Bankruptcy Court allows "Chapter 20" debtor to remove a mortgage from her home

One of the benefits of filing a Chapter 13 Bankruptcy case (where an individual can "reorganize" through a plan providing for payment of creditors over 3 to 5 years), is that Chapter 13 allows some forms of  mortgage modification not available elsewhere. Specifically, under certain circumstances junior mortgages can be "stripped off" a home, leaving the borrower with a home that is less financially "underwater". It goes like this:
Let's assume your home is worth $200,000.00 but the first mortgage payoff is $201,000.00. The second mortgage and third mortgage are worthless, because there is zero equity for those lenders. If the home were sold, the first mortgage holder takes it all. When this is the case, in a Chapter 13 case, the borrower can, through her bankruptcy plan, convert these worthless mortgages into unsecured debts. After she completes her plan, the mortgages are "stripped off", leaving only the first mortgage.

This is a big benefit. However, Mrs. Gloster did not have enough income to support any payments to her creditors, so she had to file a Chapter 7 bankruptcy (where "strip off" is not allowed). She got her discharge. This meant that she no longer had any personal liability on either of the two mortgages on her home, but to keep the home she still had to keep paying the first and second mortgages. In her case, the home was worth $182,000. Chase had a first mortgage with a balance of $200,200, and Bank of America ["BOA"] had a second mortgage with a balance of $51171.00. Apparently she was resigned to losing the home. She was behind on both mortgages.

After she got her Chapter 7 discharge, Mrs. Gloster's fortunes changed. She got a raise, and she got Chase to reduce her payment on the first mortgage. This meant she now had some money to fund a Chapter 13 Plan. To save her home, Mrs. Gloster filed a "Chapter 20", ie a new Chapter 13. She did not have to discharge any debt; indeed she could not do so. But what she proposed was to remove the BOA second mortgage through a "strip off" and use monthly payments to bring her first mortgage current.

The problem is that courts around the country disagree whether Mrs. Gloster could do this. Some courts held that a Chapter 13 debtor who is ineligible for a discharge, loses the right to "strip off" mortgages as well  Until now, no New Jersey court had issued a published opinion on this point. In In re Gloster, issued October 13, 2011 for publication, Judge Novalyn Winfield, in a carefully reasoned opinion, held that this use of Chapter 20 was allowed, so long as the second bankruptcy filing was made in good faith.  Judge Winfield reviewed the existing case law, but was persuaded that nothing in the plain and direct meaning of the bankruptcy code provisions involved prevented Mrs. Gloster from doing what she proposed.

The opinion cautions that a debtor using Chapter 20 this way must demonstrate good faith. Factors to be considered on this issue include (1)whether the debtors have a need for bankruptcy other than lien avoidance [Mrs. Gloster needed to cure mortgage arrears to save her home]; (2)whether debtors acted equitably in proposing the plan [here there were some small payments to be made to non-mortgage unsecured creditors]; (3) whether debtors are devoting their income to the plan [Mrs. Gloster was]; and (4) whether the debtors used serial filings to avoid paying their creditors [Mrs. Gloster could not qualify for Chapter 13 when she filed her Chapter 7, because of lack of income. The mortgage lenders were no worse off than they would be otherwise]

This is a welcome clarification. It also illustrates how, with the proper guidance and under the right circumstances, borrowers can use Chapter 13 to save their home. For more guidance and help with mortgage modification and use of Chapter 13, see our website: Alternatives to Foreclosure

Chapter 13 Bankruptcy- a Swiss Army Knife of Debt Relief–the path to a brighter future

For individuals who qualify and need it, Chapter 13 Bankruptcy is the ideal solution. It provides a simple, direct and relatively inexpensive means for people to reorganize and restructure their debt. It is much cheaper and simpler than Chapter 11.

Like Chapter 11, in Chapter 13 the Bankruptcy Court approves a Plan which redefines what you owe your creditors. At the end of a three or five year payment period, you are free of all debt except the ones you agree to. Of course, you have to fully pay taxes, and if you want to keep property that is subject to a mortgage, car loan, lease or other secured debt, you will still have those debts to deal with after your bankruptcy, except to the extent you are allowed to modify them.

