Recent Entries

Should This Mortgage Be Saved?

Published on October 11, 2011 in Real Estate. 0 Comments

With residential loans defaulting at a record pace, Congress proposed or passed various bills to staunch this consequence of the economic dive-bomb.  The Home Affordable Modification Program (“HAMP”) was enacted to prevent foreclosures through loan modifications.    The general consensus is that this program has not produced the number of loan modifications as hoped.  The process has proved burdensome for both creditors and debtors.  Other bills proposed in an attempt to prevent foreclosures would have changed the Bankruptcy Code and permit Chapter 13 debtors to “cramdown” and bifurcate underwater residential mortgages.  For good reasons, including the probable disastrous effect this would have on our already damaged economy, these bills were defeated.

Some are predicting we are on the cusp of yet another foreclosure wave.  While this looms in the background, Congress may not extend HAMP when it is set to expire on December 31, 2012, and there will no longer be a federal loss mitigation program.  There is a bill pending on the Senate calendar (which means it is awaiting action in the Senate) that would give each bankruptcy court the power to set up its own loss mitigation program. Senate Bill 222 was born on its Sponsors’ premise that mortgage servicers are bad guys because they profit from foreclosure losses, while the investors are good gals because they want to mitigate losses to protect the value of their portfolios, and so will engage in negotiations.

The bill would permit each court to establish its own program for consensual loss mitigation on loans secured by debtors’ homes. The bill in its current form would not require creditors to engage in loss mitigation.  However, this might not deter some courts from establishing programs or creating complicated requirements that would delay hearings on motions for relief for loss mitigation. This would be especially harmful when the debtor has no realistic chance of a successful modification.

Additionally, because each court could establish its own program, there could be a complex patchwork of programs throughout the country.  While loss mitigation is a worthy goal when both parties can agree, a decree from Congress to require it in bankruptcy could only delay the inevitable relief from stay in the majority of cases while further harming a creditor’s position.

Monette Cope is a Junior Partner practicing in Bankruptcy. She focuses her practice within the Consumer Bankruptcy and Commercial Bankruptcy Groups located in the Chicago office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 312.253.9614 and .

Attacking Confirmation Orders Post-Espinosa

Published on April 19, 2011 in Bankruptcy Court and Chapter 13. 0 Comments

Hope was extinguished for creditors who would seek to overturn illegal provisions in confirmed Chapter 13 plans by the Supreme Court’s recent decision in Espinosa.[1] There, the Court upheld an order confirming a plan that stated all student loans would be discharged upon the debtor’s Chapter 13 discharge even though the provision was illegal – student loans are nondischargeable under bankruptcy law.

The best defense to illegal provisions is to timely review and object to Chapter 13 plans so that creditors do not lose rights upon confirmation that they would otherwise enjoy under the Bankruptcy Code.  Confirmation orders may still be revoked for fraud under the Bankruptcy Code.[2]  However, such cases are extremely rare.  It is important to know that inserting illegal provisions in plans is not considered fraud under the law, so creditors cannot rely on this Code section as grounds to undo confirmation orders.

 But if a plan is confirmed with an illegal provision, Espinosa does not entirely shut the door on challenging the confirmation order.  That case honored the importance of the finality of orders more than the undoing of illegal provisions in Chapter 13 plans. However, a fundamental underpinning of the decision was the fact that the creditor did have notice of the bankruptcy and plan in time to object, but failed to do so.

If a creditor’s due process rights are violated, the confirmation order is void, at least as to that creditor’s treatment.[3] Due process requires that the creditor get notice in time to object.  If a creditor is omitted from the service list, or an obsolete or incorrect address is scheduled so that the creditor does not receive actual notice of the bankruptcy in time to object to confirmation, then it has a due process argument to challenge the confirmation order. 

Many districts now have model plans that debtors are required to use, but allow special provisions or additional treatment than what the model plan provides. Often, these model plans incorporate the Bankruptcy Code’s requirements for confirmation.  An example is the lien retention provision – a creditor has the right to retain its lien until the earlier of a Chapter 13 discharge or payment in full under non-bankruptcy law.[4]  The Erdmann court found that when a debtor tried to override this provision in a model plan, by inserting a special provision that a creditor’s lien was void upon confirmation, the attempt failed, and the model plan language and the Bankruptcy Code prevailed.[5]  Accordingly, the lien was not avoided at confirmation as the plan had provided. While it is important to note that in the Erdmann case, the creditor did not receive notice of the plan in time to object, rendering the confirmation order void as to that creditor’s treatment, this argument may be successful on its own.   If a special plan provision conflicts with model plan language that echoes the Bankruptcy Code, the model plan language should prevail.

Prompt and diligent review of Chapter 13 plans is the best and most dependable protection against any negative plan treatment.  However, if a plan is confirmed with an illegal provision, your bankruptcy attorney may be able to mount a challenge to the order if the facts are favorable, even after the Espinosa decision.

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312.253.9614 or via email at .

