About Me
“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Chapter 13 Bankruptcy
What is a Bankruptcy Discharge?
Posted on
The bankruptcy discharge means freedom from debt. That's my son, Max.
Written by Craig D. Robins, Esq.
The general objective in filing a consumer bankruptcy is to eliminate debts. At the conclusion of a Chapter 7 or Chapter 13 bankruptcy case, the consumer receives a discharge.
The bankruptcy discharge releases the debtor from personal liability for most debts. That means the consumer is no longer legally required to pay these debts. Certain debts are non-dischargeable such as most taxes, student loans, alimony, child support and traffic tickets.
The discharge comes at the conclusion of the bankruptcy case. For Chapter 7 filers, that is typically about three and a half months after the bankruptcy petition is filed. For Chapter 13 filers, this typically occurs a month or two after the Chapter 13 payment plan is completed.
The actual discharge is in the form of a permanent court order, signed by the bankruptcy judge assigned to the case. The Bankruptcy Court sends a copy of it to the debtor and all creditors and parties listed in the petition.
The order of discharge prohibits creditors from taking any action to collect a debt. This means that it becomes forever illegal for creditors to phone the debtor, send collection letters, sue the debtor or take any other action to collect the debt.
If a creditor has a secured debt, such as a mortgage or car loan, the creditor is still prohibited from collecting the debt. However, the creditor has the right to recover the collateral.
————————–
About the Photograph: This is one of my fine art shots of my son, Max.
Written by Craig D. Robins, Esq.In order to qualify for filing a Chapter 7 bankruptcy petition, you need to pass the means test, which is designed to prevent those individuals with relatively high incomes from easily eliminating their debts in a Chapter 7 proceeding..
The means test formula makes it easier for a larger family to be eligible for Chapter 7 relief than a smaller one. Each additional family member enables the debtors to take an additional, very significant deduction on the means test. These deductions are based on census tables and IRS charts of living expenses. See: New Changes to Means Test.
Most consumers will pass the means test and will not have any problem qualifying for Chapter 7 bankruptcy. However, some individuals, who are just barely failing the means test, can pass if they have the ability to add an additional family member to the calculation. The Means Test is Often the Key to a Successful Chapter 7 Bankruptcy Case .
Dealing with the Means Test If a Female Debtor is Expecting
If the wife is pregnant and expecting, can you include the unborn child as household member of the family to calculate family size for means test purposes? If you could, this might mean the difference between passing or not.
In at least one case, the United States Trustee has taken the position that an unborn child cannot be included as a family member for means test purposes. Some bankruptcy courts have adopted this position stating that a debtor may not rely on events which have not yet occurred.
That was the case in In re Pampas, 369 B.R. 290 (Bankr.M.D.La. 2007). In that case, the child had not been born as of the date of the bankruptcy filing, and the debtor was still carrying at the time the U.S. Trustee brought a motion do dismiss. The court dismissed the case, although the unborn child issue was just one of several concerns the court addressed.
However, this case and outcome does not necessarily spell doom for the debtor, and I do not think a similar result would have occurred if this situation had arisen here in New York.
Arguing “Special Circumstances” As a Way Around a Failing Means Test
A debtor who has filed with an unborn child, can argue “special circumstances” under Bankruptcy Code § 707(b)(2)(B).
This section enables a debtor to argue that a presumption of abuse, which is what happens if the debtor fails the means test, can be rebutted by demonstrating that there are special circumstances that justify additional expenses or adjustments to the current monthly income.
Generally, to support a claim of special circumstances, the debtor must itemize each additional expense or adjustment of income, and provide documentation and a detailed explanation of the special circumstances that make those expenses or income adjustments necessary and reasonable.
Perhaps the U.S. Trustee Would Be Reasonable
I would like to think that most local offices of the U.S. Trustee would be reasonable under such situations and keep the case in abeyance, pending the birth of the child. It would seem unlikely that a US Trustee would put much effort into seeking dismissal of a case, when shortly after the dismissal the debtor would qualify anyway because of the increased family size after the baby is born.
I personally represented a debtor last year where this became an issue. I did not include unborn children in the family size at the time of filing. However, the Chapter 7 trustee questioned the propriety of some of the other deductions on the means test and debated whether to refer the matter to the U.S. Trustee for further review as to whether the meanst test meant that this was an abusive filing.
My response to the Chapter 7 trustee was that it didn’t matter because the debtor was several months pregnant with twins, and even if the trustee was able to disallow some of the debtor’s means test deductions, the debtor would still quickly qualify in any event because of the increased family size. After some back-and-forth discussion, and proof that the debtor was pregnant, the trustee let the matter go, and the debtor received her discharge.
I also find that communicating in advance with the U.S. Trustee is very important. If I had to file a case in which the debtors had to rely on an unborn child to pass the means test, I would disclose the information early on.
