One of the most common client complaints I have heard throughout my career is how long the legal process can take. I can appreciate that. At the same time, what’s worth doing right, is worth doing well. Sometimes, it takes time to do something well. And lately, time is something that has been a luxury with some of the clients I see. Today, I was reminded how important time can be.

I received a call from some homeowners. They are in one of my least favorite mortgage products: 2/28, interest only. Translated: the first two years of their mortgage payments are “interest only.” Then, in 2 months, the principal will be added to their already high interest-only mortgage payment.

Fortunately, they are not behind. Yet. But they will be if time continues to march forward without some intervention. And even more fortunately, they are calling me early enough that we can take our time and explore all reasonable options available. There is no rushing to the Bankruptcy Court to stop an auction. We can take our time, explore the options, and move in the best direction for them.

Not everyone has that option, but the fact is, the only reason why they do not have the option is because they do not, or cannot look at the handwriting on the wall. Privately, colleagues have expressed their view that I tend to have a negative view of the economy. At the risk of continuing to sound like a 'Negative Nancy', today the stock market decided to deal with the summer heat by slipping into the deep end of the pool. Is the end nigh? No. But one cannot ignore that come October $50 billion worth of mortgages will be adjusted to reflect higher interest rates. For real. The handing writing is on the wall for more than the folks who were brave enough to pick up the phone today.

If you see the handwriting on the wall – and perhaps most importantly, if you can muster up the strength to look at what might not be so pleasant to look at on that yonder wall, call someone. Call someone now. It’s only July. There’s two full calendar months before October to plan, prioritize and strategize. That is time. And time is a precious commodity when it comes to saving your home.

October is a time for pumpkins, leaf raking and the World Series. If you are looking to October with a sense of dread, it’s time to do something about it. You can. There is time.

Posted by Bill McLeod at 7:33 PM | Permalink | Comments (0) | TrackBacks (0)

A commenter posed an interesting scenario. She received a Chapter 7 discharge in 2002. Since then, she rebuilt her credit and was able to get into her home. Unfortunately, she ended up with a subprime mortgage with payments that are high. Those payments were manageable when she was making $80,000 a year. But she recently lost her job. Now those payments seem daunting. So, the question is, can she seek bankruptcy protection again?

Chapter 7

When the bankruptcy law changed in 2005 (BACPA or BARF, depending on your perspective), among the changes was to § 727: “(a) The court shall grant the debtor a discharge, unless-- * * * (8) the debtor has been granted a discharge under this section * * * in a case commenced within 8 years before the date of the filing of the petition. Before October 17, 2005, it was 6 years.

At first glance, it would spear that our commenter would not be entitled to file. She received her discharge in 2002 and it’s 2007. It’s only 5 years. However, we do not know when the case was actually filed, and this is an important fact.

The measuring point is not she received a discharge in 2002, but when she actually filed the case. The code prohibits the entry of a discharge if the debtor received in a discharge in a case commenced within 8 years before the date of the filing of the petition. Thus, the measuring point begins when the first case was filed and ends when the second case was filed.

But is that reading of the statute reasonable? Let’s take a look at how Congress changed Chapter 13.

Chapter 13

Congress added a new subsection to § 1328. Pursuant to § 1328(f), “the court shall not grant a discharge of all debts provided for in the plan or disallowed * * * if the debtor has received a discharge-- (1) in a case filed under chapter 7 * * * during the 4-year period preceding the date of the order for relief under this chapter ….”

So a debtor cannot get a Chapter 13 discharge if they received their discharge in a case filed during the 4-year period preceding the filing of the order for relief. While we do not know when that case was filed, we do know that it was in 2002. Thus, the commenter could benefit from a Chapter 13 (assuming other factors support such a filing, such as income, expenses and the ability to present and comply with a confirmable plan).

This is important to know. Many times people who have been through bankruptcy erroneously assume that bankruptcy relief may not be available to them. By pointing out these provisions of the code, I hope I have demonstrated that that assumption is not always accurate. Of course, the only way you can determine whether a bankruptcy filing is right for you is to speak with a bankruptcy attorney.

Please comeback for a follow up post where I’ll present the same scenario, except I’ll discuss the law as if the commenter received a Chapter 13 Discharge in 2002.

Posted by Bill McLeod at 12:34 PM | Permalink | Comments (0) | TrackBacks (0)

In yesterday’s post, I discussed the definition of “Current Monthly Income” as set forth in Section 101(10A) of the Bankruptcy Code. Currently Monthly Income is used to determine whether someone is "abusing" the bankruptcy process by filing a Chapter 7 petition, when they (arguably) should be filing a Chapter 13 petition. The Current Monthly Income (or CMI) calculation does not include “benefits received under the Social Security Act.” This would obviously include Social Security benefits, such as those received at retirement. But would this apply to other sources of income that might emanate from the act? How about DUA or unemployment benefits? A Massachusetts Bankruptcy Judge recently said yes.

In this case, the married debtors excluded from their CMI the $1,010 monthly income the wife was receiving in unemployment benefits. The US Trustee objected and sought to dismiss the case, claming that the unemployment benefits should be included in the CMI calculations, and if the income was included, there would exist a presumption that the bankruptcy process was being abused (what we also refer to as the “presumption of abuse”). Debtors argued that the unemployment compensation was a “benefit under the Social Security Act” and that Social Security Act included received as unemployment compensation.

