There are a number non-profit organizations in Metro-Boston (and state wide) that provide mortgage and foreclosure assistance to homeowners facing foreclosure. Over the last several months, I have personally encountered situations where these (for lack of a better term) foreclosure prevention counselors have actually caused more harm than good (or at least have the potential to). Consumers seeking assistance of these non-profits need to be aware of a few things.

Firstly, they are not lawyers. They cannot provide legal advice. If any of these counselors tell you to do something that involves invoking a legal right – such as filing a bankruptcy petition – then you should seek the advice of an attorney.

I had a client who was told by a foreclosure prevention counselor to “just go down to the court and file bankruptcy so you can get the [automatic] stay” so that a foreclosure auction could be avoided. The problem is the client did not have a credit counseling certificate, and had no clue about the consequences of filing the case without proper preparation. His case was dismissed. In addition, had the counselor been properly trained, the counselor would have known that this individual needed bankruptcy from the get-go, not the services of the non-profit.

"Just go down ....and get the stay."

The whole concept of “just go down and get the stay” vexes me. When you’re filing bankruptcy, it’s an important and significant legal action with potentially long term consequences. You’re not going to the grocery store and picking up a loaf of bread, a gallon of milk, a pound of salami and the “automatic stay.”

Secondly, and perhaps most importantly, the counselors have no training or understanding of bankruptcy and how it works. Many bankruptcy attorneys – like me – study, write, educate while we also continue our legal education by attending to and speaking at conferences. Mortgage counselors don’t – unless they are bankruptcy lawyers – which in my experiences they have not been. This brings up my second troubling encounter with a mortgage counselor.

I received a call from a prospective client approximately two weeks ago who told me she was working with a non-profit. Generally, the only thing I can get from a telephone consult is whether I believe there is anything I can do to help the caller. This caller had a number of issues – not just the possibility of foreclosure, but also other non-mortgage debt issues. I provided a list of information that I needed for a meaningful in-office consultation and invited the caller to get back to me when she had her documents and information and was ready to meet. At the end of the conference, she asked me to speak with her counselor – which I refused without (1) being retained (since I had no information to go on) and (2) having a written authorization from her to do so.

About a week later, I received a call from the foreclosure prevention counselors. She told me she was working with the client, and was “negotiating” with the mortgage company. She wanted to know how “bankruptcy” could help the client and if I could explain bankruptcy to her so as to help her “strategize” the negotiations, or words to that effect. My first thought was ‘you have to be kidding me.’

I told the “counselor” that I had not been retained (and knew nothing of the case) and I had no written authorization from the prospective client. She then said “ok then, hypothetically how could a bankruptcy filing help this person.” This time, I actually wanted to say “you’ve got to be kidding me.”

There was little I could do to hide my consternation. With a tone that I am sure came across as sarcasm, my response was: “hypothetically, I do not have a written authorization to speak to you, and I have not been retained as her counsel.” I also essentially said that unless she was a lawyer, she wasn’t qualified to determine how a “bankruptcy” filing could help this person. After she presumably determined that she had a better chance of winning the lottery than getting me to help her “strategize”, she hung up the phone.

My comments should not be viewed as my declaring that foreclosure prevention counselors working with non-profits are all bad. Some are providing a valuable service – they are helping distressed homeowners keep their homes, and helping them avoid bankruptcy. But there is no “one size fits all” solution for struggling homeowners, and mortgage foreclosure counselors have no business developing any bankruptcy strategy - unless they are an attorneys.

If you or someone you know is working with a foreclosure prevention counselor, I recommend at the very least meeting with an attorney (not just a phone consultation). Give the attorney all the information they can to let them assess whether bankruptcy is even an option for you…and give the attorney an opportunity to see if they can – or should – work with the mortgage counselor. Then, and only then, can the homeowner determine whether a bankruptcy filing falls into the “strategy” of trying to same the home.

Posted by Bill McLeod at 9:16 PM | Permalink | Comments (0) | TrackBacks (0)

First, the news...
When a storm is coming, it's not uncommon for New Englanders to stock up on bread and milk. According to today's Financial Times, banks are apparently stocking up on cash. Does the FDIC's announcment that it plans to add 140 new workers in anticpation of bank failures have anything to do with it?

