Father in law considering CH 7 but we have a few questions

[marcus1955]

My father in law has been on a downward spiral for some time now that has finally come to a head. He went through a drug addiction and is still dealing with those demons. During the process he had a stroke and became unemployed working for cash jobs doing odds and ends with extremely limited ability due to the stroke and weakness on his left side. He is in Louisiana. At this point and for the last year or so he has been completely unemployed.


His main lingering issues are:


1. He took out a high interest loan around 2008 for about 12,000.00 using his paid for house for collateral. He signed a 20,000 collateral mortgage note. The Loan because of interest is just over 40,000.

2. He didn't file his 2007/2008 federal and state personal income taxes. The IRS completed his returns and assigned him about 25,000 in federal liens each year for a total lien of 50,000 against his house as a second place lien holder. In 2012 we learned of it and had his taxes complete showing he owed no taxes for each year after deductions. So even though he filed late he did file a return for each year. We are unsure and are looking into what the IRS did with the late returns that were filed.

3. He has also racked up a few thousand in traffic tickets from the local court system due to traffic violations and failure to appear contempt charges.

Other than that there is no other known debt at this time.

The questions we have are:

1. Is the debt for taxes and traffic violations owed to the local court system dischargeable debt?

2. Trying to keep the house is obviously important as no one in the family has spare room in their homes for him and there are trust issues that go with that as well even if we did.

The questions on keeping the house become whether or not it is cost effective for us to reaffirm his debt on the house and how much and to who will that be owed? For example the 20,000 collateral mortgage that is now 40,000.00 was only secured for 20,000 collateral mortgage note. The remaining 20,000 should be unsecured credit because it exceeded the amount of the collateral mortgage note by double. He has no income so will go chapter 7. His home depending on what comps they use could appraise anywhere from 40,000 to 90,000 based on areas sales and condition. So you can see why it is important to know what is considered secure debt counted against the house. I am thinking the Debt owed to the IRS will be resolved prior to filing and that will not be counted against the house. The other question is who contracts an appraiser? Is that something we can supply or is it left up to the trustee?


The only thing that is pushing him to file bankruptcy is the foreclosure on the house which we may have the ability to settle with the first lien holder. My wife and I could actually buy the note from them opposed to paying off his loan. We may also have the chance to have the IRS release their liens due to the fact that no taxes were actually owed once he filed his returns. In that aspect we have the ability to put off the bankruptcy for as long as needed because the only thing afterwards is the court fines that continue to grow but there is no real enforcement to make him pay.

Last but no least are there any provisions for those who have had medical issues such as a stroke that may offer any additional protection for him?

[despritfreya]

1. The only thing that is pushing him to file bankruptcy is the foreclosure on the house which we may have the ability to settle with the first lien holder.

Settlement will have to be outside the context of a bk although your FIL could use the bk to delay (for a short time) the actual loss of the home. Read on.

2. Is the debt for taxes and traffic violations owed to the local court system dischargeable debt?

If your FIL’s filed tax returns show no debt then the taxing agencies should replace the substitute returns with the actual ones and the issue should resolve itself, including the release of the tax lien against the home. He will need to work with the taxing agency to accomplish this. This should happen regardless of bankruptcy.

If your FIL files a Chapter 7, the amount due for the traffic violations will not be discharged. See 11 USC 523(a)(7). This is not an issue if he files a Chapter 13 unless the violations are in the nature of a "criminal" fine. The issue of "criminal" is state law specific so you would need to consult a local attny.

3. Trying to keep the house is obviously important. . . The questions on keeping the house become whether or not it is cost effective for us to reaffirm his debt on the house and how much and to who will that be owed? For example the 20,000 collateral mortgage that is now 40,000.00 was only secured for 20,000 collateral mortgage note. The remaining 20,000 should be unsecured credit because it exceeded the amount of the collateral mortgage note by double. He has no income so will go chapter 7.

Unfortunately, without him getting the lender to settle he is not going to get a bk court to reduce anything and his health issues do not affect this.

Chapter 7 does not impact a consensual lien against real property. Either the debtor gives up the property or makes payments to the lender to keep the property. If payments are behind, the debtor needs to work it out directly with the lender or the lender, once the protection of the automatic stay is removed, can and most likely will complete a foreclosure.

In a Chapter 13 the debtor can cure the arrears (all of it) by making payments to the Trustee each month over a period of no more than 60 months. In addition to the Trustee payments, the debtor must resume regular monthly payments to the lender. If the loan is fully due and payable or becomes fully due and payable (balloon payment contained within the loan agreement) the entire principal balance and interest must be paid over the 60 month Chapter 13 Plan unless the lender agrees otherwise.

Bankruptcy simply does not allow a debtor to modify the rights of a lender secured solely by the debtor’s principal residence. Unfortunately, the fact that your FIL got a hard money loan and owes more than double the amount borrowed will have no impact on how the loan is treated in bk. He signed a contract and is stuck with the terms of the contract barring any provable violation of state usury laws or a provable violation in federal truth-in-lending laws.

