“Such Lien is Void” – Stripping Liens from Co-Owned Property in Chapter 13 (Lopez v. SLS)

” Lien Stripping” is something we’ve discussed here in previous blog posts.  The idea is simple: In a Chapter 13 case, if there is more than one lien on your property, and if the value of the property is less than the amount owed on the first lien, the security interest is “stripped” from all junior liens, and the amounts owed under those junior liens becomes unsecured debt (i.e. subject to discharge).

One issue that often comes up with lien stripping is: What if the property is co-owned with someone else?  Of course, spouses usually co-own the family home, so the problem is easily resolved by having both spouses file a joint case.  However, if you co-own property with someone who is not your spouse, you can’t file a joint case with that person.  There is the option of both co-owners filing separate cases in which both parties strip the lien as it attaches to their half of the property, but in my practice I’ve found that co-owners rarely want to do this, and understandably so.

In October 2019, in the case of Lopez v. Specialized Loan Servicing LLC, Judge Huennekens of the Bankruptcy Court for the Eastern District of Virginia (Case 19-03046) looked at the plan language of the statute  to cut through a decade of assumptions and found that separate cases are not needed.

Blas Lopez and his brother co-owned a house in Henrico, Virginia.  The house was worth $154,000, there was a first mortgage held by U.S. Bank with an amount owed of $158,000, and a second mortgage held by SLS with an amount owed of $36,000.  Lopez initiated an adversary proceeding to determine this very question, of whether a Chapter 13 debtor may strip an unsecured lien where the property is titled jointly and where the joint tenant is not a debtor.

SLS asked the Court to follow the Middle District of Pennsylvania which, under similar facts in In re Harris, 494 B.R. 215 (Bankr. M.D. Pa. 2013), relied on the Third Circuit’s decision in Miller v. Sul (299 F.3d 183 (3d Cir. 2002) to hold that the stripped amount is limited to the debtor’s one-half interest in the property.

Judge Huennekens opined differently, finding that Harris’s reliance on Miller was misapplied.  § 506 is the section of the Bankruptcy Code that governs the stripping of unsecured liens in Chapter 13 case.  Miller was a case about § 522(f), which covers the stripping of judgment liens where there is equity in the property.  The Miller Court wanted to avoid a result that would be a windfall for the co-owners: One could file a case, wipe out the judgment lien in its entirety, then both could enjoy the remaining equity.

In § 506 actions, there is by definition no equity in the property, and therefore there is no such concern about the debtor or her co-owner receiving a windfall.  As such, there is no reason to deviate from the plain language of § 506, which says that a claim is secured only to the extent of the value of the property, that the remainder is unsecured, and that to the extent a lien is not an allowed secured claim, such lien is void.

There is no mention in the statute that only the portion secured by the debtor’s one-half interest is void.  The LIEN is void. 

This all is in keeping with something I heard Judge Carlson say from the bench in San Francisco years ago when presented with a similar situation, namely: “The lien is the lien!”  Surprising that so many of us Chapter 13 Debtors’ attorneys have taken it as gospel that two cases are required.  Long-held assumptions need to be questioned from time to time.

In re Crocker: Fifth Circuit Holds Private “Bar Study” Loans Dischargeable

On October 21, 2019, the Fifth Circuit Court of Appeals entered an opinion in In Re Crocker.  In 2015, Evan Crocker filed a Chapter 7 Bankruptcy case and received a discharge.  In his Schedules, he had listed a $15,000 claim held by Navient that was originally incurred in 2009 as a “bar study loan.” (Bar study loans are loans incurred by law school graduates/would-be attorneys after graduation to cover the costs of taking bar preparation courses and living expenses while awaiting exam results.)  After the conclusion of the case, Navient continued to try to collect from Crocker, so he filed an adversary proceeding in the Southern District of Texas, asking for a finding that the loan had been discharged and a contempt finding against Navient.