New home sales fell to a 13-year low in February. Consumer confidential fell to a 5-year low in March. Also falling, the number of retail jobs in Massachusetts.

In Sacremento, the SPCA is seeking a jump in the number of animals being surrendered by their owners who are losing their homes.

And now, the series...

Starting next Wednesday, and continuing each and every Wednesday, there will be a special blog entry dedicated to "Storm Preparation": dedicated to providing information to people and businesses who may be facing a financial storm.

Each week, I'll offer tips, news and strategies to help people and business prepare for the financial storm clouds they may see on their horizon. Remember, nothing you read here is meant to replace legal advice - and if you're facing a financial crisis now, I urge you to see an attorney.

If you have a question or a topic you'd like to see on "Storm Preparation", please email us at info@mcleodlawoffices.com.

Posted by Bill McLeod at 11:47 AM | Permalink | Comments (0) | TrackBacks (0)

A friend passed along this story from today's Boston Globe: "Going Into 'survival mode.'"" The report takes a look at the ways people from all over the area are cutting back on monthly expenses as the anxiety over the economy continues to rise. It's worth the read.

I know there are those out there who proclaim that the economy will continue its decline so long as we continue to talk about it. I am not sure we can talk ourselves into anything - if we could, I am sure I could have talked my way into a 32 inch waist by now. But is it is hard not to talk about the economy when you read things like this blog entry over at Calculated Risk: Goldman Predicts $460 Billion in Credit Losses.

Finally, a reminder of the effects of foreclosures: family pets. From today's USA Today:

...a man ...arrived at the shelter this month saying he had to give up his cat and two small dogs. When an employee walked outside to help him get the animals into the shelter, "she discovered that he had arrived in a U-Haul loaded with boxes and furniture. He had lost his home and had no place to go. The very last thing he did was surrender his animals."

And from Whitter, California:

One man brought in his cat, Speedy, but visits every day and hopes to get him back when he finds a place to live...

Posted by Bill McLeod at 3:09 PM | Permalink | Comments (0) | TrackBacks (0)

People own businesses: corporations, LLCs or other types of formal or informal business entities. When those people need to file bankruptcy, does the automatic stay that takes effect immediately upon filing also extend to those wholly-owned companies? The Bankruptcy Court in the Southern District of New York ruled on that issue on February 8, 2008.

That debtor filed for relief under Chapter 13 and was self-employed as a general contractor. He was the sole member of an LLC. Under Chapter 13, there exists a co-debtor stay, and this debtor wanted to ensure that the co-debtor stay extended to his LLC.

The Court noted that the LLC was not eligible to be a Chapter 13 debtor since it was a business entity, and not an individual. Chapter 13 is limited to individuals only. In addition, the co-debtor stay applies specifically to consumer debts, not commercial or business debtors. On his petition, the debtor noted that the debts were primarily consumer debts. And finally, there was nothing in the Bankruptcy Code allowing an individual and a business to be joint debtors. The request to extend the stay to the LLC was denied.

It is important to note that this is the bright line rule. There are circumstances that might permit a court to extend the stay to a non-debtor business entity in Chapter 13, but whether that can occur is really determined on a case by case basis. For example, if there is a claim against a non-debtor, and the debtor is a guarantor, not extending the stay could have an adverse economic consequence on the debtor’s ability to reorganize. The extension of the stay to non-debtors has been limited to those claims that “threaten serious risk to a reorganization of debtor’s estate in the form of immediate adverse consequences.”

The case is In re McCormick, 381 BR 594 (Bankr.S.D.N.Y. 2008).

Posted by Bill McLeod at 10:19 AM | Permalink | Comments (0) | TrackBacks (0)

The US Bankruptcy Court in Worcester was recently called upon to answer this question: may a landlord who discriminated against a prospective tenant because of the tenant’s Section 8 status discharge the judgment in bankruptcy? In a February 11, 2008 decision, the answer was a resounding “no.”

