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)

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" »

Posted by Bill McLeod at 7:06 AM | 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)

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)

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)

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)

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)

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.

Posted by Bill McLeod at 11:01 AM | Permalink | Comments (0) | TrackBacks (0)

An interesting case out of the 9th Circuit last week should serve as a reminder to Bankruptcy Attorneys to check and double check documents. It should also serve as a warning to debtors who may be inclined to avoid doing the same thing.

The case involved an $18,000 tax debt that the debtor owed to the Franchise Tax Board in California. The debtor filed a Chapter 13 bankruptcy in 1994 and completed the plan in two years. He received a discharge. The FTB did not file a proof of claim – and because they did not file a proof of claim, they did not get paid through the Chapter 13 plan. When the FTB tried to collect the debt after the bankruptcy discharge entered, the debtor brought an Adversary Proceeding arguing that FTB was violating the discharge injunction.

The debtor argued that FTB received notice of the bankruptcy. FTB did not deny that, but FTB argued that the debtor’s social security number on the notice of creditors meeting (which is sent to creditors notifying them of the meeting held under Section 341 of the Bankruptcy Code) was incorrect. In fact, the last number of the social security number was not correct.

Continue reading "Costly Bankruptcy Preparation Mistakes" »

Posted by Bill McLeod at 6:41 PM | Permalink | Comments (0) | TrackBacks (0)

Here’s one for the “believe it or not” list: ostriches do not hide their heads in the sand. I know – you’re thinking “get OUT!” I was as shocked as the next person. Apparently, while they do not bury their head, they will sometimes lie on the ground trying to make themselves look inconspicuous. According to The Phrase Finder:

The story also relies on the supposed stupidity of ostriches, and of birds in general. In fact, there's little to support that either as birds have a significantly larger brain to weight ratio than many other species of animal. The notion is that the supposedly dumb ostrich believes that if it can't see its attacker then the attacker can't see it. This was nicely reformed as a joke on Douglas Adams' 'Hitchhiker's Guide to the Galaxy', in which the 'Ravenous Bugblatter Beast of Traal' was described as 'so mind-bogglingly stupid that it assumes that if you can't see it, then it can't see you.'

Birds are not stupid (at least not all of them), and I find it difficult to believe that a bird that merely lies about hoping not to be avoided (such as one might do at a high school or college reunion) is intellectually deficient. So if ostriches don’t hide their heads in the sand, why do people struggling with high house payments often do just the opposite?

Continue reading "A Message For Those With Their Head in the Sand" »

Posted by Bill McLeod at 4:35 PM | Permalink | Comments (0) | TrackBacks (0)

From CNNMoney.com, a Chapter 13 debtor explains why filing for bankruptcy was the best decision he ever made.

Posted by Bill McLeod at 12:16 PM | Permalink | Comments (0) | TrackBacks (0)

While my practice is limited to Massachusetts, I understand that people all over the country read this blog. (Of course, they do so with the understanding that it’s not legal advice and that they should confer with a local attorney who can help them.) With that said, my observations this morning in Bankruptcy Court might be helpful to just about anyone facing bankruptcy.

Last week, a Chapter 13 case was filed by a debtor who had a pending Chapter 7 case which had been filed earlier this summer. The judge asked “why do I have two pending bankruptcy cases at the same time?” A good question.

Continue reading "Bankruptcy Court Observations: Bad Lawyering" »

Posted by Bill McLeod at 2:07 PM | Permalink | Comments (1) | TrackBacks (0)

When faced with a foreclosure, most people will consider a Chapter 13 filing. But I have been hearing some rumblings here and there that many people seeking protection under Chapter 13 are opting to go it alone, without an attorney. While certainly people have the right to represent themselves, there is no good reason to not hire an attorney for a Chapter 13.. In an effort to drive my point home, I have identified here the Top Ten Reasons Why You Should Not File Chapter 13 Without an Attorney. I’ve also done so while still hoping to leave a smile on your face.

May we hear a drum roll!

Continue reading "Top Ten Reasons to Hire an Attorney for Your Chapter 13 Case" »

Posted by Bill McLeod at 4:26 PM | Permalink | Comments (0) | TrackBacks (0)

The Boston Herald reports this morning:

The number of Massachusetts people filing for Chapter 13 personal bankruptcy jumped to 2,187 during the first half of 2007, up 85 percent over the previous year and up 78 percent during the same period in 2004, prior to when the U.S. bankruptcy system was overhauled in 2005.

The number of Chapter 7 liquidation filings also more than doubled to 4,251 during the first half of the year, compared to the year-ago period, according to preliminary data from the U.S. Bankruptcy Court’s Massachusetts District.

Read more here

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

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

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

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

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

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

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

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

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

Continue reading "Filing Bankruptcy. Again." »

Posted by Bill McLeod at 12:34 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)