Chapter 13 - 2nd mortgage cram down instead of lien strip?

[13herewecome]

We have recently filed for 13. My attorney has a plan to cram down the 2nd mortgage rather than a lien strip. I have read here that there is no provision for a mortgage cram down in BK but he is telling us that since the 2nd is held by a Credit Union and they typically cross-collateralize their loans with our other accounts that a cram down is then possible. There is no question that there is no equity in the house for the 1st, much less the 2nd. He wants to go the cram down path so that we can still use the credit in the repayment calculations. If he uses the lien strip then there is no mortgage to claim a credit for - a catch 22. The new cram down amount would then be paid through the plan.

Anyone have thoughts on this? Seems logical but I don't know if it is possible. Thanks!

[justbroke]

It would be interesting on what theory the attorney is using and what caselaw that could be cited that shows that you could do this. This would be a back-door "lien strip" in any case and if the value of the property is worth more than the first lien, then the 2nd would be "partially secured" which would make the entire claim allowed... which means it is subject to the protections of 11 USC 1322(b).

I just re-read this and I see there is not enough equity. So why is there a lien-stripping issue at all? It's because you want to use the credit for the mortgage payment too? That's just too odd... if you ask me.

However, it is a good theory and I think the attorney is cutting edge.

[despritfreya]

It would be interesting on what theory the attorney is using. . . However, it is a good theory and I think the attorney is cutting edge.

JB,

Like you, I have no clue why OP or OP's attny would not want to do the lien strip if there is no equity. Any other result makes no sense.

However, if there is a tiny bit of equity and the CU is cross-collateralized by other prcoperty of the debtor the attny is correct that a cram down is possible. Remember, the anti-modification provision of 1322(b)(2) states that the claim cannot be bifurcated if the lender is only secured by the debtor's principal residence. If there is a cross-collateralization provision and if there is other property attached to that provision then 1322(b)(2) should not apply.

But, why pay a dime if you can strip off the lien in full. . .

Des.

[justbroke]

But, why pay a dime if you can strip off the lien in full. . .

I had to rethink this after I read this...

He wants to go the cram down path so that we can still use the credit in the repayment calculations. If he uses the lien strip then there is no mortgage to claim a credit for - a catch 22. The new cram down amount would then be paid through the plan.

I don't understand this strategy. The only thing this does, is take money from the unsecured creditors and gives it to the credit union. In other words, this does not create more money for the debtor. It just moves money from "DMI" (disposable monthly income) to secured debt payments (expense).

Additionally, if you're in a District like mine (in Florida), the Trustee will be making the payments and you'd probably be under a wage deduction order as well; the money would never reach the debtor.

This just doesn't make sense now that I think about the shift from the payments going to "DMI" and the payments just going to the CU. Nothing is gained from the debtor standpoint... or am I missing something?

Des?

[despritfreya]

JB,

Ok, now I see. OP has excess DI and does not want to pay it to unsecured creditors. Instead he plans on bifurcating the CU claim and paying the secured portion with the excess. I too do not understand and believe this reasoning is flawed for 2 reasons, the 2nd being the more important one. . .

1. If OP can afford $x and $x must be paid for 60 months treating the CU as partially secured is irrelevant. The "pie" is the "pie" and who cares where the $ goes?

2. If OP confirms a Plan treating the CU as partially secured, what happens if his/her income drops and he/she can no longer afford the "higher" payment? OP is screwed. Had OP just agreed to pay the unsecureds what he could afford (including the striped 2nd if there was no equity), he/she could have simply modified the Plan based upon changed circumstances and reduced overall funding. The problem with bifurcating the CU claim is once the Plan is confirmed the amount being paid on the secured portion is binding upon the creditor AND the debtor. He/she cannot modify the Plan to reduce the secured portion just because he/she can no longer afford to pay it. If he/she loses income to the point that he/she can no longer fund paying the bifurcated secured claim he/she may have to surrender the property. This is not a desirable outcome.

In my opinion, if you can strip you strip. If there is some equity in the property and 1322(b)(2) does not apply then you bifurcate.

Des.

[13herewecome]

Des - you bring up some very interesting points! The way I understood it was that it would benefit me and my plan to argue that the house is worth $x more than the 1st mortgage - lets say $1000 - and that we would cram down and pay the CU that $1000 through the plan. Saying we have $1000 in equity is somewhat of a fib because in reality the house is worth way less than the 1st mortgage, but the CU couldn't/shouldn't argue it because my other option would be a strip in which case they get nothing as an unsecured creditor. (My plan will be 0% to unsecured) The benefit to me was that being able to use the mortgage credit and paying the CU a small amount through the plan was somehow better than doing the strip.

I guess I need to look at the numbers a little closer and question my attorney some more as point #2 from Des is kind of a scary thought. We fought long and hard (2+ years) for a 1st mortgage modification and finally succeeded. I don't want that potential hanging over our head!

________________________
Update

I literally just received our proposed plan from the attorney to sign and in regards to the cram down it states that "the balance of the claim will be paid as general unsecured". So to me that means that Des's point #2 does not apply, right?

Also, in a lien strip situation, if a debtor does not complete the plan in full then the lien is back in full force. For me, the worst case scenario in either case would potentially be losing the house. So that really should just be taken out of my thought process altogether.

