In his book ‘1984’ Orwell talks about the government doublespeak and how it manifests itself even in the naming of government agencies. He reflects that the Ministry of Love (Minilove) is actually the oppressive state secret police, The Ministry of Knowledge, the propaganda outlet, etc.
The United States government often follows this trend for some reason in naming pieces of legislation, almost as if the intent was to display a cruel sense of ironic humor. Thus we have the Bank Secrecy Act which effectively outlawed Americans’ financial privacy, and germane to today’s blog, the BPACPA (Bankruptcy Abuse Prevention and Consumer Protection Act. This legislation, bitterly opposed by consumer groups and advocates for years was finally pushed through a republican administration in 2005. It effectively eviscerated bankruptcy protection for the average person, eliminating options, removing exemptions and creating more obstacles than any prior bankruptcy legislation in the history of the United States.
Of course big banks and big business loved it – they should. It was their creation.
Since the enactment of BPACPA, against all odds, the average guy has actually been able to eke out a few victories, and when it happens, it is gratifying. Last week the Fourth Circuit Court of Appeals gave us a gift!
In its decision in Davis and Moore (two bankruptcy cases appealed together) the fourth circuit court of appeals (a circuit that so conservative that it gives new meaning to the term) joined other circuits in affirming that the Bankruptcy Code does in fact allow liens to be stripped out using what is affectionately called a Chapter 20 Bankruptcy.
This blog is not intended to be a treatise on bankruptcy law, so for now just accept that a Chapter 20 is the use of a Chapter 7 proceeding, followed by a Chapter 13 filing (7+13=20) to discharge unsecured debts, then protect property (such as your home) by resolving mortgage delinquencies over a the life of a bankruptcy plan.
The recent decision confirms that this is ok. What this does is provide an out for the person upside down in real estate debt, often with a second or even a third mortgage. Thanks to the real estate debacle (we won’t go into that) mortgages often far exceed the value of the property. This decision, which allows liens over and above the value of the property to be “stripped out” lets people get back on track with their first mortgage.
The key is being able to “strip off”, that is to remove, the mortgage liens from the property that were associated with debt that exceeded the value of the property by using a combination of Bankruptcy proceedings. The Chapter 7 proceeding discharges you from personal liability on the debts of the junior mortgages. The Chapter 13 treats them as unsecured debt because there is not enough value in the collateral (your property).
Before this, while bankruptcy proceeding got you a discharge from the debt – that is the creditor could not collect from you personally, the lien was still in place. Basically if it covered your home, there was no way for you ever to sell or refinance the house.
Other circuits have approved this process, but for the conservative fourth circuit to fall into line is a major victory of those of us who have fallen on hard time and need some help!!
Maybe there is a light at the end of the tunnel that isn’t a train!
If you’d like some more information on how we can help with this issue, take a look at our section on bankruptcy.