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Joining the majority of courts that have addressed the issue, the Court of Appeals for the Fourth Circuit has affirmed the decision of the Bankruptcy Court and the U.S. District Court for the District of Maryland, allowing a Debtor in bankruptcy to remove a wholly unsecured second mortgage as a lien against their primary residence.  Suntrust Bank v. Millard (In re Millard), 2010 WL 5158561 (4th Cir. 2010), aff’g, 414 B.R. 73 (D. Md. 2009).

BACKGROUND

In 2005, the Millards purchased their primary residence for $695,000.  As was the typical practice at the time, the mortgage company financed 100% of the purchase price through an 80% first mortgage and a 20% second mortgage in the amounts of $556,750 and $138,250, respectively.  Subsequently, the Millards refinanced the second mortgage twice, which resulted in a $280,000 line of credit with Suntrust bank. 

The Millards eventually fell behind on both of their mortgage payments, causing them to file for relief under Chapter 13 of the Bankruptcy Code in June of 2008.  At the time of filing, the Millards owed the first mortgage company nearly $621,000.00, which included additional fees and interest.  The Bankruptcy Court held that the fair market value of their primary residence had declined substantially from the initial purchase price and was currently worth approximately $599,000.  In the Chapter 13, the Millards sought to “strip off” (remove as lien against the property) the entire line of credit to Suntrust because it was wholly unsecured.  Suntrust objected.

Under the Bankruptcy Code, 11 U.S.C. § 525(a), a governmental unit may not deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor in bankruptcy.  The Code further provides that private employers may not terminate or discriminate with respect to employment against an individual solely because they have filed bankruptcy.  11 U.S.C. § 525(b).

Therefore, the general rule is that a private employer or the government as an employer may not demote, terminate, or transfer a person solely because they have filed for relief under the Bankruptcy Code.  Remedies for violation of this provision may entitle an employee to reinstatement, back pay, and other actual damages.

In a recent case, however, the Third Circuit Court of Appeals declined to extend the “denial of employment” provision of the Code to a private employer.  Rea v. Federated Investors, 2010 WL 5094250 (3rd Cir. 2010).  The court explained that the Code, as written, only prohibits the government from denying employment solely because of bankruptcy but not private employers.

In what has been dubbed the “Private Student Loan Bankruptcy Fairness Act” (H.R. 5043), a subcommittee within the U.S. House of Representatives took steps to reverse language in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) regarding privately issued student loans.

In 2005, as part of BAPCPA, Congress added language to the Bankruptcy Code that gave privately issued student loan creditors superior rights in bankruptcy compared to general unsecured creditors.

The Private Student Loan Bankruptcy Fairness Act, if passed, will take away the superior rights given to private student loan issuers and allow distressed student loan borrowers to discharge their privately issued student loans in bankruptcy.