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.

Application

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).

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.

Of Chapter 7 And Security Clearances

Of Chapter 7 And Security ClearancesWorkers at Fort Dix, Fort Monmouth, the FBI in Newark, and other employers in The Garden State sometimes hesitate to file Chapter 7 Bankruptcy because they’re afraid of losing their security clearances. While bankruptcy debtors may face some increased scrutiny, there are some very important legal protections in place.

Federal Law

11 U.S.C. 525 prohibits discrimination against those who file a voluntary petition. Subsection (a) states that “a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant. . . solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act.”

The key phrase is “solely because.” A bankruptcy filing does create some very serious questions about a person’s fitness to hold a security clearance, and if you were on the other side of the desk, you would probably ask the same questions about one of your employees. Fortunately, there are also some very good answers to these questions.

As a brief aside, subsection (b) applies the same prohibition to private employers and subsection (c) forbids bankruptcy discrimination in student loan matters.

Department of Defense Guidelines

Financial responsibility is one of several considerations, along with foreign preference, alcohol consumption, sexual behavior and a few others, in a security clearance. There is no automatic disqualification in any of these areas. Plenty of people have friends or relatives overseas, drink beer on the weekends or are unfaithful to their partners, but these individuals retain their status.

DoD Directive 5220.6, Guideline F, works the same way. The concern, at least where bankruptcy is concerned, is that a person with money problems may turn to illegal acts as a way to generate funds. Some additional considerations include:

  • History of Unmet Financial Obligations: If this matter is your first filing and it can be traced to divorce, illness or a sudden financial trauma, as is generally the case, this question is arguably inapplicable.
  • Deceptive Financial Practices: Very few consumer bankruptcies involve embezzlement, fraud, income tax evasion and other financial crimes.
  • “Issues of Security Concern”: Similarly, very few filings are directly attributable to gambling, alcoholism and drug abuse.

There is more good news. Directive F goes on to list several “mitigating factors” which usually can be found in a Chapter 7:

  • Isolated Incident: Most bankruptcies do not involve a pattern of reckless spending or prolonged financial irresponsibility.
  • Lack of Control: On the contrary, most bankruptcy filings do involve divorce, business downturn, illness, job loss and other similar incidents.
  • Debt Counselling: All debtors receive debt counselling and debtor education, and most seek financial advice from other sources as well.
  • Good Faith Effort to Resolve Debt: If you lack the funds to pay your debts, bankruptcy is the best way to legally resolve them.

People file bankruptcy to get a fresh start, and it is impossible to get that fresh start if you lose your job. That may be the main reason that most debtors get to keep their security clearance.

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.

Special Asset Issues

Bankruptcy and Special Assets

Bankruptcy and Special AssetsIf you have decided to file for bankruptcy as a way to get a fresh financial start, you may have concerns about how the bankruptcy filing will affect certain articles of property. What about any money you have received or are eligible for through an inheritance? What about your retirement plan assets? Will you have to reclaim property given to friends or family, or that you’ve recently sold or given away?

Inheritance and Bankruptcy

Whether or not the proceeds of an inheritance will be accessible to the bankruptcy trustee in a Chapter 7 proceeding depend on two issues:

  • Whether your state allows you to claim an exemption on an inheritance—the law varies from state to state
  • When you received the inheritance—if you have already received the inheritance when you file, or if you receive the inheritance within 180 days of filing, it must be included in a Chapter 7 proceeding

Retirement Plan Assets and Bankruptcy

As a general rule, money put into a retirement plan is exempt from access to pay creditors in a bankruptcy proceeding. This includes profit-sharing plans, defined benefit plans, 401(k)s, IRAs and money purchase plans. The only retirement assets that may be taken by the bankruptcy court are Roth and traditional IRA plan assets in excess of $1,245,475.

Gifts to Friends or Family or Items Recently Sold

A significant gift to a friend or family member within two years (under federal rules) of a bankruptcy filing can qualify as a fraudulent transfer. Some states will look back as far as seven years. As a general rule, if the bankruptcy court finds a transfer to be fraudulent, it will require that the property or its value be returned to the bankruptcy estate. It may also prohibit you from completing the bankruptcy.

Items sold at fair market value typically don’t qualify as a fraudulent transfer, but a sale for less than market value may have the same consequences as a gift.

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.

What Property Can I Keep In A Chapter 7?

New Jersey is one of 19 states which allow Chapter 7 debtors to choose between federal and state exemptions. If property is exempt, you get to keep it in a bankruptcy. What are some of the differences between state and federal bankruptcy exemptions on some commonly held property items?

Homestead

New Jersey does not have an exemption for your home.

However, the federal exemption is a bit more straightforward. Up to $22,975 of equity is exempt. After the real estate crash, fewer and fewer people have equity in their homes and as a result find that they can easily protect their homes in a bankruptcy filing.

Vehicle

New Jersey does not have a vehicle exemption, but does allow up to $1,000 of personal property to be exempt. This personal property exemption can be used on a vehicle.

If using the federal exemptions, you can claim up to $3,675 in equity for a motor vehicle.

Retirement Benefits

IRAs, 401(k)s, Social Security benefits, pension plans and other retirement benefit plans are exempt under both state and federal bankruptcy laws. So, bankruptcy will not disturb your nest egg. However, if you have borrowed money against your retirement savings, you will still be required to repay those loans.

The Wildcard

Federal exemptions provide for a “wildcard” of $1,225 plus up to $11,500 of unused homestead exemption to use on anything that you want. This wildcard exemption can be used to protect extra equity in a car, cash at home, money in the bank, or extra equity in a home, boat, investment property, timeshare… you name it!

On a practical basis, New Jersey state exemptions are very meager and infrequently chosen, especially since the federal exemptions under the Bankruptcy Code are so generous. As a result of the federal exemptions under the Bankruptcy Code, the vast majority of people who file a Chapter 7 bankruptcy are able to keep everything that they own, while shedding their debts.

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.