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Ninth Circuit BAP Rules Primary Residence Should Be Calculated as of Date of Petition - Benafel v. One West Bank

April 11, 2012

Vincent Howard and our team of Riverside foreclosure defense attorneys have written here before about the small but vital issue of where a bankruptcy debtor's principal residence is located. Primary homes and second or vacation homes, or investment properties, are treated differently by bankruptcy rules. Among other things, rule changes from the 1970s forbid debtors from "cramming down" the loans on primary residences, although they are free to reduce loan values on any other loan, including second homes. Thus, if there's a dispute over whether the home is a primary residence, significant money may be at stake. That was the issue in Benafel v. One West Bank et al., in which Mary Benafel contended that her Oregon home was no longer a principal residence because she'd moved out and began renting it.

Benafel bought the house in 1996 and refinanced in 2007. In 2009, her mother suffered a stroke, causing Benafel to quit her job and move in with her mother to be a full-time caregiver. In the same month as the stroke, she called One West, the lender, to tell them she'd have trouble making her mortgage payments. Discussions on this were unsuccessful and the home was foreclosed three months later. In an attempt to avoid foreclosure, Benafel found a renter and then filed for bankruptcy just ahead of the foreclosure sale. Her proposed Chapter 13 plan included payments for what she said was the current market value of the property, rather than the loan value from 2007, saying One West had waived its right to full payment through a contractual provision requiring her to live there only one year. After a hearing, the bankruptcy court declined to confirm it, finding the date of the loan was the proper date for calculating primary residency.

Benafel appealed the denial of her first plan, as well as the confirmation of her amended plan, which did not cram down the home loan. The Ninth Circuit Bankruptcy Appellate Panel started by noting that while Benafel's appeal was pending, it decided BAC Home Loans Serv. v. Abdelgadir, which found that the principal residence should be calculated as of the date of the petition. That was an individual Chapter 11 case and Benafel's is a Chapter 13 case, the panel said, but the material provisions are identical and the reasoning in the earlier case was persuasive. Indeed, a clear majority of cases that have examined this issue in Chapter 13 bankruptcies have supported the same view, the BAP said. Thus, it found that the bankruptcy court erred in setting the dispositive date as the date of the original loan. It went on to decline to rule One West's arguments that Benafel did in fact use the property as her principal residence, saying the bank is free to make that argument on remand.

Vincent Howard and our Santa Ana foreclosure defense lawyers are pleased to see this ruling, because we believe it will benefit clients like ours more often than not. Numerous aspects of bankruptcy are dated from the date of the petition rather than the date of the plan confirmation or some earlier date. This has the effect, presumably intended, of determining important bankruptcy issues as of the time the debtor sought formal help. This may be the most accurate reflection of the debtor's circumstances; after all, Benafel didn't need to file for bankruptcy when she took out the loan. (In fact, she wouldn't have been given the loan if she did.) At Howard Law, P.C., our San Diego County foreclosure defense attorneys will look forward to hearing about the reported appeal of the Abdelgadir case.

If you're considering bankruptcy as a way to avoid foreclosure, don't wait to call Vincent Howard and the team at Howard Law for a consultation. You can reach us through our website or call 1-800-872-5925.

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