Tag: liens

lien in bankruptcy cars

Liens in Bankruptcy: The Ultimate Guide, Explained

Liens in Bankruptcy: The Ultimate Guide, Explained

Liens in bankruptcy typically survive and don’t get affected by the discharge. However, there are exceptions where the lien can be reduced or even eliminated. I try to break these down in simple terms that are easy to grasp. But don’t be fooled: bankruptcy is more complicated than you think. Get a consultation with an attorney, and make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

What is a Lien in Bankruptcy?

A lien is a security interest of a debt that encumbers a thing owned by the borrower until the debt is paid. One common example is a car and the car loan. The borrower who “owns” a car can’t just sell the car outright. He has to pay the debt secured by the lien against the car first. Then, once the debt is paid, the lien is satisfied and removed.

Section 101(37) of the Bankruptcy Code defines “lien” as:

charge against or interest in property to secure payment of a debt or performance of an obligation.

How does bankruptcy affect a lien? The General Rule

The general rule for liens in bankruptcy (and there are exceptions) is that bankruptcy doesn’t affect a lien at all. If a debt is secured by a lien and collateral, if you wish to keep the asset, then that debt will survive the bankruptcy. You don’t get a free house or car in bankruptcy. Here, let me put that in a fancy quote because it is so important:

You don’t get a free house or car in bankruptcy.

– Attorney Hale Andrew Antico

There is a reason this is emphasized so strongly. For some reason — be it wishful thinking or confusion because the lender stopped sending statements or something else — people sometimes stop paying for a house or car. This is a mistake that can result in foreclosure or repo.

house lien in bankruptcy
Not really representative of a lien in bankruptcy, but it shows money and houses so pretend there’s a chain encumbering them.

If you wish to keep the thing with a lien in bankruptcy (e.g.: your house), then you must continue to making regular payments on the loan or loans that goes with it. With that general principle out of the way, there are some specific exceptions or applications.

Chapter 7 bankruptcy and Liens

How does bankruptcy affect a lien in Chapter 7?

Chapter 7 bankruptcy is the simpler bankruptcy. You don’t normally pay unsecured debts back here. But how does bankruptcy affect a lien in a Chapter 7? The short answer: liens don’t go anywhere. If you started a Chapter 7 with a debt secured by a lien, you will most likely end the Chapter 7 with a lien. Nothing changes. Let’s look at a few different things that come up.

Vehicles in Chapter 7: You don’t get a free car

Repeat after me: In Chapter 7 bankruptcy, you don’t get a free car. If you are financing a vehicle, if you want to keep the vehicle, you must keep paying the loan. No matter what happens, you must keep current and paying for the car (or truck or RV or quad or other secured vehicle) if you want to keep it.

If your bank turns off your online access, you must keep current and paying for the car if you want to keep it. If your bank stops sending you statements or coupons, you must keep current and paying for the car if you want to keep it. If aliens abduct your Aunt Nana, you must keep current and paying for the car if you want to keep it.

You must be wondering why I’m spending three paragraphs repeating something that seems quite basic. You know, the concept that you must keep current and paying for a vehicle if you want to keep it. This is because no matter how obvious, no matter how many times this is repeated, people still somehow stop paying for their vehicle because they read on some message board on Google Esq. that they get a free car in bankruptcy.

But that’s false. You know why? Because there’s a lien on the car. And it remains. Why?

Because you don’t get a free car in Chapter 7 bankruptcy.

lien in bankruptcy car
Lien in bankruptcy doesn’t go anywhere with regard to a car in Chapter 7 because you don’t get a free car in bankruptcy.

Reaffirmation Agreements in Chapter 7

Definition of Reaffirmation Agreement

A reaffirmation agreement is an agreement where you … reaffirm a debt. This has the legal effect of you promising to owe a debt after the bankruptcy, no matter what. I think we can all agree that vowing to be liable on a debt regardless of what happens after a bankruptcy is the opposite of what bankruptcy is supposed to be.

Why on earth would someone say, for example, yes, please, make me owe my mortgage balance even if I ever lose my house to foreclosure? You wouldn’t. Because that’s crazy. That’s what a reaffirmation agreement is: a contract where you make yourself owe a debt after the bankruptcy, regardless of what surprises the future throws at you.

That is crazy. Why would I ever sign a reaffirmation agreement?

Good question. You would never voluntarily promise to undo the bankruptcy for a debt on which you are trying to avoid personal liability. Again, it defeats the purpose of bankruptcy to say yes, I’d like to owe this debt after bankruptcy.

