Objections – Rochester Bankruptcy and Debt Relief – Rochester, NY Bankruptcy Attorney

Unpaid College Tuition Can Be Discharged In Bankruptcy

Generally, pursuant to Section 523(a)(8) of the Bankruptcy Code student loans are not dischargeable in bankruptcy, unless the debtor is facing truly remarkable circumstances. However, unpaid college tuition is not treated the same way and can be discharged in bankruptcy.

In a recent case, D’Youville College v. Girdlestone (AP 14-1018 W.D.N.Y. 2015), Bankruptcy Judge Carl L. Bucki held that unpaid college tuition is treated differently than unpaid student loans and that the changes in the bankruptcy code in 2005 did not alter the results of the earlier Second Circuit cases. In D’Youville, the debtor attended the college only for a semester and had agreed to pay tuition but did not sign a promissory note.

In Girdlestone, Judge Bucki followed the holding in Cazenovia College v. Renshaw (In re Renshaw), 222 F.3d 82 (2d Cir. 2000), which held that the mere obligation to pay tuition does not constitute a loan that is non-dischargeable under the Bankruptcy Code.

D’Youville College argued that under the amendments to 11 U.S.C. § 523(a)(8) that Congress adopted in 2005, unpaid tuition should be treated the same was as student loans. In 2005 the Bankruptcy Code provisions related to student loans were changed, and even private student loans, not guaranteed by the government or provided by a school receiving government funding, were no longer dischargeable in bankruptcy. Section 523(a)(8)(B) of the Bankruptcy Code now states that the debtor will not receive a discharge of “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.” According to Internal Revenue Code §221(d)(1), a “qualified education loan” means “any indebtedness” that a taxpayer incurs to pay certain qualified higher education expenses.

Judge Bucki held that “under the Bankruptcy Code, nondischargeability extends not to any such “qualified education loan,” but only to “any other educational loan that is a qualified education loan.” Further, according to Cazenovia College, “to constitute a loan there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money, goods, or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date.” 222 F.3d at 88. When a student unilaterally does not pay tuition, the student may be indebted to the school, but that indebtedness does not make the transaction a loan. Based on the above, Judge Bucki held that because Cazenovia College would deny this status to the claim of D’Youville College, D’Youville’s claim is not excepted from discharge under 11 U.S.C. § 523(a)(8).

Since it is very difficult to discharge student loans, the above decision represents a rare positive result for the debtor. However, most college graduates do not deal with the same issues because most colleges require payment before students can graduate and a significant number of students take out student loans as opposed to owing money directly to their school.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Fraudulent Conveyances and Bankruptcy

One of the issues that represents a significant problems for bankruptcy attorneys is that of fraudulent conveyances. Generally, a fraudulent conveyance is a transfer of money or property from a debtor to someone or something else when either (1) the debtor intends to defraud creditors, or (2) the debtor received less than a reasonably equivalent value in exchange for the transfer, and made it while insolvent. For example, if a husband transfers his house out of his name to the wife so his creditors wouldn’t get it, the transfer is a fraudulent conveyance. Such transfers can create quite a few problems in bankruptcy.

The limitations period for avoidance of fraudulent conveyances has changed over the years, but currently it is two years under the Bankruptcy Code (Section 548) and whatever longer period is available under state law (Section 544). Since I practice in New York, I will use its laws as an example. New York has a six-year statute of limitations for avoidance of fraudulent conveyances.

Earlier this year, in In re Panepinto, Case No. 12-11230 (W.D.N.Y. 2013), Judge Kaplan of the Bankruptcy Court, Western District of New York, found that a transfer of a house to the debtor’s spouse 4 years prior to the bankruptcy filing was a fraudulent conveyance. In 2008, a judgment creditor was seeking to collect on a debt owed by Mrs. Panepinto, who owned a house with no mortgages or other liens encumbering the property. So, to thwart her judgment creditor, she transferred the house to her husband with no consideration for the transfer.

Last year, Mrs. Panepinto filed for Chapter 13 bankruptcy, and her judgment creditor sought to set aside the transfer as a fraudulent conveyance under New York Debtor and Creditor Law §273. The Bankruptcy Court sustained the judgment creditor’s challenge to the transfer. The reason the timing of the transfer is significant is because at the time of the transfer New York’s homestead exemption was lower than today, $50,000.00 rather than $75,000.00. Depending on what the value of the property was at the time the bankruptcy was filed, a portion of the value of the house may not be exempt. Since the court did not have this information presented, the court reserved its decision on the amount of the exemption pending proof of its value.

