Court Decision Highlights What Bankruptcy Can And Cannot Do

In a March 2017 opinion, the Indiana Supreme Court distinguished between an in rem proceeding against property and an in personam proceeding against individuals to deny mortgage relief in a Chapter 7 case.

McCullough v. CitiMortgage involved a long-running dispute between the homeowners and a mortgage company. According to court documents, in the early 2000s, the McCulloughs fell behind on mortgage payments from a 1994 loan. They filed bankruptcy three times (two Chapter 13s and a Chapter 7). As they were apparently unable to make the debt consolidation payments in a timely manner, both the Chapter 13s were dismissed without discharge; the Chapter 7 discharged the outstanding balance on the mortgage loan.

CitiMortgage began foreclosure proceedings after the automatic stay expired, and in this action, the McCulloughs claimed that the Chapter 7 discharge paid their mortgage in full and therefore the bank could not foreclose on the lien. But the court disagreed and ruled that while the bankruptcy forgave the debt, it did not affect the promissory note, and that contract between the McCulloughs and the bank remained in force.

The borrowers went to court without a lawyer.

What Bankruptcy Does

A lawyer is essential to get the full benefits of bankruptcy. In the above case, an attorney could have advised the McCulloughs that their claims had almost no chance of success because the law on this point is so well-established, thus saving them thousands of dollars, thousands of hours, and a countless amount of stress.

The automatic stay is arguably the most significant benefit of bankruptcy. In most cases, Section 362 takes effect the moment that the debtors file their voluntary petitions. The automatic stay applies to all adverse actions, including:

• – Foreclosure,
• – Repossession,
• – Harassing phone calls,
• – Lawsuits, and
• – Wage garnishment.

In most cases, Section 362 remains in full effect until the moment that the bankruptcy ends.

Furthermore, in Chapter 13 cases, there is a protected debt repayment period that lasts as long as five years. During these 60 months, so long as the debtor makes the debt consolidation payments as agreed, moneylenders can take no adverse action.

Finally, bankruptcy gives debtors a fresh start. Most of their outstanding debts are discharged, a legal term that has a very precise meaning, so that debtors can start rebuilding their credit free from oppressive debts.

What Bankruptcy Does Not Do

Bankruptcy judges have limited powers, so while lawyers commonly say that “discharge” is synonymous with “forgiven,” that’s not exactly true. Legally, debt discharge means that:

• – The debtor no longer has any personal liability to repay the debt, at least in most cases, so moneylenders cannot pursue any in personam actions against the debtors themselves.
• – The debt cannot be used against them for many purposes; for example, a discharged debt cannot be listed as unpaid on a credit report and the bankruptcy filing cannot serve as the only basis for a denial of credit.

If the debtor signed a contract for repayment outside of bankruptcy, such as a security agreement, that contract survives bankruptcy, and although the debtor does not need to repay the mortgage and that failure cannot be used against him in many situations, the moneylender still has the right to enforce the security agreement.

Reach Out to Experienced Attorneys

Bankruptcy is a powerful shield, but it is not a magic wand that makes all problems disappear. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We handle cases in both Illinois and Indiana.

Resource:

scholar.google.com/scholar_case?q=McCullough+v.+CitiMortgage,+Inc.&hl=en&as_sdt=4,15&case=3883739840886269818&scilh=0