Bankruptcy is intended to get you out of debt. Reaffirmation agreements are intended to get you back into debt.

But you just told me I’ll owe the car debt after bankruptcy no matter what.

Not quite. The example above is just talking about payments for a car that you intend to keep. If you want to keep the car, pay for it on time. What we’re talking about now is the possibility you lose the car or house or RV after the bankruptcy.

Let’s say a year after the bankruptcy is done, an asteroid hits your employer and you lose your job and the can’t pay for the house or car. They repo or foreclose and you lose the thing, right? Right.

But if you signed a reaffirmation agreement, you not only lost the house or car, but you also owe for the contract for the house or car you no longer have. Why? Because you signed a reaffirmation agreement. Can we agree that’s a bad outcome?

Holy cow, that’s terrible. Why would I ever sign a reaffirmation agreement?

You wouldn’t voluntarily sign a reaffirmation agreement unless you had to. And for vehicles, if you want to keep the collateral, you need to stay current on payments and you need to sign a reaffirmation agreement if they send one to you. For mortgages, you don’t generally need to or want to sign one. Any lender that tells you you needed one during your bankruptcy is mistaken, lying, or evil. Probably just mistaken.

Note: the law is changing in California in 2023 to bring back bankruptcy ride-through. SB1099 will make it no longer a default on a car loan if you don’t sign a reaffirmation agreement for a vehicle.

522f Lien Avoidance in Chapter 7: Judgment Liens

Recap of the rule: liens in Chapter 7

The rule for liens and lien avoidance in Chapter 7 bankruptcy is that the lien doesn’t go anywhere and you don’t get a free house or car in Chapter 7. If you started Chapter 7 with a lien on your car or a second mortgage on your house, you will likely end the bankruptcy with one, as there usually is no lien avoidance in Chapter 7. There can be one exception to this, and you have to qualify for it, contract for it, and yes, usually pay for it: judgment liens.

Possible Exception: What is a Judgement Lien

A judgment lien is when someone sues you, and as a result of the lawsuit, the judge rules against you. As a result, there is a now judgment against you. One way to collect on a judgment is a judgment lien against real estate or property you own or have an interest in. In California, the judgment lien cannot foreclose on you and take your house. However, it can sit there and grow with interest until you sell, refinance, transfer, or otherwise try to change the title. Then, it needs to get paid in full.

Oh no. What is a Judgment Lien Avoidance in Bankruptcy?

A judgment lien avoidance is where, in some cases, you can remove, or avoid, the judgment lien in bankruptcy… even Chapter 7 bankruptcy. Yes, it’s possible in Chapter 7 bankruptcy to avoid a judgment lien. However, it is not possible in every case, and doesn’t happen automatically. It’s extra work, and unless you contract for (and pay extra for) this extra work, the judgment lien avoidance won’t happen. Plus, the calculations around your home equity and lien amounts have to be right to qualify for it.

What are the factors to qualify for Judgment Lien Avoidance?

To qualify for lien avoidance in bankruptcy, we turn to Section 522(f) of the Bankruptcy Code, which says, in part: “the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled.”

So, for judgment lien avoidance, you need to determine if the lien impairs an exemption. At its core, this is a simple math problem. Here, in the Central District of California, the form we use spells it out pretty clearly, as you can see below.

522f judgment lien avoidance calculations
522f judgment lien avoidance calculations from CDCA form F 4003-2.1.Avoid.Lien.RP.Motion

The factors are pretty self-explanatory:

  • Value of Collateral: that’s what the house is worth
  • First lien: this is usually the primary deed of trust, or first mortgage
  • Amount of Debtor’s exemption: the amount of the exemption Debtor is entitled to

Lien Avoidance Formula: Take the value of the collateral, then subtract the debtor’s liens which cannot be avoided, and then subtract the exemption amount. That’s the amount that remains to pay judgment liens.

Still, this can be confusing. Read on!

522(F) Judgment Lien Avoidance Calculator

Below is a judgment lien avoidance calculator to help with the math of determining whether a judgment lien is impairing an exemption per 11 USC 522(f). You can only avoid the lien up to the amount it is impairing the exemption. If there is only partial impairment, there can only be partial judgment lien avoidance.

Timing of amounts used for lien exemption

If you learned of a judgment lien now but had an old bankruptcy where you didn’t avoid it, you may still be able to avoid the old judgment lien using the old bankruptcy. But exemptions change over time. Which home value and exemptions amount do you use?

