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The general goal of bankruptcy is to help individuals and businesses get a “fresh-start” by reorganizing and eliminating debt. There are essentially two kinds of debts, secured and unsecured. Secured debt means a debt that is “secured” by some form of property (car, house, etc.), so if the debt remains unpaid, the lender can collect by repossessing that property. A secured lender normally places a “lien” on property to evidence its security. Contrarily, unsecured debt means that the lender does not have any property to secure its loan.
To determine whether a debt is secured or unsecured when a bankruptcy is filed, a creditor must file a “Proof of Claim.” However, a debtor may “object” to the Proof of Claim if the creditor lists the wrong amount the debtor owes, or if the creditor is not entitled to the amount set forth in the Proof of Claim.
Debtors are sometimes able to “avoid” (or eliminate) the liens of secured creditors through bankruptcy. Liens, which are often avoided, are those in a junior position (i.e. liens that the lender placed after another lien was already secured against the property). However, debtors may be unable to avoid liens in first position (such as liens that are placed when one borrows money from the bank to buy a home) . . . at least until the In re Blendheim decision by the 9th Circuit Court of Appeals.
In In re Blendheim (803 F.3d 477 (2015)), a creditor holding a first deed of trust against a debtor’s property failed to oppose an Objection to Proof of Claim. As a result, the claim was “disallowed.” The Court of Appeals held that, since the claim was “disallowed,” the Bankruptcy Code permitted the debtor to avoid the creditor’s lien in its entirety. What is the significance of this? The debtor can obtain a FREE house (i.e. a house that no longer has a lien secured against it).
I came across the Blendheim decision while working on a case with similar facts. After reading the decision in Blendheim, I was utterly shocked! Can debtors really get a free house if they object to a Proof of Claim filed by a creditor and the claim is “disallowed”? What if there is no real basis for filing the Objection?
The case that I worked on involved a debtor who filed an Objection to a bank’s Proof of Claim. The debtor alleged that the bank did not have the right to collect on the debt. The bank, which was represented by a different attorney, failed to oppose the Objection to the Proof of Claim, and the claim was deemed “disallowed.” Several years later, the debtor asked the Court to hold that the bank’s lien was voided. Despite an opposition to the debtor’s request, the Court sided with the debtor and avoided the bank’s lien! What is the outcome of that? The debtor walked away with a “free house,” worth $500,000.00!
What does the Blendheim decision teach us? Retain a competent bankruptcy attorney! Creditors who do not retain a competent attorney to represent them, and “sleep on their rights,” can lose big! On the other hand, with the help of a competent bankruptcy attorney, debtors may be able to take advantage of the Blendheim decision by filing objections to Proofs of Claim when there is a basis to do so.
If you are a creditor in need of bankruptcy representation, or an individual who is considering bankruptcy, contact us now for a FREE, no obligation, consultation!
*** The purpose of this blog post is to provide you with information about the In re Blenheim decision. The facts of the Blendheim decision are uncommon, and we do not make the representation that most debtors can walk away from bankruptcy with a free house. Again, the purpose of bankruptcy is to reorganize and get a “fresh start,” which does not necessarily mean that you will walk away completely debt-free. Contact us now to learn more, and to discuss your bankruptcy options.