By ELSA BRENNER
Is it possible for a homeowner who owes $725,000 on a mortgage to sell a house for only $560,000 and still walk away happy, or at least relieved? The answer is yes, if the transaction is a short sale — defined as selling for less than the mortgage owed, in a deal with the lender to forgive the rest of the debt and head off a foreclosure.
A last-ditch option for a homeowner in default, the short sale is increasingly being seen a valuable tool by sellers, buyers, real estate agents and lenders. But it does come with this caveat from real estate agents and lawyers: it is an intricate transaction, often taking many months to complete.
Describing the process as “the lesser of two evils,” Mark Boyland, the president of the Westchester-Putnam Multiple Listing Service and an associate broker at Keller Williams NY Realty, nevertheless emphasized its value as “a way to help out both the homeowner and the bank, and make a bad situation better.”
The case above, involving a four-bedroom ranch in southern Westchester, is typical. The sale price did not cover the entire mortgage but was still high enough for the lender to forgive the remaining balance, said Patti Cunningham, the owner of Cunningham Realty in Hawthorne, who brokered the deal.
The owner had been grappling with the costs of college tuition and a parent’s medical bills, and had refinanced the mortgage loan six times in five years to meet the growing expenses, Ms. Cunningham said.
The owner decided to sell the house, bought in 1999 for $310,000. But the $700,000 that a 46-year-old ranch in good condition might have fetched in a more robust market was not realistic. The house languished, and when bids did come in, they were far below the asking price. Several months later, the seller, who had fallen behind on mortgage payments, was notified that foreclosure proceedings had begun.
Finally, with an offer of $560,000, Phyllis Knight Marcus, a real estate lawyer in Hawthorne, contacted the lender, who eventually agreed to the deal.
“In the end, the seller got out from under,” the lawyer said. “The buyer was happy because he got a bargain, and the bank was pleased to have the situation solved.”
Ms. Marcus is working on five short-sale cases in Westchester County; last year she had none. Mr. Boyland at Keller Williams is similarly negotiating five short sales, versus none a year ago.
“It’s a trend that began last year in response to a troubled market,” he said, “and more and more people finding themselves in an upside-down situation.”
Nationally, defaults on home mortgages reached an all-time high at the end of 2007 as foreclosures surged on adjustable-rate mortgages, the Mortgage Bankers Association, an industry group, reported on March 6.
In Westchester, foreclosure numbers are also on the upswing, said Geoffrey Anderson, the executive director of Westchester Residential Opportunities, a nonprofit housing group in White Plains. In the first nine weeks of the year, there were 515 foreclosure filings in Westchester, Mr. Anderson said, adding, “That’s up significantly from what it was last year, and we’re expecting many more in the coming months” as many more adjustable-rate mortgages reset this spring and summer.
The bulk of the foreclosures are occurring in places like Yonkers, Mount Vernon, New Rochelle and Greenburgh, which have the highest concentrations of low-income residents, Mr. Anderson said. But more affluent communities are far from immune. For example, Mr. Boyland’s short-sale cases are in Pound Ridge, Katonah, Bedford and North Salem.
Still, when compared with foreclosures in other New York area suburbs, Westchester’s are relatively low. For instance, according to ForeclosureDeals.com, a listing service, Westchester has 91 homes in foreclosure, while Nassau County has 186.
As an indicator of how complicated such cases can be, and of how many more are expected, Mr. Boyland is one of a number of professionals taking courses in short sales. He has also hired a specialist as a consultant. “The banks change their guidelines every week,” he said, “so you have to stay on top of things.”
The laws governing such sales are also in flux. For example, a federal law passed late last year exempts sellers from having to pay income tax on the amount forgiven, but only if the house in question is the owner’s primary residence. In previous years, the forgiven debt was considered income, even though the seller received no money.
PropertyShark.com, a real estate data provider, is one of several businesses offering courses. “It’s very important for investors and brokers to understand the distressed-property industry,” said Bill Staniford, the company’s chief executive, “because it looks like we might be dealing with this for years down the road.”
But even though short sales are on the increase, Ms. Cunningham of Cunningham Realty cautioned that sellers should not expect to use them as “a quick way to get out of a bad deal.”
Before a bank agrees to one, she said, the lender first needs to ascertain that “a seller is really at the end of the rope financially, and has tried to utilize his or her own resources first.” A seller seeking a short sale must submit a hardship document outlining what led to the default in payments, along with a detailed lists of expected fees, expenses and commissions, in addition to principal and interest.
But even then, after a price has been determined and the paperwork submitted, many months often go by before a decision is reached by the lender, which retains the right to turn the deal down.
Housing advocates and mortgage counselors caution that a short sale is only one option; some nonprofit groups are helping borrowers work out alternative arrangements with their mortgage holders.
“The short sale is not the only way to go,” said Mr. Anderson at Westchester Residential Opportunities. “We’re not involved in any yet, but as we see that a short sale could benefit a homeowner, we would advocate for that."
Copyright 2008 The New York Times Company
Monday, March 17, 2008
Wednesday, March 12, 2008
March update on real estate and bankruptcy
The New York Times had two articles on Friday, February 29, 2008 that we believe will be of interest to the readers of our blog. The first article indicated that based on comments by President Bush, lobbying by the Mortgage Bankers Association and the opposition of Senate Republicans, the bill proposed by Congressional Democrats to allow bankruptcy judges to modify the terms of first mortgages (i.e. to increase the length of the mortgage and/or to decrease the interest rate on the mortgage) is now dead. However, the Democrats in the House and Senate have indicated that they may renew their efforts to pass this type of legislation in the future.
The second article in the New York Times was titled "Facing Default, Some Abandon Homes to Banks." A copy of that article can be found on our personal bankruptcy website and on our blog. The article deals with an issue of great interest today, which is the abandonment of one's house. Many clients have called us regarding abandoning their house or giving the house back to the bank in lieu of foreclosure or letting the bank foreclose on the house. This scenario generally occurs when the amount of mortgages that encumber the house exceed the value of the house. There are three legal issues regarding this strategy that all clients should be aware of.
The first issue is federal income tax (i.e. relief of indebtedness income). If an individual abandons a house and the mortgage is greater than the fair market value of the property, then theoretically the difference between the mortgage and the value of the collateral would be deemed relief of indebtedness income and would be reported by the banks on a 1099-R to the Internal Revenue Service. However, based on legislation that was passed by the House and Senate and signed into law by President Bush, there is no relief of indebtedness income on the abandonment of real estate during the years of 2007-2009. You can read more about relief of indebtedness income and other recent changes in bankruptcy law in our January 16, 2008 post.
Another issue concerning the abandonment of real estate is New York State Debtor and Creditor Law. If an individual abandons or walks away from a mortgage, the bank (mortgagee) can foreclose on the property and under the RPAPL, seek a deficiency judgment against the borrower. If the bank seeks the deficiency judgment and they are successful in obtaining a judgment, under New York law, the judgment will be good for 20 years. When a creditor in New York obtains a judgment, typically there are three remedies used to collect on that judgment. First, they will docket the judgment in a county where the debtor owns real estate; Second, they will attempt wage garnishment-they will use a sheriff or marshal to garnish 10 percent of a debtor's wages or earnings; and Third, they will use the judgment to lien and levy on banking, savings or brokerage accounts which a debtor may have. If a debtor is faced with this situation, they must make themselves "judgment proof," which means they cannot own or take title to any real or personal property. However, a Chapter 7 bankruptcy filing would discharge the judgment under bankruptcy law.
The third issue concerning the abandonment of real estate is one's credit report. Under federal law, an individual who abandons their house and is subject to foreclosure will have this information reported on their credit report for up to 10 years. Additionally, if an individual abandons a house and the creditor obtains a judgment, that individual will not be able to obtain credit until the judgment lapses pursuant to New York State law (20 years), is satisfied or discharged in bankruptcy. Practically, that means that an individual with an open judgment or a tax lien would not be able to buy real estate, or purchase or lease a car.
However, a Chapter 7 personal bankruptcy filing will have the following positive effects for an individual:
1. It will discharge relief of indebtedness income, which would be helpful after 2009.
2. It will discharge judgments; and
3. It will actually make it easier for an individual to obtain credit, because the judgment and other liabilities are "discharged" in bankruptcy and banks know that an individual can only file for Chapter 7 bankruptcy every eight years.
Finally, with respect to credit report issues, a personal bankruptcy is generally no worse on a person's credit report than a judgment or foreclosure. Anyone who has issues concerning the abandonment of real estate should contact Shenwick & Associates for further information.
The second article in the New York Times was titled "Facing Default, Some Abandon Homes to Banks." A copy of that article can be found on our personal bankruptcy website and on our blog. The article deals with an issue of great interest today, which is the abandonment of one's house. Many clients have called us regarding abandoning their house or giving the house back to the bank in lieu of foreclosure or letting the bank foreclose on the house. This scenario generally occurs when the amount of mortgages that encumber the house exceed the value of the house. There are three legal issues regarding this strategy that all clients should be aware of.
The first issue is federal income tax (i.e. relief of indebtedness income). If an individual abandons a house and the mortgage is greater than the fair market value of the property, then theoretically the difference between the mortgage and the value of the collateral would be deemed relief of indebtedness income and would be reported by the banks on a 1099-R to the Internal Revenue Service. However, based on legislation that was passed by the House and Senate and signed into law by President Bush, there is no relief of indebtedness income on the abandonment of real estate during the years of 2007-2009. You can read more about relief of indebtedness income and other recent changes in bankruptcy law in our January 16, 2008 post.
Another issue concerning the abandonment of real estate is New York State Debtor and Creditor Law. If an individual abandons or walks away from a mortgage, the bank (mortgagee) can foreclose on the property and under the RPAPL, seek a deficiency judgment against the borrower. If the bank seeks the deficiency judgment and they are successful in obtaining a judgment, under New York law, the judgment will be good for 20 years. When a creditor in New York obtains a judgment, typically there are three remedies used to collect on that judgment. First, they will docket the judgment in a county where the debtor owns real estate; Second, they will attempt wage garnishment-they will use a sheriff or marshal to garnish 10 percent of a debtor's wages or earnings; and Third, they will use the judgment to lien and levy on banking, savings or brokerage accounts which a debtor may have. If a debtor is faced with this situation, they must make themselves "judgment proof," which means they cannot own or take title to any real or personal property. However, a Chapter 7 bankruptcy filing would discharge the judgment under bankruptcy law.
The third issue concerning the abandonment of real estate is one's credit report. Under federal law, an individual who abandons their house and is subject to foreclosure will have this information reported on their credit report for up to 10 years. Additionally, if an individual abandons a house and the creditor obtains a judgment, that individual will not be able to obtain credit until the judgment lapses pursuant to New York State law (20 years), is satisfied or discharged in bankruptcy. Practically, that means that an individual with an open judgment or a tax lien would not be able to buy real estate, or purchase or lease a car.
However, a Chapter 7 personal bankruptcy filing will have the following positive effects for an individual:
1. It will discharge relief of indebtedness income, which would be helpful after 2009.
2. It will discharge judgments; and
3. It will actually make it easier for an individual to obtain credit, because the judgment and other liabilities are "discharged" in bankruptcy and banks know that an individual can only file for Chapter 7 bankruptcy every eight years.
Finally, with respect to credit report issues, a personal bankruptcy is generally no worse on a person's credit report than a judgment or foreclosure. Anyone who has issues concerning the abandonment of real estate should contact Shenwick & Associates for further information.
Monday, March 10, 2008
Too Much Debt? Too Bad
By Jessica Silver-Greenberg and Robert Berner
A major avenue of escape for troubled credit-card borrowers is narrowing. Consumers with onerous debt traditionally have found relief among credit counseling agencies, middlemen who negotiate with lenders to lower interest rates and consolidate balances into a low monthly payment. But banks aren't as willing to cut deals now. "More consumers will end up in bankruptcy," says Travis B. Plunkett, legislative director at the advocacy group Consumer Federation of America.
Nonprofit credit counselors have been around almost since the dawn of the credit-card business more than 50 years ago. Their approach hasn't changed much in that time. Typically, a counselor sets up a so-called debt-management plan that allows a client to pay off a balance over five years. The individual makes a single monthly payment to the group, which in turn sends the money to the various lenders.
Until recently issuers often agreed to ratchet down interest rates permanently, to as low as 0%, for those working with credit counselors. That has been a critical concession, says the industry, since it makes monthly payments more affordable and helps ensure the principal is getting paid down. But now some credit-card companies are balking. Discover Financial Services, (DFS) counselors contend, won't cut rates below 17.9% for clients, while Capital One Financial (COF) is holding firm at 15.9%. At least 5 of the 13 largest issuers are offering smaller breaks on rates than they did five years ago, according to a study by the Consumer Federation of America. Discover won't disclose rate details, saying it makes decisions on a case-by-case basis: "We have a range of rates that we temporarily offer card members depending on their situation," says spokesman Matthew Towson. Capital One didn't return calls for comment.
Some companies are still willing to deal. JPMorgan Chase (JPM) announced a year ago it would cut rates to 0% for consumers who agree to a formal debt-management plan. Bank of America will drop to the low single-digit level or even to 0% in some instances.
