Articles Posted in Chapter 13 Bankruptcy

Many more bankrupt debtors will be able to keep their house in a Chapter 7 now!

In a surprising decision by a court of appeals not noted for its sympathy for debtors’ positions, the Eleventh Circuit Court of Appeals, held in a unanimous decision that a Chapter 7 debtor may strip off a second mortgage. Prior to this O’Neal decision on May 11, 2012, debtors could only do this in a Chapter 13 case. The Eleventh Circuit is the federal appellate court for the Middle District of Florida which includes the Tampabay area.

Twenty-three years earlier, the Court of Appeals had reached this conclusion in Matter of Folendore, 862 F.2d 1537 (11th Cir. 1989), and the present court reasoned that the decision in Folendore survived the Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992), which held that a Chapter 7 debtor may not cram down an undersecured claim to the value of the collateral. Here, the Court of Appeals reasoned, the creditor’s junior mortgage lien was both allowed under Code § 502 and wholly unsecured under § 506(a), and the lien was therefore voidable under the plain language of § 506(d). In re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012).

Our Tampa, Florida bankruptcy law firm is small enough that we are able to help time our clients’ bankruptcy case for maximum results. Without proper timing, a bankruptcy can feel more like a trap than a remedy for financial ills. We are often able to save our clients several hundred dollars a month by simply correctly timing their case. A high volume mill firm won’t do this, their business model is based upon touching their clients’ files a minimum number of times and getting it filed asap.

However, the timing can be critical. Both in terms of assets that our clients can keep and the type of case or relief they qualify for. Most of our clients have something to lose. Our goal is to help ensure they come out ahead when their bankruptcy is filed.

Simple things to keep in mind. It is not wise to file a bankruptcy if you anticipate large expenses in the future, such as an upcoming surgery where there could be uninsured medical costs. It will be another 8 years before you can file Chapter 7 again so choose your timing wisely.

Due to the particularly bad housing market in Florida, more of our bankruptcy debtors are finding themselves exceeding the debt caps in a Chapter 13 when they have severely underwater homes. When this happens, a debtor becomes ineligible for Chapter 13 relief and is required to file a more expensive and cumbersome Chapter 11 in order to keep their home. Thus, those clients who most need the relief of a Chapter 13 reorganization plan, including stripping their second mortgage and having up to 60 months to catch up on their first mortgage, are denied the relief because they exceed the amount of debt allowed in a Chapter 13. Presently, the maximum amount of secured debt allowed is $1,081,400 and $360,475 for unsecured debt. It is the unsecured debt cap that becomes a problem with large underwater second mortgages, undersecured first mortgages, combined with credit card or medical debt.

This hurdle was likely not even considered by Congress when it established the debt caps in the first place. With the enactment of the Bankruptcy Code in 1978, Chapter 13s became much more widely used as sole proprietors became eligible for the first time. Prior to the 1978 revisions only wage earners qualified. While opening up Chapter 13 relief to any with regular income (including business owners and social security recipients), Congress saw the potential for abuse and established debt caps so that sole proprietors of large businesses could not evade the more stringent and creditor-friendly requirements of a Chapter 11.

So what was intended as an expansion of the scope of Chapter 13 eligibility has inadvertently turned out to be a hindrance. The courts and trustees have taken different views of eligibility, and until the U.S. Supreme Court or Congress weighs in, uncertainty will rule. Some courts consider it jurisdictional, some consider it discretionary, and the time periods for determining the total debt varies from when the case is filed to after the creditors bar date to see what debt remains after creditors file their proofs of claim and any objections are ruled upon.