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Craig D. Robins, Esq. New York Bankruptcy Attorney, Longisland bankruptcy attorney

“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”

Craig D. Robins, Esq.

Archive for December, 2012

Beware of IRS Tax Whammy With Short Sales and Mortgage Modifications in 2013

Posted on Wednesday (December 26, 2012) at 6:00 pm to Mortgages & Sub-Prime Mortgage Meltdown

Mortgage Forgiveness Debt Relief Act can fall off the fiscal cliff and create tax consequences for homeowners seeking have a short saleWritten by Craig D. Robins, Esq.
 
When a mortgage company agrees to accepts a lesser amount than what is due on the mortgage, then the amount of savings can be taxed as if it were ordinary income.  This is the concept of “imputed income.”
 
If a mortgagee forgives some or all of the balance owed on a mortgage, then the forgiven mortgage debt is taxable.
 
Thus, if a lender agrees to accept a payout of $100,000 on a mortgage, even though $150,000 may be owed, that $50,000 forgiven amount could be taxable as if it were regular income that the homeowner earned.
 
However, in 2007, Congress passed the Mortgage Forgiveness Debt Relief Act, which eliminated imputed income under most circumstances when mortgagees accepted a lesser amount.  That was great news for homeowners during these past five years, enabling many hundreds of thousands of them across the country to do short sales or mortgage modifications in which the lender accepted a reduced pay-off as full satisfaction — and the homeowner had no income tax consequences.
 
Unfortunately, this tax break comes to an end the last day of this month, and absent any extension by Congress, consumers will be on the hook for paying income taxes on any mortgage principal reduction, beginning with mortgage reductions that occur on or after January 1, 2013.
 
Of course, if Congress gets their act together by preventing a fall off the fiscal cliff, this tax benefit may be extended another year, into 2014.
 
Incidentally, when a consumer just walks away from real estate by filing for bankruptcy, there are no tax consequences, and the consumer can discharge the full mortgage obligation without worrying about imputed income at all.
 
But if Congress doesn’t act soon, mortgagees will be obligated to file IRS 1099-C forms in 2013, showing the amount of canceled debt.
 
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Is Another Wave of Bankruptcy Reform Ahead for 2013? If So, Elizabeth Warren May Spearhead It

Posted on Wednesday (December 12, 2012) at 6:00 pm to Bankruptcy and Society
Bankruptcy Legislation
Suffolk Lawyer

Elizabeth Warren may lead pro-debtor bankruptcy reform in 2013Written by Craig D. Robins, generic Esq.

 
 
The Last Wave of Bankruptcy Reform in 2005 Was Very Pro-Creditor
 
 
For eight years leading up to 2005, cialis the banking and credit card industries lobbied Congress incessantly, urging them to believe that American consumers who sought bankruptcy relief were essentially deadbeats.
 
That year, Congress bought into this perception and promulgated a great number of strict changes to the Bankruptcy Code which made it much harder for the typical consumer to discharge debt obligations in bankruptcy.  Consequently, Congress enacted BAPCPA — The Bankruptcy Abuse Prevention and Consumer Protection Act.
 
This bankruptcy reform was designed to pull every last dollar out of hard-working but suffering middle class families who appeared to have an extra dollar or two to spare — at least on paper, according to a series of controversial calculations called the bankruptcy Means Test — a new eligibility requirement for those seeking Chapter 7 relief.
 
This law was a major victory for the banks, and unfortunately, created an inequitable situation for many consumers.
 
A respected Harvard University bankruptcy law professor at the time, who I deemed a hero to the typical middle class families I usually represent in my Long Island bankruptcy practice, was a very outspoken critic of these proposed laws.
 
That was Elizabeth Warren, who was this country’s foremost authority on the sociology of Americans who file bankruptcy.
 
