Bankruptcy Questions Answered

Bankruptcy Contempt Case Highlights Important Rules

A recent news article from LoanSafe.org tells the story of a woman who broke some important bankruptcy laws and ended up with almost $48,000 in fines to pay, on top of a five-year probation period. If that doesn’t sound like a good deal to you, read on to find out what she did wrong.

According to sources, the woman’s case worked like this:

• In 2005, the woman in question filed for Chapter 7 bankruptcy. Chapter 7 is designed to help filers eliminate certain unsecured debts without making creditor payments through a repayment plan (that only comes into play in Chapter 13 bankruptcy).
• As bankruptcy law requires, the woman testified to the completeness and accuracy of the information in her bankruptcy petitions as part of the Chapter 7 process.
• Before filing her bankruptcy petition, the woman apparently transferred a piece of property (worth more than $47,000) to her son. She did not mention this transfer in her bankruptcy documents.
• After the Chapter 7 case ended, the woman reportedly sold the “transferred” property and used the money to buy a home in a different state without reporting the proceeds of the sale.

Avoiding Bankruptcy Fraud

The woman’s crime was that she improperly transferred property with the intention of shielding it from the bankruptcy court. Had she proceeded lawfully without transferring the property, it would have been considered part of the bankruptcy estate.

Depending on the specifics of the woman’s case, the property might have been sold to raise money to repay her creditors in part; however, lying about the property ended up costing her in the long run.

One reason most insiders recommend that potential bankruptcy filers work with a bankruptcy lawyer is to help them avoid bankruptcy fraud, which includes all of the following.

• Reporting incorrect or incomplete information: While the bankruptcy court may excuse honest mistakes on paperwork, more serious “mistakes” will likely lead to some legal action.
• Attempting to repay a favored creditor before filing: Singling out one creditor (say, a family member or friend who lent you money) to repay before discharging other debts in bankruptcy is not allowed. Those who attempt to do so could face charges of bankruptcy fraud.
• Improperly concealing or transferring property: This could be considered a branch of the “complete and accurate” rule, but it deserves its own section. Attempting to hide or pretending to give away assets to shield them from bankruptcy is not permitted.
• Omitting known future income: Whether you’re expecting a tax refund or a hefty inheritance, it’s important to include it in bankruptcy petitions. Otherwise, you risk being charged with bankruptcy fraud.

As the story above illustrates, bankruptcy fraud is serious business: fines can get as high as $500,000 and those convicted may face jail time. Neither of those options sounds like a good way to get back on your feet financially.

Study: Bankruptcy Considered or Filed by One in Eight Americans

A study recently published by the web site Find Law indicates that a considerable percentage of the U.S. population (one in eight survey respondents, or nearly 13 percent) has either considered filing for bankruptcy or actually done so.

That figure may seem high, but in a nation of consumer debt, depreciating home values and a limited job market, perhaps it’s no wonder that so many of us are in need of serious the serious financial protection and debt relief that bankruptcy can offer.

Who Is Considering Bankruptcy?

The study breaks down potential bankruptcy filers in part by age:

• Americans between 35 and 54 are reportedly the group most likely to consider bankruptcy as an option.
• Americans 18 – 34 and 55 and older are, according to sources, half as likely as the middle age group to consider or actually file for bankruptcy.
• Senior citizens (those 65 and older) are apparently the least likely group to consider bankruptcy as a debt relief option, at only seven percent.

How Have Bankruptcy Filing Numbers Changed in Recent Years?

Sources indicate that in 2010, 1.5 million Americans actually filed for bankruptcy protection. This number marks the highest annual total since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect and tightened the standards for those interested in bankruptcy protection.

Why Do So Many People Need Bankruptcy Protection?

While no two bankruptcy cases are alike, bankruptcy filers often note common triggers that led them to seek the protection of the bankruptcy court. These include:

• Unexpected medical expenses: Illness and injury can both cause serious medical bills to build up, particularly for those people who are uninsured or underinsured. And even an otherwise happy event, like the birth of a child, can prove very expensive.
• Change in family makeup: Divorce and death are difficult to deal with on their own, but are often compounded by the financial troubles they cause. Many families are forced to face unpleasant financial realities after divorce or death carries off a primary breadwinner.
• Job loss or reduction: Even good employees are at risk of losing their jobs in the current economic climate, and even though layoffs have slowed in recent months, the unemployment rate remains high. It’s no secret that this type of financial burden can lead a household to seek bankruptcy protection.
• Fear of foreclosure: Even those with good health and steady jobs may find themselves unable to keep up with their mortgage, and some families opt to file for bankruptcy in hopes of fending off mortgage foreclosure.

Considering the many factors that can contribute to a household’s decision to file for bankruptcy protection, it may be a wonder that only one in eight Americans has thought about personal bankruptcy!

