Articles Posted in Creditor Rights and Bankruptcy

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When the real estate market crashed, starting in 2007, we had many homeowners stuck in a situation where their homes plummeted in value so much that there was no equity at all. Thousands of homeowners walked from their homes, allowing the properties to be foreclosed upon.

A lien strip is where the lien of a lienholder, other than the first mortgage, is stripped and ultimately changes the status of the obligation owed to the lienholder from “secured” to “unsecured”.

The legal authority for lien stripping in Chapter 13 is 11 U.S.C. § 1322(b)(2). and 11 U.S.C. § 1328(a). § 1322(b)(2) allows a wholly unsecured lien on a debtor’s principal residence to be modified. § 1328(a) allows any unpaid portion of the claim to be discharged as an unsecured debt.

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Many assume that all debts are paid back in a chapter 13 bankruptcy. The reality is that most chapter 13 bankruptcy filers don’t pay very much of the dischargeable debt back. Most of it is wiped away at the end of the case.

The common follow up question is then…what type of debt is not dischargeable in a chapter 13 plan. Here is the list:

1. Criminal Penalties – Fines or Restitution resulting from a criminal conviction can’t be discharged.

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Some debts will be discharged in a chapter 7 bankruptcy case UNLESS the creditor files a complaint and obtains a court order that the debtor will remain responsible for the debt after the case is over.

The debts that are not dischargable if the creditor successfully challenges discharge are typically:

1. Debts that arise as a result of a fraudulent action. This includes:

a. Debts that are the result of an intentionally fraudulent act in which the creditor relied on the deceit in it’s extension of credit. Examples:

– Debtor obtained the loan and promised to pay back when had no intention to do so (this is common i.e. borrowing money against a line of credit or credit card when the debtor knows they are insolvent and unable to pay and/or is going to file for bankruptcy)
– Debtor borrowed an item and used it as collateral for a loan – Debtor wrote a check for an item, stopped payment on the check and kept the item – Debtor wrote a check when funds in the account were insufficient then promised the seller the check was good
b. Recent credit card charges that were used to buy luxury items.

– The law presumes…that a debt is fraudulent if it was more than 550.00 from any particular creditor for a luxury good or service within 90 days prior to filing the bankruptcy
c. Debts incurred based on a false written document about financial condition. Requirements:

– The statement must be in writing obviously.
– It must have been “material” i.e. a very important factor in the creditors decision to extend
credit. (overstatement of income is a common material false statement)
– The false statement must relate to financial condition – There must have been an intent to deceive the creditor – The creditor must have reasonably relied on the statement Continue reading