5th Circuit: No Student Loan Discharge When IBR = $0

The Supreme Court recently finally resolved a Texas student loan discharge adversary which started in 2016. The court by denying a writ of certiorari in June of 2021 in Thelma McCoy v. U.S., 2021 WL 2519193.

This is one of those “bad facts make bad law” cases. (In the interest of full disclosure, I have issues with Brunner and Gerhardt which I have written about previously.)

The Brunner/Gerhardt test has three prongs:

  1. that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself if forced to repay her student loans;
  2. that additional circumstances exist indicating that the state of affairs described in prong one is likely to persist for a significant portion of the repayment period of the student loans, and
  3. that the debtor has made a good faith efforts to repay the loans.

District Court Memorandum Opinion and Order, Case No. 16-08007, Docket No. 79, citing In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003).

Ms. McCoy went back to college in 2000 at the age of 43. Over the next 14 years she obtained a bachelor’s degree in general studies and a master’s and Ph.D. in social work. In the process of obtaining those degrees she incurred $350,000 in student loan debt. (All of her degrees were from state universities, so I would assume that she used the student loan money not only for education-related expenses but for general living expenses, as well.) The record is not terribly clear, but it appears that she was unable to find a full-time job but was regularly employed on a part time basis, sometimes with more than one job. At the age of 62, 18 months after receiving her Ph.D. she filed Chapter 7 and then filed an adversary proceeding seeking a discharge of her student loan debt. Her total non-student loan unsecured debt was $22,500. At the time of her filing and throughout the appeal process, she was in an income based repayment plan which required a zero dollar monthly payment.

Judge Isgur did not write an opinion, but did make findings of fact and conclusions of law which he announced on the record. He found that she had not established that requiring her to pay the student loan debt would impose a current hardship because the payment was zero and all she had to do to maintain the zero payment was to submit annual statements showing that her income had not substantially increased. He also found that she had not offered any proof that she would be unable to submit those statements. No payment, no hardship. Judge Isgur made it pretty clear that this was a burden of proof case – she had the burden and she didn’t meet it.

The District Court’s opinion was more focused on whether there was a change of circumstances after the loans were incurred, citing Gerhardt for the proposition that:

“additional circumstances” encompass circumstances that impacted on the debtor’s future earning potential but which either were not present when the debtor applied for the loans or have since been exacerbated. This second aspect of the test was meant to be a demanding requirement. Thus, proving that the debtor is currently in financial straits is not enough. Instead, the debtor must specifically prove a total incapacity in the future to pay his debts for reasons not within his control. Gerhardt, at 92.

[Internal citations omitted.]

The District Court went on to state: “The timing requirement exists so that courts can examine whether ‘the debtor could have calculated [a particular circumstance] into its cost benefit analysis at the time the debtor obtained the loan.”’ Citing In re Roach, 288 B.R. 437, 445 (Bankr.E.D.La. 2003. I read the transcript of the hearing in McCoy. I am reasonably certain that Ms. McCoy did not perform any cost benefit analysis. The District Court found that the debtor failed to meet her burden of proof on that issue.

There is no mention of the “timing requirement” in Brunner. FYI, Brunner is all of two pages long.

The Fifth Circuit affirmed on the burden of proof issue saying: “McCoy could not satisfy the second prong because, although her payments are set at zero dollars per month, she had not shown additional circumstances demonstrating her inability to pay a higher monthly amount would persist. Therefore, McCoy failed to meet her burden of proof.”

Thought #1:     This is an all too common theme in student loan hardship litigation – the only witness is the debtor. The debtor is typically not qualified to offer an opinion on their medical condition and likely future implications. “My doctor said…” is hearsay and is objectionable as such. The last one of these I had (admittedly five years or so ago) we had two of his doctors lined up and the attorney who won his Social Security disability appeal. The U.S. Department of Education surrendered and gave him a hardship discharge of their loans before we filed his Chapter 7. We settled with the main non-governmental lender for very low payments for just a few years.

Thought #2:     Don’t file a bankruptcy and hardship adversary 18 months after graduating. She was 62 when she filed. The adversary was finally resolved five years later when she was 67. She might have had a better chance of getting a hardship discharge if she had waited until she was 67 and then filed.

Thought #3:     Why would a judge ever grant a hardship discharge when the debtor is in a zero dollar payment plan?  I’m thinking you would need a really sad story.

Michael Baumer


Foreclosure and eviction moratoriums expiring

Guest blog by Megan Baumer

Federal moratoriums on evictions and foreclosures on federally backed mortgages are currently scheduled to end on July 31, 2021.  However, the White House held meetings with local officials from across the country on July 21st to discuss ways to keep people in their homes and to avoid a nationwide eviction crisis.  No new extension was announced following those meetings.


30-day eviction notice is required for federally-backed properties – apparently even post-July 31. 

HUD/FHA and USDA will require landlords to provide tenants with 30 days notice to vacate for non-payment rent.  This will apply only if the landlord:

a.  has underlying financing

1)   backed by the federal government, or

2)   purchased or securitized by the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National Mortgage Association (Fannie Mae), or

b.  is receiving assistance from the federal government.

While a landlord is receiving mortgage relief, they can’t evict tenants for unpaid rent or late fees or charge tenants late fees or other penalties due to paying rent late.  When a landlord stops receiving mortgage forbearance relief, they must give tenants at least 30 days’ notice to vacate.

Emergency Rental Assistance

There should still be funds available for rental assistance under the American Rescue Plan, which allocated $21.5 billion for Emergency Rental Assistance (ERA).  When combined with the $25 billion allocated by the Consolidated Appropriations Act 2021, the total ERA is more than $46 billion. 

In late June, the White House called for an acceleration of the ERA funds to renters and landlords.  A major problem is that no national infrastructure is in place to disburse the aid, so the states use various agencies and non-profits to disburse the funds. CNBC reported on July 13th that the first $25 billion has been disbursed to the states.   However, the Washington Post reported on July 14th that only $1.5 billion of that money has been used by the states for rent, utilities and arrears through the end of May.  Only about $8.6 billion of the second ($21.5 billion) round has been disbursed to the states.  About 176,000 households have been assisted, but some 11.5 million or 16% of adult renters are behind on their rent.  Meanwhile, rents are rising and housing prices are skyrocketing.

Texas has done better than many states – disbursing  $336 million of $1.1 billion the federal government provided by June 17th, with nearly $18 million going to renters and landlords every day.  (Route Fifty – June 22, 2021).

Locally, on June 10, the Austin City Council approved items to provide $42 million in rental assistance to keep Austin families from being evicted.  The $42 million is made up of about $35 million in federal funding from the American Rescue Plan and about $7 million in local funds.  Rent payments are made directly to the landlord/property manager/property owner who is owed rent payments.  It looks like either the landlord or the tenant may apply. 

For applications and other information, go to: 

Austin residents:  Austintexas.gov/rent –  RENT (Relief of Emergency Needs for Tenants)

Travis county:  https://traviscounty.onlinepha.com/en-US/

Williamson County, not Austin: http://cityofthrall.com/Wilco%20Forward%20Ph%20III%20Flyer_English.pdf

(This flier refers to payments made from March – December, so it is not current, but the listed contacts are probably the same if funds are still available.)

Also check out Check the Consumer Financial Protection Bureaus general information about assistance programs to homeowners, landlords and tenants at:



Even after the foreclosure moratorium ends on July 31, most mortgage companies cannot start the foreclosure process before January 1, 2022, unless they have reached out to the homeowner or evaluated a homeowner’s complete application for options to help avoid foreclosure. 

On June 25, 2021, HUD announced:

1.  FHA is continuing its extension of the deadline for first legal action and reasonable diligence timeframes for 180 days after July 31, 2021 (which means through January 2022). This extension excludes vacant or abandoned properties.

2. New forbearance.  Homeowners who have not previously been in COVID-19 forbearance have until September 30, 2021 to request a forbearance.  The COVID-19 Forbearance for homeowners who request forbearance assistance for the 1st time between July 1, 2021, and September 30, 2021, is for six months.

3.  Extension of forbearance.  For homeowners who received a forbearance from their mortgage servicer between July 1, 2020, and September 30, 2020, FHA is providing one additional three- month forbearance extension for those who need and request one.

4,  A  new COVID-19 Advance Loan Modification (COVID-19 ALM) for borrowers currently 90 or more days delinquent or at the end of their COVID-19 Forbearance.  For homeowners who qualify with a 30-year rate and term, the modification will bring the mortgage current and will reduce the principal and interest portion of their monthly mortgage payment by at least 25 %.  Mortgage servicers must offer the new COVID-19 ALM to distressed homeowners with FHA-insured mortgages who have faced a COVID-19 related hardship.

5.  For seniors with Home Equity Conversion (reverse) Mortgages (HECMs) who have been negatively affected by COVID-19, extension requests, servicers must grant homeowners an extension of up to six months before the servicer may call the loan due and payable, if the extension request is received between July 1, 2021, and September 30, 2021.  If the HECM loans has already been called due and payable, servicers must approve homeowner requests for an extension for any deadline related to foreclosure and claim submission of up to six months when the request is received between July 1, 2021, and September 30, 2021.

For more information, go to:


Since FHA, VA, and USDA seem to be working in tandem, these extensions probably apply to those loans as well. 


Go to this site for information about how to file a compliant against your mortgage company if you think you have grounds for one.  CFPB will forward the complaint to your lender and work to get you a response, generally within 15 days.  Consumerfinance.gov. CFPB – June 28, 2021

Property Taxes:  The City of Austin’s website says the Travis County tax office temporarily suspended new legal actions against those with delinquent property taxes.  The website does not say when this temporary suspension will end.  I found this information still up on 7/12/21.  However, we had some clients whose property tax liens were set for foreclosure on July 6, 2021.  These cases were not new actions to collect but actions filed before the Covid shut downs – that were not being set for foreclosure.  


Additional sources:




Megan Baumer



Will I be able to buy a house after filing bankruptcy?

The answer depends on what you do post-bankruptcy.

Rebuild your credit

You’ll need to build a positive payment history after the bankruptcy and raise your credit score. If you have secured debt (house note, car notes)  that you continue to pay on time after the bankruptcy, the payments will be reflected on your credit report and help you rebuild your credit score.

You may have unsecured debt you will have to pay after bankruptcy. The most common unsecured debts you will pay after a bankruptcy are student loans.  If you pay these on time post-bankruptcy, those payments will be listed on your credit report and help boost your credit score.

Many of our clients tell us that they start getting credit card offers about 90 days after their bankruptcy discharge. These will usually have high interest rates and low credit limits, but they are way to start building a post-bankruptcy positive payment history. Be careful. This only works if you make your payments on time and you carry balances below one-third of your available credit limit.

Wait the necessary time periods.

Usually, you will need to wait 2-4 years before you can obtain financing to buy a new home.  The time periods to qualify for a mortgage post-chapter 7 discharge: 

Conventional mortgage – four years       

FHA mortgage – two years        

FNMA (Fannie Mae) and FDMC (Freddy Mac) – four years

  VA loans – two years

All the time periods are cut in half if there were extenuating circumstances causing you to file bankruptcy – unforeseeable substantial reduction in income or extreme increase in expenses due to job loss due to downsizing, death of a breadwinner, or medical expense.  A divorce is not considered an extenuating circumstance.

