california bankruptcy Archives - Northern California Bankruptcy Lawyer

Chapter 13 Dismissed After All Payments Are Made: Self Inflicted Wounds

By Cathy Moran

There’s been a rash of bullet-ridden feet lately in Chapter 13 cases.

Debtors seem to whip out their pistols and shoot themselves in the foot with increasing regularity.

Just when their goal of keeping the house was within reach, had they paid attention, they lose it all.

It happens when debtors don’t hold up their end of the bankruptcy bargain.

And at the end of the day, or the end of the plan, they get none of the benefits they sought through bankruptcy.

How does that happen?

Chapter 13 saves houses

The overwhelming majority of Chapter 13 cases in the Bay Area are filed to save a house.

The homeowner needs to catch up on payments, or more frequently, needs a loan modification in order to keep the house.

The Bay Area bankruptcy judges have developed procedures to confirm Chapter 13 plans, and get money flowing out to creditors, while a loan modification is under consideration. If there is anything we know about loan modifications, it’s that they take time and persistence.

Troubles after the loan modification

One of the provisions of the Chapter 13 plan that the debtor proposes for confirmation by the court addresses how the mortgage lender will be paid while we wait on a loan modification.

The plan might provide that the debtor will make the regular payment, according to the loan terms, directly to the lender in the meantime.

Or, the debtor may propose to make an ongoing payment to the mortgage lender calculated according the the HAMP formula, which says that housing costs should be no more than 31% of a person’s gross income.

So, the HAMP payment to the lender works out to be 31% of monthly income, less property taxes and hazard insurance.

Whichever approach the debtor chooses to deal with the current mortgage payment, it’s set out in the plan, along with the monthly payment the debtor will make to the trustee toward other kinds of debts.

Once a plan is confirmed by the judge, it binds all parties, creditors, trustee and the debtor. See §1327.

Only some debtors seem to forget their part of this deal. They don’t make the ongoing payments and don’t modify their plans to match their behavior.

Confirmed plans when loan modification denied

Another variation on our Bay Area plan is the plan provision that says “if I don’t get a loan modification, I will immediately modify the plan or surrender the house”. I’m paraphrasing the language but the idea is clear: if I can’t modify the plan, I’ll present an alternative plan to the court.

And then the homeowner doesn’t get a modification, and doesn’t present another plan.

And apparently expects good things to happen despite the failure to live up to his post bankruptcy promises.

Discharge depends on plan performance

The debtor in a Chapter 13 gets a discharge “after completion of all payments under the plan”. §1328.

The payments “under the plan” include those that the debtor undertook to make directly, rather than through the Chapter 13 trustee. (In the Northern District of California, we don’t do “conduit plans” where even the post filing mortgage payments are made to the trustee.)

When it comes out that the debtor hasn’t made the on going payments or hasn’t gotten a loan modification, more and more Chapter 13 trustee are recommending that the case be closed without a discharge, since the debtor failed to meet his promises made in bankruptcy.

Ouch!

Candor works

Facing up to a change of heart about a house, or the painful failure to get a loan modification, seems tough at the time.

What debtors seem to be missing is that all the non-house benefits of a bankruptcy discharge are squandered if the Chapter 13 gets closed without discharging those debts.

The other factor that is probably not obvious to the distraught homeowner is that foreclosure does not always follow immediately from the announcement that the debtor elects to surrender the house.

The foreclosure that took forever

Even when we want lenders to foreclose on unwanted property, they don’t. Or don’t very quickly.

It is not as though the debtor will be immediately homeless if they admit it isn’t working out.

This is my clarion call to debtors:

Keep your bankruptcy lawyer in the loop about mortgage payments and loan modifications.
Keep a copy of your Chapter 13 plan handy and review what you’ve promised to do in exchange for the protection of the automatic stay and the discharge at the end of the case.

Your lawyer can’t help you if you keep secrets.

Roundup of our best advice on keeping your house

California Bankruptcy Law Is All Our Own

By Cathy Moran

California Bankruptcy law is a lot like a unicorn….appealing but imaginary.

Instead, we have bankruptcy in California, where the landscape is shaped by community property; state exemptions, large mortgages, and the 9th circuit court of appeals.

Like the Merced River cutting through the granite of Yosemite, those factors alter the bankruptcy landscape here.

Community property

California community property law defines what assets of a married couple come within the control of the bankruptcy court. While there are other community property states, it is the law of each state that defines how community property is created. State law also defines the rights of creditors in that community property.

Whether one spouses files, or both join in a bankruptcy case, all of the community is available to the creditors of the marriage.

In return, after the bankruptcy all community property is forever protected by the discharge. Post bankruptcy wages and purchases are beyond the reach of creditors.

Even when only one spouse files, all the community gets protection from creditors who had claims when the case was filed.

Much different from the treatment of marital property other places.

Two California exemption laws

While bankruptcy is federal law, California state law defines exemptions. Exemptions specify assets a debtor can protect from creditors in bankruptcy.

Exemptions are the only place in bankruptcy that the law is explicitly different from state to state.

Congress, in a legislative compromise in 1978 on the adoption of the Bankruptcy Code (back when Congress knew how to compromise), states were given the option to opt out of the federal bankruptcy exemptions in favor of the state’s exemptions.

In response, California’s legislature gave debtors a choice: the existing state law exemptions found in Code of Civil Procedure 704, or a special set of California bankruptcy exemptions starting at CCP 703.140.

Mortgage debt dominates

California boasts (or suffers) home loan balances that make eyes bug in other states. The cost of housing here skews family budgets, leaving less for other living expenses.

Why the means test is toothless in the Bay Area

For many years, credit cards were used to fill the gap between the available income and the expectations of comfortable living.

For homeowners, the deduction for mortgage payments on the means test assures most homeowners that they pass the means test.

The increasing cost of renting has sharpened the drive to save a house from foreclosure, at whatever cost.

Bankruptcy can often make that possible in Chapter 13.

9th Circuit shapes us

California bankruptcy judges are bound by the decisions of the 9th Circuit Court of Appeals. The circuit courts can only be overruled by the Supreme Court.

So, the decisions made by the 9th Circuit on bankruptcy issues drive outcomes that may be different from outcomes in other circuits.

Recently the 9th Circuit made some very satisfying decisions for bankruptcy debtors, including allowing lien stripping in Chapter 20; granting attorneys fees to debtors who win bankruptcy disputes with their creditors; and slapping down bankruptcy trustees who sought to disqualify Chapter 13 debtors who had secured debts for non essentials.

And, the 9th Circuit rejected its earlier, horrible decision about making debtors whole when creditors violate the automatic stay.

Bankruptcy the product of our environment

So, sorry to disappoint, there is no “California bankruptcy law.”

There’s just the granite of the Bankruptcy Code, fractured, shaped, and worn by the economic and legal realities of California.

And the resulting landscape is generally awesome.

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area