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Can You Strip a Second Mortgage in Chapter 13 After a Chapter 7 Discharge?

Can you strip a second mortgage in a Chapter 13, even if you’re not entitled to a discharge of debt due to a previous bankruptcy filing?  Many Debtors find themselves in a situation where they do not have the income to complete a Chapter 13 case, or a situation where they do not have an obligation to file under Chapter 13, and would rather seek a discharge of all unsecured debt in a Chapter 7 proceeding.  However, after that time, Debtors in this situation may still wish to strip a home equity line or second mortgage from their primary residence. 

Before determining whether a lien can be stripped where the Debtor is not entitled to a discharge, we must first examine when a lien can be stripped at all.  In the case of Nobleman v. Am. Sav. Bank, 508 U.S. 324 (1993), the United States Supreme Court examined the relationship between 11 USC §§1322(b)(2) and 506(a) with respect to an undersecured lienholder, and noted that the threshold question of whether the creditor holds a secured claim is resolved by looking to §506(a).  The rule that has been adopted by almost every Circuit Court in the nation is that a lien strip is allowed only if no part of the loan is secured.  As a result, if any equity in the property can be sold to provide compensation to the junior lien holder, that is, its claim is at least partially secured after application of §506(a), it will be eligible for the protection of §1322(b)(2)’s anti-modification provision.  Zimmer v. PSB Lending Corporation, 313 F.3d 1220, 1226 (9th Cir. 2002).  The Court in Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663 (6th Cir. 2002), may have stated this standard best when it wrote, “Whether a lien claimant is the holder of a ‘secured claim’ or an ‘unsecured claim’ depends, thanks to § 506(a), on whether the claimant’s security interest has any actual ‘value.’”  In the alternative, “If a claimant’s lien on the debtor’s homestead has a positive value, no matter how small in relation to the total claim, the claimant holds a ‘secured claim’ and the claimant’s contractual rights under the loan documents are not subject to modification by the Chapter 13 plan.”  Id.

Once it is determined that a Debtor has a right to strip a junior lien under the Bankruptcy Code, the next step in the analysis is whether a Debtor has the right to do so when a discharge of unsecured debt is not allowed, due to a previous discharge order pursuant to 11 U.S.C. §1328(f)(1).  The general rule of thumb is that, if a Motion to Avoid a Lien has been allowed in a Chapter 13 case where the Debtor is entitled to a discharge, the wholly unsecured lien is stripped at the time the Debtor completes his plan payment and obtains a discharge of debt.

It is undisputed that secured debts, such as those commonly found in second and third liens to property can be discharged in a Chapter 7 case and the Creditor cannot seek financial recovery from the Debtor thereafter.  As such, if a Debtor were to file a Chapter 13 case after receiving that discharge, the plan does not need to include any discharged creditors.  However, the discharge does not eliminate a secured creditor’s right to an in rem proceeding (a case against the property, such as a foreclosure).

 

Several United States Bankruptcy Courts have recently held that a Debtor’s eligibility for a discharge is not a requirement for lien avoidance. See, In re Waterman, 447 B.R. 324 (Bankr. D. Colo. 2011); In re Tran, 431 B.R. 230 (Bankr. N.D. Cal. 2010); In re Hill, 440 B.R. 176 (Bankr. S.D. Cal. 2010).  It should be noted that nothing in the Bankruptcy Code limits a Chapter 13 Debtor’s ability to modify a wholly unsecured creditor’s lien under §1322(b)(2) based on his or her eligibility for a discharge.  See, e.g., Tran, 431 B.R. at 235 (citing various Bankruptcy Code provisions and concluding that the Bankruptcy Code does not “preclude[] a debtor that is not eligible for a discharge from filing a chapter 13 case, obtaining confirmation of a chapter 13 plan, and with the exception of the right to a discharge, from enjoying all the rights of a chapter 13 debtor, including the right to strip off liens.”); Waterman, 447 B.R. at 328-29 (finding the reasoning and analysis in Tran and other cases allowing strip offs in no-discharge Chapter 13 cases to be “persuasive and compelling”).

The Court in In Re Michael James Fisette, Bankruptcy Appellate Case: 11-6012, (8th Circuit, 2011) addressed the issue of a lien strip as an in rem proceeding and held, by seeking to strip off a junior lien, a debtor seeks to do just that: avoid the lien. He does not seek a discharge of the personal liability of the debt.  Moreover, the Court explained, a discharge releases a Debtor’s in personam liability, but it does not affect the lien.  See 11 U.S.C. § 524(a) and Johnson v. Home State Bank, 501 U.S. 78, 84 (1991).  A strip off avoids the lien, thus extinguishing a creditor’s ability to proceed against the debtor in rem.

The long and the short of it is simply this, if a Debtor has obtained a discharge in bankruptcy, and then seeks to file a new case for the limited purpose of avoiding an in rem remedy of the Creditor, the Bankruptcy Court should consider and, in response to the case law cited allow, a wholly unsecured lien to be stripped after a discharge in a previous bankruptcy case.

