Cram Down a House

“Cram down” is lawyer-speak for a bankruptcy court reducing a secured interest to the value of the property. For instance, if a bass boat is worth $2,000 and there is a $4,000 balance owed to the bank, the bankruptcy court can cram down the secured interest to $2,000. The remaining $2,000 is now unsecured and paid at the same rate as other unsecured debts.

The Bankruptcy Code allows cram down of many secured debts in a Chapter 13 bankruptcy. One notable exception is a mortgage on the debtor’s primary residence found in Section 1322(b)(2). A Chapter 13 debtor may not reduce the amount of a primary or secondary home mortgage simply because it is underwater. The debtor may strip off a wholly unsecured junior lien (thereby making the debt unsecured), but if any part of the junior debt is secured, lien stripping is not allowed. Cram down is never allowed for a debtor’s home.

The exception in Section 1322(b)(2) only applies to the debtor’s primary residence, not to other property owned by the debtor. This distinction seems simple enough, but reasonable minds can disagree about the details, and often do in the world of bankruptcy. Take for example the case of In re Benafel, 461 B.R. 581 (9th Cir. BAP 2011). In Benafel, the debtor moved out of her home under threat of foreclosure. Benafel rented out her home in March of 2010 and filed Chapter 13 bankruptcy that same month. She proposed to cram down her rental property and the trustee objected.

The issue before the Ninth Circuit Bankruptcy Appellate Panel was when the court should determine the real property as a Chapter 13 debtor's principal residence for purposes 11 U.S.C. §1322(b)(2)'s prohibition. The court said that the date for this determination should be the day the bankruptcy case is commenced – the day the debtor files for bankruptcy. On that day Ms. Benafel no longer lived in her home, so she was allowed to cram it down to value.

Moving out and filing bankruptcy can be tricky business. If this is done solely for the purpose to avoid the Section 1322(b)(2) prohibition, the bankruptcy court may find the debtor has acted in bad faith. Obviously, the risk of a court finding bad faith diminishes the more time between the date the home is rented and the date of the bankruptcy filing.

 

While lien stripping a home loan only applies to a junior mortgage, cram down of investment property applies to all mortgages. Suppose the debtor has a first mortgage of $100,000, a second mortgage of $100,000, and the real estate has a fair market value of $90,000. In a lien stripping situation, the second mortgage can be entirely stripped off as unsecured, and the first mortgage is fully secured to $100,000. In a cram down situation, the second mortgage is crammed down to zero and the first mortgage is crammed down to $90,000, the value of the real estate. In effect, the second mortgage is now unsecured, and the first mortgage is bifurcated into a $90,000 secured debt and a $10,000 unsecured debt.

The problem with cram down is that most courts require the crammed down mortgage must be paid in full through the Chapter 13 plan. This not only adds trustee fees to the cost of the mortgage, but also places the burden to increase the monthly payments to the creditor or refinance the loan before the close of the bankruptcy case. On the other hand, cram down can be useful if a junior mortgage is undersecured. The debtor may cram down the junior mortgage and pay it off over the bankruptcy term.

For instance, say the amount owed on a first mortgage is $100,000, a second mortgage is $100,000, and the debtor’s rental property has a fair market value of $120,000. The debtor could cram down the property to $120,000 value, continue paying the first mortgage at the contract rate, and pay the remaining $20,000 crammed down second mortgage over five years. The unsecured $80,000 on the second mortgage is paid at the same rate as other unsecured creditors and the remaining balance is discharged at the end of the case.  

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Lien Stripping in Chapter 13 Bankruptcy

 Section 506(a) of the Bankruptcy Code separates the debtor’s obligations into two general categories or “claims”: secured claims and unsecured claims. Secured claims are obligations in which payment is guaranteed (or “backed” or “secured” or “collateralized”) by property. Section 506(a)(1) provides that a secured creditor's claim is “a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.” Consequently, when the value of the property is less than the amount of the secured claim, Section 506(a) allows the obligation to be divided into a secured claim and an unsecured claim.

