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The U.S. Supreme Court will decide whether homeowners can terminate “underwater” second mortgages during bankruptcy.
On Monday, the country’s top court agreed to review two appeals from Bank of America against bankrupt homeowners who are attempting to eliminate bank liens on their properties.
Two Florida homeowners are arguing that filing for Chapter 7 bankruptcy protection with a first mortgage valuing more than their property’s worth permits them to remove the lien from the second mortgage.
The homeowners’ lawyers argue that when both mortgage loans are underwater, the second lien is effectively valueless.
Financial lenders are fighting to keep the second mortgage lien, contending the debt could one day be fully paid—especially as property values increase.
“There is no such thing as a ‘truly valueless’ lien on property capable of appreciating,” as stated in court papers filed by Bank of America lawyers.
The 11th U.S. Circuit Court of Appeals ruled that homeowners currently in Chapter 7 bankruptcy can annul a second mortgage when the owed debt is greater than the value of the first mortgage.
Bank of America appealed the decision, stating their plea “may be the single most important unresolved issue in consumer bankruptcy.”
In 1992, the Supreme Court ruled a bankrupt homeowner does not have the authority to void a lien on a submerged first mortgage; however, the judgment is not clear as to the regulations on a second mortgage.
The last bankruptcy revamp occurred in 1978, when second mortgages were much less common.
Roughly 2.1 million debtors had partially or fully underwater second mortgages by the end of2014’s second quarter, according to a CoreLogic report.
A decision is expected June 2015.
The post Supreme Court to Rule on Second Mortgage Liens appeared first on The Bankruptcy Blog.

Most commentators suggest that the days of lien stripping in chapter 7 bankruptcy cases is soon to end. Yesterday the U.S. Supreme Court granted Bank of America's writ of certiorari which will allow it to address the issue of lien stripping in chapter 7 cases. 

The numerous recent appellate decisions out of the 11th Circuit have been suggesting that the issue would be considered by the 11th Circuit en banc or by the Supreme Court. The 11th Circuit Courts were forced by the "prior precedent rule" to apply its Foledore decision, which allowed lien stripping in chapter 7.  Under the "prior precedent rule", the 11th Circuit held that the Supreme Court's landmark decision in Dewsnup was not explicit enough to overrule Folendore. 