The lesson is that before transferring ownership in property, a debtor should seek advice of an attorney since any improper transfers may change status of assets from exempt to non-exempt or created other problems if subsequent bankruptcy is filed.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Dischargeability of Debt and Objections by Creditors

When debtors meet with me and tell me that they want to file for bankruptcy, I ask them questions about their debts, assets, and their financial affairs over the last few years. I also ask is how long ago they last used their credit cards. If they tell me that the credit cards were used within 90 days prior to the filing, I ask them to provide me with their credit card statements and information with regard to what was bought. All of this information helps me to assess whether I am likely to see potential objections from creditors with regard to dischargeability of one or more debts.

According to 11 U.S.C. §523(a)(2), a debt is presumed to be nondischargeable if a Debtor charges more than $600 for luxury goods on a credit card with in 90 days, or takes cash advances of more than $875 within 70 days of filing for bankruptcy. This presumption can be rebutted, but the burden is on the debtor to prove that the purchases did not involve luxury goods or services.

Another reason a creditor may object to the discharge is fraud and misrepresentation of debtors’ assets or income in order to obtain credit. If debtors misrepresent their financial condition in order to obtain a loan or credit line, and the creditor relies upon such misrepresentation when agreeing to extend credit, the creditor can object. For example, if the debtor earned $15,000 a year, but stated on the credit card application that he was earning $50,000 per year in order to get get approved, this would be a material representation likely to result in objections being filed.

Hiding an asset or failing to disclose it in a bankruptcy proceeding are also grounds to challenge a debtor’s discharge. For example, if you own an investment property, especially one with equity, which could not be protected under the Bankruptcy Code, and fail to inform the bankruptcy court of this asset, then a creditor may challenge debtor’s right to a discharge pursuant to 11 U.S.C. §727. Under such circumstances, a debtor may also get charged criminally.

Finally, the transfer of assets to family members or others just before filing bankruptcy can cause a creditor to challenge the bankruptcy case. It is particularly a problem if the asset transferred would not have been fully exempt in Chapter 7 Bankruptcy, and the transfer was made with the intent to deprive a creditor of a benefit. If the debtor does this, either the bankruptcy trustee or any creditor who might have received a benefit from the sale of this asset may allege you committed a fraudulent transfer of an asset. The Federal look-back period under 11 U.S.C. §548 and New York’s look-back period is six years.

In view of the above, I always advise my clients to stop using any credit cards at least 90 days prior to filing for bankruptcy, disclose all their assets, and be honest with regard to any financial transactions.

Bankruptcy and Cash Advances

Most of my Chapter 7 bankruptcy clients have a lot of credit card debt that was accumulated over time. That debt may have come from making purchases, incurring services charges and interest, as well as taking cash advances on credit card. While most of credit card debts are dischargeable in bankruptcy, credit card cash advances may represent a significant problem for potential bankruptcy filer.

According to the Bankruptcy Code, any cash advance, or combination of cash advances from one lender, totaling more than $875, obtained within 70 days of the bankruptcy filing date is presumed to be non-dischargeable. This particular provision is included in Section 523(a)(2)(C)(i)(II). The dollar amount of the cash advance, changes every three years.

This provision was included in the Bankruptcy Code because the Congress was concerned that consumers, who obtained significant cash advances relatively close to time they filed for bankruptcy, knew or should have known that they would be seeking bankruptcy relief, and should not be able to eliminate such debts. Another reason for that provision was to prevent consumers from taking cash advances immediately prior to a bankruptcy filing.

However, in terms of procedural issues associated with cash advances taken out with 70 days prior to the filing, in order to have the court declare that the debt is non-dischargeable, the creditor must file objections in the bankruptcy court. Specifically, the creditor must file an adversary proceeding. Since there are filing fees and other expenses associated with such filings, if the amount of the cash advance is not particularly large, most creditors will not bother filing an adversarial proceeding.

However, since a cash advance may result in an adversary proceeding, I always ask my clients about them and, in appropriate situation, may ask the client to postpone the bankruptcy filing until after the expiration of the 70 day period.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and Creditors’ Chain of Title

It is fairly common for Chapter 7 and Chapter 13 debtors to have credit cards that went into default some time ago. It is also common for credit card issuers to sell of delinquent credit card accounts.

