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Debt Limits Reset for Filing Chapter 13

As of April 1, you can owe more debt and still qualify for Chapter 13.

You may not have heard that if you owe too much to your creditors, you cannot file a Chapter 13 “adjustment of debts” case. Part of the reason you may not have heard about this is because the debt limits are high enough that that they don’t affect most people. By reading this blog you should be able to tell whether this is going to be an issue for you or not.

What’s the Point of Having Debt Limits?

You may have heard that Chapter 7 “straight bankruptcy” tends to be more appropriate for simpler cases while Chapter 13 is for more complex cases. But Chapter 7 has no debt limit, so why should Chapter 13? That may seem backwards.

A little bit of historical context helps make sense of this. There was a huge overhaul of bankruptcy law in the late 1970s which, among other things, created the modern Chapter 13 option. Here’s what Congress said at the time about it:

“[Chapter 13] represents a significant departure from current law. The change might have been too great, however, without some limitation. Thus, the debtor (or the debtor and spouse) must have unsecured debts that aggregate less than $100,000, and secured debts that aggregate less than $500,000 [actually compromised down to $350,000 in the law as passed]. These figures will permit the small sole proprietor, for whom a chapter 11 reorganization is too cumbersome a procedure, to proceed under chapter 13.”

So Congress had come up with Chapter 13 as a relatively streamlined procedure—especially compared to the definitely “cumbersome” Chapter 11 reorganization—to be used by individuals and married couples with somewhat more complicated circumstances, such as small business owners. But Congress felt the need to avoid the use of Chapter 13 for truly complex situations. Its practical but imperfect means of doing this was by imposing limits on the amount of debt a debtor could owe.

The Debt Limit Amounts

The original law’s debt limits of $100,000 and $350,000 did not change for about 15 years. Then in 1994 these were amended to $250,000 and $750,000 respectively, with an automatic inflation adjustment for every 3 years thereafter. The most recent one kicked in as of this April 1. So currently, an individual filing a Chapter 13 case, or a married couple doing so together, must have less than $383,175 in total unsecured debts and ALSO less than $1,149,525 in secured debts.

“Noncontingent, Liquidated Debts”?

But the law doesn’t just talk simply about “unsecured debts” and “secured debts”—it had to be more precise. So the statute actually says that you “may be a debtor under Chapter 13” only if you owe, “on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525.” (Section 109(e) of the Bankruptcy Code, with the appropriate new amounts inserted).

The point of “non-contingent, liquidated,” to be simplistic about it, is to include only genuine debts for purposes of these limits.

“Noncontingent” means that you owe the debt now, not based only on some possible future event. An example of a contingent debt would include one that you do not currently owe in the eyes of the law, but could end up owing later if the person who now owes it does not pay.

“Liquidated” means that you owe a specific and determinable amount. An unliquidated debt would include a lawsuit against you for unspecified and not easily calculable damages. A liquidated debt would be a lawsuit where the alleged debt amount can be easily determined, such as on a straightforward money debt. Just because a claim or debt is disputed does not mean that it’s not liquidated.

Caution

Most of the time, these Chapter 13 debt limits will either totally not be a problem or you will clearly be over either the secured and unsecured debt limit. (It only takes being over one of them to be disqualified.)

If you’re clearly over, see the next blog about the possible solution that is informally called “Chapter 20.” Also, if you have that much debt, you should definitely be talking with an attorney, likely about a number of issues beyond this one about qualifying for Chapter 13.

Be careful if you are anywhere close to the debt limits because you may be over and not know it. Sometimes the meaning of “noncontingent, liquidated” is not clear, making a debt that you think does not count for these purposes, actually count. A personally guaranteed business debt, or a surrendered lease on a business premises, can cause this problem. Sometimes a debt that you assumed was in the “secured” column may actually be considered unsecured, such as a “voidable” judgment lien on your home or a second mortgage that is completely “under water.” These can unexpectedly put you over the unsecured debt limit. Again, these are questions to address with your attorney, presumably early in your initial meeting.