Crocker then added as a co-plaintiff Michael Shahbazi (who had filed Chapter 7 in Virginia in 2011 with a loan related to his attendance at a technical school in 2002), and sought certification as a national class action.  Navient moved for summary judgment, claiming the District Court lacked jurisdiction to enforce a discharge entered in another District. 

The District Court certified both the dischargability and jurisdiction question to the Circuit Court.  The Fifth Circuit, in a major holding outside the scope of this blog post, held that only the Court that issued a discharge order has the power to hear an action for violation of that order.

As to the dischargeability question, the Circuit Court held that the § 523(a)(8) student loan exception to dischargeability did not apply to the bar study loan, and that it was indeed dischargeable.   This is a position that this office has long held, and successfully represented clients with respect to

§ 523(a)(8) says that absent “undue hardship,” the bankruptcy discharge does not apply to: “qualified educational loans” (§ 523(a)(8)(B)), education debts made, insured, or guaranteed by the government (§ 523(a)(8)(A)(i)), and obligations “to repay funds received as an educational benefit, scholarship, or stipend” (§ 523(a)(8)(A)(ii)).

With respect to bar study loans, such borrowers have already graduated from law school at the time of borrowing, and bar prep classes are not Title IV institutions, so such loans can’t be qualified educational loans under § 523(a)(8)(B).  Moreover, since bar prep schools are not qualified to participate in Title IV programs, therefore all such loans are private (i.e. not governmental).  That takes care of § 523(a)(8)(A)(i).  Nor are the funds received as a scholarship or stipend.  So that leaves you, as will all bar study loan cases, with the definition of “educational benefit.”

After looking at the legislative history and doing linguistic analysis, the Court concluded: “[E]ducational benefit” is limited to conditional payments with similarities to scholarships and stipends. The loans at issue here, though obtained in order to pay expenses of education, do not qualify as “an obligation to repay funds received as an educational benefit, scholarship, or stipend” because their repayment was unconditional.”

This is a good decision that does not fall into the trap that has snared other courts of confusing an “educational benefit” with “the benefit of an education.”  Debtor’s lawyers should take note.

Practical Considerations on Discharging Taxes in Bankruptcy

Consideration #1: The Basic Rules for Taxes in Bankruptcy

It’s easy to rattle off the rules regarding the dischargeability of taxes in a bankruptcy case:

  • The tax must have come due at least 3 years before the filing of the case. (§507(a)(8)(A)(i))
  • An actual return must have been filed at least two years before the case is filed. (§523(a)(1)(b)(ii))
  • The tax must have been assessed by the IRS, if at all, at least 240 days before the filing of the case. (§507(a)(8)(A)(ii))
  • You can’t have committed fraud or willful evasion. (§523(a)(1)(C))
  • Only income tax can be subject to discharge.

Sounds great, right? Let’s say it’s February 2018. You had a tax liability for 2013, which came due on April 15, 2014. That’s more than 3 years ago. You filed a return on time, and you and the IRS agree to the amount owed (and hence, as a practical matter, it’s assessed). It’s income tax, and you’re not a member of a tax deniers group. You can file a bankruptcy case and it’s all gone, right? Not so fast.

Consideration #2: Is There a Lien?

When you file a bankruptcy case, the law puts your tax debt into three categories: Priority, Secured, and Unsecured. Any tax that does not meet the 3 year/2 year/240 day rules above is subject to “priority,” and that’s the reason why it’s not going to get discharged.

But then you take a look at all that remaining non-priority tax. If the IRS has not recorded a lien, then great! All of the remaining tax goes into the “unsecured” and is subject to discharge.

However, if the IRS has recorded a lien, then you take a look at your assets. You add up the value of all your assets: equity in your home, in your vehicle, money in the bank, personal belongings, everything. (Everything, that is, except funds in ERISA-qualified retirement accounts such as 401(k)s.) Whatever the value of all that is, an equal amount of the non-priority tax becomes “secured.” And so, that amount doesn’t get discharged either, but for a totally different reason.

Thus the question of whether there is a lien becomes very important. If there is, the only amount that will be subject to discharge will be the amount that’s left after a) you subtract the priority amount, and b) you subtract the secured amount.