Banned From Bankruptcy Court: Judge Tells KEL Lawyers To Get Lost

Kaufman, Englett and Lynd, PLLC (“KEL”) is a law firm that advertises mortgage foreclosure defense work, among other things. KEL decided to get into the bankruptcy business and is one of the largest volume filers of bankruptcy petitions in the Middle District of Florida. I assume that many of KEL’s clients who could not pay their mortgage are also good candidates for bankruptcy to both protect themselves from deficiency judgments and wipe out other debts related to their financial hardship. It seems good business for KEL to capture the bankruptcy business from their foreclosure defense clients.

There was much scuttlebutt around the bankruptcy court today about a court order which sanctioned KEL by banning them from practicing in bankruptcy court for the Middle District. No bankruptcy filings, no motions, no claims, no nothing. This is a very severe sanction. I have not heard of this court ever banning an attorney from future legal practice before the court.

The order does not describe in detail KEL’s bad behavior. Apparently, KEL, though its attorney William Sanchez, filed a motion in November, 2010, for sanctions against bankruptcy debtors. The court said that “because of numerous missteps and lack of diligence by Mr. Sanchez and his firm” the court has been unable to adjudicate the motion.

I have no personal experience with KEL problems or their practice. I know they have a high-volume bankruptcy operation A few other bankruptcy attorneys I spoke with today stated that KEL typically assigns inexperienced attorneys to bankruptcy cases, , and that these inexperienced  attorneys are filing a large number of bankruptcy petitions each month. Inexperienced attorneys, generally, make mistakes in their petitions and in their bankruptcy practice. KEL attorneys  must made some serious and repeated mistakes to incite a judge to the point where they have been banned from bankruptcy court.

There is a lesson here for new bankruptcy attorneys. Bankruptcy practice is not as easy as it seems, and certainly, its more difficult than it was before the 2005 bankruptcy law. Federal court judges and bankruptcy trustees do not have much patience with sloppy law practice. Every attorney is inexperienced when he does his first case. By starting with a small volume of cases, and by working initially with a more experience attorney, you can learn things about bankruptcy law which you cannot learn in a book or by reading the bankruptcy rules. Don’t attempt to handle a large volume of cases until you have learned the ropes of bankruptcy law and procedure. Case No. 10-15477

 

How Can I Protect My Bank Accounts When Filing For Bankruptcy?

As we all know, when an individual files a bankruptcy case, they are required to disclose all of their assets, and the total value of those assets is the starting point for determining how much (if any) they must pay to their creditors in the case. So, of course, in my work as a consumer bankruptcy attorney in Southwest Florida, I get a lot of questions about how to protect one’s assets before filing a bankruptcy case. Specifically, one of the most common things that people want to know about is protecting their bank accounts. When it comes to bank accounts, it is mainly about organization. There are several specific exemptions, or protections, that can be applied to bank accounts to shield them from the reach of the bankruptcy trustee so that you can keep that money available to support your family after the case is filed. These exemptions are based on the source of the money that was deposited into the bank account, the most popular ones being wages and social security. The key to protecting the specific types of deposits that are specifically exempt in bankruptcy is to keep those deposits separate from the rest of your non-exempt money and to spend those protected monies after all other types of money that you have. That way, there is no question as to the source of the money that is in your bank account on the date that you file for bankruptcy protection.

When Lending Money For A Family Member Or Friend To Purchase A Vehicle, Treat It As A Business Transaction.

One of the situations that I see all to often as a Bankruptcy attorney in Southwest Florida, is where a family member or friend has lent money to someone to purchase a vehicle but has failed to protect this loan with a properly perfected lien and security agreement. When lending money to a friend or family member no one wants to ask for a security interest because it makes it seem like you doesn’t think the person will pay the money back or that you are watching over their shoulder as “big brother.”

However, asking for a security interest when loaning money to a friend or family member actually serves to protect not only you the lender, but also protects the family member that is borrowing the money as well, especially if they are forced to file bankruptcy or have a judgment against them from a lawsuit.

Improving Means Test Results By Incurring Car Debt

When a debtor calculates a Chapter 7 means test analysis he is entitled to deduct from income transportation expenses associated with ownership of a car. All Florida debtors can deduct from income a general transportation expense which is approximately $250. There is another deduction associated with the expense of owning a car known as the “ownership expense.” The ownership expense is calculated using the debtor’s car payment and a fixed allowance of about $500. Based upon a recent court ruling, debtors who own a car free and clear of any liens are not eligible to take any ownership expense despite the obvious costs associated with owning a car in Florida. The car ownership deduction is limited to people with car debt.

This past week I provided legal services to a woman who is a bankruptcy paralegal in a high-volume bankruptcy office located in Illinois. We discussed how her office handles car expenses in the means test.  The attorney she works for recommends that prospective debtors who own cars outright get a very small car loan in order that the debtor qualifies for the car ownership allowance.

