Wednesday, May 23, 2012

Consumer Bankruptcy Part 2: Chapter 13

This is the second part of my three part breakdown of consumer bankruptcy cases.  These pieces are meant as informational tools for consumers who are considering bankruptcy or are looking to find out more information about what bankruptcy is.  I will remind the readers that in order to determine the best options for any given person, it is very important to consult with a local professional bankruptcy attorney.  There is no substitute for learned local counsel.

Chapter 13

The sometimes less popularized version of a consumer bankruptcy is Chapter 13.  As opposed to liquidation (See Chapter 7), a Chapter 13 is a reorganization or repayment plan.  Chapter 13 provides a way that people can keep property and pay back creditors over the course of the plan (over a term of 36-60 months).  This type of bankruptcy is also very helpful to people who experienced a temporary loss of income and who now have regular income and can make regular monthly payments.  Chapter 13 can:

  • Help a homeowner to prevent or stop a mortgage foreclosure
  • Help a driver reinstate their license through repayment on parking tickets
  • Allow a consumer debtor to pay back some of their debts over time
  • Grant a debtor a discharge of debts upon completion of a plan (3-5 years)

REQUIREMENTS

The requirements for filing chapter 13 are few.  A person need only have "regular income" and less than $336,900 in unsecured debt.  Unsecured debts are typically things such as credit cards, medical bills and other regular loans and lines of credit that are not backed up with collateral.  There is also a requirement of less than $1,010,650 in total secured debt.  Please note that these debt limits are subject to change on a regular basis as determined by Congress and as permitted by law.  It is important that you consult with a local bankruptcy lawyer before making any determinations.

FILING THE CASE

Filing the chapter 13 case is very similar to a Chapter 7.  A few forms are required to start the case and the debtor must have also completed the required credit counseling course previous to filing the petition.  The main difference in filing a chapter 13 case is with the repayment plan which is proposed by the debtor.

THE PLAN

The Chapter 13 Plan is the document which is created by the debtor which is proposed to the court in the Bankruptcy case.  This Plan is the document which set forth the manner in which debts will be repaid over the next 3-5 years.  The Debtor is generally given great leeway in constructing this plan, but there are certain requirements and restrictions, some of which are:
  • All priority claims must be paid in full (i.e. taxes, child support payments, and other special debts)
  • The present value payments must equal at least what the creditors would receive through a chapter 7. This means that you cannot propose to pay less in a chapter 13 than you would in a 7.
  • Secured creditors must accept the plan. (your mortgage company)
    • additionally, you are required to continue to pay your regular payments (i.e. mortgage) as well as make payments on the arrearages.
  • Usually, the debtor must pay ALL of their available disposable income each month toward the plan (through the U.S. Trustee).
These restrictions are sometimes more complicated and there are exceptions to these rules.

CONFIRMATION

Assuming that you have followed all the rules and filed all the proper forms, you will be all set to go in front of a bankruptcy judge for confirmation of your plan.  Hopefully, you or your attorney has done all of the legwork required to create a successful and feasible plan for you.  by this point you should have already made a payment or two to the Trustee based on the proposed plan.  Barring any objections from the creditors or the Trustee, the court should confirm your plan, Congratulations!

CONVERSION/AMENDMENTS

3-5 years can be a long time.  Over that period of time, it is common for circumstances to change.  If they do, the debtor may experience a change in income or financial status.  This might mean that the original plan needs to be amended.  Don't worry, this is allowed and common.  It is important that you make sure to keep making payments to the trustee or else your case can be dismissed or converted to a chapter 7.  In order to avoid this, you should consult with your attorney or the trustee's office to make payment arrangements.  If you fail to make timely payments each and every month in the plan, your case will be dismissed and you be back to square one.  DONT MISS YOUR PAYMENTS!!!

