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FiveStarLaw
FiveStarLaw, Attorney
Category: Bankruptcy Law
Satisfied Customers: 36471
Experience:  Bankruptcy Lawyer. Experienced.
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I am a lawyer but I am looking for peer opinion. I filed a

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I am a lawyer but I am looking for peer opinion. I filed a Chapter 7, joint petition in Virginia. The clients have a home valued at $374,000 and they still owe $241,000. The homestead exemption in Virginia is $10,000. They want to keep the house and they stated this intention. They owe a little over $100,000 in unsecured debt. The husband lost his job and is on disability and is probably terminally ill with stage 4 colon cancer. They also reaffirmed on their car loans because the wife needs a vehicle to drive to her job and the husband ocasionally drives to his cancer treatments. The .341 meeting is on March 30. I filed Chapter 7 because they said they could not pay the unsecured debt. I have taken another look at this case and I want to get in front of it. Should I convert to a Chapter 13? I think I have made a mistake here. <strong>A couple of facts I need to add. (1) the clients have no significant property of value and it is for the most part exempted, (2) under the means test there was no presumption of abuse and (3) monthly expenses are exceeding monthly income.</strong>
Submitted: 3 years ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 3 years ago.

Hi JACustomer,

Is it anticipated that your clients monthly expenses will be less than or equal to their monthly income after their unsecured debts are discharged?

If not, how will they pay their expenses each month? (This is something the trustee may also want to know.)

Customer: replied 3 years ago.
This is what I can tell you: This is a family of three, one 19 yr old dependent who is living at home attending college. Schedule I shows combined monthly income(gross minus deductions) of $6,383.27; Schedule J shows average monthly expenses $5,343.42 making a net monthly income of $1,039.85. Form B22A shows they exceed the applicable median family income. which requires completion of Parts IV, V, VI, VII. Gross current monthly income (line 18) is $7,804.05. The total of all deductions allowed (line 47) is $8,583.86. which results in a monthly disposable income (line 50) of $-779.81 with a 60 month disposable income (line 51) of $-46,788.60. The amount of unsecured debt on the Schedule F is $100,809.73, divided by 60 is about $1,680.16 rounded off. I suppose they will have to cut back on other items. They want to keep the house and the two vehicles. Plus, the wife is a co-signer on her daughter's vehicle. The daughter needs it to get to school.
Expert:  cfortunato replied 3 years ago.

It is not true that they do not own anything of value, since the home has a gross equity of $133K ($374K - $241K). Since there is more equity in the home than the allowable exemption, you will have to convert to a Chapter 13 to avoid losing the home.

This looks like a problematic case, because they will have to pay the non-exempt equity over the course of the Chapter 13. Taking into account the cost to sell the home (5%), the non-exempt equity is $103,800, which will result in a $1730 monthly payment just for the home equity.

Are you sure the current market value of the home is $374K?

Customer: replied 3 years ago.
The $374K is what the county assessed it at.
Expert:  cfortunato replied 3 years ago.

That is not the amount the Bankruptcy trustee will look at. The trustee will want to know how much the house can sell for, which is often far different from the county assessment. Perhaps you can go to a website such as Zillow.com or a similar site to find out - at no charge - what their home can sell for.

Customer: replied 3 years ago.
My clients have told me that they have been to sites like Zillow and they got appraisals at $375K, they even got one for $410K I'll take a look at Zillow.com. Thanks.
Customer: replied 3 years ago.
Zillow says the market value is $352K
Expert:  cfortunato replied 3 years ago.

Do you understand why that is a problem if the balance of their mortgage is only $241K? (The problem is that Virginia's homestead exemption is one of the lowest in the country.)

I am anticipating that your next question will be how do you get your clients out of this predicament, and as I do not know the answer, I will opt out of this question so that someone else can help you further.

 

 

Customer: replied 3 years ago.
I have to convert to Chapter 13.
Expert:  cfortunato replied 3 years ago.

Yes - but I don't know if that will be an actual solution, because when a Chapter 13 is filed, the unsecured creditors have the right to receive what they would have received if a Chapter 7 had been filed. This amount is approximately $100K, which is the non-exempt equity in the home.

That means your clients would have to pay at least $100K over the life of the plan (5 years) - which is over $1500 per month. Since their disposable income is negative, this is not possible.

