Posts Tagged ‘Chapter 13’

Mercedes Rule

A rather interesting decision has come out of the Bankruptcy Court for the Northern District of Texas at Dallas.  The decision is only 4 pages, but in addition to quoting Janis Joplin, it speaks to something that debtors need to hear, that people thinking about bankruptcy need to hear, and that attorneys practicing in bankruptcy court sometimes need to be reminded of.

While the decision follows this blog, I’ve filled in the lines a bit by looking at the public records and bringing in some additional facts.

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Yet Another Reason to Avoid the Rip-Off of Debt Settlement

I was recently retained by a client who – like many people struggling nowadays – tried to tackle their mounting financial problems by going to a debt settlement company.  I’ve said it once, and I’ll say it again: debt settlement companies are a rip-off.  The proof is in how empty my client’s wallet is now, and where my client is now.

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Debt: The Prices You Pay

Some espouse the belief that if you’re up to your eyeballs in debt, it’s better to eat beans and rice for weeks, months and years until the debt is paid.  I won’t mention names.  This isn’t about them.  While it’s pretty indefensible to live a lifestyle you cannot afford at the expense of creditors, it’s even worse to lead a lifestyle that can be downright counterproductive and harmful when you’re trying to pay your creditors.  There’s being “super frugal” and then there is being “stupid frugal.” So today, I want to cover a few things I’ve noticed people doing while they are trying to pay down their debt.  I sharing my observations, but I think it’s good if you consider it food for thought.

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Do It Yourself Chapter 13: The Road To Failure

Through Twitter, I came across this article “How to File Chapter 13 Bankruptcy Without a Lawyer.” Since I wrote a book about chapter 13 – where I emphasize the need for competent representation – and, since I am also a lawyer, the title alone intrigued me.  So I clicked and read the article.  Then, I got steamed because not only was the article excruciatingly inaccurate, in some instances it was flat out wrong.  So, I’ve copied and pasted each of the “9 Steps,” and offered my response and I grade each answer.

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Cheap Becomes Expensive

Like many attorneys, I get calls from prospective clients asking me what my fee is for a bankruptcy filing.  It’s not a particularly difficult question to answer – in theory.  But at the same time, it is.  Generally, I know that if their concern is price, then who they retain as their attorney is not all that important to them.  But I also get calls from prospective clients who have or had another (and less expensive) attorney who now is not performing at what they believe is an acceptable level.  Perhaps they aren’t returning calls.  Perhaps they are not giving straight answers to honest questions.  Or perhaps better said, the cheap attorney doesn’t know what the hell they are doing.  The desire to go cheap has now turned into something expensive. (more…)

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Things I Won’t Do

Among the many reasons why I blog on this site is to give people a perspective of me that will help them decide whether I am the right attorney for them.  Sometimes the things I write about concern my legal expertise in bankruptcy, and other times, I blog about my observations about bankruptcy law in this peculiar economic climate.  And occasionally, I can write about real events that may, or may not, help readers understand why sort of an attorney they are getting if they pick up the phone and call.

This week, I received a call from a homeowner from an affluent Massachusetts suburb.  This homeowner was a real estate professional – and I probably do not need to mention that real estate professionals of all shapes and sizes are taking a beating in this economy (and have been for some time).  Like many in that industry, the income was sporadic, and at times nonexistent.  Other than commissions from closings, there is no other source of income.  The homeowner has not been gainfully employed with regular income since 2005.

The home mortgage has not been paid for almost a year and a foreclosure auction has been scheduled sometime next month.  Credit cards have not been paid for at least 18 months.  The homeowner has – like many – been consistently robbing Peter to pay Paul.

There is no equity in the property; the house is under water.  The house also has an estimate market value of more than $575,000.

As the mortgage has not been paid, the only bankruptcy alternative for this debtor would be a chapter 13 (the homeowners debt did not exceed the Section 109(e) cap).  However, for a chapter 13 to work, the homeowner needs income.  And a chapter 13 is not a quick, cheap and easy process – unlike most chapter 7 cases.  We could also explore requesting a modification of the mortgage, but a back-up plan – i.e., a chapter 13 filing – would be prudent if the modification was not approved, or if the lender refused to reschedule the auction pending the modification request.

I then asked an important question: “What do you have for cash on hand?  How much money do you have now?”

The question is important because the answer tells me much.  Since the mortgage has not been paid, I assume – or hope – that a homeowner has put some money aside to bring the mortgage current.  In other words, they have taken some money as a “housing payment” and segregated it – either in a separate account, or in the same account with the discipline to not spend it.  I also ask because it is important for me to gauge whether the homeowner will be able to afford chapter13 – not only in terms of fees and costs, but in terms of regular monthly payments to creditors and the chapter 13 trustee that in most cases, must begin shortly after the case is filed.

