The Florida Bankruptcy Law Blog

Mortgage Mediation In Chapter 13 Bankruptcy Sabotaged By Lender Document Requests

Have you been jerked around by mortgage banks in court ordered mortgage mediation in Chapter 13 bankruptcy cases? Another local attorney spoke with me this week about how big banks are playing debtors and their attorneys in court ordered mortgage modification mediation.

The attorney’s client filed Chapter 13 in Orlando where the courts have for some time ordered mortgage lenders to participate in mediation regarding modification of Chapter 13 debtor’s home mortgages. His client has a first mortgage with a very big bank whose home office is in a very big state west of the Mississippi.

The court issued a standard mediation order requiring the bank to let the debtor know all the documents needed for mediation at least 14 days prior to the mediation. The lender requested documents, and the debtor provided documents requested.

As soon as the mediation started the lender announced that they could not evaluate the modification, provide hypothetical results, or in any way discuss the modification because– you guessed it— they needed still more documents. One of the main documents was an updated pay stub which the debtor said he had at home and could have provide if only the bank gave him just one days notice instead of the 14 day notice specified in the court order. The attorney told me that the mediation was adjourned in 10 minutes.

As a result, the debtor took off a half of day of work for nothing, and the debtor attorney wasted two hours of his time, for nothing. Sue for costs and sanctions? Not so easy to do.

Here’s the problem. Mediation is confidential. No matter how much the lender screws you over in the mediation you cannot introduce the conversation as evidence in court. In this case, for example, the attorney could not tell the court that as soon as the mediation began the lender made another document request.

Does Parent's Chapter 13 Expense Schedule Include His Monthly Payments For Child's Car?

Here’s a relatively simple, but common,  question I was asked by email this past week. The writer makes payments on his daughter’s car titled in his daughter’s name. The writer (the parent) wants to file Chapter 13 bankruptcy and asks whether his monthly payment for his daughter’s car can be included in his expenses so as to reduce the amount of his monthly Chapter 13 plan payment.

The answer depends upon whether the parent signed the loan. If the parent co-signed the daughter’ s car loan then the parent may include as an expense the loan payment, maybe. The Chapter 13 trustee may challenge inclusion of the secured loan for a car which the parent does not use and which is not necessary. The extra car should not be paid for, in effect, by the debtor’s unsecured creditors. If the debtor’s plan pays 100% of his creditors then the car payment on the daughter’s car should not be a problem.

If the parent did not co-sign the loan then the parent’s monthly payment is in effect a gift to the daughter. The debtor cannot  include the gift as an expense because the debtor has no legal liability of payment. Even if the debtor proposes a 100% repayment plan the Chapter 13 trustee may disallow the “expense” so that the creditors are paid back in shorter time.

Should Annuity Proceeds Recently Received Be Included As Income In Chapter 13 Payment Calculation?

A prospective Chapter 13 bankruptcy client currently makes about $30,000 per year salary. He wants to file bankruptcy as soon as possible to stop an ongoing lawsuit. Based on his salary alone, he would make relatively minimal payments to his Chapter 13 plan and over the five year plan would pay about 20% of his unsecured creditors.

Many years ago this person won a personal injury law suit resulting in a structured settlement in the form of an annuity contract with a national insurance company. Three months ago he received the final annuity payment of $40,000. He asked whether the annuity payment will be treated as income for the purpose of determining the Chapter 13 plan payment. If included as income, his plan payment would increase substantially but he would not have any future annuity payments forthcoming to help pay the higher plan payment.

The annuity is an exempt asset. Florida statutes, and Florida case law, also exempt annuity proceeds even after the annuity proceeds are received and deposited in a financial account. The annuity and the proceeds would be exempt if the debtor filed Chapter 7.

The annuity payment three months prior to bankruptcy should not be treated as income. It is not a recurring payment. There will be no future annuity receipts during the Chapter 13 bankruptcy. Most importantly, to include the annuity receipt as income deprives the annuity proceeds of their exemption from creditors because the higher plan payment attributed to the “annuity income.” would effectively force the Chapter 13 debtor to pay during the Chapter 13 plan an part of the money received from the exempt annuity. Assets owned by the debtor at the filing date which assets would be  exempt in a Chapter 7 bankruptcy should not be captured indirectly in a Chapter 13 plan.

