by Hearthstone Legal Group | Jul 14, 2026 | creditors, mortage
After 9/11, President Bush encouraged Americans to go out and spend money to keep the economy going. One of the results of this, was a housing bubble. This was encouraged not only by the housing and lending industries themselves, but by top levels of government, and by television shows that promoted the undeniable good feeling of homeownership and do it yourself engineering.
One of the features of the housing bubble was the proliferation of second mortgages on relatively new purchases, specifically the home equity line of credit, or other Junior mortgages that allowed homeowners to go out and spend more, leveraging their house to the same or a second lender in the process.
Of course, this came to a screeching halt with the financial crash of 2007, following the failure of Lehman Brothers, the near collapse of General Motors, the implosions of WorldComm and Enron, and the companion collapse in the real estate industry.
No longer could anyone who could fog a mirror get a loan.
Over the years 2007 to 2012, there were some homeowners who were able to refinance or modify their mortgages, which saved them from foreclosure or bankruptcy. However, for many of these homeowners, they didn’t realize that what they had modified or refinanced was the senior mortgage, and not the HELOC, which laid buried in the weeds for years.
But beginning around 2013, holders of the HELOC loans began to spring out of the weeds, and demanded payment or threatened foreclosure. These mortgages, which had laid dormant for years, eventually became known as zombie mortgages, because 1) many homeowners mistakenly believe that modifying the senior mortgage had modified the second, and 2) the holders of the loans had remained silent, and not communicated with the homeowners for years.
The problem of these “springing” or “Zombie” mortgages has continued unabated since the mid-2000 ‘teens. One typical way they come to the attorney’s attention is that the client, blissfully paying his/her/their modified first mortgage, in the first, second, or fifth year after modification, receives a cold, rude letter stating that the property will be placed in default, and on the road to foreclosure, in 60 to 90 days unless the outstanding HELOC is paid off. The client is taken aback, because she/he/they believed that “Everything was modified back in 2010 or 2012 or 2014.” Or, “We thought we had taken care of all the loans.” Or, (even more cynically) “That’s the same lender who has the first mortgage.”
Eventually however, California, has sought to deal with the “zombie” mortgages, expanding protections connection to the Homeowners Bill of Rights.
Specifically, the “Zombie Mortgage” section begins with Civil Code Sec. 2924.13, which entered into effect on July 1, 2025.
The California Credit Union League, in its Summary of California Assembly Bill 130 – Housing, (July 1, 2025), summed up the prohibited conduct under new Civil Code Sec. 2924.13 (b) as follows (the following is presented as part of this commentary on an important public issue):
“Civil Code Sec. 2924.13(b), provides that any one of the following practices alone will be considered an Unlawful practice that could preclude the credit union (or presumably, another lender or servicer) from successfully foreclosing on a second mortgage lien.
“1. The mortgage servicer did not provide the borrower with any written communication regarding the loan secured by the mortgage for at least three years. (Credit unions may not send periodic statements or any other written communication on a second mortgage or home equity lines of credit (HELOC) that has been charged off. This rule also runs afoul of the applicable statute of limitations that allows foreclosure as a remedy well beyond the three year timeframe established here.)
“2. The mortgage servicer failed to provide a transfer of loan servicing notice to the borrower when required to provide that notice by law, including, but not limited to, the federal Real Estate Settlement Procedures Act, as amended (12 U.S.C. Sec. 2601 et seq.), and investor or guarantor requirements.
“3. The mortgage servicer failed to provide a transfer of loan ownership notice to the borrower when required to provide that notice by law, including, but not limited to, the federal Truth in Lending Act, as amended (15 U.S.C. 1601, et seq.), and investor or guarantor requirements.
“4. The mortgage servicer conducted or threatened to conduct a foreclosure sale after providing a form to the borrower indicating that the debt had been written off or discharged, including, but not limited to, an Internal Revenue Service Form 1099. (This raises issues for credit unions when filing 1099-Cs or otherwise communicating in writing about debt that has been discharged, including debt discharged in bankruptcy.)
“5. The mortgage servicer conducted or threatened to conduct a foreclosure sale after the applicable statute of limitations expired.
“6. The mortgage servicer failed to provide a periodic account statement to the borrower when required to provide that statement by law, including, but not limited to, the federal ruth in Lending Act, as amended (15 U.S.C. 1601, et seq.), and investor or guarantor requirements.
