Why are we protecting home lenders?

August 21, 2015

The more I research the provision of §1321(b)(2) in the Bankruptcy code that prohibits modification of mortgages on primary homes, the more I think it should be changed.  The justification that is keeps the supply of money for home loans available seems to me to be part of the problem.  Lenders have no incentive to really know what the value of the homes they are lending on because they are protected.   This little know part of the law played a big part in the housing bubble, but it is getting almost no attention.  If you want to clean up the foreclosure crises in a hurry and prevent another one from coming along, then changing this provision should  be item one.


August 12, 2015


Just getting back into this now that the posting is a bit easier.  It has been 18 years since I last had a Chapter 11 case in the office. I have two going right now.  Motions under §506 have not changed all that much.  They are still a powerful tool and can be very helpful for debtors.  In my next few posts, I hope to look at some of the issues with this type of motion and how debtors can use them to write down secured debt or to divide claims in to secured and unsecured portions.

I am also going to make this blog a bit more personal and talk about some issues that are not legal in nature.   Right now I am trying to figure out what to do with the 18 pounds of tomatoes the garden produced yesterday and the several more pounds it will produce today.

HOA dues – why they never stop…. Another example of unintended results.

December 5, 2012

When congress passed changes to the Bankruptcy Code in 2005, it is a pretty sure bet that they did not think about lenders waiting years after defaults to foreclosure on properties. However, that is what is going on now and under 11USC § 523(a)(16) homeowners who have long since moved out of a home or apartment are still being hit with big bills for HOA or condo dues. That is because this provision was written to protect home owners associations or condo associations from having to supply services to deadbeat owners that were still living in the properties. However, because the law was written broadly it hits folks that have abandoned the property to the creditors and moved out for so long a they retain any legal, equitable or possessory ownership interest in the property. Those interests are not fully extinguished until the lender actually finishes a foreclosure. So lenders, even if they have taken possession of the property and are trying to sell it, are not going through the formal foreclosure process until they have to and are sticking the former owners with the HOA dues. I should add that this only applies to post bankruptcy filing dues. Dues that were assessed but unpaid prior to the filing are discharged.

There is not a sure way around the problem. In some jurisdictions, the debtor can record a Quit Claim deed to the property that gives legal title to the lender. If there are open taxes or other charges it is not always possible to get the local recording official to accept the quitclaim deed for recording. There is also the problem of trying to figure out who is the actual lender so the quitclaim deed can be made in favor of the correct party among the many servicers and transferees that have held the loan over its life.

Daniel Carroll

December 5, 2012


What does Chapter 7 (or 13, 11, etc.) mean?

September 14, 2010

When I sit down with a potential new bankruptcy client, one of the first issues that we need to address is what chapter of the code to file under.   Because of news reports and maybe internet research most consumers are aware of Chapter 11 and Chapter 7.  They really do not understand what the different chapters mean or understand the impact on them of the different chapters. 

First off, the ‘Chapter’ refers to parts of the Bankruptcy Code.  The Bankruptcy Code is part of the United States Code (Federal Statues).  The total United States Code runs to hundreds of volumes and takes ups yards of book shelf space.  Almost all parts of the U.S. Code dealing with bankruptcy matters are in Title 11.  Title 11 of the U.S. Code is further divided into ‘chapters[1]’ that deal with different bankruptcy subjects.  There are general and administrative provisions that apply to all cases (Chapter 1, 3 and 5).  Then there are chapters dealing with specific types of cases depending on the debtors’ situation.  Chapter 7 is a liquidation case and can be business or individual.  Chapter 11 is business reorganization; Chapter 13 is an individual reorganization.  Chapter 7, 11 and 13 are the ones that most people hear about and the vast majority of cases are filed under one of these three chapters of the code.  There are some other chapters that come up once in a while.  In Western Maryland we sometimes see a Chapter 12 case, which is a reorganization of a family farm or fisherman with regular annual income.  There is also a chapter for local government bankruptcy in Chapter 9.

