Fremont Main Library Presentation (Tues., April 11 at 7:00 PM) – Filing Bankruptcy: What It Really Means and How It Helps

Please join me at the Fremont Main Library on Tuesday, April 11, 2017 at 7:00 PM for a presentation I’ll be giving on “Filing Bankruptcy: What It Really Means and How It Helps.”

This presentation is part of the library’s Smart Money Week.  It’s designed to inform, answer questions, and dispel myths about the bankruptcy process.  I really love doing programs like these because they’re a chance to connect with people who might be unsure about calling to schedule a consultation.  Topics to be covered include:

  • Using income, assets, expenses, and debts to predict your case’s outcome
  • The differences between Chapter 7 and Chapter 13
  • What can disqualify you from filing a case
  • What the Court’s protection covers
  • What assets you can keep
  • When not to file (or wait)

The Fremont Main Library is at 2400 Stevenson Blvd Fremont, CA 94538.  Presentation will last 90 minutes.

Link to program announcement: http://bit.ly/2mTIwIj

Bankruptcy News: Nov. 23, 2016

Here are your links to consumer bankruptcy news and information from around the internet this past week:

  1. New Case Comment: Lua v. Miller, No. 15-56814 (9th Cir.) – Does equitable estoppel under state law prevent a debtor’s amendment of claimed exemptions? (National Consumer Bankruptcy Rights Center)
  2. New Case Comment: Max v. Northington, No. 16-172 (M.D. Ga. Oct 27, 2016) – Vehicles subject to title pawn are property of the bankruptcy estate where the debtors filed their bankruptcy petitions prior to expiration of the redemption period. (National Consumer Bankruptcy Rights Center)
  3. New Case Comment: Rupp v. Pearson (In re Pearson), No. 15-4191 (10th Cir. Nov. 7, 2016) – Where the debtor’s historical use of bankruptcy filings suggested improper purpose to hinder and delay creditors, the trustee’s adversary complaint stated a claim for violation of section 727(a)(2)(A). (National Consumer Bankruptcy Rights Center)
  4. Article: NYC Foreclosure rate is booming – It’s starting to feel like 2007 again, but we’re not quite there yet.  While most of the country inches toward recovery from the foreclosure crisis that began almost a decade ago, New York City isn’t as resilient. (New York Business Journal)
  5. Article: Consumer Credit Default Rates Rise According To The S&P/Experian Consumer Credit Default Indices – Data through October 2016, released today by S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, showed small increases in national default rates during the month. (PR Newswire)
  6. Report: Growing Personal Loan Balances Fuel Consumer Credit Markets – Consumers’ personal loan balances, including for credit cards, continued to increase in the third quarter this year while delinquency rates remained low, according to TransUnion’s latest Industry Insights Report. (ACA International)
  7. Article: Student, Auto Loans at New All-Time High of $2.5 Trillion; Consumer Credit Jumps by $19 Billion – The Fed’s latest consumer credit report revealed that in September, overall household credit rose by a greater than expected $19.3 billion, above the $18 billion expected, if below last month’s near-record $26.8 billion. (24/7 News letter)

In re Rosa: Chapter 20 Stripped Liens Are Not Allowed Unsecured Claims

As discussed on this site, “lien stripping” is a common occurrence in Chapter 13 cases, and can provide an enormous benefit to Debtors. The idea is that if there is more than one lien against a piece of real estate, and that piece of real estate is worth less than the amount owed on the first lien, there is no equity remaining to secure the junior lien(s). It is therefore “stripped” and treated like general unsecured debt (i.e. it is dischargeable).

As also previously discussed, a “Chapter 20” case is when a person files a Chapter 7 case, shortly followed by a Chapter 13 case. There are many reasons why a person might do this, but usually it’s because he or she has too much unsecured debt to qualify for Chapter 13. You file a Chapter 7 case, get rid of all the unsecured debt, and then file the Chapter case, often to strip a junior lien (which is not available in Chapter 7 under the Supreme Court’s Dewsnup decision).