(Reg Z allows a lender on a HELOC to stop sending periodic statements to the borrower provided the lender does not continue to charge the borrower for additional interest and/or fees. As such, a credit union that stops sending statements in connection with a second lien HELOC should not be in violation of this subsection if TILA/Reg Z allows the credit union to stop sending statements given the circumstances.)”
Of course, tens of millions of dollars, in cash and real estate, are at stake. Consequently, the lenders and servicers are not taking this medicine lying down (or dead; really?); their lawsuit in federal court in Fresno will be the subject of Part II of “Zombie Loan Apocalypse.”
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY
PRESENTED AS COMMENTARY ON AN IMPORTANT PUBLIC ISSUE
by Hearthstone Legal Group | Jun 9, 2026 | bankruptcy, BANKRUPTCY LAW
According to the glossary maintained by the Administrative Offices of the United States Courts, the term “bankruptcy estate” is defined as:
“All legal or equitable interest of the debtor at the time of the bankruptcy filing. The estate includes all property which the debtor has an interest, even if it is owned or held by another person.”
In most chapter 7 cases, the bright line between the bankruptcy estate, which includes money in the bank, and wages earned prior to the bankruptcy filing, as well as lawsuits for or against the debtor, in existence at the time of the filing of the bankruptcy petition, as well as personal property and real property that the debtor owns, as opposed to for example, wages earned after the bankruptcy is filed, which wages are not part of the bankruptcy estate.
An equitable interest, such as an interest in a will, that vests after the bankruptcy is filed, may still be considered part of the bankruptcy estate, because the equitable interest existed before the bankruptcy was filed.
The debtor is required to list all assets and all debts, which would be part of his or her bankruptcy estate, in the bankruptcy petition, at the beginning of the bankruptcy proceeding.
But what about something that was neither expected nor known at the time of filing? Following the logic of the above definition, if a debtor were the victim in a traffic accident after he or she filed his or her bankruptcy petition, and he or she in fact became the plaintiff in that auto accident case, would that lawsuit be part of the bankruptcy estate, or not? Indisputably, the accident had not occurred, and the lawsuit did not exist, at the time of filing of the bankruptcy petition. The accident lawsuit would not be part of the estate, period.
Not so fast, said the US Fifth Circuit Court of Appeal. That Court held that all of the debtor’s assets and liabilities had to be disclosed, even a personal injury lawsuit that came into existence after the bankruptcy petition was filed. The defendant in the auto accident case, being rather cagey, argued that the injury lawsuit should be barred, because the debtor, who was still in bankruptcy, had not disclosed the lawsuit in his multiple amendments to the bankruptcy petition. The Court of Appeals applied the doctrine of “judicial estoppel,” in other words, the debtor was prevented from pursuing this asset, because he had failed to disclose it to the bankruptcy court.
Again, what is the definition of the bankruptcy estate? The lawsuit did not exist at the time of filing. The matter would eventually work its way to the US Supreme court.
The Supreme Court will issue its decision in the summer of 2026. However, the judges apparently are considering the question of judicial estoppel, and whether it is fair to bar plaintiff, who had no control over when the auto accident occurred, from seeking to recover relief for his personal injuries. The Fifth Circuit’s rule, which is followed in some, but not all circuits, seeks to hold a debtor responsible for non-disclosure of the asset (the lawsuit).
Some commentators seem to mock the plaintiffs debtor’s bankruptcy attorney, for not including the lawsuit in subsequent amendments to the bankruptcy papers. And certainly, given the fact that papers were amended, the careful attorney would have certainly mentioned the lawsuit, and parenthetically said that this arose after the bankruptcy was filed, and let the US trustee and bankruptcy judge sort out whether it was really part of the bankruptcy estate or not.
Additionally, as in all contested litigation, there is no guarantee that the Plaintiff will receive a dime. Pending litigation is often given a value of $0 in bankruptcy proceedings, because no one knows how it will end up.
The mechanical, punitive approach of the Fifth Circuit seemed unconvincing to the US Supreme Court. According to commentators, the justices seemed skeptical of the idea that the debtor should bear the full brunt of his attorney’s apparent failure to include the subsequent lawsuit in the amendments.
In fairness to the attorney, however, the lawsuit was not part of the bankruptcy estate, under the strict definition of the term.
