Is the Chapter 13 Mortgage Cramdown Bill Going to Be Enacted, and If So When?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

The Chapter 13 mortgage cramdown amendment will likely occur, but not as quickly as some had predicted, and almost certainly with a number of changes limiting its scope.

The Cramdown Bill is NOT Going to Be Part of the Economic Stimulus Package

• Why is this important?: That would have expedited its passage & likely improved its chances.
  
• Reason: Tactical decision by Obama and Democratic leadership to reduce Republican resistence to the stimulus.
• Specific goal: Avoid filibuster of stimulus bill in Senate, where it needs 60 votes & so requires at least some Republican support.
• Good decision?: House passed stimulus bill on Tuesday 1/27 without a single Republican vote, even after aggressive lobbying by Obama, including a visit to Capitol Hill and meetings with key Republicans.
• House Democratic leadership comments:

Senator Dick Durbin, sponsor of S. 61, said Obama persuaded him in a White House meeting Friday, 1/23, to remove the bankruptcy bill from the economic recovery package, but that Obama pledged his support for the bankruptcy proposal and would work with Durbin to attach it to other "must pass" legislation.

Speaker Nancy Pelosi: "We have a lot of work to do, and, as has been indicated, we have a deadline and a sense of urgency that we need to get the job-creation part of this [stimulus] done. We will have other legislation, or a free-standing bill, but we will get it [the Chapter 13 cramdown bill] done.”

House Majority Leader Steny Hoyer: "“I think [the bankruptcy bill] would probably hold things up in the Senate. President Obama, as you know, said he is for doing this but would prefer not to do this in the package because this package is so critical to get this done.”

Progress on the Bills (S. 61, H.R. 200 & H.R.225)

Senate: No legislative action since it was introduced on 1/06/09 and referred to the Judiciary Committee. But there was the dramatic news conference on 1/08 by the Senate leadership about getting Citigroup's support in return for concessions. See my recent Bulletin: Chapter 13 Mortgage Cramdown Bill Now Expected to Pass Within Weeks, May Be Attached to Stimulus Package: Citigroup Withdraws Opposition

House: After a 1/22 hearing by the Judiciary Committee on both H.R. 200 and H.R. 225, on 1/27 H.R. 200 was voted out of committee to the full House by a vote of 21 to 15, after some amendments were rejected, some adopted. Could not find if a date has been set for a vote by the full House.

The Amendments to H.R. 200:

• Rejected: several Republican amendments to limit the scope of the bill, such as to subprime mortgages only.
• Adopted: 1) A Republican-introduced amendment to exclude debtors who committed mortgage fraud; 2) FHA,VA & Dept. of Agriculture guaranteed or insured mortgages are EXEMPTED from cramdown; 3) any post-petition increases in home value would be shared with the mortgage lenders (decreasing with from 80% to 20% from the 1st to the 4th year of the plan) if the home is sold before the Chapter 13 discharge; and 4) a requirement that the debtor attempts to contact the mortgage holder or servicer at least 15 days before filing the Chapter 13 case, unless a foreclosure is scheduled within 30 days after filing, or for cases filed before the law's effective date the debtor attempts the contact before filing the plan or modified plan. Here is the bill with most of these changes, dated the evening of 1/26 (just BEFORE the hearing).

Please see my earlier Bulletins on the rest of the terms of the original bill, with the amendments informally agreed with Citigroup: The Essential Terms of the New--And Now Suddenly More Likely to Pass--Chapter 13 Mortgage Cramdown Bill and Crucial But Less Publicized Terms of the 2009 Chapter 13 Mortgage Cramdown Bill.


The Biggest Challenge for Enactment: Defeating Potential Filibuster

• 60 votes are needed to break a Senate filibuster. Democrats have 56 Senators, plus two independents who caucus with them, plus potentially the yet-unresolved Minnesota seat.
• Note: The sponsoring Senator of S. 61 along with its 7 cosponsoring Senators, and the sponsoring Representative of H.R. 200 along with its 16 co-sponsoring Representatives, and the sponsoring Representative of H.R. 225 along with its 39 co-sponsors--every one of them--are ALL Democrats.
• Besides winning over at least a few Republicans, it also needs full Democratic support: Last year 10 Democrats did NOT back a similar but narrower bill. All 10 of these are still in the Senate.
• The economic and political world has changed tremendously since then, but has it changed enough?

The Bottom Line

According to the Washington Post article cited below: "Banking executives privately acknowledge that some type of legislation is likely to pass and are arguing that its scope should be limited."