Senator-elect Elizabeth Warren May be Our Best Hope for Consumer-Friendly Bankruptcy Reform
 
Ms. Warren became known for her critical opinions of the practices of the banking and credit card industries, and I have written about her previously in this column.  In 2000 she co-authored a book, “The Fragile Middle Class,” and “The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke,” in 2003.
 
In the latter book she stated, “This year, more people will end up bankrupt than will suffer a heart attack. More adults will file for bankruptcy than will be diagnosed with cancer. More people will file for bankruptcy than will graduate from college. And, in an era when traditionalists decry the demise of the institution of marriage, Americans will file more petitions for bankruptcy than for divorce.”
 
Some commentators have said Ms. Warren has become the country’s most respected and resonant voice on consumer issues since Ralph Nadar’s zealous quest to protect consumers in the 1970s.
 
Now it looks like the Senate Banking Committee is about to get a serious dose of bankruptcy expertise from the protector of the middle class.
 
Ms. Warren defeated her Republican rival last month in one of the most expensive and most watched Senate campaigns of the year – for the Massachusetts seat previously held by the late Ted Kennedy.
 
It is expected that Ms. Warren will land a seat on the high-profile Senate Banking Committee.
 
More importantly, as a staunch advocate of protecting the consumer, an ardent critic of the banking industry and an outspoken critic of BAPCPA, there is a high likelihood that Ms. Warren, now as a lawmaker, will take the initiative to introduce legislation to reform the problems and inequities created by the Bankruptcy Reform Act of 2005.
 
There Is No Doubt that Ms. Warren Will Bring Her Liberal, Pro-Consumer Views to the Senate
 
Ms. Warren created the U.S. Consumer Protection Bureau – a federal agency established in 2010, not only to prevent risky mortgage practices, but also to stop credit card companies from continuing to engage in unfair and predatory business practices.
 
A great many bankruptcy judges across the country, including several in our own district, have officially and unofficially expressed their frustration with many aspects of the new bankruptcy laws and sometimes their personal opinion that many parts of the law are a disaster. 
 
In addition to making it harder for the middle class to get bankruptcy relief, BAPCPA is flawed and poorly drafted.
 
This has resulted in many decisions which have caused judges to stray from a strict interpretation of its hastily-drafted words, which can result in an absurd result, and instead focus on a more common-sense analysis.
 
BAPCPA was drafted primarily by lobbyists, rather than bankruptcy professionals.  A significant problem continues to be a lack of consistency among courts in different jurisdictions for enforcing its provisions.
 
Ms. Warren has pledged to stand up for the little guy against the financial forces of Wall Street.  I predict that when Ms. Warren goes to Washington, the likelihood is that we will see her introduce some substantive pro-debtor legislation to amend the Bankruptcy Code, in which she will seek to reform some of the ill-conceived and poorly-drafted aspects of BAPCPA.
 
She will also likely address issues concerning student loan debt relief, mortgage debt relief, as well as the debt burden on consumers.
 
Ms. Warren’s election to the Senate is wonderful news for bankruptcy attorneys and middle-class Americans alike.
 
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the January  2013 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.      Call        (516) 496-0800  (516) 496-0800    (516) 496-0800  (516) 496-0800 . For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 
 
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Suspended Bankruptcy Attorney and Paralegal Punished

Posted on Tuesday (December 11, 2012) at 8:00 pm to Bankruptcy Practice
Chapter 7 Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

Brooklyn Bankruptcy Court punishes bankruptcy attorney and paralegal as a bankruptcy petition preparerWritten by Craig D. Robins, Esq.
 
In Recent Brooklyn Case, Attorney and His Paralegal Flaunted the Bankruptcy Petition Preparer Statute
 
Non-attorney bankruptcy petition preparers can get into a heap of trouble if they do not accurately follow certain Bankruptcy Code provisions designed to protect consumer debtors.
 
This was evident in a case just decided by Judge Carla E. Craig, the Chief Bankruptcy Judge of the Eastern District of New York, sitting in the Brooklyn Bankruptcy Court.
 
