Home Sweet Home!



Whether you live here, or....



Home is where the heart is...  That's the expression and that's how most of us feel.  The question of what happens to one's home in a bankruptcy is a question that causes a lot of apprehension for our clients.

Most people are surprised to find out that generally they can keep their home through a bankruptcy.  So, how does that work?



...here, it is still home!

Let me give you a couple of examples. 

Example A:  Home is worth $200,000 with a $50,000 mortgage.  If a person who lives in this home files for bankruptcy, they can keep it, so long as they keep their mortgage current.  Why?  Arizona law says that you can protect $150,000 worth of equity in your home.  In other words, neither the bankruptcy court, nor your creditors, can take that home from you.  This is true in a Chapter 7, a Chapter 13, or a Chapter 11. 

Example B:  Home is worth $200,000 with a $210,000 first mortgage and a $50,000 second mortgage.  If a person who lives in this home files for bankruptcy they can still keep it for the same reasons set forth above.  There is no equity to protect, so as long as they keep their mortgage payments current, they will be left alone. 

However, in Example B there is a substantial difference between Chapter 7 and Chapter 13.  In a Chapter 7, the debtor can discharge both loans, but they can't get rid of either lien.  This means they don't have to pay on either loan, but the lenders can choose to foreclose.  Most likely, if the debtor stopped paying on their first mortgage, the lender would foreclose.  However, if the debtor stops paying on their second mortgage, but keep the first current, the second lender likely WON'T foreclose.  Why?  The second mortgage lender gains nothing from the foreclosure sale, because all the proceeds from the sale of the home would go to the first mortgage lender.  So what happens in that case?  The second mortgage can be held in limbo until (i) the debtor and lender settle the account; (ii) the debtor tries to sell the home (in which case the second mortgage lender will require payment); (iii) there is enough equity to refinance the home; or (iv) the home's value increases to the point where it is worth it to the second mortgage lender to foreclose.  Wow, there is a lot going on there.

So, what happens in a Chapter 13?  This is really cool.  Chapter 13 permits the debtor to strip-off the second lien and treat the second mortgage lender as an unsecured creditor.  This means that upon completion of the Chapter 13 repayment plan, the home will only have one loan on the home (the original first mortgage lender).  The second mortgage lender has their lien stripped and they get treated as an unsecured creditor in your repayment plan (which generally means they get a few pennies on the dollar for their loan).

Another tool available in a Chapter 13, which is not available in a Chapter 7, is that arrearages (the amount you are behind on your loans) can be made up through a Chapter 13 repayment plan.  This is very useful if you are trying to avoid or cancel a foreclosure.

Remember, every situation is different.  If you would like to see how these issues affect your personal situation, set up a time and we'd be happy to sit down with you.

Chapter 11 Bankruptcies Increased 24.2% in July 2011!

According to an article written by Rachel Feintzeig (click the preceding link to view), 1,217 business and individuals filed for Chapter 11 Bankruptcy in the month of July, 2011.  This represents a substantial 24.2% increase over the previous month. 

Chapter 11 Bankruptcy is a "reorganization type" bankruptcy, which is most often times filed by businesses (corporations, LLCs, etc.).  Individuals who desire to reorganize under the Bankruptcy Code, but do not otherwise qualify for Chapter 13, may also file for Chapter 11 Bankruptcy protection.

There is no "qualification" process for Chapter 11 like there is for Chapter 13.  In a Chapter 13, the debtor must be an individual; businesses cannot file Chapter 13.  In addition, in a Chapter 13, the debtor cannot have more than $360,475 in unsecured debt, or more than $1,081,400 in secured debt, going into the plan (note: these figures are the current limits set by Congress, but are subject to change).  Chapter 11 Bankruptcies have no such limits.

In many cases, a Chapter 11 Bankruptcy can help a business survive a past financial hiccup, adjust to a new market reality, or provide temporary relief from demanding creditors.  However, a Chapter 11 Bankruptcy will not "save" a failed business model or bring a company back from the dead.  In order to remain in a Chapter 11, the business must be profitable enough to fund its Chapter 11 Plan payments.