Save a downpayment

If you have a home before you file a bankruptcy, you can sell it after, and the net proceeds after paying off the mortgage are protected from your pre-bankruptcy creditors. The more money you have for a down payment, the more it will increase your chances of qualifying for a new mortgage with a lower interest rate.  If you don’t have a home to sell after your bankruptcy, you will need to save for a down payment. The amount required is generally controlled by federal regulations.  FHA requires (1) a down-payment of at least a 3.5%  down payment if your credit score is 580 or higher and at least 10% if it is 500- 580 and (2) that you not have incurred new debt.  VA does not require a down payment as long as the sales price isn’t higher than the appraised value and there is not minimum credit score, although some lenders require a credit score of 620.  Your credit score will also impact the interest rate your mortgage company will charge. 

Short version – you need to build positive credit history after your discharge (the more “credit lines” the better), raise your credit score and save up for a down payment.  Then you may qualify for a mortgage as short as two years after your discharge – perhaps one year if you can show extenuating circumstances.

Michael Baumer


Supreme Court: Creditor retention of vehicle after bankruptcy filing does not violate automatic stay

The “automatic stay” is imposed when someone files a bankruptcy case. Sec. 362(a)(3) prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” [Emphasis added.] If the person filing bankruptcy owns a vehicle on the date of the bankruptcy filing, it becomes property of the estate when the case is filed. I have been a bankruptcy attorney for 37 years, and it has always been the rule that if a creditor repossessed a car prior to the bankruptcy but it had not disposed of it, the creditor had to return the car to the debtor once the bankruptcy case was filed. This is particularly true in Chapter 13 cases where a repayment plan has been filed and the vehicle is insured.

In January 2021, the Supreme Court issued an opinion in City of Chicago v. Fulton which held that “passive retention” of a vehicle does not constitute exercising control. The court held that the statute requires an “affirmative” act and simple “passive retention” of the car was not an affirmative act. In this case, the City impounded the vehicle for traffic violations, but the legal issues are the same for a creditor who repossesses a vehicle for non-payment of the car note. The opinion doesn’t address some of the actual facts, but in most big cities, cars that are impounded are held in an impound lot with a fence and police or security staff. That doesn’t sound like mere “passive retention” to me, but I’m not going to quibble with the Supreme Court about the meaning of “passive.”

In the final paragraph of the opinion, the court stated:
“Though the parties debate the issue at some length, we need not decide how the turnover obligation in §542 operates. Nor do we settle the meaning of other subsections of §362(a). We hold only that mere retention of estate property after the filing of a bankruptcy petition does not violate §362(a)(3).”

The “other subsections” of §362(a) mentioned in the opinion are §362(a)(4) and (6). 362(a)(4) operates as a stay of “any act to create, perfect, or enforce any lien against property of the estate.” [Emphasis added.] 362(a)(6) operates as a stay of “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.” [Emphasis added.]

The Supreme Court remanded the Chicago v. Fulton case to the 8th Circuit Court of Appeals by order dated April 12, 2021, to consider whether passive retention of property of the estate violates §362(a)(4) or (6). Although the Supremes remanded for further consideration, I believe the opinion on 362(a)(3) tells us the answer. Section 362(a)(3) prohibits “any act.” Section 362(a)(4) and (a)(6) also prohibit “any act.” It is a basic rule of statutory construction that a word used in a statutory scheme has the same meaning anywhere it is used in that statutory scheme. (the phrase “any act” is not just used elsewhere in thee Bankruptcy Code, it is used in various subsections of the same section. [By the way, (a)(5) also contains the “any act” language.]

In dissent, Justice Sotomayor addresses the practical realities of asserting claims under §542(a) rather than §362(a). Section 542(a) provides:
“Except as otherwise provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” [Emphasis added.]

The practical reality is that §542 requires an adversary proceeding, which requires a filing fee and a request for a temporary restraining order which only lasts 10 days. There must be a hearing on a temporary injunction and a bond may be required. If the creditor wants to draw the process out, it depends on how much patience the judge has with the stall tactics. (I would suggest that FRBP 9011 comes into play, but that is a question for another day.)

Section 542(a) requires the creditor to “deliver to the trustee” the property in question, which raises other practical issues. If the car has been claimed as exempt, the trustee is not going to want to have any part in this process – the trustee is not going to be paid anything for participating and will simply deliver the car to the debtor who (hopefully) will make the plan payments and all of this fuss will be a waste of everyone’s time, effort, and money.

Congress could fix this with a simple amendment to §362 but that is unlikely. I suspect that Bankruptcy Courts around the country will address this through standing orders or local rules that will probably work, but uniformity would be in all parties best interests.

Michael Baumer

Ongoing Saga of Homestead Proceeds

In the latest installment of the homestead proceeds saga, the US District Court for the Western District has issued an opinion reversing Judge Gargotta’s opinion in In re DeBerry, 2015 WL 6528024. The District Court opinion can be found on the Western District Court website under Case N. 5:15-cv-01135-RCL, Docket No. 9.

This case starts with an unusual fact pattern as the property in question was the separate property of the debtor husband at the time of filing. The property was sold pursuant to a court order post-petition and the trustee requested and obtained a paragraph in the order approving the sale that stated:

ORDERED, ADJUDGED and DECREED that nothing in this Order shall prohibit John Patrick Lowe, as Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate (the “Estate”) of the Debtor, or any other successor trustee, from seeking to recover the proceeds from the sale of the real property located at 8 Tudor Glen, San Antonio, TX 78257 as an asset of the Estate under 11 U.S.C. §541, to the extent the proceeds from such sale are no longer exempt under Texas Prop. Code §41.001.

Upon sale of the homestead on September 26, 2014, the Debtor netted $364,592. The proceeds were deposited into a bank account solely in the name of the non-filing spouse. $85,000 of those proceeds were subsequently transferred into another account, also solely in the name of the non-filing spouse. Out of that account $50,000 was transferred to Goldstein, Goldstein & Hilley, a criminal defense firm that had previously been engaged to represent the Debtor, by check dated September 29, 2014. The $85,000 in proceeds were not reinvested in another homestead within six months of the sale of the property. (The record is unclear what happened to the remaining $280,000 in proceeds.)

