Questions about debts or bankruptcy? Call Doug Beaton, a local specialist in American bankruptcy law.

If you are a debtor in bankruptcy court, stripping could be a very profitable thing . . . stripping off liens from your property, that is.

But it might not be the only bankruptcy strategy to get rid of pesky liens. Avoidance could work well, too.

California bankruptcy law guru Cathy Moran has written a nice article on the niceties of the differences between the two approaches. Its a subject that often confounds even experienced bankruptcy attorneys.

Basically, the idea is that avoidance is a way to eliminate liens placed on property that the debtor has declared exempt from attachment in the bankruptcy. It works principally on judicial liens, meaning those issued by a court as the result of a lawsuit. It won’t help you get rid of tax liens, because those arise by statute, not court orders.

If you are attempting to avoid a lien, it usually is a simple matter which involves your attorney filing a motion which is rarely disputed. As long as you complete your bankruptcy case and don’t bail out early, you will end up with an order from the judge that you can record at the county registry of deeds.

Avoidance is a creation of section 522 of the bankruptcy code (concerning exeptions), and so applies equally to Chapter 7 and Chapter 13 cases.

As for the somewhat sexier topic of stripping, for years this tactic has been the exclusive province of Chapter 13 filers. With lien stripping, the trick is to find second of third liens that are completely underwater. In that case, they can be “stripped,” and the creditor gets an unsecured claim instead.

Again, this is handled by a fairly routine motion, which may or may not be contested in court.

First mortgages on residential homes cannot be stripped or modified at all, and if there is even a dollar’s worth of equity supporting a loan in second or third position, that lien can’t be stripped off either. Again, the loan must be completely underwater to get it’s lien stripped.

The big news recently in the lien-stripping world came out of Georgia, where the in the McNeal case the 11th Circuit recently ruled that Chapter 7 filers can strip liens, too.

So far, this decision only applies in Florida and Georgia, but you can be sure I’ll be watching to see if there is any enthusiasm for the reasoning behind it among Massachusetts and New Hampshire bankruptcy judges.

It certainly would be much cheaper and quicker for debtors to be able to strip liens in a Chapter 7 case. But only time will tell if that will become a realistic possibility in this corner of the nation.

By Doug Beaton

Here’s my nomination for the most useless bankruptcy form that has to be routinely submitted to a court during the course of a bankruptcy case: The “Chapter 7 Statement of Intention.”

In a Chapter 7 case, this is where the debtor makes a declaration of what he proposes to do about his secured debts — home mortgages, car loans, and so forth.

Reaffirm the loan? Turn the property over to the creditor? Those are the choices debtor’s supposedly “make” when they submit their statement of intention.

I think the form is “useless” for two reasons: first, it only describes the debtor’s intention, that is, their mental state with regards to the collateral, and second, very few players in the bankruptcy system even stop to read it.

The statement of intent, however, must be filled out and submitted in every Chapter 7 case. That’s written right in to the bankruptcy code in section 521:

“if an individual debtor’s schedule of assets and liabilities includes debts which are secured by property of the estate—
(A) within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property.”

Observant readers of this mumbo-jumbo will note that the intention form has a deadline date all its own — 30 days after the petition itself is filed. In practice, I usually file them for my clients at the same time the petition is filed — who wants to keep track of one more not-too-important deadline?

Once the statement of intention is filed, who gets to look at it? Anyone who wants to, with a little effort, but in practice it is NOT sent out to the affected creditors. So unless they want to log on and hunt through your filing on-line, creditors themselves don’t have a clue about what you intend to do with their collateral. Pretty useless, eh?

Trustees do get a copy, but in my experience, they are handling so many cases that they simply can’t remember who is doing what with what loan, and instead of doing research by reading the statement, they simply ask debtors what their intention is at the meeting of creditors if they are curious.

As far as strategy goes, there is a line of thought that has been gathering strength recently that it is NEVER in the debtor’s interest to admit on the statement of intention to wanting to get rid of a secured loan. This is because if there are means-test issues, debtor’s don’t want to risk losing a secured loan “deduction” to a sharp-eyed trustee who might argue that the deduction is illegitimate if the debtor does not intend to make future payments.

Out of this, the “hope springs eternal” strategy is born, where lawyers will always indicate that their clients are going to reaffirm all secured loans, no matter how grim the chances are, just so the clients don’t lose means-test deductions and get into Chapter 7 eligibility problems.

So if the Statement of Intention only indicates a non-binding intention, and the forms are being filled out mechanically to give the appearance that every secured loan will be reaffirmed, and no one pays much attention to the form anyway, don’t you sense the whole thing is a bit of a time-waster?

I do, and that’s why the Statement of Intention is my top nominee for the most useless bankruptcy from of them all.

By Doug Beaton