Back in 2012, the North case became the local precedent establishing that a Debtor in a Chapter 20 case could indeed strip junior liens, even though there was no discharge in the second, Chapter 13 case. Now in 2015, In re Rosa has become the local precedent establishing that stripped liens are not allowed unsecured claims.

Are Chapter 20 stripped liens allowed claims?

Diana Rosa filed a Chapter 7 case in 2012. After receiving her discharge, the only debt she had left was a $700,000 mortgage against a house worth $350,000 ($44,000 in arrears), a $84,000 second mortgage to EMC, $8,500 owed to the IRS, and $300 in general unsecured debt. She then filed a Chapter 13 case, in which she stripped the second mortgage and proposed a Plan that would pay the IRS and the unsecured debt in full. As to the arrears on the first mortgage, the Plan stated that she was seeking a loan modification.

All parties agreed that Rosa’s personal liability on the second mortgage had been discharged in the Chapter 7 case, and that EMC’s in rem rights were extinguished when the lien was stripped. However, the Chapter 13 Trustee objected to the Plan, contending that EMC held an unsecured claim that needed to be paid in full.

The Chapter 13 Trustee cited Akram from out of the Central District (259 B.R. 371, 2001) and Gounder from out of the Eastern District (266 B.R. 879, 2001) to support the position that EMC held an allowed unsecured claim. As to Akram, the Court rejected what it called that decision’s “attempt to circumscribe the power of the discharge injunction.” As to Gounder, the Court rejected that decision’s conversion of the discharged junior mortgage into an unsecured claim against the Chapter 13 estate: if there is no claim against the debtor, there can be no claim against the estate. Additionally, the is no language in §506(a)(1) converting a nonrecourse claim into a recourse obligation. As to both decisions’ argument that holding otherwise would create a back door around Dewsnup’s prohibition on Chapter 7 lien strips, the Court held that such arguments are better suited for bad faith objections.

Ms Rosa case was allowed to proceed and her Plan was confirmed with EMC receiving anything.  If she completes her Plan, that second mortgage will be gone forever.  A very technical case indeed, but very good for debtors: the upshot is that Chapter 20 lien strips continue to be alive and well here in the Northern District of California.

Lien Stripping in Chapter 13 (Bankruptcy Basics)

What Does It Mean to “Strip” a Lien in a Chapter 13 Case?

Simply put, if you own a piece of real estate, and there’s more than one mortgage on that real estate, and the value of the property is less than the amount owed on the first mortgage, and you file a Chapter 13 bankruptcy case, the idea is that there is no equity present to secure the second mortgage.  Therefore, the second lien is “stripped,” and the second mortgage is treated like unsecured debt (like credit cards and medical bills).  The benefit of having that mortgage treated like unsecured debt is that it becomes subject to discharge and allowing you to pay less than 100% of the amount owed.  It’s important to note that the principle applies to all subsequent liens, e.g. HELOCs and HOA liens.

Lien Stripping in Chapter 13 in More Detail

Many homeowners have more than one mortgage on their homes. And depending on the vicissitudes of the residential real estate market, many homes are worth less than what the homeowners owe on them. That means that if a lender foreclosed on a house and sold the house at auction, there wouldn’t be enough money to pay off all of the lenders. Bankruptcy law has a process where homeowners who owe more on their home than it is worth can have a second mortgage striped away or wiped out by the order of a bankruptcy court.

Not all debts are considered equal in bankruptcy. Some debts are given a higher priority than other debts. In the case of real estate the earliest recorded lien is given the highest priority by the court. For most homeowners this means that a first mortgage will be a higher priority debt than a second or third mortgage. Because there are never enough assets to pay all creditors back in full, the court gives priority debts the first chance at getting paid back. Debts with lower priority are often completely erased, with the creditor not getting anything.