What is important to keep in mind, is that each chapter has slightly different qualification provisions.  Each chapter may also have different treatment of creditors.  For instance, liens may be treated differently.  Last week I blogged about stripping a 2nd mortgage liens in Chapter 13.  Those provisions are not available in Chapter 7.  Broader lien stripping powers exist under Chapter 12, but the jurisdictional requirements make is difficult to take advantage of them.  See 11 U.S.C. §101(18) – (21A).

This discussion is by no means complete, but I hope I have given you a feel for some of the terms that are thrown around and maybe made them a bit more understandable.

Dan Carroll

Carroll & Ferguson
9438 Woodsboro Pike
Walkersville, MD 21793

[1] There are also subchapters, but let’s keep it simple for this discussion.

Stripping Second Mortgages in Chapter 13 Bankruptcy Cases in Maryland

September 10, 2010

A couple of months back I was in line on ‘Chapter 13 Day’  waiting to talk to the Trustee with all the other counsel.  While waiting we got to discussing ‘shop’.  The topic of stripping 2nd mortgage liens came up and the consensus was that while the law had allowed it for years in the District of Maryland, it has only been in the couple of last years or so that we have had the facts to really make use of the provision.  “Stripping” is a term used to describe judicially voiding a lien (security interest).    In this discussion it refers to a second mortgage lien on real property, but it can refer to other types of security interests.

The key facts necessary to strip the 2nd mortgage lien is that the balance on the first mortgage has to be greater than the value of the property.   With falling real estate values, this is now frequently the case.  This can only be done in a Chapter 13 wage earning reorganization case.   One issue is that the lien stripping is only effective upon the completion of the Chapter 13 Plan and the entry of a discharge order in favor of the debtor.  

 The motion to strip the lien should be filed at the outset of the case.  The motion is filed under §506 of the Bankruptcy Code.  Local Rule 3012-1 and Local Rule 3012-2 for the U.S. Bankruptcy Court for the District of Maryland govern the procedure and there is also in Appendix A of the Local Rules a form for the motion (Local Bankruptcy Form G). 

One issue that I see arising in the years to come in that the new prevalence of these motions to strip liens will lead to title problems in the years to come.   Most title companies and real estate practices are not all that informed about bankruptcy practice.  There is no requirement that the order granting the stripping of the lien be recorded in the land records of the county where the property is situated.  My practice is to put recording information for the lien being stripped in the Order the Bankruptcy Court signs.  The idea is to make it possible to record certified copies of the two orders (Lien Stripping Order and Discharge Order) side by side in the local land records and have it indexed against the property so that a future title search will not show an unreleased mortgage that will cause marketability problems.

Dan Carroll
September 10, 2010

Estate Planning Terms

November 23, 2009

It has been a while since a posted on the blog.  The state of the economy has meant that I have been doing far more bankruptcy work than planned when I started this blog.  To get away from the bankruptcy work a bit, I am including today a set of definitions for estate planning terms.  

After putting together our Estate Planning Kit,  (download the Kit at: http://www.carrollandferguson.com/EstatePlanningKit.pdf  ).  I realized the need for a glossary like this to help folks wade through the materials and the process.  I you think we need to add other terms, please let me know.  This should be a dynamic process.

Dan Carroll

November 22, 2009

Estate Planning


 Adjusted Gross Estate.  The amount remaining from the gross estate after administrative expenses, debts, losses and claims against the estate have been deducted.

 Adjusted Gross Income.  The amount remaining from gross income after certain deductions, including business expenses and losses from the sale of property.

Annual Gift Tax Exclusion.  An exclusion that permits an individual to make gifts each year of up to $12,000 to each of as many individuals as he or she chooses, without being deemed to make any gifts for federal gift tax purposes; husbands and wives may give $24,000 as a couple to an individual – regardless of who actually owns the asset that is given.

Annuity.  A right that has been purchased to receive a series of periodic payments for life.

