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Bankruptcy Basics: Inability to Pay in Installments.

In addition to the income test the debtor must be unable to pay the filing fee in installments. In determining whether the debtor has the ability to pay the filing fee in installments, the Judicial Conference’s Chapter 7 Fee Waiver Procedures instruct the court to consider the “totality of the circumstances” based on the information concerning the debtor’s expenses and assets stated on Official Form 103B.

Bankruptcy Basics: Case Conversion.

If a case is converted from chapter 13 to chapter 7, the Judicial Conference’s Chapter 7 Fee Waiver Procedures provide that the debtor may seek a waiver of any unpaid balance of the filing fee. If the chapter 7 filing fee has been waived and the debtor later converts to a case under chapter 13, the debtor must then pay the chapter 13 filing fee. The order granting conversion should set a reasonable period of time for the debtor to pay the fee in full or in installments.

Bankruptcy Basics: Waiver Possible Even If Attorney Paid.

The Judicial Conference’s Chapter 7 Fee Waiver Procedures provide that “[a] debtor may qualify for a waiver of the filing fee even if the debtor has paid or promised to pay a bankruptcy attorney, bankruptcy petition preparer, or debt relief agency in connection with the filing.” However, courts may take such payments into account as part of the totality of the circumstances. Part 4 of Official Form 103B requests that the debtor list all payments that have been made or promised to an attorney or petition preparer.

Bankruptcy Basics: Hardship Presumption

Reaffirmation agreements are generally disfavored by the courts because they preserve the debtor’s liability on a debt despite the bankruptcy discharge. The potential for abuse by creditors in coercing debtors to enter into ill-advised reaffirmation agreements had led to the development of the undue hardship test.

Bankruptcy Basics: Attorney Signature

For reaffirmations negotiated by the debtor’s attorney the attorney must sign the agreement and must certify: (1) that the agreement represents a fully informed and voluntary agreement by the debtor; (2) that the agreement does not impose an undue hardship on the debtor or the debtor’s dependents; and (3) that the debtor has been fully informed about the consequences of the reaffirmation agreement. 11 U.S.C. § 524(c)(3); Form 2400A, Part IV.

Bankruptcy Basics: Payment in Full

Unless the creditor agrees otherwise, the debtor must redeem through a lump-sum cash payment of the redemption amount. This requirement may present a problem to the debtor who cannot afford to pay the entire redemption amount and is unwilling or unable to negotiate a reaffirmation agreement. There are several possible solutions to this problem. The debtor may elect to file under chapter 13 instead of under chapter 7 and provide for treatment of the secured claim in the chapter 13 plan.

Bankruptcy Basics: Redemption Procedure

When the parties agree on value and other terms, redemption may be accomplished by the debtor paying the creditor in exchange for release or satisfaction of the lien. Neither a motion to redeem nor a hearing before the court to obtain approval of the redemption agreement is necessary. When there is a dispute regarding some issue related to the redemption, most often as to valuation of the collateral, the court’s intervention is necessary.

Bankruptcy Basics: Redemption Valuation

The most common source of disagreement between debtors and creditors related to redemption is valuation of the property. For property used for personal, family, or household purposes, section 506(a)(2) requires valuation to be based on replacement value given the property’s age and condition at the time the value is determined. Because the type of property subject to redemption usually depreciates in value over time, there may be an advantage to the debtor in having the valuation determined on the date of redemption rather than on the date the bankruptcy petition was filed.

Bankruptcy Basics: SURRENDER

The Bankruptcy Code does not provide much guidance on the surrender process. With respect to personal property secured by a purchase money security interest, sections 362(h) and 521(a)(6) and the hanging paragraph following section 521(a)(7) collectively provide that, in a chapter 7 case, the automatic stay is lifted as to such property after forty-five days following the first meeting of creditors, and such property is no longer property of the estate.

Bankruptcy Basics: In General.

Section 522(f)(1) addresses a particular type of avoidance proceeding involving certain liens. This section permits the debtor to avoid (1) judicial liens on any property claimed as exempt, and (2) nonpossessory, nonpurchase-money security interests in household goods and certain other property claimed as exempt. Such liens may be eliminated to the extent that they impair the debtor’s exemption in the property.

Bankruptcy Basics: Overview

Beyond lien avoidance under section 522(f), the provisions of chapter 13 provide some of the greatest powers to affect the rights of secured creditors. Section 1322(b)(2) provides that the debtor’s plan may modify the rights of holders of most secured claims, except for some claims secured only by a security interest in real property. In addition subsections 1322(b)(3) and (b)(5) provide that as to any claim, including a claim secured only by the debtor’s principal residence, the plan may provide for the curing of a default over a reasonable period of time.

Bankruptcy Basics: “Cramdown” Basics

Most of the flexibility given to the debtor in chapter 13 comes from the broad right to modify the rights of secured creditors. In bankruptcy parlance this right to limit the enforceability or change the terms of a creditor’s contract over the creditor’s objection is called a “cramdown.” The debtor’s power to change the terms of a contract is broad.