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[1] United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367(U.S. 2010)
[2] 11 U.S.C. § 1330(a)
[3] Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)
[4] 11 U.S.C. § 1325(a)(5)(B)(i)(I)
[5] Erdmann v. Charter One Bank (In re Erdmann), infra.

When Spouses Cannot Strip Mortgage Liens in Bankruptcy

Published on April 13, 2011 in Chapter 13, Chapter 7 and Real Estate. 0 Comments

In a previous advisory, titled “Lien Stripping Prohibited if Debtor is Ineligible for Discharge”, the discussion centered on emerging case law that prohibits a debtor from stripping liens on wholly unsecured mortgage claims when that debtor is ineligible for a Chapter 13 discharge.  A recent case out of the Northern District of Illinois Bankruptcy Court adds another barrier to stripping wholly unsecured liens – when property is held in a tenancy by the entirety, and only one spouse seeks to strip the lien.[1]

In this case, both the husband and the wife filed a Chapter 13 bankruptcy, but the husband was ineligible for a Chapter 13 discharge because he received a Chapter 7 discharge within four years of filing the case. The wife, however, was eligible for a discharge, and so could conceivably strip the lien.  The plan proposed to strip the second mortgage as wholly unsecured, and an adversary proceeding was filed to determine the secured status of the mortgage lien.  If the husband could not strip the lien, the question became:  could the wife do it for both, or only as to her interest?  The creditor argued that she could not do either, and the court agreed.

Most states recognize tenancy by the entirety as a form of property ownership. Each state may vary its characteristics. But the fundamental aspect remains the same – only married couples may hold property in a tenancy by the entirety.  This is an ancient form of property ownership which, while it recognizes two individuals as owners of a property, it also recognizes only one tenant of the property, that is, the marriage.  In other words, neither spouse has an individual slice of the property. Both together own it all.

Spouses may only affect the property by acting together, but individually they cannot.  For example, neither can mortgage the property without the other’s consent, but together they both can.  Conversely, a creditor cannot hold a lien on only one spouse’s interest, only on the whole of the marital entity’s interest, the whole property. 

Using this reasoning, the judge held that when property is held as a tenancy by the entirety, a lien strip may occur only when both spouses are acting as one. In this case both spouses signed the note and granted a second mortgage on their residence. But, because only one spouse could conceivably strip the lien due to the other’s ineligibility for discharge, neither spouse could do it.

When only one spouse seeks to strip a lien, determine whether the property is held in a tenancy by the entirety. If only one spouse seeks to strip a lien, research whether the property is held in a tenancy by the entireties.  If both spouses seek to strip a lien, verify that neither is ineligible for a discharge.  Consult with your local bankruptcy counsel to review the state law as to tenancy by the entirety and advise you how to proceed.

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached at 312.253.9614 or .

[1]Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)

Lien Stripping Prohibited If Debtor Is Ineligible For Discharge

Published on April 7, 2011 in 2005 BAPCPA, Chapter 13 and Chapter 7. 1 Comment

Chapter 13 debtors who are ineligible for a discharge may not strip mortgage liens, even if the liens are wholly unsecured. This is a growing consensus among a majority of bankruptcy courts, and is a result of the interplay between two Bankruptcy Code provisions enacted in the 2005 BAPCPA amendments.

The first provision is that a debtor is not eligible for a discharge in Chapter 13 if the case is filed less than four years after obtaining a discharge in a Chapter 7, 11 or 12,[1] or less than two years after a discharge in a Chapter 13.[2]  Previously, there were no grounds to deny discharge in Chapter 13 if a debtor was a frequent filer, or more to the point here, filed a “Chapter 20.”  A “Chapter 20” is obtaining a Chapter 7 discharge as to all unsecured debt, and then filing a Chapter 13 to cure defaults on secured debt to avoid repossessions and foreclosures.

The second provision is that a secured creditor has the right to retain its lien on an “allowed secured claim” until the earlier of 1) payment in full of the balance under non-bankruptcy law, or 2) a Chapter 13 discharge.[3]  This was enacted to end common plan provisions that required release of a lien before a Chapter 13 discharge or payment of any unsecured portion once the secured portion of a claim was paid.  If the case was later converted or dismissed, the creditor had lost its lien.

Combined, these two provisions work to prohibit lien stripping when a debtor is ineligible for a Chapter 13 discharge. If a lien must remain until the earlier of discharge or payment in full of the non-bankruptcy balance, then the earlier event will be full payment because no discharge will be entered.  This operates to prohibit lien stripping when the debtor is ineligible for a discharge– the lien must remain until the underlying claim is paid in full, even if it is wholly unsecured. 

Debtors have claimed that they can avoid the lien retention statute if a mortgage is wholly unsecured by arguing a wholly unsecured mortgage lien is an unsecured claim in actuality and the statute only applies to “allowed secured claims”.  Likewise, by calling such a claim unsecured because of the absence of any equity, they have also argued that the lien is void by operation of law under 11 U.S.C. § 506(d), which states:  “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.”  (Emphasis added.)  Neither one of these arguments has been successful. 