The landlord was sued in the Worcester County Housing Court for violations of Massachusetts Anti-Housing Discrimination laws. Under Massachusetts Law, a landlord may not discriminate against a prospective tenant on the basis that the tenant receives federal, state or local housing subsidies. The court found that the landlord violated the law, and awarded $1.00 in compensatory damages, and $5,000 in punitive damages in addition to attorneys fees and costs. Rather than simply pay the judgment for violating the tenant’s civil rights, the debtor filed bankruptcy.

The tenant brought an Adversary Proceeding claiming that the judgment was not dischargeable under Section 523(a)(6) of the Bankruptcy Code, which precludes dischargeability of debts that arise from a willful or malicious injury.

The debtor-landlord contended that the verdict slip did not reference the compensatory damages (which were a buck), that punitive damages were not allowed under Massachusetts law, and that the tenant was represented by Legal Assistance Corp. of Central Massachusetts, which did not charge the tenant for services. For reasons that were not clear from the decision, the landlord never appealed the decision of the housing court. Since the failure to appeal gives finality to the Housing Court judgment, the Bankruptcy Court was bound by the Housing Court’s judgment of punitive damages.

The Bankruptcy Court then turned to the issue of whether the discrimination itself was a willful or malicious injury as contemplated by Section 523(a)(6). The court pointed out that “a willful injury is one that is inflicted ‘either with the intent to cause the harm complained of, or in circumstances in which the harm was certain or almost certain to result from the debtor’s act. Non-dischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Since discrimination itself contemplates a discriminatory intent, motive or state of mind under Massachusetts law, that was sufficient to constitute the willfulness component of 523(a)(6). “The discrimination per se constituted an intent to injure because the conduct could serve no other purpose.”

A malicious act is one that is committed “without just cause or excuse [and] in conscious disregard of one’s duty.” Punitive damages are justifiable in cases where the conduct is “outrageous because of the defendant’s evil motives or his reckless indifference to the rights of others.” Finding that the awarding of punitive damages sufficient for a finding of maliciousness, the debt was deemed nondischargeable.

The landlord-debtor’s final arguments that the attorney’s fees award were dischargeable was, in a word, wrong. The Anti-Housing Discrimination laws provide for attorneys fees to successful claimants, and if the underlying judgment is non-dischargeable, the attorneys fees incurred in obtaining that judgment is similarly non-dischargeable. The discriminating landlord will have to pay.

Posted by Bill McLeod at 6:31 PM | Permalink | Comments (0) | TrackBacks (0)

From FoxBusiness: a look at the legislation Congress is mulling over to give bankruptcy judges more authority to modify residential mortgages.

Have you ever heard those radio commercials touting "debt elimination?" It usually has an announcer proclaiming that "my plan does not reduce your debt, it eliminates it!" One commercial in particular on a local station also has a speaker who says "using this system, I will be able to pay my 30 year mortgage in just three years making only the money I am making now." That sure does sound too good to be true. Well, it was a bad week for two scam artists from California who ran such an out. The Mercury News reports that on Tuesday they were sentenced to more than 25 years in prison for mail fraud.

Actually, this bit is yesterday's news, but it's worth mentioning: The New York Times reports that the mortgage crisis is not only affected lower and middle income borrowers. According to the report "affluent consumers with annual incomes of $100,000 or more ... are increasingly being ensnared in the home mortgage crisis."

And finally, here's something we might want to think about this weekend: is the US Dollar on its last leg?

Posted by Bill McLeod at 11:21 AM | Permalink | Comments (0) | TrackBacks (0)

If you think you can get away with not being honest with your bankruptcy lawyer, think again. In a January 31 decision out of the Southern District of Mississippi, a bankruptcy attorney has been required to turn over his complete file to his client’s adversary and testify.

The case involved a Chapter 7 debtor who was a defendant in an Adversary Proceeding brought by Liberty Mutual. During his deposition, the debtor was asked questions about his schedules and about his decision to convert his case from Chapter 13 to Chapter 7. The debtor effectively stated that he relied on the advice of his attorney.

Liberty Mutual sought to compel the debtor’s counsel to produce the documents used to prepare the petition and schedules, and to testify concerning information given to him by the debtors that was used to prepare the petition and schedules (such as income, expenses, assets and liabilities). The attorney and the debtors argued that the information and testimony was protected by the attorney-client privilege. But the insurer countered, reminding the court that it was the debtor who claimed reliance on his attorney’s advice as a defense. It argued that the debtor could not use the shield of the attorney-client privilege if he has already used it as a sword.

