A Debtor May Strip Second Mortgage in a Chapter 13 Notwithstanding Prior Chapter 7 Discharge

In a Chapter 13 bankruptcy, a debtor can strip off a wholly unsecured second mortgage on his primary residence.  The debtor’s mortgage is stripped when he or she completes the Chapter 13 plan and gets the Chapter 13 discharge. 

Historically, a debtor is prohibited from first filing a Chapter 7 to discharge unsecured debt followed soon thereafter by a Chapter 13 bankruptcy to strip a second mortgage.  The reason is that a Chapter 13 debtor is not eligible for a discharge if he filed a successful Chapter 7 case within the four prior years. Therefore, a debtor who has discharged unsecured debt in a Chapter 7 must wait four years to file a Chapter 13 bankruptcy to strip a second mortgage.

Recently, in In re: Dang, Case Number 11-2970, a Middle District of Florida judge came to a different conclusion. The Court held that a Chapter 13 debtor may strip a wholly unsecured junior lien even though the debtor filed a prior Chapter7 case and is, therefore, ineligible for the Chapter 13 discharge. As a caveat, the Court also held that the Chapter 13 must have been filed in good faith, and a debtor is not proceeding in good faith if he files a Chapter 13 primarily to strip the second mortgage. The issue is whether the Chapter 13 is designed mainly to achieve a lien strip that could not be obtained in the prior Chapter 7. In this particular case, the court did not find the debtor acted in bad faith.

The debtor had initially filed a Chapter 13 case.  The Chapter 13 trustee moved to dismiss the case because the debtor’s unsecured debts exceeded Chapter 13 ceilings. The debtor then converted to a Chapter 7 to discharge the unsecured debt. Subsequently, the debtor filed a Chapter 13 to strip the second mortgage. The court noted that the debtor did not start off with plan to file Chapter 7 and a subsequent Chapter 13. 

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.

Stripping Off Wholly Unsecured Mortgages in Chapter 7

On May 11, 2012, the Eleventh Circuit Court of Appeals issued an unpublished opinion, McNeal v. GMAC Mortgage LLC, et al., Case No. 11-11352 (11th Cir. 2012), which allowed a Chapter 7 debtor to strip off a wholly unsecured mortgage where the amount of the first mortgage exceeded the value of the home.  Prior to McNeal, it was commonly understood that wholly unsecured mortgages could not be stripped off in a Chapter 7, although they could be stripped off in a Chapter 13.  This understanding was based on Dewsnup v. Timm, 112 S. Ct. 773 (1992), which held that a Chapter 7 debtor could not strip down a partially secured mortgage in a Chapter 7 bankruptcy.

In McNeal, the debtor sought to strip off her wholly unsecured mortgage in a Chapter 7.  It was undisputed that the second mortgage was both an allowed claim pursuant to 11 U.S.C. Section 502 and a wholly unsecured claim pursuant to 11 U.S.C. 506(a).  The Bankruptcy Court denied the debtor’s request and the District Court affirmed the Bankruptcy Court’s ruling.  On appeal to the Eleventh Circuit, the Court overruled the District Court.

In its analysis, the Eleventh Circuit acknowledged that many courts interpreted Dewsnup to also preclude a Chapter 7 debtor from stripping off a wholly unsecured second mortgage.  Despite lower courts’ reliance on Dewsnup, the Eleventh Circuit found that the controlling precedent was actually Folendore v. United States Small Bus. Admin., 862 F.2d 1537 (11th Cir. 1989).  In Folendore, the court held that an allowed claim that was wholly unsecured was voidable under the plain language of 11 U.S.C. Section 506(d).  In McNeal, the Eleventh Circuit disagreed with the bankruptcy courts that treat Folendore as abrogated by DewsnupMcNeal is currently up on appeal and we should have a binding decision soon as to whether Chapter 7 debtors can strip their wholly unsecured mortgages.  In the meantime, some courts are following McNeal as persuasive authority and/or allowing unsecured mortgages to be stripped off in a Chapter 7 if uncontested.

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.

Court Okays Post-Discharge Mortgage Modification

In the case of In re Claudie J. and Deborah D. Hairel, 2012 WL 2090435 (Bankr. M.D. Fla. 6/8/12), the Bankruptcy Court ruled that neither the automatic stay or the discharge injunction prevented a lender from modifying a mortgage with the debtors after they received a discharge in their Chapter 7 bankruptcy.

The mortgage was held by U.S. Bank, N.A. and serviced by American Home Mortgage Servicing, Inc.  After filing Chapter 7 bankruptcy, the debtors submitted a Home Affordable Modification Program application, which the lender approved.  After the debtors received a discharge, the lender asked the for the Court’s approval to enter into the loan modification.  The debtors did not enter into a reaffirmation agreement.

The Court said “[t]he automatic stay of 11 U.S.C. Section 362(a) arose by operation of law on the petition date of March 17, 2011.  The mortgage debt is dischargeable pursuant to 11 U.S.C. and was discharged on June 28, 2011.  The automatic stay and the discharge provisions of the Bankruptcy Code do not prevent the parties from negotiating and entering into a loan modification postpetition.”

