Bankruptcy provides an opportunity for a filer to reduce a lien to the value of the property. It is difficult to do this, however, when the property is your home. The recent case of In re Birmingham illustrates this. Attempting to take advantage of a bankruptcy code provision that insulates mortgages secured solely by the debtor’s principal residence from modification, the debtor argued that three provisions of the mortgage secured property other than the home. These provisions permitted a security interest in escrow items, property insurance proceeds, and miscellaneous proceeds. The Fourth Circuit Court of Appeals held that these property items were similar enough to the home to be a part of it and thus the mortgage could not be stripped down or reduced to the value of the home. Remember, however, that when the circumstances are right you can strip off a second mortgage completely, and it will no longer be a mortgage, but unsecured debt, subject to substantial reduction.
A bankruptcy gets rid of debts but does not necessarily get rid of liens. Strangely, a person can file bankruptcy, and have no obligation to pay the mortgage on the house where they remain. If they want to keep their home, however, they have to take care of the lien held by the mortgage company, and the mortgage company can foreclose on the home if the lien is not paid. The mortgage company cannot attempt to collect on the debt, but it can provide the owner notice of its lien rights. In the recently decided Fourth Circuit case of Lovegrove v. Ocwen, the court held that a generic notice sent to mortgage holders and bankruptcy filers did not violate the law when it said:
This communication is from a debt collector attempting to collect a debt; any information obtained will be used for that purpose. However, if the debt is in active bankruptcy or has been discharged through bankruptcy, this communication is not intended as and does not constitute an attempt to collect a debt.
Lovegrove also held that the creditor did not violate the Fair Credit Reporting Act when the customer asked it directly to remove credit information. The court determined that the request to modify negative credit information must come from the credit reporting agency
It would be a disservice to Maryland United States’ District Court Judge Paula Xinis’ recent opinion in Okoro v. Wells Fargo to say that it stood for the principle that the courts are not going to give homeowner’s free homes as a result of technical violations of RESPA, federal and state debt collection statutes, and the common law. Judge Xinis carefully went through the Okoro’s claims and explained why each one of them had no merit. The court also reiterated that the Fourth Circuit has held that no one can bring a suit to enforce their right to pursue or obtain a loan modification. However, the bottom line for the Okoro’s was that they could stay in a home and not expect to make any payments just because the lender may have done some things incorrectly.
The heading above may seem like common sense advice. However, many people come to me who have not made a mortgage payment in years. They assert that the lender bringing the foreclosure action has no right to bring it because there was a defect in the process of transferring the loan from a prior lender to the current holder of the note. Conover v. Fisher, a recent unreported Maryland Court of Special Appeals Case, reinforces the principal that the court will not permit a great deal of exploration of whether a party has a right to foreclose. The court is interested in whether payments were made. If they were not, whoever is bringing a foreclosure case probably has a right to bring it
Puerto Rico is not a State. The District of Columbia lacks certain privileges that other states have. These are subjects I could spend all day talking about. However, this is a bankruptcy blog. So we will talk about Puerto Rico’s attempt to authorize bankruptcy for its utility companies by enactment of a law.
In the recent United States Supreme Court decision of Puerto Rico v. Franklin California Tax-Free Trust, the Court held that Puerto Rico had been preempted from adopting its own bankruptcy laws by the federal government. The Court acknowledged that all 49 States (excluding notably the District of Columbia) could authorize a municipality to file bankruptcy; however, Puerto Rico was not a State under the Bankruptcy Code definition that applied; therefore, Puerto Rico simply did not have the power to authorize a municipal bankruptcy filing (DC doesn’t either). A power every one of the 49 States has.
Judge Martin Teel’s recent Maryland decision in In re Weaver confirms how difficult it is to obtain a discharge from student loans. Even though the debtor in that case received only social security income and suffered from “ongoing psychological problems”, she was not granted a discharge, because she had not done enough to address her psychological issues and had not attempted a reduced payment workout to the court’s satisfaction.
One of the benefits of filing a chapter 13 bankruptcy is that it can be dismissed or converted to a chapter 7 bankruptcy at any time. However, care needs to be taken to insure that a bankruptcy filer or debtor does not lose assets in the process. In the recent case of In re Goins, Judge Brian Kenney of the United States Bankruptcy Court for the Eastern District of Virginia ruled that, when a case was converted to a chapter 7 from a chapter 13, any increase in the value of a house during the course of a chapter 13 case was property of the estate which would not be kept by the debtors, but would instead go to pay creditors. The court held that the debtors were entitled only to the amount of principal which they were able to pay off during the time that that the 13 case was pending.
Under the bankruptcy code, a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, is generally non-dischargeable. In other words, while you can generally get rid of just about all debt in a bankruptcy case, you cannot get rid of a fine, penalty, or forfeiture. Criminal restitution is generally considered to be a fine, penalty, or forfeiture. However, Judge J. Frederick Motz of the United States District Court in Baltimore recently determined, in the case of Cregger v. Maryland, that restitution, owed by a parent, as a result of criminal activity of their child, was dischargeable.
Judge Martin Teel, sitting in the United States Bankruptcy Court in Greenbelt, recently ruled in the case of In re: Mitchell that a law firm, who received timely notice of a bankruptcy filing, could not get a pass on its failure to file a timely proof of claim. As a result, the claim was denied and the law firm was barred from receiving any portion of the Chapter 13 plan payments. This case underscores the need to be aware of the claims filing deadline and procedures for filing a proof of claim. If you are a creditor in a bankruptcy case, make sure you consult with an experienced bankruptcy attorney!
In the Maryland case of In re: Miller, Bankruptcy Judge Martin Teel determined that the automatic stay should be lifted to allow a sale in lieu of partition case to proceed between previously divorced parties. He also decided that the Maryland State Court could determine that the proceeds of sale could be disbursed in a manner which differed from the parties’ separation agreement. Counsel for the debtor argued that the request to deviate from the settlement agreement penetrated the bankruptcy estate and was thus, subject to continued protection by the stay. However, the bankruptcy court indicated that the division of proceeds was a state court function.