discharge – Page 2 – Rochester Bankruptcy and Debt Relief

Chapter 13 Discharge and Child Support Arrears

Chapter 13 Bankruptcy cases can take between 3 and 5 years to complete, and, in a current economy, as many as two thirds of all Chapter 13 plans fail. Thus, any debtor who has completed the plan should be proud of his or her accomplishments.

However, under some circumstances, even if all of the plan payments are made over a five year period, the debtor may not receive his Chapter 13 discharge. Specifically, Bankruptcy Code Section §1328, precludes the judge from issuing a discharge if you do not certify that all domestic support obligations that have come due during the pendency of your case have been paid. Additionally, if the debtor has child support arrears prior to filing of the case, those arrears must be paid in full during the term of the plan.

If domestic support (i.e. child support or alimony) were not paid, and that failure was not excusable, the case will be closed, and the debtor will not receive the discharge. In the case of child support in Chapter 13, the debtor cannot ignore the obligation, even if the custodial parent or child support enforcement is saying and doing nothing. Otherwise, the debtor may end up with a perfect payment history in Chapter 13, but no order of discharge.

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.

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.

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.

What Are the Benefits of Bankruptcy?

I am often asked during initial bankruptcy consultations about negative implications and benefits of filing either Chapter 7 or Chapter 13 Bankruptcy. My usual answer is that in most cases, benefits associated with a bankruptcy far outweigh its negative aspects. Debtors who are dealing with significant amounts of debt that they cannot repay should not fear filing. There are many benefits to filing; some readily obvious and some surprising.

Top 3 obvious benefits of filing for bankruptcy

1. Assuming you are filing Chapter 7 bankruptcy, your bills will be discharged and you will not need to repay them. In Chapter 13 bankruptcy, you will be repaying either all or a portion of your debts through the plan that will be based on your ability to pay. Ultimately, bankruptcy will eliminate most or all of your credit card debt, loans, medical bills and other unsecured debt.

2. Once you file for bankruptcy, your creditors will stop contacting you. You will no longer receive letters or phone calls from the creditors. Once the bankruptcy is filed, creditors have no right to contact you and can be punished by the bankruptcy court for doing so.

3. After the bankruptcy is completed, debtors have an opportunity to have a fresh start without paying old bills and concentrate on rebuilding their financial health. They will not need to choose which bills to pay first, or chose between paying for their home or paying credit card debt.

Top 3 surprising benefits:

1. Debtors get their dignity back. They are able to sleep better at night knowing that they will not be harassed by creditors and they do not have to worry about the debt they are unable to repay. Once the bankruptcy is filed, there is an immediate sense of relief.

2. Bankruptcy gives you a chance to rebuild your credit score. Your credit score is greatly affected by such negative items as judgments and late payments. While a bankruptcy will not rebuild your credit right away, it gives you a chance to make future debt payments on time which will lead to a better credit score.

3. Your life becomes easier. Concerns about debt can damage personal and business relationships, make work more difficult and can lead to depression. If those concerns are eliminated, debtors can go on with their lives.

Rather than being something negative, a bankruptcy is a solution to problems that otherwise cannot be resolved. It can help and it usually results in both financial and intangible benefits, and can lead to a life free of debt.

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.

Repaying Debts After the Bankruptcy

Sometimes I am asked by debtors if they can pay their creditors after they received a bankruptcy discharge. My answer to them is that there is nothing in the bankruptcy law that prohibits debtors from voluntarily paying their creditors, either those creditors that are important to you, or all of them. However, for me as a bankruptcy lawyer, it can be a bit difficult to understand since debtors typically file for bankruptcy protection because they cannot afford to pay their creditors. At the same time, I understand that under some circumstances debtors make a deliberate decision to repay someone.

In many different situations, debtors have creditors that are important to them. Those creditors may be family member who have loaned debtors money. Typically, debtors do not want to discharge the debt owed to close relatives. In those situations, my advice is to list the debt but, once the case is over, repay it voluntarily.

Another usual situation is where the debtor may have credit at a small, local store. Since it may be important for the debtor to have that access to such credit, the debtor may choose to pay that debt even after the bankruptcy case is over and the debt is discharged.

