Chapter 20 (Chapter 7 BK Followed by Ch 13)- Debt Limits

[easymoney]

Hello,

I had a few questions regarding a chapter 20 (federal) bankruptcy (chapter 7 followed by a chapter 13). I am currently not able to do a chapter 13 bankruptcy as I am over the debt limit, however I can file a chapter 7 bankruptcy.

Here is the scenario- there are three properties (1 homesteaded primary residence and 3 rental properties).

Primary residence – 1st Mortgage ($400,000) Market Value $275,000.
Rental property # 2 – 1st Mortgage $260,000- 2nd HEL $200,000- Market Value $240,000
Rental property # 3 – 1st Mortgage $500,000- 2nd HEL $150,000- Market Value $300,000
Rental property # 4 – 1st Mortgage $340,000- 2nd HEL $20,000- Market Value $200,000
Rental property # 5 – 1st Mortgage $320,000- 2nd HEL $20,000- Market Value $190,000

I am currently paying the mortgages on property #1 and #2 and I plan on keeping them. Properties 3, 4 and 5 are in foreclosure and I do not intend to keep them.

I was thinking of filing a chapter 7 bankruptcy first, followed by a chapter 13 bankruptcy in an effort to lien strip the HEL on property # 2.

As it currently stands, I am way over the debt limits for a chapter 13 filing. My questions are as follows:

After I file a chapter 7 bankruptcy, are the properties that are still in foreclosure still counted towards the debt limits of a subsequent chapter 13 bankruptcy filing? If so, how are they counted? Is it the market value of the properties that count towards the debt limits in the subsequent chapter 13 filing or the actual secured mortgage amounts? What about the HELs, are they part of the secured balance or unsecured balance as the properties are underwater?

If I am still over the debt limits after the chapter 7 bankruptcy, do I have to wait until some of the properties actually do foreclose to file the subsequent chapter 13.

The ultimate goal is to lien strip property # 2.

Any feedback would be appreciated.

Best regards,

EM

[JackBondLove]

Are you planning on signing a reaffirmation on properties #1 or #2? If not, the lienholders can foreclose at any time.

I am trying to understand why you would want to do a Chapter 13 after a Chapter 7. The Chapter 7 is supposed to impoverish you (aside from the exemptions) and discharge you from all debt (aside from student loans and other non-dischargeables.)

[helpmeout]

The ultimate goal is to lien strip property # 2.

I am not an attorney, but I think that in order to strip a 2nd Lien on property #2, it would actually have to be your residence and that there would have to be a discharge after the 13 is completed. Not sure how it works when the debt was discharged before the 13 began. That is something to discuss with an attorney.

Once your Chapter 7 is discharged, you will have no debt.

[despritfreya]

Primary residence – 1st Mortgage ($400,000) Market Value $275,000.
Rental property # 2 – 1st Mortgage $260,000- 2nd HEL $200,000- Market Value $240,000
Rental property # 3 – 1st Mortgage $500,000- 2nd HEL $150,000- Market Value $300,000
Rental property # 4 – 1st Mortgage $340,000- 2nd HEL $20,000- Market Value $200,000
Rental property # 5 – 1st Mortgage $320,000- 2nd HEL $20,000- Market Value $190,000

From what I gather you are surrendering property 3, 4 and 5 through the Chapter 7 and whish to file a Chapter 13 once you are discharged in the 7 so that you can:

1. Maintain the mortgage on your residence
2. Maintain the 1st mortgage on property #2
3. Strip off the 2nd mortgage on property #2

If the above is correct you would be below the 13 debt limits as the claims of the creditors for properties 3,4 and 5 will not flow through to the 13.

In theory this work, assuming your jurisdiction is in the majority which hold that you can do the “Chapter 20” for the purpose of the strip off, even though you will not be getting a Chapter 13 discharge. However, theory is not always reality so here is your problem:

1. Until the Chapter 7 Trustee abandons all interest in property 1 and 2, those properties will not be assets of your Chapter 13 since they are assets of the Chapter 7 estate. The entry of your discharge is not going to help. The properties must be removed from the Chapter 7 estate before they can become property of a subsequently filed bk. And, the removal may need to happen before the subsequent case is filed. (There is a question on this since “after acquired property” becomes property of the Chapter 13 estate.)

2. If property 2 is rented, you most likely will have to turn those rents over to the Chapter 7 Trustee and will continue to have to do so until the Trustee abandons the property.

Maybe you should be thinking Chapter 11 - at least explore it:

Surrender 3, 4 and 5
Service 1
Cram down and then service the 1st on 2 (only $20k based upon your numbers, but that may be worth it)
Strip off the 2nd on 2

Only issue that can throw a wrench into the 11 is the 1st on property 2 making an 1111(b) election which, in my experience, is not likely since we are dealing with residential, not commercial, property.

I trust you are not attempting this on your own and have hired a “well seasoned” attny. Discuss all options and the ramifications of each strategy.

Des.

