Southern California Bankruptcy Law Blog

The Codebtor Stay In Chapter 13 Bankruptcy

By Nicholas Gebelt on Posted in Automatic Stay, Chapter 13

I have written several times about the automatic stay of 11 U.S.C. § 362(a). 

I.          The Automatic Stay

I wrote:

Simply put, the automatic stay stays all actions by the debtor’s creditors against the debtor as a person (in personam), and against the property (in rem) of the debtor and of the bankruptcy estate that is created upon the filing of the papers.  In practical terms – with a few exceptions listed in § 362(b) – this means that creditors must stop all direct communications with the debtor, all attempts to collect money or other assets from the debtor, all lawsuits against the debtor, and all attempts to exercise control over the debtor’s (or the estate’s) property.  Willful violations of the automatic stay can be expensive mistakes because the debtor who successfully sues in the Bankruptcy Court under § 362(k) can collect damages including costs, attorney’s fees, and punitive damages.

Thus, the automatic stay provides some very important protection to a debtor who files for bankruptcy protection. 

II.        The Chapter 13 Codebtor Stay

If the debtor files under Chapter 13 there is another stay that is triggered that protects, not only the debtor, but also codebtors of the debtor.  Unsurprisingly, it is referred to as the codebtor stay, and it is found in 11 U.S.C. § 1301(a).  The portion I will focus on today is:

[A]fter the order for relief under this chapter, a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor . . . Continue Reading

Omitting A Creditor – Part II

By Nicholas Gebelt on Posted in Uncategorized

I’ve been a bit busy lately, and haven’t posted anything for a while.  I plan to remedy this over the next couple of weeks.  This post begins that process of “blogging rehabilitation.”

Some time ago I posted an article discussing the consequences of omitting a creditor in a debtor’s bankruptcy papers.  Recently, I had an interesting email exchange with a colleague, that explored the question in a bit more depth.  This post gives you that email exchange.  I hope you find it interesting.  In the interests of privacy I have changed any personal identifiers.

I.        The Question My Fellow Attorney Posed

We all know that per In re Beezley that failure to schedule a creditor in a no-asset Chapter 7 case does not affect the dischargeability of any debts.  This works both ways, in that debts that would be dischargeable (but for failure to schedule) are discharged, but also that debts that would NOT be dischargeable (such as DSO’s, certain taxes, etc.) are not discharged.  My question regards those types of non-dischargeable debts which are not self-executing, namely fraud claims (523(a)(2)).  Since these aren’t really non-dischargeable unless and until a court makes a finding of the requisite fraud, is there any time limit for a creditor to reopen the bankruptcy case to litigate the fraud claim if they weren’t scheduled?

The specific facts I’m dealing with are:  Debtor filed Ch. 7 and got their discharge.  Debtor failed to list a certain creditor.   Debtor later seeks to reopen Chapter 7 case to amend schedules and add creditor.  Court allows it for some reason, and debtor amends.  Creditor files lawsuit in state court against debtor claiming breach of promise and fraud for prepetition debts.

My bigger question is:  Am I “safe” to file an OSC re: contempt for violating section 524 or, per Beezley, was this debt not discharged?

II.       My Response

I offer my thoughts with a suggestion on the OSC motion. Continue Reading

Mortgage Rescission And Bankruptcy

By Nicholas Gebelt on Posted in Chapter 13, Chapter 7

I.          What Is Mortgage Rescission?

Rescission is a way for a borrower to get out of a mortgage that was fraudulently or deceptively originated.  For example, if the lender misrepresented the terms of the mortgage by failing to disclose a balloon payment, or the nature of the adjustable rate, or advised the borrower to inflate income to qualify for a larger loan – gasp! does this sort of thing ever happen? up until recently, all the time – the borrower may cancel the loan.

