New York Bankruptcy Court: Wells Fargo’s “Administrative Freezes” Violate the Automatic Stay

When I conduct an initial consultation with a client, I’m always careful when I hear that client has a bank account with Wells Fargo.  That’s because if a person files a Chapter 7 case, and if they have more than $5,000 in Wells Fargo bank accounts at the time of filing, Wells Fargo “freezes“ those bank accounts until otherwise instructed by the Chapter 7 trustee.

Needless to say, these freezes are very frustrating to deal with, and a nuisance to have to avoid by such methods as cashing out the accounts prior to filing.  Unfortunately, in California the practice is likely to continue for the time being:  In October, the Ninth Circuit Court of Appeals (in the case of In re Mwangi, 764 F.3d 1168, 1179 (9th Cir. 2014)) affirmed its earlier holding that only the Chapter 7 Trustee has the standing to assert an injury based on such freezes.

However, in a more recent case (In re Weidenbenner, No. 14-35443, 2014 Bankr. LEXIS 5009 (Bankr. S.D. N.Y. Dec. 12, 2014)), the Bankruptcy Court for the Southern District of New York has reached the opposite conclusion.  There, the Court held that such freezes are indeed an “exercise of control over property of the estate”; they are not “mandated by the Bankruptcy Code, ordered by the Court, or requested by the chapter 7 trustee.”  It also rejected Wells Fargo’s argument that the freezes were required under § 452(b) as a misreading of prior caselaw (specifically, Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995)).  Finally, as to the standing issue, the Court held that the holdings in cases such as Mwangi are “not consistent with the Code and the practical realities of debtors’ lives.”

It is probably wishful thinking to hope that because the practice is now outlawed in New York, Wells Fargo will voluntarily abandon it in other parts of the country.  Perhaps the opinion will persuade other courts to come to the same conclusion, until the Ninth Circuit sees its mistake and changes its mind.  In the meantime, Chapter 7 debtors in California will just have to continue moving their money out of Wells Fargo accounts before filing.

NY Appellate Court: Rent Control Laws Are a “Public Benefit”

On November 20, 2014, the New York Court of Appeals decided the matter of Santiago-Monteverdi v. Pereira (In re Santiago-Monteverdi), 2014 NY Slip Op. 8051 (N.Y. Nov. 20, 2014).  Ms Santiago-Monteverdi had lived in her New York City rent-controlled apartment for 40 years.  In 2011, she filed a Chapter 7 case, seeking to discharge approximately $23,000 in credit card debt.  Section 365(a) of the Bankruptcy Code empowers bankruptcy trustees to assume unexpired leases, and the owner of Ms Santiago-Monteverdi’s building offered the Chapter 7 trustee that, if he assumed Ms. Santiago-Monteverdi’s lease, the owner would buy him out for an undisclosed sum.  Ms Santiago-Monteverdi then sought to exempt the asset as a “Public Assistance Benefit,” as provided for by New York law.  The Bankruptcy Court sided with the trustee, and the District court affirmed.  On appeal, the Second Circuit certified the question to the New York Court of Appeals for this interpretation of state law.

The Court looked to the legislative history, finding that the rent control system had been created to allow lower-income residents to retain their housing as the cost of housing increased.  The Court also found that the law bore the hallmarks of a public assistance benefit: its continued application depended on local need, it was implements at the local and state level, and it provided assistance to a segment of population who could not otherwise afford housing.  The Court further held that direct payments are not necessary for a program to constitute public assistance, and noted that while the benefit was not paid by the government, it was conferred by the government.

The case is significant for residents of San Francisco, Oakland, and Berkeley where rent control laws are in place.  I have not heard of a local instance where a Chapter 7 trustee has pursued an rent-controlled lease as an asset, but if this case had gone the other way, doubtless we would start to hear of it happening.  Indeed, attorneys should be on their guard for this issue in case some trustee attempts to test the interpretative waters regarding the California public assistance benefit exemption.

Supreme Court Agrees to Hear Chapter 7 Lien Strip Case

On November 17, 2014, the U.S. Supreme Court granted the petition to have the case of Bank of America, N.A. v. Caulkett heard.  The case comes out of Florida and deals with ‘lien strips” of second mortgages in the Chapter 7 context.