Bankruptcy Basics: Bifurcation

In general, the treatment of secured creditors in bankruptcy turns on whether and to what extent they are the holder of an “allowed secured claim.” In determining the allowed amount of a secured claim, section 506(a) provides that the claim is secured only to the extent of the value of the collateral and that any amount of the claim in excess of the value of the collateral will be treated as an unsecured claim.

Bankruptcy Basics: Overview.

Section 1325(a)(5) states that with respect to each allowed secured claim (as determined by section 506(a)) provided for in the plan, at least one of the following three conditions must be satisfied:

Bankruptcy Basics: Retaining Collateral When Creditor Does Not Consent.

The most complicated option is the second one, which deals with the retention of the property when the creditor does not consent to the plan. To meet this standard the plan must explicitly provide that the creditor retains a lien until either the full underlying debt is paid or the debtor receives a discharge. The plan must also provide that the present value of the payments to be made to the creditor under the plan equals the amount of the allowed secured claim.

Bankruptcy Basics: Equal Monthly Payments and Adequate Protection.

Subsections 1325(a)(5)(B)(iii)(I) and (II) contain two additional requirements. First, if the property’s value is to be distributed to the secured creditor in periodic payments, the payments must be made in equal monthly amounts. It is important to note that this provision refers to the distributions to the holder of the allowed secured claim and not to the debtor’s plan payments. There is also no requirement that the equal monthly amount extend throughout the plan.

Bankruptcy Basics: Introduction

Consumers facing a home mortgage foreclosure, property tax sale, or forced sale on a judicial lien may find bankruptcy is the only effective option for saving their home. Chapter 13 is the most commonly used form of bankruptcy in consumer home defense, as it provides a powerful right generally unavailable under state law, namely the right to deaccelerate a mortgage default and cure the default by paying the arrearage in installments over the life of the chapter 13 plan. In addition, in some situations bankruptcy can be used to modify home-secured obligations.

Bankruptcy Basics: Proper Crediting of Plan Payments

There have been pervasive problems with creditors miscrediting payments made to cure a default under a chapter 13 plan. These problems are generally caused by the inability of the loan calculation programs used by mortgage servicers to distinguish between and properly apply prepetition and postpetition payments in accordance with the legal requirements of section 1322(b). Under section 524(i), a creditor’s willful failure to credit payments received under a confirmed plan in accordance with the plan constitutes a violation of the injunction of section 524(a).

Bankruptcy Basics: “Stripping Down” or “Stripping Off” Mortgages

As discussed above an exception to the general rule permitting modification of secured claims in chapter 13 is found in section 1322(b)(2). This exception applies to claims secured “only by a security interest in real property that is the debtor’s principal residence.” Significantly, the protection against modification afforded to home mortgage lenders is not unlimited. In each of the following situations, a home-secured loan may be modified:

Bankruptcy Basics: One Prior Dismissed Case.

If the consumer has had a prior bankruptcy case dismissed within the year before the petition is filed, the automatic stay will terminate thirty days after the case is filed. 11 U.S.C. § 362(c)(3). However the debtor may request that the court extend the stay as to some or all creditors. 11 U.S.C. § 362(c)(3)(B). The debtor must demonstrate that the case has been filed in good faith, often by showing that circumstances have changed.

Bankruptcy Basics: Two Prior Dismissed Cases.

If a debtor has had two or more prior bankruptcy cases dismissed within the year before filing the new petition, the automatic stay does not go into effect upon the filing of the case. 11 U.S.C. § 362(c)(4). On a motion filed by the debtor within thirty days after the filing of the later case the court may order the stay to take effect as to some or all creditors upon a showing by the debtor that the case has been filed in good faith.

Bankruptcy Basics: Codebtor Stay Still Available.

The codebtor stay provided by section 1301 is not affected by the repeat filing limitations. The stay limitations under subsections 362(c)(3) or (c)(4) do not prevent the application of the codebtor stay to any actions taken against a codebtor on a consumer debt of the debtor.

Bankruptcy Basics: Court Order in Prior Case.

The automatic stay is not applicable as to the enforcement of a security interest in real property if the debtor files a case during a period when the debtor is ineligible to be a debtor under section 109(g) or in violation of a prior court order prohibiting the debtor from being a debtor in another case. 11 U.S.C. § 362(b)(21).

Bankruptcy Basics: Burden of Proof.

Section 362(g) has generally been interpreted to require that the creditor seeking relief from the stay has the burden to establish the validity and perfection of its security interest, the amount of the debt and other allowable costs included in its claim, and the amount of the debtor’s equity in the property. While the debtor has the burden of proof with regard to the remaining issues, the question of adequate protection is often determined based on the debtor’s equity in the property, which the creditor is usually required to prove is lacking.