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Voluntary Dismissal of a Chapter 7 Not Always Available

By Jonathan on August 27, 2006

My colleague, Orlando bankruptcy lawyer Jonathan Alper, recently wrote about the rules for voluntarily dismissing a Chapter 7 case. Jonathan discusses the McDaniel case out of Florida, where the bankruptcy judge allowed a pro se debtor to dismiss a case after the debtor discovered that his tax debt was not dischargeable. The sole reason that the debtor had filed Chapter 7 was to discharge tax debt and the judge used "the court's discretion" to find that fairness and a lack of prejudice to the IRS warranted approval of the debtor's request to dismiss.

Over fifteen years ago, I was involved in a similar case, but one that yielded very different results. In my case, a gentleman came to see me after filing a pro se Chapter 7. He had filed the case to stop a payroll garnishment, and his total debt was around $100,000 – mainly credit cards. The problem he was facing had to do with his mother's home. Several years prior, his mother had added him to her deed for estate planning purposes. His mother continued to live in the home (which had no mortgage debt) and she paid the taxes and insurance. The mother's home had a fair market value of $200,000.

The Chapter 7 trustee ran a title search and found the real estate. The trustee wrote both the debtor and his mother to advise them that the trustee intended to sell the mother's house to liquidate the equity or that the mother could "buy out" the estate's interest by taking out a mortgage against the property.

The debtor came to me because he wanted to dismiss the case and to keep his mother out of the picture.

I looked at the Code section and saw that it gave the judge discretion to grant a motion to dismiss on the grounds of fairness, debtor's best interest and lack of harm to the creditor. I argued to the judge that it was fundamentally unfair to the mother to take her house and that the creditors (all unsecured) would be receiving a windfall because this debtor foolishly failed to seek counsel before filing Chapter 7.

The judge disagreed. She ruled that once the debtor filed Chapter 7, he gave up control of his estate and that by virtue of his title interest in his mother's house, he had equity in her real estate. We eventually settled with the trustee for slightly less than half the equity and the mother ended up taking out a mortgage on the property.

I have also been involved in a Chapter 13 in which the debtor received a large lawsuit settlement and the Chapter 13 trustee successfully moved the court for an order disallowing the voluntary dismissal of his Chapter 13 case.

The lesson here is that in my view, you cannot assume that a bankruptcy judge will permit you to dismiss your Chapter 7. I suspect that the debtor described by Jonathan Alper did not have any non-exmept equity and probably had a friendly judge. You cannot always assume that your judge will cut you a break. My feeling is that filing a bankruptcy without the advice of counsel is dangerous in general. A bankruptcy case can take on a life of its own and you may not be able to turn back the clock.

[tags] voluntary dismissal of chapter 7, judicial discretion, chapter 7 trustee, settlement with the Chapter 7 trustee [/tags]

Your First Meeting With a Bankruptcy Lawyer – What Do You Bring?

By Jonathan on August 24, 2006

One of the consequences of the new bankruptcy law has to do with the increased obligation on the part of both the lawyer and our clients to provide extensive documentation to the trustee and the courts. Since much of this documentary information is mandatory, your filing will be delayed if we do not produce it at the time of filing.

The information you will need to have on hand will vary based on where you file. In the Northern District of Georgia, which includes Atlanta, Newnan, Rome and Gainesville, we have a number of local rules that call for specific documents.

By contrast, there are different local rules for filings not in the northern district.

The Bankruptcy Court for the Middle District of Georgia is the appropriate venue for debtors in Macon, Columbus, Athens and surrounding towns. The Southern District includes Savannah, Waycross, Augusta, Statesboro and Dublin. Pursuant to the Bankruptcy Code, you are required to file bankruptcy in the district where you have lived for the greater part of 180 days (i.e. 3 months and 1 day). There are special calculations that we would do if you have moved several times in a short period of time.

In addition, the new Code limits your bankruptcy protection if you move from one State into another State. If you now live in Georgia but moved from out of State within the last two to three years, make sure to make your lawyer aware of your move. Even if you have been in Georgia for a year or longer, laws from your previous state may apply in your case as Congress has attempted to stop people from “venue shopping.”

