October 2012

A fellow bankruptcy attorney recently posed an interesting pair of related questions:

How (if at all) does a valid prenuptial agreement affect the requirements to list a non-filing spouse’s income in CMI per 707(b)(7)(B)?  Does it make ALL of the spouse’s income includable in the “marital adjustment”?

Here is my response.

I.          The Bankruptcy Code’s Definition Of CMI

It seems to me that the starting point for the analysis must be § 101(10A), which provides (with emphasis added):
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I recently had an interesting email exchange with a couple of fellow bankruptcy attorneys on the subject of foreclosure.  The specific question we discussed was whether a second mortgage holder’s claim is extinguished after the holder of the first mortgage conducts a foreclosure sale.

The question is complicated by the fact that there are three relevant statutes at work, and they don’t have the same foci.

I.          The “One-Action” Rule

The first statute is Cal. Civ. Proc. Code § 726, which states in relevant part:

There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter.

This means that if a creditor holds a mortgage on a piece of property, it has one bite at the apple:  it can either foreclose on the property, or sue the borrower to collect on the debt, but not both.  Thus, if the lender conducts a foreclosure sale and comes up short, it cannot sue the borrower to collect the post-resale deficiency.  The shortfall has to be cancelled, which is why the (former) homeowner can face a nasty tax bill after losing the home.
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