The bankruptcy court agreed. Relying on the Federal Rules of Evidence and the Massachusetts case of In re Eddy, 304 B.R. 591 (Bankr.D.Mass.2004) the court noted that “[t]he privilege serves the purpose of promoting full and frank communications.” The court stressed:

Open and honest communication is the foundation of the relationship between attorneys and their clients. Without the privilege, clients would not divulge important confidential information to their attorneys, and therefore, their attorneys would not be able to provide adequate advice or representation.

But the court noted that the ruling in In re Eddy was that the debtor has no reasonable expectation that information will be kept confidential if it must be disclosed in documents that are filed in a bankruptcy.

The Mississippi court also pointed out an exception to the attorney-client privilege: there is no exception to the privilege if the lawyer’s services were sought or obtained to further a crime or fraud. If this debtor used his attorney to commit bankruptcy fraud, there is no privilege.

The lesson here should be obvious: be honest in the process and be honest with your bankruptcy lawyer.

Posted by Bill McLeod at 6:14 PM | Permalink | Comments (0) | TrackBacks (0)

Companies and consumers who find themselves with financial pressures often borrow money from family and friends to make ends meet with the hope that bankruptcy can be avoided. But if bankruptcy cannot be avoided, there may be a motive to pay back those family members and friends who helped out before filing the petition. Doing so can cause problems….for them.

In bankruptcy, all creditors are treated equally. Well, sort of. There are secured creditors – such as a mortgage (they have their collateral). There are priority claims, such as taxes (they get paid first). And finally, there are unsecured creditors, such as credit cards. In bankruptcy, all of these creditors are treated equally (depending on their status). And this includes those friends and family members.

Family members and friends are considered “insiders.” Any debt payments made to “insiders” during the 12 month period prior to filing the petition must be disclosed on the Statement of Financial Affairs. These payments are called “preferences.” Simply stated, the creditor got preferential treatment because he, she or it was paid while other creditors may go unpaid, or not paid as much. Those payments are recoverable by a bankruptcy trustee. In other words, your friends and family who were paid back may have to pay those funds to the bankruptcy estate.

Those are not the only payments that need to be disclosed. Payments to regular creditors that total $600 or more within the 90 day period prior to filing also need to be disclosed, and may be recoverable by trustee. However, few debtors get upset about having their credit card company pay money to the trustee. The same cannot be said about family and friends who helped in a time of need and may now have to cough up funds.

Of course, there are other factors to consider: the amount, where the relatives and friends reside, etc. But the best recommendation is to avoid preferential payments all together. After all, if you file bankruptcy and get a discharge (business entities do not get a discharge), there is no obligation to pay the debt. That does not mean that you cannot pay the debt if you are so inclined, and your resources allow you to do so. So what do you do if you owe your family or friends money and are thinking about filing bankruptcy.

Talk to them. Tell them what you need to do – and tell them why. If you have paid them money, talk to an attorney about what a trustee might do in your situation. When you file bankruptcy, list those friends and family members on your petition and give full disclosure to the court and trustee. What you do after the bankruptcy matter has concluded, and you’re back on your financial feet is entirely up to you.

Posted by Bill McLeod at 7:37 PM | Permalink | Comments (0) | TrackBacks (0)

There are many reports of struggling homeowners “walking away” from their properties. If you own a condominium, shares in a cooperative or a lot or home in a housing association (which I’ll refer to here as “real estate”) and you’re contemplating walking away and bankruptcy, an amendment to the Bankruptcy Code may influence many of your decisions.

Prior to the passage of the 2005 Act, if a bankruptcy debtor wanted to surrender their real estate, they could simply “walk away.” Real estate owners who owed dues or assessments to condo association, homeowners associations or cooperative corporations could simply include those claims in a Chapter 7 discharge or exclude them in a Chapter 13 plan. In addition, owners who did not reside or who had rent paying tenants in the property they intended to surrender were not responsible for post-petition condo fees and assessments. But that has changed.

