Source: https://dianedrain.com/bankruptcy-law/bankruptcy-case-law/case-law-real-estate-issues/
Timestamp: 2020-07-06 19:43:20
Document Index: 145956231

Matched Legal Cases: ['§ 33', '§ 522', '§ 522', '§ 33', '§ 522', '§ 33', '§ 33', 'Case No: 3', '§ 12', '§ 12', '§ 521', '§ 542', '§ 341', '§ 2601', '§ 1692', '§ 522', '§ 33', '§ 33', '§ 522', '§ 522', '§ 522']

Real Estate: HOA, Homestead & Bankruptcy Issues | Diane L. Drain - Phoenix Arizona Bankruptcy & Foreclosure Attorney
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1 Real Estate, HOA & Bankruptcy Issues
1.1 REAL ESTATE: HOMESTEAD and BANKRUPTCY ISSUES
1.1.1 Motion to Reopen Bankruptcy and Motion to Avid Lien on Real Property
1.2 At least once or twice a week someone asks if they have to pay a judgment when trying to sell their home.
1.3 I want to sell my home but the title company says I have to pay a judgment.
1.4 I filed bankruptcy and want to sell my Arizona home, but the title company requires that I pay a judgment.
1.5 WHAT SHOULD I DO?
1.5.1 Homestead Post-Petition Sale Proceeds Retain Exempt Status in Chapter 7
1.5.2 9th BAP Holds that Post-Petition Excess Proceeds from sale of exempt or non-exempt real property is not DMI
1.5.3 VERY IMPORTANT TO CHECK STATUS OF CASE LAW:
1.5.3.1 Issues order blocking foreclosure and grants declaratory relief to homeowner
1.5.4 Do Arizona exemptions have an extraterritorial effect?
1.6 HOMEOWNERS’ ASSOCIATION “HOA” and BANKRUPTCY ISSUES
1.7 At least once or twice a week someone asks if they have to pay a judgment when trying to sell their home.
1.8 I want to sell my home but the title company says I have to pay a judgment.
1.9 I filed bankruptcy and want to sell my Arizona home, but the title company requires that I pay a judgment.
1.10 WHAT SHOULD I DO?
REAL ESTATE: HOMESTEAD and BANKRUPTCY ISSUES
In re Wilson, (9th Cir. Ct of Appeals, 11-27-18) The State of Washington’s homestead exemption statute says “the exemption amount shall not exceed the lesser of (1) the total net value of the [homestead] . . . or (2) $125,000 thousand dollars . . . .” “Net Value” under Washington law is defined as the home’s equity value (just like AZ).
FINDING: The filing date of a bankruptcy petition determines the law governing exemptions and freezes the value of the exemptions that the debtor may claim. Because Debra Wilson’s amended bankruptcy schedules sought to claim more than Washington law permitted her to claim as of the petition date, we affirm the district court’s decision, limiting her claimed exemption to the amount she was entitled to under Washington law as of the petition date.
In this case, the debtor’s equity value at the time of filing was $3560. She used that number on Schedule C when filing. Then after filing, the house appreciated and had increased equity. The increased equity was still less than $125,000. Thereafter, debtor amended Schedule C to exempt the house “100% of fair market value, up to any applicable statutory limit” (using Washington State’s homestead exemption). The intent of the debtor was to allow the exemption to be increased up to $125,000 per the Washington statute to capture the appreciation post-petition.
The court said she could not amend Schedule C to increase the exemption amount after the case was filed. The court explained that any post-petition appreciation is always for the benefit of the estate, not the debtor. The Washington homestead statute specified that the exemption is either the lesser of the total equity value or $125,000. Because exemptions are fixed as of the date of filing, the debtor only gets to exempt what the equity was as of the date of filing. Any post-petition appreciation is for the benefit of the estate, not the debtor, even if the appreciation is still below $125,000.
In re Smith, 3:10-bk-19970-MCW, 526 B.R. 343 (Az District Ct. 2015) Turnover of post-petition sale from homestead. On May 16, 2014, the Trustee filed his turnover motion. Id. The bankruptcy court held oral argument on June 9, 2014. Id. at 5. On July 1, 2014 the bankruptcy court issued a preliminary order directing the Trustee to file an affidavit explaining why he did not close the Debtors’ bankruptcy case prior to the expiration of the eighteen-month reinvestment period, nearly four years after the petition date. Id. On August 26, 2014, after accepting the Trustee’s declaration, the bankruptcy court issued an order granting the Trustee’s turnover motion, holding that the proceeds from the post-petition sale were subject to the eighteen-month reinvestment period imposed under § 33-1101(C). Id. On September 9, 2014, Debtors filed notice of their appeal. Affrimed on appeal
In re Jacobson, 676 F.3d 1193 (9th Cir.2012), the Court of Appeals was asked to decide the applicability of California’s homestead exemption reinvestment requirement, which compelled a debtor to turn over proceeds from the sale of her exempt homestead after she failed to reinvest those proceeds within the six months permitted by the statute. In re Jacobson, 676 F.3d at 1198-99. Before Jacobson, California had elected to opt out of the Bankruptcy Code’s list of default property exemptions outlined in § 522(d), and defined their own exemptions as permitted by § 522(b)(2). Id. at 1198. California provided a homestead exemption similar to the exemption provided by many states, including Arizona. Id.; In re White, 377 B.R. 633, 643 (Bankr.D.Ariz. 2007) (recognizing that California’s homestead exemption is similar to A.R.S. § 33-1101).
The debtor in Jacobson argued that the reinvestment requirement should be read out of California’s homestead exemption. In re Jacobson, 676 F.3d at 1200. Jacobson rejected the argument, stating that “nothing in 11 U.S.C. § 522(b) limits California’s power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all.” Id. (internal quotations omitted). Jacobson held that bankruptcy exemptions are fixed at the time of the bankruptcy petition’s filing, and the entire state law that is applicable on the petition’s filing date, including the reinvestment requirement, is determinative of whether an exemption applies.
