Blog

Bankruptcy Filings On Their Way Back Up

By Jonathan on June 7, 2006

My colleague, New York Bankruptcy attorney Jay Fleischman reports on his New York Bankruptcy and Consumer Law blog that bankruptcy filings are beginning to rise. Jay notes the following factor as reasons for the increase:

relaxed credit underwriting standards by lenders in every range of the risk spectrum
interest rates with no caps – such as 30% penalty interest rates on credit cards
a growing number of uninsured debtors who have to file bankruptcy to resolve unpaid medical expenses
increasing gasoline prices

My call rate has been increasing because of these factors and a few more, including

the doubling of minimum credit card minimum payments
the post-Christmas, post-tax refund effect – many people are still carrying credit card balances from Christmas and they have used up their income tax refunds
mortgage delinquencies caused by upward adjustments of adjustable rate or interest only mortgages
the end of the October 17 lull – prior to October 17, thousands of debors who otherwise might have waited a few months to file took advantage of the old law. Now, enough time has passed that people who were not previously in trouble are in trouble

As expected, the new bankruptcy law has not and will not reduce the need for honest, hardworking debtors to file bankruptcy. The same problems that existed for debtors prior to October 17, 2005 still exist in 2006.

Crazy Credit Card Enticements

By Jonathan on June 5, 2006

Just when I thought I had seen it all, today’s mail brought a credit card promotion called “Upfront Rewards” from a credit card issuing bank. The promotion offers immediate delivery of a Dell laptop if the applicant agrees to transfer an existing $5,000 balance and “maintain a minimum balance of $3,500 for at least 18 months. Should the balance fall below $3,500 then the card will be charged a flat $600 fee.

An analysis of this promotion suggests that it is not quite the deal it seems to be. Firstly, this Dell laptop (which the promotion calls an $850 value) is going for around $400 on eBay (for a new machine).

So, if you take this deal and your balance falls below $3,500 you would be slapped with a $600 charge in addition to whatever interest you had already paid.

Now, if you are very disciplined and you maintained a $3,500 balance at the current 9.9% rate (although the card rate is “variable” with a rate of 3.49% to the Prime Rate on purchases and 11.99% on cash advances, what happens?

According to my amortization calculations 18 months of interest on a $3,500 balance at 9.9% results in a charge of $280.72 of interest. So the minimum you are paying for this promotion would be $280.72. Of course the issuer is assuming that you will not be so disciplined and will use the card and build up a balance of more than $3,500. In a best case scenario, you would save $100 or so from the eBay cost of a new Dell (slightly used models can be had for less) but you would absorb 18 months of risk for delinquency or early payoff charges. And, of course, in 18 months, your laptop will be worth about $50 if you are lucky.

If you do not pay down your initial $5,000 balance and pay interest on it for 18 months, then your interest cost jumps to $534.12, which, of course, is more than the open market cost of the Dell.

I must say that this promotion got me to open the direct mail piece, even if this is not a deal I could recommend. I will keep my eyes open for the first time I see one of these accounts in a bankruptcy that I file for a client.

Behind on Mortgage and Vehicles – is Chapter 13 an Option?

By Jonathan on June 5, 2006

My mortgage is about to go into foreclosure–as we are two months behind right now and we also owe for June…The mortgage company will not accept a partial payment…and will initiate foreclosure proceedings very soon..we are also in trouble with our car notes and timeshare payments… should we consider bankruptcy if we cannot work out something with our lender???
–Mark

Jonathan Ginsberg responds: Mark, if your mortgage company will not work with you, then your only real option is Chapter 13. I think you are smart to consider this option early – which is preferable to waiting until a few days before foreclosure to look into the process. At a minimum, you should do the following now:

1) request copies of all 3 credit reports (both you and your wife) – credit reports are free in Georgia but will take a few days to arrive in the mail (by contrast if you need them immediately, I can get them for $45 per person). This is another advantage of starting early

2) get your credit counseling certificate. Credit counseling is now mandatory and if you wait until the last minute, you may not be able to get an appointment. I have a section about credit counseling on my Bankruptcy Worksheet site – click to visit the page where I have posted links to multiple credit counseling companies.

3) complete my bankruptcy intake form. Please pay special attention to the budget portion. Chapter 13 will not help you if you do not have enough stable income to pay your mortgage on-going and contribute to your Ch. 13 plan. If you have fallen behind on your house and your car because you are not making enough money, you may need to consider surrendering one of these secured items to make a Chapter 13 plan feasible. I can tell you that in almost every case, the Chapter 13 trustee will insist that you give up your time share. If you fell behind because of an unusual circumstance (i.e., an unexpected job layoff, an illness, a pregnancy, etc.) then a 13 will catch you up.