For instance, suppose the debtor finances a car for $40,000. It’s commonly said that a car depreciates the minute it drives off the lot, so let’s say the car is now worth $35,000 and no payment has been made. In bankruptcy, this car loan would have a secured claim of $35,000 (the value of the collateral) and an unsecured claim of $5,000.

The most notable prohibition against reducing the amount owed on a secured obligation is found in Section 1322(b). This provision, often called the “anti-modification provision,” prohibits a Chapter 13 debtor from modifying the rights of a secured claim when the claim is secured only by the debtor’s principal residence. The U.S. Supreme Court in the case of Nobelman v. American Savings Bank, 508 U.S. 324 (1993), decided that 1322(b) means that a claim against the debtor’s primary residence cannot be bifurcated into secured and unsecured claims. However, most bankruptcy courts have distinguished the ruling in Nobleman to allow a junior mortgage to be stripped away if the value of the senior claims are more than the value of the debtor’s home.

To understand how lien stripping works, consider the following “negative equity” example of a debtor’s home:

Value of home:           $330,000

First mortgage:            $360,000

Second mortgage:       $40,000

Amount of equity       -$70,000

Most courts allow the $40,000 second mortgage to be stripped off and reclassified as an unsecured debt because the amount owed on the first mortgage is more than the value of the home. In other words, the second mortgage is not actually secured by anything because the amount owed on the first mortgage “eats up” all of the home’s equity. There is no equity left to secure the second mortgage. If the second mortgage was partially secured, even by one dollar, the second mortgage could not be lien stripped according to Nobelman.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Assumption of a Lease vs. Reaffirmation

A reaffirmation agreement continues the personal liability of a debtor in secured property after the bankruptcy discharge. A reaffirmation agreement must be approved by the bankruptcy court before it is effective. Essentially, if the debtor purchases a vehicle with financing, and wants to keep it after bankruptcy, he will be asked to execute a reaffirmation agreement by the lender. According to 11 U.S.C. § 521(a)(6), if the debtor fails to reaffirm or redeem the vehicle within 45 days after the first 341 Meeting of Creditors, the automatic stay is terminated and the lender may repossess the vehicle - even if the debtor is current on the payments!  See In re Dumont, 581 F. 3d 1104 (9th Cir. 2009).

Assuming or rejecting leases (and executory contracts) in bankruptcy is detailed in Section 365. This Section and area of the law has been described as “psychedelic.” See In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687 (Bankr. S.D.N.Y. 1992) (quoting Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989)). The part relevant to personal property is found in Section 365(p):

If a lease of personal property is rejected or not timely assumed . . . the leased property is no longer property of the estate and the stay under section 362 (a) is automatically terminated. . . . If the debtor in a case under chapter 7 is an individual, the debtor may notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract. . . .

When read together with the relevant part of § 365(d):

In a case under chapter 7 of this title, if the [debtor inheriting the trustee’s power to assume the lease pursuant to § 365(p)] does not assume or reject an executory contract or unexpired lease of . . . . personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.

Section 365 requires the debtor to assume a lease in personal property, rather than to reaffirm the lease.

All courts agree that the bankruptcy court plays no part in the assumption or rejection of a debtor’s personal property lease, but there is confusion over whether assumption of a lease continues any personal liability after discharge. Collier explains it this way:

If the debtor then assumes the lease, the liability under the lease will be assumed by the debtor and not the estate. However, because there is no reaffirmation of the lease debt, it is not entirely clear what this means. Personal liability on the lease will ordinarily be discharged if the chapter 7 discharge is entered, presumably even if the lease is assumed.

See 1-15 Collier Consumer Bankruptcy Practice Guide ¶ 15.04[8].

