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.

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. 

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.

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.

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.

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.

Everyone in debt trouble, particularly those in trouble with a heavy hitter like the IRS, wants to believe that a cheaper resolution is available for their problem. The consumer is predisposed to believe that a former insider, like the former IRS agents who supposedly work for JK Harris, can solve their problem on the cheap. Even as I write this, Google brings up the following headline for Harris:

JK Harris Company Will Solve Your IRS Problems Today.I see lots of clients with large tax problems who have signed up with J K Harris to “settle” their taxes before they come to me with their tax problems unaddressed. Often, it is obvious to me that these people are not good candidates for an offer in compromise, which is what tax settlement firms are touting.

The IRS will compromise taxes where the taxpayer (or non-taxpayer) has few assets; little income; the collection statute of limitations is approaching; or other factors that make it unlikely the IRS can collect everything it’s owed.

If the individual doesn’t fit that profile, a successful offer in compromise is unlikely. Yet I see no evidence that Harris explored those factors before taking money from the desperate customer.

One of the myths about bankruptcy is that you can’t discharge taxes. Wrong: income taxes first due more than three years ago, for which a truthful return has been on file for at least two years, and assessed more than 240 days ago are dischargeable in bankruptcy.

My next candidate for the Attorneys General of the various states are the debt settlement companies, whose pitch to consumers is equally as false as JK Harris.

• 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.

But I would take it a step further: it’s not just a lawyer you can tell your secrets to. You need to find a lawyer whom you can question, over and over if necessary, until you understand the choices that you must make in filing bankruptcy.

Some things a client doesn’t have to truly understand to file bankruptcy: how the means test works, or doesn’t work, is one of them. The debtor need only validate some of the information in the form.

But other bankruptcy issues require the client to make choices and perhaps confront risks. Is the loan repayment to your parents a recoverable preference? Does the recent use of your credit card make you susceptible to the charge of incurring debt by fraud? Are you at risk of a UST challenge to your Chapter 7 case as an abuse?

Decisions surrounding these issues are, in the end, the client’s decision. The factors are complex, and in this day of “new” bankruptcy law,sometimes uncertain. The client needs to feel absolutely comfortable asking their counsel to explain the issue, assess the risks, and explore alternatives with them. The lawyer needs to be capable of explaining without jargon or presumption.
So I would add to the list of qualities in superior bankruptcy counsel openness to the layman’s questions and the willingness to restate and reanalyze the options until the client understands. A lawyer who is not capable of making you a partner in the conduct of the case may end up excluding you from considerations that rightfully belong to you, the client.

The broader question in the mortgage meltdown is whether the Wall Street firms that bought these liar loans from the sleeping lenders have any recourse against the lender.   Can the seller of the loan escape responsibility for selling a financial instrument of questionable value?  Did the Wall Street buyer have to investigate the actual bona fides of the loans or is it entitled to rely on the lender’s representation that the loan was sound?

Street smarts suggest that Wall Street was content not to look too closely at these loans so it could pretend that all of this profitable paper was what it was puffed up to be.  Under the theory of the Hill case, they, too, may be found not to have been reasonable in their reliance.