In bankruptcy, as in many things, issues of law are sometimes seen through a lens of fairness (“equity”). If someone received a $10 million inheritance a week after filing bankruptcy, the bankruptcy trustee would have a hard time ignoring that and considering whether that money should be part of the bankruptcy estate. But there may be valid arguments for the debtor, depending on the circumstances (including a motion to dismiss the bankruptcy).
But here, the Supreme Court seems to be leaning towards not holding the debtor/accident victim accountable for his lawyer’s arguable error, and not preventing him from recovering on his lawsuit.
It will also be interesting to see if the High Court even mentions “abandonment” of the claim (asset) by the Trustee, or whether the Trustee would be the real party in interest. My guess is that the issue won’t even come up.
The Supreme Courts decision should be an interesting read.
Keathley v. Buddy Ayers Construction, Incorporated.; Docket 25-6
Thanks to the Oyez Project, at Chicago Kent School of Law
FOR EDUCATIONAL PURPOSES ONLY; THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. PLEASE CONSULT AN ATTORNEY
by Hearthstone Legal Group | May 26, 2026 | creditors, Fair Credit Reporting Act
A very important legal principle is, “If it’s not in writing, it didn’t happen.” And this is as much true of business transactions as it is in the realm of legal precedents.
When it comes to Court of appeals opinions, they must actually be published to become law. And a recent opinion, LVNV Funding v. Rodriguez, was published, and is now the law with regard to debt collection. Rodriguez v. LVNV Funding, LLC (2024)106 Cal.App.5th 717.
In that case, a creditor filed a collection lawsuit against Yolanda Rodriguez, but soon realized that she was not the same Rodriguez as the person who owed the debt. Apparently, the Rodriguez who was actually sued had communicated with the lender, and tried to prevail upon the creditor not to sue, due to the misidentification. The lender went ahead, however, and filed the lawsuit.
What the matter came before the Court, and the defendant proved that she was not the debtor, the creditor decided to dismiss. But the damage had been done. Ms. Rodriguez had been dragged in the court. She had been forced to answer at the bar. She had been embarrassed. So she sued the creditor.
The trial court, however, found for the creditor, on a type of “litigation priviliege” (specifically here, argued as Anti-SLAPP law), and ruled that Ms. Rodriguez’s suit was barred.
The Fifth Appellate District Court of Appeal (Fresno) forcefully disagreed, and did not keep the matter secret. The creditor has reason to know they sued the wrong person. Ms. Rodriguez’s successful appeal, under California and Federal law, was published, so now the interpretation of the Rosenthal Act and FDCPA in favor of the debtor, can be seen by and cited to by other debtors and their attorneys. That case now stands for the proposition that where the creditor has a reason to know that it is pursuing the wrong person, it does so at its peril. There is no free pass. That Ms. Rodriguez who was sued was allowed to vindicate her rights under California’s new Rosenthal Act, and the Federal Fair Debt Collection Practices Act.
The case is straightforward but has important implications. Research shows that 25% of all civil cases in California are now debt collection. This enormous number unfortunately gives rise to a great potential for abuse. Many debtors do not open their mail, move, and are not aware of lawsuits. And there’s obvious mischief that can be caused by debtors who share the same name, and a creditor who is not careful in determining who is exactly whom.
The second point is that lenders, who have much in the way of resources, are cautioned now to be very careful when suing a defendant who may be misidentified, or who has a legitimate defense to a debt. Simply plowing ahead for the sake of driving a debtor into the dirt is an act which may eventually be punished, and punished very publicly.
FOR EDUCATIONAL PURPOSES ONLY; THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. PLEASE CONSULT AN ATTORNEY
by Hearthstone Legal Group | Mar 17, 2026 | creditors, Uncategorized
According to Pew Research, litigation by credit card companies and debt collectors against delinquent borrowers (debtors) has reached volume of 25% of civil cases filed in California. Indeed, in the most populous counties of California there were over 2 million such lawsuits between 2009 and 2020. (Raba, One-Sided Litigation: Lessons from Civil Docket Data in California Debt Collection Lawsuits (U. of Chicago Law School, 2023).
The largest 5 creditor lenders or debt collectors filed 533,307 such lawsuits from 2009 to 2020, and cases likely have increased as a result of the Pandemic, inflation, and economic stagnation since 2020.
Not only are such lawsuits of burden on the courts, but they have direct impact upon the debtors lives. Consumer credit suffers. The debtor’s ability to pay other bills or get other loans suffers or disappears. Unsurprisingly, most debtors cannot afford to hire attorneys and file a response to the creditor’s lawsuit. Statewide, debtors filed responses to only 14% of such lawsuits.
