One debtor and his attorney came up with a creative cram down plan in a Chapter 13 bankruptcy filed in our Orlando court. The debtor’s plan proposed that during the initial 59 months of his 60 month plan the debtor would make small monthly payments toward a cram-down mortgage secured by the debtor’s investment property. The plan provided for a large balloon payoff of the allowed secured claim at the end of the plan. This plan provided the debtor with affordable plan payments for four years, eleven months during which time he could hopefully qualify to refinance the allowed mortgage balance at the end of the plan.. The mortgage lender objected to this payback arrangement and brought the issue before the bankruptcy court.

The mortgage lender argued that the bankruptcy law requires Chapter 13 debtors to make equal payments toward a cram-down secured debt throughout a five year bankruptcy plan. The debtor responded that the Code requires the cram-down debt be paid during the five year plan without condition- there is no requirement of equal payments and no prohibition of a balloon at the end of the plan. The bankruptcy judge ruled in the debtor’s favor. The judge said that a Chapter 13 plan may provide unequal payments of a cram-down secured debt even if the plan includes a large balloon payment at the end. The judge ruled that the plan must include sufficient interest on the secured debt to make sure that the creditor receives a total amount during the plan, including the balloon, equal in value to what the creditor would have received if the allowed secured debt were paid in full at the beginning of the Chapter 13.

This court’s interpretation provides debtors opportunity to save property in a Chapter 13 where the debtor is eligible to cram down the secured debt. The case is In re Cooper 6:08-11960Download Cooper Order

Trustee: "Mr. Debtor, what is the most valuable thing you own?"

I’m thinking, "what a great question!" The debtor will probably respond that his most valuable asset is something like a piece of jewelry, or an heirloom ,or some artwork which was not put on his bankruptcy schedules. I think my client is about to get himself in trouble.

The debtor is silent. He’s obviously surprised by the question, as am I.

I open my file, find Schedule B of the Petition ( the personal property list), shove the list in front of my client, and say, "Here’s your list of possessions- pick one."

The Trustee quickly retorts. "Maybe his possession is not on the list."

I respond, "I’m sure that it is." (hopefully, the exchange will buy time for my client).

The client thinks some more. Then he answers. "I’d have to say it’s my picture of all my grandchildren."

I say, "Great answer" (Its a great answer because the picture is worhless to anyone but the client, and the picture is not the type of thing listed on a bankruptcy petition).

The trustee says, "That is a good answer."

The meeting continues without incident. That was the best Trustee question I’ve ever heard.

Today I met a married couple who were considering bankruptcy. They were unsure if one spouse should file or if the should file jointly. Each spouse had separate debts; no joint unsecured debts. The spouses jointly owned some real estate free and clear. Even in today’s market the properties had significant value. They knew the general entireties rule from reading my website, and they knew if either spouse filed bankruptcy separately the jointly owned real estate would be exempt. They asked me if the result if different if they both file a joint bankruptcy. They assumed that bankruptcy law would not permit spouses to jointly file bankruptcy and protect jointly owned property with equity. Isn’t the joint bankruptcy filing, they asked, the same as having joint unsecured debts?

I think the entireties property would remain exempt even if both spouses jointly file bankruptcy where they have no joint debts. The entireties would be exempt in this case if the spouses filed separate bankruptcies either concurrently or sequentially. Joint filing for administrative convenience should not change the entireties exemption. Also, outside of bankruptcy court none of the creditors of either spouse could reach the entireties property. I am not aware of any bankruptcy case that dealt with the question posed by these clients.

There is an exception to the rule. The rule prohibing cram downs of car loan made within 910 days of filing only applied to cars purchased for your personal use. Mr. DeMott's blog post explains a case where a husband purchased a car for his wife within the 910 days. The debtor husband, not the wife, signed the car loan. The husband and wife filed a joint Chapter 13. The judge ruled that the joint Chapter 13 plan could cram down the car loan even though it was taken out within 910 days of the bankruptcy.

The post quotes part of the bankruptcy attorney's argument:

““while section 302 permits the filing of a joint case, if the court were to find that the hanging paragraph applied to  Mr. Brown’s purchase of the vehicle, it would result in the Browns being penalized for filing a joint case.”

Read the post for a full explanation. If you are filing Chapter 13 with a car purchased within 910 days make sure you consider whether the car was purchased for the personal use of the debtor who signed the car loan. Cars purchased for children, for business use, for your spouse may be outside the cram down restrictions.

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

I explained to this caller that he could not convert to a Chapter 7 because he expected future job problems. If and when his income actually dropped significantly he then could convert to Chapter 7 if his future income and expenses passed the means test. Maybe a month or two prior to his job termination he might be able to skip his Chapter 13 payment which would cause the Trustee to file a motion for dismissal. In Chapter 7 this debtor would have to account for the non-exempt cash not paid to the Chapter 13 Trustee.

The debtor told me the name of his attorney. I know the attorney to be a competent and experienced bankruptcy attorney. It is not unusual for this type of question to be handled adequately by a bankruptcy attorney’s paralegal. The issue is not a difficult legal question that requires the attorney’s research or judgment. An experienced bankruptcy paralegal knows the answer to this debtor’s question and should be able to explain the answer to their client. Just because this debtor’s attorney chose not to, or was unable to, answer the question personally does not mean the attorney is not interested in the case or the client.

