Two Things Every MN Lawyer Should Know That MN Bankruptcy Lawyers Do

Written by Wesley Scott | June 30, 2016 at 9:15 PM

How many of us lawyers meet with clients and yet miss issues the client could pursue to their benefit? I suspect the answer is a lot of us. Don’t be too hard on yourself since it’s impossible to know everything right? Most of us limit our areas of practice to a few and focus on those areas. When clients ask our MN Bankruptcy Lawyers and I about other areas of law we get jittery and tell them that we don’t practice in that area and they should see a lawyer who specializes in it. At Kain & Scott every Lawyer has a referral directory that we use to refer clients to any other area of law besides consumer bankruptcy work. Minnesota Bankruptcy work is all we do.

Our practice is limited to Filing Chapter 7 Bankruptcy and Chapter 13 Bankruptcy in Minnesota. Anything else gets referred to a lawyer who specializes in that area. With this said, sometimes it is good to know when a prospect is a good referral to another lawyer or another area of law. Recently, I met with an attorney who pointed out several potential causes of action we were a little fuzzy on. The lawyer spent some time with us and got us up to speed on what a good referral would look like for him.This sort of corroboration is priceless for us lawyers. Please tell us what a good referral looks like to you so we can recognize it and send them to you. This leads me to my blog topic today. There are two things to look out for in the bankruptcy realm where seeing these things may be cause for a referral to a bankruptcy lawyer to help.

1. CRAMMING DOWN THE VALUE OF A VEHICLE IN A CHAPTER 13 BANKRUPTCY

How many among us have ever had a client say something like, yeah, that is my 2007 Chevrolet Impala, with 129,000 miles on it. I owe $22,000.00 on the vehicle and it’s only worth $3,500.00? The answer is a lot of us have. How can they owe $22,000.00 and yet it is only worth $3,500.00? Most of the time, this results when the client is constantly rolling negative equity from a previous vehicle to the next one.

In this case, maybe the client traded in a 1999 Ford F150 worth $4,000.00 but the client still owed $13,500.00 on the vehicle loan. So the client trades the 1999 Ford F150 in and applies a total of -$9,500.00 to the new loan. If you repeat this cycle enough the amount of negative equity can be enormous, as it is here.

Fortunately, Congress has a remedy for people in situations like this. Section 506 of the Bankruptcy Code limits a secured claim to the value of the collateral it is secured by. So, if the loan against the vehicle is $22,000.00 but the value of the vehicle is $3,500.00, the value of the secured claim is reduced to $3,500.00. However, Congress, in 2005, curbed this ability by making changes to Section 1325(a). Section 1325(a) of the Bankruptcy Code provides in part:

...For purposes of paragraph (5), section 506 shall not apply to a claim
described in that paragraph if the creditor has a purchase money
security interest securing the debt that is subject of the claim, the debt
was incurred within the 910-day period preceding the date of filing of
the petition, and the collateral for that debt consists of a motor
vehicle.....acquired for the personal use of the debtor.............

So under 1325(a) a bankruptcy court cannot confirm a plan if the plan proposes to pay less than the entire secured claim, regardless of the vehicle’s value, if the loan for the vehicle was taken out less than two and half years before the date of filing of the petition.

Let’s assume you purchased a vehicle for less than two and half years ago. The vehicle is a 2011 Dodge Durango. The loan against the Dodge is $15,000.00. But, let’s assume the Dodge Durango is only worth $9,000.00. Is it possible to “cram down” the value of the Dodge Durango such that you propose a chapter 13 plan that proposes to pay $9000.00 for the Dodge Durango and then treats the balance of the claim as an unsecured claim?

No, you cannot do that. Why? Because the loan was taken out less than 2 and half years ago. Now, switch the facts around a little bit and you get a different result. If the loan secured to the Dodge Durango was taken out 3 years ago, you can propose a plan that pays the creditor $9000.00 on the secured claim and treat the balance as unsecured and the bankruptcy court “shall confirm the plan.”

Prior to the changes made to the Bankruptcy Code in 2005, there was no prohibition to “cramming down” the value of the vehicle loan. Bankruptcy lawyers relied on section 506 of the Bankruptcy Code which limits a secured claim to the value of the collateral attached to the loan. Prior to 2005, you could cram down the value of a vehicle loan on a vehicle purchased days before filing the chapter 13 bankruptcy. Basically, we “crammed down” every secured claim we could where the value of the vehicle was less than the amount of the loan.

After the changes made to the Bankruptcy Code in 2005 by BAPCA, the ability to cram down a loan was curbed by section 1325(a) of the Bankruptcy Code. Still, if you see a person who is obviously upside down in a vehicle loan and it seems to you that it “shocks” your conscience, they should meet with a bankruptcy lawyer.