Consideration #3: Your Assets and Income

Let’s say you’ve gotten this far and it’s looking good. All your tax is old and you filed your returns on time, and there’s no lien. Next you have to look at your assets and income. This is more a question of basic bankruptcy law than tax law.

If you file a Chapter 7 case, the law puts your assets into different categories, and then puts caps (“exemptions”) on those categories. If you have assets over those caps, a Chapter 7 trustee has the authority to liquidate those assets and divvy up the proceeds amongst your creditors.

So even if all of your tax debt falls into the “unsecured” category, if you have significant assets (such as a house with lots of equity), the IRS is still going to get at least partially paid: they will get a portion of the proceeds from the trustee’s distribution.

If you file a Chapter 13 case, the Trustee does not have the authority to liquidate your assets. However, the Court cannot confirm your Chapter 13 Plan unless your creditors get paid at least as much as they would receive in a hypothetical Chapter 7 case. So whatever the IRS would get if you filed Chapter 7, your Chapter 13 Plan must propose to pay them at least that much over 5 years.

There’s also a consideration of income. Even if all your tax debt is non-priority and unsecured, and even if your assets are below the exemption caps, there is a thing called the Means Test. This is a calculation that tries to come up with an amount that you can supposedly afford to pay to your unsecured creditors through your Chapter 13 Plan. Again, the Court cannot confirm your Chapter 13 Plan unless it pays your creditors what the Means Test says you can afford. And so again, the IRS would at least get something.

It’s Complicated, But There Is Help (and Hope!)

Dealing with taxes in bankruptcy is more complicated than just knowing the dischargeability rules. But perhaps I’ve depicted it as overly complicated here. It’s not really; these are concepts that any experienced bankruptcy lawyer is going to be readily familiar with. What’s more, I have represented a large number of clients in getting rid of a large amount of tax debt. It’s the rare case in which the Bankruptcy Court doesn’t have any kind of assistance to offer.

I post this because I know that there is a great deal of misunderstanding out there about what happens to taxes in bankruptcy, both on the part of individuals and on the part of professionals helping them. It may be more complicated than you think, but there is also more that the Bankruptcy Court can accomplish for you than you think, and only an experienced bankruptcy lawyer can sort it out for you.

HOAs’ Secured Claims Are Limited to Amounts Stated in Lien

If a person files a Chapter 13 bankruptcy case (or a Chapter 7 case where there is a distribution to creditors), creditors must file claims with the court in order to receive any money from the trustee.  Such claims are categorized as secured, unsecured, or some of each.  Claims such as mortgages, car loans, and tax liens are secured and will have to be paid in full.  Credit cards and medical bills are unsecured and can be paid less than 100%.  (In many cases, unsecured creditors get nothing.)

It is not uncommon for people to file bankruptcy cases where there are unpaid HOA dues/assessments, and where the HOA has recorded a lien.  Homeownership issues and foreclosure prevention are, after all, primary reasons why people file bankruptcy cases.  In such cases, the HOA will typically file a claim asserting that the secured portions of such claims consist of not just the amount listed on the recorded lien that they recorded, but of the entire amount that the homeowner owes to the HOA.  Such claims are based on the notion that their liens secure future amounts that come due. This notion is simply not correct under California law.

The District Court for the Southern District of California weighed in on this question back in 1993 (In re Henderson, 155 B.R. 10, 12 (Bankr. S.D.Cal. 1993)), and now so too has the Northern District in In re Warren (N.D. Cal., 2016), bankruptcy case no. 14-31236.

The facts the Warren case are these:  Angela Warren the homeowner failed to make seven HOA payments from December 2007 through June 2008.  The HOA then recorded an assessment lien against the property for those unpaid dues, specifying an amount of $5,865.  The lien also contained language claiming to include other fees, costs, and interest “as may become due to with respect to the Property subsequent to the typed dates set forth above”.  Ms Warren filed a Chapter 13 case in August 2014, then converted it to Chapter 7 in September 2014.  The HOA filed a claim in a total amount of $88,796, with a secured portion of $31,406.  The Bankruptcy Court disagreed and limited the HOA to a secured portion of the $5,865 listed in the lien.

