In chapter 13 Bankruptcy, homeowners can use the Bankruptcy proceeding known as “Adversarial Proceeding” to challenge the lender’s authority to enforce or collect the mortgage payments. In most cases, the mortgage loan have been securitized and the assignments were not done in accordance of the law. That is when the Bankruptcy laws that in place in Chapter 13 is designed to protect the homeowners. However, due to numerous changes in the Bankruptcy laws, not all homeowner could meet the “means test” required to retain their homes under Chapter 13 which could lead to a conversion to chapter 7 for liquidation of assets to pay creditors. When homeowners with income could show that they could pay certain bills even if they did not have enough to pay all, the Bankruptcy laws were there to protect the homeowner. Once the Chapter 13 is filed, then the homeowner could use “Bankruptcy Adversarial proceeding” to challenge the Lenders’ authority to collect the debt. When the lenders fails to prove their standing in the mortgage loan transaction, their rights to collect payments from the borrowers were therefore not met and the Bankruptcy judges usually sanctions them for that and in certain cases may outright dismiss their cases which could result to the homeowner owning the property free and clear.
Homeowners should have know that using the Bankruptcy option to save their homes also means that they may give up their rights to sue in the State or Federal Jurisdiction to collect damages for the violations and wrongs done in their mortgage loan transaction as damages are not awarded in the Bankruptcy courts. Reasons being that “you can not sues the same defendants in different jurisdictions using the same set of facts” The keyword here is (“The same set of facts”). So whatever the allegations you are going to make to save your home for mortgage law violations to collect damages in State or Federal courts are most likely the same allegations you will make in the adversarial proceedings in the Bankruptcy court. Therefore, the lenders well paid Attorneys will most likely challenge those sets of facts in their motion to dismiss on the new jurisdiction you filed. That is why Bankruptcy is usually reserved as the last option to “save the home” but without monetary damages, so smart homeowners seeking to collect monetary damages in the State or Federal court as well as saving the home usually start on those courts. However, the problem is that waiting for a few years before proceeding with Bankruptcy chapter 13 to save the home means that the homeowner should be able to make both the payment of the current mortgage, as well as the portion needed to bring the past due payments current. For Example if a homeowner missed 3 years of payment on a $2500/mth mortgage. The homeowner would have owed $90,000 ($2500×36), in the past due payments, then when in Chapter 13 Bankruptcy, the homeowner will then take the “means test” in order to be able to meet both $2500/month payment plus additional ($1500/month payments ($90,000 divided by 60 months), plus other payments needed to pay other secured and unsecured creditors such as car loans, student loans, back taxes and credit cards etc. The Bankruptcy trustee administrative fees that will also be included in the plan for that 5 years of your plan will amount to approximately $27000. Homeowner also must be current in all taxes meaning that all taxes must have been filed in order to determine if you owe extra taxes than needed to be included in your chapter 13 plan. The last 4 years is mandatory before the judge will approve the plan. You may also request an extension for 120 days in order to file those taxes.
It is important however to note that there are more favorable laws in the Bankruptcy jurisdiction than in the Federal and State jurisdiction and homeowners needs to be aware of that. Bankruptcy Judges are now becoming lenient towards homeowners in default and in order to help keep homeowners in their homes, many BK judges have forced the lenders to modify the loans they had refused to modify for years. (Bankruptcy judges looks at the case as “Borrowers that recognize their delinquency and needed to reorganize their debt and pay those debt only to Bona Fide Creditors”.), some state courts depending on where you are located has similar views. However, Federal courts only address federal questions and in most cases approach the case with a view that a (“Borrower defaulted on a mortgage or failed to pay his/her mortgage, but rather wish to seek for a free home using mortgage law violations in the federal jurisdiction). There is a big difference between these views that is why most federal judges frown on home owners unless you can proof that you know “exactly what you are doing” then it raises their curiosity towards your case as a pro-se litigant, but you must have the rights allegations in your complaint to succeed or you have a better chance having your case thrown out.
Chapter 13 bankruptcy divides debts into several categories. How much you must pay on each type of debt differs. General unsecured claims in Chapter 13 Bankruptcy are those debts that are not secured (examples of secured debts include mortgages and car loans) and not deemed as “priority” by bankruptcy law (examples of priority debts include child support and certain incomes tax debts).
For the most part, you must pay 100% of your secured and priority debts (there are some exceptions). This is not the case with nonpriority, unsecured debts. How much you must pay to your general unsecured creditors in Chapter 13 bankruptcy depends on several factors.
• Disposable income. You must devote all of your disposable income to your plan — so what your unsecured creditors get depends on how much money you have left over each month after paying expenses, secured debts, and priority claims.
• Best interest of the creditors. In addition, at a minimum, your unsecured creditors must get what they would have received had you filed for Chapter 7 bankruptcy.
Disposable Income – How Much You Can Afford?
