Cram-Downs – What & When?

A secured loan is considered “under water” when the value of the collateral securing the loan is less than the balance owed on the loan.  Because of how rapidly automobiles depreciate as soon as they are driven off the lot, and because of the depression of home values following the market crash in 2008, a great number of secured loans qualify as being under water.
In Chapter 13, certain secured loans can be “crammed down” so that the secured loan balance is reduced down to the replacement value of the collateral.  The remaining balance is treated as an unsecured debt.  Say, for example, that you have a vehicle worth $8,000, but the loan balance is $12,000.  If the vehicle loan is eligible for cram-down, then the secured loan balance is reduced from $12,000 to $8,000, and the remaining $4,000 on the loan is treated as an unsecured debt.
Let’s also knock back one more definition before we continue: purchase money security interest (or PMSI).  A debt is a PMSI debt if the loan was used for the purpose of purchasing the collateral that is pledged as security for the loan.  A debt is non-PMSI if the borrower already owns an item that is pledged as security for the loan.
So which debts can be crammed-down?  Let’s look at the relevant statutes…
11 U.S.C. § 506(a)

(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.

11 U.S.C. § 1322(b)

Subject to subsections (a) and (c) of this section, the plan may—
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;

11 U.S.C. § 1325(a) “Hanging Paragraph”

For purposes of paragraph (5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day period preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

49 U.S.C. § 30102(a)(6)

“motor vehicle” means a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, but does not include a vehicle operated only on a rail line.

What do all of these statutes boil down to?
  1. A mortgage secured only by your home can never be crammed-down.
  2. If a loan is non-PMSI, then it can be crammed-down at any time (though it would be wise to wait at least 3 months to avoid a challenge to your discharge under 11 U.S.C. § 523(a)(2)(C)(i).
    • If a loan is refinanced (even if the loan was originally a PMSI loan), the act of refinancing causes it to become a non-PMSI loan.
  3. A PMSI loan can be crammed down if the collateral is
    1. an automobile (car, truck, van, or motorcycle) and if the debt was incurred more than 2½ years before your bankruptcy case was filed.
    2. anything else (such as a boat, ATV, snowmobile, furniture, appliances, jewelry, or real estate that is not your principal residence) if the debt was incurred more than a year before your bankruptcy case was filed.

    Reaffirmations & Credit Reporting – Theory & Practice (Part 2)

    Last week, we were discussing reaffirmation agreements in contrast to a “ride-through”; the latter of which is a method of keeping collateral after filing for bankruptcy without assuming the risk of liability on a deficiency balance should you default on the loan in the future, with the only risk being loss of collateral.
    We were discussing the two main reasons why people would opt for a reaffirmation agreement instead of doing a ride-through, and having dispensed with the first (less common) reason, let’s continue on to the second more prolific reason…
    #2 – Credit Reporting
    Conventional wisdom these days suggests that secured creditors will report post-petition payments to credit bureaus if and only if a debtor enters into a reaffirmation agreement.  Creditors argue that if they report payments without a reaffirmation agreement, that they would be in violation of the discharge injunction.
    While this may be conventional practice, we want to explore a little deeper to determine what legal responsibilities exist.  To do that, we’re going to try to answer two major questions.

    1. If a reaffirmation agreement is not signed, are creditors violating the discharge injunction if they report post-petition payments?

    I am unable to find any case law that suggests that making reports of payments to the credit bureaus – in the absence of a reaffirmation agreement – constitutes a violation of the discharge injunction.  And there’s an obvious reason for this – if a debtor makes payments on a ride-through and his payments are being reported – he is getting both the benefit of positive credit reporting AND reduced liability for not having signed a reaffirmation agreement.  Why on earth would he sue for violation of the discharge injunction?

    11 U.S.C. § 524(a)(2) is the primary provision prohibiting the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor”.  It is difficult to imagine how reporting payments that a debtor makes could constitute an act to induce such payments.  The only conceivable issue here is if, during a ride-through, the debtor defaults and then – under the FCRA requirement that credit reporting be done accurately – the creditor reports a missed payment.  That could, conceivably, be considered a discharge violation if the debt was discharged in the absence of a reaffirmation agreement.  But the argument that the reporting of payments received as being a discharge violation is patently absurd.

    2. If a reaffirmation agreement is signed, do creditors have an affirmative duty to report post-petition payments?

    Simple answer is: NO.  There is no provision of the Fair Credit Reporting Act, nor the bankruptcy code, which imposes an affirmative duty upon any creditor to make reports to the credit bureaus.  This is true, even in cases that don’t involve a bankruptcy case.  Under FCRA, creditors are only obligated to make accurate reports, if they report at all.  There is no authority to compel them to make a report at all.

