Chapter 13 can save you from Foreclosure, short of a discharge

March 23rd, 2008, 10:13 am

In today’s poor economy, where home foreclosures seem to be commonplace, and where debtors have few options to stop a foreclosure, when the bank does not want to negotiate with the debtor, a chapter 13 filing may be the only way out. The bankruptcy code has set a time frame which a debtor can not file and obtain a discharge in a chapter 13 case, if they have already filed another chapter. When a debtor is forced to file a chapter 13, in order to protect their home, many trustees will simply file a motion to dismiss the case without taking into consideration the strict language of the code. The code does not in fact prohibit a debtor from filing a chapter 13, even if they are still in another 13 or 7, but rather, prohibits a discharge. As such, many trustees do not consider that a debtor may be seeking the protection of certain chapter 13 benefits outside of a discharge.

There is some, although limited case law on point, which would protected the homeowner seeking to save their home, by using the automatic stay, at least for a period of five years. In a 2008 case, the trustee contended that, because debtors were ineligible for discharges under 11 U.S.C.S. § 1328(f), they should not be allowed to file a Chapter 13 petition. The court held that a debtor was not precluded from filing in good faith a new Chapter 13 bankruptcy case even though he was ineligible for a discharge under § 1328(f). … Whether an individual may be a debtor under Chapter 13 is established under 11 U.S.C.S. § 109(e) 11 U.S.C.S. § 1328(f) never mentions the word “filing,” speaks only of “discharge,” and does not purport to limit the eligibility provisions of 11 U.S.C.S. § 109(e). Therefore, the plain language of 11 U.S.C.S. § 1328(f) does not prohibit a debtor who is ineligible for a discharge from filing a Chapter 13 petition. Branigan v. Bateman (In re Bateman), 515 F.3d 272 (2008). The Bateman decision further held, 11 U.S.C.S. § 1328(f) does not prevent a debtor from filing a Chapter 13 bankruptcy case even though he is ineligible for a discharge.

In Branigan v. Khan (In re Khan), Bankr. L. Rep. (CCH) P80,820 (2006), the court held a Chapter 13 debtor may not always be motivated by the availability of a discharge, so courts would be wrong to impute bad faith to a Chapter 13 petitioner simply because discharge was unavailable. Although the availability of a discharge is undoubtedly the main reason Chapter 7 cases are filed and Chapter 7 debtors view the bankruptcy discharge as “the holy grail,” a Chapter 13 debtor ineligible for a discharge may file a Chapter 13 case and utilize the tools in Chapter 13 to cure a mortgage, deal with other secured debts, or simply pay debts under a plan with the protection of the automatic stay. Thus, in many Chapter 13 cases, it is the ability to reorganize one’s financial life and pay off debts, not the ability to receive a discharge that is the debtor’s “holy grail.”. The court father held, Congress has expressly prohibited various forms of serial filings in 11 U.S.C.S. § 109(g) (no filings within 180 days of dismissal), 11 U.S.C.S. § 727(a)(8) (no Chapter 7 filing within six years of a Chapter 7 or Chapter 11 filing), and 11 U.S.C.S. § 727(a)(9) (limitation on Chapter 7 filing within six years of Chapter 12 or Chapter 13 filing). The absence of a like prohibition on serial filings of Chapter 7 and Chapter 13 petitions, combined with the evident care with which Congress fashioned these express prohibitions, convinces the Supreme Court of the United States that Congress did not intend categorically to foreclose the benefit of Chapter 13 reorganization to a debtor who previously has filed for Chapter 7 relief. … The language of 11 U.S.C.S. § 1328(f) is clear and unambiguous. It prohibits only the grant of a discharge under Chapter 13, and does not address the circumstances, set out in 11 U.S.C.S. § 109, under which a Chapter 13 bankruptcy petition may be filed.

Filed under Bankruptcy, Foreclosure, Post Petition Protection, Automatic Stay · Comments

New Chapter 7 income requirement

March 16th, 2008, 8:49 am

In order to file for a chapter 7 bankruptcy, and not have the trustee file a motion to dismiss based on a presumed abuse claim, a debtor must fall under the state’s median income level. The new median income levels have recently been released for cases filed on or after February 1, 2008 will be subject to the Census Bureau’s updated median family income data and the Administrative Expense Multipliers.
You can check out the updated figures at the U.S. Trustee’s “Means Testing” page.

