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

Can the lien of the second mortgage be removed from my house? - Bankruptcy
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

Can Bankruptcy Stop Foreclosure?

Rental property and personal bankruptcy

Can Bankruptcy Stop ForeclosureForeclosures continue to occur at an alarming rate in many parts of the country. Many homeowners who obtained subprime mortgages earlier in the past decade or who now find themselves unemployed or underemployed because of the depressed economy are unable or unwilling to make their monthly mortgage payments

State and federal programs for distressed homeowners to assist in loan modifications are available to some but you may not qualify. For others, a short sale transaction is a way to extricate themselves from a home whose value is less than the loan amount, but these can be complicated and may not work for any number of reasons.

As a result, many people facing overwhelming financial pressures turn to bankruptcy as a solution, but can a bankruptcy stop foreclosure?

The Foreclosure Process

Once you miss at least 3-4 consecutive mortgage payments and the lender has sent you notices warning you of possible foreclosure, the lender will generally begin the process to repossess your home. This can take several months and in some instances more than one year.

Minnesota is a non-judicial foreclosure state, meaning that there is usually no court action. When the foreclosure is done without court action, it is called a “foreclosure by advertisement.” Mortgages typically have a power of sale clause allowing an attorney to foreclose on your home. A lender may choose, however, to go to court in a judicial foreclosure to obtain a judgment of foreclosure.

If your home is taken, there are certain reporting and notice requirements before the lender can sell it at an auction conducted by the sheriff, usually at a greatly reduced price. In Minnesota, as long as it’s a foreclosure by advertisement, you are not subject to a deficiency judgment if the sale is for less than the loan amount.  This means that most of the time, as long as there is only one mortgage, a homeowner in Minnesota can walk away from a house free and clear.  If  there is a second mortgage, however, watch out.  These days the holders of second mortgages are suing people in large numbers after the first mortgage has foreclosed.  Sometimes they don’t even wait for the first mortgage to foreclose if the payments are not up to date.

Accordingly, if you are facing foreclosure, can a bankruptcy stop the foreclosure or benefit you in some way?

Can a Chapter 7 Bankruptcy Stop a Foreclosure?

Whenever you file for bankruptcy protection under a Chapter 7, an automatic stay of all legal proceedings, including foreclosures, goes into immediate effect. A Chapter 7, if you qualify, allows you to discharge most if not all of your debt.

Unfortunately, the lender is allowed to file a motion to lift the automatic stay as it pertains to your property as the lender can otherwise suffer economic harm. In this instance, a Chapter 7 will only temporarily delay the foreclosure.

It is very difficult to fight the motion to lift the automatic stay.  About the only practical way to stop the motion is to get the payments up to date or make arrangements to bring the payments up to date.  In a Chapter 7 the automatic stay ends when the discharge is granted, usually around three months after the case is filed.  This means that most of the time lifting the stay doesn’t mean much anyway, because the stay was going away by itself.

At the least, you may be able to save thousands of dollars while not making any mortgage payments and take the time to look for alternative housing.  Once the foreclosure is stopped, many lenders are very slow to get it started again.  While the automatic stay officially only stops things for about three months, you will very likely gain much more time than that.

Can a Chapter 13 Bankruptcy Stop a Foreclosure?

The other bankruptcy filing available to a homeowner is Chapter 13. Under this plan, you must submit a repayment plan that includes all your creditors and that is approved by the bankruptcy trustee. The automatic stay also goes into immediate effect once you file.

Unlike a Chapter 7, this chapter allows you to keep your home but you must have proof of sufficient income to not only maintain the current mortgage payments but to make up the arrearages over the life of the repayment plan. Many repayment plans are for the maximum 60 months. Under a Chapter 13, then, you may be able to stop the foreclosure so long as the indicated conditions are met.

In a Chapter 13 it might also be possible to do a lien strip.  We’ll know for sure when the Eighth Circuit Court of appeals finally decides the Fisette case.  A lien strip would benefit homeowners with multiple mortgages. It would eliminate payments on all mortgages except the first one. If your home’s value has declined and the first mortgage has secured all the home’s equity, if any, then the other mortgages  would be considered unsecured debt and will be discharged.

