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.

Preferences

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!