Is it possible to wipe out loan in Chapter 13 bankruptcy? One court says YES!

Real Estate Attorney with The Law Offices of Steven C. Vondran, P.C. Attorney at Law


Jackson v. US Bank Nat’l Ass’n Trustee (In re Jackson), 245 B.R. 23 (E.D. Penn. 2000)

Facts: Pauline M. Jackson, a widow and mother of five dependent children, was contacted by All Star Remodeling Inc. (“All Star”) about possible home improvement work. At the time, Ms. Jackson had no mortgages on her house and was in desperate need for new windows. The representative for “All Star” quoted an estimate over $3,300 for the total cost of supplying and installing seven new windows. Ms. Jackson told the All Star representative that she could not afford the cost and believed that she could not get a loan either. In response, the All Star representative stated that he would get her a loan. Accordingly, they wrote up a signed contract for the seven new windows at a cost of $3,351.

Shortly after signing the contract, MLM (Finance/Mortgage Company) contacted Ms. Jackson about getting her a loan. After several phone conversations she was given an appointment to go to the offices of MLM where should would obtain and sign for the loan. Prior to arriving at the offices of MLM, Ms. Jackson never received any paperwork about the loan and did not know the loan amount or fees associated with the loan.

Per the conditions of the loan, Ms. Jackson ended up obtaining a loan to pay for $3,351 worth of windows (the loan check went directly to All Star) the borrower would have paid over $50,000 over the life of the loan. Which is why they loan was considered to be a HOEPA loan.

On April 1999, almost two years after obtaining the loan from MLM, Ms. Jackson filed for Chapter 13 Bankruptcy. By now, the loan had been sold to U.S. Bank. The defendant bank filed for relief from automatic stay to foreclose the same mortgage for defendant assignee as that apparently held by defendant mortgagor. However, Ms. Jackson filed an adversary proceeding under Truth in Lending Act (TILA), specifically the HOEPA Amendments to TILA.

Legal Issues:

I.Did Defendants (MLM, FCF and subsequently US Bank as assignee of the loan) violate the HOEPA amendments of TILA and if so what damages are appropriate to award Ms. Jackson?
II.Can an assignee of a loan be held liable for damages that flow from TILA violations?
III.What damages are available from TILA violations?
IV.Who bears the burden of proof in a TILA dispute?

Holding: The Bankruptcy Court held that the loan was in essence akin to “equity stripping” and determined that Ms. Jackson had attempted to exercise a valid rescission under TILA. In addition, the Court found that the Defendant’s violated the disclosure requirements under HOEPA/TILA. The Court awarded: (1) termination of the holder's security interest in the borrower's residence; (2) statutory damages of $2,000 for failing to properly respond to the rescission demand; (3) a penalty measured by recoupment against the remaining unsecured claim on account of the original disclosure violations ($3,800); (4) elimination of all finance charges; (5) elimination of the debtor's entire obligation to the creditor; (6) recovery of all payments made; and (7) recovery of reasonable attorney's fees and costs by the successful borrower's counsel. In short, she took the lender to the cleaners!!

Rationale: The court held that the assignee of a loan can and will be held liable for all of the damages that flow from the Truth in Lending Act, 15 U.S.C.S. § 1601 et seq., and for ignoring a valid rescission request for a Home Ownership Equity Protection Action (“HOEPA”) loan, but no total of damages greater than these set forth in 15 U.S.C.S. § 1641(d)(2),

Additionally, pursuant to 15 U.S.C.S. § 1635(c), a borrowers written acknowledgment of receipt of any disclosures does no more than create a rebuttable presumption of delivery. This presumption may be rebutted by credible testimony of a debtor that the disclosures were not given or received, even where a disclosure statement is produced. Once a debtor has provided an affidavit or testimony that he or she did not receive certain documents, it is incumbent upon the creditor (burden shifts back) to produce some positive evidence that delivery of the documents occurred.

In this case, the testimony of Ms. Jackson and her fiancée was enough to rebut the presumption created by the signed documents held by the Defendants, which stated that the borrowers received all required documents per TILA. In addition, because this loan was a HOEPA loan the statute of limitations had not run and the Defendant’s only defense would be denial of knowledge that this was a HOEPA loan.