Courts are split in the interpretation of Section 365 in regard to personal liability. The majority of courts find that assumption of a lease is not the same as reaffirmation, and, therefore, the debtor’s personal obligation under the lease is extinguished by the discharge. See, e.g., In re Eader, 426 B.R. 164 (Bankr.D.Md. 2010); and In re Creighton, 427 B.R. 24 (Bankr.D.Mass. 2007). These courts point to the necessity of a reaffirmation agreement under Section 524(c) and Federal Rule of Bankruptcy Procedure 4008 to continue the debtor’s personal obligation, and that the bankruptcy discharges “personal liability of the debtor, whether or not discharge of such debt is waived." See 11 U.S.C. § 524(a)(2).

A minority of courts find that assumption of a lease binds the debtor to the original lease terms and the discharge has no effect on the debtor's assumed obligation. The court in In Re Mortensen, 444 B.R. 225 (Bankr. E.D.N.Y. 2011), found:

Once a lease is assumed, it is assumed cum onere and the Debtor is bound to accept the obligations and the benefits. See NLRB v. Bildisco and Bildisco, 465 U.S. 513, 531-32, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984); and In re Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir.1999) (citation omitted). In exchange for the right to retain the lessor's property for her use, the Debtor cannot assert that the Debtor has been discharged of her obligations under the Lease the discharge injunction simply does not apply.

Most courts will find that assuming a lease creates a kind of non-recourse situation. The debtor is entitled to keep and use the leased property, but has no personal liability for default. Lenders, especially auto finance companies, have different perspectives on leased vehicles in bankruptcy. Some lenders require short lease assumption documents, while others compel the debtor to file a reaffirmation of the lease obligation with the bankruptcy court.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

Where are Bankruptcy Rules Found?

Bankruptcy law is complex and confusing to bankruptcy outsiders (and often to bankruptcy in-siders). To gain a general understanding of the process, the Administrative Office of the U.S. Courts publishes a basic overview of the federal bankruptcy process entitled Bankruptcy Basics. This guide is available on the US Courts website: http://www.U.S.C.ourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics.aspx

Article I, Section 8, of the United States Constitution authorizes Congress to enact federal bankruptcy laws, which are codified in Title 11 of the United States Code. This section of federal law is commonly called the Bankruptcy Code and is divided into nine chapters. Chapters 1, 3, and 5 apply to all cases. An individual bankruptcy case is filed under either Chapter 7, 11, or 13. A complete copy of the Bankruptcy Code is maintained on-line at: http://www.law.cornell.edu/U.S.C.ode/text/11

The dollar amounts found in the Bankruptcy Code change from time to time. Changes are published in the Federal Register: https://www.federalregister.gov

The federal bankruptcy process is governed by the Federal Rules of Bankruptcy Procedure, which may be read on-line at: http://www.law.cornell.edu/rules/frbp

Approved agencies for consumer credit counseling and the financial management course are found on the United States Trustee’s website, along with information required for completing the bankruptcy Means Test: http://www.justice.gov/ust/

Finally, take a look at the bankruptcy court’s “local rules,” which supplement the bankruptcy procedures. Every court has a copy of its local rules posted on its website.

Bankruptcy rules are only one aspect of understanding the bankruptcy process. The court interpret these laws and rules, including the bankruptcy court, district court, bankruptcy appellate panels, circuit courts and the United States Supreme Court. Phew! That’s a lot of reading! Fortunately, an experienced bankruptcy attorney has spent years reading these laws and cases, and is able to help you navigate the bankruptcy system.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

 

Bankruptcy Discharge Order

At the conclusion of nearly all consumer bankruptcy cases the court will issue a permanent injunction prohibiting creditors from collecting on pre-bankruptcy debts. This permanent injunction known as the “bankruptcy discharge” replaces the “automatic stay,” a temporary injunction. Specifically, the discharge order prohibits discharged creditors from taking any kind of collection action against the debtor personally. The discharge injunction generally forbids a discharged creditor from sending bills, making collection phone calls, or filing a lawsuit to collect on a debt. This protection is final and permanent. Violation of the discharge injunction has serious consequences, and may result in a federal contempt of court charge.

