The Florida Bankruptcy Law Blog

Chapter 13 Wage Deduction Order For Defense Industry Employees

Chapter 13 plans have a very high completion rate when debtors agree to pay using a wage deduction order. Payment is more likely when deducted from your paycheck as opposed to having to discipline yourself to give the Chapter 13 payment priority over other household expenses. 

Many debtors are reluctant to use payroll deduction because they do not want their employer to know about their bankruptcy. Particularly, I have had several clients who were working for companies with military defense contracts. These bankruptcy debtors had various degrees of security clearance and were afraid they would lose their clearance and job if the employer knew about the bankruptcy. 

Chapter 13 Plan Payments And Increases In Debtor's Income

Most people are optimistic about their future including most of my clients who file Chapter 13 bankruptcy. People believe, or hope, that bankruptcy’s protection will lead them to increase their future salary or business profits. A common question is whether a Chapter 13 debtor’s increased future income will make their Chapter 13 plan payment increase. My clients often tell me that there is no incentive for them to seek better employment or work harder at their business if all the increased income goes to the Chapter 13 trustee.

Creditors and the Trustee’s office have a different view of a debtor’s future success. The law requires Chapter 13 debtors to pay all their disposable income to their Chapter 13 plan and their creditors. As a debtor is able to pay more of his debts he should be required to do so through increased plan payments. Chapter 13 debtors are required to submit their annual tax returns during the term of their plan so that the trustee can monitor their income.

In practice, the Chapter 13 trustee applies a common sense approach to changes in debtor’s income over the course of their repayment plan. Increases in monthly income of $500 or less ($6,000 annualized) typically will not cause an increase in the debtor’s plan payment level. Also, a debtor reporting more substantial increases in income has the opportunity to show evidence of offsetting increases in necessary expenses.

Debtors who honestly report changes in income and expenses will be treated fairly in Chapter 13 bankruptcy.

Chapter 13 Cram Downs Of First Mortgages On Investment Real Estate

Chapter 13 debtors can cram-down mortgages on investment property to the amount of the property’s fair market value. People considering Chapter 13 to remedy upside down investment properties often ask how the cram-down works. Their questions cover issues such as when the cram down is final, does Chapter 13 affect their interest rate, and how does Chapter 13 cram-down deal with arrearage of past due payment on the investment property mortgage.

Here are some general answers to these common cram-down questions. Cram down differs from stripping a second mortgage on a primary residence. A second mortgage strip is final and permanent  at the end of the Chapter 13 plan. An investment mortgage cram down is temporary. Our courts will cram down an investment mortgage for two years during which time the debtor is expected to refinance or pay off the mortgage at the cram down value. The two year time limit can be extended for reasonable grounds such as, for example, time required to complete loan applications or closings.

Mortgage Cram-Downs On Investment Property In Chapter 13 Bankruptcy

Chapter 13 permits debtors to “cram down”, or reduce, the amount of a mortgage on investment property to the property’s current market value. A client recently asked me if the Chapter 13 cram down eliminates past-due mortgage payments and if the “cram down” can include a reduction of the mortgage interest rate in addition to the mortgage balance.

My experience is that a Chapter 13 plan will not eliminate past-due payments but can add the arrearage to the loan balance after cram-down. The Chapter 13 does not reduce mortgage interest rates unless the rate is unreasonably high, such as interest rates typically associated with “hard money” loans from private lenders.

Remember that Chapter 13 cram-downs of investment property does not permanently strip part of a mortgage unless the debtor refinances the property during the course of the Chapter 13 plan. The investment property strip does not continue after Chapter 13 discharge.

Student Loan Discharge In Chapter 13 Bankruptcy Possible In Most Cases

Student loans are almost impossible to discharge in Chapter 7 bankruptcy. The debtor must show actual hardship to discharge a student loans. Courts interpret hardship very strictly. If you are able to work you probably don’t have hardship sufficient to discharge a student loan in Chapter 7.

In Chapter 13 cases student loans are not dischargeable if the creditor objects the discharge. I recently spoke with a well-placed source who indicated that actually student loan creditors usually do not file an objection to discharge in Chapter 13 proceedings. As a practical matter, a Chapter 13 bankruptcy could be used to discharge a large part of student loan debt. Of course, the debtor would be gambling that his case would not be one of the exceptional cases where the student loan creditor does file an objection.

I do not believe most of my clients would file Chapter 13 primarily to discharge student loan debts. However, I think that the probability of student loan discharge should be considered more than it usually is  in pre-bankruptcy planning decisions.

Federal Circuit Court Liberalizes Chapter 13 Stripping Of Unsecured Junior Mortgages

Because of substantial decline in Florida real estate values Chapter 13 bankruptcy is commonly used to strip off second and third mortgages from the debtor’s upside down  primary residence. Junior mortgages are not stripped off the residence at start of the Chapter 13. If that were the case then homeowners could file the Chapter 13 to wipe out the junior mortgage and quit payments soon thereafter. No, debtor’s junior mortgages are stripped at the “back end”, that is, at the end of the Chapter 13.

There is a difference of opinion regarding whether the debtor’s junior mortgages are stripped off upon successful completion of the Chapter 13 plan or upon entry of the Chapter 13 discharge. Why does that make any difference since the discharge is entered when the debtor successfully completes the Chapter 13 plan payments.  It makes a difference because under the 2005 bankruptcy law debtors who file Chapter 7 bankruptcy are not eligible for a discharge in a Chapter 13 filed four years after a Chapter 7. A debtor can still file a  Chapter 13 within the four years and complete a bankruptcy plan, but he cannot get the Chapter 13 discharge.