Chapter 13 Bankruptcy and Liens

Section 506: Lienstripping a junior mortgage, mortgage cramdown, or avoiding a second mortgage lien

What Does the lienstripping law say?

There are really a few sections to focus on. First, section 506(d) of the Bankruptcy Code states, generally:

To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void

Making a lien void is a very good thing, and in Chapter 13 bankruptcy this can sometimes be done. The problem is it can’t be done all the time; the circumstances — and the math — have to be just right. Sometimes Sections 506(a) and 1322(b)(2) come into play in helping define what is secured.

The 9th Circuit BAP clarified when this can be done in In re Lam, 211 BR 36 (9th Cir BAP, 1997). It was in this major ruling when the Bankruptcy Appellate Panel ruled, “The Nobelman decision holding that section 1322(b)(2) bars a chapter 13 plan from modifying the rights of holders of claims, secured only by the debtor’s principal residence, does not apply to holders of totally unsecured claims.” Id. at 41.

liens in bankruptcy house
Liens in bankruptcy regarding a house, this time with a chain encumbering it in rich symbolism.

So, the key language in Lam is “totally unsecured.” Unlike avoiding a lien under 522(f) which can allow partial removal of a judgment lien, avoiding a consensual lien like a deed of trust or mortgage cannot be partially secured. “…a one dollar difference in property value could have a profound effect on a secured creditor’s rights.” Lam at 41. So the evidence for property value is key, and this can be where all the fight is.

Lam Lienstrip Examples

Let’s say Debtor has a home valued at $200,000 with a first mortgage of $225,000 and a second mortgage with a balance of $50,000. Because the second isn’t “touching” the secured house, it is totally unsecured and can be avoided with a lien-strip in a Chapter 13 bankruptcy. However, if that same property were valued at $230,000, then there’s about $5,000 of secured status for the junior mortgage. That’s enough to make it a secured claim, and then, because it’s not wholly unsecured, it cannot be avoided or lienstripped.

I made a handy calculator where you can test out the above lien stripping examples yourself, and of course, your own numbers to see if it’s totally unsecured and qualifies in the Ninth Circuit for lien avoidance under Lam.

If you are in the Los Angeles, Ventura, or Orange County, contact me and let’s go over your options.

Section 522(f) and Judgment Liens in Chapter 13 bankruptcy

Judgment liens, where for example, a credit card won in court against you and then liened your home, can be avoided in Chapter 13 if they impair an exemption. While there can be a huge benefit to removing a judgment lien in Chapter 13, it also wouldn’t be necessary if it’s a 100% plan. In other words, if you’re paying all your unsecured debt back, turning a secured debt to an unsecured one wouldn’t provide a whole lot of benefit but would increase legal fees. For a discussion – and a judgment lien calculator — see above in the Chapter 7 judgment lien section.

What is Cramdown in Bankruptcy (Chapter 13)?

Chapter 13 bankruptcy cramdown is where we can reduce the secured debt of a car to the fair market value of the vehicle. In other words, in Chapter 13, we can “cram down” the loan balance to what the car is worth if the loan was incurred over 910 days ago. The remaining debt gets paid through the Chapter 13 plan at the same percentage as the unsecured debt, potentially saving thousands of dollars on a vehicle loan.

A bankruptcy cram down example would be if a vehicle loan was $30,000, and the car was only worth $18,000. In Chapter 13, it’s possible to only pay $18,000 for the car loan, and treat the rest of the car debt like credit card debt. Again, this wouldn’t make a lot of sense if it’s a 100% plan or there is some doubt you’ll be able to finish the bankruptcy with the car “in the bankruptcy” because if the case is dismissed, you’re now late on the loan which was being partially paid through the case, which is now ended. You’ll need to ensure you can get to the finish line if you take this route. However, the benefit can be valuable.

Penrod and Negative Equity

Is The Negative Equity PMSI?

Penrod is not just a funny name, but a Ninth Circuit case. The Penrod case addresses trade-ins which had the old loan rolled into the new one, where the old loan is now called negative equity. We just learned that we can cram down a vehicle loan if the balance is more than the vehicle’s value if the debt was incurred over 910 days prior to filing. There is a way to remove the traded-in loan from the current loan, even if this happened in the 910 days before filing.

