A question I get asked all of the time is “will bankruptcy get rid of my debts?” The answer is always a reassuring, yes, most of them. (There are a few areas everyone seems to know about that don’t get discharged, e.g., recent taxes, student loans and domestic support obligations.) But some creditors have been pushing the envelope in an attempt to narrow that discharge window, which if successful, could have scary implications for debtors in bankruptcy.
In Heritage Pac. Fin., LLC v. Montano (In re Montano), __ B.R. __, 2013 WL 5890681 (9th Cir. BAP Nov. 1, 2013), a debt buyer bought a second mortgage which was paid nothing when the first deed of trust foreclosed on the property. The case does not state how much was paid for the debt, but it was undoubtedly pennies on the dollar, and likely 1% or less. And if you read the case, this debt buyer turned that modest investment into a huge loss. When the borrowers filed bankruptcy, the debt buyer challenged the dischargeability of the sold-out junior mortgage, asserting that the debtors fraudulently stated their income. The debtors fought this and eventually won (although it may be appealed again) using a not well known portion of California’s anti-deficiency law to prevail.
In addition to prevailing on the merits, the Debtor was also awarded attorney fees of approximately $70,000 because the claim of the debt buyer was not substantially justified, and there were doubtless other fees that were incurred on appeal. It will be interesting to see what happens next. Does the debt buyer appeal again and incur more potential exposure or work out a settlement with these debtors?
What can borrowers learn from this case? (1) Make sure you are completely truthful when filling out a loan application, and (2) when filing a bankruptcy, make sure you have an attorney who will be willing to go to bat for you even if you run up against an aggressive creditor.