Thoughts and ideas are greatly appreciated! Thanks!

[justbroke]

I literally just received our proposed plan from the attorney to sign and in regards to the cram down it states that "the balance of the claim will be paid as general unsecured". So to me that means that Des's point #2 does not apply, right?

This means that it's being stripped. So Des' point #2 does not apply at all.

[despritfreya]

I literally just received our proposed plan from the attorney to sign and in regards to the cram down it states that "the balance of the claim will be paid as general unsecured". So to me that means that Des's point #2 does not apply, right?

This means that it's being stripped. So Des' point #2 does not apply at all.

NO.

This sounds like a cram down. The balance is being paid as unsecured. Logically this means that there is some portion that is being paid as secured. How much is being paid as secured and why?

I do not understand OP's comment that he needs to treat it as partially secured to use the "mortgage credit". Is OP referring to Form 22C in that if he treats the CU as totally unsecured he cannot include the mortgage payment as an allowed deduction in calculating Form 22C DI? That is the only thing I can think of. If it is then I believe his attorney needs to look at the Lanning decision.

Des.

[justbroke]

Des, when I did my plan, I had the same language, but it was because of the lien strip. However, the strip wasn't completed until the plan was confirmed -- they do everything at the final confirmation hearing in my District. The "balance" to be paid as an allowed unsecured claim is the language that I used, but was based on what the order on the lien strip. My lien strip was approved, and I didn't need to go back and modify the plan, which was confirmed the same day. So maybe mine was different.

Shouldn't there be a hearing on the cramdown? Shouldn't there be a Motion to Determine Secured Status and Value? If the hearing on the Motion indicates that the secured value is $0.00 then the "balance" would be the entire claim? Just thinking aloud.

[despritfreya]

Des, when I did my plan, I had the same language, but it was because of the lien strip. . .

Language is an art and, like "beauty", art is in the eye of the beholder.

Shouldn't there be a hearing on the cramdown? Shouldn't there be a Motion to Determine Secured Status and Value? If the hearing on the Motion indicates that the secured value is $0.00 then the "balance" would be the entire claim? Just thinking aloud.

Yes, whether it is a cramdown or a complete strip a 506 Complaint (or some motion depending on the procedure in the district) is in order. The “balance" would be the unsecured claim but to me such language presumes there is some portion that is not included in that “balance”.

Des.

[justbroke]

I know you're right Des, but I'm wondering if you still need the Motion hearing to Determine Secured Value given the strategy that this attorney is using?

[despritfreya]

but I'm wondering if you still need the Motion hearing to Determine Secured Value given the strategy that this attorney is using?

Theoretically (I have successfully done this) if the Plan is specific enough and the CU has been properly listed, not only with its normal mailing address but also with its statutory agent and any other address you can find, if no one objects to the treatment you have an Espinosa cramdown or strip.

Des.

[justbroke]

I remember Espinosa! Without cheating -- by looking -- that was a res issue and whether Plan confirmation was res judicata as to the binding nature of the plan on a creditor... right?

[BnkrptcyLwyr]

I agree and would attempt to strip the second lien. Even if you have to pay unsecureds something you can lower the amount by way of a plan modification should you run into trouble.

If there is a challenge to valuation by the credit union, and they win, such that the claim would have to be treated as secured, then you go ahead and cram it down.

JB,

Ok, now I see. OP has excess DI and does not want to pay it to unsecured creditors. Instead he plans on bifurcating the CU claim and paying the secured portion with the excess. I too do not understand and believe this reasoning is flawed for 2 reasons, the 2nd being the more important one. . .

1. If OP can afford $x and $x must be paid for 60 months treating the CU as partially secured is irrelevant. The "pie" is the "pie" and who cares where the $ goes?

2. If OP confirms a Plan treating the CU as partially secured, what happens if his/her income drops and he/she can no longer afford the "higher" payment? OP is screwed. Had OP just agreed to pay the unsecureds what he could afford (including the striped 2nd if there was no equity), he/she could have simply modified the Plan based upon changed circumstances and reduced overall funding. The problem with bifurcating the CU claim is once the Plan is confirmed the amount being paid on the secured portion is binding upon the creditor AND the debtor. He/she cannot modify the Plan to reduce the secured portion just because he/she can no longer afford to pay it. If he/she loses income to the point that he/she can no longer fund paying the bifurcated secured claim he/she may have to surrender the property. This is not a desirable outcome.

In my opinion, if you can strip you strip. If there is some equity in the property and 1322(b)(2) does not apply then you bifurcate.

Des.

[despritfreya]

I remember Espinosa! Without cheating -- by looking -- that was a res issue and whether Plan confirmation was res judicata as to the binding nature of the plan on a creditor... right?

Correct. This all stems from the In re Parde decision in my neck of the woods. If the Plan contains an impermissible provision and the creditor is on notice and fails to object the Order Confirming is binding (res judicata as to all issues that could have or should have been litigated). Espinosa does assert that the bk court must monitor such things and warns attorneys about Rule 11 but, so far, as long as the Plan is very specific (goes back to language is an art), it works. Now, in my district there is a Trustee who makes you go through the hoops of the AP but that is exactly what Espinosa wants - someone objecting.

Des.