National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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Withholding Graduation Date from Transcript Violates Stay

Excluding the graduation date from the debtor’s transcript was tantamount to withholding the transcript altogether and constituted a violation of the automatic stay for which the debtor was entitled to damages, even though those damages consisted only of the costs associated with vindicating her rights. California Coast Univ. v. Aleckna, No. 16-158 (M.D. Pa. Aug. 28, 2019).

At the time the Chapter 13 debtor completed her coursework at California Coast University, she owed $6,300 in overdue tuition. When she and her husband filed for bankruptcy she listed the tuition debt as unsecured and disputed. She later sought an official copy of her transcript. CCU provided a transcript that omitted the graduation date, explaining that, because of the outstanding debt, she had not officially graduated. CCU filed an action in the bankruptcy case seeking a finding that the tuition debt was non-dischargeable. Ms. Aleckna counterclaimed that CCU’s refusal to provide her complete transcript violated the automatic stay. The bankruptcy court found in favor of Ms. Aleckna and awarded damages for lost $230.16 wages, and unspecified attorney’s fees and costs.

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Adoption Assistance Payments Excluded from Current Monthly Income

The debtors’ Adoption Assistance payments were “benefits received under the Social Security Act” and were therefore excluded from the calculation of their current monthly income. In re Isaacs, No. 18-1651 (Bankr. M.D. Pa. Aug. 26, 2019).

The above-median debtors proposed a 21% plan and the trustee objected to confirmation on the basis that they were not paying all their projected disposable income into the plan as required under section 1325(b)(1)(B). The dispute centered around the nature of the $2,325/month in benefits the debtors received under the Adoption Assistance and Child Welfare Act of 1980 (the Act). The debtors maintained that those benefits should be excluded from the calculation of current monthly income because they were benefits received under the Social Security Act (SSA). The Act was established under Title IV-E of the Social Security Act (SSA), under which the federal government created a fund to provide benefits to the states to assist families adopting special needs children. The monthly benefits the debtors received were not entirely made up of federal funds, however, but were comprised of 51.82% federal funding, 38.54% state funding, and 9.64% county funding. The trustee argued that the funds were not social security benefits under the definition found in section 101(10A)(B) of the Bankruptcy Code.

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Direct Payments to Creditor Are Not “Under the Plan” for Discharge Purposes

Adopting the minority view, the Bankruptcy Court for the D.C. Circuit found that the Chapter 13 debtor’s direct payments to a residential lienholder were not provided for under the plan and, therefore, her failure to make all the payments did not preclude entry of discharge. In re Drabo, No. 1:15-bk-653 (Bankr. D. D.C. May 10, 2019) (unpublished).

Ms. Drabo’s plan provided that she would pay her pre-petition arrears and make regular mortgage payments outside the plan until the debt was paid off—an event scheduled to occur five years after the completion of her plan. After she completed all plan payments, she moved for discharge under section 1328(a), but the lender, Ameritas Life Insurance, objected, complaining that Ms. Drabo had failed to keep up with the direct payments under the lending agreement.

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Contingent Future Interest In Tenancy by Entirety Not Exempt

Where state exemption law does not specifically apply to a contingent future interest in a tenancy by the entirety, the interest is not exempt under bankruptcy law and the debtor cannot avoid a judgment lien under section 522(f). In re Jaffe, No. 18-2726 (7th Cir. Aug. 5, 2019).

Including a mini-tutorial on the history of women’s property rights, from coverture (married woman’s property interests absorbed by her husband), to tenancy by the entirety (co-ownership and transfer to surviving spouse), to the Married Women’s Property Acts (providing means for women to own property and emerge from financial and social dependency), the circuit court explored the interaction of bankruptcy exemptions and Illinois property law.

The debtor entered bankruptcy owning his residence with his wife as a tenant in the entirety. When his wife died post-bankruptcy, he sought to exempt his entire fee simple interest in the property and avoid his creditor’s judgment lien under section 522(f) as impairing his exemption. The district court found that he could do so, and the creditor appealed.

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7th Circuit Rules Creditor Should be Held in Contempt for Jailing Discharged Debtor but No Contempt for Creditor’s Counsel

On August 13, 2019, the Seventh Circuit Court of Appeals reversed in part and affirmed in part the lower courts. On appeal, NACBA board member Tara Twomey submitted an amicus brief on behalf of the National Consumer Bankruptcy Rights Center (NCBRC) supporting the Debtor. 

The facts underlying the case started in 2001. Jacqueline M. Sterling (“Debtor”) was sued in state court for approximately $520.00 in membership fees owed to Southlake Nautilus Health & Racquet Club (“Creditor”). The Creditor was represented by the law firm Austgen, Kuiper & Associates (“Creditor’s Counsel”). After obtaining a judgment in 2002, the Creditor’s Counsel filed a “proceeding supplemental” in state court to collect on the judgment. The Debtor did not appear at the collection hearings and ultimately the state court issued a “body attachment” (bench warrant) against Debtor to show cause for violating the court’s orders.

In 2010, the Debtor filed for bankruptcy protection and listed the Creditor but not the Creditor’s Counsel. The Debtor obtained a discharge. The Creditor was notified of the discharge but did not forward the discharge to the Creditor’s Counsel. Creditor’s Counsel did not know the discharge order.

In 2011, the Debtor had a flat tire and was assisted by the local police. The police discovered the bench warrant and the Debtor was arrested and held in jail for two days.

