Interestingly, even with the economy in such poor shape, it looks like local bankruptcy filings are staying flat or somewhat down from last year. This is only for the first quarter of the year so it is difficult to know exactly what these statistics mean for the rest of the year, but from all of the bankruptcy attorneys I talk to, it sounds like the number of potential filers is down slightly. This is good new for consumers, because they won’t have to choose between waiting months to get in to see an experienced bankruptcy attorney and choosing a less-experienced bankruptcy attorney who is available now. A couple of years ago, it might have taken a month to get in to see some of the more experienced consumer bankruptcy attorneys in Fresno. The wait should be much less now.
Archive for the ‘Chapter 13’ Category
Fresno Bankruptcy Filings Are Flat or Trending Down Slightly
Monday, June 27th, 2011Three of Biggest Mortgage Servicers Get Failing HAMP Grades
Friday, June 10th, 2011The U.S. Treasury Department recently released a report on the Home Affordable Modification Program (HAMP). One of its findings was that Bank of America, JPMorgan Chase and Wells Fargo all needed “substantial” improvement. The Treasury Department was so displeased by the unsatisfactory performance that it is withholding all future financial incentives from these three titans of the servicing world until they make specific improvements. And if they don’t fix problems in a reasonable time, there may be permanent reductions in financial incentives. The problem is that the incentives are so relatively minor that it is little incentive for these big servicers. It will be interesting to see what comes of this report.
For clients that tell me about loan modification attempts, it is an incredibly mixed bag right now. If you hit everything right and get the right person handling your modification, it might go through. But a surprising number of clients with viable modifications have been declined by these servicers, sometimes with no rationale basis for the decision.
What really needs to happen is that we need a vehicle to modify home loans in Chapter 13 bankruptcy. Lenders are leery of such a solution because sometimes it is easier for a lender to just foreclose on a property and get the money out now, rather than have the money tied up over a long term at today’s low interest rates. But there has to be a Chapter 13 home loan modification proposal that would make sense. For example, what if valuation for purposes of such a loan modification was determined to be some multiple more (e.g., 15-25%) than the creditor would receive if the loan was foreclosed upon. Then, loans could be valued at, say, 120% of what the lender would receive if the property was foreclosed upon.
Let’s use a hypothetical: Borrowers owe $450,000 on a property. The payments are $3,000/mo. and borrowers are six months behind. The lender would receive $200,000 for that property through a foreclosure. (Non-distressed, it might sell on the open market for $235,000.) The bankruptcy woud value it at $240,000 and it would be reamortized over 30 years at six percent interest. That would create a payment of $1,438.92, which the borrowers could afford.
The next problem that is brought up is that everyone would do it. While I think it is unlikely that everyone would do it, the way to solve that problem is to tie the proposed modification to some kind of income metric. For example, the rule could be that you could not reduce the payment below 31% of the borrowers gross monthly income or 41% of the borrowers take-home monthly income after certain payroll deductions, whichever was less. I really don’t think this would be a problem, however, because all of the amount that is determined to be unsecured then goes over to the unsecured side of the ledger and if the debtor has a large income, they will have to pay a substantial portion of the unsecured debt.
The Automatic Stay, a.k.a., You Can Answer Your Phone Again
Wednesday, June 8th, 2011One of the main reasons that people file bankruptcy is something called the “automatic stay.” The automatic stay is called that because that is what it is: (1) it goes into effect automatically upon the filing of a bankruptcy petition and (2) it operates as a “stay,” or stops, efforts to collect against a debtor. The automatic stay is quite different from most other areas of law. In most areas of law, if you want a stay or an injunction, you have to make a significant showing as to why the stay is necessary. Not in bankruptcy. In bankruptcy, you just file the case and the stay goes into effect.
So what happens if a creditor violates the automatic stay? Let’s say a creditor disregards the automatic stay and continues a lawsuit against a debtor after the bankruptcy is filed. What penalties are there? A willful disregard of the automatic stay can result in the creditor being liable for actual damages, attorneys fees, and in appropriate cases, punitive damages. So, creditors have good reason to be very cautious about violating the automatic stay.
Unfortunately, they are not always as cautious as they should be. When that happens, it is important to have an attorney that is willing to sue the creditor for violation of the automatic stay. It is also important to remember that automatic stay violations have to be proven by evidence. So, if you think a creditor is violating the automatic stay, you should start keeping track of each detail regarding that violation. This would include (1) writing down details regarding each phone contact, (2) keeping any written communication, including the envelope used to send the communication, and (3) documenting any damages that occur as a result of the violation.
A Bankruptcy Doesn’t Get Rid of Your House
Monday, February 28th, 2011I frequently talk with people who think that by filing a bankruptcy, they can rid themselves of a house they don’t want anymore. Unfortunately, this is not the case.