By the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Section 523(a)(16) (“Exceptions to Discharge”) was amended. Instead of limiting the discharge of fees and assessments only to those debtors who had tenants or who were not residing in the dwellings, Congress limited it to debtors who have a “legal, equitable or possessory ownership interest” in the real estate.

Simply because a homeowner expresses an intention to surrender the home in their bankruptcy case does not mean that they will still not be the “legal, equitable or possessory” owner of the property. Condo owners who move out into a rental and file bankruptcy prior to any foreclosure are going to be responsible for post-petition condo fees and assessments. Whether the debtor lives in the property is no longer a consideration thanks to the 2005 amendments.

Prepetition condo fees and assessments still fall under the discharge. What’s changed is the responsibility for post-petition fees and assessments while the home is still in the debtor’s name. People who are considering bankruptcy protection as well as surrendering their property should be sure to carefully plan the date of their filing and/or their moving out with their attorney. The last thing any financially strapped debtor needs is to be paying rent on a new dwelling and trying to rebuild their financial house, all while paying the condo fees and assessments on a home the bank has not yet taken by foreclosure.

Posted by Bill McLeod at 8:40 AM | Permalink | Comments (0) | TrackBacks (0)

Earlier this week I was talking with a client who let me know that their home was headed into foreclosure. I was a bit surprised to hear this because I had been led to believe that there was no problem making the home mortgage payments, only the other debt (which included other real estate). I was also surprised to learn that this problem had been going on for a few months. And I was even more surprised to learn that the clients had been working with a mortgage broker. But what really surprised me was why I was only learning about this now.

Apparently, the clients had been solicited by a mortgage broker who assured them they need not file bankruptcy. He assured them that they would refinance the house and avoid bankruptcy. He also told them not to discuss this at all with me: their bankruptcy attorney.

For reasons that only they can explain, the clients chose to follow that advice. And unfortunately, they may pay a price for doing so: they risk losing their home, and they have complicated their bankruptcy filing and made it more expensive. I write about his with the hope that this error will serve as a cautionary tale to others in a similar situation.

Mortgage brokers get paid a commission based on the mortgage they obtain. If they do not obtain a mortgage, they do not get paid (although some may charge non-refundable applicable fees). If a mortgage broker is able to get financing, no bankruptcy attorney is going to dissuade a consumer for taking it…unless the mortgage product (or the act of refinancing itself) is going to place the client into an even more precarious financial position. With that said, the only reason why a mortgage broker would be concerned about a client talking with an attorney is if the attorney attempted to talk the consumer out of the mortgage….and the only way I see that happening is if the attorney is doing his or her job by protecting the client.

If you’re trying to refinance and are speaking with mortgage professionals, please do yourself a favor and speak with an attorney. If any of these professionals urge you not to speak with an attorney of your choosing, do not do business with them. There is no harm in speaking to your attorney, but there can be great harm to you and your family if you follow the recommendations of someone whose interest is not the same as yours.

Posted by Bill McLeod at 3:31 PM | Permalink | Comments (0) | TrackBacks (0)

A recent Massachusetts Bankruptcy Court decision set forth the standard that the majority of Federal Circuits have adopted: a bankruptcy debtor may avoid a wholly unsecured lien on the home.

The case involved a debtor who claimed their home was worth $370,000. The balance of the first mortgage was approximately $ 376,000, and a second mortgage, held by American Home, had a balance of approximately $95,000. In the Chapter 13 plan, the debtor proposed to pay American Home as an unsecured creditor as a “result of ‘cram down of unsecured claim on second mortgagee on Debtor’s principal residence.” The debtor also field a Motion to Determine Secured Status under Section 506(a). (Despite adequate and proper notice, American Home did not challenge the debtor’s expressed intentions.)

Even though the Bankruptcy Code expressly prohibits modification of mortgages on a debtor’s primary residence under Section 1322(b)(2), the Court found that Chapter 13 plans may avoid liens on a debtor’s residence that are wholly unsecured. As this view appears to have been adopted in other districts, the Bankruptcy Court ruled in favor of the debtor, and allowed the debtor’s motion seeking a determination that American Home’s mortgage was unsecured.

For Massachusetts homeowners contemplating bankruptcy and looking at declining property values, this decision is welcome news.

In re Pelosi, Chapter 13 case no. 07-16820 (February 21, 2008).