Relying on the analysis of the court in In re Allman, 286 B.R. 402 (Bankr. D. Ariz. 2002), the Court has previously determined that Arizona law does not preclude a homestead claim in multiple adjoining parcels. In Allman, the court cited to Wuicich v. Solomon-Wickersham Co., 18 Ariz. 164, 166, 157 P. 972 (1916) for the proposition that two adjacent parcels can satisfy the requirement of one compact body for homestead purposes. Allman, 286 B.R. at 405. Ultimately, the court determined that Arizona courts would allow a homestead on contiguous parcels of land, whether purchased at the same time or not, unless there is evidence that a sub-divided portion of the entire parcel is not being used for residential purposes. Allman, 286 at 407; see also Banner Bank v. Johns (In re Johns), 2014 WL 6892744, at *5-7 (BAP 9th
Cir. 2014) (interpreting Idaho law and finding a homestead exists in multiple parcels on which more than one dwelling exists).
Section 522(f) addresses a lien which “impairs” a debtor’s exemption. “[U]nless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning, …” Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979), cited in Sanders, 39 F.3d at 261 and in Pioneer Inv. Services Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). 13 Webster’s Third New International Dictionary Unabridged (1981), at 1131, provides as one of the definitions of “impair” the meaning “diminish in quantity, value, excellence or strength.” Sanders ruled that because the lien does not fix upon the Utah exemption, the homestead is not impaired. Sanders, 39 F.3d at 262. (Emphasis added.) But there can be little question that not avoiding this lien results in a diminishing of the value of the Debtors’ exemption (and of their discharge and their fresh start). While the Debtors’ homestead exemption is technically and legally “exempt from attachment”, in these days in which a title policy is ordinarily a condition of the transfer of an interest in real property, Debtors may well not be able to convey or refinance their property without (1) further state-court litigation to clarify the “non-attachment” of the judgment lien, (2) paying off or otherwise compromising with the creditor, or (3) convincing a title company to insure the title over the existence of this judgment lien on the *339 record. See also Coats, 232 B.R. at 214 n. 8:
Pacific, et al. v. Castleton, et al. December 27, 2018 – 1 CA-CV 17-0667 – Issue:Whether a judgment creditor may attach a judgment lien to homestead property, or whether it may execute on its judgment only by way of a forced sale of the property under Ariz. Rev. Stat. section 33-1105. Holding: The court holds that a recorded judgment is not a lien on homestead property.
Motion to Reopen Bankruptcy and Motion to Avid Lien on Real Property
In re Awdisho, 2:14-bk-06594-DPC. (2/12/20) IT IS ORDERED denying Debtors’ Motion to Reopen. IT IS FURTHER ORDERED denying Debtors’ Motion to Avoid Lien. The judgment recorded by Midland prior to the Petition Date does not constitute a lien against the homestead property owned by the Debtors. Midland’s claim has been discharged in Debtors’ bankruptcy proceedings. Should Midland refuse to voluntarily remove its judgment from the Recorder’s records, the Debtors may seek relief in State Court under A.R.S. § 33-420.
TITLE COMPANY INSISTING I PAY A JUDGMENT BEFORE SELLING MY HOMESTEAD
At least once or twice a week someone asks if they have to pay a judgment when trying to sell their home.
I want to sell my home but the title company says I have to pay a judgment.
Very bad information from title company.
Assuming this is in Arizona then you are dealing with a title company that does not know how to read Arizona law. See Arizona Revised Statutes 33-964:
A. Except as provided in sections 33-729 and 33-730, from and after the time of recording as provided in section 33-961, a judgment shall become a lien for a period of ten years from the date it is given, on all real property of the judgment debtor except real property exempt from execution, including homestead property, in the county in which the judgment is recorded, whether the property is then owned by the judgment debtor or is later acquired. A civil judgment lien obtained by this state and a judgment lien for support, as defined in section 25-500, remain in effect until satisfied or lifted.
If this is your Arizona home (homestead) then do not let the title company bully you into paying the judgment. Move to a different title company who knows how to read the law.
Pacific, et al vs Castleton Arizona Court of Appeals, Div 1, No. 1 CA-CV 17-0667 Pacific Western Bank and Coastline Re Holdings Corp. (collectively, “PWB”) appeal from the superior court’s entry of a preliminary injunction enjoining the sale of a home owned by the Castleton Revocable Trust (the “Castleton Trust”). Because a judgment creditor may not attach a judgment lien to homestead property, but instead may execute on its judgment only by way of a forced sale of the property under Arizona Revised Statutes (“A.R.S.”) § 33-1105, we affirm the superior court’s preliminary injunction. The amount of equity is immaterial. The only method of enforcement is by Sheriff sale.
Notes: Bottom line for a creditor’s remedy: The creditor cannot record a judgment lien and just wait for the house to sell before getting paid on a homestead, even if the house has $1 million dollars of equity. It is incumbent on the creditor to initiate the sheriff sale on the homestead if and only if: (a) it is done before the home is transferred/sold; and (b) there is sufficient equity above $150,000 (which means over and above homestead, plus all consensual or liens that attach by law). There is no such thing as a judgment lien that attaches to a homestead. This does not apply if the realty is not a homestead.
I filed bankruptcy and want to sell my Arizona home, but the title company requires that I pay a judgment.
Again, the Arizona law applies even if you filed for bankruptcy. It is important to list all debts, including judgments (remember you signed a sworn declaration that you listed 100% of all your debts). Even if you forget to list this judgment it is still not a lien against your home (see the Arizona law above).
Note – selling your home while in bankruptcy will be a problem. Most likely you will need to get permission from the court, or at least the trustee, in order to sell your home. Talk to your bankruptcy attorney before deciding to sell your home. If your bankruptcy attorney does not know the answer to your questions then hire another attorney. This issue is a very basic one and every bankruptcy attorney should know the process.
If a title company does not ignore judgment liens that show up on a title report with respect to a seller’s homestead (even if no bankruptcy was filed), send a letter to the title company’s lawyer explaining the law and why this judgment lien does not attach to the homestead (include copies of the statutes: ARS 33-964. Highlight the provisions dealing with homestead ‘exempt’ property.). If the title company refuses to change their requirements then move the escrow to a title company that will (such as North American Title or First American Title).
