Florida Bankruptcy Law Blog

Study Suggest Reasons For Failure of Voluntary Mortgage Modifications And Solution Through Chapter 13 Changes

Mortgage lenders' voluntary loan modification programs have given many homeowners hope that their bank will negotiate with them to help save their homes from foreclosure. However, a study sponsored by an organization of bankruptcy attorneys (the "NACBA") found that the voluntary loan modifications are not helping homeowners, and in some cases, are making matters worse. The study reported that less than 10% of the time do the mortgage lenders voluntary result in reduced principal loan balances as more than half of the modifications involve nothing more than capitalizing unpaid interest and fees into a larger mortgage balances. According to the study, only about one-third of the voluntary mortgage modification reduce monthly payments and nearly half actually increase payments as a result of the mortgage modification process.

The groups offered several reasons why  voluntary mortgage modifications are not solving housing problems. For instance, mortgage notes transformed into investment securities end up being owned by multiple institutional owners all of whom would have to consent to a modification. Mortgage service companies are often concerned about being sued by one of the mortgage owners if the service companies agree with the homeowner to a modification plan. Where there are multiple mortgages on one home all the mortgages must agree; a homeowner's modification of a first mortgage will usually not solve his financial problems if a second or third mortgage does not also modify their mortgage. Also, the NACBA noted that mortgage service companies are overwhelmed with mortgage defaults and modification request. Foreclosures is an automated process while loan modifications must be done on relatively time-consuming case by case basis. The mortgage companies and service companies are having trouble keeping up with modification request, and by the time they can deal with a homeowner's request it is often too late to save the house from foreclosures.

The NACBA proposed solution is to change the bankruptcy laws to allow Chapter 13 debtors to cram down their mortgage principal balance to current house value as part of a Chapter 13 bankruptcy plan. One  argument in favor of changing Chapter 13 laws is that bankruptcy courts provide a nation wide legal system already in place where judges could force mortgage modifications to save homes from foreclosure. Lenders oppose this change in the law arguing that allowing bankruptcy courts to stip away mortgage debt will make future mortgage loans more expensive and difficult for everyone including borrowers with good credit.

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

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

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

Modification Of Chapter 13 Plans For Debtors In Financial Distress

I attended a meeting of local bankruptcy attorneys where the Chapter 13 Trustee spoke about current developments. She stated that the real estate recession in Florida, and job losses in many related industries is causing more and more Chapter 13 debtors to fall behind in their plan payments. The Trustee encouraged attorneys to educate Chapter 13 debtors experiencing financial difficulty about the opportunity to modify Chapter 13 plans to defer payments. When good cause is shown, the Chapter 13 Trustee will support plan modification request. The Chapter 13 Trustee also raised the possibility that bankruptcy judges may permit more lenient modifications as the Florida economy deteriorates further.

If you are a debtor in Chapter 13 who experiences a pay reduction, temporary job loss, or a family illness please contact your attorney about seeking a modification of your Chapter 13 plan prior to defaulting in plan payments. It is easier to modify a Chapter 13 plan when your payments are current than after you are months behind in your payments.

For another discussion about what to do if you fall behind in Chapter 13 payments, you may want to read this article by attorney Peter Orville. Link: What Happens In A Chapter 13 If I Get Sick Or Lose My Job And Can’t Afford To Make My Plan Payments? : Bankruptcy Law Network.

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

Can Chapter 13 Help Debtor With $ 1 Million Plus Mortgage

Here’s a question I received last week about using Chapter 13 bankruptcy to save an investment property and a primary residence from foreclosure.

"I'm in the midst of having two homes foreclosed on. One in an investment propert with a loan of 1.65 million and the other is my primary residence that was used as colalteral to get the loan (I do have a second mortgage for 250k on my primary home)....Would I be a candidate for Chapter 13?"

Chapter 13 bankruptcy is used mainly (but not exclusively) to stop foreclosures and to give the homeowner an opportunity to cure arrearage through a Chapter 13 plan. In this case, Chapter 13 may not work. Chapter 13 bankruptcy had debt ceilings. Debtors with secured debts greater than approximately $1 million are not eligible to file Chapter 13. There is also a debt ceiling for unsecured debts of approximately $300,000. People, like this debtor, who have secured debts exceeding the Chapter 13 ceiling may have to file an individual Chapter 11 bankruptcy to impose a repayment plan on the mortgage lenders. Chapter 11 bankruptcies are much more expensive and complicated than Chapter 13.

I do not think this debtor is a candidate for Chapter 13 because his secured debts far exceed the Chapter 13 ceiling. Disputed debt does not count in the debt amounts subject to the debt ceilings. Some attorneys have told me they have successfully filed Chapter 13 cases by disputing some of the filer’s debts in order to fit under secured or unsecured debt ceiling amounts.

