Recently in Chapter 13 Category

With the economic downturn, continuing high levels of unemployment and the housing crisis, it's no surprise that a lot of people are dealing with debt problems. When you sit down to consider filing for bankruptcy, you may have a lot of questions. You've probably heard, for example, that there are some kinds of debt that bankruptcy won't get rid of: child support, alimony, student loans and taxes, for example.

The truth is that, while these kinds of debt are very hard to discharge through either Chapter 7 or Chapter 13 bankruptcy, there are exceptions. For example, under the 2005 bankruptcy law, student loans can still be discharged in limited cases by going to trial to prove "undue hardship."

Federal tax debts were also made harder to discharge by the 2005 bankruptcy law, but in a few cases, they can still be released in Chapter 7 and Chapter 13. Some taxes are never dischargeable, such as payroll taxes, an IRC §6672 trust fund tax penalty, most state sales taxes and certain excise taxes.

There Are Alternatives to Bankruptcy That Can Resolve IRS Tax Debts

As the troubles in the housing market drag on and government programs like HAMP fail to make any significant dent in the problem, many pundits are again bringing up the question of granting bankruptcy judges "cramdown" powers in Chapter 13 bankruptcy.

"Cramdown" basically means that bankruptcy judges would be allowed to reduce what is owed on a mortgage without discharging it completely. The judge would "strip" the loan into two parts: a secured loan equal to the current market value of the home and an unsecured loan equal to the rest of the original mortgage. Because the payment priority of the unsecured portion would be lower, many borrowers would qualify for Chapter 13 repayment plans that essentially resulted in that part of their loan never being paid off.

The idea of giving bankruptcy judges cramdown powers came up early in the debate after the housing market crashed, but it never came to fruition. Many people believe the banking industry simply wouldn't tolerate it.

In a recent editorial in the Atlantic, business and economics editor Megan McArdle argues that it may not be just another case of Washington protecting banks at the expense of the little guy. She says there are good reasons to believe that cramdown wouldn't really help -- at least not without overall bankruptcy reform.

Would Chapter 13 Cramdowns Help a Lot of Troubled Homeowners?

According to 2009 statistics recently released by the Administrative Office of the U.S. Courts, 1.4 million U.S. consumers filed for bankruptcy last year. Total consumer bankruptcy filings were up 32 percent over last year, and both the average wealth of filers and their average total debt load went up, especially in California.

Of all U.S. Chapter 13 bankruptcy filers, those in Northern California had, on average, both the highest income in the month before they filed and the highest expenses. Nationwide, the total assets consumers reported on their bankruptcy petitions was up 34 percent, meaning that relatively wealthier consumers were increasingly at risk for bankruptcy.

Approximately 71 percent of all consumer bankruptcies last year were filed under Chapter 7. People filing under Chapter 7 either make no more than the median income for their region or are demonstrably unable to pay even a portion of what they owe.

Of the 109,936 people who filed for Chapter 13 last year, 28 percent had filed for bankruptcy before within the last eight years.

The report, which is required as part of the 2005 bankruptcy law known as BAPCPA, compiles information provided by consumers on Chapter 7, Chapter 13 and Chapter 11 personal bankruptcy filings.

Most San Diego-Area Filers Owe Substantially More Than Their Total Assets

Vinnie "Wiz" Vincent, the former "Ankh Warrior" guitarist for the glam-metal rock band KISS in the mid-80's, has lost his Chapter 13 bankruptcy appeal. Former KISS members Gene Simmons, Paul Stanley and others had a judgment against Vincent and were trying to collect by selling his songwriting copyrights. His bankruptcy filing and subsequent appeal were an attempt to stop those sales.

Vincent, who has filed for Chapter 13 bankruptcy three times in the past three years, had filed most recently in Tennessee. A bankruptcy judge in that district ruled that his filing was in bad faith. A three-judge panel from the U.S. Circuit Court of Appeals for the Sixth Circuit affirmed that ruling, which also bars Vincent from filing Chapter 13 again for two years.

Vincent, whose actual name is Vincent John Cusano, wrote such songs as "Lick It Up" and "Young and Wasted" for the band, and continues to own the rights to those songs.

In 2009, Vincent unsuccessfully sued other KISS band members for unpaid royalties and defamation in California. The court awarded the other band members $82,000 to pay their attorney fees in the case. The KISS showmen then proceeded to collect on that judgment, demanding that Vincent turn over those copyrights to pay it.

A recent article on CNNMoney.com confirms what we've been telling our clients and readers: Yes, filing for Chapter 7 or Chapter 13 bankruptcy can help you save your home. It's not going to help everyone, but for those in the right situation, it can be a powerful tool to get you back on your feet.

Bankruptcy has a number of additional benefits, as the article points out, for people currently in foreclosure and for those whose homes have already been foreclosed upon. Both Chapter 7 and Chapter 13 can strip off second mortgages, kill deficiencies, and prevent you from having to pay surprise taxes.

Bankruptcy Stops the Foreclosure Process and Gives You Breathing Room

As soon as you file for bankruptcy -- whether you file for Chapter 7 or Chapter 13 -- a halt is put on the foreclosure process and other collection actions. This can give you time to reorganize your finances and make up missed payments, as the article mentions.