Note: if there is equity over the allowed $150,000 homestead then the judgment creditor must initiate a sheriff sale before the property is transferred. If the creditor fails to go through the sheriff sale process before the property is transferred, the creditor has lost its remedy to get paid with respect to the homestead.
WHEN IS A HOUSE A HOME AKA HOMESTEAD
When is a house a home? Article from ABI with lots of cases (2/2019)
SELLING THE HOME WHILE IN CHAPTER 13
The trustees will require the following (generic list):
1. A purchase contract
2. A proposed amendment to schedules I and J
3. The debtors must be current with all plan requirements (plan payments and turn-over of taxes/refunds)
4. If there is no title company involved yet, they will require that once a sales offer is made, and escrow opened, Preliminary Closing docs. But, the best practice is to open escrow before going this far.
Once sold, the debtors must file the amended schedules which means they need to be in another property and know the expenses associated with that property.
The letters from the trustee usually take less than a week to process. More often than not, they do not require a court order assuming the confirmed plan re-vests the home to the debtor(s).
If pre-confirmation will probably need a Motion to sell. If post-confirmation the sale can be done informally as long as the plan is confirmed. Make certain the SOC/Plan provides that the property re-vests in the debtor(s) and that they are debtors are free to use the property in anyway (such as sell it or refinance) without further order of the court. I believe the only reason for the trustee permission letter is the title agency and the trustee needs to know if the house sells for more then $150,000 in equity.
If you have to file a Motion, include the name of the mortgage company, the realtors, their percentage of commission, the proposed sales price, the amount of the debt and the purchaser’s name(s). If no purchaser, a generic request to allow the sale with the provide that additional information, including amended schedules, can usually be filed. The motion should allege that based on market prices, and opinions of the realtor, the sale price is reasonable and the sale would not impact on the creditors of the estate.
Ex-parte: see LR 2084-25 (http://www.azb.uscourts.gov/rule-2084-25
If lender is being difficult (debtor cannot get a final payoff for the sale – as evidenced by a history of lender’s failure to respond): consider drafting the motion to not provide for higher and better offers (unless the property could sell for more than secured debts, plus homestead). If the sale could (reasonably) produce non-exempt proceeds, then will need to allow for higher and better offers.
When there is a difficult lender – consider drafting the order to give the option to hold (escrow) out a specified amount of money and sell it free and clear of the mortgage lien. That will help if later the lender continues to be difficult to work with (obtain payoff).
HOMESTEAD and INVESTMENT OF EXCESS OR SALE PROCEEDS
In re Won Case No: 3:17-bk-01600-DPC (AZ BK Court 6/5/19) Discusses several cases regarding co-mingling of homestead proceeds with non-homestead. The Court now finds that on December 14, 2018, net homestead proceeds of $73,709.15 from the sale of the Debtors’ homesteaded real property (the “Property”) were deposited in Debtors’ Chase Bank account which then contained non-homestead proceeds. $50,000 of the homestead proceeds were admittedly spent by the Debtors but they failed to supply any evidence that the $50,000 was spent on acquiring a new homestead property. ORDERS that the homestead exemption asserted by the Debtors in the sale proceeds from the sale of the Property has lapsed to the extent of $58,368 and the sum of $58,368 is no longer exempt.
EXCESS SALE PROCEEDS - POST-CONFIRMATION - NOT DISPOSABLE INCOME
9th BAP Holds that Post-Petition Excess Proceeds from sale of exempt or non-exempt real property is not DMI
In re Black, 609 B.R. 518 (9th Cir BAP 2019) “Excess proceeds that Chapter 13 debtor obtained, beyond those necessary to make final balloon payment contemplated in his confirmed plan and to satisfy his obligations thereunder, as result of post-confirmation sale of his real property, were not “disposable income,” such as had to be devoted to payment of unsecured creditors under plan.”
JUDICIAL FORECLOSURE, REDEMPTION & BANKRUPTCY
Helvetica Servicing Inc. v. Giraudo, 1 CA-CV 15-0490 2/9/17 The redemption price for a junior lienholder is the sale price of the secured property plus the outstanding value of the senior lienholder’s allowable deficiency judgment. If a property is subject to two deeds of trust and the senior lienholder purchases the property at a foreclosure sale without joining the junior lienholder, the junior lienholder may seek to redeem the property under A.R.S. § 12-1285(B).
The redeeming junior lienholder is not required to pay any portion of the senior lien that is unenforceable
against the judgment debtor under the statutes.
12-1282. Time for redemption
The judgment debtor or his successors in interest may redeem at any time within thirty days after the date of the sale if the court determined as part of the judgment under which the sale was made that the property was both abandoned and not used primarily for agricultural or grazing purposes.
The judgment debtor or his successor in interest may redeem at any time within six months after the date of the sale except when the court has made the determinations as provided in subsection A.
If the redemption as provided in subsection A or B is not made, the senior creditor having a lien, legal or equitable, upon the premises sold, or any part thereof, subsequent to the judgment under which the sale was made, may redeem within five days after expiration of the applicable period provided in subsection A or B, and each subsequent creditor having a lien in succession, according to priority of liens, within five days after the time allowed the prior lienholder, respectively, may redeem by paying the amount for which the property was sold and all liens prior to his own held by the person from whom redemption is made, together with the eight per cent added to the amount as provided in section 12-1285.
VERY IMPORTANT TO CHECK STATUS OF CASE LAW:
Bankruptcy related: Most likely fee remains property of the estate until the foreclosure judgment is entered, after which the right to redeem is what remains property of the estate (see ARS § 12-1281 to -1289 (esp. -1282 and -1283(A)), but there’s a pair of older case saying that title doesn’t pass to the purchaser until after the redemption period passes, In re Sapphire Investments, 27 B.R. 56 (Bankr. Ariz. 1983), and that this period can be extended. In re Sapphire Investments, 19 B.R. 492 (Bankr. Ariz. 1982).
JTWROS ENDS UPON DEATH OF ONE SPOUSE
Cohen v. Chernushin (In re Chernushin), 18-1068 (10th Cir. Dec. 21, 2018) At least when joint tenancies with right of survivorship are involved, the common conception of the snapshot test does not apply to fix an interest in property as of the filing date, according to the Tenth Circuit.