To make matters more interesting, the case also involves disgraced attorney, Peter J. Mollo, who was the subject of my column in May 2012:  Two Bankruptcy Attorneys Get Into Serious Trouble Over E.C.F. Filings .
 
Mollo, despite having been suspended from practicing law earlier this year, continued to represent clients and tried to get away with it by forging another attorney’s name on several bankruptcy petitions which he then filed.
 
Judge Craig sanctioned him in a decision dated March 22, 2012.  In re:  Clyde Flowers, (01-12-40298-cec, Bankr. E.D.N.Y.)
 
It seems that Mollo didn’t learn his lesson and immediately embarked upon a new scheme to circumvent his suspension by having his paralegal, Anna Pevzner, continue to meet with debtors and prepare petitions.
 
When the Office of the United States Trustee learned about this conduct in four separate Chapter 7 consumer cases, it quickly brought proceedings against both of them, seeking sanctions and disgorgement of fees.
 
After several evidentiary hearings, Judge Craig issued a 31-page decision on September 28, 2012, in which she severely sanctioned both of them and in doing so discussed the various statutory requirements that bankruptcy petition preparers must adhere to. In re Edith L. Moore, et. al., (12-41111-cec, Bankr. E.D.N.Y.).
 
  
What is a “Bankruptcy Petition Preparer?”
 
A bankruptcy petition preparer (BPP) is essentially a non-attorney who prepares bankruptcy petition legal forms.
 
Congress was so concerned about vulnerable debtors who had been victimized by non-attorney petition preparers who rendered bad legal advice and charged unreasonable fees that in 1994 it implemented Bankruptcy Code section 110 which is devoted to regulating their services.
 
That section defines a BPP as a person, other than an attorney or an employee of an attorney, who prepares a bankruptcy court document for a fee. 
 
Since BPPs are non-attorneys, they are not permitted to give legal advice and may only type documents and charge a reasonable fee for doing so.
 
That means that they cannot assist with determining what assets are exempt or what exemptions statutes to use, nor can they suggest what chapter to file.  They cannot offer advice as to whether a debt is dischargeable or whether a car loan should be reaffirmed.
 
In addition, BPPs may not collect, receive, or handle the court filing fees in connection with a bankruptcy case.  That means that BPPs cannot file petitions with the bankruptcy court.
 
BPPs may not us the word “legal” or any similar term in any advertising.  This is to prevent them from misleading the public into thinking that they are authorized to practice or render legal advice.
 
If a BPP prepares a petition, the BPP must sign it (there is a special area of the petition form devoted to this) and print his or her name, address and Social Security number.
 
The BPP must also disclose, under penalty of perjury, any fee or compensation received for preparing the documents, and the BPP is obligated to file a declaration as to this within ten days of the filing of the petition.
 
Code section 110 also provides for the assessment of various penalties for BPPs who act negligently or with intentional disregard for the Bankruptcy Code and Rules, or if the BPP commits any fraud, or unfair or deceptive act.
 
In such instances the court can award actual damages, and the greater of $2,000 or twice the amount paid to the BPP, and reasonable attorneys fees and costs. 
 
In addition, each failure to comply with a particular subsection of the statute, such as failing to sign the petition, include the Social Security number, disclose the fee, etc., is punishable by a fine of not more than $500.
 
The statute also requires the court to triple the fines if the BPP failed to disclose the identity of the BPP.  As you will see, it was this provision that really socked Mollo and Pevzner big time.
 
Court Imposes $45,000 Sanction Against the Suspended Bankruptcy Attorney and His Paralegal
 
After Mollo was sanctioned in March, potential clients were still contacting him from his advertising, which he did not stop.  Rather than turn them away, he had Pevzner, his paralegal of six years, meet with them, and in some instances, he met with the clients as well.
 