Posted by Bill McLeod at 7:56 AM | Permalink | Comments (0) | TrackBacks (0)

I have written about so-called "debt settlement" companies that tout a benefit of paying off your debt quicker and cheaper. In the long run, consumers are left with less money and still at the door of the bankrutpcy court.

From the March 6 issue of Business Week:

The booming business has caught the attention of prosecutors and regulators, who say such programs can leave consumers in worse financial shape. Fees for the services run high. And when banks don't agree to settle—if the settlement firm contacts them at all—consumers get hit with late charges and penalized with higher interest rates, leaving borrowers with even more debt than when they started.

You may have missed...

"Be Debt Free in only 18 months!"
Thinking about Debt Settlement? Think about this...
And Speaking Of Credit Counseling Predators...
Credit Counseling Predators

Posted by Bill McLeod at 10:39 AM | Permalink | Comments (0) | TrackBacks (0)

From the Globe: Massachusetts bankruptcy filings are up 22% from last year.

Massachusetts Democrat Barney Frank presents his case for a housing rescue.

The slowing economy is not keeping gasoline prices from creeping up and up.

Posted by Bill McLeod at 7:07 AM | Permalink | Comments (0) | TrackBacks (0)

Transferring real estate while contemplating bankruptcy can raise some issues. But transferring real estate after the bankruptcy case has been filed without the permission of the bankruptcy court is a big “no no.” And as a debtor in learned in a February 11 Bankruptcy Court ruling out of Worcester, it can raises some serious problems. In his case, a denial of his discharge.

The chapter 7 debtor filed the case on May 18, 2007. He owned his home along with his mother. According to his bankruptcy schedules, he valued the home at approximately $315,000 and with a mortgage of about $263,000. A mere 7 days later, the debtor transferred his interest in the home to his mother and father for $1.00. The debtor’s parents paid off the outstanding mortgages, as well as some other bills at closing.

Debtor attempted to argue that there was no equity in the home and that the appraisal should not be considered as “completely accurate”. However, the appraisal was dated 8 days prior to the case being filed, and it was an appraisal commissioned by the debtor himself. Notwithstanding this creative position, the debtor never produced any evidence demonstrating that the property would be appraised at another value (i.e., by submitted evidence of another appraisal, or of some substantive defect with the appraisal submitted).

The trustee contended that the property had equity and that the debtor intended to “hinder, delay or defraud” the creditors, the trustee and the bankruptcy estate by transferring it out of his name. Because of that not only should the debtor’s discharge be denied, but the transaction should be avoided (or set aside).

The Court Rules

In analyzing whether the debtor should be denied a discharge, the Bankruptcy Court looked at several factors: the “insider” relationship between the debtor and her parents; the fact that the debtor still resided in the property (which was not contested); the lack of adequate consideration ($1.00); and the fact that the transfer occurred without the Court’s permission or the court’s knowledge (although there was no evidence that the transaction was intended to be kept a secret). The Court considered that at a minimum there was $15,000 in equity in the property based on the debtor’s appraisal and her schedules. Based on that, the Court found that the debtor intended to defraud, hinder or delay and therefore, the discharge was denied.

As for the transfer, the court found that Section 549(a)(2)(B) of the Bankruptcy Code applied; the transfer of the real estate was avoidable by the trustee because the court’s permission was not obtained.

There is no happy ending here, and based the filings, I cannot understand why the debtor transferred the property. On the debtor’s schedules, there are almost $37,000 of unsecured claims which will not be discharged. According to this debtor’s schedules, he was seeking to exempt $37,215 in equity in the property based on the Massachusetts Homestead Statute (c. 188, sec. 1). Assuming he had a properly recorded Declaration of Homestead (which gives him the protection), the property would have been exempt from the bankruptcy estate, and from the reach of his creditors. If he owned the property with his mother, his equity interest would only be approximately $19,000. Even if the debtor did not have a valid declaration of homestead, the debtor could have still utilized the federal exemptions available to him, and the home could have been exempt. Instead, what appears to be the debtor’s nonsensical actions have caused him to lose his chapter 7 discharge.