If the U.S. Trustee believes that the debtor has filed in good faith, then it is much more likely that they will evaluate the case in a fair and equitable manner and give due consideration to the debtor’s special circumstances.
An Objection by the U.S. Trustee Can Be Politically Charged
In parts of the country, the U.S. Trustee might want to avoid raising controversy over the potential for politically-charged issues which can result in Roe v. Wade type arguments that are used in debates over the right to abortion.
There’s Always Waiting a Few Months so the Unborn Child Can Undisputedly Be Included in the Bankruptcy Means Test
If debtors want to play it safe, they can wait until the baby is born before filing. That way, there would not be any controversy of dispute over family size. However, sometimes debtors need immediate bankruptcy relief and simply cannot wait.
In a worse-case scenario, if the U.S. Trustee brought a motion to dismiss the case, refusing to accept the unborn child as a member of the household for means test purposes, the debtor could always let the case be dismissed, and then re-file after the child is born.
Also see my post: Options If You Fail the Bankruptcy Means Test .
Other Issues Concerning Family Size for Bankruptcy Means Test Purposes
Calculating family size for the means test can be tricky. This subject seems to be a never-ending source of issues and bankruptcy court decisions. See my post: Determining Household Size for the Means Test .
Unborn Children in Chapter 13 Bankruptcy Cases
In Chapter 13 cases, a debtor will often pay less into a monthly Chapter 13 plan if there is another member of the household. This savings is usually many hundreds of dollars a month. Therefore, an expected child could make a great impact as to the affordability of a Chapter 13 plan.
If the issue of an unborn child arose in the context of a Chapter 13 filing, I would argue that confirmation should be delayed until the child is born if the Chapter 13 trustee is not willing to count the unborn child right away. Then, assuming the child is indeed born, the baby should be included in the household size.
Most Bankruptcy judges, at least in New York, are forward-thinking judges who want the means test in Chapter 13 cases to be based on realistic events going forward, as opposed to looking backward. I explored this concept in my post: Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts .
In one Colorado case, the bankruptcy court stated that a debtor had the right to amend schedules to show an increase or decrease to household size prior to plan confirmation, to reflect changed circumstances. In that case, the unborn child was delivered just days after the Chapter 13 trustee filed a pre-confirmation motion to dismiss. In re Baker, (Bankr. Court, ND Illinois 2009).
In the Baker case, the court interpreted Bankruptcy Code § 1325(b)(1) (which states that the applicable commitment period should be determined as of the plan’s effective date), as meaning the date when the plan is confirmed. Thus, the Baker court permitted the debtors to include the unborn child in the means test over the objections of the Chapter 13 trustee.
The Importance of Consulting with Experienced Bankruptcy Counsel When There Are Means Test Issues
When unusual issues arise that can mean the difference between qualifying or not for bankruptcy relief, it becomes that much more important to seek out experienced bankruptcy counsel.
The means test is rather complex and complicated. Retaining an experienced Long Island bankruptcy attorney is your best way to ascertain whether you qualify for Chapter 7 bankruptcy filing, and if not, to learn what your other options are.
Written by Craig D. Robins, Esq.
With relatively little notice, bankruptcy court filing fees have increased.
The Judicial Conference of the United States Bankruptcy Court voted to increase various bankruptcy court filing fees, including the fees to file bankruptcy petitions.
For most of us, the increase primarily affects the fees consumers pay to file their bankruptcy cases. They are increasing by $7.00.
Here are the New Filing Fees, Which Go Into Effect November 1, 2011:
Chapter 7 bankruptcy cases: The filing fee is increasing from $299 to $306.
Chapter 7 bankruptcy cases: The filing fee is increasing from $299 to $306.
Chapter 13 bankruptcy cases: The filing fee is increasing from $274 to $281.
Various Other Bankruptcy Filing Fees Are Increasing as Well:
Amending Schedules: Increase from $26 to $30
Filing Adversary Proceeding: Increase from $250 to $293
Filing Motion for Relief from Stay: Increase from $150 to $176
There are other miscellaneous fee increases as well: Full Schedule of Bankruptcy Court Fees and Charges Effective November 1, 2011.
When did the Bankruptcy Filing Fees Change Last?
In my Bankruptcy Update back in February 2006, I wrote that the filing fees were increasing again.
In February 1, 2006, the House of Representatives passed the Budget Reconciliation Act which included fee increases for various court filings, including bankruptcy filings. The Senate previously had approved the measure.
That fee increase, which went into affect on April 6, 2006, was strictly a revenue-raising measure.
The bill increased the Chapter 7 filing fee by $25 to $299, and increases the Chapter 13 filing fee by $85 to $274. The apparent purpose of the fee increases at that time was to balance the budget though payments from those who could least afford it.
Prior to that, on October 17, 2005, when the bankruptcy laws were reformed by BAPCPA, the filing fees increased for Chapter 7 cases from $209 to $274, and for Chapter 13 cases from $194 to $189.