She then prepared the bankruptcy petitions, and rendered legal advice in doing so.  She had the debtors sign a retainer agreement which contained the name of a different attorney who did not have anything to do with these cases.
 
At the hearing, Paralegal Pevzner admitted that she prepared the petitions and claimed that she was not an employee of Attorney Mollo and worked strictly as a “volunteer” for him without salary.
 
Pevzner testified that she was familiar with Bankruptcy Code section 110.  Although Code section 110 required the BPP to sign the petition and provide a declaration as to legal fees, she did not do that either, claiming that this was an “honest mistake.”
 
Judge Craig stated that both Attorney Mollo and Paralegal Peyzner were not credible witnesses and concluded that Pevzner repeatedly violated a number of subsections of the statute and that they both engaged in the unauthorized practice of law.
 
The Judge pointed out that Mollo continued to hold himself out as a bankruptcy attorney, despite his suspension, and despite his representations to the Court in the earlier case.
 
It was clear to Judge Craig that Paralegal Peyzner was the BPP, as she prepared the petitions.  However, the Judge applied an unusual theory and held that Attorney Mollo was vicariously liable for Peyzner’s violations.
 
The judge rejected Peyzner’s claim that she was a volunteer, and instead concluded that she continued to be an compensated employee under Mollo’s direction.  Thus, the Court found that Mollo also violated the same provisions of section 110 under the doctrine of vicarious liability.
 
As for punishment, Judge Craig directed both of them to disgorge all fees received, being $3,100, and in addition, fined them jointly and severally $15,000.  However, it did not stop there.
 
Because Paralegal Peyzner failed to disclose on the petitions that she was the BPP, Judge Craig stated that she was required to triple the fine to $45,000 as provided by the statute.  Hopefully, this duo has finally learned their lesson.
 
As with many things, consumers get what they pay for.  A BPP cannot give legal advice and at most, can only act as a data entry clerk.  There are no requirements that a BPP take any courses or be certified.  Yet, bankruptcy is a highly complex area of the law.
 
There are many horror stories about consumers who lost valuable assets, believing that they were exempt, because a bankruptcy petition preparer drafted the petition. 
 
The Office of the U.S. Trustee takes BPP improprieties very seriously.  Last year they brought 504 actions against BPPs across the country.
 
If you are a consumer looking for a bankruptcy attorney, make sure the attorney is legitimate and currently admitted and in good standing.  If anything seems suspicious, think twice about using that attorney.
 
To see the decision in this case, click here:  In re Edith L. Moore, et. al., (12-41111-cec, Bankr. E.D.N.Y.). 
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the November  2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.      Call (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 
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Bankruptcy Court Says $5,000 Chapter 13 Legal Fee Is Reasonable

Posted on Thursday (December 6, 2012) at 3:00 am to Chapter 13 Bankruptcy
Lawyer to Lawyer
Recent Bankruptcy Court Decisions
Suffolk Lawyer

Bankruptcy legal fees in Chapter 13 casesWritten by Craig D. Robins, Esq. 

 Recent Brooklyn Bankruptcy Court Decision Reviews Legal Fee Factors
 
What is a reasonable legal fee for a typical Chapter 13 bankruptcy case?  That issue was addressed in a decision just released by Judge Jerome Feller, a bankruptcy judge in the Eastern District of New York, sitting in the Brooklyn Bankruptcy Court.

 

In that case, Chapter 13 trustee Marianne DeRosa objected to a $7,500 flat legal fee that the debtor’s attorney had charged.  She insisted that the debtor’s attorney, Paul Hollender, of New York City, bring a formal fee application to approve his fee.  She then filed opposition to his fee, arguing that it was in excess of the fees customarily charged for routine cases in this district. 