The debtor responded: about “$1,100.” Without missing a beat, the caller then offered assurances that money would come in the future, and that the homeowner could make it work.  I declined representation.  Here’s why.

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Property Insurance and Chapter 13

If you’re thinking about Chapter 13, it’s important for you to know that your real property (real estate) must be insured.  Increasingly, I am finding that homeowners are allowing their policies to lapse.  This poses a problem – especially for debtors who wait until the last minute to file.

If real estate is not insured, this will pose problems for any debtor hoping to reap the benefits of Chapter 13.  It’s also important to know that not only is insurance required, but a Massachusetts Local Bankruptcy Court rule mandates that evidence of insurance be filed with the Bankruptcy Court along with the petition.  If it is not filed, the Court can dismiss the case.

Sometimes, the mortgage payment also includes an amount that’s held in escrow for taxes and insurance.  When a homeowner stops making monthly mortgage payments, the lender may – or may not – continue paying taxes and insurance.  If the lender doesn’t pay the insurance, the lender will obtain Force Place insurance.  This policy protects the lender.  It does not protect the homeowner, the homeowner’s family, or the contents of the home and it is not acceptable for Chapter 13 purposes.

If you’re contemplating a Chapter 13 – check on the homeowner’s insurance. Be sure it is current and up to date.  Be sure that the premiums are paid.  Be sure that any special riders that you want are included, such as special protections for jewelry, electronics, and other items.  Keep those documents handy and in a safe place – because you will need them if you’re thinking about filing Chapter 13.  The time to do this is now, not on the eve of a foreclosure auction – which will only cause delay, increase anxiety and perhaps even be more expensive.

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‘20 Months Too Late’: Let’s Start Rethinking Mortgage Modifications in Chapter 13

I’ve been thinking about yesterday’s blog entry.  When I first read the First Circuit decision, I wondered why the case was brought.  Here was a homeowner arguing that a mere technical violation of TILA would enable him to rescind a mortgage that he signed 20 months prior.   Based on the facts cited by the Court, it seemed a bit disingenuous.  But then, as I was thinking about it more, it occurred to me that what did not sit well with me was not what I knew from the court decision.  It was what I didn’t know.  I knew nothing about the homeowner.

I don’t know if the homeowner knew exactly what he was doing when he was at the closing.  I don’t know if the homeowner was honest when he was applying for the loan, but knew that he could not afford the mortgage unless he was able to refinance.  I don’t know if he was banking on rates going down, his property value going up, or both.

I don’t know if the mortgage broker lied, if the notary was drunk, or the closing agent fled to Columbia after the closing.  I don’t know if the homeowner was warned every step of the way, but heard and saw only what they wanted to.

I don’t know if the homeowner simply misgauged what the future might hold.  I don’t know if he was motivated by greed.  I don’t know if he was motivated by someone else’s greed, like family member’s, fueled further by his reluctance or his refusal to urge restraint.

I don’t know if his inability to afford the payments is based on what they could have controlled, but for whatever reason, did not.  I don’t know if he had the ability, the choice or the wherewithal to do everything he could to avoid heading into the financial minefield he now finds himself in.

I don’t know if it was a father trying to refinance their home because of a child – a new child to be born, an older child to be schooled or a sick child to be healed. I don’t know what was going through his mind.  I don’t know what was going through his heart.

I also don’t know if the homeowner himself or his spouse was ill.  Assuming they were, I don’t know if he was ill because of something he couldn’t control, or if his quart-of-gin-and-two-pack-a-day lifestyle was finally catching up with him.

I don’t know if the homeowner was employed, was under employed or was unemployed.  I don’t know if the homeowner one day went to work only to find the office doors locked or if he came home to find his spouse gone.

I don’t know if the homeowner refinanced to pay for a new roof, new wiring or a new septic system.  I don’t know if it was for a man-cave for him or an addition for his ailing mother.

Nor do I know if the homeowner was a scoundrel.  I don’t know if he overestimated his income to such a degree that it reflected a hope for a better, brighter and richer future than any rational person would think possible.  I don’t know if this is just one more thing he had already assumed he was going to get away with.