Written by Craig D. Robins, Esq.For Those with Mortgage Problems, Bankruptcy Offers Options
This post was my monthly column that was published in the September 2011 issue of the Suffolk Lawyer. It was aimed at general practitioners and non-bankruptcy attorneys who may not be that familiar with how bankruptcy can be used to help clients with mortgage problems during these recessionary times.
This post should also be helpful to those consumers who are facing foreclosure and need to explore their bankruptcy options.
In the past two years I’ve helped a great deal of clients who were either in foreclosure or who owned homes that were very much underwater. I am also seeing a lot of clients who have been rejected after trying to modify their mortgages, such as under the HAMP program. Many consumers have found HAMP to be a dismal failure as I wrote in Problems with HAMP — Too Many to Count?
Also see my post: Warning: HAMP Can Drive Homeowners into Bankruptcy.
There are several bankruptcy options that can provide great relief for such clients.
Chapter 13 Bankruptcy
Consumers who have seriously fallen behind on their mortgages and who want to keep their homes, can use a Chapter 13 payment plan to cure mortgage arrears over a five-year period.
Chapter 13 Bankruptcy
Consumers who have seriously fallen behind on their mortgages and who want to keep their homes, can use a Chapter 13 payment plan to cure mortgage arrears over a five-year period.
However, this option is only available to those consumers who can not only afford to make their new post-petition mortgage payments, but can also make an additional monthly Chapter 13 plan payment approximately equal to 1/60th of the mortgage arrears.
A benefit of filing Chapter 13 is that the consumer can also resolve all credit card and medical debt as well, often paying just cents on the dollar.
There is a further significant benefit to those consumers who have a second mortgage that is totally underwater. In these situations where the house is worth less than the balance owed on the first mortgage, the consumer can bring a “cram-down” proceeding and effectively “strip-off” and totally eliminate the second mortgage. This benefit alone can often save the consumer over a hundred thousand dollars.
In order to qualify for Chapter 13 filing, the consumer must have a regular and steady source of income. Some clients who would like to save their home, unfortunately cannot do so if they do not have sufficient monthly income.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy enables a consumer to discharge most obligations including liability on a mortgage.
When I meet with a client who has significant mortgage arrears, and whose mortgage balances greatly exceed the value of their home, I discuss the concept that it may no longer be viable to save the home. Chapter 7 bankruptcy can provide a way out of bad, highly-leveraged real estate. A recent study indicated that one-fourth of all U.S. homes were underwater.
One of the judges in the Central Islip Bankruptcy Court permits Chapter 7 debtors to cram-down second mortgages.
Also see my post: What Happens to Your House if You File for Bankruptcy?
Walking Away from Real Estate
With these clients I often recommend a two-step process to extend their ability to remain in the home for a period of time, and to discharge their liability on the mortgage and ultimately any deficiency owed after a foreclosure sale. It is often possible to remain in the house for one to two years or more, without paying any mortgage or real estate tax payments.
Assuming that you can interpose one or more genuine, good faith defenses in a foreclosure proceeding in Supreme Court, you can then prevent a default judgment and take the foreclosure proceeding out of the automatic conveyor belt type of processing, effectively delaying the process by many months, or a year or more.
These days there are a host of possible foreclosure defenses. These include bringing shoddy or defective paperwork to the court’s attention; citing issues which may indicate that the lender may not have proper standing; and identifying improper mortgage assignments.
These days there are a host of possible foreclosure defenses. These include bringing shoddy or defective paperwork to the court’s attention; citing issues which may indicate that the lender may not have proper standing; and identifying improper mortgage assignments.
By defending a foreclosure proceeding, the foreclosure process can be greatly slowed down.
Strategic Default
Sometimes I come across a client who is current on his or her mortgage, but whose home is extremely underwater. In such instances I discuss the possibility of a “strategic default” which is when the consumer stops paying the mortgage, not because he or she can no longer afford it, but because keeping the house is no longer viable or financially worthwhile.
A Morgan Stanley report last year revealed that about 12 percent of all mortgage defaults are now “strategic,” which is a great increase from mid-2007, when the level was only 4 percent
A Morgan Stanley report last year revealed that about 12 percent of all mortgage defaults are now “strategic,” which is a great increase from mid-2007, when the level was only 4 percent
Bankruptcy Eliminates Recourse
By filing a bankruptcy and possibly engaging in foreclosure defense, the consumer will have to eventually walk away from the home, but they will probably be able to stay in it for several years without making any payments – all without financial recourse from the mortgage company.
There is also a strategy for timing the filing of the bankruptcy. Although the bankruptcy filing can be done at any time, doing so at the right time will get the homeowner a few extra months in the house, as the bankruptcy stay will stop the foreclosure proceeding until the lender can get permission to lift it.