Appreciated Property.  In general, any asset that has increased in value and which, if sold at its fair market value, would produce a capital gain.

 Bargain Sale.  A sale of property to a charitable organization for an amount less than the property’s fair market value.

Basis.  In general, the amount against which profit or loss is measured on the sale of an item of property.  Usually, the original cost to an individual of a certain property.  Sometimes called “cost basis”.

Beneficiary.  The individual or organization that is the recipient of a gift — either cash, property or income.  Also, one designated as recipient of the proceeds of a life insurance policy.

Bequest.  A gift of cash or other personal property made by will.

Capital Asset.  In general, any item of property, but excluding inventory items and also excluding any work of art in the hands of the artist who created it.

Capital Gain.  The profit realized by the seller from the sale or exchange of a capital asset.

Carryover.  The portion of a charitable contribution or a business lose that is not deductible for income tax purposes in the current year and may be “carried over” and deducted in the following year for up to 5 years.

Charitable Contribution.  An irrevocable gift of money or other property made to a qualified charity, either during life or by will.  To be distinguished from a charitable deduction.

Charitable Deduction.  The deduction allowed, either for income, gift or estate tax purposes, for a charitable contribution.

 Charitable Lead Trust.  A trust that makes income payments to a charitable organization for a specified period and then distributes its assets wither back to the donor or on to the donor’s heirs.  Lead trusts can be annuity trusts with a fixed annual amount payment, or unitrusts with a  fixed annual percentage payment to the charity.

 Charitable Remainder Annuity Trust.  A charitable remainder trust that pays a fixed, guaranteed amount (at least 5% of the initial value of trust assets) each year to one or more individuals for a specified period and then distributes its assets (the “remainder”) to a charitable organization.

 Charitable Remainder Unitrust.  A charitable remainder trust that pays a variable amount of the annual value of the trust assets as determined every year (at least 5% of the initial value) to one or more individuals for a specified period and then distributes its assets (the “remainder”) to a charitable organization.

 Closely Held Stock.  Corporate stock owned by a small number of persons and not actively traded.

 Codicil.  A supplement or addition to an existing will.  It revises, changes, or modifies the existing will.  A codicil must meet the same requirements of execution and validity that a will must meet.

 Community Property.  Property owned equally by husbands and wives under the laws of community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington).

 Contingent Gift or Bequest.  A gift or bequest to an organization that is contingent upon the occurrence of some event (e.g., a gift of real property to a hospital that is contingent upon the hospital’s building a clinic on the property).

 Deduction.  An amount of money that offsets the amount that is subject to a tax.

 Deferred Gift.  A gift arrangement that provides an immediate income tax benefit to the donor while providing a future benefit to a charitable organization.  Examples of a deferred gift include charitable remainder trusts and pooled income funds.

 Depreciation.  For tax purposes, the amount that can be written off with respect to the normal wear and tear of an asset such as a building or a machine.

 Devise.  The act of transmitting or giving real property by will. The property or lands so transmitted or given. A will or clause in a will transmitting or giving real property.

 Estate/GSTT Tax Credit.  Also called the Exclusionary Amount. It directly offsets a limited amount of gift/estate tax possibly owed on gifts not made to a spouse or charity.  For 2009, it allows a person to transfer $3,5,000,000 in assets to anyone without owing any federal estate taxes.   However, state estate taxes may still be due, and in Maryland the exclusionary amount for state estate tax purposes in still $1,000,000.

 Fair Market Value.  In general, what a willing buyer would pay to a willing seller, each having knowledge of all facts relevant to the value of the item in question.

 Federal Estate Tax.  The tax imposed by the federal government on the transfer of assets at death.

 Federal Gift Tax.  The tax imposed by the federal government on the transfer of assets by gift during life. 

 Federal Gift Tax Exemption.   The first $1 million of taxable gifts may be entitled to a federal exemption  if certain requirements are met.  At one time the Federal tax exemption was equal to the federal estate tax exemption and they worked together to set a limit on transfers to heirs without incurring federal tax.  They still work together but not as smoothly.