Regardless of the one or the combination of any of the above things that I do not know, I do know that the homeowner cannot go to bankruptcy court to modify the loan secured by the mortgage on their principal residence.  If you simple replace the words “I don’t know” with “What if you knew that…?” in each of the above situations or with a combination of any, and was able to consider what you did know, it would not change anything because the homeowner still could not modify the loan secured by the mortgage on their principal residence in bankruptcy.  But more simply stated: for the homeowner before the First Circuit Court of Appeals seeking to change the terms of a promise he made 20 months prior, I don’t know the reasons why.

Section 1322(b)(2) of the Bankruptcy Code of the United States won’t allow any homeowner in chapter 13 to seek modification of a loan secured by their principal residence regardless of the reason.  Congress has determined that the reason for the requested modification is irrelevant.  They have determined that no one, no judge, and indeed, not even me or my readers need ask why the modification is needed in chapter 13.  From the perspective of Congress (and frankly that of the Mortgage Bankers Association and their ilk), “why” is irrelevant.  (Actually, I’m not entirely correct on that point.  Lenders can choose to voluntarily modify the mortgages on a debtor’s principal residence.  They alone can consider the reasons “why.”)

Our country is embroiled in an economic crisis of historic proportions.  It’s bad out there, and for many may get worse.  If I’m eventually (i.e., within several months) proven wrong then you can all paint me crazy and I’ll find myself my own “Plan B.”  Until then, let’s all help each other find answers to the questions that start with “What if you did know…?”  And let’s start a meaningful discussion that may result with an amended Section 1322(b)(2) that will let homeowners prove in our forum of last resort (the Bankruptcy Court) the desperate financial situations they find themselves in, and will let judges consider and weigh the reasons why they should get a second chance to keep their family home.  If for no other reason because it defies logic that the same standards be applied to someone who has been dealt a bad hand versus someone who is gaming the system.

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Wondering What a Bankruptcy Attorney Really Does?

Thursday I was in Bankruptcy Court waiting for my client’s case to be called.  Before the judge took the bench, a gentleman sat behind me and tapped me on the shoulder.

“You a bankruptcy lawyer?” he asked.

“I am.”

“How easy is it for me to convert my case from Chapter 13 to Chapter 7?”

I asked if he had an attorney, and he replied that he did not.  He was representing himself (which is not a good idea in Chapter 13, by the way… I’ll talk about that another day).

I told him that the Bankruptcy Court had a Pro Se Law Clerk and that he should direct his questions to the law clerk, who can then either answer the question or direct him to a resource that can.

“Oh, I see,” he replied.  “You want to get paid, huh?.”

Imagine if you were walking down the street and you saw a person who you knew to be a dentist.  Would you go up to him or her, peel back your lips to show a molar and ask “excuse me, but do know how easy it would be to but a cap on this?  Or a porcelain veneer?”  No respectable dentist would give you an answer.  In fact, some might flee.  A disreputable dentist might say “it will be very easy, here’s my card, let’s make an appointment, and be sure to bring your insurance card or check book.”

As I said, while I sort of felt a bit insulted, that feeling was quickly quelled with the realization that this pro se debtor had no clue what it was I did, and why I could not answer his question.  So I told him:

“Actually, the reason why I cannot answer your question is because I do not know anything about your case, or about your circumstances.  I cannot begin to think about the your question and give you any answer you can rely on unless I do that.  Right now, I cannot.  The Pro Se Law Clerk however, can.”

The debtor thanked me, and left the courtroom. I do hope that he paid a visit to the Pro Se Law Clerk, and I do hope he got some better direction than I could have given him.

This all got me thinking: there are some people who believe that you don’t need a bankruptcy lawyer to get through the process.  There are also some people who believe that lawyers are only out to get paid, and don’t do anything but fill out forms and, on occasion, dress nicely.  There’s an assumption that I am a walking fount of information, and the only thing preventing me from sharing it is getting paid.

All of those assumptions make me feel dirty.

All of those assumptions are also completely unfounded.

There’s no way I could have answered this debtor’s question accurately.  I could have said “when the judge takes the bench, ask her to convert your case.”  That answer would have been the equivalent of the dentist saying “sure, make sure you use good glue and don’t drink hot liquids for 24 hours.”

But I had not reviewed the petition and schedules.  I don’t know what the exemptions are, and what issues might arise in a 7 that might not otherwise arise in 13.  I don’t know why the debtor is changing course and whether that might open up a whole host of issues.  I also don’t know whether the judge – who I bet knows the history of the case and why it’s on the docket that day – doesn’t have some assumptions or questions about the case.  In other words, I don’t know a lot.  I do know the law.

Yet merely knowing the law is not enough for me to do my job.  A good lawyer takes the facts of the client’s case, applies it to the law, and then proceeds while mindful of the client’s goals.  A good lawyer is not merely a resource of legal information available to answer questions at the drop of a hat knowing that people will rely on those answer and  make important decisions with significant legal consequences.  My job requires thought and analysis.

