Recent Entries

The 8th Circuit Opens the Door to Partial Discharge of Student Loans and Upends the Totality of the Circumstances Test

By Monette Cope Attorney Junior Partner

Most student loans are nondischargeable in bankruptcy unless a debtor can show that repayment of the loans will cause the debtor an “undue hardship”.[1] The Eighth Circuit is the only Circuit that does not apply the three prongs set out in Brunner v. New York State Higher Education Services Corp[2]. As the test of undue hardship. Rather, it employs a “Totality of the Circumstances” test which looks in part at “the debtor’s past, present and future financial resources”.[3] In Conway v. National Collegiate Trust (In re Conway)[4], the debtor filed for Chapter 7 bankruptcy in 2009, obtained a discharge, and then reopened the bankruptcy in 2011 to seek a discharge of her student loans. While she had other student loans, the only ones that were considered at trial were fifteen loans owing to one private loan holder. She graduated with a B.A. in Media Communications in 2005, had held two full-time jobs, but was laid off of each one.

At the time of the trial, she held two part-time jobs as a server in restaurants. The bankruptcy court denied her a discharge of her student loans, finding she had at least 30 years to establish herself in the world of work and that her future financial resources should allow her to pay her student loans. While not disturbing the factual findings upon which the bankruptcy court found that the debtor will have reasonably reliable future finances to pay, the Bankruptcy Appellate Panel (B.A.P.) reasoned differently. Instead of looking to future possibilities, the court stressed it could not engage in speculation, and looked only to the debtor’s past and current earnings as evidence of what she may make in the future.[5] The 8th Circuit B.A.P., in accordance with most other courts, stated in Conway that it had no authority to grant partial discharges of student loans. It then turned around and found a way to do it. The case was reversed and remanded to the bankruptcy court to individually determine the dischargeability of each of the fifteen student loans in light of the debtor’s current yearly income.[6]

This is a stunning ruling because it effectively prevents a bankruptcy court in the 8th Circuit from looking at any evidence of future earning potential other than a debtor’s past and current income. So, if a highly trained professional chooses to work part-time in a low-paying job and establishes a pattern of low earnings, is the court only to look at those earnings in determining a future ability to earn and pay student loans? Can future income potential still be part of the totality of circumstances test?
While this case is only applicable to bankruptcy cases in the 8th Circuit, courts in other circuits may start to relax their analysis of the undue hardship test in Brunner.

[1] 11 U.S.C. §523(a)(8).
[2] 831 F.2d 395, 396 (2d Cir. N.Y. 1987).
[3] Reynolds v. Pa. Higher Educ. Assistance Agency (In re Reynolds), 425 F.3d 526 (8th Cir. Minn. 2005).
[4] 495 B.R. 416(8th Cir. BAP 2013) ( affirmed June 2014 by 8th Cir.).
[5] Id., at 423
[6] Id., at 424.

Election of Remedies: Foreclosure, Money Judgment and Bankruptcy

By Anne Smith, Attorney

When a borrower defaults on a promissory note that is secured by real estate through a mortgage or deed of trust, lenders have a decision to make. Is it better to foreclose on the property, take a deed in lieu of foreclosure, or sue on the promissory note? The choice made at the outset may affect how the obligation is handled in the event your borrower files bankruptcy. When choosing a remedy to pursue, lenders must consider the cost as well as the effects of each alternative. Most states adhere to an election of remedies doctrine, which means a lender must choose one remedy over the other. When a lender decides to file a lawsuit, the attorney will usually file one complaint that will describe two separate remedies: one remedy will be to foreclose the lien, and the other remedy will be for a money judgment. After the suit is filed, the lender must choose one of the remedies, as it cannot pursue both simultaneously. If a lender chooses to foreclose, the unit will be sold to the highest bidder at judicial foreclosure sale, frequently the lender itself. Alternatively, the lender may seek a money judgment, which would allow the lender to immediately attempt to collect the judgment amount from the debtor through garnishment and attachment, but will extinguish its lien on the property.