Lien stripping is a fairly common occurrence in Chapter 13 cases; the principle is that if there is more than one mortgage (or “lien”) against a piece of property, and the property is worth less than the first (i.e. it is “under water”), then there is no equity to secure the junior mortgages.  The security interest is stripped from those mortgages, and they are treated like unsecured debt.

The general trend among the Circuit Courts has been to hold that such junior liens cannot be stripped in Chapter 7 cases, largely based on analogy to the 1992 Supreme Court decision Dewsnup v. Timm, (502 U.S. 410), which held that partially unsecured junior liens cannot be “crammed down” in Chapter 7 cases.

The Eleventh Circuit, in which Florida resides, was the only Circuit to make the distinction between cramdowns of partially secured junior liens and strips of wholly secured junior liens, allowing the latter in the case of McNeal v. GMAC Mortg., 735 F.3d 1263 (11th Cir. 2012).  Caulkett is a challenge to that decision.

Oral argument is likely to take place in Spring 2015, with a decision by June.

“When Non-Bankruptcy Clients Need Bankruptcy Advice” – Thursday, Nov. 20 Attorney Action Club Presentation

Calling all Bay Area lawyers and legal professionals:  Come to my Thursday, November 20 presentation entitled “When Non-Bankruptcy Clients Need Bankruptcy Advice.”  It’s part of the “Attorney Action Club” and will take place at 11:30 AM at the offices of City National Bank at 150 California Street, 12th Floor, in downtown San Francisco.  0.5 hours MCLE will be offered, as well as free lunch and networking opportunities.  Registration is here.

Topics to be covered:

  •  A brief overview of bankruptcy law for attorneys who represent individuals
  • Information for divorce lawyers on discharging community debt
  • Information for tenant lawyers on treatment of rent arrears
  • Estate planning in anticipation of bankruptcy
  • Civil defendants and post-litigation bankruptcy

I’m looking forward to seeing you and sharing information with you!

NPR Story Perpetuates Myth of Debt Repayment

This past Sunday morning, I was listening to the radio, making breakfast for my family, when I heard NPR feature a story about credit card debt. Claire Shrout is a nurse and a mother of two who, after her husband had a second bout with cancer, found herself $48,000 in credit card debt. It wasn’t due to some profligate lifestyle, but to simple necessities like a new transmission and pediatric emergency room visits. She told of how her family then proceeded to spend four years struggling to climb out of the hole.

It’s a heartbreaking story. Claire speaks eloquently about the guilt and shame she felt. Listening to her, I felt like she could have been any one of my clients. It’s usually not the doctor bills that bring people to my office; more often it’s the debt accrued from the resulting loss of income.

Toward the end of the interview, the interviewer asked her if she had considered filing a bankruptcy case. She said no; they had gotten themselves into this debt and so they felt they could get themselves out.

That was a frustrating thing to hear. I know there’s a lot of pride in that statement, but it perpetuates the myth that there’s some kind of heroism in contributing to the profits of the big banks. There isn’t. When Claire’s creditors extended credit to her, the likelihood that she would default was already calculated into the interest rate she was charged.

I wanted to ask her: Why put yourself through that? Why put yourself through that when the banks have already accounted for that money’s possible loss? Why put yourself through that when the law provides you with a clear and fast way out? Why put yourself through that when your family needs that money more?

There’s no heroism in contributing to the profits of the big banks, but there is heroism in holding onto that $48,000 to provide for your kids and their future.

Earlier in the interview, Claire had said that at a certain point, “you realize there’s nothing coming along to bail you out.” Sadly, there was something there all along that could have bailed her out: the helping hand offered by the Bankruptcy Court, if only she’d been willing to take it.

If you’re in a situation similar to Claire’s, I urge you: Swallow your pride. Put out of your mind negative connotations you have with the word bankruptcy. The bankruptcy court is there to help you. Schedule an initial consultation with a lawyer, and really seriously look into the possibility of hanging on to your money, for your family’s sake.

100% Chapter 13 Plans: What Are They?

What is a 100% Chapter 13 Plan? When you file a Chapter 13 Bankruptcy case, you present the court with a plan. That plan in most cases is 5 years long, and it essentially says: “For the next 60 months, I’m going to pay X dollars per month to a trustee, and here are the instructions on how that money is to be distributed.” While you’re in your plan, you are under the court’s protection, and no one can attempt to collect on a debt from you without getting special permission.

There are certain parties that need to be paid in full through your Chapter 13 Plan. Your attorney may be getting part of his or her fees paid through the plan. The trustee takes a portion for administering the plan. Car loans are usually paid in full through the plan, as are recent income taxes. Most importantly, if you’re behind on your mortgage and want to keep the house, those arrears are usually paid in full through the plan, too.

All your other creditors (your general unsecured creditors, such as credit cards, personal loans, and medical bills) get paid something somewhere between 0% and 100% of what they’re owed. How much they get is largely based on two factors: your income and your assets.

On the income side, there’s a document called the Chapter 13 Means Test. It’s a complicated calculation that basically comes down to: Based on your last 6 months’ income, minus necessary expenses, how much can you afford to pay your unsecured creditors per month? Whatever that number is, your unsecured creditors have to get at least that much per month from your plan.

As to assets, the question is: Are your assets so valuable that, if you were in a Chapter 7 case, some of those assets would be subject to liquidation? If so, your unsecured creditors need to get at least as much through your Chapter 13 Plan as they would in that hypothetical Chapter 7 case.

Which brings me to the point of this post: A 100% Chapter 13 Plan is one where, based on income or assets, you have to pay back to your unsecured creditors 100% of what they’re owed.

I’m seeing more and more 100% Chapter 13 Plans these days, and they’re almost always due to one thing: assets. From 2008 through 2012, it was very rare to see 100% Chapter 13 Plans. That was because, due to the housing market crash, hardly anybody had any equity in their homes during that time.

These days however, are an entirely different matter: I practice in the San Francisco Bay Area, where the housing market is very hot. Home values are higher now than their pre-bubble peaks. As a result, almost everyone I see now who owns a home has equity in their home. That’s good, right? Absolutely. But the consequence is that if you have to file a Chapter 13 case, you’re going to have to pay more to your unsecured creditors. And most of the time, we’re talking about amounts that are high enough to trigger 100% Plans.

Here’s the common situation: Married couple own a home. For whatever reason (everyone’s exact situation is unique), they’ve fallen behind on their mortgage, and now there’s a foreclosure date. To stop the foreclosure, they file a Chapter 13 case to enjoy the court’s protection while they catch up on the arrears over 5 years. But because their house is so valuable now, they have to pay off 100% of their other debts through the plan, too.

So that’s the upshot: In the current market, your house is worth a lot more than it was worth 2 years ago. While that’s great, it also means that if you have to file a Chapter 13 case, you’re going to have to pay back a lot more to your unsecured creditors. However, you can’t let the prospect of being in a 100% plan stop you from filing a Chapter 13 case if you need to. Foreclosures are still happening, and if you’re being threatened with one, a Chapter 13 case remains one of the best legal tools for keeping your home.

Executive Benefits v. Arkinson: Supreme Court walks back from Stern v. Marshall

Executive Benefits v. Arkinson: A little background: In 1978, Congress based the bankruptcy courts’ existence on its Article I powers to establish uniform laws on bankruptcy. But then in the 1982 case of Northern Pipeline Construction, the Supreme Court held that federal judicial power could only be exercised by judges appointed under Article III. However, the Court also allowed for certain exceptions, such as cases involving “public” rights.

What exactly constituted a “public” right was never defined, but in 1984, Congress created a list of “core” matters that bankruptcy courts were authorized to decide. (As to “non-core” matters, bankruptcy courts were directed to submit findings of fact and conclusions of law to district courts, which are Article III courts.)

All was fine and good until the 2011 case of Stern v. Marshall reopened the can of worms.  That case involved Vickie Marshall’s (AKA Anna Nicole Smith) estate’s state law counterclaim against her late husband’s son. The Supreme Court held that the counterclaim was indeed a “core” matter under the 1984 Act, but since it only involved state law rights (and were so not “public”), the bankruptcy court had no Constitutional authority to hear it.

Which brings us to June 9’s decision of Executive Benefits v. Arkinson, which asked the question: “What does a bankruptcy court do with these so-called Stern claims (i.e. “core” claims that don’t involve public rights)? Is a bankruptcy court barred from hearing the matter at all?  Or can it issue reviewable findings of fact and conclusions of law (just as it does with “non-core” claims), even though it has no explicit statutory authority to do so)? Justice Thomas, writing for a unanimous Court, held for the latter position.

