Expert: Mark J. Markus- California Bankruptcy Attorney - 1/13/2011

Question
QUESTION: Hi, I have a $1,000,000 first and a $750,000 second on my personal residence. I also have a $45,000 lien on my vehicle. Will I be barred from filing a Chapter 13 if my secured debt is almost $1,800,000?
Are their exceptions to these limits, such as filing an adversarial action against the $1,000,000 first while in Chapter 13 and that amount not be counted?

I read somewhere concerning a proposal to not include the secured debts of a principal residence, did that pass?

ANSWER: Under those facts, you would not be eligible for Chapter 13.  Eligibility is based on the amounts owed on the date your case is filed, so filing an adversary against the first mortgage (for what, I don't know--but unless you were able to get a court to determine you don't owe them any money AND their lien is voided, it would still likely be over the debt limits anyway) would not alter your being over the limits when the case was filed.

The exception is that if the value of the property is less than the amount you owe on the first mortgage, the second mortgage could be treated as unsecured debt, but in your facts this wouldn't help because you'd be over the unsecured debt limit as well.

There is no law regarding exclusion of secured debts on a principal residence under 11 USC 109.

Mark J. Markus, Attorney at Law
Handling exclusively bankruptcy law cases in California since 1991.
http://www.bklaw.com/

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

QUESTION: Thanks for your prompt reply. I forgot to mention that my second was placed on my home by a private lender (relative) just over two years ago and the note was drafted much like a line of credit would be, so my actual draw against the recorded $750,000 deed of trust is less than $40,000.

Under those circumstances, how would I avoid be barred if my title shows a $750,000 lien, when in fact I really only owe much less? Can I just ignore that debt given that my relative would never foreclose, or even come into Bankruptcy to seek any type of payment, or should I file a substitution of trustee and show that debt ss satisfied to avoid confusion. I did at least want my relative to have some priority in the event of liquidation, but also do not want to be barred from a Chapter 13.

And lastly would my arrears that I owe on the first be counted as secured or unsecured at the time of the filing ($25,000) under 11 USC 109?

ANSWER: No, you cannot ignore the debt, unless your relative files a release of lien and signs a document stating you do not owe them any money.  On the new facts you state, only $40,000 would be secured and owed on that debt.  Title should not be showing a $750,000 lien.  You should discuss that with a real estate attorney because that is not my area of expertise.

If your first is exactly $1,000,000 and the second is $40,000, you may be OK for Chapter 13 depending on what other secured and unsecured debts you have.


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

QUESTION: Thanks again, are the arrears on the first considered secured or unsecured for Chapter 13 Debt limitations. The loan is for $1,000,000 but the arreas will be closer to $25,000 by the time of filing?

Answer
They are secured as they are part of the balance owed to the first.  The original loan amount is completely and utterly irrelevant.

Different courts have different interpretations of what to do if a loan is partially secured (e.g. if the value of your property was less than $1,000,000) so you need to consult with an attorney in the jurisdiction where you'd be filing.