A recent case decided in the Northern District of Illinois,[4] rebuffed this reasoning using established case law and explained what an “allowed secured claim” is.  Claim “allowance” is the process of putting a claim in line for payment. A claim is allowed unless it is objected to.[5]  Claims may only be disallowed on specific grounds enumerated in the Bankruptcy Code.[6]  A secured claim may not be disallowed simply because there is no equity in the collateral.  Hence, when any secured claim is filed, it is “allowed”.

A claim is a “secured claim” if a creditor has recourse to collateral, most commonly in the form of a lien.[7]  The value of the lien is a separate issue,[8] and does not determine whether the claim is “secured” or not. If a claim has an underlying lien, it is a “secured claim”.  

A wholly unsecured mortgage claim is an “allowed secured claim” because it is allowed and because it has recourse to real estate by the lien.  Thus, debtors may not declare such a claim “void” under 506(d) or skirt the lien retention requirement by claiming an unsecured mortgage lien is not an “allowed secured claim”.

This is a powerful tool when a debtor is not eligible for a discharge.  It will prevent the stripping and discharge of wholly unsecured liens.  Only the Ninth Circuit has case law that allows lien stripping when a debtor is not eligible for a Chapter 13 discharge.[9]  If a debtor files a Chapter 13 and seeks to strip a lien within four years of obtaining a Chapter 7 discharge or within two years of obtaining a Chapter 13 discharge, creditors should consult with their bankruptcy counsel to determine whether to object to the proposed lien strip.  

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312.253.9614 or via email at .
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[1] 11 U.S.C. § 1328(f)(1).
[2] 11 U.S.C. § 1328(f)(2).
[3] 11 U.S.C. § 1325(a)(5)(B)(i).
[4] In re Fenn, 428 B.R. 494 (Bankr. N.D. Ill. 2010)
[5] 11 U.S.C. § 502(a)
[6] 11 U.S.C. § 502(b)
[7] Dewsnup v. Timm, 502 U.S. 410, 417 (1992)
[8] 11 U.S.C. § 506(a)
[9] In re Tran, 431 B.R. 230, 235 (Bankr. N.D. Cal. 2010)

New Plan Provision Allows Lien Stripping Without An Adversary Proceeding

Published on September 14, 2010 in Bankruptcy Filings. 0 Comments

Stripping unsecured liens without an adversary proceeding is now easier for debtors in the Northern District of Illinois (Chicago).  The new Model Plan adds a section specifically for lien stripping.  Debtors will be required to use this new plan commencing October 15, 2010, but the plan is available online now, and debtor’s attorneys can start using it immediately. 

Previously, if a plan sought to strip a lien, language to that effect was inserted in the Special Terms section at the end of the plan.  A creditor must be aware of this new section so as not to miss a debtor’s intention to strip its lien.

The new Model Plan adds Sec. E. 3.2, titled Other secured claims treated as unsecured, and is as follows:

The following claims are secured by collateral that either has no value or that is fully encumbered by liens with higher priority. No payment will be made on these claims on account of their secured status, but to the extent that the claims are allowed, they will be paid as unsecured claims, pursuant to Paragraphs 6 and 8 of this section.
(a) Creditor: _________________Collateral:_________________________

This section permits a debtor to declare a lien unsecured and then pay it as an unsecured claim along with other unsecured creditors.  Coupled with Sec. B. 3, which provides that a creditor must release its lien upon discharge (or earlier if the debtor pays off the debt in full), this permits lien stripping without an adversary proceeding.  Liens would be stripped at discharge.

To further trip up lien holders, the plan also provides in Sec. E. 8. that:

Any claim for which the proof of claim asserts secured status, but which is not identified as secured in Paragraphs 2, 3.1, or 3.2 of this section, will be treated under this paragraph to the extent that the claim is allowed without priority.

This means that if a creditor files a secured claim, and it is not listed in these sections, it will be paid as an unsecured claim by operation of the plan.

Some of the judges in the Northern District of Illinois will still require an adversary proceeding to strip liens even if debtors fill out this section.  I’ve talked to the chair of the court’s liaison committee, and this will be on the agenda at the next meeting.  Hopefully, the inquiry will help identify which of our eleven judges will accept the plan provision in lieu of an adversary proceeding.

So, lien holders must now check in three places within the plan to determine the treatment of their claim.  First, look to see if your claim is identified as secured in Sec. E. 2, 3.1, or 3.2.  If it is not listed at all, it will be treated as unsecured.  If it is listed in Sec. E. 3.2, it will be treated as unsecured. Finally, check in the Special Provisions Section at the end of the plan.  If a judge still requires an adversary proceeding, the intention to file an adversary to strip the lien and pay the claim as unsecured may be listed there.

If you have any questions on this matter, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312-253-9614 or via email at .