Meanwhile, counselors are fretting that they aren't getting paid for their services as they did in the past. The credit counseling agencies historically have collected 15% of the total debt that's paid off. Today banks are forking over less than 8%, notes the National Foundation for Credit Counseling, the umbrella group for 1,500 counselors. That money goes to fund operations, so counselors worry they may have to skimp on services given the cutbacks. "If funding doesn't improve, we will be in serious trouble," says Winchell Dillenbeck, executive director of Consumer Credit Counseling Services of the North Coast in Arcata, Calif.
Why are credit-card companies clamping down? Some analysts suspect issuers are increasingly worried about losses. Card issuers reported $38 billion in bad loans last year. Columbia Law School professor Ronald Mann gives another reason. He says banks have taken a closer look at the data and determined that most individuals will keep paying their debts even if lenders don't lower the rates as they have in the past. "Higher rates maximize the recovery," says Mann.
The counselors see the world differently. In the current credit crunch, more borrowers are turning to their programs. The NFCC worked with 2.7 million individuals last year, a nearly 30% jump from 2006. Without the usual rate breaks, counselors think more people will fall behind on their payments. That could lead to an uptick in bankruptcies. A study by Visa Inc. (V) found that 50% of consumers who dropped out of credit counseling programs declared bankruptcy. Says Dillenbeck: "If we don't have good concessions, we have little power to help people."
Copyright (c) 2008 Business Week. All rights reserved.
Look Out For That Lifeline
By Robert Berner and Jessica Silver-Greenberg
Granville Jones knew he was spending beyond his means after he racked up $90,000 largely in credit-card debt—$10,000 more than his annual income. So last summer the Durham (N.C.) pharmacist turned to the Consumer Law Center for help. The firm told Granville that if he withheld payments from creditors, the CLC would have the leverage to negotiate a lump settlement on his debts and cut his balances by half in five years. So Granville stopped paying his bills and instead handed over a monthly sum to the CLC to cover an eventual settlement with creditors as well as the firm's fees. "When you are financially stressed, you hope for miracles," says the 47-year-old, who was current on his bills before reaching out to the law firm.
The miracle never happened. Instead, Jones gets daily calls from collection agencies. One lender has sued him in county court for the $25,000 it's owed. Frustrated, Jones cancelled the program in January. The CLC agreed to refund the $10,744 he paid, but only after Jones filed a complaint with North Carolina's attorney general in February. "All Consumer Law did was leave me hanging," says Jones. The CLC did not return calls for comment.
Jones' predicament is another by-product of the credit crunch. With individuals of all income brackets struggling to pay their bills, many are seeking help from the hundreds of debt-settlement firms that promise to reduce credit-card balances by as much as 70% over several years.
NO-BARGAIN BARGAINING CHIP
Like credit counselors, debt-settlement firms generally collect a single monthly payment from clients. But rather than disbursing the money to credit-card companies to cover the borrowers' bills, they withhold it. The settlement firms then use the money as a bargaining chip in an attempt to negotiate a lump-sum payout with lenders. These programs have proliferated of late as credit-card debt has soared; the typical U.S. household now has more than $7,000 in outstanding balances, up 45% from five years ago.
The booming business has caught the attention of prosecutors and regulators, who say such programs can leave consumers in worse financial shape. Fees for the services run high. And when banks don't agree to settle—if the settlement firm contacts them at all—consumers get hit with late charges and penalized with higher interest rates, leaving borrowers with even more debt than when they started.
Wary of such pitfalls, seven states have already banned settlement activities. Others, such as Iowa, are considering similar rules. Meanwhile, the Federal Trade Commission and attorneys general in six states have recently filed complaints against debt-settlement firms. Four are investigating Hess Kennedy Chartered, an affiliate of the Consumer Law Center, including AGs in North Carolina and Florida, both of which filed civil charges against the Coral Gables (Fla.) firm for allegedly deceptive practices. "There are more of these firms than we can handle," says Norman Googel, an assistant attorney general in West Virginia, which is investigating 15 settlement firms. "They are truly exploiting a group of consumers already in crisis." Hess Kennedy didn't return calls for comment.
The settlement industry defends its services, asserting that its payment plans can be more affordable than traditional credit counselors and provide consumers an alternative to bankruptcy. "Debt settlement is a boot camp for getting out of debt," says Nicolas de Segonzac, president of the trade group Association of Settlement Cos. Says Jenna Keehnen,
executive director of U.S. Organizations for Bankruptcy Alternatives: "In any industry there are bad actors. But for every complaint, there are thousands and thousands of appreciative customers that have gone successfully through the programs."
What many borrowers who sign on don't realize, though, is that fees can run as high as 30% of the total outstanding balance, or $3,000 on $10,000 in debt. It's also often unclear to individuals, say state and federal prosecutors, that the bulk of their initial payments—those made within the first year—go toward fees rather than the settlement. "The programs
typically require financially strapped consumers to pay fees up front, so they make money whether or not any useful services are performed," says Philip Lehman, an assistant attorney general in North Carolina.
Although some consumers have found relief with debt-settlement firms, the programs do not have the same success rate as credit-counseling agencies. Credit counselors, which have long-standing relationships with issuers, work with lenders to lower interest rates and create a monthly payment plan for borrowers. According to the National Foundation for Credit
Counseling, which represents 1,500 counselors in the U.S., 60% of clients complete the plans.
By comparison, North Carolina prosecutor Lehman estimates that 80% of consumers drop out of debt-settlement programs within the first year. And the Federal Trade Commission, which has settled six cases against settlement outfits in the past four years, found that at one of those firms, just 1.4% of the consumers who entered the program finished it and settled with lenders.
Why? One reason is that some banks, including Bank of America (BAC) and Discover Financial Services, (DFS) refuse to negotiate with settlement firms. The programs, issuers say, only add to their pile of bad debt since consumers stop payment. "This is one instance where both creditors and debtors are worse off," says a credit-card executive who declined to be named.
Meanwhile, borrowers rack up late fees, over-limit charges, and other penalties for missed payments. Creditors may also pass the debts to collection agencies or sue for damages in court. Those blemishes inflict long-lasting damage on a credit report. All that can leave borrowers not only with more debt, but even worse, can force them into bankruptcy—exactly the situation many were trying to avoid.
Barbara Bautch knows what it's like to be on that slippery slope. Unable to manage the $12,000 tab on two cards, the part-time health-care aide in Silver Bay, Minn., signed up with settlement firm American Financial Services in 2006, forking over $233 a month to the Bakersfield (Calif.) company. After one of the card companies sued, Bautch learned that AFS hadn't contacted either issuer regarding a settlement deal. Between late charges, penalty interest, and attorneys'
fees, her debt now stands at $20,000. AFS did not return calls for comment. Says Bautch: "AFS drove me into bankruptcy, and it was no sweat off its back."
Copyright (c) 2008 Business Week. All rights reserved.
Granville Jones knew he was spending beyond his means after he racked up $90,000 largely in credit-card debt—$10,000 more than his annual income. So last summer the Durham (N.C.) pharmacist turned to the Consumer Law Center for help. The firm told Granville that if he withheld payments from creditors, the CLC would have the leverage to negotiate a lump settlement on his debts and cut his balances by half in five years. So Granville stopped paying his bills and instead handed over a monthly sum to the CLC to cover an eventual settlement with creditors as well as the firm's fees. "When you are financially stressed, you hope for miracles," says the 47-year-old, who was current on his bills before reaching out to the law firm.
The miracle never happened. Instead, Jones gets daily calls from collection agencies. One lender has sued him in county court for the $25,000 it's owed. Frustrated, Jones cancelled the program in January. The CLC agreed to refund the $10,744 he paid, but only after Jones filed a complaint with North Carolina's attorney general in February. "All Consumer Law did was leave me hanging," says Jones. The CLC did not return calls for comment.
Jones' predicament is another by-product of the credit crunch. With individuals of all income brackets struggling to pay their bills, many are seeking help from the hundreds of debt-settlement firms that promise to reduce credit-card balances by as much as 70% over several years.
NO-BARGAIN BARGAINING CHIP
Like credit counselors, debt-settlement firms generally collect a single monthly payment from clients. But rather than disbursing the money to credit-card companies to cover the borrowers' bills, they withhold it. The settlement firms then use the money as a bargaining chip in an attempt to negotiate a lump-sum payout with lenders. These programs have proliferated of late as credit-card debt has soared; the typical U.S. household now has more than $7,000 in outstanding balances, up 45% from five years ago.
The booming business has caught the attention of prosecutors and regulators, who say such programs can leave consumers in worse financial shape. Fees for the services run high. And when banks don't agree to settle—if the settlement firm contacts them at all—consumers get hit with late charges and penalized with higher interest rates, leaving borrowers with even more debt than when they started.
Wary of such pitfalls, seven states have already banned settlement activities. Others, such as Iowa, are considering similar rules. Meanwhile, the Federal Trade Commission and attorneys general in six states have recently filed complaints against debt-settlement firms. Four are investigating Hess Kennedy Chartered, an affiliate of the Consumer Law Center, including AGs in North Carolina and Florida, both of which filed civil charges against the Coral Gables (Fla.) firm for allegedly deceptive practices. "There are more of these firms than we can handle," says Norman Googel, an assistant attorney general in West Virginia, which is investigating 15 settlement firms. "They are truly exploiting a group of consumers already in crisis." Hess Kennedy didn't return calls for comment.
The settlement industry defends its services, asserting that its payment plans can be more affordable than traditional credit counselors and provide consumers an alternative to bankruptcy. "Debt settlement is a boot camp for getting out of debt," says Nicolas de Segonzac, president of the trade group Association of Settlement Cos. Says Jenna Keehnen,
executive director of U.S. Organizations for Bankruptcy Alternatives: "In any industry there are bad actors. But for every complaint, there are thousands and thousands of appreciative customers that have gone successfully through the programs."
What many borrowers who sign on don't realize, though, is that fees can run as high as 30% of the total outstanding balance, or $3,000 on $10,000 in debt. It's also often unclear to individuals, say state and federal prosecutors, that the bulk of their initial payments—those made within the first year—go toward fees rather than the settlement. "The programs
typically require financially strapped consumers to pay fees up front, so they make money whether or not any useful services are performed," says Philip Lehman, an assistant attorney general in North Carolina.
Although some consumers have found relief with debt-settlement firms, the programs do not have the same success rate as credit-counseling agencies. Credit counselors, which have long-standing relationships with issuers, work with lenders to lower interest rates and create a monthly payment plan for borrowers. According to the National Foundation for Credit
Counseling, which represents 1,500 counselors in the U.S., 60% of clients complete the plans.
By comparison, North Carolina prosecutor Lehman estimates that 80% of consumers drop out of debt-settlement programs within the first year. And the Federal Trade Commission, which has settled six cases against settlement outfits in the past four years, found that at one of those firms, just 1.4% of the consumers who entered the program finished it and settled with lenders.
Why? One reason is that some banks, including Bank of America (BAC) and Discover Financial Services, (DFS) refuse to negotiate with settlement firms. The programs, issuers say, only add to their pile of bad debt since consumers stop payment. "This is one instance where both creditors and debtors are worse off," says a credit-card executive who declined to be named.
Meanwhile, borrowers rack up late fees, over-limit charges, and other penalties for missed payments. Creditors may also pass the debts to collection agencies or sue for damages in court. Those blemishes inflict long-lasting damage on a credit report. All that can leave borrowers not only with more debt, but even worse, can force them into bankruptcy—exactly the situation many were trying to avoid.
Barbara Bautch knows what it's like to be on that slippery slope. Unable to manage the $12,000 tab on two cards, the part-time health-care aide in Silver Bay, Minn., signed up with settlement firm American Financial Services in 2006, forking over $233 a month to the Bakersfield (Calif.) company. After one of the card companies sued, Bautch learned that AFS hadn't contacted either issuer regarding a settlement deal. Between late charges, penalty interest, and attorneys'
fees, her debt now stands at $20,000. AFS did not return calls for comment. Says Bautch: "AFS drove me into bankruptcy, and it was no sweat off its back."
Copyright (c) 2008 Business Week. All rights reserved.
Wednesday, March 05, 2008
Filings for Bankruptcy Up 18% in February
By JENNY ANDERSON
Published: March 5, 2008
Americans filed for bankruptcy in growing numbers in February, buckling under the combined weight of rising energy prices, a weakening housing market and sky-high personal debts.
An average of 3,960 bankruptcy petitions were filed per day nationwide last month, up 18 percent from January and up 28 percent from a year earlier, according to Automated Access to Court Electronic Records, a bankruptcy data and management company.
February was the busiest month for filings since Congress overhauled the bankruptcy law in 2005. Bankruptcy experts said the rise was particularly worrisome because those changes made filing for bankruptcy more complicated and expensive.
“This number of bankruptcies may be under-representative of the true financial distress consumers are feeling because of the steps Congress has taken,” said Jack Williams, a scholar in residence at the American Bankruptcy Institute and a professor at Georgia State University.