    Failure to report payments does not constitute a violation of the discharge injunction.  See In re Bates, 517 B.R. 395 (Bankr. D. N.H. 2014)In re Manning, 505 B.R. 383 (Bankr. D. N.H. 2014), and In re Estrada, 439 B.R. 227 (Bankr. S.D. Fla. 2010).  (Estrada notes that language in a notice which threatens the suspension of credit reporting for failure to sign a reaffirmation agreement may be an impermissible violation of the automatic stay.)

    Special thanks to Hon. Margaret D. McGarity and Atty. Michael J. Maloney for case summaries in Bates, Manning, and Estrada.

    Summary

    Continuing to make payments on secured loans like home mortgages or auto loans (and non-dischargeable debts like student loans) are a terrific way to reestablish credit history and rebuild your credit score after bankruptcy.  These are pre-existing loans, so there is no need to try to get financing approval despite just having filed for bankruptcy.

    A ride-through is a less-risky way to proceed, in that in the event you default on a mortgage or auto loan in the future, you only stand to lose the collateral, and you cannot be held liable for a deficiency balance.

    However, most secured creditors – as a policy – refuse to report post-petition payments to credit bureaus in the absence of a reaffirmation agreement (which does leave you potentially liable for a deficiency balance).  Although creditors have no affirmative duty to make reports, even with a reaffirmation agreement, they are not in violation of the discharge if they choose to condition their reporting on a reaffirmation agreement.

    15 U.S.C. § 1681s-2 – Relevant Provisions
    (a) Duty of furnishers of information to provide accurate information
    (1) Prohibition
    (A) Reporting information with actual knowledge of errors. A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.
    (B) Reporting information after notice and confirmation of errors. A person shall not furnish information relating to a consumer to any consumer reporting agency if—
    (i) the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and
    (ii) the information is, in fact, inaccurate.
    (D) Definition. For purposes of subparagraph (A), the term “reasonable cause to believe that the information is inaccurate” means having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information.
    (2) Duty to correct and update information. A person who—
    (A) regularly and in the ordinary course of business furnishes information to one or more consumer reporting agencies about the person’s transactions or experiences with any consumer; and
    (B) has furnished to a consumer reporting agency information that the person determines is not complete or accurate, shall promptly notify the consumer reporting agency of that determination and provide to the agency any corrections to that information, or any additional information, that is necessary to make the information provided by the person to the agency complete and accurate, and shall not thereafter furnish to the agency any of the information that remains not complete or accurate.
    (3) Duty to provide notice of dispute. If the completeness or accuracy of any information furnished by any person to any consumer reporting agency is disputed to such person by a consumer, the person may not furnish the information to any consumer reporting agency without notice that such information is disputed by the consumer.
    (4) Duty to provide notice of closed accounts. A person who regularly and in the ordinary course of business furnishes information to a consumer reporting agency regarding a consumer who has a credit account with that person shall notify the agency of the voluntary closure of the account by the consumer, in information regularly furnished for the period in which the account is closed.
    (5) Duty to provide notice of delinquency of accounts
    (A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.
    (B) Rule of construction. For purposes of this paragraph only, and provided that the consumer does not dispute the information, a person that furnishes information on a delinquent account that is placed for collection, charged for profit or loss, or subjected to any similar action, complies with this paragraph, if—
    (i) the person reports the same date of delinquency as that provided by the creditor to which the account was owed at the time at which the commencement of the delinquency occurred, if the creditor previously reported that date of delinquency to a consumer reporting agency;
    (ii) the creditor did not previously report the date of delinquency to a consumer reporting agency, and the person establishes and follows reasonable procedures to obtain the date of delinquency from the creditor or another reliable source and reports that date to a consumer reporting agency as the date of delinquency; or
    (iii) the creditor did not previously report the date of delinquency to a consumer reporting agency and the date of delinquency cannot be reasonably obtained as provided in clause (ii), the person establishes and follows reasonable procedures to ensure the date reported as the date of delinquency precedes the date on which the account is placed for collection, charged to profit or loss, or subjected to any similar action, and reports such date to the credit reporting agency.
     (7) Negative information
    (A) Notice to consumer required.
    (i) In general.  If any financial institution that extends credit and regularly and in the ordinary course of business furnishes information to a consumer reporting agency described in section 1681a(p) of this title furnishes negative information to such an agency regarding credit extended to a customer, the financial institution shall provide a notice of such furnishing of negative information, in writing, to the customer.
    (ii) Notice effective for subsequent submissions.  After providing such notice, the financial institution may submit additional negative information to a consumer reporting agency described in section 1681a(p) of this title with respect to the same transaction, extension of credit, account, or customer without providing additional notice to the customer.
    (B) Time of notice
    (i) In general.  The notice required under subparagraph (A) shall be provided to the customer prior to, or no later than 30 days after, furnishing the negative information to a consumer reporting agency described in section 1681a(p) of this title.
    (ii) Coordination with new account disclosures.  If the notice is provided to the customer prior to furnishing the negative information to a consumer reporting agency, the notice may not be included in the initial disclosures provided under section 1637(a) of this title.
    (C) Coordination with other disclosures. The notice required under subparagraph (A)—
    (i) may be included on or with any notice of default, any billing statement, or any other materials provided to the customer; and
    (ii) must be clear and conspicuous.
    (8) Ability of consumer to dispute information directly with furnisher
    (D) Submitting a notice of dispute. A consumer who seeks to dispute the accuracy of information shall provide a dispute notice directly to such person at the address specified by the person for such notices that—
    (i) identifies the specific information that is being disputed;
    (ii) explains the basis for the dispute; and
    (iii) includes all supporting documentation required by the furnisher to substantiate the basis of the dispute.
    (E) Duty of person after receiving notice of dispute. After receiving a notice of dispute from a consumer pursuant to subparagraph (D), the person that provided the information in dispute to a consumer reporting agency shall—
    (i) conduct an investigation with respect to the disputed information;
    (ii) review all relevant information provided by the consumer with the notice;
    (iii) complete such person’s investigation of the dispute and report the results of the investigation to the consumer before the expiration of the period under section 1681i(a)(1) of this title within which a consumer reporting agency would be required to complete its action if the consumer had elected to dispute the information under that section; and
    (iv) if the investigation finds that the information reported was inaccurate, promptly notify each consumer reporting agency to which the person furnished the inaccurate information of that determination and provide to the agency any correction to that information that is necessary to make the information provided by the person accurate.
    (b) Duties of furnishers of information upon notice of dispute.
    (1) In general. After receiving notice pursuant to section 1681i(a)(2) of this title of a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall—
    (A) conduct an investigation with respect to the disputed information;
    (B) review all relevant information provided by the consumer reporting agency pursuant to section 1681i(a)(2) of this title;
    (C) report the results of the investigation to the consumer reporting agency;
    (D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other consumer reporting agencies to which the person furnished the information and that compile and maintain files on consumers on a nationwide basis; and
    (E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1), for purposes of reporting to a consumer reporting agency only, as appropriate, based on the results of the reinvestigation promptly—
    (i) modify that item of information;
    (ii) delete that item of information; or
    (iii) permanently block the reporting of that item of information.
    11 U.S.C. § 524 – Relevant Provisions

