Posts Tagged ‘Bankruptcy’

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

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