1st circuit rules mortgage payments count towards means test even if property is surr

[keepmine]

http://lawprofessors.typepad.com/bankruptcyprof_blog/2009/08/1st-circuit-rules-that-debtor-may-deduct-mortgage-payments-on-the-means-test-even-if-he-intends-to-r.html

[music12]

keepmine, you have done a great service to many by posting this. bless you!

[justbroke]

Yes, I've been watching these cases, and they are consistent amongst all Circuits that reviewed them. However, beware of the 707(b)(3) statement at the end. Some Trustees foolishly pursue the debtor under 707(b)(2) as a presumption of abuse. This first circuit case (and others in 9th and 11th) looked to claiming payments on property claimed on the Means Test only. It is perfectly fine to include it on the Means Test.

All of these Courts also stated, that the Trustee should have filed a motion to dismiss under 707(b)(3) instead, because 707(b)(3) is not a mechanical test.

So, it's not all good news. Just makes the Means Test easier.

Here's the full case for reference: http://caselaw.lp.findlaw.com/cgi-bi...cket&no=089007

[DeadManCrawling]

This mirrors a circuit case here in Florida as well.

However, I think it is wise for people reading this to consider a slight variation on this.

Our local BK court (if recollection is correct) also ruled that the mortgage obligation could NOT be used if foreclosure proceedings had already begun. It was assumed that the foreclosure cycle would complete, thus changing the debtor's financial picture.

If someone else knows different please, post, as this is from memory a few months back.

It makes sense, but would suggest that if you wish to use these expenses on the means test, you need to file the BK prior to the beginning of foreclosure.

Best wishes,

-dmc

[justbroke]

This mirrors a circuit case here in Florida as well.

I don't think it matters in the 11th Circuit (Florida, Alabama, Georgia). The key is that you can include it in the Means Test. The reasl question has been on whether the Trustee can make you modify your means test to reflect the future, when the Means Test is a snapshot view. All of the circuits are coming into alignment, especially with the 1st Circuit ruling this month.

However, and the key is, that the 707(b)(3) "totality of circumstances" and "bad faith" are still there for the Trustee to use as a weapon. The Smart Trustees would do a Motion to Dismiss under 707(b)(1) and 707(b)(2) Presumption of Abuse, or, in the alternative, under 707(b)(3)(A) or 707(b)(3)(B). It's the Trustees who attack the Means Test that end up eating crow.

I'm recalling this off the top of my head, but you may be thinking of the Florida landmark case from the Southern District, In Re. Parada. I'll look it up for you. I think I have it on my computer somewhere.

[music12]

even a smart trustee who includes 707(b)(3) would still have to have some argument beyond the difference between past and future on the means test. i suspect that the trustees in these cases simply don't have anything to substantiate a "totality of circumstances" or "bad faith".

[justbroke]

even a smart trustee who includes 707(b)(3) would still have to have some argument beyond the difference between past and future on the means test. i suspect that the trustees in these cases simply don't have anything to substantiate a "totality of circumstances" or "bad faith".

[music12]

so they win even without having to prove anything beyond the fact that circumstances will change? without proving that, say, the debtor chose this particular point in time to file because they knew their circumstances will change? or something else that indicates abuse? just changing a (2) to a (3) gives them a win? is this our "justice" system??

[HakunaMatata]

I found this article earlier this week and was initially comforted by it (I maintained hopes this would be applicable in Michigan as well). After reading your discussions, I'm completely confused!

Bear in mind, I'm new to bk talk (right now...all of you seem to be practicing your numbers and letters: a bunch of 707s, As, and Bs! ). Obviously, I need to gain understanding of such (bk studies are reserved for my vacation next week...oh, how exciting!).

As a novice I ask...should I be fearful of filing C7 after the foreclosure process has commenced? I missed my July mortgage payment and I haven't submitted my August payment (I'm current on insurance and property taxes). I have no choice but to give up my house as I can't afford the costly necessary repairs (I have negative equity). I met with my second consult attorney yesterday and was told I should wait until November to file. Given this timeline, I will be five months into the foreclosure process (since first payment missed). If this causes conflict, should I submit mortgages payments leading up to filing? Thankfully, I have my July and August payments reserved (intended for attorney's fees). Do you think I should become current on my mortgage payments?