Judge Feller issued a twelve-page decision on October 11, 2012 in which he concluded that reasonable compensation for a routine Chapter 13 filing in this jurisdiction is $5,000.  In re: Nicholas Moukazis, (01-12-42200-jf, Bankr. E.D.N.Y.).  (In her motion papers, Trustee Marianne DeRosa pointed out that the customary Chapter 13 legal fees in this jurisdiction are between $3,500 and $5,000.)

This is important news as Long Island bankruptcy attorneys have at times been at odds with the two Chapter 13 trustees in this district over what a reasonable fee is. 

For a period of time, the other Chapter 13 trustee in our district, Michael J. Macco, insisted that every bankruptcy practitioner charging over $4,000 had to bring a fee application to seek approval of the fee.  Now we have a current judicial determination indicating what is reasonable for routine Chapter 13 cases.

For those who are not familiar with Chapter 13 practice, these bankruptcy proceedings, which involve a payment plan, usually require several court appearances, and often involve at least twice as much work as a typical Chapter 7 case.

Factors In Determining What a Reasonable Bankruptcy Attorney Fee Is In a Consumer Case

Judge Feller began the legal analysis in his decision by reviewing the elementary bankruptcy law concept that the Bankruptcy Court not only has the authority, but the duty, to determine the reasonableness of compensation paid or agreed to be paid for representing a debtor in a bankruptcy case regardless of whether a party in interest objects to it.

The Judge then determined that the following factors were necessary to assess the reasonableness of the legal fee: the necessity of the services rendered, the benefit to the debtor, the time expended, the customary fees and reasonable hourly rates for the services performed, and public policy concerns.

Judge Feller observed that the Moukazis case was unexceptional and uncomplicated.  The debtors’ income was about $150,000 per year.  They owed about $92,000 in unsecured debt.  Their mortgage was current.  The plan proposed a distribution of about 44% to unsecured creditors. 

The debtors retained their attorney about seven weeks before the petition was filed. There was only one meeting of creditors.  The Court confirmed the Chapter 13 plan less than six weeks after that.  The attorney performed the legal work well.

The retainer agreement the attorney used provided for the $7,500 flat legal fee, and also indicated that this was for the bare minimum of possible legal services in a Chapter 13 case. 

The attorney also indicated that he reserved the right to charge additional fees for services such as amendments, attendance at additional meetings of creditors or hearings, and routine motion practice. 

Of the $7,500 fee, the debtors paid $2,000 prior to filing.  In his fee application, the debtor’s attorney claimed he spent 12 hours devoted to the case, and that his paralegals expended a total of 23 hours.

The debtors were actually able to afford the higher fee; however, that did not sway the judge.  He observed that they were paying a portion of the fee through the Chapter 13 plan, and that unless there is a 100% plan, unsecured creditors will effectively pay the fee while receiving a lower pro rata distribution.

Public Policy Considerations Come In To Play In Determining Reasonableness of Bankruptcy Legal Fee

The Judge also commented on the public policy considerations for ensuring that Chapter 13 legal fees are reasonable.

Empirical evidence shows that Chapter 13 cases are much more likely to succeed when debtors are represented by counsel.  Accordingly, in order to ensure that debtors have access to counsel, they should not be overcharged.

Thus, a reasonable fee must be one which protects the debtor, while being generous enough to encourage lawyers to render the necessary and exacting services that bankruptcy cases often require.

Some districts in other parts of the country have “fee caps” in consumer cases which essentially permit bankruptcy counsel to charge any fee up to the cap without having to obtain court approval.  Our district is not one of them. 

Judge Feller, in the decision, expressly stated that “this Court is not hereby endorsing fee limits in Chapter 13 cases” and “does not intend to establish a fee cap in Chapter 13 cases.”

Looking back to other decisions which addressed Chapter 13 legal fees in this district, in 2010, Judge Robert E. Grossman, sitting in the Central Islip Bankruptcy Court, addressed the propriety of a $15,000 fee charged by an attorney who apparently was less than competent in representing the debtor. 

In that case, Chapter 13 trustee Michael J. Macco objected to the fee and the Judge reduced it to $4,000 stating that “the bankruptcy proceeding was not complicated” and the attorney “performed at an incompetent level.”

In his decision (which is now several years old), Judge Grossman pointed out that experienced counsel charged between $4,000 and $4,500 for cases in the district.  He therefore reduced the fee to $4,000 for this attorney and ordered him to disgorge the rest.  The attorney appealed to the District Court, which affirmed.  In re Arebelo, 2011 U.S. Dist. LEXIS 37449, 2011 WL 1336676.

The takeaway here is that an experienced Chapter 13 bankruptcy attorney, who does a proper and professional job, can charge as much as $5,000 for a typical Chapter 13 case, and more if unusual or additional legal work is necessary.

In addition, if the trustee or court challenges the legal fee, the bankruptcy attorney bears the burden of demonstrating the reasonableness of the fee.

Incidentally, this relatively high legal fee is indicative of the large amount of work that a bankruptcy attorney must put into a typical Chapter 13 case, which was made somewhat more complex and complicated by the significant changes to the bankruptcy laws in 2005 (BAPCPA).
 
To see a copy of the Mouzakis decision, click this link:   In re: Nicholas Moukazis, (01-12-42200-jf, Bankr. E.D.N.Y.). 
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the December  2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.      Call (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 
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Creative Lawyering with Chapter 20 Bankruptcy Case Tests Limits

Posted on Wednesday (December 5, 2012) at 6:00 pm to Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Lawyer to Lawyer
Suffolk Lawyer

Chapter 20 bankruptcy discussed on LongIslandBankruptcyBlog.comWritten by Craig D. Robins, Esq.

 
Judge Rules That Debtor Engaged in Unfair Manipulation of Bankruptcy Code
 
Judge Alan S.Trust, sitting in the Long Island Bankruptcy Court in Central Islip, New York, just issued an interesting decision in a case which the Judge stated “tests the outer limits of how debtors may seek to utilize the Bankruptcy Code and Rules to obtain the maximum advantages of the process known as ‘Chapter 20′.”  In re: Adam John Renz, No. 11-73471-ast, (Bankr. E.D.N.Y., Aug. 1, 2012).
 
What is a Chapter 20 Bankruptcy?
 
First, let’s discuss the concept of “Chapter 20.”  There is no actual Chapter 20 of the Bankruptcy Code.  Instead, this refers to the situation in which a consumer debtor files a Chapter 7 case and receives a discharge, and shortly thereafter files a Chapter 13 case.
 
There are several reasons why debtors may try to use a Chapter 20 strategy.  The objective is to obtain more relief than filing for Chapter 7 or Chapter 13 alone.
 
One common reason why debtors will do so is to discharge their unsecured debts through the Chapter 7 filing and then cure mortgage arrears over an extended period of time with a Chapter 13 plan.
 
Chapter 20 also enables consumers who need Chapter 13 relief, but don’t qualify because they owe more unsecured debt than Chapter 13 jurisdictional requirements permit, to become eligible for Chapter 13 filing.
 
In the past several years, some savvy bankruptcy practitioners have utilized Chapter 20 in a more creative way – to cram down a second mortgage that they could not have done if the debtor only filed for Chapter 7 relief, as most judges do not permit debtors to strip off second mortgages in Chapter 7 cases.
 
This has become a controversial maneuver as some jurisdictions do not permit this, having concluded that a debtor cannot strip off a second mortgage that has already been discharged, or that the second filing was not done to further the purpose of Chapter 13 relief, which is to pay debts through a plan, but instead to seek cram-down relief.
 
It should be noted that once a debtor files for Chapter 7 relief and obtains a discharge, the debtor is not entitled to receive a Chapter 13 discharge unless more than four years have passed from the date of the first filing to the date of the second filing.  Code section 1328(f)(1).
 
