The rule that lien strips can not take place in Chapter 7 bankruptcy has been turned on its ear this week though.  In Re: McNeal, Case: 11-11352, Lorraine McNeal v. GMAC Mtg. held that at least in the 11th Circuit, a Debtor can still not cramdown the value of an investment property, but can strip a junior lien from their primary residence.

I read the opinion and it seems that this case is ripe for appeal, where the court essentially said, since the Supreme Court only discussed cramdowns not being allowed in a Chapter 7 case under 506, that stripping a junior lien entirely was not addressed and as such, there is no restriction on lien stripping.  To me, this argument is a little thin.  A Debtor can not reduce the principal owed to a Creditor, but they can completely eliminate it.  If this holds up though, it could be very helpful to many Debtors who find themselves in a Chapter 13 for no other reason then to file a Motion to avoid lien, where they meet every other criteria to be in Chapter 7.

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So you have amassed a significant amount of debt to a credit card company, or some other lender.  Maybe the debt is due to loosing a job; maybe it is because you are recently separated or divorced; maybe it is because you have become sick with a physically limiting disease.  No matter what the reason, you simply can not afford to stay current on the debt, and in fact have fallen behind on your payments.  You have fallen so far behind, that the threatening letters have come and gone.  The phone calls have actually stopped, as your creditors have come to the realization that you are simply not going to pay them.  It has gone so far, that you come home one day, go to the mail box, open it up, and find that you have been served with a complaint for breach of contract by one of your creditors.  So what do you do now?

            The first and most important thing to do is not ignore the problem.  So many consumers simply believe, or at least hope that if they ignore the situation, it will go away on its own.  This mistaken belief could not be further from the truth.  Should you fail to respond to a civil complaint, with in 20 days of receipt of the summon, the Creditor has the right, under Massachusetts rules of Civil Procedure to request the court enter a default judgment against the Defendant, due to the fact that the Defendant or Debtor either refused or failed to defend themselves and as such, has admitted everything in the compliant is true and accurate.  If this default judgment enters, then the Creditor will next request an execution be rendered, which will then increase the judgment by 12% each year, until the balance and interest is paid in full.  Additionally, the Creditor can use this execution to have a lien placed against your house, take your tax refund, attach your bank account and even have your employer garnish your wages and send a portion every week to the Creditor.

            So how do you, as a Debtor, ensure this does not happen to you?  The first thing you should do is seek the advice of a debt relief attorney.  However, if you choose to not do this, you will have three options.

            First, you can answer the complaint by denying some of if not all of the allegations and challenge the Creditor to prove each element of the breach of contract.  You can challenge that the Creditor even has standing (whether they actually own the debt they are trying to collect).  You can challenge whether the Creditor has the proper paperwork and that it has been filed appropriately.

            If you do not choose to challenge the case in court, you can try to negotiate with the Creditor and settle the matter for a lump sum of money, or even a monthly payment.  The key in doing this is to make sure that if you do settle the account, it is settled in full and no deficiency or uncollected part of the debt can be sold to yet another collection agency.

            Finally, if you are unable to settle the matter with your Creditor and don’t believe you can successfully litigate the matter in your favor; you can file a bankruptcy petition.  If you file a bankruptcy, whether it be a Chapter 7 or 13, any attempt to collect a debt against you MUST be stopped the second you file your bankruptcy case, pursuant to Section 362 of Title XI.  Presuming your bankruptcy goes through and you receive your discharge of debt, you will not be obligated to fulfill your previous obligation to pay back the Creditor anything, or at least anything more then your proposed Chapter 13 plan may require.

            The bottom line is this, if you receive a summon to answer a complaint, you must take a very proactive approach to resolving it, or a judgment and execution can and in all likelihood will follow you for the next twenty years.

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