Bankruptcy Questions Answered

Failure to Disclose Assets Lands Chapter 7 Debtor in Prison

Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts.  This particular debtor used Chapter 7 to discharge over $1 million in liabilities.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor's case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a "poison pen" letter to the trustee will allegations about improper activities by a bankruptcy debtor.

Second, be aware that Chapter 7 trustees and the U.S. trustee like to pursue fraud cases periodically to send a message to debtors and debtors' lawyers that the trustees are paying attention.   Bankruptcy lawyers may be tempted to say "don't worry about it," to avoid extra expense and complication but playing fast and loose with disclosure rules can create major problems for both debtors and their lawyers.

Occasionally I meet with a client who may say something like "between you and me, no one knows this but…."    This type of statement is the last thing that any bankruptcy lawyer wants to hear.  From my perspective that client is really saying "I am thinking about committing a federal crime and I want you to help me."  My license to practice law is not worth the fee for any one case and I have and will continue to decline representation for any client who wants to use my office to file inaccurate schedules.

Nobody likes to surrender assets, especially in a bankruptcy case that may have come about because of factors beyond one's control (such as a layoff, unfair treatment by a lender, a lawsuit judgment that you did not know about).   In most bankruptcy cases you will not lose in assets.   However, losing a few hundred or thousands of dollars is a far better fate than federal prison.

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Federal Mortgage Assistance Programs Modified to Include Bankruptcy Debtors

Every week I receive several phone calls from homeowners who want to take advantage of the federal HAMP (Home Affordable Mortgage Program) but do not know where to start.  Often these callers are behind two or three months and are receiving foreclosure notices, but they really do not want to file Chapter 13 before exhausting all non-bankruptcy alternatives.

These homeowners may have received foreclosure notices that suggest that the mortgage lender intends to negotiate or modify their mortgage.   Georgia law now provides that all foreclosure notices must include a "negotiation provision."   O.C.G.A. Section 44-14-162.2 provides:

Notice of the initiation of proceedings to exercise a power of sale in a mortgage, security deed, or other lien contract shall be given to the debtor by the secured creditor no later than 30 days before the date of the proposed foreclosure. Such notice shall be in writing, shall include the name, address, and telephone number of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor, and shall be sent by registered or certified mail or statutory overnight delivery, return receipt requested, to the property address or to such other address as the debtor may designate by written notice to the secured creditor.

However, in real life, very few of these homeowners have had much success in reaching a deal with their lenders.

What about the highly touted HAMP program?   A quick search on the Internet reveals dozens of articles suggesting that, to date, HAMP is not working.

Now comes word that the federal government has modified HAMP to include homeowners in bankruptcy with new guidelines effective on June 1.   Supplemental directive 10-02 specifically addresses the applicability of HAMP to homeowners in bankruptcy.

These directives are intended for mortgage servicers and set out numerous obligations for servicers.   I did find a fairly comprehensive Making Home Affordable FAQ section written for borrowers on the MakingHomeAffordable.gov site.

In reviewing the HAMP materials, it appears to me that the program is designed to direct homeowners to approved HAMP counselors, rather than to have homeowners apply directly.  Further there appear to be regulations that apply to mortgage servicers where they must proactively advise homeowners of possible eligibility.  The on-going issue – the HAMP rules are so complex that most individuals will have no idea about whether they are eligible.   For example, to qualify for a modification, here are the requirements set out in the FAQ:

• Be the owner-occupant of a one- to four-unit home.
• Have an unpaid principal balance that is equal to or less than:
  • 1 Unit: $729,750
  • 2 Units: $934,200
  • 3 Units: $1,129,250
  • 4 Units: $1,403,400
• Have a first lien mortgage that was originated on or before January 1, 2009.
• Have a monthly mortgage payment (including taxes, insurance, and home owners association dues) greater than 31% of your monthly gross (pre-tax) income.
• Have a mortgage payment that is not affordable due to a financial hardship that can be documented.

Would you know what documents to produce, or how to calculate 31% of your monthly gross income?  The government goes on to advise you that "only your servicer will be able to tell you if you qualify."  In other words, you are expected to turn to the foreclosing lender to help you apply for a program that will stop foreclosure.

Thanks to Las Vegas bankruptcy attorney Randy Creighton for highlighting the June 1, 2010 HAMP changes on his well researched blog post.

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IRS May Soon be Out of the Business of Seizing Income Tax Refunds for Benefit of Chapter 13 Trustee

As you probably know, there are two types of consumer bankruptcy cases available to you – a Chapter 7 which wipes out debt, and a Chapter 13 which creates a five year payment plan in which you pay back some or all of your debt with your "disposable income."  When I prepare a Chapter 13 case, we work with you to create a liveable budget.  The money "left over" after you pay for housing, food, transportation, insurance, utilities and other necessities must be sent to the Chapter 13 trustee, who then disburses these funds to your creditors based on a plan of reorganization that we submit to the court.

What happens if you need to file a Chapter 13, you have not yet filed your tax return for last year, but you know that a refund will be coming your way.  The simple answer is that unless you are paying back your creditors at 100%, your Chapter 13 will demand that you turn over your tax refund check, and will use that money to pay your creditors.  If you know that a refund is headed your way, make sure to tell your lawyer before you file – there are some steps you can take to preserve some or all of your tax refund money.

Your Chapter 13 trustee will also want future refunds paid to the trustee.  This situation is easier to handle – you will want to adjust your payroll withholdings so that you do not have any refund coming.  As far as the Chapter 13 trustee is concerned, your tax refund is kind of like a savings account that artificially reduces your net pay amount.

All of the Chapter 13 trustees in the Northern District of Georgia require debtors who are paying less than 100% to creditors to include in their Chapter 13 plans a provision that authorizes the IRS to intercept any refund payable during the years that your plan is in effect and send this money to the Chapter 13 trustee.  And until now, the IRS has cooperated with the Chapter 13 trustees in redirecting refund money.

In January, 2010, however, a federal district court in Michigan has rules that the Chapter 13 trustee does not have the power to compel the IRS to serve as its collection agent.  In the case of United States v. Carroll, a judge in the Eastern District of Michigan ruled that there is no legal basis for the IRS to withhold money and deliver it to the trustee because Congress has not waived the IRS' "sovereign immunity" that would otherwise leave the IRS vulnerable to contempt actions and other enforcement actions by the trustee (in other words, if the IRS failed to withhold a debtor's refund, the trustee would not have the right to sue the IRS for damages or for remedial action).  The Michigan judge issued an order forbidding the bankruptcy courts there from confirming any Chapter 13 plan that has the income tax refund seizure language.

I would not be surprised if bankruptcy courts elsewhere in the nation begin to follow the path set by the Michigan judge.  We'll know soon enough, but I suspect that the trustees in the Northern District may discontinue their demand for an income tax provision involving the IRS in Chapter 13 plans.

I do not expect, however that Chapter 13 trustees here or elsewhere in the country will permit Chapter 13 debtors from keeping large tax refunds.  I suspect that trustees will still demand provisions that obligate debtors to tender their tax refunds but they will expect the debtors to send in the money, rather than having it withheld by the IRS.  I will continue to advise my clients to minimize their refunds to avoid the problem entirely.

Needless to say, losing this automatic tax refund payment mechanism will make enforcement of tax refund plan provisions much more difficult.  It will be interesting to what if anything Chapter 13 trustees do to address this potential administrative nightmare.

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