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  1. Student Loans and the Trump Administration

    January 7, 2017 by Shannon Doyle

    Student Loans and the Trump Administration

    On January 20, 2017, the new administration will begin its many challenges. Among one of the issues facing our country is that of the mounting student loan debt. What will a Trump administration do for the current problem?  Shares of the largest private student loan lender, Sallie Mae, have increased by 55% since the November 8th election in anticipation of private student loan lstudentloanpayenders re-entering the market. Under Obama, origination of federally backed student loans was transferred entirely to the U.S. government, leaving most of the mainstream private lenders such as J.P. Morgan Chase and U.S. Bancorp out of the running.  If these private lenders resume student loan lending, how will this affect the student loan market? If the shift doesn’t come with free-market protections like bankruptcy rights, statutes of limitations and other protections that exist for every other type of loan it won’t fair well for borrowers as past history shows.  But there may be hope yet. Under Obama’s Income Based Repayment Plan (“IBR”), borrowers can repay student loans at a cap of 10% of their income over 20 years. After 20 years the debt is discharged. Trump’s IBR plan calls for a 12.5% cap over 15 years – so while the cap is slightly higher, the term is greatly reduced ultimately allowing for a much greater debt forgiveness. But perhaps more notable is Trump stated on the campaign trail that private student loan grantors should offer these same IBR terms. Will this campaign soundbite be dead on arrival in the real world? Maybe. Banks will not likely accept the new burden on their loan portfolios and Republican’s aren’t known for such regulation. But Trump may be able to get it done, we’ll see.

    If private lenders aren’t restrained by IBR’s or other regulations, with the recent trend of bankruptcy cases loosening the hardship qualifications for dischargeability, it could mean an increase in student loan litigation down the road. Trump didn’t mention bankruptcy reform during his campaign but given his rather liberal view on IBR’s coupled with his own experience with bankruptcy, maybe private student loans will finally be subject to discharge in bankruptcy.


  2. Modified Bankruptcy Rule 9006(f) Shortens Time to Respond to a Pleading

    November 28, 2016 by Shannon Doyle

     The judicial council has modified a number of bankruptcy rules effective December 1, 2016. Of particular interest is the change in

    Last Day words written in red marker ink on a calendar date and circled as a reminder of the deadline, due period or expiration

    Last Day words written in red marker ink on a calendar date and circled as a reminder of the deadline, due period or expiration

    Bankruptcy Rule 9006(f). The amendment to Bankruptcy Rule 9006(f) eliminates the 3-day extension to time respond to pleadings when service is made electronically. Under the prior rule – if you had 14 days to respond to a motion and you were served electronically or by mail, you would get an extra three days for a total of 17 days to respond. Now, you no longer get the extra three days for filing a response if you were served electronically. Your response would be due in 14 days. The extra three days remains if you were served via regular mail.


  3. The Ninth Circuit Changes California Law on Equitable Possessory Interests

    July 1, 2016 by Shannon Doyle

    eviction 1The law of evictions, known as “unlawful detainer” dates back as far as the Forcible Entry Act of 1381 which prohibited a land owner from personally retaking possession of his or her real property from a tenant. This remains an important concept in modern eviction statutes.  When the unlawful detainer court issues a judgment for possession, it is coupled with a writ of possession. The writ of possession is delivered to the sheriff and provides the authority for the sheriff to execute the judgment and forcibly remove the tenants from the property, otherwise known as a “lockout”.  So what happens when you add a bankruptcy to the eviction process? In In re Perl, No. 14-60039, (Jan. 8, 2016, 9th Circuit), Eden Place, who was the purchaser of the Perls’ property at a foreclosure sale, brought an unlawful detainer action to remove the Perls from the premises. Eden Place obtained a judgment and writ of possession.  Just prior to Eden Place executing the writ of possession, the Perls filed a skeletal chapter 13 bankruptcy petition.  Eden Place filed a motion for relief from stay alleging that the subject property was not included in the Perls’ bankruptcy estate; however, prior the hearing on the motion for relief from stay, the sheriff proceeded with a lockout of the Perls. The Perls responded with a motion for violation of the stay pursuant to §326(a)(1)(3). The Bankruptcy Court found that the lockout was a violation of the stay. Eden Place appealed and the Bankruptcy Appellate Panel (“BAP”) agreed with the Bankruptcy Court. Eden Place appealed again, and the Ninth Circuit overturned the Bankruptcy Court and the BAP and ruled in favor of Eden Place. In doing so, the Ninth Circuit overturned long standing California law without much an explanation. The question to be answered here is, does a debtor/tenant retain an equitable possessory interest in property after an unlawful detainer judgment under California law that is protected by the automatic stay of 11 U.S.C. §361(a)(3)?