Worthwhile Articles, Papers

Written testimony by Adam Levitin, Associate Professor of Law at Georgetown University Law Center, before the House Judiciary Committee hearing on H.R. 200 and H.R. 225, on January 22, 2009. By far THE very best argument I have seen anywhere in support of Chapter 13 mortgage cramdowns; very thorough, with a wealth of supportive research and accessible references, systematically explains the fallacies in the arguments against Chapter 13 cramdowns, excellently written, a masterful paper well worth the time for anybody interested in the many public policy issues involved.

Written testimony by Christopher Mayer, Senior Vice-Dean of Columbia Business School, at the same hearing as above. Strongly opposes the bills and presents three very intriguing alternative plans to combat the mortgage disaster. In my opinion Prof. Levitin's much more detailed paper squarely, and generally successfully, addresses each of Vice-Dean Mayer's concerns about the bills, but the programs he advocates do grapple with some of the key problems with voluntary modifications, and in some form may well be helpful, in conjunction with the Chapter 13 amendments, His programs focus on the lack of financial incentives for mortgage servicers to negotiate modification, the huge problem of second and third lien holders, and spurring the depressed housing market through lower mortgage interest rates.

An excellent blog story on this House Judiciary Committee hearing on 1/22 at which these two above testified, on the Bankruptcy Prof Blog.

One of the better mainstream press articles on the House Judiciary Committee Hearing of last Tues., 1/27, from the Washington Post: Key House Panel Backs Measure Allowing Judges to Modify Mortgages.

And for the math-inclined, a Los Angeles bankruptcy attorney's amazing less-than-1-page "H.R.200 in Algebraic Form"!

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

BAPCPA Significantly Contributed to the Mortgage Crisis, According to Federal Reserve Bank of New York Staff Report

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) substantially "contributed to the surge in subprime foreclosures by shifting risk from credit card lenders to mortgage lenders." That is the conclusion of a Federal Reserve Bank of New York Staff Report called Seismic Effects of the Bankruptcy Reform presented in November (and revised in early March 2009).

BAPCPA significantly increased foreclosures in two ways. First, the means test shifted some bankruptcy filers from Chapter 7 to Chapter 13, overall shifting debtors' post-petition cash flow from mortgage payments to unsecured creditors. Second, the prohibition against cramdowns on vehicles financed less than 910 days before bankruptcy filing made vehicle loans more secure and thus limited funds available for mortgage payments.

Plausibility of the Hypothesis
The authors start with the observation that "the surge in subprime foreclosures that has rocked financial markets came right after the bankruptcy reform in 2005." While acknowledging many other factors in the foreclosure fiasco, they argue that it made perfect sense that "the first overhaul of U.S. personal bankruptcy law in over a quarter century, [one which] made filing bankruptcy much less protective and much more expensive" would have the effect of protecting some classes of creditors while harming others.

The Circumstantial Statistics
The Report presents statistics showing that BAPCPA reduced overall bankruptcy rates, which "under either Chapter [7 or 13] remain lower than one would predict given economic and housing market conditions," and that the ratio of Chapter 7's to 13's has fallen, reflecting a lower relative demand for filing Chapter 7.

Very importantly, BAPCPA "appears to have reversed the historical relationship between
bankruptcy filings, on the one hand, and the relative performance of mortgages and credit loans, on the other." "Relative mortgage performance used to improve when filings increased, consistent with the argument that filers were better positioned to make the mortgage once their credit card and other unsecured debt was discharged, but not so since [BAPCPA]." Indeed, in the years since the amendment, large credit card lenders have had substantial profits while mortgage lenders and those holding mortgage-backed securities have had huge losses and many business failure. (See Harvard Law School Fellow Michael Simkovic's paper, The Effect of 2005 Bankruptcy Reforms on Credit Card Industry Profits and Prices.) Indeed, the former have been buying up the latter, such as Bank of America's purchase of Countrywide and JP Morgan Chase's takeover of Washington Mutual.

From Circumstantial Evidence to Proof of BAPCPA's Effect
Acknowledging that the above statistics could be just coincidental, not necessarily reflecting changes caused by BAPCPA's amendments, the Report creatively found a way to determine causation and even to begin quantifying BAPCPA's adverse effect. The authors used differences in states' property exemption statutes as a means to show that BAPCPA was more likely to induce bankruptcy filers to file Chapter 7 in high home exemption states than in low exemption states. "Intuitively, home owners in low exemption states were less likely to demand Ch. 7, so limiting access is less likely to matter there."

Using mathematical modeling and statistical analysis the Report found the impact of BAPCPA to be significant: "smaller, but of the same order" as that of changes in house value. It roughly predicted an additional 32,000 more subprime foreclosures per quarter nationally as a result of BAPCPA.

