A Chapter 7 Bankruptcy Debtor can strip a second mortgage in a Chapter 7 bankruptcy if they live in a jurisdiction under the 11th Circuit Federal Court of Appeals.  Approximately two weeks ago, the 11th Circuit issued an opinion in In Re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012) wherein it held quite simply that a Chapter 7 Debtor could strip a second mortgage during the Chapter 7 case.  This is huge because everyone and I mean everyone did not believe this to be the case after the Supreme Court’s decision in the Dewsnup v. Timm case.

The McNeal case is rather surprising for several reasons.  First, the 11th Circuit is not noted as being the most Debtor friendly Circuit in the Nation; however, that seems to be changing as the Court issued several Debtor friendly decisions this year in FDCPA cases.  Second, everyone thought that this issue was dead after the Supreme Court issued the Dewsnup opinion.  As a matter of fact, many Bankruptcy Court within the 11th Circuit issued opinions stating exactly this point, including the Courts that I practice in.

Third, and this was a kind of slap in the face by the 11th Circuit, was that the opinion was based upon a 1989 case, Matter of Folendore, and the Court explained that the Dewsnup case did not abrogate or overrule their precedent in Matter of Folendore, and therefore, Matter of Folendore was still good law.

Now, the real issue will be to see where this case goes next.  Obviously, this issue is going to continue to heat up.  There are several appeals pending right now in New York, Utah and Illinois.  It may be five years before the cases get to the Supreme Court, but until then, we are going to get busy stripping liens down here.

If you think about it for a little bit of time, the implications are huge.  In a Chapter 13 bankruptcy, a debtor can strip a second mortgage lien, there is no doubt about that.  But, in order to truly get the benefits of the bankruptcy, you must wait to get your discharge, and that could take from three to five years.  Ouch.  Now, if a person is eligible, they can file a Chapter 7 bankruptcy and be completely done in 6 months.

Yes, that is what I said, completely done in 6 months.  Who wouldn’t want to take advantage of that scenario?  Chapter 7 bankruptcy is cheaper and quicker.  A debtor doesn’t have to worry about filing a plan of reorganization that will have them under scrutiny for the next 5 years, etc, etc, etc.  The benefits clearly outweigh the negatives on this issue.

We will definitely keep watching this issue here at the Bankruptcy Law Network.

I was recently surprised to hear from a 2008 client who was just denied a $4,000 loan for a new roof by a credit union.  The reason was not having any post-bankruptcy credit on her credit report.

She and I had agreed that it did not make sense to incur unnecessary debt after her bankruptcy and then pay it off solely for credit reporting reasons.  I always give that advice because the largest factor in credit scoring is the passage of time after the last negative entry, the bankruptcy.  She did not want to risk incurring debt she might not be able to repay due to unforeseen future circumstances. 

Her credit union apparently went beyond her credit score and – gasp! - actually looked at her history.  That’s a good thing, but it’s only halfway.  The rest of her analysis should have looked at her long-term and stable state employment, and her very reasonable debt-to-income ratio. 

What to do?

Credit reports must be accurate.  Balances owed, including retained mortgages and car loans, must be reported as “zero owed, discharged in bankruptcy“.  But the balance and the payment history are two different things.

I advised her to get a payment history from her mortgage lender to show the credit union that she was responsibly paying despite the bankruptcy.  Oddly, the credit union did not ask for that. 

I then advised her on how to dispute the absence of her payment history on her credit reports.  Remember, those reports must be accurate.  They contain payment history information as well as balance owed information.

The dispute should lead to an accurate report of her payment history, either the easy way by the creditor not responding to the dispute or by a, ah, confrontation with the misreporting creditor. 

All in all, a good day’s work and a happy client.

Bankruptcy is a terribly hard thing for most people to consider.  So is surgery.  Oddly many people are more likely to go ahead with a necessary surgery — an invasion of their body — than they are to go see a bankruptcy lawyer.

The irony is that the bankruptcy option may be easier, and certainly less physically painful, than surgery.  And sometimes you might recovery from it faster.

