S is for Strip in my Bankruptcy Alphabet.? Bankruptcy lawyers delight in stripping liens from people’s homes.

In any chapter of bankruptcy, a debtor can void judgment liens that have attached to assets that would otherwise be exempt.

In Chapter 13, tax liens and other statutory liens can be stripped off the asset if there is no value in the asset, after considering liens that were perfected earlier, for the lien in question to attach to.

But the crowning feat in Chapter 13 is to strip off a voluntary mortgage lien on a home.

When is it possible to strip off a mortgage lien?? In the 9th Circuit, and several other circuits, when there is not a single dollar of value for the mortgage to attach to.? When that’s the case, the Bankruptcy Code says that the lien simply isn’t an allowed, secured claim.? And only allowed secured claims are protected from modification by ?1322.

That’s a long, lawyerly explanation of how Chapter 13 bankruptcy can utterly eliminate thousand or even hundreds of thousands of dollars in debt that once encumbered a home.

The debtor’s ability to strip a mortgage lien is dependent on three things:

1. The value of the home in today’s market
2. The sum of the liens on the home senior to the lien to be stripped
3. Completion of the Chapter 13 plan

During the Chapter 13 plan, the loan underlying the stripped lien is treated and paid (or not) just like all other unsecured claims.

At the end of the Chapter 13 plan, the lien representing the stripped mortgage is forever void, and any personal liability that the homeowner had to the lender is discharged.

Lien stripping alone is enough for homeowners to think about filing Chapter 13 even if the balance of their debts are manageable.

I’m sure my mother never dreamed I’d grow up to be a stripper!

This post has been brought to you by the letter S.

Jay Fleischman, New York bankruptcy lawyer and the guy who started the alphabet madness, claims? S is for Security Interest

Image courtesy of Leo Reynolds.

Car lenders who finance car loans including the excess debt on a trade in lost some of their protected status in bankruptcy when the Supreme Court declined to review a? 9th Circuit decision;? Californians? will continue to benefit from the debtor friendly decision in Penrod, arising out of a San Francisco bankruptcy case.

At issue was whether the prohibition on cramming down the debt on a vehicle purchased within 910 days of a bankruptcy filing protected “negative equity” financed in the car purchase.

“Negative equity” is the debt in excess of the trade in’s value.? That left over debt is added to the total of the new car loan and is unrelated to the value of the purchased vehicle. In Penrod, the Redwood City resident? had traded in a car worth $6,000? on which she owed? $13,000.? The new car loan included $7000 necessary to pay off the debt on the trade in.

The legal issue is whether that left over debt should enjoy the projections extended car sellers in BAPCPA for purchase money loans on the debtor’s car.

Every other circuit that addressed the question has given purchase money protection to the entire debt including the negative equity portion of the new loan. The 9th Circuit held the negative equity was not purchase money as to the current car and remanded the case for the bankruptcy court to figure out how to apportion the payments made before bankruptcy between the purchase money element and the leftover debt element.

It’s surprising to me that SCOTUS didn’t accept cert on Penrod, since there is clearly a split among the circuits and it seems? to this California bankruptcy lawyer that the Supremes take great pleasure in overturning the 9th Circuit.

But I’ll take a victory however it presents itself and await a decision on how to calculate what can be trimmed from a debtor’s car loan in bankruptcy.

Image ? ArchMen – Fotolia.com

Come on, Madame Trustee, get over it. What is there about BAPCPA that leads you to expect that it or its misbegotten spawn of a means test treats debtors fairly or equally? And where does the Chapter 13 trustee have a mandate to challenge the filing of a case by a debtor whose spouse will not or cannot join in the filing?

The Bankruptcy Code clearly permits a married person to file without their spouse. I see no basis to deny relief to one spouse or to hedge that relief because their spouse does not file.

The single spouse filing has become more attractive for debtor?s counsel in a world of longer periods between bankruptcy filings and Chapter 13 debt limits that disqualify homeowners in sections of the country that once had a hot real estate market.

I will join in the chorus of boos about how the means test is obscure. In so many ways, it simply does not fit neatly with a myriad of real world configurations. How does it apply to the recently married, the recently widowed, the family whose composition will change when the expected baby is born? What?s the logic of including family support received in Chapter 7 but backing it out in Chapter 13?

Face it, this is simply an instance of drafter?s malpractice. The formerly explicit power of judges to determine whether expenses were reasonable or the plan non-abusive has been superseded by a judicial warrant to interpret an opaque and ill-conceived statute.

