on the Bankruptcy Soapbox

Peter Orville wrote about the impact of the Chapter 13 trustee’s commission

The point he makes goes to the heart of the debate about whether car loans or current mortgage payments are paid by the Chapter 13 trustee or directly by the debtor.  Here in California, with mortgage payments regularly in the $3,000-6,000 a month, requiring debtors to pay their mortgages through the trustee increases the debtor’s cash requirements significantly.

Proponents of making payments through the trustee note the advantages in the event of accounting disputes and the added visibility it gives the trustee.  My fear is that at 7-10% commission, routing mortgage payments through the plan is just another barrier to a successful Chapter 13 plan.

California has a program to refund a portion of property taxes to qualifying seniors, including those who rent.  The deadline for applying for this year’s refund is October 15.

To qualify, you must be 62 years of age or older;  owned or rented in 2006, and have an annual income less than $42,770 in 2006.

The form is available online from the Franchise Tax Board.

Spend the rents generated by a property in foreclosure  and you may have invited big trouble even if bankruptcy is in your future.

The borrower in the typical real estate transaction pledged the rental income and other proceeds of the encumbered property to the lender along with the real estate, as security for the obligation to repay the loan.  Those rents are “cash collateral” in which the lender has a legal interest.

The borrower may have a fiduciary relationship to the lender with respect to those rents.  Failure to pay them over to the lender may be a species of fraud, potentially non dischargeable in bankruptcy.

I’ve seen a rash of clients in the past couple of weeks who have  rental houses that are now, or soon will be, in foreclosure.  Once a notice of default is recorded, starting the foreclosure process, the lender won’t accept payments unless the borrower can tender the entire amount necessary to cure the default.

So, the borrower is collecting rent from the tenants but the lender isn’t accepting payment of those rents if not sufficient to cure.  The borrower is in possession of a hot potato.

My advice to such clients is to set up a bank account and deposit any rent net of the costs of preserving the property to this separate account which contains only the cash collateral that belongs to the lender in question.

I haven’t yet had to figure out if/when the lender will accept payment of those funds, but that’s a far better problem to have than a nondischargeability action against the borrower for fraudulent misuse of the lender’s security.

If this fact pattern mirrors your situation, get an attorney involved in making sure that you don’t lose more than the property to foreclosure.

My colleague at the Bankruptcy Law Network Karen Oakes talks about some reasons a debtor in bankruptcy may want to object to a claim filed in the case.  There is another, a real bombshell, arising out of a 9th Circuit Court of Appeals case Siegel 143 F.3d 525.

Siegel addressed a post bankruptcy dispute between the discharged debtor and his mortgage lender.  Even though Siegel’s bankruptcy case had been a no asset case, in which there was no practical need to examine the bona fides of the claims filed, the 9th Cir. held that the Bankruptcy Code presumption that a filed claim was allowed, bound the debtor after bankruptcy.

This holding, which seems to me to be a case of bad facts make bad law, is scary in at least two very common fact patterns in bankruptcy.  One is the pattern in Siegel, involving the debtor and the mortgage lender.  A second could be the Chapter 13 case that is dismissed, either voluntarily or involuntarily.  Will an unchallenged claim in a dismissed case be deemed accurate and enforceable against the debtor?

I don’t know, but I’d rather not find out on my watch.