Articles Posted in Chapter 7

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This post was prepared by yours truly, with contributions from Phil Bradford, a financial web content writer. Phil graduated from New York University School of Law and recently joined Herald University as a reporter. He has also written for websites such as debtfreeguys.com and disabilitycanhappen.org

An now, on with the post…

Those who’ve exhausted their financial options or are unable to meet obligations due to illness, divorce, job-loss, or other life-altering events, may consider filing Bankruptcy to get their life back on track.  Here is a quick-guide to help you navigate the process with the help of a good Bankruptcy Lawyer:

Basic Types of Bankruptcy

The most basic distinction when thinking about Bankruptcy is the one between a liquidation (Chapter 7) and a reorganization (Chapter 13 for most people). Whether you need to file a Chapter 7 or 13 case will depend on several factors, including:

  • Total “household” income
  • The value of your property
  • What you stand to lose
  • What you intend to keep

That said, below you will find a few of the most important points when considering if Bankruptcy is right for you.
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Jepson v. Bank of New York Mellon
Court of Appeals for the 7th Circuit  Docket No. 14-2459

Opinion Date: March 22, 2016

This case is a testament to the subprime crisis and illustrates how complex and devastating mortgage securitization and pooling was to ordinary homeowners; middle-class people faced with sudden and insurmountable mortgage debt. Sadly, this decision also illustrates just how hard it is to stand up to the holders of pooled mortgage loans.

The underlying facts of the case are so common that the Plaintiff could have been anyone; while the tortuous path of the case up to the 7th Circuit – years after the underlying foreclosure and bankruptcy – left this Plaintiff financially devastated.

Factual Background

Patricia Jepson (Jepson) executed a Note and Mortgage issued by “America’s Wholesale Lender” – a d/b/a of notorious subprime mortgagee Countrywide – and Mortgage Electronics Registration Systems (MERS), its nominee. The Note was endorsed by Countrywide d/b/a America’s Wholesale Lender and transferred to CWABS, a residential mortgage trust operating under New York law that pooled loans and sells mortgage-backed securities sold on Wall Street. CWABS is governed by a Pooling and Service Agreement (PSA). Bank of New York Mellon (BNYM) was the Trustee for CWABS. MERS therefore assigned Jepson’s mortgage to BNYM.

When Jepson eventually defaulted on her mortgage – a common scenario in such subprime traps – BNYM filed a Foreclosure complaint in State Court. Jepson inturn filed Chapter 7 Bankruptcy. BNYM predictably moved to lift the Automatic Stay. But instead of lying down and letting the Bank proceed, Jepson filed an Adversary Complaint and Objection seeking a declaration that BNYM had no interest in her mortgage because, inter alia, the note did not proceed through a complete chain of intervening endorsements; was endorsed after the closing date in the PSA; and that America Wholesale Lender was a fictitious entity rendering the Note was void under Illinois law. Continue reading

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BK Ct. ND IL EDAmerican Eagle vs. Friedman, 13-AP-01199

Bankruptcy Court, N.D. Ill., Eastern Div.  Opinion: December 29, 2015.

JACK B. SCHMETTERER, Bankruptcy Judge.

This case resulted in a Summary Judgment finding despite the assertion by the Debtor-Defendant of his 5th Amendment right to be free from self-incrimination.

Specifically, this Adversary Case arose from the Chapter 7 Bankruptcy filed by Arthur Friedman (“Debtor”). Creditor-Plaintiff, American Eagle Bank (the “Plaintiff) filed a 3-count Complaint to determine the dischargeability of debt as follows:

Count I  –  per 11 U.S.C. § 523(a)(2)(A)
Count II –  per 11 U.S.C. § 523(a)(6)
Count III-  per 11 U.S.C. §§ 727(a)(3) and (a)(5)
Count IV- per  11 U.S.C. §§ 727(a)(2), (4),(5) and (7)

Count IV was added in the Amended Complaint. The Debtor answered both the Complaint and the Amended Complaint.

On August 4, 2015 the Plaintiff served Requests for Admission pursuant to Fed.R.Bankr.P.7036. The Debtor never responded, and the Plaintiff brought a Motion for Summary Judgment as to Count IV, alleging that the unanswered Requests were deemed admitted under Fed.R.Civ.P.36(a)(3). The Court agreed, and Summary Judgment was granted on Count IV.

I. JURISDICTION AND VENUE

Subject matter jurisdiction is proper in the Bankruptcy Court per 28 U.S.C. §1334, and this is a “core proceeding” under 28 U.S.C. §§157(b)(2)(A), (I), and (O) since it seeks to determine the dischargeability of a debt. Therefore, it “stems from the bankruptcy itself” and may be decided by a Bankruptcy Court (See: Stern v. Marshall, 131 S.Ct. 2594, 2618 (2011)).

II. UNCONTESTED FACTS

The Plaintiff filed a Statement of Material Facts as required by Local Rules, but the Debtor failed to file an opposing statement; thus “[a]ll material facts in [Plaintiff’s] statement…[were] deemed admitted.” Accordingly, the following was taken from the Plaintiff’s Statement of Material Facts, Debtor’s Answers, and the Requests for Admission:

Debtor was a principal and the president of Prestige Leasing (“Prestige”). Before filing, the Debtor was party to a lawsuit that was settled in his favor. As a result, the Debtor received $75,000 annually, minus attorneys’ fees.  Payments were made to Prestige until it was closed in 2011. After that time, payments were made to the Debtor. In his Answers the Debtor admitted as much, and that payments were received within a year of filing bankruptcy.