"It's the best tool there is for people behind in payments but who have ongoing income," according to a bankruptcy lawyer from Binghamton, New York, who was interviewed for the article, "those who had been making payments and who could be making payments again."

The nation's largest banks might want to take a hint from a recent upswing in Chapter 13 bankruptcies by people who have second mortgages. The four largest issuers of both first and second mortgages, Bank of America, Wells Fargo, JPMorgan and Citibank hold nearly $435 billion of the $1 trillion second mortgage market, and they could face staggering losses if the trend continues.

Mortgage borrowers generally seek loan modifications before even considering filing for bankruptcy. When they face too many roadblocks to debt negotiation with their banks despite government programs like the Home Affordable Modification Program (HAMP), however, they often find that Chapter 13 is a way to keep their homes while ditching unaffordable second mortgage liens.

Bankruptcy Courts Can Reclassify Second Mortgages as Unsecured

In the case of an underwater mortgage, where a home has an appraised value of less than the amount owed on the first mortgage, Chapter 13 can offer an unexpected life raft for some drowning debtors. The homeowner can petition the bankruptcy court to reclassify the second mortgage from secured debt to unsecured, which does not have to be paid in full.

A recent order from the U.S. Bankruptcy Court for the District of South Carolina has shed some light on whether a debtor who has inherited a house subject to a reverse mortgage in foreclosure can pay off that mortgage as part of a Chapter 13 bankruptcy plan. According to the Honorable John E. Waites, Chief Bankruptcy Judge of that court, such a debt is eligible for Chapter 13 under certain conditions.

In this case, Ms. Brown had lived with her mother, along with several other family members, in the family home for 40 years. Her mother took out the reverse mortgage on the home during her lifetime. Upon her mother's death, Ms. Brown inherited the house, along with the remaining balance on the reverse mortgage -- $29,524.44 -- which became payable in full immediately upon her mother's death.

The reverse mortgage was owned by Financial Freedom Senior Funding, which called in the debt and began foreclosure proceedings. In 2009, Ms. Brown filed for Chapter 13 bankruptcy, proposing to pay off the reverse mortgage in full as part of her five-year Chapter 13 repayment plan.

Reverse Mortgage Holder Argues That the Chapter 13 Repayment Plan Would Impermissibly Modify Its Rights; Court Disagrees

Stephanie Lanning of Kansas filed for Chapter 13 bankruptcy protection in October of 2006. In a Chapter 13 bankruptcy, the Bankruptcy Court sets up a three- to five-year debt repayment plan based on the debtor's ability to pay, which the court determines by calculating the debtor's projected disposable income.

Projected disposable income is the debtor's average monthly net income minus reasonable monthly expenses. To determine average monthly net income, the courts look at the debtor's income for the last six months -- a period called the "look-back period."

The Chapter 13 repayment plan distributes the debtor's projected disposable income, whatever it may be, among the creditors. When the plan is successfully completed, any remaining debt is wiped away.

In Ms. Lanning's case, there was a hitch. During the six-month look-back period, Ms. Lanning received a one-time buyout from her former employer, which was paid in installments over April and May of 2006. When the court averaged her gross income over the March-September period, the buyout payments in April and May inflated her average gross income level, and thus her disposable income.

The difference was devastating. Based on her actual income as reflected on her paychecks, Ms. Lanning could afford to pay $144 a month toward her Chapter 13 plan. If the inflated figure were used, she would have had to pay $756 -- more than 40 percent of her total pay.

Under the largest mortgage servicing settlement in the Federal Trade Commission's history, Bank of America is to repay former Countrywide Financial customers $108 million for what the FTC called "false or unsupported claims" in Chapter 13 bankruptcy proceedings and "illegal and excessive fees" charged to desperate homeowners.

Bank of America purchased Countrywide in July 2008 and admitted no wrongdoing on behalf of the company.

The FTC's complaint alleges that Countrywide acted improperly in numerous Chapter 13 bankruptcy proceedings where it was a creditor. The FTC also charges that Countrywide deceptively and illegally jacked up certain fees on properties in foreclosure in order to pad its bottom line during the housing crisis.

Making an End Run Around Chapter 13 Bankruptcy Protection

In the Chapter 13 cases, the FTC contends that Countrywide made "false or unsupported claims" to borrowers who had filed for Chapter 13 protection. When some borrowers filed for bankruptcy, Countrywide misled them about the amounts they owed and the status of their loans.

A recent ruling by the U.S. Supreme Court could change how some bankruptcy filings are handled - as well as how lenders may follow up in cases where there is a dispute over provisions for loan repayment. The case revolved around Francisco J. Espinosa, who had borrowed just under $14,000 in 1988 and 1989 to attend trade school.

By 1993, Espinosa owed about $17,000 in student loans, interest and penalties. At the time, he was making a mere $6.70 per hour and filed for Chapter 13 bankruptcy to restructure his debt. His court-approved payment plan included stipulations to repay the principal amount, but did not require him to pay off any of the interest or penalties he had accrued.

Along the way, both Espinosa and the judge in his bankruptcy case made procedural errors.