Sunday, May 30, 2010
Monday, February 15, 2010
What Are NV Bankruptcy Exemptions
What Are Nevada Bankruptcy Exemptions?
When a debtor files bankruptcy, all his property becomes part of the estate and a trustee is entrusted to handle all the matters of his estate. However, a debtor is entitled to get back his property which is exempted. Exemptions are handled under Nevada laws.
This article describes various exemptions and provided an answer to the various exemptions under bankruptcy.
Has state opted out of federal bankruptcy exemptions?
Yes. Nev. Rev. Stat. § 21.090.
Is opt out limited to residents or domiciliaries of the state?
Yes. Nev. Rev. Stat. § 21.090:
‘‘Any exemptions specified in [§ 522(d)],
do not apply to property owned by a resident of this State. . . .’’
Do state’s exemptions have extraterritorial application?Homestead: $550,000.00
Personal property: Uncertain.
Wages: Nev. Rev. Stat. §§ 21.090, 31.295 to 31.298.
How much of a debtor’s earnings can be garnished via garnishment in Nevada?Earnings.
Amount: Garnishment may not exceed the lesser of 25% of disposable earnings for the workweek or the amount by which disposable earnings that week exceed 50 times the federal minimum wage.
Survival after payment/deposit: Yes. Earnings are defined to include compensation received by the judgment debtor, in the possession of the judgment debtor, held in accounts in a bank or any
other financial institution, or, in the case of a receivable, compensation that is due the judgment debtor.
Waiver: Not specified in garnishment statute.
Homestead: Nev. Rev. Stat. §§ 21.090, 21.095, 115.005, 115.010,
115.040.
Amount: $550,000 in either land and a dwelling or a mobile home, subject to certain liens; land held in spendthrift trust for debtor is exempt. Unlimited exemption if ‘‘allodial title’’ has been established.
(Nevada residents can acquire ‘‘allodial title’’ to their land by buying out the property tax right from the government. Then the landowner does not have to pay property tax on the land.) The
primary dwelling, including a mobile home, and land may not be executed upon for a medical bill during the lifetime of the debtor, debtor’s spouse, a joint tenant who was a joint tenant at the time
judgment was entered, or debtor’s disabled dependent adult child, or during the minority of any child of debtor. A 2007 amendment added an exemption for sums reasonably deposited with a landlord,
to secure the rental or lease of debtor’s primary residence (except not exempt as to landlord’s claims for rent).
Procedural requirements: Procedure available for filing declaration of homestead. Exemption available even without declaration. Once declaration is filed, spouse must join in any encumbrance or sale.
Special provisions: None specified.
Waiver:
Spouse must join in conveyance or encumbrance of declared homestead.
How much of a tangible personal property is exempted?
Nev. Rev. Stat. §§ 21.080, 21.090,
21.100.
Household goods:
$12,000 necessary household goods, furnishings,
electronics, wearing apparel, other personal effects and yard
equipment.
Motor vehicles:
$15,000, no limit if specially equipped for disabled
debtor or dependent.
Tools of trade:
$10,000 tools of trade; $4500 mining equipment;
$4500 farm equipment.
Clothing and jewelry: Jewelry is included in the $5000 wildcard
exemption.
Miscellaneous and wildcard: $5000 in private library, works of art, musical instruments and jewelry, all family pictures and keepsakes; health aids; property held in a spendthrift trust; uniforms debtor is legally required to keep, one gun, a collection of metal
bearing ores, geological specimens, art curiosities or paleontological remains if the debtor catalogues them and the catalogue is kept near the collection for the free inspection of all visitors; coin collections are not exempt. $1000 in any property, including accounts in a financial institution.
Waiver: Not specified in exemption statute.
Benefits, retirement plans, insurance, judgments, and other intangibles:
Nev. Rev. Stat. §§ 21.080, 21.090, 21.100.
Public benefits: Social Security benefits, including without limitation,
retirement, survivors, SSI and disability. See Nev. Rev. Stat.
§ 422.291 (assistance awarded pursuant to public welfare administration
laws is exempt). Earned income credit or any similar credit pursuant to state law.
Pensions, retirement plans and annuities: Up to $500,000 (present value) in tax-qualified retirement plan.
Insurance, judgments or other compensation for injury: Money or benefits in any manner growing out of life insurance, if premium not more than $15,000 per year (for higher premium, the proportion that $15,000 bears to the premium paid); $16,500 personal injury judgment; wrongful death judgment for person on whom debtor was dependent; compensation for loss of future earnings of debtor or person on whom debtor was dependent, so far as needed
for support; criminal restitution.
Bank accounts:
Not specified in exemption statute.
Alimony, child support:
Court-ordered family support.
Survival after payment or deposit:
Not specified in exemption statute
When a debtor files bankruptcy, all his property becomes part of the estate and a trustee is entrusted to handle all the matters of his estate. However, a debtor is entitled to get back his property which is exempted. Exemptions are handled under Nevada laws.
This article describes various exemptions and provided an answer to the various exemptions under bankruptcy.
Has state opted out of federal bankruptcy exemptions?
Yes. Nev. Rev. Stat. § 21.090.
Is opt out limited to residents or domiciliaries of the state?
Yes. Nev. Rev. Stat. § 21.090:
‘‘Any exemptions specified in [§ 522(d)],
do not apply to property owned by a resident of this State. . . .’’
Do state’s exemptions have extraterritorial application?Homestead: $550,000.00
Personal property: Uncertain.
Wages: Nev. Rev. Stat. §§ 21.090, 31.295 to 31.298.
How much of a debtor’s earnings can be garnished via garnishment in Nevada?Earnings.
Amount: Garnishment may not exceed the lesser of 25% of disposable earnings for the workweek or the amount by which disposable earnings that week exceed 50 times the federal minimum wage.
Survival after payment/deposit: Yes. Earnings are defined to include compensation received by the judgment debtor, in the possession of the judgment debtor, held in accounts in a bank or any
other financial institution, or, in the case of a receivable, compensation that is due the judgment debtor.
Waiver: Not specified in garnishment statute.
Homestead: Nev. Rev. Stat. §§ 21.090, 21.095, 115.005, 115.010,
115.040.
Amount: $550,000 in either land and a dwelling or a mobile home, subject to certain liens; land held in spendthrift trust for debtor is exempt. Unlimited exemption if ‘‘allodial title’’ has been established.
(Nevada residents can acquire ‘‘allodial title’’ to their land by buying out the property tax right from the government. Then the landowner does not have to pay property tax on the land.) The
primary dwelling, including a mobile home, and land may not be executed upon for a medical bill during the lifetime of the debtor, debtor’s spouse, a joint tenant who was a joint tenant at the time
judgment was entered, or debtor’s disabled dependent adult child, or during the minority of any child of debtor. A 2007 amendment added an exemption for sums reasonably deposited with a landlord,
to secure the rental or lease of debtor’s primary residence (except not exempt as to landlord’s claims for rent).
Procedural requirements: Procedure available for filing declaration of homestead. Exemption available even without declaration. Once declaration is filed, spouse must join in any encumbrance or sale.
Special provisions: None specified.
Waiver:
Spouse must join in conveyance or encumbrance of declared homestead.
How much of a tangible personal property is exempted?
Nev. Rev. Stat. §§ 21.080, 21.090,
21.100.
Household goods:
$12,000 necessary household goods, furnishings,
electronics, wearing apparel, other personal effects and yard
equipment.
Motor vehicles:
$15,000, no limit if specially equipped for disabled
debtor or dependent.
Tools of trade:
$10,000 tools of trade; $4500 mining equipment;
$4500 farm equipment.
Clothing and jewelry: Jewelry is included in the $5000 wildcard
exemption.
Miscellaneous and wildcard: $5000 in private library, works of art, musical instruments and jewelry, all family pictures and keepsakes; health aids; property held in a spendthrift trust; uniforms debtor is legally required to keep, one gun, a collection of metal
bearing ores, geological specimens, art curiosities or paleontological remains if the debtor catalogues them and the catalogue is kept near the collection for the free inspection of all visitors; coin collections are not exempt. $1000 in any property, including accounts in a financial institution.
Waiver: Not specified in exemption statute.
Benefits, retirement plans, insurance, judgments, and other intangibles:
Nev. Rev. Stat. §§ 21.080, 21.090, 21.100.
Public benefits: Social Security benefits, including without limitation,
retirement, survivors, SSI and disability. See Nev. Rev. Stat.
§ 422.291 (assistance awarded pursuant to public welfare administration
laws is exempt). Earned income credit or any similar credit pursuant to state law.
Pensions, retirement plans and annuities: Up to $500,000 (present value) in tax-qualified retirement plan.
Insurance, judgments or other compensation for injury: Money or benefits in any manner growing out of life insurance, if premium not more than $15,000 per year (for higher premium, the proportion that $15,000 bears to the premium paid); $16,500 personal injury judgment; wrongful death judgment for person on whom debtor was dependent; compensation for loss of future earnings of debtor or person on whom debtor was dependent, so far as needed
for support; criminal restitution.
Bank accounts:
Not specified in exemption statute.
Alimony, child support:
Court-ordered family support.
