Extending Deadlines and Section 108 of the Bankruptcy Code

How many times in life have we wished that we could extend a deadline? Section 108 of the Bankruptcy Code, under certain circumstances, allows us to do just that.

Section 108(a) extends any statute of limitation to commence an action that the debtor could have taken before the filing of the bankruptcy petition for two years after the date of the bankruptcy filing, unless it would expire later under applicable non-bankruptcy law. 

Section 108(b) is applicable when there is a time limit set for taking certain actions, such as the filing of pleadings or claims, and that period has not expired before the date a bankruptcy petition was filed.  Under § 108(b), a bankruptcy trustee is given 60 days to take actions not covered under § 108(a), such as filing a pleading, a demand notice, or proof of claim or loss (such as an insurance claim).  Section 108(b) also extends the time to commence an administrative proceeding or file a notice of appeal.

Section 108(b) does not apply to time periods in actions against a debtor.  Such actions are stayed by § 362 of the Bankruptcy Code and may proceed only when the stay under the applicable sections of the Bankruptcy Code terminates.  Therefore, in a Chapter 11 bankruptcy case, deadlines that have not expired prior to the bankruptcy filing may be extended for an additional 60 day period. 

In Canney v. Merchants Bank (In re Canney), 284 F.3d 362 (2002), the Second Circuit (which includes New York) held that when there is a foreclosure sale and the debtor has a certain amount of time by law to redeem the property, the debtor’s rights to the property are controlled by § 108(b), and extend the redemption period for a maximum of 60 days.

Section 108(c) provides that if a non-bankruptcy claim against the debtor is stayed due to bankruptcy, any deadline for commencing or continuing the action is extended to 30 days after notice of the termination of the stay, if the deadline would have occurred on an earlier date (if a party does not receive notice of the termination of the stay, the 30 days never begins to run).

 

For more information about how bankruptcy affects deadlines in legal actions, please contact Jim Shenwick.

WSJ: Student-Loan Debt Tops $1 Trillion

By JOSH MITCHELL and MAYA JACKSON-RANDALL

The amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes, potentially slowing the housing recovery, U.S. officials said Wednesday.

Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

The new figure—released Wednesday at a banking conference in Austin, Texas—is a preliminary finding from a study of student debt that the bureau plans to release this summer. Bureau officials said the estimate is based on a survey of private lenders, as opposed to other estimates that rely on a sampling of consumer credit reports.

CFPB officials say student debt is rising for several reasons, including a surge in Americans going to college in recent years to escape the weak labor market. Also, tuition increases—which many colleges say are needed to offset big cuts in state funding—have many students taking out bigger loans.

In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, bureau officials said. New York Fed data show that as many as one in four student borrowers who have begun repaying their education debts are behind on payments.

Economists say college is an increasingly good investment because of the widening pay gap between jobs that require a degree and those that don't. Ultimately, the educational degrees and added skills are meant to help workers earn higher incomes that, in time, will more than offset the student debt.

But as more people go to college and assume bigger loans for education, they may take longer than previous generations to hit key milestones such as buying a house or getting married, U.S. officials and economists say. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.

Rohit Chopra, student-loan ombudsman for the Consumer Financial Protection Bureau, said student debt could ultimately slow the recovery of the housing market. "First-time home-buyers are a substantial part of the housing market," Mr. Chopra said in a speech at the banking conference in Austin. "Instead of saving for a down payment, these borrowers are sending big payments every month."

Student debt is a burden not just for recent college graduates in their 20s but also parents, who often co-sign their children's student loans, as well as midcareer professionals who opted to go back to school during the sluggish recovery.

David Johnson, a 58-year-old groundskeeper from Milton, Wash., decided to leave gardening after more than two decades to become a nurse. Two years ago, he took out about $18,000 in private and federal loans to attend a local community college that had a nursing program. After completing prerequisite classes, he learned that the program had a waiting list. With no guarantee of getting into the nursing program, he is wondering whether to take out more debt to continue in school.

"It's an awkward place to be. I'm not yet a nurse but I've got all this debt and interest compounding on me," he said. "I don't have a lot of working years left and I'm saddled with this debt."

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved.

NYT: One Couple's Ordeal Against Credit-Card and Housing Debt

By TESS VIGELAND 

Seattle

TWELVE-STEP programs often talk about the moment of clarity, when an addict starts to understand just how dire the situation has become.

For Karawynn Long, 42, and Jak Koke, 47, it arrived in 2005, when they crossed the $40,000 mark on their credit card bills. “For some reason that was a scary number, over some internal threshold,” Ms. Long said.

Their pledge to fix the problem came a couple of years before the economy turned, giving them a head start on all the other people who buckled down once disaster become clear. Ms. Long and Mr. Koke, who live here, paid off the debt, earned more money and changed their spending habits — all of the things you’re supposed to do when plotting a financial turnaround.

But in the end, their best efforts were not enough to avoid being dragged down by the one asset that they thought would protect them — their home, which they will have to shed before they can complete their comeback.