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MORTGAGE DEBT FORGIVENESS ACT

There is considerable confusion about the Mortgage Debt Forgiveness Act. I hear this from potential clients all the time, who hear it primarily from realtors who are doing short sales and telling them “don’t worry about the excess, the Mortgage Debt Forgicemenss Act means you don’t have any exposure”. NOT TRUE. The Mortgage Debt Forgiveness Act does not impact exposure for deficiency, and does not forgive any debt – its impact is only as to the tax consequences IF the creditor forgives any of the debt. Normally, to the extent this debt is forgiven, it is TAXABLE AS INCOME. The Mortgage Debt Forgiveness Act suspends the operation of the Tax Code provisions, as to qualified personal residences, but for a limited time due to sunset at the end of this year. Unless the deadline is extended, once it passes, any principal that is forgiven is again taxable as income, UNLESS the borrower is insolvent or the debt is discharged in bankruptcy or the loan is a non-recourse loan.

See http://www.irs.gov/individuals/article/0,,id=179414,00.html for details.

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FTC Shuts Down Forensic Audit Scam that claims: 95% of mortgages may be legally unenforceable.

Forensic Mortgage Loan Audit Scams: A New Twist on Foreclosure Rescue Fraud

At the request of the Federal Trade Commission, a U.S. district court has halted an operation that allegedly preyed on financially vulnerable homeowners, convincing them to pay $1,995 or more by holding out bogus promises that they could help them avoid foreclosure and renegotiate their mortgages.

The order issued by the court stops the allegedly illegal conduct, freezes the operation’s assets, and appoints a receiver to run the business while the FTC moves forward with the case.

According to the FTC complaint, the defendants behind the operation claimed on their website that…

“up to 95% of mortgages may be legally unenforceable due to defects like lost documents, improper notices, appraisal and/or predatory lending.”

Using this claim, several defendants, including Consumer Advocates Group Experts, LLC, virtually guaranteed that they could get mortgage modifications with reduced interest rates and lower monthly mortgage payments for consumers. The defendants offered to review consumers’ mortgage loan documents to determine whether their lenders complied with state and federal mortgage lending laws, and made allegedly false claims that the consumers could use the resulting “forensic audits” to avoid foreclosure and negotiate more favorable terms on their mortgages.

The complaint charges the defendants with violating the FTC Act and the Mortgage Assistance Relief Services Rule, known as the MARS Rule, by deceptively telling consumers that they could renegotiate mortgages, making payments substantially more affordable; that they could use the “forensic audits” to negotiate with lenders; and that if they failed to do these things, they would provide a refund.

The complaint also charges the defendants with other MARS Rule violations, including collecting fees for mortgage foreclosure rescue and loan modification services before homeowners accept a written offer from their lender or servicer, and failing to make required disclosures.

According to the FTC, the Los Angeles, California-based Consumer Advocates Group Experts, LLC, company owner Ryan Zimmerman, and several other companies he controlled charged from $1,995 to $2,590 for the “forensic audits,” assuring consumers in ads on their website www.consumer-advocates-group.com that, “After our examinations, lenders suddenly get religion and become much more cooperative in renegotiating.”

“An audit by San Francisco county officials of about 400 recent foreclosures there determined that almost all involved either legal violations or suspicious documentation.”

Commissioned by Phil Ting, the San Francisco assessor-recorder, the report examined files of properties subject to foreclosure sales in the county from January 2009 to November 2011. About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities.”