Here is what you can do using Chapter 13:

Saving your home or real estate and reducing mortgage debt to a manageable level.

1. If your house is worth less than what you owe on the first mortgage, you can remove the second mortgage (called a "strip off"), and instead pay that lender a fraction of what is owed. At the end of your agreed payment plan, you can have the mortgage removed from the title to your home.
2. If the mortgage is for a rental or investment property, you will usually be able to "modify" the loan to force the mortgage lender to accept the market value of the property instead of the full balance owed.
3. The same thing can be done with other secured loans, subject to some exceptions and special rules

Settling up with the tax man

1. While most but not all income, payroll or sales taxes have to paid in full (exceptions are certain older taxes, and most tax penalties) you can pay them back over five years with zero interest.
2. Very often, such taxes that you could discharge because they are too old have become liens on your home and other property because the tax collector has filed a tax lien. Without bankruptcy, you are still stuck paying that lien even after a bankruptcy discharge. In Chapter 13, however, you can "cram down" tax liens to the value of your property. Let’s say you have $100,000.00 in state or federal tax liens for old taxes that without the tax lien could be discharged in bankruptcy, but the total value of all your property, net of other liens, is $20,000.00. You can pay the tax man the $20,000.00 over five years, and when you are done, the tax lien disappears.
3. There are other big tax benefits from any bankruptcy, that apply in Chapter 13.
1. First, there is a "home court advantage". Outside of bankruptcy, disputes with the tax man have to be fought out in Washington, DC or in a tax court, giving the tax man the "home court advantage". The Bankruptcy Code gives bankruptcy courts the ability to hear and decide these issues, in a courthouse that may be much closer to home. This is a definite "home court advantage" for the debtor-taxpayer.
2. Secondly, if you can settle debts outside of bankruptcy for less than the full amount owed, you will usually get hit with a tax bill from what is called "debt-discharge income". In a bankruptcy discharge, this is not the case.

Making lienholders take less than what they are owed
Let’s say that old car is worth $3000.00 but you owe $6000.00 on it. If the car loan was taken out more than 2 ½ years ago, you can "buy back" the car for the $3000.00 plus interest (usually at a lot lower rate than the contract provides for) paid out over a five year period.
For many other secured debts, the same rules can apply.Paying back without interest, and usually less than what you owe

1. Even those cases where the Bankruptcy Code requires full payment of debts, the payout is without interest. Compared with the high interest rates–as much as 28% for credit cards–this can be huge savings.
2. And for most people, a chapter 13 plan pays a small fraction to garden-variety unsecured debts.

A guaranteed plan that creditors have to live with–the road to taking control of your life and a brighter financial future.

1. Many people we seen have tried to negotiate with their creditors. While deals can be made, they are not guaranteed. Each collector wants to extract as much money as they can from you, right now or in a few months. And even if you settle with 7 out of 10 creditors, there is no guarantee that the last 3 will do so on terms you can afford. This leaves you having to consider a bankruptcy anyway.
2. A Chapter 13 Plan, once it is confirmed by the court, fixes all your obligations to all your creditors, once and all. And to get the plan approved, it must be one you can actually do.

The Road to a New Day and a Brighter Future
Our clients who are successful in Chapter 13 (and we have a high success rate because we are careful to craft plans that work for our clients), have taken control of their lives and are on the road to a new day with a brighter financial future. For more information about gaining control of your life and solving financial problems, see our website. Neuner and Ventura-NJ Bankruptcy

Building a new business from the ashes of the old-a primer on avoiding common mistakes

Here's a scene we see all too commonly. The old business is plagued with troubles that threaten to sink the ship. Unpaid bills are piling up and creditors are going to court. If only the old debts could go away, the business could survive and prosper. The business owners want to just start clean and start over. Yet all too often they charge ahead and make mistakes that result in their creditors and financial problems following them,  or worse. Early advice from experienced and qualified legal and financial professionals  is essential. This article will touch on the sources of trouble, the problems that arise, and the mistakes that are often made.