On appeal, the District Court affirmed the Bankruptcy Court’s Decision.  The reasoning is simple: §5650(a) of the California Civil Code requires an HOA to give at least 30 days’ notice before filing a lien to collect “a past due assessment” and that the notice must include, among other things, a statement of the charges owed.  Further, the HOA can only impose liens after a vote by the directors.  The Court noted that the Code’s HOA provisions “reflect the legislature’s intent to impose and rigorously enforce its procedural requirements to protect the interest of the homeowner.”  Therefore, the language purporting to secure future assessments was not permissible under the Code, and therefore the secured portion of the claim was limited to the amount originally listed.  The Court pointed out that the HOA could have continued recording additional liens when new amounts came due, but they didn’t do that.

This is a much-misunderstood area of bankruptcy law, a state of affairs that isn’t helped much by the HOA industry’s continued insistence that their claims are fully secured.  I myself wouldn’t have been aware of these developments if I hadn’t recently heard Oakland’s Judge Novack discussing them from the bench recently.  I hope this information will become more widely known among the debtors’ bar, and you can bet I will be on the lookout for this in future cases with HOA issues.

10 Steps to Filing a Bankruptcy Case

Filing a case with the Bankruptcy Court can seem complicated and daunting, but it doesn’t need to be that way.   Here are 10 steps to filing a bankruptcy case to help you know what to expect.  I’m providing this list in the hope that if you know what’s in store for you, it’ll be less confusing and stressful.  Of course, this list is no substitute for being represented by a lawyer.  (I would never, ever recommend that you consider that you try filing bankruptcy without a lawyer, and so that is #1 below.)  As you review this list, you’ll see that there are one or two “heavy lifting” items that your lawyer has to do, but that most of it is comprised of information that you have to provide.  Fortunately, providing the information is not too difficult: pulling a few documents from your bank or employer, plus a few online searches, should do it.

Also, be aware that this is just a list of PRE-filing items.  Once the case is filed, there will be a few more things for you to do.  Fortunately, in a consumer bankruptcy case, most of the “big picture” decisions are made before the case is filed.

Here are the basic pre-filing steps:

