Lien Stripping Still Possible Despite Supreme Court Case

You may have seen this headline in today's news:

"Supreme Court says homeowners underwater on loans can't void second mortgage in bankruptcy"

HOWEVER, this decision was issued in a Chapter 7 case.  The case is entitled: Bank of America N. A. v.. Caulkett, and was issued June 1, 2015.

The Supreme Court syllabus (synopis) says:

A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under §506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under §502 of theBankruptcy Code. 
 
The Minnesota Bankruptcy Judges have never, as far a I know, allowed a person to strip an underwater second mortgage in a chapter 7.  

However, the rules of the game in Chapter 13 are different.  The courts have been allowing persons in a chapter 13 to strip a second mortgage, and since the Caulkett case was not a chapter 13, it is my hope and belief that lien stripping is still available in a chapter 13 case.

Pending legislation

     People who have to file bankruptcy often have judgments against them from before their bankruptcy case was filed.  Bankruptcy discharges the personal obligation, but  does not remove the judgment from the state court recrods.
     Minn. Stat. 548.181 provides a simple mechanism to remove pre-bankruptcy judgments from the state court records.  The statute states that there is a $5 fee payable to the court administrator for each judgment.
     Unfortunately, in the last year or so court administration has been requiring the payment of a full filing fee -- $324.00 in Stearns County -- to discharge judgments.  The theory is that the application to discharge judgment is the "first paper filed in an action", and that you must pay the full filing fee in order to "file the first paper in an action".
     There is a bill in the Minnesota Legislature that would change this result, by providing that "This paragraph does not apply to the filing of 1.17 an Application for Discharge of Judgment. An Application for Discharge of Judgment filed by a party shall not be considered a first paper filed in an action."
     The bill in the House is called HF 652;  the companion bill in the Senate is called SF 999.
     I hope our legislators will pass this bill this Spring.

Lien Stripping Case At Supreme Court

The United States Supreme Court may give us an answer to the following question:  If you have a home with a first mortgage that exceeds the value of the home, can you use a Chapter 7 bankruptcy to "strip off" a second mortgage?

Most of the judicial circuits around the country do not permit this in a Chapter 7, although most cases DO permit a person to do this in a Chapter 13 payment plan bankruptcy.

The case pending at the US Supreme Court is entitled "Bank of America, N.A., v. Caulkett" and comes out of the 11th Circuit.

The Caulkett case is linked with another case, Bank of America N.A., v. Toledo-Cardona. 



The Caulkett case is 13-1421.  The Toledo- Cardona case is No. 14-163.

This link should lead you to the 11th Circuit decision in the Caulkett case:

 https://cases.justia.com/federal/appellate-courts/ca11/14-10803/14-10803-2014-05-21.pdf 

The decisions are very brief, and basically hold that the 11th Circuit cases of McNeal and Folendore hold that this can be done in a Chapter 7.  Those case are: Folendore v. U.S.Small Bus. Admin., 862 F.2d 1537, 1538-39 (11th Cir. 1989) and McNeal v. GMAC Mortg., LLC, 735 F.3d 1263, 1265–66 (11th Cir. 2012) (percuriam).

This does not sound all that exciting, until you realize that being able to strip an underwater second mortgage in a Chapter 7 would tremendously help homeowners in that situation.  Many people could handle their first mortgage payments, but cannot pay both their first mortgage and their second mortgage.

The decision will be big news in the bankruptcy world when it is announced.  I will certainly post when the decision comes out.

Subprime loans were cash out, not purchase

Although not directly related to current bankruptcy practice, I thought this was interesting.

I came across an article in the New York Times, published on November 14, 2014, with the following interesting paragraph:

One of the most abjectly false narratives about the financial crisis is that risky mortgages proliferated so that people who couldn’t afford homes could nonetheless buy them. Modern subprime lending was not about homeownership. Instead, the 1990s crop of subprime mortgage makers allowed people with bad credit to borrow against the equity in their existing homes. According to a joint HUD-Treasury report published in 2000, by 1999, a staggering 82 percent of subprime mortgages were refinancings, and in nearly 60 percent of those cases, the borrower pulled out cash, adding to his debt burden. The report noted that “relatively few subprime mortgages are used to purchase a house.”

