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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
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Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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I have the following with my credit union (Senate Federal Credit

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I have the following with my credit union (Senate Federal Credit Union):

Home Equity Loan - 45,000 balance

Credit Card - 5,000 balance

Personal Unsecured Loan - 10,000 balance

My first mortgage balance is 220,000 and my estimated home value (Zillow) is 246,000.

If I file chapter 13, will I be able to include the credit card and personal loan or will they be cross collateralized with the home equity loan?

Since the amount of the home equity loan exceeds the value of the home, will a cram down of the home equity balance be allowed?
Home Equity Loan - 45,000 balance

Credit Card - 5,000 balance

Personal Unsecured Loan - 10,000 balance

My first mortgage balance is 220,000 and my estimated home value (Zillow) is 246,000.

If I file chapter 13, will I be able to include the credit card and personal loan or will they be cross collateralized with the home equity loan?

A: Each loan is a separate issue for bankruptcy purposes. The creditor could use equitable setoff to use any deposit accounts or CDs, etc., to pay off your debts owed to the creditor (so, you may want to close any such accounts). But, the debts will not be setoff against each other.

Since the amount of the home equity loan exceeds the value of the home, will a cram down of the home equity balance be allowed?

A: No cramdown allowed on a principal residence 1st mortgage. In order to "lien strip" a 2nd loan on a debtor's principal residence (which is the terminology used for Chapter 13), and convert it to an unsecured loan, the loan balance of the senior loan/lien must be greater than fair market value of the property. Of course, if you were to not pay your mortgage for a few months, the fees and interest that would build up could quickly drive your loan balance over fair market value. But, until it does, sufficient for you to be able to prove it to the court, you cannot strip the 2nd lien off the property.

Hope this helps.
Customer: replied 4 years ago.


So the cross collateralization clause that the credit unions write into the loan does not apply in chapter 13? Each loan, credit card, HELOC are treated seperately?

You stated that your loans were unsecured. If they are cross-collateralized, then they may not be unsecured.

 

Although the issue has not yet been considered by the U.S. 4th Circuit Court of Appeals -- which controls bankruptcy law interpreted in the Maryland District, the general rule is that cross-colateralization of unsecured debts to real property is unlawful under the Bankruptcy Code, because it effectively creates a security in an unsecured debt, as a consequence of the bankruptcy petition filing, and without constructive notice recorded with the clerk or court prior to the bankruptcy. Matter of Saybrook Mfg. Co., Inc., 963 F. 2d 1490 (U.S. 11th Cir. 1992).

Were such cross colateralization permitted, creditors could effectively transform all unsecured debt into secured debt upon bankruptcy, and thereby render the entire bankruptcy code meaningless.

So, while I cannot be absolutely definitive, due to your locale in Maryland, I'd say it's a pretty good bet that the bankruptcy court will deny recognition of any cross-collateralization clause.

 

That said, if your bankruptcy lawyer determines that the credit union cross collateralization agreement is enforceable (or, more to the point, too costly to litigate, in comparison to the amount of savings gained by a favorable ruling), then your maximum liability would be the remaining equity in your real property -- which after considering costs of sale, appears from your allegations to be roughly zero.

 

Regardless, I don't see any legal rationale under which all of the "unsecured" loans would be considered immune from a lienstripping ("cramdown" using your terminology), because the HELOC and the 1st loan appears to render all of the other financing greater than the value of the collateral/real property.

Hope this helps.

Customer: replied 4 years ago.

One last question. How far back does the trustee go to look at new loans? For example, I suspect getting a $10, 000 loan an then filing chapter 13 the following month would not be allowed.

A debt incurred with the actual intent to defraud can be avoided if within 2 years of the date of filing bankruptcy. Bankr. Code 548(a)(1)(A). Additionally, a debt incurred at any time can be deemed incurred with fraudulent intent and declared nondischargeable. Bankr. Code 523(a)(2). A substantial loan or credit card purchase incurred within 90 days of filing will receive particular scrutiny.

The legal consideration is your intent when incurring the debt. If it is shown by extrinsic evidence or your own testimony that you knew you would be filing bankruptcy when you incurred the debt, then that is a fraud, and the creditor or trustee can have the debt declared nondischargeable.

Hope this helps.
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