ABI Bankruptcy Blog Exchange

The ABI Bankruptcy Blog Exchange collects several blogs about bankruptcy into one convenient site.
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BankruptcyProf Blog

Circuit Court of Appeals Cases for Last Week

Posted: July 3rd, 2008, 10:13am PDT by Bankruptcy Prof

3rd Circuit Court of Appeals, June 24, 2008 In re Mansaray-Ruffin, --- F. 3d --- (3rd Cir. 2008)(Chapter 13 plan did not invalidate lien, adversary proceeding required) 4th Circuit Court of Appeals, June 25, 2008 Tidewater Fin. Co. v. Kenney,...

Credit Slips

Debtors Anonymous?

Posted: July 3rd, 2008, 9:28am PDT by John Pottow

I wanted to pass along an interesting story I saw a few weeks ago in the WSJ about support groups for debtors. They had such names as the "Sunday Morning Club" and "Girls Just Wanna Have Funds." These groups, to me, serve as an indicator that debt has become a socio-cultural phenomenon akin to addiction, such that people now feel the need to have support groups to confront and combat their problems. I also note a lot seem church-based. I suspect these are more organic and less slick than. e.g, current commercialized debt gurus. Here's my lingering question: what do the credit card lenders have to say about them? I suspect they'll proffer support, the way brewers encourage "responsible drinking," but I can't help but wonder whether secretly they can't stand them...

Bankruptcy Law Network - Real Lawyers, Real Solutions

If I Charge On My Credit Card And Don’t Make A Payment, Is This Fraud?

Posted: July 2nd, 2008, 3:24pm PDT by Rachel Lynn Foley - Kansas City, MO Bankruptcy

Creditors these days are looking for any and all ways to prevent debtors from discharging their debt in bankruptcy. As a result we are seeing more and more allegations of fraud. The most common fraud allegation from the creditor is that you, the debtor, charged on a credit card and made absolutely no payments or [...]

Georgia Bankruptcy Blog

Ply-Mart's, Inc. in Bankruptcy: Involuntary Bankruptcy Petition Filed By Creditors

Posted: July 2nd, 2008, 3:19pm PDT

An involuntary Chapter 11 Bankruptcy Petition was filed against Ply-Marts, Inc. (a/k/a Ply-Mart and PlyMart) on July 1, 2008. Ch. 11 (Invol.) Case No. 08-72687. See the petition here. The petition was signed by Dixie Plywood Company of Atlanta, JB Hunt Transport, Inc., and Primesource Building Products, Inc..
As discussed in this post, Ply-Marts consented to the appointment of a receiver in the U.S. District Court last week.
The primary element required to prevail on an involuntary petition is that the would-be debtor is not paying its debts as they become due. See 11 U.S.C. §303. Given the Consent Order in the District Court case, it will be difficult for Ply-Marts to overcome this allegation -
E . In the fall and winter of 2007, Ply-Marts experienced significant financial difficulties, and by no later than early 2008, events of Default under (and as defined in) the Loan Agreement had occurred and continue to exist .problems have intensified and accelerated to the point that there is imminent danger that Plaintiffs interests in the Ply-Marts Collateral will be irreparably harmed.
G. Ply-Marts' financial problems have intensified and accelerated to the point that there is imminent danger that Plaintiffs interests in the Ply-Marts Collateral will be irreparably harmed.
H. Ply-Marts has commenced an orderly wind-down and liquidation of its lumber products business . The remaining operating divisions of Ply-Marts have sustained and continue to sustain substantial operating losses .

It appears more likely that Ply-Marts will either not contest the involuntary petition, as in most cases, or it could file its own Chapter 7 or 11 petition. Although the Receiver is still in control of the company, its board of directors likely have the authority to consent to bankruptcy relief even over the objection of the Receiver.
11th Circuit - In A Case Of First Impression, Order Denying Motion To Dismiss Chapter 7 Case Not Final Appealable Order