The latest figures show the financial pain is spreading from states like California and Florida, which exemplified the housing boom and subsequent bust, to those along the Eastern Seaboard like Maryland, Virginia and Delaware, which were among the 10 states with the largest percentage increase in filings in January and February. “You are seeing a good-size uptick everywhere,” said Mike Bickford, president of Automated Access.
Bankruptcy experts caution, however, that data from just one or two months can be misleading.
“The monthly bankruptcy filing rate has a lot of cyclicality,” Robert M. Lawless, a professor of law at the University of Illinois College of Law, wrote on Tuesday on the widely read bankruptcy blog, Creditslips.org. Some experts, for example, say bankruptcies often seem to rise in February as debts from the holiday season come due. Even so, the trend is definitely upward, Mr. Lawless wrote. States as disparate as Kentucky and Rhode Island joined the top 10 list, and the absolute number of filings rose significantly.
Mr. Williams expects the number of bankruptcies nationwide to reach 1.2 million to 1.4 million this year, up from 826,732 in 2007; Mr. Lawless expects more than one million. (In 2004, the last year with a normalized set of data, 1,597,462 petitions were filed, according to Automated Access.)
The states with the most significant increase in bankruptcy filings during the first two months of 2008 were California, with a 33 percent increase; Maryland, up 29 percent; and Florida, with a 26 percent rise, the data shows. Filings fell in 16 states, including Colorado, Indiana, Ohio, South Dakota, Kansas, and Wyoming.
Proponents of the bankruptcy law argued in 2005 that some consumers were abusing the law, using Chapter 7, or liquidation, to shed credit card debt. The bill, supported by both Republicans and Democrats, “increased the expense for everyone and reduced the protections for everyone,” said Mr. Williams.
Elizabeth Warren, a professor at Harvard Law School and the author of books on bankruptcy, said, “The credit industry did its best to drive up the cost of filing but when families are in enough trouble they will fight their way through the paper thicket and higher attorneys’ fees to get help.”
Ms. Warren says that the increase also reflects changing attitudes about bankruptcy. Many Americans now understand that filing bankruptcy is legal, something many did not appreciate a few years ago. Studies last year showed that one of seven families were dealing with debt collectors, who often encourage families not to file for bankruptcy, she said.
“The word is leaking out that the bankruptcy courts are open for business,” Ms. Warren says.
Record home foreclosures have contributed to the rise in bankruptcies but on their own do not account for the latest increase.
“Rising bankruptcy certainly understates the stress because bankruptcy is not a refuge from foreclosure,” Mark Zandi, chief economist at Moody’s Economy.com, said. Under the current bankruptcy code, the courts cannot alter the terms of first mortgages. Proposed legislation in Congress seeks to change this, but few think it will pass.
This suggests more trouble for the broader economy.
“Everything is going wrong for households,” Mr. Zandi said. “They are struggling with rising unemployment; high debt loads, heavier because of mortgage resets and plunging housing values; soaring gasoline prices; wobbly stock prices. The data suggest bankruptcies will rise measurably through the remainder of the decade.”
Copyright (c) 2008 The New York Times Company. All rights reserved.
Published: March 5, 2008
Americans filed for bankruptcy in growing numbers in February, buckling under the combined weight of rising energy prices, a weakening housing market and sky-high personal debts.
An average of 3,960 bankruptcy petitions were filed per day nationwide last month, up 18 percent from January and up 28 percent from a year earlier, according to Automated Access to Court Electronic Records, a bankruptcy data and management company.
February was the busiest month for filings since Congress overhauled the bankruptcy law in 2005. Bankruptcy experts said the rise was particularly worrisome because those changes made filing for bankruptcy more complicated and expensive.
“This number of bankruptcies may be under-representative of the true financial distress consumers are feeling because of the steps Congress has taken,” said Jack Williams, a scholar in residence at the American Bankruptcy Institute and a professor at Georgia State University.
The latest figures show the financial pain is spreading from states like California and Florida, which exemplified the housing boom and subsequent bust, to those along the Eastern Seaboard like Maryland, Virginia and Delaware, which were among the 10 states with the largest percentage increase in filings in January and February. “You are seeing a good-size uptick everywhere,” said Mike Bickford, president of Automated Access.
Bankruptcy experts caution, however, that data from just one or two months can be misleading.
“The monthly bankruptcy filing rate has a lot of cyclicality,” Robert M. Lawless, a professor of law at the University of Illinois College of Law, wrote on Tuesday on the widely read bankruptcy blog, Creditslips.org. Some experts, for example, say bankruptcies often seem to rise in February as debts from the holiday season come due. Even so, the trend is definitely upward, Mr. Lawless wrote. States as disparate as Kentucky and Rhode Island joined the top 10 list, and the absolute number of filings rose significantly.
Mr. Williams expects the number of bankruptcies nationwide to reach 1.2 million to 1.4 million this year, up from 826,732 in 2007; Mr. Lawless expects more than one million. (In 2004, the last year with a normalized set of data, 1,597,462 petitions were filed, according to Automated Access.)
The states with the most significant increase in bankruptcy filings during the first two months of 2008 were California, with a 33 percent increase; Maryland, up 29 percent; and Florida, with a 26 percent rise, the data shows. Filings fell in 16 states, including Colorado, Indiana, Ohio, South Dakota, Kansas, and Wyoming.
Proponents of the bankruptcy law argued in 2005 that some consumers were abusing the law, using Chapter 7, or liquidation, to shed credit card debt. The bill, supported by both Republicans and Democrats, “increased the expense for everyone and reduced the protections for everyone,” said Mr. Williams.
Elizabeth Warren, a professor at Harvard Law School and the author of books on bankruptcy, said, “The credit industry did its best to drive up the cost of filing but when families are in enough trouble they will fight their way through the paper thicket and higher attorneys’ fees to get help.”
Ms. Warren says that the increase also reflects changing attitudes about bankruptcy. Many Americans now understand that filing bankruptcy is legal, something many did not appreciate a few years ago. Studies last year showed that one of seven families were dealing with debt collectors, who often encourage families not to file for bankruptcy, she said.
“The word is leaking out that the bankruptcy courts are open for business,” Ms. Warren says.
Record home foreclosures have contributed to the rise in bankruptcies but on their own do not account for the latest increase.
“Rising bankruptcy certainly understates the stress because bankruptcy is not a refuge from foreclosure,” Mark Zandi, chief economist at Moody’s Economy.com, said. Under the current bankruptcy code, the courts cannot alter the terms of first mortgages. Proposed legislation in Congress seeks to change this, but few think it will pass.
This suggests more trouble for the broader economy.
“Everything is going wrong for households,” Mr. Zandi said. “They are struggling with rising unemployment; high debt loads, heavier because of mortgage resets and plunging housing values; soaring gasoline prices; wobbly stock prices. The data suggest bankruptcies will rise measurably through the remainder of the decade.”
Copyright (c) 2008 The New York Times Company. All rights reserved.
Friday, February 29, 2008
New York Times article: Facing Default, Some Walk Out on New Homes
This article describes a growing trend in real estate:
Facing Default, Some Walk Out on New Homes
By JOHN LELAND
Published: February 29, 2008
When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.
In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.
Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.
Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”
You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.
For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.
“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.
In recent months top executives from Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages.
Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. “I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ ” Mrs. Newhouse said.
“You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,” she said. “And sometimes the bank people who call these consumers aren’t really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative.”
The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.
“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”
In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.
Since the Depression, American government policy has encouraged homeownership as an absolute good. It protects people from increases in rent and allows them to build equity as they pay off their mortgages. And it creates stability in communities, because owners are invested in their neighbors.
But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.
The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.
Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”
Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.
“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”
When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”
For Raymond Zulueta, the decision to go into foreclosure, and to hire You Walk Away, brought him peace of mind. The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts.
Consumer advocates and others question the value of You Walk Away’s service.
“We are more interested in servicers and borrowers coming to mutual resolutions through loan remediation,” said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Even though we are not seeing good outcomes, we’re not willing to throw up our hands and say people should walk away from their homes based on the advice of a company that stands to profit from foreclosure.”
Jon Maddux, a founder of You Walk Away, said the company’s services were not for everybody and were meant as a last resort. The company opened for business in January and says it has just over 200 clients in six states.
“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”
Mr. Zulueta said he felt he had let down the lender, himself, and his family.
“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”
Copyright (c) 2008 The New York Times Company. All rights reserved.
Facing Default, Some Walk Out on New Homes
By JOHN LELAND
Published: February 29, 2008
When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.
In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.
Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.
Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”
You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.
For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.
“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.
In recent months top executives from Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages.
Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. “I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ ” Mrs. Newhouse said.
“You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,” she said. “And sometimes the bank people who call these consumers aren’t really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative.”
The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.
“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”
In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.
Since the Depression, American government policy has encouraged homeownership as an absolute good. It protects people from increases in rent and allows them to build equity as they pay off their mortgages. And it creates stability in communities, because owners are invested in their neighbors.
But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.
The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.
Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”
Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.
“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”
When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”
For Raymond Zulueta, the decision to go into foreclosure, and to hire You Walk Away, brought him peace of mind. The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts.
Consumer advocates and others question the value of You Walk Away’s service.
“We are more interested in servicers and borrowers coming to mutual resolutions through loan remediation,” said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Even though we are not seeing good outcomes, we’re not willing to throw up our hands and say people should walk away from their homes based on the advice of a company that stands to profit from foreclosure.”
Jon Maddux, a founder of You Walk Away, said the company’s services were not for everybody and were meant as a last resort. The company opened for business in January and says it has just over 200 clients in six states.
“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”
Mr. Zulueta said he felt he had let down the lender, himself, and his family.
“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”
Copyright (c) 2008 The New York Times Company. All rights reserved.
Tuesday, February 19, 2008
Mortgage and foreclosure update
This month, we’re going to update you on the latest Congressional and judicial developments in the rapidly escalating debate over mortgages and foreclosures.
1. On December 12, 2007, the House of Representatives Judiciary Committee narrowly ordered H.R. 3609, the “Emergency Homeownership and Mortgage Equity Protection Act of 2007” to be reported as amended out of committee for consideration by the full House. The bill would allow bankruptcy judges to modify the terms of a Chapter 13 debtor’s mortgage loan. Among those terms that a judge could tweak are the loan's interest rate, remaining value and maturity.
The substitute bill that was reported out of the committee would limit relief to subprime or nontraditional loans that are in foreclosure or at least 60 days overdue. Judges would also have the authority to determine if debtors qualified for relief under the current means test. The bill applies to existing nontraditional and subprime mortgages originated between Jan. 1, 2000 and the bill's enactment.
Although the compromise bill was nominally bipartisan, only one Republican on the committee voted for the bill. Many opponents of the bill, including The Financial Services Roundtable, argue that the changes could have unintended consequences, by pricing people with poor credit risks out of the mortgage market and causing lenders to require higher interest rates or down payments or both.
However, the bill gained the support of the National Association of Federal Credit Unions, since the definition of a “nontraditional” loan would be limited to interest-only mortgages and adjustable-rate mortgages with payment options that can lead to negative amortization. Credit unions don’t typically provide these types of loans.
On October 3, 2007, Sen. Dick Durbin (D-IL) introduced S. 2136, the “Helping Families Save Their Homes in Bankruptcy Act.” It would allow bankruptcy court judges to reduce the remaining values, interest rates, and maturities of existing mortgages. Specifically, the bill allows cramdowns for principal residential mortgages for homeowners in Chapter 13 bankruptcy. During proceedings, judges would have the discretion to fix the APR over a 30-year period. The bill also exempts the debtor from the requirement for credit counseling if the court receives certification that the home has been scheduled for a foreclosure sale. In addition, any prepayment penalties can be waived. Another provision in the bill prohibits a bankruptcy judge from allowing a claim that is subject to any remedy for damages or rescission due to failure to comply with the Truth in Lending Act or any other state or federal consumer protection law. The bill has been the subject of hearings in the Senate Judiciary Committee.
Look for closely contested floor votes on these bills this spring.
2. In In re Maisel, No. 07-43324-JBR (Bankr. D. Mass. 11/15/07), Wells Fargo Bank was allegedly the current holder of the note and mortgage and filled a motion for relief from the automatic stay. However, the Bankruptcy Court called upon the lender to prove that it was the holder of the note and mortgage. At the hearing, Wells Fargo presented an assignment of the documents dated four days after Wells Fargo’s motion was filed.
The Court observed that Section 362 of the Bankruptcy Code plainly limits motions for stay relief to parties in interest and that Federal Rules of Bankruptcy Procedure 9011 requires movants to make factual assertions that have evidentiary support. In this case, Wells Fargo was unable to provide evidentiary support for its assertion that it was a party in interest when the motion was filed because it did not yet have a colorable claim to the property.
Judge Rosenthal wrote:
“Today, more and more homeowners turn to the bankruptcy system for protection when facing financial hardship or impending foreclosure. It is this Court's responsibility to ensure that these debtors receive the full protection of the Bankruptcy Code, including the benefit of an automatic stay, for as long as they are entitled to it. Unfortunately, concomitant with the increase in foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system. It is the lenders' responsibility to comply, and this Court's responsibility to ensure compliance. with both the substantive and procedural requirements of the Bankruptcy Code. Compliance with these rules is not difficult and this Court will require it in order to preserve the rights of debtors. Any motion filed with the Court must be true and have support as of the date of the motion. For example, a movant cannot state that it is the ‘current holder’ of an instrument if it is not. Similarly, this Court has seen motions for relief that state that a debtor is in postpetition default where the last payment was due prepetition, or allege that the debtor will be In default by the time of any hearing; these types of allegations are unacceptable to this Court. Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims.”
