Can an insider secured creditor help salvage some of our assets in a BK?

[SinkingLL]

We are in a situation where our problem is mortgage debt and not consumer credit card debt. We have liquid assets exceeding our unsecured debt but we can't handle the negative cash flow of our secured debt so we're considering Ch7.

We owe an insider a lot of money secured as 2nd mortgages on rental property. This person could be an adversary, a friend, whatever we need them to be.

He's NOT going to get anything from his secured interest. Everything is just too upside down.

So, should we make sure that he makes an unsecured claim against our non-exempt assets? At least in this scenario he should get a cut, right? (And then we can borrow it back after the BK and not be completely broke).

Second part to the question: Is the trustee required to liquidate and pay unsecured claims in cash or can the unsecured creditor accept the personal property itself as payment? For instance, there's a car we'd like to try to keep -- not that we're in love with it, and it has 125000 miles on it, but we know it's history and it's maintenance all the way back to new, so it's worth more to us than the average buyer. Can the insider possibly accept the car as payment if the Trustee is a reasonalbe person?

[tcreegan]

distribution

Hello Sinking,

The trustee has to divide proceeds up evenly amongst the unsecured creditors. That is why they can't give someone a car out of the estate.
However.....lots of folks have bought cars back from the trustee. But....this car seems like it doesn't have much equity, most likely it can be exempted.

As to moving the 'insider' who holds the 2nd from secured to unsecured seems fishy (aka fraudulent)....highly likely to attract the attention of the trustee. But it really depends on how the debt is written up, something to check with your attorney.

Tom in Colo

[SinkingLL]

My understanding is that an undersecured secured creditor can petition to be treated as unsecured themselves.

If he sued me on the note without foreclosing the collateral and I didn't contest it, and he took it to judgment then that judgment would be an unsecured debt at that point. Any thoughts on this idea? The suit wouldn't have to be expensive if I didn't contest it.

Hello Sinking,

The trustee has to divide proceeds up evenly amongst the unsecured creditors. That is why they can't give someone a car out of the estate.
However.....lots of folks have bought cars back from the trustee. But....this car seems like it doesn't have much equity, most likely it can be exempted.

As to moving the 'insider' who holds the 2nd from secured to unsecured seems fishy (aka fraudulent)....highly likely to attract the attention of the trustee. But it really depends on how the debt is written up, something to check with your attorney.

Tom in Colo

[keepmine]

Do your friend and yourself a favor.
Don't involve him in your bk. Let him file his own claims as instructed by your trustee.
Post bk, you can pay back anyone you please. You can try and take care of him once you're discharged.

[backtoschool]

Do your friend and yourself a favor.
Don't involve him in your bk. Let him file his own claims as instructed by your trustee.
Post bk, you can pay back anyone you please. You can try and take care of him once you're discharged.

I totally agree with keepmine. If your friend gets caught by the trustee, or the trustee senses in anyway that the change in status from secured to unsecured status amounts to a preferential payment, then your friend will end up owing the trustee the amount of the note that he is suing you for. Trustees are trained to look for transfers of property, changes in loan status, loan payouts and new loans amongst insiders. You will probably get caught and it is not worth it. Your friend would end up owing the trustee additional money.

[catleg]

I'm going to go the other way from y'all on this. Assuming these are bona fide 2nd mortgages (i.e. recorded with the county clerk), then you should be able to make payments on them to your "lienholder" without triggering a preferential payment issue, because preferential payments only apply to unsecured creditors, and as of now he has a secured claim against your asset. Whether he would be considered an "insider" to your case, I don't think we really have enough information. But as long as he understands that any payment you make to him, should be held aside by him and not spent in case the trustee goes after it, I'd think you at least have some chance of success. Naturally I would run this by a real attorney first to see what he thinks.

Of course, you could have him sue you, get a judgment, and apply for a bank account garnishment against a bank account where you have placed such funds for him to claim, to make it look more official.

[backtoschool]

I'm going to go the other way from y'all on this. Assuming these are bona fide 2nd mortgages (i.e. recorded with the county clerk), then you should be able to make payments on them to your "lienholder" without triggering a preferential payment issue, because preferential payments only apply to unsecured creditors, and as of now he has a secured claim against your asset. Whether he would be considered an "insider" to your case, I don't think we really have enough information. But as long as he understands that any payment you make to him, should be held aside by him and not spent in case the trustee goes after it, I'd think you at least have some chance of success. Naturally I would run this by a real attorney first to see what he thinks.

This is a very interesting idea catleg. It could work if there is no breadcrumb trail leading pointing to the friend as an "insider". If it is a family member, ex spouse, etc then it won't work for sure. But if it is not easy to see the friend's insider status, it could work. It's not a sure bet though.