Posted: July 2nd, 2008, 9:02am PDT

Barben v. Donovan (In re Donovan), No. 07-13915 (11th Cir. July 2, 2008).
Donovan filed a Chapter 13 bankruptcy petition on February 17, 2004, prior to the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. ... Donovan became unable to make the payments under the plan as they came due. Accordingly, Donovan—apparently at the bankruptcy court’s suggestion—converted the case to Chapter 7 on June 14, 2006; the bankruptcy court dismissed the Chapter 13 case on June 30, 2006.
Barben objected to the conversion and moved to dismiss the Chapter 7 case. She argued that the conversion to Chapter 7 was presumptively abusive within the meaning of the 2005 Act ... The bankruptcy court held that the more stringent standards of the 2005 Act for conversion to Chapter 7 did not apply ... Accordingly, her motion to dismiss was denied on November 8, 2006. It is this denial of the motion to dismiss that was appealed first to the district court, which affirmed and granted costs to Donovan, and now to this court.
A court of appeals has jurisdiction over only final judgments and orders arising from a bankruptcy proceeding, whereas the district court may review interlocutory judgments and orders as well....Finality is given a more flexible interpretation in the bankruptcy context, however, because bankruptcy is an aggregation of controversies and suits. ..Instead, “[i]t is generally the particular adversary proceeding or controversy that must have been finally resolved rather than the entire bankruptcy litigation.”... Thus, to be final, a bankruptcy court order must “completely resolve all of the issues pertaining to a discrete claim, including issues as to the proper relief."
Based essentially on this logic, the weight of circuit authority has concluded that orders denying a motion to dismiss for bad faith or abuse are not appealable. At least three other circuits have specifically held that an order denying a motion to dismiss a Chapter 11 bankruptcy case for abusive filing is not a final order. In re Jartran, 886 F.2d 859, 864 (7th Cir. 1989); In re 405 N. Bedford Dr. Corp., 778 F.2d 1374, 1379 (9th Cir. 1985); see also In re Comm. of Asbestos Related Litigants, 749 F.2d 3, 5 (2d Cir. 1984) (declining to issue mandamus to review denial of motion to dismiss; suggesting in dicta that such denial was insufficiently final for direct appeal). But some courts have concluded to the contrary. In particular, the Third Circuit has held that the denial of a motion to dismiss for bad faith is immediately appealable in both Chapter 7 and 11. See In re Brown, 916 F.2d 120, 123-124 (3d Cir. 1990) (citing In re Christian, 804 F.2d 46 (3d Cir. 1986)). These cases, however, do not discuss whether a particular adversary proceeding must be final. Here, the bankruptcy court’s order denying Barben’s motion to dismiss the Chapter 7 case is not a final order. By denying her motion to dismiss, the bankruptcy court permitted the Chapter 7 case to continue. The court did not conclusively resolve the bankruptcy case as a whole, nor did the court resolve any adversary proceeding or claim.

Bankruptcy Law Network - Real Lawyers, Real Solutions

National Association of Chapter 13 Trustees Unveils New Bankruptcy Information Resource

Posted: July 2nd, 2008, 6:51am PDT by Jay Fleischman, New York Bankruptcy Attorney

Our primary goal at Bankruptcy Law Network is to increase the amount of information available to you, the American consumer, about debt relief options. Now the National Association of Chapter 13 Trustees has launched a new portal designed to help consumer bankruptcy practitioners learn more at www.ConsiderChapter13.org. The National Association of Chapter 13 Trustees devoted significant [...]
Is Bankruptcy The Same Everywhere? Part 2

Posted: July 1st, 2008, 9:58pm PDT by Peter Orville, Attorney at Law

One year ago, I posted a blog on this website discussing some of the ways that the bankruptcy law was applied differently in different locations throughout the country. In that blog I discussed the fact that states had vastly different exemption laws, and that in some states a debtor in bankruptcy could protect an [...]

Credit Slips

Interchange and the Price of Gas

Posted: July 1st, 2008, 9:22pm PDT by Adam Levitin

With all the attention being paid to the soaring cost of gasoline, there's one price component that could easily be lowered that hasn't gotten a lot of attention: interchange. Americans pay about 10 cents/gallon or $2/tank (20 gallon) in interchange fees. Compare this with the estimated benefit of drilling in ANWAR--3.5 cents per gallon by 2027. Tremendous political energy that has been spent over drilling in ANWAR. If we're really interested in reducing gasoline prices, then reforming the interchange fee system presents an option of immediate savings that would far outstrip ANWAR. Of course, the maximum savings would be less than from a federal gas tax (18.4 cents/gallon), but a gas tax holiday isn't permanent. (I'm putting aside the question of whether we should want pricing that encourages fossil fuel consumption.)

Fortunately, the good folks at Visa are looking out for the American consumer. And out of concern for American drivers, Visa has adjusted its interchange rate schedule. Unfortunately, there's more than meets the eye to Visa's apparent benevolence and desire to "Help Ease Pain at the Pump." The devil, of course, like so many things in the card industry, is in the details.
When you go to the gas station and you use a Visa card, the gas station will pay its acquirer bank a merchant discount fee that consists of the interchange fee plus some thin profit margin for the acquirer. For simplicity's sake, let's just say that the merchant pays interchange and ignore the acquirer's margin.

So currently, if you fill up your tank and pay at either a service station or an automatic fuel dispenser with a Visa card, the interchange fee will be is a five or ten cent flat fee plus between 1.43% and 2.10% of the purchase price (depending on rewards level). So on a $50 tank of gas, you're paying your credit card issuer that's between $.80 and $1.15. I'm going to use the $1.15 for illustrative purposes.