Although Wells Fargo did not have standing. the court granted the relief because the debtors intended to surrender the property.
Judge Rosenthal’s decision follows in the footsteps of In re Foreclosures Cases, a case decided last fall in the U.S. District Court for the Northern District of Ohio, Eastern Division, in which Deutsche Bank claimed to hold the notes and mortgages for properties it was attempting to foreclose on. The cases were dismissed without prejudice.
The lesson to be learned from these cases is that if a client is the target of a foreclosure action, it is incumbent upon counsel to review the mortgage and note and verify that the party making the motion for relief from the automatic stay or foreclosure is the party that owns those instruments and has standing to commence the action.
For the latest news on real estate and bankruptcy, please contact Shenwick & Associates.
1. On December 12, 2007, the House of Representatives Judiciary Committee narrowly ordered H.R. 3609, the “Emergency Homeownership and Mortgage Equity Protection Act of 2007” to be reported as amended out of committee for consideration by the full House. The bill would allow bankruptcy judges to modify the terms of a Chapter 13 debtor’s mortgage loan. Among those terms that a judge could tweak are the loan's interest rate, remaining value and maturity.
The substitute bill that was reported out of the committee would limit relief to subprime or nontraditional loans that are in foreclosure or at least 60 days overdue. Judges would also have the authority to determine if debtors qualified for relief under the current means test. The bill applies to existing nontraditional and subprime mortgages originated between Jan. 1, 2000 and the bill's enactment.
Although the compromise bill was nominally bipartisan, only one Republican on the committee voted for the bill. Many opponents of the bill, including The Financial Services Roundtable, argue that the changes could have unintended consequences, by pricing people with poor credit risks out of the mortgage market and causing lenders to require higher interest rates or down payments or both.
However, the bill gained the support of the National Association of Federal Credit Unions, since the definition of a “nontraditional” loan would be limited to interest-only mortgages and adjustable-rate mortgages with payment options that can lead to negative amortization. Credit unions don’t typically provide these types of loans.
On October 3, 2007, Sen. Dick Durbin (D-IL) introduced S. 2136, the “Helping Families Save Their Homes in Bankruptcy Act.” It would allow bankruptcy court judges to reduce the remaining values, interest rates, and maturities of existing mortgages. Specifically, the bill allows cramdowns for principal residential mortgages for homeowners in Chapter 13 bankruptcy. During proceedings, judges would have the discretion to fix the APR over a 30-year period. The bill also exempts the debtor from the requirement for credit counseling if the court receives certification that the home has been scheduled for a foreclosure sale. In addition, any prepayment penalties can be waived. Another provision in the bill prohibits a bankruptcy judge from allowing a claim that is subject to any remedy for damages or rescission due to failure to comply with the Truth in Lending Act or any other state or federal consumer protection law. The bill has been the subject of hearings in the Senate Judiciary Committee.
Look for closely contested floor votes on these bills this spring.
2. In In re Maisel, No. 07-43324-JBR (Bankr. D. Mass. 11/15/07), Wells Fargo Bank was allegedly the current holder of the note and mortgage and filled a motion for relief from the automatic stay. However, the Bankruptcy Court called upon the lender to prove that it was the holder of the note and mortgage. At the hearing, Wells Fargo presented an assignment of the documents dated four days after Wells Fargo’s motion was filed.
The Court observed that Section 362 of the Bankruptcy Code plainly limits motions for stay relief to parties in interest and that Federal Rules of Bankruptcy Procedure 9011 requires movants to make factual assertions that have evidentiary support. In this case, Wells Fargo was unable to provide evidentiary support for its assertion that it was a party in interest when the motion was filed because it did not yet have a colorable claim to the property.
Judge Rosenthal wrote:
“Today, more and more homeowners turn to the bankruptcy system for protection when facing financial hardship or impending foreclosure. It is this Court's responsibility to ensure that these debtors receive the full protection of the Bankruptcy Code, including the benefit of an automatic stay, for as long as they are entitled to it. Unfortunately, concomitant with the increase in foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system. It is the lenders' responsibility to comply, and this Court's responsibility to ensure compliance. with both the substantive and procedural requirements of the Bankruptcy Code. Compliance with these rules is not difficult and this Court will require it in order to preserve the rights of debtors. Any motion filed with the Court must be true and have support as of the date of the motion. For example, a movant cannot state that it is the ‘current holder’ of an instrument if it is not. Similarly, this Court has seen motions for relief that state that a debtor is in postpetition default where the last payment was due prepetition, or allege that the debtor will be In default by the time of any hearing; these types of allegations are unacceptable to this Court. Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims.”
Although Wells Fargo did not have standing. the court granted the relief because the debtors intended to surrender the property.
Judge Rosenthal’s decision follows in the footsteps of In re Foreclosures Cases, a case decided last fall in the U.S. District Court for the Northern District of Ohio, Eastern Division, in which Deutsche Bank claimed to hold the notes and mortgages for properties it was attempting to foreclose on. The cases were dismissed without prejudice.
The lesson to be learned from these cases is that if a client is the target of a foreclosure action, it is incumbent upon counsel to review the mortgage and note and verify that the party making the motion for relief from the automatic stay or foreclosure is the party that owns those instruments and has standing to commence the action.
For the latest news on real estate and bankruptcy, please contact Shenwick & Associates.
Monday, February 11, 2008
Debt Relief Can Cause Headaches of Its Own
It wasn’t supposed to work this way.
Joseph A. Mullaney, a consumer affairs lawyer in New Jersey, was once a victim of a debt settlement company.
Credit card companies have long seduced customers with “buy now, pay later,” hoping they would pay at least a minimum amount month after month but never pay off their debts. Now, though, with the economy slowing and houses no longer easy sources of cash, a growing number of consumers cannot pay even the minimums.
In December, revolving debt — an estimated 95 percent from credit cards — reached a record high of $943.5 billion, according to the Federal Reserve. The annual growth rate of this debt increased steadily in 2007, reaching 9.3 percent in the last quarter, up from 5.4 percent in the first quarter.
The amount of debt that is delinquent — in which minimum payments are late but the accounts are still open — also appears to be on the rise. The Federal Reserve found that 4.34 percent of the credit card portfolios of the 100 largest banks that issue cards was delinquent in the third quarter of last year, up from 4.07 percent in the previous quarter. Charge-offs — accounts closed for nonpayment — also grew in that period, and banks expect charge-offs to keep rising in 2008.
“It’s not that card debt is unmanageable for everyone,” Adam J. Levitin, a credit expert and an associate professor of law at Georgetown University, wrote in an e-mail message. “Rather, it is unmanageable for some (and a growing group, it seems).”
What can borrowers do to extricate themselves?
If belt-tightening suffices, one option is a debt management repayment plan in which interest rates, but not balances, are reduced.
Ronald J. Mann, a law professor at Columbia University and a credit expert, describes credit industry practices as intended to enslave borrowers in a “sweat box.” He recommends a Chapter 7 bankruptcy that wipes out most credit card debt.
Many consumers, however, are loath to file for bankruptcy protection, said Mark S. Zuckerberg, a bankruptcy lawyer in Indianapolis. And others may find that they cannot qualify for a Chapter 7.
Then there is debt settlement, when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. Debt settlement generally works best when consumers can offer a lump sum, the experts said. But consumers may face taxes on the amount the creditor has forgiven.
“Done correctly, it can absolutely help people,” said Cyndi Geerdes, an associate professor at the University of Illinois law school who also runs a consumer debt clinic.
Consumers can arrange debt settlement themselves, and many Web sites offer advice. Consumers can also hire a lawyer or use debt settlement companies, many of which advertise online and on television. The experts agree, however, that “buyer beware” is the best advice when considering debt settlement companies.
A thousand such companies exist nationwide, up from about 300 a couple of years ago, estimated David Leuthold, vice president of the Association of Settlement Companies, which has 70 members and is based in Madison, Wis.
Deanne Loonin, a senior lawyer with the National Consumer Law Center in Boston, has investigated them. “It’s possible there are honest ones,” she said, “but I assume they aren’t until proven otherwise.”
Travis Plunkett, legislative director of the Consumer Federation of America in Washington, said distressed borrowers who cannot produce lump sums to settle with creditors were the most vulnerable to dishonest companies. In some cases, these companies tell consumers to stop paying monthly minimums, explaining that they will negotiate a settlement when borrowers have saved enough. Meanwhile, they take hefty monthly fees directly from clients’ bank accounts.
Creditors will not negotiate reduced balances with consumers who are still making monthly payments. But when they stop paying, total balances swell with fees and interest rates. And depending on the law in states where debtors live, creditors can attach wages and property to satisfy the new total owed.
“Many debt settlement companies never explain these risks clearly,” said Joseph A. Mullaney, a consumer affairs lawyer in Voorhees, N.J.
According to Ms. Geerdes, whether a creditor takes legal steps depends on its analysis of each debtor.
Mr. Leuthold said his association’s members served consumers who had already stopped making payments and had no better options. And his members must pledge to inform clients of risks and spell them out in contracts, he said.
David Johnson, senior vice president of ByDesign Financial Solutions, a nonprofit charity in Commerce, Calif., says he advises consumers to avoid companies that charge large fees upfront or through payments.
“It certainly would seem likely that there would be less incentive to push to settle quickly,” Mr. Johnson wrote in an e-mail message. He recommended that consumers look for services that charge after settlement, about 20 percent of the amount of the negotiated reduction in balance.
Desperate consumers may turn to debt settlement, Mr. Mullaney says, because “they usually want to pay their debt” but are also “intrigued with the proposition of getting out of it without the dishonor of declaring bankruptcy and with the prospect of compromising the actual principal that they owe.”
And company employees can be smooth talkers, said Susan Block-Lieb, a law professor at Fordham University and a consumer affairs expert. “You’ve got these really convincing, calm people with a really complicated formula, who are saying, ‘Don’t worry.’ ”
Katherine Taylor, the maiden name of a white-collar worker in Austin, Tex., who did not want to be further identified because she is a supervisor, said she realized last summer that she and her husband would soon be unable to make monthly minimums on their $59,000 in credit card debt. After seeing a television advertisement, Ms. Taylor said she typed “Christian debt settlement” into her computer. “I wanted an agency with high ethics,” she explained.
On the first phone call with one based in Austin, she agreed to let the company take $676 from her bank account for five months, then $416 for the next 13. “I was told that if I stopped making payments and saved up almost $24,000 on my own, in 48 months I would be free and clear and my credit score would improve,” Ms. Taylor said.
Late last year, unable to reach the settlement company by phone and getting constant calls from collectors, Ms. Taylor contacted a local Better Business Bureau office. She was advised to close her bank account immediately and file a complaint.
Offered a partial refund by the service, she is considering her options.
Mr. Mullaney himself was a victim of a debt settlement company. He was determined, he said, to avoid bankruptcy, a black mark for lawyers. But after starting practice in 2003, he said he realized that he would not be able to afford both student loan payments and the minimums on his $33,500 in credit card debt. He searched online for a debt settlement company run by a lawyer, and by phone closely questioned one based in Anaheim, Calif.
As instructed, Mr. Mullaney stopped paying his credit cards, started paying monthly fees and saved aggressively, he recalled. But without warning, three of Mr. Mullaney’s four creditors took legal action. “Finally, the cloud of irrational belief in the concept disappeared, and I realized the scam I’d fallen for,” he said.
On Oct. 17, 2005, the last day before changes in federal bankruptcy law made it harder to obtain a Chapter 7, Mr. Mullaney filed for bankruptcy protection and eliminated his credit card debt. “I’ve found redemption, through using my legal degree and what I’ve gone through, in counseling others who sit before me ashamed and in tears,” he said.
Marc S. Stern, a bankruptcy lawyer in Seattle, said most consumers should not negotiate for themselves. “It’s too emotional, and a lawyer can say things about clients that they never will, like he’s a deadbeat and you’re never going to get any more from him,” Mr. Stern said.
Experts agreed that deals may be struck with many original creditors for 50 to 80 cents on the dollar, while debt buyers, who paid 20 cents or less on the dollar, may settle for a lower amount.
Debt settlement companies are regulated by state attorneys general and the Federal Trade Commission, but they are rarely prosecuted. To improve regulation of this interstate business, the Uniform Law Commission, sponsored by state governments and based in Chicago, is promoting a model law that covers credit counseling and debt management companies. It was in force in four states last year, and an estimated five state legislatures will vote on it this year, said Michael Kerr, the commission’s legislative director.
Mr. Leuthold says his association welcomes regulation but has reservations about the model law, including its volume. “Some say it is long and complicated, 80 pages, and a lot of states don’t want that level of detail,” he said.
Until the states or Congress act, credit card holders are “naked in the world,” said Elizabeth Warren, a law professor at Harvard and a bankruptcy expert. “Unscrupulous debt counselors have built their business models around taking advantage of desperate people.”