Disclaimer
The Report contained this disclaimer, noteworthy because the involvement of the Federal Reserve:

"This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors."

Another Finger Pointing at BAPCPA
As a pertinent aside, in early November I reported on this website about another totally different adverse effect of BAPCPA in my Bulletin titled: At the Extreme of BAPCPA's Unintended Consequences: Did Arcane Provisions of BAPCPA Contribute to the Bear Stearns, Lehman Bros. & AIG Collapses? This Bulletin was based on an article reported in The Financial Times of London, and its primary thesis is summarized in this excerpt from the Bulletin:

By newly exempting credit default swaps and mortgage repurchase agreements from the automatic stay, instruments which Bear Sterns and Lehman Brothers used extensively, creditors of these institutions--such as hedge funds and other financial institutions--no longer had the disincentive that the institutions could file bankruptcy and freeze their transactions and their collateral if they were pushed too hard. These creditors, instead of being normally cautious about settling trades and about forcing these institutions to put up more collateral, became aggressive along these very same lines, which greatly accelerated the credit and liquidity squeeze that led to these institutions' demise.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Disability Insurance Benefits Are Included in "Current Monthly Income" Under the Means Test for Determining Presumption of Abuse

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



Blausey v. US Trustee
Ninth Circuit Court of Appeals Case No. 07-15955
January 23, 2009

The Holding

The Ninth Circuit held that disability insurance benefit payments ARE included in Chapter 7 debtors' current monthly income ("CMI") under the means test in determining whether there is a presumption of abuse. This was an issue of first impression among the circuit courts, including the broader question of whether CMI is defined by reference to the Internal Revenue Code. In a split opinion, this three-judge panel upheld the bankruptcy court's dismissal of debtors' Chapter 7 case under § 707(b)(2), holding that, although the Internal Revenue Code explicitly excludes from "gross income" "amounts received through accident or health insurance . . . for personal injuries or sickness," the plain language of the Bankruptcy Code mandates that disability payments be included in CMI.

Statutory Context

As summarized nicely by the court:

Section 707(b)(2) provides a means test by which bankruptcy courts determine whether a case is presumed to be an abuse of Chapter 7. If the case is presumed abusive, it will be dismissed unless the debtor shows “special circumstances” rebutting the presumption. 11 U.S.C. § 707(b)(2)(B)(I). If the presumption does not arise, the bankruptcy court may still find abuse under § 707(b)(3) based on the totality of the circumstances.

The focus here was on whether there was presumptive abuse as determined by the means test, specifically whether or not the "current monthly income" (CMI) component of the means test includes the disability payments. If these disability payments are included in CMI in this case, that led to a presumption of abuse; without those payments being included, the calculations under § 707(b)(2) would have led to no presumption of abuse.

Since the Ninth Circuit panel determined that the disability payments were included in CMI and thus that a presumption of abuse existed, it did not need to address the totality of circumstances issue under § 707(b)(3).

The Code provides a two-part definition of CMI, under § 101(10A)(A) and (B). The term:

(A) means the average monthly income from all sources that the debtor receives . . . without regard to whether such income is taxable income . . . ; and

B) includes any amount paid by any entity other than the debtor . . . on a regular basis for the household expenses of the debtor or the debtor’s dependents . . . , but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism . . . or domestic terrorism . . . on account of their status as victims of such terrorism.

The Rationale

• The Internal Revenue Code's definition of gross income is not applicable because the Bankruptcy Code's definition of CMI at § 101(10A)(A) explicitly states that its meaning is "without regard to whether such income is taxable income," which "reflects Congress’ judgment that the Internal Revenue Code’s method of determining taxable income does not apply to the Bankruptcy Code’s calculation of CMI."
• "[W]here Congress wishes to define a term in the Bankruptcy code by reference to the Internal Revenue Code, it clearly knows how to do so."
• "[T]he statute makes several specific exclusions from CMI but does not specifically exclude private disability insurance benefits. This indicates that Congress meant for the benefits to be included in CMI."
• Standard definitions of income which base it on being derived from labor are not persuasive because "the purpose of the disability insurance plan is to replace the income that Mrs. Blausey lost due to her disability.".
• According to the legislative history, the purpose of the means test is promoted by the inclusion of disability benefits in the CMI, that purpose being to "help the courts determine who can and who cannot repay their debts and, perhaps most importantly, how much they can afford to pay."

The bottom line: "Congress’s determination that a certain type of income should not be taxed does not reflect a determination that the income is not available to repay debts."