In Chapter 7 and Chapter 13 Bankruptcy, all creditors are notified of the bankruptcy filing and can file claims. It is common for a new entity to file a proof of claim as successor or assignee of the original credit card issuer, but often such proof of claim does not include any evidence that the claim was, in fact, assigned. This situation is commonly referred to as a missing chain of title, missing proof that the claim has been legally transferred or assigned to the new owner.

Here in Rochester, United States Bankruptcy Court Judge John C. Ninfo II has issued several decisions addressing this issue. In one of them, In re Doherty and In re Benedetti, he held that in Chapter 7 Bankruptcy, the successor creditor was obligated to prove it was the legal holder of the claim.

In Doherty, Chapter 7 Bankruptcy Trustee filed his objection to the successor creditor’s claim arguing that (1) successor creditor was not scheduled as a creditor in the petition; (2) although the debtors had scheduled the creditors that the successor creditor alleged originally held the claims, there was no breakdown in the proofs of claim to support the amounts alleged to be due,which differed from the amounts the debtors had scheduled; and (3) there was no assignment or bill of sale produced to demonstrate that the successor creditor was the current holder of any of the claims that were alleged to have been sold and assigned to it.

Judge Ninfo held that the successor has failed to produce a chain of title from the alleged original holders of the claims to it by either a series of assignments or bills of sale, or by any other acceptable proof of ownership. As a result, he disallowed successor creditor’s claims, since there was no proof that it was a proper creditor entitled to file a proof of claim under Section 501 of the Bankruptcy Code.

This issue can be extremely important in Chapter 13 Bankruptcy cases where it may impact duration of the plan as well as the amount of money paid by debtors under the plan. In Chapter 7 Bankruptcy, this issue becomes particularly significant in asset cases, i.e., situations where debtors have nonexempt assets that the bankruptcy trustee may sell to pay the creditors.

Adversary Proceedings – What Are They?

Even in most common Chapter 7 Bankruptcy cases, creditors may file an adversary proceeding. An adversary proceeding is basically a federal lawsuit brought within a pending bankruptcy case. The Bankruptcy Rules require that certain contested matters in bankruptcy, usually claims related to outstanding debts or transactions, must be litigated in adversary proceedings. Bankruptcy Rule 7001 lists such matters which include: objections to discharge; determination of the validity, priority, or extent of a lien or interest in property of the estate; actions to recover property of the estate; and proceedings to sell property in which the debtor is only a part owner. Bankruptcy Rule 7001 et. seq., lists all of the rules applicable to adversary proceedings.

The most common adversary proceedings in bankruptcy cases are proceedings to determine the dischargeability of a debt. Since the credit card debt is one of the primary reasons for consumer bankruptcy filings, many credit card lenders are actively reviewing petitions and credit usage histories to determine if the debtor obtained the debt through either fraudulent or improper means. In accordance with Bankruptcy Code §523, a creditor can contest the dischargeability of a particular debt that was incurred through false pretenses, fraud, use of false financial statements, embezzlement, or larceny.

Bankruptcy Code §727 allows an interested party, such as a creditor, to contest the entire discharge for intentional concealment, transfer or destruction of property; unjustified failure to keep books and records; dishonesty in connection with the bankruptcy code; or failure to explain loss of assets. If a trustee requests a debtor to provide documents at the meeting of creditors and the debtor is uncooperative, the trustee may bring an adversary proceeding under this section.

In adversary proceedings, the Federal Rules of Civil Procedure apply. These rules are adapted to bankruptcy proceedings by Bankruptcy Rules 9001 et. seq. In order to commence an adversary proceeding, the creditor or trustee will draft a complaint, setting forth the facts and allegations which the plaintiff believes justify the granting of relief against the debtor, and stating the relief requested.

Just like bankruptcy filings, all adversary proceedings must be filed electronically through the court’s E.C.F. system. Each adversary proceeding will be assigned a case number, which will be different from the original bankruptcy case number. All adversary proceeding documents filed with the court must contain the full adversary proceeding caption, both case number and adversary proceeding case number, the type of chapter, and the name of the judge. In adversary proceedings, each debtor is referred to as either “debtor” or “defendant.”