Marlene Penrod traded in an Explorer and bought (and financed) a 2005 Ford Taurus. She rolled about $7,000 of her old Explorer loan into the new Taurus financing. Less than 910 days later, she filed Chapter 13 bankruptcy. In the case, she bifurcate, or split, the Taurus loan into two, and said she’d only pay the new Focus price in full as Purchase Money Security Interest (PMSI). The negative equity from the Explorer wasn’t purchase money, and therefore wouldn’t be secured.

The new finance company objected, and the Ninth Circuit Court of Appeals agreed with Marlene Penrod when it wrote, “In sum, we find that a creditor does not have a purchase money security interest in the “negative equity” of a vehicle traded in during a new vehicle purchase.” In re Penrod, 611 F. 3d 1158 (9th Cir, 2010).

Penrod and Gap Insurance and Extended Warranties

Not only can negative equity can be removed from a vehicle loan in a Chapter 13 in the Ninth Circuit, other bankruptcy courts in the circuit have broadened this to other areas. For example, in Washington state, a bankruptcy court has held that Penrod also applies to removing gap insurance and an extended warranty. This is because, like negative equity, they are not part of the purchase money security interest. In re Jones, 583 BR 749 (WDWA, 2018).

In Jones, the court ruled:

Accordingly, this Court finds the Option Contracts are not part of the “price” of the Vehicle secured by the PMSI. Like negative equity, the Option Contracts are not sufficiently related to the purchase of the Vehicle. Unlike other expenses listed in Official Comment 3, neither the purchase of optional gap insurance or maintenance contracts are akin to sales tax and license fees, which are not optional but are required in order to obtain the vehicle.

Jones at 755.

It went on to write, “The Court concludes that Kitsap Credit Union’s purchase money security interest in the Vehicle does not secure sums advanced to pay for optional gap insurance and vehicle maintenance contracts.” Id. at 759.

Tax liens in Bankruptcy

Tax liens in bankruptcy generally don’t go anywhere. In Chapter 7, because they didn’t get paid, they survive the bankruptcy case. A tax lien in bankruptcy (Chapter 13) will have to be paid as a secured debt to avoid it and remove it. This can create feasibility problems in your Chapter 13 bankruptcy case, depending on the size of tax lien and secured debt. As always, discuss with a bankruptcy lawyer.

In sum

Liens in bankruptcy are generally not removed, and you don’t get a free car or house. Sometimes liens can be reduced, stripped, or avoided, if the math works out right in various situations. There is a lot more flexibility in Chapter 13 bankruptcy to reduce or even eliminate liens. Arrange a consultation with an experienced bankruptcy attorney in your area to learn your particular options. Thanks for reading.

time of bankruptcy filing determines homestead exemption

9th Cir: To Avoid a Judgment Lien, Use Exemptions at this Time

9th Circuit: Lien Avoidance Homestead Determined at Time of Bankruptcy Filing

If someone wants to avoid a judgment lien in bankruptcy, is the homestead exemption the one at the time the lien attached, or at the time of the bankruptcy filing? The Ninth Circuit Court of Appeals has recently weighed in, and the answer can affect thousands of dollars of liens on your home.

Why it matters

Liens in bankruptcy don’t usually go away. But there are times we bankruptcy lawyers can reduce or avoid liens. You may have heard that the California homestead exemption got a massive increase in 2021. This protects more home equity than ever before for people filing bankruptcy.

Now couple that with the fact that some liens in bankruptcy can be avoided if they impair an exemption. So, the bigger the exemption, the better the chances you can avoid a judgment lien and make thousands — or tens of thousands — of dollars of judgment liens disappear forever.

It’s very common for bankruptcy attorneys to be asked to remove an old judgment lien from a property. This can be done by reopening an old bankruptcy case where the lien then existed but wasn’t known, or filing a new case if the lien now impairs an exemption. But for a new case on an old lien, given that the homestead law just changed; there can be confusion which timing — and exemption amount — is used.

The question then is: to determine if the judgment lien impairs an exemption (a simple math problem), do we use the puny California homestead exemption at the time of the lien attaching where the lien won’t impair an exemption? Or the massively humongous homestead at the time of filing? It will determine the very question as to whether the lien can be removed in bankruptcy.

The Ninth Circuit, citing the Supreme Court, clarified which timing counts

In the battle of the clock, bankruptcy lawyers fight over which timing to use. The Ninth Circuit Court of Appeals just clarified the answer. It ruled that, “we must look to the amount of the homestead exemption that Boskoski could have claimed if, as Section 522(f) commands, the Greek Village lien against his property is disregarded.” Barclay v. Boskoski, WL 16911862 (9th Cir, Nov. 14, 2022).