Moreover since the Debtor did not respond to the Requests for Admission within the 30-day time limit prescribed by the rules, the resulting admission could be deemed a violation of his Fifth Amendment right not to incriminate himself. Therefore, the Court’s inquiry began with a discussion of the Debtor’s Fifth Amendment rights.

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Duff v. Central Sleep Diagnostics, LLC
7 Cir. U.S. Court of Appeals Docket No. 13-3837 Opinion September 10, 2015

Original Claim
Investors in Central Sleep sued the company as well as Dachman, its promoter, and others. Their claims included fraud, the Racketeering Influenced and Corrupt Organizations Act (RICO), conversion, fraudulent conveyance, civil conspiracy, and securities fraud. Dachman was also singled out for fraudulent conduct; he spent stolen investor funds on a tattoo parlor, vacations, cruises, a new Land Rover, rare books, personal stock trading, and gambling. The Judge ordered Central Sleep into receivership and issued a stay against “all civil legal proceedings” involving Defendants.

Attorney Claim
Attorney Goodman had represented the Defendants and obtained a judgment for his unpaid legal fees. He submitted a claim to the Receiver for that amount; but also filed a lien on the proceeds of Dachmans’ separate State Court medical malpractice suit. Neither Goodman nor the Dachmans informed the Receiver or Judge about those proceedings. When the Receiver learned of the malpractice suit he immediately recovered the settlement proceeds and proposed a distribution plan. Goodman objected to the plan and argued that unlike the other creditors he was entitled him to full – rather than pro rata – payment.
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BoA v. Caulkett, 13–1421 (Jun 1) Supreme Court of the United States

Background

This case came to the Supreme Court due to a Circuit split on the issue of “Lien Stripping.” In this pair of cases the Debtors both filed Chapter 7 Bankruptcy cases, owned houses encumbered with senior mortgages and “underwater” junior mortgages held by the Petitioner banks. Because the amount owed on each senior mortgage was greater than each house’s current market value, the Banks would have received nothing if they foreclosed on the junior liens (i.e. underwater).

Debtors sought to void their junior mortgage liens under the terms of Bankruptcy Code §506, which provides that “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11 USC §506(d). In each case, the Bankruptcy Court granted the Debtor’s respective motions, and both the District Court and the Eleventh Circuit Court of Appeals affirmed.

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Think you know about Lien Strips, the controversial practice featured in our post here? Well think again, because the law may be changing. Lucky for you we have an update ready to go.

WHAT IS A LIEN STRIP?

11 USC 1322(b) provides that wholly undersecured liens on real property may be removed or “stripped,” and the debt to which they relate treated as unsecured in a Chapter 13 Plan of Reorganization. Lien stripping has 2 distinct, and very desirable, benefits for debtors:

  1. The lien strip removes the junior lien from the property entirely; and
  1. The debtor only pays a percentage of the claim (as if it were an unsecured debt).

CAN A PARTIAL LIEN STRIP SUCCEED?

There is no such thing as a partial lien strip. Bankruptcy Courts will only allow a lien to be stripped if it is wholly undersecured (i.e. unsecured): that is, the secured potion is zero or negative. Moreover, lien stripping is permissible only for claims secured by the Debtor’s principle residence because a lien strip modifies the “total package of rights for which the claim holder bargained.”

QUALIFYING FOR A LIEN STRIP

For a lien to be stripped, the value of the debtor’s property as of filing, minus fully-secured non-target debts, must be = or < $0. Once upon a time meeting these requirements could be challenging; but today, when many homeowners are “underwater” as to their first mortgage and have a HELOC or 2nd mortgage on top of that, the conditions necessary for a lien strip to take place are relatively straightforward and can sometimes be met without much resistance from the affected creditor.

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For Debtors, Chapter 7 Liquidation is the ultimate relief, while Chapter 13 and 11 Reorganization offers an opportunity to reduce their Debtor’s payments in light of their income. In either type of case however, the Creditor is not entitled to anything until it has filed is Proof of Claim.

What Is a Proof of Claim?

The Proof of Claim or “PoC” is the means by which Creditors state:

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We represent many consumers in Bankruptcy, and getting our Clients back on their feet afterwards is a big part of what we do. Often, cases are driven by upside-down home loans or even reasonable loans in which payments have become too high because the homeowner lost their job or had to take a lower paying job as a result of the Great Recession. One option for those who’ve gone through Bankruptcy and are looking to borrow again is the FHA Loan.

Before the housing bubble burst in 2008 FHA loans were considered the choice for buyers with little credit or bad credit; or an option for those with low incomes. But since everyone’s home value began falling – often taking their credit standing with it – FHA mortgages have become more widely appealing, especially when compared to conventional loans that require private mortgage insurance (“PMI”). PMI is the mortgage lender’s way of ensuring it gets paid following default. It is insurance for which the borrower pays the premium, adding to the cost of the loan.

For those considering an FHA Loan, keep these points in mind: