Bankruptcy Caselaw

Sacramento area debtors who have filed Chapter 7 or Chapter 13 bankruptcy are frequently concerned with the implications of the FDCPA (affecting a creditor’s ability to collect on a debt) while his or her case is pending in the local bankruptcy court.

The Seventh U.S. Circuit Court of Appeals, which covers the Midwestern U.S., recently decided that some communications sent to borrowers by a loan servicer may fall under the provisions of the FDCPA. In Gburek v. Litton Loan Servicing LP, a borrower appealed after the trial court dismissed her case when she sued her mortgage servicer for violating her rights under the Act when the mortgage servicer hired a third party company to communicate with her about the debt. In her original complaint, Gburek claimed that Litton violated the FDCPA by contacting her despite knowledge that she had a lawyer, using deceptive means to obtain her personal information, and for disclosing her personal information to a third party.

According to the case, Litton contacted Gburek to discuss Gburek’s default on her mortgage. Litton sent Gburek a letter that asked her for a variety of financial information which also discussed Gburek’s possible alternatives to foreclosure on the property in an attempt to settle her mortgage-loan debt. The letter contained a disclosure that Litton was a debt collector and that the letter was sent as an attempt to collect a debt. Sometime thereafter Litton contracted with Titanium Solutions to contact Gburek. Gburek received a letter from Titanium that also asked for Gburek’s financial information but stated that it was not a debt collector and could not accept payments even though they had been hired by Litton to contact Gburek in order to facilitate a settlement between them.

For those of you living in the Sacramento area that have a second mortgage on your real property which is essentially “unsecured” due to the fact that the value of your house has fallen below the amount secured by your first mortgage may be able to stop the bank from foreclosing and save your home by filing Chapter 7. In the case In Re Lavelle, 2009 Bankr., a bankruptcy judge for the Eastern District of New York allowed debtors to void the second mortgage lien held by the bank against their property by filing Chapter 7 when the value of their home fell below the amount secured by the first mortgage.

Since the case-law has not been settled in the Ninth Circuit, whose rules apply to those of us living in the Sacramento area, a debtor could conceivably prevent foreclosure and save their house so long as they can afford to continue making payments on the first mortgage after all other debts have been discharged in addition to the second mortgage. It makes sense that local judges could be inclined to interpret the bankruptcy code in a similar fashion as the court in the Eastern District of New York since a bank holding an unsecured second mortgage would not see a penny whether the house gets foreclosed on or the debt is stripped-off and voided under Chapter 7. Given the economic “fresh start” principles that Chapter 7 is designed to provide to a debtor, and the number of people that this interpretation of the law could help from losing their homes, I believe judges will become increasingly receptive to the argument. This view rests on a novel interpretation of the bankruptcy code, however, and would probably be an uphill legal battle. Nonetheless, In Re Lavelle shows at least one judge has become sensitive to the current economic situation and there is enough wiggle room in the law to provide a legal basis for making such a claim.

As a Sacramento bankruptcy attorney I have spoken with numerous clients with these types of questions. The only way to know for sure is by locating a debtor who finds himself in this situation to retain a lawyer who is willing to bring the case before a local court and present the argument. This would almost certainly become a drawn out legal process, but the courts would probably allow the debtor to at least remain in the property until all appeals have been exhausted and a final decision, perhaps by the United States Supreme Court, has been made. If you believe that you could benefit from this interpretation of the law it may be in your best interest to consult an attorney familiar on the subject.

Articles Posted in Bankruptcy Caselaw

Appellate Court makes decision regarding Fair Debt Collection Practices Act (FDCPA) and Mortgage Lenders

Sacramento Area Bankruptcy Laws Unsettled With Regard to “Stripping-off” an Unsecured Second Mortgage by Filing Chapter 7