Let's say you can buy 12 gallons of gas for $50, so gas is $4.17/gallon (close to the national average). If you weren't paying the interchange fee, you'd be getting 12 gallons for $48.85. That means gas would be $4.07/gallon. In other words, you're paying 10 cents a gallon to your credit card issuer. And that's before any interest or late fees, etc. For smaller purchases, the credit card tax on gasoline gets higher because of the flat fee. And if the price of gas/gallon is higher, then interchange represents an even greater cost per gallon.

[For debit, Visa's interchange fee is .70% plus 17 cent flat fee, but debit card transactions at service stations often result in debit card holds--much large notional charges--that can limit the cardholder's available funds for a few days. I'm going to leave the debit card hold issue aside for now.]

So what has Visa done in response to the "Pain at the Pump"?

Visa instituted a new interchange fee for all gas stations of ~~1.5%~~ 1.15% of transaction price plus 25 cents, regardless of the level of rewards on the card. Because of the increased flat fee, consumers making high dollar amount transactions will pay less, but consumers with small transactions will pay more. Where is the dividing line? It depends on whether you were using an exclusive Visa Signature Preferred Card (2.10% + 10 cents) or a mass market rewards card like Visa Signature or Traditional Rewards (both 1.65% + 10 cents) or a non-rewards card (1.50% + 5 cents). If you are wealthy enough to land a Visa Signature Preferred Card, this means the cost of interchange to the gas station (and thus ultimately to you) will be less on transactions over $15.79. If you have a regular rewards card, then the savings kick in at $30. And if you don't have a rewards card at all, then the new rates are actually more expensive for the station for all transactions under $57. [Correction 7.2.08]

Does this new structure actually represent a lowering of interchange costs for gas stations? It depends on the card mix and the purchase prices. If everyone in town drives a Hummer and has a Visa Signature Preferred Card (Greenwich?), then this is a great program. But if most people have plain vanilla cards and aren't letting their tanks get bone dry, then that $57 threshold is pretty high; I rarely exceed $57 for a single gas purchase with my thirsty minivan. That'd mean that gas stations would be paying even more in interchange and the price to consumers would go up even more.

Surely Visa looked at card usage data and concluded that it would actually be more profitable to lower percentage fees while increasing the flat fee. Visa is a for-profit company, after all, and there's no tax write-off to helping consumers. So it is easy to see a scenario in which Visa gets the PR boost for trying to help consumers, while actually sticking it to them.

Curiously, the Visa move also undercuts Visa's litigation and lobbying position, that interchange is just an interbank fee. By announcing its "lowering" of interchange rates as a move to help consumers, Visa implicitly acknowledged that interchange contributes to consumer costs. (The best empirical evidence that interchange is passed on to consumers also comes from the gas station industry.) Interchange is not just a Main Street vs. Wall Street issue. It is also a consumer issue.

All of this points at the need to think about ways of reforming the interchange system. One possibility is that it will be done through the courts. Another possibility is that it will be done legislatively. Interchange week will continue with a post about the Credit Card Fair Fee Act.

Bankruptcy Law Network - Real Lawyers, Real Solutions

Northern District of New York Bankruptcy Judge Says Unsecured Creditors Must Get Paid Sooner In a Chapter 13

Posted: July 1st, 2008, 8:31pm PDT by Peter Orville, Attorney at Law

Under the former bankruptcy law, unsecured creditors in a Chapter 13 were paid only after all secured and priority creditors were paid in full. Under the new bankruptcy law (BAPCPA), Congress imposed a new formula for determining the minimum amount unsecured creditors would be paid in a Chapter 13 for debtors who were above [...]

Credit Slips

Interchange Week on the Slips

Posted: July 1st, 2008, 8:01pm PDT by Adam Levitin

Let's call this interchange week. With efforts to bring the Credit Card Fair Fee Act to vote in Congress picking up steam, I'm going to do a few postings on different aspects of the interchange debate this week. Coinciding with this, the printer proof of my recent article on the economics and origins of interchange is available on SSRN (spoiler: interchange and merchant restraints are less about network effects than about evading TILA, usury laws, and branch banking restrictions).

So as a primer for the rest of my posts, who's up for some good ol' fashion credit card network economics?
Here's the deal. You purchase $100.00 of goods at a merchant on a credit card. The merchant receives $100 minus the "merchant discount fee," of say $3.00 which is taken out by the merchant's bank (the "acquirer bank"). The acquirer bank keeps perhaps $.40 and remits $.10 to the credit card network (MC or Visa--Amex and Discover are a little different so I'll leave them out of this) as an authorization, clearing, and settlement fee, and $2.50 to your card issuer (the "issuer bank"), which is the interchange fee. The interchange fee is thus technically a fee paid by the acquirer to the issuer, not by the merchant or the consumer. But leaving this formalism aside, it is a fee on merchants and consumers. The interchange fee sets a floor for the merchant discount fee (often it is explicitly priced to merchants as "interchange plus"), and merchants pass along at least part of the interchange fee to consumers.

The interchange fee is set by the card network. Fees are typically a flat fee of a 5-15 cents and a percentage fee of 1-3 percent. The precise fee depends on (1) the merchant's industry, (2) the size of the merchant, and (3) the level of rewards on the consumer's credit card (more rewards-->higher interchange fees). In other words, the interchange fee, which is technically not a fee paid by merchants, but an interbank fee, as the card networks emphasize in their literature, is set based on merchant and consumer characteristics. How often does an interbank fee depend on the characteristics of third parties?

Credit card network rules restrict merchants' ability to pass on interchange fees to cardholders. (For shorthand, let's call these rules "merchant restraints".) Merchants are required to accept all (credit or debit) cards bearing a card association's label, to take them at all of their locations (web, brick and mortar), to treat all cards the same, and are forbidden from surcharging for credit. Federal law gives merchants the right to offer cash discounts, but merchants are forbidden from doing the mathematical equivalent of surcharging for credit. Of course, the right to discount for cash largely misses the point--such a right would be valuable if merchants didn't want to take credit cards. Merchants generally do want to accept credit cards (and in certain businesses, like Internet retailers, they must). What merchants don't like is having to accept high cost rewards cards on which they see no benefit. And merchants also don't like that interchange rates have been marching steadily upwards without any increase in benefits of card acceptance (and arguably an increase in liability because of PCI data security standard rules).

So that set's the stage for my next post--interchange and the price of gas.

A Texas Bankruptcy Lawyer's Blog

5th Circuit Rejects Equitable Subordination Claim With Deepening Insolvency Aspect; Insiders Not Subordinated for Stoking the Fires of a Sinking Ship

Posted: July 1st, 2008, 6:28pm PDT

The Fifth Circuit has ruled that insiders who “grabbed for as much as they could get” were not subject to equitable subordination where the bankruptcy court did not find sufficient harm resulting from their conduct. The court rejected a theory of damages which it equated to deepening insolvency. Matter of S.I. Restructuring, Inc., 2008 U.S. App. LEXIS 13140 (5th Cir. 6/20/08).

Background

S.I. Restructuring involved the Schlotzsky’s sandwich chain. At the time, John and Jeffrey Wooley were officers, directors and the largest shareholders of the company. In April 2003, the Wooleys made a secured loan to the company for $1 million. The company and the Wooleys were each represented by separate counsel, the transaction was approved by the company’s audit committee and board of directors and the loan was reported in the company’s SEC filings.

The company’s finances continued to deteriorate and in October 2003, it sought financing from International Bank of Commerce. IBC declined to make a loan to Schlotzsky’s, but agreed to loan the money to the Wooleys for them to loan to the company. The board of directors was given just three days notice of the meeting to approve the loan, but were provided with copies of the proposed loan documents along with emails from the company’s assistant general counsel.

In mid-2004, the Wooleys were removed as officers and directors and the company for chapter 11 shortly thereafter. The unsecured creditors committee brought a complaint for equitable subordination against the Wooleys. The bankruptcy court found that John and Jeffrey Wooley, as fiduciaries, engaged in inequitable conduct in relation to the November transaction and that their conduct conferred an unfair advantage upon them. Specifically, the court found that the Wooleys breached their fiduciary duties by: (i) presenting the loan proposal to the board as a fait accompli; (ii) by securing the loan with the “crown jewel” of the Debtor’s assets; and (iii) by securing their contingent liability as guarantors. As a result, the bankruptcy court subordinated the secured claims to the level of the unsecured creditors.

Fifth Circuit Ruling

The Fifth Circuit reversed and rendered. The Fifth Circuit characterized equitable subordination as an “extraordinary remedy” and recited the following test from In re Mobile Steel Corp., 563 F.2d 692 (5th Cir. 1977): “(1) the claimant must have engaged in inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code.” The Court also noted an additional requirement that “a claim should be subordinated only to the extent necessary to offset the harm which the debtor or its creditors have suffered as a result of the inequitable conduct.”

Applying this test to the April 2003 transaction, the appellate court found that the bankruptcy court had not made any findings of inequitable conduct or unfair advantage. As a result, it was necessary to reverse the subordination of this debt.

When examining the November 2003 transaction, the Fifth Circuit assumed without deciding that the record supported the findings of inequitable conduct and unfair advantage. The court went on to state, “However, the bankruptcy court made no finding of harm, and the record does not support a finding that either the debtor or the unsecured creditors were harmed by the November transaction.”

The Plan Administrator argued that the securing of the loan harmed the Debtor by diminishing the pool of assets available to unsecured creditors. On a certain level, the Plan Administrator was correct. Creditors would have been better off if the Wooleys had made unsecured loans to the company. However, the Fifth Circuit did not penalize the Wooleys for protecting their own interest. Instead, the court noted that the bankruptcy court had expressly found that the debtor needed the money and that the money had been used to pay unsecured claims. The Court stated:

“Because the loan proceeds were used to pay current unsecured creditors, unsecured creditors as a class, were not harmed when the Wooleys obtained security for for the November loan. The general unsecured creditors who were paid from the proceeds of the November loan may have benefitted to the detriment of another group of unsecured creditors, but this does not mean that unsecured creditors were harmed when the Wooleys obtained security for their loan.”

The Fifth Circuit also rejected the argument that the Wooleys harmed the company by loaning it additional funds which allowed it to continue operating until its condition worsened. Although the Appellee denied that it was relying upon deepening insolvency, the court found that this was exactly what was being alleged and rejected the theory. The Court stated that, “Deepening insolvency has been defined as prolonging an insolvent corporation’s life through bad debt, causing the dissipation of corporate assets.” The Court went on to state that:

“A deepening insolvency theory of damages has been criticized and rejected by many courts. We agree with the Third Circuit Court of Appeals, which recently concluded that deepening insolvency is not a valid theory of damages. The court recognized that deepening insolvency as a measure of harm depends on how the company uses the proceeds of the loan in question and ‘looks at the issue through hindsight bias.’”

As a result, the Fifth Circuit reversed and rendered.

What About Herby’s Foods?

S.I Restructuring has some factual similarities to Matter of Herby’s Foods, 2 F.3d 128 (5th Cir. 1993), an earlier decision which upheld equitable subordination. How then to reconcile the two cases?

In Herby’s Foods, the parent company purchased the debtor less than two years before it failed. Part of the consideration was payment of a debt to another entity. In return for this payment, the parent company took a lien against the debtor’s assets. Another related entity extended a secured line of credit to the company. Another insider made unsecured advances to the company. The secured claims were not perfected until shortly before bankruptcy. During the time between the acquisition and the bankruptcy filing, unsecured claims grew from about $900,000 to $4,600,000. The unsecured creditors’ committee sought to avoid the liens as preferential, to recharacterize the loans as equity and to subordinate the insider debts to the level of equity. The bankruptcy court granted all of the relief requested. On appeal, the Fifth Circuit affirmed, finding that the requisites for equitable subordination had been established, but did not reach the issue of recharacterization.

The Fifth Circuit found that a combination of undercapitalization, failure to disclose the existence of unfiled liens and advancing funds as loans rather than capital constituted inequitable conduct. The Fifth Circuit found that unsecured creditors were harmed by the fact that the amount of unsecured debt owed to third parties increased dramatically.

“The bankruptcy court found that the Insiders’ conduct harmed Herby’s outside creditors by significantly increasing their trade credit exposure and by reducing their ultimate dividend in the liquidation. Most importantly, the court found that the Insiders had secured an unfair advantage by structuring their cash contributions to Herby’s as loans, rather than as equity capital. If the Insiders were allowed to retain their ranking as unsecured creditors, they would have gained an advantage in the priority scheme by encouraging outside creditors to increase their credit to Herby’s. Their efforts were successful; those trade creditors substantially increased their credit to Herby’s during the period in question.”

Herby’s at 134.

The Court in Herby’s accepted the “deepening insolvency” model of damages which was expressly rejected in S.I. Restructuring. However, they did not call it deepening insolvency, a term which was not in vogue in 1993. Instead, the court analyzed the case as one involving deception and trickery. The bad Insiders (referred to with a capital I in the opinion) tricked the trade creditors into advancing more credit by advancing debt rather than infusing equity, by failing to timely record their liens and by failing to adequately record the loans on the company’s books, thus giving the appearance that the company was adequately capitalized. This caused the unsecured creditors to extend trade credit. The court did not cite any evidence that creditors had relied on the company’s books. It simply found that an increase in trade debt was enough to prove harm. However, the court in S.I. Restructuring expressly rejected an argument that an increase in trade debt standing alone was evidence of harm.

Scott Ritcheson (see Acknowledgement below) suggests that Herby’s Foods is best understood as a recharacterization case which was decided based upon equitable subordination. Section 510(b) allows the court to recharacterize a debt as equity without regard to inequitable conduct, while Section 510(c) is based upon principles of equitable subordination which courts have interpreted to require proof of inequitable conduct. In the Herby’s case, the evidence of inadequate capitalization, failure to record loans on the books and failure to treat the insider loans as debts would be evidence to support a finding of recharacterization (which was one of the grounds found by the bankruptcy court but not addressed by the court of appeals). On the other hand, in S.I. Restructuring, the company was publicly traded and the transactions were approved by an audit committee of outside directors and the full board and were reported as loans to the SEC. This greater level of formality may be the factor which reconciles the two apparently contradictory opinions.