There are three parties in the bankruptcy court case who can file an adversary proceeding. Those parties are the creditor, the trustee (either the Chapter 7 Bankruptcy trustee, Chapter 13 bankruptcy Trustee, or the United States Trustee), and the debtor. Each adversarial proceeding is heard by the United States Bankruptcy Judge for the district where the bankruptcy is filed. For the cases filed here in Rochester, the adversary proceeding cases are heard by Hon. John C. Ninfo, II.

Mere fact that an adversary proceeding is filed does not mean that the party filing it will prevail. The bankruptcy judge will hear the case and will determine each party’s rights. It is the job of the bankruptcy attorney to advise the party as to the likelihood of success in an adversary proceeding, but the case will be decided by the bankruptcy judge.

While most documents in adversary proceedings are served pursuant to Bankruptcy Rule 7004(b) by first class mail upon both the debtor and his or her attorney, service can be completed by other means as well. Service upon the debtor must be made within 10 days of the summons date pursuant to Bankruptcy Rule 7004(f).

In Chapter 7 Bankruptcy, the court sets a statute of limitations for creditors to file objections to discharge. The bar date is 60 days from the date set for the first scheduled meeting of creditors pursuant to Bankruptcy Rules 4004 and 4007. If the meeting of creditors is adjourned, it does not affect the bar date. If a creditor fails to file an adversary proceeding by the bar date, that creditor will be forever barred from objecting to discharge.

Adversary Proceedings In Bankruptcy

For most part, filing either Chapter 7 Bankruptcy or Chapter 13 bankruptcy is an administrative process. The bankruptcy lawyer gathers information, prepares and files the petition. In Chapter 7 bankruptcy, the debtor attends a brief hearing conducted by a trustee. In Chapter 13 Bankruptcy, the debtor also has to attend a confirmation hearing. However, in some cases an “adversary proceeding” is filed.

An adversary proceeding is essentially a case within a case. It is a lawsuit within either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy case about an issue related to the bankruptcy case. There are many other situations in which adversary proceedings arise. In other instances, the debtor brings the adversary proceeding to bring a claim or to obtain a determination from the court. The Bankruptcy Rules of Procedure specify the situations in which parties must file adversary proceedings.

When a creditor files an adversary proceeding, it is usually because the creditor is claiming that the debt owed to the creditor should not be discharged in the bankruptcy. Usually the creditor will argues that it is only that particular creditor’s claim that should not be discharged since it falls within one of the exceptions to discharge, such as a debt created through fraud, willful or malicious injury, or a personal injury caused by drunk driving. Alternatively, the creditor may argue that the filing of the bankruptcy case was done in bad faith and the debtor is not entitled to the discharge altogether. These kinds of adversary proceedings are not common.

Another kind of adversary proceeding is filed by the Chapter 7 Trustee, Chapter 13 Trustee, or the United States Trustee. A trustee may argue that the schedules were not filled out accurately and were intentionally fraudulent. A trustee may file a motion to dismiss the bankruptcy case if paperwork is not filed timely, improperly, or if the debtor misses a court date without a good reason. A trustee may file an adversary proceeding seeking to collect money back from a creditor who received funds or property from a debtor. A trustee may also file an adversary proceeding to reverse a transfer of real property. The United States Trustee may file an adversarial proceeding to force the debtor to move from Chapter 7 Bankruptcy to Chapter 13 bankruptcy, if the U.S. Trustee believes that the filing of the bankruptcy petition was done in bad faith. The U.S. Trustee may also file an adversary proceeding to dismiss the case, if the U.S. Trustee believes the filing of any bankruptcy petition was done to abuse the bankruptcy system.

Finally, a debtor may file an adversary proceeding against a creditor. The debtor may recover damages for a creditor’s actions taken in violation of the U.S. Bankruptcy Code, or violated the automatic stay, or the discharge (such as contacting the debtor after the bankruptcy is completed).

The following is an example of a situation where an adversary proceeding is filed. The debtor obtained a large cash advance prior to filing. That cash advance was used to prevent a foreclosure or recover a vehicle after a repossession. However, the credit card issuer is likely to object claiming that the cash advance taken out only a few months prior to filing bankruptcy and argue that the debt is nondischargeable since it was either fraudulent or the money was borrowed in anticipation of the bankruptcy filing.

The litigation would commence with a filing or a complaint. An answer would serve, and the parties would engage in discovery. If the parties were unable to resolve their dispute during pretrial proceedings, there would be a trial.

