Fresno Bankruptcy & Credit Blog

In court today, the Honorable Whitney Rimel issued a decision from the bench in the Rossner case, No. 11-16432-A-13 (E.D. Cal.) finding that a discharge is not required for lienstripping purposes.

The issue most frequently arises where a debtor files a Chapter 7 case and then shortly thereafter files a Chapter 13 case. Section 1328(f) precludes entry of discharge in a Chapter 13 case if a Chapter 7 discharge has been received in a case filed within 4 years of the date of the new Chapter 13 case filing. Filing a Chapter 13 after a Chapter 7 is sometimes referred to as a Chapter 20.

One of the main reasons that debtors file Chapter 13 is to strip off a junior mortgage from their home so that the claim can be treated as an unsecured claim in the case, instead of a secured claim. This often allows a debtor to pay far less toward the unsecured claim than would have to be paid if it were secured. The question in the Rossner case is whether Chapter 13 could be used to strip off that junior mortgage even when no discharge could be obtained in the Chapter 13 case. The debtor obtained a discharge of the debt personally in the Chapter 7 case, so the creditor could never sue the debtor personally to collect. But a Chapter 7 cannot be used to remove a voluntary mortgage from a property.

Judge Rimel reasoned that the statutory and caselaw bases for lienstripping in Chapter 13 do not require a discharge. All that is required is for the debtor to finish the plan. Judge Rimel recognized that she found Judge Sargis’ opinion in the Frazier case to be persuasive. There have now been two judges in the Eastern District to have found that a discharge is not necessary in Chapter 13 to strip a fully unsecured junior mortgage.

This is a really interesting article speculating that credit unions are poaching clients from big banks. Interestingly, it notes that the big banks may not be all that disappointed to be losing some of these customers. That being said, if this was more than just a few customers, I am sure the banks would be a little more concerned. From the anecdotal evidence out there, this appears to be highly symbolic, but not terribly extensive shift of deposits. As the article notes, big banks prefer the big depositors where they can make money. And big depositors seem to prefer the security of a big bank, as opposed to the statement they can make by going to the local credit union.

Reading this article brought to mind a lot of conversations that I have with clients going into bankruptcy. I warn them to stay away from Wells Fargo and Union Bank, because they might have their deposits frozen. When I initially thought about this, I thought, “man, that’s a stupid thing for these banks to do because they will lose all of these customers.” But I think some of these big banks don’t mind losing clients who are in bankruptcy, because the deposit amounts are not going to be very large. One thing that I tell these clients is that big banks don’t think the way individuals or small businesses think. They think in non-emotional, macro-economic terms and will sometimes make what appears on the surface to be a ludicrous economic decision because the data supports the decision. So, don’t get frustrated with how big banks think. Just take your money elsewhere.