Gambling Debts Unenforceable in Bankruptcy Court

In a refreshing and insightful opinion, the Wisconsin Bankruptcy Court determined that gambling debts could not be recovered in a bankruptcy court context. The case is In re Jafari --- B.R. ----, 2007 WL 4276535 (Bankr. W.D.Wis. Oct 16, 2007). (Westlaw subscription requred.)

The debtor had incurred debts on gambling markers at a casino in Nevada. The court determined that it was against public policy to enforce debts to gaming institutions.

I have had many clients come in with gambling addiction problems and I think this ruling makes good sense. Such debts should be unenforceable.

Ninth Circuit BAP: Means Test is Starting Point for Chapter 13

One of the raging debates in Chapter 13 bankruptcy circles is whether projected disposable income for above-median debtors (the amount to be paid to unsecured creditors) is determined using figures from Form 22C (commonly known as the means test) or Schedules I and J (actual income and expenses).

The Ninth Circuit BAP has weighed in on this argument with a Solomon-esque (splitting the baby) opinion. The case is In re Pak. Some courts have held that projected disposable income is whatever Schedules I and J say, just like under the old law. In my opinion, that argument does not make any sense because Congress intended something to happen when they changed the law in 2005. The other extreme says that projected disposable income is taken from Form 22C, end of story. This argument is more logical, but probably goes too far.

In Pak, the court determined that Form 22C is a starting point. If there has been a substantial change since the figures in Form 22C were used, then the court can take those figures into account. The rationale is that the word "projected" must mean something. Form 22C only uses income figures in the past. So, if the income significantly changes, the "projected" income would also change. This case at least makes some sense and gives some guidance. Unfortunately, however, there is another case at the Ninth Circuit Court of Appeals that will be decided soon that could overrule Pak. So, we cannot fully rely on the Pak decision in formulating Chapter 13 plans.

Hearings on Allowing Mortgage Modification in Chapter 13

The House Judiciary Committee is holding hearings on "Straightening Out the Mortgage Mess". The question is whether Sec. 1322(b)(2) should be amended to allow modification of home mortgages. Currently, that section does not allow modifications. The reason this prohibition was originally added was because without it, mortgage banks argued that the credit market would dry up for home mortgages.

Predictably, the bankrutpcy folks from NACBA and the National Bankruptcy Conference argued in favor of allowing modification and the Mortgage Banking Association argued against allowing modification.

Interestingly, however, an economist from Moody's, Mark M. Zandi, testified that "there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise" and that "[p]roperly designed, the legislation could reduce the number of foreclosures through early 2009 by at least 500,000." This has always been my biggest question: (1) would allowing mortgage modifications dry up credit and (2) if not, can Congress be convinced enough by this so that they are willing to pass legislation allowing modification of mortgages? I think that the answer to (1) is "no" for several reasons: (1) before the credit crisis, there was no problem getting a loan in the non-primary residence home mortgage market, (2) there has already been a tightening of credit across all sectors, so we should probably expect a loosening of the lenders want to make money in the future. With some solid data from economists concurring on this point, I think the legislation is in much better shape than it would have been otherwise.

Wells Fargo Agrees to Ground-Breaking Order Effective in All Districts

Wells Fargo, one of the larger mortgage servicers in the nation, agreed to an order in Louisiana Bankruptcy Court that requires Wells Fargo to take substantial steps to make sure that unauthorized fees and expenses are not tacked onto Chapter 13 cases. The full decision is In re Jones, No. 06-01093 (Bankr. E.D. La. Aug. 29, 2007), and can be found here.

The relevant text of the agreement ordered by the Court is as follows:

1. Upon the filing of a chapter 13 bankruptcy petition, the amounts outstanding on a debtor’s loan will be divided into two new, internal administrative accounts. The first account will contain the sums to be paid under debtor’s plan by the Chapter 13 Trustee; typically the pre-petition past due amounts including past due interest, costs, charges, and fees (“Account One”). The opening balance on Account One should directly correlate to the amounts reflected on Wells Fargo’s proof of claim. Account One will also include any amounts added by subsequent court order to the plan for payment by the Trustee during the case’s administration. All payments made by the Trustee will be applied to the reduction of the amounts owed on Account One.