Their story begins in early 2002, when they moved in together. A year later, they began a publishing start-up — Per Aspera Press — that they hoped would become their own science fiction and fantasy imprint. The business name is taken from the Latin phrase “ad astra per aspera,” which means “to the stars through difficulties.” But the effort generated more difficulties than stars, and they struggled to finance it with ever-more credit card debt.

Ms. Long, an author herself, also acknowledged that half of that $40,000-plus debt load was from living beyond their means.

She always assumed she would share the upper-middle-class lifestyle of her childhood. She went out to eat — a lot — something that continued during her relationship with Mr. Koke. They took vacations. And when money was tight? “Basically I just put it on credit cards to keep that level of lifestyle no matter the actual situation,” she said. “Like I was entitled to that.”

Mr. Koke grew up in what he describes as an average middle-class family. Both his parents worked. His money philosophy has always been to try to arrange his expenses and his life so that he could live on part-time employment, with the rest of his time devoted to writing novels.

“I did pick up the responsibility gene in the sense that up until we had our business where we ran up this huge debt, I didn’t have much debt on my cards,” he said. And the pair were sure the publishing imprint would succeed. “It always seemed like at some point it will break through and pay for itself and our lives, too,” Mr. Koke said. “But it never actually did.”

The credit cards had also seen them through periods of unemployment. Both have spent the bulk of their careers in the technology industry, mostly as contract employees. She has worked as a Web designer at various start-ups, and he has had jobs as a biotech researcher at several universities, as well as on-and-off work doing technical and marketing writing and editing at Microsoft.

He has two daughters from a previous marriage: Michaela, 19, who rents a room from a great-aunt in Portland, Ore., while saving for college, and Claire, 13, who lives half-time with her father and Ms. Long.

By late 2005, Ms. Long started to worry about the ballooning debt. Early in 2006 they began household austerity measures, including few or no meals in restaurants, no vacations and the suspension of contributions to their retirement funds.

The couple also shut down the publishing effort and found full-time jobs. She worked for a brokerage firm, and he got what he thought was a long-term contract writing for Microsoft. That raised their combined annual income to around $150,000.

Then, they threw every extra penny at the credit card debt, around $2,000 a month. Soon the older daughter, Michaela, noticed that the formerly automatic answer of “Sure, honey, here’s the money” started to change. “If you wanted to get a sports sweatshirt or something we would work something out where I paid half if I really wanted it,” Michaela said.

Claire, who was 7 at the time, said she noted the drop-off in vacations and meals out. And Christmas changed. “I did think I used to want to have lots of stuff under the tree,” she said. “But then I kind of got more excited about people opening the presents that I got them and making them happy. You don’t need to have all the things.”

The couple first took aim at the credit cards with the highest interest rates and wiped out the entire balance within two years. To celebrate, they took vacations to Sea World and Mexico. But the family had mere months to enjoy the accomplishment before the nation spiraled into financial crisis.

By October 2008, Ms. Long was unemployed. Mr. Koke’s hours at Microsoft were slashed in half, and his wages for the time he did work dropped by 10 percent. Both have lived off contract work in the three years since, and their annual income is less than half of its peak. What saved them from utter financial devastation was the fact that they had rid themselves of the credit card debt.

But then there was that one remaining troubled debt lurking: their home. The green, single-story house sits among fragrant pine trees in a quiet neighborhood of north Seattle, near Haller Lake. Inside, the furnishings are sparse and tend toward Native American arts and Pacific Northwest décor.

They bought it in 2006, just as their family austerity measures began. It measures 1,800 square feet and cost just over $400,000. They had not saved enough for a down payment, so they did what many Americans did at the time: they took out a second mortgage, also known as a piggyback loan. The first mortgage was a 30-year fixed rate loan for $303,750. The second mortgage was for $101,250 with a 15-year fixed rate and a balloon payment at the end. This meant they had no equity in the home from the outset. Based on estimates at Zillow.com, they now owe $82,000 more on the mortgage than the property is worth.

Given their severely diminished household income, the two mortgage payments ended up being about 65 percent of the couple’s take-home pay each month. “We were killing ourselves to pay this mortgage,” Ms. Long said.

So in January 2011, they stopped paying.

They said they had tried to work with their bank, to no avail. So they are squatting in their own home, waiting for a foreclosure notice to tell them when they must leave. Ms. Long, who now writes her own personal finance blog called Pocketmint, was blunt. “I’m C.F.O. of this household,” she said. “It’s a business decision for us.”

The mortgage payments that have not gone to the bank have instead gone into an emergency fund and will also help with an eventual apartment rental.

The family also took a vacation last fall, their first in at least two years. The four of them flew to Washington, D.C., for less than $250 each, according to Ms. Long, who did dogged airfare research. They stayed with a relative, prepared most of their own meals (including lunches to eat outside the Smithsonian museums), and spent less than $1,800 for nine days, she said.

Those who would look askance at that expense when they are not paying the mortgage, Ms. Long said it was money well spent. “We took a vacation to the Smithsonian because we’ve learned that experiences, rather than possessions, are the way to happiness,” she said. “And we wanted to share that with our kids.”

Claire says she learned even more over the last few years by watching her parents work their way through their financial problems. “I learned,” she said, “a lot about not getting trapped.”

Devin Maverick Robins contributed reporting.

Copyright 2012 The New York Times Company.  All rights reserved.

NYT: Bankruptcy Becomes Unaffordable for Small Businesses

By IAN MOUNT

For the past 23 years, Chuck Benjamin has been working as a turnaround consultant, primarily for troubled private companies with annual revenues of $25 million to $250 million. During that time, his company — Benjamin Capital Advisors of Rye Brook, N.Y., and Boca Raton, Fla. — has handled some 70 cases. “My endgame is to save companies,” said Mr. Benjamin, 71, “hopefully for their owners.” 

That has become much more difficult in recent years, he says, as changes in bankruptcy law have given unsecured creditors more power and made bankruptcy more expensive. These legal changes and increased costs have in turn pushed troubled companies to liquidate their assets instead of reorganizing, Mr. Benjamin said, which ends up eliminating the original owners — and many jobs — in the process. The following is a condensed version of a recent conversation.

 

Q. You say the bankruptcy process is broken. How so?

 

A. When bankruptcy evolved, it was to protect debtors, the owners. The whole concept was forgiving debts or restructuring so the business would survive in the hands of the owners. But the rules have changed over the years. Today, if they have to go into Chapter 11, the odds of the owners keeping the business are much lower. So there’s no incentive for the owners to enter Chapter 11 and reorganize. Why save a company for somebody else?

 

Q. What changed?

 

A. First, the Supreme Court’s 1999 LaSalle decision basically meant that any company that entered bankruptcy was on the market and could be bought either whole or piecemeal. And then in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, and that changed the face of Chapter 11 for privately held businesses. No. 1, B.A.P.C.P.A. changed the landlord’s position. It limits the time to just seven months for debtors to decide whether to accept or reject the lease in bankruptcy. It used to be you could get extended almost forever the time you could accept or reject a lease. Now they have seven months. That’s not a long time to decide which locations to close while you’re in trouble and you’re trying to work through all kinds of other issues.

The second change is exclusivity, that is, the debtor’s exclusive right to file a plan of reorganization. It used to be you had all kinds of extensions. Sometimes bankruptcies used to take two, three, four, five years. I had one that was in Chapter 11 for seven years. But it survived. Now you have 18 months where the owner has the exclusive right to file plans for reorganization. Unsecured creditors know that after 18 months they can file a plan excluding the debtor. After you’re in Chapter 11 for eight or 10 months, creditors say, “I’m just going to hang on. I’ll file my own plan and take over the company. Or after 18 months we’ll just liquidate it.”

 

Q. It’s hard to see anything positive about a bankruptcy that takes seven years.

 

A. Sometimes staying in bankruptcy a longer time was better, because it gave a debtor time to catch its breath.

 

Q. Who wins from this change?

 

A. The LaSalle decision and B.A.P.C.P.A. have given unsecured creditors a huge advantage, and the result is the cost of bankruptcy has gotten so high — because of professional and other costs — that the ability to continue the company under current ownership has reached almost zero. I understand the plight of unsecured creditors, but everyone who sells on unsecured account understands the risk. Every businessman understands this when he sells and makes a credit decision.

 

Q. Really? Small-business owners offer credit like this routinely. You don’t think they expect to get paid?

A. You know that old saying, “Let the buyer beware”? I think it’s every businessman’s responsibility to know to whom he sells and offers credit. If I sell to you and you begin to pay very slowly — which often happens before a bankruptcy — I should stop selling to you on credit. But if I continue to sell to you to make a buck, it’s not your fault, it’s mine.

 

Q. So what happens instead of reorganization these days?

 

A. Companies are liquidated. Back in 1983, the Lionel case allowed companies the freedom to sell off assets as opposed to filing a plan of reorganization. It expanded what could be sold in a “363 sale.” The 363 component was originally designed to allow companies to sell off spoilable product, like fruit. If you were in the grocery business and you filed bankruptcy, it allowed you to sell off assets. The Lionel case expanded that so you could sell major assets, virtually including the whole company. That’s a quick way to avoid a plan of reorganization.

 

Q. How does a 363 sale work?

 

A. The 363 sale requires nothing more than saying, “I’m going to sell you my equipment,” and I publish that, and for 30 or 40 days people have a right to object to it and the judge can decide, O.K., sell it, or if there’s a higher or better bid, it goes to the highest or best bidder. That happened in the Brunschwig & Fils bankruptcy where I was the chief restructuring officer. I sold the company’s assets for $10 million, very successful, but the original owners lost control and 116 employees lost their jobs. In the old days we would have been able to reorganize the company.

 

Q. How do these changes affect a troubled company’s ability to get financing during reorganization?

 

A. All of these changes say to the world that the chance of a company surviving bankruptcy is much lower. And if it’s much lower, the banks aren’t going to give debtor-in-possession financing — and rightfully so. The D.I.P. financer gets a priority lien. Last in, first out. But the company has to survive to have the money to pay that super-priority lien.