A very wonkish, non-sexy decision indeed, but important in that it deals with issues of the fundamental basis of bankruptcy courts’ Constitutional authority. It’s notable for the Court’s declining to throw bankruptcy courts’ current bases of authority into disarray (which it could well have done). Instead, it is a very pragmatic decision that walks from the precipice opened by Stern v. Marshall.

Top 8 Bankruptcy Lawyer Blogs – June 2014

I try my best to provide helpful, accurate, and interesting information here at the blog section of my website.  But I also try to keep abreast of what other bankruptcy lawyers are writing about.  To that end, here are what I view as the top 8 bankruptcy lawyer blogs, as of June 2014.  If you’re looking for information on a subject that I haven’t covered, you would do well to search these sources.

The Top 8 Bankruptcy Lawyer Blogs – June 2014

Bankruptcyblog.org – Bankruptcyblog.org is a website that features regular articles by bankruptcy attorneys from throughout the country and is intended “to educate consumers about the complexities of the United States Bankruptcy Code.” One recent article warns debtors about potential Chapter 13 overpayment when they elect a voluntary wage order and are paid bi-weekly.

Bankruptcy Law Network – Another group of unaffiliated debtor lawyers, perhaps the most widely-recognizable bankruptcy blog around.  If you’re looking for information on any bankruptcy-related topic, odds are good someone’s written about it there at some point.

Bankruptcy Soapbox – Cathy Moran, my colleague here in the San Francisco Bay Area, is amazing.  Her Bankruptcy Mastery blog remains my go-to place for technical legal questions, but her Bankruptcy Soapbox, which is intended for clients instead of lawyers, is equally fantastic.

Carol A. Lawson – Clearwater, Florida attorney Carol Lawson handles family law matters as well as bankruptcy.  The blog section of her website features articles on interesting topics, such as a recent analysis of the Consumer Financial Protection Bureau’s May, 2014 report on older consumers and mortgage debt.

Daniel Stone – Columbia, South Carolina bankruptcy lawyer Daniel Stone publishes great articles that should be useful to people unfamiliar with consumer bankruptcy.  Recent topics include the benefits of filing Chapter 13 over Chapter 7, and “What happens to my credit after bankruptcy?”

Matt Berkus – Denver, Colorado bankruptcy attorney Matt Berkus has very good blog posts that should round out your understanding of potential issues in a bankruptcy case.  Recent posts include one about why not to sign a mortgage reaffirmation agreement and another about how your bankruptcy case may be more complicated than you think.

Maxwell Law Firm PLLC – This is a medium-sized firm in New York City that provides a number of services, including tax, traffic, and small business issues.  Their frequently-updated blog has many interesting bankruptcy posts, including the dangers of debt consolidation and the differences between a Chapter 7 trustee and a Chapter 13 trustee.

Russ DeMott – Charleston, South Carolina bankruptcy lawyer Russ DeMott has an excellent blog section of his website.  It looks like he hasn’t been able to update it as often in the past couple months, but the archives are absolutely worth perusing.

Southern California Law Advocates, P.C. – SCLA is a multi-lawyer, multi-office firm in Southern California.  Their frequently-updated blog has very helpful articles on such topics as co-debtors’ credit ratings and reaffirmation agreements on car loans.

Congratulations to these lawyers, for their commitment to providing people with high-quality information as well as for their continued representation of people in need of help.

How Much Does Bankruptcy Cost?

How much does bankruptcy cost? The answer is “it depends.”

The most important factors are what type of case you’re filing (Chapter 7 or Chapter 13) and how complicated your case is. Basically, there are three kinds of costs associated with filing a bankruptcy case: lawyer fees, court fees, and “other.”

Court Fees: These are the most straightforward, so let’s start here. At the time of writing (June 3, 2014), the fees for filing a bankruptcy case are: $335 for a Chapter 7 case and $310 for a Chapter 13 case.

“Other”:  Next, let’s take “other.” There are a number of miscellaneous fees associated with filing a bankruptcy case.  The main ones are the costs of taking the pre-filing class and the post-filing class. If you search online, you’ll be able to find different providers that charge varying amounts, but they’re usually approximately $30 each.  Additionally, your lawyer needs to do his/her due diligence. That includes such items as credit reports, tax transcripts, real estate title searches, and appraisals. Again, costs vary for these items.