Acknowledgement

My analysis in this article was strongly influence by an excellent paper presented by Scott Ritcheson to the Annual Meeting of the Bankruptcy Section of the State Bar of Texas on June 26, 2008 entitled “Issues and Trends in Equitable Subordination.” Anyone litigating an equitable subordination issue would benefit significantly from reading Scott’s scholarly, comprehensive article. Scott can be reached at scottr@rllawfirm.net.

The Florida Bankruptcy Law Blog

Defending Mortgage Foreclosure

Posted: July 1st, 2008, 6:05pm PDT by Jonathan Alper

There are so many foreclosures and so few attorneys who know how to defend on behalf of the homeowner. I have referred many clients facing foreclosure to an Orlando real estate attorney named David Cohen. David has had good success delaying foreclosures and thereby giving his clients extra time to remain in their homes without paying any mortgages or taxes. David recently gave me an overview of his tactics and results fighting foreclosure suits on behalf of many people who were either unable to make payments or who decided to walk away from their homes with negative equity.
David Cohen explained that simply by filing an answer to a mortgage foreclosure complaint will give the homeowner at least five or six months in the home. Most homeowners do not answer foreclosure complaints, and foreclosure judgments are entered by default. Default foreclosure judgments are easy for the mortgage lender to process quickly. Filing an answer requires the lender to turn the file over to legal staff for more involved litigation. Creative defenses make the foreclosure more difficult. In some cases, a defense attorney can find technical defects in the foreclosure suit or the original loan documents which can substantially dely foreclosure and even defeat the lender’s lawsuit. David Cohen says that in most cases he is able to delay foreclosure suits more than six months and often as long a nine months after the complaint is filed and the homeowner is served with a summons.

Legal fees associated with foreclosure defense usually range between $1,500 and $3,500 over a four to nine month period. Complicated cases which delay foreclosure even longer may costs more for legal help. For most homeowners, the legal fees of foreclosure defense will be substantially less than their monthly housing expense so that it usually is a good business decision to hire an attorney to defend and delay foreclosure actions.

Bankruptcy Law Network - Real Lawyers, Real Solutions

Are Social Security And Other Exempt Funds Deposited In Bank Accounts Protected From Creditors? New York Makes Changes

Posted: July 1st, 2008, 5:50pm PDT by Peter Orville, Attorney at Law

Each state has their own laws about what funds deposited in bank accounts are exempt and protected from creditor attachment. In New York, while Social Security and other exempt funds are protected, if a person’s bank account contains “co-mingled funds”, the creditor can attach the money deposited in the account. This is a [...]
There Is Something Happening And You Don’t Know What It Is, Do You, Mr. Jones?

Posted: July 1st, 2008, 3:49pm PDT by Peter Orville, Attorney at Law

The most experienced and knowledgeable bankruptcy attorneys try to stay current with the latest bankruptcy court decisions and with the local and national trends that are most affecting their current and potential future clients. To do that, we refer to several sources. One, of course, is keeping current with the postings on bankruptcylawnetwork.com, [...]

Credit Slips

Credit Check

Posted: July 1st, 2008, 2:11pm PDT by Elizabeth Warren

Late yesterday I recorded an interview with Terry Gross on Fresh Air. She is one of my favorite interviewers (smart, and what a voice!). She had called me to ask about credit reporting agencies. What made the interview stand out was her introduction. She told a story about her husband's trip through Credit Reporting Hell.
Her husband's experience is no real surprise. After all, a 2004 PIRG study found that 87% of credit reports had errors, and one in four had an error big enough to change a credit score. Consumer Federation of America reported that 31% of credit reports had an error that would change a credit score by 50 points or more. If a serious error hasn't happened to you, then it has happened to someone you know. Because Terry Gross's husband could hire a lawyer, the problem was eventually fixed, but not until he had spent a lot of time and a lot of worry.

Starting the interview with a personal story about the impact of an error raised an important question: Why should consumers be saddled with the responsibility to monitor the errors of credit reporting agencies? It is MY information about ME. Someone else is collecting it, creating errors, and passing those errors along to other people. Those errors can cost me a job, denial of homeowners' insurance, a higher premium on my car loan, a higher price to buy a car even for cash, and, of course, a higher price for a mortgage, a credit card, a car loan, or any other loan. And the system says, in effect, it is my problem to monitor the information. It isn't enough that I don't impair my own credit. It is also my problem to find errors that the company has put in, to document the correct those errors, to fight with the company if they won't believe me, to check to make sure the errors were removed and to make sure those errors never reappear. I can even pay for insurance to help me if a credit reporting company makes a mistake.