    (a)(2) A discharge in a case under this title operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.
    (b)(2)(C) Subsection (a)(3) of this section does not apply if an agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if—
    (1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;
    (2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;
    (3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that—
    (A) such agreement represents a fully informed and voluntary agreement by the debtor;
    (B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
    (C) the attorney fully advised the debtor of the legal effect and consequences of—
    (i) an agreement of the kind specified in this subsection; and
    (ii) any default under such an agreement;
    (4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;
    (5) the provisions of subsection (d) of this section have been complied with; and
    (6)
    (A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as—
    (i) not imposing an undue hardship on the debtor or a dependent of the debtor; and
    (ii) in the best interest of the debtor.
    (B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.
    (f) Nothing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.
    (j) Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim, if—
    (1) such creditor retains a security interest in real property that is the principal residence of the debtor;
    (2) such act is in the ordinary course of business between the creditor and the debtor; and
    (3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.

    Reaffirmations & Credit Reporting – Theory & Practice (Part 1)

    A key component to helping people rebuild credit after filing for bankruptcy are post-filing payments on reaffirmed debts.  However, there’s a lot of confusion – even among attorneys and other professionals – about creditors’ obligations to report these payments.  So today, we’re going to examine key statutes, case law, and some anecdotal evidence.  We’re going to discuss what creditors legally are and are not obligated to do, and how these obligations may differ from what we see in common, every day practice.
    But first, I’m going to assume that you have not read other posts on this blog about reaffirmations, so let’s hit up some basics: What is a reaffirmation agreement?