As part of the questionnaire I would need copies of all pay stubs for income earned by you and your wife (regardless of whether she would be filing with you) for the period December, 2005-May, 2006.

I also think that during this process you should continue negotiating with your creditors. And if you have numbers and knowledge about how Chapter 13 would work for you, you will be in a better position to evaluate your options.

I am happy to spend 30 minutes with you at no charge to review your completed questionnaire. Let me know by phone or email if you would like to talk.

Trends in Mortgage Foreclosures

By Jonathan on June 4, 2006

One component of the new bankruptcy law that gets little popular attention has to do with the limitations the new law places on re-filed Chapter 13 cases. The Bankruptcy Code now provides that in a second case filed within one year of a first filing, the automatic stay terminates in 30 days unless the debtor files a Motion to Extend Stay. For a third filing within a year, the automatic stay does not go into existence at all.

The intent of this new Code section is to stop so called “serial filers” – people who file and re-file to stop mortgage lenders from foreclosing.

Under the old law, by the way, bankruptcy judges could and frequently did exercise their power to dismiss a case “with prejudice” (pursuant to Section 109(g) of the Code) thereby barring a debtor from refiling for 180 days.

The problem from my perspective as a consumer debtor lawyer arises when a debtor has to file a second or even third case because of circumstances beyond his control. For example, in the Northern District of Georgia, where I practice, problems with Chapter 13 plan funding are the primary reason why Chapter 13 cases fail. Often the funding is short because the employer fails to start the payroll deduction on time. In our district every debtor who is employed must be subject to an automatic payroll deduction.

An initial Chapter 13 case may fail because the debtor’s lawyer was inexperienced or got in over his head. Chapter 13 now requires numerous document disclosures and fast response to trustee objections. Many times over the past twenty years, I have received a frantic call from a debtor whose case had been filed by a lawyer who “dabbled” in bankruptcy and who failed to respond properly to the trustee objections. And there are also those cases that debtors filed pro se and two or three months into the case decided (usually on advice from their trustee) to get a lawyer. Under the old law trustees and judges frequently recommended re-filing. Now, that option is much less appealing or practical.

A case may fail because a debtor has not yet wrapped his mind around the idea that his lifestyle and spending habits must change.

When a debtor wants or needs to refile, he will find that it has become much more difficult and expensive to find a lawyer to take his case. In my office, I will take a second filing within a year sometimes, but the up front cost will be higher that it would be for an initial filer. Why? I know that at a minimum I will be making an additional court appearance to extend the stay and because the trustees tend to be much more demanding in a refiled case.

As a rule I will not take third filings and many of the more experienced, capable bankruptcy lawyers I know will not take third filings either. The risk of getting stuck in litigation and hours of unpaid time loom too large. I routinely refer third cases to one of the high volume filers.

No doubt the debtors themselves are partially to blame. In my office I advise my clients orally, in memo form and by letter and email that the debtor is responsible for making all trustee payments until the payroll deduction kicks in and that all mortgage payments must be paid directly as on-going mortgage payments are not part of the plan. And every month or so I have a debtor insist that “nobody told me” to make my mortgage payments or trustee payments.

However, without minimizing the debtor’s responsibility, I can see how a debtor would be confused by the process. Bankruptcy is confusing and a bit terrifying. Debtors are almost always very stressed and overwhelmed by months of financial pressure. And, often, a main reason that a debtor is in bankruptcy relates to that debtor’s poor financial management skills and practical budget know-how. This lack of know how, in my view, extends to the debtor’s decision making in choosing a bankruptcy lawyer and evaluating his bankruptcy and non-bankruptcy options.

Often the choice of a bankruptcy lawyer is made at the last minute. Cash strapped debtors often choose a lawyer based on up front price. Usually a law firm offers a low up front cost because (a) it is a volume filer or (b) it is a new or inexperienced lawyer trying to get cases to learn the practice area. In both these scenarios, despite the good intentions of the lawyer, there is an increased risk that the first filing will not work.

The bottom line, in my view – there are many reasons why an initial filing may not work and more often than not the dismissal is for a reason other than a serial filing mindset by the debtor.

Now I am reading that teaser rates and adjustable rates are rising, especially in the subprime lending market. In the Bankruptcy Litigation blog, Illinois bankruptcy attorney Steve Jakubowski cites a Wall Street Journal article as stating that subprime loan originations have increased from $150 billion in 2000 to $650 billion in 2005. Further, about 25% of all mortgage debt in the United States is coming up for interest rate resets in 2006 and 2007. Many of these resets will result in substantially higher monthly mortgage payments.

