I have more actions against creditors for violation of the automatic stay going right now than I have brought in the entirety of my nearly 30 year career. What is it that makes creditors so heedless of a federal court injunction?

I have clients complaining of staid banks like Bank of America calling multiple times a day after they got notice of the bankruptcy; Chase trying to foreclose on a client’s house despite the automatic stay; the State of California levying against a Chapter 13 debtor for the second time in two years, well after the bankruptcy case was filed.

Is it desperation on the part of creditors? A general disdain for the law? Budgets that don’t permit training of staff?

I don’t know, but my mission is to make this scofflaw attitude costly for creditors. Debtors are entitled to a respite from collection efforts. It’s about time creditors got the message.

California’s legislature passed changes to state foreclosure law that attempts to require dialog between an unpaid mortgage lender and a homeowner facing loss of his home.

SB1137 adds a requirement that the parties meet and discuss options to foreclosure before a notice of default can be recorded. Lenders must advise the debtor of the availability of HUD certified housing counseling.

What are the constraints on the advice HUD counselors can give? Can they suggest the borrower look for violations of applicable law in their loan transactions? Will they suggest Chapter 13 as an alternative to foreclosure? Do they have contact information for the loan modification staff at the lenders?

I applaud the California politicians who took some action on the problem. (Congress, Mr. Bush, are you listening?). My concerns go to whether any form of “counseling” will make a difference.

The typical problem is that the terms of the existing loan are simply beyond the capacity of the borrowers. The only solution is a modification that includes a fixed interest rate and often a forgiveness of interest or even principal. Otherwise, at the end of a longer foreclosure process, the bank is going to own another home.

I’ve spent the last three days at the annual meeting of the National Association of Chapter 13 Trustees in San Francisco. Strewn through the convention site are banners thanking those who have contributed money to put on the gathering of Chapter 13 trustees. Those three sponsors at this event are exclusively big creditors and lawfirms who represent them.

The parties in interest in a Chapter 13 form a triangle: trustee, debtor, creditors. The trustee has obligations to both of the other parties. Debtors come in onesies and twosies. Creditors tend to be national and big money players. There is no organization of bankruptcy debtors; there is an organization of debtor’s attorneys, the National Association of Consumer Bankruptcy Attorneys. By the nature of the practices of its members, NACBA is not a big money player.
At the gatherings of debtor’s lawyers, the usual sponsors are those who want to sell something to the attendees. It’s not the opposing parties.

I don’t think that Chapter 13 trustees can be “bought” by free breakfast and afternoon snacks. But just like influence of lobbyist money on politicians, this feels uncomfortable to me as a debtor’s lawyer.

More on education efforts by the Chapter 13 Trustees.

My clients this week had a number of rental properties on which they owned nearly as much as the properties were worth. The clients thought the properties had long-term appreciation potential and were just certain that filing Chapter 7 meant giving up the properties. Not so.
The bankruptcy trustee is charged with turning non exempt property of the bankruptcy debtor into cash for the benefit of the creditors. The trustee’s focus is on the bottom line. For each asset, the trustee asks:

1. What is the asset worth, today, in its present condition?
2. What are the costs of preserving the property pending sale?
3. What are the costs of selling the asset?
4. Are there tax consequences of the sale?

The trustee’s handbook is clear that the trustee should administer assets only if he expects to be able to make a meaningful distribution to creditors. Each trustee has a threshold that he sees as the minimum amount of money necessary to open a case.

So, for my clients, they are likely to emerge from Chapter 7 with title to these properties still in their portfolio. When you crunch the numbers, for each property, the costs of selling the properties, maintaining them in the interim, dealing with tax returns and possible tax consequences would consume all the sale proceeds.

A basic premise of bankruptcy law is that liens pass through bankruptcy unaltered. Post bankruptcy my clients will still have rentals encumbered to the extent of their value. They will still be subject to foreclosure if they fail to make the mortgage payment. But they don’t have to worry that the trustee will deprive them of the property simply because they filed bankruptcy.

Debt settlement companies thrive on tapping the consumer’s genuine desire to pay back their debts. They promise that they will compromise with your creditors for a sizable discount and all will be well with the world. There are any number of reasons that isn’t so, and the promoters know it, but that’s another blog.

The scheme works because the debt settlement company gets a hunk of their fee first, before creditors are offered a dime. And they get it by automatic withdrawal from the consumer’s bank account. I have been amazed lately at just how hard it is to cancel one of those payment arrangement.

The couple in my office this week are poster children for the absurdity of the debt settlement program. The numbers supplied to the desperate couple, 79 and 76, showed that $19K would go to creditors and $16K to the debt settlement company. Huh?

The other absurdity was that this couple had only Social Security and a small pension for income, and they have a substantial mortgage payment. Yet, the debt counselors(!) wanted $1036/month for this service! Needless to say, the entire arrangement was unworkable and any debt expert worth a $16K fee knew it from the start.

Yet, the firm got several months worth of $1000 bank drafts before the couple’s son learned what was going on and helped extract them from the “program”.

I’ve turned the Florida law firm running this “business” in to the State Bar of California for investigation of unauthorized practice of law in this state. My next task is to see if the money is recoverable.