Gregory and Andrea Chernushin owned a second home in Colorado in joint tenancy with right of survivorship. Eventually, Mr. Chernushin (but not Ms. Chernushin) filed for bankruptcy. During the bankruptcy proceedings,
Mr. Chernushin died. The bankruptcy trustee, Robertson B. Cohen, then filed an adversary complaint against Ms. Chernushin, seeking to sell the home. Ms. Chernushin argued the bankruptcy estate no longer included any interest in the home because Mr. Chernushin’s joint tenancy interest ended at his death. The bankruptcy court agreed with Ms. Chernushin, as did the district court on appeal. Mr. Cohen now appeals to this court. Because the bankruptcy estate had no more interest in the home than Mr. Chernushin and Mr. Chernushin’s interest extinguished when he died, we affirm.
“Consequently, Section 363(h) confers no power on [the trustee] to sell the second home,” Judge McHugh said. In sum, she said, the estate had “no interest in the second home that extends beyond [the debtor’s] death.”
FAILURE TO COOPERATE WITH TRUSTEE = LOST HOME
Madatian v. Goldman (In re Madatian) CC-18-1166-FKuTa 9th Cir BAP, 2/11/19. This shows how dangerous it can be to assume filing for bankruptcy is under the debtor’s control (I would never allow a client to act in this way). Trustee filed a Motion for Turnover to compel debtor to vacate her residential property and turn over possession of the property and certain records. Trustee argued that debtor had failed to cooperate with the real estate agent’s efforts to market and sell the property. Specifically, the Trustee argued that debtor had a duty to cooperate and turn over all property of the estate. The Trustee’s real estate agent needed to inspect the interior of the residential property, take photos, and show the property to prospective buyers. The agent twice attempted to make these arrangements with debtor, but debtor did not respond.
At the hearing on the Motion for Turnover, the bankruptcy court ruled that the Trustee was entitled to turnover of the Residential Property and the records associated with certain rental property. Regarding the rental property records, the court required debtor to surrender the requested documents under § 521(a)(4). It also found that debtor was “interfering with the Trustee’s collection of rent from which to pay expenses and refusing to simply provide the documents containing the information necessary to pay the expenses ….” Finally, the court stated that the Trustee “is absolutely entitled to turnover of the residence.”
The court stated that the Trustee can evict an uncooperative debtor under § 542(a), and “there’s ample evidence demonstrating that this Debtor and her family will not cooperate with the [Trustee’s] efforts to market the residence and that turnover is necessary.” The court listed the various facts demonstrating debtor’s failure to cooperate with the Trustee: “(1) Ms. Madatian failed to file chapter 11 monthly operating reports; (2) she failed to file a disclosure statement; (3) she sent the Trustee an e-mail threatening civil and criminal prosecution if the Trustee or her agents “trespassed” on the Rental Property; (4) she stormed out of the § 341(a) meeting and refused to appear thereafter; (5) she refused to provide the Trustee with her tax returns and other requested documents; (6) she appeared to tell the tenants not to pay rent to the Trustee; (7) she did not respond to the real estate agent’s e-mails; and (8) she did not provide any evidence to contravene the declaration testimony offered by the Trustee.
The court concluded that Ms. Madatian’s “obstreperous conduct demonstrates there’s really no practical way for the Trustee and her broker to market this residence and show it to prospective buyers while the Debtor continues to occupy it.” The bankruptcy court issued an order granting the Motion for Turnover but allowed debtor a reasonable time to vacate the residential property.
A/C UNITS and SOLAR PANELS
PMSIs in consumer goods are perfected without any recording (other than vehicles). See ARS 47-9309(1). Panels probably are part of the real estate. However, the attached case says because the air conditioner is a consumer good, no recording was necessary (either UCC-1 or fixture filing).
Also, even assuming a lien is avoidable in BK, perfection is about priority and notice which may not be required to make a security agreement enforceable. In other words, a security interest is not void by the fact a UCC or fixture filing is not recorded (assuming it is required because the collateral is not a consumer good). Unless a trustee or DIP avoids it under the BK code. A non-recorded financing statement/fixture filing cannot be avoided when it wasn’t required under state law to begin with (because they are consumer goods).
See attached case that says no recording was required for an air conditioner, which seems akin to solar panels. And again, even if a recording were required, the lack of recording doesn’t defeat the lien.
Attached (NOTE: Bankruptcy Court in N. Carolina): UCC not necessary to grant security interest in consumer goods.pdf
ONE ACTION RULE - RE FORECLOSURE AND DEFICIENCY
Serap v. Idnani (In re Serap)
Ruling : BAP for 9th Circuit affirmed ruling of bankruptcy (D. Nev. May 2, 2019) in 2-1 split, concluding Nevada’s “one-action rule” renders a creditor’s deed of trust void if, prior to the completion of the creditor’s foreclosure sale, the creditor obtained a personal judgment against a guarantor who is unable to waive the protections of the one action rule under state law. The BAP agreed with bankruptcy court that under Nevada law, creditor’s lien was released and discharged once she obtained a personal judgment against the guarantor for full amount of the debt. Dissent disagreed with ruling on Nevada law.
IN REM & IN PERSONAM OBLIGATIONS & DISCHARGE
After an individual debtor receives a bankruptcy discharge, a creditor may not seek to recover the discharged debt. Under section 524(a)(2) of the Bankruptcy Code, a discharge injunction permanently enjoins creditors from trying to collect discharged debts and prohibits a creditor from collecting any debt where the debtor has been discharged of personal liability.
A bankruptcy discharge does not completely extinguish the prepetition debt. While the debtor’s in personam (personal) liability for the debt is discharged, the discharge does not extinguish a creditor’s in rem rights to foreclose on the property against which it holds a lien (see Johnson v. Home State Bank, 501 U.S. 78, 82–83 (1991); Long v. Bullard, 117 U.S. 617, 620–21 (1886)).