A mortgage is the most common type of lien that can be entered against real estate, but there are other types of liens such as from a court judgment or an HOA lien. Lien striping works for more than just mortgages, but may be limited in certain situations such as cases where a divorce judgment has created a lien.

The Difference Between Secured and Unsecured

Debt can either by secured or unsecured. Secured debt means the debt is attached to something particular. A mortgage is a secured debt because it is backed by the real estate. The creditor has the right to foreclose if they are not paid. But, when there are multiple mortgages on a home and the fair market value of the home is less than the amount owed on the mortgages, some of the mortgages are not secured by the house. The rule for these mortgages is that if the house were sold and there would not be enough money to pay off the first mortgage, all the other junior mortgages are wholly unsecured.

Lien stripping allows a court to erase the wholly unsecured mortgage.

Not All Bankruptcies Work the Same

If you are behind in your house payments or are facing foreclosure the only way to protect your house in most circumstances is to file for a Chapter 13 bankruptcy. A Chapter 13 bankruptcy allows the court to restructure your debts so that you can pay off the highest priority debts, such as a first mortgage, while lower priority unsecured debts are often erased.

Usually a Chapter 7 bankruptcy will not work to save a house because Chapter 7 is not about restructuring your debt and is instead about liquidating certain assets and paying off as many creditors as possible before erasing the rest of the debts.

However, every case is unique. If you are having difficulty staying current with your house payments, you need to get expert advice. You may be able to benefit from a bankruptcy that lets you keep your home and strips off other liens. Don’t wait to get good legal advice until its too late. Contact a bankruptcy lawyer today.

Considering Converting from Chapter 13 to Chapter 7 with Appreciated Real Estate? Think VERY Carefully

This is an extremely timely and relevant issue here in the Bay Area/Northern District of California, where I practice.  If you filed a Chapter 13 bankruptcy case more than a year or two ago, and owned any real estate, the value of that real estate was probably very low at the time; the market hit bottom somewhere around early 2012.  But what a difference a couple of years makes! The last couple of years has seen an enormous explosion in the local residential real estate market.  So enormous in fact, that housing values are now at or above their pre-crash peak.  Your home is probably worth significantly more now than it was back then.

So let’s say you filed a Chapter 13 case back in 2013.  Your house was worth significantly less back then, and maybe you were “underwater.”  If that was so, had you filed a Chapter 7 case, a Chapter 7 trustee wouldn’t have been very interested in your house.  (Chapter 7 trustees make their money by liquidating valuable assets for the benefit of creditors.)  Let’s also say that now you want to get out of court Chapter 13 case, sell your house, and reap your profits.  Can you do that?  Can you convert to Chapter 7, get a discharge, and move on?  The answer to that question depends on the answer to another question:  If you convert, who gets that appreciated value, you or the Chapter 7 trustee?

Prior to the 2005 changes to the Bankruptcy Code, the answer to that question was very clear: On conversion, post-filing appreciation is yours.  And in the years since then, few had even bothered to ask the question of whether that rule was altered by the 2005 changes.  (In a down market, there was no point.)  But now, with a hot real estate market, Chapter 7 trustees are starting to look into it.

The theory being put forward in certain quarters revolves around the interpretation of § 348(f)(1) of the Bankruptcy Code.  § 348(f)(1)(A) says that “property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.”  In other words, whatever interest the debtor had in the property on the date of filing, that’s what the Chapter 7 trustee gets on conversion.  That was the rule pre-2005, and it’s still the rule as most courts understand it.

However, proponents of this new theory argue that § 348(f)(1)(A) has to be read in conjunction with § 348(f)(1)(B), which was substantially altered by the 2005 changes.  It used to read: “valuations of property … in the Chapter  13 case shall apply in the converted case”.  However, post-2005, it now reads: “valuations of property … in the Chapter 13 case shall apply only in a case converted to [Chapter 11 or 12], but not a case under Chapter 7.”  The proponents argue that the Chapter 7 trustee doesn’t get whatever interest the debtor had at the time of filing; she gets the thing itself, and the value of her interest is that of the conversion date.  It basically turns the existing rule on its head.

