Supreme Court Limits Stripping Second Liens in Chapter 7

In a decision which probably caused mortgage bankers everywhere to pop champagne corks and party like it’s 1999, the High Court ruled that Chapter 7 debtors are not entitled to strip-off a second lien on residential property.

Lien Removal and Reduction

Before Bank of America v. Caulkett, all bankruptcy debtors could remove junior liens, if the property’s value was insufficient to secure both notes. Assume Harry Homeowner used 80/20 financing to purchase a $200,000 residence, and the property’s value dropped to $160,000. The second lien would be unsecured, and dischargeable like any other unsecured debt.

The Supreme Court had already limited cram-downs, wherein the loan balance is reduced to the fair market value of the property, to Chapter 13 debtors. More on that in a minute.

The Case

As a rule of thumb, any case that contains the phrase “Unfortunately for the debtor” is probably not going to end well.

Caulkett was a consolidation of several actions from Alabama. The debtors had all filed Chapter 7 Bankruptcy in 2013, and sought to remove junior liens from their primary residences. Both the District Court and the Eleventh Circuit Court of Appeals voided the subsequent mortgages, holding that the declining property value had rendered these notes unsecured.

Writing for the majority, Justice Clarence Thomas drew heavily from 1992’s Dewsnup v. Timm, the aforementioned case on cram-downs. In that opinion, the Justices essentially redefined a secured claim as “a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim.” In other words, the loan instrument created a security interest, and the words on the paper are all that matter.

The homeowners attempted to distinguish Dewsnup, but the Justices were unpersuaded. Justice Thomas noted that the “constantly shifting value of real property” could lead to “arbitrary results” unless the Court drew a bright-line rule.


Caulkett is probably not the last word on the subject. Justice Thomas hinted that the Court may be willing to reconsider Dewsnup, because that decision has been so heavily criticized. Tellingly, only three Justices refused to join in the chorus of boos directed at Dewsnup.

At any rate, if eliminating a junior lien is a major concern, Chapter 13 is still an option. Both types of consumer bankruptcy ultimately give debtors a fresh start; they just work a bit differently.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).

Who’s The Boss?

In a 6-3 decision, the Justices gave significantly more power to bankruptcy judges, provided that they use this authority under carefully controlled circumstances.


The underlying dispute in Wellness International v. Sharif began in 2005, when Wellness obtained a $650,000 default judgment against Richard Sharif. Four years later, Mr. Sharif filed bankruptcy in Illinois. He claimed he had no assets, but Wellness asked the bankruptcy court to include a trust that he controlled in the bankruptcy estate. Somewhat predictably, Mr. Sharif failed to participate in the lawsuit in any meaningful fashion. The Bankruptcy Court declared that the trust’s assets, for all practical purposes, belonged to Mr. Sharif and therefore were part of the bankruptcy estate.

In 2011, even as the Wellness/Sharif dispute continued, the Supreme Court decided Stern v. Marshall, which seemingly held that bankruptcy judges had no power to hear other civil matters. Based on Stern, the Seventh Circuit overturned the Bankruptcy Court’s judgement against Mr. Sharif.


The Supreme Court reinstated the Bankruptcy Court’s judgment. Writing for the majority, Justice Sonia Sotomayor essentially said that Stern had been misinterpreted. She bluntly stated that “Our precedents make clear that litigants may validly consent to adjudication by bankruptcy courts,” and Stern did not change that pattern.

Instead, in order to determine the Bankruptcy Judge’s authority, a reviewing court must ask two questions:

  • Was the civil matter pertinent to the bankruptcy case?
  • Did both parties consent to that civil matter being heard by someone who is not a federal district judge?

The Court returned the case to the Seventh Circuit, because it was a bit unclear whether or not both parties gave effective consent.


It is not uncommon for a civil suit to be tied to a bankruptcy case. All these lawsuits are subject to the automatic stay. Creditors may not take any action against debtors without special permission from the presiding judge. Unless the debtor consents to the arrangement, the bankruptcy judge has no jurisdiction over these cases and they must be suspended, pending the discharge order.