When the mortgage against the debtor’s home remains enforceable in rem, and the debtor wants to keep its residence and continues to engage with its mortgage servicer by making monthly payments or participating in a loss mitigation program, the mortgage servicer is in a complicated situation. The mortgage servicer must balance trying to communicate with the discharged debtor about the mortgage without engaging in collection attempts that may violate the discharge injunction or other law. Mortgage servicers can face potential sanctions and damages for engaging with discharged debtor-borrowers and should therefore have clearly outlined policies and protocols for addressing these scenarios based on the servicer’s risk tolerance.
This Note provides guidance to mortgage servicers when servicing the residential mortgage debt of a discharged debtor-borrower, highlights the risks that servicers encounter from this continued relationship, and provides recommended language for post-discharge communications to help servicers mitigate the risk of discharge injunction violations.
Understanding a Residential Mortgage
Residential mortgages involve several key parties. These include:
The lender, who is the original entity (originator) that lends the money to the borrower.
The investor, who owns the mortgage loan. Investors can be government-sponsored entities (GSEs) such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) or privately owned. Often, the originator sells the loan to an investor.
A mortgage servicer who manages the loan account. The servicer can be the loan owner or the owner can sell the right to service the loan to another company. The duties of the servicer include:
collecting and processing payments;
sending monthly billing statements;
managing escrow accounts;
communicating with borrowers;
reviewing borrowers’ loss mitigation applications;
managing the property if abandoned by the borrower; and
managing foreclosures.
Discharged Debt in Individual Bankruptcy Cases
Debtors in both Chapter 7 and Chapter 13 bankruptcy may seek to retain their primary residence in bankruptcy. While debtors in a Chapter 11 or 12 bankruptcy may also seek to retain their residence, this Note addresses only individual Chapter 7 and 13 bankruptcies because individual Chapter 11 and Chapter 12 cases are less common.
Discharging Debt Under Chapter 7
A Chapter 7 debtor has several options to retain real property encumbered by a loan. A Chapter 7 debtor may:
Redeem the loan and pay it off.
Reaffirm the loan and agree under contract to be personally liable for the debt (despite the discharge of other debts) while maintaining ownership and possession of the property.
If the debtor is current on its loan, convert the mortgage into a non-recourse obligation through a “ride-through” and remain in the property while continuing to make regularly scheduled mortgage payments.
Unless the debt has been reaffirmed, a Chapter 7 discharge relieves an individual debtor from personal liability for mortgage debt and prevents the mortgage servicer from taking any collection actions against the debtor personally.
For more information on Chapter 7 bankruptcy, see Practice Note, Chapter 7 Liquidation: Overview (W-000-6231).
A Chapter 13 debtor will typically elect to file a Chapter 13 case to keep the family home. Generally, this is done when a Chapter 13 debtor chooses to catch up on past due payments and make go forward payments under the terms of the Chapter 13 plan of repayment.
A Chapter 13 debtor can also elect to surrender the property through the Chapter 13 bankruptcy plan. If the debtor receives a discharge but remains in possession of the property despite an intent to surrender in the confirmed plan, the debtor is discharged of personal liability. However, the security interest survives the discharge.
For more information on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy Timeline (W-019-8355).
Section 24(J) Safe Harbor
Section 524(j) of the Bankruptcy Code provides a limited safe harbor for a creditor holding a secured claim on the debtor’s principal residence that seeks to collect periodic payments from the debtor in the ordinary course in lieu of foreclosure relief. Under particular circumstances, a creditor may take certain actions with respect to the mortgage outside of foreclosure without violating the discharge injunction.
Section 524(j) does not completely protect against allegations of discharge injunction violations that can arise from communications relating to collecting payments on the mortgage debt. If servicers elect to accept payments in lieu of foreclosing on the property post-discharge, it is critical to ensure that all servicing activity, particularly communications:
Are narrowly tailored to eliminate the risk that they are viewed as coercive.
Attempt to inform of, rather than demand, payments.
While it is widely accepted that a mortgage servicer may send informational statements to a discharged debtor (see Best v. Nationstar Mortg. LLC, 540 B.R. 1, 10-11 (B.A.P. 1st Cir. 2015)), statements that attempt to coerce payment violate the discharge injunction. Therefore, servicers must adapt servicing correspondence to avoid a discharge violation through routine correspondence such as:
Default and foreclosure notices.
Loss mitigation solicitations. Loss mitigation is generally governed by investor requirements whereby the loan servicer solicits the borrower for information to evaluate it for potential loss mitigation options. This can mitigate or lessen the loss to the investor resulting from a borrower’s default. In some circumstances, loss mitigation can help a borrower keep its home through a loan modification (see Guidelines For Post-Discharge Loan Modification).
Force-placed insurance notices (where the lender must place an insurance policy on a property when the homeowners’ own property insurance has lapsed or is insufficient).
The only way to fully eliminate the risk of violating the bankruptcy discharge injunction is to cease all communications with debtor-borrowers who receive a discharge. This drastic change in practice is not realistic because:
Where a debtor-borrower still lives in the home and pays on the loan, the debtor-borrower may seek additional information about the loan, including how much the debtor borrower must pay to avoid foreclosure. Additionally, the discharge injunction does not absolve the servicer of sending escrow statements as required by the Real Estate Settlement Procedures Act (12 U.S.C. §§ 2601–2617).
Other non-bankruptcy laws may require certain communications. For example, the servicer may have a statutory requirement to send the debtor-borrower pre-foreclosure notices and information (see In re Kirby, 589 B.R. 456 (Bankr. D. Me. 2018) (post-discharge default letter sent by mortgagee to Chapter 7 debtors that included information required under Maine law to preserve mortgagee’s in rem right to foreclose, contained bankruptcy disclaimer in bold type and indicated that it was not attempt to collect a debt that might have been discharged in bankruptcy, did not violate the discharge injunction)).
Servicers must balance between providing statutorily mandated correspondence to debtor-borrowers and avoiding allegations that the correspondence violates the discharge injunction. In these cases, a carefully worded, narrowly tailored disclaimer is advisable.
Bankruptcy Disclaimer Wording
To determine whether a post-discharge communication violates the discharge injunction, courts conduct a fact-intensive inquiry into whether the communication was an attempt to collect the debt from the debtor-borrower personally. Courts heavily scrutinize the existence of and language within bankruptcy disclaimers on debtor-borrower communications. As part of this scrutiny, courts view these communications from the perspective of the unsophisticated consumer.
