Cross-Collateralization Agreements in Bankrupty

What is a cross-collateralization agreement?

A cross-collateralization agreement is a type of consumer contract that provides for property to be used as collateral for two or more loans. For example, a cross-collateralization agreement could provide that your car serves as collateral for a credit card and personal loan, in addition to your car loan. This type of agreement is commonly used by credit unions and community banks.

What happens if I default on a cross-collateralized loan?

If you have cross-collateralized loans, then your collateral is typically security for every loan with that credit union or bank. Turning back to our car loan example, this means that even if you are current on your car loan, your car could be repossessed if you default on any of the other loans you have with that lender.

How does a cross-collateralization agreement affect your bankruptcy?

If you want to eliminate debt through a Chapter 7 Bankruptcy, cross-collateralized loans could throw a monkey wrench in your plans. Under the Bankruptcy Code, all of the loans subject to the agreement would be considered secured claims. This means that in order to to keep your property, you would have to either redeem or reaffirm all of the cross-collateralized debt.

To demonstrate how this affects a Chapter 7, here’s a hypothetical. Let’s assume that you own a car worth $5,000.00. You have a $6,000.00 balance on your car loan, a $15,000.00 personal loan, and you signed a cross-collateralization agreement with your lender. If you want to file a Chapter 7 Bankruptcy and keep your vehicle, you would have to either redeem the property by making a lump-sum payment of the fair market value of the vehicle ($5,000.00) or reaffirm $21,000.00 in debt. Neither of these are great options.

So what is a better solution? Depending on your circumstances, one option may be to file a Chapter 13 and reorganize your debt. A Chapter 13 Bankruptcy requires that a debtor repay at least a portion of their debt over a three to five year period. A major advantage, however, is that debtor can “cramdown” certain secured debts. This would allow the debtor in our hypothetical to pay off the car at its fair market value ($5,000.00) and treat the remaining $21,000.00 as unsecured debt which could be discharged by the bankruptcy.

To find out if you qualify to file bankruptcy, and which solution is right for your financial circumstances, you should consult with an attorney. To schedule a free bankruptcy consultation with The Mays Law Firm PC, call (215) 792-4321.

Median Income Increased In Pennsylvania. Do you qualify to file Bankruptcy?

Are you thinking about eliminating or restructuring your debt through bankruptcy? Do you qualify? As of November 1, 2016, the median income data for Pennsylvania has increased. This median income data is used to determine whether or not a debtor qualifies for a Chapter 7 Bankruptcy. In a Chapter 13 case, the median income is used to determine the commitment period and disposable income of debtors in a Chapter 13 Bankruptcy.

For cases filed in Pennsylvania after November 1, 2016, here is the updated median income data:

For each additional member of your household add an additional $8,400.

Are you considering bankruptcy? The Mays Law Firm can help you determine if you qualify. Call (215) 792-4321 to schedule a free consultation.

Discharging Taxes In Bankruptcy?

As Benjamin Franklin once wrote, “in this world nothing can be said to be certain, except death and taxes.” Although you may never be able to completely rid yourself of tax debt, you may, however, be able to discharge some income tax obligations through bankruptcy.

Types Of Tax Debt That Can Be Discharged in Bankruptcy.

The good news: You may be able to discharge some tax debts by filing bankruptcy. The bad news: Not all tax debt is dischargeable. And, the rules regarding the discharge of tax debt can be complicated.  For starters, only income taxes can be discharged through bankruptcy. Other taxes, such as payroll taxes, real estate taxes, etc., are nondischargeable. It is important to note that if you commit tax fraud or engage in willful tax evasion, then you will lose your ability to discharge the tax under the Bankruptcy Code.

The Rules For Discharging Income Taxes (The 3-2-240 Rules).

Assuming you owe federal or state income taxes, under the Bankruptcy Code, the taxes must be owed from a filed return over 3 years prior. So, for example, if you filed your tax return on April 18, 2016, for your 2015 taxes, you will have to wait until April 18, 2019, before you could file bankruptcy and discharge those taxes.

