Avoiding liens can be an important part of the bankruptcy “fresh start.” There is a variety of methods of lien avoidance in bankruptcy cases. We will here discuss lien avoidance under two code sections, Section 506(d) and 522(h). Under Section 506(d), liens securing disallowed claims are not valid. There are some exceptions to this rule, however.
As part of his or her “fresh start” in bankruptcy, it is possible for a debtor to avoid liens on property securing dischargeable debts. If this is not done, the liens may pass through the bankruptcy and impair the debtor’s ability to move forward. Section 522(f) of the Bankruptcy Code is one of the principal ways that such liens may be avoided. This section of the code has four paragraphs.
Taken together, the section states how a debtor may avoid judicial liens against his or her exempt property to the extent that the lien impairs the debtor’s exemption. It should be noted here that we are speaking in this article only of Section 522(f). Liens may also be avoided by a debtor using other sections of the Bankruptcy Code, such as Sections 506(d) and 522(h). Knowing which section to use will depend on various factors, such as the nature of the lien, the type of bankruptcy filed, and the specific issues of the case.
The Bankruptcy Code makes specific provision for the protection of debtors who file bankruptcy. One of those protections is the right not to be discriminated against once they file bankruptcy. It is comforting for debtors to know that they are protected by specific legal provisions that prevent anyone from discriminating against them or drawing adverse inferences about them once they file a case.
The bankruptcy automatic stay is one of the most fundamental protections provided to a debtor in a bankruptcy case. It is not, then, surprising that bankruptcy courts take a very dim view of creditors who ignore the protections granted to a debtor after the filing of a case. The bankruptcy code permits a debtor to recover damages for violations of the automatic stay; those provisions are contained in 11 U.S.C. §105(a) and 11 U.S.C. §362(k).
Adversary proceedings can be used to dispute, remove, or contest liens. The validity of a lien can be disputed by a trustee or a Chapter 11 debtor in possession under several of the various “avoidance” sections of chapter 5 of the Bankruptcy Code. For example:
There are some situations in which the validity of a lien can be contested indirectly. For example, a secured creditor filing a proof of claim may claim a security interest. The trustee or debtor in possession can object to the claim under F.R. Bankr. P. 3007. If the creditor cannot verify its secured status, the claim may be disallowed as a secured claim.
Sometimes valuation of the collateral in question is an important issue. This issue can come up in adversary proceedings that attempt to strip away the second or third mortgage that is claimed to be wholly unsecured. In Re Mansaray-Ruffin, 530 F.3d 230 (3d Cir. 2008).
Here, the real issue is to what “extent” the secured creditor is secured. If there is no equity in the property to which a lien can attach, then the lien is said to be unsecured.
For example, suppose a house has a fair market value of $150,000. The first mortgage secured against the property is in the amount of $165,000. There is no equity left in the property for any second mortgage to attach to, since the mortgage is larger than the fair market value. Under Section 506(a) of the Code, secured claims are to be valued and allowed as secured to the extent of the value of the collateral, and unsecured for the excess over such value.
This provision is implemented by F.R. Bankr. 3012. Under Rule 3012, the court can determine the value of a claim secured by a lien on property on motion of any party in interest. If a debtor attempts to “strip off” or “strip down” a lien based on valuation, the majority view is that no adversary proceeding is required. Harmon v. U.S., 101 F.3d 574 (8th Cir. 1996); In Re King, 290 B.R. 641, 647 (Bankr. C.D. Ill. 2003); In Re Marsh, 475 B.R. 892, 896 (N.D. Ill. 2012). Local rules and procedures here will provide the best guidance on whether a lien can be removed by motion or by adversary proceeding.
Despite the case law supporting the idea that unsecured mortgages can be removed by motion, in practice most courts prefer that this by done by adversary proceeding, due to the nature of the rights of the creditor that are being affected.In the 8th Circuit, there is case law holding that a debtor can strip off a junior lien of a wholly unsecured claim on a debtor’s principal residence by confirmation of a Chapter 13 plan. In Re Fisette, 455 B.R. 177 (8th Cir. BAP 2011).
If a trustee is in doubt as to the priority of a lien in estate property, an adversary may be appropriate. For example, if the trustee is authorized to sell estate property under Section 363(b) of the Code “free and clear” of other interests, then an adversary might need to be used.A trustee could use Rule 7022 to do this, which permits him to interplead any competing claimants and obtain a determination of the rights of all the various claimants. An adversary proceeding can also be used under Rule 7001 to determine “other interests in property.”
