In May 7 decision the First Circuit Court of Appeals ruled that a debtor was limited to the amount of his stated objections. For those thinking of preparing cases on their own, or for others with perhaps different motives, the case teaches a good lesson: you reap what you sow.

In a chapter 7, all of the debtor’s property becomes property of the estate, and is sold. The proceeds of the sale are used to pay creditors and other administrative expenses. The debtor is permitted to keep property – what are referred to as exemptions. In addition to other documents, debtors are required to file schedule B, which identifies personal property, and schedule C, which sets forth the debtor’s claimed exemptions. The code requires that if any party wants to object to any claimed exemption of the debtor, the party must file an objection within 30 days following the conclusion of the creditors meeting, or Section 341 meeting. If that is not done, the property slips “beyond the estate’s grasp.”

In this case, the debtor listed on Schedule B a total of about $170,000 in money that was owed to him. On Schedule C, he claimed that the claims were only worth $8,000 and were otherwise exempt from the estate. No objection was filed. About a year later, the trustee asked the bankruptcy court to approve a settlement in the amount of $100,000.

The debtor argued that the estate had no interest in the lawsuits at all. But the Bankruptcy Court in Puerto Rico ruled that the debtor had not exempted the lawsuits, but only $4,000 partial interest in each suit. It approved a settlement where the proceeds could be paid to the trustee, with $8,000 paid to the debtor reflecting the amount of their exemption. The US District Court for the District of Puerto Rico affirmed and the debtor appealed.

Continue reading "A Lesson in Exemptions" »

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A chapter 13 debtor proposes a plan to pay creditors over a period of time. Their creditors may include credit cards and utilities, and as in most cases I deal with, prepetition mortgage arrears. In some cases, debtors simply make a monthly payment to the chapter 13 trustee over the life of the plan. In others, debtors propose plans that provide for gradual increases in monthly payments (what might be referred to as a “step plan”). Other proposals might include monthly payments, with the last payment being a large balloon. That final balloon payment might be paid by the sale of an asset or a refinancing of property. However, a recent Massachusetts Bankruptcy Court decision says that this practice is no longer permissible since BAPCPA. The decision is on its way to the Bankruptcy Appellate Panel and debtors and practitioners should follow it closely.

Continue reading "Did Congress Pop the Balloon?" »

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I have been asked by clients if they can avoid having to list all of their credit cards on their bankruptcy schedules. The answer is simple: “no.” However, they must list all of their debts. And if you owe the credit card company money, you must list it on your bankruptcy schedules (open lines of credit are not debts, although no debtor should expect that an inactive line of credit will survive a bankruptcy filing). Not doing so is – legally speaking – stupid. And recently, a debtor in Massachusetts learned just how stupid it really was.

The debtor filed a chapter 7 case. In an Adversary Proceeding, a creditor alleged that the debtor made a false oath when she failed to list five separate credit card debtors on her petition. She also did not bother to amend her schedules at any time…even after the Adversary Proceeding was filed. When asked about it, the debtor replied:

I didn’t list [the credit cards] because I didn’t want to totally destroy my credit. That’s basically – I didn’t think I had to, you know, divulge these small little credit cards that didn’t mean anything. They weren’t huge.

Continue reading "Not Huge and Very Stupid: A Discharge is Denied" »

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Very often, I find myself speaking to debtors and wondering what I would do if I were in their shoes. This week, I spoke with a debtor who has had a chapter 13 case pending for about a year and was representing himself. The debtor was facing a Motion for Relief from Stay for failing to make post-petition mortgage payments, although the plan payments were current. I asked the debtor why he was representing himself in his case and he told me that all the lawyers he spoke to had told him he should just “walk away” from his house and file a chapter 7. After our conversation, I understood why.

Continue reading "What would you do...." »

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Parents – like all of us – get older. Parents – like all of us – are human. And parents – at times – find themselves in a financial mess. Over the years, I have had a chance to represent older debtors, and in many cases, that representation resulted from the urging of their children. If you think your parent or parents might need to file bankruptcy, you might want to think of a few things.

Continue reading "When Parents are in Debt" »

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When people gamble, they can win. But let’s face it: not often. When they lose, they can lose big. When is a gambler entitled to relief under the Bankruptcy Code? While the answer is not entirely black and white, a February 29 decision out of the Northern District Ohio sheds some light on the issue.

The debtor’s gambling habit started just for fun (with no money) but then, money slipped into the games. The money was followed by credit cards. All of this led to a downward spiral during which time the gambling began to consume the debtor’s life. She visited online gambling sites in the morning before going to work, would come home from work at lunch and gamble, and then do it throughout the evening at the end of her work day. At some point, the debtor realized that it was out of control, and she started seeing a counselor.

After she stopped gambling and was seeing her counselor, she cut back on household expenses. She canceled her home internet service and checked emails only from work. However, by this time she had accrued high balances on her credit card accounts.

Rather than run to bankruptcy court, she attempted to investigate various debt consolidation services, but found that the monthly payments would be more than what she could afford.

Continue reading "This Debtor Knew When to Fold" »

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Since the 2005 Bankruptcy Act, debtors have had to gather and provide their attorneys more documentation. There are a variety of documents that debtors need to collect, but the class of documents that is often difficult to put one’s hands on at the last minute is pay stubs.

The 2005 Act required all debtors to complete a Means Test. In theory, the form was designed to help determine whether a bankruptcy filing was an abuse of the Bankruptcy Code. To properly complete the form, one of the first calculations needed is that of “current monthly income” or CMI.

Continue reading "Storm Preparation: Payment Advices" »

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There has been so much written about BAPCPA and the creditors who practically wrote the law and got it passed. While I cannot doubt that creditors – such as the good folks at MBNA (which was bought out by Bank of America), paid their lobbyists millions of dollars for years to get the Bankruptcy Code changed, a recent case perhaps rightly suggested that lenders had good reason to seek a change in the law. The case, decided in February, came out of the Northern District of Alabama.

The husband and wife debtors filed their case in October 2006. It was the wife’s seventh bankruptcy case (no that’s not a typo....that's 7) and the husband’s fifth (and again, not a typo....that's 5). As the October filing was their second case within a year, they filed a motion to seek an extension of the automatic stay. Since 2005, if a debtor has had a case pending within the year prior to the case being filed, the stay expires 30 days unless the court orders otherwise. The hearing of the motion must be held within the 30 day period. The debtors needed the stay to prevent a foreclosure on their home.

Continue reading "Poster Children for Bankruptcy Reform" »

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When is a “friend” an insider and when is an “insider” a friend? That was a question that a Kansas Bankruptcy Court had to struggle with in the case of In re Tankersley.

The chapter 7 debtor’s friend (Anne) paid about $21,000 on the debtor’s mortgage. A little less than a year prior to filing the case, the debtor paid her back $5,000. About 6 months later, she paid her $4,000 and as of the date of the petition, she still owed her about $12,000. The debtor identified the payments to Anne on her statement of financial affairs, and identified her as an “insider.”

The chapter 7 trustee sued the friend (Anne) to avoid the preferential transfer and to recover the value of the property. The trustee alleged that he was entitled to a one-year look back period because Anne was an insider, and was disclosed as such on the debtor's statement of financial affairs.

The court found that they did not appear to be especially close friends. The debtor had never been to Anne’s home, and they spoke on the phone every few weeks, and saw each other sporadically.

Annie also did not fall under the definition of per se insider, such as a family member, a business partner, or a corporation that the debtor has an interest in or controls. While the court acknowledged that the debtor identified Anne as an insider, that disclosure was not dispositive but was done “for the debtor’s own protection.” The trustee did not prove that Anne was an insider: Anne “did not cross the threshold from friend to insider….just as [the debtor] never crossed the threshold into [Anne’s] home.” Since Annie was not an insider, she does not need to turn over the payments she received from the debtor.

In re Tankersley, 382 BR 522 (Bankr.D.Kan February 13, 2008).

Related:
Preferences: What are they?

Posted by Bill McLeod at 8:46 AM | Permalink | Comments (1) | TrackBacks (0)

Everyone has found themselves saying that at one time or another. Perhaps it was the regrettable decision of a particular business venture (or business partner), or perhaps it was ordering the chicken salad special, rather than a turkey club. Or, perhaps, you happened to be joint debtors who recently learned what can happen when you do not do what you should have and could have done.

The debtor’s joint case was filed as a chapter 13 in July of 2007. At a later hearing, the debtors advised the court that they intended to convert the case to chapter 7. At a later 341 meeting, the debtors provided the trustee with a copy of their 2005 income tax return, but did not provide a copy of the 2006 tax return, even though that return had been filed. The Trustee warned the debtors to produce the return, and advised them that he would seek a dismissal of the case if it was not provided. The meeting was continued to the following month to allow the debtors time to give the returns to the trustee.

At the continued meeting, the debtors’ attorney appeared without the debtors and without the tax return despite what she relayed was “harsh admonitions to her clients” to produce the documents. The return was eventually provided 36 days after the deadline set forth in Section 521(e)(2)(A)(i).

This code provision requires the debtors to provide the trustee a copy of the federal income tax return required under applicable law for the most recent tax year ending immediately before the commencement of the case for which a federal income tax return was field. The code requires that the case be dismissed unless the debtor can establish that the failure to abide by the provision was beyond the debtor’s control, however, the court acknowledged that seeking dismissal was within the discretion of the trustee.

The Chapter 7 Trustee exercised that discretion and moved to dismiss the case because the debtor did not provide copies of the 2006 tax returns. In allowing the motion, the court noted that “Congress did not intend that trustees spend inordinate amounts of time chasing down tax returns from debtors who have sought relief in bankruptcy.”

In re Nordstrom, 381 BR 766 (Bankr.C.D.Cal., January 18, 2008).

Posted by Bill McLeod at 7:38 AM | Permalink | Comments (0) | TrackBacks (0)

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.

Continue reading "A Word of Caution: Foreclosure Prevention Counselors" »

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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.

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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).

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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.

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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).

Continue reading "Unauthorized Post Petition Transfer Leads to Denial of Discharge" »

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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.

Continue reading "6th Circuit Orders Turnover of Tax Refund" »

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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)

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.

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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)

There are many things that bring people into bankruptcy. More than a few times, I’ve represented people who have had something in common: a gambling problem. There are unique legal and practical issues that face gambling debtors. But before I get into my professional perception of things, let me share with you some personal experiences.

When I was in college in Newport, Jai Alai had opened. Jai Lai is a game where men hurl balls using large baskets at a wall. I forget exactly what you're supposed to be betting on. I think it was points.

Anyway, my first visit was a little over 20 years ago. I walked in with $10 in my pocket. I left with more than $100. Obviously, given that I was a poor college student who had a steady diet of macaroni and cheese and other various pasta creations, I was pleased as kitten at a cat nip farm. I also looked forward to going back.

Continue reading "Gambling, Gamblers and Bankruptcy" »

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I have a message to all of those folks out there who are hoping that the economy will get better, that their mortgage company will “work” with them, or that the government will do something to help them through the financial quagmire they find themselves in: the sun is not going to come out tomorrow. Perhaps more succinctly said: it ain’t going to happen. I know I sound really negative, but hear me out.

Contrary to what you may read in the news, there are not a lot of mortgage work-outs and rewrites going on. If you do not have equity in your real estate, you’re going to have a tough – if not impossible time trying to refinance. The same applies if you are behind in mortgage payments or if the income is not there to pay the monthly mortgage payments. If you got sucked into an exotic mortgage product with the hope that the value of your real estate was only going to appreciate, then if you think you’re in a precarious position now, it’s only going to get worse.

Property values are depreciating everywhere. If you think I am being melodramatic, read about what’s happening in Arizona, California and Maryland. Then look further.

Property values are starting to go below the mortgage notes secured by the property ….and this hurts even those who did not get into exotic loans. Read more here: here’s a homeowner that bought a home for approximately $400,000 and the value has dropped 20%. Let’s assume that the homeowner put down a $40,000 as a down payment. If the value has dropped 20%, that down payment has evaporated. Poof. All gone (and unfortunately, I have clients in a very similar situation). If the homeowner was in an interest only payment period, then none of those payments were being applied to principal. Without equity, that homeowner has little chance of refinancing.

In addition to all of that the economy is tanking. I am no economist, nor do I pretend to be, but I did grow up during the 70s. I remember the gas lines, the “WIN” buttons and the nightly news updates reporting the price of gold. At that time, it touched just over $800 per ounce. A few years ago, on this very site, I wrote that a rise in the price of gold should be expected. Here’s what I wrote on October 17, 2005:

[W]hat can we Americans expect in the days, months and years to follow? Expect foreclosures to sky-rocket. Expect real estate values to plummet. Expect a slow down in consumer spending. Expect lay offs and business closings. Expect the price of gold, an indicator of inflation, to push past its now 18 year high (a fact which is curiously under reported in the main stream media).

As I write this article, gold is over $900 per ounce. In October 17, 2005, the price of gold closed at $473.80. And we’re no where near the end of this mess.

I’m not the only one touting this fact: Treasury Secretary Henry Paulson is. Watch these videos at Calculated Risk. Mr. Paulson is asked: “Is the worst over?” His answer speaks for itself.

Despite the wishful (and perhaps understandable) thinking of real estate professionals, the real estate market has not hit bottom. The price of gold (and likely silver) is only going to continue to inch its way up to history making highs. If the financial storm has not hit you yet, be thankful but do not assume you are safe and secure on high ground. Think of it this way: the flood waters are still rising, and no one really knows where “safe” high ground really is. All you can do is be aware, pay attention and prepare because when it comes right down to it, “the worst isn't over, the worst is just beginning.”

In other words, the sun is not going to come out tomorrow. Please plan accordingly.

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According to a study released by the Georgetown Law Center, “there would be ‘no or little’ impact on home-mortgage interest rates if Congress moves ahead with pending legislation -- H.R. 3609, The Emergency Home Ownership and Mortgage Equity Protection Act of 2007) and Senate (S.2136, The Helping Families Save Their Homes in Bankruptcy Act of 2007) – designed to ease the U.S. mortgage foreclosure crisis by allowing modifications in bankruptcy proceedings.”

The study was conducted by Adam J. Levitin, Associate Law Professor at the Georgetown University Law Center and Joshua Goodman, Ph.D. in Economics candidate at Columbia University. It is entitled “The Effect of Bankruptcy Strip-Down on Mortgage Interest Rates.” From today’s press release:

There is no empirical evidence that supports a conclusion that permitting either strip-down or other forms of modification of principal home mortgage loans in bankruptcy would have more than a minor impact on mortgage interest rates or on home ownership rates. As there is significant evidence that mortgage interest rate markets are indifferent to bankruptcy modification risk, we conclude that permitting unlimited strip-down would have no or little effect overall on mortgage interest rates

Addressing MBA claims that mortgage interest rates will shoot up if Congress acts to address the mortgage foreclosure crisis, the Levitin/Goodman study concludes: “… statistically there is a zero percent chance that the MBA’s 150 basis point claim is correct. All empirical and market observational data indicates that that MBA’s claim of an effective 150-200 basis point increase from allowing strip-down is groundless. The empirical evidence indicates that there is unlikely to be anything more than a de minimis effect on interest rates as a result of permitting bankruptcy modification.

The Levitin/Goodman study continues: “The Mortgage Bankers Association (MBA) has claimed that permitting modification of mortgages in bankruptcy will result in an effective 200 basis point increase in interest rates on single-family owner-occupied properties… Our research on current mortgage interest rate spreads among different property types disproves the MBA’s claim. …More recent MBA press releases have claimed only an increase of 150 basis points, without explaining the 50 basis point decline from the 200 basis point figure featured in Congressional testimony.

Commenting on the study findings, Levitin said: “The overwhelming thrust of the historical analysis is that the effect of permitting strip-down on mortgage interest rates would be either nonexistent or quite small — nothing near the range suggested by the Mortgage Bankers Association. We explain the lack of market sensitivity to strip-down risk by reference to two sets of consumer bankruptcy data, one from 2001 and one from 2007, both of which suggests that lenders’ losses in strip-down would be extremely limited both in scope and magnitude and often total less than those they would incur in foreclosure.

The study findings indicate that the nature of the pending U.S. House and Senate bills make it even less likely that there will be interest-rate implications if Congress acts: “First, to the extent our findings are used as a guide for predicting the impact of pending legislation, it is important to note that both our current and historical data analysis is of the impact of an unlimited strip-down regime on certain property types. The proposed legislation in the House (H.R. 3609 with the Conyers-Chabot Compromise Amendment) and the Senate (S. 2136) do not propose such an unlimited regime for single-family principal residence mortgages. Instead, both bills would impose a variety of limitations on modification. Both bills would impose eligibility requirements in the form of a strict means test, limiting relief to those homeowners whose income is insufficient, after deducting modest living expenses allowed by the IRS, to cover their mortgage obligations. Both bills would also limit relief to subprime and nontraditional mortgage products. Moreover, for interest rate modifications, both the House and Senate bills set a floor for modifications of the market rate for 30-year conforming mortgages plus a risk-premium. The House bill would further limit relief to mortgages made between January 1, 2007 and its effective date, and has a seven-year sunset provision. Because of these proposed limitations, the pending legislation would likely have an even smaller impact than the unlimited strip-down regime we tested in our study.

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The Mortgage Bankers Association which represents the real estate finance industry is apparently not pleased with a report by the Center for Responsible Lending which urges reforms to the US Bankruptcy Code. According to David Kittle, the Chairman Elect of the MBA:

Policymakers should ignore this report as it is more rhetoric than fact. Bankruptcy reform is not the answer for consumers having trouble making their mortgage payments. It will drive up the cost of credit in the form of higher rates, larger down payments and greater closing costs.

Further, bankruptcy is a logistical and financial nightmare for consumers. Filing for bankruptcy is expensive and approximately two-thirds of all bankruptcy plans fail. Nobody should be holding it out as a better alternative to working with your lender to try to find a mutually agreeable resolution.

But the CRL is responding with a report that shows that voluntary loan modification fall short. You'll find a link to the PDF report, and the statistics here.

As for Kittle’s comments, I have no idea where the uncited reference to “two-thirds of all bankruptcy plans fail.” Where does that factoid come from? There are lots of reasons why bankruptcy cases fail, but there is no magical statistic that I am aware of. That's flat-out misleading. And as for a "nightmare", oh come on now. While none of my clients want to be in bankruptcy, they would rather keep their home and put food on the table, than live with the proposed "resolutions" offered by their lender.

And unfortunately, for Mr. Kittle, the sad news is that for an increasing number of homeowners, filing bankruptcy is the better alternative to working “with your lender.” The fact is, some lenders are unwilling (or for their own reasons unable) to “work” with a homeowner. When there can be no “mutually agreeable resolution”, bankruptcy is the better alternative. And until lenders start getting serious about modifications, and about their lending practices that got the country into this mess, that alternative will only appear better and better.

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The Dow has dropped 10 percent since January 1.

Some of the victims of the sub-prime mortgage mess are bigger than a bread box, have more than two legs and are very innocent.

Ohioans are wondering the government is to blame for the sub-prime foreclosure mess. Canadians are wondering if the housing storm will creep over the border. According to one report, forecasts are mixed.

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The Executive Office of the US Trustee announced that it has suspended designation of bankruptcy cases subject to audit. The reason? Congress provided no funding in the FY 2008 Consolidated Appropriations Act.

Read more here.

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Thinking about filing bankruptcy? Do you have a paper shredder or know a friend with a dumpster? You should know that a US Bankruptcy Court judge in Boston recently ruled that a Chapter 7 debtor was not entitled to a discharge because documents had been destroyed.

The case involved a carpenter and homebuilding contractor who operated under a corporate entity. The corporation had employees and handled large projects involving hundreds of thousands of dollars. While perhaps a good contractor, the debtor was not a savvy business person but that did not stop him from being the record keeper for the company.

The business records were kept in a large plastic bin which included canceled checks, copies of contracts and even some personal records. He did not maintain a cash flow ledger for the company.

In 2004, the company started to face cash flow problems which eventually snowballed. He and his company were forced to abandon projects they had been paid on and he expected to be sued. The debtor consulted a bankruptcy attorney. By 2005, the debtor became seriously depressed about the company’s financial problems so much so that the mere site of the plastic bin made him sick. The Court noted that “sometime between December 2004 and February 2005, he relieved himself of this immediate problem by driving the bin to, and depositing it in, a dumpster belonging to a roofing contractor friend.”

Continue reading "Destroyed Documents leads to Denial of Discharge" »

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Today’s New York Times is reporting that Countrywide Financial “fabricated documents related to the bankruptcy case of a Pennsylvania homeowner.” Apparently, the documents were letters addressed to the homeowner claiming that $4,700 was owed. Countrywide’s local counsel told the bankruptcy court that the letters were “recreated.”

“These letters are a smoking gun that something is not right in Denmark,” Judge [Thomas P.] Agresti said in a Dec. 20 hearing in Pittsburgh.

Read more here.

For an interesting take on this, please check out Tanta's entry early this morning over at Calculated Risk: "Turns Out Judges Don't Like 'Efficient' Servicers.'"

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The foreclosure crisis sweeping the nation is also sending some mortgage companies into financial ruin, leaving many folks caught in the middle. Last week the Federal Trade Commission issued a new publication giving consumers advice on what to do if their mortgage company files bankruptcy.

The PDF of "How to Manage Your Mortgage If Your Lender Closes or Files for Bankruptcy" can be found here. There is also information how to obtain the publication by mail.

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It has been reported that the US Trustee has subpoened records from Countrywide Financial, one the largest mortgage lenders - if not the largest. According to CNNMoney.com (and a New York Times report), in two separate bankruptcy cases in Southern Florida, the debtors

objected to Countrywide's claims of what was owed on their home loans. One couple contended that their mortgage payments were current, while Countrywide claimed $2,400 in overdue mortgage payments in that case.

Countrywide has not commented on the litigation. Yet.

Read more here.

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There’s been a lot of debate over how unfair BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) is on consumer debtors. Some of that debate can actually be found on this site. There have been aspects of BAPCPA that I have called silly, and some that we have to question the logic on. Recently, the US Bankruptcy Court in New Hampshire issued a ruling that appears to correctly interpret the post-BAPCPA Bankruptcy Code, but also shows how absurd the amendments to the code may be.

Prior to BAPCPA, a Chapter 7 filing was not presumed to be an abuse of the bankruptcy code. Abuse needed to be proved by the party claiming it, and a finding of substantial abuse could lead to dismissal or conversion

Under BAPCPA, the word “substantial” disappeared, leaving only “abuse.” Also, the means test was implemented, creating an objective means to determine whether there is a presumption of abuse. If there is a presumption of abuse, the United States Trustee must file a report indicating whether the case is presumptively abusive under 11 U.S.C. Section 707(b) within 10 days of the creditor’s meeting. Within 30 days after that, the US Trustee must either file a motion to dismiss or convert the case, or a statement explaining the reasons why the US Trustee does not consider such a motion to be appropriate.

In the New Hampshire case, the US Trustee wanted to compel the debtor to produce documents as well as submit to a Rule 2004 examination (which is something like a deposition, but isn’t really the same thing – which is another subject I should write about sometime). The US Trustee argued that it did not have enough information to evaluate whether the debtor’s case was presumptively abusive. The US Trustee also argued that under Rule 9011, she had an obligation to conduct a reasonable investigation before filing a motion. Under this rule, a party can be sanctioned for filing a baseless pleading in court. In response, the debtor argued that the US Trustee’s request was overbroad and unduly burdensome.

“Both parties are right,” the court wrote “and both parties are wrong.”

Continue reading "The Two Edge’s of BAPCPA’s Sword" »

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Last week, the US Bankruptcy Court in the Western District of Kentucky ruled that a Chapter 7 debtor’s credit card debt was not dischargeable because the debtor used a card that should have been closed. The debtor and the plaintiff divorced in 2003 and as a part of the divorce, the parties agreed to pay their own credit card debt as well as hold each other harmless in the event of default.

The husband and wife had a joint Fleet Visa which was to be paid by the husband. He paid it in April of 2003. The debtor/wife remarried in December of that year and she changed her name. That marriage only lasted a year, but the wife again married and again changed her name.

In 2004, Fleet was bought by Bank of America and issued a new credit card on what was formerly the Fleet Visa account. The debtor used the card, and when the bills arrived, the bills were addressed to her former ex-husband and the debtor using the name she had while married to him. She never notified the bank she was divorced or that her ex-husband’s name should not be on the card.

In 2006, after some business problems and an illness, the debtor filed bankruptcy. The husband sued claiming that the debt was not dischargeable on the basis of fraud. He argued that the debtor knew that she was using a card that was in both their names.

Debtor claimed that she did not know that the husband’s name was still on the account – and that because she had so many other bills at the time, she had no idea it was a joint account. However, this explanation did not make sense since the husband’s name was on the card, and on the bill, and the bills were in a name she used two marriages ago. She also had to reactivate the account, and thus had to have known at that time it was a joint account – as well as in her former name. Even “[i]t was not done knowingly,” the court wrote, “it certainly was done with gross recklessness.”

Because debtor did not take some very simple steps to change the holder of the account, the debt is non-dischargeable, and because of the hold-harmless language of the settlement agreement, she must pay it. Based on these facts, shouldn’t the debtor have known better?

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Houston-based LTD Financial Services got slapped with $1.3 million in civil penalties to settle FDCPA violation charges.

Washington Mutual issued a press release in response to the action filed by the NY Attorney General. We reported on that action earlier this week.

An astute observation on the passage of BAPCPA: "Be careful what you wish for."

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I received a call today from someone with questions about Chapter 7. I receive many calls a day, but what made this call interesting was that the caller told me that they conferred with another attorney and was told that with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, only 50% of debt was now dischargeable in a Chapter 7. My response was "nope, not true."

The caller also told me that according this other attorney there was no law that required a bankruptcy filing to appear on the credit report for 10 years. According to what the attorney purportedly stated: “Credit card companies want you to believe there is a federal law out there that requires it, but there is not.” My reponse was "that's not my understanding." Since this issue is not a primary one in my practice, it's not something I can rattle off the tip of my tounge, like I might be able to with regard to discharge exceptions. So I decided to take a quick detour from my petition preparations and research the issue a bit further.

Let me start with the easy one: nothing in BAPCPA declared that only 50% of debt would be discharged in Chapter 7. If anyone is telling you that, they do not bankruptcy law.

The claim that there is no federal law that requires a credit card company to report a bankruptcy filing is also hogwash (I could think of another term, but this is a professional site). Title 15, Section 1681c(a)(1) of the United States Code states that credit reports may not contain information concerning “[c]ases under Title 11 or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years.” And there is an exception. Under 1681(b)(2) a credit report may contain information about a bankruptcy that is more than 10 years old if the report is to be used in connection with a “(1) a credit transaction involving, or which may reasonably be expected to involve, a principal amount of $150,000 or more; (2) the underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of $150,000 or more; or (3) the employment of any individual at an annual salary which equals, or which may reasonably be expected to equal $75,000, or more.”

So the bankruptcy can stay on the credit report for up to 10 years, an din come cases, even longer. If any attorney tells you otherwise, invite them to call me.

Posted by Bill McLeod at 11:58 AM | Permalink | Comments (0) | TrackBacks (0)