From the creditor’s side, once the bankruptcy is filed, the creditor may not contact the debtor to attempt to “persuade” him to “voluntarily” pay the debt. TIf any creditors does this, it would be viewed by the bankruptcy court as an attempt to collect a discharged debt in violation of the discharge injunction.

If the debtor decides to repay a debt after filing for either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, he should be very careful about making payments on a discharged debt. If a creditor were to sue the debtor on a discharged debt in state court, the debtor could raise the fact that the debt was discharged in bankruptcy by raising it as an affirmative defense in state court litigation or he could remove the action to bankruptcy court and allow the bankruptcy court to enforce its discharge injunction. By making payments on a discharged debt, the debtor could create a “waiver” of the bankruptcy discharge on that particular debt.

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.

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.

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.

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).

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 .

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.

Debtor Who Can’t Make His Chapter 13 Bankruptcy Payments and Hardship Discharge

Once debtor’s Chapter 13 Bankruptcy plan is confirmed, the debtor has an obligation to make monthly payments. Unfortunately, sometimes circumstances change and the debtor cannot continue to make payments. When the debtor can’t make the payments on a confirmed Chapter 13 plan, the choices available to the debtor are limited. While there are a number of options, the best option for the debtor is usually a hardship discharge under §1328(b).

A bankruptcy discharge under §1328(b) eliminates all the debt that would have been dischargeable had the case been filed initially as a Chapter 7 Bankruptcy. While certain types of claims would still survive a hardship discharge, but the remainder of the debt is discharged, as if the plan has been completed over its term.

In order to obtain a hardship discharge, the debtor has to satisfy the best interests of creditors test, i.e., creditors must have received at least as much as they would have received had the case been filed as a Chapter 7 Bankruptcy. Additionally, the debtor’s reasons for his inability to complete the plan must be events outside of the debtor’s control. Usual events include death, illness, job loss, and, occasionally, divorce.

I prefer hardship discharge for my clients, as opposed to converting a Chapter 13 Bankruptcy to Chapter 7 Bankruptcy? When the discharge is entered under Chapter 13, the debtor is eligible to file another Chapter 13 immediately. If the case is converted to a Chapter 7 Bankruptcy, the debtor cannot file under either chapter of the Bankruptcy code for a period of time. An additional advantage of a hardshipt discharge is that there is no need for a new 341 meeting or amended schedules, as there would be if the case were converted to Chapter 7.

Since Chapter 13 Bankruptcy often includes debt that is not dischargeable in Chapter 7 Bankruptcy, while the hardship discharge won’t discharge priority taxes, by obtaining a hardship discharge, the debtor is eligible to file another Chapter 13 when he is again healthy or employed. Further, the debtor can receive the automatic stay in a subsequent case to finish paying the debts that often caused the Chapter 13 Bankruptcy.

In subsequent posts, I intend to discuss additional options available to the debtor.

Bankruptcy, Cancellation of Debt and Tax Issues

I am often asked if the debt discharged in bankruptcy is treated as debtor’s income and is subject to taxes. The answer to that question under the Bankruptcy Code, for both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy is unequivocally no. Debt discharged in bankruptcy does not result in taxable income to the debtor.

While I have written previously about the problems with debt settlement, this is one more advantage that bankruptcy has over various debt settlement arrangements. If the debtor has his debt reduced or cancelled, the creditor may issue an IRS Form 1009-C form and the debtor would have to report it on his taxes. As a result, the amount of cancelled debt will be added to the debtor’s income as miscellaneous income, and while not subject to self-employment or social security tax, it will be subject to income taxes. If the amount of the cancelled debt is significant, the debtor may face an unexpected tax liability amounting to thousands of dollars.

One exception to the above is cancellation of mortgage debt. The Mortgage Debt Relief Act of 2007 generally allows debtors to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief as well.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition. For a detailed discussion of IRS’ position on these issue, please follow this link.

Occasionally, even the debtor who filed fro bankruptcy may receive 1099-C from one of his creditors. Nonetheless, if the debtor received a discharge as a result of either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, the debtor is able to file IRS Form 982, which will inform the IRS that the debtor went through the bankruptcy and any discharged debt should not be included in his gross income. If you are considering your options between a bankruptcy or debt settlement, one of the issues that you should discuss during a consultation with a bankruptcy lawyer is what impact either approach would have on your tax liability.