Survival after payment or deposit:
Not specified in exemption statute
Short Sale vs. Foreclosure
Short Sale vs. Foreclosure
Of course both short sale and foreclosure are not appealing to my senses and I detest equally both of them, but here my likings are not in discussion: I have to make distinction between these two often quoted and touted remedies in this national crisis. It is actually a selection between the two lesser evils. Short-Sale versus Foreclosure. A short sale is just the opposite of a full sale. Let us say your home has an appraised value of $400,000, and you had placed your house on sale for quite some, and no offer comes, and endlessly waiting you get tired. You can tell the bank that heck with it, I want to just get out of it. The bank would plan along with your knowledgeable broker a sale which should be quick, non cumbersome and in which you would not see a penny coming to your pockets. Altogether it is called a Short Sale. It is not as damaging on your credit report as let us say a foreclosure is. Closely related to short sale, of course, a surrender of deed which I will discuss in another time. The lasting impact of a short sale would stay few years on your credit. You may have to report to IRS which is a tax question and need to be addressed to your tax consultants.
Few things you have to remember at this time;
1. Banks would not allow a short sale if there is a second lien attached with it. A short sale is a compromise between you and the bank who is the lien holder of your first principal. A short sale would wipe out the junior interests and that means second lien holder or HELOC. They would not get anything, and they would not agree to short sale unless they get something out of it. Now there would be a fight between the first lien holder and the second lien holder. This fight of course is detrimental to your interest and can cause delay in the process. Also, there are many layers of approvals on various levels in the banks’ hierarchy and oligarchy.
2. You can compromise with the bank how it should be reported to you credit bureaus. Use it to your advantage.
3. A negotiated short sale would stop the bank for a deficiency judgement against you.
4. One problem, if there is a short sale and you declare bankruptcy right after it, it can be treated as a collusive transaction between you and the lender, and your other creditors can contest it and may invalidate it.
5. Of course the solution again lies with your knowledgeable attorney handling your issue.
6. The IRS has very complex tax consequences in a debt renegotiation, such as a short sale, or foreclosure, that are more detrimental for solvent taxpayers than those who are insolvent or bankrupt as each generates Cancellation of Debt Income.
7. A borrower who refinanced their home to take the cash out to buy another home, then let the first home go to foreclosure thinking they are getting off debt and obligation free, are living in a fools paradise. This practice can be stopped by the lender. The first thing to establish; is what the home’s basis is. The IRS definition for basis is your investment in the home for tax purposes. It usually starts with the cost to acquire the house. Adjusted basis is the increase or decrease in the original basis according to certain events. Increases to basis include but are not limited to improvements having a useful life of more than a year, assessments for local improvements, sales tax, the cost of extending utility lines to the home, legal fees such as the cost of defending or perfecting title, and zoning costs. Decreases to basis include but are not limited to depreciation, nontaxable;corporate distributions, casualty and theft losses, easements, and rebates from the seller. IRS Pub 551 Basis of Assets is a handy reference.
Taxable gain or loss on a house is determined by the difference of the selling price/amount realized and its adjusted basis. IRC 61(a)(12) CODI, Cancellation of Debt Income other than as a gift, creates taxable income to the debtor unless an exception applies. In a Short Sale, the lender issues a 1099-C to the IRS. In a Short Sale example of a home, whether it be primary, second home, or third home, A bought his home in Reno in November 2004 for $290,000. In November 2005, A refinanced to a new loan for $380,000. Unfortunately, today its Fair Market Value is $260,000. A can no longer make the payments due to his legal split with B, his spousal equivalent. In 2007 A sells the property through a Realtor who successfully negotiated a Short Sale of $120,000 loan reduction with A’s lender, so A walked away with no immediate out-of pocket loss. A has a $120,000 nondeductible loss (adjustment to basis) on his home. The $120,000 principal reduction is taxable income in 2007 to A. (rev. Rul. 82-202) It is reported as “Other Income” on Line 21 of the 1040. If A had bought with seller-financing, there is special rule IRC 108 (e) (5).
If three conditions are met, the borrower reduces the property’s basis and does not recognize CODI. The IRS treats a foreclosure as a sale or exchange from which the borrower may realize gain or loss. In a foreclosure, the lender issues a 1099-A to the IRS. In a recourse state such as Nevada, the lender checks Box 5 as “Yes.” The borrower is personally liable to pay any amount of the debt not covered by the property’s value. The amount realized for borrower’s Federal gain or loss on the transaction is the smaller of debt cancelled or FMV of the transferred property. The borrower’s CODI is ordinary income if the loan balance exceeds the property’s FMV. If A had gone to foreclosure, his adjusted basis is $290,000, the recourse debt cancelled is $380,000 and the FMV of the property is $260,000. Here he realizes $260,000. The cancelled debt ($380,000) up to the property’s FMV ($260,000). Compare amount ($260,000) realized with adjusted basis ($290,000). A has a $30,000 non-deductible loss. He also recognizes ordinary income equal to the CODI of $120,000 ($380,000 debt cancelled less $260,000 FMV). This $120,000 is the part of the cancelled debt not included in the amount realized. In a short sale example of a rental house, if A had bought and used the house as a rental, if A is not insolvent or bankrupt, if A can meet the required extent of his involvement, A can elect on Form 982 to exclude from gross income any income from the discharge of QRPBD (Qualified Real Property Business Debt). IRC 108(c)(3) QRPBD includes debt 1) that was incurred or assumed in connection with real property used in trade or business and that is secured by such real property, 2) debt incurred or assumed to acquire, construct, reconstruct, or substantially improve real property used in a trade or business. IRC 108(c)(1) Income excluded for the discharge of QRPBD reduces the basis of the taxpayers depreciable real property, first to the property with the discharged debt, then to the taxpayer’s other depreciable real property proportionally, on each property’s relative adjusted basis
Of course both short sale and foreclosure are not appealing to my senses and I detest equally both of them, but here my likings are not in discussion: I have to make distinction between these two often quoted and touted remedies in this national crisis. It is actually a selection between the two lesser evils. Short-Sale versus Foreclosure. A short sale is just the opposite of a full sale. Let us say your home has an appraised value of $400,000, and you had placed your house on sale for quite some, and no offer comes, and endlessly waiting you get tired. You can tell the bank that heck with it, I want to just get out of it. The bank would plan along with your knowledgeable broker a sale which should be quick, non cumbersome and in which you would not see a penny coming to your pockets. Altogether it is called a Short Sale. It is not as damaging on your credit report as let us say a foreclosure is. Closely related to short sale, of course, a surrender of deed which I will discuss in another time. The lasting impact of a short sale would stay few years on your credit. You may have to report to IRS which is a tax question and need to be addressed to your tax consultants.
Few things you have to remember at this time;
1. Banks would not allow a short sale if there is a second lien attached with it. A short sale is a compromise between you and the bank who is the lien holder of your first principal. A short sale would wipe out the junior interests and that means second lien holder or HELOC. They would not get anything, and they would not agree to short sale unless they get something out of it. Now there would be a fight between the first lien holder and the second lien holder. This fight of course is detrimental to your interest and can cause delay in the process. Also, there are many layers of approvals on various levels in the banks’ hierarchy and oligarchy.
2. You can compromise with the bank how it should be reported to you credit bureaus. Use it to your advantage.
3. A negotiated short sale would stop the bank for a deficiency judgement against you.
4. One problem, if there is a short sale and you declare bankruptcy right after it, it can be treated as a collusive transaction between you and the lender, and your other creditors can contest it and may invalidate it.
5. Of course the solution again lies with your knowledgeable attorney handling your issue.
6. The IRS has very complex tax consequences in a debt renegotiation, such as a short sale, or foreclosure, that are more detrimental for solvent taxpayers than those who are insolvent or bankrupt as each generates Cancellation of Debt Income.
7. A borrower who refinanced their home to take the cash out to buy another home, then let the first home go to foreclosure thinking they are getting off debt and obligation free, are living in a fools paradise. This practice can be stopped by the lender. The first thing to establish; is what the home’s basis is. The IRS definition for basis is your investment in the home for tax purposes. It usually starts with the cost to acquire the house. Adjusted basis is the increase or decrease in the original basis according to certain events. Increases to basis include but are not limited to improvements having a useful life of more than a year, assessments for local improvements, sales tax, the cost of extending utility lines to the home, legal fees such as the cost of defending or perfecting title, and zoning costs. Decreases to basis include but are not limited to depreciation, nontaxable;corporate distributions, casualty and theft losses, easements, and rebates from the seller. IRS Pub 551 Basis of Assets is a handy reference.
Taxable gain or loss on a house is determined by the difference of the selling price/amount realized and its adjusted basis. IRC 61(a)(12) CODI, Cancellation of Debt Income other than as a gift, creates taxable income to the debtor unless an exception applies. In a Short Sale, the lender issues a 1099-C to the IRS. In a Short Sale example of a home, whether it be primary, second home, or third home, A bought his home in Reno in November 2004 for $290,000. In November 2005, A refinanced to a new loan for $380,000. Unfortunately, today its Fair Market Value is $260,000. A can no longer make the payments due to his legal split with B, his spousal equivalent. In 2007 A sells the property through a Realtor who successfully negotiated a Short Sale of $120,000 loan reduction with A’s lender, so A walked away with no immediate out-of pocket loss. A has a $120,000 nondeductible loss (adjustment to basis) on his home. The $120,000 principal reduction is taxable income in 2007 to A. (rev. Rul. 82-202) It is reported as “Other Income” on Line 21 of the 1040. If A had bought with seller-financing, there is special rule IRC 108 (e) (5).