The second account will reflect the principal amount due on the petition date (“Account Two”). No other sums should be owed on Account Two at the start of the case. Account Two will include post-petition interest accrual, post-petition property insurance or property tax expenditures, and other court authorized postpetition charges as provided in paragraph 2 below. A debtor’s regular monthly note payments will be posted to this account, reducing post-petition interest accrual, postpetition property and tax expenditures, and principal. The account’s first posting will typically be the first installment payment due on the loan following the petition date.

Wells Fargo may maintain, post-petition, its customary records on the loan provided that the two new internal accounts shall control the loan’s administration during the pendency of the case.

2. With the exception of post-petition property taxes and property insurance expenditures, Wells Fargo may provisionally accrue, but not assess or collect, any post-petition charges, fees, costs, etc. allowed by the note, security agreement and state law. Post-petition property tax and insurance expenditures may be assessed against debtor’s account and collected after the delivery of a ten day written notice to debtor, debtor’s counsel, and the Trustee. The assessment and collection of expenditures for post-petition property inspections and taxes will not require approval of the bankruptcy court unless a written objection is filed within ten days of the notice of assessment and collection. If authorized by Wells Fargo’s note, security agreement, and state law, the collection of amounts necessary to pay postpetition insurance and property tax expenditures may be made in advance through the use of escrow accounts. If escrows are utilized, Wells Fargo must give a written accounting of the amounts collected at the time it seeks to apply the escrowed funds to payment of the insurance or property tax expenditures.

As to Post-Petition Charges, annually, between January 1 and February 28 of each year during a case’s administration, Wells Fargo shall file with the Court and serve
upon the debtor, debtor’s counsel, and the Trustee, notice of any Post-Petition charges (which do not include property taxes or insurance), accrued in the preceding calendar year. The notice shall contain an itemization describing the charge, amount provisionally incurred, the date incurred, and if relevant, the name of the third party to whom the charge was paid. The notice will also provide a direct reference to the provisions of the note, security agreement, or state law under which Wells Fargo asserts its authority to assess each type of charge.

The notice shall also state that debtors, the Trustee, and any other interested party, shall have 30 days within which to object to any or all assessments outlined in the notice. It shall contain a statement to the effect that debtor may elect to add the charges to his plan with approval of the bankruptcy court, satisfy the charges directly outside the plan, or defer repayment until the conclusion of his case. If no objection to the amounts provisionally assessed is filed, or if filed, upon entry of an order approving some amount of the provisional charges, Wells Fargo may submit a proposed ex parte order authorizing assessment of the Post-Petition Charges as set forth in its notice or as approved by the court, as applicable. However, Wells Fargo may not collect on any approved Post-Petition Charges unless the debtor voluntarily delivers payment separate and above from that due as a regular monthly installment or obtains approval of the court to modify the plan and satisfy the amounts due through periodic payments by the Trustee. If the approved Post-Petition Charges are to be paid through the modified plan, they will be added to Account One and satisfied by the Trustee. If to be paid by the debtor, they may be added to Account Two.

If no provision for payment is made by a debtor, the collection of the approved Post-Petition Charges must be deferred until the close of the case or relief from the stay is obtained.

3. If Wells Fargo does not issue a notice of Post-Petition Charges, in accordance with paragraph 2, for any given year of the case’s administration, then Wells Fargo shall be prohibited from collecting or assessing any charges accrued against the debtor for that year and shall treat the debtor as fully current at the time of discharge.

4. Upon the issuance of a discharge, Wells Fargo shall adjust its permanent records to reflect the current nature of debtor’s account. Provided however, that if debtor elected to defer the payment of approved Post-Petition Charges until the conclusion of the case’s administration, then Wells Fargo shall be authorized to collect said sums in accordance with the provisions of its note, security instrument, and state law.

The court was deciding whether to impose massive punitive damages (in the millions of dollars). Wells Fargo said, "we'll agree to an order like this if you agree not to impose massive punitive damages." So, this order was entered. The order further states: "Wells Fargo also offered to memorialize this agreement into an order of the Court, enforceable in any case pending or subsequently filed before any court in the country." The court took them up on this offer and agreed not to impose a multi-million dollar punitive damage award.

