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"Cash Out Refi" $ from primary now rental used to buy new primary & BK restitution??

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  • "Cash Out Refi" $ from primary now rental used to buy new primary & BK restitution??

    Hi,

    Does anyone have info about how this would play into a BK and if there would be any restitution needed to be paid from us on the cash out recvd? I'm still researching, but maybe a ch. 11 (even though not mentioned too much here) or a Ch. 13.

    We had a primary townhome since 92. Countrywide gave us a aprox. $82k cash out & refi'd the loan in 2008 from $52k to aprox. $135K. We used aprox. $23k for a down on a new primary home, the same yr. 2008, & made the townhome a rental property. If it matters we also used about $15k, at least for upgrades to the townhome (rental) and about $15k for upgrades to the new primary home.

    We are seeking to keep both properties. I have rented the townhome for less than the current mortgage payments/association/and other costs/repairs, ect. We are looking at if we could do a cram down, the rental property is now worth about $31-33k and we owe $128k, plus HOA aprox. $2k, and 2 liens about $600. I understand a cram down would be not to exceed 5 yrs. However, it states if we are below state guidelines of income- 3 yrs, above 5 yrs. ?? A ch. 11 states you could go longer than 5 yrs, even out to 30. and if we moved out of our primary, we could look at cramming that down too. It is worth less than we owe. (I have to verify value) We owe $165 aprox.

    My two questions are:

    1. Do we make restitution of the cash out $ at a %, like 10% or so, as you would credit card debit?

    Can anyone speak of experience of info about what happens to a cash out refi in a BK, maybe 11 or 13. I don't think I can keep both properties in a 7.
    I read one place that only a rental property can be crammed down, yet if you did use funds from a cash out refi to purchase a primary, those funds could be in essence crammed down. (considered unsecured debt)

    2. Ch 11 vs Ch 13 cram down insight and length of time to pay off.

    Anyone with any similar situation?

  • #2
    Chapter 11 will be a non-starter, too expensive and too much costly overhead (in both time and money for all the ongoing reporting requirements) for what you have going on. (even a cheap chapter 11 starts at $10,000, the average "individual" chapter 11 when it is all said and done, tend to push $40K, so non-starter.

    The real question...how much other unsecured debt do you have? (not counting the upside down mortgages).

    Although your idea is possible "in theory", it rarely ever actually works. Reason being, the trustees argue "best interests of the creditors", or more preciously, the money going to pay the cram down should be used to pay your unsecured creditors instead of going to keep a "non-essential" piece of real estate that is hugely upside down and losing money. Generally, the only way this works is either (1) you don't have other unsecured creditors (credit cards, taxes, etc), or (2) you pay your other unsecured 100%, (3) the money to pay the cram down comes from an outside source (e.g. loan, gift, etc).

    Honestly, with the numbers you have provided, and assuming you have other unsecured creditors, you are not-doing a cram down. You can keep the property, assuming it essentially pays for itself, but cram down is very unlikely. Here is the other problem, you mentioned that the property is cash flow negative. I assume with a cram down, it would become cash flow positive....the trustee is going to want that difference to pay into the chapter 13 plan. For example, let's say you rent it for $1,000 per month. After the cramdown, your fixed cost goes to $600...the other $400 will go back into the chapter 13 plan as income.

    All the other stuff you metioned, cash out refi etc, because it was so old, 2008, non-issues at this point, assuming you committed no fraud when you took out the loan.
    Last edited by HHM; 06-11-2012, 08:07 AM.

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    • #3
      Here is where HHM and I disagree. A Chapter 11 does not cost $40k. A well run one costs about $10k and, when push comes to shove, is no more expensive than the 13. The cheapest one we did was $6,000.00. Remember, in an 11 there is no trustee (you are the trustee). As a result the Trustee does not get paid to disburse payments to creditors. The funds you would have paid to the Trustee will now be paid to your attorney therefore, the overall cost can be exactly the same depending upon how efficient the law firm is.

      Having said that, there is one big downside to the 11. It is called an “1111(b) election”. If the cram downed creditor makes the election you are screwed. However, in the many years my Firm has been doing individual 11's the election has come up less than a handful of times.

      You can cram down the rental and keep it in either the 13 or the 11 so long as the rents generated exceed the cost of the cram down mortgage, taxes, insurance etc. If you have a positive cash flow then you can keep the property.

      If you elect a Chapter 13, the reduced amount and interest must be paid over the 60 month Chapter 13 Plan, in equal monthly installments (typically outside the Plan to save on Trustee fees), unless the lender agrees otherwise. Normally this makes it impossible to do as most folks cannot afford to pay a mortgage over 60 months. However, your numbers might work since we are not dealing with a “large” cram down value. If your cram down value is $33,000.00 plus an interest rate of say 5.25%, paying that over 60 months, directly to the lender, would mean a payment of approximately $660.00/month. Add to that the taxes and insurance and ask yourself if you can rent it for more than the monthly cost. If so, the 13 may work.

      If you cannot afford to pay the cram down over 60 months or cannot rent it for a sufficient amount to give a positive cash flow, then you would elect to file the Chapter 11. Assuming the creditor does not exercise the 1111(b), you get to re-write the loan typically either over a 30 year period or based upon the remaining term of the existing loan. The length of time is very flexible.

      You should meet with several attorneys who handle both 13s and 11s to see which one best suits you goals.

      As it relates to the other questions, I will have to come back to it as I must go to work now.

      Des.

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