  1. Get a Lawyer: This is absolutely the first step.  Please don’t try to file a bankruptcy case without a lawyer.  There are many documents to be filed with the Court, and if you fail to do so, your case will be dismissed.  If your case is dismissed, a subsequent case becomes much more difficult.  Moreover, the documents you file with the Court should present a coherent picture to the judge and the trustee.   What are you trying to accomplish with your case? Are your assets protected from liquidation?  How much are your creditors entitled to receive? These are all basic questions that should be very clear from a well-drafted bankruptcy petition.
  2. Determine Your Income: How much money do you make?  From what sources? (e.g. employment, business, social security, retirement, rental, etc.)  How much money did you make in each of the past 6 months? Is there going to be a change in the immediate future?  The answers to these questions are used in the Means Test, which determines whether you are eligible to file a Chapter 7 case, or how much creditors must receive in a Chapter 13 case.
  3. Break Down Where Your Money Goes: You have the same ordinary & typical expenses that everybody has: housing, groceries, cell phone, gas, car insurance, things like that. But you also have expenses that are unique to you.  Are you making payments on student loans?  A payment plan to the IRS?  Domestic support?  Medical expenses? Care and support of a family member? The answers to these questions are also taken into consideration in the Means Test.
  4. List your assets: Do you own any real estate? A business?  Vehicles? Retirement accounts? These are the big items a person usually thinks of as assets, but there are other, easily overlooked items: Does anyone owe you money? Are you the beneficiary of any trust? Do you have life insurance with a cash value? A security deposit with your landlord? An anticipated tax refund?
  5. List and categorize your debts: Who are all the people in the world who say you owe them money?  I think of them as falling into 4 categories: 1) General unsecured debt: credit cards, personal loans, medical bills, deficiencies on repossessed vehicles, etc. 2) Secured debt: generally, mortgages and car loans. 3) “Priority” debt: Debts owed to the government, such as recent taxes, domestic support arrears, fines and penalties. 4) Student loans.
  6. Be aware of potential pitfalls: Are you a married person filing without your spouse? Do you own a business? Have you incurred any new debt recently? Is anyone suing you, alleging fraud?  Have you transferred any property to, or have you paid off, any family members or business partners?  Have you filed previous cases in the past?  These are examples of the kind of thing that can very quickly make a bankruptcy case very complicated.
  7. Figure out what kind of case is right for you: This is a very big decision, and one you probably can’t make without the help of a lawyer. This is probably the first thing any lawyer you speak with is trying to figure out, and it should probably be #2 in this list, except that no lawyer will be able to give you an answer until the answers to numbers 2-6 have been fleshed out.  Just be aware that for most people, there are two kinds of cases, Chapter 7 and Chapter 13.  If you have modest income and modest assets and entirely unsecured debt, Chapter 7 is almost certainly better for you.  If you are trying to stop a foreclosure, Chapter 13 is almost certainly better for you.  However, most people are in between, and there are pros and cons to each kind of case, and you need a lawyer to help you figure it out.
  8. Take your pre-filing class: Everyone who files a bankruptcy case has to take 2 classes, one before you file, one after. People typically take them online.  They take about 2 hours each.  If you don’t take the pre-filing class, your case gets dismissed.  If you don’t take the post-filing class, you don’t get a discharge.  The certificate showing you took the pre-filing class must be attached to the petition when you file your case.
  9. Prepare the petition, schedules, and other documents: A typical consumer bankruptcy filing consists of around 40 to 60 pages.   Much of the information contained therein is comprised of the income, assets, expense, and debt information discussed above.  You have to swear under penalty of perjury that it is all true and accurate.  As mentioned above, it is especially important that the documents present a coherent picture.
  10. Pay the filing fee and file the case: As of today, filing fees for a Chapter 7 case are $335, and $310 for Chapter 13.  Most bankruptcy lawyers will file your case electronically, although it is possible to go to the clerk and file paper documents.  In my practice, I do not file “skeleton petitions” (just a couple basic documents, with the rest needing to be filed later) unless it is absolutely necessary.  And if you have done all the preparatory work listed above, it generally will not be necessary.

That’s it.  Filing a bankruptcy case shouldn’t be confusing or scary.  The hardest parts will probably be meeting with, paying, and getting documents to your lawyer.  Don’t worry; most bankruptcy lawyers do this kind of work because they want to help people.  They won’t bite.  Perhaps more importantly, as lawyers, they have ethical obligations to you that other people don’t (such as debt consolidators and “foreclosure prevention” realtors).  In my practice, initial consultations are free.  If you need help, call or email me today.

Fremont Main Library Presentation (Tues., April 11 at 7:00 PM) – Filing Bankruptcy: What It Really Means and How It Helps

Please join me at the Fremont Main Library on Tuesday, April 11, 2017 at 7:00 PM for a presentation I’ll be giving on “Filing Bankruptcy: What It Really Means and How It Helps.”

This presentation is part of the library’s Smart Money Week. It’s designed to inform, answer questions, and dispel myths about the bankruptcy process. I really love doing programs like these because they’re a chance to connect with people who might be unsure about calling to schedule a consultation. Topics to be covered include:

Using income, assets, expenses, and debts to predict your case’s outcome
The differences between Chapter 7 and Chapter 13
What can disqualify you from filing a case
What the Court’s protection covers
What assets you can keep
When not to file (or wait)
The Fremont Main Library is at 2400 Stevenson Blvd Fremont, CA 94538. Presentation will last 90 minutes.

Link to program announcement: http://bit.ly/2mTIwIj

In re Rosa: Chapter 20 Stripped Liens Are Not Allowed Unsecured Claims

As discussed on this site, “lien stripping” is a common occurrence in Chapter 13 cases, and can provide an enormous benefit to Debtors. The idea is that if there is more than one lien against a piece of real estate, and that piece of real estate is worth less than the amount owed on the first lien, there is no equity remaining to secure the junior lien(s). It is therefore “stripped” and treated like general unsecured debt (i.e. it is dischargeable).