If Wells Fargo fails to abide by this order in any case in the country, they could be subject to punitive damages, because they are disobeying a court order, and more than that, an agreed court order, and even more than that, an agreed court order entered for the purpose of avoiding multi-million dollar sanctions. Wells Fargo better comply or there will be a deluge of suits alleging violation of this agreement.

Bankruptcy Filings Are Increasing

I have noticed that I am getting quite a few new bankruptcy appointments now and I am wondering if that means bankruptcy filings will be picking up. So, I went to the stats page to see what the trends look like. I compared the 12 month period ending June 30, 2005 with the 12 month period ending June 30, 2007. The reason I used the June 30, 2005, date is that was before the unnatural surge in filings that we saw before October 17, 2005.

A couple of interesting points: (1) the filings for Sacramento have actually gone up (8051 for 2005 and 8313 for 2007); (2) the filings for Fresno are down significantly (5258 for 2005 and 3379 for 2007). Not including Fresno's filings, the total filings for the district would be equal. This leads us to ask a few questions. Why are the filings for Sacramento back to 2005 levels and the filings for Fresno not? Is this going to be a continuing trend or will it even out eventually?

My opinion is that the rise in filings for Sacramento is an indication that filings will eventually rise in Fresno. Sacramento is bigger than Fresno and is often ahead of Fresno on economic issues. Consequently, I don't think this will be a trend that is continuing and I think it is very likely that Fresno will see the same increase back to 2005 levels of filings within the next 6 months.

Stripping Off Junior Liens

One of the commonly known facts about bankruptcy is that in general you cannot modify a mortgage secured by your principal residence. This means that if you have an adjustable rate mortgage and the rate is going from 5% to 13% and your payment is going from $1500 to $2500, you generally can't change that by filing a bankruptcy. However, there is one option that has been irrelevant for the last several years due to the hot real estate market.

If a junior mortgage is wholly unsecured, i.e., there is no equity for that mortgage, the wholly unsecured mortgage may be stripped off and treated as an unsecured claim. Thus, if a house has a value of $200,000 and there are two deeds of trust, one on which there is $205,000 owing and one on which there is $40,000 owing. The second deed of trust with $40,000 owing could be stripped off and treated as an unsecured claim. In a Chapter 13 plan, this might mean that the $40,000 deed of trust could get nothing if the plan pays 0% to unsecured creditors.

With real estate values rising by 25% a year in the first five years of this decade, there were no opportunities to strip off mortgages, because all mortgages were at least partially secured. With some of the risky lending practices that were being used (100% financing and even 125% financing), however, that is changing now. A house that was 100% financed with two mortgages (80% and 20%) might be worth 80% of what it was worth when it was financed. Thus, the 20% mortgage might be stripped off and treated as unsecured.

This is an important right for debtors to consider in deciding whether they will be able to keep their home.

N.D Cal. - Applicable Committment Period is a Multiplier, not a Time Period

One of the requirements in a Chapter 13 case is that a debtor contribute all of his "projected disposable income" to unsecured creditors during the "applicable commitment period." The applicable commitment period is 3 years if the debtor's income is below median or 5 years if the debtor's income is above median. The projected disposable income is determined (primarily) by subtracting certain allowed expenses (based on IRS formulas) from the current monthly income (which is determined by looking at the last six months of income and averaging it). That gives the amount that is required to be paid. Sometimes, debtors are actually able to pay more than their projected disposable income every month and so the question arises. Let's say an above median debtor has projected monthly income of $100/mo. However, the debtor could pay $150/mo. If the debtor pays for 5 years at $100 per month, the total amount paid in will be $6,000. May the debtor pay $150 per month for 40 months (also $6,000), instead?

In In re Swan, --- B.R. ----, 2007 WL 1146485 (Bkrtcy.N.D.Cal., April 18, 2007) (Westlaw subscription required to view link), the Court said "yes." In that case, the total projected disposable income for 60 months would have been $3,570. The debtor proposed a plan that would pay a total of $18,900 over 36 months. The court allowed the debtor to pay the higher amount and finish the plan in 36 months.