    Contrary to common belief, almost all secured debts are dischargeable.  In terms of dischargeability, they are no more or less special than other unsecured debts like credit cards, payday loans, or medical bills.  This is how and why people are able to file for bankruptcy, walk away from a home or vehicle that they don’t want, and not be liable for a deficiency balance.
    But secured liens are not extinguished in bankruptcy (except in rare case of stripping unsecured mortgages in Chapter 13, judgment liens, etc.).  So while a secured creditor may not be able to pursue you for a deficiency balance, they can act upon their security interest and foreclose or repossess collateral if you default on the loan.  And of course, that right exists even if you don’t file for bankruptcy – bankruptcy just extinguishes their right to pursue you for money on the loan.  So you can’t just stop paying your mortgage and expect to be able to continue to remain in your home, even if you file for bankruptcy.
    A reaffirmation agreement takes your dischargeable pre-petition obligation and converts it into a post-petition obligation that is not discharged in bankruptcy.  In other words, if you enter into a reaffirmation agreement and default, then not only can the creditor repossess the collateral, but they can also pursue you for a deficiency judgment.
    Reaffirmations are NOT required.  On the contrary.  They are voluntary agreements.  A creditor can no more require you to sign a reaffirmation agreement than you can require a creditor to sign one.  In fact, some creditors – as a policy – don’t bother with reaffirmation agreements.
    Strictly from a liability standpoint, I (along with most other attorneys I’ve spoken to) would prefer that our clients not enter into a reaffirmation agreement.  There is always the possibility that something will happen down the road, and you are unable to continue to make payments on your mortgage or car loan.  Without a reaffirmation agreement – the worst thing that the creditor is entitled to do is repossess the collateral.  With a reaffirmation agreement – the creditor can repossess the collateral AND seek a deficiency balance.
    What I (and most other attorneys) prefer are what we refer to as a “ride-through”.  A ride-through is when a bankruptcy debtor retains collateral, continues to make normal monthly payments on a secured loan, but does so without a reaffirmation agreement.  This way, the debtor keeps their property, but minimizes their risk in case something happens down the road.
    Sounds great!  Why doesn’t everyone do a ride-through?  Why don’t attorneys INSIST that their clients just do a ride-through?  Well, two reasons.
    #1 – The Risk of Repossession
    This almost never happens.  Many years ago, there were rumors that Wells Fargo was foreclosing on homes and repossessing vehicles, even though the debtors were current on their payments.  The sole reason they foreclosed and repossessed?  The debtors had not signed a reaffirmation agreement, which Wells Fargo considered a technical default and grounds for exercising their security interests.
    11 U.S.C. § 521(a)

    (6) [I]n a case under chapter 7 of this title in which the debtor is an individual, not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors under section 341(a), either –
    (A) enters into an agreement with the creditor pursuant to section 524(c) with respect to the claim secured by such property; or
    (B) redeems such property from the security interest pursuant to section 722.

    In Steinhaus, Idaho Central Credit Union argued that this language (revised under BAPCPA in 2005) limited a debtor to 3 options: reaffirm, redeem, or surrender.  Since Steinhaus had not entered into a reaffirmation agreement within the proscribed time period, ICCU demanded termination of the automatic stay, an order compelling surrender of property, and an order authorizing foreclosure.  The court agreed that 11 U.S.C. § 362(h) permitted ICCU to obtain termination of the automatic stay, but disagreed that it had authority to compel surrender of collateral or to authorize foreclosure.  In re Steinhaus, 349 B.R. 694 (Bankr. Idaho, 2006).

    The right to repossess is still controlled by applicable state law, and we get a pretty good discussion of that in Henderon, a Nevada case that specifically deals with Nevada law that differs from the Uniform Commercial Code.  In this particular case, it was decided that the contract provision invoking an ipso facto right of recovery based solely on the filing of bankruptcy or lack of a reaffirmation agreement was invalid under Nevada law.  In re Henderson, 492 B.R. 537 (Bankr. Nev., 2013).

    Wisconsin’s default provisions are outlined at Wis. Stat. § 425.103.  I’ll include them here for reference, but I’m not going into an analysis of the code.  The point is that since the right of recovery is an issue of state law, the bankruptcy court has no authority to compel surrender of collateral, which means you – as a bankruptcy debtor – can force this issue before a state court judge.  An informal survey suggests that most judges are not inclined to permit repossession based solely on the lack of a reaffirmation agreement.

    (2) ”Default”, with respect to a consumer credit transaction, means without justification under any law:(a) With respect to a transaction other than one pursuant to an open-end plan and except as provided in par. (am); if the interval between scheduled payments is 2 months or less, to have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the scheduled or deferred due dates, or the failure to pay the first payment or the last payment, within 40 days of its scheduled or deferred due date; if the interval between scheduled payments is more than 2 months, to have all or any part of one scheduled payment unpaid for more than 60 days after its scheduled or deferred due date; or, if the transaction is scheduled to be repaid in a single payment, to have all or any part of the payment unpaid for more than 40 days after its scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(am) With respect to an installment loan not secured by a motor vehicle made by a licensee under s. 138.09 or with respect to a payday loan not secured by a motor vehicle made by a licensee under s. 138.14; to have outstanding an amount of one full payment or more which has remained unpaid for more than 10 days after the scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(b) With respect to an open-end plan, failure to pay when due on 2 occasions within any 12-month period;(bm) With respect to a motor vehicle consumer lease or a consumer credit sale of a motor vehicle, making a material false statement in the customer’s credit application that precedes the consumer credit transaction; or(c) To observe any other covenant of the transaction, breach of which materially impairs the condition, value or protection of or the merchant’s right in any collateral securing the transaction or goods subject to a consumer lease, or materially impairs the customer’s ability to pay amounts due under the transaction.

