Thursday, February 18, 2016

Mortgagee misconduct post bankruptcy

When you file bankruptcy, one of the benefits (maybe the biggest benefit) is silence.  Nobody, not your creditors, not their collection agents and not their attorneys, are permitted to hassle you.  They can't call, they can't write, they can't file or finish a lawsuit!  If you filed a bankruptcy and collectors are hassling you, tell your lawyer right away!  This isn't legal.

But what happens if the creditors don't obey the law?  We've certainly seen that banks can get away with murder.  Virtually no one had to go to jail after they crashed the economy in 2008.  But with bankruptcy that isn't so much the case.  A bankruptcy court in North Carolina just sanctioned Nationstar Mortgage $54,000 for repeatedly calling people during their bankruptcy in an attempt to collect the debt.  The unusual part of the case is that these debtors were actually current on their mortgage, and paying it in a Chapter 13 case!

Please contact your attorney if you experience debt collection after filing bankruptcy.  It is a serious matter!

Friday, January 22, 2016

Clawback lawsuits

When longtime Albuquerque real estate developer Douglas Vaughan filed bankruptcy in early 2010 suddenly a new bankruptcy term gained some local public recognition; the term "clawback".  What does clawback mean in the world of bankruptcy?

Clawbacks come in at least two flavors; preferential transfers and fraudulent conveyances.  Preferential transfers are payments by a Debtor to creditors within 90 days of filing bankruptcy (within a year if the payments go to family members) of at least $600 (the threshold is much more with a business bankruptcy).  Fraudulent conveyances are payments or transfers of assets by a Debtor within four years of filing bankruptcy.  The harm that Congress is trying to cure with clawbacks is the chance that a Debtor might give away valuable assets (including money) right before bankruptcy so he doesn't lose them to a trustee.  Congress gives the trustee in bankruptcy some power to undo certain transfers by "clawing them back" into the bankruptcy estate where they can be sold and paid to creditors.


The general rules are pretty simple for preferential transfers.  Say you are paying a Capital One credit card $1,000 per month for the past year.  Tomorrow you file a bankruptcy.  Your Trustee in bankruptcy can sue Capital One to get the $3,000 paid within 90 days back, and use that money to pay your creditors equally.  The theory is you are paying Capital One but not other worthy creditors, and the Trustee should even things up.  Most people don't really care whether Capital One or the Trustee gets this $3,000 because it isn't coming back to them no matter what.

Where preferential transfers can become painful is when the payments are made to a family member.  Let's say you borrowed $10,000 from your mother last year.  You have been paying her $1,000 per month until it was all paid off.  That doesn't leave you enough money to pay your credit cards, so Capital One and Wells Fargo get nothing while your mother gets $10,000 within a year of filing bankruptcy.  Your trustee in bankruptcy sues your mother, tries to recover the $10,000, and uses that money to repay all creditors (including your mother) the same percentage.  As you can imagine, your mother is likely to be upset that your bankruptcy gets her sued, and maybe costs her $10,000!  Your attorney should ask about any payments you have made to family members, and if there are any, discuss your options.  Sometimes some pre-bankruptcy planning can at least reduce, if not eliminate the problem.  Sometimes if your attorney tells you to stop paying your mother for several months before filing bankruptcy, there isn't a problem at all.  But many other wrinkles exist; discuss with your attorney if you are in this situation before filing a bankruptcy.

Fraudulent Conveyances

Fraudulent conveyances are more complicated than preferences.  Trustees aren't allowed, for example, to sue your car lender to get back your monthly car payments, or your mortgage lender to get back your mortgage payments.  Those are secured debts, and you are getting something back from the person you are paying.  The classic example is giving away assets to hide them from the bankruptcy trustee.  Let's say your attorney says you can't protect that paid off 2015 Lamborghini if you file a bankruptcy.  You decide to sign the title over to your brother for $1 and file bankruptcy the next month.  You got something back in this example, but $1 is a long way from the value of a 2015 Lamborghini.  Your trustee would sue the brother, get the car, sell it at auction and use the money to pay your creditors.  There are a number of defenses to fraudulent conveyance lawsuits, and like preferences the most useful planning and preparation occurs before filing bankruptcy.  Talk to your attorney about how to minimize any problems with transfers.

