Underwater investment property -- paralegal said defiency makes me ineligible?!

[s2kreno]

Hi,

I am trying to file a Chapter 13 bankruptcy and my attorney's paralegal called and said that I am not eligible and must do Ch 11 because I own an underwater investment lot (I paid $345k for it a few years ago, owe $290k and today it's worth $90k). I no longer want the lot and assumed that filing would protect me from any potential deficiency judgment. I have run the numbers using Nolo's means test and calculator and came up with a payment of a couple hundred $ a month. The paralegal said that my payment would be $1,500 a month -- kind of hard to believe.

Ineligible because of underwater property?! I have never heard of this; most people these days would be out of luck if underwater property was a disqualifier I think. I once worked for a bankruptcy attorney but his clientele was almost always Ch 7 material so this did not come up in my experience. Does a deficiency on secured property matter in a Ch 13 if you want to surrender the property? Or is this person smoking something?

[momofthree]

Does the $200k unsecured deficiency balance push you over the unsecured debt limit of $360k-ish?

Could you file non-consumer ch.7?

[s2kreno]

Does the $200k unsecured deficiency balance push you over the unsecured debt limit of $360k-ish?

Could you file non-consumer ch.7?

Hadn't considered that, thanks. But no, my other unsecured equals about $100k. And secured is just about $1,000,000. Thought we passed the means test (tried the calcs on a couple of sites) but she says that we don't. I'd be more inclined to believe that if this other didn't seem so off the wall. My poor husband was very shaken up so I am trying to get to the bottom of it; the attorney is out of town for some time.

[CoBelle]

I just got screwed on this very thing...but under different circumstances.
So: you say you owe $290 and their is $90 equity = $200 unsecureed and you have another $100k unsecured...right?
On the mil that is secured, were you planning on avoiding any 2nds or judgment liens? If you were, then that amount that is
now secured becomes unsecured and if more than $60k could put you over the limit.

Otherwise, I'd say that you might need to find another attorney....but good luck whatever you do.

[s2kreno]

Here is the scoop:
Primary residence: owe $717k, value $800k, equity $93k
Lot: owe $290k, value $90-$100k, equity -$200k
Car #1: owe $15k, value $22k, equity $7k
Car #2: owe $9k, value $18k, equity $9k
Car #3: owe nothing, value $10k, equity $10k

Total: Owe: $1,031,000 secured debt but I don't want the lot. Without that loan it's $741k (if that matters).

I am a bit confused about the secured debt. I'm assuming that the reason for putting a limit on it is to give the unsecured ones a chance to get some repayment? If that's the reason, shouldn't secured debt against an asset that I wish to surrender go away?

Second, the calculation has changed since we started because my lenders put me in trial modifications for a year, racked up big arrearages, then capitalized them as a condition of the mods. So the balances did increase by almost $40,000 (before that we were under $1 million); not sure if that matters.

Third, would it help to do a deed-in-lieu and make the lot loan go away before filing? Or sell one of my cars and use it to pay off the other car loan?

[justbroke]

I would definitely check to see if you are a non-consumer filer based on what you owe. It's not the unsecured versus secured portion, it's the total debt. However, if you have a loan on your primary residence and it's over $290K, it's less likely that you can do a non-consumer Chapter 7. It reads as though you have a sizable mortgage on your primary residence. However, if that's an investment home that you moved into -- after purchasing it as an investment -- you might still make a non-consumer case.

Ineligible because of underwater property?! I have never heard of this;

You are ineligible because 11 USC 109(e) limits the amount of unsecured debt that you can have when you file a Chapter 13. That amount is about $360K (up from $336K earlier this year).

Does a deficiency on secured property matter in a Ch 13 if you want to surrender the property? Or is this person smoking something?

No, the deficiency wouldn't matter. What matters for a Chapter 13 is whether you are an "eligible" debtor. That is clearly defined in 11 USC 109(e) as someone with under $360K. Your choice is Chapter 7, if eligible, or Chapter 11.

The Congress is aware that many debtors -- including myself -- that benefited from the period of prosperity during the early 2000's are going to be hit hard by this low limit. However, Congress has done nothing. (Too busy spending money I guess.)

[s2kreno]

I am very very confused. The ONLY non-secured debt I have is $100k medical bills and the $200k deficiency. That's only $300k. I am under that limit, correct? Per Nolo.com:

Chapter 13 bankruptcy isn't for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you'll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A "secured debt" is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don't pay the debt. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right.

[justbroke]

I can't tell you exactly if you're over / under either of the limits. Your attorney seems to have more numbers which put you over the limit.

[CoBelle]

You seem to be under the unsecured limit, but may have gone over the secured limit....check the newest figures and so yep, you'd haveto get rid of something before you filed or it will be dismissed ....and you will immediately lose your automatic stay.

[daytona]

One thing my Atty told me was that in a Ch13 if you let a secured property go (lot) then the lender usually can't move fast enough to get a deficiency to tack on for "unsecured". Essentially it is "deemed" secured... This does depend on what stage the lot is relative to foreclosure, etc...meaning if it's already in or near foreclosure they might be able to move fast enough. The "limits" are higher for 2010 also; 1,081,500 secured, 360,525 unsecured.

[s2kreno]

Hi, i am not interested in an automatic stay; properties are current. But I don't want the lot and if the deficiency doesn't make it in there then that's more money for the other creditors. I am actually eligible for a 7 but am trying to do a 13 to do whatever I can for my creditors without killing myself.

The mystery is solved, however -- the paralegal thought that I was upside down on the primary home as well because silly Zillow said that it was only worth $500k. I told her that Zillow valued the property at just over $800k at the same time I had a full-on appraisal for $1.4 mil. Primary is not upside down and we signed off on the paperwork today. What a relief.

[justbroke]

One thing my Atty told me was that in a Ch13 if you let a secured property go (lot) then the lender usually can't move fast enough to get a deficiency to tack on for "unsecured".

Smart lenders, who think this will happen, will file a claim with both a secured and unsecured component. They usually take $1 of the secured part and claim it as unsecured. That way, they can amend the claim later.

[justbroke]

The mystery is solved, however -- the paralegal thought that I was upside down on the primary home as well because silly Zillow said that it was only worth $500k. I told her that Zillow valued the property at just over $800k at the same time I had a full-on appraisal for $1.4 mil. Primary is not upside down and we signed off on the paperwork today. What a relief.

Yes, what a relief! Sometimes you have to re-check your attorney's numbers and make sure that the attorney is using the right values.