In the modern housing crisis, there are many people who do not want to keep an over-encumbered house. They may have lost a job and know they will never be able to pay for it, or their efforts to obtain a loan modification may have been frustrating and ineffectual, and they are just tired of fighting to keep the house. So, the logical next question is, how can I give my house back to the bank? The short answer is, you can’t . . . unless the bank agrees.
(Note: I am using the term bank here loosely. Yes, I know that almost all residential loans are handled by a servicer, not by the holder of the note.)
Often, these people need to file a bankruptcy anyway and they think that the bankruptcy can help them deal with the house they want to dump. Here comes the confusing part: they are partly right and partly wrong. The bankruptcy discharges the personal liability on the debt, i.e., the bank could not sue you and get a money judgment against you personally. However, the bankruptcy does not cause the property to be transferred from you to the bank. And this can be a big problem for several reasons.
As long as the property is in your name, you are responsible for everything that happens on the property. So, you have to keep the insurance and property taxes current, and you have to make sure that the property complies with all codes and ordinances, e.g., making sure the grass is watered. Also, if your home has a property owners’ association, you are liable for any post-petition fees or assessments. This may be why it seems like banks are slower to foreclose on houses with property owners’ associations.
So, what has to happen to have the property transferred out of your name? There are several ways that could happen when the property is “under water”:
1. Deed in lieu of foreclosure. Sometimes, the bank is willing to take a deed in lieu of foreclosure. Essentially, the borrower signs a deed to the bank. Unfortunately, the bank usually requires a laundry list of guarantees to do this, and even then, few banks will actually approve these. Banks want to get the property sold and quickly out of the bank’s name, not keep it around in the bank’s name.
2. Short sale. A short sale means selling your property for less than the bank is owed. To do that, the bank has to agree. Getting bank approval can take a long time and they may not agree to it. There are also issues with potential tax consequences from doing a short sale. Once escrow closes, the property is no longer in the borrower’s name.
3. Trustee’s Sale a.k.a. Foreclosure. The foreclosure process takes a minimum of 110 days, but usually longer. First, the bank records and sends out a Notice of Default, giving the borrower 90 days to bring the loan current. If the loan is not brought current, the bank can then give 20 days notice of a trustee’s sale. At the trustee’s sale, the property is equitably transferred to the new owner, but it is not finalized until a trustee’s deed is recorded. Usually, the trustee’s sale deed is recorded within 15 days of the trustee’s sale. It is probably not safe to consider the property to have left the borrowers name until the trustee’s deed is recorded.
In bankruptcy, we might say that the “debtor intends to surrender the house.” But all that means is that the debtor will not be contesting a foreclosure. The bank still has to complete the foreclosure for the property to be transferred out of the debtor’s name. And sometimes, it takes a long time.
I have had many clients who have told me that the bank took over 2 years to foreclose on a home. Consequently, I usually suggest that clients not move out of a home until they know the lender will foreclose. That way, the client can make sure the property is kept up and taken care of while waiting for the lender to foreclose. Of course, the client won’t have to pay any rent during that time period and can save up for moving costs.
Will Your Attorney Be With You When You Go To Bankrutpcy Court?
Wednesday, December 8th, 2010When you hire a bankruptcy lawyer, you probably assume that lawyer or another attorney from that lawyer’s firm will be with you when you “go to court.” (The technical name for the court hearing is the “341 meeting of creditors.”) But depending on what lawyer you hire, you might be wrong. A few clues that you should look for to see if your lawyer will actually be with you all the way through the case:
- Is your lawyer physically located in the same area where the courthouse is located? If not, the lawyer will probably try to find a local attorney who knows little or nothing about your case to stand in for them.
- Have you ever met face-to-face with your lawyer? If you never have a face-to-face meeting with your lawyer, that is an indication that the lawyer may not be planning to go to court with you.
- Does your lawyer do everything by a website, e-mail or phone? This is another indication that the lawyer might not be in the area and therefore, might not personally attend your hearing.
- Hire a local lawyer. If you hire a local lawyer, there is a much better chance that the lawyer will appear with you in court.
- Lastly, you should ask your lawyer if they will be personally present with you at the 341 meeting. Now, there are occasional scheduling issues which might prevent a lawyer from personally appearing at the 341. What you want to avoid is the situation where a lawyer regularly relies on outside counsel to handle court appearances.