This is by no means an accepted position; as of the date of writing (June 30, 2015), I know of no caselaw clearly and cleanly adopting this position. (Indeed, one court, the Bankruptcy Court for the Eastern District of Tennessee, in In re Hodges, 518 B.R. 445, declined to directly accept this theory.)  A Chapter 7 trustee may well face an uphill battle convincing a court to reverse current interpretations of law.  But this is not a frivolous argument, and at least one of the Oakland Chapter 7 trustees has stated that she intends to use this theory to pursue the asset if a case with this situation is assigned to her. If one of the trustees is looking into it, you can bet the others are, too.

Where does that leave you if you’re in such a situation?  Simply put, don’t convert.  Not now anyway.  You don’t want to be a test case.  Yes, the trustee may have an uphill battle in making this argument, but if she wins, your house will be liquidated and your appreciated value will be taken too.  The risk is just too great.

If you are a homeowner in a Chapter 13 case and are considering converting to Chapter 7, be very careful, and be sure to ask your attorney if he or she is familiar with this issue.

What Happens to My Property if I File a Bankruptcy Case?

What Happens to My Property if I File a Bankruptcy Case?

When you file for any kind of bankruptcy a bankruptcy estate is created. This is a legal concept that means some of the property you own is under the control of the bankruptcy court while your case is processed. In a Chapter 7 bankruptcy typically almost all of your property or assets are part of the bankruptcy estate. Different chapters of bankruptcy have different effects.

Does that mean if I file bankruptcy I lose everything?

The bankruptcy court administers the property in the bankruptcy estate, but you remain the owner of all of the property unless the court enters an order for you to sell or turnover some property. All of the property in the bankruptcy estate is also sheltered from creditor actions by the automatic stay.

If you owned a car, but were behind on the payments and you filed for bankruptcy the creditor would not be allowed to repossess the car because of the automatic stay. The car would be a part of the bankruptcy estate. But, the court would ultimately decide whether or not you got to keep the car based on a variety of factors.

Most people who file for bankruptcy find that they do not lose anything because the value of their assets is so low.

Can I sell my property during a bankruptcy?

While you remain the owner of the property during a bankruptcy, the bankruptcy court controls all of the property that is part of the bankruptcy estate. You are not allowed to sell any of the property that is part of the bankruptcy estate without the prior approval of the bankruptcy court. Usually, the bankruptcy court appoints a trustee to monitor the administration of the bankruptcy estate. The bankruptcy trustee is charged with making sure the creditors get what they are legally entitled to.

This means that if you own a car and file for bankruptcy, and you own the car outright, you cannot sell the car or even give the car away, without first getting the permission of the bankruptcy trustee. This also applies to stocks, jewelry, or any other kind of property.
Property can be removed from the bankruptcy estate if certain conditions and procedures are met.

Is there ever anything not part of the bankruptcy estate?

The law excludes some property from being a part of the bankruptcy estate. Social Security payments, generally any property received after the filing of the bankruptcy, and certain pension or retirement benefits are not a part of the bankruptcy estate and are not subject to any control from the bankruptcy court.

What happens once the bankruptcy is over?

Once the bankruptcy has been completed the bankruptcy estate disappears. Any property that was not ordered to be sold or turned over to a creditor is back under your control. For most people almost nothing ends of being sold. Once the bankruptcy is completed you can sell or gift your property as you see fit.

Bankruptcy is a highly technical area of law with many complicated rules and procedures. If you are thinking about filing a bankruptcy, you need to consult with an experienced bankruptcy lawyer right away. Sometimes the rules of the bankruptcy estate apply to what you do with property before you even file for bankruptcy.

LVNV v. Crawford, the FDCPA, and the End of a Circuit Split?

