Supreme Court Cracks Down on Stripping! (Lien Stripping Junior Mortgages, that is!)

Supreme Court Cracks Down on Stripping! (Lien Stripping Junior Mortgages, that is!)

Published on June 1, 2014 by: Ian M. Falcone

In 2012, the Eleventh Circuit held that, contrary to common belief at the time, a junior mortgage that is wholly unsecured, was not considered a secured debt and therefore, could be stripped off or voided in a Chapter 7 case.  (See McNeal v. GMAC Mortgage, 735 F. 3d 1263 (11th Cir. 2012).  Learning of this opportunity, Debtors' lawyers filed motion after motion to strip off these junior mortgages.  Earlier today, the party ended;  the United States Supreme Court, in a unanimous decision, held that junior mortgages, even those that are wholly unsecured, can not be stripped off.  

The issue of lien stripping turns on the definition of whether or not a debt is secured.  "Section 506(a)(1) of provides that "[a]n allowed claim of a credit secured by a lien on property . . is a secured claim to the extent of the value of such creditor's interest in  . .  such property," and "an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim." Bank of America, N.A. v. Caulkett, 575 U.S. _____ (2015).  The Court went on to explain that under 506(a), where a senior mortgage exceeds the fair market value of the real property, it would certainly seem that the junior mortgage, by definition is not secured.

Unfortunately, as the Supreme Court went on to explain, the "Court has already adopted a construction of the term 'secured claim; in 506(d) that forecloses this textual analysis.'"  Bank of America, N.A. v. Caulkett, 575 U.S. _____ (2015) (referring to Dewsnup v. Timm, 502 U.S. 410 (1992)).  In Dewsnup, the Court, rather than relying on the statutory meaning, concluded that a "secured" claim was one in which a security interest existed regardless of the value of the collateral.

The Debtors in Caulkett tried to convince the Court, as the McNeal court did, between partially secured liens and wholly unsecured mortgages.   The Court refused to draw such  distinction.

Thus, it appears that Chapter 7 debtors are now stuck with all mortgages on their homes, regardless of the fair market value of the real property.   It was a nice party while it lasted.

What you don’t know can hurt you!

What you don’t know can hurt you!

Published on April 1, 2014 by: Ian M. Falcone

A couple sits down in your office to discuss a potential bankruptcy case.  They have $40,000 in credit card debt, own one car worth $4000 with no debt on it, another that is leased, and a house that is under water.   Their combined income is $40,000.  They are current on the house and car payments.  They can pay everything except the credit card debts.  They are being contacted by debt collectors and have a lawsuit pending against them.  They need help.   You suggest a Chapter 7.  Sounds like a simple case, right? 

Most practitioners rely on their clients to provide the bulk of the information needed to complete the voluminous bankruptcy paperwork.  Credit reports help identify creditors.  Websites such as Kelly Blue Book, NADA, Zillow and local tax commissioner offices help establish values.   But, is that enough?

In United States Bank Nat’l Ass’n v. Gordon, 289 Ga. 12 (2011) the Trustee raised the bar.  In that case, the Trustee successfully argued that the security deed, which failed to contain the signature of an official or unofficial witness, was invalid.  As a result, the bank’s lien never attached to the real property and upon the debtor’s bankruptcy filing, the Trustee effectively took the property free of that purported lien.

What lesson should the Debtor bar take away from this situation?  What you don’t know can hurt you!  Conducting an independent analysis is good practice.

O.C.G.A. §44-14-33 states:

In order to admit a mortgage to record, it must be attested by or acknowledged before an officer as prescribed for the attestation or acknowledgment of deeds of bargain and sale; and, in the case of real property, a mortgage must also be attested or acknowledged by one additional witness. In the absence of fraud, if a mortgage is duly filed, recorded, and indexed on the appropriate county land records, such recordation shall be deemed constructive notice to subsequent bona fide purchasers.

That means, a deed should contain:

1.              A notary signature and seal

2.              An unofficial witness signature

3.              A description of the property

A cursory examination of your client’s deed before filing will save you a lot of headaches (including the possibility of a malpractice claim) later.  Deeds in Georgia can be found at:  https://www.gsccca.org.