    The BAP concluded that Eden Place was in violation of the stay. In rendering its decision, the BAP relied on prior California precedence – In re Williams, 323 B.R. 691 (9th Cir. BAP 2005), and cases upon which Williams relied – In re Di Giorgio, 200 B.R. 664 (C.D. Cal. 1996) and In re Butler, 271 B.R. 867 (Bankr. C.D. Cal. 2002). The Di Giorgios were defendants in an unlawful detainer action. After a writ of possession was issued by the unlawful detainer court, but before it was executed, the Di Giorgios filed a bankruptcy.  The sheriff’s department, relying on Cal. Code Civ. Pro. §715.050, executed a writ of possession without obtaining relief from the automatic stay. Cal. Code Civ. Pro. §715.050 states as follows:

    “Except with respect to enforcement of a judgment for

    money, a writ of possession issued pursuant to a

    judgment for possession in an unlawful detainer action

    shall be enforced pursuant to this chapter without delay,

    notwithstanding receipt of notice of the filing by the

    defendant of a bankruptcy proceeding.”

    Seems straightforward enough, but enter 11 U.S.C. §362(a)(1), (2) and (3). The District Court found that 11 U.S.C. §362(a) preempted Cal. Code Civ. Pro. §715-050, and that based on Cal. Code Civ. Pro. §1006, mere possession of property, even after an unlawful detainer judgment, creates an equitable interest in the bankruptcy estate under 11 U.S.C. §541 that is subject to the protections of the automatic stay. In Perl, the Ninth Circuit recognized the BAP’s reliance on this decision but never explains why the analysis is incorrect. In fact, the Ninth Circuit ignores the issue altogether and simply adds a footnote to its decision, “Because we resolve this case without relying upon the provisions of §715.050, we express no view on whether the state statute is preempted by the Bankruptcy Code.” Perl at 18.

    The BAP also relied on In re Butler, 271 B.R. 867 (Bankr. C.D. Cal. 2002). Tiphany Butler was being evicted from her residence at Westside Apartments. Westside Apartments obtained an unlawful detainer judgment and writ of possession. A week later, Butler filed a chapter 7 bankruptcy. The sheriff’s department advised Butler they were proceeding with the lock-out pursuant to Cal. Code Civ. Pro. §715-050. Butler filed an emergency motion to stay the eviction which was granted. Westside Apartments responded with a motion for relief from stay which went unanswered and was granted. However, the Court did find that Butler held an equitable interest in the property subject to the automatic stay.  The issue at hand was whether mere possession of real property without a legal right to possession, creates an equitable interest in the property under California law that is protected by the automatic stay of 11 U.S.C. §362(a).  It is undisputed that Butler had no legal title or legal right to possession pursuant to Cal. Code Civ.  Pro. §1161(a). The Court then looked at Cal. Code Civ. Pro. §1006, which states,

    “Title by Occupancy; extent

    Occupancy for any period confers a title

    sufficient against all except the state and those

    who have title by prescription, accession,

    transfer, will, or succession; but the title

    conferred by occupancy is not a sufficient

    interest in real property to enable the occupant

    or the occupant’s privies to commence or

    maintain an action to quiet title, unless the

    occupancy has ripened into title by prescription.”

    Based on Cal. Code Civ. Pro. §1006, and early case law interpreting this statute, the Court found that Butler had an equitable interest in the property created by her physical possession thereof. The Butler Court further found that Congress intended the bankruptcy estate to include possessory interests in residential real property, quoting Di Giorgio, “Section 541(a) provides that, with a few express exceptions, property of the bankruptcy estate comprises all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1). The legislative history indicates that Congress intended the estate to include possessory interests. See S.Rep. No. 989, 95th Cong., 2d Sess. 82 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5868 (debtor’s interest in property includes `title’ to property which is an interest, just as are possessory interests, or leasehold interests).” Butler at 871.  In Perl, the Ninth Circuit says that the Butler Court’s reasoning is flawed in that Cal. Code Civ. Pro. §1161(a), doesn’t just determine legal title but also establishes who has the immediate right to possession of the property.  The Ninth Circuit relied heavily on a California Supreme Court case called Vella v. Hudgins, 572 P.2d 28 (Cal. 1977).  Vella simply said that in circumstances where the plaintiff in an unlawful detainer action obtained the property at a foreclosure sale, the issue of legal title may be considered for the limited purpose of proving standing of the plaintiff in the unlawful detainer action. I fail to see how the Ninth Circuit concluded from Vella that Cal. Code Civ.  Pro. §1161(a) divests a tenant from an equitable possessory interest in property. The Ninth Circuit merely concludes that if legal title is proven in the unlawful detainer action then the legal owner has the immediate right to possession. We know that Butler and the Perls don’t have a legal right to possession of the property. We know that right belongs to the legal title owner but what the Ninth Circuit fails to address are the tenants’ current possessory rights to the property and why there is no equitable right of the party in possession of the property.  Remember there is no self-help in the eviction process. An immediate legal right to possession is still subject to the execution of the writ of possession via the lock-out process by the sheriff.