If three conditions are met, the borrower reduces the property’s basis and does not recognize CODI. The IRS treats a foreclosure as a sale or exchange from which the borrower may realize gain or loss. In a foreclosure, the lender issues a 1099-A to the IRS. In a recourse state such as Nevada, the lender checks Box 5 as “Yes.” The borrower is personally liable to pay any amount of the debt not covered by the property’s value. The amount realized for borrower’s Federal gain or loss on the transaction is the smaller of debt cancelled or FMV of the transferred property. The borrower’s CODI is ordinary income if the loan balance exceeds the property’s FMV. If A had gone to foreclosure, his adjusted basis is $290,000, the recourse debt cancelled is $380,000 and the FMV of the property is $260,000. Here he realizes $260,000. The cancelled debt ($380,000) up to the property’s FMV ($260,000). Compare amount ($260,000) realized with adjusted basis ($290,000). A has a $30,000 non-deductible loss. He also recognizes ordinary income equal to the CODI of $120,000 ($380,000 debt cancelled less $260,000 FMV). This $120,000 is the part of the cancelled debt not included in the amount realized. In a short sale example of a rental house, if A had bought and used the house as a rental, if A is not insolvent or bankrupt, if A can meet the required extent of his involvement, A can elect on Form 982 to exclude from gross income any income from the discharge of QRPBD (Qualified Real Property Business Debt). IRC 108(c)(3) QRPBD includes debt 1) that was incurred or assumed in connection with real property used in trade or business and that is secured by such real property, 2) debt incurred or assumed to acquire, construct, reconstruct, or substantially improve real property used in a trade or business. IRC 108(c)(1) Income excluded for the discharge of QRPBD reduces the basis of the taxpayers depreciable real property, first to the property with the discharged debt, then to the taxpayer’s other depreciable real property proportionally, on each property’s relative adjusted basis
How to successfully challenge foreclosure in Nevada?
How to successfully challenge foreclosure in Nevada?
This is not a term paper or an extensive legal thesis but just some analytical and factual discussion for Nevada homeowners to know their capabilities how to challenge an imminent foreclosure. One must know here the rules of mediation in Nevada. If, however, the mediation is not granted and not applicable here, one can take all these steps or one of them, and not in any particular order. This is prepared for general awareness, and not meant as a legal situation. Each situation is different and this whole set of steps may not work for individual case. This is your home, please do not hesitate to fight and hire an attorney. This is one important part of your life where you should not shy away from spending money. Again, this is a brief guide for lay persons about how to challenge foreclosure successfully in Nevada. As usual, always consult a legal counsel licensed in your jurisdiction, and never someone who is barely familiar or paralegal because these are very complex issues even for the courts to decide. Enjoining foreclosure is difficult yet not impossible. Let us see what possible steps a Nevada homeowner, who is deep under water, can take. It can be one or more step:
• Filing Bankruptcy before Foreclosure Occurs
• Suing to Enjoin Foreclosure before It Occurs
• Suing to Set Aside a Foreclosure that Has Already Taken Place
• Filing a Counterclaim in the Detainer Action after Foreclosure Has Occurred
• Filing Bankruptcy after Foreclosure
• Procedural Grounds for Challenging the Foreclosure
• Substantive Grounds for Challenging the Foreclosure
Filing Bankruptcy before Foreclosure Occurs
This is often the shortest and simplest procedure. You can hire a bankruptcy attorney. Our firm is also great help in this matter. Law Office of Malik Ahmad has extensively dealt with various foreclosure issues as well as loan modification and Law Office of Malik Ahmad has a very strong tract record in this regard. One thing you should avoid is not to do yourself or hire a paralegal. Because the courts (deep down in their heart) frown at your own representation and the paralegal. Because both of them slows the process and jam the wheels and court does not like it. It has the following advantages: a bankruptcy filing automatically prevents foreclosure temporarily and sometimes permanently. Again, you have the opportunity to cure a default in your payments by paying the delinquent amount in installments over a reasonable period; you may be able to reduce or eliminate the fees of the lender’s attorney; and you may be able to avoid interest on the amount you are delinquent (though not interest on the loan itself). You may file a counter motion if there is a motion to lift the stay requested by creditors’ attorney. There is no procrastination required, these are the steps you had to take. One additional advantage is that you can get rid of most of the unsecured debts. The obstacles again are if you can pass the means test, and otherwise qualified under the Nevada Median Income rules.
Suing to Enjoin Foreclosure before It Occurs
To obtain an injunction, you must file a complaint in a court. You will need a lawyer. You need to get a hearing date, and time from the court. Call the clerk and get a hearing date, and place it on the calendar. Make sure that there is still time left before the due date of your foreclosure. You need to serve the copy to the lender, creditor, or whoever has your mortgage papers. We are enclosing a sample Memorandum for Injunction here. Again, this is just a sample and purely for education purpose.
Temporary injunctions require a “clear” showing of “immediate and irreparable injury, loss or damage” or “that the acts or omissions of the adverse party will tend to give [the] final judgment ineffectual.” Judges take this need seriously.
The most difficult requirement of all may be the need to give a bond “in such sum as the court … deems proper” unless you successfully obtain permission to bring the action as an indigent person. A homeowner with only modest amounts of other assets and income may be unable to qualify as indigent and may also be unable to find anyone willing to provide a bond, especially one on short notice. However, Nevada courts may seeks small bonds and sometime it is less than $500.
Suing to Set Aside a Foreclosure that Has Already Taken Place
The grounds for setting aside a foreclosure are limited to “some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or the mortgagee that caused or contributed to an inadequate price.” Defenses like the absence of a delinquency or violations by the lender of federal or state commercial law may not be raised.
Again, you have the burden of proof in a lawsuit to set aside a foreclosure. It requires lots of proof of violations of both TILA and RESPA. For more accurate version, please see the loan modification blog of Attorney Malik Ahmad. Damages are the only remedy. There is nothing to prevent a third-party purchaser from keeping your house even if he knows of your claim against the lender and even if he believes that your claim is meritorious.
Filing a Counterclaim in the Detainer Action after Foreclosure Has Occurred
Foreclosure may be challenged by a counterclaim when the lender (or other new owner of the property) seeks possession by a “detainer” action. It is better to file the counterclaim in writing, and the grounds for doing so are discussed below. It is preferable that you use a lawyer to assist you, but most persons do not.
There is an initial problem. A statute says: “The estate, or merits of the title, shall not be inquired into” in a detainer action. Lenders may assert that a wrongful foreclosure may not be challenged even when the parties are before the court on the issue of possession, the right to possession is necessarily founded on ownership, and ownership depends on the lawfulness of the foreclosure. In our view, the statute disallows only attacks upon title based on transactions prior to the creation of the deed of trust. We also believe that the statute is inapplicable to counterclaims seeking to set aside a foreclosure, even if it bars defenses to the detainer action.
Who is a Real Party-In-Interest?
Not every new owner is successful in obtaining possession. It may overlook the proof that is necessary to show that it the foreclosure was conducted properly and that it was entitled to foreclose — things like affidavits or testimony showing that you did not make timely payments. You may and should contest every assertion made by the new owner, even if you do not have a lawyer. The new owner has the burden of proof. If it fails to meet that burden, the judge may conclude that you are entitled to remain in possession even though you no longer own the home.
On the other hand, if the new owner is successful in the detainer action, it is entitled not only to possession but also to the rental value of the property from the date of foreclosure until the date of removal. You have only ten days for an appeal. Just recently there have been major changes in landlord-tenancy relationship both in federal and state laws. Again, we continuously update on our blog and websites.
Filing Bankruptcy after Foreclosure
It is possible to set aside the foreclosure through the bankruptcy process. The grounds that may be asserted are discussed below.
There is some good news even if you lose the challenge; bankruptcy usually discharges all or part of a deficiency judgment against you for any amount still due after the foreclosure occurs.
Procedural Grounds for Challenging the Foreclosure
• Failure to Give Personal Notice. No personal notice to a borrower is required by statute. However, we believe that federal and state constitutions require personal notice to each borrower, either by summons or by certified mail that is actually received, and we are litigating cases so as to establish this principle. There are whole set of notice requirements provided under various Nevada notice statutes.
• Insufficient Notice by Newspaper Publication or Posting in Public Places. Under Nevada statutes, advertisement of a foreclosure sale must be made three different times in “some” newspaper “published” in the “county where the sale is to be made.” Only 20 days’ notice is required, and the use of publications read almost exclusively by lenders and lawyers is permitted. Both the shortness of the time and the use of obscure newspapers seem vulnerable to constitutional objection. In addition, some counties have no eligible newspapers. In this case, written notice may then be posted in five “of the most public places in the county.” There is no guidance about what such places are or how they are to be determined. This is too vague a standard to pass constitutional muster.
• Failure to Give Notice Required by the Deed of Trust. Many deeds of trust require notice of foreclosure by certified mail, or at least by mail, in addition to notice by newspaper publication. Many also require notice — before foreclosure is sought — that the entire sum has been declared to be due because of a late payment or other default.
• Nevada legislature just passed AB 149 which mandates mediation before foreclosure. Please see an attorney to find out the latest rules about mediation. Please do not in any case get the help of your loan officers. I have seen many loan officers, or some paralegals destroying a very good chance for loan modification for Nevada homeowners.
• No Meaningful Opportunity to Dispute the Foreclosure. This too is a constitutional challenge to Nevada’s foreclosure process. It is based on the notion that making you find a lawyer and file a lawsuit in 15 days, assume a high burden of proof, and furnish a bond are unfair hurdles imposed on you.
• Defects in the Foreclosure Sale.