Chapter 13 Success Enhanced With Voluntary Automatic Wage Deduction Payments

Most Chapter 13 bankruptcies fail. Most debtors do not pay their required payments to the Chapter 13 trustee throughout the term of their plan, and when payments fall behind their bankruptcy is dismissed without a discharge. It takes financial discipline to consistently budget money for Chapter 13 plan payments.

Chapter 13 success is greatly increased when the debtors pay the trustee through automatic wage deductions so that the debtor’s employer deducts the  required plan payment from the debtor’s pay check. Our Chapter 13 trustee announces at every meeting of creditors that 80% of debtors who pay with wage deduction orders succeed in Chapter 13 and get a discharge while only 30% of debtors who do not use wage deduction are successful. Many people file bankruptcy because they previously lacked financial discipline to minimize debt or save for emergencies, so it is not surprising that those people cannot budget money for Chapter 13 plan payments I advise all my Chapter 13 clients to use wage deduction payments if they can do so.

Many Chapter 13 debtors cannot practically use wage deduction payments. For example, self-employed business owners are not candidates for wage deduction because if their monthly income fluctuates.  My experience is that self employed people, or any persons with unpredictable income, do not do well in Chapter 13 bankruptcies. The bankrutcy court will issue wage deduction orders upon the debtor's request. the employer is required to comply with the court's wage deduction order.

Debtors Strip Their Second Mortgage Without Having To File Chapter 13 Bankruptcy

Some people with minimal credit card debt file Chapter 13 bankruptcy primarily to strip a second mortgage. You may be able to accomplish the same result without filing bankruptcy now that banks are becoming somewhat more flexible to work out mortgage solutions on upside down property. I’ve heard of cases where a second mortgage company will substantially reduce a second mortgage balance and permit the debtor to pay off the settlement amount in installments. Here is one real example.

A couple had a first mortgage equal to or a little less than their house’s fair market value. They had a second mortgage of approximately $120,000. They were willing to let the house go if they had to pay both mortgages, but they wanted to keep the house if they could “strip” the second. They had about $15,000 of joint credit card debt. They wanted to avoid any bankruptcy if possible.

The couple stopped paying the second mortgage. They hired an attorney to defend any foreclosures and to negotiate with the second mortgage company. The attorney was able to reach a settlement with the second mortgage lender whereby the lender agreed to accept $15,000 as payment in full of the second mortgage. Furthermore, the second mortgage lender agreed to let the debtors pay the $15,000 settlement over three years in monthly installments. After payments were completed the second mortgage would be satisfied in full.

Joint Debtors Can Stack Their Chapter 13 Debt Ceilings In Some Cases

Many people who wanted to file Chapter 13 found that they were ineligible because their debts exceeded the Chapter 13 debt limits of approximately $1 million of secured debt or approximately $360,000 of unsecured debt. The debt limits have affected more people in the past few years because inflated real estate values during the boom resulted in many debtors having large mortgages which exceeded the secured debt ceiling. I have had several clients who could not qualify for Chapter 7 and who were willing to pay their creditors what they could afford in Chapter 13, but who were excluded from Chapter 13 by the debt ceilings. These people either had to file an expensive Chapter 11 case or forgo bankruptcy protection completely.

One unresolved question about Chapter 13 debt ceiling is whether joint married debtors could stack their ceilings. For example, if stacking were permitted, joint married debtors could have up to $2 million joint debt in a Chapter 13. Joint Chapter 7 debtors can stack their exemptions.

This past week one of the Orlando bankruptcy judges issued an opinion which hold that joint married debtors may in some cases stack the debt ceilings of Chapter 13 eligibility. The opinion explained that a joint bankruptcy is actually the combination of separate bankruptcy estates. In a joint Chapter 13 filing each of the joint debtors must individually meet Chapter 13 debt requirements.

Chapter 13 Debtor Opposition To Late Filed Unsecured Claim

Chapter 13 bankruptcy cases have claim deadlines by which date the debtor’s creditors are supposed to file claims in order to be included in the roster of creditors entitled to distributions of money out of the Chapter 13 plan. I represent a debtor who prior to filing owed money to a law firm which represented him in a pre-bankruptcy legal matter. Three months after the Chapter 13 claim deadline the law firm filed an unsecured claim.