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

Social Security Income in Chapter 13

I received an email about the treatment in Chapter 13 bankruptcy of money received for basic social security and for social security disability. Social security payments do not count as income for computation of means test eligibility under the new bankruptcy law.. Yet, once someone wants to, or is forced into, a Chapter 13 bankruptcy instead of a Chapter 7 there is a separate income issue. The issue in a Chapter 13 is the amount of the debtor’s disposable income. Debtor’s must pay all disposable income to the Chapter 13 trustee. If the social security payments count as disposable income then the debtor would have to pay more money to his creditors and the trustee during the Chapter 13. I had thought that social security disability money counted for disposable income but that basic social security receipts did not count as income because it was not part of the income definition under the means test.

I posed the question to the Chapter 13 trustee at a recent meeting of creditors. The Trustee stated that in the Orlando Division both basic social security money and disability are taken into account in computing the debtor’s disposable income. He said that there were court rulings in this Division sustaining his position. Interestingly, he said that the law of this question is different in different bankruptcy Divisions around the country. Florida debtors considering Chapter 13 need to check on the rules in their particular bankruptcy court.

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

Simultaneous Chapter 13 Bankruptcies?

I received an email from someone currently involved in a Chapter 13 bankruptcy somewhere in Florida. The debtor stated that he filed bankruptcy two years ago, and he states that at the time he filed his Plan his home mortgage was current. Now his home mortgage is in arrears; he says the mortgage company got a relief from stay; and he wants to know if a debtor can file a new Chapter 13 case just to take care of the mortgage during the time when the debtor is paying on a Plan from an existing Chapter 13 case. The short answer is "no." The bankruptcy law does not provide for simultaneous bankruptcies, nor does the law contemplate bankruptcies filed with respect to selected assets.

The question does not make sense. The initial Chapter 13 bankruptcy should have included all debts and required current mortgage payments. I don’t see how this debtor fell behind on the home mortgage without defaulting in Plan payments under the initial Chapter 13, assuming the existing 13 including the current mortgage payments. It may be that the debtor failed to list his mortgage in his initial bankruptcy so that the Plan payments did not include current mortgage payments. If that’s the case, his mortgage problems are self-created and he will lose his house to foreclosure.

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

Chapter 13 To Stop Foreclosure After Prior Chapter 7 Discharge

received an email question from someone who filed a Chapter 7 bankruptcy two years ago and is now facing foreclosure on his home mortgage. He asked me whether a Chapter 13 bankruptcy could save his house. In the old days, this person could file a Chapter 13 bankruptcy to stop the foreclosure. Under the new bankruptcy law, once you complete a Chapter 7 bankruptcy you are not allowed to seek relief under a new Chapter 13 bankruptcy for several years regardless of whether your current problems, in this instance a mortgage foreclosure, arose after the Chapter 7. More particularly, you cannot file a Chapter 13 case if your eceived a discharge in a prior Chapter 7 that was filed within the past four years. I told this person that the new bankruptcy law prevented him from filing a Chapter 13 to stop the foreclosure.

Chapter 13 Bankruptcy and Secured Creditors

I received an email from a creditor asking when he could take back secured property from a debtor who file Chapter 13 when he has not received current payments. . Even if a creditor is secured by the Debtor’s property the secured creditor is prohibited by the bankruptcy stay from enforcing his security interest and taking the property. The debtor’s normal payments for secured debt is paid to the Chapter 13 trustee after the bankruptcy filing. It often takes a few months for the Trustee to disburse payments received to the secured creditors. That the Trustee is paying late does not mean the debtor is not making their payments on time to the Trustee. If the debtor is late in payments, the Trustee and the Bankruptcy Court will quickly dismiss the bankruptcy for non-payment in which event the stay will be lifted and the secured debtor can enforce their security interest.

A chapter 13 bankruptcy is not a bad thing for secured creditors. The bankruptcy trustee is enforcing payment collection on behalf of the secured creditors, and if the bankruptcy proceeds the secured creditor will get their payments. Neither a Chapter 13 or a Chapter 7 bankruptcy impairs the security rights of a secured creditor.

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

Does Second Chapter 13 Bankruptcy Stop Foreclosure?

Today I had my first hearing on a motion to extend the automatic stay in a Chapter 13 bankruptcy. In this instance, the debtor filed a Chapter 13 early this year, and the Court dismissed his bankruptcy for non-payment of his plan payments after the client lost his job. The bank started foreclosure after the dismissal. The client found a new, higher paying job. A few days before the sale date I helped the client file a new Chapter 13 plan. Under the old bankruptcy law the new filing would automatically stay the foreclosure and stop the sale so long as the new bankruptcy remained active and plan payments current. Under the new bankruptcy law, upon filing a repetitive bankruptcy ( that is , a bankruptcy within a few months of an earlier case) the new automatic stay is short lived.

The automatic stay triggered by my client’s second bankruptcy lasts only 30 days unless the debtor proves that he filed the second bankruptcy in good faith. The debtor has to show the court there are changed circumstances which explain why the second bankruptcy is feasible after the initial bankruptcy failed. Absent a showing that a second bankruptcy is filed in good faith bankruptcy protection terminates in 30 days, and the lender can restart foreclosure. In this instance the court found that the debtor’s new job was a sufficient financial improvement to warrant extension of the bankruptcy stay protection against foreclosure.

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