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.

A debtor who becomes entitled to an inheritance in the six months following the filing of a bankruptcy case must contribute that inheritance to his creditors. 11 USC 541 (a)(5). This is one of only three exceptions to the idea that bankruptcy operates to “net out” what the debtor owns and what he owes on the day the case is filed.

As Craig Andresen points out, the contents of a spend thrift trust are not property of the bankruptcy estate, and not, therefore, available to pay creditors in a bankruptcy case. So, if that inheritance comes to the debtor in trust rather than outright, it does not go to creditors.
As awkward as it is, I try to ask prospective debtors if there is any likelihood that they will inherit money in the near future. If that is a possibility, I suggest that the client talk frankly with the source of that inheritance about making any gift to my client in trust, with a spendthrift clause.

While most Americans are incredibly private about their financial troubles, I doubt that anyone leaving money to their loved ones at their passing wants that money to end up benefiting the credit card lenders. It may require that the client swallow their pride to admit to the depths of their financial woes in the process of enlisting the help of the testator to make their gift effective. It requires consideration.

We got a call about three o’clock the other afternoon from someone who wanted to come in that afternoon and file bankruptcy that day. When my partner hesitated, the caller responded, “Well , you are open now aren’t you?”

I had a mental image of one of those parking lot, drive up coffee vendors, selling “bankruptcy” instead of java. As Mike Doan writes about the information gathering for bankruptcy, would that it was that easy.

The general “bankruptcy bargain” is that the debtor provides full financial disclosure and the system provides a discharge of debts. (It’s somewhat more complicated than that, but that describes the overview).

We’ve experienced a spate of clients who think that because they’ve signed a representation agreement and provided us with some information, their work is done. Wrong.

Usually the information is incomplete, ’cause they either don’t read, don’t think about the “bankruptcy bargain” , or can’t believe that we really need all that information.

Believe me, we wouldn’t ask for it if it wasn’t necessary.

I need to be able to better convey the idea that staggering in our door and paying us money just gets you out of the starting blocks in the Bankruptcy Relay; the finish line is getting the discharge, and there are miles to run between those two points.

It was a good day at my desk, if one has to work on Saturdays.

• I gave notice that one client was rescinding a $180,000 mortgage for Truth in Lending violations.
• I found three clients whose second deeds of trust can be eliminated as liens on homes because they are completely underwater.
• I sent out three Qualified Written Requests under RESPA to lenders whom I suspect have played games with the servicing on my client’s mortgages.

My conclusion about the mortgage meltdown is that there is not one universal approach to getting clients some breathing room on their mortgage debt, but there are a number of approaches that can lessen the pain borrowers are feeling, and raise the odds these people can keep their homes.

You never know just how a client hears your advice, until you hear yourself quoted back to yourself as the reason for a client doing something stupid. In my case, I’m unclear about whether the message received was really as reported, but it’s made me think about my choice of words.

I was asked in the initial consultation if gifts of money from the debtor’s parents in the past year presented “a problem”. No, I replied, thinking that such gifts don’t change the analysis, or the expected outcome of the case. The client now claims that my words were a license to fail to disclose the gifts. Huh?

For some clients, it is clear that full and complete disclosure is emotionally very hard. The fearful and the stressed somehow are simply sure that telling the whole truth imperils the bankruptcy, when just the opposite is true. Just as sunshine is the best disinfectant, disclosure in the bankruptcy paper work is the best insurance for a good outcome.

So, I will be looking for new phrases that will penetrate the understanding of those disinclined to hear what I’m trying to convey and reiterating that the client is the one ultimately responsible, under penalty of perjury, for the completeness of the schedules.

While there are an endless number of misconceptions about filing bankruptcy, the one I’ve encountered more often in the past weeks is the belief that participation in a debt management program or debt settlement program meets the new requirement for a “credit briefing” as a condition of filing bankruptcy.

To be clear, the credit briefing that is required in order to file bankruptcy must be from an organization approved by the UST in the district in which the bankruptcy case is to be filed. Most commercial debt settlement outfits are not approved. Here’s the list of approved agencies . The briefing must be completed within 6 months of filing the case.

Among the bad information out “there” about credit counseling is that the counseling takes 6 months. No. The usual credit briefing session is between 30 minutes and an hour. It must take place within 6 months of filing.

Another complexity that I’ve seen twice in three weeks are individuals who attempted credit counseling on the internet and encountered a computer or connection glitch such that they didn’t “complete” the session. In each instance, the bankruptcy case was dismissed for failure to complete the briefing before filing.

While there is no evidence that credit counseling serves any useful purpose, it is the law. Fail to get credit counseling and the case is likely doomed.

One of the petty struggles I have with clients is convincing them that they need to include all of their debts in bankruptcy. Sometimes, they will tell me they don’t want to include their car loan in the case because they “need the car”. Sometimes I find the student loan payment in the budget but not on the list of creditors.

