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I received an email from a person who filed Chapter 13 bankruptcy and who expressed dissatisfaction with their attorney. The caller said that his company was downsizing, or going out of business, and he knew now that he would not be able to sustain her Chapter 13 plan payments. The person is current on Chapter 13 plan payments yet is sure that he will be unable to make future payments. The debtor wants to convert now to a Chapter 7 liquidation bankruptcy; by stopping the Chapter 13 payments he could conserve money for future expenses. He complained that when he called his lawyer’s office to ask about conversion he had to discuss this issue with the paralegal. He felt his questions should have been answered by the attorney and not the paralegal. The called said that, "I ...desire to ask questions of an attorney who actually seems to be interested in what is best for ...our future and my financial status."
I explained to this caller that he could not convert to a Chapter 7 because he expected future job problems. If and when his income actually dropped significantly he then could convert to Chapter 7 if his future income and expenses passed the means test. Maybe a month or two prior to his job termination he might be able to skip his Chapter 13 payment which would cause the Trustee to file a motion for dismissal. In Chapter 7 this debtor would have to account for the non-exempt cash not paid to the Chapter 13 Trustee.
The debtor told me the name of his attorney. I know the attorney to be a competent and experienced bankruptcy attorney. It is not unusual for this type of question to be handled adequately by a bankruptcy attorney’s paralegal. The issue is not a difficult legal question that requires the attorney’s research or judgment. An experienced bankruptcy paralegal knows the answer to this debtor’s question and should be able to explain the answer to their client. Just because this debtor’s attorney chose not to, or was unable to, answer the question personally does not mean the attorney is not interested in the case or the client.
If want your bankruptcy attorney to personally respond to your every question you need to make your expectations known when you hire your attorney. Understand that those attorneys who are more personally involved in their clients’ bankruptcy cases tend to charge higher fees because they commit more time to each case. If you need unrestricted access to your bankruptcy attorney make sure you find an attorney whose practice meets your expectations and be prepared to pay for the service.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
Another bankruptcy attorney emailed me asking me for my opinion about a case where an Orlando bankruptcy judged permitted a Chapter 7 debtor to "strip" off a second mortgage on their homestead. The law as I understood it was (and is) that only Chapter 13 debtors can use bankruptcy to strip a second mortgage lien off their homestead. The second mortgage is removed when the debtor successfully completes the Chapter 13 assuming that the house value is equal to or less than the first mortgage balance.
I looked up the case the attorney referred to. Sure enough, it was a Chapter 7 bankruptcy, and the judge issued an order stripping a second mortgage from the residence. The judge did not write an opinion explaining the order. There was no objection filed by the second mortgage lender.
I don’t accept this order as precedent. I think the judge’s office made a mistake. The law is clear on this issue. A second mortgage can be stripped only in a Chapter 13 case. That there was not lender objection and no written opinion suggests that this order was entered in error.
If a debtor’s attorney submits an order with a 20 day negative notice (any party has 20 days to object or the order will be granted) , and no party objects, the judge’s office will draft an order approving the motion and present it to the judge for signature. I think in this instance the judge’s office saw an order to strip a second mortgage with a routine negative notice, did not catch the fact that it was a Chapter 7 proceeding, and drafted an order approving the motion for the judge. If the judge understood that this was a Chapter 7 case, the judge would have written an opinion explaining why the mortgage could be stripped from the homestead.
This case may be a windfall for this debtor. Debtors may get in trouble with the court if they try to "slip by" a strip motion in a Chapter 7 bankruptcy.
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida
A lawyer called me with a question about a car lease in a Chapter 13 bankruptcy. His debtor filed Chapter 13 with a car lease that terminates in three years. His client’s bankruptcy plan is a five-year plan. Chapter 13 debtors cannot incur new debt (such as a new car loan or lease) without permission. The attorney and debtor are concerned that three years into the Chapter 13, at the end of the current car lease, the debtor be without a car. The attorney asked me if I knew of a way for a Chapter 13 plan to extend the term of an existing car lease.
The general rule is that Chapter 13 debtors can assume or reject leases and other contracts. This debtor will assume the car lease to keep the car for the balance of the lease term. Another general Chapter 13 rule is that debtors cannot modify the terms and conditions of existing contracts such as mortgages and leases. I don’t think this Chapter 13 debtor can extend the term of his car lease.
