Changing Secured Creditor T Unsecured for Ch. 7
Posted: Fri Aug 31, 2012 2:30 pm
Dear Stephen,
The scenario you described is a good example of something you learned in law school: the difference between in rem liability and in personam liability. The lien against the property, i.e., the HELOC, is an example of an in rem claim - a claim against a thing (the objective case of the Latin word for "thing" is "rem"). The personal liability of your client on the HELOC is an example of an in personam claim - a claim against a person.
When a debtor receives a Chapter 7 discharge, all in personam claims against the debtor are extinguished, except for those listed in 523(a) - including, by the way, 523(a)(2), (4), and (6) claims, if the creditor successfully prosecutes an adversary proceeding against the debtor pursuant to 523(c). One caveat: if your client reaffirms a debt, then the in personam liability on that debt is resurrected and survives the bankruptcy discharge.
However, unless they have been avoided through a 522(f) motion, in rem claims survive the bankruptcy discharge intact.
Applying this to your client's case, the in rem claim against the property is still valid postdischarge. However, your client's in personam liability on the HELOC was discharged when your client received a Chapter 7 discharge. Therefore, your client will have no personal liability on the debt after the foreclosure sale.
Moreover, in light of 26 U.S.C. 108(a)(1)(A), your client will have no cancelation of debt income tax liability on any resale deficiency. Therefore, when the lender sends your client a 1099-C form after the sale, your client will need to include a Form 982 (available at: http://www.irs.gov/pub/irs-pdf/f982.pdf) with his/her income tax returns for the tax year in which the debt was discharged. However, you may wish to tell your client that you are not a tax attorney, and urge your client to discuss the matter with a competent tax professional.
All the best,
Nick
Nicholas Gebelt, Ph.D., J.D.
Board Certified Bankruptcy Specialist
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