Recent Entries

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 .

Treasury Department Issues Guidelines for Use of HAMP in Bankruptcy

Published on March 30, 2010 in Bankruptcy Filings, Homeowners Affordable Modification Program and Real Estate. 0 Comments

A recent post advised lenders and servicers of a strategy proposed by a prominent Chapter 13 Trustee to file bankruptcy and apply for a HAMP modification at the same time. To recap, theoretically, the servicer will lower the mortgage payments and a modification would be in executed within 60 days of filing the bankruptcy, and the plan would be ready for confirmation.  However, this not only overlooks likely delays in the process, but also the three month trial period during which the debtor must make full and timely modified payments before the modification is permanent.  During the process, the servicer can be bound by automatic stay for months while awaiting completion of the modification, and so confirmation.

Now the U.S. Treasury is promoting the idea through its just-issued Supplemental Directive 10-02.  It includes guidelines for HAMP modifications in bankruptcy, which will become effective June 1, 2010.  These guidelines may in some cases help ease the expected delays in Chapter 13 confirmations.

The Treasury acknowledges that the HAMP process may cause delays in Chapter 13 cases, and further permits (but does not require) servicers to extend the trial payment period from three to five months to accommodate any legal proceedings needed to approve the modification or to receive trial payments from the Chapter 13 trustee.  This would obviously create more delay, but gives the servicer control over such an extension.

Even better, servicers can waive the three month trial period when:

  1. Post-petition payments on the loan are current prior to entering into a HAMP agreement; and
  2. The payments are equal to or more than the payment as modified; and
  3. The Bankruptcy Court approves the modification, if necessary; and
  4. The investor agrees to the waiver.

If a debtor qualifies, the Treasury Directive’s waiver provision could prevent months of delay before confirmation, and could allow a plan to be confirmed within 60 days of filing in some cases.

Coordinating HAMP with a Chapter 7 bankruptcy is much less complicated.  The only new requirement applies in the event a debtor obtained a discharge, and a reaffirmation agreement was not filed.  If a debtor later enters into a modification agreement, the servicer must include specific language that it will not hold the debtor personally liable for any debt arising out of the agreement.

In both Chapter 13 and Chapter 7, the servicer may choose (but is not required) to accept bankruptcy schedules and tax returns provided in the case as evidence of income in lieu of the Affidavit of Hardship and Form 4506T-EZ. The only restriction is that the schedules must be less than 90 days old.

These guidelines, where appropriate, are avenues that can reduce delay where a Chapter 13 case is combined with a HAMP application.  However, servicers still need to take quick and aggressive action in this circumstance because all too often, it may lead to unjustified delay.

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

Beware of Chapter 13 Plans That Depend on HAMP Modification

Published on March 25, 2010 in Chapter 13, Homeowners Affordable Modification Program and Real Estate. 0 Comments

The bills in both the House and Senate which would have allowed bankruptcy judges to modify the terms of certain mortgages died long ago.  However, one prominent Chapter 13 bankruptcy trustee is promoting his own version of reform by promoting the use of HAMP (Homeowners Affordable Modification Program) in concert with a Chapter 13 bankruptcy.  Lenders and Servicers need to be aware of this and the issues it presents.

The idea is to submit an application for a HAMP modification at the same time a Chapter 13 bankruptcy is filed.  Because both require proof of income, a budget, and the debtor’s most recent tax return, it should be “easy” for the debtor’s attorney to submit them to HAMP along with the Request for Modification and Affidavit of Hardship.  Because lenders and servicers are required to respond to applicants within 30 days with a yea or nay, it would in theory dovetail perfectly with the timing of most districts’ confirmation hearings, and result in reduced mortgage payments and so affordable plan payments.

The assumptions behind this idea show its inherent problem – delay.  Among the assumptions are the following: the debtor is a viable candidate for a HAMP modification; the documents the attorney sends are complete and sufficient the first time; the lender or servicer will be able to respond within the 30 days; the debtor can afford the proposed modification; the modification is accepted immediately; the plan will work with the modification; and the modification documents are signed soon after the 30 day response period has passed.  It is more likely that there will be snags in the process and it will not move as smoothly as the trustee assumes.   Debtor’s counsel will certainly use any delay in the HAMP process to delay the Chapter 13 proceedings.