Although most consumers are eligible for Chapter 7 filing, they must nevertheless pass the means test which Congress imposed about six years ago. As such, this approach should work for most consumers except those with high incomes or substantial non-exempt assets.
If the dream of home ownership has become a nightmare, then remember that there are bankruptcy options out there.
————————-
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 2011 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. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.One of the most important features of any bankruptcy filing is the automatic bankruptcy stay. This is the very powerful federal law that prevents any creditor from taking any action to collect a debt once any bankruptcy case is filed. It goes into effect immediately upon the filing of any bankruptcy case.
When it comes to tax debt, the automatic stay requires tax authorities to stop collection activity and release any tax levies.
The Co-Debtor Bankruptcy Stay
When a consumer files for Chapter 13 bankruptcy relief, the stay also protects any other individuals who are also obligated on the debt, even if they did not seek bankruptcy relief. This is set forth in Bankruptcy Code section 1301.
Thus, if a husband files for Chapter 13 protection and the wife does not, and the husband listed a credit card debt that they both signed for, then the bankruptcy stay protects both of them from collection efforts — even though the wife did not file.
The co-debtor stay only exists in Chapter 13 cases — not in Chapter 7 cases.
Co-Debtor Stay Only Applies to “Consumer Debts”
However, this protection only applies to “consumer debts.” Fortunately, the definition of consumer debts include almost all debts that the typical consumer would schedule in their bankruptcy petition – credit card obligations, car loans, mortgages, and medical debts.
The Bankruptcy Code does not define consumer debts to include tax debts. A consumer debt is a debt “incurred by an individual primarily for a personal, family, or household purpose.” Most bankruptcy court decisions have held that tax debts are not consumer debts.
Thus, the co-debtor stay does not protect a non-filing spouse from efforts of the IRS or New York State Department of Taxation to collect the tax debt. Of course, the bankruptcy stay does protect the party who files for bankruptcy relief; it just does not protect anyone else from collections on joint tax debt.
Since taxes are not considered consumer debt and there is no co-debtor stay for tax debt, serious thought should be given to including both spouses in a Chapter 13 filing when the joint tax debt is substantial.
Written by Craig D. Robins, Esq.Recent Long Island Bankruptcy Court Decision Addresses How to Allocate Non-filing Spouse’s Share of the Tax Refund
(This post was my monthly column that was published in the September 2011 issue of the Suffolk Lawyer.)
April may be tax time for most consumers, but bankruptcy judges seem to address bankruptcy tax issues year round. That’s because tax refunds have been a constant and significant source of potential funds for trustees, who are often quite willing to litigate the issues involved.
However, with the increased bankruptcy exemptions in New York, perhaps there will be fewer tax refund disputes.
In the past two years, I devoted many blog posts to issues concerning tax refunds and bankruptcy.
I also devoted two columns of my monthly articles published in the Suffolk Lawyer to the topic of tax refunds of non-filing spouses. A recent decision by Central Islip Bankruptcy Judge Robert E. Grossman here in the Eastern District of New York now requires that I write monthly third column on the subject. First, let me provide some background on the other two cases.
The 50/50 Rule for Allocating Tax Refunds in Bankruptcy Cases has been the Previous Standard in New York
In my May 2009 column, I raised the issue: Who owns the non-filing spouse’s tax refund in a bankruptcy case, and how do you apportion it?
The Marciano case out of the Southern District of New York adopted the 50/50 Rule — a simple and straight-forward approach in which the refund is apportioned equally between the two spouses regardless of the source of income or tax withholding. In re Marciano, 372 B.R. 211 (S.D.N.Y. 2007). Local bankruptcy practice since that time has adopted that rule.
Non-Filing Spouses Do Not Have to Contribute Their Share of the Tax Refund into the Chapter 13 Plan
In December 2010, I focused my column on a decision by Judge Grossman which addressed this issue: What happens when only one spouse files for Chapter 13 relief? Does the non-filing spouse also have to surrender his or her tax refund to the trustee?
At the time, Judge Grossman held that a non-filing spouse is not obligated to devote his or her share of a joint tax refund to plan payments made to the Chapter 13 trustee.
In that case, In re Malewicz, No 8-09-74807-reg, 2010 WL 4613119 (Bankr. E.D.N.Y., Nov. 4, 2010), the Court ruled that a non-debtor spouse’s share of a joint tax refund received post-confirmation is not property of the debtor’s estate or part of the “projected disposable income.”
Therefore, unless the non-debtor spouse specifically consents to contribute the refund to the plan, the non-debtor spouse’s share of tax refunds received post-confirmation need not be turned over to the trustee.
Thus, the non-debtor spouse in that case was not required to devote his share of tax refunds to the Chapter 13 plan. The non-filing spouse’s share of the tax refund is not property of the estate and it should not be included in the calculation of Chapter 13 plan payments.