    As a matter of practice, most creditors will permit a ride-through, and there are two major reasons for this.  First – if a debtor is willing to continue make payments on a secured debt, they’re going to receive more money if they permit the ride-through rather than immediately demanding turnover of the collateral.  If the debtor defaults, they still have a right of recovery and sale later on.  (For example, if collateral is worth $10k at auction and a debtor makes $500/mo payments for a year before defaulting, the creditor potentially gets $16k out of the deal; whereas they only get the $10k if they repossess immediately.)  The circumstances in which a creditor may not want to wait for a default is where there is significant risk or danger that the property will be damaged or wasted before the default, significantly devaluing the asset by the time it can be sold.

    The other reason most creditors permit a ride-through is because threatening to repossess in the absence of a reaffirmation agreement would conceivably be a violation of the discharge at 11 U.S.C. § 524(c)(3)(A).

    Lien On Me

    Last week (and several times in the past), I mentioned that bankruptcy generally discharges debts, but does not remove liens.  And this is true of consensual property liens (such as mortgages and auto loans) and tax liens (11 U.S.C. § 522(c)(2)(B)).

    Judicial liens, on the other hand, can be eliminated in bankruptcy (§ 522(f)(1)(A)).  Judicial liens are liens obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding (§ 101(36)).

    There is a common misconception that once a creditor files a lawsuit against you and obtains a judgment, that the debt becomes non-dischargeable, and that is not the case.  § 523 outlines the various types of debts that cannot be discharged, and a civil judgment – in and of itself – is no more special than a credit card, medical bill, or payday loan.

    Locating tax liens, and why they’re important.

    One of the issues that has frustrated clients in the past is locating the existence of tax liens.  The IRS and the state will send notices of them, but most people disregard or trash these notices without fully comprehending their meaning.
    In Chapter 13, tax liens are entitled to treatment as secured creditors.  They don’t get Till interest (prime rate, currently at 3.25%, + 1-3%) , but they do get the underpayment rate (currently at 3%).
    Why is this important?  Taxes are generally presumed to be either priority or non-priority.  Priority taxes are usually taxes from within the past three years (with multiple caveats and loopholes that I won’t bore you with today), must be paid in full, but get 0% interest in this district.  Non-priority taxes (typically older than 3 years) do not have to be paid in full, and may be dischargeable.
    But if a tax lien is filed against you, not only does the debt have to be repaid, but it also has to be paid with interest.  If the tax debt is only $1k and you enjoy today’s interest rate of 3% – the effect is pretty minimal – an extra $79 over 5 years.  But what if you have a larger tax liability?  Let’s say…  $25k.  And let’s assume a higher interest rate.  It was 8% as recently as the fourth quarter of 2007, and 11% back in 1991.  $25k at 8% is an extra $5,414.60 over the life of the plan.  With the trustee’s fee, that bumps up a plan payment an extra $100/mo.
    We like to know about these things ahead of time, so that you make an informed decision before you file your case, and so we have a smooth process to confirmation.
    So with that in mind, here’s how to find out if you have a tax lien…

    1. You should search if you owe taxes to the IRS, or taxes or benefit overpayment owed to the state.
    2. Go to the Register of Deeds’ office in any and all counties in which you own real estate, and ask to check for a tax lien.
    3. Check for tax warrants filed against you with the Clerk of Courts.  For Wisconsin, go to http://wcca.wicourts.gov/index.xsl
    4. Check your state’s registry of UCC filings.  For Wisconsin, go to https://www.wdfi.org/ucc/search/
    5. You may also consider a comprehensive records search through a provider such as Lexis.