Seven Minutes to Summarize Bankruptcy Law!

By Jonathan on August 18, 2006

Several months ago, I was invited by my colleague Marvin Solomiany to speak at a Family Law seminar presented by the Atlanta Bar Association. Marvin explained that my role would be to discuss bankruptcy at the "hot tips" part of the seminar. It turns out that the "hot tips" presentation is where five lawyers take seven minutes each to brief the family lawyers (i.e. divorce) about our areas of specialty. Besides myself, there was an immigration lawyer, a real estate lawyer, a criminal defense lawyer and a business lawyer. As I commented to the crowd, if there is if there is speed dating in hell, five lawyers in 35 minutes is what you would get!

At first I thought that the idea of speaking for seven minutes was kind of silly, but the more I thought about this, the more it made sense to me. The point of the "hot tips" presentations was to expose family lawyers to two or three points about another area of law and to introduce them to lawyers who practice in those areas. This was a chance for me to gain exposure before 75 or 80 lawyers who I otherwise might not meet.

Because I only had seven minutes, I was forced to focus on three or four points that would be most relevant to a family law attorney. Here is what I said:

1. a family lawyer ought to think about whether a joint bankruptcy – prior to the entry of a final divorce decree – makes sense. Since financial disputes can be the source of many divorces and settlement agreement arguments, there are some circumstances when a joint divorce while the couple is still married can make sense to eliminate issues. Bankruptcy can allow a divorcing couple to cancel leases, break contracts, surrender secured collateral and reduce or eliminate credit card debt. A joint bankruptcy does not always makes sense, but sometimes it does.

2. divorce lawyers need to be aware of Bankruptcy Code Sections 523(a)(5) and (a)(15). These Code Sections talk about what divorce related debts are dischargeable. Under the current (post October 17, 2005) law, pretty much any divorce related debt cannot be discharged in bankruptcy. However, cases filed prior to October 17, 2005 are governed by the old version of Code Section 523(a)(15) which provides that some divorce/separation related debts may be dischargeable. This means that family law attorneys need to be aware that two different versions of the same statute might apply – depending on when the debtor/spouse filed for bankruptcy.

3. financial disclosures are a big part of domestic relations litigation. I pointed out to the family law lawyers that bankruptcy schedules are public record and that the financial information within a petition could be used to evaluate the accuracy of financial disclosures in divorce litigation. Family law lawyers should know how to access bankruptcy paperwork and should know how to read the schedules.

4. my final suggestion was that family law attorneys should find blogs (like this one) and subscribe to those blogs. In my view, a good legal blog will include case studies, case law updates and other observations that can help a non-specialist keep up with developments that might affect his practice. News alerts are another good way to keep current. It still surprises me that so few lawyers use blogs, much less publish them. I strongly believe that my participation in the blogosphere has made me a better lawyer and I encourage my colleagues at the bar to take advantage of this powerful and free resource.

[tags] divorce and bankruptcy law Georgia, 523(a)(5), 523(a)(15), lawyer blog, bankruptcy schedules [/tags]

Property Surrendered in Chapter 7 – Will I Owe if There is a Deficiency?

By Jonathan on August 14, 2006

What happens when you surrender real estate in a bankruptcy? What does it mean for the trustee to "abandon interest" in the property. And most importantly, are you – the debtor – responsible for any deficiency balance that may arise after the case is over and the property sold?

This question was posed to me by Christina, one of my recent Chapter 7 clients. Because of a loss of income, Christina had surrendered back to the mortgage lender a home that she valued at $350,000. She estimated that the debt owed to the first and second lender totaled $375,000.

Recently, Christina has been receiving letters from the trustee and the second mortgage lender and she is unsure about what this all means. Most importantly, she is concerned that she may end up with personal liability if the foreclosure sale of the property results in a shortfall. Because this question raises issues that can apply in a wide range of situations, I decided to answer it on my blog.