The botXXXXX XXXXXne is they cannot save their home by filing a Bankruptcy.

Customer: replied 3 years ago.
The only other option would be to move to dismiss the Chapter 7 case then.
Expert:  cfortunato replied 3 years ago.

You will not be able to have the Chapter 7 case dismissed.

I think they have to decide how important the house is, and they have to decide if they are able and willing to budget so that they are able to pay the $1500 monthly (maybe a little less, because trustees can negotiate) over and above their other necessary expenses for the next 5 years. This way the decision is theirs, and if it is possible for them to budget, you should be able to convert to a Chapter 13.

Otherwise, they have to accept the fact that they are going to lose the house.

 

Customer: replied 3 years ago.
I didn't mention this yesterday. The husband has $65K in a 401k which is listed as exempt. Does this help out in the Chapter 7 context. Can I use it in the conversion?
Expert:  FiveStarLaw replied 3 years ago.
As the expert you were working with has opted out, perhaps I can help. Please let me know if you still require assistance
Customer: replied 3 years ago.
I have a Chapter 7 Joint Petition clients. My clients look like they will lose the house because they have about $130K in equity. The unsecured creditors are at about $101K So, I know I have to convert to Chapter 13. I am not experienced in Chapter 13 but I will work it and I got myself some mentoring. The husband has a 401k with $66K in it. I intially exempted this. Could I amend Sehed C to remove this exemption and if so would that help the trustee maybe settling the unsecured debt with 66cents on the dollar instead of taking the remaining equity in the house in the Chapter 7. The husband is very ill with advanced cancer so losing the house would be very hard on him. In the Chapter 13 context, could I make the 401k part of the Chapter 13 plan. The clients have been unsuccessful in getting access to this money to settle with their unsecured creditors so could I get at this money through the bankruptcy process..
Expert:  FiveStarLaw replied 3 years ago.
Hello,

So sorry to hear of your clients difficult situation.

I am a lawyer with 25 years experience. While I am not your lawyer and do not represent you, I will endeavor to provide you with legal information through this open and nonconfidential forum.

Liquidating an exempt asset to fund the Chapter 13 plan is typically a grave error. Once liquidated it becomes an unsecured asset available to fund the plan.

My suggestion is that you have your client convert to a Chapter 13 bankruptcy. A chapter 7 debtor can convert as of right to a chapter 13 provided the Chapter 7 debtor meets the qualifications for the Chapter 13 plan.

Once your client has converted to a Chapter 13 plan -- without liquidating a 401(k) --you can move for dismissal. You will not be able to dismiss strictly from the Chapter 7 but may dismiss from the chapter 13
Customer: replied 3 years ago.

It looks like my client will need the 401k to fund the plan because monthly disposable income (B22A line 50) and 60 month disposable income (B22A) is negative.

 

I do not understand the paragraph about dismissal.

Expert:  FiveStarLaw replied 3 years ago.
If you use the 401(k) to fund the plan, your client will lose both the 401(k) and the house.

It was a mistake to have a filed bankruptcy and you need to get your clients out of the bankruptcy court because they are over exemption and will lose their house.

A chapter 7 bankruptcy trustee will not allow your case to be dismissed. The only method to have the case dismissed is to first convert to a chapter 13 and then dismiss from the 13