A foreclosure is costly and time-consuming, and creates new obligations for the lender. There are numerous requirements to include all parties, owners and lienholders, requirements to participate in mediation or loss mitigation, and delays for any number of issues. However, many states now permit a lender to seek a deficiency judgment on the remaining balance after a sale. If the property has chain of title or assignment issues, environmental issues, or is a non-desirable property for other reasons, seeking a money judgment may be preferable. A money judgment permits attempts at immediate recovery, and may be the best course of action for a junior mortgage or lienholder. A primary recommendation after obtaining a money judgment is to make sure a judgment lien is recorded in the county deed records, if required by your state to effectively attach to real property. You can then proceed with garnishment or attachment while maintaining a lien on the real estate. Keep in mind that your lien priority will change upon taking the judgment and filing the lien, but that may be a non-issue if you hold a junior mortgage with little or no equity available to you.

One problem with a money judgment is the effect of a bankruptcy filing on its collectability.  Once a lender takes a money judgment, its claim will be deemed unsecured in a bankruptcy estate, as the lender will be seen as having waived its option to enforce the mortgage.  If the lender has filed a judgment lien in the deed records, that may provide some measure of security, but it is likely that the debtor will seek to avoid the lien. Most importantly, if the judgment lien is filed within ninety (90) days of the bankruptcy filing, it may be avoided as a preference, and stripped from the real property. Lenders have many decisions to make with regard to a defaulted note, and as always, timing is everything. Please contact legal counsel with any questions about a particular situation or state’s laws.

Amendments to Pennsylvania’s Law on Powers of Attorney

By Keri P. Ebeck, Attorney

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On July 2, 2014, Governor Tom Corbett signed into law as part of Act 95 of 2014, House Bill 1429, which provides for the amendments of Title 20 Chapter 56 (20 Pa. C.S. §§5601-5612). Title 20, Chapter 56 provides for the laws that govern all power of attorneys (hereinafter “POA”) used in financial and property transactions.

The amendments of Title 20 specifically change the law involving third party acceptance, reliance and civil liability of POA(s). This amendment was established to legislatively overturn a prior Pennsylvania Supreme Court case of Commonwealth v. Vine, 9 A. 3d 1150 (2010). The Vine case held that a third party is not reasonable to rely upon a power of attorney submitted by an agent where the POA may be defective or void, even in cases where the third party had no knowledge of such.[1]

The amendments of Title 20 were partially enacted to correct the Vine case decision by amending §5608 to state as follows:

5608(c) Genuineness.–A person who in good faith accepts a power of attorney without actual knowledge that a signature or mark of any of the following are not genuine may, without liability, rely upon the genuineness of the signature or mark of:

(1) The principal
(2) A person who signed the power of attorney on behalf of the principal and at the direction of the principal
(3) A witness
(4) A notary public or other person authorized by law to take acknowledgments [2]

By this amendment, a third party may accept in good faith (without specific knowledge) the POA that an agent submits without consequences and civil liability. Additionally, the amendments went on to state in §5608(d) that “A person who in good faith accepts a power of attorney without actual knowledge of any of the following may, without liability, rely upon the power of attorney as if the power of attorney and agent’s authority were genuine, valid and still in effect…”[3] This amendment specifically changed the law in PA, as previously a rejection or refusal of a POA may have resulted in civil liability.  The POA law now states that “A person who is asked to accept a power of attorney may request and, without liability, rely upon without further investigation…(1) an agent’s certification under penalty of perjury; (2) an English translation of the POA; (3) an opinion of counsel as to the POA.”[4]

These amendments to Title 20 directly affect all banks and their employees, who accept POA(s) for their customers on a daily basis to conduct business. The amendments allow for a greater protection from liability for accepting the POA(s) in question. The legislation of Act 95 of 2014 also incorporates the standing Pennsylvania law as part of the Uniform Power of Attorney Act, which is effective and law in fifteen (15) other states.[5]  Should a lender or third party have a question on a particular POA, it is recommended to contact legal counsel for interpretation of the current standing law and amendments recently enacted.