First, Christina needs to understand that by surrendering her property, she is relieved of all liability arising from any subsequent sale and shortfall. By surrendering the property, the debt to the mortgage lenders becomes an unsecured debt which is dischargeable in the Chapter 7. I should note that Christina's mortgage lenders, like any other creditor in her case, do have the right to file a challenge to her bankruptcy if they suspect fraud or other wrongdoing by Christina.

I have seen challenges to bankruptcy discharges in cases of mortgage fraud but, absent some unusual bad faith circumstance, it is very unlikely that any credit would file a challenge. In Christina's case the deadline for filing challenges has long past so she is in the clear.

So, the brief answer to her question – she will not owe any money to the trustee or to either the first or second mortgage lender.

Now, let's take a look at what is going on behind the scenes and why Christina is getting all of those letters.

When Christina filed her Chapter 7, her filing triggered a basic bankruptcy protection called the "automatic stay." This "stay" means that all creditor actions, including foreclosure, repossession, wage garnishments, etc. must stop immediately. Christina's bankruptcy filing also triggered the creation of a bankruptcy estate, administered by a Chapter 7 trustee. The trustee's job is to investigate Christina's financial picture to see if there are any assets to liquidate.

Although Christina filed a Statement of Intention providing for a surrender of the property, the creditor did not get it back because the Chapter 7 trustee had to perform his own investigation to see if there was any equity. Further, the automatic stay remained in effect while the trustee was performing his investigation.

It is interesting to note that the trustee's investigation has just concluded (August, 2006) although this case was filed in October, 2005. The reason for the delay – the huge backlog of cases filed prior to the October 17, 2005 change in the bankruptcy law. The mortgage creditors in this case have been sitting for almost a year without any payments waiting for the trustee to finish his investigation – no wonder they are not very happy!

On August 1, 2006, the trustee filed his Notice of Abandonment. This means that the trustee has concluded that thereis no equity for the estate.

Now that the trustee has abandoned any claim to equity in the property the mortgage company will move for relief from the bankruptcy stay and will proceed with foreclosure. Even if the foreclosure results in a deficiency in favor of either the first or second lender, Christina will not owe anything – her obligation is discharged.

[tags] Chapter 7, bankruptcy, mortgage deficiency, motion for relief from stay, automatic stay, Chapter 7 trustee, Notice of Abandonment, surrender of property [/tags]

Cost of Chapter 13 May Outweigh Its Benefits

By Jonathan on August 1, 2006

Yesterday, I met with a potential client who was facing immediate foreclosure (today) and I encouraged him not to file Chapter 13 to stop the foreclosure.

During the course of our discussion, I learned:

that he had previously filed a pro se Chapter 13 earlier this year that was dismissed for non-payment
because of a reduction in overtime hours, this potential client did not have sufficient income to pay his regular mortgage payment, much less contribute to a plan to cure his arrearage
he had been in his house for less than a year and had no equity (and actually owed more than the property was worth when late fees and penalties were included)
his real estate agent was pushing him to file the 13 because she had a potential buyer lined up
he was very concerned that a foreclosure would cause damage to his credit

I expressed to this gentleman that, in my opinion, Chapter 13 was a waste of his money. Here is why:

we could not propose a feasible plan since he did not have enough disposable income to pay his regular mortgage, much less contribute to a Chapter 13 plan
his credit was most likely already badly damaged because of his first unsuccessful bankruptcy and his failure to pay his first or second mortgage for almost a year. A foreclosure would likely not cause significantly more damage
if he was to stop the foreclosure for the purpose of selling the property, how would he close? The total debt on the property exceeded the sales price – he would walk out of closing owing $10,000 to $20,000
deficiency judgments arising from foreclosures are rare in Georgia – should the mortgage lender pursue him, we could look at filing a Chapter 7 down the road
given the current bias against 2nd filings, it is possible that the lender would foreclose in escrow then immediately petition the Bankruptcy Court for an Order validating the foreclosure
because second cases require extra work – a Motion to Extend the Stay – I have to charge more up front. In this case, the potential debtor was basically telling me that he had no desire or intention to stay in this Chapter 13 for more than a month. As such, I would have to charge $2,500 up front + the filing fee.
the primary practical problem that the potential client faced – he and his family would have to move fairly quickly

I expressed that in my view, it made little sense to spend thousands of dollars for the hope that he could stay in his house for a few weeks to months. Instead, use his cash reserves to move and find a place to live. I closed by saying that I would file a Chapter 13 for him if he insisted, but that in my view he was wasting his time and money.

