Modification of Secured Debts in Chapter 13
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Modification of Secured Debts – “Strip Down“
A Chapter 13 plan may modify the rights of secured creditors. For example, if the property is worth less than the amount of the secured debt (“upside down” or “underwater” loans), the Chapter 13 debtor may write down the debt to the property’s current fair market value.
In particular, the Chapter 13 debtor is permitted to divide the secured debt into two parts – secured and unsecured. The secured part of the debt is represented by the current fair market value of the collateral and must be paid in full through the plan (cram down). Usually, it is done with a balloon payment due in the 24th month of the plan. The debtor may need to sell or refinance the property to make the balloon payment. The unsecured part of the debt is the “upside down” or “underwater” amount, i.e., the difference between the total debt and the value of the collateral, and can be “stripped down”. The stripped down portion of the claim is treated and paid as general unsecured debts.
The strip down may not be allowed when the debtor has a non-filing co-signer on the car loan. In such cases, the creditor may object to the strip down and/or possibly seek compensation or repossession of collateral after the discharge. Sometimes, however, creditors may agree to the strip down, especially when the alternative is Chapter 7 for both the debtor and the non-filing co-signer.
There is one exception. The strip down is not allowed with respect to home mortgages and undersecured claims on cars purchased for personal use within 910 day (about 2 ½ years) prior to the bankruptcy filing and to any type of collateral for a debt incurred within one year of the bankruptcy filing. The Chapter 13 plan must provide for full payment of these debts, not just the value of the collateral, except that the home mortgage does not need to be paid in full. Payments to the home mortgage may be made over the original loan re-payment schedule so long as any arrearages are caught up on during the plan.
Modification of Secured Debts – “Strip Off”
Although the debtor may not write down a homestead mortgage to the fair market value of the home, a wholly unsecured homestead mortgage is not protected from modification and can be “stripped off.”
If the debt is completely unsecured (this typically happens with second mortgages when the first mortgage itself is “upside down”), a Chapter 13 debtor can eliminate or “strip off” the entire secured claim (second mortgage), leaving the second mortgage creditor with only an unsecured claim. A wholly unsecured claim is void upon Chapter 13 discharge – the second mortgage lien against the house is removed. If the debtor does not receive the discharge, most commonly for failure to complete the Chapter 13 plan, the second mortgage debt will be re-instated.
Valuation of Property for “Strip Down” and “Strip Off”
Valuation of property is necessary to determine whether the full amount of the secured debt is secured by the collateral. In Chapter 13, the value of the collateral is generally determined as of the effective date of the Chapter 13 plan. Generally, the value of the real estate is established through an appraisal prepared by a Florida Certified Appraiser. However, a bankruptcy court is not bound by valuations submitted by appraisers and may form its own opinion as to the value of property based on the proposed comparables.
When the collateral is a car, the NADA retail or trade-in value of the vehicle depending on the bankruptcy court where the case is filed. The Orlando division of the Middle District of Florida Bankruptcy Court allows redemption for the NADA trade-in value. The Tampa and Jacksonville divisions go by the retail value based on the condition of the vehicle. If a vehicle requires significant repairs, body or mechanical work, an appraisal may be beneficial to prove the value of the vehicle.
How can we help?
If you have secured debts that need attention, either because you are struggling to make monthly payments or behind on payments and risk foreclosure or repossession of the collateral, we can help you evaluate your options with respect to such debts if you want to keep the property and guide you through the necessary process to restructure your obligations and repay them over 3-5 years.
At Anna Handy Law Firm, P.A., we are acutely aware of the financial strain of our clients. We do not charge you for the initial phone consultation. We do not push you to file bankruptcy to get a retainer. We don’t judge – we find solutions. We give you honest advice about your options and rights, including the “doing nothing” approach. As such, we offer very affordable bankruptcy fees. We make our fees competitive and in certain cases, we offer payment plans to address each case individually as each case has a different set of circumstances.
If you are overburdened by your debts, being sued or harassed by creditors, or subject to wage garnishment, do not hesitate to call us now for a free initial phone consultation. The attorney’s direct business cell phone number is (386) 248-3000. You may also email us at [email protected].