The amendments of Title 20, Section 56; §§ 5601(f), 5608, 5608.1, 5808.2, 5611 and 5611 are effective as of July 2, 2014. All other parts of Act 95 of 2014 are effective as of January 1, 2015.

If you have any questions on this matter, please contact Ms. Keri P. Ebeck, Esq. Keri is an attorney who practices in bankruptcy and is based in the Pittsburgh office. She can be reached at 412.338.7102 and

[1] Commonwealth v. Vine, 9 A. 3d 1150 (2010)
[2] House Bill 1429 (Act 95 of 2014)
[3] Id.
[4] Id.
[5] Important Changes Enacted to Pennsylvania’s Power of Attorney Law, Pepe, Raymond, June 26, 2014;…/Important_Changes_to_Pennsylvania’s_Power_of_ Attorney_Law_Take_Effect_Jan2015


Lien Stripping: Should a debtor’s eligibility for a discharge be a factor?

By Keri P. Ebeck, Attorney

Anyone who practices bankruptcy is familiar with Chapter 7, Chapter 13 and most likely Chapter 11, but what about a Chapter 20? To some, the question is whether a Chapter 20 bankruptcy is part of the bankruptcy code? The answer is – not technically, but a Chapter 20 bankruptcy does exist. A Chapter 20 is when a debtor files a Chapter 7, receives a discharge and then proceeds to file a Chapter 13 in an effort to strip a wholly unsecured mortgage lien. The question that courts, lawyers and judges are dealing with in many jurisdictions is whether those debtors who are ineligible for a Chapter 13 discharge are able to strip a wholly unsecured mortgage lien?

In a majority of the courts, most jurisdictions are holding that wholly unsecured mortgage liens can be stripped off and treated as unsecured mortgages without the benefit of a Chapter 13 discharge. The courts are grappling with various arguments and issues to determine if debtors are to accomplish such under §1325, 1322 and 506. Pursuant to §1325(a)(5), a holder of a secured claim provided for by the plan shall retain the lien securing such claim until the earlier of “the payment of the underlying debt determined under non-bankruptcy law; or discharge under section 1328.”[1]  On its face, §1325 appears to deal with secured claims only – the question is, what about wholly unsecured mortgage claims? Additionally, §1322 (b)(2) states that “the plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.”[2]  A majority of the courts are relying upon §506(d) to determine the value of the collateral in question. If under 506(d) the value determined leaves a mortgage lien completely unsecured, the court will then look to §1322(b)(2), which allows rights of unsecured creditors to be modified.[3]  By valuing the collateral at zero, the debtors are able to modify the rights of the creditor under §1322 and strip the wholly unsecured mortgage lien. The argument is that under §1325(a)(5), the holder of a secured lien retains its lien until discharge, but if the debtor is not eligible for a discharge, there can be no effective lien strip. The parties in In Re Davis argued, to which the Court agreed with, that “Congress did not intend to alter the ability of the bankruptcy courts to enter lien-stripping orders in Chapter 13 cases. And this is so regardless of the availability of a discharge. A discharge, the debtors say, extinguishes only in personam liability…Because the debtors here have already discharged their in personam liability in the prior Chapter 7 proceedings, they have no need for a discharge with respect to the liens.”[4]   Once the lien strip order becomes effective and the plan is confirmed and completed, a discharge is not needed to strip the lien. The lien becomes stripped upon plan confirmation and completion.