Conclusion: The remedies generally available under the Truth in Lending Act, 15 U.S.C.S. § 1601 et seq., for valid but ignored rescissions of Home Ownership Equity Protection Action loans include: (1) termination of the holder's security interest in the borrower's residence; (2) statutory damages for failing to properly respond to the rescission demand; (3) a penalty measured by recoupment against the remaining unsecured claim on account of the original disclosure violations; (4) elimination of all finance charges; (5) where equitable to do so, elimination of the debtor's entire obligation to the creditor; (6) recovery of all payments made; and (7) recovery of reasonable attorney's fees and costs by the successful borrower's counsel.

Analysis: This case represents a strong reason for having your previous loan transaction audited by a foreclosure defense lawyer. You may have valid Truth in Lending (“TILA”) rescission rights, that could greatly benefit in a bankruptcy, or non-bankruptcy setting.


HOEPA is the Home Ownership Equity Protection Act. It is part of the Truth in Lending Act or TILA. This amendment protects especially vulnerable homeowners from potential predatory lending at the hands of creditors and lenders who may seek to abuse them or engage in predatory lending practices.

Here is a brief summary of the HOEPA amendment.

HOEPA is an amendment to TILA that deals with the substantive abuses of creditors offering alternative, typically high interest rate, home loans to residents in certain geographic areas. The statute was enacted to ensure that consumers most vulnerable to abuse would be afforded a safety net without impeding the flow of credit altogether.

Triggers for HOEPA Coverage

APR more than 10% above comparable Treasury security rate (8% on first-lien loans closing on or after October 1, 2002) on the 15th day of the month before the lender received the loan application. 12 C.F.R. 226.32(a)(1)(i); 66 Fed. Reg. 65,617 (2001). (For Treasury rates, see U.S. Government Securities);

"Points and fees" exceeding 8% of the "total loan amount." 12 C.F.R. 226.32(a) (1) (ii).
Some examples of Points are:
All prepaid finance charges. 12 C.F.R. 226.32(b) (1) (i);
All compensation paid to mortgage brokers. 12 C.F.R. 226.32(b) (1) (ii);
All items paid to the lender or to a lender affiliate. 12 C.F.R. 226.32(b) (1) (iii);

Disclosure Requirements

A special HOEPA disclosure notice must be delivered to the consumer at least three business days prior to the closing of the loan. 15 U.S.C. § 1639(b); 12 C.F.R. 226.31(c). A signed statement to the effect that the consumer received the HOEPA notice creates a refutable presumption only. 15 U.S.C. § 1635(c). The notice must inform the consumer that he need not enter into the loan, and that if he does enter the loan, he could lose his home and any money he has put in it. 15 U.S.C. § 1639(a); 12 C.F.R. 226.32(c) (1). The notice must also include an accurate statement of APR, monthly payment and balloon payment amount, and maximum payment amount on a variable-rate loan. 15 U.S.C. § 1639(a) (2); 12 C.F.R. 226.32(c) (2)-(4); Official Staff Commentary 12 C.F.R. 226.32(c) (3)-2.

Prohibited Terms

The following terms are prohibited (or limited) by the statute and Regulation Z: prepayment penalties, default interest rate, balloon payments, negative amortization, prepaid payments, improvident lending, and direct payments to home improvement contractors. 15 U.S.C. § 1639(c)-(h); 12 C.F.R. 226.32(d).


Failure to deliver the required HOEPA notice or inclusion of a prohibited term triggers an extended (three-year) right of rescission (described above). 15 U.S.C. § 1639(j); 12 C.F.R. 226.23(a) (3) n.48.

In addition to regular TILA monetary damage remedies, HOEPA violations give rise to "enhanced" monetary damages under 15 U.S.C. § 1640(a)(4), namely, all payments made by the borrower.

Tip: Remember that if you have a HOEPA rescission case, this effectively gives you double deduction-- you get to deduct all payments made twice before getting to your "HOEPA-adjusted" tender amount (once in calculating the TILA tender amount, and once in calculating HOEPA damages). Also, if you're beyond three years and can't rescind, you can still raise a HOEPA claim and deduct all payments made in the nature of defensive recoupment.

As with any TILA violation, the rescission remedy runs against any assignee of the loan. 15 U.S.C. § 1641(c). In addition, where the loan documents demonstrate that the loan is covered by HOEPA coverage, assignees "shall be subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor." 15 U.S.C. § 1641(d) (1). This provision mirrors the FTC Holder Rule and creates assignee liability for all state and federal claims and defenses. For monetary damages claims under TILA, it provides an exception to general rule that violations must appear on the face of the documents.

Statute of Limitations

1 year for affirmative claims. 15 U.S.C. § 1640(e);
3 years for rescission. Beach v. Owen, 523 U.S. 410 (1998);
Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.


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