Note that I said, “from a filed return.” That’s another rule. The tax return needs to be filed at least 2 years prior to filing bankruptcy. Are you avoiding filing that return because you owe taxes? Don’t. You could end up owing the IRS even more, and make the debt nondischargeable in the process.

Finally,  you must also meet the 240 day rule, which provides that the tax must have been assessed at least 240 days before your file your bankruptcy. Generally, the date of the assessment would be the date you filed your return, but there can be some scenarios, such as an audited or amended return, where the assessment date could be different that the return date.

This is a complicated topic, but if you’re facing a mountain of income tax debt, you may be able to reduce or eliminate your tax debt through bankruptcy. Remember, if you avoid your obligation to file returns, you could limit your ability to discharge your tax debt in bankruptcy. A failure to file could have other consequences as well, such as preventing your from obtaining a mortgage modification or other loan to restructure your debt.

If you are considering restructuring or eliminating debt through bankruptcy, call The Mays Law Firm PC at (215) 782-4321, to schedule a free consultation.

NJ Court Cans Condo Cramdown

The United States District Court for the District Court for the District of New Jersey recently dealt some bad news for New Jersey condominium owners attempting to restructure their debt in bankruptcy. In Whispering Woods Condominium Association v. Rones, the Court reversed an earlier Bankruptcy Court ruling, holding that a condominium association’s lien for assessments (condo fees) could not be crammed down in bankruptcy.

What is a cramdown?

If you are not familiar with bankruptcy lingo, a “cramdown” is a proceeding in a bankruptcy case that asks the Court to reduce the balance of a lien on real or personal property because the amount of the lien exceeds the value of the property. This is sometimes also referred to as “stripping” or “bifurcating” the lien. This is a helpful tool for people that are underwater in certain qualifying liens. For example, let’s say that your car is only worth $10,000.00, but you still owe the bank $15,000.00. You could cramdown the loan to the value of the car ($10,000.00) and the remaining $5,000.00 would be treated as an unsecured debt. In many Chapter 13 bankruptcy cases unsecured creditors do not receive the full amount of their claim, so if you were successful in cramming down your loan, you may end up paying the loan off for substantially less money.

There are certain debts that cannot be crammed down.

There are certain debts in the bankruptcy code that cannot be crammed down. Notably, a lien that is secured by an interest in real estate that is your primary residence (such as a first mortgage on your home) cannot be crammed down thanks to the “anti-modification clause” found in Section 1322(b) of the Bankruptcy Code. Second mortgages or other liens on your primary residence can only be crammed down if they are “wholly unsecured”, meaning that your home’s value is less than the prior mortgages.

Turning back to condo fees.

If you own a condo, I’m sure you’re aware that you have to pay your condo assessments. If you don’t, most state’s laws provide for a lien on your home until they get paid. Typically, to protect first mortgage holders, this lien is subordinate, at least in part, to a first mortgage. Turing back to the Whispering Woods case, the homeowners attempted to cramdown the entire condominium lien by arguing that that their home was worth less than the balance due on their first mortgage. They they convinced the Bankruptcy Court that the condominium lien was “wholly unsecured” because the first mortgage balance exceed the value of their home.

This District Court disagreed, relying on New Jersey’s “super-lien” provision to reverse the Bankruptcy Court’s ruling. New Jersey, like most other states, provides that a limited portion of a condominium lien retains priority over other liens, including first mortgages. In New Jersey and Pennsylvania, a condominium retains a six month lien for assessments over the first mortgage. This is commonly referred to as a “super-lien”. Because of this “super-lien”, the District Court found that the condominium’s lien was at least partially secured, and rejected the homeowners attempt to cramdown the lien.

What does this mean for condo owners in bankruptcy?

While you cannot cramdown a condominium lien, you still might have other options to deal with substantial, past-due condo fees in bankruptcy. An experienced attorney can help you evaluate your financial situation and find solutions to your debt problems. The Mays Law Firm PC offers a free, no-obligation consultation. Call (215) 792-4321 now to schedule a consultation.