Adversary proceedings have a wide range of uses. They can be used by a Chapter 11 debtor in possession, a debtor in a Chapter 7 or Chapter 13 case, by a trustee, or by a creditor. Besides providing a way to object to the discharge of certain debts, they are commonly used to determine property rights, valuations of secured collateral, extent of security interests, and determinations of ownership priority in collateral.
Read More: Bankruptcy Adversary Proceedings Under Section 523: Seeking To Prevent Discharge of Certain Debts
It occasionally happens in bankruptcy cases that a debtor will forget to list a creditor on his or her bankruptcy forms and schedules. The Bankruptcy Code permits a debtor to amend his schedules to include the missed creditor, even long after a case is closed or discharged. It also (much more rarely) happens that assets will be identified or recovered long after a bankruptcy has been closed. But how long is too long?
Or is there any time limit beyond which a creditor cannot be added? Is there any time limit beyond which a late-discovered asset with tangible value is irrelevant? Apparently not, one court has ruled. The case is In Re Dunning Brothers Co., 410 B.R. 877 (Bankr. E.D. Cal. 2009). In this case, a bankruptcy court ruled that a case that had been closed over seventy years earlier could be reopened to include some assets that had not been listed in the case.
Bankruptcy trustees and courts permit debtors to make charitable and religious contributions. Reasonableness is the operative guideline, as it is in much else in the bankruptcy world. Historically, courts in the United States have been very deferential towards issues implicating religious or cultural freedom. Even if tithes or charitable contributions are permitted, what is the limit? Is there a bright line rule? Or will the court evaluate such gifts on a case by case basis?
And if tithes are so allowed, will that prevent a debtor from claiming the “undue burden” standard in the context of a student loan dischargeability action? One recent case from the Northern District of Iowa illustrated the interplay between contributions to religious organizations and the possible dischargeability of student loan debt. The case in question was In Re Lovell (N.D. Iowa, 2012).
In Lovell, the debtor disclosed that she contributed about 11% of her gross income as tithes to a religious organization. She filed an adversary proceeding seeking the discharge of her student loan debt, arguing (in accordance with 8th Circuit standards) that repayment of the student loan would impose and “undue burden” on her living standards.
She wished to continue her practice of charitable giving, and still discharge her student loans at the same time. She was employed and was making an income that placed her solidly in the middle class.
The bankruptcy court first held that contributing 11% of one’s income in tithes was not per se unreasonable. Rather, the better approach would be for an in-depth inquiry into be undertaken to determine whether the expenditure was reasonable, based on a consideration of all the attendant circumstances.
The 8th Circuit’s view of the “undue burden” standard for student loan dischargeability essentially focuses on all the facts and circumstances that a debtor is facing: current monthly income and expenses are probed into in detail, to determine exactly what the debtor’s prospects might be for paying the loan back. See, e.g., Walker v. Allie Mae Servicing Corp., 650 F.3d 1227 (8th Cir. 2011).
Of particular interest to the court was the fact that the debtor was still in the early stages of her career. This being the case, there was a substantial likelihood that her earning power would increase as the years went by. In addition, she stated that giving to her church was an important part of her religious beliefs.
Interestingly, the court found that whether tithing was “compulsory” was not a determinative factor in weighing the reasonableness of the expense. This “hands off” approach is in keeping with the long tradition of deference that courts have shown in matters involving religious faith. Bankruptcy courts in both Kansas and Missouri have both been very generous in their allowances for charitable contributions. Debtors are often relieved to find out just how much leeway and freedom they are given in this regard.
The Religious Liberty and Charitable Donation Protection Act (RLCDP) is a factor in the background that courts have also been mindful of. See 11 U.S.C. 1325(b)(2)(A). Congress passed RLCDP as a remedial law after anecdotal evidence accumulated that charitable donations were being avoided as preferential transfers by bankruptcy trustees. Section 548 of the Bankruptcy Code was amended to allow charitable donations made in good faith, providing some relief to debtors and religious organizations with little ability to fight preference actions in bankruptcy court.
In fact, a survey of the relevant case law shows that most courts have been tolerant of religious contributions that approach 15% of a debtor’s annual income. Contributions of up to 15% have generally been held to be not presumptively unreasonable, although some creditors in student loan discharge cases have tried to argue that such a contribution would indicate a lack of “undue burden.”
