March 2012

I.          What Is Mortgage Rescission?

Rescission is a way for a borrower to get out of a mortgage that was fraudulently or deceptively originated.  For example, if the lender misrepresented the terms of the mortgage by failing to disclose a balloon payment, or the nature of the adjustable rate, or advised the borrower to inflate income to qualify for a larger loan – gasp! does this sort of thing ever happen? up until recently, all the time – the borrower may cancel the loan.

II.        The Legal Foundation For Mortgage Rescission

The main statutory vehicle for rescission is the Truth in Lending Act (“TILA”), 15 § U.S.C. 1601 et seq., and its regulatory partner, Regulation Z, 12 C.F.R. 226.31, et seq..  TILA and Regulation Z are complicated, so it is easy for a creditor to violate them.  The most common violations involve inadequate disclosures.  See 15 U.S.C. §§ 1638(a)-(b)(1) for some of the required disclosures.  Regulation Z has its own plethora of required disclosures.
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In my last post I discussed the three basic requirements a Chapter 13 plan must meet to get confirmed.  In this post I will discuss a powerful Chapter 13 tool that has no Chapter 7 analogue:  lien stripping.  (No, it’s not X-rated.)

I.          Lien Stripping On The Debtor’s Primary Residence

First the bad news:  In Nobelman v. American Savings Bank, 508 U.S. 324 (1993) the U.S. Supreme Court held that an under-secured – i.e., “partially secured” – mortgage on the debtor’s primary residence is protected up to the full amount of the debt in the sense that the unsecured portion cannot be stripped off.

Now the good news:  Any wholly unsecured mortgage on the debtor’s primary residence can be stripped off and treated as if it were ordinary general unsecured debt.  Thus, a second mortgage can be stripped off, put into the Chapter 13 plan, and paid off at the same percentage as the other general unsecured debts – which is usually a small percentage.  This means that the debtor can have the second mortgage extinguished in five years, after having paid only a small percentage of that mortgage.
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The goal in Chapter 13 is to use future income to pay all or a portion of one’s debts through a court approved and administered Chapter 13 repayment plan.  The judge assigned to the case must confirm the plan.  During the confirmation process the creditors are permitted to have some input.  However, once the plan is confirmed, the creditors are obligated by its terms.  See 11 U.S.C. § 1327(a).

Chapter 13 plans typically last either three or five years, with five years being the statutory maximum.  See 11 U.S.C. § 1322(d)(1)(C) and (d)(2)(C).  Each month during the pendency of the plan the debtor sends a plan payment to the Chapter 13 Trustee assigned to the case.  The Trustee in turn sends payments to the creditors according to the terms of the confirmed plan.  At the end of the plan any remaining scheduled unsecured dischargeable debt is discharged.

One attractive feature of Chapter 13 for the debtor wanting to keep collateral securing a debt is the chance to catch up on the payments.  For example, the debtor can use the plan to pay off a mortgage arrearage over the life of the plan, rather than having to immediately become current as in a Chapter 7 bankruptcy.

Another benefit is that the debtor does not have to surrender any nonexempt assets:  the debtor gets to keep everything.  Why?  The short answer is because in the plan the debtor makes monthly payments to pay creditors.  However, as we shall see, the value of the debtor’s nonexempt assets provides a starting point for the size of the monthly plan payments.

How much are the monthly payments?  In order to answer that question we need a little background.  In particular, we must observe that a Chapter 13 plan must satisfy three basic criteria.  These three criteria contain the essence of 11 U.S.C. § 1322.
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credit repair after bankruptcy clean sweepCan you really get that bankruptcy legally removed from your credit report? If only it were so easy.

After bankruptcy you’re looking to rebuild your credit. That’s understandable because you want to be able to get financing for a car or a new home at some point.

You do some searching online, or maybe you

I will be covering the topics of “Chapter 13: Vehicle and Mortgage Complications” and “Formulating a Confirmable Chapter 13 Plan” at the “Complex Bankruptcy Issues” seminar for the National Business Institute on May 2, 2012 in Orange, California.  This presentation will cover such thorny issues as 910 car claims, rescission and second mortgages,  detail how