Posted by Bill McLeod at 1:26 AM | Permalink | Comments (0) | TrackBacks (0)

From today's Boston Globe: Brokers at Lehi Mortgage Services Inc. have been accused of fraud by the Massachusetts Attorney General.

Lehi Mortgage "engaged in a widespread practice" of submitting false information about bank accounts and incomes that "it knew or should have known were inflated," the attorney general's suit said.

Again, not a good week for Countrywide. There are reports that the FBI is investigating the mortgage company over possible mortgage fraud.

Sharper Image issued a press release announcing that it will be accepting gift cards once again. WIth some restrictions. More here.

Posted by Bill McLeod at 12:31 PM | Permalink | Comments (0) | TrackBacks (0)

The Bankruptcy Appellate Panel in the 6th Circuit affirmed an Ohio Bankruptcy Court order requiring the debtors to turn over their tax refunds to the chapter 7 trustee. The debtors filed their chapter 7 case in March 2005 and their meeting of creditors was approximately two months later. By the time of the meeting, the debtors had not yet filed their 2004 tax returns. The trustee advised the debtors that any refunds were to be turned over to the trustee upon receipt, and the debtors signed an acknowledgment of the instruction.

The tax returns were filed in July and the debtors received approximately $4,000 in refunds. The debtors claimed that their bankruptcy attorney advised them that they could exempt approximately $1,600 of the refund, and the debtors sent their counsel a check for the difference. Debtors also provided bankruptcy statements and tax returns to their attorney. Debtors were under the belief that their attorney would forward the check to the chapter 7 trustee.

For reasons that were not clear in the record, the attorney didn’t, although he did retain approximately $717 in satisfaction of outstanding attorneys fees.

In May 2006, the trustee filed a motion for turnover of the bank statements, the tax returns and the non-exempt portion of the tax refunds. Debtors’ counsel opposed the motion, and then filed a motion to withdraw his appearance three days later. The debtors also filed a response and appeared at the hearing on their own behalf. The court allowed the motion.

Based on the bank statements (which I presume were not examined by their attorney prior to filing the case), the debtors had $1,564 in their account on the day they filed their petition. Based on the exemptions they had available under Ohio law, none of the refund was exempt. The court ordered the debtors to turn over their entire federal tax refund.

The debtors did not contest that the refund was property of the estate. Their bone of contention was with their lawyer, and their arguments were grounded in the bad advice they claimed to have received. They also claimed that since they paid the balance of the refund to their attorney, they did not have the money any longer.

As for the “it was my lawyer’s fault” argument, the court held that the debtors were obligated to take that issue up with their lawyer, and suggested that the debtors could sue their lawyer. However, the case law supports the proposition that a client is generally bound by the acts and omissions of the lawyer (which is why lawyers carry malpractice insurance). As for the “we don’t have it anymore” argument, the court found that the debtors had possession the proceeds for a period of time during the pendency of the case. “Although one may be sympathetic to the Debtor’s plight, the law provides the Debtors no valid defense to the Trustee’s Motion.” Bailey v. Suhar, 380 B.R. 486 (6th Cir. BAP 2008).

Posted by Bill McLeod at 2:42 AM | Permalink | Comments (0) | TrackBacks (0)

Congress is trying to move a bill that woujld give bankruptcy court judges more power to modify mortgages. From Law Professor Lynn LoPucki in today's Atlantic Journal Constitution:

...the bankers want to negotiate in an environment where they, not neutral bankruptcy judges, have the final say. But the Bush administration and the bankers have had their shot at the mortgage crisis. They announced many renegotiation schemes but accomplished few renegotiations. The bankers still don't have people in place with the knowledge, skills and incentives to deal with the crisis. The bankruptcy courts do. Congress should give the go-ahead.

Well said.

You may have missed...
Truth and Consequences: The Bankruptcy Debate Continues
Truth & Consequences Continued: Georgetown Study contradicts Mortgage Bankers Association Analysis

Posted by Bill McLeod at 6:56 AM | Permalink | Comments (0) | TrackBacks (0)

Countrywide is not having a particularly good week. The New York Times reports that the US Trustee for the Southwest Region has brought suit in Miami against the mortgage company with claims it is abusing the bankruptcy process.

