Archive for May, 2009

¶There are new restrictions on when credit card companies can increase the interest rate on balances you have already run up. The bill says that banks generally must wait until you are 60 days late in making the minimum payment before applying a penalty interest rate to your existing debt.

¶Card companies will have to give 45 days’ notice before raising their interest rates.

¶Banks must send out your bill no later than 21 days before the due date. 

¶If the card company gets your payment by 5 p.m. on the due date, it’s on time.  Also, no more late fees if the due date is a Sunday or holiday and your payment doesn’t arrive until a day later.

¶If you are paying different interest rates on the debt on a single card — one for a cash advance, another for a balance transfer and a third for new purchases. Now, when you make a payment over the minimum balance, banks will have to apply it to the highest-interest debt first.

¶Banks will need your permission before allowing you the “privilege” of spending more than your credit limit and paying a fat $39 fee for that privilege.

¶Students will find it more difficult to get a credit card. No one under 21 will be able to have a credit card unless a parent, legal guardian or spouse is the primary cardholder. However, students with their own income can submit proof and ask for an exception to the co-signer requirement.

 

With overwhelming debt on their shoulders, many Long Island consumers feel that the economy is at the precipice of near collapse.  The national debt is soaring and the unemployment rate is at a post-WWII record level. Bankruptcy filings are also at a near-record level, as people seek debt relief that only bankruptcy protection can afford.

 

With many consumers quickly eating through their savings accounts to make ends meet, and with additional access to credit becoming very tight and often unavailable, many Long Islanders are tempted to borrow against their 401-K, IRA, Keough, pension or other retirement accounts.  However this is a big mistake – no matter how easy.

 

For some the enticement is too hard to resist as there are even credit card companies and banks that offer ways for people to easily cave in to that temptation – by making such borrowing as simple as utilizing a credit card – just as if it were a “normal” debit card.

 

However, this practice – withdrawing funds from any retirement account – should be avoided at all costs. Why? Because, in the State of New York, retirement funds are exempt.  They are totally protected from creditors when a consumer files for bankruptcy relief.  In almost all cases, the retirement and pension funds are absolutely exempt in personal bankruptcy filings whether Chapter 7 or Chapter 13 bankruptcy. 

 

However, other funds such as cash and money in the bank are susceptible to being appropriated by a bankruptcy trustee if they add up to more than $2,500 per person.  Although cash and money are only protected up to $2,500, pension funds and retirement accounts are usually fully protected.

 

Thus, it is crucial that a consumer considering bankruptcy maintain their pension and retirement assets.  Once a retirement account is tapped, those funds are no longer safe – they become part of the debtor’s current cash account – and therefore receive limited protection in bankruptcy.

 

In addition, when hard-earned funds are withdrawn from retirement accounts, there generally are heavy tax consequences.

 

For these reasons, it is very important to seek the advice of an experienced bankruptcy attorney prior to even thinking about withdrawing funds from retirement accounts, as the consequences are usually quite severe.

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There was a very intriguing article in the Long Island section of today’s New York Times which explored the extent of the foreclosure problem on Long Island: “Foreclosures Rise, With No End in Sight.”

  

The high cost of sub-prime borrowing is now causing mortgage default to rapidly  spread across the metropolitan area.  Most sub-prime mortgages contain adjustable rate provisions that are now causing the mortgages to be unaffordable.

 

Several years ago, once-blighted neighborhoods became gentrified when sub-prime mortgage funds easily flowed in.  Now, however, the tide has turned, and these areas are suffering an epidemic of default, as homeowners simply cannot afford to pay their mortgages. Now, thousands of homeowners stand to lose lifetimes of savings as well as their homes.

 

Data shows that Long Island’s housing problems appear to be worsening. Long Island’s foreclosure rate is 3.7 percent, with at least 31,000 homes in some stage of foreclosure during the period 2005 through 2008.  This is higher than the 3.3 percent rate for the tri-state region.

 

Additional data shows that more than 6 percent of Long Island mortgages are 90 days or more past due, which is substantially greater than the 3.5 percent amount for the same period last year.

 

Certain communities had the greatest level of default: In Nassau County there was Hempstead, Freeport, Uniondale and Roosevelt.  In Suffolk County there was Brentwood, Central Islip, Wyandanch, Islandia and Mastic Beach.

 

Suffolk County had the most foreclosure activity.  Now huge swaths of Suffolk are experiencing mortgage defaults, mostly the blue-collar communities of Shirley, Mastic and Ridge west to Centereach and Ronkonkoma.  In addition, the rates more than tripled in the area around Central Islip and Brentwood, and the foreclosure problem has also spread south into Bay Shore.

