Source: http://holbuslaw.com/blog/2014/05/
Timestamp: 2019-04-26 06:06:52+00:00

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Bankruptcy… it’s not just for poor people.
There is a great misconception out there that to file bankruptcy is synonymous with admitting that one is poor, and this is just not true. Even billionaires (like Donald Trump) and multi-national corporations (practically every airline I’ve ever known to exist) file for bankruptcy.
Bankruptcy has less to do with debt or income, and more to do with the ratio between those two. Someone making $30,000 per year and only $6k in debt has much less need to file bankruptcy than someone making $60,000 per year with $100k in debt.
In fact, people who are truly “poor” are often the people who benefit from bankruptcy the least. If they are below the poverty guideline or receiving public assistance, their wages are generally exempt from garnishment in the state of Wisconsin. That’s not to say that poor people can’t file bankruptcy. They may wish to do so just to end creditor harassment. But they face fewer invasive debt collection actions as opposed to their wealthier counterparts.
So no, you do not have to be poor to file for bankruptcy. No, filing bankruptcy doesn’t mean you are poor. And no, bankruptcy isn’t just for poor people.
Now, the wealthier you are, the less likely it is that you will qualify for Chapter 7 bankruptcy. But again, the qualification for Chapter 7 (if your income is above the state median income level) has more to do with your debt-to-income ratio than anything else. I have routinely represented families with six figure household incomes. And while many of them had to file Chapter 13, more than a few have qualified for Chapter 7 – depending on the overall circumstances.
Remember – bankruptcy doesn’t mean that you’re broke. It means that you cannot afford to pay all of your bills as they come due, and require some form of relief. Whether that relief is a discharge, a reduction in interest rates, or something else depends on the particular facts of your case.
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Last July, the 7th Circuit Court of Appeals rendered its decision in Ryan v. United States (725 F.3d 623 (7th Cir. Ill. 2013)). In it, Judge Rovner reasoned that 11 U.S.C. § 506(a) and § 506(d) did not have to be read together. The former allows claims to be split into a secured and unsecured portion (where the debt exceeds the value of the collateral), and the latter allows for the avoidance of a lien for disallowed secured claims.
Previously, § 506(a) and (d) were read together, and essentially, it allowed for the stripping of an unsecured junior mortgage via § 506(d). Judge Rovner wrote that just because a debt is unsecured under § 506(a) doesn’t mean it is a disallowed secured claim for purposes of § 506(d). And since then, § 506(d) has no longer been a viable vehicle for lien stripping.
What is lien stripping? Well, in the context I’ll be discussing today, it’s where the value of one’s home is less than the balance of one or more senior mortgages, such that there is no equity for a secondary (or later) mortgage to attach to.
In English: Say you have a home worth $100,000. Your first mortgage balance is $120,000. Your house is already underwater, but to make things worse, you have a second mortgage for $20,000. In this situation, the second mortgage is strippable. This would not be the case is there was any equity (e.g. the house is worth $100,000, but the mortgage balance is $99,999 or less) for the junior mortgage to attach to. The key here is NOT that the house is underwater, but that the house is underwater even before considering a junior mortgage.
In the wake of Ryan, the general consensus is that unsecured junior mortgages can still be stripped by way of § 1322(b)(2). Additionally, the local bar in the Eastern District of Wisconsin has met a few times since then to discuss other problems cropping up in lien strip cases and to bring some uniformity to the process.
Lien stripping a junior mortgage is only possible in Chapter 13 Bankruptcy.
You must be eligible for a Chapter 13 discharge. The “Chapter 20” option (which is a Chapter 7 to wipe out debt followed immediately by a Chapter 13 to strip the lien and affirmed by Judge Pepper in In re Fair, 450 B.R. 853 (E.D. Wis. 2011)) has since been rejected at the district court level in Lindskog v. M&I Bank, 480 B.R. 916 (E.D. Wis. 2012).
If successful, a certified copy of the court order must be recorded with the Register of Deeds in the county where your property is located. Many also believe that, once obtained, a certified copy of the discharge order should also be recorded.
A title abstract for the property.
Copies of all recorded mortgages, assignments of mortgages, and subordination agreements attached to your property – obtained from the Register of Deeds’ office.
Evidence supporting valuation of the property. I strongly recommend all three of the following: (1) copy of your most recent property tax bill, (2) a comparative market analysis not more than 6 months old, and (3) a real estate appraisal not more than 6 months old. If your property was in foreclosure, check the court papers (complaint and judgment) for any assertions of value.
