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

Is There A "Hardship Exemption" Under Florida Law?

Florida law has many laws protecting the debtor’s ability to provide for his family. Creditors cannot take a family homestead, and creditors cannot garnish the wages of a debtor who supports a spouse or children. A debtor may own a car to get to work provided the car is worth less than $1,000, and there is no prohibition about debtors using cars owned by their spouses. Other than the generous exemptions of Florida’s asset protection law there are no laws which exempt assets necessary for the debtor to maintain his current lifestyle or his job. Most debtors who are unable to support themselves or their families as a result of a creditor’s successful collection effort are eligible to file bankruptcy and discharge all their debts. After bankruptcy, a creditor cannot attack the bankruptcy debtor’s future wages or any assets the debtor acquires in the future.

I have been asked several times over the past years if debtors can assert a "distress" defense to creditors’ collection tactics. Most often, people ask whether they can reverse wage garnishment or car attachment if, as a result of the collection, the debtor suffers severe financial difficulty. Last week a caller asked if a judge would dissolve a wage garnishment because without all of his income he would be unable to pay his home mortgage. Another person asked if a court would order a judgment creditor to return an automobile the creditor took to satisfy a judgment because the debtor needed the car to work. The general answer is "no." There are no hardship defenses to collection.

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

Interesting Homestead Issue In Bankruptcy Court

While waiting my turn in a bankruptcy courtroom I heard a debtor’s attorney and a bankruptcy trustee argue an interesting homestead case. The debtor purchased a single family townhouse as his principal residence. After the moved in he created a separate living quarters for his mother-in-law by erecting drywall partitions and building a small kitchen area for the mother-in-law. He transformed the house into two separate living units. The debtor claimed the entire property as his homestead in his Chapter 7 bankruptcy. The Trustee argued that the homestead exemption did not apply to that portion of the property occupied by the debtor’s mother-in-law and that a proportionate amount of property value was non-exempt and could be taken by the Trustee. The Trustee said that only the debtor’s portion qualified as homestead because it was the only area occupied by the debtor and his family.

The bankruptcy judge denied the Trustee’s objection to homestead protection. The judge noted that the property had only one tax id number and legal description, and zoning prohibited subdividing the property into a separate residence for the mother-in-law. The judge also said that the debtor had intended the property as a family home and had subdivided the unit physically to afford privacy to his mother in law. The judge said the result would be different if a person physically subdivided the interior of a property to take in an unrelated tenant who paid rent.

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

Is Motor Home Exempt Homestead In Chapter 7?

An asset protection client described the following homestead dilemma. The client lived in a mobile home on a lot he and his family rented in a trailer home park. The mobile home had a motor and was drive able, but the family had attached the home to utilities service on the lot and had not driven the home off the lot for several years. The family wanted to travel to Minnesota and live there temporarily in the motor home during a job assignment. The client assured me that the family would return to Florida as soon as he completed the temporary job assignment. He asked whether the mobile home would be exempt homestead property if he filed for bankruptcy soon after returning to Florida and living in the mobile home on the same rented lot.

There are several issues raised by this fact situation. As long as the client always intends to return to Florida I do not think he interrupts Florida residency for bankruptcy purposes by his temporary situation in another state. The more important issue is whether the mobile home is homestead property. Courts have protected all sorts of property under a homestead umbrella including cooperative apartments, mobile homes, and houseboats. Homestead law is liberally applied to protect the debtor’s family.

The motor home is closest in kind to a houseboat. Both the houseboat and motor home are motorized and capable of self-movement. Courts have denied homestead protections of houseboats which had a functioning motor and were used, or capable of use, as a sailing vessel. Houseboats permanently attached to a dock have been afforded homestead protection in Florida. When this client’s mobile home was permanently anchored to the rental lot it may have been protected homestead. I think a bankruptcy court may deny homestead protection after the client drives the motor home back and forth to Minnesota. Homestead protection would not be lost because this family moved away from Florida temporarily, but it may be lost because they drove their home out of state. If the client left the home anchored in Florida, traveled to Minnesota by other means, and rented a place in Minnesota I think he would have a better chance, but far from certainty, of protecting the mobile home if he were to file bankruptcy in Florida upon his return.

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