Expert: Los Angeles Bankruptcy Lawyer Leon D. Bayer - 1/13/2011

Question
QUESTION: Hi, could you elaborate on the new Chapter 13 debt limits and if there are exceptions to these limits?

I have a 1st and 2nd on my personal residence for approx. $1,750,000 and an auto with a lien of $45,000. Is there a way to still be able to file a Chapter 13 with theses secured debts. The home is worth approx. $1,400,000.

I also wish to challenge at least one of the banks standing as a result of securitization. Does filing an adversarial action cause one of those secured interests to not be counted towards the debt limits?

ANSWER: Based solely on the information in this question, I feel you are not eligible for a 13. There are sometimes "exceptions." If a debt is contingent or unliquidated, it does not count towards the debt limits.

The classic example of this is a lawsuit for personal injury. Suppose you are were in a fender-bender car accident and you are being sued for $1,000,000. That does not mean you owe $1,000,000 it just means that is what the other side would like to collect that from you. Such a debt is unliquidated until a court determines if you were at fault, and how much you owe to the other party. The court could say you were not at fault and don't owe anything. The court could also say you were at fault but the claimant did not suffer any actual damages. If you file a chapter 13 case before the accident case goes to trial, the accident claim is still a debt but it won't count towards the debt limits because it has not been determined if you really owe anything.

I don't understand the basis for your comment about "securitization." I am guessing you contend that one of the lenders on your home does not have sufficient loan documents to prove that they indeed own the mortgage? If so, the debt still counts. For example, suppose your adversary action establishes that bank #B can't prove that they were validly assigned the mortgage that you originated with bank #A. That doesn't make the debt go away. It just means that you still owe the money to Bank #A instead of Bank #B, so the mortgage still counts towards the debt limits. In other words, if you don't owe it to the bank that is trying to collect it, then you still owe it to the previous bank.

If that happened in real life, bank #A and bank #B would just redo the paperwork to clear up the uncertainly, making it clear that bank #B is the rightful holder of the debt and bank #B will resume collections or foreclosure.

You should consult with an experienced local bankruptcy lawyer right away for guidance. You may be able to do a Chapter 11.

I hope things work out and get cleared up for you real quickly.


---------- FOLLOW-UP ----------

QUESTION: Thanks for your thoughtful reply, however, in the recent Ibanez case, the Mass supreme court stated that the bank who foreclosed did not in fact have the legal right to do so and that their rights to foreclose were void. The assignments cannot be thereafter corrected and the debt at best will become unsecured.

assuming for argument sake, that the bank is not able to prove standing through Discovery in the adversarial proceedings in bankruptcy and loses at the summary judgment stage. That debt becomes unsecured at best and until the actual note holder comes forward to claim their rights to collect, perhaps no one can collect?

What would happen if you than transfer that asset into a 3rd party irrevocable trust while still in Chapter 13. Are their provisions where you can shelter an asset while still in a chapter 13 or 11 without having the unsecured lay a bigger claim to that now unencumbered asset?

Also, what if my second lien was created through a private lender (brother) over two years ago and the Deed of Trust states a $750,000 obligation, however, the note was created as a line of credit which only utilized $35,000 over those two years.

Given that I would want my brother to have a priority for his loan in the event of liquidation, I would not want that Deed of trust amount to bar me from filing a Chapter 13 if in fact I do not owe that amount stated in my recorded deed.

Would I just list that secured debt as $35,000, or can I just ignore even stating that debt as my brother would not in reality come in and challenge or confirm the debt if that would hurt my legitimate rights. Pleaselet me know your thoughts on these additional questions.

Answer
It seems to me Ibanez is in the same position as I described in my original answer. If the Ibanez mortgage is not owed to US Bank, then it is owed to the banking entity that preceeded US Bank. In my earlier example, that would have been bank #A. The debt does not vanish, it is still owed to someone. What the court actually did was to rule that US Bank did not obtain good title in the foreclosure sale. I strongly suspect there will be additional chapters written to the case; the debt was in default, and if the subject foreclosure sale was defective, then next one won't be. One way or another, I'm certain Ibanez won't get a free house because the court did not rule that there is no money owed, but simply that good title was not passed at that particular foreclosure sale.

As to the line of credit, it only matters what you owe on the date of filing, not the face amount of the note for Chapter 13 purposes. You can't ignore it, but list it for the amount actually due.

For example, you could have a $2,000,000 mortgage that you took out 25 years ago, but as of now the balance has been paid down to $900,000. If that was your only secured debt, you would be eligible, at least as far as secured debts are concerned becuase you owe $900,000, not the amount of the original note.

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/