PRE-BAPCPA: In re Price, 370 F.3d 362 (2004)
The Debtors in this case filed a joint Chapter 7 Bankruptcy in Delaware and attempted to “ride through” their automobiles in the Bankruptcy—that is, they wanted to use their automobiles while remaining current on the their monthly auto loan payments but made no agreement to reaffirm the debt with the creditor. To “ride through” essentially means that the debtor's personal liability for the original debt is discharged, but the creditor is precluded from repossessing the item so long as the debtor remains current on the original contract payments. The creditor in this case argued that the Bankruptcy Code does not permit the Debtors to continue possessing the cars simply by paying their bills, but instead allows only four options: (1) surrender the cars, (2) purchase them in a lump-sum payment (“redeem”), (3) negotiate another loan that would attach postpetition liability (“reaffirm”), or (4) claim a recognized exemption under the Bankruptcy Code.
The Third Circuit Court of Appeals considered whether these options were intended to be exclusive by the Bankruptcy Code. In making its decision, the Court looked to Section 521(2)(A) of the Bankruptcy Code, which states that the debtor shall file a statement of intention with respect to retaining or surrendering property and, if applicable, specify that the property is exempt, that debtor intends to redeem the property, or that the debtor intends to reaffirm the property. The phrase “if applicable,” the Court found, serves the purpose of requiring the debtor to specify its intent only if that intent falls under one of the three specified categories.
Furthermore, the Court concluded that creditors would not be disadvantaged by interpreting the Bankruptcy Code in this light, as they would still be able to motion to lift the automatic stay if the debtors were to default on payments under the original loan agreement.
The Court ultimately held that their “examination of the substantive rights provided elsewhere in the Code guides [this Court] to conclude that although unstated in section 521(2), debtors do have the option to retain property while staying current on loan payments” thus allowing Debtors to “ride through.”
BAPCPA
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), which amended the Bankruptcy Code. Among other things, BAPCPA now required that a failure to redeem or to reaffirm a debt within the applicable time period terminated the automatic stay with respect to personal property of the estate or the debtor. (See Section 362(h))
This meant that debtors could no longer “ride through” bankruptcy simply by retaining the property while staying current on the loan payments, but instead needed to redeem or reaffirm the debt within a prescribed time period, or risk a lifting of the automatic stay, allowing the creditor to take measures to repossess the property.
POST-BAPCPA: In re Baker, 390 B.R. 524 (Bankr. D. Del. 2008)
In Baker, the debtor filed a statement of intention to retain the collateral and to continue to make payments but then entered into a reaffirmation agreement. The Court later refused to approve the agreement because it constituted undue hardship on the debtor.
The Court ultimately found that the debtor substantially complied with the Code by entering into the reaffirmation agreement. Although the reaffirmation agreement was ultimately denied, debtor was able to retain the collateral while continuing to make payments since it had substantially complied with the applicable sections of the Code (521(a)(2)(C) and 362(h))—thus allowing debtor to “ride through.”
CURRENT STATE OF THE LAW
The “ride through” option remains available to debtors in Delaware. In order to make sure substantial compliance is met, debtors should indicate one of the statutory options in its Statement of Intention. If the debtor chooses to reaffirm, it must complete a reaffirmation agreement with the creditor. The court will review the reaffirmation agreement to determine if it is in the best interest of the debtor. If the court determines that the reaffirmation agreement is not in the best interests of the debtor after reviewing the agreement and the debtor’s current income and expenses, the court will deny the agreement. Once the agreement is denied, debtor is able to continue to make payments and retain the collateral, all while being able to discharge personal liability of the debt—effectively creating a “ride through.”

Chapter 7 bankruptcies may not void a junior mortgage lien on underwater property

Bank of America v. Caulkett & Bank of America v. Toledo-Cardona

On June 1, 2015, the Supreme Court of the United States handed down its decision regarding a Chapter 7 debtor’s ability (or inability, rather) to strip off a wholly unsecured junior lien on debtor’s property. Previously, in Dewsnup, the Supreme Court held that a Chapter 7 debtor could not strip a partially unsecured lien of a junior debtor down to the amount actually secured by the property, reasoning that the entire lien was considered an “allowed secured claim” under section 506(d) of the Bankruptcy Code. However, in Caulkett and Toledo-Cardona (decided together), the Supreme Court decided for the first time the possibility of stripping off a junior lien which was wholly unsecured, ultimately holding that a “secured claim” is a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.

Although these unsecured junior mortgages are not able to be stripped off in Chapter 7 bankruptcies, debtors still have other options for dealing with such debts. First, although the lien remains on a property in Chapter 7, the debtors are released from personal liability for any negative equity that may exist. Additionally, debtors may choose to file a Chapter 13 bankruptcy which, although more costly and taking a longer time, allows the unsecured portion of a junior mortgage to be effectively stripped off.

In a recent article in the Cape Gazette I was quoted extensively on the liquidation of a business that filed Chapter 7 Bankruptcy.

We often hear about businesses filing for Chapter 11 Bankruptcy, which gives them breathing room to reorganize their debts. Sometimes there are success stories where the business comes back leaner and stronger.  But it is frequently the case where those businesses devolve into a Chapter 7 liquidation, the doors are shuttered and the assets of the business are divided among the creditors.

The Safe Haven case pulls at the heartstrings. A No-Kill shelter which started with high aspirations and decent financial backing. Things went bad for Safe Haven so quickly that they did not file for Chapter 11 and try to reorganize their debts to keep the business afloat, but instead went straight to Chapter 7 liquidation.