If a Chapter 13 strip the junior mortgages upon completion of a Chapter 13 plan then debtors can file a Chapter 7 to wipe out credit card debt, and immediately following the Chapter 7 discharge they can file a Chapter 13 to address their junior mortgages on their upside down home. If the mortgage strip requires a Chapter 13 plan completion and a Chapter 13 discharge then Chapter 7 debtors have to wait four years to address their home mortgages.

More Chapter 13 Mortgage Mediation Insights

My last post discussed a bankruptcy seminar which promoted  advantages of court ordered mediation in the context of a Chapter 13 bankruptcy. Here are a some additional interesting points I heard from various seminar speakers (in no particular order)

• Your mortgage servicer makes more money when your mortgage goes into default. Maybe this is one reason why your mortgage services insists that you be at least 90 days late before they will discuss short sales or modifications;

 

• All the legal defenses and counter claims against your mortgage company which your attorney can assert in a state court foreclosure case can also be asserted in Chapter 13 bankruptcy through an objection to the mortgage companies bankruptcy claim. For example, you can object to the mortgage company’s bankruptcy claim on the grounds of a lost promissory note or improper assignment of the mortgage to the mortgage investor;

 

• There are new software programs which permit homeowners to upload financial documents to an online “file cabinet” and provide access to their mortgage lender. The software should help homeowners prove the date that they provided requested documents and help lenders organize and  keep track of documents provided from their borrower.

 

• Our local mortgage mediation program started about one year ago. Chapter 13 debtors who filed bankruptcy before the program started can still request mortgage mediation any time up to their discharge at the end of their Chapter 13 plan. Attorneys may want to contact earlier clients who are involved in ongoing Chapter 13 cases to see if they are interested in mediation of their first mortgage payment.

Chapter 13 Mortgage Mediation Seminar Reports Program Success

Last month I attended a seminar about mortgage modifications in Chapter 13 bankruptcy. There were several points that warrant a series of blog posts.

One speaker compared mortgage mediation in the context of a Chapter 13 bankruptcy with mortgage mediation in a state court foreclosure. He explained why the homeowner usually has a better chance to save his home by filing Chapter 13 and requesting mortgage mediation.

The speaker stated that only four percent of state court mediation results in permanent loan modification whereas about 60% of bankruptcy court mediation produces a permanent loan solution. Many homeowners have two or more mortgages on their home; state court mortgage mediation affects only the mortgage foreclosed. Modification of a first mortgage, for example, does not change junior mortgage payments. Chapter 13 “strips” off unsecured second mortgages. A modified first mortgage together with a stripped second mortgage provides greater financial relief to the homeowner. Also, Chapter 13 bankruptcy reduces credit card payments, and reduction of unsecured debt payments makes it easier for homeowners to afford a modified mortgage.

Even mortgage companies fare better in a bankruptcy. Even though a Chapter 13 plan provides the stripped second mortgage, credit card lender, and other unsecured creditors a much reduced payback, these creditors at least get some money through the bankruptcy. A foreclosure often leads the homeowner to file Chapter 7 bankruptcy in order to wipe out 100% of his debt.

Chapter 13 Mortgage Cram-Down On Multi-Family Building When Debtor Lives In One Of Units

Chapter 13 debtors can cram-down the value of mortgages on properties other than their principal residence. The debtor initiates the process by filing a motion to value the underlying property. If the property is under water the court will modify the mortgage to reduce the loan balance to the current property value.

A Florida bankruptcy court considered a motion to value on a debtor’s duplex. The debtor lived in one unit and rented the other unit. The issue was whether the property was whether the property is ineligible for valuation and mortgage reduction because the debtor lived in one of the units, or whether the property was an investment eligible for valuation.

The court said that when a debtor resides in part of a multi-unit building the cram-down requests must be examined on a case by case basis with particular attention to the loan agreement. The court must focus on the predominant character of the loan transaction to see what the lender bargained for.  This judge noted that the debtor’s mortgage documents do not require the debtor to occupy the property at all, and therefore the predominant character of the transaction is that of a commercial loan. The court said that this commercial loan could be crammed down even though the debtor lives in one unit. In re Zaldivar Case No. 10-34719-BKC-JKO

Debt Ceilings Make Chapter 13 Cram-Downs Difficult To Accomplish

People get excited about the prospect of cramming down mortgages on investment properties in a Chapter 13 bankruptcy. I received at least two calls this past week from people interested in using Chapter 13 to both strip a second mortgage on their homestead and reduce the mortgage balance on at least one rental property.

Sounds like a plan, but unfortunately the plan usually does not work because of Chapter 13 bankruptcy’s unsecured debt ceiling. You cannot file Chapter 13 bankruptcy if your total unsecured debt exceeds about $330,000. Most courts, including the Orlando bankruptcy court, considers as part of the unsecured debt load, the total amount of stripped-off second mortgages on the debtor’s homestead as well as amounts crammed down (“reduced”, “wiped clean”) on the debtor’s investment property mortgages. You also have to watch out for the secured debt ceiling of approximately $1.1 million.

The debtor seeking to cram down or strip mortgages in Chapter 13 has to navigate the two debt ceilings in designing a Chapter 13 plan. The debtor has some control over the valuation of his properties when he proposes a Chapter 13 plan and mortgage reduction. The Chapter 13 debtor sometimes has to adjust his proposed property values so that he does not create too much additional unsecured debt by mortgage reduction, but that he also reduces the secured part of his mortgages to get below the secured debt ceiling.