At the time, the Malewicz case seemed to be the end of the road on the issue. You had the 50/50 rule, so what else could come up?
The Duarte Decision Introduces New Standard for Allocating Tax Refund
In October 2010, Carlos Duarte, a typical consumer, filed for Chapter 13 relief individually, without his wife. Through his attorney, fellow Long Island bankruptcy lawyer Lawrence S. Lefkowitz, he offered 50% of the couple’s joint 2010 tax refund into the plan and asserted that the other 50% belonged to his wife, and was hers to keep.
After all, the 50/50 Rule, for determining each spouse’s respective rights to a tax refund, is a test employed by a majority of Bankruptcy Courts in New York.
The debtor also pointed out a 2009 decision by Judge Alan S. Trust which held that “spouses filing joint returns who equally share the liability for payment of the taxes, should equally share the benefit of any tax refund.” In re Spina, 416 B.R. 92 (Bankr. E.D.N.Y. 2009).
However, Long Island Chapter 13 bankruptcy trustee Michael J. Macco noticed an unusual aspect of the family’s tax situation: only the husband paid withholding tax during the 2010 tax year; the wife did not pay anything.
The trustee then objected to confirmation of the plan, arguing that the entire 2010 refund resulted from an overpayment made solely by the debtor-husband.
The trustee argued that there was only a presumption that the 50/50 Rule should be used, and that the facts of this case rebutted the presumption. He insisted that the debtor pay 100% of the tax refund into the Chapter 13 plan based on a different rule known as the “Withholding Rule.”
Under the Withholding Rule, which is considered the majority approach, the tax refund is divided based upon the extent to which the refund is attributable to the separate withholdings of each spouse.
At the confirmation hearing, Judge Grossman granted confirmation, but reserved decision as to whether the non-filing spouse was required to turn over 50% of the tax refund.
New “Separate Filings Rule” Now Governs Allocating Spouse’s Tax Refunds in Bankruptcy Cases
In a decision issued in July 2011, Judge Grossman ruled that neither the 50/50 Rule should be applied, nor the withholding Rule. Instead, he adopted a totally different formula known as the “Separate Filings Rule,” first enunciated by the Tenth Circuit in the case, In re Crowson, 431 B.R. 484 (10th Cir. BAP 2010). In re Carlos Duarte, no. 8-10-78606-reg, (Bankr. E.D.N.Y. July 12, 2011).
The Judge clarified the issue before the Court: since the debtor consented to turn over his share of the tax refund, the sole issue was determining how to calculate the debtor’s interest in the tax refund.
After reviewing in detail the considerations for rejecting the other rules (there are four of them), Judge Grossman held that it was necessary to use a formula based on a calculation of what each spouse’s tax obligation would have been if the spouses had filed separate tax returns.
Then, he said there should be a calculation of the contributions each spouse had actually made towards the total tax payment.
Unfortunately, this new method will be messy and the Judge even pointed out that this approach “is not a ‘bright-line rule’ and therefore it is not simple to understand or apply.”
The Judge stated that “This Court is not ruling that the Trustee, the debtor and the non-debtor spouse in each case must undertake this analysis in order to determine each parties’ interest in a joint income tax refund, but this formula shall be employed where the parties do not agree on the proper allocation.”
Judge Grossman’s “Separate Filings Rule” approach will certainly produce the fairest result to all concerned, but if the parties cannot reach a resolution, they’ll certainly have a fair amount of work on their hands and they’ll have to study the formula details set forth in the Duarte and Crowson cases.
I recently spoke with the debtor’s attorney who had just prepared the separate tax returns (for bankruptcy calculation purposes only), and he was optimistic that he and the Chapter 13 trustee would work out a resolution as to the actual numbers without the need for further litigation.
Future Bankruptcy Court Decisions on Tax Issues Ahead?
On a separate note, I anticipate we may see another bankruptcy tax case in the near future. The Court did not address whether the Bankruptcy Code requires a debtor to turn over pre-confirmation tax refunds as opposed to post-confirmation tax refunds. Judge Grossman went so far as to point this out in a footnote.
Since I have seen this issue arise several times recently, I wouldn’t be surprised to see this issue come before the Court in a case where the parties cannot reach a resolution on their own.
NOTE: You can review copies of some of the actual decisions I cited in this post by clicking on these links: In re Carlos Duarte, In re Spina, In re Malewicz.
————————-
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 September 2011 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. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.Court Finds Mortgagee’s Appraiser Lacked Credibility in Chapter 13 Mortgage Cram-Down Proceeding
Over the past several years, the judges in the Central Islip Bankruptcy Court here in the Eastern District of New York have done an outstanding job issuing well-reasoned decisions covering a variety of issues.
These opinions are great practice tools and I truly look forward to reading new ones as soon as they come out. These decisions often explain a judge’s thinking, which can give clues as to how the judge may decide other issues down the road. They may explain a complex issue of law.