I sympathize with your difficulty in determining how to assess the appropriate elements of the marital deduction. We don?t get much help in the statute. Some expenses seem obviously deductible: support arising from a previous marriage and debts incurred pre-marriage come to mind. It?s harder to find an analytic line for debts incurred during marriage in the non-filer?s name only. Is the deciding factor who is liable or the purpose of the expenditure?

But looking at the issue of fairness from another perspective, why should a creditor who has no claim against the non-filing spouse get the benefit of all of the non-filing spouse?s income? If the creditor expected recourse against the spouse, they should have bargained for it at the inception of the debtor/creditor relationship. Is the creditor any worse off than they would have been had the marriage failed before the bankruptcy case was filed?

Join debtors? counsel in trying to make sense out of nonsense.

Image courtesy of aka kath

Can you afford to cram down a mortgage when cram down is permitted?

Mortgages on a debtor’s home are protected from cram down in Chapter 13 by 1322(b)(2).? Mortgages on any other kind of real estate can be reduced to the value at filing of the collateral securing the debt as of the date of the filing of the case.

The practical dilemma posed by cramming down partially secured mortgage liens in Chapter 13 for us in the 9th Circuit has been the decision in Enewally. The debtor’s plan sought? to reamortize the reduced claim over the remaining loan term.? Enewally held that the reduced secured claim had to be paid in full during the life of the plan.

With the constriction of mortgage lending that has put refinancing out of reach and the BAPCPA provisions that secured claims be paid in equal installments, the real world utility of the right to strip down a lien is highly restricted.

So, I was tickled to see the court in Elibo, 447 B.R. 359 ( S.D. FL 2011) , hold that the debtor could reduce the debt to the current value of the collateral while maintaining the term of the loan.

Elibo is a trial court opinion outside of the 9th Circuit, so it has no immediate answer to the issue here in the 9th, but it is a beginning on what I hope is a judicial dialogue about cram down and long term debts.

It was more obvious before BAPCPA: we calculated the debtor’s projected income and living expenses, and all of what was on the bottom line was paid into the plan. Now, we use Congress’ objective? measure of what it should cost to live, and pay 100% of the arbitrary formula? into the plan. There is no provision in the Chapter 13 means test for savings other than long term retirement savings.

I’m not knocking saving for retirement. In fact, as debtors counsel, my most oft-repeated reason for reluctant clients to take the plunge and file bankruptcy is to provide for retirement. Discover, I tell them, does not have to retire, and you do. What have you saved for that day?

But every household needs some savings for today, for tomorrow, and next month.

The Supreme Court’s Ransom decision reinforces the sense that saving is not a financial virtue. A debtor with a paid for car is not reminded that the old car will need to be replaced, and saving toward that inevitability is a good thing. Rather, the car is paid for and we’ll indulge in the idea that the car will last another 5 years and devote that cash flow to creditors. We have effectively mandated that, instead of putting a serious down payment on the next car, our client will again finance the next purchase at whatever interest rate is available to the newly discharged. The cycle of borrowing is perpetuated.

Debtors are required to take a class in personal financial management to get their discharge. Those classes surely do not promote consuming 100% of one’s income. Short term saving is needed to provide for the unexpected and the infrequent. Otherwise, you continue to live on the financial brink

It is ironic, but true, that a Chapter 7 debtor can begin reforming the way she handles money almost immediately after filing bankruptcy. A Chapter 13 debtor lives for 3 to 5 years with a budget that makes no provision for an emergency fund.

I would like to think that Chapter 13 is rehabilitative, that it uses the duration of the plan to build new and better habits of money management. That isn’t what’s happening. As it is, the system’s distaste for savings while debts are unpaid perpetuates budgeting to spend every single dollar the debtor handles.

The language of our confirmation order provides that the debtor’s post petition income is submitted to the supervision and control of the Chapter 13 trustee. What kind of financial professional is the Chapter 13 trustee if that supervision and control doesn’t encourage some level of savings?

Or is the financial management class just window dressing whose lessons don’t really apply until the creditors have gotten their pound of flesh?

This article was originally written for the Variety of Views feature at ConsiderChapter 13.org.? Unfortunately, there, it was? behind a pay wall.

Image courtesy of kenteegardin

Perhaps I shouldn’t be surprised that? folks who didn’t take filing tax returns seriously in the first place continue to blow it off when bankruptcy is filed.? But filing returns is mandatory and dismissal automatic under the provisions of bankruptcy reform.

What debtors need to understand is that bankruptcy is a benefit and to get the benefit, you need to play by the rules on the timeline created by the Bankruptcy Code.