In Florida, for example, debtors get a $1,000 base car exemption. Most debtors today also qualify for a $4,000 wildcard exemption which can be applied to protect car equity. Assume a debtor in Florida owned outright a car worth less than his applicable exemption limit. Using the advice provided by the Illinois attorney, the debtor would get a very small car loan prior to filing bankruptcy, if and as necessary, to help him qualify for the means test. The small loan would not significantly affect his monthly household budget.  If the debtor’s car was worth more than the allowable exemption the trustee would demand payment of non-exempt equity.

There are a some pitfalls with this plan. To name a few, the debtor must be prepared to explain what he did with the money borrowed on the car. Using the borrowed money to pay  his bankruptcy attorney, or pay priority debts such as tax debt, may be acceptable. Second, bankruptcy attorneys are not supposed to encourage their clients to incur debt prior to filing bankruptcy. Issues aside, my client’s suggestion is an inventive way for some clients with free and clear cars  to improve their means test results.

Bankruptcy Lawyers Help Homeowners Erase Second Mortgages

Many Americans currently considering bankruptcy are in financial trouble partly because of the struggling housing market. Underwater mortgages (those in which the homeowner owes more than the home’s current value) are a reality for as many as 28 percent of American homeowners.

Even though bankruptcy law prohibits the court from modifying the terms of a primary mortgage, some bankruptcy lawyers have found a legal way to help their clients stay in their home and avoid foreclosure.

Unsecured Second Mortgages

Here’s the process some bankruptcy petitioners are following to help ease their mortgage debt:

• File for Chapter 13 bankruptcy: Entering a Chapter 13 case means that the filer agrees to a three- to five-year repayment plan in which she will catch up on past-due debts.
• Petition the court to declare a second mortgage unsecured debt: Filers who have second mortgages that, combined with their primary mortgages, exceed the value of their home’s current value, may be able to make this move. A bankruptcy lawyer can explain in more detail how the move works and whether it might be possible in any individual’s case.
• Make payments according to the repayment plan: If the court accepts the petition, the filer must continue making payments according to her repayment plan for the duration of the bankruptcy case. At the end of the case, the remaining unsecured debt (including that from the second mortgage) may be excused by the court.
• Avoid foreclosure: In many cases, reclassifying a second mortgage as unsecured debt allows filers to make mortgage payments and remain in their homes.

The Winners and the Losers

Naturally, this legal maneuver is good news for struggling homeowners and potential bankruptcy filers. But banks and other lenders are apparently less than thrilled about the development – after all, they’re the ones who lose out on mortgage payments when debts are excused in court.

But, as one news outlet reminds us, the only way to change the law is an act of Congress. Given the current state of the American housing market and level of financial difficulty many Americans are facing, a move of that sort seems unlikely: what politician would want to be responsible for taking away a tool for avoiding foreclosure?

Can You Save Your Home from Foreclosure?

In order to take advantage of this legal protection, your financial situation must meet a number of criteria:

• Sufficient income to make payments: In order to benefit from Chapter 13, you have to be able to make monthly payments according to a repayment plan, which means you have to have a steady source of income.
• Two (or more) mortgages: Again, primary mortgages cannot be modified in bankruptcy court.
• An underwater home: Finally, you can only have debt declared unsecured if there is no property to secure it (that is, if your loan is worth more than your home). If your home value exceeds the amount of your primary mortgage, then at least a portion of the second mortgage is secured by the home, and cannot be excused by the court.

If you’re ready to find out whether this might work for you, connect with a bankruptcy lawyer today.

Study: Minorities File for Chapter 13 More than Whites

A recent study released by the Woodstock Institute of Chicago shows some strange numbers about bankruptcy filings and race. Specifically, the study shows that African American bankruptcy filers choose Chapter 13 bankruptcy more frequently than their white peers.

The implications of this finding are interesting and instructive to anyone considering bankruptcy as a way of easing debt.

Chapter 13 vs. Chapter 7: What’s the Difference?

In order to understand why this study’s findings matter, it’s essential to understand the key differences between Chapter 7 and Chapter 13 bankruptcy.

• Chapter 7 bankruptcy is designed to offer filers a full discharge of eligible unsecured debt. In order to qualify, filers must pass a means test showing that they do not have sufficient income to make regular payments according to a Chapter 13 repayment plan. Chapter 7 often works well for low-income filers who don’t have very much non-exempt property.
• Chapter 13 bankruptcy is designed to help those with a regular income repay a portion of their debts. Chapter 13 filers follow a three- to five-year repayment plan in order to catch up on money they owe. At the end of this period, remaining unsecured debts may be discharged by the court.