• The first misconception to overcome:  Bankruptcy is about failure.   Bankruptcy for people is about renewal, not failure.    Business ventures fail and are liquidated in bankruptcy.   But people go into it for a fresh start.  They may have fallen upon difficult times and have been unable to pay debts back.  That’s the cause but the point of the process is to get you back on your feet.

• The second misconception:  Bankruptcy is a punishment.  Even though they’ve done nothing wrong, folks expect that their creditors, the trustee, and the judge will line up to torture them like they just joined a college fraternity.  In reality, it’s more like a loan closing where everyone is verifying the information you provide so that they can get you on your way to your fresh start.  It’s a team effort — if you do your part, the system will do its part to get you through safe and sound.

• The third misconception:  You’re the only one.  Let’s do some basic math.  In almost every year going back about 20 years, more than a million cases were filed.   A fair number of those were joint (husband & wife) cases.  Some households will have had to file multiple times but think about it…You already know people who filed bankruptcy.  They’re not bragging about it — no one brags about knowing me professionally! — but they’re doing just fine.

Today, right now, thousands — possibly millions — of folks just like you are doing something foolish to avoid calling someone just like me, a bankruptcy lawyer.  They might be about to cash out their 401(k) or IRA account — even though I can save it for you.  They might be hiring a debt settlement company to negotiate ridiculously unlikely deals with creditors who will sue before the end-game is played.  They might even be going back to our friend from the last decade — the cash-out mortgage, using their home like a piggy-bank.  (Notice all those foreclosed homes around lately?)

And today, right now, millions of Americans believe that they are doing just fine financially, mostly because they’re keeping up on the minimum payment on all their debt.  For the moment.  Even though they aren’t saving for their children’s college fund, their own retirement, or even their next car purchase.

It takes courage to talk to a surgeon if you have a health problem.  But deep down you know it really is not going to get better, right?  If your debts are now keeping you from important things — like your kids’ education, replacing your car, or being able to retire — or even critical things — like your health care — then why haven’t you already called a bankruptcy lawyer?  And if your answer is that you’re afraid or you’re too proud to “ever do that” then think again.   Fear and pride are hard to eat sometimes.  It might just be time to find out what you don’t know.

Yesterday, May 22, 2012, the Supreme Court declined to hear the appeal of the large damage award levied against Boston University student Joel Tennenbaum for downloading and sharing 30 songs on Napster. Wikipedia’s summary of the case can be read here.

First of all, this post is in the nature of a thought experiment; it is not legal advice for Mr. Tennenbaum nor anyone else. However, as a bankruptcy lawyer, the problem piqued my interest. The damage award against Mr. Tennenbaum for copyright infringement totaled $675,000 and, at the time, Mr. Tennenbaum was only an undergraduate student doing what tens of thousands of other college students had been doing at the time–using illegal file-sharing services to download and distribute music. As the jury found in Mr. Tennenbaum’s case, these actions, despite their rampant popularity, violated federal copyright laws and, among other things, vested the music-industry plaintiff with the right to recover sizable statutory damages. Statutory damages under copyright laws are, for each act of infringement, $750 to $30,000 for non-willful infringements, and a range of $750 to $150,000 for willful infringements. In Mr. Tennenbaum’s case, the jury was convinced to award damages of $22,500 for each infringement, for a total of $675,000.

While Mr. Tennenbaum received a doctorate in statistical physics last week, he quite-understandably claims not to have the free cash to pay the judgment. So, could he file bankruptcy and discharge the judgment?

Generally speaking, judgments are dischargeable in bankruptcy. However, creditors in bankruptcy have the basic right to object to a debtor’s discharge or the dischargeability of a particular debt. Here, Sony and Warner Brothers would likely object to the dischargeability of Mr. Tennenbaum’s debt in bankruptcy. Would they succeed?