The Dissent and the Jurisdictional Issue

The dissenting judge indicated that he "admire[d] and agree[d] with the court's thoughtful treatment of the merits of this case." So the panel was unanimous on the substantive issue discussed above. The dissent simply believed that the Ninth Circuit did not have jurisdiction to hear the appeal. Indeed of the 14 pages of discussion in the opinion and dissent, only five pages addressed the merits of the case. In any event the holding on the merits will stand for a long time, since the case will not be appealed to the Supreme Court on these jurisdictional grounds because the U.S. Trustee had raised the jurisdictional issue but then won on the merits and so has no reason to appeal.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Mortgage Modification Programs Are Failing Because Mortgage Servicers Are Not Paid to Have Them Succeed

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Following up on the Bankruptcy Bulletin on this website of January 7 entitled Mortgage Modification Programs Have Been Ineffective. Why?, in that Bulletin I referred to "one of the most important and least recognized reasons for so few modifications" being that "the incentive structure for mortgage servicers in most cases greatly favors foreclosures over modifications." This Bulletin explores this incentive structure and how it is stymieing mortgage modifications.

The Role of Mortgage Servicers
As succinctly stated in an article by Katherine Porter, associate professor at the University of Iowa law school (and former associate at Stoel Rives LLP in Portland, Oregon):

The communication problems in today's securitized mortgage market are very different than during past real estate downturns, such as the Midwest farm crisis of the 1980s or the wave of foreclosures in the 1930s. Why? Because of the widespread use of mortgage servicers, third-party agents who collect payments from borrowers and remit them to the mortgage note holders (usually investors, often via a trust). Mortgage servicers are responsible for enforcing defaults, including pursuing foreclosures, and for engaging in loss mitigation. Gone are the days of sitting down with the bank that originated your loan and negotiating a new deal. . . . . I am concerned that policymakers, including legislators, judges, and regulators still do not understand the barrier that loan servicing presents to voluntary or consensual loan modification.

How Servicers Are Paid
An excellent article on the nefarious role of mortgage servicers, The 800 Pound Gorrilla in the Room: Servicers Profit While Investors Face Losses, outlines their general fee arrangement:

When loans are performing servicers generate most of their income through flat servicing fees based on the unpaid principal balance of the loans. When loans become delinquent, the lack of cash flow causes fees to be deferred until a cash-generating resolution occurs, but the opportunity to increase the fees grows more than enough to compensate for the delay. Such sources of ancillary revenue include penalty fees for late payments, “foreclosure fees and costs, insufficient funds charges, property inspection fees, broker price opinions or appraisals, corporate advances, post-petition fees and suspense funds.” . . . . These fees all flow to the servicer, not the investor.[Citations excluded.]

(See also Katie Porter's two excellent postings last May in Credit Slips on a Senate Judiciary Committee's subcommittee hearing on mortgage servicing at which she testified, where she refers to the testimony of Countrywide's executive for loan administration on how servicers generate income.)

Resulting Conflict of Interest Between Servicers and Investors
Since the servicer's fees are paid before investors, the above "Servicers Profit While Investors Face Losses" article also argues:

Increased fee rates on defaulted loans along with the certainty of receiving them encourages the servicer to lengthen the duration of default status, further reducing the value of the mortgage pool to the investor. Additionally, in a market of declining home equity, investors face greater likelihood of a loss of principal when servicers aggressively charge ancillary fees.

[Citations excluded.]

The Accepted Benefits of Mortgage Modifications With Principal Reduction
In a detailed but highly understandable speech by Fed Chair Ben Bernanke in March 2008 titled Reducing Preventable Mortgage Foreclosures, he strongly acknowledged (albeit in his necessarily understated tone) the great need for mortgage servicers and investors to modify mortgages through principle reductions, not just fiddling with the interest rate or term of the mortgage:

Loan modifications, which involve any permanent change to the terms of the mortgage contract, may be preferred when the borrower cannot cope with the higher payments associated with a repayment plan. In such cases, the monthly payment is reduced through a lower interest rate, an extension of the maturity of the loan, or a write-down of the principal balance.
. . . .
To date, permanent modifications that have occurred have typically involved a reduction in the interest rate, while reductions of principal balance have been quite rare. The preference by servicers for interest rate reductions could reflect familiarity with that technique, based on past episodes when most borrowers' problems could be solved that way. But the current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions. With low or negative equity, as I have mentioned, a stressed borrower has less ability (because there is no home equity to tap) and less financial incentive to try to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.