This all means that there are going to be a lot of first time filers looking at Chapter 13 to stop a foreclosure. How many of those debtors will be affected by the new restrictions on refiling Chapter 13?

Stay Violation – When to Go For Sanctions

By Jonathan on June 3, 2006

Orlando bankruptcy lawyer Jonathan Alper recently wrote in his Florida bankruptcy blog about a case he observed in the Orlando bankruptcy court in which a debtor’s lawyer failed to win stay violation sanctions for his client because of his desire to extend professional courtesy to the creditor’s lawyer. The debtor’s attorney dropped his demand for sanctions against the lawyer but continued to pursue a contempt recovery against the actual creditor. The judge ruled that the attorney was the party who did not honor the automatic stay, not the company, and by dismissing the lawyer from the Complaint for Sanctions, the debtor had no basis for recovery.

This reminds me of a case that my colleague Bernie Stittleburg and I pursued a couple of years ago against a law firm that represents numerous homeowner’s associations in the Atlanta area. In our case, as in the one Jonathan Alper discusses, the creditor, through its law firm, filed a post-bankruptcy lawsuit against the debtor even though the debt had been discharged in my client’s bankruptcy. At the State Court hearing (we had a transcript), the creditor’s lawyer argued to the State Court judge that the bankruptcy stay did not apply to his client because his client did not get proper notice. In fact, we had given the creditor notice at an address specifically identified by the creditor in loan documents. In addition, there is case law that suggests that actual notice may be sufficient in some circumstances. The bottom line in this case is that the creditor’s lawyer was absolutely incorrect in his statements to the State Court judge.

By the time the client came back to us, his wages had been garnished and he had suffered some very real financial hardship.

Bernie and I decided to file a Contempt lawsuit against the creditors as well as the law firm that pursued the judgment against our client. I remember engaging in several very uncomfortable telephone conversations with the managing partner of this firm who was reluctant to admit to wrongdoing and even more reluctant to make a settlement offer.

In the Orlando case, I suspect that the debtor’s lawyer was trying to preserve a relationship – as debtor’s lawyers we see and negotiate with the same creditor lawyers weekly. In consumer bankruptcy, negotiated settlements on motions for relief and Chapter 13 confirmation objections are very common. Busy creditor lawyers, who are paid hourly by their clients, are usually in court all day anyway so it would not burden them to refuse to negotiate every case, thereby forcing the debtor’s lawyer to spend hours of non-billable time waiting for a calendar call.

In our case, Bernie and I eventually worked out a settlement with the creditor law firm. But our relationship with the creditor firm was damaged. What happens the next time I am trying to work out a deal with that firm is very much an open question.

Jonathan Alper’s point that the lawyer needs to think about his client’s interest is correct. However, for the debtor’s lawyer, thinking about the big picture, pursuing damages against a creditor’s lawyer who he will see again and again, is a difficult call.

Alimony and marital property are assets that should be disclosed in your bankruptcy petition

By Jonathan on June 3, 2006

The Georgia Supreme Court recently issued a decision in a divorce case called Benton v. Benton that has bankruptcy implications. In this case, Mrs. Benton filed a Chapter 7 bankruptcy in the middle of her divorce case. In her petition she revealed her pending divorce action but did not reveal on Schedule B (the personal property schedule) of her petition her right to alimony or property settlement. For bankruptcy purposes, a right to receive money from any source is an asset.

After the bankruptcy case was closed, her husband asked the divorce court to deny his wife’s request for alimony and property settlement under the doctrine of judicial estoppal. He argued that because the wife failed to reveal the existence of property (her right to alimony and her claim of a property settlement), she should be “estopped” from receiving this property in the divorce case.

After the husband made this argument, the wife filed a Motion to reopen her bankruptcy case to add these assets as property. The Bankruptcy Judge approved the Motion.

The Supreme Court held that judicial estoppal was not appropriate because the wife had amended her bankruptcy to add the asset.

What should you take from this case? First, you and your lawyer should think very carefully about what constitutes an “asset” for bankruptcy purposes. Any claim you have to receive money is technically an asset.

Secondly, if you realize that you left something out, file an amendment to fix the problem. Estoppel does not just apply in divorce cases. I have seen it applied in car accident and medical malpractice cases as well. If, for example you have been in a car accident but your case has not settled, your potential settlement is an asset of your bankruptcy estate and your failure to list that claim could result in a defense verdict.

Thanks very much to Atlanta attorney Scott Riddle for featuring this case on his excellent blog called the Georgia Bankruptcy Blog. Scott’s blog reviews recent cases and developments in Georgia and the 11th Circuit. It is well worth your time. Scott is a bankruptcy litigator and has extensive experience in Chapter 11 business bankruptcy cases.