    I can’t agree with the Ninth Circuit’s conclusion in Perl. The legal right to possession could only be restored by the sheriff acting pursuant to the writ of possession. The legal title owner can’t go from the courthouse steps with his unlawful detainer judgment in hand and start clearing out a tenant’s belongings. That is why the history of eviction law is based on the no self-help concept and that is the whole point of the writ process. So until such time the sheriff acts on the writ, the tenant retains an equitable possessory interest in the property. If a bankruptcy case is filed before the sheriff acts, the tenant’s equitable possessory interest become property of the estate which is clearly protected under 11 U.S.C. §362(a). Accordingly, in my opinion, the Ninth Circuit completely missed the issue and unilaterally changed long standing California law without good cause.

     

     

     

     


  4. ARE YOU BURNING YOUR ADVERTISING DOLLARS?

    June 20, 2016 by Shannon Doyle

    From TV ads to social media to word-of-mouth, there are numerous ways to market your bankruptcy law firm to prospective clients. But how do you know where to get the best bang for your buck? By calculating your “cost-per-case”, your firm can identify ineffective marketing channels and boost profitability. For purposes of this article, “cost-per-case” refers to how much you spend on one campaign to sign a client (of course there are additional costs once the client is retained).  Let’s say you spend $300 on leads from a third party company. If you end up signing two leads as clients, you have a cost-per-case of $150. Cost-per-case is important because it allows attorneys to evaluate their marketing sources and determine which channels are profitable and deserve further investment.

     

    TV ADVERTISEMENT AND COST-PER-CASE

    One of the most common forms of advertisements for attorneys are TV ads because they have a high retention rate among consumers. In fact, a study conducted by MarketShare showed that TV ads were four times as memorable as digital ads. Before you write a check to your local news station, first consider the volume of clients you’d need to sign to make profit. A local ad will cost at least $200 per thirty-second slot (up to $1,500 per thirty-second slot). If you run two ads per day for six months, you’ll be paying a minimum of over $73,000 for local TV commercials. If your ad does very well and you sign one new client per day, you’ll have signed just 180 new clients after spending $73,000. This means a cost-per-case of $405. This is a great cost-per-case for an employment law attorney earning more than $10,000 per settlement, but if you are a bankruptcy attorney and earn around $1,500 per case, you should seek other marketing avenues.

     

    DIGITAL MARKETING AND COST-PER-CASEBurn Money

    Many firms have turned to digital marketing to sign new clients. When done correctly, social media, paid web advertisements, and search engine optimization (SEO) and can be excellent methods for firms to sign cases with a lower expense. Say you run a pay-per-view (“PPV”) campaign on Google’s Display Network to attract consumers that need a divorce attorney. PPV campaigns charge your firm per impression, which is whenever a consumer sees your ad on a browser. PPV tends to be very inexpensive per view, and you can often pay fractions of one penny per impression. With a budget of $15,000, your ad should easily receive more than 5 million impressions. With so many people seeing your ad, it’s not unreasonable to expect at least 10,000 consumers to click through to your website. Of these 10,000 consumers, around 6% (or more) should decide to contact your firm. Next, imagine that one in five of the 600 consumers that contact your firm after clicking your PPV ad have a desirable/pursuable case for your firm. This gives you 120 new clients and a cost-per-case of $125.

     

    BUT WAIT—THERE ARE ADDITIONAL COSTS TO CONSIDER!

    When calculating your cost-per-case, you cannot forget the fixed costs required to make marketing assets. You’ll need to add in the price of creating your TV commercial to your total cost-per-case. For a commercial on a local channel, this may be relatively low.

    Hiring someone to handle your digital marketing efforts would cost you much more. If you hire an experienced digital marketer full-time, you will likely be paying at least $40,000 annually. Factoring in 6 months salary for PPV, the cost-per-case skyrockets to $291.67. Final factors to keep in mind:

    There are three key components to remember when evaluating your cost-per-case:

    1. Be proactive. Ask every caller how he or she found your firm. Even digital marketing campaigns can have “offline” value.
    2. Keep your practice area in mind. Most bankruptcy attorneys earn an average of $1,500 to $2,500 per case so you want a low cost-per-case.
    3. Don’t be afraid to ditch inefficient marketing channels. If you’ve crunched the numbers and found that you’re paying too much for any form of marketing, eliminate it.

    All attorneys should investigate how much their clients cost to acquire. The results may be surprising!

    Deanna Power is the Director of SEO for eGenerationMarketing, one of the largest legal lead generation companies in the US.

     


  5. World’s First Artificially Intelligent Attorney Will Practice Bankruptcy Law

    June 1, 2016 by Shannon Doyle

    According to the Washington Post, the law firm of Baker Hostetler has hired Ross, the word’s first attorney robot who will assist with bankruptcy cases. While this sounds intriguing, Ross wont’ be creating a marketing plan, conducting bankruptcy consultations, preparing chapter 7 or chapter 13 petitions, running to court or managing the functions of a bankruptcy law ROssfirm any time soon. Although it would be nice if  Ross could handle some of those functions for the busy bankruptcy practitioner!  Ross is limited to researching case law. It can apparently perform legal research and suggest a hypothesis saving the attorney hours of research time. Ross can also interact with its human counterpart who can accept Ross’s proposition or get Ross to question its legal theory. While bankruptcy attorneys don’t have to worry about being replaced by machines just yet, the newly admitted lawyer might. According to Baker Hostetler, Ross is a hired legal researcher which is a job typically held by lawyers just starting their careers.