And on a good day, that actually is what I get paid for.  Keep this in mind if you’re thinking about filing bankruptcy with or without a bankruptcy attorney.

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The Handwriting on the Wall

Over the last two years or so, I’ve seen a particularly troubling trend with homeowners seeking bankruptcy protection.  It is making bankruptcies unnecessarily complicated and expensive.  It also puts them at a greater risk of failing – at least once (which at the very least, makes it more expensive).  It’s the trend for them to wait until the very last minute to actually consider bankruptcy as an option.  This is a bad, bad idea.

Years ago, I would hear from callers who had oppressive credit card debt, medical bills and had experienced some sort of major life event: job loss, medical crisis, death in the family, or divorce.  That debt was getting out of control, but their real estate was usually current….or perhaps was approaching default but not in foreclosure.  They could see the handwriting on the wall; they could see the storm clouds on the horizon.  They needed to prepare for what they thought was inevitable. Nowadays, it’s usually quite different.

Now I typically hear from callers who are facing foreclosure within 2-3 weeks, and if they (and I) are lucky, they have more than a month before the scheduled auction.  The reasons are essentially the same: many are losing jobs, wages and overtime is getting frozen or eliminated, mortgage payments and other debts have creeped up.  There is also the occasional debtor with a health care issue or some other extraordinary set of circumstances. The bankruptcy filing can delay the sale, and give the debtor an opportunity to reorganize finances or even secure a loan modification.  But think about this – if you Google “GM Bankruptcy” you will see that pundits were talking about GM’s bankruptcy last fall (look under archives).  I am willing to bet GM was at least thinking about it was well.  I’m also willing to venture that GM was preparing for the possibility of having to file bankruptcy.  For homeowners, there’s no good excuse to be waiting until the auction has been scheduled and the notice has been published to be at least considering and planning a bankruptcy filing.  Think of it as Plan B.

Unfortunately, to homeowners who are attempting to secure a modification of their loan, I have some bad news.  Lenders are not all that organized themselves: it’s not altogether uncommon for the foreclosure department who is handling the auction not to be speaking to the loss mitigation department who is handling the modification and vice-versa.  Perhaps this is what happens when we let companies get too big to fail.  I realize that this lack of communication protocol may seem strange if not completely asinine, but this has been my experience, and my colleagues who represent lenders have shared their frustrations with me on this issue as well.  Thus, your request for modification will not necessarily stall a foreclosure.

Of course, filing a properly prepared chapter 13 bankruptcy petition takes quite a bit of work.  And documents.  And information.  And good counsel.  Tax returns need to be filed.  Pay stubs or payment advices need to be gathered.  Property needs to be valued.  The Bankruptcy Code requires that documents be filed within a certain period of time after the case is filed. A typical bankruptcy petition – along with a chapter 13 plan – can exceed well over 45 pages.  And chapter 13 plans require some thought, strategy and expertise.

If a debtor seeks bankruptcy protection but does not have this information properly prepared when the case needs to be filed, an Order to Update will enter.  The Bankruptcy Court will order that the debtor file all documents by a date certain: anywhere from 3-14 days.  Need an extension?  You might get one.  You also might not.

I am increasingly finding that debtors simply do not have the information needed within the 3-14 day period.  Sometimes I can get an extension.  Sometimes I cannot.  Sometimes the pro se debtor cannot get one and that is the first time they pick up the phone and speak to a bankruptcy attorney.  The delay, the motions, and frankly, the hunt for this information under the pressure of a strict time deadline only adds to the expense and increases the risk for error.  It also does nothing to quell the anxiety of what is undeniably a stressful situation.  Sadly, this is all fueled by debtors who are considering bankruptcy only within weeks, days or in worse case scenarios hours before a foreclosure auction is scheduled to move forward.  And in many cases, their delays prove costly, and may also lead to their case imploding.

If you are a homeowner who is serious about saving their home and attempting to keep what you have worked hard for, then you must consider bankruptcy as an option at the earliest opportunity.  This way, you can start gathering information and be ready to go if the mortgage modification doesn’t come through.

Of course, there are others out there who I know are telling folks not to think about bankruptcy.  There are others who mislead with claims that bankruptcy protection is harder to get now.  If you rule it out the bankruptcy option without getting the facts, speaking with a bankruptcy attorney, and understanding process and what will be expected of you in that process, I promise you this: you will regret it.

Anyone that tells you differently is selling you something.

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