Nevada judges have said that the foreclosure must occur in the county in which the property is located; it must take place at an accessible location; and a lender may not use a purely technical default as a basis for foreclosure. However, when the lender demands the full amount of the debt, they have refused to let the borrower cure the delinquency by paying the disputed amount before the time the foreclosure occurs. They also have ruled that there is no minimum price that must be paid and have allowed the lender to recover a deficiency judgment if the amount received in the sale is less than the amount owed. They have yet to decide whether the combination of a shockingly low price and another procedural defect are sufficient to disallow the foreclosure.
Substantive Grounds for Challenging the Foreclosure
There are innumerable federal guidelines which must be observed by the lenders before foreclosure. The whole list is outside the scope of this article. However, the following claims and defenses are among those that may be raised so as to defeat a foreclosure altogether or reduce the amount of any deficiency:
• Late Payments Were Accepted on Other Occasions. This suggests that the lender waived the right to refuse late payments and was estopped from foreclosing.
• The Lender Refused to Supply a Pay-Off Amount or Accept Full Payment so Foreclosure Could Be Avoided. Despite unfavorable precedent, this could be a viable ground.
• A Borrower was in Military Service at the Time of’ the Foreclosure. If the borrower was actively on duty in Afghanistan, or Iraq, he is fully protected under this clause.
• The Loan was Unconscionable. That is, the inequality of the bargain is so manifest as to shock the judgment of a person of common sense, and the terms are so oppressive that no reasonable person would make them on the one hand. No honest and fair person would accept them on the other.
• The Making of the Loan, or the Servicing of It, was riddled with Unfair and Deceptive Practices that Violated the Nevada Consumer Protection Act.
• The Services Collected Unauthorized Fees for the Escrow Account, or as Late Charges, or as Attorney Fees during the Foreclosure Process.
• One Spouse Was Required to Sign the Mortgage Note even though the Credit of the Other Spouse was Sufficient.
• One or More Borrowers Lacked the Mental or Physical Capacity to Borrow.
• The Mortgage Broker Was Paid an Unlawful Sum by the Lender.
• The Lender Violated a Relationship of Trust with the Borrower that Developed in the Lending Process.
• There Was Fraud or Misrepresentation by the Lender in the Making of’ the Loan.
A trial loan modification was approved, the homeowners fulfilled all the terms of the trial loan modification and lender backed out from the affirmative contractual obligations.
This is not a term paper or an extensive legal thesis but just some analytical and factual discussion for Nevada homeowners to know their capabilities how to challenge an imminent foreclosure. One must know here the rules of mediation in Nevada. If, however, the mediation is not granted and not applicable here, one can take all these steps or one of them, and not in any particular order. This is prepared for general awareness, and not meant as a legal situation. Each situation is different and this whole set of steps may not work for individual case. This is your home, please do not hesitate to fight and hire an attorney. This is one important part of your life where you should not shy away from spending money. Again, this is a brief guide for lay persons about how to challenge foreclosure successfully in Nevada. As usual, always consult a legal counsel licensed in your jurisdiction, and never someone who is barely familiar or paralegal because these are very complex issues even for the courts to decide. Enjoining foreclosure is difficult yet not impossible. Let us see what possible steps a Nevada homeowner, who is deep under water, can take. It can be one or more step:
• Filing Bankruptcy before Foreclosure Occurs
• Suing to Enjoin Foreclosure before It Occurs
• Suing to Set Aside a Foreclosure that Has Already Taken Place
• Filing a Counterclaim in the Detainer Action after Foreclosure Has Occurred
• Filing Bankruptcy after Foreclosure
• Procedural Grounds for Challenging the Foreclosure
• Substantive Grounds for Challenging the Foreclosure
Filing Bankruptcy before Foreclosure Occurs
This is often the shortest and simplest procedure. You can hire a bankruptcy attorney. Our firm is also great help in this matter. Law Office of Malik Ahmad has extensively dealt with various foreclosure issues as well as loan modification and Law Office of Malik Ahmad has a very strong tract record in this regard. One thing you should avoid is not to do yourself or hire a paralegal. Because the courts (deep down in their heart) frown at your own representation and the paralegal. Because both of them slows the process and jam the wheels and court does not like it. It has the following advantages: a bankruptcy filing automatically prevents foreclosure temporarily and sometimes permanently. Again, you have the opportunity to cure a default in your payments by paying the delinquent amount in installments over a reasonable period; you may be able to reduce or eliminate the fees of the lender’s attorney; and you may be able to avoid interest on the amount you are delinquent (though not interest on the loan itself). You may file a counter motion if there is a motion to lift the stay requested by creditors’ attorney. There is no procrastination required, these are the steps you had to take. One additional advantage is that you can get rid of most of the unsecured debts. The obstacles again are if you can pass the means test, and otherwise qualified under the Nevada Median Income rules.
Suing to Enjoin Foreclosure before It Occurs
To obtain an injunction, you must file a complaint in a court. You will need a lawyer. You need to get a hearing date, and time from the court. Call the clerk and get a hearing date, and place it on the calendar. Make sure that there is still time left before the due date of your foreclosure. You need to serve the copy to the lender, creditor, or whoever has your mortgage papers. We are enclosing a sample Memorandum for Injunction here. Again, this is just a sample and purely for education purpose.
Temporary injunctions require a “clear” showing of “immediate and irreparable injury, loss or damage” or “that the acts or omissions of the adverse party will tend to give [the] final judgment ineffectual.” Judges take this need seriously.
The most difficult requirement of all may be the need to give a bond “in such sum as the court … deems proper” unless you successfully obtain permission to bring the action as an indigent person. A homeowner with only modest amounts of other assets and income may be unable to qualify as indigent and may also be unable to find anyone willing to provide a bond, especially one on short notice. However, Nevada courts may seeks small bonds and sometime it is less than $500.
Suing to Set Aside a Foreclosure that Has Already Taken Place
The grounds for setting aside a foreclosure are limited to “some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or the mortgagee that caused or contributed to an inadequate price.” Defenses like the absence of a delinquency or violations by the lender of federal or state commercial law may not be raised.
Again, you have the burden of proof in a lawsuit to set aside a foreclosure. It requires lots of proof of violations of both TILA and RESPA. For more accurate version, please see the loan modification blog of Attorney Malik Ahmad. Damages are the only remedy. There is nothing to prevent a third-party purchaser from keeping your house even if he knows of your claim against the lender and even if he believes that your claim is meritorious.
Filing a Counterclaim in the Detainer Action after Foreclosure Has Occurred
Foreclosure may be challenged by a counterclaim when the lender (or other new owner of the property) seeks possession by a “detainer” action. It is better to file the counterclaim in writing, and the grounds for doing so are discussed below. It is preferable that you use a lawyer to assist you, but most persons do not.
There is an initial problem. A statute says: “The estate, or merits of the title, shall not be inquired into” in a detainer action. Lenders may assert that a wrongful foreclosure may not be challenged even when the parties are before the court on the issue of possession, the right to possession is necessarily founded on ownership, and ownership depends on the lawfulness of the foreclosure. In our view, the statute disallows only attacks upon title based on transactions prior to the creation of the deed of trust. We also believe that the statute is inapplicable to counterclaims seeking to set aside a foreclosure, even if it bars defenses to the detainer action.
Who is a Real Party-In-Interest?
Not every new owner is successful in obtaining possession. It may overlook the proof that is necessary to show that it the foreclosure was conducted properly and that it was entitled to foreclose — things like affidavits or testimony showing that you did not make timely payments. You may and should contest every assertion made by the new owner, even if you do not have a lawyer. The new owner has the burden of proof. If it fails to meet that burden, the judge may conclude that you are entitled to remain in possession even though you no longer own the home.
On the other hand, if the new owner is successful in the detainer action, it is entitled not only to possession but also to the rental value of the property from the date of foreclosure until the date of removal. You have only ten days for an appeal. Just recently there have been major changes in landlord-tenancy relationship both in federal and state laws. Again, we continuously update on our blog and websites.
Filing Bankruptcy after Foreclosure
It is possible to set aside the foreclosure through the bankruptcy process. The grounds that may be asserted are discussed below.
There is some good news even if you lose the challenge; bankruptcy usually discharges all or part of a deficiency judgment against you for any amount still due after the foreclosure occurs.
Procedural Grounds for Challenging the Foreclosure
• Failure to Give Personal Notice. No personal notice to a borrower is required by statute. However, we believe that federal and state constitutions require personal notice to each borrower, either by summons or by certified mail that is actually received, and we are litigating cases so as to establish this principle. There are whole set of notice requirements provided under various Nevada notice statutes.
• Insufficient Notice by Newspaper Publication or Posting in Public Places. Under Nevada statutes, advertisement of a foreclosure sale must be made three different times in “some” newspaper “published” in the “county where the sale is to be made.” Only 20 days’ notice is required, and the use of publications read almost exclusively by lenders and lawyers is permitted. Both the shortness of the time and the use of obscure newspapers seem vulnerable to constitutional objection. In addition, some counties have no eligible newspapers. In this case, written notice may then be posted in five “of the most public places in the county.” There is no guidance about what such places are or how they are to be determined. This is too vague a standard to pass constitutional muster.
• Failure to Give Notice Required by the Deed of Trust. Many deeds of trust require notice of foreclosure by certified mail, or at least by mail, in addition to notice by newspaper publication. Many also require notice — before foreclosure is sought — that the entire sum has been declared to be due because of a late payment or other default.