  6. Tax Withholding Pitfalls to Avoid When Preparing Chapter 13 Petitions

    May 29, 2016 by Shannon Doyle

    Often as a person experiences financial difficulty, the first thing they do is have their payroll department adjust their income tax withholding to take out less taxes. People do this thinking it will be a short-term solution to their problem. However, typically this leads to tax debt.

    When drafting petitions, this is something that is very important to watch out for, as not accounting for this income tax liability on the Means Test could be detrimental for the debtor in causing them to be in a Chapter 13, when they might otherwise qualify for a Chapter 7. Or you may end up proposing an overestimated Chapter 13 Plan payment tax debtand creating new tax issues during the course of debtor’s plan.

    When drafting the petition, avoid blindly entering the information from the debtor’s pay stubs into Schedule I and the Means Test. Rather, analyze the data you are entering to look for this type of issue.  If a debtor has tax debt from the prior year, most likely he needs to adjust his withholdings to avoid future tax debt.  If the debtor’s financial situation mirrors that of the previous tax year (same income and tax deductions), you can take the tax liability that is owed from the prior year and divide that amount by 12. This will give you a monthly average of the amount debtor is under withholding. Or as you look over the six months of pay stubs provided by the debtor, look for a higher amount of income tax being withheld several months ago, and less income taxes being withheld later, which may indicate that not enough taxes are currently being withheld. Or you just may sense it is too low. A good way to check this, is to go to the ADP calculator  and enter the debtor’s pay check and withholding allowance into the salary pay check calculator to get an idea how much debtor may be under withholding. Make sure to check with the debtor as to what their correct withholding allowance should be. The more allowances a person claims the less taxes are taken out of their check.

    For example, debtor’s gross pay is $1553 every two weeks which calculates to $3364.83 per month ($1553 x 26 pay periods, divided by 12). Debtor is only withholding $200 per pay period or $433.33 per month.  According to the ADP calculator, debtor should be withholding $841.20 per month.

    Once you ascertain an accurate withholding for the debtor, enter the data in the petition as follows:

    1. Enter the information from the most recent pay stub into Schedule I, just as it is reported on the pay stub.
    2. Figure out the difference between what is being withheld for income taxes, and what should be withheld for income taxes.

    In our example, debtor is withholding $433.33 but should be withholding $841.20 so the difference is $407.87.

    1. Account for this additional tax liability on Schedule I and the Means Test so that the court can see this additional tax liability.

    In Schedule I, the additional income tax amount not being deducted by payroll, can be entered in the Other Wage Deduction Details. On the Means Test, add the additional income tax withholding to the current amount being withheld and enter is as the actual tax withholding.

    CAVEAT: Please note, unless you are a CPA or tax attorney, I am not suggesting that you ever give debtor tax advice or tell them what their withholding allowance should be.  The above analysis is simply meant to help the bankruptcy professional identify potential tax issues and how to enter that data into the petition. If you are a paralegal, bankruptcy assistant, or virtual bankruptcy assistant, you want to flag the petition with a memo to the attorney as follows:

    “The client’s income tax withholding is only $433.33 per month.  Debtor believes his withholding allowance should be 1 but changed it last year to 3 when he was trying to pay off debt. I entered his pay stub information into Schedule I, but also calculated an additional income tax liability of $407.87 per the ADP pay check calculator, and entered this amount in the Other Wage Deduction Details of Schedule I, and added it to the actual withholding in the Means Test”

    If you are an attorney, you want to refer your debtor to a CPA to get an accurate withholding amount so as to propose the most accurate chapter 7 petition or chapter 13 plan as possible and avoid future tax liability for your debtor.


  7. Creative Options for Student Loans in Chapter 13

    May 25, 2016 by Shannon Doyle

    Student LoanStudent loans are very difficult to get discharged in bankruptcy; however, don’t assume you can’t help your debtor with their student loans. In fact, you may be doing your client a huge disservice if you aren’t considering the following options for debtors with student loan debt: (1) designate a separate class, (2) file a Chapter 20, (3) Consolidate and/or apply for an Income Based Repayment plan for federal student loans, (4) mediation, and (5) discharge. This article will address the benefits of designating a separate classification for federal and private student loans.

    Pursuant to 11 U.S.C. §1322(b)(1) you can designate a separate class for unsecured creditors as long as you don’t “unfairly” discriminate against any class. By designating a separate class in the chapter 13 plan, you will help your debtor to (1) avoid the 18.5 % default rate on federal student loans, (2) stay current on Income Based Repayment plans toward the goal of forgiveness and (3) protect co-signers (especially for private student loans).

    How does it work? Let’s say your debtor has $300k in total unsecured debt, $200k of which is federal student loans, $50k of which is private student loans and $50k in other general unsecured debt. Let’s say your client has disposable income of $1k per month for 60 months and is currently on an Income Based Repayment plan paying $250 per month toward federal student loans.