DISCHARGE

Assuming that you made it through 3-5 years of monthly payments, the final step in the case is discharge.  The discharge is the order from the bankruptcy court which releases the debtor from any further obligations under debts which were properly included in the bankruptcy petition and plan.  A Chapter 13 discharge is often broader than a discharge in chapter 7 (some additional types of debts are included) but it is also more difficult to obtain.  Some of these additional types of debts are:
  • debts arising from injury to property
  • marital property settlements
  • certain fines or penalties
There are, of course, exceptions to a discharge in a chapter 13 as there are in a chapter 7.  Please consult with a local bankruptcy attorney to find out if a Chapter 13 is right for you.

For more information about Chapter 7, please see my separate article Here

My next article will discuss how to decide if bankruptcy is right for you and if so, what chapter you should file.

Wednesday, May 9, 2012

Consumer Bankruptcy: Part 1 - Chapter 7

As a consumber bankruptcy firm, one of the most common questions asked by clients is about the different kinds of bankruptcy (called chapters).  The most common types of cases filed by individual consumer debtors are chapters 7 and 13.  Choosing the right type of case to file is a decision that is based on your financial situation, your goals, the types of debts you owe and your intentions relating to your property.  This decision can be very important and for many people, very difficult.  It is important that you seek professional advice from an experience bankruptcy attorney regarding which may be right for you.  I will provide a general idea of what each chapter involves and who typically qualifies to file.  Remember, this is a general information article.  Each person has a specific set of circumstances that alter the following criteria.  Furthermore, bankruptcy rules (even though through a federal court) are very different from state to state and district to district. Please consult with a local attorney in-person or on the phone in order to properly assess your personal situtation.

Chapter 7

Most people, when thinking of bankruptcy, think of a chapter 7 (also called a liquidation).  During the years of 2008-2012, more than 1 million consumer debtors file for Chapter 7 bankruptcy protection per year. US Courts BK Stats.  Any person residing in or having property in the US (including a business) may file for Ch. 7 bankruptcy protection (11 USC sec. 109).  Before filing, the person muct have received a credit counseling briefing from an approved non-profit agency.  US Trustee Approved Credit Counseling Agencies

FILING

There are a number of forms that consumer debtors must fill out in order to complete a chapter 7 filing but in order to start the case, a person only needs to fill out a 3 page petition with an attached proof of credit counseling along with a court assessed filing fee of $306 (current as of May 2012).  The proper place ("venue") to file a petition in bankruptcy is the "domicile, residence, principal place of business or where the principal assets are located" for 180 days prior to petition.  This means that if you have recently moved, the proper place to file and more importantly, the proper rules and exemptions that apply to you might not be where you actually are.  Again, you should consult with a local bankruptcy expert in order to assess your case.

POST-FILING

Upon filing the petition, the debtor is automatically granted immediate protection from creditors.  This includes garnishments, levies, seizures and attachments.  Additionally, the assets and property of the debtor are generally frozen (there are always exceptions to any rule).  Within a few weeks of filing, the court will notify all creditors of a meeting to be held with the trustee (an attorney who represents creditors in bankruptcy court).  This meeting is sometimes called the "meeting of creditors" or the "341 meeting"  This notice also sets certain deadlines with the court and the important filing dates with the court.

341 MEETING

The 341 meeting is often the only hearing that a consumer debtor has to appear for in a straight chapter 7 case.  At this meeting, debtors and their attorneys meet with the bankruptcy trustee to verify information that was filed with the petition.  The trustee is tasked with administering the bankruptcy estate of debtors and if appropriate, she will distribute assets to creditors that are owed money by the debtor's estate.  Typically, trustees will ask debtors about property they own, law suits that are pending, tax returns for a few years prior to filing, pay stubs (or other proof of income) and questions relating to monthly expenses.  Debtors are required to appear in person with a photo ID and proof of social security number.  Despite being called the "meeting of the creditors", creditors rarely actually appear a the 341 meetings, instead the trustee acts on behalf of the creditors.