Filed under Bankruptcy, Pre-petition · 1 Comment

Boston Globe Reports: AG charges mortgage broker with fraud

March 11th, 2008, 9:28 pm

Kimberly Blanton of The Boston Globe reported on March 8, 2008 that the Massachusetts attorney general filed suit yesterday against a Quincy mortgage broker, charging the firm with falsifying applications from customers to ensure they would qualify for loans.

Brokers at Lehi Mortgage Services Inc. inflated incomes and savings account balances of loan applicants to boost their qualifications, the lawsuit filed in Suffolk Superior Court said. The civil suit charges Lehi with engaging in unfair and deceptive practices and fraudulently procuring loans, and it seeks to stop the firm from making new mortgages.

The suit is based on an audit conducted by the Massachusetts Division of Banks of 100 loans the firm closed in 2006 and 2007.

That audit, conducted last fall, determined that at least one in four of the applications contained fake information, according to the lawsuit. The banking division referred the results of its audit to the attorney general’s office.

Lehi Mortgage “engaged in a widespread practice” of submitting false information about bank accounts and incomes that “it knew or should have known were inflated,” the attorney general’s suit said.

Boston lawyer Jonathon Friedmann, who represents Lehi, declined to comment. “We have not seen the suit yet,” he said.

Loan brokers are intermediaries who shop for competing mortgage offers on behalf of borrowers, and they are paid a fee by the lender who wins the business.

The lawsuit is the latest action by state regulators to crack down on subprime mortgage lenders and brokers in the wake of the foreclosure crisis, which has resulted in a near-record number of homeowners in Massachusetts losing their properties and many others facing foreclosure.

In the subprime market, many borrowers purchased homes they could not afford using these expensive loans, and regulators said many applications were falsified. The Division of Banks in recent months has closed several mortgage firms for falsifying mortgage applications or for charging extraordinarily high fees.

At Lehi Mortgage, the state said 23 applications contained inflated or fake bank account statements from Citizens Bank - some of the accounts didn’t exist at all. In three cases, a single Citizens employee in a Dorchester branch created verification of deposit forms, or VODs, with incorrect statements from the bank. Lenders often require these verification forms be submitted with a prospective borrowers’ loan application.

One of the falsified Citizens statements said Lehi’s client had $18,341 in her bank account; in fact, she had $25, the suit said.

Citizens fired the employee in August, the court document said.

Citizens spokesman Michael Jones said the bank is cooperating with the state’s investigation.

Lehi also inflated loan applicants’ incomes, the suit said. In one application, an unnamed borrower earned an annual salary of $29,858. But in two different applications for loans, his income was stated as $63,000 and $55,800.

The suit said the Division of Bank’s audit of Lehi’s activity uncovered 26 problem loan applications out of 100 audited. Lehi also has offices in Mattapan, Lynn, and Dorchester.

Filed under Debt Negotiation · 4 Comments

The cost of delaying Bankruptcy

March 11th, 2008, 9:17 pm

Cathy Moran, a California bankruptcy lawyer recently blogged at The Debt Podcast about a client who delayed filing a chapter 13 bankruptcy, and as a result, the client’s chapter 13 plan cost one of her clients over $30,000 in payments.  The issue was that the client delayed filing even when he knew he owed unsecured creditors large sums of money.  He delayed so long that the creditors obtained liens against his house, and as a result the value of the liens had to be included in his chapter 13 plan as well as his secure and priority debts.  Below read the post:

“Despite having discussed bankruptcy with me for several years, he put his head in the sand and waited until there was a wage garnishment crisis. When the dust settled, the price of his Chapter 13 plan was far higher than if he’d acted earlier.

What made the difference? My client had significant equity in his house and, though he owed taxes on account of a failed business, it was the business vendors who sued first and got judgment liens that attached to the house. So when he could pretend no longer that all would be well, he was left with liens on all the equity in his house to creditors who held dischargeable claims and the taxing authority still needed to be paid.