In doing so, the Ninth Circuit relied on the U.S Supreme Court case of Owen v Owen, 500 US 305 (Supreme Court, 1991). The Owen case involved a 522(f) lien avoidance issue also. In that case, a judgment was entered against debtor. Creditor then recorded a lien against debtor’s property, and then state law changed to better protect debtor with a homestead exemption.

The Supreme Court ruled, “To determine the application of § 522(f) they ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself.” Id. at 310-311. Or put differently, the language of 522f looks to the exemption the debtor would have been entitled but for the judgment lien.

And if there was no “old” judgment lien, the debtor “would be entitled” to today’s (larger) California homestead exemption. And that exemption is large enough where the lien would impair the exemption, and therefore can be avoided by 522(f).

A note about Wolfe v Jacobson

The creditor here, Barclay, argued that the Ninth Circuit was bound by Wolfe v Jacobson, 676 F.3d 1193, 1198 (9th Cir, 2012). It wanted “the entire state law” followed, per Jacobson at 1199. This Jacobson reading would have had the Barclay appellate court “apply all limitations that a state places on its exemptions when conducting the Bankruptcy Code’s lien avoidance calculation—including California’s limitations on the application of its homestead exemption.”

But the Ninth Circuit avoided that, and then pointed back to Owen, quoting the Supreme Court: “the Bankruptcy Code’s policy of permitting state-defined exemptions is not ‘absolute.'” Id. at 313. It found that the Owen case, involving lien avoidance, was a closer match than Jacobson, which doesn’t.

The 9th Circuit continued: “Anticipating the issue we address today, the Court held that ‘it is not inconsistent’ for the Code to allow states to define their own exemptions but ‘to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state-created.'”

In doing so, the Ninth Circuit in Barclay distanced itself further from Jacobson. Note that just a few months ago, new California SB1099 law was passed, which contained provisions which some speculate will limit Jacobson in other areas. By going out of its way to distinguish Barclay from it, it seems the Ninth Circuit is eroding the Jacobson holding without overturning it (yet).

The Ninth Circuit Already Ruled on Timing of Exemptions

The In re Barclay ruling is consistent with another case the Ninth Circuit affirmed on a very similar topic.

“It is well-established that the nature and extent of exemptions is determined as of the date that the bankruptcy petition is filed.” In re Chiu, 266 B.R. 743, 751 (9th Cir BAP, 1999), later affirmed, 304 F.3d. 905 (9th Circuit Court of Appeals, 2002), citing White v Stump, 266 U.S. 310, 313 (Supreme Court, 1924).

The Ninth Circuit in Barclay vs Boskoski, without going into much detail, gave a hat tip in passing to Stump above and its “snapshot rule.”

So, everything points in the same direction and lands at the same place. Exemptions are decided at the time of filing, and not the time of the (much) earlier lien attaching. This is consistent with the holdings of the 9th Circuit in Chiu, the Supreme Court in White v Stump, and the Supreme Court in Owen, which got there using different rationale and analysis.

All in all, good news for debtors!

sell home chapter 13

Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

Sell a Home in Chapter 13 Bankruptcy: Motion to Sell or Refi

My clients ask me, “can I sell a home in a Chapter 13 bankruptcy?” As a bankruptcy attorney experienced in Chapter 13, selling a house is an issue that comes up often, particularly in a robust housing market. This is written without giving advice to the specifics of your case, but merely addressing whether it’s possible to sell or refinance a house during Chapter 13.

The answer is “yes… but.” It’s not always in your best interests to sell a home in Chapter 13, and you really should consult on this with your bankruptcy lawyer, as facts vary depending on judicial circuit, state, local practice, and your particular case and its Order Confirming. As I’m a Los Angeles bankruptcy attorney, I’ll be focusing on practice in the Central District of California here in the Ninth Circuit, so the following may not apply to you if you’re elsewhere.

Can I move during a Chapter 13 bankruptcy?

Let’s start with the basic question of whether you’re allowed to move and change residence during the term of a Chapter 13. The answer is, “Yes.” There is nothing in a bankruptcy that prevents you from moving, or even changing states. You are free to move about the country.

As leaving the state would likely mean you’re now working out-of-state from where the case was filed, you will almost certainly want to update your Schedules with your new employer, income and expenses, and this may potentially affect your plan payment, and the percentage of debt which you’re paying the general unsecured creditors. And that may turn into a Motion to Modify (MoMod) being filed with the court, leading to new legal fees.

