Friday, May 17, 2013

“Chapter 20″ Lien Stripping Allowed by Fourth Circuit Appeals Court

The U.S. Court of Appeals, Fourth Circuit, has become the first U.S. Court of Appeals to approve “chapter 20″ lien stripping.  Although virtually all U.S. bankruptcy courts allow the “stripping” (vacating and eliminating) of completely unsecured junior mortgages on homestead real estate, the Fourth Circuit is the first circuit-level appeals court to approve lien stripping in a chapter 13 which follows closely on the heels of a chapter 7 bankruptcy filing.  In re Davis (Branigan v. Davis), No. 12-1184 (4th Cir. May 10, 2013).
“Chapter 20″ is a colloquial term for a chapter 13 bankruptcy filed within four years of a chapter 7 case.
A junior mortgage is the second, third, or any other mortgage which is junior to the first mortgage upon homestead real estate.  Although junior mortgages cannot be stripped or otherwise modified in a chapter 7 bankruptcy (although the Eleventh Circuit has allowed this practice in an unpublished opinion), junior mortgages can indeed be stripped off in a chapter 13 bankruptcy, if the junior mortgage is entirely unsecured.

An example of an entirely secured junior mortgage would be where the home’s value is $200,000 and the first mortgage has a balance of $250,000; if the home is also subject to a second mortgage in the amount of $50,000 the second mortgage is not secured by any actual value of the real estate.  To think of this example in another way, if a foreclosure sale were to occur on this underwater home, the first mortgage would receive only $200,000 (the home’s value) and the second mortgage would get absolutely nothing.  This is what the bankruptcy code means when it categorizes a junior mortgage as entirely unsecured.

“Chapter 20 junior mortgage lien stripping” means stripping an entirely unsecured junior home mortgage in a chapter 13 bankruptcy case which is filed within four years after a chapter 7 filing by the same debtor.  The question whether this is permissible arises because the debtor is not eligible for a discharge of debts in a chapter 13 filed within four years of a chapter 7 discharge.

Many are surprised that someone can file chapter 13 bankruptcy within four years of filing chapter 7 — isn’t there a mandatory eight year waiting period between bankruptcy filings?  The answer is no.  A debtor can file chapter 13 at any time, it’s just that a chapter 13 debtor cannot receive a discharge, in the new chapter 13 case, if the case is filed within four years of a previous chapter 7 case.

Mortgage banks have raised the argument that even if junior mortgage lien stripping is allowed in chapter 13 bankruptcy cases, it should not be allowed in a no-discharge chapter 20 case.  If the debtor cannot receive a discharge of debts, the argument goes, then how can the chapter 13 filing strip off a junior mortgage?
In In re Davis, the appeals court noted that lower courts have been split on the question of chapter 20 lien stripping, although one Bankruptcy Appellate Panel had approved this practice in In re Fisette, 455 B.R. 177 (8th Cir. BAP 2011).

Call Speckman Law Firm at 619-696-5151

Monday, May 13, 2013

Who gets Lower Rates? Wall Street Banks or Student Loans?

Wall Street Banks Get Lower Rates Than Student Loans AND Can Bankrupt Their Loans From The Government



Bankruptcy remains a source of financial relief for most borrowers.  Most debts are discharged in bankruptcy and folks receive a “fresh start”. However, there is one huge exception that is not discharged automatically in any bankruptcy - student loans.
Both government and private loans are not discharged in bankruptcy. Student loans are dischargeable in bankruptcy cases only if the student can prove that the loans cannot be repaid without undue hardship, now or at any time in the future.   Providing undue currently hardship would seem to be easy — after all, bankruptcy means broke, right?   The difficult part is proving that the hardship will continue indefinitely into the future.  Absent a permanent disability, this standard is seldom met. So, the practical consequence is that student loans are largely considered “non-dischargable.”

There may be some relief in the future – at least with private student loans. 

A meaningful push to revamp the current loan is being made by Elizabth Warren, a former Democratic Senator from Massechusetts. 
There, Elizabeth Warren served as the interim potential head of the Consumer Financial Protection Bureau, but her permanent appointment was blocked by partisan politics. Undeterred, Elizabeth Warren ran for Senate shortly thereafter. Warren now serves on the Senate Banking Committee, where she has introduced her first piece of legislation:  “The Bank on Students Loan Fairness Act.” Ms. Warren proposes a radical change:   to give individuals the same interest rate that the big Wall Street banks obtain, an interest rate of about .75% on loans they obtain from the government. The interest rate for Stafford (government backed) student loans is currently set at 3.4% and is set to double to 6.8 percent in July.

As Warren explains, this student loan problem is a quiet but growing problem.  She explains that taxpayers are investing in the big banks and that taxpayers should invest in our students.    America should not be “drowning our students in debt while we give a great deal to the banks.”  She points out that economists have stated that defaulted student debt poises a problem and barrier to the recovery of our economy.    She concluded with a call to action and a reminder that students have only their voices, not lobbyists, to ask Congress for equal treatment.

Why should our government make it so easy for Wall Street to skip out on debt while requiring students, our future, to jump hurdles and hire attorneys to obtain financial relief?

Ms. Warren, a former Harvard law professor, understands the financial pressure faced by most Americans as she came from a working-class background, becoming a waitress at age 13 (after beginning as a babysitter at age 9).  Ms. Warren has authored 9 books, including two best sellers.  Let’s hope her efforts produce some meaning change.

If you are struggling with student loan debt, call us today to schedule a free consultation with attorney David L. Speckman.

1350 Columbia Street, Suite 1350
San Diego, CA 92101