The Lack of Principal Reductions in the Voluntary Modification Programs
Notwithstanding the clear need for principal reductions, an empirical study of voluntary mortgage modification programs by Valparaiso University Law School professor Alan White, updated through November 2008, found that principal loan balances were reduced in less than 10 percent of modifications. Even monthly payments were reduced in only about 35% of the modifications. Indeed, more than half of the modifications actually increased the total amount of mortgage debt by capitalizing the unpaid contractual interest and fees onto the tail end of the mortgage, and 45% even increased the monthly payments. As a NACBA (the National Association of Consumer Bankruptcy Attorneys) press release last month quoted Professor White:

While banks have written down more than half a trillion in mortgages and mortgage-related securities, homeowners have gotten little or no relief. A broad range of economists from Nouriel Roubini to Ben Bernanke to Martin Feldstein have recognized the need to deleverage the American homeowner. The excess mortgage debt is depressing home prices and consumer spending, and acting as a drag on the broader economy. Empirical evidence from mortgage servicer reports to investors shows that for the most part, the necessary deleveraging of homeowners is not happening.

The Economic Disincentives for Servicers to Modify Mortgages
In the speech quoted above, Fed Reserve Chair Bernanke also acknowledged the disincentives for servicers to engage in modifications (which he here also calls "workouts"):

Unfortunately, even though workouts may often be the best economic alternative, mortgage securitization and the constraints faced by servicers may make such workouts less likely. . . .. Thus, servicers may not pursue workout options that are in the collective interests of investors and borrowers. Some progress has been made (for example, through clarification of accounting rules) in reducing the disincentive for servicers to undertake economically sensible workouts. However, the barriers to, and disincentives for, workouts by servicers remain serious problems that need to be part of current discussions about how to reduce preventable foreclosures.

Bernanke reemphasized this theme in a speech just a few weeks ago:

[D]espite the substantial costs imposed by foreclosure, anecdotal evidence suggests that some foreclosures are continuing to occur even in cases in which the narrow economic interests of the lender would appear to be better served through modification of the mortgage. This apparent market failure owes in part to the widespread practice of securitizing mortgages, which typically results in their being put into the hands of third-party servicers rather than those of a single owner or lender. The rules under which servicers operate do not always provide them with clear guidance or the appropriate incentives to undertake economically sensible modifications.

As more pointed stated by the author of the article above bylined "Servicers Profit While Investors Face Losses" (with extensive footnotes excluded):

Ancillary fees, which are profit centers for servicers, result in significant losses to investors. The servicer is ensured collection of the fees and costs as they are received prior to the investor getting any proceeds. Any deficiencies are covered from the securitized pool. Increased fee rates on defaulted loans along with the certainty of receiving them encourages the servicer to lengthen the duration of default status, further reducing the value of the mortgage pool to the investor. Additionally, in a market of declining home equity, investors face greater likelihood of a loss of principal when servicers aggressively charge ancillary fees.
. . . .
Not only do servicers have incentives to use strategies which are detrimental to investors, but the means to act with limited impunity. Lack of investor, borrower and regulatory oversight and informational asymmetry between the investor and servicer ensures servicers will act on their self interests. Additionally, the consolidation of the mortgage service industry leaves investors with few alternatives to their current servicers.

The Solution?
This is a problem that has been recognized and directly addressed in the past with proposed legislation that has gone nowhere. For example, HR 5679 last year, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, would have required mortgagees and servicers to participate in "reasonable loss mitigation activities," a carefully defined term, before being able to start the foreclosure process. The bill also sought to address homeowners' challenges in communicating with the servicer about modification by commonsensically requiring servicers to provide a toll-free telephone number with which homeowners could reach a person at the servicer, within the U.S., with the necessary information and authority to deal with loss mitigation, and thus presumably with modifications. This bill never passed out of committee.

The multi-billion dollar question now is whether the Chapter 13 mortgage modification bill currently charging through Congress is about to be part of the attempted solution to this so-far intractable problem.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Judge Brown Affirms Chapter 13 Trustee's Ability and Obligation to File Modified Plan After Increase in Debtors' Income

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


In re Midgley
Bankruptcy Court for the District of Oregon Case No. 05-30162
January 6, 2009
Unpublished opinion of Judge Trish Brown

Although unpublished, this opinion provides an excellent overview of the trustee's and debtor's duties regarding plan modifications in the context of debtors' income increases. Perhaps one of the reasons this opinion was not published is that it applies the pre-BAPCPA Bankruptcy Code and so will not be relevant for long, but there are still many pre-BAPCPA Chapter 13 cases pending. Indeed since they are all at least three years old, there is more likelihood that there have been changes in income in the interim, making this opinion still highly worthwhile. Also, although the case involved an increase in debtor income, some aspects of Judge Brown's opinion also apply to reductions in income.