By Jane Birnbaum. Copyright 2008 The New York Times Company. All rights reserved.
Joseph A. Mullaney, a consumer affairs lawyer in New Jersey, was once a victim of a debt settlement company.
Credit card companies have long seduced customers with “buy now, pay later,” hoping they would pay at least a minimum amount month after month but never pay off their debts. Now, though, with the economy slowing and houses no longer easy sources of cash, a growing number of consumers cannot pay even the minimums.
In December, revolving debt — an estimated 95 percent from credit cards — reached a record high of $943.5 billion, according to the Federal Reserve. The annual growth rate of this debt increased steadily in 2007, reaching 9.3 percent in the last quarter, up from 5.4 percent in the first quarter.
The amount of debt that is delinquent — in which minimum payments are late but the accounts are still open — also appears to be on the rise. The Federal Reserve found that 4.34 percent of the credit card portfolios of the 100 largest banks that issue cards was delinquent in the third quarter of last year, up from 4.07 percent in the previous quarter. Charge-offs — accounts closed for nonpayment — also grew in that period, and banks expect charge-offs to keep rising in 2008.
“It’s not that card debt is unmanageable for everyone,” Adam J. Levitin, a credit expert and an associate professor of law at Georgetown University, wrote in an e-mail message. “Rather, it is unmanageable for some (and a growing group, it seems).”
What can borrowers do to extricate themselves?
If belt-tightening suffices, one option is a debt management repayment plan in which interest rates, but not balances, are reduced.
Ronald J. Mann, a law professor at Columbia University and a credit expert, describes credit industry practices as intended to enslave borrowers in a “sweat box.” He recommends a Chapter 7 bankruptcy that wipes out most credit card debt.
Many consumers, however, are loath to file for bankruptcy protection, said Mark S. Zuckerberg, a bankruptcy lawyer in Indianapolis. And others may find that they cannot qualify for a Chapter 7.
Then there is debt settlement, when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. Debt settlement generally works best when consumers can offer a lump sum, the experts said. But consumers may face taxes on the amount the creditor has forgiven.
“Done correctly, it can absolutely help people,” said Cyndi Geerdes, an associate professor at the University of Illinois law school who also runs a consumer debt clinic.
Consumers can arrange debt settlement themselves, and many Web sites offer advice. Consumers can also hire a lawyer or use debt settlement companies, many of which advertise online and on television. The experts agree, however, that “buyer beware” is the best advice when considering debt settlement companies.
A thousand such companies exist nationwide, up from about 300 a couple of years ago, estimated David Leuthold, vice president of the Association of Settlement Companies, which has 70 members and is based in Madison, Wis.
Deanne Loonin, a senior lawyer with the National Consumer Law Center in Boston, has investigated them. “It’s possible there are honest ones,” she said, “but I assume they aren’t until proven otherwise.”
Travis Plunkett, legislative director of the Consumer Federation of America in Washington, said distressed borrowers who cannot produce lump sums to settle with creditors were the most vulnerable to dishonest companies. In some cases, these companies tell consumers to stop paying monthly minimums, explaining that they will negotiate a settlement when borrowers have saved enough. Meanwhile, they take hefty monthly fees directly from clients’ bank accounts.
Creditors will not negotiate reduced balances with consumers who are still making monthly payments. But when they stop paying, total balances swell with fees and interest rates. And depending on the law in states where debtors live, creditors can attach wages and property to satisfy the new total owed.
“Many debt settlement companies never explain these risks clearly,” said Joseph A. Mullaney, a consumer affairs lawyer in Voorhees, N.J.
According to Ms. Geerdes, whether a creditor takes legal steps depends on its analysis of each debtor.
Mr. Leuthold said his association’s members served consumers who had already stopped making payments and had no better options. And his members must pledge to inform clients of risks and spell them out in contracts, he said.
David Johnson, senior vice president of ByDesign Financial Solutions, a nonprofit charity in Commerce, Calif., says he advises consumers to avoid companies that charge large fees upfront or through payments.
“It certainly would seem likely that there would be less incentive to push to settle quickly,” Mr. Johnson wrote in an e-mail message. He recommended that consumers look for services that charge after settlement, about 20 percent of the amount of the negotiated reduction in balance.
Desperate consumers may turn to debt settlement, Mr. Mullaney says, because “they usually want to pay their debt” but are also “intrigued with the proposition of getting out of it without the dishonor of declaring bankruptcy and with the prospect of compromising the actual principal that they owe.”
And company employees can be smooth talkers, said Susan Block-Lieb, a law professor at Fordham University and a consumer affairs expert. “You’ve got these really convincing, calm people with a really complicated formula, who are saying, ‘Don’t worry.’ ”
Katherine Taylor, the maiden name of a white-collar worker in Austin, Tex., who did not want to be further identified because she is a supervisor, said she realized last summer that she and her husband would soon be unable to make monthly minimums on their $59,000 in credit card debt. After seeing a television advertisement, Ms. Taylor said she typed “Christian debt settlement” into her computer. “I wanted an agency with high ethics,” she explained.
On the first phone call with one based in Austin, she agreed to let the company take $676 from her bank account for five months, then $416 for the next 13. “I was told that if I stopped making payments and saved up almost $24,000 on my own, in 48 months I would be free and clear and my credit score would improve,” Ms. Taylor said.
Late last year, unable to reach the settlement company by phone and getting constant calls from collectors, Ms. Taylor contacted a local Better Business Bureau office. She was advised to close her bank account immediately and file a complaint.
Offered a partial refund by the service, she is considering her options.
Mr. Mullaney himself was a victim of a debt settlement company. He was determined, he said, to avoid bankruptcy, a black mark for lawyers. But after starting practice in 2003, he said he realized that he would not be able to afford both student loan payments and the minimums on his $33,500 in credit card debt. He searched online for a debt settlement company run by a lawyer, and by phone closely questioned one based in Anaheim, Calif.
As instructed, Mr. Mullaney stopped paying his credit cards, started paying monthly fees and saved aggressively, he recalled. But without warning, three of Mr. Mullaney’s four creditors took legal action. “Finally, the cloud of irrational belief in the concept disappeared, and I realized the scam I’d fallen for,” he said.
On Oct. 17, 2005, the last day before changes in federal bankruptcy law made it harder to obtain a Chapter 7, Mr. Mullaney filed for bankruptcy protection and eliminated his credit card debt. “I’ve found redemption, through using my legal degree and what I’ve gone through, in counseling others who sit before me ashamed and in tears,” he said.
Marc S. Stern, a bankruptcy lawyer in Seattle, said most consumers should not negotiate for themselves. “It’s too emotional, and a lawyer can say things about clients that they never will, like he’s a deadbeat and you’re never going to get any more from him,” Mr. Stern said.
Experts agreed that deals may be struck with many original creditors for 50 to 80 cents on the dollar, while debt buyers, who paid 20 cents or less on the dollar, may settle for a lower amount.
Debt settlement companies are regulated by state attorneys general and the Federal Trade Commission, but they are rarely prosecuted. To improve regulation of this interstate business, the Uniform Law Commission, sponsored by state governments and based in Chicago, is promoting a model law that covers credit counseling and debt management companies. It was in force in four states last year, and an estimated five state legislatures will vote on it this year, said Michael Kerr, the commission’s legislative director.
Mr. Leuthold says his association welcomes regulation but has reservations about the model law, including its volume. “Some say it is long and complicated, 80 pages, and a lot of states don’t want that level of detail,” he said.
Until the states or Congress act, credit card holders are “naked in the world,” said Elizabeth Warren, a law professor at Harvard and a bankruptcy expert. “Unscrupulous debt counselors have built their business models around taking advantage of desperate people.”
By Jane Birnbaum. Copyright 2008 The New York Times Company. All rights reserved.
Wednesday, January 16, 2008
2008 changes to bankruptcy law
We hope the start of your 2008 has been happy and healthy and that you’ve been able to keep all of your New Year’s resolutions!
This month, we’d like to review the changes in bankruptcy law that took effect on January 1, 2008.
1. Median income. The new median income for a New York State household with 1 earner is $43,352. For a household with 2 people, the median income is $52,891, for 3 people, $62,882 and for four people, $75,513. The median income is increased by $6,900 for each individual in excess of 4.
2. National Standards: Food, Clothing and Other Items. The new National Standards for food, clothing, housekeeping supplies, personal care products and services and miscellaneous are $494 for 1 person, $925 for 2 people, $1,123 for 3 people and $1,331 for 4 people. $246 is added to the allowance for each additional individual in the household.
3. Local Standards: Housing and Utilities. These are set at the county level. For New York County (Manhattan), the new Local Standards are: $671 for non-mortgage expenses and $3,102 for mortgage or rent for 1 person, $788 for non-mortgage expenses and $3,643 for mortgage or rent for two people, $830 for non-mortgage expenses and $3,840 for mortgage or rent for 3 people, $926 for non-mortgage expenses and $4,281 for mortgage or rent for 4 people, and $941for non-mortgage expenses and $4,350 for mortgage or rent for 5 or more people.
4. Local Standards: Transportation. Nationally, $163 is allowable for public transportation costs and $478 for ownership costs for each car (up to 2). In the New York Metropolitan Statistical Area, $268 is allowable for operating costs for 1 car and $536 for 2 cars.
5. National Standards: Out-of-Pocket Health Care Expenses. This is a new standard. Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. For each person under 65, the standard amount is $54. For each person 65 and older, the standard amount is $144. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.
6. Marital Adjustment. Under Section 101(10A)(B) of the Bankruptcy Code, “current monthly income” 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). The marital adjustment line on the calculation of current monthly income now has lines for specifying the basis for excluding spousal income (such as payment of the spouse’s tax liability or the spouse’s support of persons other than the debtor or the debtor’s dependents) and the amount of income devoted to each purpose.
7. Tax Relief for Mortgage Debt Forgiveness. At the end of the year, President Bush signed into law a bill that exempted mortgage debt forgiven through a foreclosure, a short sale (where a home is sold for less than the amount of the loan) or a loan restructuring from being treated as taxable income. Ordinarily, forgiven debt is treated as taxable income. The legislation is retroactive to Jan. 1, 2007 and scheduled to expire at the end of 2009
2008 also inaugurates a new way for Shenwick & Associates to work with our bankruptcy clients. We now offer a Web-based Questionnaire to our clients who are filing for bankruptcy protection.
As always, please contact Shenwick & Associates for the most up to date bankruptcy services.
This month, we’d like to review the changes in bankruptcy law that took effect on January 1, 2008.
1. Median income. The new median income for a New York State household with 1 earner is $43,352. For a household with 2 people, the median income is $52,891, for 3 people, $62,882 and for four people, $75,513. The median income is increased by $6,900 for each individual in excess of 4.
2. National Standards: Food, Clothing and Other Items. The new National Standards for food, clothing, housekeeping supplies, personal care products and services and miscellaneous are $494 for 1 person, $925 for 2 people, $1,123 for 3 people and $1,331 for 4 people. $246 is added to the allowance for each additional individual in the household.
3. Local Standards: Housing and Utilities. These are set at the county level. For New York County (Manhattan), the new Local Standards are: $671 for non-mortgage expenses and $3,102 for mortgage or rent for 1 person, $788 for non-mortgage expenses and $3,643 for mortgage or rent for two people, $830 for non-mortgage expenses and $3,840 for mortgage or rent for 3 people, $926 for non-mortgage expenses and $4,281 for mortgage or rent for 4 people, and $941for non-mortgage expenses and $4,350 for mortgage or rent for 5 or more people.
4. Local Standards: Transportation. Nationally, $163 is allowable for public transportation costs and $478 for ownership costs for each car (up to 2). In the New York Metropolitan Statistical Area, $268 is allowable for operating costs for 1 car and $536 for 2 cars.
5. National Standards: Out-of-Pocket Health Care Expenses. This is a new standard. Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. For each person under 65, the standard amount is $54. For each person 65 and older, the standard amount is $144. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.
6. Marital Adjustment. Under Section 101(10A)(B) of the Bankruptcy Code, “current monthly income” 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). The marital adjustment line on the calculation of current monthly income now has lines for specifying the basis for excluding spousal income (such as payment of the spouse’s tax liability or the spouse’s support of persons other than the debtor or the debtor’s dependents) and the amount of income devoted to each purpose.
7. Tax Relief for Mortgage Debt Forgiveness. At the end of the year, President Bush signed into law a bill that exempted mortgage debt forgiven through a foreclosure, a short sale (where a home is sold for less than the amount of the loan) or a loan restructuring from being treated as taxable income. Ordinarily, forgiven debt is treated as taxable income. The legislation is retroactive to Jan. 1, 2007 and scheduled to expire at the end of 2009
2008 also inaugurates a new way for Shenwick & Associates to work with our bankruptcy clients. We now offer a Web-based Questionnaire to our clients who are filing for bankruptcy protection.
As always, please contact Shenwick & Associates for the most up to date bankruptcy services.
Friday, December 14, 2007
Mortgage foreclosures
Happy holidays! This month we’ll be discussing something we hope you avoid this holiday season-mortgage foreclosures.