    In a traditional chapter 13 plan, the creditors would receive the following:

    Federal Student Loans Private Student Loans Other General Unsecured Creditors
    $40,000 $10,000 $10,000

     

    In this scenario, debtor exits chapter 13 with large balances owed on the federal and private student loans. But if you were to designate a separate class for each creditor, they would receive the following (excluding fees and costs):

    Federal Student Loans Private Student Loans Other General Unsecured Creditors
    $250 on IBR works toward goal of forgiveness $583 x $60 = $34,980 (Debtor exits chapter 13 with much less debt) $167 x 60 = $10,2020 (Same amount they would receive under the traditional plan)

     

    Many attorneys assume they can’t separate the classes because their trustee objects. In a webinar I recently attended on this issue, Laurie Weatherford, a Chapter 13 Trustee in the Middle District of Florida stated that she used to routinely object to separate classification assuming it was unfair discrimination. But now she supports this strategy as an effective way to help debtors without hurting creditors. The Courts are looking at this more closely now and balancing the benefit of the debtor staying current and curing pre-petition arrearages on their student loans with the detriment to other unsecured creditors by separate classification.  Let me be clear, you can’t separate a class that will result in disproportionate payout to student loan creditors at the expense of other unsecured creditors. Nondischargeabliity alone does not allow discriminating against other unsecured creditors, and avoiding harm to the debtor is not a reasonable basis for discrimination. Further, discrimination is not necessary or reasonable.  When proposing a plan that separates student loan debt into a separate classes, identify who will object. A servicer is unlikely to object if they are getting paid. Unsecured creditors are unlikely to object. The most likely party to object is the chapter 13 trustee. The trustee may object to protect precedent, maintain strict code adherence or because of the degree of disparity in treatment of unsecured creditors. But things are changing in this arena and as long as you can show the separate class does not unfairly discriminate, and establish debtors’ good faith you should be able to persuade the Court that designating a separate class is the best possible outcome for debtor is achieving a fresh start.


  8. The Surrender Of Collateral In Bankruptcy – What Does “Surrender” Really Mean?

    May 17, 2016 by Shannon Doyle

    Foreclosure-02-small[1]It is not uncommon for debtors in a Chapter 7 case to express their intent to surrender collateral in  their   statement of intention.  In Chapter 13 cases, debtors may propose in their plan that they will surrender collateral.  In either case, there are instances when a debtor actively defends a state foreclosure action after either receiving a discharge or surrendering the property.  This article will address the question of whether such debtor has the right to take action to oppose the foreclosure of the collateral it has purportedly surrendered.

    Applicable Law

              Bankruptcy Code §521(a)(2) provides that the debtor must file a written statement regarding secured collateral indicating that he or she will either redeem, reaffirm or surrender it.  Section 1325 provides the requirements for confirming a plan. With respect to secured claims, if the Debtor is unable to comply with Section 1325(a)(5)(A) or (B), then Section 1325(a)(5)(C) provides that “the debtor surrenders the property securing such claim to such holder….”

    Although “surrender” is not defined in the Code, this definition has been widely accepted:

    [S]urrender, at a minimum, requires a debtor to relinquish secured property and make it available to the secured creditor … i.e., not taking an overt act to prevent the secured creditor from foreclosing its interest in the secured property.[1]

    Prevailing View

    Thus, debtor’s counsel beware – a new foreclosure theory has emerged in Florida forging a rather harsh majority view that when a debtor elects to surrender property in his bankruptcy schedules he is, in effect, relinquishing rights to defend against a foreclosure action.  A proposal before the Florida legislature to amend Fla. Stat. 702 to this effect did not pass, but a majority of bankruptcy judges in Florida do not agree with the legislature.

    In reviewing the history of §521, only one case in the 11th circuit remotely sets a precedent, In re Taylor, which dates back to 1993.[2]  In Taylor the issue was whether a debtor could retain real property without redeeming or reaffirming the debt securing the property – allowing the debtor to “ride through” the bankruptcy. The Court found that this was not permissible because it allowed a debtor to be released from all personal liability on the debt while retaining the collateral so long as the debtor remained current on the loan. While the Taylor Court prohibits a “ride through”, it suggests the alternate option that a debtor can surrender the property. Unfortunately, the Taylor Court doesn’t provide guidance on the ramifications of electing to surrender.  However, a majority of recent rulings have made it clear that a debtor may not elect to surrender property as a strategy to effectuate a “ride through”.