The court recognized that there is a split of authority on this issue. The court's rationale is as follows:

Section 1325(b)(1)(B) states that a court may not confirm a plan unless it "provides that all of the debtor's projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan." 11 U.S.C. § 1325(b)(1)(B). According to the Code, the "applicable commitment period" that applies to Debtor is "not less than 5 years." 11 U.S.C. § 1325(b)(4)(A)(ii). Creditor contends that Debtor's Plan may only be shorter than 5 years if Debtor pays all allowed unsecured creditors in full, pursuant to § 1325(b)(4)(B). It is undisputed that the Plan does not provide for full payment of all allowed unsecured claims. Debtor argues that the statute does not require a fixed plan term, and that, because the Plan proposes to pay, over 36 months, an amount greater than Debtor's projected disposable income multiplied by 60 months, the Plan should be confirmed as proposed.

This issue has been described as a distinction between a "monetary" requirement and a "temporal" requirement. In re Brady, 361 B.R. 765, 2007 WL 549359, *9 (Bankr.D.N.J. Feb.13, 2007), citing Alane A. Becket and Thomas A. Lee, III, Applicable Commitment Period: Time or Money?, 25-MAR Am. Bankr. Inst. J. 16 (2006). Creditor espouses the view that the phrase "applicable commitment period" imposes a temporal requirement that Debtor must commit to a plan for a specific amount of time--in this case, five years. Some courts have adopted this position. Slusher, 359 B.R. at ----, 2007 WL 118009 at *11; In re Casey, 356 B.R. 519, 527 (Bankr.E.D.Wash.2006); In re Cushman, 350 B.R. 207, 212 (Bankr.D.S.C.2006); In re Davis, 348 B.R. 449, 458 (Bankr.E.D.Mich.2006); Dew, 344 B.R. at 661; McGuire, 342 B.R. at 615.

*10 Debtor takes the position that "applicable commitment period" constitutes a monetary requirement such that, in order to be confirmed, Debtor's three-year Plan must provide for payment of her projected disposable income multiplied by the applicable commitment period. In this case, the relevant calculation is $59.50 projected disposable income according to Form B22C multiplied by the 60 month applicable commitment period equals $3,570. Debtor argues that the Plan satisfies the requirements of the Code, and therefore may be confirmed, because it proposes to pay $18,900 over 36 months, which is over five times more than Debtor's projected disposable income over the applicable commitment period of $3,570. Cases supporting Debtor's position include Brady, and In re Fuger, 347 B.R. 94 (Bankr.D.Utah 2006). Bankruptcy Judge Keith M. Lundin takes the same view in his chapter 13 treatise. See 5 Keith M. Lundin, Chapter 13 Bankruptcy §§ 500.1 at 500-2 (3d ed. 2006)("The applicable commitment period does not require that the debtor actually make payments for any particular period of time. Rather it is the multiplier in a formula that determines the amount of disposable income that must be paid to unsecured creditors.")

The logic of Debtor's position is straightforward. Unsecured creditors will receive more under the Plan than is required by the Code. Specifically, in this case, unsecured creditors will receive more than five times what the Code requires ($18,900 compared with $3,570), and they will receive it more quickly under Debtor's three-year Plan than they would if the Court were to adopt Creditor's position, and require a five-year plan term. This is clearly to the benefit of all creditors. The unsecured creditors are not being paid interest, so the time value of money makes the disparity between what Debtor is offering to pay under the Plan--$18,900 over three years--and what unsecured creditors would be entitled to under Creditor's position--$3,570 over five years--even greater than it appears at first blush. Debtor's position also furthers the Code's fresh start policy, allowing Debtor to fulfill the obligations imposed by the Code in a shorter amount of time, receive a discharge, and move on.

In light of the extreme monetary disparity between the two positions, it is difficult to comprehend why Creditor has taken this position. Practically speaking, Creditor must be hoping for one of two events to occur. Creditor wants the Plan term extended to five, rather than three, years because the longer time period increases the likelihood either that (1) the Plan will be modified upward; or (2) Debtor will default on the Plan and Creditor will maintain an entitlement to the full amount of its claim. In this Court's experience of over sixteen years on the bench, the former is extremely rare. Accordingly, Creditor's reason for supporting this position appears to be its hope that the Plan will fail. The Court finds such reasoning unpersuasive. This reasoning contravenes the Code's fresh start policy. It also delays payment to other creditors, most of whom would likely prefer to receive payment over three years, rather than five. Moreover, if Debtor cannot keep up her Plan payments, she will likely convert to chapter 7--which would deprive creditors of a substantial portion of Debtor's Plan payments.