 

Q. Does this change how troubled companies act?

 

A. Debtors are delaying seeking help longer and longer and longer. They’re very frustrated. They’re walking in molasses. They figure if they wait another week the economy is going to turn.

 

Q. What should business owners do instead of filing for Chapter 11?

 

A. People need to seek help quicker, change their business plan quicker, and avoid Chapter 11. It’s just an absolute last resort. It’s virtually nonsurvivable. One of the things we do as consultants is take two weak companies that are facing annihilation and we merge them and we get one survivable company — without a bankruptcy. We also try to make out-of-court settlements with creditors, as opposed to Chapter 11 proceedings. In Chapter 11, the debtor pays for attorneys, accountants and consultants of the creditors’ committee. They even pay for the investment bankers. The owner is paying the other side to oppose him. It’s tilted to the unsecured creditor side.

 

Q. But doesn’t this law fix some biases toward debtors that allowed them to drag out the process, hurting their creditors as they did so?

 

A. The law probably does fix some problems, but you have to look at the nuances. There are some cases with the tighter rules where the creditors get a little more but the company fails. The other option is the bankruptcy lingers and the creditors get a little less but the company survives, and that way the creditors continue to have a customer.

 

Q. You’re a small-business owner yourself. How is your business doing?

 

A. Business right now is kind of quiet. I think this is the calm before the storm. 

Copyright 2012 The New York Times Company.  All rights reserved.

Bloomberg: Banks Paying Homeowners to Avoid Foreclosures

By Prashant Gopal - Feb 7, 2012

Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.

Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.

Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.

Karen Farley hadn’t made a mortgage payment in a year when she got what looked like a form letter from her lender.

“You could sell your home, owe nothing more on your mortgage and get $30,000,” JPMorgan Chase & Co. (JPM) said in the Aug. 17 letter obtained by Bloomberg News.

$200,000 Short

Farley, whose home construction lending business dried up after the housing crash, said the New York-based bank agreed to let her sell her San Marcos, California, home for $592,000 -- about $200,000 less than what she owes. The $30,000 will cover moving costs and the rental deposit for her next home. Farley, who is also approved for an additional $3,000 through a federal incentive program, is scheduled to close the deal Feb. 10.

“I wondered, why would they offer me something, and why wouldn’t they just give me the boot?” Farley, 65, said in a telephone interview. “Instead, I’m getting money.”

Tom Kelly, a JPMorgan spokesman, declined to comment on the company’s incentives.

“When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure,” he said in an e-mail.

A mountain of pending repossessions is holding back a recovery in the housing market, where prices have fallen for six straight years, and damping economic growth. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth, said RealtyTrac Inc., a property-data company in Irvine, California.

Foreclosure Holdouts

Short sales represented 9 percent of all U.S. residential transactions in November, the most recent month for which data is available, up from 2 percent in January 2008, according to Corelogic. Bank-owned foreclosures and short sales sold at a discount of 34 percent to non-distressed properties in the third quarter, according to RealtyTrac.

As lenders shift their focus to sales, they are finding that some borrowers would rather risk repossession while they wait for a loan modification, according to Guy Cecala, publisher of Inside Mortgage Finance, a trade journal. In a loan modification, the monthly payment, and sometimes principal, is reduced to help prevent seizure. Homeowners facing foreclosure may live rent-free for years before they are forced out.

“That’s why the banks have got to pay the big bucks,” Cecala said. “The real question is why is the bribe so big? Is that what it takes to get somebody out of their home?”

Multiple Banks

Banks also pay a few thousand dollars to the owners of second liens, whose loans can be wiped out by a short sale, to encourage them not to block the deals.

While JPMorgan is giving the largest incentive payments, other banks and mortgage investors are also offering them, according to interviews with 12 real estate agents in Arizona, California, Florida, New York and Washington. Lenders also provide incentives on loans they service and don’t own when the mortgage investor, such as a hedge fund, requests it.

JPMorgan, the biggest U.S. bank, approves about 5,000 short sales a month. It generally offers $10,000 to $35,000 in cash payments at settlement, real estate agents said. Not all of the sales include incentives.

Borrowers also can receive payments from the federal government’s Home Affordable Foreclosure Alternatives program, which in 2010 began offering as much as $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who complete short sales.

Quicker Resolution

For banks, approving a sale for less than is owed on the home can cut a year or more off the time it takes to unload a property. From listing to sale, the transactions took about 123 days on average at the end of last year, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.

Lenders spend an average of 348 days to foreclose in the U.S. and an additional 175 days to sell the property, according to RealtyTrac. In New York, a state that requires court approval for repossessions, it takes about four years to foreclose on a home and then resell it, the company said.

Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor who trains brokers and attorneys to negotiate with banks for short sales.

Chapman, who also writes a blog on TheShortSaleGenius.com, said he’s heard about 50 homeowners who have received incentives from lenders including JPMorgan, Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.

Wells Fargo

“My guess is they want to get rid of bad loans,” Chapman said. “If they short sale these types of loans, they have less of a headache and have some goodwill with the homeowner.”