With the falling real estate market, many of the readers of this e-mail are aware of the rise in mortgage foreclosures. It is predicted that in 2008 there will be 1.8 to 2 million foreclosures. When a client calls an attorney and indicates that their house is being foreclosed upon, there are a number of options that the attorney should suggest or discuss with the client.
1. Is the party that is commencing the foreclosure action actually the party that owns the mortgage and the promissory note? On October 31, 2007, a federal District Court Judge in Ohio issued an opinion and order which dismissed 14 foreclosure actions by Deutsche Bank based on the fact that Deutsche Bank was unable to provide proof of ownership of the mortgage. This case can be read on our website here.
2. Is the client or the defendant able to work out a forbearance agreement with the mortgagee or the bank? Forbearance agreements may include the following different scenarios: an increase in the number of years in which the loan is due, a reduction in the interest rate on the loan, a separate payment plan for arrears on the mortgage, or the arrears being backended and paid after the mortgage is paid off in full.
3. Chapter 7 bankruptcy. With the increase in the New York State homestead exemption, each debtor in bankruptcy is allowed to keep a house in bankruptcy with no more than $50,000 in equity, so if a couple files for Chapter 7 bankruptcy, they would be able to keep a residence which is their homestead (a house, townhouse, co-op or condo which is their primary residence) and in which they have no more than $100,000 in equity. For bankruptcy purposes, equity is calculated by the difference between the value as determined by a broker price opinion letter or a formal appraisal less any outstanding mortgages, home equity loans or mortgage arrears.
4. Chapter 13 bankruptcy. If the debtors have a regular source of income and they’re generating sufficient income, they may be able to file a three to five year plan with the Bankruptcy Court where they would remain current on their mortgage payments and pay the arrears due the bank over a three to five year period. The debtor would need to show that they have a regular source of income and that the plan is feasible (i.e. that they have sufficient after-tax monies or disposable income to fund the plan).
5. Finally, there are several bills before Congress (in fact, one bill that has passed the House) that would allow a Bankruptcy Judge to modify the terms of a first mortgage which is a subprime mortgage and which would allow the judge to modify the interest rate or the term of the mortgage. Currently, Bankruptcy Judges are unable to modify first mortgages on houses. Shenwick & Associates is monitoring this bill and we will provide updates regarding the status of this bill and if the bill becomes law.
With the falling real estate market, many of the readers of this e-mail are aware of the rise in mortgage foreclosures. It is predicted that in 2008 there will be 1.8 to 2 million foreclosures. When a client calls an attorney and indicates that their house is being foreclosed upon, there are a number of options that the attorney should suggest or discuss with the client.
1. Is the party that is commencing the foreclosure action actually the party that owns the mortgage and the promissory note? On October 31, 2007, a federal District Court Judge in Ohio issued an opinion and order which dismissed 14 foreclosure actions by Deutsche Bank based on the fact that Deutsche Bank was unable to provide proof of ownership of the mortgage. This case can be read on our website here.
2. Is the client or the defendant able to work out a forbearance agreement with the mortgagee or the bank? Forbearance agreements may include the following different scenarios: an increase in the number of years in which the loan is due, a reduction in the interest rate on the loan, a separate payment plan for arrears on the mortgage, or the arrears being backended and paid after the mortgage is paid off in full.
3. Chapter 7 bankruptcy. With the increase in the New York State homestead exemption, each debtor in bankruptcy is allowed to keep a house in bankruptcy with no more than $50,000 in equity, so if a couple files for Chapter 7 bankruptcy, they would be able to keep a residence which is their homestead (a house, townhouse, co-op or condo which is their primary residence) and in which they have no more than $100,000 in equity. For bankruptcy purposes, equity is calculated by the difference between the value as determined by a broker price opinion letter or a formal appraisal less any outstanding mortgages, home equity loans or mortgage arrears.
4. Chapter 13 bankruptcy. If the debtors have a regular source of income and they’re generating sufficient income, they may be able to file a three to five year plan with the Bankruptcy Court where they would remain current on their mortgage payments and pay the arrears due the bank over a three to five year period. The debtor would need to show that they have a regular source of income and that the plan is feasible (i.e. that they have sufficient after-tax monies or disposable income to fund the plan).
5. Finally, there are several bills before Congress (in fact, one bill that has passed the House) that would allow a Bankruptcy Judge to modify the terms of a first mortgage which is a subprime mortgage and which would allow the judge to modify the interest rate or the term of the mortgage. Currently, Bankruptcy Judges are unable to modify first mortgages on houses. Shenwick & Associates is monitoring this bill and we will provide updates regarding the status of this bill and if the bill becomes law.
Monday, November 26, 2007
Real estate and personal bankruptcy
Last month, the Wall Street Journal published an article titled "Burned by Real Estate, Some Just Walk Away" on the rise in foreclosures that accompanied the collapse of the subprime mortgage market.
The article was informative and mostly correct, but got a few facts about real estate and personal bankruptcy wrong. Here’s our letter to the editor in response to the article:
To the Editor:
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
For more information on foreclosures and the relief bankruptcy protection can offer, contact Shenwick & Associates. Happy holidays!
The article was informative and mostly correct, but got a few facts about real estate and personal bankruptcy wrong. Here’s our letter to the editor in response to the article:
To the Editor:
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
For more information on foreclosures and the relief bankruptcy protection can offer, contact Shenwick & Associates. Happy holidays!
Friday, October 19, 2007
Letter to the editor Wall Street Journal
To the Editor:
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
Friday, September 21, 2007
Educational expenses and bankruptcy
This month is a month of transition for us and many of our clients-vacations are over, the seasons are changing and many of us have children who are going (albeit reluctantly) back to school. This month we’re going to look at educational expenses and bankruptcy.
Before 1976, debtors could discharge their student loans and other educational debt in bankruptcy. In 1976, Congress amended the Higher Education Act (“HEA”) to make federally insured and guaranteed student loans nondischargeable if the debt had first become due less than five years prior to the bankruptcy filing and its repayment would not impose an undue hardship on the debtor and his or her dependents. Despite efforts to repeal this provision of the HEA and make educational debt dischargeable again, Congress retained the conditional dischargeability of educational debt when it enacted the Bankruptcy Code in 1978. Since then, Congress has further limited the dischargeability of educational debt by both broadening the class of creditor that can take advantage of the exception to discharge and tightening the conditions under which educational debt may be discharged.
Unfortunately for both debtors and courts interpreting the Bankruptcy Code, the section concerning educational debt merely says:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt - unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for - an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
As the Bankruptcy Court for the Western District of Texas said in 2001, “the statute Congress crafted in gives the Courts absolutely no guidance as to what would constitute ‘undue hardship’ other than a Webster’s dictionary.” Consequently, bankruptcy judges have had a difficult time determining what debtors should be granted or denied discharge of educational debts. The courts have devised several tests for undue hardship, but the most frequently used test was articulated by the Second Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp. The Brunner test for undue hardship requires a three-part showing:
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Failure to by the debtor to prove any of these factors can result in denial of discharge of the educational debt.
For more information about how educational expenses and debts can impact a bankruptcy filing, please contact Shenwick & Associates.
Before 1976, debtors could discharge their student loans and other educational debt in bankruptcy. In 1976, Congress amended the Higher Education Act (“HEA”) to make federally insured and guaranteed student loans nondischargeable if the debt had first become due less than five years prior to the bankruptcy filing and its repayment would not impose an undue hardship on the debtor and his or her dependents. Despite efforts to repeal this provision of the HEA and make educational debt dischargeable again, Congress retained the conditional dischargeability of educational debt when it enacted the Bankruptcy Code in 1978. Since then, Congress has further limited the dischargeability of educational debt by both broadening the class of creditor that can take advantage of the exception to discharge and tightening the conditions under which educational debt may be discharged.
Unfortunately for both debtors and courts interpreting the Bankruptcy Code, the section concerning educational debt merely says:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt - unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for - an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
As the Bankruptcy Court for the Western District of Texas said in 2001, “the statute Congress crafted in gives the Courts absolutely no guidance as to what would constitute ‘undue hardship’ other than a Webster’s dictionary.” Consequently, bankruptcy judges have had a difficult time determining what debtors should be granted or denied discharge of educational debts. The courts have devised several tests for undue hardship, but the most frequently used test was articulated by the Second Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp. The Brunner test for undue hardship requires a three-part showing:
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Failure to by the debtor to prove any of these factors can result in denial of discharge of the educational debt.
For more information about how educational expenses and debts can impact a bankruptcy filing, please contact Shenwick & Associates.
Tuesday, August 07, 2007
Chapter 13 changes under BAPCPA
As many of our clients may know, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) modified, but did not eliminate the process of filing for Chapter 13 bankruptcy. Chapter 13 bankruptcy is generally filed to protect assets such as a house, a car or a below-market lease.
With the fall in real estate values and increase in interest rates on variable rate mortgages, we have been receiving more calls from clients whose houses are either close to foreclosure or have been foreclosed on.
Here are a few of the changes BAPCPA made to filing for Chapter 13 bankruptcy:
1. If the Debtor’s income is above the median income ($42,896 for one earner, $51,994 for two people, $62,815 for three people, $74,501 for four people and $6,900 for each individual in excess of four), the Debtor may be required to file a Chapter 13 repayment plan where the Debtor repays a percentage of his or her debts over a period not to exceed five years, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where the debts are eliminated (discharged), unless the Bankruptcy Court rules that the Debtor’s circumstances are extraordinary.
2. If the Debtor is required to file a Chapter 13 case under the Median Income or Means Test, then the Debtor’s monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment.
3. If a Chapter 13 Debtor’s current monthly income combined with their spouse’s current monthly income is greater than the applicable median income, the plan proposed by the Debtor must not exceed five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses.
4. All returns “required” for the 4 years ending on the petition date must have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.
5. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee.
6. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13.
7. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case.
8. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property.
9. The Chapter 13 “super-discharge” that was obtainable under the Bankruptcy Reform Act of 1978 is greatly reduced under BAPCPA. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a)(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
For more information about filing for Chapter 13 bankruptcy, please contact Shenwick & Associates.
With the fall in real estate values and increase in interest rates on variable rate mortgages, we have been receiving more calls from clients whose houses are either close to foreclosure or have been foreclosed on.
Here are a few of the changes BAPCPA made to filing for Chapter 13 bankruptcy:
1. If the Debtor’s income is above the median income ($42,896 for one earner, $51,994 for two people, $62,815 for three people, $74,501 for four people and $6,900 for each individual in excess of four), the Debtor may be required to file a Chapter 13 repayment plan where the Debtor repays a percentage of his or her debts over a period not to exceed five years, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where the debts are eliminated (discharged), unless the Bankruptcy Court rules that the Debtor’s circumstances are extraordinary.
2. If the Debtor is required to file a Chapter 13 case under the Median Income or Means Test, then the Debtor’s monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment.
3. If a Chapter 13 Debtor’s current monthly income combined with their spouse’s current monthly income is greater than the applicable median income, the plan proposed by the Debtor must not exceed five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses.
4. All returns “required” for the 4 years ending on the petition date must have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.
5. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee.
6. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13.
7. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case.
8. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property.
9. The Chapter 13 “super-discharge” that was obtainable under the Bankruptcy Reform Act of 1978 is greatly reduced under BAPCPA. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a)(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
For more information about filing for Chapter 13 bankruptcy, please contact Shenwick & Associates.
Wednesday, June 20, 2007
Reclamation Claims and Defenses Aginst Claims of Preferential Transfers
We get a lot of questions about changes to the Bankruptcy Code under BAPCPA (which became effective on October 17, 2005). Based on inquiries we have received and an expected increase in Chapter 11 bankruptcy filings, here are updates on two issues: reclamation claims and defenses against claims of preferential transfers.
1. Reclamation Claims. Reclamation is a seller’s limited right to retrieve goods delivered to a buyer when the buyer is insolvent under the Uniform Commercial Code. Under Sections 546(c)(1)(A) and (b) of the Bankruptcy Code, the reclamation deadlines are now (1) not later than 45 days after the date of receipt of such goods by the debtor, or (2) not later than 20 days of the commencement of the case, if the 45-day period expires after the commencement of the case. Under the Bankruptcy Reform Act of 1978, the deadlines were before 10 days after receipt of such goods by the debtor, or before 20 days after receipt of such goods if the 10-day period expired after the commencement of the case.
2. Defenses against Claims of Preferential Transfers. A preferential transfer is a pre-bankruptcy transfer made by an insolvent debtor to or for the benefit of a creditor, thereby allowing the creditor to receive more than its proportionate share of the debtor's assets; specifically, an insolvent debtor's transfer of a property interest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate.
Section 547(c)(2) of the Bankruptcy Code, which provides a defense to claims of preferential transfers based on the ordinary course of business of the debtor or ordinary business terms of transaction, now states: "to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was-(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms." The previous standard under the Bankruptcy Reform Act of 1978 required that both (A) and (B) apply, but under BAPCPA, either clause may be raised as a defense, making it much easier for a creditor to defend against the claim of a preferential transfer.
Another defense new to BAPCPA is that in a case filed by a debtor whose debts are not primarily consumer debts (i.e. primarily business debts), the debtor can only pursue alleged preferential payments that exceed $5,000.
