Debtors with a Chapter 7 discharge too recently to get a discharge in a subsequent Chapter 13 can strip off underwater mortgage liens under a decision issued by Judge Edward Jellen in the Oakland division.

This has been a simmering issue, since the guidelines issued by the judges in the Northern District of California include a form order allowing the voiding of an underwater mortgage “on entry of the discharge” in the Chapter 13.  A debtor can’t get a discharge in a 13 filed within four years of the prior Chapter 7.

Since those guidelines were promulgated, several courts in other districts have allowed lien stripping in no discharge 13′s.  Some courts have gone the other way.

Judge Jellen’s decision held that a discharge was not required in order to value and strip a lien for which there is not supporting value in the collateral.  However, he dismissed one of the pair of cases on which he wrote sua sponte for bad faith.  So, there remain issues, but not, apparently, whether lien stripping is available in Chapter 20.

The marketing success of  debt settlement companies flows from two profound truths about the indebted consumer:  they want to pay their bills and they were rebuffed by their creditors when they sought realistic terms.  It’s only too bad that marketing is the only thing that debt settlement companies are successful at.

Today’s New York Times story on debt settlement concluded that the industry “deepens the misery of debtors”. I think the whole concept of debt settlement is faulty and impractical.  But the industry doesn’t care so long as it gets its money off the top.

Debtors who genuinely want to repay their creditors should avail themselves of Chapter 13, where they can generally write the terms on which they repay creditors and have that plan enforced by a federal bankruptcy judge.  Plus, debts settled in bankruptcy generate no cancellation of debt income and therefore no tax hit.

Debt settlement outside of bankruptcy trashes the consumers credit record, so the illusion that debt settlement will preserve credit history is just that, an illusion.  The individual might just as well get real, effective and tax free relief from debts in bankruptcy.

Used to be, bankruptcy law was organized to encourage debtors to file Chapter 13 and repay some part of their debts.  Some part of that encouragement came in the form of the Super Discharge:  the ability to discharge debts incurred by bad acts; unfiled tax debt from long past tax years; and unfiled claims in the bankruptcy case.  Most of that departed with BAPCPA.

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 month 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.

My post on what to do when you can’t make your Chapter 13 payments on Bankruptcy Law Network, written for consumers,  sparked a couple of responses from my lawyer colleagues there.  Chip Parker observed he needed a refresher on how-to, since hardship discharges hadn’t been see much in the last decade in Florida.

Turns out my other bud, Kent Anderson, had written on the showing necessary for a hardship discharge for Lexis.

The exchange and cross pollination that is available to us as lawyers and consumers via the internet never ceases to energize me.

Yesterday we got notice from one trustee that 5 of our confirmed Chaper 13 cases were in default and in danger of being dismissed.  Jackson Morris, a colleague up the Peninsula, sent a link to this map showing change in unemployment figures.

The default picture becomes clearer.

A recent case out of Kansas, In re Dana Werts, held that each debtor in a Chapter 13 was entitled to debts within the debt ceilings for Chapter 13 eligibility. Judge  Karlin recognized that a joint case is simply two separate cases administered together.

Previously,  courts have treated a joint case as though it were a single person and required that the debts of the couple be combined to look at Section 109 eligibility.

This is a marvelous decision for Californians where hard times and underwater real estate increasingly find married couples with collective debts in excess of the limits.  I have found myself deconsolidating cases filed jointly when it was determined that the total debt rendered the couple ineligible, if you assume that the 109 limits apply to the sum of the debts.

It then raises the question of exemptions:  if a joint case is really two cases, are not the debtors entitled to two sets of exemptions?

My thanks to my friend Doug Jacobs for pointing me to this case.

It’s tax season:  don’t forget to write off the deductible expenditures made by your  Chapter 13 trustee on your tax return.  Many Chapter 13 plans are paying mortgage arrears (which are almost exclusively deductible interest), taxes of some sort, or business expenses.  These items should be deductible to you.

You can get a report from your Chapter 13 trustee of the distributions she’s made during 2008.  Many trustees have this information on line for your convenience. The report will itemize payments  made with your money, on your debts.

If you’re in a Chapter 13 and  have a bushel of lemons, make lemonade, and reduce your current tax burden.

My newest colleague in the Bankruptcy Law Network, Adrian Lapas, discussed the critical importance of developing a budget in connection with a Chapter 13 plan.  Spend the plan payment on something else and your case may be dismissed.

Budgeting for your post filing life is made more complex by a number of factors:

• Many people underestimate the actual  cost of transportation, health care, and running a household
• The official bankruptcy form for budget includes no line item for vacations, birthdays, Christmas, or the routine replacement of appliances and soft goods
• Debtors have been doing without everything that can be postponed in an effort to pay their debts
• The little things have become “standard” in people’s lives and add up:  cell phones, meals away from home, manicures, hi end cable

My charge to my clients is to figure out where the money needs to go and to rethink  what is essential.  What is at stake, often, is keeping the house, discharging the debt, and saving for emergencies and retirement.

First things first.

I’ve spent the last three days at the annual meeting of the National Association of Chapter 13 Trustees in San Francisco. Strewn through the convention site are banners thanking those who have contributed money to put on the gathering of Chapter 13 trustees. Those three sponsors at this event are exclusively big creditors and lawfirms who represent them.

The parties in interest in a Chapter 13 form a triangle: trustee, debtor, creditors. The trustee has obligations to both of the other parties. Debtors come in onesies and twosies. Creditors tend to be national and big money players. There is no organization of bankruptcy debtors; there is an organization of debtor’s attorneys, the National Association of Consumer Bankruptcy Attorneys. By the nature of the practices of its members, NACBA is not a big money player.
At the gatherings of debtor’s lawyers, the usual sponsors are those who want to sell something to the attendees. It’s not the opposing parties.

I don’t think that Chapter 13 trustees can be “bought” by free breakfast and afternoon snacks. But just like influence of lobbyist money on politicians, this feels uncomfortable to me as a debtor’s lawyer.

More on education efforts by the Chapter 13 Trustees.

Peter Orville wrote about the impact of the Chapter 13 trustee’s commission

The point he makes goes to the heart of the debate about whether car loans or current mortgage payments are paid by the Chapter 13 trustee or directly by the debtor. Here in California, with mortgage payments regularly in the $3,000-6,000 a month, requiring debtors to pay their mortgages through the trustee increases the debtor’s cash requirements significantly.

Proponents of making payments through the trustee note the advantages in the event of accounting disputes and the added visibility it gives the trustee. My fear is that at 7-10% commission, routing mortgage payments through the plan is just another barrier to a successful Chapter 13 plan.