[easymoney]

Hi Des,

I appreciate your response (as well as the earlier responses). It was very helpful.

I have spoke with a few attorneys regarding a chapter 20. Several of them don’t seem to have a good knowledge on chapter 20s and seem uncertain in their responses. That is why I have been searching the internet and came across this web site/ forum.

The ultimate goal (besides the BK) in all of this is the most effective way to successfully lien strip the 2nd mortgage on property # 2- as it is nearly $200,000. This is a big enough carrot I think to justify several approaches, including a chapter 11 or 20.

My concerns relative to the lien strip on property # 2 are mostly centered around timing and the length of time for a chapter 20 (7 followed by a 13) versus chapter 11.

* Specifically, what if the market value of property # 2 increases in the next 1 to 2 years above the 1st mortgage balance- thereby eliminating the lien strip option on property # 2? Would a chapter 11 eliminate the risk by valuing property # 2 (with a professional appraisal) at the time of my filing- which could be right away? A chapter 11 would negate waiting on a chapter 7 before waiting to file a chapter 13 for the lien strip, correct?

* Would a chapter 11 expose me to more problems than a chapter 20, as creditors would need to vote on the chapter 11 plan?

Option #3:
Option number 3 (which I did not include in my original post) is to let properties 3, 4 and 5 actually foreclose and change ownership before filing a chapter 7 or 13. My question on this scenario is debt limits? If the mortgage lenders have not filed for a deficiency judgment after they have actually foreclosed and changed ownership, would it keep me under the chapter 13 debt limits as I would then only owe properties 1 and 2? This option really has quite a bit of unknown as to timing- as everyone knows there is a substantial backlog on foreclosures.

Thank you for your time.

EM

[despritfreya]

I have spoke with a few attorneys regarding a chapter 20. Several of them don’t seem to have a good knowledge on chapter 20s and seem uncertain in their responses. That is why I have been searching the internet and came across this web site/ forum.

And this is why you need to continue searching for the “right” attny.

(In the context of a chapter 20), what if the market value of property # 2 increases in the next 1 to 2 years above the 1st mortgage balance- thereby eliminating the lien strip option on property # 2?

I wouldn’t even think about it. Your property is not going to increase over $200k anytime soon. Just not going to happen.

Would a chapter 11 eliminate the risk by valuing property # 2. . . at the time of my filing. . .A chapter 11 would negate waiting on a chapter 7 before waiting to file a chapter 13 for the lien strip, correct?

In general, property is valued at the time of confirmation of the Plan. However, in the case of a lien strip or cram down, the property value will be set when the Judge enters an order or judgment in the 506 adversary you will bring to determine the value and extent of the lien. You will not be doing a 506 valuation in the context of the Chapter 7.

Some, but not all reasons to elect to do the 11 instead of the 7 and then the 13:

1. If you are collecting rents you will have to turn the rents over to the Chapter 7 Trustee.
2. The property, until it is abandoned, does not belong to you if you file a Chapter 7. You have complete control over it if you do an 11.
3. If you are in a jurisdiction that does not allow a strip off on the heals of a 7 discharge, doing the Chapter 20 is a waste of time.

Would a chapter 11 expose me to more problems than a chapter 20, as creditors would need to vote on the chapter 11 plan?

Yes, but, if you are not cramming down the 1st on the rental property and can find an “impaired class” who will vote in favor of the Plan, voting should not be an issue.

Option #3 is to let properties 3, 4 and 5 actually foreclose. . . before filing. . . If the mortgage lenders have not filed for a deficiency judgment after they have actually foreclosed. . .would it keep me under the chapter 13 debt limits. . .

I will assume that, under your State’s law, if the 1st forecloses the 2nd will just become a general unsecured creditor that can sue under the promissory note you signed. If my assumption is correct then you would be over the debt limit. This would be made worse if your state does not have an anti deficiency statute. If the foreclosing 1st has “recourse” add that to the mix.

Des.

[HHM]

Not much to add, but to reiterate, many jurisdictions do not allow a chapter 20 for the purpose you describe, for whatever silly reasons, they feel that a non-dischargeable 13 cannot strip a mortgage even if the loan was discharged in a prior 7 (it really is the stupidest reason I have ever heard, it judges failing to see the forest through the trees). Those that do allow it, overlay the ability to do a lien strip in a chapter 20 with a "good faith" requirement. Which means, you MUST have some other reason for filing the chapter 13 other than simply stripping the 2nd mortgage in question. The most common allowed reason is "falling behind on your first mortgage and you file the chapter 13 to cure".

As such, I think the chapter 20 is probably a non-starter for you.

In my district, we have a split of authority, we have 1 judge that says no lien strip in non-dischargeable 13, ever...and another that say, yes you can, so long as the plan is filed in good faith. The other judges haven't ruled and there has been no appeal yet to BAP or US District Court. So, imagine that conversation with client, "maybe we can do it, it will depend on which judge we get, and by the way, you should be prepared to file and PAY for an appeal"