His Chapter 13 plan, then, had to pay the judgment lien holders and the taxes in order to emerge from bankruptcy with his house free of judgment liens and the taxes paid. Had he filed bankruptcy before the judgment liens were obtained, the plan still would have had to pay the taxes, but not, in all likelihood, the unpaid business vendors.

I honor the impulse in clients that says “I want to pay my debts” but I applaud more loudly the client who accepts that it isn’t possible, and takes the bankruptcy plunge to get that fresh start.

Filed under Bankruptcy · 1 Comment

Chapter 13 Bankruptcy affects online creditors

March 10th, 2008, 6:09 pm

When an individual or a business faces difficult financial times, it often becomes necessary to consider filing for bankruptcy protection. In order to assist in selecting the best bankruptcy option for a client, the effective advocate must be aware of and understand the advantages or disadvantages in choosing one bankruptcy selection over another. Generally speaking, bankruptcy allows people who are unable to pay all bills due to get a fresh start by jumping through various procedural obstacles. There are four kinds of bankruptcy protection provided for by statute:

  • Chapter 7: known as “straight” bankruptcy or “liquidation.” Chapter 7 requires that a debtor give up property which exceeds certain limits so that the property can be sold to pay creditors.
  • Chapter 11: known as a “reorganization.” Chapter 11 is used by businesses and some individual debtors whose debts are very large.
  • Chapter 12: is reserved for family farmers.
  • Chapter 13: known as a “wage earners plan.” Chapter 13 requires a debtor to file a plan to pay debts (or parts of debts) from current income.

Most individuals who can afford to make some payments to creditors will elect Chapter 13 bankruptcy protection. When filing for Chapter 13 bankruptcy, the individual files an interest free debt repayment plan, generally over a 3-5 year period, which consolidates (and often reduces) the debt, and must be approved by a federal bankruptcy court. While in a Chapter 13 debt repayment plan, creditors are barred from collecting, and they are required by the presiding Court order to adhere to the terms of the plan. To qualify for Chapter 13 though, the individual must be working or have a consistent source of income that will allow them monthly living expenses in addition to the required debt payments.The repayment plan is the centerpiece of Chapter 13 bankruptcy, and is essentially an agreement between an individual and their creditors. The creditors usually agree to forgive a portion of the debts owed them in exchange for a commitment to repay the reduced debts over time. Most plans require monthly payments to the bankruptcy trustee, which is a federal official appointed by the court to oversee the case. The trustee then makes distributions to the creditors. While making payments under a repayment plan, the creditors listed in that individual’s plan cannot take any collection actions against them, and they are required by law to abide by the terms of the repayment plan.

An online creditor’s ability to collect money after the initiation of a Chapter 13 filing by the debtor, like other creditors, will largely depend on the nature of the debt. Due to the speed and anonymity of electronic commerce, most online creditors will be unsecured. In order to participate in the bankruptcy process to ensure some level debt recovery, any unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. With general creditors this does not present an issue, but because of jurisdictional barriers created by electronic commerce, this requirement is often not met.

An online creditor must exercise an extra level of due diligence when attempting to collect on past due accounts. While Chapter 13 requires that a debtor list all debts and creditors at the beginning of the process, it is possible for a creditor to not be notified due to distance or other jurisdictional issues. Failure to take notice of a claim may preclude the creditor from collecting any of the money due.

Chapter 13 is often a viable alternative to Chapter 7 bankruptcy for those people who can maintain a certain level of income. Whether attempting to collect on a Chapter 13 bankruptcy filing, or contemplating seeking the protection offered by filing, only an experienced bankruptcy lawyer can accurately guide you through the difficult process. A qualified bankruptcy attorney is both the creditor’s and the individual’s most useful tool in being able to navigate the bankruptcy process. As electronic commerce continues to expand, Chapter 13 online creditors will only increase in proportion. Due to the unique obstacles and challenges presented by the online creditor collection process, an experienced attorney may be the only way to ensure Chapter 13 protection or collection.