The Supreme Court's DocketDocketed: August 13, 2014 No. 14-163
Title: Bank of America, N.A., Petitioner v. Edelmiro Toledo-Cardona
Lower Court: United States Court of Appeals for the Eleventh Circuit, Case Nos. (13-15855)
Decision Date: May 5, 2014

~~~Date~~~ ~~~~~~~Proceedings  and  Orders~~~~~~~~~~~~~~~~~~~~~Aug 13 2014Petition for a writ of certiorari filed. (Response due September 12, 2014)Aug 25 2014Order extending time to file response to petition to and including October 14, 2014.Oct 6 2014Brief of respondent Edelmiro Toledo-Cardona in opposition filed.Oct 21 2014Reply of petitioner Bank of America, N.A. filed.Oct 22 2014DISTRIBUTED for Conference of November 7, 2014.Nov 10 2014DISTRIBUTED for Conference of November 14, 2014.Nov 17 2014Petition GRANTED The petition for a writ of certiorari in No. 13-1421 is granted. The cases are consolidated and a total of one hour is allotted for oral argument.Jordan E. Bublick - Miami Bankruptcy Lawyer - Kendall & Aventura Offices - (305) 891-4055 - www.bublicklaw.com

The amount you are required to pay back to your general unsecured creditors in a Chapter 13 Bankruptcy Case depends on various factors.  It can range from only a few pennies on the dollar to a 100% of the debt. The amount required to be paid must be the higher of the "Means Test" (projected disposable income) and the amount of the chapter 7 liquidation test.Means TestThe amount you are required to pay back must be at least the amount of you "projected disposable income" as calculated by the "means test" used in Chapter 13.  Basically, your monthly income is calculated and your expenses are deducted, leaving the "projected disposable income."
For purpose of this test, your income is based on the income for the six months period prior to the filing of the bankruptcy case. If the income changes, higher or lower, the new figure may be required to be used. The expenses used in these test are not your actual living expenses, but they are amounts based on the IRS collection standards for certain items and actual mortgage and car loan debts.The amount of  expenses is deducted from the income leaving the monthly "projected disposable income." Debtor with income less than median income will only be required to pay for three years, but over-median income debtors are required to pay for five years.Chapter 7 Liquidation TestThe amount required to be paid back in a Chapter 13 case must be at least as much as the "chapter 7 liquidation test" which is the amount that could be received on a hypothetical chapter 7 liquidation of your property.Jordan E. Bublick - Miami Bankruptcy Lawyer - Kendall & Aventura Offices - (305) 891-4055 - www.bublicklaw.com

The 8th Circuit Bankruptcy Appellate Panel denied Kathryn Nielen's application to discharge her student loans, and the result, although discouraging in many respects, is not all that surprising. (Nielsen vs. ACS Inc, No. 13-6034, 8th BAP 2014)  The debtor graduated high school in 1995 and went on to obtain an Associates of Science degree in biology and then a Bachelor's of Science in Health Services Administration followed by a Masters of Business Administration degree in 2001.  At the time she filed bankruptcy she was 36 years old and married with 4 children.  The debtor claimed medical problems due to allergies and mold exposure, but the court did not believe these conditions prevented the debtor from working.
 Several factors were decisive in turning down the application to discharge her student loans:

1. Poor Work History.  The court described the debtor's work history as "minimal, if non-existent."  The debtor offered many excuses for her lack of employment such as being overqualified for many jobs or lack of job experience, but the opinion suggests that the minimal work history was due to a lack of effort and not lack of opportunity. 
2. Opportunity for Job Advancement.  The debtor's spouse had opportunity for advancement at his employment.  In addition, the debtor's spouse was not exploring the possibility of higher paying jobs and was not supplementing his income with part-time employment.  (Does a father of 4 children really have to take on a 2nd job to discharge student loans?  Isn't being a father of 4 young children a full time job in itself?  The court continues a trend of chastising debtors who turn away work to tend to family matters.)
3. Too Many Assets. The debtors had a retirement fund and equity in a home.  (Is home ownership a disqualification for student loan discharge?  Isn't the real question whether the mortgage payment exceeds comparable rental rates?)
4. Extra Income Available. The debtors discharged a significant amount of credit card debt they were servicing prior to bankruptcy.  Clearly the funds that were used to pay credit cards could now be paid towards the student loan debt.
5. Significant Tax Refunds.  The debtors received $7,000 of tax refunds, much of that coming from Earned Income Credit or Child Tax Credits.  Such refunds have to be included in the calculation of the average monthly income.
6. Family Debts were Repaid.  When funds were available to repay debts in the past the debtors opted to repay family loans instead of making payments on student loans. 
7. Post-Trial Change of Circumstances Ignored.   Following the trial the debtor and her husband separated and divorced.  Claims of spousal abuse existed, but this information was ignored by the appeals court since it occurred after the trial.  The appeals court is limited to reviewing facts presented at trial.
8. Self-imposed Income Limits.  The court found that the debtor's ability to seek employment were mainly self-imposed.  Choosing to focus on raising a family, although admirable in many respects, is not well received by bankruptcy courts when seeking a discharge of student loans.
9. Income Contingent Repayment Plan ("ICRP").  The debtor had not applied for an income-contingent repayment plan with the Department of Education.  The student loans (36 separate loans) appear to have been federal loans available for an income based repayment and not private loans, although the opinion does not explicitly state one way or the other.  The debtor was eligible for a zero monthly payment ICRP, so no real hardship existed by denying the debtor's application.  It is fair to say that a debtor has virtually no chance of discharging federal student loans in bankruptcy where no effort to comply with an income-based payment has been made, especially if the payment would be zero.  Private student loans, however, offer no such income based payments and for this reason are more frequently discharged in bankruptcy.
10. Thirty-Six Separate Loans.  The debtor did not ask the bankruptcy court to evaluate each of her 36 loans for discharge separately.  In the 8th Circuit the bankruptcy courts will take a loan-by-loan analysis to determine which, if any, loans might be discharged.  Unfortunately, the debtor did not seek such an evaluation.