Choosing the Right Chapter Matters

The study apparently found that blacks and whites of equal income levels were choosing bankruptcy chapters in different proportions. Specifically, sources indicate that in predominately black areas, about 47.9 percent of filers choose Chapter 13 bankruptcy and in predominately white areas, only 22.5 percent of filers do. Nationwide, the rate is 32.8 percent.

Some sources suggest the difference may have been caused in part by overly aggressive advertising by certain bankruptcy firms who were targeting filers in specific areas. These firms, it seems, may have earned more money by leading filers toward Chapter 13 even when they could have filed for Chapter 7.

And the consequences for filing for Chapter 13 when you qualify for Chapter 7 could be serious:

• Strained finances: Those who qualify for Chapter 7 protection may just barely make enough money to make payments in the Chapter 13 repayment plan, which could harm their ability to save money for emergencies.
• Prolonged debt: Rather than moving through a quick, four- to six-month Chapter 7 case and ending with a debt discharge, Chapter 13 filers must wait for several years before their debts are cleared. In that time, missing a payment could cause the court to remove its protection.
• Few benefits: Those who do not have significant non-exempt property may have little or nothing to gain from filing for Chapter 13 when they qualify for Chapter 7.

Deciding which type of bankruptcy makes the most sense for your situation can make a huge difference to your financial future. If you’re considering a bankruptcy filing, be sure to consult with a bankruptcy lawyer about your options.

Chapter 7 Discharge Of Attorney Fee Sanctions From Divorce Proceeding

One of my Chapter 7 bankruptcy clients wants to discharge a judgment in favor of his former wife’s attorney. A family law judge issued a judgment for sanctions against my client  for frivolous litigation during a dispute over enforcement of a property settlement. The judgment was issued in favor of the ex-wife’s attorney for his attorney fees defending my clients continued and baseless challenges to the ex-wife’s enforcement of the property settlement. The client wants to know if a Chapter 7 bankruptcy could discharge the debt to his ex-wife’s attorney.

Whether divorce related attorney fee judgments are dischargeable depends upon the underlying proceeding. Chapter 7 bankruptcy does not discharge obligations for “domestic support” including alimony and child support. Chapter 7 bankruptcy does not discharge attorney fee judgments when the fees were incurred to obtain or enforce domestic support obligations.

Equitable distribution judgments are dischargeable. I think that attorneys fee judgments related only to equitable distribution and property settlement awards would also be dischargeable in bankruptcy.

Lawsuit Alleges Mortgage Fraud by Deutsche Bank

News reports this week announce that the U.S. Department of Justice has initiated a lawsuit against Deutsche Bank, one of the world’s largest, claiming that the institution lied to federal regulators in order to secure taxpayer-funded insurance for less-than-secure mortgages.

Here’s a look at the details and some of the underlying issues.

The Charges against Deutsche Bank

According to the lawsuit, Deutsche Bank and its subsidiary MortgageIT:

• Initiated risky mortgage loans to homebuyers. Some of these loans may have been subprime, and since their initiation, sources indicate, about a third have defaulted.
• Lied to federal regulators. While the loans themselves may have been a bad move financially, what interests prosecutors is what happens next: that Deutsche Bank allegedly lied to officials with the Federal Housing Authority (FHA) in order to secure insurance for the shoddy loans.
• Got taxpayer-backed insurance for questionable loans. Because of its reportedly false claims that it was evaluating its mortgages for default risk, Deutsche Bank managed to secure FHA funding (which comes from tax dollars) for the questionable loans.
• Required money from the government when the loans defaulted. Now, as many as 12,500 of Deutsche Bank’s loans have apparently defaulted (meaning that the homes have gone into foreclosure), leaving the government responsible for covering the losses. The money goes to those investors who own the mortgage debt. Sources note that, to date, defaulted Deutsche Bank loans have cost the government more than $386 million.

Because of all these allegations, the Justice Department is reportedly suing the bank for $1 billion, an amount that represents the dollar amount lost plus individual penalties for each mortgage that went into default.

What Mortgage Lending Rules Were Broken?

The government’s lawsuit charges that Deutsche Bank and MortgageIT failed to follow the rules required of anyone interested in federal mortgage insurance. These rules require lenders to:

• Annually verify various records of mortgage borrowers, including credit reports, incomes and record of employment. This measure is to make sure borrowers are not at risk of defaulting.
• Examine any loan that goes into default shortly after being originated in an effort to prevent and eliminate careless lending techniques.
• Act in the government’s best interest, because any money needed to guarantee loans that defaulted would come directly from taxpayers’ pockets.

The lawsuit claims that Deutsche Bank did none of these things and so is both on the hook for the money lost by the government and responsible for paying penalties for breaking the rules of engagement for obtaining federal insurance.

Some sources suggest that the Deutsche Bank lawsuit could be the first of many; after all, reckless lending techniques were fairly common during the housing boom that touched off the current recession.