The US Trustee contended that the benefit was an “indirect payment” under the Social Security Act since benefits are ultimately administered by the individual states to those eligible recipients, and not the Social Security Administration. But the Court disagreed, noting that in other sections of the bankruptcy code, Congress did specifically limit its applicability to specific provisions of the Social Security Act. The Court noted “when Congress wished to limited the applicability of the Social Security Act, it did so by reference to particular sections.” In Section 101(10A), there is no such limitation.

Relying on an Ohio case, the Massachusetts court found that the plain meaning of 101(10A) required a finding that unemployment compensation, a benefit received under the Social Security Act, was excluded for the purposes of determining CMI.

Posted by Bill McLeod at 4:14 PM | Permalink | Comments (0) | TrackBacks (0)

There are many things that factor into the decision to file bankruptcy. Avoiding a foreclosure sale, stopping a wage garnishment, or just ending the relentless harassment of collectors all force people into the bankruptcy court. But under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, something new was invented that factors into the decision as to when a bankruptcy petition should be filed. It’s called “Current Monthly Income.”

I have mentioned before that “Current Monthly Income” is neither current, nor monthly, and it is certainly not income. Under Bankruptcy Code Section 101(10A),

the term "current monthly income"--
(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on--
(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii) [11 USCS § 521(a)(1)(B)(ii)]; or
(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii) [11 USCS § 521(a)(1)(B)(ii)]; and
(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act [42 USCS §§ 301 et seq.], payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18 [18 USCS § 2331]) or domestic terrorism (as defined in section 2331 of title 18 [18 USCS § 2331]) on account of their status as victims of such terrorism.

What this really means (we think) is that “current monthly income” is ultimately determined by the amount of income received during the 6 calendar month period prior to filing. That’s a really simplistic definition, since “income” is still being defined (and I’ll be writing about that later this week). But the big question is, why is any of this relevant in the context of a Chapter 13 plan?

Another Nifty Term: “The Applicable Commitment Period.”

Section 1325 of the Code defines the "applicable commitment period"--

(A) subject to subparagraph (B), shall be--
(i) 3 years; or
(ii) not less than 5 years, if the current monthly income of the debtor and the debtor's spouse combined, when multiplied by 12, is not less than--
(I) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner;
(II) in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals; or
(III) in the case of a debtor in a household exceeding 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals, plus $ 575 per month for each individual in excess of 4; and
(B) may be less than 3 or 5 years, whichever is applicable under subparagraph (A), but only if the plan provides for payment in full of all allowed unsecured claims over a shorter period.

Still with me? I’ll save you from a third quote from the code. The “applicable commitment period” is the number of months that the debtor must commit to a Chapter 13 plan. By way of example, if a debtor’s current monthly income is under the median, the Chapter 13 applicable commitment period is 3 years. If it’s over the median income, the Chapter 13 applicable commitment period is 5 years. If a debtor is earning income above the median for the entire “current monthly income” period (6 calendar months), the math is (I would hope) easy and the formula pretty straight forward (and the plan is 5 years). But what if the debtor is not making that income for the entire period? When’s the best time to file? What if the debtor was unemployed during the first few months, but is now earning an income well over the median?

As I will discuss later this week, none of these questions are easily answered because the courts and the bar are still grasping with the definition of “income” for “current monthly income” purposes.

Posted by Bill McLeod at 5:59 PM | Permalink | Comments (0) | TrackBacks (0)

I am just getting back from a much needed respite. I had originally contemplated writing about my attending the Northeast Consumer Forum in Newport, Rhode Island. But after I wrote about it, I thought it was a pretty boring piece. So instead, I’ll simply mention that I happened across this article out of San Diego on the foreclosure crisis.

But before I do, I need to create the mood, and since I am still trying to get back into the swing of things, I cannot manage a more artful segue than to tell you that I am going to create mood and thus, I am going segue.

In the 2001 film Moulin Rouge, Satine, played by Nicole Kidman is a doomed temptress at the French Club which is run by Harold Zidler, played by Jim Broadbent. Satine needs to tempt the Duke to give money to the club to fund a show. But before she can finish singing her first number, she passes out to the horror of the “guests” of the club. As she is carried backstage, concerned people fawn all around. When she awakes, she is coughing up blood, a fact her attendants are all too careful to hide from Harold who desperately needs the Duke’s money, and presumably, the Duke’s happiness, and sees the only way of getting both is through Satine.

Being the trooper that she is, she gets up. She is clearly having difficulty breathing. She doesn’t look like she can stand, and she’s sweating profusely. She assures Harold she’s fine, and Harold who can see only what he wants to see, announces gleefully “e-very-thing’s go-ing so welllll!” It’s painfully funny and sad.

Segue back to this article. Here’s a tid bit:

Now that the dice have come up snake eyes on the housing market, other shoes will probably be dropping soon. Retail sales, which are plummeting at places like Home Depot and Sears, seem likely to decline further as defaulting home buyers cut down on their big-ticket purchases. In June, retail sales excluding gasoline fell 0.9 percent.

If retail sales continue to fall, adding to the declines in construction and real estate employment, unemployment could start to rise. The Norris Group's latest real estate market report presents a feasible scenario in which unemployment in California rises above 8 percent, compared with its current level of 5.2 percent.

Posted by Bill McLeod at 4:03 PM | Permalink | Comments (0) | TrackBacks (0)