Thanks!

[goingcrzy]

Justbroke-

where do you find the chap 11 cases? We are fighting a 707(b)(3) due to our mortgage payment. I found out the other day that we are a borderline 11/13. Our UST spoke to our attorney and said if we walked away from our house we could fund an 11! Yikes!!

I am trying to study up on the 11s and 707(b)3 cases as well. Do you find all your info on Pacer, or do you have a secret source? Our case seems very similar to the CA high mortgage payment case, but I am not in the same district. Our lawyer says that our judge likes to make up his own mind and "not be persuaded by other judges". This scares me to death. BUT, if the cases are similar, (I am going to say 100% the same, other than the $$$ figures), what is the likelihood the judge will follow the CA case.

Thanks for all you input!
"Crazy Lady"

[justbroke]

so they win even without having to prove anything beyond the fact that circumstances will change? without proving that, say, the debtor chose this particular point in time to file because they knew their circumstances will change? or something else that indicates abuse?

Actually, you're quite correct... when it comes to "predicting the future" they can't do so. When you have a 707(b)(3) hearing, the only thing that is in play are the facts and situation as of the day of the hearing.

My statement really only goes specifically to a debtor who is, as an example, surrendering their home in a Chapter 7. The payments are what are keeping them negative for monthly income. However the Trustee sees they are doing this, and goes for a 707(b)(3) dismissal because the "totality of circumstances". The Trustee can easily prove that you will, in fact, have $XXXX more (and positive monthly income), when you surrender the home. Also, the fact that you're not even making payments on the home (because you're surrendering) gives the UST more ammunition that you have no intent to keep up those payments!

That's the issue with 707(b)(3).

just changing a (2) to a (3) gives them a win? is this our "justice" system??

Seems that way, but it's just when they attack the Means Test, they'll lose (which is what this case way about). The UST needs to attack a petitioner on the right grounds if it's a change in circumstances, or a bad faith filing.

Realize that the majority of UST objections to discharge, and hence the Motion to Dismiss, come under 707(b).

[justbroke]

As a novice I ask...should I be fearful of filing C7 after the foreclosure process has commenced?

No, this has nothing to do with foreclosure. These ruling in the 1st Circuit Court of Appeals had to do with a U.S. Trustee trying to dismiss a case because the debtor claimed a mortgage expense on a property they were surrendering int he Bankruptcy. The UST asked for the dismissal, frankly, under the wrong section of the BK Code!

Do you think I should become current on my mortgage payments?

Continue to work with your attorney. The strategy they come up with is what's important. Generally, if you're filing bankruptcy and surrendering the home, you stop paying on it.

[music12]

even if someone stops paying their mortgage, at some point they'll be paying rent, right? rent payments aren't that much less than mortgage, are they? so what's the big difference? they are just replacing one kind of house payment with another.

[justbroke]

even if someone stops paying their mortgage, at some point they'll be paying rent, right? rent payments aren't that much less than mortgage, are they? so what's the big difference? they are just replacing one kind of house payment with another.

I like the way you think.

However, this is exactly how the U.S. Trustee thinks. They will substitute the mortgage payment for the "allowed" housing expense for the debtor's family size and area. If you still have positive disposable income (above approximately $182/month), they'll go for the 707(b)(3) motion to dismiss.

The only condition that would hurt you, is where the "replacement" rental costs are less than the prior "mortgage" costs. A person with a mortgage has other expenses that renters don't have. A person with a mortgage has a higher insurance cost, possibly trash/water costs, maybe some HOA or CDD fees, and definitely property tax costs. So when the housing cost is replaced with a rental cost, it's usually much less than the original total cost to own an encumbered home.

[music12]

I like the way you think.

ah! if only i could put that on my resume!!