• Nevada legislature just passed AB 149 which mandates mediation before foreclosure. Please see an attorney to find out the latest rules about mediation. Please do not in any case get the help of your loan officers. I have seen many loan officers, or some paralegals destroying a very good chance for loan modification for Nevada homeowners.
• No Meaningful Opportunity to Dispute the Foreclosure. This too is a constitutional challenge to Nevada’s foreclosure process. It is based on the notion that making you find a lawyer and file a lawsuit in 15 days, assume a high burden of proof, and furnish a bond are unfair hurdles imposed on you.
• Defects in the Foreclosure Sale.
Nevada judges have said that the foreclosure must occur in the county in which the property is located; it must take place at an accessible location; and a lender may not use a purely technical default as a basis for foreclosure. However, when the lender demands the full amount of the debt, they have refused to let the borrower cure the delinquency by paying the disputed amount before the time the foreclosure occurs. They also have ruled that there is no minimum price that must be paid and have allowed the lender to recover a deficiency judgment if the amount received in the sale is less than the amount owed. They have yet to decide whether the combination of a shockingly low price and another procedural defect are sufficient to disallow the foreclosure.
Substantive Grounds for Challenging the Foreclosure
There are innumerable federal guidelines which must be observed by the lenders before foreclosure. The whole list is outside the scope of this article. However, the following claims and defenses are among those that may be raised so as to defeat a foreclosure altogether or reduce the amount of any deficiency:
• Late Payments Were Accepted on Other Occasions. This suggests that the lender waived the right to refuse late payments and was estopped from foreclosing.
• The Lender Refused to Supply a Pay-Off Amount or Accept Full Payment so Foreclosure Could Be Avoided. Despite unfavorable precedent, this could be a viable ground.
• A Borrower was in Military Service at the Time of’ the Foreclosure. If the borrower was actively on duty in Afghanistan, or Iraq, he is fully protected under this clause.
• The Loan was Unconscionable. That is, the inequality of the bargain is so manifest as to shock the judgment of a person of common sense, and the terms are so oppressive that no reasonable person would make them on the one hand. No honest and fair person would accept them on the other.
• The Making of the Loan, or the Servicing of It, was riddled with Unfair and Deceptive Practices that Violated the Nevada Consumer Protection Act.
• The Services Collected Unauthorized Fees for the Escrow Account, or as Late Charges, or as Attorney Fees during the Foreclosure Process.
• One Spouse Was Required to Sign the Mortgage Note even though the Credit of the Other Spouse was Sufficient.
• One or More Borrowers Lacked the Mental or Physical Capacity to Borrow.
• The Mortgage Broker Was Paid an Unlawful Sum by the Lender.
• The Lender Violated a Relationship of Trust with the Borrower that Developed in the Lending Process.
• There Was Fraud or Misrepresentation by the Lender in the Making of’ the Loan.
A trial loan modification was approved, the homeowners fulfilled all the terms of the trial loan modification and lender backed out from the affirmative contractual obligations.
How to strip second lien on your mortgage?
How to strip second lien on your mortgage?
The real estate bonanza and the bubble was created with the arsenal of second trust deeds, HELOC (home lines of equity) and even a third lines of equity to continuously fuel the perpetual boom. Along the way, lot of greed, deception and other malpractice also was added by mortgagors, loan servicers, lenders and of course unscrupulous loan officers. However, the real estate crashed and homeowners are walking away in droves from their erstwhile American dream. Unfortunate, as it is, something has to be done for folks who has somewhat equity left in their homes and can still pay their principal mortgage payments yet cannot afford paying the second mortgage or HELOC loan. This is a widespread dilemma in Nevada which is still very high in the foreclosure statistics in USA. Let us analyze this matter Let us say the value of the falls very low and the house is worth less than the balance of the original and principal mortgage, the second mortgage or HELOC can be “stripped off”, in a chapter 13 bankruptcy. This second becomes unsecured debt and can be extinguished if someone files chapter 13 bankruptcy and fulfills other parameters.
The parameters are as follows:
- First, the debtor must complete the chapter 13 plan. This means that the consumer must make payments to the chapter 13 trustee for at least 3 years (more often 5 years). If for some unforeseen reason, the consumer is unable to complete the plan, then the lien strip fails and it regains its secured status. Second, a stripped lien losses its secured interest, but it the second mortgage lender must still be paid as an unsecured creditor. This means that the second mortgage will be paid a percentage of its balance over the life of the chapter 13 plan.
- Stripping a second mortgage in a chapter 7 is a more powerful remedy in a chapter 7. In a chapter 7 bankruptcy, all unsecured liabilities are discharged upon completion of the case. The second mortgage would get nothing. If the consumer decided to sell the property down the road, they would not have to payoff the second mortgage to complete the closing.
This issue came up before a bankruptcy judge (Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge)
At issue is whether a second mortgage that is wholly unsecured by virtue of the first mortgage exceeding the value of the property may be “stripped off” pursuant to 11 U.S.C. 506(d). The Court has jurisdiction pursuant to 28 U.S.C. § 1334(a) and (b). This contested matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O) and 11 U.S.C. §§ 105(a) and 506. The following constitutes the Court’s finding of fact and conclusions of law.
FACTS The Debtors filed for bankruptcy relief under chapter 7 of the Bankruptcy Code on April 9, 2009. The Debtors obtained their discharge on July 8, 2009.
The Debtors reside at a home in Levittown, New York (the “Property”). The Property is owned by the debtor husband. The Debtors listed the Property in their Schedules A and D to the bankruptcy petition as having a value of $400,000. The Debtors listed a first mortgage against the Property held by Bank of America, N.A. (“BOA”) in the amount of $411,183 on the petition date and a second mortgage also held by Bank of America in the amount of $9,904. As of May 2009, the outstanding balance on the second mortgage has grown to $10,127.99.
On May 12, 2009, BOA filed a motion seeking relief from stay, based on their second mortgage lien, in order to commence foreclosure proceedings on the basis that, inter alia, the Debtors have no equity in the Property. On June 1, 2009, the Debtors filed opposition to the motion for relief from stay and a cross motion seeking to avoid Bank of America’s second lien on the basis that under 11 U.S.C. § 506(a), a creditor has a secured claim only to the extent of the value of its collateral and an unsecured claim for the balance. Because the second mortgage is fully unsecured, no one challenges the fact that there is no value in the property beyond the first allowed secured claim and thus, under § 506(d), such an unsecured claim is not a lien against the property and, therefore, such lien is void. Although this is a chapter 7 case, the Debtors argue that the ability of the Court to modify wholly unsecured liens against a debtor’s residence in a chapter 13 case under 11 U.S.C. § 1322(b)(2) should be extended to chapter 7 cases because (1) there is no reason why unsecured liens can only be “stripped off” in a chapter 13 case and not in a chapter 7 and (2) the Debtors could obtain such relief by putting the Property into foreclosure and then immediately filing a chapter 13 case to achieve the same result.
Bank of America filed opposition to the Debtors’ cross-motion on July 30, 2009. A hearing was held on September 22, 2009. At the hearing, the Debtors concede that notwithstanding their cross-motion, the automatic stay did not apply to Bank of America’s attempts to proceed with a foreclosure sale because the automatic stay terminated upon the Debtors obtaining their discharge of debt on July 8, 2009. Bank of America is awaiting this Court’s decision as to whether this wholly unsecured lien can be “stripped off”.
DISCUSSION
The Court notes that the Debtors’ application should have been brought as an adversary proceeding rather than by motion, as Rule 7001(2) of the Federal Rules of Bankruptcy Procedures provides that an adversary proceeding includes “a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(f).”
Notwithstanding the inappropriate form of the application for the relief sought, the Debtors seek to avoid BOA’s wholly unsecured second mortgage lien on the Property based upon 11 U.S.C. §§ 506 (a) and (d). In effect, the Debtors are objecting to the claim filed and allowed only as an unsecured claim.
Section 506 provides in relevant part:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property and is an unsecured claim to the extent that the value of such creditor’s interest is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” . . .
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless – (1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or (2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
11 U.S.C. §§ 506 (a)(1), (d)(1-2). None of the exceptions to § 506(d) are applicable in this case.
The issues before the Court are: (1) whether BOA’s mortgage lien is an allowable
secured claim; and (2) if it is not an allowed secured claim, can the lien be stripped off as a
secured claim pursuant to sections 506(a) and 506(b).
Section 502 provides in relevant part:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that–(b)(1) [S]uch claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.
11 U.S.C. §§502 (a)-(b)(1). The Debtors argue that because a creditor’s lien on property is secured only to the extent of the value of such creditor’s interest where the creditor is wholly unsecured under § 506(a), then such lien is void under § 506(d), because it is not an “allowed secured claim.” BOA’s response relies on the U.S. Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992).
After § 506 was enacted into the Bankruptcy Code in 1984, courts generally held that “the plain language of § 506(a) meant that a creditor held a secured claim for the amount of the lien up to the value of the collateral and an unsecured claim for any amount of the lien over the amount of the value of the collateral.” In re Smith, 247 B.R. 191, 195 (W.D. Va. 2000) (quoting Crossroads of Hillsville v. Payne, 179 B.R. 486, 490 (W.D. Va. 1995)). These courts further held that according to the plain language of § 506(d), the unsecured portion of a creditor’s lien is to be voided. See In re Folendore, 862 F.2d 1537 (11th Cir. 1989); In re Mays, 85 B.R. 955 (Bankr.
E.D. Pa. 1988); In re Lindsey, 823 F.2d 189 (7th Cir. 1987); In re O’Leary, 75 B.R. 881 (Bankr.
