The bar has learned to navigate the new law, shuffle the additional forms and avoid the events of “automatic dismissal”.

We only  need one little change to the law to make relief from the consequences of the Great Recession available to a hunk of the Silicon Valley middle class now excluded.  We need an increase in the Chapter 13 debt ceilings.

Only Chapter 13 of the available chapters  limits who can file a bankruptcy case by the size and composition of their debt.  Adjusted tri-annually, today a Chapter 13 filer’s secured debt cannot exceed $1,081,400 and unsecured debt of $360,475.

You might ask how could a limit of $360,475 not cover most people’s unsecured debts, which are usually credit cards, personal loans, and medical bills?  Because the home equity loans that are now underwater are counted as unsecured, despite the fact that there is a lien on the debtor’s home, are added to the unsecured debt total.

Shrunken home values have left a large swath of Silicon Valley homeowners with HELOC’s no longer secured by equity.  When the HELOC balance is added to the usual array of credit cards and student loans, it’s not hard to run over the $360,475 limit.

Chapter 13 has features unique among the chapters of bankruptcy that make it important for families trying to reorganize their finances.  In Chapter 13, you can cure mortage arrears, catch up on taxes or family support, and most importantly these days, strip off mortgage liens that aren’t attached to actual value in collateral.

I would argue that the debt limits in Chapter 13 are no longer meaningful at all and ought to be doubled or tripled to cover a wider group of consumers.  Before BAPCPA, Chapter 13 had some very special and more advantageous provisions, sometimes called the super discharge.  Chapter 13 was seen as a privilege and because creditors have less influence in Chapter 13 than they do in Chapter 11, the other reorganization chapter, debt limits struck a balance between the rights of debtors and creditors.

With “reform”, Chapter 13 has become the presumptive norm. The means test is designed to push people from Chapter 7 to Chapter 13.  The super discharge was largely gutted by BAPCPA.

There seems little reason to choke off entry to Chapter 13, unless of course the unspoken intent of the Congress is that the middle class should soldier on, swamped by debt it can never repay because “people should pay their debts.”

There are work arounds for families who are not eligible at the outset for Chapter 13, including single spouse filings and Chapter 20 (a 7 followed by a 13).   But they are more expensive and inefficient than raising the debt limits for Chapter 13.

At issue was whether Jones could discharge a state tax debt in her Chapter 7 case;? the question turned on an arcane question of what the Bankruptcy Code means when it provides that property “vest” in the debtor at plan confirmation.

If the automatic stay continued in effect after confirmation in Ms. Jones’ prior Chapter 13 bankruptcy, the FTB’s claim in her subsequent case was protected from discharge.? If, however, vesting terminated the protection for her property provided by bankruptcy law, sufficient time had run to make the tax claim dischargeable.

The Court of Appeals noted that there are four different legal theories about what it means for property to “vest” in a Chapter 13 case.? While declining to decide directly which of those four approaches was correct, the 9th Circuit panel held that some property of the estate vested in the debtor at confirmation and therefore the clock started ticking on the FTB’s window for collecting the tax.? That window closed before Ms. Jones filed her new Chapter 7, and the tax was thus old enough to be eliminated in bankruptcy.

I’ve been following and speaking on this issue of vesting for a couple of years.? I had hopes that this circuit would choose sides and provide some guidance to bankruptcy practitioners.? It’s frustrating that presented with an opportunity to affirm the Bankruptcy Appellate Panel’s analysis that the estate terminates at vesting, the circuit court ducked.? But their decision came to the same place the BAP was:? a post petition creditor is free to collect its claim against the debtor following the vesting of the property of the estate at confirmation of a Chapter 13 plan.

The law, signed on July 15, 2011, becomes effective immediately.? It applies to properties, held by individuals, comprising 1-4 residential units.? Senate Bill 458 accords the same restrictions on seeking a deficiency judgment as SB 931 mandated for the senior lender.

Before these two bills were enacted, a secured lender who agreed to a short sale might reserve the right to collect the shortfall from the seller.? Too often, the selling homeowner was not aware until very late in the transaction whether he would emerge free of the debt or still owing the lender.

Now, for transactions covered by this legislation, consent to the short sale is a waiver of future action against the borrower.

Hurray!