As also previously discussed, a “Chapter 20” case is when a person files a Chapter 7 case, shortly followed by a Chapter 13 case. There are many reasons why a person might do this, but usually it’s because he or she has too much unsecured debt to qualify for Chapter 13. You file a Chapter 7 case, get rid of all the unsecured debt, and then file the Chapter case, often to strip a junior lien (which is not available in Chapter 7 under the Supreme Court’s Dewsnup decision).

Back in 2012, the North case became the local precedent establishing that a Debtor in a Chapter 20 case could indeed strip junior liens, even though there was no discharge in the second, Chapter 13 case. Now in 2015, In re Rosa has become the local precedent establishing that stripped liens are not allowed unsecured claims.

Are Chapter 20 stripped liens allowed claims?
Diana Rosa filed a Chapter 7 case in 2012. After receiving her discharge, the only debt she had left was a $700,000 mortgage against a house worth $350,000 ($44,000 in arrears), a $84,000 second mortgage to EMC, $8,500 owed to the IRS, and $300 in general unsecured debt. She then filed a Chapter 13 case, in which she stripped the second mortgage and proposed a Plan that would pay the IRS and the unsecured debt in full. As to the arrears on the first mortgage, the Plan stated that she was seeking a loan modification.

All parties agreed that Rosa’s personal liability on the second mortgage had been discharged in the Chapter 7 case, and that EMC’s in rem rights were extinguished when the lien was stripped. However, the Chapter 13 Trustee objected to the Plan, contending that EMC held an unsecured claim that needed to be paid in full.

The Chapter 13 Trustee cited Akram from out of the Central District (259 B.R. 371, 2001) and Gounder from out of the Eastern District (266 B.R. 879, 2001) to support the position that EMC held an allowed unsecured claim. As to Akram, the Court rejected what it called that decision’s “attempt to circumscribe the power of the discharge injunction.” As to Gounder, the Court rejected that decision’s conversion of the discharged junior mortgage into an unsecured claim against the Chapter 13 estate: if there is no claim against the debtor, there can be no claim against the estate. Additionally, the is no language in §506(a)(1) converting a nonrecourse claim into a recourse obligation. As to both decisions’ argument that holding otherwise would create a back door around Dewsnup’s prohibition on Chapter 7 lien strips, the Court held that such arguments are better suited for bad faith objections.

Ms Rosa case was allowed to proceed and her Plan was confirmed with EMC receiving anything. If she completes her Plan, that second mortgage will be gone forever. A very technical case indeed, but very good for debtors: the upshot is that Chapter 20 lien strips continue to be alive and well here in the Northern District of California.

Lien Stripping in Chapter 13 (Bankruptcy Basics)

What Does It Mean to “Strip” a Lien in a Chapter 13 Case?
Simply put, if you own a piece of real estate, and there’s more than one mortgage on that real estate, and the value of the property is less than the amount owed on the first mortgage, and you file a Chapter 13 bankruptcy case, the idea is that there is no equity present to secure the second mortgage. Therefore, the second lien is “stripped,” and the second mortgage is treated like unsecured debt (like credit cards and medical bills). The benefit of having that mortgage treated like unsecured debt is that it becomes subject to discharge and allowing you to pay less than 100% of the amount owed. It’s important to note that the principle applies to all subsequent liens, e.g. HELOCs and HOA liens.

Lien Stripping in Chapter 13 in More Detail
Many homeowners have more than one mortgage on their homes. And depending on the vicissitudes of the residential real estate market, many homes are worth less than what the homeowners owe on them. That means that if a lender foreclosed on a house and sold the house at auction, there wouldn’t be enough money to pay off all of the lenders. Bankruptcy law has a process where homeowners who owe more on their home than it is worth can have a second mortgage striped away or wiped out by the order of a bankruptcy court.