*11 [7] One court has held that the phrase "applicable commitment period" does not come into play where the debtor has no disposable income, but that, where the debtor has positive disposable income, the phrase mandates a specific plan length. In re Alexander, 344 B.R. 742, 751 (Bankr.E.D.N.C.2006). However, this is a distinction without a difference. Construction of the phrase "applicable commitment period" as a monetary requirement renders this distinction meaningless. The Code requires debtors to pay their projected disposable income over the applicable commitment period into the plan. Whether that amount is zero or greater than zero makes no difference, because in the end the effect is the same. Just as it makes no sense for a debtor to remain in chapter 13 where he has no disposable income and has paid his secured, administrative and priority claims in full, it likewise makes no sense for a debtor with some disposable income to remain in chapter 13 after he has paid the full amount required by the Code to his unsecured creditors. In both cases, the absurdity is having a debtor remain in chapter 13 awaiting discharge where, after a certain point, he has fulfilled all of the Code requirements and his plan payment is reduced to zero. The purpose of the Code is to provide debtors a fresh start and to ensure that creditors are paid as much as possible as soon as possible. It is not to incentivize people to remain in bankruptcy at the continued expense of their creditors, who could have received their plan payments much earlier, and at the expense of the bankruptcy system as a whole.

Some courts adopting Creditor's position have held that the language of § 1325(b)(1)(B) "clearly indicates" that, where there is an objection to confirmation and the debtor does not propose to pay unsecured creditors in full, above-median debtors must perform a plan of reorganization for 60 months. Cushman, 350 B.R. at 212; In re Schanuth, 342 B.R. 601, 607 (Bankr.W.D.Mo.2006). However, the statute does not specify a minimum plan term. The statute merely states that, in order to be confirmed, a plan must apply all of a debtor's projected disposable income during the applicable commitment period to make payments under the plan. Brady, 361 B.R. at ----, 2007 WL 549359 at *9. Accordingly, the Plan meets the requirements of the statute in that it applies all of (in fact, much more than) Debtor's projected disposable income ($59.50) during the applicable commitment period (60 months) to make payments under the Plan.

The rationales supporting the conclusion that the "applicable commitment period" is a temporal requirement are unpersuasive to this Court. In McGuire, the bankruptcy court cited three reasons for its conclusion. First, it reasoned that, because the disposable income calculation on Form B22C is "merely a starting point," and is not dispositive such that a court need not confirm a plan that proposes to pay the amount reported on Form B22C, "it follows that a court is not required to confirm a plan because it proposes to pay a total sum equal to the Form B22C amount multiplied by the applicable number of months." McGuire, 342 B.R. at 615. This reasoning is unhelpful because, while the Court need not reach the question of whether departure from Form B22C is permissible under the law, under the facts of this case, the amount of disposable income reported by Debtor on Form B22C in fact satisfies the requirements of the Code. [FN9] Therefore, the statement that a court "is not required to confirm a plan simply because the debtors propose a plan payment in the Form B22C amount," does not help answer the question of whether a court may do so when the amount of the Form B22C payment is not challenged as being too low.

*12 The second reason cited by the McGuire court was that "a monetary interpretation of ACP renders § 1325(b)(4)(B) meaningless." Id. That section states that the applicable commitment period "may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period." The contention that this section is rendered superfluous by a monetary interpretation of "applicable commitment period" assumes that it is inherent in the Code that a debtor who pays unsecured claims in full may complete a chapter 13 plan in less than 36 months. See Davis, 348 B.R. at 455: "Under this interpretation of ACP, § 1325(b)(4)(B) doesn't really state anything more than that a debtor does not have to pay more than 100% on his unsecured claims." The fact that the Code specifically provides that if a debtor pays 100% of his claims with interest that the court must confirm the plan regardless of the plan's length does not mean that a debtor may not do what the Debtor's Plan does here, i.e., pay the same amount to unsecured creditors that would be required over five years, in three years. Accordingly, the Court is not persuaded by this argument.