Motion to Sell or Refinance in Chapter 13

A Motion to Sell or Refinance in Chapter 13 is where you ask the judge permission to sell or refinance your home. So, yes, you can sell or refi in Chapter 13. Whether it’s a smart decision or not will vary based on the circuit, district, and even your particular case, and you’ll want to seek advice with your bankruptcy lawyer.

Chapter 13 can pay only a fraction of your debts. But that can trigger a couple of things that lead to it getting fed more money. If you’re paying less than 100% of the general unsecured creditors, sometimes you don’t get to keep tax refunds in Chapter 13. Similarly, when there is a ton of extra money from a home sale or refi, that too can lead to more debt getting paid.

Revesting of the Estate and Form Plans

Revesting

One factor as to whether you should sell a home in Chapter 13 (or refinance in your Chapter 13 bankruptcy) depends on whether the estate revests at confirmation or at discharge. That’s all a fancy way of saying, “when does the ownership and control of your stuff — including your home — return to you, the debtor?”

In bankruptcy, here’s the crux of the matter: when you sell or refinance in a Chapter 13, do you have to use the sale proceeds to pay all of your general unsecured debt, or all of the part you are intending to pay during the bankruptcy? Remember, Chapter 13 bankruptcy doesn’t necessarily pay all your debt. If a Chapter 13 is only paying a fraction of the credit cards, how much of the credit cards get paid by the proceeds of the house or other sale?

A recent case on postpetition equity

The issue as to whether you can sell in a Chapter 13 and who gets the proceeds was recently seen in Colorado, when the Chapter 13 trustee fought to get the postpetition appreciation of an LLC. In re Klein, WL 3902822 (Bankr. D. Colo. 2022). The trustee argued that proceeds were postpetition property under Section 1306 (nothing about 541a6). However, debtor argued that Section 1327 says that property vests in the debtor at confirmation, unless provided otherwise in the plan. The two sides fought about the tension between 1306 vs 1327. Ultimately, the Court concluded that 1327 was more specific and the proceeds belonged to Debtor.

What about Section 1322(b)(9)? That says the plan may “provide for the vesting of property of the estate, on confirmation of the plan or at a later time, in the debtor or in any other entity.” That “may” (coupled with 1327b) also indicates that it may not.

More on that later.

This is the Tenth Circuit. What about here in the Ninth Circuit?

Black vs Leavitt (In re Black)

Glad you asked. That’s the issue the Ninth Circuit Bankruptcy Appellate Panel faced in 2019 in Black vs Leavitt (In re Black), 609 B.R. 518 (9th Circuit BAP, 2019). There, the BAP decided that when someone tried to sell a home in a Chapter 13 (actually, a rental property), the property — and the proceeds — were the debtor’s to do as he wanted.

In our view, the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any postpetition appreciation. When the bankruptcy court confirmed Mr. Black’s plan, the Property revested in Mr. Black. See In re Jones, 420 B.R. at 515. As such, it was no longer property of the estate, so the appreciation did not accrue from estate property.

Id. at 529.

Great news, right? Not so fast. There’s some key language in footnote 9 of the same case. There, the 9th Cir BAP wrote:

If the plan did not vest the Property in Mr. Black, the result would likely be different. See Klein v. Chappell (In re Chappell), 373 B.R. 73, 83 (9th Cir. BAP 2007), aff’d sub nom. Gebhart v. Gaughan (In re Gebhart), 621 F.3d 1206 (9th Cir. 2010) (In a chapter 7 case, where property does not revest in the debtor, “[u]nder well-settled Ninth Circuit law, any postpetition appreciation in value in the residence in excess of the maximum amount permitted by the exemption statute invoked inures to the benefit of the estate.”); § 541(a)(6) (a bankruptcy estate includes “[p]roceeds, product, offspring, rents, or profits of or from property of the estate ….”).

Clearly, the issue of who gets the sale proceeds is determined by what the Chapter 13 plan says. It’s important to know this crucial fact before asking your bankruptcy attorney to submit a motion to sell or motion to refinance real property.

In re Berkley

In one case, the debtor was repaying one percent (1%) of his unsecured debt. The plan said the estate revests at confirmation. After the case was confirmed, he started getting stock options. At month 57 of his plan, he sold his postconfirmation stock options for $3.8 million. Trustee filed a motion to modify for some of the sale proceeds. The Ninth Circuit BAP held that Section 1329 and a modification allows for change of circumstances, and the millions of dollars means that debtor can repay his debts.