Proof of the current balance on the senior mortgage(s) – either a recent billing statement or the proof of claim filed with the bankruptcy court.
Last week (and several times in the past), I mentioned that bankruptcy generally discharges debts, but does not remove liens. And this is true of consensual property liens (such as mortgages and auto loans) and tax liens (11 U.S.C. § 522(c)(2)(B)).
Judicial liens, on the other hand, can be eliminated in bankruptcy (§ 522(f)(1)(A)). Judicial liens are liens obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding (§ 101(36)).
There is a common misconception that once a creditor files a lawsuit against you and obtains a judgment, that the debt becomes non-dischargeable, and that is not the case. § 523 outlines the various types of debts that cannot be discharged, and a civil judgment – in and of itself – is no more special than a credit card, medical bill, or payday loan.
One of my jobs as your bankruptcy attorney is to help you prepare for life after bankruptcy – including rebuilding your credit while minimizing your potential risks. Today, I’d like to discuss reaffirmation strategies – and specifically – whether you should sign a reaffirmation agreement for a second or third mortgage.
But first, let’s back up and explain what a reaffirmation agreement is and why you might need one.
A common misconception I have encountered among my clients is that secured debts are non-dischargeable. This is not true. Your secured debts (e.g. mortgages and auto loans) are every bit as dischargeable as a credit card, payday loan, civil judgment, or medical bill. And that’s a good thing. This allows people to file for bankruptcy and walk away from their home and car free-and-clear – so they can get a true fresh start.
However, bankruptcy only discharges debt. It doesn’t get rid of the liens. So, if you file for bankruptcy and stop making payments on your mortgage – the lender may not be able to sue you for payment, but they can take back possession of their collateral (i.e. foreclosure).
Not everyone wants to surrender their home or car when they file bankruptcy. In fact, I’d estimate my clients choose to retain between 85% and 90% of their secured loans. So what do they do if their secured debt is dischargeable but they want to keep the collateral? Well, that’s where reaffirmation agreements come in.
Plainly-speaking, a reaffirmation agreement is the voluntary exemption of a debt from discharge. (Another way I like to think of it is that they turn a pre-filing debt into a post-filing debt.) Reaffirmation agreements are great in that they let you keep your stuff and help rebuild your credit faster. The downside to a reaffirmation agreement is that if you run into financial trouble again after your bankruptcy, the discharge won’t protect you from collection on that debt.
There are a number of things a bankruptcy client should consider before signing a reaffirmation agreement. I won’t get into those here. Suffice it to say, I include a comprehensive list of considerations as a cover letter when I send out reaffirmation agreements for the client to review.
What I want to discuss is a strategy in dealing with junior mortgages. IMPORTANT: This advice should not be followed blindly. There are a number of considerations that could affect your decision to sign an agreement or not, and you should discuss those particular circumstances with your bankruptcy attorney.
What I have found to be the best strategy in about 95% of cases is for the debtor to sign the reaffirmation agreement on the first mortgage, but not on any secondary mortgages (or HELOCs).
Why? Let’s pretend you file bankruptcy, sign the reaffirmation agreement on the first mortgage (let’s say Bank of America), don’t sign a reaffirmation agreement on the second mortgage (let’s say Associated Bank), and later hit another financial snag and default on your mortgage payments. The house is going into foreclosure and you’ve elected to walk away from it, but you’re hoping to not have to file bankruptcy again.
In the state of Wisconsin, primary mortgage lenders almost always waive seeking a judgment for a deficiency balance (the difference between what you owe on the mortgage and what the house sells for). Even though you signed a reaffirmation agreement with Bank of America, they’re not pursuing you for the money.
Associated Bank, on the other hand, is not required to waive deficiency. Because you didn’t sign a reaffirmation agreement, the bankruptcy discharge still protects you from collection attempts on this mortgage.
You might be asking yourself: Wouldn’t Associated Bank foreclose if I don’t sign a reaffirmation agreement? Highly unlikely. First, a junior lienholder will almost never foreclose (even in the event of a default), because at auction, the house will sell for less than what is owed on the first mortgage, which means the junior lienholder will have paid all of the expenses of a foreclosure and get nothing out of it in return. Second, most lenders won’t foreclose simply because you didn’t sign a reaffirmation agreement (it’s possible, but rare).

References: v. 
 § 506
 § 506
 § 506
 § 506
 § 506
 § 506
 § 506
 § 1322
 v. 
 § 522
 § 523