D. Or. 1987). When a lien is voided, any post-petition property appreciation inures to the benefit of the debtor under bankruptcy fresh start principles. See In re Crouch, 76 B.R. 91 (Bankr. W.D. Va. 1987).
Analysis of Dewsnup
In Dewsnup, the only mortgage on debtor’s property was partially secured. The issue in that case was whether it was proper to strip off the unsecured portion of the claim held by the mortgagee. The Court held that there is ambiguity in the text, and it is uncertain whether the words “allowed secured claim” in § 506(d) has the same meaning as in § 506(a). Id. at 417. Given such ambiguity, the Court was not convinced that Congress intended to depart from the opinion, the Supreme Court held that § 506(d) did not apply to a first lien securing a claim that
was fully allowed under 11 U.S.C. § 502, but rather only voids claims that have not been allowed
as secured.
Justice Scalia, joined by Justice Souter, strongly dissented, arguing that:
Read naturally and in accordance with other provisions of the statute, [506(d)] automatically voids a lien to the extent the claim it secures is not both an “allowed claim” and a “secured claim” under the Code. In holding otherwise, the Court replaces what Congress said with what it thinks Congress ought to have said — and in the process disregards, and hence impairs for future use, well established principles of statutory construction.
Id. at 420 (Scalia, J., dissenting). Section 506(a) says that an “allowed claim” is also a “secured claim” ‘to the extent of the value of [the] creditor’s interest in the estate’s interest in [the securing] property.’ Id. at 420-21 (quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989)).
Justice Scalia further points out that the phrase “allowed secured claim[s]” used in other subsections of § 506 and in other Bankruptcy Code sections invariably means what § 506(a) describes: “the portion of a creditors allowed claim that is secured after the calculation required by that provision have been performed.” Id. at 421. See 11 U.S.C. § 506(b); 11 U.S.C. § 722; 11
U.S.C. § 1225(a)(5); 11 U.S.C. § 1325(a)(5).
Justice Scalia further asserts that the Supreme Court holds that plain meaning of the Bankruptcy Code is dispositive to the exclusion of legislative history and judicial policy considerations. See Ron Pair Enterprises, Inc., 489 U.S. at 241. When the words of a statute are unambiguous, then, this first canon is also the last: ‘judicial inquiry is complete.’ Rubin v. United
While Dewsnup is subject to substantial judicial and scholarly criticism, “it remains the law of the land”. In re Cunningham, 246 B.R. 241, 246 (Bankr. D. Md. 2000) (citing Lawrence Ponoroff & F. Stephen Knippenberg, The Immovable Object Versus the Irresistible Force: Rethinking the Relationship Between Secured Credit and Bankruptcy Policy, 95 MICH. L. REV. 2234 (1997); Margaret Howard, Secured Claims in Bankruptcy: An Essay on Missing the Point, 23 CAP. U. L. REV. 313 (1994); Barry E. Adler, Creditors Rights After Johnson and Dewsnup, 10 BANKR. DEV. J. 1 (1993); Margaret Howard, Dewsnupping the Bankruptcy Code, 1 J. BANKR. L. & PRAC. 513 (1992)).
Distinguishing DewsnupHowever, Dewsnup is not applicable to every permutation of § 506(d) cases, as Dewsnup itself stated, “we therefore focus upon the case before us and allow other facts to await their legal resolution on another day.” Dewsnup, 502 U.S. at 416-17 (majority opinion).
The Debtor distinguishes Dewsnup from the present case advancing two arguments. First, Dewsnup holds that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property. Second, Dewsnup disallowed a “strip down”; it did not address a “strip off”, which would remove a wholly unsecured junior lien, as opposed to a “strip down”, which reduces an under-secured lien to the fair market value of the collateral. In re Arrieta, No. 09 B 12052, 2009 Bankr. LEXIS 1683, at *2 – 3 (Bankr. N.D. Ill. June 22, 2009). Here, the Bank of America second mortgage is wholly unsecured, because the value of the collateral does not even secure the entire first mortgage lien. Debtor therefore argues that the wholly unsecured second lien is voidable under § 506(d), and should be “stripped off”.
While the Debtor’s first argument, that Dewsnup dealt with first mortgage liens is mortgage is different than a first mortgage under Dewsnup. If any part of the second mortgage lien is secured by some property, there is no authority that supports holding second mortgages to be outside of Dewsnup. There is no distinction based on Dewsnupthat stripping down a second mortgage is different than stripping down a first mortgage. In re Poirier, 214 B.R. 528, 529 (Bankr. D. Conn. 1997) (citing In re Willis, 157 B.R. 617, 621 (Bankr. N.D. Ohio 1993) (holding that under Dewsnup, the debtor could not avoid an allowed second mortgage under § 506(d), even though little or no equity remained in the property for the second mortgagee)). As long as the second mortgage had any value, Dewsnup would apply. Debtor’s second argument, distinguishing the instant case from Dewsnup because the second mortgage is wholly unsecured, is the issue before this Court.
Treatment of wholly unsecured consensual liens by other courts
Since Dewsnup, the issue of whether wholly unsecured liens with respect to consensual loans may be “stripped off”, as opposed to “stripped down” as addressed byDewsnup, has been a contentious issue between various bankruptcy and district courts and their respective Courts of Appeals.
The Fourth, Sixth and Ninth Circuits apply Dewsnup equally to both stripping down and stripping off of consensual liens. See Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortgage Servs., 344 F.3d 555 (6th Cir. 2003); In re Laskin, 222 B.R. 872
(B.A.P. 9th Cir. 1998).
In Dewsnup, where a portion of the value of the claim at issue exceeded the value of the property, the claim was both 1) allowed and 2) secured, albeit undersecured, for purposes of § 506(d). Because part of the claim was secured, it was considered a “secured claim” under § 506(d). However, where the claims are totally unsecured, there is no equity whatsoever for the junior lien to attach for purposes of § 506(a) because a creditor’s claim is secured only “to the extent of the value of such creditor’s interest in such property”. With respect to a wholly unsecured lien, the creditor de facto only has an unsecured claim under § 506(a). Accordingly, the wholly unsecured claims cannot qualify as “allowed secured claims” under § 506(d), and must be voided. In re Zempel, 244 B.R. 625, 629-30 (Bankr. W.D. Ky. 1999).
In regard to Chapter 13, the Supreme Court in Nobelman, Nobelman v. American Savings Bank, 508 U.S. 324 (1993), held that § 1322(b)(2) barred a Chapter 13 debtor from relying on § 506(a) to bifurcate an undersecured homestead mortgage to secured and unsecured components. In reaching this conclusion, the Supreme Court held it appropriate to look to § 506(a) as a preliminary matter to determine whether the claim in question was secured. See id. at 328-32. Because the mortgage in Nobleman was partially secured, under § 1322(b)(2) the claim is considered secured and may not be modified. This is consistent with Dewsnup. However, Nobelman is only applicable where the collateral retains some value. If the creditors are wholly unsecured under § 506(a), than § 1322(b)(2) will allow a debtor to reduce the claim to a general unsecured claim. In re Yi, 219 B.R. 394, 399 (E.D. Va. 1998)(citing Wright v. Commercial Credit Corp., 178 B.R. 703, 706-07 (E.D. Va 2005)); See In re Geyer, 203 B.R. 726, 729 (holding that “unless there is some equity to which a creditor’s lien attaches, there is no allowed secured claim” under § 506(a)). The majority of circuits and bankruptcy courts limit Nobelman to a partially secured lien. Where the creditors are wholly unsecured, looking first to § 506(a), the lien that is wholly without equity is an unsecured claim, and thus open to being void under § 506(d), and § 1322(b)(2) does not bar modification of a wholly unsecured lien. See In re Zimmer, McDonald, 205 F.3d 606, 615 (3d Cir. 2000); In re Tanner, 217 F.3d 1357 (11th Cir. 2000); In re Mann, 249 B.R. 831, 840 (B.A.P. 1st Cir. 2000); First Mariner Bank v. Johnson, 411 B.R. 221, 224-225 (D. Md. 2009); In re Sette, 164 B.R. 453, 456 (Bankr. E.D.N.Y. 1994); In re Hornes, 160 B.R. 709 (Bankr. D. Conn. 1993). These holdings in a Chapter 13 context clearly demonstrate that under the Code it is appropriate under § 506(a) and § 506(d) to distinguish partially secured liens from wholly unsecured liens. Once it is established that Dewsnup is distinguished, there is no reason why in a Chapter 7 context the same language in §§ 506(a) and
(d) should not void the lien of a wholly unsecured claim.
The present case is easily distinguished from Dewsnup, therefore the wholly unsecured lien cannot qualify as an “allowed secured claim” under § 506(a), and is void under § 506(d). First, the Bank of America second mortgage cannot be considered a secured claim under § 506(a), because the junior claim is wholly unsecured. Accordingly, the plain meaning of § 506(d) requires the lien to be voided. Second, the Supreme Court itself limited Dewsnup to its specific facts, and in light of the persuasive argument of Justice Scalia in the dissent regarding the requirement to interpret a seemingly unambiguous statute according to its plain textual meaning, Dewsnup should be narrowly interpreted. Because this case is substantially distinguished from Dewsnup, there is no reason for this Court to read § 506(a) and § 506(d) in any way other than their plain textual meaning. The plain meaning is applied to Chapter 13 section 1322(b)(2) analysis where the lien is wholly unsecured, and there is no logical reason to read the text differently when applied to Chapter 7 wholly unsecured liens.