Wells Fargo, based in San Francisco, offers relocation assistance of as much as $20,000 for borrowers who complete short sales or agree to transfer title through a deed in lieu of foreclosure “in certain states with extended foreclosure timelines, including Florida,” Veronica Clemons, a spokeswoman, said in an e-mail.

Bank of America Corp. sent letters to 20,000 Florida homeowners as part of a pilot program, offering incentives of as much as $20,000, or 5 percent of the unpaid loan balance, Jumana Bauwens, a spokeswoman, said in an e-mail. The program expired in December and the Charlotte, North Carolina-based bank hasn’t decided whether to introduce it in other states, she said. About 15 percent of the homeowners agreed to participate in the program, she said.

Citigroup Offers

“The bank is pleased with the response,” Bauwens wrote. “The state is experiencing higher foreclosure rates than other parts of the country and is therefore seen as a viable market to gauge incremental short-sale response and completion rates when presenting homeowners with relocation assistance at closing.”

Citigroup offers $3,000 to most borrowers who qualify for its program, but the “amount may increase based on the circumstances of each individual case,” Mark Rodgers, a spokesman for the New York-based bank, said in an e-mail. “Investor programs have different guidelines for relocation incentives, which we honor.”

Susan Fitzpatrick, a spokeswoman for Detroit-based Ally, didn’t comment specifically on incentives when asked about them.

Borrowers typically can’t negotiate the incentives, which arrive by mail, Chapman, the Realtor, said.

Tap on Shoulder

“It’s not really easy to identify the guidelines because Chase doesn’t tell you, they kind of tap you on the shoulder,” he said. “When I first saw it in January 2011, I thought it was a joke or a typo. I was convinced it must say $3,000, not $30,000.”

Offering enough for the homeowner to put down a deposit on a rental apartment is reasonable, said Sean O’Toole, chief executive officer of ForeclosureRadar.com, which tracks sales of foreclosed properties. Giving tens of thousands of dollars to delinquent homeowners sends the wrong message, particularly if they got into trouble by running up home-equity loans during the housing boom, he said.

“It may make sense for people to walk away, it doesn’t make sense for them to get rewarded for doing it,” O’Toole said. “It’s not the homeowner’s fault that house prices dropped so dramatically, but they have already received months of free rent, if not cash out.”

Cecala of Inside Mortgage Finance said he wonders whether lenders are making big payments on properties with underlying title problems. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Florida, said representatives of a large bank told him the incentives are primarily given to borrowers when it doesn’t have the proper paperwork needed to win its foreclosure case. He declined to name the bank for publication.

Incentive Disconnect

State attorneys general across the U.S. began investigating foreclosure practices in October 2010 following allegations that the nation’s top mortgage servicers were using faulty documents to repossess homes.

Berlin said his office negotiated about 400 short sales in the past year and about a quarter included an incentive, ranging from $3,000 to $48,000. In some cases, the payments aren’t incentives at all because they’re offered after the borrower has almost completed the short sale, he said.

“The idea is that this is relocation assistance,” Berlin said. “But when you’re offering $48,000, obviously it doesn’t cost $48,000 to relocate.”

Cooperation Sought

The size of the payment may have little to do with sales price. JPMorgan gave one Phoenix homeowner $20,000 after she sold her property in June for $32,000, according to Royce Hauger, the real estate agent who represented the seller and shared a copy of the settlement sheet with Bloomberg News. The bank also agreed to forgive more than $70,000 in debt, she said.

Kelly, the JPMorgan spokesman, declined to comment on the payment.

The homeowners are getting the money in exchange for their cooperation, said Kris Pilles, a Riverhead, New York-based real estate broker who represents banks, servicers and hedge funds that own distressed housing debt.

Pilles is frequently dispatched to the homes of delinquent borrowers to explain the benefits of avoiding foreclosure, he said. His clients have paid as much as $92,500. In return, the lenders expect the seller to clean the house before showings, and trim the grass.

“Money talks,” Pilles said. “From the bank side, it’s anything to initiate a conversation with someone who may not be listening to them.”

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

The Discharge of Taxes and Tax Liens: A Study in Complexity

When two sections of the laws are Code-oriented (the Bankruptcy Code and the Internal Revenue Code), the interaction of those laws can create complexity for an individual or their adviser. As many of you are aware, at Shenwick & Associates we do many bankruptcy filings for individuals to discharge personal income taxes. In a prior e-mail, we discussed what taxes qualify for discharge in personal bankruptcy. A gloss or complexity, however, is when an individual who files for bankruptcy to discharge taxes (which are dischargeable in bankruptcy) and the Internal Revenue Service has filed a Notice of Federal Tax Lien prior to the bankruptcy filing.