If you have questions about reclamation claims or preferential transfers, please contact Jim Shenwick.
1. Reclamation Claims. Reclamation is a seller’s limited right to retrieve goods delivered to a buyer when the buyer is insolvent under the Uniform Commercial Code. Under Sections 546(c)(1)(A) and (b) of the Bankruptcy Code, the reclamation deadlines are now (1) not later than 45 days after the date of receipt of such goods by the debtor, or (2) not later than 20 days of the commencement of the case, if the 45-day period expires after the commencement of the case. Under the Bankruptcy Reform Act of 1978, the deadlines were before 10 days after receipt of such goods by the debtor, or before 20 days after receipt of such goods if the 10-day period expired after the commencement of the case.
2. Defenses against Claims of Preferential Transfers. A preferential transfer is a pre-bankruptcy transfer made by an insolvent debtor to or for the benefit of a creditor, thereby allowing the creditor to receive more than its proportionate share of the debtor's assets; specifically, an insolvent debtor's transfer of a property interest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate.
Section 547(c)(2) of the Bankruptcy Code, which provides a defense to claims of preferential transfers based on the ordinary course of business of the debtor or ordinary business terms of transaction, now states: "to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was-(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms." The previous standard under the Bankruptcy Reform Act of 1978 required that both (A) and (B) apply, but under BAPCPA, either clause may be raised as a defense, making it much easier for a creditor to defend against the claim of a preferential transfer.
Another defense new to BAPCPA is that in a case filed by a debtor whose debts are not primarily consumer debts (i.e. primarily business debts), the debtor can only pursue alleged preferential payments that exceed $5,000.
If you have questions about reclamation claims or preferential transfers, please contact Jim Shenwick.
Monday, May 14, 2007
Funding a Chapter 13 plan
One of the many changes that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 was in the calculation of how a debtor funds a plan under Chapter 13 of the Bankruptcy Code. Section 1325(b)(2) and (3) define the disposable income which must be paid to unsecured creditors as current monthly income less amounts necessary for:
- the maintenance or support of the debtor or a dependent of the debtor, and
- a domestic support obligation that first becomes payable after the date the petition is filed, and
- charitable contributions of up to 15 percent of gross income, and
- payment of expenditures necessary for the continuation, preservation and operation of a business.
These subsections also require these amounts to be determined in accordance with the Means Test of Section 707(b)(2) if the debtor's income exceeds the median income in the state. For cases filed after February 1, 2007, the median income in New York State for one earner is $42,869, for two people is $51,994, for three people is $62,815 and for four people is $74,501. For cases filed on April 1, 2007 or after, $6,900 is added for each individual in excess of four.
Pre-BAPCPA, this amount was determined by the difference between Schedules I (current income of individual debtor(s)) and J (current expenditures of individual debtor(s)).
This new formula is clearly stated in a recent case from the U.S. Bankruptcy Court for the District of New Jersey, In re Brady, 2007 Bankr. LEXIS 501 (Bankr. D. N.J.). In that case, the Court overruled the objections to confirming the debtors' proposed plan and assertion that the debtors' plan should be based on Schedules I and J of the trustee and one of the unsecured creditors. The Court explicitly stated that the disposable income figure determined by Form B22C (the Means Test form) is then projected over the applicable commitment period, which is 60 months if the debtors have positive disposable income.
In another case from the United States Bankruptcy Court for the District of Oregon, In re Cummings, 17 C.B.N. 527 (Bankr. D. Ore. 2007), the Court ruled that Chapter 13 debtors may deduct the full amount of the IRS standard home and car ownership expenses regardless of the amount of their actual payments, thereby not penalizing "frugal debtors." Frugal debtors thus benefit from BAPCPA's treatment of housing and transportation allowances over the pre-BAPCPA reliance on judicial interpretation of the reasonableness of Schedules I and J. This represents one of the few positive changes that BAPCPA wrought on the bankruptcy landscape. Anyone with questions about filing for Chapter 13 bankruptcy should contact Jim Shenwick.
- the maintenance or support of the debtor or a dependent of the debtor, and
- a domestic support obligation that first becomes payable after the date the petition is filed, and
- charitable contributions of up to 15 percent of gross income, and
- payment of expenditures necessary for the continuation, preservation and operation of a business.
These subsections also require these amounts to be determined in accordance with the Means Test of Section 707(b)(2) if the debtor's income exceeds the median income in the state. For cases filed after February 1, 2007, the median income in New York State for one earner is $42,869, for two people is $51,994, for three people is $62,815 and for four people is $74,501. For cases filed on April 1, 2007 or after, $6,900 is added for each individual in excess of four.
Pre-BAPCPA, this amount was determined by the difference between Schedules I (current income of individual debtor(s)) and J (current expenditures of individual debtor(s)).
This new formula is clearly stated in a recent case from the U.S. Bankruptcy Court for the District of New Jersey, In re Brady, 2007 Bankr. LEXIS 501 (Bankr. D. N.J.). In that case, the Court overruled the objections to confirming the debtors' proposed plan and assertion that the debtors' plan should be based on Schedules I and J of the trustee and one of the unsecured creditors. The Court explicitly stated that the disposable income figure determined by Form B22C (the Means Test form) is then projected over the applicable commitment period, which is 60 months if the debtors have positive disposable income.
In another case from the United States Bankruptcy Court for the District of Oregon, In re Cummings, 17 C.B.N. 527 (Bankr. D. Ore. 2007), the Court ruled that Chapter 13 debtors may deduct the full amount of the IRS standard home and car ownership expenses regardless of the amount of their actual payments, thereby not penalizing "frugal debtors." Frugal debtors thus benefit from BAPCPA's treatment of housing and transportation allowances over the pre-BAPCPA reliance on judicial interpretation of the reasonableness of Schedules I and J. This represents one of the few positive changes that BAPCPA wrought on the bankruptcy landscape. Anyone with questions about filing for Chapter 13 bankruptcy should contact Jim Shenwick.
Wednesday, May 02, 2007
Jim Shenwick lecture at SUNY Optometry School on May 4th
Here's the outline:
I. What every Doctor should know before entering into an office lease.
1. The Parties to the Transaction (“the Team”)- The role of the Real Estate Broker/CPA/Lawyer/Insurance Agent/Architect
2. What is a Term Sheet?-Is it binding?
3. Term of Lease- How many years? Option to Renew, Option on Adjacent Space? Option to Purchase?
4. Use Clause- Broad use clause favors Tenant.
5. Rent- Base rent v. Additional Rent (Rent Estate Taxes, Porter Wages, Water Bill, HVAC) Free Rent, Commencement Date, Landlord Contribution to Buildout (?)
6. Assignment & Sublet – The most important clause in the lease?-What’s the Difference? An exit strategy for Tenant. Recapture of Space by Landlord, profit split with Landlord on assignment or sublet of space.
7. Alterations- Initial Build-out. Free rent period. Structural v. Non-Structural
Is Landlord consent needed? Pre-approval of alterations before lease is executed.
8. Security Deposit-Common Charge – How much? Who gets interest? Tenant Corporation? Personal guaranty, “Good Guy Guaranty” by principal of tenant.
9. Signage- How will your clients find your office? Sign on Building or Flag on Building. Door, Hallway, Elevator, Lobby- Who pays the cost?
10. Other Lease Provisions – Snow Removal, Garbage Disposal, Medical Waste Disposal? Insurance. How much?
QUESTIONS
II. What every Doctor should review in an existing lease before buying into a
practice.
1. “Due Diligence” check list- Lease should be abstracted to focus on key points:
2. Term- Enough time to amortize cost and develop practice?
3. Rent/Additional Rent Projections– Overhead that the practice must carry.
4. Use Clause – Lease allows for use you desire.
5. Sublet/Assignment – “Exit strategy” What is the difference? Procedure should be detailed in the Lease.
6. Alterations- Can you remodel space without the consent of the Landlord?
7. Background, Prior Experience, Net Worth, Balance Sheet.
8. Renewal Options- Generally favor the Tenant if they can be included in the lease.
III. Purchase of Real Estate.
1. For business use or personal use?
2. For business use professionals can mortgage (a) fee interest (such as a house or town house office and use for practice), co-op unit (maintenance) or a condominium unit (common charges). The cost is a set fee plus a percentage commission. No mortgage on building? There are fewer restrictions on the transfer of a condominium than on the transfer of a co-op unit.
3. For personal use choices are house, town house, co-op, or condominium.
4. Due diligence co-op-review of building financials, proprietary lease (in a co-op), board minutes, offering plan and amendments, house rules, building amenities, budget-are there any projected major repairs, pending litigation, asbestos issues, increase in maintenance/common charges, What percentage of financing allowed?
5. Closing Costs: Title insurance for fee, condominium or house purchase, transfer tax or flip tax for co-op, NYS and NYC Transfer Taxes, Mansion Tax?
QUESTIONS
IV. Dischargeability of Student Loans
BAPCPA-Department of Education-Lobby(?)-Hardship
§ 523. Exceptions to discharge (a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—(8) unless excepting such debt from discharge under this paragraph would impose an “undue hardship” on the debtor and the debtor’s dependents, for—(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
Case Law: Brunner v. New York State Higher Ed. Servs., 831 F.2d 395 (2nd Circuit Court of Appeals 1987)
• Inability to maintain a minimal standard of living for most of the repayment period
• These hardship circumstances will persist for a significant portion of the repayment period
• The debtor made a good faith effort to repay the loan
Congratulations on completing the program and best of luck in your career.
If you have any questions, please contact me.
I. What every Doctor should know before entering into an office lease.
1. The Parties to the Transaction (“the Team”)- The role of the Real Estate Broker/CPA/Lawyer/Insurance Agent/Architect
2. What is a Term Sheet?-Is it binding?
3. Term of Lease- How many years? Option to Renew, Option on Adjacent Space? Option to Purchase?
4. Use Clause- Broad use clause favors Tenant.
5. Rent- Base rent v. Additional Rent (Rent Estate Taxes, Porter Wages, Water Bill, HVAC) Free Rent, Commencement Date, Landlord Contribution to Buildout (?)
6. Assignment & Sublet – The most important clause in the lease?-What’s the Difference? An exit strategy for Tenant. Recapture of Space by Landlord, profit split with Landlord on assignment or sublet of space.
7. Alterations- Initial Build-out. Free rent period. Structural v. Non-Structural
Is Landlord consent needed? Pre-approval of alterations before lease is executed.
8. Security Deposit-Common Charge – How much? Who gets interest? Tenant Corporation? Personal guaranty, “Good Guy Guaranty” by principal of tenant.
9. Signage- How will your clients find your office? Sign on Building or Flag on Building. Door, Hallway, Elevator, Lobby- Who pays the cost?
10. Other Lease Provisions – Snow Removal, Garbage Disposal, Medical Waste Disposal? Insurance. How much?
QUESTIONS
II. What every Doctor should review in an existing lease before buying into a
practice.
1. “Due Diligence” check list- Lease should be abstracted to focus on key points:
2. Term- Enough time to amortize cost and develop practice?
3. Rent/Additional Rent Projections– Overhead that the practice must carry.
4. Use Clause – Lease allows for use you desire.
5. Sublet/Assignment – “Exit strategy” What is the difference? Procedure should be detailed in the Lease.
6. Alterations- Can you remodel space without the consent of the Landlord?
7. Background, Prior Experience, Net Worth, Balance Sheet.
8. Renewal Options- Generally favor the Tenant if they can be included in the lease.
III. Purchase of Real Estate.
1. For business use or personal use?
2. For business use professionals can mortgage (a) fee interest (such as a house or town house office and use for practice), co-op unit (maintenance) or a condominium unit (common charges). The cost is a set fee plus a percentage commission. No mortgage on building? There are fewer restrictions on the transfer of a condominium than on the transfer of a co-op unit.
3. For personal use choices are house, town house, co-op, or condominium.
4. Due diligence co-op-review of building financials, proprietary lease (in a co-op), board minutes, offering plan and amendments, house rules, building amenities, budget-are there any projected major repairs, pending litigation, asbestos issues, increase in maintenance/common charges, What percentage of financing allowed?
5. Closing Costs: Title insurance for fee, condominium or house purchase, transfer tax or flip tax for co-op, NYS and NYC Transfer Taxes, Mansion Tax?
QUESTIONS
IV. Dischargeability of Student Loans
BAPCPA-Department of Education-Lobby(?)-Hardship
§ 523. Exceptions to discharge (a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—(8) unless excepting such debt from discharge under this paragraph would impose an “undue hardship” on the debtor and the debtor’s dependents, for—(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
Case Law: Brunner v. New York State Higher Ed. Servs., 831 F.2d 395 (2nd Circuit Court of Appeals 1987)
• Inability to maintain a minimal standard of living for most of the repayment period
• These hardship circumstances will persist for a significant portion of the repayment period
• The debtor made a good faith effort to repay the loan
Congratulations on completing the program and best of luck in your career.
If you have any questions, please contact me.
