Equitable Subrogation In Bankruptcy Image by Getty Images via @daylife

Under most state laws a business is not allowed to assert an action or claim against someone in another state if it the action/claim arises for a transaction for which they are not properly registered with the state. This often arises in the case where lenders are not licensed to grant home equity loans in a certain state. The law usually states: “A foreign filing entity . . . may not maintain an action, suit, or proceeding in a court of this state . . . on a cause of action that arises out of the transaction of business in this state unless the foreign filing entity is registered in accordance with this chapter.” However, an entity sometimes seeks equitable subrogation, especially in bankruptcy so that they can pursue a claim.

“The doctrine of equitable subrogation has been repeatedly applied to preserve lien rights on homestead property.” “It has been called a legal fiction by which an obligation, extinguished by a payment made by a third person, is treated as still subsisting for the benefit of this third person.”

For example, there are a lot of bankruptcy cases where a bankruptcy debtor is fighting a lien which they say is invalid because the creditor violated the state law.  This is often the case with home equity loans.  The mortgage lender refinances a mortgage and gives a home equity loan to the debtor although the lender is not legally entitled to because they don’t have a license in that particular state.  Once the debtor files bankruptcy, they attempt to invalidate the lien saying that because the lender was not licensed to give home equity loans, the lien is void and that the lender should get no repayment.  However, the bankruptcy court has repeatedly found that while a mortgage lender may have violated the state law by giving a home equity loan, they still are entitled to repayment under equitable subrogation.  The purpose of equitable subrogation is to prevent the unjust enrichment of the debtor who owed the debt.

(source: http://www.leagle.com/xmlResult.aspx?xmldoc=In%20BCO%2020110217729.xml&docbase=CSLWAR3-2007-CURR)

Amendments to the Bankruptcy Code in 2005 placed limits on the duration of the automatic stay for those who are repeat filers: debtors with a prior case pending in the last year that was dismissed get a stay of 30 days; debtors with two or more cases pending in the past year but dismissed get no stay at all.  In these situations, the automatic stay isn’t automatic at all–the debtor must request a stay from the court in order to get that protection.

The following acts are prohibited under the automatic stay:

* Beginning or continuing law suits;

* Collection calls;

* Repossessions;

* Foreclosure sales; and

* Garnishment or levies;

The automatic stay will remain in effect until:

* A judge lifts the stay at the request of a creditor;

* The debtor gets a discharge; or

* The item of property is no longer property of the estate.

Once the debtor’s bankruptcy is discharged, the automatic stay is replaced by a permanent injunction prohibiting creditors from all of those actions relating to discharged pre-petition debts that the automatic stay previously prohibited.

The automatic stay is not a “get out of jail free” card and will not stop the following:

* Criminal proceedings;

* Actions for a family support order or the modification of such order; or

* Actions to collect support from property that is not property of the estate

* Tax audit, demand for tax returns or assessment of tax (actual collection of tax is still stayed).

Those who willfully violate the stay can be held liable for actual damages caused by the violation and sometimes for punitive damages.  Courts can confine the right to damages to individual debtors and deny damages for stay violations as to corporate debtors in certain cases.  Since courts typically take several days or even weeks to mail creditors notice of the bankruptcy, the debtor or debtor’s counsel absolutely should give actual notice of the automatic stay to creditors to make sure they do not take any actions in the meantime.   Most creditor actions taken after the stay is in place are considered void or voidable, meaning any action the creditor takes in violation of the stay will have no legal effect on the debtor.

Since bankruptcy is such a complex proceeding, consumers may wish to consider consulting an experienced bankruptcy lawyer in order to discuss the ins and outs of bankruptcy protection and the automatic stay as pertains to their specific cases.

The first step is to know what and who you owe.  Medical bills are a slightly different beast than credit card bills in that they seem to come out of nowhere.  A friend of mind still laments her trip to the emergency room three years ago when she broke her ankle.  Within a few months she was receiving a plethora of bills from companies and people she never remembered meeting:  a radiologist, the hospital, the company that did her blood work, and the even the nurse that gave her an aspirin.  They don’t come in on a planned monthly schedule.  They pile on you like a stack of bricks from the sky.  It can be difficult to actually determine who you owe and how much you owe when your care has involved multiple services.  So, start by organizing what you have with a simple binder and some inexpensive tabs.  When you can get your hands around the binder, you can then feel a bit more in control over what will happen next.

The second step is to get the debts resolved.  You don’t have to wait three years for reform legislation to take effect.  Relief is available now through bankruptcy.  Take your medical binder and any other debt obligations to a qualified bankruptcy attorney in your area and review the options that are best for your situation.  Timing of your petition is an important discussion to have with your attorney.  Just like with major corporations, you can plan when is best for you to proceed with your filing so that you can maximize the benefits of bankruptcy protection.  However, keep in mind that the sooner you get a handle on high, lingering debt, the sooner you will be able to prepare for the proposed reform changes.  One of the more contentious aspects of the President’s plan is the requirement that all families carry health insurance by 2013, much like they are required to carry auto insurance.  If you are struggling with the paying your bills already, adding another mandatory expense to your bottom line could flat line your financial health.  Bankruptcy will enable you to free up more of your income so that you will have the finances to comply and not be hit with penalties on your income tax returns.

Supporters of the latest proposal justify the implementation delay in that it takes time to insure effective execution.  Bankruptcy also takes some pre-planning, but fortunately, relief is available much sooner.  Contact a bankruptcy attorney today to learn what remedies are available.