A discharged debt is not erased. See In Re Mahoney, 368 B.R. 579 (Bankr. W.D. Tex. 2007)(“Bankruptcy does not erase debt; the discharge is only an injunction against attempts to collect the debt as a personal liability of the debtor. See 11 U.S.C. § 524(a)” see also In re Vogt, 257 B.R. 65, 70 (Bankr. D. Colo. 2000)). The debt still exists, but payment cannot be collected from the debtor because of the bankruptcy court's injunction. However, a creditor may still have opportunities to collect.

Although a debtor is no longer personally liable for a discharged debt, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) during the bankruptcy case will remain after the debt is discharged. This is because enforcing the lien is an action against the property, not against the person. In this way the bankruptcy laws balance the interests of the debtor and the creditor. For instance, the bankruptcy discharge may prohibit an auto lender from garnishing a discharged debtor’s wages to satisfy an unpaid and defaulted loan, but the law allows the lender to repossess the vehicle. Bankruptcy attorneys are fond describing it this way: “secured property must be paid for or returned.”

The bankruptcy discharge does not protect non-filing co-debtors. The discharge injunction only applies to the debtor. A creditor may still enforce its collection rights against a co-debtor. Typically co-debtors are "jointly and severally liable," which means that the non-discharged co-debtor is likely on the hook for 100% of the debt.

What happens when a creditor contacts the debtor after discharge?  The answer depends on the situation and first involves answering three questions: (1) “Was the debt discharged in bankruptcy?” (2) “Is the collection directed at the discharged debtor?” and (3) “Was the creditor notified of the bankruptcy case or discharge?”

As stated previously, a discharged debt is no longer legally enforceable against the debtor. Some debts are not discharged, so it is important to understand which debts are included in the discharge and which are not. For instance, taxes, student loans, and family support obligations may not be subject to the discharge.  In other cases a debt may be excepted from discharge by the court. 

The discharge only protects the debtor from collection efforts. It does not protect a co-debtor who did not file bankruptcy, and, as a general rule, it does not protect property that is subject to a lien. For instance, a discharged creditor may not garnish the debtor’s wages to collect on a discharged debt, but may repossess collateral when a lien survives the bankruptcy discharge. Therefore, it is important to understand how property is affected by the bankruptcy discharge and whether a creditor can seize, repossess, or foreclose on the property after a bankruptcy.

As a practical matter, if a collector does not know about the bankruptcy discharge, the bankruptcy court is not likely to impose sanctions against it. Often a collection attempt can be resolved by informing the collector of the discharge and either providing a copy of the discharge or referring the collector to the debtor attorney. Buying and selling debt is big business, and debts often get passed from collector to collector – even uncollectable debts like those discharged in bankruptcy!

The bankruptcy discharge injunction applies to the original creditor, collection agencies, attorneys, and any other subsequent collector. A creditor may be liable for selling a discharged debt when the subsequent purchaser attempted collection action. See Laboy v. FirstBank P.R. (In re Laboy), 2010 Bankr. Lexis 345 (Bankr. D.P.R. 2010) (concluding that the original creditor had knowledge of the bankruptcy discharge and selling the debt some 15 years later to a debt collector violated the discharge injunction. Creditors “are obligated to maintain procedures to ensure that they do not violate [the discharge injunction], and may be held liable for damages and attorney’s fees if they do not”).

 

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

Chapter 13 Bankruptcy

 A Chapter 13 bankruptcy case is primarily used to repay all or some of an individual’s debts. It is also known as a debt adjustment case, or a “wage earner's plan.” Chapter 13 can stop a foreclosure or repossession and allow the individual time to make payments over three to five years, often even over the objection of a creditor.

A debtor who is behind on a mortgage or car loan is able to catch up in a Chapter 13 bankruptcy. Through Chapter 13, the debtor may restructure debts and sometimes change loan terms, such as the interest rate and the time for repayment. Some upside-down vehicle loans can be “crammed down,” meaning the obligation is reduced to the value of the vehicle and then paid over three to five years.Second or third mortgage debts can also be stripped off, if the amount of the first mortgage is equal to or more than the value of the home.