LVNV v. Crawford: Are Bankruptcy Debtors Limited to Bankruptcy Remedies?

For years, the courts have struggled over consumers’ remedies when creditors continue collection attempts in violation of the automatic stay. Under the Bankruptcy Code, consumers can bring a contempt of court action. Also, the Fair Debt Collection Practices Act (FDCPA) enables consumers to sue when creditors attempt to collect on invalid debts, which would seem to hold true even during the course of a bankruptcy case. Previously, the Ninth Circuit (which includes California), had limited consumers to the former remedy, while (presently) the Eleventh Circuit allowed for both.

On April 20, 2015, the Supreme Court denied certiorari (i.e. it declined to hear) LVNV v. Crawford, the aforementioned Eleventh Circuit case, seemingly resolving the split & allowing consumers to pursue both contempt & FDCPA actions.

Crawford’s History

Stanley Crawford filed a Chapter 13 case, during the course of which LVNV filed a proof of claim with the court, which all parties agreed was an attempt to collect on the debt. However, the since debt was past the statute of limitations, LVNV had no right to make such a collection attempt. Mr. Crawford brought an action for an FDCPA violation, but the Bankruptcy Court held that he was limited relief provided by the Bankruptcy Code. The Eleventh Circuit reversed.

Apparent Circuit Split

The Ninth Circuit had ruled in Walls v. Wells Fargo Bank, N.A., 276 F. 3d 502 (9th Cir. 2002) that the Bankruptcy Code was the only source of relief for people in Crawford’s position. Once a bankruptcy court had jurisdiction over a debt, and even after a discharge, the FDCPA was not an option for consumers.

Since the Eleventh Circuit had found consumers could bring an FDCPA claim even if there was a bankruptcy, most observers felt that a circuit split had been created and an appeal to the Supreme Court was all but certain. However, the Supreme Court declined to hear an appeal of Crawford, denying cert. and allowing the Eleventh Circuit decision to stay in place.

Where Does that Leave Us?

While the Supreme Court did not issue a ruling on the merits of LVNV v. Crawford, by declining to take the case it seems to be give the Eleventh Circuit’s ruling the seal of approval. It is unclear what the courts in the Ninth Circuit will do in light if the cert denial, but it seems clear that the Supreme Court sees no reason to not allow consumers in bankruptcy access to relief from improper creditor actions under both the Bankruptcy Code and the FDCPA.

This is potentially good news for people who file bankruptcy cases in California, as this decision opens the door to cases challenging the legitimacy of Walls.

Bank of America v Caulkett: No Chapter 7 Lien Strips – Supreme Court

On June 1, 2015, the U.S. Supreme Court decided the case of Bank of America v. Caulkett and held unanimously that a debtor in a Chapter 7 bankruptcy can not “strip” a junior lien.  “Lien stripping,” a topic we have address previously, is this: When there is more than one lien on a piece of property, and the amount owned on the senior lien is greater than the value of that property, there is no equity present to secure the junior lien.  Therefore, in a Chapter 13 case, the property owner can “strip” the junior lien, causing it to be treated as unsecured debt.

Prior to today’s decision, all of the Circuit Courts to have addressed this issue (besides the Eleventh Circuit) had held that the Bankruptcy Code does not permit such lien stripping in Chapter 7 cases.  They relied (as did the decision today) on the Supreme Court’s holding in 1992’s Dewsnup v. Timm; Section 506(d) of the Code allows a lien to be voided when it secures a claim that is not an allowed, secured claim.  And while no equity was present here to secure the claim, Dewsnup says that the existence of the lien categorizes it a secured.  Case closed.

Interesting thing though: While the decision was unanimous, a single footnote in the middle of the opinion acknowledges that Dewsnup has been harshly criticized, but points out that the Debtors insisted that they were not asking it to be overruled.  Kennedy, Breyer, & Sotomayor did not join in this footnote, which raises an interesting question: what would happen if a debtor did expressly ask Dewsnup be overruled?