The primary basis for objection to the dischargeability of a copyright infringement judgment is Section 523(a)(6) of the Bankruptcy Code, which excepts from discharge claims “for willful and malicious injury by the debtor to another entity or to the property of another entity.” When applicable, creditors attempt to use copyright awards for willful infringement as the basis for a nondischargeability ruling under Section 523(a)(6). However, the bottom line is that Mr. Tennenbaum would likely get another bite of the apple in a bankruptcy case and the chance to convince a bankruptcy judge that the infringement was not willful and malicious within the meaning of Section 523(a)(6) of the Bankruptcy Code. A finding of maliciousness is a separate and independent requirement under the Bankruptcy Code, while it is not a requirement under copyright law. As one of the courts in a seminal case put it (when reversing the nondischargeability finding of the lower court):

(1) there is a genuine issue of material fact as to whether the infringement was a “willful” injury within the meaning of § 523(a)(6) of the Bankruptcy Code; and (2) the “malicious” requirement was not addressed separately from the “willfulness” requirement as required by our precedent.

In re Barboza, 545 F. 3d 702, 704 (9th Cir. 2008).

The First Circuit BAP recently cited Barboza positively, noting the requirement that both willfulness and malicious be proven in the bankruptcy context in order for a debt to be held nondischargeable. In re Bradley, Case No. 10-16021-WCH (1st Cir. BAP 2012) (footnote 9). Assuming Mr. Tennenbaum stays in the Boston area, any bankruptcy filing would be governed by First Circuit law, and as the Bradley panel noted:

It is clear that an act in reckless disregard of the rights of others does not constitute willful and malicious conduct for the purposes of § 523(a)(6).

In the bankruptcy context, Mr. Tennenbaum’s pursuers would have to deal with the need to prove maliciousness. It is possible that Mr. Tennenbaum would win that fight and clear himself of the sizable judgment looming over his future.

With apologies to Paul Simon:

     You Just slip out the back, Jack
     Make a new plan, Stan
     You don’t need to be coy, Roy
     Just get yourself free
     Hop on the bus, Gus
     You don’t need to discuss much
     Just drop off the key, Lee
     And get yourself free
            50 Ways to Leave Your Lover

Until you get the property out of your name, you are still responsible for it, a fact recently pointed out by my colleague, Jay Fleischman.  You have to do something to get that property out of your name so you can walk away with peace of mind.  How do you do it?

As the song time suggests there are a myriad number of ways to transfer the title out of your name.  Maybe there aren’t 50 ways, but here are a few:

First, you can contact your lender to see if they would accept a Deed in Lieu of Foreclosure.  In this case, you would execute a deed transferring the property back to the lender.  Once recorded in the Land Records, you no longer own the property.  Some banks are offering a payment to homeowners to voluntarily leave their homes in a “Cash for Keys” program.  This saves the lender the time and expenses of foreclosing the property and physically putting you out on the street.  After all, time is money and in some ways, it is far cheaper to offer you money to move.  But most importantly, it takes ownership of the poreprty out of your name so you are no longer responsible for it.

Another way is a Short Sale.  A short sale is selling the priority to a third party for less than you owe.  This can be a long and difficult process because your lender will want proof of value, proof that the buyer is not related to you in any way and will insist on knowing exactly how much they will get out of the sale.  There are other details as well, like whether or not the lender is going to require some additional payment from you or whether they will allow deduction of the closing costs and attorneys fees out for he sale proceeds before they get their check.  Again, the most important part of this is that the property is transferred out of your name.

These first two steps can be taken either before or after a bankruptcy.  If after a bankruptcy discharge, you need to remember that you have discharged your debt to the lender so there is no need to pay the lender anything. But you can also use the bankruptcy process to enforce a surrender of the poperty to the lender.

In Chapter 13, this will be a component of your Plan.  Some jurisdictions allow surrender simply by saying so in the plan.  In other jurisdictions, several motions need to be filed first.  These might include a Motion to Determine the value of the secured interest.  This is important because if the lender’s debt is more than the value of the property, the lender may have a partially unsecured claim in your case which will need to be paid in the plan after surrender.  You would should include surrender language in you plan with a proposed instrument to be recorded giving up your ownership the property. Once all of this is approved by the Court, you can record the instrument eliminating your ownership in the property.  Poof!  Gone.

In Chapter 7, this can be a little trickier, but the Code provides that you must indicate your intention to redeem, reaffirm or surrender the property so it might be best to file a Motion indicating surrender and get the bankruptcy court to approve a deed or release transferring the property back the lender.  Again procedures will differ according to your jurisdiction.