Courts have found discharge violations where correspondence with a debtor-borrower following the debtor’s discharge included:
A statement that a late fee would be charged for untimely payment.
Where courts have found violations for correspondence containing these items, the correspondence has typically been coupled with other conduct that could be viewed as coercive or harassing (see In re Forson, 583 B.R. 704 (Bankr. S.D. Ohio 2018); In re Sharak, 571 B.R. 13 (Bankr. N.D. N.Y. 2017); In re Vanamann, 561 B.R. 106 (Bankr. D. Nev. 2016); In re Brown, 481 B.R. 351 (Bankr. W.D. Pa. 2012); In re Bruce, 2000 WL 33673773 (Bankr. M.D. N.C. 2000)).
Courts are less likely to find a violation if the statement:
Has a proper disclaimer that includes a statement:
acknowledging the effect of the discharge;
that the creditor is not attempting to collect discharged debt against the debtor-borrower personally; and
that any payments would be voluntary.
(See In re McConnie Navarro, 563 B.R. 127 (Bankr. D. P.R. 2017) (monthly statements to debtor indicated, in multiple places and in all capital letters, that they were being sent for informational purposes only); In re Best, 2015 WL 6643649 (B.A.P. 1st Cir. 2015) (correspondence containing language stating that, if the debtor had received a discharge in bankruptcy, the communication was not an attempt to collect a debt and was provided for informational purposes only); In re Lemieux, 520 B.R. 361 (Bankr. D. Mass. 2014) (mortgagee’s notice of change in interest rate mailed to Chapter 7 debtor post-discharge did not violate discharge injunction because notice indicated that, if debtor had received a bankruptcy discharge, then notice was not intended to collect a debt, and mortgagee would “only exercise rights as against the property”).)
Mortgage servicers should be mindful that there is no language that has been deemed an absolute shield for a bankruptcy disclaimer. Even innocuous statements under the right facts may be found to violate the discharge injunction.
Circumstances of Communication
The specific circumstances of the borrower-servicer relationship, and the facts presented by the debtor-borrower, weigh heavily in a court’s analysis of whether the servicer has violated the discharge injunction. For example, if:
A servicer sends a large quantity of letters offering alternatives to foreclosure in a short period of time, it will look more like coercive behavior than sending similar correspondence once (see In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011) (lender sent 24 letters over ten-month period in post-discharge communication); In re Nibbelink, 403 B.R. 113 (Bankr. M.D. Fla. 2009) (mortgagee violated the discharge injunction by making numerous telephone calls and sending numerous letters to debtors post discharge, demanding that they become current or face foreclosure)).
The debtor-borrower indicated an intent to surrender the property, that fact will often weights in favor of a finding of a discharge injunction violation during a review of the servicer’s correspondence with the debtor-borrower (see In re Plummer, 513 B.R. 135 (Bankr. M.D. Fla. 2014); In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011); In re Bruce, 2000 WL 33673773 (Bankr. M.D. N.C. 2000)).
The debtor-borrower previously requested that the servicer cease sending post-discharge correspondence, the court is more likely to find a violation (see In re Szenes, 515 B.R. 1 (Bankr. E.D. N.Y. 2014) (bank’s conduct of sending two letters to debtor inquiring about payment of debt, the second of which was mailed after debtors’ counsel had contacted bank and pointed out that the first letter violated discharge injunction, violated the discharge injunction); In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011) (debtors had requested that communications cease and had filed contempt motion against lender for excessive post-discharge communications)).
FDCPA Disclaimer
Under the Fair Debt Collection Practices Act (FDCPA), when a third-party debt collector makes any communication with a debtor, they must include a disclaimer that the correspondence:
Is for collecting a debt.
Will use information obtained from the communication only for that purpose.
(15 USC § 1692e(11)).
Crafting correspondence to discharged debtor-borrowers is complicated when both an FDCPA disclaimer and a bankruptcy disclaimer are necessary. The servicer can appear to tell the debtor-borrower that it intends to collect the debt (under the FDCPA disclaimer) while also recognizing that they cannot do so (under the bankruptcy disclaimer). This has led some courts to find this type of double disclaimer misleading to the least sophisticated consumer.
Some courts find it permissible to include both FDCPA disclaimers and significant and prominent bankruptcy disclaimers (see Whalen v. Specialized Loan Servicing, LLC, 155 F.Supp.3d 905, 908 (W.D. Wis. 2016) (where the notice contained both FDCPA and bankruptcy discharge disclaimer language as follows: “Bankruptcy notice—if you are a customer in bankruptcy or a customer who has received a bankruptcy discharge of this debt, please be advised that this notice is sent to comply with the requirements of the Fair Debt Collection Practices Act (’FDCPA’). This notice constitutes neither a demand for payment nor a notice of personal liability to any recipient hereof, who might have received a discharge of such debt in accordance with applicable bankruptcy laws or who might be subject to the automatic stay of section 362 of the United States Bankruptcy Code. However, it is being sent to you as the lien against the collateral property has not been discharged in your bankruptcy.”)).
For more information on the FDCPA, see Practice Note, FDCPA Litigation: Key Issues and Considerations (W-007-2315).
Drafting a Disclaimer: Practice Pointers
To help mitigate the risk of discharge injunction violation allegations, mortgage servicers should ensure that all communications to discharged debtor-borrowers:
Acknowledge the bankruptcy discharge.
State the voluntary nature of continued payments.
Confirm that the debtor-borrower has no personal obligation to pay the servicer.
Prominently display any disclaimer, rather than include it as a part of the fine print.
Are specific and personalized, not generic or hypothetical.
Include repeated disclaimers on correspondence related to payments of any type.
Servicers should also consider the totality of the communications with debtor-borrowers, including quantity and frequency of the following:
Loss mitigation overtures.
Escrow statements.
Servicers should avoid sending any unnecessary letters to discharged debtor-borrowers, including letters not otherwise required by non-bankruptcy law.
Guidelines for Post-Discharge Loan Modification
A bankruptcy discharge of personal liability does not preclude a debtor-borrower from seeking a loan modification.