These opinions are great practice tools and I truly look forward to reading new ones as soon as they come out. These decisions often explain a judge’s thinking, which can give clues as to how the judge may decide other issues down the road. They may explain a complex issue of law.
They can also provide insight on some of the recent changes to the law and how counsel should interpret these new provisions. Sometimes the decisions are merely entertaining and an interesting read.
The decisions are easily accessible on the court’s website for free. I’ve found so many of the Court’s recent decisions important and interesting that I’ve devoted many of my columns to discussing them. This month’s column is no exception.
Last month, Judge Robert E. Grossman issued a fascinating decision which basically pointed out many things a real estate appraiser should NOT do. Joseph Lepage v. Bank of America, no. 8-10-08287-reg, (Bankr. E.D.N.Y. May 18, 2011).
Appraisals in Cram-Downs
Lepage was a Chapter 13 bankruptcy case which involved a routine adversary proceeding in which the debtor sought to cram down the second mortgage.
A Cram-down, also known as a “strip-off,” is when a debtor strips off and avoids the secured status of the second mortgage because there is insufficient value in the property to secure any part of it.
Debtors have the ability to cram down second mortgages in Chapter 13 bankruptcy cases pursuant to Bankruptcy Code § 1322(b)(2). One of our three Central Islip judges, Judge Dorothy T. Eisenberg, also permits Chapter 7 debtors to do this as well, something I’ve addressed in a prior column.
A debtor must bring a cram-down application by adversary proceeding, which is essentially a federal lawsuit brought within the bankruptcy case.
In order to cram down a second mortgage, the house must be underwater to the extent that there is no equity whatsoever covering the second mortgage. In other words, the value of the house must be less than the balance due on the first mortgage.
The debtor demonstrates this by supplying the Court with an appraisal. As such, the only defense that the second mortgagee can generally assert is that the debtor’s appraisal is inaccurate, and that the house is actually worth at least a dollar more than the balance due on the first mortgage.
The appraisal is therefore very important and, as you will see, using a highly experienced appraiser, at least in the event there is a trial, can be critical.
The Recent Lepage Case – The Only Issue Was Valuing the Property for Purposes of the Cram-Down
When a mortgagee challenges the appraisal, which is relatively rare, then the Bankruptcy Court ultimately schedules an evidentiary hearing in which the Court decides what the value of the property is. That was the sole issue in the Lepage case.
In fact, the parties agreed that the only issue to be litigated was the value of the house. It was agreed that if the Court determined that the house was worth less then the amount due on the first mortgage, then the debtor would prevail on the cram-down proceeding.
In Lepage, the debtor asserted that the house, a 900-square foot ranch located in Brentwood, was worth $175,000, which was less than the balance due on the first mortgage.
The second mortgagee, however, argued the house was worth much more – $205,000. The balance due on the first mortgage was $181,000.
Thus, as long as the Court determined that the property was worth less than that amount, the debtor would be successful with the cram-down application.
The debtor used an appraiser who has been an active appraiser for 31 years, and has been licensed for the past 15 years. There was evidence that he had testified extensively in Federal and state courts. He even held a law degree.
The mortgagee’s appraiser, on the other hand, had only been appraising for eight years, and had only been licensed for four years. He testified that he had never testified as an expert in any court.
Both appraisers testified that they employed the “direct sales comparison” method of valuation in determining the value of the property.
As the debtor’s appraiser explained, this method involves inspecting the property and reviewing Multiple Listing Service reports for sales comparisons. The appraiser then takes into consideration a number of factors and adjusts the comparable sales to the property.
The court stated that this approach constitutes the best evidence of market value.
The debtor’s appraiser also considered a downward “time adjustment” of two percent per month to account for the decline in sales prices as the Long Island residential real estate market has been in decline since 2007, which was important as Brentwood has experienced a steeper than average decline in home prices.
The debtor’s appraiser also considered a downward “time adjustment” of two percent per month to account for the decline in sales prices as the Long Island residential real estate market has been in decline since 2007, which was important as Brentwood has experienced a steeper than average decline in home prices.
He estimated this decline to be 25% per year. In addition, he stated that Brentwood contains many properties that have been foreclosed, and are now “REO”– real estate owned by the bank. Since banks typically sell REO properties for less than market value, this has the effect of depressing all sales of homes in the area.
Appraiser Made Serious Mistakes in Bankruptcy Court Proceeding
Appraiser Made Serious Mistakes in Bankruptcy Court Proceeding
During cross-examination, debtor’s counsel was able to demonstrate that the approach taken by the mortgagee’s appraiser contained three significant and ultimately fatal deficiencies.
First deficiency: The mortgagee’s appraisal contained valuations based on the fact that the house did not have a garage. However, during cross-examination, the mortgagee’s appraiser was caught admitting that he did not know whether the premises had a garage or not – a significant factor that affects valuation. In fact, the house did have one. That certainly shot down this appraiser’s credibility.