If the lawsuit involved a suit on account, such as a medical bill or past-due utility bill, these unsecured debts are nearly always discharged, and the case goes away. In the case of a suit on a sworn account, such as a credit card or student loan, the case may or may not resume, depending on the type of debt. When a secured debt is involved, such as a mortgage or car note, the lawsuit nearly always resumes, unless the debtor is no longer in violation of the security agreement (i.e. has caught up on payments).

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).

Another Bankruptcy Filing Reduction

The filing rate decreased 6.5 percent in The Garden State, while nationwide, bankruptcy filings were down by almost 13 percent. By direct comparison, filings in New York were down 11.5 percent 11.8 percent in Pennsylvania. Does this mean that consumers in New Jersey are in worse financial shape than their peers in other states, or that they are smarter when dealing with money troubles?

Behind the Numbers

In terms of consumer bankruptcies, observers point to low interest rates, high legal fees and an improving economy for the decline. The falling rate has been going down steadily for the last several years.

While borrowing money to work your way out of debt – essentially robbing Peter to pay Paul – is sustainable for a few months, it is disastrous in the long term. You are still digging yourself into a hole; you just aren’t digging quite as fast as you were before. As for the legal fees, they pale in comparison to the tens of thousands of dollars that are typically discharged in a Chapter 7, and many reputable law firms are willing to consider payment plans. Plus, the money is typically a very worthwhile investment. More on that in a minute.

Finally, the improving economy may be fueling a false sense of confidence that is causing people to put off a needed filing. For example, an individual may hope that a new job or a higher wage may help reverse some financial misfortune. In this situation, that “hope” is more akin to “wishful thinking.”

If you are facing difficulties for whatever reason, you are certainly not alone. Take control of the situation by talking to a bankruptcy lawyer in Barrington.

What the Numbers Mean

The declining volume means that the trustees will scrutinize petitions even more than before. While it may be tempting to use a nonlawyer petition preparer or a do-it-yourself bankruptcy, the investment in a qualified bankruptcy lawyer is more important than ever. Only an attorney can give you solid legal advice and advocate for you in any court hearings.

Eventually, the reduced volume will mean cuts at local bankruptcy courthouses. Staff will be laid off, hours reduced and locations eliminated. If you are contemplating bankruptcy, file it now before the action becomes more of an inconvenience.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).

Corinthian College Bankruptcy Leaves Students In Limbo

A major for-profit private school has declared bankruptcy and ceased operations, leaving thousands of students with significant debt and no degrees. The closure has also raised questions about the nature of student loans and personal bankruptcy.

In the wake of a $30 million fine from the Department of Education for inflating graduate hiring statistics, Corinthian Colleges announced that its 28 campuses would close. Collectively, about 16,000 former students owe an estimated $480 million in student loans.

To call attention to their predicaments, and in protest of the school’s illegal activity, a number of these students are staging a “debt strike” and are refusing to make loan payments. Several key Democrats are sympathetic to their case: Senators Barbara Boxer of California and Patty Murray of Washington sent a letter to the Department of Education requesting “additional support” for the displaced students.

Corinthian Colleges also owned Everest University and Heald College campuses, as well as WyoTech College in Laramie.

Student Loans and Bankruptcy

Student loan discharge is a thorny issue because of the difficulty in categorizing these debts.

On the one hand, student loans are an investment. If a person borrows money that is related to the Small Business Administration and that enterprise subsequently fails, the borrower still must repay the funds. Discharge opponents argue that student loans have a similar risk, and if the investment in tuition does not pay off, for whatever reason, the students should still repay their loans.

But the difference is that the SBA only loans money to qualified borrowers who have some wherewithal to repay the funds even if the business fails. Moreover, the SBA will not approve a loan to someone with no business experience or a poor business plan. Student loans, on the other hand, are available to almost anyone who is attending any postsecondary institution.

There is a second issue, related to the loan guarantees issued by the federal government. Theoretically, depending on the nature of each loan agreement, the government could be forced to pay out billions of dollars to private banks whose borrowers defaulted, and Uncle Sam can ill afford this bill in the current budgetary climate.