In any case involving a foreclosure, consult with an attorney to explore all your legal options.

 

How Much it Costs to File Bankruptcy

By Dave Kelly, Minnesota Bankruptcy Lawyer

I often receive phone calls where the first thing I hear is “how much does it cost to file bankruptcy?” It’s very hard for me to provide a simple answer.  Bankruptcies aren’t like cans of beans which I keep here on a shelf already stamped with a price.

If the caller will let me ask a series of questions so that I can get an idea of what kind of case it would be, then I might be able to suggest what the fee would probably be. If the caller wants a number right away, the conversation usually ends fairly quickly. My fees are not the lowest in the area, and if that’s all someone is looking for, then I’m not the lawyer they want.  All I can do in this situation is say “Can I ask you a few questions?” and see if they want to discuss it or not.

Lawyer fees in bankruptcy are a matter of public record. In every case the petition includes information on what the lawyer has charged. When it comes to Chapter 13 cases, it’s true that there is what is called the “no-look fee.” This is the amount that the judges have agreed a lawyer can charge without having to provide a detailed explanation. In Minnesota this has not gone up for a long time, and I often hear complaints from my colleagues that it is too low. Several lawyers I know make it their policy to provide a detailed billing for every Chapter 13 case so they can go higher than the no-look fee. For many of the more complicated cases, such as a case involving a lien strip, I can certainly see this might be an appropriate thing to do.

Personally, however, I have always so far just charged the no-look fee. Right now as of the date of this writing, the no-look fee in Minnesota is $2,500 for a below median Chapter 13 and $3,000 for an above median Chapter 13. The court filing fee is always additional.  BUT in a Chapter 13 part of the lawyer’s fee can be put into the Chapter 13 Plan so that the client does not have to pay it before the case is filed. In most Chapter 13 cases, putting part of the attorney fee in the Plan just means that the creditors get that much less. So from the point of view of my client, the part that goes into the Plan might as well be free. The result is that in most of my Chapter 13 cases, I wind of asking for less before filing than I do in the Chapter 7s.  The current court filing fees are $281 for a Chapter 13 and $306 for a Chapter 7.  Whatever it is that I’m charging, the court filing fee has to be put on top of that.

For most of the Chapter 7 work that I do, my fees are lower than they are for the Chapter 13s. There’s a good reason for that: in the Chapter 13 case I am responsible for the case for between three and five years. Chapter 7s are over usually in a matter of months. My fees for the Chapter 7s are competitive, but not the lowest in town. I dare not say much more than that without having a specific situation in mind.  Every case is so much different from every other case that I’ve never been able to come up with a one size fits all fee schedule. But I’m always glad to discuss my fee with anyone who can take a few minutes to chat about their situation on the phone, and for those chats on the phone I don’t charge a thing.

I should mention here that there is a counseling requirement that must be satisfied in both Chapter 7 and 13. There is one counseling course that must be done before filing, and another that must be done after filing. That’s two (2) courses that must be done before the process is complete.  My clients can go anywhere they want for the counseling, as long as the agency has been approved by the US Trustee’s office. The agency I recommend charges $40 per course if I sign the client up for the course, and $10 more per course if the client goes there on their own. It can be done on line and over the phone without leaving home.  I don’t get any sort of commission or referral fee from the counseling people, although they did send me some cookies one Christmas. When you count the before filing and the after filing courses together, this is another $80 of total cost.

I am not comfortable with filing anything with the court unless I have given it the proper amount of attention, so I know it’s done right and likely to go smoothly. I tell my clients that we are going to do the work in my office before filing the case, so that we don’t have to do a lot of extra work at the courthouse after the case is filed.  By the time we get to the hearing, also known as the first meeting of creditors, I want the case to be the most boring and plain vanilla thing the Trustee has ever seen. If the Trustee almost falls asleep during the hearing, I did it right. My clients often say after the hearing, “is that all there is to this?” Most of the time at that point it is all there is, because I did all the sweating over the case before it was filed.