The third and final rationale used by the McGuire court to support its conclusion was that Congress did not express any intent to alter pre-BAPCPA practice on this issue by enacting the BAPCPA. McGuire, 342 B.R. at 615. Prior to BAPCPA, § 1325(b)(1)(B) required all of the debtor's projected disposable income received during the three-year period, beginning on the due date of the first payment, to be applied to the plan, and according to McGuire, debtors were not allowed to exit chapter 13 early unless they could establish extraordinary circumstances or creditors were paid in full. Id. Noting that the BAPCPA amendments in this regard only changed the phrase "the three year period" to "applicable commitment period", the McGuire court, following Schanuth, 342 B.R. at 608, discerned no clear intent on the part of Congress to alter the pre-BAPCPA practice. Id. The Court disagrees with McGuire's characterization of pre-BAPCPA law, particularly as it existed in this Circuit. Several pre-BAPCPA cases permitted debtors to payoff the plan balance and exit chapter 13 in less than 36 months without paying unsecured creditors in full. Fuger, 347 B.R. at 101, citing In re Sunahara, 326 B.R. 768 (B.A.P. 9th Cir .2005)(court may approve a plan modification allowing a debtor to complete plan in fewer than 36 months without paying unsecured claims in full); In re Richardson, 283 B.R. 783 (Bankr.D.Kan.2002); In re Forte, 341 B.R. 859 (Bankr.N.D.Ill.2005); In re Miller, 325 B.R. 539 (Bankr.W.D.Pa.2005). Accordingly, the lack of a clearly expressed Congressional intent to alter pre-BAPCPA law on this issue is at best an ambiguous rationale, since an interpretation of "applicable commitment period" as a monetary, rather than temporal, requirement is not necessarily inconsistent with pre-BAPCPA law. In the Ninth Circuit where, under Sunahara, debtors could modify their chapter 13 plans to pay off the plan balance in less than 36 months, this rationale actually lends additional support to Debtor's position.

*13 Some of the cases take a theoretical, but impractical approach to this issue that divorces the language of the Code from the realities of the debtor/creditor relationship. See e.g., Slusher, 359 B.R. at ----, 2007 WL 118009 at *8. There can be no question that in the vast majority of cases, creditors will be far better served under the monetary, rather than the temporal, approach. Creditors will be paid sooner under the monetary approach. This is of tremendous financial advantage, especially since unsecured creditors normally receive no interest on their claims. The present value of payments over three years is much greater than payment of the same amount of money spread out over five years. Plus, the risk of plan default is lower on a shorter plan--which means the creditors are much more likely to actually get paid, rather than having the debtor convert to chapter 7, in which case creditors are unlikely to receive any further payments. In sum, everyone benefits under the monetary approach in the vast majority of cases. More debtors will receive fresh starts more quickly. Creditors will be paid more money, more quickly, on their claims, and the entire bankruptcy system will be easier to administer and much more efficient.

This Court agrees with the Fuger court that "where the debtor's projected disposable income is consistent with the calculations on Form B22C, it makes little sense to hold the debtor hostage for 60 months where the debtor can satisfy the requirements of § 1325(b)(1)(B) in a shorter period." Fuger, 347 B.R. at 101. Accordingly, the Court holds that the phrase "applicable commitment period" does not dictate a minimum plan term, but requires only that the Debtor's projected disposable income be computed over that amount of time-- at least where, as here, Debtor's Plan provides for a term of at least three years. The Court finds that the Plan proposes to pay all of Debtor's projected disposable income over the sixty-month applicable commitment period to unsecured creditors, and therefore satisfies the requirements of § 1325(b)(1)(B). Alternatively, if this Court has the discretion to confirm Debtor's three-year Plan because it pays creditors what they would receive--in fact much more than what they would receive--under a five-year plan, the Court exercises its discretion to do so for the reasons set forth in this Memorandum Decision. Creditor's objection on this basis is overruled.

Ride-through is Still Alive, With a Twist

Before the advent of BAPCPA (2005), Chapter 7 debtors in the Ninth Circuit (which includes California) did not have to reaffirm a car loan in order to keep the car. As long as the debtor was current on payments, the debtor could keep the car, even if the installment contract stated that bankruptcy was an event of default. Things are different under BAPCPA, however. One of the sweeping changes made by BAPCPA was to require debtors to require debtors to reaffirm if they wish to keep a car.