In a chapter 13 bankruptcy plan (minimum 3year plan and a maximum 5 year plan), we can cram down vehicle loans to the value of the vehicle if the loan was taken out more than 2.5 years ago, the loan was a purchase money security interest loan, and the vehicle is used for personal use as opposed to business use.

Going back to the first example, if the client owns a 2007 Chevrolet Impala and owes $22,000.00 on the loan and the vehicle is worth $3,500.00, this may be a situation where the benefits of the cram down provision are huge. Assuming all of the criteria are met, we can put the client in a 3 year plan, make their payments $150.00 a month for 3 years, and at the end of 36 months, the client would get a discharge and the bank would be required to release their lien against the 2007 Chevrolet Impala.

In sum, even though Congress curbed the ability of debtors to reduce a secured claim, we still have the ability to reduce a secured claim in many instances. This ability is beneficial to many debtors who have car loans that are way underwater. In addition, there are many loopholes to the Congressional prohibition on cramming down vehicles. For example, the prohibition relates to “purchase money” security interests. If the vehicle was already paid off and the vehicle was offered as collateral for a new loan and the proceeds of the loan were not used to purchase the vehicle, the loan can be crammed down.

If the vehicle’s use is not primarily personal but if it is business, the loan can be crammed down. So, if you ever run into a situation where the debtor owes way more on a loan that the vehicle is worth, refer them to a bankruptcy lawyer. There may be remedies available to the debtor to improve their position.

2. CURING MORTGAGE ARREARS OVER 5 YEARS

How many of us have come across Minnesotans who are behind on their mortgages? My guess is most of us have at one time or another. Did you know it’s possible to cure those mortgage arrears over five years in a chapter 13 bankruptcy? For most of us, owning a home is highly personal and emotional. For many of us, our homes are not just places where we raise our children but places where we have made a lifetime of memories, laughter, tears, and our oasis from the world.

Most of us have pledged our homes as collateral for the loan used to purchase the home. When we fall behind on those payments, the anxiety that takes place is enormous. Most people I know don’t have cash reserves saved up of 6 months worth of their expenses to tap into. The loss of a job, a medical emergency, etc can overwhelm most of us and cause us to fall behind on our mortgage payments. Once you fall behind, your credit suffers, and the ability to refinance your way out of the problem becomes limited. We do see many of our clients try loan modifications with varying degrees of success.

The one thing everyone tells us about loan modifications is how painful the process of modifying is. You send in duplicate paperwork, you speak to multiple people, and then the results are not what you hoped for.I see many loan modifications that result in a 40 year mortgage and the payments added to the back of the loan. It solves the immediate problem of being behind but then it indentures you to a longer repayment period. So, you solve the problem but at what price? What many don’t know is that we can cure mortgage arrears in a chapter 13 bankruptcy plan. We often stop foreclosure sales and spread the arrears out over a maximum duration of 60 months or 5 years, interest free!

Bankruptcy Code Section 707(b) (2)(A)(iii)(I) provides that mortgage arrears may be cured over a 60 month period. I know of other lawyers that have received challenges on this as too lengthy and not allowed by the code. The lawyers who object rely upon a pre-BAPCA case law interpretation of a reasonable length of time to cure arrears on a chapter 13 plan. I believe BAPCA has resolved that issue by allowing for the cure of mortgage arrears on the means test over 60 months. I have yet to be challenged on this in any serious way. Most creditor attorneys acknowledge that Congress has spoken and changed the cure period from the pre-BAPCA interpretation to BAPCA’s interpretation which allows for a cure period of 60 months.

We have helped thousands of people save their homes and many of them had to cure mortgage arrears on a chapter 13 plan over 3-5 years in duration. Not only are the arrears spread out over time, but there is no interest paid on the arrears! That is a HUGE money saver in and of itself. Often times, we recommend the client skip doing a loan modification altogether. Why? Because loan modifications are uncertain and take a really long time. Clients do not find this process filled with anxiety to be funny at all. What clients want is a certain result. Skipping the loan modification process, for the certainty of a chapter 13 bankruptcy court order is much more reassuring to the anxious client. If the client is persistent about keeping the home, and can do a chapter 13 bankruptcy, that is the safer way to go. If the client is not persistent about keeping the home, taking a chance on a loan modification may be the answer.

So now you know the rest of the story. If you have a client suffering with overwhelming debt and is behind on their house payments and just can’t pull out of it, there is help. Chapter 13 bankruptcy prioritizes debt, and pays the most important first, like mortgage arrears, child support arrears and back taxes. Unsecured debt gets relegated to the bottom of the pile and gets a pro rata distribution on whatever is left, which typically is not much. The beauty is after all is said and done, the mortgage arrears get cured, interest free, and whatever unsecured debt does not get paid off, gets wiped out tax free! I love happy endings!

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