Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

In determining "projected disposable income" for the purposes of creating a chapter 13 bankruptcy plan, how do we deal with debtors whose incomes have changed?  Can we just disregard that huge bonus you received; or what happens when your income goes up, or down during your bankruptcy?  How should we deal with that car you own outright?  For answers to these questions we turn to recent case law.

The court in Ransom v. MBNA (In re Ransom), 577 F.3d 1026 (9th Cir. Aug., 2009) held that an above-median income debtor seeking bankruptcy relief under chapter 13 cannot deduct from his disposable income, a vehicle 'ownership cost' for a vehicle he owns free and clear, that would otherwise be income available to unsecured creditors.  The Ransom case is one example of the court's plain reading of the statute in 11 U.S.C. Section 707(b)(2) that an ownership cost is not an 'expense.' 

The 10th Circuit court reviewed the issue of whether 'projected disposable income' for purposes of chapter 13 plan confirmation should be obtained using the "mechanical test" set forth in the Code, or a "forward looking approach."  The holding from In re Lanning, 545 B.R. 1269 (10th Cir. November, 2008) says, "The mechanical approach 'subject to a showing of substantial change in circumstances,' in other words the forward looking approach."  The Solicitor General has filed an invitation brief with the Supreme Court in the In re Lanning case. This case is currently pending before the Supreme Court.  We are forward-looking to the outcome after the Supreme Court's review.

This issue is of national concern as Craig Anderson points out in his blog article, '“Projected Disposable Income” in Chapter 13 Cases: Rearview Mirror, or Crystal Ball?'   posted at the Bankruptcy Law Network.  What these cases mean to our bankruptcy practice of chapter 13 cases is to really look at the individual circumstances of our clients.  Every case is unique.  The good news is that we have more control in chapter 13 and more options; such as timing the filing of the case; or request to modify the chapter 13 plan.  As debtor's counsel, we must have a complete understanding of our client's goals and their particular circumstances so that we may present the best argument on their  behalf.

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Over on MSN Money, Liz Pulliam Weston wrote an article entitled, "Are You Foolish to Pay Your Mortgage?"  I get asked this question all the time, is it worth it to keep my home?  I'm passionate about this subject on behalf of my clients, whom I advise whether filing bankruptcy is in their best interests financially.  What really caught my eye about this article was Law Professor Brent White's paper, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."  I agree with Liz that this is a must read for the finer points and Liz certainly summarizes his points from her perspective that we all need to do our best to save our homes and we all must make the best of a bad situation and know when it's time to walk away from our mortgages.

The good news is that California is a 'non-recourse' state.  This means that lender cannot pursue defaulting homeowners for deficiency judgments where they owe more than what the house is worth or what the lender might receive in a short sale or foreclosure sale.  For Californian's this is good news too because their will be no income tax on the cancelled debt or capital gains taxes to be paid on the deficiency. 

Knowing that we won't get taxed or sued after we walk away from our mortgages here in California should bring a sigh of relief, but when is it a good financial decision to walk away?  Professor White says that when the net cost of homeownership becomes more expensive than the net cost of renting is when you should walk away.  His article provides in-depth details and citations and even a hypothetical example of a couple who bought their home in 2006, at the height of the real estate boom. To make it easy, I've found a housing cost calculator on the internet that might help, but I wouldn't base any decision solely on this information.

I think the biggest challenge is to walk the imaginary road into the future and ask yourself whether you'll be better off in the long run.  I suggest that if you can afford your mortgage payment now, even though you're home's value is less than what you owe, you may be better off in 20 years than if you had rented.  Why?  In 20 years you will likely have paid down your principal, or even paid off your mortgage and if you've been maintaining your home, you're maintenance costs will likely have dropped.  If you rented for 20 years, you're still a renter and we all know the cost to rent will invariably rise over that time too.

I agree with Liz when she says to "Get Help."  Talk to your HUD Counselor, your tax professional and your local bankruptcy lawyer.  The sooner, the better.  Don't spend down any savings trying to save a sinking ship because you may end up in a worse financial situation. 

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The following information has been provided by the  Insolvency Law Committee - Business Law Section of the State Bar of California.  The bulletin was prepared by Gary Kaplan, Special Counsel at the law firm of Farella Braun + Martel LLP in San Francisco. 

