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?" »

Posted by Bill McLeod at 7:10 AM | Permalink | Comments (0) | TrackBacks (0)

In January, the Executive Office of the US Trustee announced that audits of consumer debtor cases were suspended due to budgetary constraints. On May 9, the US Trustee program announced that it was resuming random audits. Originally, 1 out of every 250 cases filed in a judicial district could expect to be selected. Apparently, the budgetary issues have not been completely resolved because now, it is 1 out of every 1,000.

Read more here

Previous posts:
Audits of Bankruptcy Petitions

Posted by Bill McLeod at 7:23 PM | Permalink | Comments (0) | TrackBacks (0)

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" »

Posted by Bill McLeod at 7:16 AM | 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)

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.

Posted by Bill McLeod at 4:00 PM | Permalink | Comments (0) | TrackBacks (0)

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.

Posted by Bill McLeod at 5:11 PM | Permalink | Comments (1) | TrackBacks (0)

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" »

Posted by Bill McLeod at 6:08 PM | Permalink | Comments (0) | TrackBacks (0)

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."

Posted by Bill McLeod at 1:19 PM | Permalink | Comments (0) | TrackBacks (0)

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

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

Continue reading "What's Income, and What's Not?" »

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

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

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

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

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

Continue reading "Filing Bankruptcy: Timing can be Everything in Chapter 13" »

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

And I forgot, spiteful.

These are just some of the words used to describe the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Posted by Bill McLeod at 12:55 PM | Permalink | Comments (0) | TrackBacks (0)