I suggest that you bring in cocounsel as you have placed your clients in a very difficult position.
Customer: replied 3 years ago.
I did think of the potential for both losses if I this. Should I convert before the .341 meeting takes place?
Expert:  FiveStarLaw replied 3 years ago.
absolutely
FiveStarLaw, Attorney
Category: Bankruptcy Law
Satisfied Customers: 36471
Experience: Bankruptcy Lawyer. Experienced.
FiveStarLaw and 4 other Bankruptcy Law Specialists are ready to help you
Customer: replied 3 years ago.
I just filed the Motion to Convert . I really feel like an idiot but this has been a learning experience. However, I'm sure you know that dismissing out of Chapter 13 is not a foregone conclusion but I think I can get my clients into a workable plan. Thank you very much. You were very helpful. You were the best expert
Expert:  FiveStarLaw replied 3 years ago.
Thank you for your kind words and thank you for the bonus. After the chapter 7 is converted into the chapter 13, the chapter 13 will almost absolutely be dismissed if the debtor does not attend the 341 hearing and/or confirmation hearing or does not make plan payments
Customer: replied 3 years ago.
The way I am reading the statutes it looks like there is an option to kick it back into 7 if the client does these things but you have the experience so who am I to gainsay what you say. I took the last 6 years off to take care of my mom and when I started back up last year I wanted to get into something that would start fast to make up for lost time. Bankruptcy sure has been that for me and this case is the first time I made a bad situation for myself that I couldn't figure out quickly enough. I spotted this bad situation on Sunday when I was taking another look at the case. You set me on the right track out of it.
Customer: replied 3 years ago.
I converted my clients (husband & wife) from a Chapter 7 to a Chapter 13 because they have $133K in equity in their house and they want to keep the house. (They have about $101K in unsecured debt). Now, the husband is gonna be dead from two types of stage 4 cancer in a year and the wife is 57 so, I'm thinking, why would she want to pay down a $241K motgage on this house in her elderly years. She has good and steady employment. She could rent. All of her kids are out of the house living their own lives. Shouldn't she dump the house and use the equity to make the payments under the Chapter 13 plan any way?
Expert:  FiveStarLaw replied 3 years ago.
I am glad that you have converted to a Chapter 13 plan. To be perfectly clear, you have significant malpractice exposure and need to mitigate your exposure and the damage to your client by moving them out of bankruptcy.

Now that your clients are in a chapter 13 plan, consider letting them pay on the plan for 2 or 3 months and then petition the court for dismissal. The wife may be able to sell the house and work out a payment plan with the creditors outside of bankruptcy that would be much more favorable than a 100% payment plan in a chapter 13.
Customer: replied 3 years ago.

What would have been the alternative to bankruptcy. They were not allowed to borrow against the equity in the house to pay off their unsecured creditors; their unsecured creditors were hounding them and wouldn't work out payment arrangements; the husband couldn't get at his 401K to help out in settling with creditors.

 

Am I really exposed to malpractice? These people look like they will lose anyway.

 

I have done a lot of work in boning up on Chapter 13 and I took a CLE in drafting a 13 plan.

Expert:  FiveStarLaw replied 3 years ago.
Unfortunately in my opinion it is a clear malpractice case. I would have advised the clients to either:
1. Sell the house and negotiate out of court with the creditors; or
2. Allow the unsecured creditors to obtained judgments against them and lien the house; or
3. Take an early withdrawal from the 401(k) and negotiate a lower payment
Customer: replied 3 years ago.
Do you think I have minimized the chance of a malpractice case against me by converting to Chapter 13?
Expert:  FiveStarLaw replied 3 years ago.
Yes. You will now need to have the bankruptcy dismissed.
Customer: replied 3 years ago.
Isn't there a chance that the trustee might require the unsecured creditors to take less than 100% on their claims?
Expert:  FiveStarLaw replied 3 years ago.
No there is no chance of that at all since the equity in the property exceeds the amount of outstanding unsecured debt
Customer: replied 3 years ago.

OK

 

I admit that I am getting concerned about my position in this. I will try to work it through.

 

You are fairly sure that the clients can dismiss out of this; that the court won't put them back into 7?

Expert:  FiveStarLaw replied 3 years ago.

Did you have any contact with the chapter 7 trustee? Did you convert prior to the 341?
Customer: replied 3 years ago.
I moved to convert on March 9th. The 341 is set for March 30th. I have had no contact with the Chapter 7 trustee.
Expert:  FiveStarLaw replied 3 years ago.
There is an absolute right to convert from the 7 to 13. Once the 7 is converted to the 13, the conversion or dismissal rights are based upon the rules of conversion or dismissal under Chapter 13. A debtor has an absolute right to dismiss the Chapter 13 bankruptcy unless the chapter 13 is the result of conversion. Since this 13 is going to be the result of a conversion from the 7, it is very helpful that you have stayed out of the chapter 7 trustee's "radar" as typically only the trustee would object. My experience has been that provided your client makes a couple of payments under the chapter 13,the court will allow the dismissal
FiveStarLaw, Attorney
Category: Bankruptcy Law
Satisfied Customers: 36471
Experience: Bankruptcy Lawyer. Experienced.
FiveStarLaw and 4 other Bankruptcy Law Specialists are ready to help you

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