Chapter 13 differentiates between three types of debts: first, priority debts, including most taxes and child support, must be paid in full. Second, secured debts, debts secured by collateral, must be paid with interest over the life of the plan, or surrendered back to the creditor. Finally, unsecured debts, like credit cards and medical bills, are paid in accordance with the debtor’s financial ability. This may be as much as 100% or as little as 0%.

 

The main feature of a Chapter 13 bankruptcy is the repayment plan, which must be approved by the bankruptcy court. A Chapter 13 plan will propose a monthly payment to pay all or some creditors over three to five years.  Once the bankruptcy court approves a Chapter 13 plan (called “confirmed” in bankruptcy lingo), the court will direct the bankruptcy trustee to pay creditors (and keep a percentage as a fee) in accordance with the confirmed plan.

 

There are monetary limits on the amount of unsecured and secured debts in a Chapter 13, currently set at $383,175 in unsecured debts and $1,149,525 in secured debts. Debtors who exceed these limits are not eligible for Chapter 13 relief and should consider a Chapter 11 reorganization bankruptcy.

 

The Bankruptcy Code does not allow joint debtors to double the Chapter 13 debt limits. Most courts apply the plain meaning of the statute and disqualify couples who exceed the debt limits. A minority of courts will look at the individual debtor’s debts to determine whether the individual falls under the debt limits. In these courts if both debtors are individually under the debt limits, the joint case is allowed to proceed. In those cases, if only one debtor qualifies and the other debtor does not, the qualifying debtor may continue with her Chapter 13 case, while the nonqualifying debtor must convert to another chapter.

If a claim is “underwater,” such as a junior mortgage, it is classified as unsecured for purposes of the Section 109(e) so long as it is not supported by any part of the collateral’s value. This is the case even when the creditor’s lien has not been avoided as of the petition date, and even if the loan is not avoidable at all. Similarly, most courts will bifurcate a debt into secured and unsecured portions when analyzing the debt limits of Section 109(e).

 

When pushing Chapter 13 debt limits in a joint case, the debtors should consider: (1) filing separate cases for married couples (and consider filing a Chapter 7 for one spouse and a Chapter 13 for the other); and (2) using Chapter 20. Your attorney can help you decide the best strategy to maximize your bankruptcy benefits.

If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705. 7584 or send an email to fears@fnlawfirm.com

Attorney Obligations during Bankruptcy

 

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created new obligations for “debt relief agencies” engaging in bankruptcy related services. For a definition of a “debt relief agency,” see 11 U.S.C. §101(12A). The United States Supreme Court in Milavetz v. U.S., 130 S.Ct. 1324 (2010), held that “attorneys are debt relief agencies when they provide qualifying services to assisted persons.” As debt relief agencies, bankruptcy attorneys are instructed by the Bankruptcy Code to avoid certain conduct and are required to provide information and notices to clients (called “assisted persons”) found in Sections 526, 527, and 528.

 

Section 526 directs that a debt relief agency shall not (1) fail to perform any services promised to a client; (2) make any untrue or misleading statement, or counsel a client to make an untrue or misleading statement in connection with a bankruptcy case; (3) misrepresent any promised services or the benefits and risks of filing bankruptcy; or (4) advise a client or prospective client to incur more debt.