There are others ways too, but :urban myths” of how this is done could get you into criminal trouble.  As always, it is important to consult a competent bankruptcy lawyer in your jurisdiction.

That’s the cry of the “debt settlement” industry.  They claim that they will help you rid yourself of debt without bankruptcy. If you avoid the out-right crooked companies, can they do it?  Sure…

But at what cost?

There are two types of these companies. One, simply takes a portion of your monthly income, negotiates with your credit card companies to stop or lower interest, and, in return, makes a monthly payment to each company.  After several years of those payments your debts will be gone.  Assuming, of course that you can make all the monthly payments to the credit negotiator and assuming you don’t incur any new debt. Oh yes, you’ll pay them a percentage of your income to do this – often several hundred dollars or more a year.

The other type of company takes a monthly payment from you and saves it.  They notify your creditors that they are working to get them paid.  Then, once they have 50% or more of the balance owed a credit card company; they negotiate to pay off the card in full for that percentage.  This usually works although it’s nothing you can’t do yourself; and you are paying a monthly fee to allow the company to do this for you.  Since it can take several years to raise enough money to do this and the negotiating company is being paid monthly this can be quite costly.  And, of course, if you miss a payment or two, you’ll still be liable for the credit card balances.

Meanwhile, whichever of the above programs you use, your credit score won’t improve until everything is paid off.

Don’t be fooled by the claims of “nonprofit” companies.  These credit negotiators may not be a “for profit company,” but you’ll still pay for the service at a hefty monthly amount.

Now let’s compare those programs with a simply bankruptcy.  You’ll pay your attorney a one-time fee – often less than $2,000 – and your debts will be gone in 3 to 4 months.

And you’ll start rebuilding your credit score right away.

image credit: Steve Rhode

Remember, when you were a child, you assumed that anything written in a book was true.

And then, as you got older, you realized that there were books in print  that said utterly opposite things.  Both couldn’t be true, yet there they were, in print.

And then came the internet, and anyone with a computer could became an author.

I know, because 14 years ago I sat down to write about bankruptcy for the internet public.  Four pages became 160, and then I started writing here too.  Bankruptcy law is as complex as the people who need bankruptcy, and then the law changed and it became even more so.  There’s lots to tell you about.

But if you are looking for bankruptcy information on the internet, the assumption that authors are necessarily authorities is dangerous.

Just because it’s in print doesn’t make it so

There are no words that strike more terror into my heart than when a client says “I’ve been researching bankruptcy on the internet.” Invariable, what follows that statement is wrong.

I’ve spend a fair amount of time lately playing the truth squad with misinformation I’ve found on the internet.

• when bankruptcy lawyers get the basics wrong
• when supposed teachers of lawyers get it wrong
• when those peddling alternative remedies get it wrong

Be a savvy consumer of bankruptcy information

The rules for evaluating information about the law are the same as testing the credibility of any other kind of material.

1. Consider the source:  is there an “about us” page with some credentials?  How long has the author been a bankruptcy lawyer?  How much of her time is spent in this field?
2. Identify the author’s self interest:  bankruptcy lawyers think bankruptcy is a fine remedy for debt.  Those selling debt management or some other solution want to scare you away from bankruptcy.  Some new bankruptcy lawyers want to get clients regardless of their skill sets.
3. Beware of sweeping statements:  we lawyers joke among ourselves that often the answer to a legal question is, “it depends”.  Lots in this field depends on the facts of your situation.
4. Consult multiple sites:  test what you learn against several sources.  If the information is accurate, you will find it replicated on many sites.

Approach internet research as arming you with questions to test, rather than conclusions to act on, when you meet with an experienced lawyer.

Image courtesy of Lorena 

You walk into bankruptcy to get rid of your mortgage. You walk out still owning real estate. How’s that happen?

It’s almost a joke – when does surrender not mean surrender? It’s not a funny joke, but one nonetheless.

Here’s the tip: when you surrender property in Chapter 7 bankruptcy, you’re doing nothing more than indicating a willingness to let it go. You’re not actually handing it off to anyone.

When you go through Chapter bankruptcy, you’re looking to discharge your obligations. In return, you’re surrendering your property that’s not considered exempt under the bankruptcy laws as applied in your state.

