Converting to 13 after 7 discharge?

[DougG]

I have a question regarding converting to a 13 after receiving a 7 discharge. The 7 case has not been closed and the trustee has indicated an intention to sell the house. Interestingly, one of the debts discharged is the mortgage which was listed as unsecured for the reason that a 3 year rescission was extended under the truth in lending laws which voids the lien. Does a conversion post-7 discharge to a 13 resurrect the lender's claim? I guess my question is whether a conversion to a 13 post-7 discharge wipes out the discharge? If the discharge is wiped out by converting to a 13, can I challenge the lender's claim by filing an adversary proceeding and assert that the lien was rendered void by virtue of the 3 year rescission? It seems to me that this could be done and, in so doing, save the house while minimizing unsecured debts. Anyone have any thoughts on this?

I can find no law on the topic of the effect of a conversion on a previously issued discharge.

[despritfreya]

I found one case out of Maryland right on point however, it sounds like your attempt to convert will be opposed by the Chapter 7 Trustee as this is an asset case. Further, since you asserted that the lender is “unsecured” you have to determine if you were eligible for a 13 when you filed the Chapter 7.
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In re Stern, 266 B.R. 322 (Bankr.Md., 2001)

Creditor filed a motion to revoke the debtor's discharge and to dismiss the case on the grounds that a debtor cannot receive both a Chapter 7 and a Chapter 13 discharge in the same case, and that the debtor was ineligible for Chapter 13 relief. Held. . .

A Chapter 7 debtor has the right to convert the case to a proceeding under Chapter 13, provided that the case was not previously converted from another chapter to Chapter 7. While a Chapter 7 debtor's right to convert to Chapter 13 has been described as "nearly absolute", the debtor must be eligible to be a Chapter 13 debtor in order to convert from Chapter 7 to 13. The debtor's eligibility is judged as of the original date of the filing of the bankruptcy petition, because the conversion of a case from one chapter to another "does not effect a change in the date of the filing of the petition.(11 U.S.C. § 348(a)). Therefore, the date of the debtor's conversion to Chapter 13 related back to when the debtor filed his Chapter 7 petition (regardless of the subsequent entry of a discharge). Further, "the existence of an unvacated Chapter 7 discharge does not constitute a bar to conversion or to confirmation of a chapter 13 plan, provided the plan is proposed in good faith and otherwise meets the requirements for confirmation.

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So the question is, were you below the unsecured debt limits of a Chapter 13 on the day you filed the Chapter 7? If not, you cannot convert to a 13 - but you could try an 11. You also need to be mindful of the fact that the Stern case pre dates the USSC decision that states that conversion to a 13 is not an absolute right.

Des.

[DougG]

Thanks Des for your thoughts. It looks like we'll have a little work ahead for us; but, I think it's worth a try. Thanks much!

Doug

[tcreegan]

Hi DougG,

Saw this and thought it would apply in your case. The way I read it, if you file your recission, they have to give back everything you paid them.....and you have to give back the property.


§ 226.23 Right of rescission
(a) Consumer's right to rescind. (1) In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section.

(f) Exempt transactions. The right to rescind does not apply to the following:
1) A residential mortgage transaction.

§ 1635. Right of rescission as to certain transactions
When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the boligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor’s obligations under this section, the obligor shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the obligor, at the option of the obligor. If the creditor does not take possession of the property within 20 days after tender by the obligor, ownership of the property vests in the obligor without obligation on his part to pay for it. The procedures prescribed by this subsection shall apply except when otherwise ordered by a court.

[SunshineGal]

I'm curious to know how you ended up with a three year right of rescission to begin with. Most loans carry a 3 business day right to rescind.

[DougG]

There's a 3 day right of rescission in any refinance of your primary residence. But, "if the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation...." 12 C.F.R. Sec. 226.23 "Material disclosures" has taken on a term of art definition to include variance between the disclosures given and accuracy within a certain percentage of the required disclosure. You can actually find excessive variation beyond required limits in many adjustable rate loans. Lenders will typically not observe the exercise of a 3 year rescission right which can cause the lender to lose not only their lien but right to repayment on the loan itself. That is what happened in this situation. The Federal Reserve, motivated by big banks, is attempting to have this law rewritten to avoid a forfeiture result on the part of the lender...which stinks because it simply shifts the burden to the borrower to litigate (and incur litigation expense that wouldn't be necessary if banks simply did their jobs correctly) in order to get a lender to observe the borrower's rights. Hope this helps!

[justbroke]

This, I must say, is a very interesting case. Can't wait to read more!

[SunshineGal]

Wow, interesting, thanks for sharing.