Loan Modification Generally
A loan modification permanently restructures the terms of a mortgage, which often provides a more affordable payment to the borrower. A loan modification can reduce monthly payments by:
Reducing the borrower’s interest rate.
Converting a variable interest rate to a fixed interest rate.
There are many different loan modification programs available. While debtors may seek a loan modification following discharge, a servicer is not required by law to modify the loan. Instead, the servicer is directed through the modification process by investor guidelines such as the Department of the Treasury’s Home Affordable Modifications Program (HAMP) or a servicer’s own policies.
HAMP Guidelines for Loan Modifications
The now expired HAMP program provided clear and consistent loan modification guidelines when the debtor-borrower had discharged its personal liability.
The HAMP guidelines encouraged loan modification language to include:
A disclaimer that all payments are voluntary.
An acknowledgment that the servicer cannot seek to collect against the debtor-borrower personally.
Fannie Mae and Freddie Mac have both given guidance that loan modification documents include similar suggested language.
Servicer Guidelines for Loan Modifications
Where a debtor has received a discharge of personal liability, servicers are often wary of violating the discharge injunction and offering loan modifications in general. To protect themselves, servicers that offer loan modifications to post-discharge debtors should:
Tailor the loan modification offerings to only those debtor-borrowers who have indicated an intent to retain the property. Discharge violations are often found where a debtor-borrower surrenders the property and a servicer solicits that debtor-borrower for loss mitigation. Upon surrender, the debtor-borrower indicates intent to sever the relationship with the servicer, and the servicer should not offer loss mitigation to that borrower.
Carefully consider which products are offered to borrowers who have discharged personal liability. Investors, particularly GSEs, offer partial claim modification, which involves the borrower entering into a separate note, with a second lien position, in favor of the Department of Housing and Urban Development (HUD). When considered within the context of a bankruptcy discharge, the second lien note may be viewed as an impermissible post-discharge reaffirmation if it lacks language acknowledging the bankruptcy discharge. The standard subordinate note provided by HUD does not currently contain this acknowledgement language.
Take care when deciding whether, and how, to modify a discharged debtor-borrower’s loan. Servicers should ensure the loan modification process is tailored to mitigate risk of other discharge injunction violations.
Best Practices for Offering Loss Mitigation to Discharged Debtor-Borrowers
As a practical matter, regulators, investors, and bankruptcy courts expect lenders and servicers to evaluate debtor-borrowers for possible loan modifications post-discharge. Notwithstanding this expectation, lenders and servicers should proceed with caution when processing post-discharge requests for loss mitigation assistance, as courts are unlikely to accept widespread industry practice as a defense to discharge injunction violations.
Be Cautious When Using Templates
Investors often provide templates or required language to document loan modification agreements. Some specifically include language to reflect a bankruptcy discharge. For example, the Fannie Mae loan modification agreement (Fannie Mae Form 3179) provides:
If templates do not include similar disclaimers:
Servicers should consider discussing and seeking approval from the investor to incorporate these disclaimers.
Servicers can send separate correspondence to the debtor-borrower confirming that personal liability has been extinguished by the bankruptcy discharge and including an acknowledgement to be signed by both parties.
Evaluate Treatment of Debtor-Borrowers Who Have Surrendered
Courts generally view a debtor-borrower’s statement of intention to surrender property under Chapter 7 or intent to surrender property in a confirmed plan under Chapter 13 as evidence that the debtor-borrower no longer wants to continue the relationship with the servicer or stay in the property. To eliminate risk, servicers should avoid soliciting and entering into loan modifications following a debtor-borrower’s stated intent to surrender the property. These broad prohibitions are likely impractical because:
Many discharged debtor-borrowers who have surrendered property continue to make voluntary payments and may even seek loan modifications.
Some states such as California and Nevada have statutory pre-foreclosure requirements that include loss mitigation solicitation (see Practice Notes, Residential Foreclosures (CA): Pre-Foreclosure Requirements and Considerations (W-013-8580), Residential Foreclosures (Nonjudicial) (NV): Pre-Foreclosure Requirements and Considerations (W-010 1072), and Residential Foreclosures (Judicial) (NV): Pre-Foreclosure Requirements and Considerations (W-019-0178)).
Because of these situations, servicers should mitigate risk by developing robust procedures regarding solicitation of discharged debtor-borrowers for loss mitigation to avoid soliciting debtor-borrowers who have surrendered. This will allow servicers to:
Outline their process for credit pulls (even soft credit pulls) for debtor-borrowers who have indicated an intent to surrender. Under the Fair Credit Reporting Act, credit pulls are only permissible where there is a “legitimate business need for the information.” If the debtor-borrower has indicated it does not want the property anymore, there is arguably no legitimate business need for the mortgage servicer to pull that borrower’s credit.
Tailor communications to minimize the risk of violating the discharge injunction by drafting and reviewing these communications on a one-off basis rather than relying on forms to ensure all of the debtor-borrower’s specific circumstances are considered.
Personalized, individual analysis and communication decreases the likelihood of complaints or litigation by the debtor-borrower for post-discharge conduct relating to loan modification outreach.
Beware of Court-Specific Loss Mitigation Requirements
Among the nearly 100 bankruptcy courts across the country, approximately only two dozen courts or individual bankruptcy judges have programs permitting debtors and creditors to engage in loss-mitigation negotiations under court supervision. These have been published as:
Published formal guidelines.
These bankruptcy loss-mitigation programs share some common traits, such as the entry of an order setting deadlines and establishing certain ground rules for the process. However, many variations exist, including the use of an electronic portal for all communications related to the loss-mitigation process and the appointment of a mediator.
While many post-discharge loss mitigation efforts occur after a bankruptcy case has closed, servicers should stay apprised of all local court requirements related to loan modifications.
For more information on the local bankruptcy rules in bankruptcy courts across the jurisdictions, see Local Bankruptcy Rules Toolkit (W-001-4018).
Conduct Specialized Training for Customer-Facing Employees
To mitigate risk, lenders and servicers must develop and conduct cross-department training to educate employees on the complexity and risks of solicitation and loan modifications for discharged debtor-borrowers. Key concepts can also be memorialized in an FAQ or talking points, particularly for employees handling customer calls or complaints.