Disqualification of Debtor From Filing Chapter 7 Bankruptcy

I have previously written about the requirements that a debtor must meet in order to file for Chapter 7 Bankruptcy. As long as the debtor is able to meet the means test and disposable income test, the debtor can file for Chapter 7 Bankruptcy. However, there are a number of conditions that would disqualify a debtor from filing Chapter 7 Bankruptcy. The following post will address those conditions.

Generally, any debtor who is qualified to file and complete a Chapter 7 Bankruptcy case is eligible for a Chapter 7 Bankruptcy Discharge, unless the debtor falls into one or more of the following categories:

A person who has been granted a discharge in a Chapter 7 Bankruptcy case that was filed within the last 8 years. This limitation prevents debtor from filing another Chapter 7 Bankruptcy case despite meeting all other qualifications. The bankruptcy petition specifically asks debtors regarding any prior bankruptcy filings.

A person who has been granted a discharge in a Chapter 13 Bankruptcy case that was filed within the last 6 years, unless 70% or more of the debtor’s unsecured claims were paid off in the Chapter 13 Bankruptcy case. Therefore, if the debtor’s Chapter 13 Bankruptcy case paid less than 70% of the unsecured claims, the debtor is limited to filing Chapter 13 Bankruptcy within the 6 year period.

A person who files and obtains court approval of a written waiver of discharge in the Chapter 7 Bankruptcy case.

A person who conceals, transfers, or destroys his or her property with the intent to defraud his or her creditors or the trustee in the Chapter 7 Bankruptcy case. This relates to the provisions denying discharge to the debtor who committed that type of conduct.

A person who conceals, destroys, or falsifies records of his or her financial condition or business transactions.

A person who makes false statements or claims in the Chapter 7 case, or who withholds recorded information from the trustee.

A person who files to satisfactorily explain any loss or deficiency of his or her assets.

A person who refuses to answer questions or obey orders of the bankruptcy court, either in his or her bankruptcy case or in the bankruptcy case of a relative, business associate, or corporation with which he or she is associated.

A person who, after filing the case, fails to complete an instructional course on personal financial management. This is the reason that it is critical for the debtor to complete the course within 45 days of the meeting of the creditors.

A person who has been convicted of bankruptcy fraud or who owes a debt arising from a securities law violation.

If the debtor meets on or more of the above conditions, he is not eligible for a Chapter 7 Bankruptcy discharge and should not file a Chapter 7 Bankruptcy.

Chapter 7 Bankruptcy and Stripping of Unsecured Second Mortgage

One question that I am often asked is whether the unsecured second or third mortgage on the property owned by the debtor can be stripped in Chapter 7 Bankruptcy. In Chapter 13 Bankruptcy, the unsecured second mortgage can be stripped by bringing a Ponds motion.

Unfortunately, in Chapter 7 Bankruptcy, the unsecured second or third mortgage cannot be stripped. In a recent decision which also applies to the bankruptcy cases in Rochester, New York, In re Grano, the Buffalo Bankruptcy Judge Bucki held that in Chapter 7 Bankruptcy cases, the debtors cannot avoid wholly unsecured second or third mortgages.

Joseph and Ann Grano owned a residence in the Town of Amherst, New York. After filing a Chapter 7 Bankruptcy petition, they commenced the adversary proceeding against Wells Fargo Bank, N.A., to avoid a second mortgage. In their complaint, they alleged that their real estate has a current fair market value of $445,000 and that it is encumbered by two mortgages: a first lien with an outstanding principal balance of $511,000, and the second mortgage of Wells Fargo with a balance of $95,837.60.

Granos asserted that they can avoid the second mortgage pursuant to the authority of 11 U.S.C. § 506(a) and (d). In lieu of an answer, Wells Fargo moved to dismiss the complaint for failure to state a cause of action. In relevant part, section 506(a)(1) of the Bankruptcy Code states that “[a]n 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.” Asserting that the first mortgage secures a debt greater than the value of the property, the debtors argue that in its status as a second mortgagee, Wells Fargo retains only an unsecured claim. Subject to exceptions not here present, 11 U.S.C. § 506(d) states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” In reliance upon this later subdivision, the debtors commenced their adversary proceeding to avoid the second mortgage of Wells Fargo.