 

Many of these homes are “under water” and no longer have any equity.  The homeowner owes the mortgage company more than the home is worth.

 

The article quoted my friend, Garden City Bankruptcy Attorney Roy J. Lester, who said that while it might appear noble to go down fighting to save a house, people should make sure that it is worth saving.

 

My office has been especially busy the past year helping Long Island homeowners  litigate and defend mortgage foreclosure proceedings and filing Chapter 13 bankruptcy to stop foreclosure.   When a homeowner is in trouble, the best thing he or she can possibly do is meet with bankruptcy attorney and mortgage foreclosure defense lawyer.

 

Making decisions about whether a house should be saved are best done after consulting with legal counsel.

 

 

The 2005 Bankruptcy Amendment Act, which made it slightly more difficult for some people to eliminate their debts in bankruptcy, placed a damper on a debtor’s ability to pay the expenses of their children’s college tuition while seeking bankruptcy relief.

 

The new bankruptcy laws require individuals to pay their creditors any money that is over and above what is needed for necessary day-to-day living expenses.  Fortunately, most individuals that we represent with Chapter 7 bankruptcy cases are able to show that they do not have any “disposable income” after paying their necessary expenses.

 

The essence of the new bankruptcy law is the means test which indicates what expenses are reasonable and necessary.  Unfortunately, the means test does not treat contributions to a child’s college tuition as a reasonable expense.  The government would rather see any disposable income being paid to creditors.

 

Since the new bankruptcy laws went into effect in 2005, there have been several cases across the country addressing the issue of whether debtors may deduct college expenses for their adult children.  Unfortunately, the bankruptcy judges in these cases have found no statutory support for educational expense deductions for a child’s college tuition.

 

Perhaps one bankruptcy court expressed the current state of the law best, by stating that, “while a parent’s desire to assist a child. . . pursuing a college degree is laudable, a debtor is not free to do so at the expense of her unsecured creditors.”  In re Hess, No. 07-31689,(Bankr. N.D. Ohio 2007).

 

Another bankruptcy judge stated that a debtor paying college expenses of an adult child is a luxury, not a necessity, and that the Bankruptcy Code does not provide any support for allowance of such a deduction.  In re Hicks, 370 B.R. 919 (Bankr. E.D. Mo. 2007).

 

The most recent case analyzing the issue of a debtor paying college tuition was decided in January 2009.  Although the bankruptcy court in that case recognized that “special circumstances” might justify allowance of college expenses for adult children, it found that the facts in that case did not rise to that level because it was not apparent that the debtor had made a reasonable effort to mitigate her expenses.  In re Baker, No. 08-13987 (Bank. N.D. Ohio 2009).

 

The new bankruptcy law is not kind towards the large number of Long Island parents who are both overwhelmed by debt and who are obligated to assist their children with college tuition.  However, discussing a budget with an experienced bankruptcy attorney might uncover some possible solutions.  For example, in some Chapter 13 cases, a parent can pay a child’s college tuition.

 

 

Chrysler, which is undergoing this nation’s largest Chapter 11 bankruptcy reorganization, announced today that it is ending franchise agreements with 789 dealers across the country, about one-quarter of the company’s dealership roster. The terminations are to take effect on June 9.

 

According to Chrysler’s CEO, the aim is “to create a dealer network that is stronger, more profitable, and better able to meet and exceed the high expectations of today’s car and truck buyers.”

 

However, this will have predictable negative consequences on Long Island that will certainly result in financial hardship to numerous consumers.  The ensuing ‘ripple effect”  that will inevitably cause many of them to file their own personal bankruptcies.

 

We already know that Chrysler is closing four Long Island dealerships:  ABC Motors in Valley Stream, Eagle Auto Mall in Riverhead, Thomas Dodge in Port Jefferson and Island Jeep in Lindenhurst.

 

Once these dealers are out of business, perhaps a hundred employees in Nassau and Suffolk Counties will be without work.  Local vendors who supplied these dealers will lose sales and may have to lay off some of their own staff.  Even the local deli down the street will suffer.  This is the ripple effect.

 

To make matters worse, these dealerships aren’t the only ones who will be receiving bad news this week. General Motors Corp. says it is notifying 1,100 dealers that it will not renew their franchise agreements next year.