In the bulletin, Gary Kaplan writes, "On November 30, 2009, the Departments of Corporations weighed in with its regulations in support of Assembly Bill 7, referred to as the California Foreclosure Prevention Act, which was enacted on February 20, 2009 and became effective upon the issuance of the first set of regulations in support of it.  This marks the third regulatory agency to do so, following the Departments of Financial Institutions and Real Estate.  The new regulations can be found at http://www.corp.ca.gov/OLP/pdf/rm/0509-2B.pdf.  The Act provides a 90-day foreclosure delay for residential mortgage loans on owner-occupied homes where the first loan was recorded between January 1, 2003 and January 1, 2008, unless the loan is serviced by a financial institution that has a comprehensive loan modification program, as specified.  The provisions of this legislation “sunset” on January 1, 2011."

What this means to you, the homeowner, is that generally, you will notice that after you receive a notice of default on your mortgage, your lender will begin sending you loan workout packages and gather information from you to determine whether you qualify for a loan modification.  This seems to be what the lenders are doing during their 90-day moratorium.  We have already seen that these trial loan modifications are not working to modify the majority of home in distress.  This is either because the loan has been sold as an asset-backed security to investors, or the owner simply cannot afford the mortgage.

As I have said before, in the  5 ways to stop foreclosure, only a bankruptcy and a court ordered injunction will legally stop a foreclosure.  The sooner you talk to a bankruptcy lawyer to discuss your options, the more options you will have in creating the best course of action for your particular circumstances.  Every case is unique.  

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For those attorneys who are new to the area of bankruptcy law and who need to know how to get around in the Central District; here are ten (10) steps you can take to significantly improve your bankruptcy knowledge and practice.

1. Join the Central District Consumer Bankruptcy Attorneys Association and Read the list serv:  As much as you can.  I also create folders in my email account and distinguish them by the chapters so I can later reference them.
2. Read Professor John Hayes Book, A Summary of Bankruptcy Law
3. Buy Practice Guides from the National Consumer Law Center
4. Sign up for the Bankruptcy Mastery Ecourse [FREE]
5. Volunteer for Public Counsel and take their training Course [FREE] contact Marisa Hawkins at: mhawkins@publiccounsel.org
6. Get Your Own Mentor and take them to Lunch!  Be willing to volunteer to help your mentor, co-counsel with them, etc.  Our experts are busy practicing law and have been so generous as to answer our newbie questions . . . lunch is a great way to get questions answered and build your network at the same time. 
7. Read Blogs from NACBA and join NACBA while you're at it.
8. You Must Read the Local Bankruptcy Rules
9. Attend all the MCLE programs put on by the CDCBAA, NACBA, OCBF, ABI, CEB, etc. that are in town. 
10. Volunteer your time to help improve our group because you care! 

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If you have ever found CNBC on television, they have this show called, Til Debt Do Us Part.  It's a great show where the host, Gail Vaz-Oxlade takes a tough love approach to helping couples get out of debt and on the road to financial recovery.  I would say that if your marriage can survive through these tough economic times, then you will make it through anything; together.

Unfortunately, with money being a primary motivator for divorce, many couples are faced with the decision as to whether to file for bankruptcy or divorce first.  My answer will always be on a case by case basis with couples.  I will always support couples to stay together and that money does not have to break a marriage apart.  However, some marriages may have needed  to be ended some time ago and a financial crisis may serve as the perfect issue to end the marriage with.

Because California is a community property state, all property acquired during marriage is community property, while property acquired before marriage or after permanent separation, or by gift or inheritance, is separate property.  The characterization of an asset as community property or separate property depends on three factors: (1) the source of the item; (2) action of the parties which may have altered the character of the item; (3) any statutory presumptions affecting the item.  This means, in general, is that all your assets and all your debts belong to the community and are shared equally between spouses.

So, if you're in a marriage that is facing insurmountable debts and you are trying to determine whether to file for divorce or bankruptcy first, then you will need to consult with your local bankruptcy lawyer.  Your local bankruptcy lawyer will conduct an extensive review of your marital assets and other information, to determine the right strategy for you.

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