Do you agree with my analysis?

[tags] Chapter 13, pending foreclosure, Georgia foreclosure, foreclosure Fulton County, stop foreclosure, bankruptcy, bankruptcy analysis, re-filed case, motion to extend stay [/tags]

Weakening of Consumer Bankruptcy Protections Based on Faulty Assumptions

By Jonathan on July 29, 2006

One of the consequences of the new bankruptcy law (BAPCPA law) has to do with erosion of protections offered by bankruptcy in various situations. For example, the automatic stay provisions, which previously offered a comprehensive, no-questions-asked protection from any creditor action, no longer provides absolute protection in all circumstances. Under BAPCPA, the automatic stay terminates in 30 days (unless you go to Court to renew it) in certain repeat filing situations and it does not exist at all in the third case filed within a year.

While the policy considerations that underlie this erosion of the automatic stay may be valid, my concerns are (1) when you create complicated exceptions to core concepts, the system loses predictability and public confidence and (2) the stage is set to undermine the entire bankruptcy system with exceptions that swallow the rules, i.e. the “slippery slope” argument.

I find the reduction in bankruptcy protection that applies to repeat filers especially troublesome. There seems to be an underlying assumption that a debtor who seeks bankruptcy protection – usually under Chapter 13 – more than once within a year is acting with less than honorable purposes. In my experience, at least half of the second filers I see have to file a second case because they did not fully understand the process and their obligations thereunder the first time around.

In most jurisdictions, one or two high volume consumer bankruptcy firms account for a majority of the Chapter 7 and Chapter 13 filings. These high volume firms are a product of the Bankruptcy Courts’ paternalistic attitude towards debtors and consumer bankruptcy counsel. In most jurisdictions, the Judges set out “no look fee” provisions for Chapter 13 that essentially set the market rate for legal fees in that jurisdiction. Although the standing court orders that set out these provisions are careful to state that the judges are not setting a fee, the practical effect is, in fact, to set a fee for services.

Because it is hardly practical for a small firm to spend three or four hours of non-billable time to present a fee application, most consumer bankruptcy attorneys accept the no look fee as a flat fee for services. In the northern district of Georgia, for example, the no-look fee for Chapter 13 is around $4,500. If a Chapter 13 lasts five years, that amounts to $500 per year to prepare, file and manage a case. Until just a few years ago, that no look fee was $1,500 for five years’ worth of work (that amounted to $300 for five years’ worth of work).

By contrast, in Chapter 11 cases, where the financial stakes may be in the millions of dollars, bankruptcy attorneys may bill at $500 or $600 per hour without any significant judicial interference.

Is it any wonder, therefore, that high volume consumer bankruptcy firms spend so little time with their clients to walk them through the filing and case management process. Actually face to face attorney time in a high volume firm may amount to 30 minutes or less. Further, because the business model dictates that costs must be kept down, the high volume firms have no choice but to rely on inexperienced, young lawyers who stay for a year or two then move on.

In simple consumer cases, a paralegal driven model may be fine and I personally have no issue with operating a law firm according to a profitable business model, especially when that model is driven by judicial control of attorney compensation. In more complex cases, however, it may take a second or third filing for the debtor to find a lawyer who is equipped to deal with that debtor’s complicated problem.

The automatic stay issue discussed above is but one of the many erosions and exceptions to full relief now contained in the Code. A 2005 article in the ABA Journal entitled “Debts that Will Follow You to the Grave” by Marc S. Stern and Larry B. Feinstein offers an excellent summary of other exceptions to bankruptcy relief.

The prevalence of high volume, limited service bankruptcy mill firms in every large jurisdiction is clearly the product of judicial control of bankruptcy fee payments in Chapter 13 cases. Yet BAPCPA incorporates a simplistic formula to punish repeat filers, even those who have to seek repeat protection because they ended up in the wrong attorney’s office for their particular case.