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.

FHFA Selling Foreclosed Homes to Investors for Rentals

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The Federal Housing Finance Agency will soon start the implementation of a new pilot program by which it will sell thousands of foreclosed homes owned by Fannie Mae.  The geographic areas to be targeted by this program are Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida.

The homes will be sold in packages to qualified investors through a bidding process.  In order to qualify for participation in the program, investors have to demonstrate they have the necessary experience and financial capability to purchase and manage the properties.

This bulk-sales pilot program requires the investors to rent the purchased properties for a specified number of years.  Reportedly, the first stage of the program seeks to sell 2,490 homes, 85 percent of which are currently occupied by renters.  A total of 775 of those homes are located in Florida.   

The program is expected to reduce the backlog of distressed homes, help stabilize home values reduce taxpayer losses, and reduce the number of REO properties in the market.  Of the many governmental programs tried to date, this one actually makes sense and could help stimulate the real estate market.

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.

New Housing Task Force

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During his State of the Union address, President Barack Obama announced the formation of a Housing Task Force, officially called the Residential Mortgage-Backed Securities Working Group.  This new agency, led by New York Attorney General, Eric T. Schneiderman, will be responsible for cracking down on financial firms that have improperly bundled mortgage loans into securities for investors.  The task force will focus on Wall Street firm and large lenders. 

This is not be the first time the current administration has attempted to institute some form of investigative body to investigate or prosecute crimes related to the financial crisis.  The task force is the latest effort by the administration to address the complaints of so many homeowners and investors that the government has not done enough to hold the financial institutions accountable, or to address and correct the behavior and practices that led to the financial crisis.

Mr. Schneiderman has stated that the new task force will make a more focused, concerted and aggressive effort to address the issues.  Reportedly, 15 attorneys from the U.S. Attorney General’s Office and 10 FBI agents will join the task force staff of 30 attorneys in the investigative and prosecution efforts.  The Securities and Exchange Commission will also be involved.

The task force has already sent subpoenas to the 11 largest financial institutions, which as of today remain undisclosed. More subpoenas are expected.

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.

Debunking Bankruptcy Myths

When it comes to bankruptcy, there are several misconceptions and myths floating around.  This misinformation often persuades individuals not to avail themselves of the benefits of a bankruptcy filing. Below is an account of the most common misconceptions regarding bankruptcy.

I will lose my property. This is generally not the case.  In many cases, debtors do not lose or have to give up any property.  In a Chapter 7 Bankruptcy, most assets are exempt from liquidation. Florida, especially, provides very generous exemptions.  Only non-exempt property is subject to liquidation.  In a Chapter 13 case, debtors’ assets are fully protected so long they comply with their payment plan. 

Everybody will know.  Although bankruptcy filings are a matter of public record, unless you are a high profile individual, it is unlikely people will find out about the case.  Of course, all your creditors will be notified of your filing, and if someone, an employer, potential employer, landlord, or an interested individual obtains a credit report, or sets to find out specifically whether you have filed for bankruptcy, they will have that information available through the appropriate sources.

My credit will be ruined forever or I won’t get credit for 10 years after my filing.  The filing of a Chapter 7 case will stay on your credit report for 10 years.  However, you will be able to access credit shortly after your bankruptcy, and you will be able to rebuild your credit within 2 years of your bankruptcy.    Since bankruptcy reduces your outstanding debt, some lenders actually see you as a good candidate for new credit.

I don’t have to include a creditor if I am current and intent to continue to pay.  Many debtors would love to keep their Macy’s credit card, or other department stores credit card, or they feel they must keep their commitment to repay their friend or family member who aided them in a time of need.  However, you must include all your creditors and debts in your bankruptcy petition.  Institutional lenders will most likely close your account upon your bankruptcy filing.  You are allowed to reaffirm your debt with a particular creditor if you desire to continue to have the legal obligation to repay them after bankruptcy.

Filing for Bankruptcy is simple.  Filing for bankruptcy is a lot more than filling out a few forms.  Bankruptcy is a serious legal proceeding; every form submitted in bankruptcy has legal implications.  Although bankruptcy generally is not adversarial, even in a simple case there is potential for litigation and loss of assets if not done correctly.  For more information on Bankruptcy visit www.kelleylawoffice.com.

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.”

Florida Supreme Court Suspends Foreclosure Mediation Program

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On December 19, 2011, the Florida Supreme Court issued an Administrative Order discontinuing the state’s mandatory foreclosure mediation program.  The residential mortgage foreclosure mediation program was established in December of 2009 to address the foreclosure crisis in the state’s courts.  Although no cases filed after December 19, 2011 will be required to be referred to the mediation program, the Court clarified that the cases currently pending mediation on the date of the issuance of the administrative order will still be able to complete the mediation process. 