 Gift Annuity.  An annuity issued by a charitable organization in exchange for cash, securities or, in some states, other kinds of assets.

 Gross Estate.  In general, the fair market value of the deceased’s interest in all property, real or personal, tangible or intangible, wherever situated, which must be included in his or her estate for federal and possibly state  estate tax purposes.

 Interest.  A right of ownership in property.  Consider property, any kind of property, as consisting of a bundle of sticks.  Each stick represents a single interest in that property.  One stick might be the right to use the property, another  the right to sell it, yet another the right to give it away.

 Undivided Interest.  A fraction or percentage of all the owner’s rights in a property.  In other words, a whole stick (see above).

 Remainder Interest.  The right to receive property upon termination of a prior interest in it.

 Future Interest.  The postponed right to use or enjoy property (e.g., a remainder interest).

 Income Interest.  The right to all or part of the income produced by a property.

 Intestacy.  Dying without a valid will.

 Life Income Gift.  A term frequently used by development officers to describe a gift arrangement that provid es a life income interest to the donor or some other person.  Examples include gift annuities, charitable remainder trusts and pooled income funds.

 Long-Term Capital Gain.  Gain on the sale of a capital asset that has been held for more than 12 months.

 Short-Term Capital Gain.  Gain from the sale of a capital asset that has been held for 12 months or less.

 Marital Deduction.  The deduction allowed under the federal gift tax for a gift to one’s spouse or under the federal estate tax for a bequest to one’s spouse.

 Ordinary Income.  Income that is fully taxed, such as wages and ordinary interest.

 Ordinary Income Property.  Property that when sold would produce any (a) ordinary income, or (b) short-term capital gain.  A charitable contribution of ordinary income property is reduced by the amount of such income or gain.

 Personal Property.  Property excluding real estate and money but including such items as stocks, bonds, boats, coin collections, automobiles, and the like.  Also called tangible personal property.

 Pledge.  A promise to make a gift to a charitable organization.  Not deductible until paid.

 Pooled Income Fund.  A trust, maintained by a charitable organization, to which various donor transfer assets, contributing irrevocable remainder interests to the organization and retaining or otherwise creating life income interests in the trust.

 Probate.  Technically, the procedure for determining the validity of a will.  Often used, however, to mean the whole process of settling a decedent’s estate.

 Qualified Charitable Remainder Trust.  A charitable remainder trust that meets all the requirements of an annuity trust or all the requirements of a unitrust.

 Real Property.  A term used for real estate or land.

 Remainder Beneficiary.  An individual or an organization that has a remainder interest in a trust or in an item of property; an interest that follows either the interest of someone (or something) else or a term of years.

 Taxable Estate.  The gross estate, reduced by all allowable deductions, and increased by any adjusted taxable gifts.

 Taxable Gift.  That portion of a gift to an individual that remains after taking into account the $12,000 exclusion, gift splitting (if any) and all allowable gift tax deductions.

 Testator.  An individual who is making his or her will or who has a will.

 Transfer Taxes.  Technically, any tax imposed on the transfer of property of any kind.  In the estate planning field, the collective terms for the Federal and State Gift Tax(es), the Federal Estate Tax, State Estate Tax,  and Generation Skipping Transfer Tax.  Estate planning involves using the various deduction and exemptions available to the transfer taxes to minimize the total tax liability.

 Trust.  An arrangement in which one person transfers legal title to property to another person (the trustee) for the benefit of one or more beneficiaries who may have income or remainder interests in the trust.

 Will.  An instrument that is effective to transfer property at death.  Subject to a number of technical requirements.

 Zero Bracket Amount.  For Federal income taxes, the amount over which the sum of a person’s itemized deductions are deductible (abbreviated ZBA).