First, some background information on tax liens. Section 6321 of the Internal Revenue Code provides that:

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

One of the consequences of a tax lien is that the IRS obtains an interest in the taxpayer's property, whether it be a condominium, a house or a car, and that property cannot be sold or refinanced (since the lien applies also applies to the taxpayer's credit) without paying the IRS. Additionally, if the IRS is so inclined, they can foreclose on the property (via a tax levy) to obtain title to the property. In fact, Section 522(c)(2)(B) of the Bankruptcy Code provides that if a tax authority has an outstanding tax lien, the tax authority can still collect on the lien, even if the tax is dischargeable in bankruptcy. This provision provides that property exempt under the Bankruptcy Code is not liable during or after the case for any debt that arose before the commencement of the case except "a tax lien, notice of which is properly filed." Unfortunately for the taxpayer, Section 6502 of the Internal Revenue Code provides that a tax lien is collectible for ten years after the date of assessment. And even worse, the Supreme Court case of Glass City Bank v. United States, 326 U.S. 265 (1945), held that tax liens attach to all property owned by the taxpayer during the ten years in which the lien is collectible.

So what are the consequences of the discharge of a tax where the IRS has filed a tax lien prior to the bankruptcy filing? To understand this issue, one must go back to a painful time in most lawyers' lives, the first year of law school, when we learned the distinction between an in personam obligation and an in rem obligation. An in personam obligation or liability means that an individual is liable for the debt, and an in rem liability or obligation means that only the property is liable for the payment of the debt.

Accordingly, if an individual files bankruptcy to discharge income taxes, and based on the statutory requirements of the Bankruptcy Code those taxes are in fact discharged, but the IRS had filed a Notice of Federal Tax Lien, then while the individual is not personally liable for the debt, any assets owned by the individual during the ten years after the date of filing of the tax lien are subject to being seized by the Internal Revenue Service.

Accordingly, if an individual files bankruptcy and discharges taxes, and a tax lien has been filed by the Internal Revenue Service, then the individual must make sure not to acquire property after they receive their discharge of debts during the pendency of the ten year statute of collections. And in fact, the taxpayer must make themselves "judgment proof."

Let us clarify this analysis by a recent example. An individual recently contacted us who wanted to file bankruptcy to discharge taxes. Our analysis indicated that many of her taxes for the early tax years were dischargeable. We did the bankruptcy filing and commenced an adversary proceeding (bankruptcy litigation) to determine whether her taxes were dischargeable. The Internal Revenue Service then contacted us and indicated that they had filed a Notice of Federal Tax Lien in 2003 and that, while they agreed the taxes were dischargeable, the tax lien was in effect through 2013. The debtor received her discharge of debts in 2011, and she agreed that she would not acquire property until 2013 to make herself "judgment proof." In 2013, after the tax lien expires, she will then be able to acquire property. In the interim, since the debtor is married, she will put property in her husband's name, if necessary.

In conclusion, a couple of rules:

1. If an individual is considering filing bankruptcy, they should file bankruptcy prior to the Internal Revenue Service filing a tax lien. The automatic stay that goes into effect upon filing for bankruptcy will prevent the Internal Revenue Service from filing a tax lien.

2. If an individual files bankruptcy and they are subject to a tax lien, they must determine when the tax lien expires and they cannot put property in their name until the tax lien expires.

3. A tax lien, by statute, is good for ten years. While the IRS can renew tax liens, in our experience, they rarely do.

Anyone with questions concerning tax liens and the discharge of taxes should contact Jim Shenwick.

NYT: Blacks Face Bias in Bankruptcy, Study Suggests

By TARA SIEGEL BERNARD

Blacks are about twice as likely as whites to wind up in the more onerous and costly form of consumer bankruptcy as they try to dig out from their debts, a new study has found.
The disparity persisted even when the researchers adjusted for income, homeownership, assets and education. The evidence suggested that lawyers were disproportionately steering blacks into a process that was not as good for them financially, in part because of biases, whether conscious or unconscious.

The vast majority of debtors file under Chapter 7 of the bankruptcy code, which typically allows them to erase most debts in a matter of months. It tends to have a higher success rate and is less expensive than the alternative, Chapter 13, which requires debtors to dedicate their disposable income to paying back their debts for several years.

The study of racial differences in bankruptcy filings was written by Robert M. Lawless, a bankruptcy expert and law professor, and Dov Cohen, a psychology professor, both with the University of Illinois; and Jean Braucher, a law professor at the University of Arizona.
A survey conducted as part of their research found that bankruptcy lawyers were much more likely to steer black debtors into a Chapter 13 than white filers even when they had identical financial situations. The lawyers, the survey found, were also more likely to view blacks as having “good values” when they expressed a preference for Chapter 13.

“Unfortunately I’m not surprised with these results,” said Neil Ellington, executive vice president of Consumer Education Services, a credit counseling agency in Raleigh, N.C. “The same underlying issues that created the problem in mortgage lending, with minorities paying higher interest rates than their white counterparts having the same loan qualifications, are present in all financial fields.”
The findings, which will be published in The Journal of Empirical Legal Studies later this year, did not suggest that there was any obvious evidence of discrimination in the bankruptcy process. “I don’t think there is any overt conspiracy,” Professor Lawless said. “But when you have a complex system, these biases can play out and the people within the system don’t see the pattern because nobody is in charge of looking at these big issues.”

Changes in the bankruptcy law in 2005 were intended to force more debtors to file under Chapter 13 and repay some of their debts, but that has not been the effect. In fact, the rate of Chapter 13 filings has remained relatively steady, at about 30 percent. Last year, overall bankruptcy filings were 1.4 million.