Part of the issue is grounded in confusion between scheduling a debt and discharging the debt. Debtors are required to list all of their debts and risk denial of discharge if they don’t. However, debts are not necessarily discharged just because they are listed. The Bankruptcy Code specifies a number of debts that simply aren’t dischargeable in bankruptcy. Those debts still must be listed.

The desire to exclude debts from the schedules is sometimes fanned because debtors don’t know that they can reaffirm debts during their case. A reaffirmation agreement essentially waives the discharge as to that particular debt and puts the parties back on the same legal footing as they had before the bankruptcy was filed.

Clients are frequently surprised when they learn that they can continue to pay a discharged debt voluntarily if they wish. “Pay the dentist after the case is filed if you wish, but list them in the bankruptcy if you owe money when the case is filed. ”

Then, there are the clients who “love” their credit card issuer and want to keep paying because of loyalty or out of fear of being without plastic. I have to tell them that for some card issuers, the love is one sided, and the issuer will cancel the card independently of being listed or not in the case.

Moral of the story, there are a number of options for debts post filing, so don’t get tripped up by leaving out creditors.

My colleague Craig Andresen writes about the problem of debts repaid to family members within a year of filing bankruptcy. Craig suggested having the debtor recover the money before filing in the form of a new loan; after bankruptcy, the debtor is free to repay the family member without hindrance and the new loan is protected from avoidance by the “new value” exceptions to preference recovery.

This comes about because the Bankruptcy Code gives the trustee the power to recover the money from the recipient and distribute it to creditors according to the priorities of the Code. A payment to a creditor within the statutory period that allows them to get more than other creditors is a preference.

This came up in an initial consultation I had last week. My proposed solution was a little different than Craig’s: I pointed out to my client that the client, who has a fine job but an investment disaster on his hands, could fund the preference settlement with the trustee on behalf of his relative. After all, the trustee simply wants the value that went out to the family member restored to the bankruptcy estate for the benefit of all.

Fundamental lesson, though, is that your bankruptcy lawyer can’t find solutions if you don’t disclose all of the facts.

Sort of unwittingly, I got involved in one of the bigger issues plaguing bankruptcy courts recently: the claim filed in the bankruptcy by the debt buyer without supporting documentation. I objected to a claim filed a client’s case by Roundup Funding, who had never had any contact with my client prior to filing. There were no documents attached showing that Roundup was really the owner of the claim.

Roundup’s response to the objection proffered every argument suggesting it really owned the claim, except an assignment proving that it was the owner of the particular debt in question. This, it turns out, is their M.O., and as I looked, I found $400,000 in claims it had filed in other cases in just this bankruptcy division in the last calendar year.

The Chapter 13 trustee saw immediately what the issue was and supported my objection to the claim, even though the amount of money involved in this particular case was small. Small claims multiplied by enough cases, and there is real money at issue.

The United States Trustee has trumpeted lately that it is interested, not only in debtor misconduct, but in abuse by creditors. The UST responded to my letter on this issue, and professed interest. They then announced their interest in the issue at a gathering of bankruptcy lawyers, as apparent evidence that they didn’t just pick on debtors.

Come the hearing on my objection, the Chapter 13 trustee appeared and advised the judge how this seemingly small potatoes claim hearing had much larger implications. No sign, however, of the UST, who has a governmental mission, supposedly, to police the bankruptcy courts for abuse and attorneys on staff to do the work.

Roundup made a deliberate decision to withdraw its claim rather than appear in court to prove that it was entitled to file the claim. The judge and trustee discussed setting up an omnibus hearing to look at a range of Roundup claims.

Where was the UST? As I walked out of the courtroom, I saw the Assistant US Trustee sitting quietly in the back of the courtroom. Perhaps I imagined her finger in the wind, taking the measure of the situation, before doing anything.

Meeting with a client with Truth in Lending claims the other day reminded me about the power of the Bankruptcy Code to facilitate the sale of property subject to disputed liens while preserving the claims against a secured creditor.

These clients had property they wanted to sell but the amount they owed the holder of the first was in dispute. They asserted that the lender had violated Truth in Lending and had elected to rescind the loan. The parties were fighting about how much the clients had to tender to the lender as a result of the rescission.

Generally, a seller has to pay off all the liens on the property in order to deliver clear title to the buyer. Outside of bankruptcy, they might have to pay the creditor’s claim and sue to get it back. There is some risk of losing a TILA claim upon sale, as well.
Under Section 363 (f), the bankruptcy court can order the property sold and the liens to attach to the proceeds of sale. Thus, the debtor/seller and the secured creditor can argue later over the fund of money created by the sale, rather than having to resolve disputes before sale of the property. The costs of preserving the property in the interim are eliminated.

This section of the code speaks of the trustee as the seller, but the Chapter 13 debtor has most of the same powers as are granted to a Chapter 7 trustee. One more in my long list of why I love Chapter 13.