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A.G. SCHNEIDERMAN SECURES $136 MILLION FOR STRUGGLING NEW YORK HOMEOWNERS IN MORTGAGE SERVICING SETTLEMENT

A.G. SCHNEIDERMAN SECURES $136 MILLION FOR STRUGGLING NEW YORK HOMEOWNERS IN MORTGAGE SERVICING SETTLEMENT After Schneiderman’s Persistence, Narrow Settlement Preserves Sweeping Legal Claims For Housing Crisis Misconduct That Has Not Yet Been Investigated

New York To Receive More Per Underwater Borrower Than Any Other State, Plus Loan Modifications, Principal Reductions

Schneiderman: Civil & Criminal Investigations Will Continue As We Seek Accountability For Those Responsible For Crisis And Leverage Greater Relief For Homeowners

NEW YORK – Winning his long, persistent demand that a wide array of sweeping civil and criminal claims not be released without investigation, Attorney General Eric T. Schneiderman announced today a $136 million settlement for New York with the nation’s five largest mortgage servicers over foreclosure abuses, the most per “underwater” borrower of any state in the nation, and the fourth highest dollar amount nationwide as part of the federal-state settlement. In addition to penalties for past abuses, the settlement includes direct relief to victims of wrongful foreclosure conduct, loan modifications including principal reductions for struggling homeowners, and funds that can be used to support foreclosure legal assistance and housing counseling programs. Today’s settlement, which also imposes strong national standards for mortgage servicing, fulfills Attorney General Schneiderman’s demand that he retain the right to bring legal action over misconduct that has not yet been investigated, a right that was absent from earlier settlement proposals.

“Thanks to the advocacy and support of Americans across the country, we have preserved the right to continue investigating the misconduct that led to the bubble and crash of the housing market. For a year, the proposed settlement was simply inadequate, and I applaud all those who fought with us to hold banks accountable for their role in the foreclosure crisis, provide meaningful relief to New York’s struggling homeowners, and allow a full airing of the facts to ensure that abuses of this scale never happen again,” said Attorney General Schneiderman.
“On multiple fronts, we will continue to investigate the mortgage crisis that has impacted communities in every corner of this state, and ensure that justice and accountability prevail.”

Over the past year, Attorney General Schneiderman fought for a fair national settlement, on behalf of New York’s homeowners, for mortgage servicing abuses, making it clear that he would not sign an agreement that would give financial institutions broad legal immunity for conduct that had not been investigated. Until recently, the language in settlement proposals had been too broad to justify reaching an agreement. Today’s settlement is a vast improvement, and it will allow the Office of the Attorney General and other agencies to investigate and bring appropriate civil and criminal actions.

New York’s estimated share of the guaranteed cash payments in the settlement is $136 million, the fourth highest in the nation. New York will be able to distribute these funds to legal aid, homeowner assistance and advocacy organizations to help distressed individuals facing foreclosure or servicer abuse.
Among the critical legal claims Attorney General Schneiderman fought for, and successfully preserved in today’s settlement are:

All criminal claims.
All claims based on mortgage securitization misconduct, under securities fraud statutes, including New York’s Martin Act, and other sources of law. This includes securitization claims based on servicing, foreclosure or origination-related facts.
All claims directly against the private national mortgage electronic registry system known as MERS, as well as claims against financial institutions for the use of MERS in the Attorney General’s recently filed lawsuit over a wide range of deceptive and fraudulent practices in New York.
All claims for violations of fair lending lawsthat relate to discriminatory practices in loan origination.
All tax claims, including any claim that the failure to transfer mortgage loans to the securitization trusts or other conduct violated tax rules.
All claims by counties for lost mortgage recording fees; and All claims and defenses held by private and third parties, including those held by individual mortgage loan borrowers.
Mark Ladov, Counsel for the Brennan Center’s Democracy Program said, “Homeowners in every corner of state have been hit hard by the mortgage crisis. We must do everything we can to prevent this kind of economic catastrophe from happening again, and to assist the families and communities hit hardest. We applaud the leadership of Attorney General Schneiderman in ensuring that today’s settlement provides much-needed funding for foreclosure prevention services, a great deal for the people of this state. This settlement is a landmark, but much work remains to be done. Fortunately, Attorney General Schneiderman has preserved our state’s right to investigate the mortgage meltdown, and we will work with him to deliver justice for the people of New York.”