Reportedly, the mediation program was never very successful. Statewide, less than 4 percent of cases referred to mediation resulted in an agreement between the parties. In Palm Beach County, the numbers are even more disappointing – less than 2 percent.  Often times, lenders could not reach the borrowers to set the mediation; other times, the lenders came to the mediation with no intentions to actually reach an agreement; and many times, the borrowers came to the mediation with no real ability to work anything out due to economic strains.

The Florida Supreme Court’s decision to terminate the foreclosure mediation program does not necessarily mean that the program or some form of it will cease to exist throughout the state. For instance, the Fifth Judicial Circuit Court has already indicated its intention amend its county administrative order to continue its mandatory managed mediation program.  Some other circuits may do the same.

 —Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. For more information about bankruptcy, visit www.KelleyLawOffice.com or contact Craig I. Kelley by calling 561-491-1200 or by emailing info@kelleylawoffice.com.

Palm Beach County November Foreclosure Stats

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The Palm Beach County Office of the Clerk & Comptroller recently released the November foreclosure statistics.  These stats show that the number of foreclosure cases in the county has increased 51 percent compared with the same time last year.  Notwithstanding this significant increase, the November numbers are still lower than the numbers for the previous month. 

Also significant is that the number of foreclosures filed in 2011 is still lower than the number of foreclosures filed in 2010.  Specifically, by November 2010, 18,968 foreclosures had been file in the County.  By November 2011, only 10,935 cases had been file, a 42.4 percent decrease from 2010.  For perspective, however, foreclosures in Florida continue to be relatively high.  Around 25,000 foreclosures were filed in the State in November 2011, the second highest total in the country.

The Clerk’s office sold 899 properties though foreclosures auctions in November, 2011.  Of those auctioned properties, only 142 were sold to third parties; the rest were sold back to the lender or mortgage holder.

—Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. You can get more information about bankruptcy from an experienced bankruptcy attorney in West Palm Beach by contacting Craig I. Kelley at 561-491-1200 or by emailing info@kelleylawoffice.com.

Bankruptcy Demographics: Who is the American Debtor?

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The Institute for Financial Literacy (“IFL”) recently released its 2011 Annual Consumer Bankruptcy Demographics Report.  This is an annual report that looks at the demographic profile of the American debtor.  In this report, the IFL did not limit its presentation to the 2010 bankruptcy demographic data, but it compared data from the previous five years to determine how the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the Great Recession of 2008, and the political changes have affected the demographic makeup of the Bankruptcy petitioner.  The report examines the demographic information of the bankruptcy filer in 2010, and compares the results with the findings from 2006 through 2009.

The IFL found that since the passage of BAPCPA, the following demographic changes have occurred:

  • Although more than 70% of the debtors do not have a college degree, more people with advanced degrees are filing for bankruptcy
  • Most debtors earn $40,000 a year or less, and approximately 40% of debtors make less than $20,000.
  • Sixty percent of debtors are married, and 35% of those married debtors filed jointly
  • More men are filing for bankruptcy, closing the once existing gender gap.

The IFL also reports that the following changes are attributable to the Great Recession:

  • The number of bankruptcy filers 45 years old and older increased by 19%
  • The number of bankruptcy filers 34 years old and younger decreased by 30% since 2006
  • The number of Asian American debtors doubled
  • The number of Hispanic/Latinos filing increased by 33%
  • The number of college-educated people filing for bankruptcy increased by 20%
  • The number of debtors earning above $60,000 increased by 66%
  • The number of unemployed bankruptcy filers increased by 21% since 2006
  • The number of married bankruptcy filers increased by 12% since 2006

Other interesting findings is that the number of African American bankruptcy petitioners has been steadily decreasing since 2006, while the number of Caucasian, Latino/Hispanic American and Asian American bankruptcy filers has been steadily increasing since 2006.  With the exception that the number of Caucasian filers decreased by 2.3% in 2010.  The number of Native American filers has been fluctuating, with the lower number of Native American filing in 2009.

The number of bankruptcy filers with graduate, bachelor’s and associate’s degrees has been steadily increasing since 2006. With the exception that the number of bankruptcy filers with a bachelor’s degree slightly decreased in 2010.  Most of the bankruptcy filers only have a high school degree or GED diploma, but the number of these filers has been steadily decreasing since 2006.

With respect to the income gap, expectedly, the less you make, the more likely you are to file for bankruptcy, except if you make more than $60,000.  Debtors making between $50,000 and $60,000 have consistently been the least likely to file for bankruptcy since 2006.  The number of bankruptcy filers with an income of more than $60,000 has been steadily increasing since 2006.

Craig I. Kelley, West Palm Beach Bankruptcy Attorney of Kelley & Fulton, P.L., represents individual and business debtors and creditors in Chapter 7, 11, 12, and 13 proceedings. He is A.V. rated by Martindale-Hubbell directory, which is the highest rating as voted on by his peers in the legal profession. He is an Adjunct Professor of Bankruptcy Law at Palm Beach Community College and lectures nationally on the subject. For more information about bankruptcy, visit www.KelleyLawOffice.com or contact Craig I. Kelley by calling 561-491-1200 or by emailing info@kelleylawoffice.com.