Second deficiency: The mortgagee’s appraiser used some comparable properties that were listings and not sales. A listing is not an accurate indicator of a property’s value and usually has no place in an appraisal.
Third deficiency: The debtor’s appraiser took into consideration the effect of REOs in the neighborhood, whereas the mortgagee’s appraiser neglected to do so. The Court pointed out that this constraint made his report less accurate.
Judge Grossman adopted the debtor’s appraiser’s valuation of the property in its entirety, commenting that his methodology was consistent with industry standards and his testimony was credible.
In stark contrast, the Judge described the mortgagee’s appraiser’s methodology as flawed, and his testimony as less credible. Indeed, the mortgagee’s appraiser even admitted that his omission of REO sales in his calculations rendered his valuation less accurate.
In citing caselaw, Judge Grossman pointed out that valuing assets is not an exact science and that the Court must look to the accuracy, credibility and methodology employed by the appraisers. Courts are not bound by appraisals submitted by the parties and may form their own opinions as to the value.
The burden is on the debtor as the moving party to establish that “there is not even one dollar of value” in the property to support the lien which the debtor seeks to avoid. Once the debtor has met this burden, it is up to the challenging party to submit evidence to overcome the debtor’s valuation.
The burden is on the debtor as the moving party to establish that “there is not even one dollar of value” in the property to support the lien which the debtor seeks to avoid. Once the debtor has met this burden, it is up to the challenging party to submit evidence to overcome the debtor’s valuation.
Accordingly, the debtor prevailed and was successful in cramming down the second mortgage to his house. Kudos go to bankruptcy attorney Alan C. Stein of Plainview, who represented the debtor, and his appraiser, John Breslin, of Huntington.
Practice Pointers for Bringing Mortgage Cram-Down Proceedings in Bankruptcy Cases
Most cram-down applications are unopposed. However, if the mortgagee contests your valuation, hire a highly experienced appraiser who will testify in court.
Also, keep in mind that if you have a hearing on valuation, you will either be totally successful or totally unsuccessful – all depending on how the court weighs the competing valuations. Therefore, it may be wise to play it safe and negotiate a settlement with the mortgagee, for example, by agreeing to reduce the balance on the mortgage substantially.
————————-
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 June 2011 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. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.Forcing lenders to work out settlements with homeowners in bankruptcy is the subject of a bill that Senator Sheldon Whitehouse (D., R.I.) introduced last week. Today there were hearings on the bill before the Senate Judiciary Committee.
The ideas under the proposed law, which would permit homeowners to modify their mortgages through bankruptcy proceedings, have been tossed around before and at times have been quite controversial.
Mortgage Cram-Down in Bankruptcy is the Bill’s Objective, But In a Voluntary Manner
Previous bills would have given debtors the ability to cram-down first mortgages in bankruptcy cases. However, these bills never made it into law.
Cramming down a mortgage in bankruptcy is not the essence of Senator Whitehouse’s bill; getting the lender to voluntarily agree to it, however, is.
The current bill would give bankruptcy judges the power to require foreclosure mediation between banks and homeowners.
The bill creates a mechanism for judges to supervise talks between homeowners and their lenders. This could address the problem where a homeowner makes a reasonable settlement proposal to the mortgage lender, but the lender or its servicer rejects it — a rather common occurrence.
The Proposed Bill Permitting Bankruptcy Modification Would Help Cut Through the Bureaucratic Red Tape
One of the biggest obstacles in seeking a mortgage modification is the difficulty in getting though to individuals at the lender who have the authority to negotiate terms. Take it from me, this can be a fruitless exercise in frustration.
The proposed bankruptcy modification bill would require that an individual with full settlement authority for the bank must show up for the mediation proceeding. In addition, the bill requires the lender to be open to good-faith negotiations.
Senator Whitehouse believes that court-ordered talks could pressure mortgage servicers to modify mortgages that they wouldn’t otherwise agree to modify.
During the hearings, Senator Whitehouse also criticized the HAMP program which has not succeeded as intended — Something I’ve written about extensively. See Problems with HAMP — Too Many to Count?
Legislative Action is Needed to Curb the Number of Foreclosures
This is now more important than ever as foreclosures are expected to climb to 12 million by the end of 2012 and Long Island will certainly have its fair share of that number..
I’ve also written extensively before about the frustrations in persuading lenders to modify a mortgage. See Why I Won’t Negotiate Loan Modifications and Loan Modification Industry is a “Sham” Says Attorney General Cuomo !
New York Bankruptcy Judge Drain Testifies at Hearing
The New York Bankruptcy Courts in the Southern District have a pilot loss-mitigation program that enables debtors to confer with their mortgagees.
Judge Robert Drain, sitting in the Southern District of New York, testified that half of the mediations that take place in his court end in an agreement which is often a modification. He said that the other half at least give the homeowner a clear understanding for why they are losing their home.