And there is also a significant risk to the lawyers who routinely hire outside counsel to attend bankruptcy court hearings. In a recent case out of Michigan, the court examined one of these arrangements. The bankruptcy lawyer did not appear with the client at the court hearing (which was apparently the lawyer’s regular practice) and paid a local attorney (not a member of the bankruptcy lawyer’s firm) $100 to attend instead. This payment was not disclosed to the court. The court ordered that the bankruptcy lawyer refund $500 to the client for substandard legal representation and as a sanction for failing to make the full disclosures required by bankruptcy law. The court described the problem as follows:
More important than this lapse, however, is the fact that [bankruptcy lawyer] left the Debtor to attend her first meeting of creditors, the only hearing the Debtor was required to attend throughout the course of her case, with an attorney she did not know or retain. Although the Debtor offered no specific criticism of [appearance attorney], the court infers she was not pleased with the last-minute substitution, and that she believed she did not get the full benefit of her bargain with [bankruptcy lawyer]. Had the Debtor wanted to retain [appearance attorney], she could have done so; instead, she chose [bankruptcy lawyer].
So, to sum up, there are many quality bankruptcy attorneys in this local area. Choose one of them over someone out of the area. And feel free to ask your attorney if they or someone from their firm will be personally appearing with you at the meeting of creditors.
Fresno & Clovis Home Values Levelling
Thursday, June 10th, 2010Fresno and Clovis home values have been somewhat level for about the last year, although Fresno home values did decrease slightly during that time.
This chart from Zillow.com shows the average home price in Fresno for the last five years.
And this chart shows the average home price in Clovis for the last five years.
This is interesting for bankruptcy professionals for a few reasons:
1. If home values are levelling off, people who are buying homes right now will not be below water in 5 years and are less likely to get into troublesome loans (and there aren’t many out there anyway).
2. In the last 2 years, we have seen a lot of completely unsecured second mortgages. If home values start going back up, some of those unsecured mortgages might be start being partially secured. If that is the case, debtors would not be able to discharge the second mortgages in Chapter 13 bankruptcy.
I like to look at median household income as a basis for figuring out what home values should be. Fresno median household income is $32,236. Clovis median household income is $42,283. Generally, you don’t want to see home values at an amount that would require payments higher than 31% of the borrowers gross income. This would put the monthly mortgage payment for a Fresno borrower at $832.76 per month and for Clovis, $1,092.31 per month. Assuming 6% interest and 30 year term, this would put the maximum median loan amount for Fresno borrowers at $138,897.94 and for Clovis borrowers it would be $182,188.29. Current Fresno home values are $139,700 and for Clovis it is $211,100. According to the income analysis, that means Fresno real estate should be nearing the bottom of its free-fall and Clovis may have a bit farther to fall. We’ll see if that is the way it plays out, because there are a lot of other factors that influence real estate values. It is just my opinion that income should be the main one.
SCOTUS Opts for Reality
Tuesday, June 8th, 2010When confronted with the question of whether Congress meant you apply the means test mechanically to determine how much a debtor can pay in Chapter 13, even when that would lead to impossible results, the Supreme Court sided with reality, finding that “projected disposable income” is a “forward-looking” term and is not equivalent to “disposable income.” The case is Hamilton v. Lanning. This is a significant landscape shift for those of us in the Ninth Circuit, because the Kagenveama case reached the opposite conclusion finding that disposable income (derived mechanically from the means test) was equivalent to “projected disposable income” (the amount that has to be paid to unsecured creditors in a Chapter 13 bankruptcy case).
In Lanning, the Supreme Court found that the means test (and disposable income) is a starting point for determining how much debtors have to pay in Chapter 13. But, however, if there are known or virtually certain changes to a Debtor’s income or expenses, the court has discretion to take that into account in figuring the amount that can be paid to unsecured creditors. Many of the bankruptcy cases that have gone up to the Ninth Circuit since Kagenveama have been attempts to reconcile the mechanical approach adopted by the Ninth Circuit with the reality of bankruptcy practice. Many of those cases are not quite so important after Lanning, because reality will now be determined as of the confirmation of the plan, not as of the date of filing, and if there are known changes as of confirmation, the court will take those changes into account at the time of confirmation.
As a side note, Justice Scalia is the only justice who dissented. In his view, disposable income is equivalent to projected disposable income. While Justice Scalia may have made the most intellectual defensible position, I think the decision reached by the Court will work out best in the long run for all parties to Chapter 13 cases. Bankruptcy judges need discretion to consider significant changes in each case and they now have that with the Lanning decision.
City of Fresno to Layoff 225 City Employees
Monday, May 3rd, 2010The City of Fresno announced today that the City has to layoff 225 employees. This is going to be a huge blow to a lot of people, but it is almost certainly necessary due to the current economic climate. Cities get the bulk of their revenue from two sources: (1) property taxes and (2) sales taxes. When property values decrease and the economy is stagnating (and sales are, therefore, lower) both of these revenue sources shrink. During the past two years, we have had an almost unprecedented decline in property values. Fortunately, the run-up in property values was limited by Proposition 13, so only non-residential property and homes that had been sold had the inflated values. With that being said, the financial hit has been pretty drastic. At least Fresno is taking bold and decisive action, unlike Los Angeles, which seems more bent on taking political shots than actually solving the problem.
