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Bankruptcy Law/Ch 13 - So what is the benefit?

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Expert: - 1/20/2010


Question
Hello.  I am in the same boat as this gentlemen whose question you answered on 5/19/2009

"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."

http://en.allexperts.com/q/Bankruptcy-Law-909/2009/5/CH-13-reduce-principal.htm

I had heard the same thing.  My question is - so what is the benefit to Ch. 13 then with the cram-down if it requiers one to pay back a ton of money in 5 years?  Is there some tax benefit?

Thank you.  

Answer

Leon Bayer
Thanks for digging that out! Kudo's to you for actually reading the archives!

Looking back on that, I think I wrote a pretty good essay. In fact, not long after I wrote that, the Chapter 13 judges in my district actually adopted the position that I warned my readers about, (I doubt the judges saw my answer so I don't claim credit for influencing them), namely that stripping off a mortgage shifts the debt from that mortgage into the unsecured debt category, and in many cases it makes the debtor ineligible for Chapter 13 because then they have too much unsecured debt for the Chapter 13 debt limit!

I know your question is focused more on the issue of paying off a secured debt claim within 5 years. The is no tax benefit that I know of. For tax advice consult a CPA. The 5 year rule is a real back breaker. I have had cases where we did in fact accomplish it, by paying down as much of the mortgage as possible during a few years and then refinancing during the BK case to pay off the balance. However, that to is unlikely in this kind of an economy. Up until a few years ago it was a viable alternative.

Believe it or not the radio used to be saturated with ads from mortgage companys offering to refi people out of BK. They did that because property values were rapidly rising, and mortgage underwriters has such loose standards that they literally had almost no qualification requirements for issuing a loan. Lenders were doing refi loans at 100% of property value, and many were advertising that they would lend 125% of property value.  That ended 3 years years ago with the collapse of the real estate market.

Chapter 13 always has to be examined on a case by case basis. In fact it turns out to be a fantastic legal remedy for hundreds of thousands of people every year. However as I wrote, the shoe doesn't always fit everybody. Some people can not be helped.

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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