Almost all car installment purchase agreements provide that bankruptcy is an event of default, thus allowing the creditor to repossess the car. Under prior law, these "ipso facto" (by the very fact) provisions had no effect. However, BAPCPA allows these provisions to have effect if the Debtor fails to either (1) timely file a statement of intention, or (2) timely fulfill that statement of intention. What this means is that if the debtor fails to timely file the statement of intention or follow through on the statement of intention, arguably, the creditor can repossess the car, even if the debtor is current.

This presents a significant conundrum often to debtors who are current on their car payments. The effect of reaffirmation is harsh. If you reaffirm, you probably can't discharge the debt in a subsequent bankruptcy, even if your car blows up or you lose your job and can't make the payments.

A recent case, however, indicates that the "ride-through" is still alive, if the debtor does everything he is supposed to do and the court declines to approve the reaffirmation agreement. The case is In re Moustafi, --- B.R. ----, 2007 WL 1592965 (Bkrtcy.D.Ariz.,2007). (Must have Westlaw to view.) In that case, the debtor timely filed the statement of intention and timely signed a reaffirmation agreement. The court declined to approve the reaffirmation agreement, because it was not in the debtor's best interest. Then the court stated that because the debtor had done everything that was required, 11 U.S.C. Sec. 521(d) does not allow the ipso facto clause to be valid. If the ipso facto clause is not valid, then there is no default and the creditor cannot repossess the car.

Negative Equity Does Not Count for 910 Claims

In In re Acaya, --- B.R. ----, 2007 WL 1492475 (Bkrtcy.N.D.Cal.,2007) (must have Westlaw subscription to view), the Northern District of California Bankruptcy Court determined that negative equity does not qualify as "purchase money" to protect what would otherwise be a 910 day creditor.

This is a situation that often happens. A debtor trades in his car, but he owes more than it is worth. The dealer allows him to take his "negative equity" with him to the next car he purchases. It is kind of like a reverse down payment. Instead of putting money down for the car, you take more debt with you that you add on to the car.

Under the old (pre 2005) law, debtors could cram down, i.e., pay only what the car is worth, in a Chapter 13 plan. Under the new law (2005 to present), if a car was purchased within the last 910 days, you have to pay the full amount owed on the car, not just what it was worth. However, you have to pay the full value of a "purchase money" loan. The court in Acaya determined that this roll-over of negative equity was not "purchase money" and therefore, it could be stripped off if the value of the car was less than what was owed.

Sale While in Foreclosure Rescinded 18 months After Contract and 14 months After Close of Escrow

In this case, In re Lloyd, --- B.R. ----, 2007 WL 1346553 (Bkrtcy.N.D.Cal.,2007), out of the Northern District of California, the Court held that a rescission of a home purchase contract was valid 18 months after the contract was signed and 14 months after close of escrow. The reason is that under the Home Equity Sales Contracts Act (HESCA), if a sale of a home in foreclosure is going to be completed, the seller needs to be given notice (next to his signature) stating that he has a 5-day right to rescind (cancel) the contract. That was not done in this case and the court found that the seller/debtor could rescind the contract and get his house back, even though the rescission was done over a year after close of escrow on the property.

Kansas Case Determines that 910 Claims Are Not Entitled to Interest!

This bankruptcy case out of Kansas, In re Kinsey, states that 910 car claims are not entitled to interest, because they are not "allowed secured claims" which would otherwise be entitled to interest under the Code. The case substantially relies on the Dewsnup v. Timm Supreme Court case. I am not aware of any other jurisdictions that have taken the same stance and I know that this issue has not been decided by the Fresno Bankruptcy Court. As a matter of practice, most Chapter 13 plans in the Fresno division contain the contract or Till interest rate.

New Chapter 13 Debt Limits

The new debt limits for Chapter 13 have been published. The new limit for unsecured debt is $336,900 and the new limit for secured debt is $1,010,650. These debt limits will go into effect on April 1, 2007. The old limits were $307,675 and $922,975, respectively. Click here for a link to the federal register with all of the new dollar amounts.