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Bankruptcy Law/Can CH 13 reduce principal on 2nd/3rd property.
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Question
Basically I heard that a person with multiple properties
could file Ch 13 BK and a judge could reduce the principal
and interest rate on properties other then the primary
residence. We have a care home and a condo that are both
deeply underwater. As it is obvious that the gov is not
going to help with a potential foreclosure - is there any
way a Ch 13 BK could somehow help to reduce principal and
interest rate? The condo is being rented at a lose and the
care home could become quickly unprofitable as the State of
CA is reducing payments because of the budget crisis.
Thank you.
Good question.
)
Theoretically, it is possible. The hitch is that in a Chapter 13 you have only 5 years to pay claims that you have modified. Thus, if you leave a long term mortgage alone and do nothing to change the terms of the loan, the loan, (let's say a 30 year mortgage) remains in place unaffected by the BK, and you have 30 years left on it.
However, when you modify an obligation, you have to finish paying the secured claim IN FULL during the Plan, which is a maximum of just 5 years. Let's say you modify a mortgage from $800,000 down to $400,000, because the property is only worth $400,000.
That's fine, but you have to pay off the $400,000 in under 5 years! How would you do that? That is probably impossible for an individual in a Chapter 13 case in almost all cases.
Since the loan is being crammed down to current market value, but not below market value, there will be no equity. If there is no equity, a refinance to pay off the $400,000 cram down is unlikely, especially in present economic circumstances.
Hence, such a Plan is unlikely to be approved. There are numerous confirmation problems with your scenario which make it unlikely for a court to confirm such a plan. The biggest problem is that debtor has the burden of convincing the court that the Plan is feasible, proposed in good faith and can be completed in 5 years.
How could a person earn enough money to pay off the remaining secured mortgage debt in 5 years? Even if you thought you could do it, the court may say that such a Plan is unfair and in bad faith because you are proposing to pay off the secured claims in full on no-equity real property, but not giving as good treatment to unsecured creditors, (assuming that you have unsecured claims other than the unsecured portion of the mortgage claims).
Yet another problem is eligibility. The cram down proceedure might be shifting so much debt to the unsecured catagory, (in my example, $400,000 of the mortgage becomes unsecured) that the court may rule that you have exceeded the unsecured debt limit for Chapter 13 eligibility, which is generally $336,900 in unsecured debt and $1,010,650 in secured debts.
Like I said at the beginning, theoretically possible, but unlikely to be achieved in reality.
Readers who want to do some general reading about chapter 13 can check out my Bankruptcy Guide, at http://www.debt-relief-bankruptcy.com/faq-browse11-17/bankruptcy-guide.asp
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Answers by Expert:
Los Angeles Bankruptcy Lawyer Leon D. Bayer
Expertise
Leon Bayer has successfully represented clients in bankruptcy for over 30 years. He is frequently called upon by the media, the California Bar and other associations to provide insight and help educate attorneys on bankruptcy issues. If you or other readers want to keep up with my blog postings about life in and out of bankruptcy, you can follow my blog at http://www.bankruptcyblogger.org/ and my personal web site at http://www.debt-relief-bankruptcy.com and A Human Guide to Bankruptcy at http://www.thebankruptcyguide.net/ Leon also writes about bankruptcy law for Nolo, see http://www.nolo.com/law-authors/leon-bayer.html and his "Ask Leon" bankruptcy law blog column at http://blog.nolo.com/bankruptcy/
Experience
Leon is a Certified Specialist in Bankruptcy Law by the State Bar of California, and has been a practicing bankruptcy lawyer in Los Angeles, California for 33 years.
Organizations
National Association of Consumer Bankruptcy Lawyers, California Bar Association, Los Angeles County Bar Association.
Publications
Author, ?The Essentials Of Chapter 13,? Daily Journal Report, December 18, 1987.
Contributing Editor, Basic Bankruptcy, California Practice Handbook, Matthew Bender 1992, 1993.
CEB Consultant, CEB-Personal and Small Business Bankruptcy Practice in California, 2003.
Education/Credentials
B.A., J.D.
Awards and Honors
President, 1995-1996-Los Angeles Bankruptcy Forum; Member - Los Angeles County Bar Association Committee on Commercial Law & Bankruptcy, 1988. Law Advisory
Commission-Personal & Small Business Bankruptcy Law of the State Bar of California, 1996-2000
MR. BAYER SAYS: The big banks and credit card companys have been working overtime for many years to undermine the Consitutional right of the American people to be able to claim bankruptcy protection. In 2005 the banking lobby successfully convinced Congress and the President to make the laws and proceedures more complicated, hopeing that it will stymie legitimate people from filing bankruptcy. They succeeded in gaining these complex new legal proceedures by greasing the legislative system with hundreds of millions of dollars in "campaign contributions." The good news for the American people is that while the new laws have made the proceedures needlessly complex to the point where inexperienced people can't help but trip over the maze of new rules and regulations, the process is still doable, especially with a lawyer who is well trained and experienced in this specialty.
Past/Present Clients
I have probably handled something on the order of about 15,000 bankruptcy cases thropughout my career.
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