There is, however, nothing in the law that requires the bankruptcy trustee to take the property. Rather, the trustee’s goal is to liquidate and sell property that will yield a financial benefit to the creditors. If he or she looks at something and doesn’t think it’s financially worth it to sell, then no liquidation occurs.

In addition, discharging your personal obligation to repay the mortgage doesn’t mean the bank magically becomes the owner. Rather, the bank’s got to get title to the property either by foreclosure, deed-in-lieu of foreclosure, short sale, or other legal means.

Unless and until the bank takes action and takes back title to the house, however, it’s still legally yours. You’re not personally liable to the bank for any deficiency on the mortgage, but you do own the property.

That means you’ve got to comply with all local laws regarding ownership. Keep the sidewalks clear of debris, trim the trees out front, and the like. If you get a citation after you bankruptcy is filed, you’re going to be on the hook for it.

If we’re talking about a condo or house with a homeowners’ association then you’re going to remain liable for all post-bankruptcy HOA charges. Once again, this is still legally your place.

In the end, it’s for you to realize the impact of your decision to surrender. Take the steps necessary to protect yourself, but also recognize that your liability for some things may not end until the deed is signed over.

Common courtesy and respect are essential life skills.

It never ceases to amaze me as to how people act in bankruptcy court regardless if it is the attorney, debtors or creditors.  As with all things in life, common courtesy and respect are skills that will take you far.  But sometimes what I think should be second nature to people are things that others just don’t think about or simply don’t know because no one has ever shared this knowledge with them. So please allow me to share some bankruptcy courtroom etiquette with you.

“Please” and “thank you” are always good basic starters.  Think about how wonderful you feel when you go to hold the door for someone and they say “thank you”.  It kinda gives you a warm fuzzy feeling inside.  The same thing is true if you are dealing with your attorney, the judge or the trustee.  All these people are human beings who liked to be treated with kindness and acknowledged that you are on their turf taking their time.  Even if the judge and trustee are not courteous to you, you should still exhibit basic manners and say please and thank you.  Why?  Because it is a sign of respect.  You are in the judge’s courtroom and he or she is the one in charge.  You are asking for their help to accomplish your goal in regaining financial control and one of the best ways to do this is to show respect.

I always instruct my clients that they should say yes sir and no sir along with please and thank you.  It is a matter of showing respect for the chain of command and the position that the trustee and judge holds.  For those of you who do not think this makes a difference I would humbly disagree.  A client of mine was at a 341 meeting.  This meeting lasted for what seemed like forever and a day.  It was so long that not only were all the debtors complaining but so were the attorneys and the comments could be heard by the trustee.  The trustee was doing her job and it was not her fault that the docket was over stacked.  So Murphy’s Law kicked in and anything that could go wrong did go wrong.

My debtor did exactly what I asked.  He removed his hat when he entered the courtroom.  He remained silent and patiently waited for his turn.  When it was his turn as the last person on the docket, he replied either yes ma’am or no ma’am.  Then he thanked her for her time, which he did on his own.  She thought for a couple of moments and replied:  “You know that you have equity in the guns and I was going to think about taking them.  However, I have noticed that you have been very courteous throughout these entire proceedings and I think good behavior should be rewarded.  Therefore, I am choosing to abandon my interest in your guns.”  To which my debtor replied, “thank you ma’am.”

Was it a big victory?  It was to my debtor.  He was advised that he may have to give up his hunting guns but it is in the sole discretion of the trustee.  So he walked away from the 341 meeting happy as lark as he was able to keep his guns and be totally debt free.  The price of the guns?  I think it was maybe $900, maximum.  Who knows what they would have brought at an auction.  Common courtesy and respect saved the day and the guns.

The question that comes up is about the dress.  How do I dress for court?  Always ask your attorney as local standards may vary.  In Kansas and Missouri, the dress code is casual to business casual.  Jeans are fine unless they have holes in them.  So wear long pants and a clean shirt.  If your pants require a belt, wear one.  Sagging isn’t it illegal but it can be considered disrespectful not to mention you look funny walking like a penguin up to the podium.  Unless you are working for UPS, FedEx or the Post Office please do not appear in shorts.  If it is a uniform, that is fine but if it is not, it is disrespectful.  If you are wearing a hat and you are male, remove it unless you wear one for religious reasons. If you are in the medical profession and appear in scrubs it is okay because it is a uniform.  The judges and trustees are aware that many people are coming from work and/or do not own a suit.  However there is a fine between casual and being down right disrespectful.