SB308, Increasing Homestead Exemption to $300,000, Passes CA Senate, Goes to Assembly

On Friday, May 22, 2015, the California Senate passed SB308 (proposed by Senator Bob Wieckowski), which would make changes to the exemption rules for bankruptcy cases filed in California. The bill now heads to the Assembly.

When a person files a bankruptcy case, the law puts all of that person’s assets into different categories, and then places caps on those categories. Those caps are the “exemption limits.”   If the value of the person’s assets exceed those caps, a trustee in a Chapter 7 case can liquidate that excess, while a trustee in a Chapter 13 case can demand that unsecured creditors receive at least that amount through the Chapter 13 Plan.

California has two sets of exemptions for bankruptcy debtors; one for people with equity in their home, and another for everybody else. Currently, the home equity exemption in the former category is $75,000 for unmarried people, $100,000 for married people, and $175,000 seniors, disabled people or people who are 55 or older with a limited income. SB308, if it becomes law, would increase this “homestead” exemption to $300,000.

This is very big news for Californians considering filing bankruptcy cases. Currently, because of the volatile residential real estate market in the Bay Area, many homeowners are essentially precluded from filing Chapter 7 cases: Even if they’re not clearly over the limit, there’s uncertainty over whether an aggressive Chapter 7 trustee will attempt to pursue the house.  Moreover, Chapter 13 is a less appealing option because the amount they would have to repay their unsecured creditors impairs the “fresh start” a bankruptcy case is meant to provide. Increasing the homestead exemption to $300,000 will go a long way toward improving this state of affairs, and is good policy.

An additional provision of SB308 is that it creates a $5,000 “wild card” exemption for self-employed people. (The home equity exemption scheme currently has no wild card exemption whatsoever.)

If you are a California resident considering filing a bankruptcy case, please contact your Assemblyperson and urge passage of SB308; you may wind up making things easier for yourself.

SCOTUS: At Conversion, Undistributed Funds Go to the Debtor (Harris v. Viegelahn)

When someone converts from a Chapter 13 bankruptcy case to a Chapter 7 case when the Chapter 13 Trustee is in possession of funds that haven’t been distributed to creditors, what happens to that money? Does it go to the debtor (as the 3rd Circuit held), or does it go to the creditors (as the 5th Circuit held)? That was the issue decided today by the Supreme Court in Harris v. Viegelahn.

Charles Harris filed a Chapter 13 case in February 2010, largely to get caught up on arrears on the mortgage to his house. Unfortunately, Mr. Harris continued to fall behind on his mortgage payments during his Chapter 13 plan, and in November 2010, the mortgage holder received permission to proceed with the foreclosure. Mr. Harris then exercised his right to voluntarily convert his case to Chapter 7. After the conversion, the Chapter 13 trustee (Viegelahn) distributed $5,519 of accumulated funds to Mr. Harris’s lawyer, herself, and to unsecured creditors. The Bankruptcy Court ordered the trustee to return the funds, but the Fifth Circuit revered, holding that “considerations of policy and equity” dictated that the funds go to the creditors.

Writing for a unanimous court, Justice Ginsberg looked to the reasoning in the 2012 3rd Circuit case of In re Michael, which had gone in the opposite direction on the same issue. The Court held that, pursuant to Section 348(e) of the Code, the Chapter 13 trustee had been stripped of authority to distribute assets at the moment of conversion. Additionally, no provision of the Code provides that any property (including post-petition assets) as belonging to creditors. Thirdly, the Court rejected the 5th Circuit’s concern that such a hold would result in a windfall for the debtor; the money being returned to the debtor was money that the debtor would have kept had he filed a Chapter 7 case.

Local practice here in the Northern District of California was already in keeping with the law as laid out here, but it is nice to see the Supreme Court holding unanimously in favor of the debtor in a consumer case like this. A PDF of the opinion can be found here.