 

Section 527 mandates that the debt relief agency must give written notices to a client within three days of first offering to provide bankruptcy assistance, including:

1.      A written notice required by Section 342(b) which is filed with the clerk at the time of the bankruptcy filing (currently Official Form B201A, Notice to Consumer Debtor(s) under §342(b) of the Bankruptcy Code; and Official Form B201B, Certification of Notice to Consumer Debtor(s) Under § 342(b) of the Bankruptcy Code );

2.      A clear and conspicuous written notice advising the client of the necessity to be truthful in all statements and disclosures throughout the bankruptcy process; that assets and replacement value must be completely and accurately listed after reasonable inquiry; that Means Test information must be truthfully listed after reasonable inquiry; and that the client’s case may be subject to audit and sanctions. A copy of this notice must be retained by the debt relief agency for two years;

3.      A statutory form listed in Section 527 describing rights and debt relief agency duties; and

4.      A description of how to identify and schedule all the information the client is required to provide under Section 521, including a list of creditors, the schedule of assets and liabilities, the schedule of income and expenses, and the statement of financial affairs. Additionally, the debt relief agency is directed to instruct the client in writing how to determine replacement value and exempt property.

 

Section 528 requires that a contract between a debt relief agency and client must be in writing and “clearly and conspicuously” explain the scope of services that the agency will provide and the fees or charges for such services.

 

Violations. The penalties for violating these sections are harsh. “[A]ny contract for bankruptcy assistance between a debt relief agency and an assisted person that does not comply with [Sections 526-528] … shall be void” and may only be enforced by the assisted person. See 11 U.S.C. § 526(b). Additionally, Section 526(c)(2) states that a debt relief agency may be required to pay back all fees and charges received from the client, plus pay any actual damages and reasonable attorney fees and costs, under either of these circumstances:

  • if a material requirement of the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure is intentionally or negligently disregarded; or
  • if the client’s case is dismissed or converted on account of intentionally or negligently failing to file a required document.

 If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

What if I'm Over the Chapter 13 Debt Limit?

There are monetary limits to the amount of unsecured and secured debts in a Chapter 13, currently set at $383,175 in unsecured debts and $1,149,525 in secured debts. Debtors who exceed these limits are not eligible for Chapter 13 relief and should consider a Chapter 11 reorganization bankruptcy.

The Bankruptcy Code does not allow joint debtors to double the Chapter 13 debt limits. See 11 U.S.C. § 109(e); see also In re Kersner, 412 B.R. 733 (Bankr. D. Md. 2009). Most courts apply the plain meaning of the statute and disqualify couples who exceed the debt limits. See In re Miller, No. 13 B 2178  (Bankr. N.D.E.D.IL., 2013); In re Archibald, 314 B.R. 876 (Bankr. S.D. Ga. 2004).

A minority of courts will look at the individual debtor’s debts to determine whether the individual falls under the debt limits. If both debtors are individually under the debt limits, the joint case is allowed to proceed. See In re Werts, 410 B.R. 677 (Bankr. D. Kan. 2009). If only one debtor qualifies and the other debtor does not, the qualifying debtor may continue with her Chapter 13 case, while the nonqualifying debtor must convert to another chapter. See In re Butler, 2010 WL 2035373 (Bankr. D. Dist. Col. 2010); In re Tabor, 232 B.R. 85 (Bankr. N.D. Ohio 1999).

When pushing Chapter 13 debt limits in a joint case, the debtors should consider: (1) filing separate cases for married couples (and consider filing a Chapter 7 for one spouse and a Chapter 13 for the other); and (2) using Chapter 20 (filing a Chapter 7 case to eliminate dischargeable unsecured debts, then filing a Chapter 13 case to deal with secured or nondischargeable debts).

There are many options available to debtors in bankruptcy. It takes an experienced guide to help you choose the right path to a financial fresh start. Call today and find the best road to success in your case. 

If you are considering filing for bankfruptcy please call the experienced attorneys at Fears | Nachawati to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com

To Reaffirm or Not To Reaffirm. . .

Congress recognizes that in the real world, sometimes a reaffirmation agreement is not filed. When that happens, the discharge injunction prohibits contact with the debtor concerning the debt. However, in a fit of practical wisdom, Congress enacted Section 524(j) which allows a creditor holding a mortgage on the debtor’s principal residence to accept payments in the ordinary course of business from the debtor without violating the bankruptcy court’s discharge injunction. A debtor may continue to pay his home mortgage and the debtor may accept payments even when the debtor’s personal obligation was discharged by the bankruptcy case.