Arguments that debtors will benefit from possible windfalls, are not persuasive. Markets are uncertain, and it is not certain such a scenario will ever occur. Secondly, the creditors’ right
the property for them. Bankruptcy is not intended to benefit either the creditor in securing a
potential increase in property value, or the debtor. However, where the future is unknown,
bankruptcy principles of giving the debtor a fresh start should apply. While these issues of
debtors’ and creditors’ rights are the subject of long standing philosophical debate, in light of the
unambiguous, clear language of §§ 506(a) and (d), § 506(d) requires this Court to void the lien as
a matter of law regardless of any possible further potential debtor benefits.
CONCLUSION
BOA’s second mortgage claim is not an allowed secured claim pursuant to section 502 of
the Bankruptcy Code, since it has no collateral to support its claim. It is an allowed unsecured
claim.
Based upon the foregoing, the Debtors’ cross-motion to void Bank of America’s second mortgage lien pursuant to 11 U.S.C. §§ 506(a) and 506(d) against the Property is granted. So ordered.
The real estate bonanza and the bubble was created with the arsenal of second trust deeds, HELOC (home lines of equity) and even a third lines of equity to continuously fuel the perpetual boom. Along the way, lot of greed, deception and other malpractice also was added by mortgagors, loan servicers, lenders and of course unscrupulous loan officers. However, the real estate crashed and homeowners are walking away in droves from their erstwhile American dream. Unfortunate, as it is, something has to be done for folks who has somewhat equity left in their homes and can still pay their principal mortgage payments yet cannot afford paying the second mortgage or HELOC loan. This is a widespread dilemma in Nevada which is still very high in the foreclosure statistics in USA. Let us analyze this matter Let us say the value of the falls very low and the house is worth less than the balance of the original and principal mortgage, the second mortgage or HELOC can be “stripped off”, in a chapter 13 bankruptcy. This second becomes unsecured debt and can be extinguished if someone files chapter 13 bankruptcy and fulfills other parameters.
The parameters are as follows:
- First, the debtor must complete the chapter 13 plan. This means that the consumer must make payments to the chapter 13 trustee for at least 3 years (more often 5 years). If for some unforeseen reason, the consumer is unable to complete the plan, then the lien strip fails and it regains its secured status. Second, a stripped lien losses its secured interest, but it the second mortgage lender must still be paid as an unsecured creditor. This means that the second mortgage will be paid a percentage of its balance over the life of the chapter 13 plan.
- Stripping a second mortgage in a chapter 7 is a more powerful remedy in a chapter 7. In a chapter 7 bankruptcy, all unsecured liabilities are discharged upon completion of the case. The second mortgage would get nothing. If the consumer decided to sell the property down the road, they would not have to payoff the second mortgage to complete the closing.
This issue came up before a bankruptcy judge (Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge)
At issue is whether a second mortgage that is wholly unsecured by virtue of the first mortgage exceeding the value of the property may be “stripped off” pursuant to 11 U.S.C. 506(d). The Court has jurisdiction pursuant to 28 U.S.C. § 1334(a) and (b). This contested matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O) and 11 U.S.C. §§ 105(a) and 506. The following constitutes the Court’s finding of fact and conclusions of law.
FACTS The Debtors filed for bankruptcy relief under chapter 7 of the Bankruptcy Code on April 9, 2009. The Debtors obtained their discharge on July 8, 2009.
The Debtors reside at a home in Levittown, New York (the “Property”). The Property is owned by the debtor husband. The Debtors listed the Property in their Schedules A and D to the bankruptcy petition as having a value of $400,000. The Debtors listed a first mortgage against the Property held by Bank of America, N.A. (“BOA”) in the amount of $411,183 on the petition date and a second mortgage also held by Bank of America in the amount of $9,904. As of May 2009, the outstanding balance on the second mortgage has grown to $10,127.99.
On May 12, 2009, BOA filed a motion seeking relief from stay, based on their second mortgage lien, in order to commence foreclosure proceedings on the basis that, inter alia, the Debtors have no equity in the Property. On June 1, 2009, the Debtors filed opposition to the motion for relief from stay and a cross motion seeking to avoid Bank of America’s second lien on the basis that under 11 U.S.C. § 506(a), a creditor has a secured claim only to the extent of the value of its collateral and an unsecured claim for the balance. Because the second mortgage is fully unsecured, no one challenges the fact that there is no value in the property beyond the first allowed secured claim and thus, under § 506(d), such an unsecured claim is not a lien against the property and, therefore, such lien is void. Although this is a chapter 7 case, the Debtors argue that the ability of the Court to modify wholly unsecured liens against a debtor’s residence in a chapter 13 case under 11 U.S.C. § 1322(b)(2) should be extended to chapter 7 cases because (1) there is no reason why unsecured liens can only be “stripped off” in a chapter 13 case and not in a chapter 7 and (2) the Debtors could obtain such relief by putting the Property into foreclosure and then immediately filing a chapter 13 case to achieve the same result.
Bank of America filed opposition to the Debtors’ cross-motion on July 30, 2009. A hearing was held on September 22, 2009. At the hearing, the Debtors concede that notwithstanding their cross-motion, the automatic stay did not apply to Bank of America’s attempts to proceed with a foreclosure sale because the automatic stay terminated upon the Debtors obtaining their discharge of debt on July 8, 2009. Bank of America is awaiting this Court’s decision as to whether this wholly unsecured lien can be “stripped off”.
DISCUSSION
The Court notes that the Debtors’ application should have been brought as an adversary proceeding rather than by motion, as Rule 7001(2) of the Federal Rules of Bankruptcy Procedures provides that an adversary proceeding includes “a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(f).”
Notwithstanding the inappropriate form of the application for the relief sought, the Debtors seek to avoid BOA’s wholly unsecured second mortgage lien on the Property based upon 11 U.S.C. §§ 506 (a) and (d). In effect, the Debtors are objecting to the claim filed and allowed only as an unsecured claim.
Section 506 provides in relevant part:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property and is an unsecured claim to the extent that the value of such creditor’s interest is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” . . .
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless – (1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or (2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
11 U.S.C. §§ 506 (a)(1), (d)(1-2). None of the exceptions to § 506(d) are applicable in this case.
The issues before the Court are: (1) whether BOA’s mortgage lien is an allowable
secured claim; and (2) if it is not an allowed secured claim, can the lien be stripped off as a
secured claim pursuant to sections 506(a) and 506(b).
Section 502 provides in relevant part:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that–(b)(1) [S]uch claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.
11 U.S.C. §§502 (a)-(b)(1). The Debtors argue that because a creditor’s lien on property is secured only to the extent of the value of such creditor’s interest where the creditor is wholly unsecured under § 506(a), then such lien is void under § 506(d), because it is not an “allowed secured claim.” BOA’s response relies on the U.S. Supreme Court’s decision in Dewsnup v. Timm, 502 U.S. 410 (1992).
After § 506 was enacted into the Bankruptcy Code in 1984, courts generally held that “the plain language of § 506(a) meant that a creditor held a secured claim for the amount of the lien up to the value of the collateral and an unsecured claim for any amount of the lien over the amount of the value of the collateral.” In re Smith, 247 B.R. 191, 195 (W.D. Va. 2000) (quoting Crossroads of Hillsville v. Payne, 179 B.R. 486, 490 (W.D. Va. 1995)). These courts further held that according to the plain language of § 506(d), the unsecured portion of a creditor’s lien is to be voided. See In re Folendore, 862 F.2d 1537 (11th Cir. 1989); In re Mays, 85 B.R. 955 (Bankr.
E.D. Pa. 1988); In re Lindsey, 823 F.2d 189 (7th Cir. 1987); In re O’Leary, 75 B.R. 881 (Bankr.
D. Or. 1987). When a lien is voided, any post-petition property appreciation inures to the benefit of the debtor under bankruptcy fresh start principles. See In re Crouch, 76 B.R. 91 (Bankr. W.D. Va. 1987).
Analysis of Dewsnup
In Dewsnup, the only mortgage on debtor’s property was partially secured. The issue in that case was whether it was proper to strip off the unsecured portion of the claim held by the mortgagee. The Court held that there is ambiguity in the text, and it is uncertain whether the words “allowed secured claim” in § 506(d) has the same meaning as in § 506(a). Id. at 417. Given such ambiguity, the Court was not convinced that Congress intended to depart from the opinion, the Supreme Court held that § 506(d) did not apply to a first lien securing a claim that
was fully allowed under 11 U.S.C. § 502, but rather only voids claims that have not been allowed
as secured.
Justice Scalia, joined by Justice Souter, strongly dissented, arguing that:
Read naturally and in accordance with other provisions of the statute, [506(d)] automatically voids a lien to the extent the claim it secures is not both an “allowed claim” and a “secured claim” under the Code. In holding otherwise, the Court replaces what Congress said with what it thinks Congress ought to have said — and in the process disregards, and hence impairs for future use, well established principles of statutory construction.
Id. at 420 (Scalia, J., dissenting). Section 506(a) says that an “allowed claim” is also a “secured claim” ‘to the extent of the value of [the] creditor’s interest in the estate’s interest in [the securing] property.’ Id. at 420-21 (quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 239, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989)).
Justice Scalia further points out that the phrase “allowed secured claim[s]” used in other subsections of § 506 and in other Bankruptcy Code sections invariably means what § 506(a) describes: “the portion of a creditors allowed claim that is secured after the calculation required by that provision have been performed.” Id. at 421. See 11 U.S.C. § 506(b); 11 U.S.C. § 722; 11
U.S.C. § 1225(a)(5); 11 U.S.C. § 1325(a)(5).