Based upon the balance of your post, it appears the best avenue is to settle with the mortgage lender and work with the taxing agency to remove the lien. If your FIL takes this approach and does not file bk, he must make sure that the mortgage lender continues to postpone completing the foreclosure. Get it in writing.

Best of luck to your family in this matter.

Des.
　

[marcus1955]

I appreciate your reply and input. Not that it changes anything as it seems most of it is pretty clear. In Louisiana our laws operate a little different than the rest of the country due to Napoleonic Code. Not sure if collateral mortgage is different or used in places outside Louisiana or not. In Louisiana lets day you plan to do a home mortgage for 125k. It is not uncommon for the lender to take a promissory note for the 125k but also file a collateral mortgage note for up to say 300,000 as first lien holder on the property. This allows them the flexibility to make multiple loans under the 1st place lien holder with separate promissory notes but seems more commonly used to protect lenders who have debtors that file behind where they can recover every penny they are owed under the secured collateral mortgage note. The mortgage he has is from a local lender so he signed a promissory note for the 12k as well as the collateral mortgage note against his house for up to 20k. Any amount owed to the mortgage company beyond the 20k collateral mortgage note limit would be considered unsecured I believe. So while it may not change the avenue we take I guess the question is how do they treat the other 20k that is owed above and beyond the secured collateral mortgage of 20k? It still may not change whether he files or not because lets face it if he can resolve the IRS liens and the traffic fines are not dischargeable then he may be better off either not filing or using the Ch 13 to his advantage to pay the traffic fines and if possible gain leverage on the 1st lien holder to negotiate.

[justbroke]

marcus1955, desprifreya is a Louisiana Bankruptcy Attorney. Of course anything that des writes is neither an attorney-client relation nor does it establish one, but I would (always do!) respect despritfreya's opinion. And even more so when it comes to Louisiana law.

Because des is responding to your questions I am not answering them.

[despritfreya]

marcus1955, desprifreya is a Louisiana Bankruptcy Attorney. Of course anything that des writes is neither an attorney-client relation nor does it establish one, but I would (always do!) respect despritfreya's opinion. And even more so when it comes to Louisiana law.

JB and Marcus,

Not sure why JB said this. I am not licensed in your State. I am only licensed in the State of Arizona. Marcus's comments relative to Louisiana's unique law simply goes to my comment about state usury laws. You would need to consult with an attorney but here is my take on this. In all jurisdictions one signs a promissory note. If the note is to be secured it is secured by some sort of mortgage. In Arizona and many other states it is called a Deed of Trust. The Deed of Trust references the PRINCIPAL balance owed under the note and may or may not have a separate attachment referencing the type of interest or balloon payment. The amount referenced on the Deed of Trust DOES NOT control the transaction - the terms of the promissory note control.

Please review with an attorney and keep us posted.

Des.

[despritfreya]

In re Parker, 196 B.R. 338, 342 (Bankr. W.D. La., 1996)

"Collateral mortgages involve the execution of a collateral mortgage and a collateral mortgage note. The mortgage is recorded in the public records which does not take effect unless funds are advanced against the mortgage. When a loan is advanced, a "hand note" is executed together with an agreement which "pledges" the collateral mortgage note to secure the hand note. Subsequent advances may be made at the election of the borrower, up to the value of the mortgaged collateral".

This explanation tells me that the loan is nothing more than a "line of credit" and that the terms of the note control. It does not appear to mean that the amount owed to the lender, which covers principal, interest, default interest, late fees and all other costs associated with collection, cannot exceed the value of the property or the amount stated in the mortgage lien.

I could not find any Louisiana bankruptcy case law that supports a proposition that the amount owed under a collateral mortgage, secured solely by a principal residence, can be bifurcated to secured and unsecured. I did find one Chapter 13 case that referenced bifurcation, however the lender was secured by additional collateral and, like all such cases, the anti modification provision did not apply (See In re DeMoss, 59 B.R. 90 (Bankr. W.D. La., 1986)).

So, to recap my assessment - Chapter 7 does not impact the mortgage lien. Chapter 13 does not allow the modification of such lien if the lender is secured only by a principal residence.

I would be thrilled if OP kept us informed. I would like to know if my assessment is wrong, and if wrong, the case law citation so that I can read such for myself.

Des.
　

[justbroke]

Not sure why JB said this. I am not licensed in your State. I am only licensed in the State of Arizona. Marcus's comments relative to Louisiana's unique law simply goes to my comment about state usury laws.

I don't know either. I knew it ended in an "a". Sorry about that.

[marcus1955]

LOL thanks for the replies. DES here is a link to an opinion. While as a layman I don't believe it applies to what I describe, it is an interesting read with case citations you may find of interest in how the collateral mortgage is viewed in Louisiana. I have replaced the tt with XX in the http below to avoid a live link. It is a link directly to the Louisiana Supreme Court database.

hXXp://www.lasc.org/opinions/2001/00c0469.opn.pdf

In retrospect I vaguely remember a possible related issue when my wife filed her ch. 7. Her mortgage company filed a proof of claim and I thought they filed the secured amount for the amount of the collateral mortgage and the additional funds beyond that on the same form as unsecured. I may be mistaken and will verify and post back and will also provide additional info when we talk to a bk lawyer locally.