Filed under Bankruptcy · 1 Comment

Intellectual property transfers can lead to bankruptcy fraud

March 10th, 2008, 6:09 pm

Many small businesses and independent contractors have obtained either common law or Federally registered copyright and trademark protection on creative works, web sites and domain names. The intellectual property has the potential to become an extremely valuable business or personal asset. Yet in today’s digital age, so many start-ups and contractors simply do not have the financial viability to sustain their small business. These people often end up filing for chapter 7 bankruptcy. Chapter 7 bankruptcy is a liquidation of all assets that a individual, married couple or business owns, in an attempt to satisfy the debts owed to secured and unsecured creditors. Many businesses and contractors want to try and save their intellectual property rights by transferring those rights to family members, so that they can try again to generate profits in a business setting. This practice begs the question; can you transfer intellectual property rights to a family member to avoid loosing the asset in a bankruptcy?Recently a bankruptcy court in the First Circuit heard a case where a Chapter 7 trustee had moved to avoid a pre-petition transfer of property from the debtor to the debtor’s daughter. The bankruptcy court’s decision finding the transfer voidable was affirmed in light of the fact that the property in question was not recorded until after the filing of the bankruptcy petition. In Re: Garrido Jimenez, Freddy V. Appealed from the U.S. Bankruptcy Court for the District of Puerto Rico (Docket No. PR 06-044) (June 19, 2007).

In my hypothetical, it would seem to follow that if a business or contractor did in fact transfer an asset including their common law copyright or trademark for good and valuable consideration, and then file for bankruptcy; they could protect their asset. However, the issue to consider is whether the family member can transfer the intellectual property back to the original creator subsequent to its assignment, and if so at what point in time would the transfer be acceptable?

The problem with a transfer to a family member then back to the debtor is that it raises the presumption that it was a fraudulent transfer. Although intentions may be in the best light, the idea that a person is freely transferring property while dealing with creditors does not sit well with anyone: bankruptcy attorneys, trustees or the Feds in general. However, if property is provided to family member in the ordinary course of business for services rendered, for example, car repairs, construction, and etc. Then, a debtor may do so as long as it is a normal business transaction–nothing like $10,000 for an oil change etc. However, intellectual property is many situations can qualify as exempt property, under chapter 7, especially where it is difficult for the property to be liquidated, it depends on the type and characteristics.

The bottom line is a debtor can transfer the rights to his or her trademark or copyright to a family member, so long as the property transfer takes place prior to filing for bankruptcy, and it does not appear that the transfer could have been conducted for the sole purpose of alienating a creditor.

Filed under Bankruptcy · 2 Comments

Wrongful Termination claim barred by failure to advise bankruptcy court

March 10th, 2008, 6:08 pm

Each year millions of Americans file for chapter 7 or 13 bankruptcy protection in order to eliminate unsecured debt, including large credit card balances, personal loans and court ordered awards or secured debt in order to stop a foreclosure on their home or car. What these debtor’s don’t realize, is that not only do they need to put the bankruptcy trustee on notice of their possessions, bank accounts, taxes and liability to creditors, but these debtors are also required to include notice of any potential law suits, including likely suits in the near future in their scheduled and statements. One such example of a contingent suit that many debtors may bring is for a violation of their employee rights. The forgoing information can be used a great defense tool for civil litigation defendants. As a business owner, this information can be used to defend a wrongful termination claim, if the employee does not list the employer in their schedules and statements.

More specifically, if an employee fails to list any contingent claims of value, the claim can be dismissed. A Federal court recently held in Cannon-Stokes v. Potter, an employee is prohibited from omitting a discrimination claim from her bankruptcy petition and then trying to bring it after having her debts discharged. The courts reasoning was that if debtors with possible employment claims might be encouraged to “scam” their creditors by keeping those claims hidden.

The bottom line for small business owners is that you always want to check into employee’s financial affairs as part of your litigation strategy in defending claims for wrongful termination.

The forgoing was written by Michael Goldstein for the Law Office of Goldstein and Clegg, a Massachusetts small business and bankruptcy lawyer.

Filed under Debt Negotiation, Bankruptcy · 4 Comments