Justice Scalia further asserts that the Supreme Court holds that plain meaning of the Bankruptcy Code is dispositive to the exclusion of legislative history and judicial policy considerations. See Ron Pair Enterprises, Inc., 489 U.S. at 241. When the words of a statute are unambiguous, then, this first canon is also the last: ‘judicial inquiry is complete.’ Rubin v. United
While Dewsnup is subject to substantial judicial and scholarly criticism, “it remains the law of the land”. In re Cunningham, 246 B.R. 241, 246 (Bankr. D. Md. 2000) (citing Lawrence Ponoroff & F. Stephen Knippenberg, The Immovable Object Versus the Irresistible Force: Rethinking the Relationship Between Secured Credit and Bankruptcy Policy, 95 MICH. L. REV. 2234 (1997); Margaret Howard, Secured Claims in Bankruptcy: An Essay on Missing the Point, 23 CAP. U. L. REV. 313 (1994); Barry E. Adler, Creditors Rights After Johnson and Dewsnup, 10 BANKR. DEV. J. 1 (1993); Margaret Howard, Dewsnupping the Bankruptcy Code, 1 J. BANKR. L. & PRAC. 513 (1992)).
Distinguishing DewsnupHowever, Dewsnup is not applicable to every permutation of § 506(d) cases, as Dewsnup itself stated, “we therefore focus upon the case before us and allow other facts to await their legal resolution on another day.” Dewsnup, 502 U.S. at 416-17 (majority opinion).
The Debtor distinguishes Dewsnup from the present case advancing two arguments. First, Dewsnup holds that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property. Second, Dewsnup disallowed a “strip down”; it did not address a “strip off”, which would remove a wholly unsecured junior lien, as opposed to a “strip down”, which reduces an under-secured lien to the fair market value of the collateral. In re Arrieta, No. 09 B 12052, 2009 Bankr. LEXIS 1683, at *2 – 3 (Bankr. N.D. Ill. June 22, 2009). Here, the Bank of America second mortgage is wholly unsecured, because the value of the collateral does not even secure the entire first mortgage lien. Debtor therefore argues that the wholly unsecured second lien is voidable under § 506(d), and should be “stripped off”.
While the Debtor’s first argument, that Dewsnup dealt with first mortgage liens is mortgage is different than a first mortgage under Dewsnup. If any part of the second mortgage lien is secured by some property, there is no authority that supports holding second mortgages to be outside of Dewsnup. There is no distinction based on Dewsnupthat stripping down a second mortgage is different than stripping down a first mortgage. In re Poirier, 214 B.R. 528, 529 (Bankr. D. Conn. 1997) (citing In re Willis, 157 B.R. 617, 621 (Bankr. N.D. Ohio 1993) (holding that under Dewsnup, the debtor could not avoid an allowed second mortgage under § 506(d), even though little or no equity remained in the property for the second mortgagee)). As long as the second mortgage had any value, Dewsnup would apply. Debtor’s second argument, distinguishing the instant case from Dewsnup because the second mortgage is wholly unsecured, is the issue before this Court.
Treatment of wholly unsecured consensual liens by other courts
Since Dewsnup, the issue of whether wholly unsecured liens with respect to consensual loans may be “stripped off”, as opposed to “stripped down” as addressed byDewsnup, has been a contentious issue between various bankruptcy and district courts and their respective Courts of Appeals.
The Fourth, Sixth and Ninth Circuits apply Dewsnup equally to both stripping down and stripping off of consensual liens. See Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortgage Servs., 344 F.3d 555 (6th Cir. 2003); In re Laskin, 222 B.R. 872
(B.A.P. 9th Cir. 1998).
In Dewsnup, where a portion of the value of the claim at issue exceeded the value of the property, the claim was both 1) allowed and 2) secured, albeit undersecured, for purposes of § 506(d). Because part of the claim was secured, it was considered a “secured claim” under § 506(d). However, where the claims are totally unsecured, there is no equity whatsoever for the junior lien to attach for purposes of § 506(a) because a creditor’s claim is secured only “to the extent of the value of such creditor’s interest in such property”. With respect to a wholly unsecured lien, the creditor de facto only has an unsecured claim under § 506(a). Accordingly, the wholly unsecured claims cannot qualify as “allowed secured claims” under § 506(d), and must be voided. In re Zempel, 244 B.R. 625, 629-30 (Bankr. W.D. Ky. 1999).
In regard to Chapter 13, the Supreme Court in Nobelman, Nobelman v. American Savings Bank, 508 U.S. 324 (1993), held that § 1322(b)(2) barred a Chapter 13 debtor from relying on § 506(a) to bifurcate an undersecured homestead mortgage to secured and unsecured components. In reaching this conclusion, the Supreme Court held it appropriate to look to § 506(a) as a preliminary matter to determine whether the claim in question was secured. See id. at 328-32. Because the mortgage in Nobleman was partially secured, under § 1322(b)(2) the claim is considered secured and may not be modified. This is consistent with Dewsnup. However, Nobelman is only applicable where the collateral retains some value. If the creditors are wholly unsecured under § 506(a), than § 1322(b)(2) will allow a debtor to reduce the claim to a general unsecured claim. In re Yi, 219 B.R. 394, 399 (E.D. Va. 1998)(citing Wright v. Commercial Credit Corp., 178 B.R. 703, 706-07 (E.D. Va 2005)); See In re Geyer, 203 B.R. 726, 729 (holding that “unless there is some equity to which a creditor’s lien attaches, there is no allowed secured claim” under § 506(a)). The majority of circuits and bankruptcy courts limit Nobelman to a partially secured lien. Where the creditors are wholly unsecured, looking first to § 506(a), the lien that is wholly without equity is an unsecured claim, and thus open to being void under § 506(d), and § 1322(b)(2) does not bar modification of a wholly unsecured lien. See In re Zimmer, McDonald, 205 F.3d 606, 615 (3d Cir. 2000); In re Tanner, 217 F.3d 1357 (11th Cir. 2000); In re Mann, 249 B.R. 831, 840 (B.A.P. 1st Cir. 2000); First Mariner Bank v. Johnson, 411 B.R. 221, 224-225 (D. Md. 2009); In re Sette, 164 B.R. 453, 456 (Bankr. E.D.N.Y. 1994); In re Hornes, 160 B.R. 709 (Bankr. D. Conn. 1993). These holdings in a Chapter 13 context clearly demonstrate that under the Code it is appropriate under § 506(a) and § 506(d) to distinguish partially secured liens from wholly unsecured liens. Once it is established that Dewsnup is distinguished, there is no reason why in a Chapter 7 context the same language in §§ 506(a) and
(d) should not void the lien of a wholly unsecured claim.
The present case is easily distinguished from Dewsnup, therefore the wholly unsecured lien cannot qualify as an “allowed secured claim” under § 506(a), and is void under § 506(d). First, the Bank of America second mortgage cannot be considered a secured claim under § 506(a), because the junior claim is wholly unsecured. Accordingly, the plain meaning of § 506(d) requires the lien to be voided. Second, the Supreme Court itself limited Dewsnup to its specific facts, and in light of the persuasive argument of Justice Scalia in the dissent regarding the requirement to interpret a seemingly unambiguous statute according to its plain textual meaning, Dewsnup should be narrowly interpreted. Because this case is substantially distinguished from Dewsnup, there is no reason for this Court to read § 506(a) and § 506(d) in any way other than their plain textual meaning. The plain meaning is applied to Chapter 13 section 1322(b)(2) analysis where the lien is wholly unsecured, and there is no logical reason to read the text differently when applied to Chapter 7 wholly unsecured liens.
Arguments that debtors will benefit from possible windfalls, are not persuasive. Markets are uncertain, and it is not certain such a scenario will ever occur. Secondly, the creditors’ right
the property for them. Bankruptcy is not intended to benefit either the creditor in securing a
potential increase in property value, or the debtor. However, where the future is unknown,
bankruptcy principles of giving the debtor a fresh start should apply. While these issues of
debtors’ and creditors’ rights are the subject of long standing philosophical debate, in light of the
unambiguous, clear language of §§ 506(a) and (d), § 506(d) requires this Court to void the lien as
a matter of law regardless of any possible further potential debtor benefits.
CONCLUSION
BOA’s second mortgage claim is not an allowed secured claim pursuant to section 502 of
the Bankruptcy Code, since it has no collateral to support its claim. It is an allowed unsecured
claim.
Based upon the foregoing, the Debtors’ cross-motion to void Bank of America’s second mortgage lien pursuant to 11 U.S.C. §§ 506(a) and 506(d) against the Property is granted. So ordered.
Friday, January 1, 2010
Obama Plan is Adding Woes to Homeowners' Miseries
Obama Plan was launched with great fanfare and it was expected that the plight of the homeowners would be rectified, and the tide of foreclosures would be stopped. This wish has not come true as only 37,000 homes were permanently modified and about 750,000 homes were modified on a trial loan modification basis. In 2009, about 2 millions homes were lost to foreclosure. This is an enormous number. Still, according to various studies the lenders are not willingly helping distressed homeowners. NY Times has published a very latest article depicting this situation.
http://www.nytimes.com/2010/01/02/business/economy/02modify.html?hp
http://www.nytimes.com/2010/01/02/business/economy/02modify.html?hp
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