Why Many Homeowners Need to Run,  Not Walk, to Bankruptcy Court and File for Chapter 13 Bankruptcy.

The world has many sacred sites. Places that inspire great faith. Places where people go to express, renew, and sometimes discover their faith. Rome, Mecca, and the Holy Land come to mind.

But there are humbler locales like Bakersfield or maybe it was Barstow, where, nestled in a modest single family home, one hears tell of the visage of Jesus appearing in the genuine imitation wood-grain veneer on the bathroom door when the homeowner takes a shower.

Closer to home, the forest near Pinto Lake in Watsonville California, is said to contain a tree in which the face of the Virgin Mary appears to true believers. Cool…

In the Internet Age, you don’t have to travel the world to see a miracle, discover your faith, or renew it. Miracles have bubbled up much closer to home than they’ve ever done before, creating a little mini-Lourdes springing forth beneath your feet.

Miracle one

For Americans who are still in their homes, the first miracle may be just to have retained your home against the onslaught of deliberately deceptive neg-am mortgages, mail fraud, wire fraud, conspiracy, forgery, and perjury committed by the financial industry, all of which has gone completely unpunished.

All of  those constitute serious felonies that the federal courts, yet the Untied States Attorneys and of course the FBI, can’t do enough to ignore. Meanwhile these crimes continue to be uncovered daily by civil attorneys fighting desperately, house by house, to save the homes of individual homeowners.

The Miracle You Perform

The hidden miracle under your feet may be something much greater… It’s the second miracle of the disappearing value of the real estate you call “home”. It may  time for you to make lemonade from your biggest lemon.

That “underwater” lemon that is your house could be your own personal financial savior. That is, if salvation consists of keeping your home.

If you want to give the holder of your second and third mortgage that taste of cold steel many of them so richly deserve, now may be the time.

Enter Chapter 13

With lenders engaged in a cruel, corrupt and one-sided game of loan-modification-water-torture, there is a way for many homeowners to level the playing field. It’s known as a Chapter 13 Bankruptcy strip-off AKA lien stripping. For many homeowners it’s now time to quote chapter and verse from the Federal Bankruptcy Code.

Time to do it now. Before a Congress, completely co-opted by the financial industry, does the bidding of its paymasters and removes this tool from the pathetically tiny toolbox of homeowner rights.

Stripping Off Your Second Mortgage in Bankruptcy

In the 9^th Circuit of the federal court system, which sadly includes California, federal district and appellate court judges generally despise distressed homeowners. They’ve made no secret of their hatred of homeowners. The body of decisions emanating from this group reads like and ode to the sanctity of any and all things that will satisfy the lending industry’s every whim.

Standing defiantly removed from that not so august cabal, are the U.S. Bankruptcy Court’s decisions and the judges therein. In particular Zimmer, 313 F.3d 1220 and Lam, 211 B.R. 36 9th Cir.BAP (Cal.). Together these cases establish a potentially massive source of relief for beleaguered homeowners in Chapter 13 by utilizing a simple formula:

If the value of your home is less than the amount of your first mortgage, and you have a second, third or more mortgages mortgage on your home, those junior mortgages can be reclassified as an unsecured debt and treated essentially like credit card charges.

They can be discharged and “stripped off” in a Chapter 13 Bankruptcy proceeding for pennies on the dollar over the period of the repayment plan.

There is no way out of this for the lender and no adverse debt relief tax for the debtor due to the bankruptcy exception provided in Internal Revenue Code Section 108.

For once the lender has to do something they’ve been making California homeowners do for the last 7 years: they gotta stand there and take it.

They who destroy equity in the homes of the people shall in turn have their liens destroyed.  So sayeth the law.

Guest author Bill Purdy practices real estate and tax law in Soquel, California specializing in foreclosure relief, predatory lending, and short sales.  Bill has written on 1099′s and foreclosure and The Don’t Do List for Troubled Mortgages.

Image courtesy of MGChan.

The list goes on. Each of the assumptions above is false.

Some assume that they can do it themselves as “bankruptcy is just filling out forms”.? As a bankruptcy lawyer who winces at what untrained lawyers do in this field, that horrifies me.? Too much is at stake to represent yourself.

Those filing bankruptcy whose income is below the median are excused from the full-blown means test.? In fact, most individuals and families who are above median also qualify for bankruptcy, they just have to jump through more hoops to prove their entitlement.

