Michigan Bankruptcy Blog

Divorce and Bankruptcy: The Legal Intersection of Two of Life's Most Challenging Moments

Two of the most difficult and stressful legal processes that individuals participate in are divorce and bankruptcy proceedings. Unfortunately, as lives are upturned and finances stretched, one often closely follows the other.

Such was the case in a recent case in the United States Bankruptcy Court for the Western District of Michigan.

A husband and wife (both Michigan residents) used equity from property owned by the wife - prior to and during the marriage - to finance a roofing repair business started by the husband in Florida. To accomplish this, the wife quit-claimed her interest in the property to herself and the husband. They then refinanced the property and borrowed $200,000 from the lender. The loan funds were used to pay off the wife's original mortgage on the property ($120,000), pay down the husband's credit card debt and fund the new business.

They then agreed that the husband would make monthly mortgage payments on the new loan until the payments equaled the amount of the original mortgage - $120,000. They subsequently refinanced the loan with two new lenders. Shortly thereafter the husband's business failed, and the husband and wife started divorce proceedings in 2011. Read More ›

Categories: Chapter 7, Western District of Michigan

Can Individuals “Strip Off” Second Mortgages on Underwater Homes in Chapter 7 Bankruptcy? The Supreme Court to Decide

On Monday, November 17, 2014, the U.S. Supreme Court agreed to hear two bankruptcy-related cases that involve issues commonly faced by banks and homeowners with underwater mortgages in Chapter 7 cases. The cases of Bank of America v. Caulkett and Bank of America v. Toledo-Cardona come from Florida, where many homeowners own homes with mortgages that exceed equity value due to the recent housing crisis. Bank of America holds the second mortgage in both cases.  Read More ›

Categories: Chapter 7, U.S. Supreme Court

Foreclosure Without Closure: Sixth Circuit Analyzes Claims Asserted by Borrower Following State Court Foreclosure Proceedings

The financial and housing crisis that began in 2008 led to a huge wave of foreclosures and foreclosure-related litigation. While foreclosure is rooted in state law, the initiation of a foreclosure proceeding by a lender often leads to federal bankruptcy proceedings initiated by a borrower, giving rise to interesting legal issues involving the interplay of state foreclosure law and federal bankruptcy law. Recently, the U.S. Court of Appeals for the Sixth Circuit (the "Sixth Circuit") considered the implications of a foreclosure on a residence following the borrowers' Chapter 7 bankruptcy proceeding.[1] Read More ›

Categories: 6th Circuit Court of Appeals, Chapter 7, Eastern District of Michigan

Timing is Everything: Sixth Circuit Reverses Bankruptcy Court and Rules that Lawsuit Settlement is Not Property of the Debtor's Estate

When someone files for bankruptcy, an estate is created that consists of, among other things, any and all assets owned by, or to which the debtor filing the bankruptcy case has a right to or interest in. This includes tangible things such as real estate, vehicles, money, clothing, and jewelry, as well as rights to property such as litigation claims.

In a Chapter 7 case, all assets belong to the trustee on the date a case is filed unless an exemption is claimed, and the trustee gets to keep, sell or otherwise administer assets for the benefit of creditors.

When it comes to determining "property of the estate," timing is important. Generally speaking, a debtor gets to retain property acquired after the bankruptcy filing occurs. Read More ›

Categories: 6th Circuit Court of Appeals, Chapter 7

Are Student Loans Dischargeable in Bankruptcy? Only if You Can Prove Undue Hardship

Many students don't realize the scope and extent of the lifelong financial burden they saddle themselves with when taking out student loans. It is only after getting into the "real world" that they realize that living expenses are higher, and after tax income is lower, than they anticipated, making student loan debt repayment difficult if not impossible.