Not all debts are considered equal in bankruptcy. Some debts are given a higher priority than other debts. In the case of real estate the earliest recorded lien is given the highest priority by the court. For most homeowners this means that a first mortgage will be a higher priority debt than a second or third mortgage. Because there are never enough assets to pay all creditors back in full, the court gives priority debts the first chance at getting paid back. Debts with lower priority are often completely erased, with the creditor not getting anything.

A mortgage is the most common type of lien that can be entered against real estate, but there are other types of liens such as from a court judgment or an HOA lien. Lien striping works for more than just mortgages, but may be limited in certain situations such as cases where a divorce judgment has created a lien.

The Difference Between Secured and Unsecured
Debt can either by secured or unsecured. Secured debt means the debt is attached to something particular. A mortgage is a secured debt because it is backed by the real estate. The creditor has the right to foreclose if they are not paid. But, when there are multiple mortgages on a home and the fair market value of the home is less than the amount owed on the mortgages, some of the mortgages are not secured by the house. The rule for these mortgages is that if the house were sold and there would not be enough money to pay off the first mortgage, all the other junior mortgages are wholly unsecured.

Lien stripping allows a court to erase the wholly unsecured mortgage.

Not All Bankruptcies Work the Same
If you are behind in your house payments or are facing foreclosure the only way to protect your house in most circumstances is to file for a Chapter 13 bankruptcy. A Chapter 13 bankruptcy allows the court to restructure your debts so that you can pay off the highest priority debts, such as a first mortgage, while lower priority unsecured debts are often erased.

Usually a Chapter 7 bankruptcy will not work to save a house because Chapter 7 is not about restructuring your debt and is instead about liquidating certain assets and paying off as many creditors as possible before erasing the rest of the debts.

However, every case is unique. If you are having difficulty staying current with your house payments, you need to get expert advice. You may be able to benefit from a bankruptcy that lets you keep your home and strips off other liens. Don’t wait to get good legal advice until its too late. Contact a bankruptcy lawyer today.

Considering Converting from Chapter 13 to Chapter 7 with Appreciated Real Estate? Think VERY Carefully

This is an extremely timely and relevant issue here in the Bay Area/Northern District of California, where I practice. If you filed a Chapter 13 bankruptcy case more than a year or two ago, and owned any real estate, the value of that real estate was probably very low at the time; the market hit bottom somewhere around early 2012. But what a difference a couple of years makes! The last couple of years has seen an enormous explosion in the local residential real estate market. So enormous in fact, that housing values are now at or above their pre-crash peak. Your home is probably worth significantly more now than it was back then.

So let’s say you filed a Chapter 13 case back in 2013. Your house was worth significantly less back then, and maybe you were “underwater.” If that was so, had you filed a Chapter 7 case, a Chapter 7 trustee wouldn’t have been very interested in your house. (Chapter 7 trustees make their money by liquidating valuable assets for the benefit of creditors.) Let’s also say that now you want to get out of court Chapter 13 case, sell your house, and reap your profits. Can you do that? Can you convert to Chapter 7, get a discharge, and move on? The answer to that question depends on the answer to another question: If you convert, who gets that appreciated value, you or the Chapter 7 trustee?

Prior to the 2005 changes to the Bankruptcy Code, the answer to that question was very clear: On conversion, post-filing appreciation is yours. And in the years since then, few had even bothered to ask the question of whether that rule was altered by the 2005 changes. (In a down market, there was no point.) But now, with a hot real estate market, Chapter 7 trustees are starting to look into it.

The theory being put forward in certain quarters revolves around the interpretation of § 348(f)(1) of the Bankruptcy Code. § 348(f)(1)(A) says that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.” In other words, whatever interest the debtor had in the property on the date of filing, that’s what the Chapter 7 trustee gets on conversion. That was the rule pre-2005, and it’s still the rule as most courts understand it.