    Property Taxes

    In the majority of home foreclosures where the homeowner decides to surrender the property, they are not responsible for the property taxes owed on it.  Whoever purchases the property ends up paying the taxes.  Often, it’s the foreclosing mortgage lender, and they either absorb the cost or pass it along in the purchase price when it gets resold.  Thus, creating the general maxim: property taxes follow the property.
    But this isn’t always the case.  Here’s a cautionary tale, from when two parties on a land contract agreed that the tenant/buyer would be responsible for paying property taxes, rather than the landlord/seller.
    As legal title of the house remained with the seller until the land contract reached maturity, the landlord remained liable to the county, notwithstanding the land contract agreement.  The seller then paid the property taxes, and then filed a claim in the buyer’s Chapter 13 bankruptcy case (in which, the buyer decided to abandon the land contract and moved somewhere else).
    11 U.S.C. § 523(a)(14A) makes non-dischargeable any debt that was incurred to pay particular kinds of taxes, referencing § 523(a)(1).  Most commonly, this discourages people from using credit cards (which are non-dischargeable) to pay off tax debt (which is non-dischargeable) and sticking the credit card company with the bill.
    Next, § 523(a)(1) references § 507(a)(8).At § 507(a)(8)(B) we have: a property tax incurred before the commencement of the case and last payable without penalty after one year before the date of the filing of the petition. 
    So, where does this leave us?  In the particular case described above, the portion of property taxes that the landlord/seller paid on behalf of the tenant/buyer, the portion of which was due within 365 days of the date the bankruptcy case was filed – that becomes non-dischargeable.
    Why doesn’t this happen all the time?  Because in Wisconsin, the mortgage company almost always folds the property taxes into the mortgage, and waives their right to collect a deficiency.

    Creditor Superpowers

    Not all creditors are created equal.
    Some debts are “secured” which means the lender can exercise security rights in collateral you own if you default under the terms of the note.  For example, if you stop making payments on a secured loan, a mortgage lender can foreclose your home, and an auto lender can repossess your car.
    Other debts are non-dischargeable in bankruptcy.  A full list of these can be found at 11 U.S.C. § 523(a), but it includes items such as taxes, student loans, debts incurred by misrepresentation and fraud, domestic support, and certain governmental debts, among other things.
    Secured debts and non-dischargeable debts are the two most common distinctive classes of debts that people going through bankruptcy are made aware of.  But there are a number of superpowers that certain creditors have over other creditors, and we’re going to go over some of the most pertinent ones here.
    Utility Companies – are given special status under 11 U.S.C. § 366, and may discontinue utility services if the debtor does not provide adequate assurance of payment, such as a deposit.  In my experience, requests for deposits have been relatively rare, but they do occur from time to time.
    Internal Revenue Service and State Taxing Authorities – in addition to the non-dischargeable and priority status that many tax debts enjoy, taxing authorities are also allowed to file claims in a debtor’s Chapter 13 case for tax debts that arise after the bankruptcy case is filed under 11 U.S.C. § 1305.  For example, John Doe files a Chapter 13 Bankruptcy in 2011 with a 5 year term.  In 2013, John Doe finds that he owes taxes to the IRS for the 2012 tax year.  The IRS can file a claim in John’s existing bankruptcy case and force the debt to be paid in the plan.  On the one hand, this is a good thing, because the tax won’t incur interest while it’s paid in the plan.  On the other hand, it may be difficult for John to fund his plan when it is saddled with the new debt, particularly if John is nearing the end of this plan (no plan can go longer than 60 months, so the later in the plan that this happens, the less time you have to spread the payments out).
    Student Loan Creditors – filing bankruptcy can trigger higher default interest rates, which is particularly a problem for Chapter 13 debtors who are not paying off their student loans in full during the Chapter 13 Plan.  Since student loans are currently non-dischargeable (there has been a lot of buzz in Washington lately about possibly amending the bankruptcy code to allow certain types of student loans to be discharged under certain conditions), those post-petition rates continue to be incurred throughout the life of the bankruptcy plan.  Bruning v. United States, 376 U.S. 358 (U.S. 1964).

    Why reaffirm?

    I have blogged in the past about why it is critical to disclose all of your debts on your bankruptcy schedules, even ones you don’t want to include or “file against”.  The two main things to take away from that article are:

    • Listing a debt is NOT the same thing as “filing against” or discharging a debt.
    • You have an obligation to disclose all creditors – dischargeable or non-dischargeable, secured or unsecured – as a matter of due process.

    So, with that in mind, let’s move on to the topic of reaffirmation agreements.  Again, there are two main points to make in order to understand why a reaffirmation agreement may be necessary.

    • Bankruptcy wipes out debts, but it does not remove liens (with some exceptions).
    • Secured debts are generally dischargeable debts.

