What’s the Difference between a Debt and a Lien in Chapter 7 Bankruptcy?

I recently had a conversation with a person who had just received a discharge in a Chapter 7 bankruptcy.  He had also received what he thought was a very weird item from his mortgage company. The mortgage company had sent him a form for his signature which would give them permission to start sending monthly statements again even though the mortgage debt had been discharged. In the fine print on the back of the discharge there is a court order requiring all creditors – including the mortgage company – to make no attempt of any kind to collect the debt.   This includes mortgages, even if the homeowners want to keep the house.   But most homeowners who have mortgages want to continue paying the mortgage so they can keep their home.  Having a monthly mortgage statement helps a lot in keeping  track of that, but without permission to start sending statements again, the mortgage companies tend to be afraid to do so.

The permission to restart monthly statements form DOES look a little weird.  It usually will start off by saying something like: “Well, we know you’ve been discharged in a bankruptcy and you don’t owe this personally anymore, so don’t take this as attempt to collect a debt.  We were just wondering if maybe, not that you actually owe this anymore, you might still like updates on the status of the mortgage, for information purposes only, in case you might still want to make some payments on a strictly voluntary basis – not that we would really want the money or anything like that.”

This odd language is the result of there being two seemingly contradictory facts for a homeowner with a mortgage following a Chapter 7 bankruptcy discharge.  The first fact is that the personal obligation to pay the debt no longer exists.  The second fact is that the lender still has a mortgage lien on the house, and if you don’t pay the mortgage that lender will foreclose.

In the phone conversation I felt a bit put on the spot.  I was asked repeatedly to explain if the debt has been discharged, how can there still be a lien on the house that carries with it a right to foreclose.  I tired to explain that a mortgage lien is actually a property right  – a form of partial ownership – which the lender has.  The bankruptcy discharge takes away the personal obligation to pay the debt, but it does nothing to the ownership interest.  The discharge only affects personal obligations, not property interests.

So the bottom line is that when it comes to Chapter 7 bankruptcy, if you want to keep your house you better keep paying your mortgage or mortgages.

This was confirmed within the past few days by a decision of the U.S. Supreme Court issued on June 1, 2015.  In the case of Bank of America v. Caulkett, the court ruled that mortgage liens cannot be stripped off in a Chapter 7 Bankruptcy.  Under certain limited circumstances, the situation can be different in a Chapter 13 Bankruptcy.  More about that in my page about keeping your house.

This post is for general information purposes only and is not legal advice.  Interactions here do not create an attorney-client relationship.  Consult your own attorney concerning the details of your case.  I am a debt relief agency, helping people file for relief under the federal bankruptcy code.

At the Bankruptcy Institute Today and Tomorrow

It’s that time of year again.  Every October the bankruptcy section of the Minnesota State Bar Association puts on a two day continuing legal education program for the bankruptcy attorneys of the state.  Unlike the meetings of the National Association of Consumer Bankruptcy Attorneys, to which I also belong, these sessions include lawyers for the creditors as well as lawyers for the debtors.

There were multiple classees to choose from, and nobody could attend them all without the ability to be in more than one place at the same time.  First I attended a really boring session about amendments to the bankruptcy rules of procedure.  Boring but important.  I hate it but I need to know that stuff.  There was then a sessioabout law office technology, where they had a geek who frankly I had trouble following.  I think his presentation was aimed at law offices larger than what I operate.

The big excitement for the day, however, was the session on lien stripping.  As we filed in and found a place to sit, they were playing an old hit, “The Stripper,” over the sound system.  That lightened things up a bit.  Following the disappointment with the decision in the Fisette case, to which I have devoted an earlier post, the big question is where does lien stripping go from here.  It seems that the rules committee has finished work on a new local rule of procedure which outlines a proposed procedure for doing lien stripping in the District of Minnesota.  The rule has now been presented to the judges for consideration.  As they consider the rule, I expect they will ask for comments.  The new rule seems to assume that lien stripping will be legal in Minnesota, which of course is still undecided – at least not decided permanently and for good.  In my opinion the procedure will eventually become legal and common, but right now I’m still not sure what to make of it.

The proposed lien strip rule will require a motion prior to the confirmation of the Chapter 13 plan asking the court to issue an order establising the value of the home as compared to the amounts owing on  the mortgage liens.  This motion requirement appears to be an invitation to a fight with the lender and the lenders’ lawyers.  I’m not absolutely sure, but the impression I have is that the bankers’ and lenders’ lawyers on the committee outnumber the consumer bankruptcy lawyers on the committee, so that the proposed rule is coming out leaning way in the direction of the bankers.  If this rule is approved, it appears to me that it would make the procedure more risky and more expensive than what most of us were anticipating.

After the lien strip session I attended a session on how to prepare one’s law practice for a disaster, and another sessin about reaffirmation agreements.

So that’s what I learned in school today.

Fisette is a Fizzle – Minnesota Chapter 13 Lien Strip Decision Inconclusive

Can the Second Mortgage be removed in Chapter 13 Bankruptcy?

Can the Second Mortgage be removed in Chapter 13 Bankruptcy?

What I am about to say here applies only to Minnesota and the other states in the swath of territory here in the middle of the US which is served by the 8th Circuit Court of Appeals.  It is only my opinion.  You may find other attorneys who would disagree.

We have been waiting for the 8th Circuit Court of Appeals to make a final decision on lien stripping.  I’ve been telling people for months that I would really like to see what the appeal court has to say before I get seriously into lien strip work.

In a bankruptcy context, when  you see talk about “lien stripping,” it is about a process in Chapter 13 cases where a second mortgage can be treated as if it was unsecured.  This can be done, if it is permissible at all, in Chapter 13 cases where the value of the house is lower than the balance on the first mortgage, so that there literally is no security to support the second mortgage.  The second mortgage becomes no longer a mortgage on the house, no longer a lien that must be paid if you want to keep the house.  It is to be treated like any other unsecured debt.  Usually in Chapter 13 the unsecured creditors get paid very little, only a fraction of the full amount of the debt.

A lower court – the Bankruptcy Appellate Panel (or BAP) – ruled about two years ago in the Fisette case that the procedure is permissible.  The decision was promptly appealed to the 8th Circuit Court of Appeals, and we have been waiting for a decision ever since.  Finally the big decision was released yesterday.  I practially held my breath as I tried to figure out what the decision said. I printed a hard copy for myself to I could go over it more carefully.   It started out reading in a fairly positive way. As I flipped through the pages, at first I thought I was seeing a decision in favor of lien stripping.  A footnote on page 3 of the decision listed a string of cases from other courts which say that lien stripping is an acceptable procedure.  The opinion, however, comes to an abrupt end with the words, “The appeal is dismissed for lack of jurisdiction.”

Only “final” orders can be appealed.  The court said they didn’t think the order being appealed was final.  They sent it back to the lower court for “further judicial activity,” whatever that means.  They don’t seem to have decided a thing, and it’s very disappointing.

It is true that they did not overturn the BAP decision.  That means that the BAP decision, which said that lien stripping is OK, is the current law of the 8th Circuit.  However, the lower court judge this is apparently being sent back to is reputed to be very much against the lien stipping idea.  There is likely to be another lower court decision which again will be appealed.  It’s hard to tell, but the process could take years before we have the clarity I was hoping for.

It will take a while before the legal community in these parts has this decision fully digested.  It is very early to say what the meaning of it really is.  I’ll try to keep you posted.

This post is for general information purposes only, is not legal advice, and does not create an attorney-client relationship.  Please consult the attorney of your choice concerning the details of your case.  I am a debt relief agency, helping people file for relief under the federal bankr

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