Chapter 13 is not always an inferior choice. Many distressed borrowers go that route because they may be able to save their homes from foreclosure. But even that does not explain away the difference: among blacks who did not own their homes, the rate of filing for Chapter 13 was still twice as high as the rate for other races. And the trend persists across the country, beyond regions like the South where Chapter 13 tends to be a more popular option among all debtors (perhaps, in part, because Chapter 13 originated in the South).

If a debtor chooses an inappropriate chapter, there can be serious implications. Chapter 13 plans, for instance, are more likely to fail than a Chapter 7. Nearly two of every three Chapter 13 plans are not completed, which means the filers’ remaining debts are not discharged, leaving them right where they started. One bankruptcy judge, who sees filers once they can no longer make the required payments in the plans, said the debtors usually do not have enough income to stick with the budget.

“They thought they could cut back on this or that, and you might be able to do that for three or four months,” said the judge, C. Ray Mullins, chief judge for the United States Bankruptcy Court in the Northern District of Georgia. “But in a Chapter 13, it will be either three or five years. There are certain things you can’t anticipate — a spike in gas prices.”

The study has two parts. One used data from actual bankruptcy cases from the Consumer Bankruptcy Project, the most detailed trove of information on filers currently available. The project surveyed 2,400 households nationwide who filed for bankruptcy in 2007.

Results from the second part of the study, which illustrated the lawyer’s influence in determining which bankruptcy chapter to choose, came from a survey sent to lawyers asking them questions based on fictitious couples who were seeking bankruptcy protection. When the couple was named “Reggie and Latisha,” who attended an African Methodist Episcopal Church — as opposed to a white couple, “Todd and Allison,” who were members of a United Methodist Church — the lawyers were more likely to recommend a Chapter 13, even though the two couples’ financial circumstances were identical.

Even though the attorneys’ fees for the more labor-intensive Chapter 13 are more than double the charge for a Chapter 7, some truly distressed debtors will pursue a Chapter 13 anyway, several bankruptcy experts said. That is because they can pay the fee over time, unlike in a Chapter 7, which typically requires a payment before the case is filed. If blacks are perceived as less likely to have the resources — or a family with resources — to come up with a lump sum, some lawyers may be inclined to suggest a Chapter 13, these experts suggested.

But Professor Lawless said he and the other researchers accounted for this possibility in their results. As to the possibility that unscrupulous attorneys could push Chapter 13 filings in an attempt to get higher fees, Professor Lawless said that effect should be apparent across all races.

He said the study has no information about whether other players in the process — judges and bankruptcy trustees, among others — were contributing to the difference in filings rates.

William E. Brewer Jr., president of the National Association of Consumer Bankruptcy Attorneys, and a practicing lawyer in Raleigh, N.C., disputed the premise of the study that Chapter 13 was always more burdensome and always required debtors to pay more to their creditors. “The study does not adequately control for the numerous complex factors that dictate chapter choice,” he said. “Having said this, Nacba intends to present the study to its members for discussion and self-reflection.”

Other, more limited studies have also shown the higher incidence of Chapter 13 among blacks. In Chicago, the Woodstock Institute, a research and policy group, reported last May that in mostly black communities in Cook County, nearly half the cases from 2006 to 2010 were filed under Chapter 13, compared with 32.8 percent of all cases filed in the county. “For people of color, who historically have fewer assets, preservation of assets is a top priority,” said Tom Feltner, vice president at Woodstock, who added that lawyers often have a financial incentive to push Chapter 13 filings. “It is possible that the higher levels of Chapter 13 in communities of color can be explained by a combination of higher attorney’s fees and a filer’s desire, or advice that elevates a filer’s desire, to preserve as many assets as possible.”

Henry E. Hildebrand III, who has served as a Chapter 13 trustee in Tennessee for 30 years, said he had noticed that blacks and other minorities appeared to be overrepresented in Chapter 13 cases. “We should focus not on picking apart the conclusions,” Mr. Hildebrand said, “but use this study as an indication that we should be attempting to fix what has become a complex, expensive, unproductive system.”

Copyright 2012 The New York Times Company.  All rights reserved.

Cuts for the Already Retired

By MARY WILLIAMS WALSH

Retired police and firefighters from Central Falls, R.I., have agreed to sharp pension cuts, a step thought to be unprecedented in municipal bankruptcy and one that could prompt similar attempts by other distressed governments.


If approved by the bankruptcy court, the agreement could be groundbreaking, said Matthew J. McGowan, the lawyer representing the retirees.

“This is the first time there’s been an agreement of the police and firefighters of any city or town to take the cut,” he said, referring to those already retired, who are typically spared when union contracts change. “I’ve told these guys they’re like the canary in the coal mine. I know that there are other places watching this.”

As cities, towns and counties struggle with fiscal pain, there has been speculation that they could shed their pension obligations in bankruptcy. Some have said it might, in fact, be easier for local governments to drop those obligations than it is for companies, which use a different chapter of the bankruptcy code. Large steel companies, airlines and auto suppliers like Delphi have terminated pension plans in bankruptcy.