If want your bankruptcy attorney to personally respond to your every question you need to make your expectations known when you hire your attorney. Understand that those attorneys who are more personally involved in their clients’ bankruptcy cases tend to charge higher fees because they commit more time to each case. If you need unrestricted access to your bankruptcy attorney make sure you find an attorney whose practice meets your expectations and be prepared to pay for the service.

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

I looked up the case the attorney referred to. Sure enough, it was a Chapter 7 bankruptcy, and the judge issued an order stripping a second mortgage from the residence. The judge did not write an opinion explaining the order. There was no objection filed by the second mortgage lender.

I don’t accept this order as precedent. I think the judge’s office made a mistake. The law is clear on this issue. A second mortgage can be stripped only in a Chapter 13 case. That there was not lender objection and no written opinion suggests that this order was entered in error.

If a debtor’s attorney submits an order with a 20 day negative notice (any party has 20 days to object or the order will be granted) , and no party objects, the judge’s office will draft an order approving the motion and present it to the judge for signature. I think in this instance the judge’s office saw an order to strip a second mortgage with a routine negative notice, did not catch the fact that it was a Chapter 7 proceeding, and drafted an order approving the motion for the judge. If the judge understood that this was a Chapter 7 case, the judge would have written an opinion explaining why the mortgage could be stripped from the homestead.

This case may be a windfall for this debtor. Debtors may get in trouble with the court if they try to "slip by" a strip motion in a Chapter 7 bankruptcy.

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

The general rule is that Chapter 13 debtors can assume or reject leases and other contracts. This debtor will assume the car lease to keep the car for the balance of the lease term. Another general Chapter 13 rule is that debtors cannot modify the terms and conditions of existing contracts such as mortgages and leases. I don’t think this Chapter 13 debtor can extend the term of his car lease.

However, there is an easy solution. Three years into the bankruptcy plan the debtor can request permission from the Chapter 13 trustee to purchase a car when the car lease expires. The key will be to keep the debtor’s monthly payments for the next car at or below the amount of the debtor’s payments under the current lease. If the debtor does not increase his monthly car expenses the trustee will approve the purchase because the new car payment will not increase total monthly expenses and will not decrease the amount of money paid monthly to the debtor’s unsecured creditors under the bankruptcy plan. New car debt equal to or less than the current car payment does not negatively impact the debtor nor his creditors.

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

My clients’ had two mortgages on their principal residence including a small first mortgage and a large second mortgage. The U.S. Trustee took my clients’ deposition. During the deposition he asked the clients why they incurred the large second mortgage. The clients testified that they used the proceeds of the large second mortgage to make down payments on their investment properties during the real estate bubble.

The U.S. Trustee concluded from the deposition testimony that the debtors’ debts were primarily non-consumer debts because the large second mortgage on the residence, as well as the mortgages on the debtor’s investment properties, were used for investment purposes. The general rule is that mortgages on your primary residence are consumer debts, not business debts. When a debtor uses a homestead’s second mortgage proceeds for business as opposed to consumer purposes, such as down payment on investment properties, the second mortgage is deemed to be for investment rather than consumer purposes.

A debtor whose debts (secured and unsecured) are primarily non-consumer debts is exempt from the means test in determining eligibility to file Chapter 7 bankruptcy. The U.S. Trustee explained that the non-consumer debt test also applies to the so-called "b(3)" abuse issue. Even when the U.S. Trustee believes a Chapter 7 debtor is living an extravagant lifestyle after filing Chapter 7 bankruptcy the Trustee cannot challenge the filing as an abuse when the debtor’s debts are primarily non-consumer debts.

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

Some of my own clients have asked me whether they can combine a Chapter 7 bankruptcy and a Chapter 13 bankruptcy to both discharge unsecured debts and then strip their second mortgage from their primary home. The plan is to file a Chapter 7 and discharge all credit card debt. After the Chapter 7 discharge is entered, the debtor would immediately file for Chapter 13 bankruptcy. There would be not automatic stay applied in the Chapter 13 case, but the debtor would be current on his mortgage payments would not benefit from an automatic stay’s protection from foreclosure. The debtor would file a motion to strip the second mortgage in the Chapter 13 case. The debtor would end up with no unsecured debts (all discharged in the Chapter 7) and no second mortgage on his residence (stripped in Chapter 13). Can this plan work?

I don’t think this plan will work, and here’s why. The judges in the Orlando Division have written a standard order granting a motion to strip a second mortgage in Chapter 13 case. The standard order states that the debtor’s second mortgage will be released from the property when the debtor completes the Chapter 13 plan and the court enters a Chapter 13 discharge of any debts not paid in the plan. However, under the new bankruptcy law a debtor is ineligible for a discharge under Chapter 13 if he received a prior discharge in a Chapter 7 case file four years before the current Chapter 13. Therefore, the Chapter 13 filed immediately after the Chapter 7 could not earn a discharge. Since the standard mortgage strip order requires a Chapter 13 discharge, the Chapter 13 filed soon after the Chapter 7 case could not strip the debtor’s second mortgage.

Sure, the debtor could wait four years after the Chapter 7 case to try the Chapter 13 mortgage strip, but by then the debtor either will have defaulted on the unaffordable second mortgage or a market recovery will have increased the property value to the point where a mortgage strip is not allowed.