Until November 1, 2011, the median figures for Bay Area? households based on size is as follows:

• 1 person – $48.009
• 2 people??? $62,970
• 3 people??? $68,670
• 4 people? ? $78,869

For cases filed on or after November 1, the median incomes are

• 1 person???? $47,683
• 2 people???? $61,539
• 3 people???? $66,050
• 4 people???? $74,806

The data for each state, now and next month, is found on the U.S. Trustee’s site.

If you are preparing to file, consider immediately how these changes effect you.? The bankruptcy process is easier if you are below median.? There’s a $4,000 difference for a household of four depending on where your bankruptcy case is filed on Monday, Oct.31 or Tuesday, November 1.

Then we have to ask ourselves, is this any way to run a legal system?

Image courtesy of luxpim

Other professionals should know better than to? advise people about the workings of bankruptcy.? And if they don’t know better, they should be made to pay, in? some exquisitely painful way, for the harm they inflict.

The terrified client in my office was told by her accountant that if she filed Chapter 13 to save her home, the court would not allow her to buy prescription dog food for an ailing 16 year old pet!? Further, the accountant went on to declare that in Chapter 13, the debtor could pay only for housing, food and gas:? nothing more.? No maintenance for the house, no insurance, no clothes, no medical care.

Of course, the accountant was dead wrong. Articulate but wrong.? So I explained the operation of Chapter 13, how the means test works, and the balance between the debtor’s reasonable living expenses and the claims of creditors.? And assured the client that she can provide for her treasured pet for the balance of its life.? Then I fumed.

I’m resigned in the age of the internet that new clients have encountered lots of bad information on the web.? There is no competency examination before anyone with a browser and an internet connection can opine on any subject.

But the source of this utterly distorted information holds a professional license in another field;? that license gave apparent authority to the tales of horror she told my client.? How was the client to know it was tripe, pure tripe?

It took me two hours to find and eradicate the externally caused fears in my client and the self generated terrors she’d nurtured based on bad information.

Can I count on my readership to bail me out of jail if I find the accountant providing worthless and harmful bankruptcy advice?

Image courtesy of Sandeep Thukral

I’ve adapted.? Chapter 13 became more like the alternative dumping ground if the means test closed off Chapter 7.? Often, the differing allowable deductions on B-22C meant the debtor foreclosed from 7 made minimal payments in 13.

But what galls me these days is the impact of the 9th Circuit BAP decisions of Smith and Martinez which disallow deductions for debt contractually due in the upcoming 60 months on liens to be stripped in the Chapter 13 and for property to be surrendered.? The result is that Chapter 7 becomes more attractive because there, the prevailing case law hews close to the statutory language that allows means test deduction for debts due over the life of a Chapter 13 plan.? What a blow to the sponsors of BAPCPA who were intent on forcing more debtors into Chapter 13 repayment plans.? (This has to be the only time I’ve mourned the thwarting of the intentions of the? BAPCPA proponents.? Remember the line from the Grinch Who Stole Christmas that the Grinch’s heart was just so many sizes too small?)

Very soon after BAPCPA was effective, I argued the Pak case to the BAP concerning whether the statutory look back period in B-22 was conclusive when the debtor’s future income was not only different but larger.? I argued that the law was to be applied the way it was written:? that Congress, in its infinite wisdom (and I tried not to giggle) thought it could write a formula to find the “can pay” debtors and that it intended to cut off judicial discretion to assess the allowance of expenses or the income to be available to fund the plan.? I lost and came away after oral argument with the sense that the judges on the panel wanted the old days back, when their judgment and good sense were the last word.? That was a perfectly fine world, but not the world after enactment of BAPCPA.? (Kagenveama from the 9th Circuit some months later vindicated the argument I made unsuccessfully to the BAP.)

With Smith and Martinez, I again sense that the BAP is chafing at the idiocy found in? BAPCPA. ? I chafe too, but I don’t want to see a legal atmosphere where the words of the statute can be ignored if the judges see a way to “get” a debtor or to return to a world where their judgment is valued.? I treasure predictability, and if? BAPCPA gets applied as written(mean though it is), then I’ll figure out how to get my clients the best deal available under the law.? If however we have courts finding interpretations that carry them back to preBAPCPA days, then I feel like the Light Brigade: ” canon to the right of them, canon to the left of them…”? hoping I can ride boldly and well,? into the mouth of hell,…

In the mean time, I’m filing more Chapter 7′s.