In general, a Chapter 11 Bankruptcy permits a business to disclose its current financial situation to their creditors and propose a reorganization plan.  The creditors then vote on whether or not they are willing to accept the proposed plan, while the business continues to operate.  Once the plan is approved by the businesses' creditors and the Court, the business will commence repaying its creditors, in accordance with the approved Chapter 11 Plan.

Chapter 11 also permits businesses to "lien strip" through a Chapter 11 Plan.  In other words, if a business owns property with more than one loan secured by the property, and the property is worth less than the 1st position lien, then the other liens get stripped and treated as unsecured debt.

Finally, the most powerful tool in a Chapter 11 is "cram-down."  In some cases Chapter 11 Bankruptcies permit a business to pay a creditor the current market value of the property, rather than what is actually owed on a loan.  If the cram-down is approved by the Court, the creditor is forced to accept the fair market value of the property as a pay-off of the loan.  The only downside to a cram-down is that the fair market value must be paid in its entirety during the Chapter 11 Plan.

Chapter 11 is a wonderful tool in the right situation, but even then it can be a minefield. If you have questions about whether or not a Chapter 11 Bankruptcy might be right for you or your business, please contact Clint W. Smith, P.C., and let's talk.

What Happens to My Car If I File for Bankruptcy?



Can I keep it?  Please?



Generally speaking, you can keep any vehicle (car, motorcycle, boats, etc.) and file for bankruptcy.  The real question is: Does it make sense to keep a vehicle, in light of certain consequences.  In many cases that answer is - yes!

In Arizona, the law currently says that each person filing for bankruptcy gets to "exempt" $5,000 of equity in a car.  For example, let's say you own a car that is worth $5,000 and you are planning on filing for Chapter 7 Bankruptcy.  If you own that car, you can file for bankruptcy without any consequence as to that car.  If you are married and filing jointly, both spouses get a $5,000 exemption to protect one car each.



This one is probably OK.



So, what happens if your car is worth more?  Let's say you have a car that is worth $8,000.  The law says you can only protect $5,000.  What happens to the extra $3,000?

We refer to that $3,000 as "excess equity" and it is not protected.  This means that your creditors must be compensated for the extra $3,000.  So, what can be done?  First, you could sell the car prior to filing and spend the money on a $5,000 car (the remaining $3,000 could be spent on household expenses prior to filing).  Second, you could compensate the Trustee for the non-exempt equity, meaning you could pay the Trustee $3,000, after you filed, over the course of 6-12 months.  Third, you could turn the car over to the Trustee, let them sell it, pay you the first $5,000 and let the Trustee pay your creditors with the remainder.  Fourth, and lastly, you could get a $3,000 lien against the car prior to filing.  In this last case, you would then be obligated to pay the $3,000 loan as agreed with the lender, but the remaining $5,000 in equity would be protected under Arizona law.

How is this different if you are filing for Chapter 13?  Each of the above scenarios still apply, with the exception of the second scenario above (which is not allowed).  However, Chapter 13 permits a scenario that is similar to the second scenario above.  In a Chapter 13, where there is excess equity in a vehicle, the debtor is permitted to increase their reorganization plan payment in an amount equal to the excess equity.  Let's use the same example as above, but this time they file a 60 month reorganization plan under Chapter 13.  In such a case, the $3,000 would be paid over 60 months in equal installments to the Trustee and it would be in addition to the payment amount they would otherwise be required to pay.  In other words, they can keep the car and pay an additional $50 each month (in addition to the amount required by law to be paid under their reorganization plan).  

As you can see, there are many factors that need to be considered and discussed with your attorney prior to filing for bankruptcy.  If you have questions about what would happen to your vehicles in a bankruptcy, please give us a call to schedule a free consultation.

Please remember, every case is different and the law is constantly changing.  The above should not be considered legal advice and proper legal advice should always be sought prior to filing for bankruptcy.