 

Like the famished creatures of the forest foraging for food after the winter thaw, around this time each year Chapter 7 trustees begin their annual hunt for tax refunds. 

 

 

Tax refunds are in the category of liquid assets which are only exempt up to $2,500 per debtor.  The amount of this exemption is relatively small and has not increased in over 20 years.  To make matters worse, a debtor cannot avail himself of the liquid assets exemption if he or she takes the homestead exemption to protect equity in a home.

Generally, a tax refund that is received post-petition is property of the estate if it is not exempt, and it is attributable to wages earned and withholding payments made during prepetition years.

 

 

Trustees get excited that Long Island bankruptcy filers often receive substantial tax refunds.  Since tax refunds combined with funds in the bank often exceed $2,500, and also, since many Long Island bankruptcy filers use the homestead exemption instead of the liquid assets exemption, we regularly see trustees salivating at the meeting of creditors over the prospect of administering a tax refund as an asset of the estate.

 

 When One Spouse Files, How Do You Allocate the Tax Refund?

 

Here is a frequent situation that I observe at the meeting of creditors.  Only one spouse has filed for bankruptcy relief and the trustee discovers that there is a sizable post-petition tax refund.  The issue then becomes what part of the refund belongs to the debtor (which is usually not protected) and what part belongs to the non-filing spouse (which is totally protected because it is not property of the bankruptcy estate).

 

 

I have seen different trustees taking different approaches, often based on what was most advantageous to the trustee at the time.  However, the case law is specific as to determining the apportionment.

One approach is to apportion the refund equally between the two spouses, 50/50, regardless of the source of income or tax withholding.  This is rather simple and straight-forward.

  
The other approach is to apportion the tax refund by calculating a proportional amount: the proportion of the withholdings that the debtor contributed.

 

The problem with either approach is that each can yield what appears to be an unfair result.  If you use the 50/50 approach, and one spouse contributed substantially more than the other, then you get a lopsided result.  On the other hand, if you use the proportional income rule approach, and the non-filing spouse contributed very little towards withholding taxes, then the trustee winds up getting most of the refund.

 

Since it is hardly worth it to litigate over relatively modest sums, debtors often quickly settle and give in to the trustee’s demands.  However, knowing the law will enable you to properly plan your filing and avoid getting into a dispute with the trustee.

 

 

The best case to look to is In re Marciano, 372 B.R. 211 (S.D.N.Y. 2007), which clearly states that New York uses the 50/50 approach, which is the minority view.  In reaching this determination, the court stated that it had no choice but to look to matrimonial law in dividing tax refunds between husband and wife, as state law is controlling.

 

The court distinguished New York from those states adopting the majority view (apportionment).  These other states have different bodies of law involving property rights; New York does not have any such laws.  In New York, matrimonial law (Domestic Relations Law section 236) governs disputes over dividing tax refunds between spouses.

 

The Marciano court concluded that considering the fairness of each rule to (1) the debtor, (2) the non-filing spouse, (3) the creditors, and (4) the estate, adopting a presumption of equal ownership of a joint tax refund as between a debtor and non-debtor spouse is the most equitable outcome. In a continuing marital relationship, it is a fair presumption that the proceeds of the tax return would be shared equally as a joint venture.

One caveat: the court noted that the 50/50 rule can be rebutted under certain circumstances if the spouses can demonstrate by their present conduct or history of financial management, that there is a basis for separate ownership.

 

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 May 2009 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 Medford, Commack, 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.
 

 

My friend and colleague, Salvatore LaMonica, a bankruptcy attorney from Wantagh, New York, was named Chapter 7 trustee in the prominent case of a disgraced Manhattan lawyer Marc Dreier, who is accused of defrauding hedge funds of $700 million.

 

Dreier was recently put into involuntary Chapter 7 bankruptcy by some of his creditors. Salvatore LaMonica, who is the latest addition to the Chapter 7 panel of trustees in the Southern District of New York, was named trustee of Dreier’s personal properties.

 

As trustee, Sal will liquidate two of Dreier’s beachfront Southampton properties located
on 111 Dune Road, as well as the Manhattan condominium where Dreier was held under house arrest.  The properties are worth about $15 million.

 

Sal, a partner of Lamonica Herbst & Maniscalco, LLP, was previously a law clerk to Judge Eisenberg when the Long Island bankruptcy court had a courthouse in Westbury.

 

Yesterday, Drier pleaded guilty to one count of conspiracy to commit securities fraud and wire fraud, one count of money laundering, one count of securities fraud and five counts of wire fraud.  Sal discussed Drier’s personal Chapter 7 bankruptcy case with the judge in Manhattan Federal Court.