    Recent cases interpreting the meaning of surrender state that a debtor who schedules the surrender of property in a Statement of Financial Affairs or a Chapter 13 Plan is not required to deed the property back to the lender or otherwise deliver physical possession of the property until a foreclosure judgment has been obtained.[3]  In In re Plummer, the Court found that surrender is not tantamount to foreclosure. A lender must still go through the legally mandated process of foreclosing on property and may not seek fees and costs for that foreclosure on the grounds that debtor failed to sign over a deed as part of his obligation to surrender. The bankruptcy judges in Florida are in agreement with this proposition; however, a majority split prescribes that a debtor who elects to surrender property on his bankruptcy schedules must not simultaneously act inconsistently with that stated intention, and is therefore prohibited from defending the lender’s foreclosure action.[4]

    The rationale for these decisions stems from the concept that a debtor who  (1) admits the validity of a debt, (2) represents that the collateral is to be surrendered to receive a discharge of the underling debt, and (3) receives the benefit of the wildcard exemption, but actually has a different agenda is not only in violation of 11 U.S.C. § 521(a)(2)(B) which requires a debtor to perform his intentions within 30 days after the 341(a) meeting of creditors, but more significantly is committing a fraud on the court.[5] Almost all the case law suggests that the court will direct the debtor to withdraw any defenses in the foreclosure action under the threat of sanctions, revoking confirmation and/or revoking a discharge.

    In In re Burnett, Jr.,[6] the Court found that a debtor who chose to surrender property but defended a subsequent foreclosure action obtained the discharge by fraud. Consequently, the Court revoked the discharge. In Meltzer, the debtor was in the midst of a chapter 13 case. After a finding that the debtor failed to comply with his stated intentions under §1325 by defending a foreclosure, the court revoked debtor’s confirmation order[7].  A debtor may also be subject to sanctions for engaging in this behavior[8]. Similar facts were at were at issue in In re Fallia and In re Trout where Judge Hyman and Judge Kimball ordered that if the debtors did not cease efforts to defend the pending foreclosures, the debtors would be subject to sanctions and a withdrawal of discharge for non-compliance.

    Likewise, in In re Lapeyre[9], debtors provided for the surrender of property in their chapter 13 plan but submitted affirmative defenses and counterclaims to the state court in the foreclosure action.  Judge Mark declined the lender’s argument that the debtors were barred by judicial estoppel because that is an issue for state court. However, the Judge found authority under the confirmed plan to order debtors to dismiss their defenses and counterclaims in the foreclosure action.

    In Florida many chapter 13 debtors attempt to modify their mortgage under the Mortgage Modification Mediation Program (“MMM”) rather than cure the mortgage arrears or surrender. However, if the MMM fails, the debtor is now required to modify the plan to set forth either a cure of arrears or surrender of the property.[10] In Calzadilla and Espinosa, Judge Mark found that after an unsuccessful MMM attempt, amending the plan to provide for relief from stay was not sufficient to meet the requirements of §1325 – a debtor must stipulate to surrender and relinquish their right to contest the foreclosure (absent an ability to confirm a plan that provides for the cure or mortgage arrears).

    Debtor’s counsel may not be able to rely on laches as a viable defense for a debtor in this situation. A particularly “grim” decision was handed down in In re Grimm when Judge Briskman granted a motion to compel surrender five years after the case was closed.[11] The Judge threatened that the case would be reopened and the discharge revoked if the debtor did not comply with the motion to compel surrender and cease defending the foreclosure action.

    Luckily, it is not all doom and gloom for debtors. In In re Guerra[12], a lender who came back three years after discharge was denied an order reopening case to compel surrender.  While the Guerra Court found that it could revoke debtor’s discharge and order debtor to withdraw defenses to the foreclosure, it declined to do so. The Court found that debtor did not intend to perpetuate a fraud when a substantial amount of time had passed from when debtor stated an intent to surrender to when debtor resisted foreclosure. It is interesting to note that the debtor was successful in getting her state court foreclosure action dismissed in that case.

    Further, good counsel with some creative thought (and the right facts) may be able to escape some of the tough consequences of these rulings and afford some protection to debtors. In In re Townsend, the chapter 13 was filed in 2008.[13]  Debtor opposed the foreclosure in 2014, one year after obtaining a chapter 13 discharge. The lender relied on Metzler and Fallia in seeking a motion to compel surrender. However, there was a significant factual distinction in Townsend –  the plan proposed to surrender the property but had additional language stating, “nothing herein is intended…to abrogate Debtor’s state law contract rights”.[14] Since the debtors reserved their state law rights in a confirmed plan, the Court could not find that debtors acted inconsistently with the confirmed plan. Further, while Judge Delano concurred with the rationale in Meztler, Plummer and Fallia , she did not believe those rulings should be applied retroactively.

    Minority View

              While the Florida line of cases in particular supports the argument that a debtor’s declaration in bankruptcy to surrender is more than just lip-service, a few cases call into question the conclusion of those courts holding that surrender necessarily stops a debtor from continuing to defend a state foreclosure action.

    In In re Elkouby, when the debtor filed his Chapter 7 petition, he was involved in a foreclosure action brought by the lienholder.[15]  The debtor’s statement of intention indicated that he planned to surrender the property involved. The debtor received his discharge having never turned over the property, and continued to defend the foreclosure litigation.  In response, the lienholder filed a motion to reopen the case and to compel the debtor to surrender, arguing that the debtor’s defense was barred by his stated intention to surrender.  The debtor countered that “surrender” only required him to surrender to the trustee, and since the trustee did not administer the property, it was abandoned back to the debtor.  Consequently, he should not be precluded from defending the foreclosure action.   Rejecting the analysis in In re Failla, the court accepted the debtor’s abandonment argument:

    In fact, there is no Bankruptcy Code section that provides that if a chapter 7 trustee doesn’t administer surrendered real property what follows is a second surrender – surrender to the lienholder.  Rather, what the Bankruptcy Code specifically provides is that what follows is the property is abandoned to the debtor.