Mr. Lowe then filed an adversary in which he sought declaratory relief that the proceeds of Mr. Deberry’s separate property homestead were also his separate property and that the proceeds became property of the bankruptcy estate, and sought turnover of the proceeds from the non-filing spouse, the criminal defense attorneys and unidentified Jane or John Does.

The defendants filed a motion to dismiss contending that the Texas Proceeds Rule and In re Frost, 744 F.3d 384 (5th Cir.2014) do not apply in Chapter 7 cases. Judge Gargotta agreed, relying primarily on Judge Davis’ opinion in In re D’Avila, 498 B.R. 150 (Bankr.W.D.Tex.2013) and rejecting Judge Bohm’s opinion in In re Smith, 514 B.R. 838 (Bankr.S.D.Tex.2014).

Mr. Lowe appealed and on March 10, 2017, the District Court issued its ruling holding that Judge Gargotta was incorrect and that Frost and the Texas Proceeds Rule do apply in Chapter 7 cases, relying primarily on Judge Bohm’s opinion in Smith. The court also relied on In re England, 975 F.2d 1168 (5th Cir.1992) for its oft cited statement that the purpose of the proceeds exemption “was solely to allow the claimant to invest the proceeds in another homestead, not to protect the proceeds in and of themselves.” The court also relied on In re Zibman, 268 F.3d 298 (5th Cir.2001) which held that a debtor who sold his homestead prior to filing Chapter 7 and was holding proceeds on the petition date was subject to the Texas Proceeds Rule.

This is an important and binding opinion for attorneys in the Western District of Texas and is clearly an important opinion for attorneys everywhere in Texas. (At least until the Fifth Circuit tells us what the official answer is.)

Now for my soapbox. Please feel free to stop reading at this point.

1. Texas enacted the first version of what is now Texas Property Code Sec. 41.001(c) in 1897. That’s 120 years ago. The statute provides, in total: “The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” There is nothing in the statute (nor has there ever been) that says that the homestead claimant cannot use the proceeds for some other lawful purpose. What if the debtor needs to buy a car to get to and from work? What if he needs to acquire tools or equipment to perform his vocation? What if he needs to feed his kids? It is not the function of the courts to create statutory limitations through judicial gloss when the legislature has failed to act to impose those limitations.

2. There is a clear rule of statutory construction that Texas exemption statues are to be liberally construed, particularly with respect to homesteads. Woods v. Alvarado State Bank, 19 S.W.2d 35 (Tex. 1929): “The rule that homestead laws are to be liberally construed to effectuate their beneficient purpose is one of general acceptation.” Trawick v. Harris, 8 Tex. 312 (Tex.1852): “Profoundly impressed with the wisdom in which our homestead policy is founded, and fully impressed with its ameliorating influences, we admit that it is entitled to the most liberal construction for the accomplishment of its object.”

3. As noted above, England is almost invariably cited for the proposition that proceeds were never meant to be protected as proceeds, but only to allow the debtor to re-invest the proceeds in another homestead. England cites no authority to support that “holding.” (It isn’t actually holding, by the way.) England is a 1992 opinion. Was there no precedent in 99 years that supports England’s statement?

4. The District Court opinion in DeBerry lists six bankruptcy sections that courts addressing this issue have relied upon: 541(a)(1), 541(a)(6), 522(c), 1306(a), 1306(b), and 1327(b). I have another one that DeBerry and none of the other homestead proceeds cases mentions – 1307(b) which provides:

On request of the debtor at any time, if the case has not been converted under section 706, 1112, or 1208 of this title, the court shall dismiss a case under this chapter. Any waiver of the right to dismiss under this subsection is unenforceable. [Emphasis added.]

It is my opinion that 1307(b) represents a fundamental difference between Chapter 13 (Frost) and Chapter 7 (Smith). 1307(b) allows a debtor in a Chapter 13 case to dismiss his/her case without any cause. One of the very basic goals of Chapter 13 is to encourage/allow debtors to save their home and vehicles and to pay something to unsecured creditors. Many of my debtor Chapter 13 clients file to try to keep their home that they are in default on. If they try to save their home by curing the default but are unable to do so, there are several options available: (1) allow the mortgage holder to foreclose; ( 2) sell the house while in a Chapter 13 and use the proceeds to buy a new homestead; (3) sell the homestead and turn over the proceeds to the Chapter 13 trustee; or (4) dismiss the Chapter 13 and use the proceeds to play “let’s make a deal” with the debtor’s unsecured creditors.

5. Unfortunately, the courts talk about the debtor buying a new homestead while in a pending bankruptcy case as if it is a realistic financial option. For most debtors, that is a false option. If the debtor has sufficient equity in the prior homestead to purchase a new homestead for cash, that is one reality. Most of my clients have relatively low amounts of equity – $50,000 to $100,000. That may suffice as a down payment on a home, but it won’t buy a home Austin, Texas. And lenders will not finance the purchase of a home for a debtor in a pending bankruptcy case.

Home Equity Loan Violations

This is a very long post describing some recent case law with respect to home equity litigation in Texas. These events are significant to a consumer bankruptcy practice, but if the subject is of no interest, you may want to skip it.

The Texas Supreme Court issued two opinions on May 20, 2016 regarding issues related to the home equity loan forfeiture provisions of the Texas Constitution. These opinions make significant changes to Texas case law regarding applicability and enforcement of those provisions. The first case was Garofolo v. Ocwen Loan Servicing, L.L.C., 497 S.W.3d 474 (Tex.2016) and the second is Wood v. HSBC Bank USA, N.A., 2016 WL 2993923 (Tex.2016). It is important that the cases are read in sequential order as Wood relies on Garofolo in reaching its conclusion. (All references to the Texas Constitution herein are to Article XVI, section 50(a)(6) and its subsections unless otherwise noted.)