Even if the modification process goes smoothly, a huge delay is overlooked.  Confirmation hearings are usually set within 60-90 days after a case is filed, and plans can be confirmed in 60 days in some jurisdictions. Under HAMP, a signed modification will not be permanent until and unless the debtor pays according to the modification for three consecutive months. Assuming that a plan cannot be confirmed until the modification is finalized, it will be at least 4 ½ months until the plan can be confirmed. Meanwhile, the creditor is bound by the automatic stay.

Moreover, if the debtor cannot afford the existing mortgage payments, how will it be paid after the bankruptcy is filed?  If a post-petition default accumulates, creditors have grounds for relief from stay.  Will courts put off granting relief while a HAMP application or trial period is pending?  More delay.

How could a debtor propose a budget and a plan if he or she cannot afford the current mortgage payments?  If not, the debtor must file a budget and plan that are unfeasible or based on a future unknown payment.  With either option, creditors have grounds for denial of confirmation, dismissal of the case or relief from stay. Will courts delay or deny creditors this relief while a debtor is waiting for a loan modification?  Again, more delay.

Or would debtor’s counsel seek and obtain an extension of time to file a plan and budget while waiting for a HAMP decision?  In cases where a loan modification gets approved, confirmation will be extended to at least 5 ½ months after filing.  In cases where modification is not successful, the case will either have to be dismissed or converted to a Chapter 7.  Again, the creditor is delayed from exercising its state court rights because the automatic stay has been in effect during the Chapter 13 case.

While a HAMP modification plan could be a win-win for both creditor and debtor in certain cases even with the delay it would cause, chances are that the creditor will be frustrated with the process.  Creditors must move aggressively and quickly if a Chapter 13 case is filed that is dependant upon a HAMP modification.

If you have any questions concerning this matter, please contact Ms. Monette W. Cope, Esq. Monette is a Junior Partner in the Bankruptcy department located in the Chicago office. She can be reached directly at (312) 253-9614 or via email at .

Debtors May Not Use Bankruptcy To Extend Expired State Court Deadlines

Published on March 4, 2010 in Bankruptcy Filings and Real Estate. 0 Comments

Lenders are faced with more and different challenges from debtors in these stressful financial times. One tactic being tried in Illinois is to use bankruptcy to attempt to extend a state court right of redemption on real estate in foreclosure.

Illinois Foreclosure law gives a mortgagor a specified and limited time to redeem a mortgage from foreclosure.  This time may not be extended by the state court judges.  Other states have similar laws.

Debtors are trying to use the bankruptcy courts to extend the time to redeem.  11 U.S.C. § 108 of the Bankruptcy Code is entitled “Extension of Time.”   § 108(b) deals with extensions of time to cure defaults inside a bankruptcy case.  The time to cure is either the state law deadline, or sixty days after the filing of the petition for relief, whichever is later.

If the state law redemption period has not expired when Debtors file bankruptcy, but will expire within 60 days after filing, they can extend the time to redeem to that 60 day date under Section 108. However, Debtors in Illinois are trying to use this section of the Code to extend the time to redeem when it had already expired before the bankruptcy was filed. 

One judge (Judge Schmetterer) in the Northern District of Illinois (Chicago) addressed these attempts in In re Brandi McKenith, in a written opinion that will be published.  While this judge is only one of eleven judges in this District, his is the only opinion on this issue in the District.  He found that an expired state court deadline to the right to redeem real estate from foreclosure could not be resurrected by filing of bankruptcy case.

By analogy, Section 108 could not be used to resurrect other state law deadlines.   For instance, Debtors could not extend an expired deadline to redeem a vehicle before sale at a public auction or extend the time to redeem purchased real estate taxes. 

If you encounter such unwanted improper demands by debtors, contact your bankruptcy attorney immediately to stop the attempt to resurrect expired state court deadlines. If you have any questions, please call Monette Cope at .