I anticipate that many of these laid off employees will have a difficult time finding re-employment, at least at their previous income level. Many will likely need to file bankruptcy, whether it be to get rid of credit card debt or to save a home (and maybe strip a second mortgage) in Chapter 13. Hopefully, those former employees, like the City itself, will be able to reinvent themselves and come out of the current crisis in a better financial position than they are in today.
Senate Considers Allowing Small Businesses to File Chapter 12
Wednesday, April 14th, 2010The Senate Judiciary Committee held a hearing entitled Could Bankruptcy Reform Help Preserve Small Business Jobs on March 17, 2010. The ideas presented at the hearing included a proposal to add a new category of entity that could file Chapter 12 (formerly reserved for family farmers and fisherman)–”small business enterprises.”
A small business enterprise would be defined as a small business with $10 million or less of debt where at least 50% of the debt had been incurred for business purposes. An exhaustive analysis of the proposal and proposed bill langauge can be found at http://judiciary.senate.gov/pdf/3-17-10%20Small%20Report.pdf.
This kind of proposal makes a great deal of sense for many reasons. First, it is rare indeed to find a Chapter 11 case that can be completed for less than $30,000 in attorney fees. A Chapter 12 case, on the other hand, might be able to be done for half of that on a fairly regular basis. Second, Chapter 13 would also be an inexpensive route, but the debt limits for Chapter 13 are so low that many small businesses do not qualify and Chapter 13 only applies to individuals, not LLC’s or corporations. Consequently, many small businesses that are incorporated (even those under the debt limits) do not qualify to file Chapter 13.
Opening up Chapter 12 like this makes a great deal of sense and the Senate should be encouraged to take up such a bill and to pass it.
New York Bankruptcy Court: Debtors and Chapter 13 Trustees Should Object to Stale Proofs of Claim
Friday, May 22nd, 2009One issue that frequently comes up in bankruptcy cases is the filing of “stale” (i.e., beyond the statute of limitations) claims. What happens is that debt buyers, such as LVNV, purchase a large volume of debt at pennies on the dollar. When a debtor files a Chapter 13 bankruptcy, they attempt to collect on that debt by filing a proof of claim. The debt, however, may be 10 years old and the debt collector could not have pursued the claim in state court. Confronting this issue, a bankruptcy court in the Southern District of New York had the following to say:
C. Debtors and Their Counsel, If They Are Represented, and the Chapter 13 Trustee Should Scrutinize and Object to Stale Claims
In most circumstances it would be enough for the Court to stop with its ruling sustaining the objections and expunging the claims. But these claims and objections highlight a larger problem for this and other bankruptcy courts across the country. Two of the three claims at issue here were filed by LVNV, one of numerous bulk-claims purchasers that regularly file stale claims in bankruptcy courts. As stated in In re Andrews, 394 B.R. at 387, “[t]he phenomena of bulk debt purchasing has proliferated and the uncontrolled practice of filing claims with minimal or no review is a new development that presents a challenge for the bankruptcy system.”
While agreeing that the practice of bulk-claims purchasers filing stale claims is a serious problem, the court rejected the debtor’s argument that the conduct was sanctionable, as had other courts before it. Id. (citing cases). As pointed out in Andrews:
Allowing claims based on unchallenged proofs of claim is efficient
and economical in most cases. However, requiring debtors to file
objections and to raise affirmative defenses to large numbers of stale
claims filed by assignees based on a business model rather than after
careful review and evaluation is both burdensome and expensive.Id. The solution suggested by the court was rules amendments:
The court will ask the Advisory Committee on Bankruptcy Rules
to consider whether changes should be made to the Federal Rules of
Bankruptcy Procedure and to the Official Bankruptcy Forms to alleviate
the significant burden on individual debtors and on the bankruptcy system
caused by the large number of undocumented, stale claims being filed by
the bulk purchasers of charged-off debts. . . . Finally, because the federal
rule-making process typically takes no less than three years to produce a
new rule, this issue will also be referred, with the consent of the two other
judges of this district, to the Local Rules Committee . . . .Id. at 389.
Unless and until local or national rules changes are made, it is incumbent on debtors, their counsel, and the Chapter 13 Trustee, carefully to scrutinize proofs of claims to identify and object, if appropriate, to stale claims. The Chapter 13 Trustee clearly has standing under Bankruptcy Code § 1302(b)(3) to object to stale claims. See Overbaugh v. Household Bank N.A. (In re Overbaugh), 559 F.3d 125, 129 (2d Cir. 2009). Particularly in cases with pro se debtors, the Chapter 13 Trustee plays a crucial role and has an important responsibility in assuring that only proper claims are allowed and paid from the debtor’s estate.
In re Hess, — B.R. —-, 2009 WL 1285296 (Bkrtcy.S.D.N.Y. May 06, 2009).