Lawyer Fees: Lawyer fees are usually the largest cost associated with filing a bankruptcy case. Unfortunately, it’s impossible to say exactly what your lawyer fees will be: Every case is unique, and the fees will be higher the more complicated your case is.  (For example, business ownership, home ownership, tax issues, pending lawsuits, special motions to be filed, etc., are all reasons why a lawyer might charge you additional fees.)  Also, different lawyers take different approaches to fees, especially with regard to retainer amount and to hourly rate vs. flat fees.

As a general rule of thumb, lawyer fees for a Chapter 7 case will usually be lower than if the same case is filed as a Chapter 13.  But the two kind of cases accomplish different things, and one shouldn’t choose one over the other based on lawyer fees.  Lawyer fees in a Chapter 7 case will almost always have to be fully paid pre-filing, while in a Chapter 13 case, a portion of the lawyer is often paid through the Chapter 13 plan.

One court where I practice, the Oakland Division of the Northern District of California, publishes a document entitled “The Rights and Responsibilities of Chapter 13 Debtors and Their Attorneys,” which establishes guidelines for flat fees in a Chapter 13 case.  Those guidelines provide for lawyer fees of $6,000 if the client operates a business, $4,800 if he or she does not.  The San Francisco Division publishes a similar document, but there the court uses a “cafeteria plan” to determine lawyer fees, with the fees being determined by the specific issues involved.

Sadly, there’s no way to answer the question “How much does bankruptcy cost”  with any specificity in a blog post.  Ultimately, the best way to get an exact answer to that question is to call two or three lawyers who offer free initial consultations, meet with them, and see what they say.

The Bankruptcy Means Test (Bankruptcy Basics)

The bankruptcy means test is an aspect of U.S. consumer bankruptcy law that was introduced as part of the 2005 bankruptcy reform law. All people who file a Chapter 13 bankruptcy case or a Chapter 7 bankruptcy case (and who primarily have consumer debts) must file a completed means test as part of their petition.

The Chapter 7 and Chapter 13 bankruptcy means tests are similar, but perform different functions.

The Chapter 7 Bankruptcy Means Test

The Chapter 7 means test basically asks the question: “Did you make so much money in the past six months that you don’t qualify to file a Chapter 7 case?”

To answer that question, you add up all your income from the last six complete months before filing, and then divide by six. If that number is below the median income in your state for a household of your size, the inquiry ends. You qualify to file Chapter 7. If that number is above median, you have to go through a complicated calculation: First you subtract what the government thinks people nationwide spend on necessities.  Then you subtract what people in your county spend on other necessities. Finally, you subtract amounts you personally spend on necessities that are specific to you (such as taxes, health insurance, car payments, etc).

If the ultimate result is that you have more than a certain amount per month in disposable income, then you don’t qualify to file Chapter 7. (That amount, as of May 1, 2014, is $208, but it changes frequently.)

The Chapter 13 Bankruptcy Means Test

The Chapter 13 means test asks two questions: “Do you qualify for a 36-month plan?” and “What’s the minimum amount your unsecured creditors must be repaid?”

To answer those questions, you add up your last six months’ income and divide by six (just like with the Chapter 7 means test). If that number is below median, you qualify for a 36-month/3-year plan. (Nevertheless, people who qualify for 36-month plans still often choose 60-month plans because it benefits them.)

If you are above-median, you go through calculations similar to those described above. If the ultimate result is a number higher than zero, then that’s the minimum amount per month that your unsecured creditors need to get paid.

Bankruptcy Means Test Provisions in the Code

For those interested, the Chapter 7 bankruptcy means test is codified in Section 707(b) of the Bankruptcy Code. Section 707(b) lays out the guideline for conducting the means test and says that if you don’t pass it, a “presumption of abuse” arises, and gives the Court the authority to dismiss the case.

The Chapter 13 bankruptcy means test is codified in Section 1325(b) of the Bankruptcy Code. Section 1325(b) states that the Court cannot confirm an objected-to plan unless the debtor commits all of his or her disposable income during the lifetime of the plan to repaying the unsecured creditors. To determine what constitutes “disposable income,” it then directs you back to the calculation laid out in Section 707(b).

Conclusion

Properly conducting the bankruptcy means test is one of the most complicated parts of filing a bankruptcy case. It takes expertise to know what expenses you are legally entitled to include in order to improve your result. Moreover, the result often determines the success or failure of your case.  If you’re unsure of how the means test will impact your case, be sure to contact an attorney who is experienced in bankruptcy.