By the time I get to the courthouse, it is likely that I will have spent as many as 15 hours on a case, sometimes much more than that. I will have had at least four face to face meetings – often many more than that – with my client, probably a couple hours each time.  Recently I checked my calendar and found that I had met with one client 11 times before the case was ready to file.  A bankruptcy petition has somewhere in the range of 500 questions, and tends to run between 50 and 65 pages in length. These questions are answered under penalty of perjury.  An incorrect answer can be a crime for my client.  When I sign the petition, I also am certifying that everything in it is correct.  I can be sanctioned, perhaps severely, if it’s not. A client asked me recently, after the case was completed, “Kelly how can you sleep at night with all this stuff to keep track of?” All I can say is that I sleep better when I know I’ve given it my best.

Lien Stripping Update in "Minnesota Lawyer"

Just noticed that Minnesota Lawyer has a good recent article on the subject of lien stripping and the status of the availability of this process for Minnesota residents. This is a process in Chapter 13 bankruptcies involving people who have second mortgages. It has to be a situation where the value of the house is less than the balance on the first mortgage. The theory is that in cases where the homestead is worth less than the balance on the first mortgage, then the second mortgage is not really a secured debt.

One prepares and files a Chapter 13 bankruptcy in which the second mortgage is put in with the unsecured debts. If it succeeds, the debtors should be able to come out the other end – usually after paying in on a Chapter 13 plan for five years – with only one mortgage on their house instead of two. This could really help a lot of people. The trouble right now is that the availability of the process is still under appeal. Besides that, the exact procedure for clearing the lien of the second mortgage from the title as a matter of real estate law is still under discussion.

Once the appeals are over and both the bankruptcy laws and the real estate laws have been fully nailed down, this could be really something. For now I have not found myself willing to subject a client of mine to all the risks involved in this procedure. To me it just doesn’t seem quite ready for prime time. I know lawyers who are going full steam ahead with this, however, and I could refer you to one it you’d like to at least look into it.

Mentioned in Lien Strip article – Not exactly a Claim to Fame

Seems I was quoted in an article in yesterday’s Sunday Pioneer Press. The topic was a process called lien stripping. It involves taking a second mortgage in a Chapter 13 case and throwing it in with the unsecured debts. The second mortgage gets treated as if it were a big credit card instead of a mortgage. At least in theory, at the end of the Chapter 13 payment plan, the mortgage is then just gone. This can only be done in a case where the value of the homestead is less than the balance owing on the first mortgage. The bankruptcy court is asked to treat that second mortgage as if it was unsecured, because as a practical matter there is no security.

I say “in theory” in the above paragraph because the situation is that this process is so new – at least here in Minnesota – that nobody knows quite for sure exactly how it should be done. That is still being worked out. For one thing, the case (Fisette) which says we can do it is being appealed. I don’t expect it to be overturned, but that could happen. For another thing, nobody knows for sure how to clear the title of the second mortgage. The mortgage can be gone as a matter of bankruptcy law, but still be a problem as a matter of real estate law. Real estate law is as if it’s on a different planet than bankruptcy law – maybe in a different solar system. There’s a need for adjustments between the two legal systems before lien stripping can be expected to go smoothly. While those adjustments might be in process, they are certainly not completed at this time.

The whole thing is a bit too up in the air for me, and so far I have been reluctant to try doing any of this. I have been explaining it as a possible option, and I have been referring people who are interested to some of the lawyers who have been doing them – such as Mr. Theisen and Mr. Andresen. People like them should be given credit for having the gumption to push for this, particularly Craig Andresen who is the one who has the case on appeal.

This is a developing area and I’m sure to have more to say about it later.

Bankruptcy court NOT shutting down -at least not for now

I’ve been concerned all week over what to expect with the anticipated federal government shut down. The bankruptcy court is federal, so this shut down could affect me and my clients in a very direct way.

I went on line and tried to research it a bit around noon today. I found announcements that the Nevada bankruptcy courts were going to stay open, along with a statement from one of the bankruptcy judges in another state – Colorado if I recall correctly – stating that they would not be closing. In an interview a lawyer from New York said that they were going to try to keep essential services concerning life and property going, and the bankruptcy court would be in that category.