The 9th Circuit BAP acknowledged that the estate terminated at confirmation, citing 9th Circuit precedent of In re Jones, 420 BR 506 (9th Cir BAP 2009), aff’d by 9th Cir in 657 F3d 921 (9th Cir, 2011). In Jones, the Ninth Circuit adopted the “estate-termination approach.” This approach is where the estate ceases to exist at confirmation. In the estate termination approach, all property then becomes property of the debtor, whether acquired before or after confirmation.

The Berkley BAP then nodded at its own recent ruling in the matter of In re Black (above).

However, the BAP then held that “[u]nder § 1329, the bankruptcy court can approve a plan modification that increases the debtor’s plan payments due to a postconfirmation increase in the debtor’s income, whether or not the additional income is property of the estate.” In re Berkley, 613 BR 547, 553 (9th Cir BAP, 2020). It distinguished Black and Jones from the instant case, as it is solely concerned with postpetition wages.

Central District Form Plan

Whether the estate revests at confirmation or at discharge is a key determining factor about who gets the sale proceeds of postpetition appreciation from a prepetition asset. So what does the form plan say here in Los Angeles County, in the heart of the Central District of California?

Locally, here in the Central District of California, the estate doesn’t revest in the debtor until discharge. We know this because this is what our Chapter 13 form plan says. Your mileage may vary.

cdca chapter 13 plan revesting in debtor
The standard Central District of California Chapter 13 Plan revesting in debtor at discharge

There is the key language that controls when you sell a home in Chapter 13 bankruptcy in most cases in the Central District of California when there is a Motion to Sell or Refi with proceeds. It means that the debtor and proceeds must not only pay “all of the plan” debt, but “all of the all” debt. This can be a strong disincentive. It often is better to just stay in the Chapter 13 until discharge, and get forgiveness of potentially tens of thousands of dollars of unsecured debt. After discharge, the house, and what you do with the proceeds, are yours.

Now, I supposed there is nothing preventing debtor from adding a nonstandard provision to the plan that debtor’s property revests at confirmation. But that may lead to other hazards that involve the automatic stay and debtor’s property which are no longer property of the estate. Try this at your own peril.

Conclusion

So, yes, Virginia, you call sell a house in Chapter 13 bankruptcy. You have the right to move cities, even states, as long as you maintain your plan payments, and update your schedules to reflect current income and expenses. However, who gets the sale proceeds is very specific to where you live, what your appellate courts say, and what your local district’s forms say. As always, ask your bankruptcy attorney, and thank you for reading.

ride-through california bankruptcy

Ride-Through Back in Calif Bankruptcy

Ride-Through Back in California Bankruptcy

Ride-through is back in California bankruptcy. This is big news for 2022. It restores the right of someone in bankruptcy to be free of personal liability on a car loan in the event of a future default. To be clear, you don’t get a free car in bankruptcy. But if you don’t reaffirm the car debt, and stop paying the car after the bankruptcy discharge resulting in a repo, you won’t owe the deficiency balance.

The change is part of SB1099, a bill the governor recently signed into law. The new law includes other protections or exemptions, for people filing bankruptcy. The changes take effect on January 1, 2023. Caution: it is likely that this may be challenged by lenders or trustees in court, so rely on this new law at your own risk. More on that below.

Meaning of Ride-Through Doctrine in Bankruptcy

ride-through doctrine meaning
Meaning of Ride-through doctrine: car loan goes thru without adding dirt

The meaning of the ride-through doctrine in bankruptcy is this: a vehicle can go through Chapter 7 bankruptcy without the debtor being on the hook for the car loan in case of future default after the bankruptcy is done.

In my ultimate guide on Chapter 7 bankruptcy, I use a car wash as a metaphor for the process as a simple way to explain it. While the bankruptcy carwash is intended to remove much dirt, the ride-through doctrine means that the car owner isn’t forced to add the new road tar to his vehicle when it comes out the other side.

You’d think that it would be common sense that all debts that existed at the time the debtor files bankruptcy would be discharged in the successful case. With credit cards, that’s certainly true (in most cases). However, a secured debt like that for a car or a house is treated differently. If you want to keep the car, you must stay current on the payments for life of the car loan.

