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  1. #1
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    Sep 2013
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    Default Converting Bankruptcy from Chapter 13 to 7

    My question involves bankruptcy in the state of: NY
    Can I use ch13 to cram down the mortgages on my rental properties and strip the second from my residence and then convert to 7 to liquidate the non secured debt?

  2. #2
    Join Date
    Sep 2011
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    Default Re: Converting from 13 to 7

    How much do you owe in secured and unsecured debt? What is your income? To attempt this you really need to show your financials to a lawyer.

  3. #3
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    Sep 2013
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    Default Re: Converting from 13 to 7

    My two rental properties are about 50k negative each. I have about 200k unsecured. My goal is to save the rental properties by getting lower payments either through cram down or negotiating a mod, and liquidate the unsecured debt. I already filed ch13 to stop a sale on one rental, but haven't filed the schedules or plan yet. I'm also trying to get HAMP at home and hoping I can use the 13 to persuade it a little. Is there a way to use the 13 to get the mortgages straightened out and then convert to 7 to liquidate the unsecured?

  4. #4
    Join Date
    Sep 2010
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    478

    Default Re: Converting from 13 to 7

    The answer to your first question is "no".

    For the (non HAMP) cram down and/or strip off to be effective you must receive either a chapter 13 or Chapter 11 discharge. The only current exception is in the 11th Circuit where strip offs (not cram downs as far as I know) are allowed in chapter 7 cases. NY is in the 2nd Circuit.

    The answer to your 2nd question is not "yes" or "no". . .

    If you are able to modify the loans under HAMP, the Chapter 7 will not impact such.

    If you go the 7 route you need to be prepared to lose, not only the non-exempt rentals but also the rents those rentals generate. In the context of a chapter 7 the rents will have to be paid to the 7 trustee since, in a 7, you as the debtor, no longer control the property of the bk estate (subject to any allowed exemption). In addition,
    the Trustee will be free to try to sell the non-exempt property. Doing short sales with a carve out (kick back) to the trustee is not uncommon these days.

    Des.

  5. #5
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    Sep 2013
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    14

    Default Re: Converting from 13 to 7

    I was thinking maybe I should convert to 7 now since there is nothing to liquidate, figuring the trustee would abandon the rentals since they have no equity and giving me opportunity to negotiate modifications. However, now your telling me that I'm at risk of the trustee taking them and short-selling them. But in a short sale there's no income generated to fund the BK creditors, so what would be the point? If I did get in this situation, is there a way of me objecting? or a way back out? My main objective is to keep these two rentals, and lower the payments with mods (cram down is not going to work for me if I have to pay the new balance over 3-5 years.) My second objective is to liquidate the unsecured debt, which is necessary for the loan mods since there are few judgments that I cant pay. By the way, there is actually 3 rental properties, but the 3rd I'm willing to surrender. I spoke with a few lawyers who all have different ideas, but none of them knew all the answers, so here I am trying to figure it out. Any thoughts, help is much appreciated

  6. #6
    Join Date
    Sep 2010
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    478

    Default Re: Converting from 13 to 7

    As to the short sale, in several states Trustees have hired realtors and negotiated with under-secured lenders to allow a short sale with a kick back of $$ to the bk estate. I do not know if trustees in your district have jumped on this bandwagon but if they have, your trustee may try to create equity where there is none. Regardless, the rents WILL belong to the Trustee. And, no, you cannot object. Once you go to a 7 you have no say in how an asset is administered (subject of course to any allowed exemptions).

    Can't help you as it relates to negotiating loan mods. You might try loansafe.org.

    Des.

  7. #7
    Join Date
    Sep 2013
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    14

    Default Re: Converting from 13 to 7

    Does all of the rent go to the trustee or just the surplus after the mortgage is paid?

  8. #8
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    Sep 2010
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    Default Re: Converting from 13 to 7

    Trustee gets the rents. If there is an assignment of rents in the mortgage then I would assume the Trustee will pay the lender. Now, of course, your trustee may decide he does not want the rents (doubt it) but look at 11 USC541(a)(6).

    Des.

  9. #9
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    Sep 2013
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    14

    Default Re: Converting from 13 to 7

    Des, Researched this issue thoroughly and this is what I found; USC541(a)(6) says that rent proceeds from "property of the estate" are also property of the estate. However, Chapter-7-s724 says proceeds of such property, shall be distributed first to any holder of an allowed claim secured by a lien. So rent from an investment property would be collected by the trustee and after the mortgage and taxes are paid the profit would go toward the estate. If the trustee or the Court abandons the property (USC554) then the property and the rent proceeds are no longer part of the estate.

  10. #10
    Join Date
    Sep 2010
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    478

    Default Re: Converting from 13 to 7

    Quote Quoting CharlieI
    View Post
    724 says proceeds of such property, shall be distributed first to any holder of an allowed claim secured by a lien. So rent from an investment property would be collected by the trustee and after the mortgage and taxes are paid the profit would go toward the estate.
    I assume you are looking at 724(b) but that section applies to tax liens and the subordination of the same by the Trustee, not payment of rents to a mortgage lender.

    “In bankruptcy, a debtor's assets in the hands of the trustee are subject to all liens and encumbrances existing on the date of the bankruptcy filing (which are not otherwise invalidated). . . Such liens are recognized as a charge upon the estate's assets. However, Section 724(b) provides a mechanism through which the estate can, if necessary, recover certain enumerated categories of administrative expenses from the proceeds of the sale of property which are subject to a tax lien. . . As a matter of public policy, Congress has subordinated the right of statutory lien creditors to the expense of administration. Section 724(b) is intended to reimburse the estate for the costs of preserving and liquidating property. The subordination provisions of 11 U.S.C. § 724(b) apply to real property sales by a Chapter 7 trustee. . .”
    In re Soltan, 234 B.R. 260, 273 (Bankr. E.D.N.Y., 1999)


    AND. . .


    “The effect of § 724(b) is to allow a Chapter 7 trustee to liquidate property subject to tax liens and distribute the proceeds to the priority claimants enumerated in § 507(a)(1) through § 507(a)(6) prior to any distribution to taxing authorities. . . The only parties affected by the operation of § 724(b) are the priority claimants and the tax lien creditors.”
    In re Bino's Inc., 182 BR 784 (Bankr. N.D. Ill., 1995)

    As I said, if the lender has a valid assignment of rents the Trustee would pay the rents to the lender. If there is no assignment of rents the lender is not secured by those rents. Further, even if there is an assignment of rents contained in the mortgage or Deed of Trust, many times the assignment will not come into effect unless the lender has taken steps to demand turnover of the rents. If there is no assignment or the right to the assignment has not been properly exercised, the lender’s sole security is the actual real property. All of the rents belong to the Trustee under 541.

    To be sure, look at your mortgage documents. Is there an assignment of rents?. If these were known rentals when the loans were taken out I would expect that you will find the assignment. However, that is not the end of the inquiry. You must determine how and when the lender becomes entitled to the rents.

    Quote Quoting CharlieI
    View Post
    If the trustee or the Court abandons the property (USC554) then the property and the rent proceeds are no longer part of the estate.
    This is correct and it will be up to the Trustee if he or she wishes to abandon the rentals and the rents they generate.

    Des.

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