Consumer Bankruptcy

On March 25, 2021, the Eleventh Circuit Court of Appeals ruled that a chapter 7 discharge prohibits the holders of a nondischargeable debt from suing the debtor post-discharge to collect a judgment. Specifically, the ruling in Suvicmon Dev. Inc. v. Morrison[1] directs that a fraudulent-transfer action is not synonymous with execution of a judgment, simply because the underlying debt is excepted from discharge. The court reasoned that “fraudulent transfer claims must be based on an underlying claim by a creditor, which the creditor could have sought to satisfy out of the asset that was transferred. However, as a distinct cause of action, a fraudulent transfer claim is a claim distinct from the claim on which it is predicated, in this case the plaintiffs’ securities-fraud claims.”

In re Horvath[1] provides a cautionary tale for debtors who seek to address judgment liens post-discharge, whether strategically or due to pre-filing negligence.

If the debtor has been sued before she files bankruptcy and a money judgment is entered, then a properly indexed lien attaches to real estate as a matter of law.[2] This lien then clouds title and makes certain future actions — like a sale or refinancing — all but impossible. A bankruptcy discharge will not affect the lien without a properly noticed — and timely — avoidance action.

In the wreck of the Great Recession, numerous borrowers sought to avoid their homestead’s foreclosure despite material payment defaults. Many took advantage of chapter 13, which empowers, inter alia, an individual with a regular income to cure precisely such failures over time under § 1322 (b)(5). With the housing market’s contraction temporarily cratering property values throughout the nation, debtors saw this subsection as the means by which to simultaneously reduce the total mortgage secured by their homes to its newly depressed market values and discharge the reminder of the secured loans. This widely held belief prompted much concluded and ongoing litigation, including the overruling of 22-year-old precedent by a majority of the sitting judges of the U.S. Court of Appeals for the Fourth Circuit in Hurlburt v. Black (In re Hurlburt).[1]

One year into the economic crisis caused by the COVID-19 pandemic, unemployment rates have already surpassed the high levels seen during the Great Recession in 2009. [1] Like everyone in this country and around the world, debtors are struggling.

Section 1329 of the Bankruptcy Code allows for post-confirmation plan modifications. For most debtors, the proposed modification need merely conform with one of the modification provisions of § 1329(a), subject to the discretion of the judge, to be approved. [2] Additionally, Congress amended § 1329 with the CARES Act, allowing for debtors whose plans had already been confirmed by the date of the enactment of the CARES Act to extend their plan terms to a maximum of 84 months if the debtor “is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus….”

When a debtor reaffirms a dischargeable debt, this means the obligation will survive discharge and continue to be enforceable. [1] To protect debtors from compromising their fresh start by making unwise agreements to reaffirm and repay otherwise dischargeable debts, the Bankruptcy Code sets out lengthy disclosure requirements for reaffirmation agreements. [2]

Once a reaffirmation agreement is signed and filed with the court, many creditors wonder how long they need to wait to transfer the account back to normal servicing status. Section 524 of the Bankruptcy Code contains references to when a reaffirmation agreement is “effective” and when it is “enforceable.” Since the case law shines scant light on the distinction between these two terms, the focus must be on the statutory language itself.

When Is a Reaffirmation Agreement Effective?

The Consolidated Appropriations Act of 2021 (CAA), which passed in Congress on Dec. 27, 2020, introduced some noteworthy additions to the Bankruptcy Code. One such issue is the changing relationship between chapter 13 debtors and mortgage lenders when it comes to forbearance requests under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

The Code Gets More Defined

The CARES Act provides federally backed mortgage borrowers experiencing pandemic-related financial difficulties a mechanism by which to temporarily postpone mortgage payments. [1] In furtherance of that process, the CAA added four defined terms to § 501, the most notable of which is the “CARES forbearance claim” (CFC), which is

Regarding chapter 13, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in part allows chapter 13 debtors experiencing a material financial hardship as a result of the COVID-19 pandemic to modify the length of their bankruptcy plan to a maximum of 84 months [1], up to an additional 24 months if the plan was initially set at 60 months, or up to 48 months for those debtors in previously confirmed 36-month plans. One of the caveats to this Code amendment by the Act provides that a plan sought to be modified must have been confirmed before March 27, 2020, the date that the CARES Act was enacted. Most plans in the Western District of Tennessee’s Western Division in Memphis are set at 60 months.

On Oct. 13, 2020, the U.S. Supreme Court heard oral argument that may alter the way bankruptcy courts interpret possession and control under Bankruptcy Code § 362(a)(3), and the right of turnover under the ambit of § 542(a). In Chicago v. Fulton,[1] the Court is set to determine whether the automatic stay requires a creditor who is passively retaining an asset to have an affirmative obligation under § 362 to return the property to the debtor immediately upon the filing of their bankruptcy.