Judge Drain said that such programs are vital to sorting out the foreclosure issue.
Seeking Mortgage Modification in Long Island Bankruptcy Cases
There is currently an underutilized loss-mitigation pilot program here in the Eastern District of New York that has been in existence for just over a year.
I will discuss this program in a future blog post.
Written by Craig D. Robins, Esq.The Executive Office of the United States Trustee issued a news release this week stating that the U.S. Trustee just entered into a settlement agreement with Capital One to resolve allegations that the bank attempted to collect on debts that had previously been discharged.
Apparently, a number of consumers across the country filed for bankruptcy years ago, and in the process, discharged their debts to Capital One. When these consumers later filed a subsequent Chapter 13 bankruptcy, Capital One filed a proof of claim in the new bankruptcy case, but on the old debt, even though that debt had been discharged.
Once a debt is discharged, a creditor is forever barred from collecting it, even if the debtor later files another bankruptcy case involving a Chapter 13 payment plan.
The investigation revealed that Capital One filed 15,500 claims totaling approximately $24.7 million on debts that were previously discharged in bankruptcy, and that they received payment of approximately $2.35 million.
The reason for the erroneous claims simply boils down to some very sloppy business practices. Here, Captial One neglected to identify which customers had previously filed for bankruptcy protection — something they should have and could have easily done.
All creditors have an obligation to maintain adequate procedures to ensure that they do not violate the discharge protections that bankruptcy offers. Here, one of the country’s largest banks failed in that regard.
Capital One will refund each consumer or bankruptcy estate with the amount that was improperly collected as a result of the erroneous claim. Consumers and bankruptcy trustees need not take any further action.
In addition, Capital One will also be paying the attorney’s fees of those bankruptcy attorneys who objected to the erroneous claims.
The case that the U.S. Trustee raised this issue in was the In re: Galley Case out of Massachusetts, going back to 2008 (United States Trustee v. Capital One Bank (USA) N.A., Adversary Proceeding No. 08-01272 (Bankr. D. Mass.).
Written by Craig D. Robins, Esq.Tax Refunds can be a big deal when factored into a bankruptcy filing — for two main reasons.
Be Mindful of the Bankruptcy Exemptions for Tax Refunds
First, tax refunds can only be protected up to a certain amount. When you file for bankruptcy, you can protect various assets, and tax refunds is one of them — but only up to a certain amount.
In what is very good news for New York residents, the exemption for tax refunds will increase after January 23, 2011. See: The New, New York Bankruptcy Exemption Statutes for 2011 . I will post a detailed article in the next few weeks about protecting a tax refund while utilizing the new, New York state exemption.
Basically, each person who files who need to protect their home with a homestead exemption, can also protect up to $1,000 worth of cash, money in the bank, and tax refunds.
For those who do not need the homestead exemption, they may be able to use the federal exemptions, which up until now has not been a choice for New York bankruptcy filers. The federal exemptions provide for a wildcard exemption that can enable you to protect other miscellaneous assets up to $11,975 per person That is very generous!
Be Wary of the Effect of the Refund on the Bankruptcy Means Test
Second, the tax refund is considered income for purposes of calculating the means test, and adding the tax refund to the means test can make it harder for some people to become eligible for Chapter . For those filing Chapter 13, a tax refund can result in having to pay a larger Chapter 13 monthly payment. See: How a Tax Refund Can Mess Up Your Bankruptcy Means Test
Tax Refunds and Bankruptcy is such an important topic that last year I devoted an entire week’s worth of posts to the subject: Tax Refunds and Bankruptcy — Everything You Need to Know . I will write a few additional posts this year.
Be Careful How You Spend Your Refund If You Are Planning to File for Bankruptcy
In the meantime, if you get your tax refund, be careful how you spend it. You should not repay any loans to friends or family members because doing so could be considered making a “preferential payment.”
A preferential payment is when you “prefer” a certain creditor, even unintentionally, and that creditor gets more than he or she would have gotten otherwise. If you file bankruptcy within a year of paying back a family member, under certain circumstances, the bankruptcy trustee has the right to sue the family member to recover the money and bring it back into a “bankruptcy estate” so that it can be distributed in a fairer manner to all creditors.
Also, don’t spend the money frivolously by taking a vacation or buying luxury goods. Doing so can be considered inconsistent with the good faith necessary to receive a bankruptcy discharge.
So what can you spend your refund on? Bankruptcy attorney’s fees is one. Many of my clients are able to file for bankruptcy relief in the Spring, because that is when they typically receive their tax refund.
Tax refunds can also be spent on household repairs, car repairs, food, clothing, mortgage or rent payments, car payments, property taxes, fuel oil, child support arrears and some other reasonable items. However, seeking advice from an experienced bankruptcy attorney is your best bet.