Maximizing the Georgia homestead exemption under bankruptcy law

Maximizing the Georgia homestead exemption under bankruptcy law.

Published on June 11, 2014 by: Ian M. Falcone

Georgia elected to opt out of the federal bankruptcy exemptions.  Georgia’s homestead exemption (O.C.G.A. §44-13-100(a)(1)) states that any debtor who is a natural person may exempt, for bankruptcy purposes, the following: 

The debtor's aggregate interest, not to exceed $21,500.00 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor. In the event title to property used for the exemption provided under this paragraph is in one of two spouses who is a debtor, the amount of the exemption hereunder shall be $43,000.00.

There are four possible scenarios involving married debtors, their home and the bankruptcy homestead exemption:

 1.        The marital home is jointly titled and both spouses are filing for bankruptcy protection.  This is probably the easiest scenario.  Each debtor is entitled to claim an exemption of $21,500, providing an effective exemption of $43,000. 

2.         The marital home is only in one spouse’s name and the other spouse is filing.  No exemption is needed because the property is not part of the estate.   This is usually the client’s favorite situation.  The house is not at risk regardless of the amount of equity. 

3.         The marital home is jointly titled, but only one spouse is filing for bankruptcy protection.  The equity is effectively “split” between the spouses.  The non-filing spouse is entitled to his or her share of the equity.  The filing spouse claims the $21,500 from his or her half of the equity.  This scenario is also a client favorite as it protects a substantial amount of equity.

4.         The marital home is only in one spouse’s name and that spouse is filing for bankruptcy protection.  Upon first glance, you might conclude that since the property is only in the filing spouse’s name, only that spouse is entitled to an exemption;  the non-filing spouse does not have title, so they get to claim nothing.  

But, that is not what the statute says.  The filing spouse gets to claim the full double exemption as if both spouses were property owners and filing together.

Here is a chart of each of these scenarios with different house values and loan amounts:

	Example 1 FMV = $250,000 Loans:  $210,000	Example 1 FMV = $275,000 Loans:  $210,000	Example 1 FMV = $300,000 Loans:  $210,000
1.  Joint title – Joint filing	Equity $40,000 Exemption:  $43,000 No risk to home	Equity $65,000 Exemption:  $43,000 Some risk to home.	Equity $90,000 Exemption:  $43,000 Risk to home.
2.  Title in non-filing spouse	Equity $40,000 Exemption: Not Needed No risk to home	Equity $65,000 Exemption:  Not Needed No risk to home.	Equity $90,000 Exemption:  Not Needed No risk to home.
3.  Joint title One filing spouse	Equity $20,000 Exemption:  $21,500 No risk to home	Equity $32,500 Exemption:  $21,500 Some risk to home.	Equity $45,000 Exemption:  $21,500 Some risk to home.
4.  Title in filing spouse’s name only.	Equity $40,000 Exemption:  $43,000 No risk to home (If only the $21,500 exemption were used, there would be some risk to the home)	Equity $65,000 Exemption:  $43,000 Some risk to home. (If only the $21,500 exemption were used, there would be risk to the home)	Equity $90,000 Exemption:  $43,000 Risk to home. (If only the $21,500 exemption were used, there would be substantial risk to the home)

As you can see, the ability to double the exemption provides substantial additional protection to the debtor. 

Also, remember that the mere fact that there is some equity after exemptions does not always place a home at risk.  In a Chapter 13 case, it will simply add to the amount that the debtor must pay into the plan to satisfy the liquidation analysis of 11 USC 1325.

In a Chapter 7 case, the Trustee will incur real world costs of sale in any transaction.  Our local trustees typically include these costs in their assessment of whether or not to sell an asset.  In the case of real property, sales commissions are typically 6% of the gross price.  While there is no “magic” amount at which the trustee takes action, and there are certainly no guaranties,  it is unusual for a trustee to try and sell a home with less than $10,000 or $15,000 of equity after exemptions.