The Eye-Catching Facts
In this Chapter 13 case filed in January 2005, debtors' gross annual income was disclosed to be $114,408, and the plan was confirmed with payments of $455 per month for 36 months. In fact the debtors' gross income for 2005 was $150,781 and for 2006 was $154,301, so as Judge Brown pointed out, "in the first two years of the plan the Debtors' income was $76,366 more than shown on Schedule I." The Order Confirming Plan contained the standard language requiring debtors "to report immediately" gross income changes of more than 10%, and to "provide copies of all tax returns to the trustee each year immediately upon filing." The debtors did not timely provide the trustee with tax returns for those two years or inform the trustee by any other means that their income had increased. Instead only after the trustee made multiple requests for copies of the tax returns, he received both the 2005 and 2006 returns in March 2008 (close to the time the case was originally scheduled to be completed). The trustee filed a modified plan in June 2008 not changing the monthly plan payment but stating that "debtors shall pay not less than $19,500.00 to the Trustee for distribution through the plan after all obligations under the first 36 months have been satisfied.”

[Remainder of this Bulletin is being edited.]

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Crucial But Less Publicized Terms of the 2009 Chapter 13 Mortgage Cramdown Bill

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


This Bankruptcy Bulletin presents the provisions of Senate Bill 61, the Helping Families Save Their Homes in Bankruptcy Act of 2009, BEYOND the core cramdown language covered in yesterday's Bulletin. These both follow up on last Thursday's dramatic announcement of Citigroup's new support for this Chapter 13 mortgage cramdown bill, which itself was reported on in my Bulletin of last Friday. This bill would take effect on the date of enactment, applicable to bankruptcy cases filed on or after that date.

(Senate Bill. 61, and its companion bill in the House, H.R. 200, were introduced on the floor of the Senate and House a week ago today, on 1/06/09, but as of yesterday evening (1/12/09) the text of of the bills had not been received from the Government Printing Office by the Library of Congress, and no summary of the bills had yet been prepared. However the text of S. 61 was printed in the Congressional Record upon its introduction and so is accessible there.)

Major Increase in Jurisdictional Debt Limits in Chapter 13 Cases with Debts on Principal Residences
Senate Bill 61's amendment of Section 109(e) would significantly broaden Chapter 13 availability to debtors with relatively high debt (such as business and former business owners), whose "current value of [their principal] residence is less than the secured debt limit." That secured debt limit is currently $1,010,650. So, as long as a debtor's principal residence is worth less than that, the secured and unsecured debts "secured by" that residence are EXCLUDED from the "noncontingent, liquidated" secured and unsecured debt limitations (currently $1,010,650 for secured debt and $336,900 for unsecured). Even if PRE-PETITION that principal residence was lost by foreclosure or by surrendered to the creditor, any debts that remain would also be excluded from the debt limitations, again as long as the current value of that former principal residence is less than the secured debt limit. This provision would mitigate against the more and more common tendency of debtors being forced into Chapter 11 largely by the value of their residences. And because this residential mortgage cramdown option is NOT being extended to Chapter 11, this expansion of the jurisdictional limits would be critical for many potential debtors.

Pre-Petition Credit Counseling Not Required in Chapter 13's With Pending Foreclosure on Principal Residence
The bill would exclude from the Section 109(h)(1) BAPCPA's pre-petition credit counseling requirement any Chapter 13 debtor "who submits to the court a certification that the debtor has received notice that the of a claim secured by the debtor’s principal residence may commence a foreclosure on the debtor’s principal residence."

Consumer Protection Laws, Particularly Truth in Lending
The bill, as in last year's version, contains an addition to Section 502(b), which is a list of types of creditor claims which are either not allowed or else are allowed only to some designated extent. As introduced last week before the new agreement with Citigroup, the bill would allow a creditor's claim "except to the extent that---

(10) the claim is subject to any remedy for damages or rescission due to failure to comply with any applicable requirement under the Truth in Lending Act, or any other provision of applicable State or Federal consumer protection law that was in force when the noncompliance took place, notwithstanding the prior entry of a foreclosure judgment.

This provision was in effect agreed to be amended in the agreement with Citigroup. This agreement has to my knowledge not yet been incorporated into any publicly available amendment to the bill introduced last week. The only readily available source about that agreement is the letter from Citigroup's CEO to Congressional leaders of last Thursday announcing conditional support for the bill. It stated: "[P]rovisions in the bill allowing a bankruptcy judge to void a mortgage entirely for violation of consumer protection laws will be limited solely to those violations of the Truth in Lending Act (TILA) that give rise to right of resission under TILA." Media sources have interpreted this condition to mean, for example in a Wall Street Journal article:

a mortgage debt could be forgiven entirely only if the lender was found to have committed a major violation of the Truth in Lending Act. Under the bill's original language, the entire mortgage debt could be wiped away based on a violation of any number of state and federal consumer lending laws.