Death & Taxes, or why estate planning is complex

September 9, 2009

Estate planning has become much more complex in recent years. The major reason is the ‘decoupling’ of state and federal estate taxes. Keep in mind that the ‘taxable estate’ is not the same as the ‘probate estate’.  State and Federal death taxes very broadly define ‘estate’ and that definition may include life insurance, jointly owned property and property held in trust. (More info at http://www.carrollandferguson.com/EstatePlanningKit.pdf )  Almost all states that have estate taxes set them up originally to be coupled to the federal estate tax to take advantage of a provision in the federal tax that provided for credit against the federal tax for death taxes paid to states. Initially, the state rates and exemptions were ‘coupled’ to the federal tax to take advantage of the maximum allowed federal credit. The result was that the total tax due by an estate was unchanged, just that some of it now went to the state instead of all of it going to the federal government. States were able to create a revenue stream without ‘raising’ taxes. The problem came in 2001. Congress in an attempt to repeal the federal estate tax completely gradually changed the federal estate taxes exemptions from $1,000,000.00 to $3,500,000.00 in 2009, complete repeal in 2010 and a return to the $1,000,000.00 exemption in 2011. While Congress is not likely to leave this situation alone, I am not going to predict what they will finally do about repeal other than they will not let the estate tax go away completely. The states, including Maryland did not want to lose the revenue stream they had gotten used to having, so they ‘decoupled’ the state estate taxes from the federal tax. We are now in a situation where an estate plan needs to take into account the difference between the state exemption amount and the federal exemption amounts. The Maryland estate tax rate can get quite high and now estate planning needs to take into account the Maryland estate tax and plan for it separately from the federal tax.

Dan Carroll, danc@carrollandferguson.com



How to use the Bankruptcy Q and A

August 25, 2009

Under the resources section of www.carrollandferguson.com is a question and answer format document that provides bankruptcy information.  (http://carrollandferguson.com/BankrQ&A.pdf)  It is several pages long and might seem to answer all your quesitons.  It does not and can not answer all your questions about bankruptcy law.  It does provide some basic informaiton and will point you in the right direction.    After reading the Q&A, it would not be surprising if you had new questions that you need to ask one of our lawyers.  An example of this occured the other day when a client, after reading the section on earned but unpaid wages and vacation leave was concerned that sick leave was treated the same way.   Sick leave is in fact treated differently and it is uselly exempt.   If after going through the Questions and Answers, you have more questions, contact use at info@carrollandferguson.com and we will try to get back to you.  You can also make an appointment to come in and discuss your case in greater detail.

  Daniel Carroll


Treatment of Creditors in Bankruptcy —

August 18, 2009

When I first talk with new bankruptcy clients one of the questions I hear over and over is, “do I have to go bankrupt on this debt?   Can I leave this debt out of the bankruptcy?”   It is often a debt for their car, or to a friend that they owe money to and almost always they are current with the payments.   Credit card companies that are calling and driving them to distraction are not usually in the mix.

The short answer is that you have to ‘file’ or list all your debts/creditors.  The Bankruptcy law is based on a couple of basic concepts.  One of these concepts is to treat all the creditors of the debtor(s) fairly.  Not all creditors are treated the same because there are different kinds of creditors.  But all the creditors should be before the court and treated fairly.

The exact treatment of an individual creditor is determined by what ‘class’ they fall in according to the bankruptcy code.    Example of the some of the different classes of creditors are;  ‘Secured’ which means they have some kind of lien or security interest in property of the debtor.  Mortgage debts and car loans are just two types of secured creditors.  ‘Priority’ creditors, fall into one of several groups defined by the bankruptcy statute.  Some examples of priority creditors are debts for domestic support obligations, taxes obligations or wages owed by the debtor to someone else.

To get back to the question, a debtor has to file and disclose all their debts, but that does not mean all their creditors will be treated the same.   Depending on the exact situation of the debtor, it might be okay to treat the car loan differently and keep the car by reaffirming the debt.  However, the debtor’s ‘fresh start’ should not be endangered, and that is a topic for another day.

Dan Carroll
Carroll & Ferguson, Attorneys at Law