However, there is an easy solution. Three years into the bankruptcy plan the debtor can request permission from the Chapter 13 trustee to purchase a car when the car lease expires. The key will be to keep the debtor’s monthly payments for the next car at or below the amount of the debtor’s payments under the current lease. If the debtor does not increase his monthly car expenses the trustee will approve the purchase because the new car payment will not increase total monthly expenses and will not decrease the amount of money paid monthly to the debtor’s unsecured creditors under the bankruptcy plan. New car debt equal to or less than the current car payment does not negatively impact the debtor nor his creditors.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
I filed Chapter 7 bankruptcy for a relatively wealthy husband and wife. The debtors passed the means test primarily because they had large mortgages on their residence and a few investment properties. Secured mortgage payments provide income offsets in means test calculations. The debtors lived in a nice house, drove nice cars, and the family enjoyed an annual income over $100,000. As expected, the U.S. Trustee filed a notice of a "b(3)" challenge which means that the U.S. Trustee may consider the Chapter 7 bankruptcy to be an abuse. Bankruptcy courts will dismiss a Chapter 7 bankruptcy as an abuse where the debtor is using bankruptcy to sustain a "lavish" lifestyle at the expense of unsecured creditors. Simply stated, your bankruptcy could be in trouble when your house and your car are nicer than the judge’s and trustee’s houses and cars. In this instance, my clients got lucky.
My clients’ had two mortgages on their principal residence including a small first mortgage and a large second mortgage. The U.S. Trustee took my clients’ deposition. During the deposition he asked the clients why they incurred the large second mortgage. The clients testified that they used the proceeds of the large second mortgage to make down payments on their investment properties during the real estate bubble.
The U.S. Trustee concluded from the deposition testimony that the debtors’ debts were primarily non-consumer debts because the large second mortgage on the residence, as well as the mortgages on the debtor’s investment properties, were used for investment purposes. The general rule is that mortgages on your primary residence are consumer debts, not business debts. When a debtor uses a homestead’s second mortgage proceeds for business as opposed to consumer purposes, such as down payment on investment properties, the second mortgage is deemed to be for investment rather than consumer purposes.
A debtor whose debts (secured and unsecured) are primarily non-consumer debts is exempt from the means test in determining eligibility to file Chapter 7 bankruptcy. The U.S. Trustee explained that the non-consumer debt test also applies to the so-called "b(3)" abuse issue. Even when the U.S. Trustee believes a Chapter 7 debtor is living an extravagant lifestyle after filing Chapter 7 bankruptcy the Trustee cannot challenge the filing as an abuse when the debtor’s debts are primarily non-consumer debts.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
Debtors are discovering that they can strip off their second mortgage lien on their primary residence by filing a Chapter 13 where the value of the house is equal or less than the balance of their first mortgage. In such cases, there is no equity securing any part of the second mortgage. Debtors with upside down second mortgages often also have substantial unsecured credit card debt. They could not afford even a first mortgage unless they get relief from their credit card payments.
Some of my own clients have asked me whether they can combine a Chapter 7 bankruptcy and a Chapter 13 bankruptcy to both discharge unsecured debts and then strip their second mortgage from their primary home. The plan is to file a Chapter 7 and discharge all credit card debt. After the Chapter 7 discharge is entered, the debtor would immediately file for Chapter 13 bankruptcy. There would be not automatic stay applied in the Chapter 13 case, but the debtor would be current on his mortgage payments would not benefit from an automatic stay’s protection from foreclosure. The debtor would file a motion to strip the second mortgage in the Chapter 13 case. The debtor would end up with no unsecured debts (all discharged in the Chapter 7) and no second mortgage on his residence (stripped in Chapter 13). Can this plan work?
I don’t think this plan will work, and here’s why. The judges in the Orlando Division have written a standard order granting a motion to strip a second mortgage in Chapter 13 case. The standard order states that the debtor’s second mortgage will be released from the property when the debtor completes the Chapter 13 plan and the court enters a Chapter 13 discharge of any debts not paid in the plan. However, under the new bankruptcy law a debtor is ineligible for a discharge under Chapter 13 if he received a prior discharge in a Chapter 7 case file four years before the current Chapter 13. Therefore, the Chapter 13 filed immediately after the Chapter 7 could not earn a discharge. Since the standard mortgage strip order requires a Chapter 13 discharge, the Chapter 13 filed soon after the Chapter 7 case could not strip the debtor’s second mortgage.
Sure, the debtor could wait four years after the Chapter 7 case to try the Chapter 13 mortgage strip, but by then the debtor either will have defaulted on the unaffordable second mortgage or a market recovery will have increased the property value to the point where a mortgage strip is not allowed.
One of my bankruptcy clients had approximately $700 in a checking account just prior to filing Chapter 7 bankruptcy. Before we filed the bankruptcy petition one of the judgment creditors listed on A bankruptcy called my office to complain that one of the debtor’s judgment creditors garnished the checking account. The debtor called the creditor and asked them to release the writ of garnishment. They refused. Then, the debtor called our office complaining that the creditor was violating the automatic stay by refusing to release the garnishment on the checking account. Is the creditor violating the bankruptcy stay by maintaining a garnishment after the account owner files bankruptcy? I think not.