Since I already have a full-time job and a life outside that job, I resent this capture of my time. I also believe that a law that puts the burden on consumers to correct errors and puts no penalty on the credit reporting companies for passing along bad information is designed to encourage a high error rate. There are simply not enough incentives for the credit issuers to spend their money to reduce errors in the credit reporting system or to make correction cheap and quick.

In some states, it is possible to lock a credit report to stop all activity. That helps prevent future errors, but it still puts the burden on the customer.

A lot of people end up paying for bad credit reports. Many never know it because they don't know that the price quoted for insurance or a car was based on their credit score. They will just be poorer than they would have been if the credit reporting companies had more incentive to get it right.

BankruptcyProf Blog

National Association of Chapter 13 Trustees "NACTT" Annual Meeting in San Francisco July 9 - 12, 2008

Posted: July 1st, 2008, 12:21pm PDT by Bankruptcy Prof

The National Association of Chapter 13 Trustees is holding its Annual Meeting next week in San Francisco. The brochure is attached here.

Credit Slips

Will BoA Claim Preemption?

Posted: July 1st, 2008, 9:40am PDT by Bob Lawless

Today (July 1) is supposed to be the closing date for the Bank of America/Countrywide merger. In recent weeks, the states of Illinois, New York, and Florida have sued Countrywide for various wrongs committed to the citizens of their states. People are lining up to sue Countrywide. As the deal has been going through the approval processes, numerous commentators have wondered about why Bank of America is willing to expose itself to such liability.

Once the merger goes through, I wonder whether Bank of America is going to claim these lawsuits are preempted by the regulations of the Office of the Comptroller of the Currency (OCC). This obscure federal agency has regulatory authority over national banks and has issued regulations exempting national banks like Bank of America from state laws and regulations governing lending. To legal types, this concept is known as "preemption," and the OCC regulations were upheld by the United States Supreme Court as we discussed here and here.
Countrywide did some but not all of its lending through a bank, called Countrywide Bank, that was a national bank and then converted to a federal savings bank (FSB). FSBs are regulated by the Office of Thrift Supervision, which does not have broad preemptive regulations like the OCC. Thus, the protection that the preemption doctrine would provide Countrywide is full of holes. BoA would have a stronger hand with the OCC, a regulatory agency that has a lender-friendly track record.

Yes, the lawsuits all allege abusive lending practices by Countrywide that predate Bank of America's acquisition, but BoA might point out that the purpose of the OCC preemptive regulation is to prevent national banks from being subject to diverse state regulators. It does not matter, BoA might say, when the violations occurred. Under this reasoning, the OCC is the only regulator that can touch the BoA empire which would now include Countrywide. Any state lawsuits would have to be dismissed. (For the bankruptcy mavens out there who might be wondering about the power of the U.S. Trustee versus the OCC, think about which agency might win a fight over the primary jurisdiction doctrine.)

Is this scenario farfetched? The timing of the state lawsuits, just before the deal closed, suggests to me that perhaps the state attorneys general were similarly concerned about a preemption claim.
Debt Stress and Other Credit Card Gems

Posted: July 1st, 2008, 9:11am PDT by Bob Lawless

On June 9, the Associated Press and AOL released a poll describing an increase in self-reported stress by Americans struggling with debt. According to a Debt Stress Index that compiled the poll results, 43% of respondents scored in the moderate to high range as compared to 32% from a comparable survey at the end of 2004. Blog posts and news stories summarizing the results can be found in many places including here (WebMD), here (AOL), and here (MSNBC, a good summary).

The link between high consumer debt and physical problems has been well known, albeit not as well publicized as it should be. For example, this most recent poll finds 44% of persons reporting high debt stress also reported migraines or other headaches as compared to 15% of the other respondents. Also, persons reporting high debt stress reported heart attacks at double the rate of persons reporting low debt stress.
Beyond these very important health issues, Credit Slips readers will want to take a look at the answers to the general financial questions in the survey. These questions focus principally on credit card usage and payment patterns. Despite a reported increase in the levels of debt-induced stress since 2004, there are smaller differences in how persons are reporting they are using their credit cards. In 2008, 63% of respondents reporting using a credit card in the past month as compared to 57% in 2004. (That figure seems very low--can it possibly be right?) As far as carrying a monthly balance, 37% report doing so as compared to 34% in 2004. The biggest change seems to be in the amount of persons carrying high amounts credit card debt with 32% now reporting carrying a balance of $3,000 or more as compared to 25% in 2004. Even accounting for inflation, that represents a real increase.