In sum, the Lovell court made the point that no “bright line” rules can be set out for religious contributions. Like everything else, charitable donations must be viewed in conjunction with everything else that is going on in a debtor’s financial life. Tithing alone, absent other circumstances, will not disqualify a debtor from satisfying the “undue burden” standard.
Read More: Student Loans In Bankruptcy In Kansas And Missouri
Attorneys who deal with Chapter 13 and Chapter 11 cases will often see, in the claims registers listing the filed proofs of claim, corporate entities that have “bought up” proofs of claim from smaller creditors. There are many companies, businesses, distressed debt investors, and hedge funds that specialize in purchasing bankruptcy debt. There are also situations where larger creditors in Chapter 11 cases will make offers to buy the claims of smaller creditors, in an attempt to control the voting and direction of the Chapter 11 case. Small creditors in bankruptcy cases may find themselves in confusion about what to do if they are contacted by a large organization asking to buy their claim.
What issues should be considered? What are the advantages and disadvantages of selling a proof of claim?
Claims buyers can scrutinize bankruptcy court records and comb cases to see if it makes economic sense for them to purchase claims. Claims buyers will prefer to purchase claims that are listed as “undisputed” rather than “contingent” or “disputed”, since undisputed debts are less likely to subject to litigation in a bankruptcy case. They are seen as less of a risk.
Claims buyers will frequently sent out documents called “claim assignment agreements” or “confirmation” documents. These documents should be reviewed carefully with an attorney with bankruptcy experience, before the claim is sold. Things are not often what they appear. Claims buyers have as their goal the maximization of their profit with a minimization of their risk. With this in mind, let us examine the pros and cons of selling a bankruptcy proof of claim.
Pros
One of the most attractive reasons for selling a claim is the prospect of cash now, rather than the uncertainty of knowing when (if ever) the creditor will recover any funds in the bankruptcy estate. Cash now has a real attraction to many small creditors who may not want to participate in the bankruptcy process. Small creditors are enticed with the prospect of immediate liquidity, rather than dealing with the possibility of drawn-out legal proceedings. Selling a claim now carries with it the perception of cutting one’s losses and eliminating future risk. This “immediacy” value is the primary attraction of selling a claim.
Cons
But this immediate liquidity can be deceptive. For one thing, it is important to remember that claims buys always want to buy at a steep discount. It is a numbers game to them, and they buy claims in volume. The amount you may be offered for your claim will be a fraction of what it may be worth. Bankruptcy cases can be unpredictable. Many cases that initially appear to offer nothing to unsecured creditors can generate significant funds down the road. You never know when assets can and will be recovered. To sell your claim too early can be a mistake.
Buying debt in bankruptcy cases, for large claims buyers, is all about making a profit. Their goal will be to maximize their profit potential, while minimizing their risk. Small creditors in bankruptcy cases should be aware of this. The enticement of immediate money may be an illusion. A small creditor who ignores the risks may find that he got more than he bargained for. It is critical to consult with a bankruptcy attorney before selling your claim, so that you are aware of all the risks involved.
Read More: The Most Important Issue With Bankruptcy And Taxes
Overland Park Bankruptcy Attorney
Can a school refuse to issue a transcript to a debtor who had wiped out his outstanding balance owed to the school in a bankruptcy case? No. A recent case demonstrates the power of the bankruptcy discharge in dealing with all types of collateral issues that might come about from the wiping out of debts in a case.
In In re Moore, 407 B.R. 855, 861 (Bankr. E.D. Va. 2009), the United States District Court for the Eastern District of Virginia found that Novus Law School violated a discharge injunction by refusing to issue a transcript or award a degree to Moore, a law student, until he paid his outstanding tuition balance, which had been discharged in Moore’s chapter 7 proceeding.
If your automobile is repossessed before you file a Chapter 13 bankruptcy, the creditor will need to return the vehicle to you in most situations. In some Chapter 13 scenarios, a case is filed right after a repossession has taken place, and a debtor will need to have the asset returned to him or her so that it can be taken care of in the Chapter 13 plan.
Can a creditor continue to hold the collateral, or must it be turned over to the Chapter 13 debtor? One case is illustrative. In Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), a court was called upon to determine whether an asset lawfully seized pre-petition must be returned to the estate after debtor files for chapter 13 bankruptcy, and if so, whether the asset must be returned even without a showing by the debtor that he can adequately protect the creditor’s interest.
Kansas City Bankruptcy And Criminal Case Defense Information 
You must be logged in to post a comment.