The first question is whether or not the debtor cares if an unsecured creditor files a late claim. If a debtor is paying all of their disposable income into a plan, but the plan will not pay 100% of unsecured claim, then a late claim does not change the amount of the debtor’s monthly plan payment or total payments under the plan. No harm no foul. If the debtor’s plan must be a 100% plan for any number of reasons (such as the debtor’s desire to reaffirm an investment property) then a late filed claim is important to the debtor because the claim would increase plan payments.

In this case, my client is required to pay 100% of unsecured claims, and therefore, opposed the late claim. The creditor argued that they had actually signed a claim form before the deadline, but that it was incorrectly addressed and that the error was not discovered until recently. The court denied the creditor’s claim. The court said that late claims can be filed if there is an “excusable neglect” but that the attorney’s clerical error of not properly filing or mailing a claim form is not one of the excuses accepted by bankruptcy courts.

Chapter 13 Bankruptcy Mortgage Mediation Seems To Be Working Well

Mortgage mediation in Chapter 13 bankruptcy is turning out to be more effective than mediation ordered in state court foreclosure cases. This, according to a report presented at a local attorneys’ meeting. Mortgage lenders express greater willingness to modify first  mortgages of debtors in Chapter 13 bankruptcy compared to other debtors already facing foreclosure in state court.

The explanations given are common sense. A Chapter 13 bankruptcy debtor eliminates or reduces other debts through bankruptcy which makes it easier to pay the first mortgage and therefore, more likely the modification will succeed. A Chapter 13 permits the debtor to pay only part of his unsecured debts and only part of a second mortgage payment, if any. The debtor pays his other creditors only what he can afford to pay based on current income and expenses. The reduction of all other debts permits the debtor to concentrate on paying his modified first mortgage.

Another explanation for Chapter 13 mortgage modification success is that the foreclosure law firms have only a few attorneys concentrating on bankruptcy mediation because bankruptcy rules make the mortgage mediation procedure more complicated than the standard state court mediation. With few attorneys involved, the mortgage lender’s process and response is relatively consistent and predictable.

Whatever the reason,  mortgage mediation program started in Orlando, Florida, bankruptcy court seems to be working.

Using Chapter 13 To Reorganize A Small Corporately Owned Business

An experienced bankruptcy attorney told me about a creative planning technique to save and reorganize a financially stressed small business by using Chapter 13 bankruptcy. Remember, Chapter 13 is for individual only. Businesses use the more expensive and complicated Chapter 11 reorganization. The attorney’s plan is a bit complicated for laymen readers, so here is a very condensed version.

Assume you own a small business in an S corporation or limited liability company. The business has significant assets but even greater liabilities. The business cash flow is “negative” on a monthly basis. You have to pump more money in the business to keep it afloat in hope the government’s economic recovery plan takes effect in time to turn your market positive. A bankruptcy attorney suggest you reorganize your debts in Chapter 11, but states his Chapter 11 retainer fee would be at least $25,000.00. If you had $25,000 available the business would be healthy. You are personally liable for business debts.

Here’s the plan. The owner dissolves the corporation and assigns all the corporation assets to himself personally. The individual personally assumes all corporation debt. There is no fraudulent transfer from the corporation to the individual because the net value of what has been transferred is zero. After the dissolution, assignment, and assumption the business without its corporation  continues operation as a sole proprietorship.

Court Disallows Mortgage Lender's Standard Bankruptcy Fee In Its Secured Claim

It’s fun to read about cases where a bankruptcy debtor successfully challenged a mortgage lender’s attorney fee claims. In this Chapter 13 case GMAC mortgage filed a secured claim including $300 legal fees for work incurred by the bank’s bankruptcy attorney to protect the bank’s secured interest and rights in the debtor’s property during the Chapter 13 bankruptcy. The debtor’s first mortgage payments were current upon filing bankruptcy and the debtor proposed to pay the mortgage outside the bankruptcy proceeding.

The court denied GMAC its attorney fees. The court pointed out that the first mortgage was on the debtor’s principal residence and its terms or amount could not be modified in the Chapter 13 plan. The court found that the bankruptcy filing may have created some extra work for the mortgage lender, but that this work was administrative in nature and not legal work requiring a licensed attorney: in other words, its extra “paper work.” The court said that referring a matter to an attorneys office does not automatically create necessary legal work.

Look at the first mortgage lenders claim in your Chapter 13 bankruptcy, and if your facts are the same as in this case, consider filing an objection to the lender’s claim which includes automatic, standard legal fees. In re Jaramillo 09-33951, Southern District Florida.