Vaughan Company Realtors

The Chapter 11 Trustee for Douglas Vaughan filed almost 200 clawback lawsuits, most of them in 2012.  I think they are pretty much all resolved by now.  There was quite a bit of publicity for these clawback lawsuits, so you may have read articles in the paper about them.  Doug Vaughan's Ponzi scheme required him to make payments to all the people he borrowed money from.  When he ran out of money to pay, he filed bankruptcy, leaving at least three different groups of lenders.  Some were paid in full, many were partially paid, and a very few got nothing at all.  The difference in what class you belonged to was mostly chronological; if you lent Vaughan money a long time ago, you might be paid in full.  If you lent him money the day before bankruptcy, you didn't get a penny.  The Chapter 11 Trustee sued many of the investors in order to get back the money Vaughan paid them and divide it up more evenly among all the investors, so that everyone got hurt a bit, and no one was completely destroyed.  This is a very superficial treatment of a very complicated subject, so if you have questions, make sure you ask them all of your lawyer!

The real purpose of this post is to warn people considering bankruptcy of potential complications.  Some things that you have done in the past may end up affecting your bankruptcy.  As always, consult your attorney!

Friday, November 6, 2015

Bankruptcy Scammers Exist

I just saw a post at the National Consumer Bankruptcy Attorneys site saying that law enforcement is seeing a new scam.  People who file bankruptcies are being called by spammers who spoof the phone numbers of their bankruptcy attorneys and high pressure the victims to wire money to them supposedly to pay some debt.  Some victims are threatened with arrest if they don't pay.  Apparently the bankruptcy part of it is that since bankruptcy filings (like all court filings) are public record, the scammers tell the victims personal details about their lives to make the deception more believable.

I have heard of one example of this happening in New Mexico to a colleague, so please be alert.  Any clients of mine who receive calls supposedly from me instructing them to pay some debt to someone please hang up and call me directly to verify.  I won't dun you to pay bills, and no bill collectors can legally threaten you with arrest or jail.

Tuesday, June 2, 2015

After your bankruptcy; should you have reaffirmed your mortgage?

Reaffirmation is a contract that cancels a bankruptcy for a specific debt.  It is virtually never a good idea for a debtor to reaffirm.  The disaster scenario, particularly in a stagnant real estate market, is you reaffirm the mortgage, suffer future job loss, the house gets foreclosed and the mortgagee can sue you for a massive deficiency.  They can garnish your bank account and your salary (if you get a new job).  If you do NOT reaffirm all those things can happen except the bankruptcy protects you from any deficiency.

In the run up to the big change in bankruptcy laws in 2005 the lending industry managed to almost make reaffirmation mandatory for car loans; there are some loopholes we debtor lawyers can use, but it was a pretty grim change for debtors with financed cars.  Luckily the provision did not extend to mortgages.  Mortgage companies rarely even ask for reaffirmations any longer, because competent debtor attorneys won't sign if they don't get concessions (reduced interest rate or something) and even if they do sign bankruptcy judges often refuse to allow them to be entered.  Mortgage companies can not force anyone to reaffirm.

Mortgage companies, however, often punish people who file bankruptcy by discontinuing sending them payment coupons or statements, disabling their online payment options and refusing to report to credit reporting agencies that they are making their monthly payments.  I consider it to be petty harassment by mortgage companies; they will tell you bankruptcy law requires them to take these steps.

I think refusal to report payments to credit reporting agencies is a violation of the Fair Credit Reporting Act.  Mortgage companies are required to report accurate credit information.  That isn't my area of the law, however, and I don't know of anyone who has taken that approach by suing their mortgagee in court for failure to report.