I found these cases to be confusing (as did my sister who edits my posts) so I write to provide my understanding/interpretation of what they mean. To help you understand where we are going let me summarize at the beginning. Garofolo holds that there is no constitutional violation if a lender violates 50(a)(6) by not curing a violation if none of the cures enumerated in 50(a)(6)(Q)(x) will actually cure the violation. The court goes on to state (in dicta) that a borrower may have a breach of contract claim if the lender fails to cure after notice from the borrower and suffered actual damages. More significantly, Wood holds that if an equity lien does not include all of the terms and conditions required by 50(a)(6), it is not a valid lien under 50(c), and since it is not a valid lien, limitations does not start to run until the lender fails to cure after notice. (The statute of limitations ruling is the big news out of these two cases.) Wood also confirms Garofolo’s statements that a borrower may assert a claim for forfeiture as a breach of contract claim if the claim is asserted under 50(c) as opposed to 50(a).

In Garofolo, the Fifth Circuit certified two questions to the Texas Supreme Court because they involved interpretation of the Texas Constitution. Those two questions were:

1. Does a lender or holder violate Article XVI, Section 50(a)(6)(Q)(vii) of the Texas Constitution, becoming liable for forfeiture of principal and interest, when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder fails to return the cancelled note and release of lien upon full payment of the note within 60 days after the borrower informs the lender or holder of the failure to comply?

2. If the answer to Question 1 is “no,” then, in the absence of actual damages, does a lender or holder become liable for forfeiture of principal and interest under a breach of contract theory when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder, although filing a release of lien in the deed records, fails to return the cancelled note and release upon full payment of the note within 60 days after the borrower informs the lender or holder of the failure to comply?

50(a)(6)(Q)(vii) states that a home equity loan is made on the condition that:

(vii) within a reasonable time after termination and full payment of the extension of credit, the lender cancel and return the promissory note to the owner of the homestead and give the owner, in recordable form, a release of the lien securing the extension of credit or a copy of an endorsement and assignment of the lien to a lender that is refinancing the extension of credit;

To avoid the suspense, the Court answered both questions “no.” Garofolo starts with one atypical fact – the equity loan in question had been paid in full and the lender filed a release of lien in the real property records before litigation ensued. Ocwen, however, failed to send the borrower the cancelled promissory note and a release in recordable form within a reasonable time after full payment of the loan as required by 50(a)(6)(Q)(vii) and by the deed of trust and the lender failed to cure within 60 day after notice from the borrower as provided in 50(a)(6)(Q)(x). The Garofolo Court held that a breach of the terms of the extension of credit under the terms of the loan documents – in this case, failure to timely return the note and send a release after demand – did not give rise to a constitutional claim for forfeiture. “Our constitution lays out the terms and conditions a home-equity loan must include if the lender wishes to foreclose on a homestead following borrower default.” In other words, an equity lending violation is a shield not a sword, although how the sword is wielded is not made completely clear by Garofolo (or Wood). The court states that “we do not suggest Garofolo is not without recourse. Her remedy simply lies elsewhere – for instance, in a traditional breach-of-contract claim, in which a borrower seeks specific performance or other remedies contingent on a showing of actual harm.” [Emphasis added.]

With respect to the breach of contract claim, however, the Court held that she did not have a claim for forfeiture under a breach of contract theory as it was undisputed that she had suffered no actual damages as a result of the breach. (Although the holder did not send her a release in recordable form, the holder did file an actual release in the real property records so there was no cloud on her title.) The court noted that the 2003 amendments to 50(a)(6) included a change to the forfeiture provision “whereas forfeiture under the original version was arguably triggered whenever a lender ‘fails to comply with [its]obligations,’ the current version does not implicate forfeiture until a lender ‘fails to correct the failure to comply… by’ performance of a corrective measure.”

50(a)(6)(Q)(x) was amended in 2003 to set out the methods by which a lender or holder may correct the failure to comply. The amended statute provides:

Except as provided by Subparagraph (xi) of this paragraph, the lender or any holder of the note for the extension of credit shall forfeit all principal and interest of the extension of credit if the lender or holder fails to comply with the lender’s or holder’s obligations under the extension of credit and fails to correct the failure to comply not later than the 60th day after the date the lender or holder is notified by the borrower of the lender’s failure to comply by:

(a) paying the owner an amount equal to any overcharge paid by the owner under or related to the extension of credit if the owner has paid an amount that exceeds an amount stated in the applicable Paragraph (E), (G), or (O) of this subdivision;
[Paragraph (E) is the 3% cap on closing costs which is one of the more common violations. Paragraph (G) is the prohibition against pre-payment penalties. Paragraph (O) limits the interest rate to a “rate permitted by statute.”]
(b) sending the owner a written acknowledgement that the lien is valid only in the amount that the extension of credit does not exceed the percentage described by Paragraph (B) of this subdivision, if applicable, or is not secured by property described under Paragraph (H) or (I) of this subdivision, if applicable;
[Paragraph (B) is the 80% loan-to-value limitation. Paragraph (H) prohibits taking “any additional real or personal property other than the homestead” as collateral for the loan. Paragraph (I) prohibits taking an equity lien on ag exempt property.]
(c) sending the owner a written notice modifying any other amount, percentage, term, or other provision prohibited by this section to a permitted amount, percentage, term, or other provision and adjusting the account of the borrower to ensure that the borrower is not required to pay more than an amount permitted by this section and is not subject to any other term or provision prohibited by this section;
[This cure does not refer to any specific provision or prohibition.]
(d) delivering the required documents to the borrower if the lender fails to comply with Subparagraph (v) of this paragraph or obtaining the appropriate signatures if the lender fails to comply with Subparagraph (ix) of this paragraph;
[Subparagraph (v) is the provision that requires the lender to provide the borrower with copies of all documents signed by the borrower related to the extension of credit which were signed at closing. Subparagraph (ix) is the provision which requires the acknowledgment of value to be signed by the borrower and the lender.]
(e) sending the owner a written acknowledgement, if the failure to comply is prohibited by Paragraph (K) of this subdivision, that the accrual of interest and all of the owner’s obligations under the extension of credit are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead; or
[This one presents a problem. Paragraph (K) provides that a borrower may only have one equity loan at a time. The cure provision is that the lender must send the borrower a written acknowledgement that accrual of interest and all of the borrower’s obligations under the extension of credit (including making payments) are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead. But, assuming that the first lien equity loan is otherwise valid, then the first lien is not prohibited by Paragraph (K). The cure provision as drafted would seem to provide only a cure for a third lien equity loan. In short, the cure does not appear to match the violation.]
(f) if the failure to comply cannot be cured under Subparagraphs (x)(a)-(e) of this paragraph, curing the failure to comply by a refund or credit to the owner of $1,000 and offering the owner the right to refinance the extension of credit with the lender or holder for the remaining term of the loan at no cost to the owner on the same terms, including interest, as the original extension of credit with any modifications necessary to comply with this section or on terms on which the owner and the lender or holder otherwise agree that comply with this section.

In this case, the violation – failing to return the cancelled note and sending a release in recordable form – does not fall within the scope of subparagraphs (a) through (e) so it must fall, if anywhere, within the scope of the “catchall” provisions of subparagraph (f). The Court held, however, that under the circumstances the catchall cure would not actually provide a cure. The lender could offer to pay or credit $1,000 but could not refinance the extension of credit as there was no longer any debt to refinance. Garofolo concluded “…if a lender fails to meet its obligations under the loan, forfeiture is an available remedy only if one of the six corrective measures can actually correct the underlying problem and the lender nonetheless fails to timely perform the relevant corrective measure.” [Emphasis added.]

The final paragraph of the opinion states:

The terms and conditions required to be included in a foreclosure-eligible home-equity loan are not substantive constitutional rights, nor does a constitutional forfeiture remedy exist to enforce them. The constitution guarantees freedom from forced sale of a homestead to satisfy the debt on a home-equity loan that does not include the required terms and provision – nothing more. Ocwen therefore did not violate the constitution through its post-origination failure to deliver a release of lien to Garofolo. A borrower may seek forfeiture through a breach-of-contract claim when the constitutional forfeiture provision is incorporated into the terms of a home-equity loan, but forfeiture is available only if one of the six specific constitutional corrective measures would actually correct the lender’s failure to comply with its obligations under the terms of the loan, and the lender nonetheless fails to perform the corrective measure following proper notice from the borrower. If performance of none of the corrective measures would actually correct the underlying deficiency, forfeiture is unavailable to remedy a lender’s failure to comply with the loan obligation at issue. Accordingly, we answer “no” to both certified questions. [Emphasis added.] [Unfortunately, Garofolo does not make clear the distinction between 50(a) and 50(c). More on this infra.]

My response to the Court’s summary:

First sentence: The terms and conditions applicable to home equity loans contained in 50(a)(6) are not “required” to be “included” in the equity loan documents (although most of them typically are included).

Second sentence: A borrower is protected from forced sale of a homestead if the loan “does not include the required terms and conditions – nothing more.”” The opinion suggests that defects in an equity loan are only a defense to foreclosure and not the basis for an affirmative claim against the lender, but… (Look at the fourth sentence).

Fourth sentence: Notwithstanding the holding that there is no constitutional violation or remedy, the court also stated that a borrower may seek forfeiture under a breach of contract theory but:
• only if one of the corrective measures contained in 50(a)(6)(Q)(x)(a)-(f) would actually cure the violation;
• and the lender fails to perform the applicable corrective action following notice from the borrower;
• and the borrower sustained actual damages as a result of the uncured violation.

Fifth sentence: If none of the corrective measures enumerated in the 50(a)(6)(Q)(x)(a)-(f) would actually correct the violation, forfeiture is not an available remedy.

The missing sentence: The Court states elsewhere that the borrower must be able to prove actual damages in order to invoke forfeiture under a breach of contract theory. Under the facts of the case, the borrower in Garofolo sustained no actual damages and has no remedy.

Because of the atypical fact in this case that the loan was paid in full prior to the instigation of litigation, the holding should be limited in its application. (Although I am primarily a debtor’s attorney, I have to agree with the result in Garofolo. The violation was highly technical and the borrower suffered no damages, actual or otherwise. A borrower shouldn’t get a “free house” under those circumstances.)

Wood is the follow up to Garofolo. Wood states:

The primary issue in this case is whether a statute of limitations applies to an action to quiet title where a lien securing a home-equity loan does not comply with constitutional parameters. The parties also dispute whether petitioners are entitled to a declaration that respondents have forfeited all principal and interest on the underlying loan. We conclude that liens securing constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to any statute of limitations. We further hold that in light of this Court’s decision today in Garofolo [citation omitted], petitioners have not brought a cognizable claim for forfeiture. [Emphasis added.]