Then a few minutes ago the Minnesota bankruptcy court sent out the following email:

“In the event that a lapse in appropriations – sometimes referred to as a “government shutdown” – occurs on April 9, 2011, the United States Bankruptcy Court, District of Minnesota will remain open for business as usual, and hearings, trials and 341 meetings will be held without interruption. Applications, hearings and other matters may be scheduled with the Court as usual. Public access to the Court, in person and through the Court’s electronic filing system, CM/ECF, will not be affected.

If a lapse in appropriations continues after April 22, 2011, the Court will continue to conduct hearings and trial. As to continuation of services in the Clerk’s office, notice will be posted on the Court’s website at www.mnb.uscourts.gov.”

At least now I can tell my clients who are scheduled for hearing next week that we are still on and nothing has changed. I’m still a bit anxious about a few cases I was planning on filing toward the end of the month, however, for obvious reasons.

A Fresh Start for the New Year

I always keep an eye on the traffic to my web site. As the holidays approached last month, I could see that the traffic was dropping off significantly. On the Monday after Christmas, however, there was a sharp spike upward. Traffic stayed high all that week and then jumped even higher following the New Years weekend. The Tuesday after New Years Day was the highest traffic day I have had for months.

These traffic statistics plus the incoming phone calls and emails confirm that a lot of people are considering using the bankruptcy process to make a new start for the new year. That’s exactly what the bankruptcy laws were originally designed to do. Instead of putting you in debtor prison or turning you into a completely homeless person, you get to clear the slate of the old debts and start fresh – if you qualify.

The original version of the United States Constitution, the one they read this week on the floor of the House of Representatives, included the power to create a nationwide bankruptcy system. This is not a new idea. The founding fathers recognized bankruptcy as a thing of value, and wanted it to uniform for the whole country instead of being different in each state. When I was first out of law school back in the 1970s the process was extremely simple. A bankruptcy petition was less than 15 pages of material. There were few restrictions on who could file. The primary concern was whether there would be a lot of assets that could not be claimed as exempt. Since then every few years additional red tape and limitations have been added. Finally in 2005 there was a massive rewrite of the law which was so severe that we were wondering if the whole process may finally have been killed.

Well, if the intent was to completely remove bankruptcy as an option, it didn’t work. The American Bankruptcy Institute reports that bankruptcy filings jumped by 9% in 2010. Last week the Wall Street Journal carried a detailed article about the increase in filings. The article includes a graph showing bankruptcy filings between 2000 and 2010. On the graph one can see the spike in 2005 right before the effective date of the 2005 law, followed by a dramatic drop in filings, followed by a steady increase. When I saw news releases last summer stating that the first half of 2010 had broken some sort of a record for bankruptcy fillings, I commented that I didn’t think it could possibly have exceeded 2005. This graph shows I was right. Nevertheless, it is quite clear that filings are back up to pre-2005 levels.

So if you are considering such a fresh start, you certainly are not alone. I’d sure be glad to talk it over with you. I can do a screening over the phone which you give you a pretty good idea of what you qualify for. I don’t charge for those phone calls. If you just can’t seem to get ahead, you might want to look into it.

Get your bankruptcy for $187.00!

While checking how my website was being ranked on Google, I noticed an ad for an outfit that said it would prepare and file your bankruptcy for $187. Well, that would be a heck of a deal. It certainly piqued my curiosity.

So I went and took a look at their site. For one thing, I was wondering who the lawyer was who was doing this. I quickly found that the site provides no way of figuring out who is running the company or whether there is a lawyer involved at all. There is no address and no phone number provided. No names of any real person.

So I tired a Google search. I typed in who is and the name of the web site at Google. The first item on the list was the web site itself. The second item listed was a page at ripoffreport.com about these guys.

You can see for yourself what they have to say. You do yourself a disservice if you use price as your only criteria.

Stopping Garnishment by filing a Bankruptcy

A lot of people have had their bank accounts garnished this week. My phone has been buzzing about it. I think the law firm of Messerli and Kramer must have been cleaning up their garnishment backlog over this past weekend or something.

