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Bankruptcy Chapter 6.5

I recently released a blog and related podcast about the bankruptcy code being broken into 9 chapters, all odd numbered except for one even numbered chapter. That post failed to mention a Chapter 6.5, which you won't find in the bankruptcy code, and you won't even find it mentioned in the halls of the bankruptcy court as slang (unless this post goes viral). So what the heck is a Chapter 6.5?

A Chapter 6.5 is where the debtor files a Chapter 13 to get a mortgage loan modification, and then dismisses the Chapter 13 when the modification is completed - in essence, the debtor only does half of a Chapter 13. Why would a debtor do that?

When a Chapter 13 is filed and the debtor is current on their mortgage payments, the mortgage company is permitted to be paid directly by the homeowner, outside of the bankruptcy plan payments. However, when the debtor is behind, those mortgage payments must be included in the Chapter 13 plan payments.

Previously, in the Middle District of Florida, Tampa Division, when a loan was delinquent and modified, the Courts would allow debtors to pay the pre-modification payments through the bankruptcy plan and the post-modification payment outside of the bankruptcy plan - significantly reducing the debtor's Chapter 13 payments. Now, over the objections of BOTH debtor and creditor attorneys, permanent loan modification payments must be made through the Chapter 13 Trustee.

It is important to note that in a Chapter 13 case, the trustee is paid based on the monthly payments that flow through their bank accounts, plus some small portion of the filing fee of each case. To be fair, there are tens of thousands of bankruptcy cases filed each year and the administrative accounting burden on the Chapter 13 trustee is tremendous, so it makes sense to pay the Chapter 13 trustee in this manner.

Consider the following simplified example:

  • Modified mortgage payment made outside the plan = $1,000
  • Payment to unsecured creditors through the plan = $500
  • Sub-Total Plan payment = $500
  • Trustee fee (assume 10%) = $50 per month
  • Total Mortgage payment paid directly to lender = $1,000
  • Total Chapter 13 payment = $550

  • Modified mortgage payment made in the plan = $1,000
  • Payment to unsecured creditors through the plan = $500
  • Sub-Total Plan payment = $1,500
  • Trustee fee (assume 10%) = $150
  • Total Mortgage payment paid directly to lender = $0
  • Total Chapter 13 payment = $1,650

The Chapter 13 trustee will forward the $1,000 payment to the mortgage company for the loan modification, after keeping their 10% fee, an extra $100 in my example.

For this reason, although we would never recommend filing a bankruptcy in bad faith, the better legal advice may be for debtors to file Chapter 13 cases to modify their mortgages and then, once the modification is completed dismiss the case. The debtor can later refile the case solely to pay unsecured creditors because the mortgage would then be current under the modification.  This might greatly reduce the debtor's monthly payment to the trustee, and the debtor's net monthly mortgage & trustee payment.

For more information on Bankruptcy, please subscribe to the Yesner Law Podcast, on iTunes and Stitcher. If you prefer, please contact us to schedule a free initial consultation to discuss your options at 813-774-5737 or email me directly at shawn@yesnerlaw.com.

Shawn M. Yesner, Esq., is the founder of Yesner Law, P.L., a Tampa-based boutique real estate and consumer law firm that helps clients eliminate debt by providing options, so they can live the lifestyle of their dreams. We assist clients with Chapter 7 liquidation, Chapter 13 reorganization, bankruptcy, loan modifications, foreclosure defense, debt settlement, landlord/tenant issues, short sales, asset protection, and the sale and purchase of real property in Tampa, Westchase, Odessa, Oldsmar, Palm Harbor, Clearwater, Pinellas Park, Largo, St. Petersburg, and throughout the greater Tampa Bay area.

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