 
I previously wrote several posts about how some of this country’s largest mortgage companies had engaged in abusive and frivolous litigation practices in bankruptcy court proceedings.  (see Finally. . . U.S. Trustee getting tough on mortgage lenders ).

 

Now the United States Trustee is seeking major sanctions against Countrywide Home Loans in a case in Akron, Ohio.  Last year I called Countrywide the “Poster Child of Bad-boy Bankruptcy Litigation” because of the extreme level of chronic abusive litigation they were engaged in across the country.

I, myself, sought sanctions against a mortgagee last year for bringing frivolous litigation in the Central Islip Bankruptcy Court and obtained a record sanctions award for my client — Litigating Against Abusive Mortgagees. Your Columnist Scores Big Win Against Mortgagee Who Filed Frivolous Motion .

 

With this Ohio bankruptcy case, the United States Trustee, which is the federal arm of the U.S. Department of Justice that monitors all bankruptcy proceedings in this country, is seeking to reform a mortgage-servicing system that is riddled with errors.

 

Last week, the U.S. Trustee sought remedies against Countrywide, which was recently renamed Bank of America Home Loans by owner Bank of America Corp.

 

Ohio bankruptcy court Judge Marilyn Shea-Stonum determined that Countrywide showed a “disregard for diligence and accuracy” and called for sanctions against Countrywide.

 

Today, the judge entertained arguments on what sanctions the court should impose in this bankruptcy case.

 

The facts of the case grew out of the 2007 bankruptcy of Marlynn R. O’Neal, who totally satisfied her mortgage debt in 2005. However, when O’Neal filed for personal Chapter 13 bankruptcy two years later, Countrywide filed papers in bankruptcy court saying she owed $88,000.  Such conduct was purely frivolous. 

 

The U.S. Trustee’s office took action against Countrywide for having commenced frivolous and abusive litigation.  Countrywide admitted to negligence in demanding payment from the debtor, but they denied that they were reckless. 

 

However, Countrywide didn’t simply overlook one entry on  a loan history, the judge noted. Months of phone calls and e-mails establishing that the debtor’s mortgage was satisfied  never showed up in the part of Countrywide’s system that produces information for bankruptcy court filings.

 

The judge determined that “Countrywide’s system is reckless.”  The judge wrote, “It appears to me designed to allow each actor in the process to act with indifference to the truth.”  Judge Shea-Stonum concluded that Countrywide’s conduct “was not reasonable, was reckless and is sanctionable.”

 

In even harsher words, the bankruptcy judge stated, “There is no evidence in the record to support that Ms. O’Neal was other than a victim of a predator whose business operations are enabled by and depend upon a mortgage servicing industry that is unconcerned with the accuracy of records and information.”

 

I will report the results of the bankruptcy sanctions hearing when they become available.

 

As a Long Island bankruptcy attorney, my clients often ask me questions like, “What does the bankruptcy trustee do?”

 

When a debtor files for bankruptcy relief, the Office of the United States Trustee (the governmental agency that monitors all bankruptcies in this country) appoints a trustee to examine the debtor.

 

The examination, which typically consists of asking the bankruptcy debtor questions in a hearing room at the Long Island Bankruptcy Court in Central Islip, usually lasts no more than 15 minutes.  This is called the “meeting of creditors”.  Most of these hearings are  finished in much less than 15 minutes although some complicated cases may last as long as half an hour.

 

In Chapter 7 bankruptcy cases, it is the trustee’s role to also determine if there are any non-exempt assets.  If there are any, it is the trustee’s obligation to liquidate them.  However, about 95% of Chapter 7 cases are “no asset” cases in which the trustee does not administer any assets.

 

In Chapter 13 bankruptcy cases, which is a payment plan bankruptcy, the trustee collects the payments from the debtor and distributes them to the creditors.  It is the trustee’s obligation to make sure the debtor has properly calculated the payment plan.

 

Trustees will not come to your home and will not check your safe deposit box, if you have one.

 

In most Chapter 7 bankruptcy cases, the only interaction the debtor will have with the trustee is the brief meeting of creditors at the bankruptcy court.

 

 

 

I cannot begin to tell you how many of my Long Island bankruptcy clients have complained about being victimized by debt settlement companies.

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Today, Attorney General Andrew M. Cuomo today announced a nationwide investigation into the debt settlement industry, subpoenaing fourteen debt settlement companies and one law firm, including one from Huntington, on Long Island.