So now I am having to explain that I can’t just create a bankruptcy filing to stop the garnishment inside of a few hours or even a few days. To be sure I am getting it right, I need somewhere around six weeks, maybe more, to put one of these bankruptcy cases together. A bankruptcy petition is a document that usually exceeds 50 pages. There are hundreds and hundreds of questions to be answered. The penalty for not answering correctly can include criminal felony charges. It just is not the sort of thing that should be slapped together in a rush.

There is a procedure for an emergency filing. It involves filing part of the bankruptcy petition, and then being allowed 14 days to get the rest done. I have done this in the past prior to the passage of the 2005 “reform” legislation, but since then I have been of the opinion that it’s too hazardous. It’s best to let them garnish away and get the bankruptcy done properly.

The filing of a bankruptcy does stop garnishment – immediately upon the filing of the case. It’s really nice that way. But if you may be vulnerable to a garnishment, don’t let it go. Get to a competent bankruptcy lawyer and get started now.

What to Bring to a Bankruptcy Hearing

At the outset let me say that this post is about the practices that I encounter here in Minnesota, mostly for cases right here in the Twin Cities. If you are from somewhere else, please consult an attorney in your own jurisdiction. Even though bankruptcy is based on federal law and should be about the same everywhere in the country, there are in fact tremendous variations from one locale to another.

Usually the only hearing there is in a Chapter 7 or Chapter 13 bankruptcy is a little proceeding they call the “Meeting of Creditors.” Sometimes it’s also called the “341” or “341 Meeting,” after the section of the bankruptcy code that sets up the hearing process. In this post when I say “hearing,” I mean this meeting of creditors.

This week I have had a hearing nearly every day, except for Friday when I had two. It is usually simple and short, possibly just five minutes, if the lawyer and the clients are properly prepared. But there’s nothing that can delay it worse or mess it up more than not coming to the hearing with all the required documents.

For most of these the required doucments fall into four categories, sometimes five. Here they are:

1. Driver’s license or goverment photo ID for each debtor.

2. Social security card. It’s surprising how many people can’t find this or have lost it a long time ago. If you absolutely can’t find your card, there are some substitutes that are acceptable. In general you can use anything that you have that has your social security number on it, AS LONG AS IT WAS CREATED BY A THIRD PARTY.

So a pay stub would work, since that is created by your employer. So would a W-2. Trouble is that most pay stubs don’t have the social security number on them anymore. It’s getting harder and harder to find a document that has it. Health insurance cards used to have them, but now most don’t. In this day of identity theft, the items that have a social security number on them are disappearing. About the only thing that I can use reliably is a W-2 or 1099. I usully can’t use a tax return, because that’s considered a self generated document – it’s not from a third party.

3. Most recent paystub from employment for each debtor. That is the pay stub that is most recent as of the date of the hearing, not the most recent stub from before the date of filing. The handout from the court which I have posted on my site says to bring “evidence of current income,” but I’ve never seen a trustee ask for anything other than a pay stub. I’ve never seen a person who gets a pension or unemployment be asked to produce evidence of that at the hearing. My experience also is that self-employed people don’t have to produce anything in this category – not at the hearing at least.

4. Bank statements for all open accounts which show what the balance was on the day the case was filed. If the account is open, you have to produce a statement for it. However, unlike the pay stub, this is not necessarily the most recent statement as of the date of the hearing. Usually the statement that comes in the mail at the beginning of the month following the filing of the case will do the trick. You have to be sure, however, that the date of filing is covered in the period included in the statement. In cases where my clients are unable to get a statment that came in the mail, I tell them to go on line or actually go to the bank and get a statement that includes about two weeks before the date of filing and two weeks after that date. Some of the trustees like to snoop through these statements, and I’m concerned that they would be disappointed if we just came in with one page that gave the balance on date of filing.

5. Additional information if the trustee requests it. The above four items or categories of items are all that’s required for more than 90% of the cases I handle. However, every now and then there will be a case where the trustee sends us a letter asking for more information. This could be almost anything, but the rule I follow is that if the trustee wants it, I tell my clients that we better provide it. Often these letters ask that the material be emailed to the trustee several days before the hearing.

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