Kirsten E. Keefe, Senior Attorney, Empire Justice Center, said, “We applaud Attorney General Schneiderman’s work towards a meaningful agreement that promises to provide desperately needed relief to New York’s homeowners, as well as hold the industry accountable. We truly appreciate the Attorney General’s recognition of the importance and need for direct services for struggling homeowners, and the critical role legal services and housing counselors play in keeping homeowners in their homes. We look forward to working with Attorney General Schneiderman to ensure that servicers do the right thing and provide meaningful loan modifications to stabilize New York’s housing market and economy.”

Sarah Ludwig, Co-Director of the Neighborhood Economic Development Advocacy Project said, “Thousands of New York families and communities are still suffering from the fallout of the foreclosure crisis, and the settlement charts out critical relief. We thank Attorney General Schneiderman for insisting on transparency and accountability in the process of forging a multi-state settlement. We look forward to working with the Attorney General to make sure that the settlement is effectively implemented and enforced in New York, and to ensuring that individual homeowners’ rights are vigorously protected.”

Christie Peale, Executive Director of the Center for NYC Neighborhoods, said, “New Yorkers have been fortunate to have strong leadership fighting for a fair resolution to the economic crisis. We applaud Attorney General Schneiderman for his continued commitment to justice and accountability. This settlement, along with the state’s ongoing investigation into the mortgage crisis will bring both immediate and long-term relief to homeowners at risk of losing their homes.”

Today’s settlement preserves the legal authority of the Schneiderman-led Residential Mortgage-Backed Securities Working Group announced by President Obama in the State of the Union address. This joint investigation brings together the Department of Justice (DOJ), several state law enforcement officials, and other federal agencies to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities. It builds upon ongoing state and federal investigations, while also launching new ones.

The new working group includes hundreds of staff, including an initial commitment of 55 Department of Justice attorneys, in addition to analysts, agents and investigators. As it begins its work, 15 federal prosecutors – civil and criminal – and 10 FBI agents and analysts will be initially assigned to the working group. An additional 30 attorneys, investigators and other staff from U.S. Attorneys’ Offices around the country will join the working group’s efforts, in addition to existing state and federal investigations into similar misconduct under those authorities.

Attorney General Schneiderman has made it a top priority of his administration to hold accountable those whose misconduct led to the collapse of the housing market– and to provide significant relief to homeowners. In the State of New York, an average of 1 in 10 mortgages is at risk of foreclosure. The approximate number of individuals living in homes that are either in foreclosure or at risk of foreclosure (based on typical household size for each distressed mortgage) exceeds the populations of Buffalo, Rochester, and Syracuse combined.

The below figures for New York homeowners are estimates of the U.S. Department of Housing and Urban Development. The specific amounts are dependent on eligibility requirements and are not guaranteed.

Payments to victims of wrongful foreclosure:              $13 million estimated Benefits estimated from refinance program:                $140 million estimated Homeowners’ benefits from loan modifications:         $495 million estimated

Because of the complexity of the mortgage market and this agreement, which will be performed over a three-year period, borrowers will not immediately know if they are eligible for relief. It will take between 30-60 days to appoint a settlement administrator, and banks will be conducting a vigorous search to identify eligible borrowers and this may take several months.

For loan modifications and refinance options, borrowers may be contacted directly by one of the five participating mortgage servicers.
For payments to foreclosure victims, a settlement administrator designated by the attorneys general will send claim forms to eligible persons (You may be eligible if you were foreclosed on between January 1, 2008 and Dec. 31, 2012) Even if you are not contacted, if your loan is serviced by one of the five settling banks, you are encouraged to contact your servicer to see if you are eligible—keeping in mind that it will take anywhere from six to nine months to be contacted.

Bank of America: 877-488-7814
Citi: 866-272-4749
Chase: 866-372-6901
GMAC: 800-766-4622
Wells Fargo: 1-800-288-3212

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