Our Redlands foreclosure defense attorneys work routinely with bankruptcy filers who are trying to hold on to their homes. Real estate has an unusual status under bankruptcy law. Almost all loans can be "crammed down" -- that is, modified -- under bankruptcy, including car loans and loans for luxury items like second homes and boats, But thanks to some changes to the law made in the 1970s, mortgage loans for the debtor's primary residence may not be crammed down; in fact, the financial industry beat back a proposal to change this early in the housing crisis. This means that when there's some question about whether a home is a primary or second home, it's much more advantageous for debtors to decide it's a second home. This was the controversy in In re Abdelgadir, a decision from the Bankruptcy Appellate Panel of the Ninth Circuit.
Salaheldin Abdelgadir and his wife, Afaf Wahbi, filed for Chapter 13 bankruptcy in July of 2009. They listed an address on Las Palomas Drive in Las Vegas, and listed it as the only real estate they owned. The primary mortgage holder is BAC Home Loans Servicing; Countrywide owns a junior mortgage. Having bought the home in 2006, they owe more than twice the home's 2009 appraised value. Their mortgage paperwork included a contract requiring them to make the home their primary residence, but they had their son live there instead for a year and a half, until they moved to Las Vegas from Wisconsin. Five months after filing for bankruptcy, they changed their address to another home within Las Vegas. Afterward, they moved to change the rights of the mortgage creditors, claiming the property was investment property that could be modified. Thus, they wished to bifurcate BAC's claim into a secured claim (for the assessed value of the home) and an unsecured claim for the balance of the loan, then avoid Countrywide's mortgage entirely. A subsequent bankruptcy plan proposed to cram down the loan They filed lease agreements for both Las Vegas properties. BAC opposed, arguing that the home was the debtors' primary residence as of the petition date or the time they took a security interest in the home. After hearing testimony on the debtors' residency and purchase, the bankruptcy court confirmed their plan with the cramdown, finding the relevant date for residency was the day of the plan's confirmation.
BAC appealed to the Ninth Circuit's BAP. On appeal, it had more luck; the panel found that the relevant date for determining primary residency was the date of the petition. The amount of any creditor's claim is fixed as of the date of the petition, the BAP noted, but modifications to claims take place at the confirmation of the plan. Thus, the panel said valuing a claim at confirmation, as the bankruptcy court did, is appropriate. However, it drew a distinction between valuing the claim and determining whether the claim can be modified at all -- that is, whether the creditor holds the claim. Because the amount of the claim, and the right to payment, is fixed as of the petition date, the panel said, that date also determines whether a residence is the debtors' primary residence for bankruptcy purposes. It rejected precedents from other courts and the Third Circuit that parsed the wording of "security interest in real property that is the debtor's principal residence" differently, ruling that the statute's plain language is not ambiguous. Thus, the panel reversed the order granting a modification and sent the case back to bankruptcy court.
As Buena Park foreclosure defense lawyers, we appreciate clarity on this subject from the bankruptcy court, even if the ruling ultimately did not allow this couple to cram down their loan. Unfortunately, not every bankruptcy filer with a home is lucky enough to have any ambiguity about where their primary residence is; most folks don't have more than one home. When this ambiguity does exist, however, this case could be a good guide to whether the debt can be modified. As we noted, primary home loans are the only kind of secured debt that cannot be crammed down to market value in bankruptcy. The BAP noted that the Supreme Court has said this is to encourage investment in homes -- but we note that this rule has also made a whole lot of money for mortgage lenders during the current financial crisis. If you're considering bankruptcy and you're not sure whether your home should be counted as your primary residence, you should contact our San Diego foreclosure defense attorneys right away to discuss planning and options.
Howard Law, P.C., represents clients across California who are considering bankruptcy or legal action to stop an unfair foreclosure. To learn more at a free, confidential case evaluation, call us today at 1-800-872-5925 or send us an email.