Of the courts that dissent and do not allow Chapter 20 lien strips, view §1325 as a protection from the Chapter 20 case, by stating in the section itself that a secured creditor retains its lien until discharge. The term “allowed secured claim” in Section 1325 (a)(5) is not defined by, or predicated on, an application of Section 506(a)… “Section 506(a) provides for the judicial valuation of an allowed secured claim, without altering the secured status of a creditor.”[5]  The other argument is that Chapter 20 lien strips can be viewed as an end run around the Dewsnup case which held that a mortgage lien (secured or wholly unsecured) cannot be stripped in a Chapter 7.[6]  But those who argue against this believe that if Congress had intended not to continue allowing lien strips in a Chapter 13 after a Chapter 7 discharge, they would have specifically “fixed” the problem with the BAPCPA Amendments of 2005.

As it stands now, more and more jurisdictions are continuing to follow Dewsnup and not allow Chapter 7 lien strips, but at the same time, allowing the debtor to proceed and file a Chapter 13 (i.e. Chapter 20 case) and ultimately strip the mortgage lien without a discharge of the debtor.

If a creditor reviews a plan with a lien strip or the creditor receives an adversary to strip a lien, immediate review of the jurisdiction and law is needed to determine what rights the creditor may have.

Keri’s bio:

[1] 11 U.S.C. §1325(a)(5)(B)(i)
[2] 11 U.S.C.§1322(b)(2)
[3] In Re Davis, 716 F.3d. 331 at 335
[4] In Re Davis,  at 337. In Re Johnson, 501 U.S. at 84.
[5] In Re Davis, at 340 (dissent) [6] Dewsnup v. Timm, 502 U.S. 410

Bankruptcy Filing Trends in the Northern District of Ohio

by Stephen R. Franks, Attorney

It’s no secret…bankruptcy filings have been on the decline over the past few years.  Debtor’s attorneys are scrambling to make ends meet.  With fewer filings, there is less revenue to go around.  The shortage of filings is forcing debtor’s attorneys to accept questionable or bad cases for filing.  Normally, these attorneys would pass on a bad case and the debtor might not normally file or would then file a pro-se case.  Pro-se bankruptcy filings have an extremely small chance of success, so the cases would ultimately be dismissed.  As a result of the decreased filings, we are actually seeing that many cases are having significant delays in obtaining a Chapter 7 discharge or Chapter 13 confirmation order which significantly impacts a creditor’s rights or income stream.

Chapter 7 Trustees are also feeling the pinch from lower filings.  Chapter 7 Trustees make their money through the administration of cases.  For each case assigned, the Trustee receives a referral fee.  With less cases being filed, the Trustees are receiving less referral fees which is forcing trustees to more aggressively seek debtor assets and property of the estate.  However, Chapter 7 Trustees in Ohio have received another blow to their income stream when Ohio’s homestead exemption was increased a few years ago.  The increased exemption has effectively eliminated any real estate equity the Trustee’s may have traditionally sought to recover.  Trustees are now forced to look for assets in other places than the real estate.  They are actively seeking recovery of assets under $1,000 whereas Trustees would not have bothered with such small amounts historically.

So, how are things looking for 2014?  In 2010, the total bankruptcy filings for the Northern District of Ohio were 38,119.  Filings have steadily declined over the next three years.  In 2013, only 26,142 total cases were filed in the Northern District of Ohio which is nearly a one-third reduction in filings over the course of the three year period.

Through April, there were 7,584 total cases filed in the Northern District of Ohio.  When projected over the entire year, this only estimates to be 22,752 cases filed for the entire year.  This amount is roughly a 40% decrease since 2010.

There are many theories as to why filings have decreased.  The most likely theory is that creditors are not collecting on debt with the same aggressiveness that they once were.  Part of the reason could be the formation of the CFPB and their implementation of new guidelines that have impacted creditors.  Many creditors are leery to run afoul of the CFPB and face possible enforcement actions.

Regardless of the reason, history has shown that the market will correct itself.  Our economy cannot continue to allow excessive ‘bad’ debt to exist.  Bankruptcy filings will increase at some point.  The real questions, is when?