    Id. at *7.   The court concluded that it did not need to determine whether and to what extent surrender to a lienholder requires a debtor to relinquish defenses to foreclosure since the debtor’s surrender in this case was to the trustee, not the lienholder.  The motion to reopen and compel surrender was denied.

    Two other recent cases challenge automatic surrender to the secured creditor in this context.   More than five years after the Chapter 7 case was closed, the creditor in In re Kourogenis, sought an order reopening the case to compel the surrender of real property as the debtor had agreed to do in her statement of intention, and barring the debtor from contesting the state foreclosure action.[16]  The court ruled that the creditor had slept on its rights and barred the relief requested based on the defense of laches. Additionally, the court noted the distinction between “surrender” and “foreclosure” – “Whatever the meaning of ‘surrender’ under Section 521, it cannot possibly mean that a party who, for instance, does not own the note and mortgage can nonetheless foreclose on the property, without the Debtor being heard, solely because the Debtor indicated an intent to surrender.”  Id. at 629.

    In In re Trussel, the Chapter 7 debtor filed a statement of intention indicating that he planned to reaffirm the debt secured by real property, but the parties were unable to reach a reaffirmation agreement.[17]  After the debtor received his discharge, the secured creditor continued its previous foreclosure action in state court and the debtor asserted affirmative defenses in that action.  The creditor filed a motion with the   bankruptcy court  to compel the debtor to stop defending the foreclosure action, arguing that he must surrender the property because he did not carry out his intent to reaffirm the debt.   The court first observed that stay relief was the best remedy for §521(a) violations rather than compelling surrender.  It also concluded that “[t]rying to avoid responding to legitimate defenses does not constitute sufficient compelling cause to obtain the extraordinary remedy of an injunction.”  Id. at *4.  The creditor’s motion was denied.

    To conclude, bankruptcy attorneys and debtors alike should be warned that manipulating the system by making unintended statements on the bankruptcy schedules, obtaining a discharge of personal liability and then fighting a foreclosure is not well tolerated in Florida. Specific facts, reservations in the plan and schedules may lead to varying results but until the 11th Circuit or Supreme Court rules on these matters, one should proceed with caution.

     

     

    [1] In re Metzler, 530 B.R. 894, 899 (Bankr. M.D. Fla. 2015) (citations omitted).

    [2] Taylor v. AGE Fed. Credit Union (In re Taylor), 3 F.3d 1512 (11th Cir. 1993).

    [3] In re Plummer, 513 B.R. 135 (Bankr. M.D. Fla. 2014) (C.J. Jennemann); In re Troutt, 13-39869-BKC-EPK  (J. Kimball).

    [4] In re Troutt, 13-39869-BKC-EPK  (J. Kimball); In re Metzler (Ch13) and In re Patel (Ch7), 530 B.R. 894 (2015); In re Failla, 529 B.R. 786, 793 (Bankr. S.D. Fla. 2014)(J. Hyman); In re Calzadilla, 534 B.R. 216 (Bankr. S.D. Fla. 2015) (J. Mark); In re Lapeyre, 544 B.R. 719 (Bankr. S.D. Fla. 2016) (J. Mark).

    [5] See e.g. Metzler and Patel; Troutt; Fallia; Calzadilla and Espinosa

    [6] In re Luther Burnett, Jr., Case No. 13–12274 (Bankr. M.D. Fla. 2013)(J. Williamson)

    [7] See e.g. Metzler

    [8] See e.g. Troutt and Fallia

    [9] In re Lapeyre, 544 B.R. 719 (Bankr. S.D. Fla. 2016) (J. Mark).

    [10] In re Calzadilla and In re Espinosa, 534 B.R. 216 (Bankr. S.D. Fla. 2015)(J. Mark)

    [11] In re Grimm, No 6:09-bk-12763-ABB (unpublished opinion)

    [12] In re Guerra, 544 B.R. 707, 711 (Bankr. M.D. Fla. 2016)(J. Williamson)

    [13] In re Townsend, No9:08-bk-12383-FDM, 2015 WL 5157505(Bankr. M.D. Fla. Sept. 1, 2015).