“But it’s a fight that municipalities haven’t been willing to fight,” said David Skeel, a law professor at the University of Pennsylvania who writes frequently on bankruptcy.

Municipalities have been reluctant because public pensions are protected by statutes and constitutional provisions meant to make them nearly airtight. And even if the rules could be broken in bankruptcy, that would present a different problem. Local officials who want to cut pensions do not, as a rule, want to shortchange their bondholders for fear of not being able to borrow in the future — yet bankruptcy law requires that both types of creditors be treated equitably.

Rhode Island sought to sidestep the issue with a law that gave bondholders more protections than retirees. Central Falls’s retirees used that issue to gain some bargaining power, extracting a commitment from the state to seek extra money for the next five years. The extra money is not a sure thing, though, and would not cover all the cuts to the retirees over those years.
The last American city to work its way through Chapter 9 bankruptcy was Vallejo, Calif., which finished the process this year. It had to navigate similar stumbling blocks. Initially, it planned to cut its workers’ and retirees’ pensions, but it changed course when California’s giant state pension system, which administered Vallejo’s plan, threatened a costly and debilitating court battle.
Vallejo instead cut pay, health care and other benefits, as well as city services and payments to its bondholders, and left the pensions intact. Even though the bondholders faced a loss, all parties eventually agreed they had been treated equitably, and the state passed a law making it easier for Vallejo to continue borrowing.

The episode strengthened the perception that public retirement plans were unalterable, even in bankruptcy.

“Central Falls is undermining that,” said Mr. Skeel, who wrote about Vallejo’s bankruptcy for a coming issue of The University of Chicago Law Review.

Central Falls had little choice. For years, its government failed to contribute enough to its police and firefighters’ pension fund, and the fund effectively ran out of money this fall. The city, which had also promised the retirees comprehensive health benefits, could not cover the pension and health payments out of its general revenue.

The police and firefighters have known for months that drastic cuts were looming. Last month, the unions representing active workers negotiated new contracts, which called for workers to complete at least 25 years to receive pensions, instead of 20. Workers will also have to meet much more rigorous standards to qualify for disability pensions.

Until now, 60 percent of Central Falls police officers and firefighters have retired on full disability pensions, drawing the inflation-protected and tax-free payments even when they embarked on new careers. One of them, at 43, has become a prominent personal-injury lawyer and can be seen in television ads shooting baskets and pretending to fall down a manhole. That retiree, Robert Levine, a former police officer, said his disability was the result of an on-duty car crash where he was not at fault, and that his pension had been granted lawfully after his condition was certified by three different doctors.

The retirees, who are not represented by the unions, voted in favor of their pension reductions last week. The cuts would be up to 55 percent of each retiree’s benefits, which now vary widely, from about $4,000 to $46,000 a year, depending on final salary, years of service and other factors. A few retirees would give up more than $25,000 a year. Central Falls’s police and firefighters do not participate in Social Security.

The new agreement also reduces the annual cost-of-living adjustments and requires retirees to start contributing toward the cost of their health benefits. But it does not take disability pensions away from retirees — something that could become a sticking point.

In the negotiations, the state’s revenue director promised to seek money from the state — enough to pay most retirees a supplement of several thousand dollars a year for five years.

Having recently enacted a big and painful package of pension cuts for state workers and teachers, Rhode Island legislators say they are in no mood to help a city’s retirees who stripped their own pension fund, often collecting disability pensions when they were well enough to work.
The retirees’ lawyer, Mr. McGowan, won support for the state money by threatening to challenge a state law enacted just before Central Falls declared bankruptcy last summer. The law protects holders of general-obligation bonds issued by Rhode Island and its municipalities by giving them priority in bankruptcy. Without the law, investors could find themselves subject to the same losses as the retirees.

The state law was intended to prevent a contagion effect, in which Central Falls’s bankruptcy would frighten investors away from other cities’ bonds, driving up borrowing costs across the state.
The idea of shielding municipal bondholders during bankruptcy is controversial, however.
“It’s not clear to me that you ought to be protecting bondholders,” said Mr. Skeel. “It seems unfair to me that you’re singling out one type of creditor to bear the burden, and another type not to.”
Mr. McGowan, the retirees’ lawyer, said he had threatened to sue Central Falls’s bondholders on the argument that the state law had given them a “voidable fraudulent transfer”— an abusive deal that could be undone by a bankruptcy court. He said the state did not want such a challenge, so it agreed to push for pension supplements.

Theodore Orson, who represents Central Falls’s state-appointed receiver in the bankruptcy, said negotiations would have been impossible without the law. He said he thought Chapter 9 should be amended to give cities the ability to shield their bondholders if they could show a compelling need to do so. But that would take an act of Congress, and federal lawmakers, at odds over their own debt and deficit, show no interest in taking on the cities’ fiscal woes.

“One thing I think we’ve demonstrated in Rhode Island is, we really have a functional state government,” Mr. Orson said. “We are pulling together and making what we believe to be difficult decisions that you don’t see Congress making right now.”

Copyright 2011 The New York Times Company.  All rights reserved.