This often doesn't even come up during bankruptcy, because mortgage companies know they aren't likely to get reaffirmation agreements signed.  Usually it comes up years after bankruptcy when a debtor wants to refinance his or her home.  The mortgage company tells them "well, you need to reaffirm before we can refinance."  There are a couple of problems with this.  First, nothing in the law requires reaffirmation.  Secondly, you can only reaffirm during a bankruptcy; it isn't possible to do so after the fact.  Probably most important of all, reaffirmation is a very technical procedure and doesn't have a thing to do with creditworthiness (at least in my opinion).

If you are in this situation I have little specific advice to counter the mortgage company bureaucrat telling you to just go get a reaffirmation.  My experience, however, is that being organized and persistent when applying for loans will usually be enough to get you the loan.  Good luck!

Friday, May 22, 2015

Morality of Bankruptcy

I hear a lot of comments about the morality of bankruptcy.  Often from prospective clients who come to me for help, but hate the thought of filing bankruptcy.  They feel that they have failed if they file a bankruptcy.  They feel ashamed.  Debt collectors prey on this feeling; they threaten debtors and castigate them for failing in their responsibilities or running out on their obligations.  I find this attitude very confusing, for a number of reasons.

First of all, my prospective clients are not the only ones who need financial help!  Wall Street banks cratered our economy a few years ago, and immediately begged for help from taxpayers!  They got a trillion dollar bailout from the government, and then used some of that money to pay themselves millions of dollars in bonuses!  To this day they're getting interest-free loans from the Fed.  That Wall Street bailout cost our government and our economy a HELL of a lot more than my clients ever could!  So why is financial help ok for the big banks but not my clients?

Secondly, I see no evidence of morality anywhere else in our financial system.  Credit card companies charge 20 - 30% interest when you get in trouble; what is the morality of that?  Payday loan companies might charge 1200% interest!  H & R Block charges payday-esque interest for their short term refund anticipation loans.  Mortgage companies can't even figure out who has the note and mortgage on your house, let alone accurately apply your payments.  Why are my clients the only ones in our entire financial system who have to be "moral" by foregoing bankruptcy help?

Thirdly I often hear "my dad would never have done this".  That is probably true at least statistically.  Bankruptcy filings are higher than they were in the 1930 - 1980 time frame (depending on how old your parents are).  I think the biggest reason for that is usury laws.  After the Great Depression we enacted laws designed to protect us from another economic collapse.  Some of them limited the amount of interest a bank could charge its customers.  Your parents weren't any more financially responsible than you are, but they couldn't get into nearly as much trouble as you can given the way interest rates have skyrocketed over the last 30 years.  A big reason for the explosion of credit cards in circulation was the repeal of the usury laws.  When I graduated college in 1979 I had to beg for months to get a $300 credit limit credit card!  It wasn't profitable for the bank to manage that kind of an account.  Both of my daughters, however, received credit card solicitations while they were in college, even before they had jobs!  It is a different world than your parents' world.

Finally, is there really any immorality?  Studies show the vast majority of Americans pay debts they can afford, but not debts they can't afford.  That sounds pretty moral to me.  The prime consumers of bankruptcy in America are single mothers, people who have lost their jobs, and people dealing with massive medical bills.  These aren't people irresponsibly running up their debts and giggling all the way to the Bankruptcy Court, these are people in genuine financial need.  Compared to ancient Rome, where they could be sent to debtors prisons, our society offers people in over their heads financially the chance to discharge their debts and get a fresh start.  I don't see any immorality.  Leave the immorality to the debt collectors who try to guilt you into paying something you can't afford!

Friday, March 20, 2015

Paying for bankruptcy

One conversation I have had many times over the 29 years I have been practicing law is about the fees bankruptcy lawyers charge their clients.  "I can't afford to go bankrupt" is a common reaction when I give a prospective client a fee quote.  A related problem occurs when a prospective client is cheered up when I offer to accept payments against my bankruptcy retainer, but wants me to file the bankruptcy immediately and take payments after the case is complete.  I try to be as clear as possible that the entire retainer must be paid before I can file the case.