    [14] Townsend at 1

    [15] In re Elkouby, 2016 WL 798177 (Bankr. S.D.Fla. Feb. 29, 2016)

    [16] In re Kourogenis, 539 B.R. 625 (Bankr. S.D. Fla. 2015)

    [17] In re Trussel, 2015 WL 1058253 (Bankr. N.D. Fla. March 5, 2015)


  9. How Do The May 2016 Means Test Numbers Affect Your Clients

    by Shannon Doyle

    budget squeezeFor the first time since the enactment of BAPCPA, the allowable deductions in the Means Test have been reduced. As you may know, these deductions as revised each year, were adopted by Congress in 2005, and are derived from the allowable living expenses determined by the IRS when considering a person’s ability to pay tax debt. The IRS relies on data from the Bureau of Labor Statistics and other governmental surveys of actual consumer expenditures to provide a basis for the allowances.  So why have these deductions gone down? According to an article from the American Institute for Economic Research, “the average American costs of living did not rise in 2015, and in fact fell relative to wages.” Apparently, there has been no inflation so it makes sense that the Means Test figures have declined but did the IRS really get it right?  Below are the significant changes to the Means Test deductions:

    • Medical – Standard medical deductions have been reduced from $60 per person to $54.  Senior citizen medical deductions have been reduced from $144 to $130.  These changes represent a 10% reduction.  Funny, because according to an article in Forbes dated June 15, 2015, healthcare costs in 2015 alone, outpaced overall inflation by 3.2%.
    • Transportation – The new IRS standards for operating costs for automobiles in the Western Region of the US have fallen from $236 per vehicle to $213 per vehicle, another 10% reduction.  Okay, so maybe gas prices have fallen from $4.50 per gallon but I just paid $2.99 a gallon today, and we all know what happens when summer hits.
    • Auto Finance Deduction – Instead of subtracting 1/60th of the secured auto debt from the old standard of $517, the new standard will be $471, an 8.9% drop.  Has there really been an almost 9% fall in the cost of new cars?  According to to U.S. News & World Report, “new car prices increased by 1.4 % in October 2015 compared to October 2014.
    • Food, Clothing & Personal Care – The new Means Test standards show minor reductions varying on the number of people in the household, anywhere from no change to down $15 per person.  However, according to the most recent reports from the Bureau of Labor Statistics, the Consumer Price Index states that these costs are up 1.53% from March 2015.  It looks like the Bureau of Labor Statistics and the IRS are drawing from different economic sources.
    • Housing Costs – In a cursory review of the California numbers, very, very few housing numbers increased.  Almost all housing deductions fell; some by as much as 15% (Sierra County).  Only one County, Mariposa, saw its housing deduction increase (about 2%).
    • Utilities – The IRS data showed parallel reductions for allowable utility costs on a county-by-county basis.  This data is similarly indexed by the number of ‘heads-on-beds’ and while there were a few increases, the numbers as a whole show a marked reduction.  I wonder how these reductions square with the recent 7% increase in rates for PG&E?

    The bottom line is that it will be more difficult for debtors to pass the Means Test and Debtors will be paying higher plan payments in Chapter 13. You may be using more special circumstances and justifying to your trustees actual expenses in the real world!

     


  10. Top 10 Most Common Means Test Errors

    July 14, 2015 by Shannon Doyle

    shutterstock_162900905-750x420Bankruptcy law is a volume, detail oriented practice. Success comes in being able to manage a high volume with efficiency. When preparing or reviewing a chapter 7 or chapter 13 petition for filing, bankruptcy attorneys should always strive to avoid post-petition amendments, continuances, delays or possible humiliation in front of their client at a 341(a) meeting. Having to scramble for documents right before a hearing only to find out the information in the petition is not accurate, or having to go back to the office to prepare an amendment after the trustee has publically advertised your mistake at the 341(a) meeting is not only embarrassing but inefficient.   Inefficiency costs money, wastes time, reduces quality and can damage the reputation of your practice.  This is not by any means an exhaustive list but here are the ten most common errors found on the Means Test that can lead to inefficiencies, or worse legal issues for your client:

    • The income does not match schedule I and there is no explanation attached.
    • The net income for a business is listed instead of gross.
    • In some jurisdictions: Taking the IRS standard deduction for a vehicle instead of the actual vehicle amount over sixty months (This is required in Central District California, Riverside Division).
    • Listing the average taxes over the six month period prior to filing instead of the current tax deduction when debtors have changed their tax deductions moving forward. This applies to other deductions like retirement and life insurance.
    • Childcare is not listed in the Means Test but is listed on Scheduled J or vice versa.
    • Telecommunications expenses are inflated and unsupported by evidence.
    • Proof of charitable contributions are not provided to the trustee.
    • Proof of money spent on the care of a disabled or elderly family member is not provide to the trustee.
    • Business expenses are not reviewed to see if the debtor is double dipping on utilities, transportation, insurance, etc.
    • “Special Circumstances” are listed without providing documentation including a declaration of the debtor.

    Whether you, the bankruptcy attorney, are preparing your own petitions or you have someone else preparing petitions for you, make sure you have all the necessary documentation and that the information presented in the petition is accurate. This is especially important if the debtor claims to have extraordinary expenses. It may consume more time up front but back tracking later will create a much greater time and expense deficient.


eBankruptcy Assistants, Inc. does not engage in the unauthorized practice of law. We never give your clients legal advice. All case analyses’ are done in a consulting capacity for the attorney of record. We do not represent individual debtors. We work solely for bankruptcy attorneys.