In Chapter 13 bankruptcy, you must devote all of your “disposable income” to repayment of your debts over the life of your Chapter 13 plan. Disposable income is what you have left over at the end of every month after you pay your reasonable and necessary living expenses. Your disposable income first goes to your secured and priority creditors, and the remainder is split among your unsecured creditors.
The court determines your disposable income first by reviewing your means test, then by reviewing your income and expense schedules.
What is the means test? When you file for Chapter 13 bankruptcy, you fill out a “means test” form, which calculates your income based on the six-month period prior to the month you filed bankruptcy. The test compares your average income to the median income of others in your county or state of the same household size.
If your income is higher than the median. If your income is higher than the median, you must complete the entire means test, taking deductions for certain expenses, including secured debt payments such as car payments and mortgages. The result will show a monthly figure which, multiplied by 60, will decide how much your unsecured creditors will receive over the life of your case.
If your income is lower than the median income. If your income is lower than the median, you do not have to complete the rest of the means test, and your disposable income is based on your income and expense schedules. When you file Chapter 13, you will also file a Schedule I, which lists your actual monthly income from all sources, and a Schedule J, which lists your actual monthly expenses. Reasonable and necessary living expenses include items such as rent, groceries, utilities, cable, pet care, gas, and insurance. The difference between your income on Schedule I and your expenses on Schedule J will be your Chapter 13 plan payment. Your unsecured creditors will receive whatever percentage that income yields after other secured and priority creditors are paid.
Best Interest of Creditors: The Hypothetical Chapter 7
The “best interest of creditors” test calculates the minimum amount you must pay to your nonpriority unsecured creditors through your Chapter 13 plan. If you can’t repay this minimum amount, the court will not confirm your Chapter 13 plan (which means you can’t proceed with your case).
The best interest of creditors test figures out how much your creditors with nonpriority, unsecured claims would have received had you filed for Chapter 7 bankruptcy. You must repay these creditors at least this much in your Chapter 13 bankruptcy. The idea is that creditors should not be disadvantaged just because you filed for Chapter 13 rather than Chapter 7 bankruptcy.
How much your unsecured creditors get in Chapter 7.
A Chapter 7 bankruptcy is a liquidation; if you have any property in a Chapter 7 case that you cannot exempt, the Chapter 7 trustee can sell the property and pay your creditors with the money. However, bankruptcy law allows Chapter 7 debtors to protect some of their property through exemptions. Exemptions allow you to keep certain property up to a certain value. If you have property that the bankruptcy exemptions don’t protect (called nonexempt property), the value of this property goes to the bankruptcy estate and will be distributed to your unsecured creditors.
The minimum amount your unsecured creditors get in Chapter 13. The Chapter 13 trustee will look at what your unsecured creditors would have received in Chapter 7, and then make sure those creditors get at least this much through your Chapter 13 plan.
Example. Say you own a car worth $10,000 and you can only exempt $3,450. The nonexempt value is $6,550. If you had filed Chapter 7, hypothetically the trustee would have sold your car, paid you your exemption, and paid the remaining $6,550 to your general unsecured creditors pro rata. That means that in your Chapter 13 case, your general unsecured creditors must receive, as a group, at least $6,550. Each creditor will receive a percentage of that amount, depending on the amount of its claim.
How Much Do You Have to Pay Nonpriority Unsecured Creditors?
When completing the Chapter 13 means test, you must provide your average monthly income for the six-month period prior to filing for bankruptcy. You then compare your average income against the median state income for a household of the same size. How much you must pay nonpriority unsecured creditors depends on whether your income is above or below the state median.
If You Have Below Median Income
If your income is below the state median, you are not required to complete the entire means test form. As a result, a monthly disposable income figure is not calculated. Essentially, if you are below median, the court assumes that you have no disposable income and your plan payment is primarily based on your budget. This means that the bankruptcy court will usually approve your Chapter 13 plan even if you are paying little or nothing to your nonpriority unsecured creditors. In addition, your plan can be only three years long instead of five.
Example. Brian is single and makes $35,000 a year. The median income for a single person household is $45,000 in his state. Since Brian’s income is below median, he does not have to complete the entire means test form and may end up paying nothing to nonpriority unsecured creditors.
If Your Income Is Above the State Median
You must complete the entire means test form if your income is above the state median. To calculate your monthly disposable income, the means test uses national and local standards for most living expenses. However, you are also allowed to deduct your actual expenses for certain items such as your mortgage, taxes, and health insurance. If you have a positive monthly disposable income figure, you multiply it by 60 to figure out how much you must pay nonpriority unsecured creditors in your plan. This is because above median debtors are required to be in a five-year bankruptcy plan.
Example. Emily and Brad are married and have a combined annual income of $90,000. Their state has a median income of $60,000 for a household of two. After completing the means test, their monthly disposable income is determined to be $500. Since they have to be in a five year (60 month) bankruptcy plan, they would have to pay nonpriority unsecured creditors at least $30,000 ($500 multiplied by 60) over the course of their Chapter 13.
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