A bill to again revise California Exemptions, introduced by Assembly Member Wieckowski, has recently passed the Assembly without opposition and is now in the Senate.? On June 14, 2011 the bill was favorably reported out of the Senate Judiciary Committee and is slated to be taken up by the Senate Appropriations Committee within the next few weeks.? It appears to be on a fast track.
The stated purpose of the bill is as follows:

This bill would revise and recast those alternative exemption provisions and would, among other things, increase the exemption available for the debtor’s interest in motor vehicles; jewelry, heirlooms, and works of art; and tools and other items used in the debtor’s trade, business, or profession or in the trade, business, or profession of the debtor’s spouse. The bill would revise the alternative exemption provisions relating to household furnishings, life insurance contracts, wrongful death and personal injury actions, unemployment compensation payments, and cemetery plots and would add to those alternative exemption provisions exemptions for workers’ compensation benefits, specified aid payments and relocation benefits, and financial aid for higher education.

Existing law provides an exemption from enforcement of a money judgment for a homestead, as defined, in specified amounts.

With regard to the homestead exemption in CCP section 704.730, the bill results in the increase in the exemption amounts as follows:

Current Law	Proposed Change
Individual	$75,000	$150,000
Family Unit	$100,000	$250,000
Over 65/Disabled/Low Income	$175,000	$350,000

The bill also increases the maximum income allowed to qualify for the low income homestead exemption for people from $15,000 to $22,000 for an individual and $20,000 to $29,000 for a married couple.

With regard to the exemptions applicable if no homestead is claimed,? CCP section 703.104(b), the bill does not increase the wildcard, per se, but does increase other provisions and also creates new exemptions such that the total amount exemptible has now increased substantially.? .? The stated purpose of these amendments is to conform the CCP Section 703.140(b) exemptions to the CCP Section 704.010 et seq. exemptions to protect those without homes in the event they file for bankruptcy protection.?? While the language of the changes to the CCP Section 703.140(b) exemptions would appear to parallel the CCP Section 704.010 et seq. exemptions, the amounts are not the same. ?The exemptions available under CCP Section 703.140(b) are substantially higher than those in CCP Section 704.010 et seq.

For example, a burial plot which previously was included under CCP section 703.140(b)(1) now has its own separate section, new CCP section 703.140(b)(17) and is exempt without regard to value.

A chart of certain of the increases follows:

Property Exempt	Current Law	Proposed Change
Vehicles	$3,525 (one vehicle only)	$4,800 of aggregate equity
Jewelry, heirlooms and works of art	$1,425	$5,000
Tools of the Trade	$2,200	$6,075 (and if married both spouses entitled to claim exemption)
Unmatured life insurance including annuities but not the loan value	$11,800	unlimited
Loan value of unmatured life insurance	included in $11,800 above	$9,700 (and if married both spouses entitled to claim exemption)
Personal Injury	$22,075 (for actual pecuniary loss)	unlimited

The Bill will result in a reduction in the number of bankruptcy cases administered with assets.? In other words, Debtors, without homes to protect in Chapter 7 bankruptcies, will be able to protect more assets.? Summary by Elissa Miller of Sulmeyer, Kupetz, PC in LA.

These changes are proposed, not passed.

Effective January 1, 2011, a lender who approves a short sale of California residential property may not look to the seller for the shortfall.? The addition to the California Code of Civil Procedure at Section 580(e) applies only to properties of one to four units and has an exception if the seller commits waste or fraud.

This closes a terrible pitfall in the short sale process that has distressed me for a long time.? Borrowers with properties worth less than the debts secured by the property have pushed to sell the property rather than let the property be foreclosed.? The “reasoning” (often, in my mind,fallacious) is that a short sale is less harmful to the borrower’s credit than foreclosure, a view chorused by realtors who see a commission in the deal for themselves.

My biggest objection to the short sale is that often the realtor has not explored with the borrower whether the lender is expected to forgive the debt not satisfied by the sale, or whether the lender expects the seller to sign a new note for the shortfall.

This new legislation puts an end to that choice:? approval of a short sale is deemed to be a waiver of any right to collect the balance of the debt not paid from escrow.

Prohibiting collection of the shortfall brings with it another issue realtors often don’t point out to sellers:? the amount forgiven by the lender will be reported to the IRS as income! Canceled debt is included in the seller’s income, just as though the seller had received that amount in cash, unless the seller is insolvent according to the IRS’s calculation, or the debt was earlier discharged in bankruptcy.

This is of necessity a summary of a complex issue and if this fact pattern applies to you, get thee to a tax advisor before concluding a short sale.

Sellers at short sales will now have certainty that they won’t be liable for the unpaid debt on the first mortgage.? They will have to address the tax consequences of the sale and the rights of any holder of junior liens on the property sold.

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