Although the House of Representatives passed legislation earlier in 2009 to allow Bankruptcy Judges to modify loans secured only by a debtor’s principal residence, 50 Democrats reversed themselves and rejected similar legislation recently introduced into the House.  When questioned, some stated with passage of sweeping banking reform earlier in the day they could not vote against the banking industry twice in one day.


This vote was taken notwithstanding Congressional reports that evidence the banking industry is not modifying loans to preserve home ownership.  And, when there is closer scrutiny of loans modified, research points to the inevitable default on such modifications.  Further, most loan modifications, not being a modification of principal balances, results in a balloon due upon sale or refinancing.  Are we a society of homeowners or home renters?  And, one of my family law colleagues reports a brisk business of new clients, each of which coincidentally is also a bankruptcy client.


The real estate industry needs to come around to better understand that bankruptcy reform to allow judges to modify home loans will preserve home ownership and therefore home sales, while bank controlled modifications will do nothing more than create indentured servitude and a society of home renters; never being able to pay off their home loans.


Lou Esbin

Law Offices of Louis J. Esbin

Certified Bankruptcy Specialist – State Bar of California.


Commencing a Chapter 13 Case

A Chapter 13 bankruptcy case begins with the filing of the bankruptcy petition.

Upon the filing of the petition an automatic stay arises that prohibits creditors from taking any further action to collect a debt or enforce a judgment.

A Notice of Commencement of Case is electronically served on all creditors who have subscribed to the national database or by mail to all others.

This Notice provides each recipient with the date, time and place of the meeting of creditors and confirmation hearing, as well as the last date to file for a determination of whether debt should not be discharged.

At the time of filing of the petition or within 15 days Schedules of personal and real property, exemptions, priority debt (taxes, domestic support obligations, etc.), secured debt, unsecured debt, income and expenses must be filed.


Chapter 13 Trustee and Creditors

Unlike Chapter 7 trustees, Chapter 13 trustees are not empowered to liquidate assets, but rather will evaluate asset values alongside income and expenses to determine if the plan payment is the debtor’s best efforts.

The Statement of Financial Affairs filed by the debtor is reviewed by the Chapter 13 trustee for complete disclosures in response to a series of questions, income over the last 3 years, transfers, repossessions, and seizures made within 2 years (most trustees will ask about over the last 4 years), and interests in any corporate or business entities.

Creditors have the right to object to the Chapter 13, but have no voting rights, as they would have under a Chapter 11 plan.

Mortgage holders and auto finance companies require continue payments for the debtor to retain property rights.  Auto financing entered into within 910 days of the filing of the case cannot have the value of their collateral reduced to the current value (cram down).


Who May Be a Debtor and Debtor’s Duties

Chapter 13 is intended to provide a vehicle through which people facing financial difficulty attempt to keep their property while using their Chapter 13 plan to cure payment defaults, typically only to their mortgage lender.

General unsecured debt that is liquidated, matured and not contingent cannot exceed $336,900, and secured debt cannot exceed $1,010,000.  The determination of what is secured and unsecured can be subject to objection and litigation in a Chapter 13 case.

Debtors are required to complete a credit counseling course prior to filing and must complete a financial management course within 45 days of confirmation of a Chapter 13 plan.

Beginning each month after commencement of the Chapter 13, debtors must begin making the regular monthly mortgage payment to the first and the second (until the second may be deemed wholly undersecured), and regularly monthly mortgage payments may now include an escrow for taxes and insurance (thereby increasing monthly payments).


The Chapter 13 Plan

Also at the time or within 15 days of the petition there must be filed a Chapter 13 repayment plan that will set forth how mortgage default payments will be cured over a 36 to 60 month period of time, as well as treatment of other debt repayment, if any.  Depending upon the jurisdiction, plans may be proposed for as little as 0% being paid to general unsecured creditors.

Under BAPCPA the period during which debtors must commit to a Chapter 13 plan will be dictated by whether their annualized monthly income is more or less than the median income in their Metropolitan Statistical Area as compiled by the Census Bureau.

Other requirements as a condition to court approval (confirmation) of a Chapter 13 plan include: submitting tax returns, proof of income and proof of monthly expenses to the Chapter 13 trustee, as well as plan payments calculated from disposable income or the curing of default payments. r all plan payments are made during the term of the plan and the total amount required, the Chapter 13 trustee will file a final report upon which the debtors receive a discharge.  In the event the second mortgage is deemed wholly undersecured, it may be avoided from title as prescribed by order of the court.


Advantages of Chapter 13

Chapter 13 affords debtors the opportunity to retain their homes, as long as they make regular monthly payments and plan payments.

Wholly undersecured junior mortgages may be removed from title upon entry of Chapter 13 discharge.

Judicial liens may be removed.

Auto loans that were made more than 910 days may be subject to being reduced to the value of the motor vehicle with payments made through Chapter 13 plan.

Foreclosures, seizures, garnishments, levies, and collection efforts are stayed during the course of a Chapter 13 and are permanently enjoined upon entry of the discharge.

Taxes are generally nondischargeable, but may be paid with post petition interested abated upon full payment and entry of the Chapter 13 discharge.


As reported on (Nov. 1, 2009):

Executives of America’s 28 largest banks will meet with Federal Reserve supervisors on Monday to discuss the Fed’s plan to police banks’ pay policies, officials said Friday.

Consumer spending plunged in September by the largest amount in nine months, reflecting the end of the government’s Cash for Clunkers auto sales program. Incomes, the fuel for future spending, were flat.

What History Says:

In 1802 it was said: “I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”

Thomas Jefferson (1802).

Today’s Required Response:

Call, write, or email your elected officials and tell them NO pay for bank executives without consumer protection and bankruptcy reform.  Why do the bank executives get an audience with the Federal Reserve, while their lobbyists thwart consumer protection laws and bankruptcy reform?  Are you, your clients, friends and family getting pay raises!




Here are Three Facts Every Client Must Know:

1. If you bank where they borrow, the bank will seize funds as a set off, even if you file bankruptcy.

2. When a Bankruptcy Case is filed, certain banks, such as Wells Fargo and Union, will freeze accounts as a custodian of the account. They will not release funds, even though checks may bounce, until further ordered by the court or they receive a No Asset Report from a Trustee.

3. Now, credit unions seem to be getting very aggressive about “popping” cars when members fall into default on credit cards and even home loans, even though car payments are current. They do so based upon the cross-collateral language in the car loan and mortgage (or note and deed of trust) documents. And, so, clients must be admonished that even though they may be current on car payments to a credit union, their car may be in jeopardy of being repossessed.

Louis J. Esbin

Law Offices of Louis J. Esbin

Certified Bankruptcy Specialist State Bar of California.

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