The determination that there is no applicable statute of limitations is a major change from prior case law which generally held that limitations accrues at closing if the violation was apparent at the time of closing. See, In re Priester, 708 F.3d 667 (5th Cir.2013); Schanzle v. JPMC Specialty Mortgage LLC, 2011 WL 832170 (Tex.App – Austin 2011); Santiago v. Novastar Mortgage, Inc., 443 S.W.3d 462 (Tex.App. – Dallas 2014); Estate of Hardesty, 449 S.W.3d 895 (Tex.App. – Texarkana 2014). [Judge Gargotta took an early lead on the limitations issue in In re Ortegon, 398 B.R. 431 (Bankr.W.D.Tex.2008), a case I lost. Somebody has to try the cases where we don’t know what the answer is.] The borrower did not have to be aware that the extension of credit violated 50(a)(6), as long as it was not concealed. For instance, if the closing costs exceeded the 3% cap on closing costs and that could be determined by doing the math on the HUD-1, the fact that the borrower was not aware of the 3% cap or how it was calculated does not delay limitations from running.

Wood explains the holding in Garofolo, including the scope of that opinion.

Our opinion today in Garofolo clarifies the extent of the protections outlined in section 50(a), including a borrower’s access to the forfeiture remedy. Specifically, we hold in Garofolo that section 50(a) does not create substantive rights beyond a defense to foreclosure of a home-equity loan securing a constitutionally noncompliant loan, observing that the terms and conditions in section 50(a) “are not constitutional rights and obligations unto themselves.” We also clarify that “the forfeiture remedy [is not] a constitutional remedy unto itself. Rather it is just one of the terms and conditions a home-equity loan must include to be foreclosure-eligible. We explain that borrowers may access the forfeiture remedy through a breach-of-contract action based on the inclusion of those terms in their loan documents, as the Constitution requires to make the home-equity loan foreclosure-eligible. In Garofolo we interpret only section 50(a), which sets the terms home-equity loans must include to foreclosure-eligible. Section 50(c), on the other hand, expressly addresses the validity of any homestead lien, broadly declaring the lien invalid if the underlying loan does not comply with section 50. [Internal citations omitted.] [Emphasis added.]

50(a) provides, in relevant part: “The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except: [a list which includes subparagraph (6) which describes home equity loans.] [Emphasis added.]

50(c) provides, in contrast: “No mortgage, trust deed, or other lien on the homestead shall ever be valid unless it secures a debt described by this section…” [Emphasis added.]

Although Garofolo is less than crystal clear that its holding is based on 50(a) as opposed to 50(a)(6), Wood makes clear that the distinction is between 50(a) and 50(c).

Although Garofolo and Wood may seem to say that a borrower may not bring a declaratory relief action regarding an alleged home equity defect, the actual holding is that a borrower may not bring a declaratory relief action based upon alleged constitutional violations. Both opinions make it clear that a borrower may bring an action for breach of contract if the loan is noncompliant and the lender/holder fails to cure after notice. This is significant as a claim for breach of contract gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 38.001 and a claim for declaratory relief gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 37.009. (I say “request” as both statutes are discretionary – the court “may” award attorney’s fees.)

What it the message for practitioners? If a potential client comes to you and you identify a home equity violation, you should draft a notice of violation letter for the client’s signature which identifies the violation with sufficient specificity for the lender to identify the violation, i.e., if the violation is charging more than 3% for closing costs, say that. You do not have to identify the specific statutory sub-paragraph. Do not take any further action during the 60 day cure period. Assuming the lender does not cure, you have a couple of options. Have the borrower default, wait until the lender files an application for foreclosure, then sue the lender for declaratory relief and breach of contract. (And injunctive relief if necessary to stop a foreclosure.) Alternatively, don’t wait for the lender to take action and file a preemptive declaratory relief/breach of contract action. In your pleading, make certain that forfeiture of principal and interest is requested under 50(c), not 50(a). The declaratory relief is that the loan is invalid under 50(c). The breach of contract claim is that the lender failed to cure the violation pursuant to 50(a)(6)(Q)(x)(a)-(e) after notice pursuant to 50(a)(6)(Q)(x).

This is way beyond the scope of this post, but home equity violations may give rise to other claims and causes of action. For instance, there may be claims for DTPA violations. Texas case law holds that a loan is not a “good’ or “service” and will not serve as the basis for a DTPA violation. If, however, the home equity violation is charging closing costs in excess of the 3% cap, one or more of those costs may be a good or service – an appraisal, a survey, a tax certificate……. – which might bring the claim under the DTPA. There may also be RESPA violations, FDCPA violations, FCRPA violation,… (I have seen all of these. This is not meant to be an exhaustive list.) I mention the DTPA in particular as it may give rise to treble damages. (And attorneys fees)

Lien Stripping

We just filed our first “lien stripping” case where we are attempting to strip off a wholly unsecured second lien from a house the debtor owns in Washington DC. The property generates positive cash flow after paying the first lien (which will help the debtor fund her plan), but not enough cash flow to pay the second lien. (The same analysis applies to property here in Texas, but I’m just giving you general info that might be relevant.)

I did a little research and lo and behold, the Southern District of Texas has a procedure for doing this, so basically I just followed/copied/misappropriated theirs. We are doing this by plan provision rather than an adversary. Rule 7001(2) defines adversary proceedings to include “a proceeding to determine the validity, priority, or extent of a lien…” The obvious goal here is to avoid the expense and delay of an adversary. One of the key issues between contested matters and adversaries is procedural due process. In addition to the notice required in the Southern District form, we also serve the registered agent or other appropriate corporate representative. (i.e the president of the bank.) We also serve a “Lien Stripping Notice” separate from the plan which basically says “Hey, you. Yes, you. We are trying to do bad things to you. Pay attention.”

 We had a confirmation hearing which has been re-set based upon an amended plan. At the hearing, our Chapter 13 Trustee and I made sure the judge  knew what I am trying to do. He did not “approve” this procedure, but he basically said give it a shot and we’ll see how it works. If the creditor objects to doing this by plan provision, we may have to re-file as an adversary, but if they don’t, it looks like it will work.