Some look to bankruptcy for relief and a fresh start. But all debt is not treated equally in bankruptcy. Student loan debt is not the same as, for instance, credit card debt. It is not dischargeable pursuant to Bankruptcy Code section 523(a)(8) except in one narrow circumstance. Specifically, to discharge student loan debt, a debtor must show undue hardship - a very high bar. Read More ›

Categories: Chapter 7, Western District of Michigan

Sixth Circuit BAP Rules that "Chapter 20" Debtor May Strip Off Valueless Liens

Lien stripping is a process that involves eliminating junior liens (such as a second mortgage) through the bankruptcy process. In a recent appeal to a Sixth Circuit Bankruptcy Appellate Panel ("BAP"), the BAP overturned a bankruptcy court's denial of a Chapter 13 debtor's motion to avoid the lien of an inferior mortgage lien holder. Read More ›

Categories: Chapter 13, Chapter 7

Supreme Court Applies its Stern Ruling and Issues a Narrow Decision Holding that Bankruptcy Courts Can Hear, But not Decide, “Stern Claims”

In 2011, the U.S. Supreme Court (the “Court”) issued its noteworthy decision in Stern v. Marshall,1 in which it held that bankruptcy courts lack the constitutional authority to enter a final judgment on a state law counterclaim that is not related to the bankruptcy proceeding. Since Stern, a number of cases have been published - at both the bankruptcy court and court of appeals levels - where Stern jurisdictional issues have been raised and adjudicated. We recently wrote about one on this blog.

The Court, itself, had a chance to consider the implications of Stern in the case of Executive Benefits Ins. Agency v. Arkinson.2 In a unanimous decision written by Justice Clarence Thomas, the Court ruled that where Article III of the U.S. Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy related claim, the bankruptcy court may issue proposed findings of fact and conclusions of law with respect to the claim, to be reviewed de novo by a federal district court.

Read More ›

Categories: U.S. Supreme Court

Ruling in Prior Litigation Precludes Relitigation of Factual Issues in Bankruptcy Nondischargeable Adversary Proceeding

When a debtor files for bankruptcy, it is principally to obtain a fresh start and discharge of debts from creditors. But not all debts are dischargeable. The Bankruptcy Code lists 19 categories of nondischargeable debts, which Congress has determined are not dischargeable for public policy reasons.

Some debts are always nondischargeable, including certain taxes, child support, and court fines and penalties, to name a few. Others are not deemed automatically excepted from discharge, but can be when challenged by creditors. When a case is filed, bankruptcy courts set a deadline for creditors to raise nondischargeability issues, and creditors who wish to except a debt from discharge must initiate an adversary proceeding (by filing a complaint) setting forth the basis for the discharge objection. These types of debts include those obtained by fraud or false pretenses and those resulting from a tort, among others.

Issues related to the nondischargeability of a debt in a Chapter 7 bankruptcy were recently examined by the United States Bankruptcy Court for the Western District of Michigan. In the case, Trost v. Trost, Sherry Trost, the plaintiff, sought to except from discharge debt owed by the debtors (her stepson Zachary and his wife Kimberly) to her. The debt related to an ownership dispute involving videotapes and other memorabilia from a television show, Michigan Outdoors, that was created and operated by Fred Trost, Sherry's late husband and Zachary's father. Sherry alleged that she became the owner of these assets after Fred died, and that the debtors/defendants converted the property to their own use. Read More ›

Categories: Chapter 7

Sixth Circuit Rules that Individual Chapter 11 Debtors are Subject to the Absolute Priority Rule

One of the fundamental tenets of a business bankruptcy reorganization plan under Chapter 11 of the Bankruptcy Code is the "absolute priority rule." This rule, codified in section 1129(b)(2)(B)(ii) of the Bankruptcy Code, provides that every unsecured creditor must be paid in full before the debtor can retain any property under a reorganization plan. Chapter 11, however, is not solely the domain of business debtors. Individuals (who more commonly seek protection under Chapters 7 and 13) may also file for Chapter 11. So how does the absolute priority rule affect individual debtors? That issue is analyzed in a recent opinion, Ice House America, LLC v. Cardin, issued by the U.S. Court of Appeals for the Sixth Circuit. Read More ›

Categories: 6th Circuit Court of Appeals, Chapter 11

The Aftermath of Stern v. Marshall: Sixth Circuit Ruling Addresses Bankruptcy Court’s Jurisdiction

One of the most interesting, and at times vexing, issues that arises in bankruptcy proceedings involves the jurisdiction of the bankruptcy courts. In 2011, the U.S. Supreme Court weighed in with its noteworthy decision in Stern v. Marshall, in which it held that bankruptcy courts lack the constitutional authority to enter a final judgment on a state law counterclaim that is not related to the bankruptcy proceeding. Since Stern, a number of cases have been published - at both the bankruptcy court and court of appeals level - where Stern jurisdictional issues have been raised and adjudicated. Read More ›

Categories: 6th Circuit Court of Appeals