1. Mistake: Not putting together a comprehensive plan. A wag once said that "if you don't know where you're going any road will get you there". Success in moving on requires a careful business plan.Which suppliers will be critical to the new business? What debts have the owners personally guaranteed, either by agreement or by law? How the new business going to be restructured? What is the timeline? Where is the money for winding up the old business and getting the new one started going to come from?

Doing it wrong can mean the owners and the new business fail or the old debts follow them into the new endeavor. First, is the problem of fiduciary duty. When a business is at or near collapse (lawyers call this being in the "zone of insolvency") the owners and managers have a fiduciary duty to protect the interests of creditors and can become personally liable as "trustees" if they engage in self-dealing or act solely for their own benefit, at creditors' expense. This does not mean they owners must surrender the business to creditors. It means they have to exercise business judgment to make the best of a bad situation so that whatever is left can be applied to legitimate claims of creditors in some fashion that has the hallmarks of fairness and reasonableness.

Secondly, there is the problem of "successor liability". A new business which takes over an old business's employees, customers, business opportunities and/or operations can be held to be a mere continuation of the old business resulting in potential lawsuits and liability to the old creditors. This is always a risk, but with careful planning the risks can be avoided.

Advance planning and understanding is essential to minimizing these risks. The plan should include a careful evaluation of all the assets and liabilities of the old business, and a timeframe for wrapping things up.

2. Mistake: Not keeping a strict separation between the old and new ventures. A new business needs to be built with new money. The old business and its accounts need to be kept strictly separate from the new. This does not mean that a new business must start from scratch, but the more connections there are between the old and new ventures, the greater the risk of "successor liability". At a minimum, the new business should keep separate accounts and separate contracts. It should avoid using or having a name that is closely similar to the one used by the old business.

All business operations of the new business and the old business should be carefully and scrupulously documented to show that the old management acted responsibly in winding up the old business and everything was kept as much as possible at "arms length".

3. Mistake: Transferring business and business assets to the new business without paying for them. If the old business has equipment or assets that the new business needs, the new business needs to buy them on terms and for a price that are objectively fair and reasonable. More importantly, the payment needs to go into the coffers of the old business. Management should document how they came to the price and terms, if possible based on some objective third party criteria (eg EBay prices, auction sale values etc). The new business need not pay full retail, but should pay something that leaves the old business and its creditors no worse than what would be there in a liquidation scenario.  This obligation extends to contracts that the new business takes over and which the old business does not have the ability to complete. Payments from new to old could be structured in a variety of ways, depending on the circumstances. For example, the old company might receive an objectively reasonable percentage of the revenue when received  from completing an existing contract. There are a variety of ways to make these arrangements.

4.Mistake:  Winding up the old business without proper legal advice. Winding up an old business while starting a new business is risky at best. Owners need to have accountants and lawyers advising them in this process. Each situation is different, but having a carefully thought out plan that is documented is critically important. Both accountants and lawyers should be consulted early on, and should work together. Money should be set aside early for their fees.

5. Mistake: Lying or cheating the old creditors The owners and managers should never make misstatements of fact. Better to say nothing. The last thing you want are allegations of fraud or breach of trust following you. At the same time, every attempt should be made, within reason and within the bounds of financial reality, to settle up with creditors, especially those who are most vocal and aggressive. These offers should be documented. This process gets back to the need for a plan. Owners need to know how far they can go and what they can do.

6. Consider letting a court oversee the windup of the old business. Business owners who are simultaneously wrapping up the old business and trying to start up the new are always in a precarious position, fraught with conflicts of interest. Under the right circumstances, a bankruptcy under Chapter 11 or an Assignment for the Benefit of Creditors under New Jersey law may make a lot of sense. Having an independent fiduciary or court approval for critical steps of the transition goes a long, long way to avoiding later claims of successor liability or breach of fiduciary duty.

We have guided many business owners through these treacherous waters, and on the flip side have pursued on behalf of trustees or creditors those who got it wrong. If you are a business owner in New Jersey, we are available to help. Visit our website to learn more. Neuner and Ventura LLP