Since the great recession, property values have plummeted leaving many properties underwater, whereby the mortgage or mortgages on the property are greater than the value of the property. Under 11 U.S.C. 506(a) and 11 U.S.C. 1322, you can cramdown the mortgage, or mortgages, to the value of the property under certain conditions, meaning that you can “cramdown” or reduce the mortgage to whatever the value of the property is. As an example, if your property is worth $120,000.00 and you owe $200,000.00 on your mortgage, you can cramdown, or reduce the mortgage to the $120,000.00 value of the property. The balance of the mortgage that is not crammed down will be discharged along with your other unsecured debt upon completion of the Chapter 13 Plan.

First, the property cannot be your primary residence, it must be an investment property.

Second, you cannot cramdown the mortgage in a Chapter 7 bankruptcy. The owner, or owners, of the property must file a Chapter 13 bankruptcy to cramdown the mortgage, therefore the owner, or owners, must be eligible to file a Chapter 13 bankruptcy.

If you have fallen behind on your mortgage payments, a Chapter 13 can save your home by enabling you to repay the missed mortgage payments over a 3 or 5 year period. Most people don’t have the ability to cure the mortgage default by making a lump sum payment, or by making double payments every month. Most people do have the ability to make up the missed mortgage payments over a 3 or 5 year period however.

In addition to curing the mortgage default, your unsecured debt will be discharged as well (with certain exceptions), which will make it easier for you to manage your monthly bills.

If your mortgage company has filed a foreclosure lawsuit against you, the Chapter 13 will immediately stop the foreclosure from proceeding and give you a chance to cure the default as described above.

While in the Chapter 13, you can also apply for a mortgage modification.

Debt consolidation companies spend a lot of money creating an image that bankruptcy should be avoided at all costs, but the facts reveal that bankruptcy is a better option for most people a vast majority of the time.

A typical debt consolidation plan requires you to make a single monthly payment to the debt consolidation company in lieu of paying your debts individually. They hold that money for months and even years until there is enough money accumulated to work out settlements with each of your creditors individually. During that time period, you are not making payments to your creditors and your credit score continues to plummet.

Additionally, once you have settled your debt for less than you owe to your creditors, then you will be responsible for paying income taxes on the amount of debt that was cancelled. Example: If you owe $50,000 in credit card debt and you settle that debt for $20,000, then then you will have to pay income taxes on the $30,000 that was cancelled. You will receive a 1099-c (Cancellation of Debt Income) from the creditor, as the creditor must report to the IRS that they cancelled your debt. By contrast, the debt you discharge in bankruptcy is not taxable at all.

On November 17, 2022, the U.S. Department of Justice put out new guidance to Justice Department attorneys regarding requests to discharge student loans in bankruptcy cases.

Current Law

Pursuant to 11 U.S.C. §523(a)(8), certain student loans may not be discharged in bankruptcy unless the bankruptcy court determines that payment of the loan would impose an undue hardship on the debtor and the debtor’s dependents.

It is the undue hardship standard that has prevented discharge of student loans in bankruptcy cases for the vast majority of debtors in the past. The seminal case that sets forth the factors a debtor must show in order to prove an undue hardship is, Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). To discharge a student loan under the Brunner test, a bankruptcy court must find that the debtor has established: (1) the debtor cannot presently maintain a minimal standard of living if required to repay the student loan, (2) circumstances exist that indicate the debtor’s financial situation is likely to persist into the future for a significant portion of the loan repayment period, and (3) the debtor has made good faith efforts in the past to repay the student loan.

I recently received a call from a financial advisor that works at one of the largest banks in the world. One of his clients accepted a forbearance plan on his mortgage during the Covid-19 pandemic and hadn’t paid his mortgage for more than a year and owed more than $30,000 in mortgage arrears. His client was told by the mortgage company that the missed payments during the forbearance period would be put at the end of the loan.

The mortgage company however, did not honor this agreement and demanded the entire sum immediately for the missed mortgage payments. This scenario is happening to so many borrowers across the country and people are being put into foreclosure for these missed mortgage payments that they thought would be deferred to the end of the loan.

I asked the financial advisor about his client’s current financial circumstances and their ability to repay the $30,000 from savings. I was told that his client did not have the money to pay the mortgage arrears from his savings, but was able to pay the ongoing mortgage payments each month from his income.

I suggested to the financial advisor that his client could file a Chapter 13 bankruptcy and pay back the mortgage arrears interest free over a five year period. I explained to the financial advisor that this is precisely what a Chapter 13 is used for. Immediately upon mentioning bankruptcy, the financial advisor dismissed the advice outright and said his client shouldn’t file bankruptcy. I asked him why and was told that he shouldn’t “trash his credit” with a bankruptcy. Instead, the financial advisor said he was going to tell his client to withdraw the money from his retirement account even though he would end up paying over $10,000 in taxes and penalties by doing so. In addition, his client would have to sell stocks in his retirement account to get the $30,000. Selling stocks in a bear stock market is not sound financial advice. I told the financial advisor that this was bad advice he was giving to his client, as a Chapter 13 bankruptcy would cost less than half of cost of withdrawing money from his retirement account. In addition I explained that the retirement savings was completely safe (exempt) in a bankruptcy. It was clear to me immediately from his tone and reaction to the mere mention of a bankruptcy, that this financial advisor was going to give bad advice to his client. I was correct and he dismissed the idea outright without ever explaining the option to his client. This type of ignorance of the bankruptcy process has caused countless numbers of people to listen to bad financial advice for no other reason than the perceived stigma of filing for bankruptcy protection.