Filing directly for Chapter 7 bankruptcy can be an effective tool for some businesses, depending upon how their assets and debts are structured. As with any venture, it is important to consult with an experienced attorney before starting a business. We all hope for the best when starting out on that dream venture, but you have to be prepared and plan ahead for the worst-case scenario so that your home and your life savings are safe from creditors if your business venture struggles or fails.

You can read the story in the Cape Gazette by clinking on the link below:

http://capegazette.villagesoup.com/p/safe-haven-property-abandoned/1376138

The stigma is that people who file for bankruptcy have done something wrong; that they’ve lived beyond their means, or made bad choices. The reality is quite different. As you go down this list of the Top Reasons People File for Bankruptcy, ask yourself, “there but for the grace of God go I?”

1.       Medical. Far and away the most common reason people file bankruptcy.  Illness and injury can strike at any time, from anywhere, to anyone. Got Insurance?  Its been described as “an umbrella that melts in the rain.” Once you’ve hit your policy limits you are on your own again, and only the most platinum of plans will fully compensate you for your lost wages.

2.       Unemployment. A distant second. Your company downsizes. Your established business begins to fail. Covert age discrimination forces you out of your job. There are many reasons people become unemployed that have nothing to do with job performance.

3.       Divorce.  Half the income, twice the bills.

4.       Fixed income. The myth of the “Golden Years”. You worked hard all your life, lived within your means, and earned your retirement. But that Pension and Social Security income remain stagnant while the cost of living, particularly medical expense, continues to rise.

5.       Addictions. Gambling, prescription medications, online purchases… Additions come in many forms, not just the stereotypical image of illicit drug use.

6.       Life Happens.  You lend your car to someone and they’re at fault in an accident. Your basement floods but the insurance won’t pay. You’re the victim of identity theft. You have to take time off from work to care for a loved one. Bad things can happen to good people.

Starting October 3, 2015, the disclosures associated with loan applications for new home mortgages will change. The new forms are designed to be simpler and more user friendly in an effort to improve on the home buying experience.

The traditional Good Faith Estimate and Truth-In-Lending Disclosure will be replaced by one new form: the Loan Estimate (“LE”). For closed-end credit transactions secured by real property (other than reverse mortgages), the lender is required to provide the borrower with good faith estimates of credit costs and transaction terms. Lenders are responsible for ensuring the figures stated in the LE are made in good faith with the best information reasonably available at the time of disclosure, and generally may not issue revisions to the LE because they later discover technical errors, miscalculations, or underestimations of charges. This new three-page form must be provided to borrowers no later than three business days after they submit a loan application.

Replacing the traditional HUD-1 Settlement Statement and the final Truth-In-Lending Disclosure will be the Closing Disclosure (“CD”). This new five-page form is used to disclose many of the terms and provisions of the loan, as well as the financial breakdown of the transaction. Lenders may estimate disclosures using the best information reasonably available when the actual term or cost is not reasonably available to the creditor at the time the disclosure is made. However, creditors must act in good faith and use due diligence in obtaining the information.

The new forms are significantly easier to understand, leading the way to a better informed borrower.

Additionally, the new laws will implement a new timetable for the closing. Lenders will be required to submit the Closing Disclosure to borrowers at least three days prior, giving borrowers a new three-day review period before the closing. Certain changes to the CD after deliver to the borrower might trigger a new three-day waiting period, including changes that affect the APR, borrower changing loan products, addition of a prepayment penalty to the mortgage, or any changes that affect the value of the property as determined by the lender.

Although these changes are expected to cause a significant amount of delayed closings initially, the new forms are much easier to understand and will help make the closing process an overall better experience for homebuyers.

 

Exemptions are the assets that individuals are permitted to keep when they file Bankruptcy. These are the things that neither the court or creditors are permitted to take from you. Delaware has a very generous list of exemptions. The highlights include:

$125,000 of equity in your home. If your house is worth $200,000.00, but you have a $150,000 mortgage there is $50,000 of equity. All of the equity in your home can be exempted, and they cannot take your home as long as you keep up with your mortgage.  However if the same house worth $200,000 only has a $25,000 mortgage, then there is $175,000 of equity in the home. Applying the $125,000 exemption against the $175,000 of equity, there is still a $50,000 of unprotected equity in the home, and the Bankruptcy Court could potentially sell your home, give you the first $125,000 in cash from the sale, and use the rest to pay your creditors.

$25,000 "wild card" exemption. This can be almost anything -- furniture, bank accounts, golf clubs, personal injury claims, inheritances, life insurance, season tickets to the Flyers. If you are married and you are filing jointly, the exemption is doubled to $50,000.

$15,000 equity in a car or tools of the trade. Like the equity in your home, this is the excess after you deduct any car loan. There is rarely any equity in newly-purchased car, but if you owe $5,000 on a car that is worth $7,500, there is $2,500 of equity. Like the “wild card” exemption, if you are married and filing together, each individual gets a $15,000 exemption.

There are other exemptions in Delaware ranging from the important (pensions & retirement) to the obscure (church pews & pianos), so it is best to consult with a Delaware bankruptcy attorney on these matters. Also, there’s a residency requirement to be eligible for these for Delaware exemptions, so if you haven’t lived in Delaware continuously for the past two years, talk to a Delaware bankruptcy attorney to know your rights.