How to reconcile the higher levels of debt-induced stress with only small changes in payment patterns? I think there probably are two factors. First, we would expect the persons with high credit card balances to be most likely to report increased levels of stress, and we do see a substantial increase in persons reporting carrying high card balances. Second, the AP/AOL survey ask about debt-induced stress generally but mainly focused on credit-card debt in its questions about payment patterns and debt levels. The mortgage foreclosure crisis undoubtedly has contributed substantially to the increase in debt stress levels.

Like Elizabeth Warren's recent post on how foreclosure is affecting families, the AP/AOL survey is another reminder to the credit regulatory community that consumer credit issues go beyond our nation's economic health and affect many parts of our lives.

Miami Florida Bankruptcy Law

Countrywide Drama Also Opens in Florida

Posted: July 1st, 2008, 9:08am PDT by Jordan E. Bublick, Bankruptcy Attorney

The Countrywide drama also opened on June 30, 2008 in Florida.Jordan E. Bublick, Miami, Florida, Attorney at Law, Practice Limited to Bankruptcy Law, Member of the Florida Bar since 1983

BankruptcyProf Blog

Tennessee Bans Credit Card Solicitation on Campus

Posted: July 1st, 2008, 8:59am PDT by Bankruptcy Prof

Thanks to Prof. Katie Porter post on Credit Slips for this information. Tennessee has passed a law banning credit card solicitation on college campuses or using school facilities or student organization to solicit for credit cards or from offering gifts...

Bankruptcy Law Network - Real Lawyers, Real Solutions

How to Pay for Bankruptcy

Posted: July 1st, 2008, 8:24am PDT by Däna Wilkinson, Attorney at Law

It comes up at almost every initial meeting with a prospective client–if I’m bankrupt, how do I pay for bankruptcy? Many folks who worry about paying for bankruptcy, and think they’ll never be able to afford it miss the obvious–if you are going to resolve your debts by filing bankruptcy, you may be able to stop [...]

SC Bankruptcy Blog

Did A Serial Killer “Conceal an Asset” By Not Listing Rights to His “Story” On His Chapter 7 Schedules?

Posted: July 1st, 2008, 7:20am PDT by Sheryl

The Louisiana (Baton Rouge) Chapter 7 Trustee apparently thinks so.

Here’s the backstory on Derrick Todd Lee, aka “The Baton Rouge Serial Killer” (I guess the acronymic and descriptive monikers well was running dry?).

On one of the bankruptcy law listservs I subscribe, one of our Louisiana colleagues mentioned that the convicted killer’s chapter 7 trustee this week filed what we call an “AP” — an “adversarial proceeding”– to revoke Lee’s discharge, and another AP claiming rights to the “story” of how the killer committed the crimes.

I think this is overreaching. We may morally and philosophically abhor allowing a convicted murderer to profit from his story — and frankly, I do (that’s the reasoning behind so-called “Son of Sam” laws that prohibit such activities and/or turn the profits over to victim restitution funds or other interests). But no story’s been written — so any funds from the sale of such a story have to be postpetition. If that’s the case, then they’re not part of the bankruptcy estate. And if that’s true, then the trustee has no right to those funds.

All that said, I haven’t read the complaints yet — so this is based purely on secondhand information and my own idle musings on a Tuesday morning. Still, one can’t deny that it’s a fascinating issue and that doesn’t always happen in Bankruptcy Law-land!

Bankruptcy Law Network - Real Lawyers, Real Solutions

Three Things To Do When Filing Bankruptcy

Posted: June 30th, 2008, 10:46pm PDT by Andy Miofsky, Illinois Bankruptcy Attorney

Regular readers know my Kansas colleague Jill Michaux penned the 33 Bankruptcy Don’ts, things not to do before filing bankruptcy, and my friend from Oregon, Karen Oakes, followed up with her Paralegal’s Bankruptcy Top 10 list of things not to do to the office help. Well, here are a couple of important things the [...]
Is Administrative Discharge of Student Loans Available in Bankruptcy?

Posted: June 30th, 2008, 9:38pm PDT by Kent Anderson, Oregon Bankruptcy Attorney

Administrative discharge is not available according to the United States Bankruptcy Court for the Northern District of Ohio in the case of Donna Gregory v. U.S. Department of Education (April 1, 2008), which ruled that the requirement of undue hardship must always apply to the discharge of student loans in bankruptcy. The court then used [...]

A Texas Bankruptcy Lawyer's Blog

On Judicial Selection

Posted: June 30th, 2008, 9:03pm PDT

On my non-bankruptcy blog, I have written an article about the different approaches that the two presidential candidates take toward appointing judicial nominees. If you are interested in reading more, you can go to:

http://satherthoughts.blogspot.com/2008/06/presidential-campaign-reveals-different.html

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