Top Ten Bankruptcy Myths

There are lot of myths and misinformation regarding debtors’ rights to file bankruptcy. In my practice, I see a lot of debtors who seek to file Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, who have heard a lot of rumors and incorrect information with respect to their rights and obligations when they file for bankruptcy relief. The following is a compilation of the typical questions, and correct answers to the questions I frequently hear from the debtors.

1. I will not be able to buy a house for ten years since I will not be able to obtain a mortgage.

Although Chapter 7 Bankruptcy will appear on your credit report for a period of ten years, you will be able to buy a house again much sooner than that, because the bankruptcy is likely to improve your credit rating. Chapter 13 Bankruptcy is likely to improve your credit sooner and is likely to disappear from your credit report much sooner as well.

2. I won’t be able to buy a car for ten years since I will not be able to obtain a car loan.

Although Chapter 7 Bankruptcy is likely to be on your credit report for a period of ten years, you will be able to borrow money to purchase a car again because because the bankruptcy is likely to improve your credit rating.

3. I won’t get a credit card or a good credit score for ten years.

Both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are likely to improve your credit rating. In my experience, although I do not recommend it, the debtors are able to obtain credit cards again within 1 to 2 years.

4. I won’t be able to get a student loan for myself or my children.

Since guaranteed student loans must be repaid, and cannot be discharged in bankruptcy, therefore, there is little concern that student loans will not be paid back. Any private lender may deny a student loan based on the debtor’s credit score, however most student loans are government backed.

5. My employer will fire me because I filed for bankruptcy.

While bankruptcy information is available as a public record, employer, or prospective employer, is not allowed to discriminate against you based on debtor’s decision to file Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. If a prospective employer asks you for a copy of your credit report, questions you about bankruptcy, most employers are prefer to know that the debtor no longer has any financial issues which may affect work performance. Discharging the debt is preferable to an employer as opposed to a situation where the debtor is receiving phone calls at work from collectors or a credit report that shows a pattern of irresponsibility. Further, in Chapter 7 Bankruptcy, employers are not notified of the filing. In Chapter 13 Bankruptcy, the employer is likely to be aware of the filing since here in Rochester, New York, the Bankruptcy Court requires a wage deduction order that is sent to the debtor’s employer and requires a portion of the wages to be remitted directly to the Chapter 13 Trustee.

6. I don’t qualify for chapter 7 bankruptcy because I own a house.

You can file for a Chapter 7 Bankruptcy even if you own a home. Most states, including New York, allow a homeowner a certain amount of equity in their residence. In New York, pursuant to its homestead bankruptcy exemption, a single filer can have $50,000 worth of equity in their residential property, and joint filers (husband and wife) can have $100,000 worth of equity in their property.

7. I will lose my car if I file for bankruptcy.

If the debtor has a financed car, and can afford the payments, the bankruptcy court will not take away the car, unless the amount of equity in the vehicle is considerably greater than New York’s vehicle exemption. Further, the lender is likely to ask the debtor to reaffirm the car loan. Most Chapter 7 Bankruptcy filers who have car loans, tend to reaffirm them.

8. I am not a citizen, and therefore I can’t file for bankruptcy protection.

You can qualify to file bankruptcy even if you are not a United States citizen. If you have the right to reside in the United States, have a social security number, and have filed income tax returns, you can file for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy protection.

9. Bankruptcy can’t help because I have unpaid federal and state taxes.

Under appropriate circumstances, even taxes can be discharged in Chapter 7 Bankruptcy. Chapter 13 Bankruptcy can reduce debtor’s monthly payment to the IRS or New York Department of Taxation and Finance and allow for payments over the life of the plan, as long as five years, without interest.

10. My creditors tell me they will still sue to recover the money owed to them.

Once the bankruptcy is filed, the automatic stay, imposed by the bankruptcy law, protects you from any further attempts to collect a debt or any pending or future lawsuits. While secured creditors may ask for their property back if you do not continue to make payments, they must seek consent of the bankruptcy court before attempting to recover the property.

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.