If, after the bankruptcy, the debtor and car owner loses his or her job and they need to turn in the car or have it get repossessed, what happens with the balance of the car loan? With the ride-through doctrine, the “old” bankruptcy reaches into the future and eliminates the new leftover debt. This is huge, as it can be thousands of dollars for something which was completely unplanned or unforeseen.

2005-2022: Congress & BAPCPA End Ride-through

It wasn’t always this way. During the dark years of 2005 through 2022, the ride-through doctrine was dead all throughout the nation. This is because back in 2005, Congress passed major bankruptcy reform called BAPCPA. As part of the sweeping changes, in a huge favor to big banks, Congress ended ride-through for all the people in the land.

In its place, Congress compelled debtors seeking a new start by filing bankruptcy to sign reaffirmation agreements if they wanted to keep their cars. A reaffirmation agreement is where a debtor (you guessed it) reaffirms their debt in a bankruptcy.

This means that the person signing the contract is promising to owe the debt and undo the bankruptcy with regard to it. Instead of discharging a debt, a reaffirmation is promising to owe the debt, no matter what. Promising to owe debt is bad, and the opposite of the goal of a successful bankruptcy. Millions of people seeking to be released from bondage to debt were forced to sign contracts owing it, or face losing their car anyway. These were dark times, indeed.

2023: California restores Ride-Through in Bankruptcy

But California changed that. In September 2022, a new law was completed which becomes effective in 2023, As part of the wide-ranging changes, California restored ride-through in bankruptcy. With Calif bankruptcy ride-through, failing to sign the reaffirmation agreement isn’t considered a default.

The pertinent “ride-through” bankruptcy part from the new CA law:

(2) Neither the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the borrower or other person liable on the loan nor the status of either of those persons as a debtor in bankruptcy constitutes a default in the performance of any of the borrower’s obligations under the loan, and neither may be used as a basis for accelerating the maturity of any part or all of the amount due under the loan or for repossessing the motor vehicle. A provision of a contract that states that the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the buyer or other individual liable on the contract or the status of either of those persons as a debtor in bankruptcy is a default is void and unenforceable.

There it is: a person using Title 11 (which is the Bankruptcy Code) cannot be said to be in default, and any contract that says a person is liable on their car loan in case of default is void and unenforceable. This means there is no more repossession for failure to reaffirm or refusal to sign a reaffirmation agreement. This is how, during 2005-2022, some car lenders repossessed vehicles even if the borrower was current on the loan. The infraction? Failing to sign a reaffirmation agreement. So now you ask: after 1/1/2023, do I have to reaffirm a car loan in California bankruptcy and stay personally liable on the debt? The answer appears to be, “no.”

Preemption: Supremacy Clause, federal law, and California’s ride-through

Can a state change, or carve out an exception, to federal law? It remains to be seen whether this portion of the law will be challenged by creditors and car lenders. The strongest argument to challenge California’s bankruptcy ride-through is the Constitution’s Supremacy Clause of Art VI, Sec 2. This would state that the federal bankruptcy laws of 11 USC 521(a)(2) and 11 USC 524 are “supreme” to and therefore preempts California state law, and by applying the Supremacy Clause, the part of the state law which conflicts with federal law is void.

A rebuttal to this would be that California’s bankruptcy ride-through is not in direct conflict with the Bankruptcy Code or of Article 1, Section 8 of the Constitution’s enumerated powers. California is not making laws about bankruptcy. Instead, the state can claim it is merely clarifying state law, as is its right. It can assert that a state has the right to define what is and is not a “default” in California, and a bankruptcy is not a default. Or whether or not car lienholders can repossess a vehicle, or make debtors owe the leftover deficiency balance on a debt after repo from an old bankruptcy case now closed. It remains to be seen if creditors or trustees act on this, and if so, which is more persuasive to a court of law.

California’s Ride-Through is a New Day Dawning for Debtors

new dawn of ride-through is back
There is a new dawn: Ride-through is back in California

The dark days of forced reaffirmation are behind us. No longer will a person seeking to become debt-free be coerced to sign a contract promising to owe on a potential future default. No more will hopeful Californians be saddled with thousands of dollars of debt after completing their bankruptcy, unable to file again for a number of years. Never again will people finishing a bankruptcy lose their car even though they were current on payments.

A new dawn is emerging in California. A radiant era where people filing bankruptcy won’t have to worry about having an old debt survive and burden them as a future liability. A glorious future where someone can seek a new start without compulsion, and have the freedom of a clear conscience, free of worry, and without having old debt burden them.

Yes, ride-through is back in California bankruptcy!