Subsequently, the Debtor sued the Creditor and Creditor’s Counsel in Bankruptcy Court for violation of the discharge injunction found in Section 524 of the Bankruptcy Code.

The Bankruptcy Court ruled in favor of the Creditor and Creditor’s Counsel. The Bankruptcy Court found the Debtor had failed to prove that the Creditor’s Counsel knew of the discharge when it continued collection proceedings. Further, the Creditor didn’t violate the discharge injunction because it was unaware of the status of the case against the Debtor, and that it didn’t direct Creditor’s Counsel to take any particular actions. The ruling was affirmed by the District Court.

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Case Bites: Interesting Issues and Decisions from This Week’s Cases

Issues discussed in the cases below:

  • In a Chapter 20 cramdown of a junior lien, can the junior lienholder file an unsecured claim for the amount of the voided lien? (9th Cir. BAP)
  • Can an heir to real estate cram down a reverse mortgage in chapter 13? (Bankr. S.D.Miss.)
  • Does a non-filing ex-spouse have to ask the bankruptcy court for permission to modify a domestic support order in the divorce case? (Bankr. N.D.IL.)
  • Is the confirmation of a Chapter 13 plan res judicata on the amount of mortgage arrears? (Bankr. W.D.PA.)
  • Can a bankruptcy abstain from reopening a bankruptcy when the Debtors have been litigating dischargeability in state court? (Bankr. N.D.GA.)
  • Is surrender of secured collateral post-confirmation per se bad faith to justify denial of the plan amendment? (Bankr. E.D.WI.)

To read more click here.

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Bankruptcy Court Discusses Novel Argument Contesting Cram Down of Totally Unsecured Mortgage

In 2004 the Debtors purchased their home with a $209,000.00 purchase money deed of trust held by Bayview Loan Servicing (Bayview). In 2006 the Debtors obtained a second mortgage from Madison Management Services (Madison). In 2017, the Debtors and Bayview entered into a loan modification agreement that provided for a new principal balance of $257,566.94.

The Debtors filed a Chapter 13 bankruptcy. Bayview filed a claim indicating total indebtedness of $255,741.64. Madison filed a claim for $141,323.78. The stipulated value of Debtors’ is between $250,000.00 to $254,000.00.

Subsequently, the Debtors filed a motion to avoid the second lien because it was completely unsecured.

Madison countered that its lien was not unsecured. Under Maryland state law, when a mortgage is refinanced to increase the principal balance, the amount of the increased balance is given lien priority as of the date of the loan modification, not the date of the original loan.  Therefore, Bayview effectively has two effective dates for its liens. The balance owed at the time of the refinance has priority as of 2004, and another lien (in the amount of the increased balance) with priority as of 2017. Therefore, when calculating whether Madison’s lien is unsecured the court should take Bayview’s first lien (approximately $207,000), then Madison’s lien ($141,323.78), then the balance of Bayview’s increased lien ($48,566.94). Since Madison’s lien is no longer unsecured, its lien is protected by the anti-modification provision in 11 U.S.C. @ 1322(b)(2).

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Court Improperly Considered Exempt Home Equity in Finding No Undue Hardship

Under the totality of the circumstances test, the bankruptcy court erred when it found that the debtor’s student loans of $106,000 were not dischargeable as undue hardship because she had sufficient exempt equity in her home to fully repay the debt. Schatz v. Access Group, No. 18-16 (B.A.P. 1st Cir. July 26, 2019).

To increase her earning potential, Audrey Schatz, a single mother, obtained a law degree when she was in her fifties, financing her education with student loans. After she graduated and passed the bar, however, Ms. Schatz spent three years unsuccessfully seeking work in her field. Ultimately, she earned minimal income through a variety of avenues including self-employment, operation of a legal non-profit for low-income clients, using her home as an Air BnB, and performing real estate closings.

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Payment of Pre-Petition Debt by Debtor’s Mother Is Preferential Transfer

In what the panel called a strained application of a legal fiction, the BAP for the Tenth Circuit found that money paid by the chapter 7 debtor’s mother directly to one of the debtor’s creditors was a preferential transfer where it preceded the bankruptcy by fewer than 90 days, was secured by a promissory note by the debtor, and favored one creditor over the debtor’s other creditors. Stevens, Littman, Biddison, Tharp and Weinberg, LLC. v. Walters (In re Wagenknecht), 2019 WL 2353534 (B.A.P. 10th Cir. June 4, 2019) (case no. 18-93).

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Case Bites: Interesting Issues and Decisions from This Week’s Cases

  • In an adversary discharge proceeding, can the bankruptcy court treat a motion for summary judgment (that asserts a new affirmative defense) as a motion to amend an answer? (Bankr. S.D.N.Y.)
  • Can a chapter 7 trustee be awarded attorney’s fees incurred in defense of the trustee’s fee application? (Bankr. D.Colo.)
  • Does a bankruptcy court have the authority to extend the time to file a dischargeability complaint on a motion filed after the deadline? (Bankr. N.D.Ga.)
  • Does a pre-petition default judgment operate as collateral estoppel in a non-dischargeability complaint for fraud in bankruptcy? (Bankr. E.D.Mich.)
  • Post-filing, can a mortgage company postpone scheduled nonjudicial foreclosure sales (rather than dismiss the action) without violating the automatic stay? (Bankr. D.Ut.)

To read the case outlines and opinions click here