The writ of garnishment creates a judicial lien on the debtors bank account when the garnishment is served on the bank. Courts have found that the debtor has no affirmative duty to dissolve the bank account garnishment. Further actions in state court to get the money after the bankruptcy filing would probably constitute a stay violation. If the debtor claims an exemption of the bank account funds because, for example, the money represents wages of a head of household debtor, the judgment creditor would have to release the money to the debtor unless the exemption is timely and successfully challenged in bankruptcy court. If the money is non-exempt, then the money becomes part of the bankruptcy estate to be distributed equally among all unsecured creditors. If the judgment creditor had already received the money prior to the bankruptcy by virtue of the garnishment the bankruptcy trustee could claim the money back from the judgment creditor because the garnishment would have produced an unallowable preference. A bankruptcy trustee can void the judicial lien of the garnishment if necessary to recover the preferential payment to this creditor.
The judgment creditor’s duty would be different if this were a wage garnishment. Wage garnishments apply to future wages which are owed to the debtor for his employment after the debtor filed bankruptcy. The debtor’s future wages are not part of the bankruptcy estate and are not available to pre-filing creditors. Courts have held that judgment creditor have an affirmative duty to dissolve a wage garnishment against a bankruptcy as soon as the bankruptcy is filed.
posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida
Most people who file bankruptcy are good people who do not abuse the bankruptcy system. In fact, almost all of my bankruptcy clients feel bad about wiping out debts they believe they are morally obligated to pay. Then, once in a while, I encounter the sleazy debtor who tries to use Chapter 7 bankruptcy to steal as much money he can from his creditors.
I received a phone call last week from a prospective bankruptcy debtor who asked me about the following pre-bankruptcy planning scenario. One of his good friends was planning do a home repair with a cost of about $25,000. The friend agreed to pay this caller $25,000 in cash which the caller would then hide under the mattress. The caller would pay for his friend’s home repair on his personal credit cards. He would make minimum payments for a few months. Then he would file Chapter 7 bankruptcy and discharge the debt for his friend’s $25,000 repair bill as well as all his previous credit card debt. He wasn’t asking me to take him as a client, but he wanted to consult with me to see if his plan would work.
This is bank robbery under the disguise of bankruptcy. I suspect these types of scams usually slip through the bankruptcy system. This guy will probably get away with it because he’ll not disclose the arrangement to his bankruptcy attorney. It bothers me because, as I said above, the overwhelming majority of bankruptcy debtors are honest people who lost income and are without adequate savings, or are people who bought things they could not afford in order to live above their means. In either case, most bankruptcy debtors do not intentionally borrow money with no intent of trying to pay back the money.
The census bureau’s median income figures are changing effective for bankruptcy petitions filed after November 1, 2009. Median income is used to determine if prospective bankruptcy debtors pass the means test. Florida’s median income has been increasing since the new bankruptcy law went into effect in October, 2005. People whose family income is below the median income for their family size can file for Chapter 7 bankruptcy automatically without having to pass the "means test." As the median income increased it became easier for people to qualify for Chapter 7.
The latest revised median income levels are lower probably because more people have lost jobs or have reduced income during the recession. For example the median income for a single person household in Florida is reduced from $42, 468 to $41,226. For a family of four, the median family income is lowered from $71,124 to $69,009. The recession is making it somewhat more difficult to file bankruptcy. For those debtors above median income, the lower census figures make it a little harder to pass the means test.
posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida
I would like to ask you, the blog readers, to help a reporter who is investigating practices in the mortgage modification programs. A national business publication is investigating overly aggressive second mortgage lenders. The reporter, Mr. Robert Berner (312-451-7149), is looking at situations where a second mortgage lender sues a homeowner after the homeowner has already entered into a modification agreement with the first mortgage. The second mortgage gets a judgment against the homeowner and then garnishes the owner's bank accounts or salary which causes the homeowner to default under the first mortgage modification agreement. These second mortgage lenders are sabotaging the modification programs set up and encouraged by the government to help homeowners. In some cases where the same bank holds the first and second mortgage the bank modifies the first mortgage and then sells the second mortgage to a third party investor which then agressively collects the second or even sues the homeowner for delinquent second mortgage payments. These mortgage lenders appear cooperative in modifying their first mortgages but then undermine the same modification by collecting or selling the second mortgage.
A related mortgage issue I have heard about from my own clients occurs when a homeowner has checking accounts at the same bank that holds his home mortgage. Some clients have reported that when they missed a mortgage payment the bank invaded their checking account and pulled the mortgage payment out of their checking account without notice. I have previously posted my general advice which is to move your accounts out of the bank that holds your home mortgage if you miss a mortgage payment.
Please get involved. If you have had a mortgage modification plan ruined by a second mortgage holder who sued you during the modification process, or if you have had your mortgage lender grab mortgage payments from your checking account at the same back before a foreclosure or other lawsuit was even filed, call Mr. Berner (312-451-7149) and discuss your experiences.