In Dewsnup, the Supreme Court accepted the position of the secured creditor, that “the words ‘allowed secured claim’ in §506(d) need not be read as an indivisible term of art defined by reference to § 506(a).” Instead, the language of section 506(d) “should be read term-by-term to refer to any claim that is, first, allowed, and, second, secured. Because there is no question that the claim at issue here has been ‘allowed’ pursuant to §502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of §506(d), which voids only liens corresponding to claims that have not been allowed and secured.” 502 U.S.at 415. Effectively, therefore, the Supreme Court refused to recognize section 506(d) as a grant of authority to a debtor in Chapter 7 to “strip-down” or cancel the lien of an undersecured mortgage.

In contrast to Chapter 7, debtors in Chapter 13 may assert rights under special statutory provisions for the treatment of secured claims. Specifically, 11 U.S.C. § 1322(b)(2) provides that a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.” InNobelman v. American Savings Bank, 508 U.S. 324 (1993), the Supreme Court held that the language of section 1322(b)(2) precluded the bifurcation of an undersecured homestead mortgage into secured and unsecured claims. Consequently, to the extent that a homestead has value to collateralize any portion of a mortgage, a chapter 13 plan must treat that lien as fully secured. However, in In re Pond, 252 F.3d 122 (2001), the Second Circuit distinguished those circumstances where the homestead lacks equity to collateralize any portion of an inferior lien. In this special circumstance, because the lien is wholly unsecured, the debtors “are not ‘holders of . . . a claim secured only by a security interest in . . . the debtor’s principal residence,’ 11 U.S.C. § 1322(b)(2), and their rights in the lien are not protected under the antimodification exception of Section 1322(b)(2).” 252 F.3d at 127.

In the present instance, Mr. and Mrs. Grano contended that this court should adopt for Chapter 7 the same exception that the Second Circuit has recognized for cases in Chapter 13, to the effect of permitting the avoidance of secondary liens that are totally undercollateralized. Unfortunately, this argument overlooks the unique statutory predicate of Chapter 13. In allowing a debtor in Chapter 13 to avoid a fully unsecured homestead mortgage, the decision in In re Pond utilized the authority of 11 U.S.C. § 1322(b)(2). No parallel provision applies in Chapter 7. The court concluded that notwithstanding the absence of equity beyond superior liens, the debtors may not avoid the second mortgage of Wells Fargo Bank, N.A.

This decision forces the debtors and their bankruptcy lawyer to engage in a cost benefit analysis in a situation where there is a wholly unsecured second or mortgage. Assuming the debtors can file either Chapter 7 or Chapter 13 Bankruptcy, the benefit of filing Chapter 7 Bankruptcy and discharging all unsecured debt, should be compared to the benefit of a Chapter 13 Bankruptcy plan payments over 5 years, and a likely discharge of the unsecured second or third mortgage. Assuming the debtors wish to retain their residence, the comparison of two figures should point them in the right direction.

Should You Use Credit Cards Once You Decided to File Chapter 7 or Chapter 13 Bankruptcy

If you are contemplating filing Chapter 7 or Chapter 13 bankruptcy, you should stop using your credit cards. Once you’ve decided to file for bankruptcy, any credit card use after that point will be highly scrutinized by both the credit card issuer and the bankruptcy trustee, and is likely to be viewed with a great deal of suspicion. The reasons for this are obvious. If the debtor decides that he is seeking to eliminate his credit card debt through Chapter 7 bankruptcy, or pay a lesser amount though a Chapter 13 filing, then incurring additional credit card debt can be considered fraudulent. Specifically, the credit card issuer will make an argument that the additional debt was incurred without intention to repay, then the discharge can be objected to. Also, the issuer will also look at all of the transactions to verify that the money was not spent on such things as vacation trips, or that other unnecessary spending didn’t take place. If a credit card issuer learns that a debtor used a card without any intention of making full payment, then the credit card company has the right to object to the debtor’s discharge of that particular debt.

Also, if the bankruptcy trustee, or United States Trustee, learn that the debtor intentionally ran up his credit cards before filing, then either trustee can seek to have the debtor’s discharge denied or move to have the case dismissed. There is also the possibility that the debtor can be found to have engaged in bankruptcy fraud, which is a criminal offense.

While consumer Chapter 7 bankruptcy allows the debtor to eliminate all credit card debts and get a fresh new financial start, the debtor should not jeopardize his ability to seek bankruptcy protection by engaging in self-serving or foolish behavior. There is simply no reason to create problems for the upcoming bankruptcy filing. Therefore, don’t use your credit cards once you’ve decided to file bankruptcy.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a New York bankruptcy lawyer.