    All right, so let’s put ourselves in an alternate reality where there is no such thing as a reaffirmation agreement, but all other bankruptcy laws are the same.  You file for bankruptcy and receive a discharge.  The discharge is good against the world.  Therefore, your mortgage and car loan are discharged.  This means that you have no obligation to pay the mortgage company and vehicle lender, and they have no legal right to pursue you for payment.
    However, bankruptcy did not wipe out the security interest that existed.  In the absence of payment, the vehicle lender repossesses your car and your mortgage company forecloses on your home.
    Enter the reaffirmation agreement.  A reaffirmation is a post-petition affirmation of a debt.  In a way, it converts an existing, pre-petition debt into a post-petition debt, and makes it non-dischargeable under the old bankruptcy.  (It can be discharged in a future bankruptcy, provided that enough years lapse such that you are eligible for a discharge.)
    Reaffirmation agreements are voluntary and must be entered into by both parties – the creditor and the debtor.  A debtor who wishes to reaffirm cannot force an unwilling creditor to enter into a reaffirmation agreement.  A creditor who wishes to reaffirm cannot force an unwilling debtor to enter into a reaffirmation agreement.
    So, what are some of the advantages and disadvantages to reaffirming?
    First, reaffirming a secured debt allows you to keep the collateral so long as you continue to make payments on the loan.  A failure to reaffirm does not necessarily mean that you lose the collateral (you can make payments without a reaffirmation, which we refer to as a “ride through”), but there are some creditors who consider a failure to reaffirm as a default, and sufficient cause to foreclose or repossess.
    Second, reaffirming a secured debt is an excellent way to rebuild credit after bankruptcy, because you don’t have to apply for a new loan – it already exists, and the payments you make on it after your case is filed will help boost your credit score.  In the absence of a reaffirmation agreement, however, creditors are not obligated to report your payments to the credit bureaus.
    Third, if you file a reaffirmation agreement, but then default on the loan later, the creditor is not only able to repossess or foreclose, but the creditor can also sue you for full payment of the deficiency balance afterward.  Your bankruptcy discharge won’t protect you.  Whereas, if you do not file a reaffirmation agreement, but later default on the loan, you still face the foreclosure or repossession, but won’t be liable for the deficiency.
    Here are a few other things to consider when making an informed decision to reaffirm a debt or not…
    Creditors are generally under no obligation to repossess or foreclose a property if they do not want to.  Although this is uncommon with real estate and vehicles, if this does happen, you could remain liable for things like property taxes, liability insurance, winterization and heating costs, parking violations, and so forth.  If you cannot get a creditor to physically take the keys to real estate or a vehicle, you probably should not abandon the collateral until they actually come for it.  And don’t just sell the collateral, either.  The lender could come back later for the collateral, and if it isn’t available for collection, you could be assessed criminal penalties.  Property that has a lien on it should never be sold without the lender’s express consent and – ideally – a lien release.
    For smaller secured loans (like furniture loans, appliance loans, and jewelry loans), although the creditors have the right to repossess if you default or do not sign the reaffirmation agreement, it is highly unlikely that they actually will.  The costs of repossession almost always outweigh the price the lender will realize at auction.
    Creditors who claim to have security in stuff you buy might not necessarily have a valid purchase money security interest (PMSI).  Best Buy is notorious for having very vague security agreements which list as security “all of the debtor’s assets” or “all the debtor’s personal property” or “all items purchased”.  Under Wisconsin law, 409.108(3) of Wisconsin statutes indicates that generic descriptions are okay for finance agreements, but not sufficient for security agreements.  There needs to be some reasonable detail of the collateral.
    If you do want to reaffirm, the agreement must be filed with the Bankruptcy Court within 60 days of the date of your 341 hearing (which is when you are scheduled to receive your discharge).  Your case cannot be reopened to get a late-filed reaffirmation approved.  (You can file a motion to delay discharge to allow more time to complete a reaffirmation agreement.  You can also reopen a case to file a reaffirmation agreement after discharge, but the court will not approve it, and at the expense of a $260 filing fee.)
    Notwithstanding considerations of positive credit reporting and eliminating the risk of foreclosure and repossession, there are other things you should consider before filing a reaffirmation agreement.  Most notably – can you afford it?  Often overlooked is the budget, but what good is a fresh start in bankruptcy if you’re just going to dig yourself into a new hole with something you cannot afford.  Consider the following factors:
    • What is the monthly payment?  Can I afford to pay it?
    • What is the interest rate?  Could I get a new loan for this sort of collateral at a better rate?  How much of my payment is actually going to the principal balance?
    • What is the term of the loan?  Do I have to make this payment for 6 months or 30 years?
    • How much is the collateral worth?  Does it make sense to pay $20,000 for a car that is worth $6,000?  Might it be cheaper to finance a new car?
    • Is the collateral necessary?  Sure, I love my 72″ plasma television, but is paying $200 a month for it really worth it when I have a wife and two kids to feed?

    Wisconsin Vehicle Titles

    On July 30, 2012, Wisconsin is set to become a “title-holding” state.  What this means is – if you finance a vehicle (rather than purchase it outright), the DMV won’t be sending the car title to you, they will send it to the lienholder, instead.
    You still own the car, of course.

    There is a common misconception that people don’t own things that have liens on them.  E.g., some of my clients tell me “I don’t own my house, the bank owns it.”  Not quite.  Lienholders have exactly what their name implies – a lien.  A lien is the right a lender has to take possession of certain property you own in the event you default on their note.  However, until such foreclosure or repossession occurs, you are – in fact – the owner.