Nonetheless, student loans are more akin to credit cards than any other type of debt, and they should be dischargeable in a consumer bankruptcy, at least in some circumstances.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).

The Taxman Cometh

Another tax filing season has come and gone, but millions of Americans still owe back taxes to a state or the federal government. Bankruptcy can offer relief from onerous collection tactics and, in many cases, eliminate the underlying debt altogether.

In terms of federal liabilities, most 1040 taxes are dischargeable. This would include any self-employment tax due under Schedule C, alimony received, annuity payments, government benefits and gambling winnings. The same holds true for most state taxes. Personal income taxes are typically dischargeable, while payroll taxes, capital gains taxes, and similar items are not in this category.

Dischargeable Debts

Most courts follow the 3/2/240 rule. First, the debt must be at least three years old. Most personal taxes are due on April 15. So, if you filed bankruptcy on April 14, 2015, any past-due amounts from tax years 2011 and before meet the first prong of this test. Second, the returns must have been on file for at least two years. So, if our hard-luck taxpayer owed money from tax year 2011, the returns must have been filed no later than April 14, 2013. A side note: some courts may require on-time filings.

Thirdly, the debt must not have been “assessed” within the last 240 days, which is roughly eight months. In most cases, the IRS assesses the debt every time you receive a collections notice. If you do not have your most recent notice, it is a very good bet that the taxing authority kept a copy.

Finally, if you “willfully evaded” the tax, the debt is not dischargeable. A bankruptcy attorney can often partner with a tax attorney in these situations, as this term has a very specific meaning.

Collections Matters

The automatic stay in a Chapter 7 or Chapter 13 Bankruptcy prohibits all creditors from taking any action against debtors in Bankruptcy. “All creditors” includes the IRS, the New Jersey Division of Taxation, and any other state revenue agency. If you are receiving collections letters, they must stop. If your paycheck is being garnished, the garnishment must be released. If the taxing authority threatened to place a lien on your property, it may not carry out that threat.

If there was already a tax lien on your personal or real property, the taxing authority cannot collect on the lien during your bankruptcy, but the discharge order does not extinguish the lien.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-759-6022 (toll free at 866-662-3191).

Crisis Deepens In Atlantic City

Crisis Deepens In Atlantic CityA source close to the financial imbroglio in America’s Favorite Playground says that a Chapter 9 bankruptcy is “inevitable,” adding that the city “should have filed bankruptcy a year and a half ago.”

The official report from the state-appointed emergency management committee stopped short of this declaration, instead calling for a layoff of up to 30 percent of the city’s workers, pension cuts and debt deferrals that would save the beleaguered city an estimated $10 million this year. But with Atlantic City facing a projected $101 million budget shortfall in the upcoming fiscal year, it seems unlikely that even drastic budget cuts could turn around the city’s financial outlook. Emergency Manager Kevin Lavin admitted that the situation was much worse than the team originally anticipated. In addition to the anticipated shortfall, Atlantic City is already $397 million in debt.

Four of the largest casinos in the city have closed in the last year; as a result, the city’s tax base is about half of its 2010 level.

When Is Bankruptcy Inevitable?

If you are having money problems, consider speaking with a bankruptcy attorney. By holding out hope that nickel-and-dime budget cuts and extra few dollars will somehow turn things around, you are making the situation worse and putting yourself, and your family, through needless stress.

Specifically, look for the following warning signs as you contemplate filing a voluntary petition:

  • $10,000: Every family is different, but as a rule of thumb, if you owe more than $10,000 in credit cards, medical bills and delinquent payments, it will be very difficult to negotiate with creditors and repay that amount.
  • 90 Days: If you are more than two or three months behind on your house payments or car note, the lenders will attempt to repossess the collateral, despite any verbal assurances they make.

Chapter 7 can eliminate most unsecured debts in as little as a few months, while Chapter 13 debtors can repay debts over time under the protection of the federal government.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

Should I File Chapter 7 Or Chapter 13 Bankruptcy?