Today's editorial in The New York Times points out that despite a White House-backed mortgage industry group formed to help homeowners, these homeowners are not getting the help they need.

The IRS has decided to rehire private tax collectors.

Locally, the Boston Herald reports that the experts believe that the housing market will continue its decline in 2008.

Posted by Bill McLeod at 11:25 AM | Permalink | Comments (0) | TrackBacks (0)

In January, the 8th Circuit Bankruptcy Appellate Panel affirmed a bankruptcy court ruling that revoked the discharge of a debtor who kept his tax refund. The debtor filed his petition on October 10, 2005 and his meeting of creditors took place about one month later. At that meeting, the chapter 7 trustee advised the debtor not to spend any tax refund without contacting the trustee. The trustee gave the debtor a handout which read in part:

Warning: Do not spend any of your tax refunds until you have received approval from my office, even if you have received notice from the Bankruptcy Court that a bankruptcy discharge has been entered. The bankruptcy discharge does not close your bankruptcy case or eliminate your need to turn over non-exemption assets.

Failure to comply with the terms of this letter or to cooperate with me in the administration of your bankruptcy estate may constitute cause to revoke your bankruptcy discharge. You will receive only one notice from my office of non-exempt monies due your bankruptcy estate and upon non-compliance, I will seek to revoke your discharge.

The debtor received his discharge in January of 2006, and in February he filed his tax returns. His refunds totaled approximately $3,500, which was spent on living expenses.

In June of 2006, the trustee filed a motion to seek a Rule 2004 examination (which is similar to but not the same as a deposition) of the debtor. The trustee also requested that the debtor produce the 2005 tax returns. Debtor produced the returns, but did not appear for the examination. Later in June, the trustee made demand for $1,556.11 of the tax refunds: the amount of non-exempt assets that belonged to the bankruptcy estate. The debtor failed to do so.

In July, the trustee sought an order from the bankruptcy court seeking again to examine the debtor under Rule 2004 and requesting that the debtor bring the $1,556.11 to the examination. Debtor did not attend nor did he pay the amount.

The US Trustee filed a complaint seeking a revocation of the discharge for knowingly and fraudulently failing to deliver the refunds to the chapter 7 trustee. Debtor offered many reasons for why he spent the refunds, but those excuses were not believed. The debtor was warned, and in spite of the warning, spent the money. The discharge was revoked….all for $1,556.11. The case is Fokkena v. Klages, 8th Cir. BAP, 07-6051 SI.

Posted by Bill McLeod at 8:37 AM | Permalink | Comments (0) | TrackBacks (0)

From PalmBeachPost.com: Family pets and animal shelters continue to feel the strain of the foreclosure crisis.

Has someone given you a Sharper Image gift card? That's a bummer.

As Congress debates some amendments to the bankruptcy code, there's news that bankruptcy filings spiked in February....at the highest rate since the law changed in 2005.

There has been some news about Countrywide (see the post from earlier today). They haven't said anything in response to the Atlanta, Georgia US Trustee's suit against them but they don't have a problem spending a reported $ 1.3 million on lobbyists last year.

Posted by Bill McLeod at 12:29 PM | Permalink | Comments (0) | TrackBacks (0)

The United States Trustee has filed suit in the US Bankruptcy Court in Atlanta seeking sanctions against Countrywide Home Loans. From the New York Times:

“Countrywide’s failure to ensure the accuracy of its pleadings and accounts in this case is not an isolated incident,” Donald F. Walton, the trustee for the Atlanta region, wrote in a brief. “In recent years, Countrywide and its representatives have been sanctioned for filing inaccurate pleadings and other similar abuses within the bankruptcy system.”

In addition to a litany of other abuses, it is alleged that Countrywide accepted payments on a mortgage that had already been paid in full (the mortgage company had issued a "satisfaction of mortgage" acknowledgment).

I recall Countrywide commercials where some delightful spokesperson would proclaim: "Countrywide says YES!." According to a statement from Countrywide, they are not commenting on the pending litigation.

News of the suit is also reported in The Sydney Morning Herald.

You may have missed...
Is Countrywide Fabricating Evidence?
The US Trustee v. Countrywide

Posted by Bill McLeod at 12:10 PM | Permalink | Comments (0) | TrackBacks (0)