 

Many bankruptcy attorneys refuse to allow their clients to execute reaffirmation agreements on real estate. Some plainly state that it is malpractice to reaffirm a mortgage. The issue of the non-recourse mortgage is undecided and replete with potential perils for the debtor. Should a Circuit Court determine that a Chapter 7 debtor must reaffirm a mortgage, then the property may no longer be protected by the bankruptcy and the creditor may assert its state law rights and accelerate the mortgage debt and foreclose on the property even though the debtor is current on the loan. A similar situation with an auto loan was discussed in the Ninth Circuit Court of Appeals case Dumont v. Ford Motor Credit Company (In re Dumont), 581 F. 3d 1104 (9th Cir. 2009).

A more practical (and perhaps a more important) question to ask before deciding to reject a mortgage reaffirmation agreement is, “If I don’t reaffirm my mortgage loan, will I be able to modify my loan in the future?” This question is best answered by looking at two current government backed housing programs: HAMP and HARP. Under the Home Affordable Modification Program (H.A.M.P.), a mortgage may be modified (modification) even though the debt was not reaffirmed. See U.S. Dep’t of the Treasury, Making Home Affordable Program: Handbook for Servicers of Non-GSE Mortgages v4.3 (2013). Under the Home Affordable Refinance Program (H.A.R.P.) the debtor is not eligible for refinancing. The reason is that the modification only changes the terms of the loan and does not expand upon or create a new personal obligation. However, refinancing clearly creates a new financial obligation for the debtor, and violates the bankruptcy court’s discharge injunction. Some lenders refuse to modify a home mortgage if the debtor did not execute a reaffirmation agreement and is no longer personally liable for the debt. 

If you are considering filing bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com 

Stop an Eviction with Bankruptcy

 Generally, when a bankruptcy petition is filed, collection actions are automatically stayed. The purpose of this stay is to give the debtor some breathing room and time to sort out financial difficulties. If the debtor is behind on rent payments, the bankruptcy automatic stays the commencement or continuation of an eviction action.  The automatic stay prohibits the landlord from any attempt to collect rents that accrued prior to the bankruptcy filing date. The landlord may not write or call the debtor in an effort to collect these rents, and may not start or continue a lawsuit to evict.

The bankruptcy automatic stay will not relieve the debtor from his obligation to pay rent after the bankruptcy filing date. If the debtor/tenant falls behind on rent payments after the bankruptcy is filed, the landlord may evict regardless of the bankruptcy, but cannot seek payment of rents that were due before the bankruptcy case was filed. If the debtor in bankruptcy is not behind on rents at the time the bankruptcy case is filed, the landlord is not a creditor and will not receive notice of the bankruptcy filing. However, the debtor must account for any rent deposit on his bankruptcy schedules.

In some circumstances a landlord may complain to the bankruptcy court that the tenant is endangering the property or using controlled substances illegally on the property. See 11 U.S.C. § 362(b)(23). The landlord must file a certification to the bankruptcy court and the tenant has 15 days to respond. The court must hold a hearing within 10 days. If the landlord is successful in this complaint, the court will lift the automatic stay and allow the eviction process to continue.

If the landlord has obtained a judgment for possession and order of eviction before the bankruptcy case is filed, the legal process is more complex. See 11 U.S.C. §§ 362(b)(22) and 362(l). The debtor must deposit one month of rent with the bankruptcy court immediately upon filing the bankruptcy petition along with a certification stating that the landlord’s judgment permits the debtor to stay in the premises upon satisfaction of the entire judgment amount. This filing stays the eviction process for thirty days. If the debtor wishes to remain longer, the amount stated in the judgment for possession must be paid within the thirty day period.

If you're interested in filing for bankruptcy contact the experienced attorney's at Fears | Nachawati  for a free consultation. Call our office at 1-866-705-7584 or send an email to fears@fnlawfirm.com.