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)

Supreme Court Adopts “Forward-Looking” Approach to Define Projected Disposable Income When Calculating Chapter 13 Repayment Plans

Published on July 1, 2010 in 2005 BAPCPA and Chapter 13. 0 Comments

When Congress amended the Bankruptcy Code in 2005, they implemented the means test.  The purpose of the means test was to provide a higher return of funds to unsecured creditors.  The test requires debtors filing chapter 13 bankruptcy to pay all “projected disposable income” into the plan.  Projected disposable income is a calculation of all income received by the debtor preceding the six months prior to filing minus allowed expenses.  After calculating the means test, a debtor in chapter 13 is required to pay a fixed amount to unsecured creditors.  The calculation is defined as the “mechanical-approach”.  Eventually problems arose with using the mechanical approach because it failed to deal with situations where debtor’s income actually decreased or increased during the life of the plan.  As a result, bankruptcy trustees and courts began to use a “forward-looking” test to calculate the debtor’s plan payments. 

Under the “forward-looking” approach, the debtor’s chapter 13 payment amount is based on the income they received during the life of the chapter 13 plan.  So if income increased over the life of the plan the debtor would be required to pay more of their income just as they would pay less to creditors if their income decreased.

In the case of Hamilton v. Lanning, the Supreme Court decided which approach was correct.  The court adopted the “forward -looking” approach.  The court reasoned that the ordinary meaning of the word “projected” supports looking to debtor’s current income.  The court also realized that following the “mechanical-approach” could lead to absurd results as debtor’s income could increase or decrease over the life of the plan, and thus some debtors would actually pay less than they were required under the Bankruptcy Code.

The ruling has both positive and negative affects for creditors.  A positive is that if a debtor’s income increases during the life of the plan, the debtor will be required to pay more into the plan, which could lead to increased distribution to unsecured creditors. The negative result occurs along the same line, as a debtor’s income may decrease during the length of the plan, and thus distribution to unsecured creditors may decrease.  Creditors will also need to keep on their toes as to monitor for possible increases in debtors’ incomes, as debtors are not likely to volunteer this information.  Some chapter 13 trustees require debtors to submit yearly tax returns so that creditors can check with the court for filed returns, indicating any change in income.

If you have any questions, please contact David Yunghans directly at 513.723.2211 or via email at .

Debtors Not Allowed to Retain If Current

Published on October 7, 2009 in 2005 BAPCPA, Chapter 7 and Motor Vehicle. 0 Comments

Most creditors are familiar with the phrase, “retain and pay”.  The bankruptcy code provides for certain treatment of debt, which is secured by personal property in Chapter 7 bankruptcies.  Specifically, the bankruptcy code provides that debtors must either reaffirm the existing debt, redeem the collateral or surrender the collateral (or assume or reject the lease.)  Prior to the amendments of the bankruptcy code in 2005, most debtors opted for the unwritten fourth option, “retain and pay.” 

However the 2005 amendment, “clearly provides that the debtor shall not only file a statement of intentions but also follow through with her express intent.”  If the intent is not followed through by the debtor in the statutory number of days, the automatic stay terminates and the property is no longer property of the estate. 

The Ninth Circuit Court of Appeals recently ruled that the “retain and pay” option is no longer viable.  If a debtor opts for this unwritten alternative then the debtor will fail to meet his/her statutory obligation and the automatic stay will be terminated.  The mere termination of the automatic stay, however, is not enough to authorize the Creditor to repossess the collateral. 

In the case before the Ninth Circuit, the debtor’s failure to adhere to the code allowed for the stay’s termination.  Once the stay is terminated, the right to repossess the collateral then goes to the parties’ contract, in conjunction with state law to determine when the debtor has a default on the automobile loan and if that default allows repossession.  The debtor’s contract in the Ninth Circuit case contained an ipso facto clause that provided a default if the debtor filed for bankruptcy.

There is a bankruptcy code provision that, “generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a of a bankruptcy case.”(1)  However, the 2005 amendment overrides the provision that renders ipso facto clauses unenforceable when debtors fail to state an applicable intention and also fail to perform that intention.

Learning Points

  • Offer reaffirmation agreements (If a reaffirmation is offered but denied by the Bankruptcy Court then the creditor cannot repossess if debtors are current after bankruptcy)
  • Contracts should contain ipso facto clauses
  • Know your state law to make sure you can repossess the collateral
  • The above statutory provisions only apply to personal property

(1) Dumont v. Ford Motor Credit Company, Appellate Case No. 08-60002 (September 15, 2009 9th Cir.)