Should I File Chapter 7 Or Chapter 13 Bankruptcy?In a way, both these programs are very much the same. They use the same basic forms and the same judge may hear both types of cases. Most importantly, they both share the same goal. Once the judge issues a discharge order, the debtors and their families have a fresh financial start.

There are at least two major differences, especially since Congress changed the laws in 2005. Chapter 7 and Chapter 13 always catered to different types of debtors with different needs, and now those differences are even more pronounced.

Type of Debt

Broadly speaking, people with credit cards, medical bills, payday loans and other unsecured debt should consider Chapter 7. Chapter 13 may be a better choice for those who are behind on car loans, home mortgages and other secured debts.

However, many people fall behind on their secured debt payments, for many reasons, and they do not wish to retain the property. For example, a debtor may be $20,000 behind on a home mortgage. Even with a five-year repayment period, many families would be hard-pressed to make a monthly catch-up payment, especially after factoring in trustee fees and other debt retirement.

So, Chapter 7 may be an option for people who are behind on secured debts and plan to surrender the collateral.

Amount of Time

Some people want to quickly emerge from bankruptcy so they may begin rebuilding their credit scores. In many cases, a Chapter 7 may be discharged in as little as four to six months. This consideration may be very important if you plan on buying something large, such as a car or house, within the next five years. But since every situation is different, make sure you discuss your goals with your attorney.

On the other hand, some people need additional protection from the Bankruptcy Court. A creditor may be garnishing wages for a non-dischargeable debt, such as student loans, certain income taxes or delinquent domestic support obligations. Both chapters stop wage garnishment until the court issues a discharge order or unless the creditor obtains special permission from the judge. In a Chapter 7, the order typically comes within a few months. However, a Chapter 13 will not be discharged for at least three years, and quite possibly longer than that.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

Rebuilding Credit After Bankruptcy

Rebuilding Credit After BankruptcyBankruptcy is one of the most negative events that can appear on a consumer credit report. Anyone who tells you otherwise is either sugar-coating the truth or is not very experienced in these matters. The key phrase is “one of” the most negative events, because most lenders consider repossession, foreclosure and referral to collections as more negative than bankruptcy – in most of those situations, the borrowers simply gave up.

Chapter 7 Bankruptcy means a fresh financial start for you and your family, and there are some proven methods to help you raise your credit score.

Correct Inaccuracies

Theoretically, all the debts included in Schedule E should have a remark that the account was included in bankruptcy. Pragmatically, some do and some don’t. Sometimes the entity is a recent debt-buyer who did not receive notice of the filing, sometimes the paperwork gets lost in the shuffle, and sometimes the moneylender simply refuses to update its records.

The Fair Credit Reporting Act gives you the power to dispute any inaccuracies in your report. It may seem tedious to contest every little error, but when you are rebuilding your FICO score, every point counts.

Be Realistic

When you seek a mortgage loan or other credit, you will pay a higher interest rate and you may even be denied altogether, if it is too soon after your discharge. Always be upfront with the lender by informing the loan officers about your credit history before they run your report. If at least twelve or 18 months have passed since the discharge, you have no new problems and you have a reasonable explanation for what happened, most lenders are willing to work with you.

Pay Bills

One of the best ways to build credit history is to borrow money and timely repay it. A secured credit card is a good option for many families. Watch your credit report, because some cards state that they are secured, and your FICO score may not increase as much. There is some debate as to whether you should leave a small balance on the card or pay it off every month. The best thing to do is to experiment with both methods, and see how it affects your score.

Also, pay your existing bills on time, especially those accounts that are reported to the credit bureaus, like home mortgages and auto loans. Never leave a balance and do not be even one day late, if at all possible.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

Is Atlantic City The Next Big Municipal Bankruptcy?

Is Atlantic City The Next Big Municipal Bankruptcy?Two prominent Wall Street rating firms recently downgraded Atlantic City to near-junk status, after Gov. Chris Christie appointed an emergency management team to handle the finances of America’s Favorite Playground.

