The Florida Bankruptcy Law Blog

U.S. Senate Defeats Bill That Would Allow Bankruptcy Judges To Modify Mortgages in Chapter 13

The United States Senate defeated the proposal to permit bankruptcy judges to force modification of home mortgages in Chapter 13 bankruptcy proceedings. The bill earned 45 votes, far less than the 60 votes needed to cut off a potential filibuster. The bill had previously been passed in the House by a wide margin.. I have had numerous bankruptcy clients ask me in recent months if bankruptcy, Chapter 7 or Chapter 13, permitted them to make changes in their interest rates or mortgage balances. The answer is now clear. With the defeat of the mortgage modification bill, bankruptcy debtors are left with current Chapter 13 rules which permit judges to treat wholly unsecured second mortgages as unsecured debts to be paid pro-rata with other unsecured creditors. First mortgages must be paid without modification in the Chapter 13 plan.

Chapter 13 Plan Payments Can Change If Family's Financial Situation Changes During Plan

I often have to explain to prospective Chapter 7 bankruptcy debtors that they are ineligible to file Chapter 7 and fail the means test because they make too much money relative to their expenses. The means test forces these debtors to pay back some of their unsecured debts in a Chapter 13 bankruptcy. A common question is what happens if these reluctant Chapter 13 debtors experience a reduction of income in the future in today’s poor economy. Are people bound to a fixed Chapter 13 monthly obligation even if they experience future income loss or unexpected family expenses?

Excessive Credit Card Debt In Unrealistic Plan To Save Business Not Grounds To Deny Chapter 7

A debtor’s business is failing; there is no rational prospect of saving the business in poor economic environment. Nevertheless, the business owners tries to keep the business alive by funding operating deficits with charges on several personal credit cards. The owner runs up a substantial credit card debt, all while his business continues to decline rather than recover. After exhausting all credit card limits the owner files Chapter 7 bankruptcy. The United States Trustee objects to the Chapter 7 bankruptcy because the debtor incurred large credit card debt with no prospect of repayment. The Trustee claims that the Debtor’s "lavish" credit card spending was conducted in "bad faith" and that bankruptcy relief should be denied.

Surrendering Home Does Not Affect Means Test Calculation in Chapter 7

A prospective Chapter 7 bankruptcy debtor has substantial credit card debt and a large mortgage payment on a house that has lost its equity in the housing collapse. By depleting savings the debtor has managed to keep all payments current. He has little saving remaining to continue payments. If he lets the house go back to the bank this debtor has the financial ability to pay his credit cards and work his way out of credit card debt provided he keeps his job and salary level. In order to clear all his debts and prevent a deficiency judgment, this individual files Chapter 7 bankruptcy and indicates his intention to surrender his house after the filing. Including the current house mortgage payment on his schedules, the debtor passes the means test for Chapter 7. The Chapter 13 Trustee objects to the filing on the basis that without the house payment this debtor has enough disposable income to pay back his unsecured creditors in a Chapter 13 plan. The issue presented in this case is whether the debtor properly included in his means test expenses the monthly mortgage payment on a house he intends to let go to foreclosure.

Bankruptcy Court Gives Homestead Protection To Motor Home

Questions come up from time to time about qualification of motor homes as protected homestead property. There have been several court cases which have disqualified motor homes, as well as houseboats, as homestead. However, a recent case in Orlando bankruptcy court held that a debtor could claim his motor home as his protected homestead. The homestead of motorized vehicle depends on the particular facts of each case. Prior cases denied homestead protection to debtor’s whose boats or motor homes were in good repair and were frequently used for transportation as well as a dwelling. In this recent case, the judge found that the debtors showed no intention of using their motor home for transportation, they had not maintained the motor home in drivable condition, the home was situated permanently on a lot, and they had driven the motor home only once for the purpose of moving the home from the dealership to their lot.

Can Debtor Claim Homestead After Moving Into Assisted Living Facility?

Today, I responded to a caller who was considering filing Chapter 7 bankruptcy for his elderly parent. The parent owns a house in Florida free and clear of any mortgage debt. The parent suffers from dementia. The family moved the parent to an assisted living facility outside of Florida. The family rented the parent’s house with a one year lease. The caller states that the parent’s doctors believe the parent’s mental condition is actually improving with medication, and that the parent may be able to once again live independently in the Florida home. The caller wanted to know if the parent’s house would be protected in a Chapter 7 bankruptcy in Florida.

Negotiating Mortgage Modification Can Create Substantial Abuse Issues in Chapter 7 Bankruptcy

Dealing with your mortgage company and filing Chapter 7 bankruptcy are supposed to be independent of one another. Filing Chapter 7 bankruptcy should not effect your relationship with the mortgage lender of an exempt homestead property; but, it can in some cases. Debtors above applicable median income must past a means test to file Chapter 7. The general rule is that your monthly mortgage payments are a deduction from income for means test purposes and help you qualify for Chapter 7. The means test formula implicitly assumes that people should pay their home mortgage first and if after paying the mortgage, and other secured debts, they do not have enough money left to pay unsecured creditors they are more likely to pass the means test. However, if people have not paid their mortgage for several months they could have a problem filing Chapter 7 bankruptcy. Although they remain liable for the debt and can use the debt for means test purposes, the United States Trustees office often challenges these Chapter 7 filings on the basis of "substantial abuse." The U.S. Trustee argues that having not paid their mortgage payments these Chapter 7 debtors have remaining enough cash flow to repay a significant portion of unsecured debt in Chapter 13, and therefore, their Chapter 7 filing should be denied and converted to a bankruptcy under Chapter 13. Of course, substantial abuse is determined on a case by case basis. Many debtors who cannot afford mortgage payments cannot afford to repay credit cards as well, whereas some people may be hoarding cash if they decide to stop paying their mortgage to relinquish an upside down house to their mortgage lenders.

Credit Crunch Affecting Chapter 7 Trustee Property Sales: More Leverage To Debtors

Credit problems are affecting Chapter 7 Trustees as well as Chapter 7 debtors. At a recent creditor meeting a Trustee explained to me that tightening of credit in the general economy is adversely affecting the trustees ability to liquidate non-exempt assets for creditors. Trustees gather debtors’ non-exempt assets and sell the assets either to the debtors or to the general public at auctions. Cars are sold at car auctions and other personal property is liquidated at property sales. The trustee told me that in a normal economy buyers at trustee’s auctions often pay for bankruptcy property with credit cards or bank lines of credit. In today’s economy fewer potential buyers have been attending bankruptcy auctions and bids are lower, largely because of the recession and credit crises.