Post-Petition Fees of Mortgage Creditors
A section of the bill titled "Combating Excessive Fees," amends Section 1322(c) of the Bankruptcy Code--which refers to the contents of Chapter 13 plans and their treatment of claims secured by debtors' principal residences--by providing rules for adding a post-petition "fee, cost or charge" by "the holder of the claim for such a debt." This section is as extensive as any in the bill. It provides for WAIVER by the creditor of ANY post-petition fees that do not comply with the new noticing procedure, such waiver enforced explicitly through the automatic stay of Section 362(a) during the case and through the discharge injunction of Section 524(a)(2) after the discharge. Such waiver is "for all purposes," presumably meaning not just for purposes of the Chapter 13 case.

The creditor is required to file with the bankruptcy court notice of any additional "fee, cost, or charge" within one year after it is incurred or "60 days before the closing of the case," whichever is earlier, and is required to do so "annually or, in order to permit filing consistent with clause (ii) [regarding filing 60 days before case closing], at such more frequent periodicity as the court determines necessary." Those fees must be 1) "lawful under applicable nonbankruptcy law," 2) reasonable, and 3) "provided for in the applicable security agreement," and 4) "secured by property the value of which is greater than the amount of such claim, including such fee, cost, or charge."

Plan Confirmation
The bill adds the following two additional subsections to Section 1325(a), which is the list of the conditions upon which "the court shall confirm a plan":

(10) notwithstanding subclause (I) of paragraph (5)(B)(i) [about holders of secured claims retaining their liens until the payment of the debt or the discharge, whichever is EARLIER], the plan provides that the holder of a claim whose rights are modified pursuant to section 1322(b)(11) retain the lien until the LATER of—
(A) the payment of such holder’s allowed secured claim; or
(B) discharge under section 1328; and
(11) the plan modifies a claim in accordance with section 1322(b)(11), and the court finds that such modification is in good faith. [Capitalization added.]

This new subsection (10) provides for the holder of a claim secured by debtor's primary residence to retain their lien the later instead of the earlier of the two events: the secured debt payoff and the discharge. I do not understand why a mortgage whose secured portion is paid off during the course of a Chapter 13 case gets to keep their lien until discharge, when any other secured creditor loses their lien upon payoff it occurs before discharge.

And the "good faith" phrase in subsection (11) seems somewhat redundant since Section 1325(a)(e) already requires that a "plan has been proposed in good faith. . . ." Presumably the point is to emphasize that the modification itself must be in good faith.

Immediate Effective Date, Applicability to Ongoing Chapter 13's
As stated above, this bill would take effect on the date of enactment. Given that Congressional leaders are signaling that they intend to add this bill to the major economic stimulus package, which the new Obama Administration very much wants to enact by mid-February, debtors' attorneys particularly need to be counseling virtually every client who owns a home NOW about this potential new law, and specifically needs to be considering the potential huge benefits of delaying filing until after its enactment. If this bill is not made part of the stimulus package--and it is not at all assured to be--its passage, especially in its present form, is less likely, and would not likely be accomplished as quickly.

The bill states that "[t]he amendments made by this Act shall apply with respect to cases commenced under title 11 of the United States Code before, on, or after the date of the enactment of this Act." Unless changed, the "before" in that provision appears to allow post-petition and post-confirmation plan modifications in cases pending at the time of enactment.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

The Essential Terms of the New--And Now Suddenly More Likely to Pass--Chapter 13 Mortgage Cramdown Bill

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



This Bankruptcy Bulletin presents the core cramdown provisions of Senate Bill 61, the Helping Families Save Their Homes in Bankruptcy Act of 2009, following up on last Thursday's dramatic announcement of Citigroup's new support for the bill. See my Bulletin of last Friday on this break-through agreement between the Senate Democratic leadership and Citigroup.

(Tomorrow's Bulletin presents other very important and less publicized provisions of the bill, including a major indirect expansion in the Chapter 13 jurisdictional limits for secured and unsecured debt (Section 109(e)), detailed new rules governing post-petition fees of mortgage creditors (Section 1322(c)), as well as the concessions made to Citigroup to gain its support.)

Senate Bill. 61, and its companion bill in the House, H.R. 200, were introduced on the floor of the Senate and House last Tuesday, 1/06/09, but as of this last weekend the text of of the bills had not been received from the Government Printing Office by the Library of Congress, and no summary of the bills had yet been prepared. However the text of S. 61 was printed in the Congressional Record upon its introduction and so is accessible there.


