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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)

Senate Judiciary Committee Approves National Loss Mitigation Program in Bankruptcy Cases

Published on April 6, 2011 in Chapter 13 and Chapter 7. 0 Comments

On April 5, 2011, the Senate Judiciary Committee passed a bill to establish a National Loss Mitigation Program in Bankruptcy Cases. By a vote of 10-8, the bill sponsored by Senator Whitehouse of Rhode Island will move onto the Senate. Senate Bill 222 will allow bankruptcy judges under 11 USC 105 to establish loss mitigation programs in bankruptcy cases. The bill mirrors the Model Loss Mitigation Program that has been in place in Rhode Island for the last several years. The Program gives the Debtor the opportunity to request Loss Mitigation Opportunities with his or her creditors at any time prior to discharge in a Chapter 7 or any time during a Chapter 13. This may have major implications on the administration of bankruptcy cases by delaying discharges and confirmations of Chapter 13 plans. In addition, Motions for Relief from Stay on Real Property could be put on hold until loss mitigation is completed.

Loss Mitigation discussions can be a very good process for both Creditors and Debtors. However, if not implemented in a fashion to prevent abuses, such as being used to  slow down a bankruptcy case and allow a debtor to live in his or house for a longer period of time without payment, the program could have negative consequences. 

The prognosis of the bill passing in the Senate is strong. However, it will have much more difficulty in the Republican controlled House, and the chances of passage do not look good.

Weltman, Weinberg & Reis will continue to monitor the status of this legislation and provide regular updates to our clients.

If you have any questions on this matter, please contact Alan C. Hochheiser, Esq. Alan is the Managing Partner of the Bankruptcy Practice Group of Weltman, Weinberg & Reis co., LPA located in the Brooklyn Heights, Ohio office. He can be reached directly at 216.739.5649 or .

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 .

Bankruptcy & The Economy: A Valuable Session

Published on May 6, 2010 in Bankruptcy Court, Bankruptcy Filings, Chapter 11, Chapter 13 and Chapter 7. 0 Comments

Cleveland, Ohio – May 6, 2010

The William J. O’Neill Regional Bankruptcy Institute, a part of the Cleveland Metropolitan Bar Association, is conducting a bankruptcy seminar offering an entertaining and comprehensive approach to the latest and best in the bankruptcy and insolvency arenas at the Marriott at Key Tower on May 12 and 13.  The two-day seminar, “What Hath the Great Recession Wrought: The Bend, The Bar and Congress Respond,” will feature regionally and nationally recognized speakers, including principal attorneys and judges from some of the nation’s highest-profile bankruptcy cases.

Beth Ann Schenz, an attorney in the Bankruptcy Department at Weltman, Weinberg & Reis Co., L.P.A. (WWR) played an integral part in putting together these dynamic presentations.  Over the last year, Ms. Schenz was Co-Chair of the 2010 Institute.  This undertaking involved coordinating over 58 speakers including 12 federal judges to speak on issues which touch the very heart of our economy.  For more information or if you would like to attend the discussion, visit www.clemetrobar.org/ONeill_Bankruptcy_Institute.aspx. 

The following is a capsule of some of the hot topics that will be discussed: 

Revitalizing a City
With lackluster economic growth, high jobless rates and dynamic talent loss in most of Midwest Cities, this lunch will focus on how a region turns around these staggering statistics.  The luncheon discussion will focus on the positive efforts that area organizations have gained over the course of the last year and what efforts they have planned to help propel this region into a strong, vibrant economic force.

Who Is Behind the Bankruptcy Statistics
The country continues to see statistics of the overwhelming amounts of people filing bankruptcy.  With bankruptcy numbers continuing to rise, the questions that are never asked are: what is behind the numbers, who are behind the numbers and what circumstances are behind the numbers.  This speaker will address those questions by taking the academia approach mainstream.  By understanding the numbers, community and economic leaders can address the situation and make policy that will help our economic future.  

Why Are They Too Big to Fail – We Have Chapter 11
Lead counsel from the Chrysler and Lehman Brothers bankruptcies will discuss the effect on bankruptcy sales of the Second Circuit’s ruling in Chrysler, and of Judge Peck’s recent decision allowing a lawsuit to proceed against Barclay’s, the bankruptcy purchaser of Lehman’s.   These disputes have reshaped the business landscape in important ways. This will be a great discussion considering the ongoing news stories involving companies and banks that are too big to fail.  Also, the discussion will continue on what is in the future of Chapter 11 bankruptcies.

Victims of Madoff & Other Ponzi Schemes
Irving Picard will lead a panel of the primary participants in the Madoff case.  They will review the hotly-litigated issues governing distributions to victims of the Ponzi scheme fraud. 

What is the Federal Legislature Doing
John Rao of the National Consumer Law Center and William A. Brandt, Jr. DSI are no strangers to Washington D.C.  Come hear what they have to say.

Loan Modification Ordered in Bankruptcy
Economic Issues before the Bench is a panel consisting of Judge Drain, Judge Isgur and Judge Morgenstern-Clarren.  Of note is Judge Drain’s piece on court-ordered loan modification procedures, which forces the creditor to enter into talks on loss mitigation.

If you have any questions regarding this bankruptcy seminar or would like a copy of the seminar materials, please contact Beth Schenz. Beth is an associate in the Bankruptcy department of WWR located in the Brooklyn Heights office. She can be reached directly at 216.739.5645 or via email at .