Michael Baumer

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Bandi – Dischargeability under 523(a)(2)(A)

On June 12, the Fifth Circuit issued an opinion addressing the meaning of “a statement respecting the debtor’s or an insider’s financial condition” [and the distinction between non-dischargeability of debts under 523(a)(2)(A) and (B)]. In re Bandi, 2012 WL 2106348 (5th Cir.2012).

523(a)excepts from discharge any debt –

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by –

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

                        (B) use of a statement in writing—

                                    (i) that is materially false;

                                    (ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive; …” [Emphasis added.]

In Bandi the debtors (two brothers) guaranteed a loan their corporation obtained from a friend. Prior to obtaining the loan, one of the brothers represented that he had purchased a home and both of the brothers represented that they had purchased a condominium project and an office building. They even took the friend (and his lawyer wife) on a tour of “their” office building. The brothers did not actually own any of the properties and admitted as much at trial. They argued that their statements were made with respect to their financial condition, so they did not fall within the scope of 523(a)(2)(A) and they were not in writing, so they did not fall within the scope of 523(a)(2)(B), either. The focus of the opinion is on the meaning of “a statement respecting the debtor’s or an insider’s financial condition.”

 The court held: “The term ‘financial condition’ has a readily understood meaning. It means the general overall financial condition of an entity or an individual, that is, the overall value of property and income as compared to debt and liabilities. A representation that one owns a particular residence or a particular commercial property says nothing about the overall financial condition of the person making the representation or the ability to repay the debt. The property about which a representation is made could be entirely encumbered, or outstanding undisclosed liabilities of the person making the representation could be far more than the value of the property about which a representation is made.” The court found that the false statements were not statements respecting the debtors’ financial condition within the meaning of 523(a)(2)(A) and the debt was non-dischargeable.

 I’m not sure I agree with the court’s definition. The Code does not say “the general overall financial condition” of the debtor – it says a statement “respecting” the debtor’s financial condition. My American Heritage Dictionary defines “respecting” as “In relation to; concerning.” “I own this office building” would seem to “relate to” my financial condition. This may just be one of those “bad facts make bad law” cases. The debtors got their friend to loan them $150,000, at least in part by “puffing.” It doesn’t seem fair for them to get away with it. The court fashioned a remedy so they didn’t. 

Michael Baumer


<p align=”justify”><a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a></p>

Discharge of taxes in bankruptcy

Ladies and Gents –

The Fifth Circuit just (1/4/12) issued an opinion that is going to change our world. (Or at least part of it.) In McCoy v. Mississippi State Tax Commission, 2012 WL 19376 (5th Cir. 2012), the court interpreted the hanging paragraph at the end of 523(a) which was added by BAPCPA. That paragraph provides:

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements.) Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law. [Emphasis added.]

The Fifth Circuit held that “applicable filing requirements” includes the requirement that a return be timely filed. If a “return” is not timely filed, it does not qualify as a “return” under 523(a). Congress has now defined “return” so that a real, actually filed return is not a “return” if it was filed so much as one day late. (Even if it was actually filed more than two years prior to the bankruptcy filing.) (If congress really wanted to change prior law, shouldn’t they have put the hanging paragraph at the end of 523(a)(1)(B)(ii) [instead of after the other 17 unrelated sub-paragraphs and sub-sub-paragraphs in 523(a)] or wouldn’t they have changed the existing wording of 523(a)(1)(B)(ii)? I am not arguing that the result is incorrect. It appears to be “correct” if you read all of this together. I am simply suggesting that this is one more example of a poorly conceived and/or drafted provision our “friends” in Washington left us with to sort out. Although McCoy involved state income tax returns, there is no basic difference between the Mississippi tax code and the Internal Revenue Code as far as filing requirements. (The Mississippi tax code also requires that returns be filed by April 15th.)

 Literally one week after McCoy,(1/11/12) Judge Lief Clark issued an opinion in Hernandez, v. U.S., Adv. No. 11-5126C (Bankr.W.D.Tex.2012) which made the same analysis with respect to the Internal Revenue Code. He reached the same conclusion Judge King did in McCoy.

To make sure that the client’s tax returns were timely filed, you should probably order a “tax account transcript” for each year in question. (Your client can sign the form so you can order these.)

I am absolutely certain this is not the end of the dispute/discussion over this issue, but advise your clients appropriately. Just my opinion, for what it’s worth.

Michael Baumer

Austin, Texas

Federal Tax Liens in Chapter 13

I recently filed a Chapter 13 case and had an issue arise which I see occasionally that I thought might be of interest to the consumer debtor bar. In my case, the debtor lived in Travis County and owed the IRS taxes for several years, all but one of which would be dischargeable as “stale” taxes. The IRS filed a tax lien, but filed it in Williamson County, not Travis.

The improper filing creates a tax lien against the debtor, but not as against third parties, i.e., a judgment lien creditor, like a trustee in bankruptcy which has the status of a hypothetical judgment lien creditor under Section 544(a)(1) or a bone fide purchaser of real property under 544(a)(3).

This made a huge difference in my case because the debtors had significant equity in their home but did not have sufficient disposable income to pay the IRS claim. If the lien was “good”, they would have had to sell their home to pay the lien. Since the lien was unperfected as against the trustee, the claim became unsecured and they were able to pay significantly less than the amount of the claim. (And the IRS did the right thing and amended their claim so I didn’t have to file an adversary to determine the validity and priority of the lien.)

For a discussion of this issue, see the Internal Revenue Manual, Part 5, Chapter 17, Section 2, which can be found at www.irs.gov/irm/part5/ Scroll down to 5.17.2 titled Federal Tax Liens and get the Service’s take.

The practice tip here is if you get a secured proof of claim from the IRS, don’t assume it is perfected. Check. Most counties have their real property records online now, so it is no great burden. I am not suggesting that this is a common situation, but this is not the first time I have seen it.

Michael Baumer


Law Office of Michael Baumer

by Michael Baumer