No matter what courtroom you appear in always stand as the judge enters or leaves the courtroom unless instructed otherwise.  If you are not sure what to do,  watch the attorneys in the court.  If the attorneys stand up at the beginning and ending of the court session so should you.  My last tip is if you chew gum, don’t for the meeting.  There is nothing more nerve bending than someone who is cracking their gum while being questioned.  If you must chew gum spit it out right before you go up to the podium or table.  If you absolutely must chew it, tuck it away so you do not crack your gum. People do not think that the judge and trustee notice these behaviors but they do.

As it states in the Good Book under Matthew 7:12 do onto others as you would want done onto you.  Think about how much better the world would be if all us practiced common courtesy and respect.

These tips are not going guarantee that you will have a perfect case nor does it guarantee a perfect experience.  These tips are just one more tool in your arsenal to help you obtain you goal of regaining financial control.

Remember that knowledge is power and the more knowledge you have about the etiquette of the court the more power you will have to gain the respect of your judge and trustee.

Georgia bankruptcy filers got two pieces of good news this past week – the Governor has signed Senate bill 117 increasing the bankruptcy homestead exemption from $10,000 to $21,500, and the median income tables for Georgia families has been adjusted upwards, reversing a steady downward trend.

By far, the new homestead exemption is the most significant of these two events.   Georgia, like several other states, has opted out of the federal exemption statute, substituting in its place Georgia Code Section 44-13-100.  For the past 10+ years, Georgia permitted bankruptcy filers to shelter or exempt $10,000 of equity in real estate ($20,000 for a  married couple filing jointly).

On May 2, 2012 Governor Nathan Deal signed into law a bill that increased the real estate exemption from $10,000 to $21,500 (the available exemption for married couples increases from $20,000 to $43,000).

The updated law does not, however, change the wildcard exemption at O.C.G.A. 44-13-100(a)(6) which allows debtors to shelter $600 in any property plus up to $5,000 in unused real estate exemption.  The wildcard exemption, therefore remains limited to $5,600 for an individual filer and $11,200 for a married couple filing jointly.

The effect of the increased homestead exemption will help more struggling families qualify for Chapter 7 without jeopardizing any equity they may have accumulated.  Chapter 13 debtors will also benefit because it will be easier to satisfy the liquidation test, which is one of the requirements for a confirmable Chapter 13 plan. The liquidation test (also known as the “best interest of creditors” test) mandates that in Chapter 13, unsecured creditors must receive at least what they would have obtained in a Chapter 7 liquidation of non-exempt property.  Since debtors can now shelter twice as much real estate equity, they will necessarily have less non-exempt real property.

The May 1, 2012 updates to the median income tables used in bankruptcy filings will also benefit Georgia debtors.  Reversing a multi-year trend of lower household income figures, the May 1, 2012 numbers have increased.  A family of 4 can now earn up to $66,250 without triggering the means test, compared to $64,223 prior to May 1.

These two changes will help more people squeeze into Chapter 7 and will slightly reduce the mathematical demands inherent to Chapter 13 calculations.

While these particular changes are limited to Georgia, the dynamic nature of bankruptcy law applies to filers in every jurisdiction.  Perhaps you met with a bankruptcy lawyer 2 years ago to discuss filing, but decided to hold off because you risked losing assets or because a proposed Chapter 13 payment was too high.  Fast forward two years and your equity in real and personal property may have decreased significantly, the median income numbers for your state may have gone up to your benefit, and your state may have passed a law that increases the options available to debtors.

Federal and state legislators are under a great deal of pressure from constituents to jump start the housing market and easing the rules on filing bankruptcy is one way to unclog the system.  The only way you will know for sure if there have been bankruptcy changes that benefit you is to pick up the phone and call you knowledgeable bankruptcy lawyer.  If your jurisdiction is served by a Bankruptcy Law Network lawyer, do not hesitate to make that call!