Last month, both Moody’s and Standard & Poor’s rating services dropped Atlantic City’s credit rating several notches, from BB to BBB+. The downgrade makes it more difficult for Atlantic City to borrow money, as it tries to stave off bankruptcy. An S&P analyst called the management team a “draconian” action that “has a greater likelihood of being detrimental to bondholders.” Moody’s said that Gov. Christie’s action may have ramifications for other financially-challenged New Jersey cities, including Newark and Patterson.

Four of Atlantic City’s 12 major casinos have closed in the last year, leaving the city with a greatly reduced tax base and nearly $400 million of debt.

Handling Bankruptcy

Atlantic City may hold a common misconception about bankruptcy, which goes back to the days of seemingly endless “Monopoly” games played out on the kitchen table, the living room floor, or a folding card table in the den. As you moved your racecar, iron, thimble, or battleship around the board, the worst thing you could do was file bankruptcy. That was the end of the game, and there was no hope of recovery.

Fortunately, the real thing works a bit differently. For one thing, a house on James Place may cost a little more than $50. More to the point, Chapter 7 Bankruptcy gives you a fresh start. Imagine that you have to take the red plastic hotel off of Pacific Avenue, but you keep the card face up and are soon able to start building it back up again. That, in a nutshell, is bankruptcy.

If you have more debt than you can pay, you can take the Atlantic City approach, and try to keep your head above water for a few more months and hope that things get better somehow. Or, you can take control of the situation and reach out to a Chapter 7 Bankruptcy attorney in Barrington. The experience may be somewhat uncomfortable in the short term, but you’ll be back at the financial starting line is as little as a few months, with little or no unsecured debt, more manageable secured debts, and a much brighter financial outlook.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

Don’t Let This Happen To You

A pair of recent decisions have some important lessons for your Chapter 7 Bankruptcy case, because they both deal with very common issues.

The Wrong Place

Don’t Let This Happen To YouIn Okechuku v. Sharp Management, a New Jersey sheet metal company filed a voluntary Chapter 7 petition. Shortly thereafter, the trustee filed a motion for turnover, claiming that Norman Sheet Metal & Mechanical owed over $100,000 in unpaid invoices to Sharp Management. NSM&M filed an unopposed motion to transfer the matter to U.S. District Court. It then almost immediately filed a motion to dismiss, claiming that the district court did not have jurisdiction. The judge granted the motion and dismissed the action, so NSM&M didn’t pay a dime to Sharp Management.

The case is confusing. This sheet metal company was a New Jersey LLC, but one member lived in New York and one in New Jersey. The trustee evidently believed that the district judge had jurisdiction, because of the diversity of citizenship. Instead, the court ruled that both the LLC and trustee were from the same state, so the matter could not be heard in federal court.

Especially when an emergency filing is involved, it is not uncommon for a case to be filed in the wrong jurisdiction. Even if that mistake can be fixed, it may lead to costly and unnecessary delays. In a similar vein, it’s also important to hire a local bankruptcy lawyer who is familiar with all the local rules and procedures, because many of these rules are unwritten.

The Wrong Attitude

A day before the Okechuku decision, the bankruptcy court refused a rather routine request because of the party’s behavior.

In Re Askman centered on Sergey Ishin’s request to extend time prior to discharge. Mr. Ishin was a creditor in the Chapter 7 Bankruptcy, and he was involved in a lawsuit against the debtor. Mr. Ishin received prior notice of the Creditor’s Meeting, but he neither attended that meeting nor requested an adjournment. Michael and Melinda Askman, on the other hand, attended the Creditor’s Meeting and timely responded to the Trustee’s request for more information. About two months later, and just two days before the discharge date, Mr. Ishin asked to extend the discharge date to investigate his claim against Mr. Askman.

When you were a child and you asked your mother to take you to a movie, she may very well have asked “did you do your homework and clean your room?” The same thing is true in a court of law. It is almost impossible to convince the judge to do you a favor if you have missed a deadline or ignored an order without a very good excuse for you conduct.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.