The full article can be accessed at:

http://www.nytimes.com/2014/11/14/opinion/a-house-is-not-a-credit-card.html?_r=0

Inherited IRA not automatically exempt

We commonly say that an IRA is exempt in a bankruptcy, up to $1,000,000.00 of value.  However the US Supreme Court has ruled that this general statement is not correct in the case of an inherited IRA. The citation is:  Clark v. Rameker, 134 S. Ct. 2242, 189 L. Ed. 2d 157 (2014).  In that case the Court said:  “[t]he text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not ‘retirement funds’ within the meaning of §522(b)(3)(C)’s bankruptcy exemption."

The facts of the case are that Mrs. Clark's mother set up an IRA in 2000 and named her daughter as the beneficiary of the IRA.  The mother died shortly thereafter, and the account passed to her daughter.  About nine years after that the daughter filed chapter 7 bankruptcy.  The account was worth about $300,000.00 at that time.

Mrs. Heffron-Clark claimed the IRA as exempt under 11 U.S.C. Sec. 522(b)(3). The trustee objected to the claimed exemption, arguing that the money in an inherited IRA is not "retirement funds" and therefore not exempt.

The Supreme Court opinion first noted that "Inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty."

The Court then said:  "Three legal characteristics of inherited IRAs lead us to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement. First, the holder of an inherited IRA may never invest additional money in the account.... Second, holders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement....Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time — and for any purpose — without penalty."

Ruling against Mrs. Clark, Justice Sotomayor said:  "For if an individual is allowed to exempt an inherited IRA from her bankruptcy estate, nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete. Allowing that kind of exemption would convert the Bankruptcy Code's purposes of preserving debtors' ability to meet their basic needs and ensuring that they have a "fresh start,"Rousey, 544 U. S., at 325, into a "free pass," Schwab, 560 U. S., at 791"

Fortunately, this is a pretty limited decision, for most people will set up their own IRA, not inherit one.  However, I mention it as it is yet another example in which there is an important exception to the general rule.

Judgments, again

As I said in a prior post, the Minnesota state court central administration has come out with an interpretation that requires a person with a judgment to pay a full filing fee in order to discharge a judgment entered against them, rather than the $5 that the statute (Minn. Stat. 548.181) calls for.  The full filing fee is $322 or $324, and it is very unusual for a defendant to have paid a filing fee.

I had hoped the Legislature would "overrule" this interpretation.  I thought it would have been reasonable to change the law and have the court system charge $25 or $40 or something like that, but $324 per judgment seems pretty outrageous.  After all, the defendant did not invoke the legal machinery of the court system, the plaintiff did.  (I will have a letter in to Jeff Shorba, the state court administrator, asking him how much money the state court system really collects out of defendant filing fees;   if I get a response I will post it here.)

Well, the Legislature has gone home for the rest of the year, so apparently we are not going to get any change in the law for the rest of 2014.

My thought, therefore, is to for the most part delay using the state court application to discharge judgments until 2015, in the hopes that the Legislature will take this up next year.

If you are going to any candidate forums this election year, maybe you could ask your candidate for State Representative or State Senator about this issue.

Discharging judgments in Minnesota

Very often a client who needs to file bankruptcy will have one or more judgments already entered against them in state court.

Bankruptcy is done in the federal court system;  judgments (for the most part) are entered in the state court system.  The two court systems do not "talk to each other".

So, what happens to a judgment in bankruptcy?

Briefly, a money judgment is a court order that determines that you owe a certain amount of money to a particular person or company, and authorizes that person or creditor to take your non-exempt property.  Bankruptcy wipes out the personal obligation for a judgment*, and means that a creditor cannot take active steps to collect the judgment.  However, a bankruptcy discharge does not remove the judgment from the records of the state court..  

We have a very simple procedure here in Minnesota to get the judgments off the state court record.  The law which authorizes this is Minn. Stat. 548.181.  What we have to do is to get a copy of your bankruptcy discharge, fill out a particular form, and mail both items to the last known address of the judgment creditor, and pay the court $5 per judgment.  If the judgment creditor does not file an objection within 20 days, the Court Administrator discharges the judgment upon the court records.

A caveat:  The state court administrator has recently come up with a theory that this application is a "paper filed with the court", and is apparently demanding that applicants pay a full court filing fee ($324.00 in most counties) instead of $5.00.  Ouch!  I understand that the state court system would like to have more funding, but I hope this new interpretation is rolled back, either by specific legislation or by one or more lawsuits.

*  Of course, some judgments are for non-dischargeable debt.