Thus, the objective in most Chapter 20 scenarios is not to discharge any debt, but instead, to use the payment plan features of Chapter 13 to cure mortgage arrears over a period of time.
 
Many debtors successfully cram down their second mortgages in Chapter 13 cases in this district and that has become a large part of consumer bankruptcy practice here during the past few years.  To do so, the debtor brings an adversary proceeding against the mortgagee seeking to strip off the second mortgage.
 
The Renz Case – An unsuccessful Chapter 20 Bankruptcy
 
In the Renz case, the debtors filed for Chapter 7 relief in 2009 and received a discharge.  Sixteen months later, they filed a Chapter 13 case.
 
Since less than four years passed from the date of the prior filing, they would not be entitled to a Chapter 13 discharge.
 
The debtor had a second mortgage on his home with with JPMorgan Chase for $100,000 that was clearly underwater.  Chase did not file a proof of claim, so debtor’s counsel, before the bar date, filed one for them.  (Bankruptcy Rule 3004 permits a debtor to file a proof of claim on behalf of a creditor).  As it turned out, Chase failed to file any papers whatsoever in the entire case.
 
Bankruptcy counsel also filed a cram-down adversary proceeding against Chase seeking a determination that the second mortgage was wholly unsecured.  Since Chase never responded to the adversary proceeding, the debtor obtained a default judgment.
 
The judgment specifically provided that “the claim held by Chase, secured by a mortgage lien on the Debtors’ real property . . . [shall] be deemed a wholly unsecured claim, and that the entire subordinate mortgage lien be declared null and void upon the filing by the Chapter 13 Trustee of a Certification of Completed Chapter 13 Plan.”
 
Here’s the kicker: two weeks later, debtor’s counsel filed a letter with the Court withdrawing the Chase claim.  He also amended the Chapter 13 plan calling for a one hundred percent distribution to unsecured creditors.  However, since the proof of claim had been withdrawn, Chase stood to receive no distribution whatsoever.
 
Chapter 13 Trustee Marianne DeRosa thereafter filed an objection to confirmation, arguing that the plan was not proposed in good faith, that the debtor did not have statutory authority to withdraw the proof of claim, and the debtor had sufficient income to satisfy the Chase claim in full.
 
Debtor’s counsel argued that the plan was proposed in good faith and that Chase’s failure to participate or file papers in any part of the proceedings was a tacit acceptance of debtor’s withdrawal of the Chase claim.
 
Judge Trust determined that the debtor’s actions here went too far and that the case “exemplifies an unfair manipulation of the Bankruptcy Code.” 
 
The judge noted that while the debtor appeared to have sought bankruptcy protection in good faith, the circumstances concerning the Chase claim demonstrate an attempt to abuse the purpose and provisions of Chapter 13.   As such, the Judge sustained the trustee’s objections to the plan.
 
Judge Trust held that the debtor did not have any cognizable basis for withdrawing the proof of claim and that it should be treated as an allowed unsecured claim.  He also held that the debtor had the ability to pay the Chase claim in full.
 
Although debtor’s counsel argued that the Chase mortgage debt had been discharged by the prior Chapter 7 case, the Court held that the debtor was required to satisfy the terms of a proposed plan before the mortgage lien could be stripped off.  Since the debtor’s gambit did not work, the case will likely be dismissed.
 
Here’s what I gleaned from this decision.  In a Chapter 20 case before Judge Trust, the debtor must file it in good faith and for the purposes that Chapter 13 is intended for.  In addition, the debtor can cram down the second mortgage, but should expect to pay it as an unsecured debt through the plan.
 
Creative lawyering and using novel theories to test the bounds of the law and to achieve extraordinary results is the mark of a smart attorney.  Many great results have been obtained this way.  After all, you don’t know where the limits are until you’ve exceeded them.  However, counsel must be careful not to tread too far over the line, which may have been the case here.
 
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About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the October  2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream.      Call (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.  
 
 
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