HUGE Problem!

[DAE]

This morning I met with an attorney at the local Debtor Assistance Project (DAP) that is run out of the federal courthouse.

I told him my story:

One: 3 mortgages secured by the same townhouse (all from the same lender) (mortgage balance = $279,000, home value = $160,000)

Two: 1 auto loan secured by the car (auto loan exceeds market value of the car)

Three: various unsecured debt (like credit cards)

Four: I filed for Chapter 7 in late April.

He said, emphatically, that secured debt cannot be discharged in a Chapter 7 bankruptcy. He gave an example, if a person files for Chapter 7 prior to the sale of their home via foreclosure the DEFICIENCY that is created post-petition is NOT part of the bankruptcy and will be the liability of the debtor. He said he always counsels his clients to wait until after the house is taken and sold before filing for Chapter 7. That way the deficiency is an unsecured debt and can be discharged.

He went on to say that the auto loan is treated the same way. The Chapter 7 will not remove my liability on the loan and that if the car is repossessed and sold, any deficiency that is created is my liability since such a deficiency would be created after my filing date.

Needless to say, I was/am SHOCKED!! If this is true, then I have to file a motion to dismiss my case and then wait for the sale of my house, then wait 180, and then refile. This obviously puts me at the mercy of my other creditors since the stay is lifted upon dismissal.

I tried to ask more questions from an oblique angle to see if he really meant what he said: I asked him how could it be the case then that an auto lender would be interested in reaffirming debt that it knows is going to survive bankruptcy. He said they just like to reaffirm to make sure you know your liable for the debt.

I asked him what't the point of a ride-through or a stay-and-pay if the lender knows you are liable for the loan...again, he said the loan survives bankruptcy since it's a secured debt.

I asked him if he meant the lien survives and maybe he was confused. He said, no, the liability survives the discharge on any secured debt.

I asked him is this was specific to my state or my appeals circuit, he said no it's a federal law that is well established.

Again, I was totally shocked and the purpose of the meeting went from brushing up on fairly innocuous details on my Schedule J, to a full-blown rethinking of my entire case.

On the drive home I began a frantic call to various local attorneys (names that were provided by the court as doing pro bono work) and every one of them disagreed with this DAP attorney's statement. They uniformly said that any deficiency would be wiped out even though it would be created post-petition.

Can some of the attorney's weigh in on this for me? I am in a PANIC!!

(DAE, Chapter 7, pro se)

[IamOld]

MUCH wiser heads then me will chime in but I think your DAP atty is nuts. From everything I read here and what my own atty said, etc., mortgages ARE dischargable. Once mort is discharged in Ch 7 - that's it! Period. You're done. same for a car loan.

Others please chime in!

This morning I met with an attorney at the local Debtor Assistance Project (DAP) that is run out of the federal courthouse.

I told him my story:

One: 3 mortgages secured by the same townhouse (all from the same lender) (mortgage balance = $279,000, home value = $160,000)

Two: 1 auto loan secured by the car (auto loan exceeds market value of the car)

Three: various unsecured debt (like credit cards)

Four: I filed for Chapter 7 in late April.

He said, emphatically, that secured debt cannot be discharged in a Chapter 7 bankruptcy. He gave an example, if a person files for Chapter 7 prior to the sale of their home via foreclosure the DEFICIENCY that is created post-petition is NOT part of the bankruptcy and will be the liability of the debtor. He said he always counsels his clients to wait until after the house is taken and sold before filing for Chapter 7. That way the deficiency is an unsecured debt and can be discharged.

He went on to say that the auto loan is treated the same way. The Chapter 7 will not remove my liability on the loan and that if the car is repossessed and sold, any deficiency that is created is my liability since such a deficiency would be created after my filing date.

Needless to say, I was/am SHOCKED!! If this is true, then I have to file a motion to dismiss my case and then wait for the sale of my house, then wait 180, and then refile. This obviously puts me at the mercy of my other creditors since the stay is lifted upon dismissal.

I tried to ask more questions from an oblique angle to see if he really meant what he said: I asked him how could it be the case then that an auto lender would be interested in reaffirming debt that it knows is going to survive bankruptcy. He said they just like to reaffirm to make sure you know your liable for the debt.

I asked him what't the point of a ride-through or a stay-and-pay if the lender knows you are liable for the loan...again, he said the loan survives bankruptcy since it's a secured debt.

I asked him if he meant the lien survives and maybe he was confused. He said, no, the liability survives the discharge on any secured debt.

I asked him is this was specific to my state or my appeals circuit, he said no it's a federal law that is well established.

Again, I was totally shocked and the purpose of the meeting went from brushing up on fairly innocuous details on my Schedule J, to a full-blown rethinking of my entire case.

On the drive home I began a frantic call to various local attorneys (names that were provided by the court as doing pro bono work) and every one of them disagreed with this DAP attorney's statement. They uniformly said that any deficiency would be wiped out even though it would be created post-petition.

Can some of the attorney's weigh in on this for me? I am in a PANIC!!

(DAE, Chapter 7, pro se)

[IHateToBeEmo]

He said, emphatically, that secured debt cannot be discharged in a Chapter 7 bankruptcy. He gave an example, if a person files for Chapter 7 prior to the sale of their home via foreclosure the DEFICIENCY that is created post-petition is NOT part of the bankruptcy and will be the liability of the debtor.

