HHM has really confused me...can you explain this post

[busbis]

[QUOTE=HHM;119184]Maybe you have discussed this in another thread (and I don't really want to hijack this thread), but why file chapter 13, if the 2 condo's are rentals (presumably), or even if only 1 condo is a rental, then wouldn't the "majority" of your debt be "non-consumer", if so, you can file a chapter 7 and side step the means test.

It is usually NOT a wise move to file a chapter 13 to get out from under secured debt. But there are exceptions.[/QUOTE]

This came from another thread, but I went ahead and made a new one because it took a different direction from what the thread was about.

Background...I plan on filing a bk13 with only 25K unsecured debt (this includes the atty fee to file). I will be at 100% payback and the reason for filing is surrendering 2 properties that I can no longer afford. By surrendering I will have disposalbe income of around $3500 per month. HHM was questioning why file the 13....

But my attorney who seems to know quite a bit (it appears anyway and he's always very helpful even returning calls as late as 9 in the evening) knows my situation and flat out said I could not qualify for a chp 7 due to income. Both condos are rentals, however I am struggling even to pay with the rental income coming in. We are getting hit left and right with assessments, insurance and taxes have increase ALOT, the mortgages are on interest only payments that are about to convert to P&I in about 4 months. The market where the property is currently at price wars with purchasing and rentals because so many condos have come on the market. I am ready to cut my losses.

Where I am confused is HHM mentioned that since I am only surrendering secured property and paying everyone else I can side step the means test. Maybe my attorney mentioned a 13 because of assets. We do have 2 paid for cars, 80% LTV in our home and some savings. You might ask why don't I sell something and just sale...I originally put $100,000 down on 1 property and can not even sell it today for what my loan balance is (that's how bad it is). If I service the debt, I am just paying more debt on top of bad. So...my question, could I file for a 7 and skip the means test...

Gosh, I am so confused. Right when I'm ready to do this now I feel like I am making a BIG mistake because I was leaning toward a 13. I did plan on paying off within a few months (if that makes a difference). Reason being so if/when they foreclose the property the lenders can't file a claim for the definency.

Sorry for the long drawn out post, but I am really confused on what to do. I was having a hard time with this already

[HHM]

The issue has to do with the nature of the debt. The median income/means test is only applicable if the "majority" of your debt is consumer debt.

There are quite a few members on this board that were in a similar situation as you. The bulk of their debt was secured debt related to income properties. Since that secured debt is "not consumer debt", AND "assuming" that when you add up all your debt (including your residence) that the non-consumer debt is more than your consumer debt, you can side step the means tests and file chapter 7 regardless of how much disposable income you have.

But based on the background you provided just now, your attorney is probably correct...in your case, you may have "asset" issues that preclude a chapter 7. Especially if the rental properties are not leveraged that much. Also, with 2 paid for cars, that becomes an issue of exemptions.

I think you might want to step back for a second and consider some alternatives. But first off, you need to assess if the amount you owe on those rental properties would be more than your credit card debt and mortgage on your current home (along with any other non-business related debt). It sounds like you have some decent income and if you really have $3,500 disposable if you didn't make the payments on your rental's, then you could pay off your unsecured in less than 10 months. If the rentals are leveraged enough so they represent the bulk of your debt...you may want to consider how you can protect your assets in a chapter 7. For example (and I hate to recommend this), you may want to go by a couple new cars and finance the purchase. Also too, you will need an accurate appraisal of your current residence to assess if any equity would be exempt.

Your in a tough situation because if you let the rental's foreclose, you would be stuck with a deficiency balance (presumably). If you file chapter 13, that deficiency will be an unsecured claim in your BK. Ideally, if you can leverage out your assets such that any equity would be exempt, and still have it where the rentals represent more than 50% of your total debt, then you can file chapter 7 (and disregard the means test), surrender the rentals, discharge ALL unsecured debt, and walk away.

[busbis]

OK...I'm starting to get it..

But I really didn't want to purchase anything new and have more debt, I'm trying to just get back on my feet. However I do see what your saying.

The properties are located in FL (if you hadn't guessed it already) which from my understanding takes about 6 months to a year to actually foreclose. Am I correct is assuming that they can not file an unsecured claim if there is a definency balance until it actually forecloses and sales? If thats the case, then I shouldn't have a problem in paying off the 13 within that time frame, but this is what the atty explained to me. He did say it was VERY important that I do pay off early so they couldn't file the claim, otherwise I defeated my purpose.

I have considered the short sale and/or just stop making my payments and forcing to the foreclosure, but in one of the cases I know for a fact that they would come after me for the definency balance because it is a former Credit Union employer where I was an executive. They would not just walk away, so that left me with my only opton of filing the bk.

[HHM]

Interesting strategy...but unfortunately, the success is solely dependant on how aggressive and savvy the mortgage lenders are. Regardless of how long the foreclosure takes, because the debt is the result of you surrendering the property in the BK, they can file an "unliquidated claim" or "contingent claim". They can also request extensions to file claims, so your BK could be sitting in limbo for quite a while (and you will be making payments that whole time). So I am not sure that is the route I would go.

I don't want to second guess your attorney, but he may be pushing you into something that may not be in your best interests in the long run. Certainly, a chapter 13 can help, but it may not be the "best" option. But your attorney has more information about your situation. But at the very least, you should probably discuss some of these issues with your attorney.

You may want to run the numbers on the short sale option, even with income tax liability on forgiven debt, a short sale may cost you less in the long run than a chapter 13 (and would certainly cost less if the chapter 13 gets out of hand).