EXEMPTIONS

What many people don't know is that you can keep much of your personal property even after filing for Ch. 7 protection.  Each state provides that debtors are allowed to protect or "exempt" certain property from creditors.  This means that people who file for bankruptcy can still keep things such as:
  • A primary home up to a certain amount of equity
  • A vehicle up to a certain value
  • Government benefits such as social security or unemployment
  • Retirement funds
  • Clothes
  • Tools used for a trade profession
The bottom line here is that, if you file for Ch. 7, the creditors will not literally take the clothes off of your back.  Bankruptcy protection exists so that people can get a fresh start and unburden themselves from a mountain of debts that seem unsurmountable.

For more information about what you can protect in bankruptcy, you should consult with a local bankruptcy attorney.  For an easy and quick look at Illinois Exemptions follow this Link to Illinois Exemptions.

DISCHARGE

The final step in the Chapter 7 process is the discharge.  This is the final order from the federal court which grants the debtor relief from any pre-petition debts that were included ("scheduled") in the bankruptcy petition.  Generally, the discharge applies to all debts EXCEPT:

  • Tax Debts and other debts owed to governmental units
  • Debts for domestic support obligations (alimony and child support)
  • Student Loans
  • Debts involving fraud
  • Debts involving personal injury
  • Other debts ruled to be non-dischargeable in a bankruptcy proceeding


Mark A. Laws is a consumer attorney and bankruptcy practitioner in Chicago, Illinois.  For more information visit lawsatlaw.com.






Tuesday, May 1, 2012

HUD Protections in Foreclosure

Courts around the country have been dismissing foreclosure action due to the bad acts of mortgage servicing companies (e.g. PHH Mortgage Corporation).  More specifically, the failure to comply with federal regulations that specifically regulate mortgages that are insured buy the US Department of Housing and Urban Development ("HUD").  Most recently, the Virginia Supreme Court (the highest court in the state) remanded a mortgage foreclosure case due to the mortgage servicer's (PHH) failure to comply with HUD regulations.

More Information on HUD Servicing Guidelines

HUD has an interest in protecting the mortgages that it ensures, therefore the US government has granted authority for HUD to create extra protections to homeowners who have a loan insured by HUD.  One of these protections requires that:

the lender to "have a face-to-face interview" with the borrower, "or make a reasonable effort to arrange such a meeting." 24 C.F.R. § 203.604(b). However, it also states that "[a] face-to-face meeting is not required if . . . [t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either." 24 C.F.R. § 203.604(c).

This means that before a lender can foreclosure, they need to meet with the homeowner to discuss loss mitigation options (loan modification, refinance, deed-in-lieu of foreclosure, sales etc.)  Lenders (and their servicers) have attempted to skirt this rule by claiming an exemption under the "200-mile rule"  this exemption allows a servicer to escape the face-to-face meeting requirement if they do not have an office located within 200 miles of the subject property (the home).

In case you are unaware, many mortgage servicing companies have only a few actual "mortgage servicing offices".  These are large facilities filled with personnel who are trained in how to service a mortgage loan (See: Collect Debts).  While you might see a Wells Fargo Mortgage storefront on every corner in your county, these are largely just sales offices where mortgage loans originate.  The mortgage companies argue that these offices do not count as "branch offices" as contemplated by HUD and under its regulations.  Many consumer attorneys such as myself disagree with this attempt to end run around the law.

In a great decision for American homeowners, the Virginia Supreme Court has sided with the homeowner!  Quoting from Mathews v. PHH Mortgage Co (April 2012):

 "The Mathewses argue the term "branch office" is unambiguous and that the plain language of the Regulation supersedes HUD's response in the FAQ. They assert that the common and popular meaning of a "branch office" is "a place for the regular transaction of business or performance of a particular service located at a different location from the business's main office or headquarters." Moreover, HUD expressly acknowledged in the FAQ that the term "branch office" encompasses not only a "servicing office" but a loan origination office as well. We agree."


The Virginia Supreme Court went out to explicitly reject PHH's argument that  because it did not have a "servicing office" within 200 miles it should be exempt from this regulation.

For the complete case follow this link to google scholar Mathews v. PHH (Virginia 2012)

Way to go Virginia!