I wish you would bring a recorder with you next time you meet with your attorney. Let him know you're recording the conversation for record-keeping purposes. Hopefully he'll repeat what you quoted above and you'll have a record of it. I'm sure whoever he reports to would be grateful to know what this attorney has been saying to clients.

[tobee43]

if i were in your shoes i would go to at least a FEW FREE consults from bk attys. you have nothing to lose. our mortgage was discharged along with the bk, although, we also surrendered our house. many people keep their homes and work with the bank to catch up on the mortgage etc. so what you wrote that this person told you doesn't sound exactly correct.

i would meet with a few and i think you will feel better real soon....best of luck!

[df04527]

What state are you in? Curious. I think they know not what they speak and they are all in bed with each other. None of that makes any sense.

[DAE]

I am surrendering the house and will not be resisting the foreclosure action. I guess what is most troubling about the conversation with this DAP attorney is that (possibly) the deficiency created by the eventual sale of the foreclosed property will survive bankruptcy because it was never part of the bankruptcy. i.e. since I filed in April and the deficiency would be created sometime this summer, it is not part of the discharge. God that would be be horrible.

tobee43, what you're saying is that when your house was sold (with a deficiency resulting?), the bank was prevented from pursuing the deficiency? Your attorney told you that and that has been your experience?

[tobee43]

I am surrendering the house and will not be resisting the foreclosure action. I guess what is most frustrating by the conversation with this DAP attorney was that the deficiency created by the eventual sale of the foreclosed property will survive bankruptcy because it was never part of the bankruptcy. i.e. since I filed in April and the deficiency would be created sometime this summer, it is not part of the discharge.

tobee43, what you're saying is that when your house was sold (with a deficiency resulting?), the bank was prevented from pursuing the deficiency? Your attorney told you that and that has been your experience?

if you are surrendering your house you are fine whether your are a definacy state or not. under the "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation" (here's my blog outlinig the entire act http://www.bkforum.com/entry.php?818...t-Cancellation) click the link on the blog and you will see you are "safe"....really.

also while insolvent one cannot collect a deficiency, it's against the law. it's both my experience, my atty and that actual written act...and or law by in my the Bush admin.

even if you get a 1099A, it's still not problem you are will fine. i know this is scary and you all this information being thrown at you. just take a breath, if you can...and you'll find it will be ok.

[DAE]

tobee43, I'm not sure we're on the same page here. I am not worried about tax liability from the resulting deficiency. Also, I am not worried about being judgment-proof.

This is a simple matter of law: does a deficiency on the sale of secured debt that occurs or that is created post-petition get discharged or is it new post-petition debt that is the debtor's responsibility?

That is the only question I am interested in right now. Let the moderators weigh in.

Thanks.

[debee]

There are incompetent people in every profession. The DAP attorney for one. No wonder it's called legal practice.

All the debts you list on your petition will be discharged, with exceptions made if you don't get a discharge at all (bad faith, totality of circumstances, etc), if a creditor files an AP and wins it, or if the debt is of the type listed in 11 USC 523(a).

[Peeps]

Well, now you know what an attorney-on-crack looks like. This guy seems to be smoking the good stuff.

Seriously... something's wrong with the advice.

As long as you don't reaffirm any of the debts, a chapter 7 bankruptcy will generally protect you from deficiency judgments... it doesn't matter if the property is sold after you file for BK.

[DAE]

debee, the DAP attorney's would agree with what you said. But he would add that a deficiency created by the sale of the house (post-petition) would be a new debt created post-petition and therefore not discharged.

Thoughts?

[DAE]

a chapter 7 bankruptcy will generally protect you from deficiency judgments

peeps, you said "generally." What would the exceptions be?

[debee]

debee, the DAP attorney's would agree with what you said. But he would add that a deficiency created by the sale of the house (post-petition) would be a new debt created post-petition and therefore not discharged.

Thoughts?

Deficiency debt isn't created post-petition. It's the old mortgage loan minus whatever they got at foreclosure.

[Peeps]

Not sure what all of the exceptions might be, after all you find some very creative financing behind some BKs... but I was thinking along the lines of bankruptcies that are discharged because the filers have been a bit naughty. Say, taking out another mortgage while knowing BK was looming. Or if a judge gets takes a look at the entire financial scenario and decides there's something fishy about the whole thing.

You've done your homework and you've been honest in presenting your financial affairs. You're ok. You just happened to run into an idiot today.

I think many of us have gone into panic mode early in the BK process. I know I did! More than once. It's normal - you just need to give yourself permission to breathe deep and logically sort through the info you've been given. You've been on the right track with your research... don't let one misinformed nucklehead derail all your hard work.

[tobee43]

tobee43, I'm not sure we're on the same page here. I am not worried about tax liability from the resulting deficiency. Also, I am not worried about being judgment-proof.

This is a simple matter of law: does a deficiency on the sale of secured debt that occurs or that is created post-petition get discharged or is it new post-petition debt that is the debtor's responsibility?

That is the only question I am interested in right now. Let the moderators weigh in.

Thanks.

i'm not just talking about the tax ramifications, that was just an added comment to make sure you didn't worry needlessly about that.

it gets discharged. that's my vote! you'll c..