In the recent case of Ow v. Oropeza (In re Ow), 2016 WL 42040336 (Bankr. N.D. Cal. 8.5.16), the bankruptcy court avoided a secured claim on the debtor’s residence because it was unconscionable, but did allow part of the claim as an unsecured claim. In Ow, the debtor’s house was damaged by fire in 2011 and declared uninhabitable. In 2013 he defaulted on the mortgage and he did not have the funds to repair the house. In 2014 he met the defendant who told him that he would cure the arrears and continue to make payments on the note until the debtor sold the house. In exchange, he asked for a 35% ownership interest in the house. After the potential buyers that defendant thought would buy the house backed out, the defendant suggested that the debtor give him a note for $105,000, which he did. After the debtor defaulted on the note, defendant recorded the note and it became a lien on the debtor’s residence. Subsequently, the debtor filed for Chapter 13 to stop a foreclosure sale on the property. He also filed an adversary proceeding against defendant to avoid his lien.
The court found that the contract entered into with defendant was unconscionable, both procedurally and substantially. Substantive unconscionability examines whether the contract has an overly harsh allocation of risks or costs which is not justified by the circumstances under which the contract was made. Procedural unconscionability looks at the oppression or surprise due to the unequal bargaining power resulting in no meaningful choice for the weaker party. The court held that the note, and lien were unenforceable, but did allow the defendant to have an unsecured claim for $38,960.50 based on the amount of his payment on the original arrears and subsequent payments on the mortgage note.
If you believe you have been the victim of an unconscionable loan secured by your residence, you may be able to void the loan as Maryland law also contains provisions protecting homeowners from unconscionable loans. If you are considering filing for bankruptcy and have questions and concerns about whether your loans, please contact us. The firm of Laura Margulies & Associates, LLC has successfully handled thousands of cases in Maryland and Washington, D.C., many involving unique or novel issues. Please contact us today for a consultation at 301-816-1600. Our website address is: www.law-margulies.com