Defaulted on Student Loans, what now?: The 1 Trillion Dollars Question

Borrow moneyYou are probably reading this blog if you either defaulted on your loans or you are about to.  The reality is that you are certainly not alone in your circumstances.  The United States government recently released that there are 1 Trillion dollars in student loans owed by students.  That this is not 1 Billion, it is 1 Trillion.  We have stepped into a whole new world in hitting a Trillion.

Additionally, the report noted that over a third of those loans are in default.  In real terms, that is 3 out of 10 borrowers are passed the opportunity to pay back student loans.  The loans are now in full blown collection and acceration and the entire amount is owed plus interest and often attorney’s fees.  Also, the report noted that nearly another third is on its way to default.  If this is true then 6 out of 10 borrowers are in trouble.

So, if you defaulted you not allow or about to default you are not alone. Why is there such an issue with student loans?  The real issue is that all students are often sold a load of crap when they go to a university for school.  I remember the days of taking the SAT, joining every school club just to look great for an university to let you in so that you can have the honor of receiving a degree.  The truth is that this is all a load of crap.  The universities that are laying it on thick that you need to come to their school to ensure a solid future is simply untrue.  I think the American public are finally seeing through these lies that universities have been telling.

We boast about how wonderful American universities are but if they are so great why are so many students with degrees unable to snag a job that makes enough to pay for the student loans that a student took out.  As they say, the proof is in the pudding and American universities are no making pudding but mud for the future of the American students.  If American universities were on Wall Street, the SEC would bring Bernie Madoff type of charges for fraud and misrepresentation for inducing students to take out money to fill the coffers of the universities’s endowment funds.

Ok—you get the point that I understand your pain.  Unfortunately, until congress gets its head out of its ass and investigates the great robbery of American’s dream by these universities and does something about it, your suck with the debt.  So how can you deal with the default of student loans or about ready to default on student loans?   The answer is short for there is only one s 13 sure fire way—Chapter 13 bankruptcy case.

I know that the option may not be ideal for you but it is still an option.  The Chapter 13 case does allow you the power to take control of your circumstances.  It also will allow you to come out of default or avoiding becoming defaulted.  I know you want to ignore the problem but it not going away and student loans will ultimately destroy your credit but take comfort in the fact that is it already destroying the over all ecomony of the United States.  However, you should focus on your situation and get the fix that is necessary for you.

Can’t Get Away From Your Ex-Spouse and Their Debt?

Recently, a client of mine came into my office and was extremely upset because her ex-husband filed for bankruptcy and a joint credit card they had while they were married is now trying to collect the debt from her.  Sound familiar?  Her divorce attorney entered into a settlement agreement in which the husband was to be liable for this debt.  It was over 10 years since their divorce and the husband incurred even more debt on that card in the last 10 years so how can be coming after her?

The short answer is someone did not execute on the settlement agreement properly.  When an a settlement agreement is entered into in a divorce regarding liability on a debt, someone must make the ex-husband close that credit card out and reissue a new card.  Especially, when the card was a joint card or if the spouse was listed as an authorized user, the spouse that is no longer liable is still going to be held liable by the credit card company.  You must understand that the credit card company does know that the spouse should no longer be liable on the debt because they are not part of the divorce proceedings.  So, if the ex-spouse or in my example the ex-husband does not close out the current card and open a card only in his name, the ex-spouse or ex-wife will still be deemed liable on the debt even years after the divorce.

Well, you heard of death do us part well it really should be debt do us part in a divorce proceedings sometimes.  How to prevent all of this from happening is that you should always look at your credit report.  Especially after a divorce and your ex-spouse is liable on credit card debt, you need to ensure that those accounts are off your credit report and no longer being reported on your credit.  Additionally, you should make sure your divorce attorney confirms with your ex-spouse’s attorney that they executed on the close out of that account and issued a new account.

However, we know that sometimes things slip through the cracks and your freedom from your ex-spouse makes you forget about the details or following up on the details and you sprint from your ex-spouse does not permit you to slowdown and ensure the final step is complete.  Also, client often think that someone else is going to do it and just convince themselves that it is in someone else’s hands and they will do it.  I say this because it is often the line I hear when I ask why did you not review this before ten years passed.  So what can you do if your ex-spouse was not forced to execute a new card being issued and its ten years later?

You can reopen the divorce case and force the ex-spouse to pay the bill.  Even if the debt is discharged in a bankruptcy case, your ex-spouse is liable on the divorce contract or order of court to pay the debt.  That is right—the debt survives the discharge of a bankruptcy.  How so?  The debt is discharged as to the creditor but not as to the spouse.  The liability that the ex-spouse incurred was due to a divorce proceeding and not as a debt owed but a duty to take on the liability in exchange for something in return provided by the ex-spouse.  Now, I do not want to confuse everyone with a property settlement in which money is promised to be paid to a spouse.  If that is the case, the money is debt owed to a spouse and in some circumstances dischargeable.

Credit card payments and liabilities do not disappear with discharges.  If this has happened to you, seek counsel’s advice to seek how to move forward.