The Core of the Bill: Amendments to Section 1322(b)

Although many parts of the bill are the same or very similar to its versions introduced and debated in the prior Congress (see S. 2136 of the 110th Congress), the current bill takes a different, and very much broader approach in its core cramdown provision. Whereas in the last session mortgage modification was limited to debts "secured by a nontraditional mortgage, or a subprime mortgage, and any lien subordinate to such claim, on the principal residence," now modification is expanded to any "loan secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced." (See the end of this Bulletin for the portion of the bill on the Section 1322(b) amendments.)

And there is no budgetary limitation: in an amended form of last year's bill, a debtor had to show through their monthly budget "insufficient remaining income to retain possession of the residence by curing a default and maintaining payments." That is no longer a condition for mortgage modification (although other budget-related provisions in Chapter 13 arguably accomplish that in practice, at least in many situations).

The most important provision, the cramdown: new subsection 1322(b)(11)(a) permits a Chapter 13 plan to provide "for payments of the amount of the allowed secured claim as determined under section 506(a)(1)." Section 506, entitled "Determination of secured status," includes subsection (a)(1), the well-known provision which provides for the bifurcation of an undersecured claim into secured and unsecured portions--with the secured portion determined by "the extent of the value of such creditor's interest in the estate's interest in such property."

With adjustable rate mortgages, this bill allows the plan to prohibit, reduce, or delay "adjustments to such rate of interest applicable on and after the date of filing of the plan." Note that this seems to preclude "prohibiting, reducing, or delaying" PRE-PETITION interest rate increases--that is, debtors appear stuck with the interest rate as of the date of filing, but subsequent language in the bill--discussed immediately below--seems clearly to allow interest rate adjustments, for all principal residence mortgages regardless whether fixed or adjustable rate.

Post-petition interest may be modified to a new rate, using the same language as last year, determined as follows:

an annual percentage rate calculated at a fixed annual percentage rate, in an amount equal to the then most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk . . . .

The mortgage repayment period may be modified

to extend the repayment period for a period that is no longer than the longer of 40 years (reduced by the period for which such loan has been outstanding) or the remaining term of such loan, beginning on the date of the order for relief under this chapter

This is substantively similar to last year's bill, but with the significant increase from the prior 30 to now 40 year maximum.

The final change in Section 1322(b)(11) is subsection (D) stating that the plan may provide "for payments of such modified loan directly to the holder of the claim," that is, such payments need not be paid through the Chapter 13 trustee.

There is a very timely discussion of this specific issue by Katherine Porter, associate professor at the University of Iowa law school (and former associate at Stoel Rives LLP in Portland, Oregon in its bankruptcy and creditors' rights group), in an article from just last Friday entitled Cramdown Controversy #1--Who Do I Pay? She asserts that "[t]he pending legislation contains language that would require the payments on mortgages modified in bankruptcy to be made 'directly to the holder of the claim.' " And she concludes: "I think debtors should have the option of making payments on a modified mortgage either directly to the mortgage company or through the trustee, as is currently the practice."

Query: By my reading (see below), Section 1322(b)(11)(D) permits but does not require direct payments to cramdown mortgage creditors. What is Porter seeing that I'm missing?

Senate Bill 61's Amendments to Section 1322(b)
For reference, here is the portion of Senate Bill 61 directly pertinent to the new Section 1322(b)(11):

[T]he [Chapter 13] plan may--

(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law, with respect to a claim for a loan secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced, modify the rights of the holder of such claim—

(A) by providing for payment of the amount of the allowed secured claim as determined under section 506(a)(1);

(B) if any applicable rate of interest is adjustable under the terms of such security interest by prohibiting, reducing, or delaying adjustments to such rate of interest applicable on and after the date of filing of the plan;

(C) by modifying the terms and conditions of such loan—
(i) to extend the repayment period for a period that is no longer than the longer of 40 years (reduced by the period for which such loan has been outstanding) or the remaining term of such loan, beginning on the date of the order for relief under this chapter; and
(ii) to provide for the payment of interest accruing after the date of the order for relief under this chapter at an annual percentage rate calculated at a fixed annual percentage rate, in an amount equal to the then most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk; and

(D) by providing for payments of such modified loan directly to the holder of the claim.

Again, tomorrow's Bulletin will present the other very important and less publicized provisions of Senate Bill 61, including an expansion in the Chapter 13 jurisdictional limits, new rules governing the allowance of post-petition fees by mortgage creditors (Section 1322(c)), as well as the three conditions agreed to with Citigroup (which have not yet been included in an amendment of S.61.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys