Bankruptcy — McLeod Law Offices

Posts Tagged ‘Bankruptcy’

A Holiday Shopping Tip (or Warning)

Wednesday, November 26th, 2008

With Black Friday soon upon us, and the holiday shopping season, I want to get a message out to those folks who are struggling. Perhaps there are folks who know they are going to lose their jobs after the New Year. Perhaps there are folks who have been using credit to get by and now see a bankruptcy petition on the horizon. Perhaps these folks are figuring that they will have one last holiday with really great gifts courtesy of their credit card companies. If you’re reading this, and you’re thinking “wow, he’s totally speaking to me (or about my friend or relative)!” please keep reading.

One thing many consumers do not know is that when you buy “large-ticket” item, it may also come with it a security interest. In other words, that purchase may be a gift, but it may also be collateral. The lender (the store, or the bank that finances the store’s credit cards or credit lines) assumes a security interest. This is something to think about as you’re eyeing that appliance or jewelry. Will it prevent you from filing bankruptcy? Probably not. Will it complicate things? It just might. You may have to pay the debt even if you file bankruptcy or you may have to surrender the collateral. Or you might hear from the creditor months or years after the bankruptcy is over.

Last minute purchases can also get you into hot water. Using a credit card when you have no intention of paying the debt back can be considered fraud. Debts incurred through fraud cannot be discharged. In addition, such actions could be considered bad faith, and might lead to a dismissal or a denial of discharge, depending on the circumstances. What does any of this mean? The short answer is more attorney fees, more anxiety and the possibility that the bankruptcy case will not go as smooth as it otherwise could.

If you’re contemplating bankruptcy, don’t use credit cards for holiday shopping. Speak with an attorney. The last thing any debtor needs is to make a tough situation even worse.

Tags: 523(a)(2): Fraud, Bankruptcy, Chapter 13, Chapter 7, Consumer Protection, Discharge of Debts, Reaffirmation of Debt
Posted in Bankruptcy, Bankruptcy Litigation, Chapter 7, Consumer Rights | No Comments »

Why Bankruptcy Lawyers Require Fees Before Filing

Tuesday, November 25th, 2008

There really is a good reason. And to help prove my point, I turn to an October 2008 decision out of the US Bankruptcy Court for the Eastern District of Pennsylvania: In re Mansfield. In that case, the court was called upon to ask what it viewed as a “deceptively simple question:” may an attorney who charges a “flat fee” for services pursue the uncollected balance due?

In this case, the attorney charged a flat fee for preparing the necessary documents and schedules, but also for attending the first meeting of creditors (which occurs after the case is filed). The fee was paid in one large installment, with the remaining balance divided into smaller installments which were paid or due after the case was filed.

The US Trustee sought a review of the fee practice as well as disgorgement of the fees collected after the case was collected. The attorney claimed there was no authority supporting the relief sought by the US Trustee, and he was entitled to collect at least the value of the services he rendered.

The court did not agree. Under Section 727(b) of the Bankruptcy Code, a “debtor’s obligation under a fee agreement to pay a fixed or flat fee to his attorney for legal services rendered pre- and postpetition in a Chapter 7 case, regardless of how the fee is scheduled to be paid, is a prepetition debt that is dischargeable. The attorney avoided having to return the fees paid because there is a difference of opinion among Bankruptcy Courts throughout the country as to whether the practice of collecting fees post-petition is permissible….and if permissible, the circumstances they are permissible.

In flat fee cases (and it is fair to say most, if not all consumer Chapter 7 cases are flat fee), the court found that the “division of a flat fee arrangement into prepetition and postpetition parts to be conceptually inconsistent and therefore untenable. The Court therefore joins those other courts which hold what when a flat or fixed prepetition agreement is at issue, the fee must be paid in full prior to the commencement of the debtor’s case or the fee is discharged under Section 727(b).”

So in reality, when an attorney requires fees and costs prior to the filing of the petition, it’s because they need to get paid…unlike creditors in a Chapter 7 who in many cases do not get paid at all. There’s case law all over the country that supports it, and other case law that suggests that it can be done. While the current code and the case law leave room for creative argument, debtor’s attorneys can be expected to be wise and take the path of least resistance: earn the fee and serve the client. Certainly, there are bigger battles for debtor’s attorneys to engage in for their clients other than fighting for a fee for postpetition services.

In re Mansfield, US Bankruptcy Court, Eastern District of Pennsylvania, No. 08-11648 SR (Ocobter 2, 2008)

Tags: attorneys, Bankruptcy, Petition Preparers and Fees
Posted in Bankruptcy, Chapter 11, Chapter 13, Chapter 7 | No Comments »

When Things Go Very Wrong

Monday, November 24th, 2008

Last week I received a phone call from someone who wanted to know about the status of a bankruptcy case. It was not their bankruptcy, rather the case of another person. Apparently, the caller was a creditor of the bankruptcy debtor. The caller had a case pending in state court and wanted to know if the claim was discharged in the bankruptcy. While we were chatting, I pulled up the case on PACER. As I started to get more information and I was reviewing the documents, I came to realize that not only was the claim discharged, but the attorney representing the caller in the state court matter committed malpractice. What happened here is a lesson for anyone finding themselves brought into a bankruptcy case.

In May of 2007, the debtor filed bankruptcy which put the automatic stay into effect. In August, the caller’s attorneys filed a Motion for Relief from Stay. By a look at the document, the attorneys did not have experience in bankruptcy matters: the motion was barely two pages long and presented nothing substantive for the court to consider. Their lack of experience was also evident by the fact that they did not file electronically (Bankruptcy Courts – like all federal courts – use electronic case filing). And finally, they also did not pay the requisite filing fee (a fact which is readily available from a number of sources, including the court’s website).

The Clerk issued a Notice of Filing Fee due, and ordered that the payment be made by 8-27-07. The Certificate of Service from the Clerk stated the Notice was mailed on August 19, 2007 to the local attorney. However, payment was not made until 9-5-07. As a result, the motion was denied.

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Tags: attorneys, Automatic Stay, Bankruptcy, Discharge of Debts
Posted in Bankruptcy, Bankruptcy Litigation | No Comments »

What’s Your House Worth?

Sunday, November 9th, 2008

When I confer with a client who is facing the prospect of bankruptcy to protect their home, I have many important questions. One of them is “what is the value of your home?” The answers are usually varied, and in most recent situations, clients have only old or not useful information. Regardless of the source however, determining the value of the home is a necessary step in any pre-bankruptcy analysis I need to do. And unfortunately, getting that accurate information is not always easy, and it is not always grounded in reality.

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Tags: Bankruptcy, Commentary, Homes, homesteads and real estate, Housing News, Mortgages and Foreclosures, Yep. We're in trouble.
Posted in Bankruptcy | No Comments »

Hope is Not a Strategy

Monday, November 3rd, 2008

In the last several months, people in precarious financial circumstances who are either facing bankruptcy or are already in bankruptcy are basing their financial recovery strategy on one thing: hope. They hope the mortgage company will work with them. They hope a bankruptcy judge will see things their way. They hope that they will get a better job, more income, or that things will change. If this sounds like you, understand this: if the foreclosure is tomorrow, next week, or even next month, hope is not a strategy.

You might consider filing chapter 13 to stop a foreclosure sale. The foreclosure auction will stop, but you’re still going to need a game plan, and that game plan – more often than not – includes income. When I speak with debtors who are considering bankruptcy at the 11th hour, I ask them one simple question: “how are you going to pay the mortgage(s) and your chapter 13 plan payments?” The answer should start with something like “I’m going to start a new job this month”, “I’m bringing in roommate who will help me pay the mortgage payment” or “I’m going to be making substantial cuts to my living expenses.” And while it should go without saying, those answers should be truthful and based on fact.

The answer should not be “I hope to get a better job”, “I hope that my mortgage company will work with me” or “I hope that the market will get better.” Why? Because it’s not an answer. And it’s not a strategy. Of course, when I hear such things from debtors, I find it is usually at the 11th hour. And by then, I have to wonder if hope is all that is left.

Blind hope is not an option for people on the eve of a foreclosure auction. Resting on hope is like resting on the platitudes of political candidates: it makes you feel good at that moment, but when the election is over, and the confetti is being swept up, the financial mess is still going to be there. Then, there is no escaping the fact that hope no longer matters; only action does. And if there really is no game plan that is grounded in reality, if there is no way to make it happen, then all that hope has been wasted. All that’s left is more misery. And that is why, when it comes right down to it, hope is not a strategy.

Tags: Bankruptcy
Posted in Bankruptcy | No Comments »

Changing Chapter 13: Some Facts on the “Pandora’s Box”

Thursday, October 23rd, 2008

There’s been some press about a proposed change to chapter 13 that would permit debtors to modify the mortgages on their primary residence. Yesterday, I attended the briefing at the State House given by Rep. William Delahunt where the need for the legislation was discussed. He has co-sponsored a bill that would modify the anti-modification restrictions imposed by Section 1322(b)(2). Among the presenters were Massachusetts Attorney General Martha Coakley, Secretary of State William Galvin, and Harvard Law Professor Elizabeth Warren.

Currently, a chapter 13 debtor cannot modify the mortgage on their home if the note is secured by the debtor’s primary residence. This does not apply if the debtor has a multi-family dwelling, such as a two-family. This does not apply if the note is secured by the house and other property (although this may vary from state to state). This also does not apply if a debtor has a vacation home or other investment property. It applies only to those chapter 13 debtors who reside in single family homes and who have a mortgage that is secured by that single family home that they use as a primary residence.

Notwithstanding those restrictions, a chapter 13 debtor may “strip off” a second mortgage (or in some cases, a third), if the mortgage is “wholly unsecured.” A simple illustration: if the value of the property is so low that if the property were sold, there would not be funds to pay the second or third mortgage. However, if that second or third mortgage is secured by even a penny, it cannot be stripped off.

The Boston Herald quoted Kevin Cuff, Executive Director of the Massachusetts Mortgage Banks Association:

You’re opening up a Pandora’s box, a precedent to haul every mortgage back into court…Many people who got these loans should not have received them in the first place. Now you go to the courts to modify the sacred contract between homeowner and lender? It’s socialized housing.

I might agree with that position if chapter 13 debtors could not modify their vacation homes or investment properties. I might agree with that if city dwellers who reside in a unit in their multi-family home could not modify their vacation homes. But that’s not the case. The current system has a disparate impact on those chapter 13 debtors who reside in single family homes, and those who do not, and for many, those who do not reside in non-urban/rural areas. It also has a disparate impact on those middle-class debtors who do not have vacation homes or investment properties.

In addition, the legislation is being proposed because voluntary modifications are not happening. It is argued that if there is a “threat” of filing bankruptcy and modifying a mortgage in chapter 13, the lender may be more apt to modify the loan voluntarily so that the homeowner does not need to file chapter 13. It sounds like a good argument, but I honestly cannot say one way or another whether that would be the case. Of course, if the law were passed, then it would be really up to the lender to decide if they wanted to be hauled into court to be forced into a modification. The only way I think any of us can know for sure is if we give it a try. But before anyone makes a decision one way or another on this proposal, I think it’s important to know what the law currently provides, and why I do not think it is necessarily a “Pandora’s box” or “socialized housing.”

Tags: Bankruptcy, Chapter 13, Homes, homesteads and real estate, In the News, Modifications and Workouts, Mortgages and Foreclosures
Posted in Bankruptcy, Chapter 13 | 1 Comment »

Pop-Financial-Guru: My Take on Dave Ramsey

Wednesday, October 22nd, 2008

I’ve often wondered why people wait so long before they file bankruptcy. Like, for example, wait until the morning that their house is scheduled to be auctioned. Wait until they know the tow-truck is coming to take their car away. Then, I wondered if Pop Culture’s Financial Gurus had anything to do with it. Dave Ramsey is one of those gurus who gets a lot of face time on the tube as well as voice time on the radio. He’s also got a book or two out. He hates bankruptcy. Do people listen to him? I bet they do and if you are thinking about bankruptcy, you might want to continue reading.

On bankruptcy, Dave Ramsey says this on his website:

Bankruptcy is not something I recommend any more than I would recommend divorce. Are there times when good people see no way out and file bankruptcy? Yes, but I will still talk you out of bankruptcy if given the opportunity.

It might shock my readers to hear that I tend to be opinionated. I would have no problem recommending divorce if I thought someone should dump their spouse. Of course, I would expect to be asked for that opinion – I would not just approach some random couple on the street who were fighting and offer my unsolicited opinion. I also have the decency to talk someone out of bankruptcy if I thought it was an unwise decision. Yes, I know that means I will not earn a fee for filing a case. But since I know what it’s like to pay for the pain of what I only learned later was unnecessary dental and gum procedures, I do not believe that I should just file bankruptcy for people who I honestly believe do not need it. Thus, I also do not buy the reckless assumption that bankruptcy is bad all around. Drunk driving? That’s bad all around. Filing bankruptcy? Not so much.

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Tags: Bankruptcy, Commentary, Dave Ramsey, Pop Financial Gurus
Posted in Bankruptcy | 9 Comments »

Debtor Can’t Reopen Case to Enforce Discharge. Yet.

Wednesday, October 15th, 2008

In an October 3 decision, a Massachusetts Bankruptcy Court ruled that a debtor could not reopen her chapter 7 bankruptcy to commence an adversary proceeding to enforce the discharge.

The debtor was involved in an auto accident in 2003 which resulted in the death of another person. Later in the year, the Administrator of the Estate accepted $100,000 from the debtor’s insurance company and signed a release. In December 2004, the debtor filed her chapter 7 bankruptcy petition and received a discharge in April 2005. In the petition, she did not list the Estate as a creditor. There were no assets to distribute to creditors.

Then, in January 2006 the debtor heard from the “successor” Administrator of the Estate.

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Tags: Bankruptcy, Chapter 7, Discharge of Debts
Posted in Bankruptcy, Bankruptcy Litigation, Chapter 7 | No Comments »

Good Faith and Bad Art

Monday, September 29th, 2008

In bankruptcy, good faith is a lot like good art. It is difficult to describe, but you know it when you see it. The same can be said with bad faith. A recent chapter 13 case out of the 9th Circuit illustrates that point.

The debtor filed a chapter 13 case in August 2004. Since chapter 13 is a voluntary proceeding, a debtor has the option of voluntarily dismissing their case at any time. Also, in chapter 13, the debtor is typically in control of assets of the estate. In this debtor’s case, one of the assets was claim that was being arbitrated against an LLC.

The debtor’s plan was met with objections from the trustee as well as creditors. The debtor assured the court that he would use funds obtained in the arbitration to fund the plan. In July 2005, the debtor was awarded approximately $185,000 in the arbitration. That month, the court ordered him to pay that sum to the chapter 13 trustee.

In August, the debtor’s attorney sought permission to withdraw from the case citing a breakdown in the attorney client relationship. At the hearing, the court learned that the debtor had not complied with the prior order from the court by turning the money over to the trustee. The court gave the debtor one hour to deliver the money, or the court was going to convert the case to chapter 7. The debtor did not deliver the money, and on that same day, the debtor filed a “Notice of Dismissal.”

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Tags: Bankruptcy, Chapter 13, Good Faith
Posted in Bankruptcy, Chapter 13 | No Comments »

10th Circuit: Legal Interest Acquired Post-petition is Property of the Estate

Wednesday, September 17th, 2008

When someone files bankruptcy, an estate is created. The property in the estate is defined in the Code, and it is the property in the estate that is used to pay creditors. But how do you value property of the estate if the nature of the interest held in the real estate changes after the petition date? On Friday, the 7th Circuit Court of Appeals answered that question.

In January 2004, the debtors filed for chapter 13 relief and sought to avoid a judgment lien (valued at about $8,200) on their residence. The lien arose from a deficiency judgment following an automobile repossession. Debtor’s estimated their interest in the residence to be valued at $65,000, subject to a mortgage of about $58,000. Their interest in the residence reflected an encumbrance of a life estate interest held by a relative. Under Indiana law, the homestead exemption at the time was $15,000 ($7,500 per debtor).

Two years later, after the plan was confirmed, the debtor’s filed a motion seeking to avoid the lien on the property. A month prior to the filing of the motion, the mother released her life estate interest by a quit claim deed, thus conveying the property to the debtors a fee simple interest. The value of that interest was determined to be $95,000. However, when the debtors sought to avoid the lien on the property, they used the prior valuation of $65,000.

The creditor argued that the valuation that should be used is the new one of $95,000. After an unsuccessful appeal to the District Court, the Court of Appeals was called upon to answer one question: for the purposes of avoiding a lien under Section 522, when should the debtors’ interest in the real estate be determined?

The Court looked to Section 1306 and what constitutes property of the estate:

Property of the estate includes, in addition to the property specified in section 541…. all property…that the debtor acquires after the commencement of the case but before the case is closed.

Section 541(a)(1) identifies property in the estate as including “all legal or equitable interests of the debtor in property at the commencement of the case.” And Section 541(a)(7) lists property of the estate as including “[a]ny interest in property that the estate acquires after the commencement of the case.” Based on that, the Court held that the value of the real estate should be determined at the fair market value at the time it was recorded in December 2005. The lien could not be avoided.

To get access to the opinion, and to hear the oral arguments of the case, Click Here.

Tags: Bankruptcy, Chapter 13, Homes, homesteads and real estate
Posted in Bankruptcy, Chapter 13 | No Comments »