The first reason for this policy is the conflict of interest.  A lawyer may not represent parties on opposite sides of a dispute.  For example, I could not represent both a husband and a wife who are divorcing.  What benefits one client harms the other client.  That is a classic conflict of interest.  In the bankruptcy setting I cannot represent the debtor who is filing a bankruptcy and also one of his creditors.  For example I cannot file a client's bankruptcy, and then go to the bankruptcy court to request stay relief on behalf of my client's mortgage company so that they can foreclose on his mortgage.  That is clearly a conflict of interest.  What is a creditor?  A creditor is someone owed money by the debtor.  If I file your bankruptcy, and you still owe me $1800 for my fees in filing the bankruptcy, I am your creditor.  We have already seen that I can't represent you and also your creditors at the same time.  So taking payments for bankruptcy services after the case is filed creates an impermissible conflict of interest.

The second reason for the policy is discharge.  When you file bankruptcy, the Bankruptcy Court puts a federal injunction against debt collection in place called "the automatic stay".  This is one of the chief benefits of filing a bankruptcy.  This is the reason all those annoying creditors who have been calling you every fifteen minutes for the last few months finally leave you alone when you file a bankruptcy.  This is the reason the judgment creditor that has been garnishing your salary for the past year has to finally stop.  What this means for my fees is that I can't collect from you post bankruptcy.  I can't remind you that you still owe me money, I can't send you a bill, I can't ask you to change a payment plan.  If I did I would be violating federal law.

Finally the pragmatic reason is that it is generally better to be paid for services in advance.  In the 29 years I have been doing this I have taken a very few cases with promises of future payment.  I have a dismal record in those cases.  I do not mean to impugn anyone's honesty when I say that this payment arrangement has not treated me well over the years, and I simply won't do it any more.

All is not lost, however.  I will accept payments from clients over time.  I won't file the bankruptcy until I get the full retainer, but I will help you buy enough time from your creditors to save the rest of the retainer up.  I will field your collection calls, I will respond (within reason) to demand letters and lawsuits, and I will help you to understand the timing of adverse lawsuits and other collection matters so that we can chart our way together toward a successful bankruptcy case.

Saturday, December 27, 2014

Exceptions to Discharge

When you file a personal bankruptcy, there are a few things that can go wrong.  They are fairly unusual, and if you used an attorney to file your bankruptcy it is pretty likely you had a good idea going in whether something was likely to go wrong.  The fact patterns that lead to trouble are fairly obvious to an experienced bankruptcy attorney.

First some background.  Congress deliberately made it difficult to interfere with a bankruptcy.  Bankruptcy is a safety valve for society.  Our economy is based on small businesses selling products and hiring employees.  A lot of people would never take such a risky step, so it is important to protect those entrepreneurial people.  If someone's first business fails but they are put in debtors prison or forced to repay the debts for the next 50 years, they won't start a second or third business that might be successful.  No less a source than the Wall Street Journal has called America's bankruptcy system the engine of its economic prosperity.  Since bankruptcy serves such an important social function, it should be hard to derail.  It is.

Some debts automatically survive bankruptcy.  These are debts that Congress (sometimes foolishly) has decided are more important than the goal of discharging debts in bankruptcy to give people a fresh start.  Examples are child support, alimony, taxes, criminal fines, criminal restitution, student loans and injuries inflicted on third parties while the debtor was driving under the influence of alcohol or drugs.  This post is not about these automatic exceptions to discharge (although there is more to it than I have mentioned so far).  This post is about debts in a gray area.  They might survive bankruptcy and they might not.  These are the so-called "misconduct" exceptions to discharge.

The three major misconduct exceptions to discharge are fraud (oral or written), breach of a fiduciary duty to someone, and willful and malicious conduct.  Congress has deliberately slanted the playing field in favor of debtors (people who file bankruptcy).  Creditors must prove their case specifically.  It is insufficient for creditors to prove you owe them money; that is very reason you filed a bankruptcy.  Congress was obviously aware that sometimes large financial institutions can put tremendous pressure on debtors simply because they have the financial resources to pursue them in Court; some consumer exception cases can result in the bank having to pay your attorney's fees if you defend the case successfully.

I have defended a lot of exceptions to discharge over the past 29 years, some in my own cases and some cases filed by other attorneys.  It is an interesting area of practice and important to the clients.