    So why am I posting this information on a blog about bankruptcy?  In all bankruptcy proceeding (both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy), trustees require copies of titles for all vehicles with a lien on them, in order to verify the existence of the lien and to verify that the lien is properly perfected.

    Why do trustees require proof of liens (such as copies of car titles and mortgages)?  A lien reduces the available equity in property, thereby impairing the trustee’s ability to liquidate assets for the benefit of unsecured creditors.  This is almost always what you want, if you are a debtor in bankruptcy.  For example, let’s say you have a house that is worth $200,000, and there is a mortgage of $180,000 on it.  There is only $20,000 in equity, that can [usually] be taken as exempt and you get to keep your house, so long as you keep current on mortgage payments.  But, what if the mortgage doesn’t exist or wasn’t properly perfected?  Then, the mortgage can be avoided by the trustee, making the full $200,000 value of the house available to the trustee.  In Wisconsin, that much equity cannot be fully exempt, in which case you’re looking at either losing the house in Chapter 7, or filing a Chapter 13 and paying back at least some of your unsecured debt back.

    Accordingly, people who purchase a vehicle after July 30, 2012 will not be able to provide a copy of the title to their bankruptcy attorney unless the car is owned clear of liens (in which case, the attorney doesn’t need the title).
    The new “Confirmation of Ownership” is form T056 from the Wisconsin Department of Transportation.
    What do you do?  There are still 3 options:
    1. The DMV will still be issuing a document to the car owner.  But it’s not the title of the vehicle.  Instead, it’s called a “Confirmation of Ownership”.  Luckily, that document will have all of the pertinent information that the actual title has, and will be sufficient for what the trustee needs to examine.
    2. Contact your lienholder (i.e. the bank, credit union, or other lender that financed your vehicle).  Since they will have the title, they should be able to provide you with a copy of it.  Short of that, two other documents are acceptable: Confirmation of Security Interest or a UCC Filing Statement.
    3. Contact the DMV for a certified vehicle record.  DO NOT request a replacement title or a replacement Confirmation of Ownership, unless you don’t plan on filing for bankruptcy for at least 3 months, because the issue date will be the current date, not the date you actually purchased the vehicle.  The certified vehicle record can be requested for $10 per vehicle via Form MV-2896.  Clients of Holbus Law Office, LLC can request that the MV2896 service be rolled into their Document Retrieval Service package at no additional charge beyond the DMV’s charges.

    The Junked Vehicle Conundrum

    All too often, I am encountering debtors who have – in one way or another – disposed of an asset which was collateral on a secured loan.  And that casts doubt as to dischargeability of that debt.
    The 3 most common scenarios:

    1. Debtor owns a car with a loan on it, cannot afford the payments, and sells the car to a friend who assumes the loan.
    2. Debtor owns a car with a loan on it, the car breaks down, and the debtor sells the car to a junkyard for scrap value.
    3. Debtor gets into an accident that totals the car, and is uninsured.

    Of course, this problem doesn’t just revolve around cars.  This issue can crop up with any secured loan.  It just happens most commonly with motor vehicles (and sometimes jewelry from a broken-off engagement).
    Problems arise in both the federal bankruptcy code and state statutes…

    Plaintiff bank had a security agreement on an old automobile owned by defendant debtor. Defendant sold this car without certificate of title to a junk dealer for $25.00. Defendant later filed for Chapter 7, and plaintiff moved the court to deny defendant discharge under 11 U.S.C.S. § 727(a)(2)(A), or alternatively to exclude this debt from discharge under 11 U.S.C.S. § 523(a)(6) for willful and malicious injury by defendant to the property which plaintiff had a security interest in. The court held that defendant had willfully and maliciously caused injury to the collateral under § 523(a)(6).  First of Am. Bank v. Afonica (In re Afonica), 174 B.R. 242 (Bankr. N.D. Ohio 1994).

    Some of you might be asking why there is a dischargeability problem in the case of the auto accident, since it is – by definition – an accident, and ergo, no malicious intent.  However, the lack of insurance as required by the lender can be construed as a failure of fiduciary duty to maintain and preserve the collateral.  I.e. – most insurance policies list the lienholder as a loss payee, so there is adequate protection to the lender for the debt owed in the event of loss of collateral.  Failure to maintain insurance – not the accident itself – is what can land you into trouble.
    The right to recover collateral is found in the Wisconsin Consumer Act (Wis. Stat. § 425.201, et seq.), and in addition to a lack of discharge – criminal penalties could even be assessed (Wis. Stat. § 425.401).
    The lesson: if you have a secured loan, make sure the collateral is insured and do not sell, gift, or dispose of the collateral!