However, proponents of this new theory argue that § 348(f)(1)(A) has to be read in conjunction with § 348(f)(1)(B), which was substantially altered by the 2005 changes. It used to read: “valuations of property … in the Chapter 13 case shall apply in the converted case”. However, post-2005, it now reads: “valuations of property … in the Chapter 13 case shall apply only in a case converted to [Chapter 11 or 12], but not a case under Chapter 7.” The proponents argue that the Chapter 7 trustee doesn’t get whatever interest the debtor had at the time of filing; she gets the thing itself, and the value of her interest is that of the conversion date. It basically turns the existing rule on its head.

This is by no means an accepted position; as of the date of writing (June 30, 2015), I know of no caselaw clearly and cleanly adopting this position. (Indeed, one court, the Bankruptcy Court for the Eastern District of Tennessee, in In re Hodges, 518 B.R. 445, declined to directly accept this theory.) A Chapter 7 trustee may well face an uphill battle convincing a court to reverse current interpretations of law. But this is not a frivolous argument, and at least one of the Oakland Chapter 7 trustees has stated that she intends to use this theory to pursue the asset if a case with this situation is assigned to her. If one of the trustees is looking into it, you can bet the others are, too.

Where does that leave you if you’re in such a situation? Simply put, don’t convert. Not now anyway. You don’t want to be a test case. Yes, the trustee may have an uphill battle in making this argument, but if she wins, your house will be liquidated and your appreciated value will be taken too. The risk is just too great.

If you are a homeowner in a Chapter 13 case and are considering converting to Chapter 7, be very careful, and be sure to ask your attorney if he or she is familiar with this issue.

What Happens to My Property if I File a Bankruptcy Case?

When you file for any kind of bankruptcy a bankruptcy estate is created. This is a legal concept that means some of the property you own is under the control of the bankruptcy court while your case is processed. In a Chapter 7 bankruptcy typically almost all of your property or assets are part of the bankruptcy estate. Different chapters of bankruptcy have different effects.

Does that mean if I file bankruptcy I lose everything?
The bankruptcy court administers the property in the bankruptcy estate, but you remain the owner of all of the property unless the court enters an order for you to sell or turnover some property. All of the property in the bankruptcy estate is also sheltered from creditor actions by the automatic stay.

If you owned a car, but were behind on the payments and you filed for bankruptcy the creditor would not be allowed to repossess the car because of the automatic stay. The car would be a part of the bankruptcy estate. But, the court would ultimately decide whether or not you got to keep the car based on a variety of factors.

Most people who file for bankruptcy find that they do not lose anything because the value of their assets is so low.

Can I sell my property during a bankruptcy?
While you remain the owner of the property during a bankruptcy, the bankruptcy court controls all of the property that is part of the bankruptcy estate. You are not allowed to sell any of the property that is part of the bankruptcy estate without the prior approval of the bankruptcy court. Usually, the bankruptcy court appoints a trustee to monitor the administration of the bankruptcy estate. The bankruptcy trustee is charged with making sure the creditors get what they are legally entitled to.

This means that if you own a car and file for bankruptcy, and you own the car outright, you cannot sell the car or even give the car away, without first getting the permission of the bankruptcy trustee. This also applies to stocks, jewelry, or any other kind of property.
Property can be removed from the bankruptcy estate if certain conditions and procedures are met.

Is there ever anything not part of the bankruptcy estate?
The law excludes some property from being a part of the bankruptcy estate. Social Security payments, generally any property received after the filing of the bankruptcy, and certain pension or retirement benefits are not a part of the bankruptcy estate and are not subject to any control from the bankruptcy court.

What happens once the bankruptcy is over?
Once the bankruptcy has been completed the bankruptcy estate disappears. Any property that was not ordered to be sold or turned over to a creditor is back under your control. For most people almost nothing ends of being sold. Once the bankruptcy is completed you can sell or gift your property as you see fit.

Bankruptcy is a highly technical area of law with many complicated rules and procedures. If you are thinking about filing a bankruptcy, you need to consult with an experienced bankruptcy lawyer right away. Sometimes the rules of the bankruptcy estate apply to what you do with property before you even file for bankruptcy.