The original article, “Servicing Post-Discharge Residential Mortgage Debt,” first appeared in Practical Law on June 5, 2019.
Bradley Arant Boult Cummings LLP – Alexandra Dugan and Karlene A. Archer
EXTRATERRITORIAL EFFECT and HOMESTEAD
California Homestead Works in Other States, Too article by Cathy Moran, California bankruptcy attorney.
Do Arizona exemptions have an extraterritorial effect?
730-day rule for the use of exemptions in bankruptcy: First, if there is a state “in which the debtor’s domicile has been located for the 730 days immediately
preceding the [anticipated] date of the filing of the petition,” that is the state whose law is applicable. 11 USC § 522(b)(3)(A). (Note that the rule requires the debtor to have been domiciled in that state for every one of those 730 days.) (“Days” means calendar days and the counting begins on the calendar day before the day the petition was filed. In re Dufva, 2008 WL 2065198 (Bankr.W.D.Mo.2008).)”
Arizona exemptions might have an extraterritorial effect,but there are competing opinions and case law is constantly developing. There is an argument that Arizona’s homestead statute is not limited to property located in Arizona, it is limited to the debtor’s “dwelling.” See In re Jarski, 301 B.R. 342, 346 (Bankr. D. Ariz. 2003) (RJH- a debtor may have several residences under A.R.S. 33-1102(a), but only one domicile.). Determining a debtor’s domicile is an issue of fact and requires i) residence and ii) a present intent to remain. See Colliers. Sounds like the debtors reside in Rocky Point and Arizona and maybe intend to make Rocky Point their permanent domicile? Second, a state’s exemption laws may be used for out of state property to the extent allowed by the state exemption statutes. See In re Fernandez, 2011 WL 3423373 (W.D. Tex. Aug. 5, 2011) (attached, finding that NV exemption statutes allowed a claimed exemption of property located in TX.). AZ’s homestead exemption statute, like the NV statue, is really broad. It would costly to litigate, but for a house that is owned free and clear, it might be worthwhile, and such a claim could give you leverage with the Mexican trustee.
in In re Rody, 468 B.R. 384 (Bankr. D. Ariz. 2012) by judge Marlar:
“As in Cole, Arizona’s opt-out statute is also an “exemption” statute that limits the availability of the state’s exemption scheme to its residents. See also Camp, 631 F.3d at 761; Battle, 366 B.R. at 636–37. Moreover, neither party to this dispute has presented any Arizona authority for the extraterritorial effect of its personal property exemptions. Even assuming that A.R.S. § 33–1125 has extraterritorial effect, the exemption is limited to Arizona residents.
As an illustration, in In re Jarski, 301 B.R. 342 (Bankr.D.Ariz.2003), a debtor resided in a home in Arizona, filed bankruptcy in Arizona, and also owned a residence in California. This being a lien avoidance case, the court did not adjudicate which state’s exemption laws actually applied, but it nonetheless opined that Arizona’s homestead exemption statute “expressly contemplates that a debtor might have more than one residence that could qualify for the exemption because it creates a procedure for the debtor to choose which to claim as exempt.” Id. at 346; A.R.S. § 33–1102(A). The Jarski court also stated that § 522(b)(3)(A) (formerly § 522(b)(2)(A)) “determines whose law governs the exemptions, but not whether the property claimed exempt must exist in that same state.” Id. (emphasis added).
While the logic of Jarski and Arrol could require the Court to review the extraterritorial effect of Arizona’s personal property exemption in the event that Arizona law was “applicable,” 11 U.S.C. § 522(b)(3)(A), here, Arizona law is not applicable. Arizona’s opt-out statute limits the state exemptions to residents of Arizona.
HOA - UNPAID ASSESSMENT - STATUTE OF LIMITATIONS 6 YEARS AFTER FULL AMOUNT DUE
33-1807(F) (and its counterpart in the Condo statutes) was amended last year such that the HOA lien for an unpaid assessment is extinguished unless proceedings to enforce the lien are instituted within 6 years after the full amount became due. It used to be 3 years. That means that any HOA claim filed in a Chapter 13 must be paid in full as a secured claim so long as the amount related to unpaid assessments from the last 6 years.
HOMEOWNERS’ ASSOCIATION “HOA” and BANKRUPTCY ISSUES
NOTE -BANKRUPTCY AND HOAs: HOAs have a statutory lien (usually in the CC&Rs) for unpaid assessments for the last 6 years. ARS 33-1256(F) and 33-1807(F). Used to be only 3 years, but the legislature quietly amended it to 6 years in 2019. So even though the personal liability of the pre-petition HOA assessments are discharged, the lien and the HOA’s foreclosure lien rights survive.
POST-PETITION HOA ASSESSMENTS IN CHAPTER 13
In re Goudelock, (9th Cir Ct Appeals, July 10, 2018) The panel reversed the district court’s decision affirming the bankruptcy court’s summary judgment in favor of a condominium association, which sought in an adversary proceeding to determine the dischargeability of a debtor’s personal obligation to pay condominium association assessments that accrued between the date the debtor filed her Chapter 13 bankruptcy petition and the date the condominium unit was foreclosed upon.
HOA UNPAID ASSESSMENTS - SECURED v UNSECURED
In re De Guillen, BAP No. CC-18-1248-LSTa and BAP No. CC-18-1242-LSTa (9th Circuit, Aug 26,2019) The homeowner’s association lien for unpaid assessments on the debtor’s condominium was limited to the amount of the HOA’s recorded pre-petition state court judgment, and the remainder of its claim was unsecured. Highland Greens Homeowners Association (“Highland Greens”) appeals the bankruptcy court’s order sustaining in part Debtor Maria Basave de Guillen’s objection to Highland Greens’ proof of claim. The bankruptcy court found that, under California law, Highland Greens’ recorded notice of lien for delinquent homeowners assessments on Debtor’s condominium did not secure amounts accruing after the recordation of the lien. Accordingly, the bankruptcy court limited Highland Greens’ secured claim to the amount of its recorded pre-petition state court judgment, classifying the remainder of the claim as unsecured. We AFFIRM.