Other factors leading to a debtor’s lack of response to a lawsuit are that many of the debts may be several years old; debtors may have forgotten about them; debtors may have moved away from the prior billing address (and thus not received the lawsuit); or the debtor may have changed last name based on marriage (the lawsuit may be against “Mary Smith,” who now married and known as “Mary Jone,” and “Mary Jones” was not served with the lawsuit).
For those who did not respond to such lawsuits, over The end result is that over 130,000 default judgments were taken against debtors. This means that there is a final judgment, which then begins to accrue interest, generally at 10% per year. For example, a judgment that may have started at under $10,000 in 2010, by 2025 could be well over $30,000.
Those defaults, and judgments after trial, can lead to wage garnishments, freezing of bank account, or repossession of cars, and indirectly could lead to eviction or foreclosure on a home (such as where the individual cannot qualify for a loan or re-finance). The impact can be devastating.
The moral of the story is that debtors who are delinquent and credit cards need to carefully monitor their credit, and can reasonably assume that if the debt is over a few years old, there is a collection agency out there trying to get that money. On the other hand, if a debtor can find a lawyer, he or she can attempt to fight the matter, because there are fortunately occasional fraudulent proof of service, which can cause a default to be withdrawn; mistaken calculation of debt; or valid statute of limitations defenses.
Having a lawyer also greatly aids the debtor in negotiating a settlement. Once there is a default and default judgment, the creditor will likely be much less inclined to negotiate.
Keeping up with your credit, opening your mail, and investigating any strange or suspicious claims of delinquent loans, are three effective ways that debtors can protect themselves. And having a lawyer definitely helps.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.
PLEASE CONSULT YOUR OWN ATTORNEY!!
by Hearthstone Legal Group | Feb 7, 2026 | bankruptcy, BANKRUPTCY LAW, creditors, debt relief, Real Estate
About 4 to 6 weeks after the debtor has submitted his / her / there / its Chapter 7 bankruptcy Petition, the debtor will appear in what is known as the 341 meeting. The 341 meeting is named for that section of the Bankruptcy Code, 11 USC section 341, which states, among other things, the following:
“(a)Within a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors.
“(b) The United States trustee may convene a meeting of any equity security holders.
“(c) The court may not preside at, and may not attend, any meeting under this section including any final meeting of creditors. . . . “
For most debtors, this is as close as they will ever get to a courtroom. It is also as close as they will get to the judge. Interestingly, the hearing does not take place in a courtroom, and the judge is not present.
The meeting is done in a conference room, with the debtor, the debtor’s attorney, if any, and the assistant United States Trustee. The debtor is under oath and the meeting is recorded on audiotape. There is no judge, no jury, and if the meeting goes well, the debtor will see none of these.
The Sec. 341 meeting is the debtor’s opportunity to confirm the accuracy of the information that she has submitted for consideration by the Bankruptcy Court, via the United States trustees office. The assistant United States trustee will ask if the bankruptcy forms, largely known as “schedules,” are complete and correct, whether there has been a change in the status of any asset or debt, whether any property has recently been transferred, and whether there are any pending lawsuits filed by or against the debtor, among other things. The trustee will ask about changes in title to any property within recent months. In other words, the trustee wants to know if there’s anything that would raise a red flag as property or debt that has not been disclosed, that has changed hands, or that has otherwise been wasted, destroyed, transferred, lost, or is not available for the bankruptcy trustee to seize or sell, if either is indicated by the bankruptcy petition and schedules.
The meeting, which is the culmination of many hours of compiling documents, usually lasts only 5 to 10 minutes. That is the best case scenario. If a debtor finds himself or herself coming back over and over again to give more information, that’s usually an indicator that the trustee feels that the documents are incomplete.
Creditors can also attend, to ask if property that they loaned to Plaintiff has gone missing, or to contest the amount of the debt disclosed by the debtor. It is very rare for creditors to appear at the garden variety Chapter 7 Sec. 341 meeting.
Assuming that the Section 341 meeting goes well, then the next steps are for the trustee to file a “report of no distribution”, stating that he or she did not find any assets to seize and sell, and then it will be up to the Clerk of the court to close the case. The whole process, from the 341 meeting ’til the closure of the case, could take a little as a week or so, or as long as a few months.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP; PLEASE CONSULT AN ATTORNEY!!!