Friday, April 20, 2007
Spousal Debts
We’re often asked by couples if one spouse is responsible for the debts of the other spouse when only one spouse is filing for bankruptcy. Section 707(7)(B) requires that:
“In a case that is not a joint case, current monthly income of the debtor’s spouse shall not be considered for the purposes of subparagraph (A) [which prohibits the filing of a motion to dismiss for presumption of abuse if the current monthly income of the debtor and debtor’s spouse combined is less than or equal to the median family income in the applicable state and of the same household size] if-(i)(I) the debtor and the debtor’s spouse are separated under applicable nonbankruptcy law; or (II) the debtor and the debtor’s spouse are living separate and apart, other than for the purpose of evading subparagraph (A); and (ii) the debtor files a statement under penalty of perjury-(I) specifying that the debtor meets the requirement of subclause (I) or (II) of clause (i); and (II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor’s spouse attributed to the debtor’s monthly income.”
So when we ask a client to fill out Schedule I (Current Income) and Schedule J (Current Expenditures), they need to keep these conditions in mind. This provision is one of the many changes enacted by BAPCPA to the bankruptcy process. Therefore, case law is still rather sparse, but one interesting case is In re Travis, 353 B.R. 520 (Bankr. E.D. Mich. 2006). The facts of the case are as follows: the debtor was married and filed for Chapter 7 bankruptcy separately from his wife. The debtor’s Statement of Current Monthly Income and Means Test Calculation (the “B-22 Form”) stated that a presumption of abuse did not arise. The United States Trustee filed a motion to dismiss the bankruptcy pursuant to §707(b)(2) and §707(b)(3). The UST argued that had the debtor completed the form correctly, a presumption of abuse arose. The primary disagreement was regarding line 17 of the B-22 Form. The debtor and his non-filing spouse both entered figures on this line, and the UST argued that the debtor’s spouse could not include in this figure any amounts for food, utilities, clothing and personal items because those expenses are already accounted for when the debtor calculated his deductions, and this would be “double dipping.” The UST also objected to several other expenses and deductions taken by the debtor.
The Court noted that the calculation of current monthly income is complicated, not clearly defined, fact specific and open to interpretation. The Court mentions that the issue of a non-filing spouse’s income is not limited to post-BAPCPA cases. In Chapter 13 cases, the issue arises under §1325(b)(1), which requires a determination of the debtor’s available disposable income and in Chapter 7 cases, the non-filing spouse’s income has been considered in conjunction with a §707 substantial abuse motion by the UST.
Thus, while §101(10A)(A) excludes a non-filing spouse’s income, a non-filing spouse’s income must be accounted for under §101(10A)(B) to the extent that the non-filing spouse contributes on a regular basis to the household expenses of the debtor and the debtor’s dependents.
In the instant case, the Court agreed with the UST that some of the expenses claimed by the debtor’s non-filing spouse as her own expenses were either counted twice or were a contribution to the household expenses of the debtor and debtor’s dependents, and therefore could not be included in the Line 17 marital adjustment. Specifically, the Court cited the contribution of the non-filing spouse for food and utilities and a deduction for taxes.
However, the court also found that it was appropriate, on the facts of this case, for the non-filing spouse to take marital adjustment for clothing and personal items. The Court contrasts the debtor’s expenses (which are fixed by the IRS national standards for allowable living expenses and the IRS local standards for housing and utility payments) with that of the non-filing spouse’s expenses, which are not fixed.
The Court recalculated the B-22 Form based on its rulings and still found a negative disposable income under §707(b)(2). Therefore there was no presumption of abuse under §707(b)(2). The Court also reviewed the totality of the circumstances to determine if the debtor’s petition was abuse under §707(b)(3) and concluded that it was not. Therefore, the Court denied the UST’s motion to dismiss.
Any persons having questions about the impact of spousal income on bankruptcy should contact Jim Shenwick.
“In a case that is not a joint case, current monthly income of the debtor’s spouse shall not be considered for the purposes of subparagraph (A) [which prohibits the filing of a motion to dismiss for presumption of abuse if the current monthly income of the debtor and debtor’s spouse combined is less than or equal to the median family income in the applicable state and of the same household size] if-(i)(I) the debtor and the debtor’s spouse are separated under applicable nonbankruptcy law; or (II) the debtor and the debtor’s spouse are living separate and apart, other than for the purpose of evading subparagraph (A); and (ii) the debtor files a statement under penalty of perjury-(I) specifying that the debtor meets the requirement of subclause (I) or (II) of clause (i); and (II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor’s spouse attributed to the debtor’s monthly income.”
So when we ask a client to fill out Schedule I (Current Income) and Schedule J (Current Expenditures), they need to keep these conditions in mind. This provision is one of the many changes enacted by BAPCPA to the bankruptcy process. Therefore, case law is still rather sparse, but one interesting case is In re Travis, 353 B.R. 520 (Bankr. E.D. Mich. 2006). The facts of the case are as follows: the debtor was married and filed for Chapter 7 bankruptcy separately from his wife. The debtor’s Statement of Current Monthly Income and Means Test Calculation (the “B-22 Form”) stated that a presumption of abuse did not arise. The United States Trustee filed a motion to dismiss the bankruptcy pursuant to §707(b)(2) and §707(b)(3). The UST argued that had the debtor completed the form correctly, a presumption of abuse arose. The primary disagreement was regarding line 17 of the B-22 Form. The debtor and his non-filing spouse both entered figures on this line, and the UST argued that the debtor’s spouse could not include in this figure any amounts for food, utilities, clothing and personal items because those expenses are already accounted for when the debtor calculated his deductions, and this would be “double dipping.” The UST also objected to several other expenses and deductions taken by the debtor.
The Court noted that the calculation of current monthly income is complicated, not clearly defined, fact specific and open to interpretation. The Court mentions that the issue of a non-filing spouse’s income is not limited to post-BAPCPA cases. In Chapter 13 cases, the issue arises under §1325(b)(1), which requires a determination of the debtor’s available disposable income and in Chapter 7 cases, the non-filing spouse’s income has been considered in conjunction with a §707 substantial abuse motion by the UST.
Thus, while §101(10A)(A) excludes a non-filing spouse’s income, a non-filing spouse’s income must be accounted for under §101(10A)(B) to the extent that the non-filing spouse contributes on a regular basis to the household expenses of the debtor and the debtor’s dependents.
In the instant case, the Court agreed with the UST that some of the expenses claimed by the debtor’s non-filing spouse as her own expenses were either counted twice or were a contribution to the household expenses of the debtor and debtor’s dependents, and therefore could not be included in the Line 17 marital adjustment. Specifically, the Court cited the contribution of the non-filing spouse for food and utilities and a deduction for taxes.
However, the court also found that it was appropriate, on the facts of this case, for the non-filing spouse to take marital adjustment for clothing and personal items. The Court contrasts the debtor’s expenses (which are fixed by the IRS national standards for allowable living expenses and the IRS local standards for housing and utility payments) with that of the non-filing spouse’s expenses, which are not fixed.
The Court recalculated the B-22 Form based on its rulings and still found a negative disposable income under §707(b)(2). Therefore there was no presumption of abuse under §707(b)(2). The Court also reviewed the totality of the circumstances to determine if the debtor’s petition was abuse under §707(b)(3) and concluded that it was not. Therefore, the Court denied the UST’s motion to dismiss.
Any persons having questions about the impact of spousal income on bankruptcy should contact Jim Shenwick.
Monday, March 26, 2007
Marrama
A recent Supreme Court case, Marrama v. Citizens Bank of Massachusetts et al., is a cautionary tale for debtors who try to play fast and loose with their bankruptcy filing.
Mr. Marrama had initially filed a Chapter 7 case, in which he made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. While he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. In fact, the home had substantial value and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his petition.
After his 341 meeting, when the trustee told Marrama’s counsel that he intended to recover the property as an asset of the state, Marrama made a motion to convert his case to Chapter 13. The Trustee, however, objected to the conversion and the Court held that neither section 706 nor section 1307(c) of the Bankruptcy Code limits a Court’s authority to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. The Court’s authority was based on Section 105 of the Bankruptcy Code, which gives bankruptcy judges broad authority to take the necessary actions to prevent an abuse of process.
What do we learn as attorneys or clients from this Supreme Court decision? Bankruptcy Court is a court of equity and in order to obtain a discharge, one must follow the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of the Bankruptcy Court and give full and fair disclosure to all creditors. When a debtor does not play by the rules, the Court will deny the debtor a right of conversion to in effect punish them for their failure to play fair with the Court. Any persons having questions about Marrama or bankruptcy should contact Jim Shenwick.
Mr. Marrama had initially filed a Chapter 7 case, in which he made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. While he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. In fact, the home had substantial value and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his petition.
After his 341 meeting, when the trustee told Marrama’s counsel that he intended to recover the property as an asset of the state, Marrama made a motion to convert his case to Chapter 13. The Trustee, however, objected to the conversion and the Court held that neither section 706 nor section 1307(c) of the Bankruptcy Code limits a Court’s authority to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. The Court’s authority was based on Section 105 of the Bankruptcy Code, which gives bankruptcy judges broad authority to take the necessary actions to prevent an abuse of process.
What do we learn as attorneys or clients from this Supreme Court decision? Bankruptcy Court is a court of equity and in order to obtain a discharge, one must follow the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of the Bankruptcy Court and give full and fair disclosure to all creditors. When a debtor does not play by the rules, the Court will deny the debtor a right of conversion to in effect punish them for their failure to play fair with the Court. Any persons having questions about Marrama or bankruptcy should contact Jim Shenwick.
Thursday, February 22, 2007
BAPCPA Trends
We have a new address:
Shenwick & Associates
655 Third Avenue, 20th floor
New York, NY 10017
Please update your records accordingly.
According to a new paper on consumer bankruptcy trends and indicators, bankruptcy filings will soon be back at the levels they were before the Bankruptcy Protection Act (BAPCPA) of 2005. Although passage of BAPCPA caused a sharp spike in bankruptcy filings before it went into effect on October 17, 2005 and a dramatic fall-off thereafter, research by University of Illinois College of Law Professor Charles Tabb suggests that filings are about to return to pre-BAPCPA filing levels.
"The data indicate that BAPCPA was based on a canard," claims Tabb. "It does not appear that consumers have made a quantum shift to Chapter 13 from Chapter 7, as Congress had hoped would happen under BAPCPA. More importantly, the data suggest that BAPCPA was predicated on (to be generous) a false hope, that making the law 'tougher' would discourage consumer debtors from filing bankruptcy. The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt."
Tabb also found that Chapter 13 filings fell after BAPCPA went into effect (though not as much as Chapter 7 filings) and Chapter 13 filings didn't increase pre-BAPCPA. In Chapter 7 bankruptcy, a debtor can discharge (or liquidate) most of his or her debts. To file a Chapter 13 bankruptcy, a debtor may not have any more than $807,750 in secured debts and $269,250 in unsecured debts. A debtor must also have regular income that's sufficient to pay for basic needs (i.e. food, shelter, clothing, etc.) and fund payments to a plan (over three to five years) to repay creditors.
An abstract of "Consumer Bankruptcy Filings: Trends and Indicators" is available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931172
James Shenwick
Shenwick & Associates
655 Third Avenue
20th Floor
New York, N.Y. 10017
Work: 212-541-6224
Cell Phone: 917-363-3391
Fax: 646-218-4600
E Mail: jhs7@att.net
Web: http://jshenwick.googlepages.com
Shenwick & Associates
655 Third Avenue, 20th floor
New York, NY 10017
Please update your records accordingly.
According to a new paper on consumer bankruptcy trends and indicators, bankruptcy filings will soon be back at the levels they were before the Bankruptcy Protection Act (BAPCPA) of 2005. Although passage of BAPCPA caused a sharp spike in bankruptcy filings before it went into effect on October 17, 2005 and a dramatic fall-off thereafter, research by University of Illinois College of Law Professor Charles Tabb suggests that filings are about to return to pre-BAPCPA filing levels.
"The data indicate that BAPCPA was based on a canard," claims Tabb. "It does not appear that consumers have made a quantum shift to Chapter 13 from Chapter 7, as Congress had hoped would happen under BAPCPA. More importantly, the data suggest that BAPCPA was predicated on (to be generous) a false hope, that making the law 'tougher' would discourage consumer debtors from filing bankruptcy. The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt."
Tabb also found that Chapter 13 filings fell after BAPCPA went into effect (though not as much as Chapter 7 filings) and Chapter 13 filings didn't increase pre-BAPCPA. In Chapter 7 bankruptcy, a debtor can discharge (or liquidate) most of his or her debts. To file a Chapter 13 bankruptcy, a debtor may not have any more than $807,750 in secured debts and $269,250 in unsecured debts. A debtor must also have regular income that's sufficient to pay for basic needs (i.e. food, shelter, clothing, etc.) and fund payments to a plan (over three to five years) to repay creditors.
An abstract of "Consumer Bankruptcy Filings: Trends and Indicators" is available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931172
James Shenwick
Shenwick & Associates
655 Third Avenue
20th Floor
New York, N.Y. 10017
Work: 212-541-6224
Cell Phone: 917-363-3391
Fax: 646-218-4600
E Mail: jhs7@att.net
Web: http://jshenwick.googlepages.com
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