 

In a press release he issued today, he called debt settlement companies “a rogue industry” that gives strapped consumers false hopes while socking them with high fees.

 

 

Many consumers are tempted by debt settlement companies that advertise on TV with fancy, large-budget TV commercials which promise to drastically reduce credit card debts.  However, the sad truth is that almost all of these companies engage in unscrupulous practices and make promises about eliminating debt that they can’t possibly fulfill.

 

When these consumers find that the debt settlement companies cannot cure debt problems, they come to me for bankruptcy relief, often in a worse position than they were in before they hired the debt settlement company.

 

To compound the problem, debt settlement companies are very loosely regulated

 

 

In these very difficult economic times, consumers are very vulnerable and become easy prey for many types of con-artists.  Companies offering debt negotiation often attempt to take advantage of people who are experiencing personal financial problems during these trying economic times. 

 

It seems that many unscrupulous companies are flourishing as the recession deepens, taking advantage of more and more consumers.

 

Just last month I wrote about how Cuomo arrested the owner of a Long Island-based process serving company, American Legal Process, for allegedly providing “sewer service” to thousands of New Yorkers owing debt.   As a result of the improper service, individuals would unknowingly default and have judgments entered against them, without the chance to defend themselves.

 

 

Now Cuomo is going after debt settlement companies which often prey upon consumers who find themselves unable to keep up with credit card payments during these difficult economic times.   (See Attorney General Investigating Process Servers for Taking Illegal Shortcuts).

 

“Today, millions of hardworking Americans are finding themselves imprisoned by debt.  In response, a rogue industry has stepped in, offering consumers false hope, charging tremendous fees, and leaving them in a worse financial situation,” said Attorney General Cuomo.

 

“Our mission is clear: to hold unscrupulous businesses accountable; to rein in a renegade industry; and to ensure that people are not victimized when faced with financial hardship.”

 

Here is a list of the fourteen debt settlement companies and one law firm that Cuomo issued subpoenas to this afternoon: American Debt Foundation, Inc.; American Financial Service; Consumer Debt Solutions; Credit Answers, LLC; Debt Remedy Solutions, LLC; Debt Settlement America; Debt Settlement USA; Debtmerica Relief; DMB Financial, LLC; Freedom Debt Relief; New Era Debt Solutions; New Horizons Debt Relief Inc.; Preferred Financial Services, Inc.; U.S. Financial Management Inc. (d.b.a. My Debt Negotiation); and the Allegro Law Firm. 

 

The subpoenas seek to uncover the companies’ fee structures, how many people have benefitted from the companies’ services, and what kind of relief the companies are actually providing.

 

Cuomo is also currently investigating Nationwide Asset Services, Inc., based in Phoenix, Arizona, and Credit Solutions of America, Inc., based in Addison, Texas.

 

 

The debt settlement plans offered by these companies are often inherently flawed and, based upon consumer complaints, it appears that many consumers are being misled regarding the nature of the services offered by these companies. 

 

For example, some companies falsely represent that they can reduce consumers’ credit card debt by as much as 75 percent through negotiations with creditors.  In addition, the companies often take their fees up front and keep their fees even when they do not provide the promised services.

 

The debt settlement plans are generally premised on consumers aggregating savings, over one to three years, from which both the payment of the company’s fees and any negotiated settlement are to be made.  Yet most consumers who are targeted by these companies are unable to meet the savings requirements because of their precarious financial situation. 

 

Even for those consumers who can meet the requirements set out by a plan, their amount of aggregated savings is ordinarily insufficient to settle their debts.  As a result, many consumers find themselves worse off financially because of these debt settlement plans.  As a result, many then come to me to discuss eliminating the debts through bankruptcy, which in many cases, they could have done in the first place.

 

Consumers who believe they are being defrauded by a debt settlement company are urged to contact the Attorney General’s office at 800-771-7755 or to visit the Attorney General’s web site at www.oag.state.ny.us.

 

 

The services offered by the debt settlement companies are very different from debt negotiation services offered by certain law firm such as my own.  With debt settlement companies, the consumer makes monthly payments to the company, and the company first applies these payments to their own fees before any settlement is actually made.

 

Frequently, they sign up consumers who they know, or should have known, would not be able to complete the program.  What’s more, the companies keep the fees even when services are not provided!

 

Debt negotiation offered by attorneys, however, is much different and involves negotiating settlements with the creditors.  The client typically does not pay any advance fees, other than an initial retainer.