II.        The Legal Foundation For Mortgage Rescission

The main statutory vehicle for rescission is the Truth in Lending Act (“TILA”), 15 § U.S.C. 1601 et seq., and its regulatory partner, Regulation Z, 12 C.F.R. 226.31, et seq..  TILA and Regulation Z are complicated, so it is easy for a creditor to violate them.  The most common violations involve inadequate disclosures.  See 15 U.S.C. §§ 1638(a)-(b)(1) for some of the required disclosures.  Regulation Z has its own plethora of required disclosures. Continue Reading

Lien Stripping In A Chapter 13 Bankruptcy

By Nicholas Gebelt on Posted in Chapter 13

In my last post I discussed the three basic requirements a Chapter 13 plan must meet to get confirmed.  In this post I will discuss a powerful Chapter 13 tool that has no Chapter 7 analogue:  lien stripping.  (No, it’s not X-rated.)

I.          Lien Stripping On The Debtor’s Primary Residence

First the bad news:  In Nobelman v. American Savings Bank, 508 U.S. 324 (1993) the U.S. Supreme Court held that an under-secured – i.e., “partially secured” – mortgage on the debtor’s primary residence is protected up to the full amount of the debt in the sense that the unsecured portion cannot be stripped off.

Now the good news:  Any wholly unsecured mortgage on the debtor’s primary residence can be stripped off and treated as if it were ordinary general unsecured debt.  Thus, a second mortgage can be stripped off, put into the Chapter 13 plan, and paid off at the same percentage as the other general unsecured debts – which is usually a small percentage.  This means that the debtor can have the second mortgage extinguished in five years, after having paid only a small percentage of that mortgage. Continue Reading

The Key Requirements Of A Chapter 13 Bankruptcy Plan

By Nicholas Gebelt on Posted in Chapter 13

The goal in Chapter 13 is to use future income to pay all or a portion of one’s debts through a court approved and administered Chapter 13 repayment plan.  The judge assigned to the case must confirm the plan.  During the confirmation process the creditors are permitted to have some input.  However, once the plan is confirmed, the creditors are obligated by its terms.  See 11 U.S.C. § 1327(a).

Chapter 13 plans typically last either three or five years, with five years being the statutory maximum.  See 11 U.S.C. § 1322(d)(1)(C) and (d)(2)(C).  Each month during the pendency of the plan the debtor sends a plan payment to the Chapter 13 Trustee assigned to the case.  The Trustee in turn sends payments to the creditors according to the terms of the confirmed plan.  At the end of the plan any remaining scheduled unsecured dischargeable debt is discharged.

One attractive feature of Chapter 13 for the debtor wanting to keep collateral securing a debt is the chance to catch up on the payments.  For example, the debtor can use the plan to pay off a mortgage arrearage over the life of the plan, rather than having to immediately become current as in a Chapter 7 bankruptcy.

Another benefit is that the debtor does not have to surrender any nonexempt assets:  the debtor gets to keep everything.  Why?  The short answer is because in the plan the debtor makes monthly payments to pay creditors.  However, as we shall see, the value of the debtor’s nonexempt assets provides a starting point for the size of the monthly plan payments.

How much are the monthly payments?  In order to answer that question we need a little background.  In particular, we must observe that a Chapter 13 plan must satisfy three basic criteria.  These three criteria contain the essence of 11 U.S.C. § 1322. Continue Reading

Credit Repair Lies And The Post-Bankruptcy Clean Sweep

By Jay S. Fleischman, Esq. on Posted in Debt

credit repair after bankruptcy clean sweepCan you really get that bankruptcy legally removed from your credit report? If only it were so easy.

After bankruptcy you’re looking to rebuild your credit. That’s understandable because you want to be able to get financing for a car or a new home at some point.

You do some searching online, or maybe you get a letter in the mail from a reputable-looking company that promises to remove that pesky bankruptcy from your credit report immediately. Your bankruptcy lawyer told you it would show up on your credit report for ten years.

Remember grandma, who said that if something sounds too good to be true then it likely is.

The Fair Credit Reporting Act governs the information on your credit report, and exists to ensure accuracy of information. Note that it does not mention anywhere that you’ve got to like what’s showing up – just that it’s correct.

If you file for bankruptcy, that’s a fact. There’s nothing that will change it. You can rail against the system, but it’s not going to provide solace or lead to a different outcome.

Disputing The Bankruptcy On Your Credit Report

The Fair Credit Reporting Act does, however, give you a mechanism for disputing inaccurate information on your credit report. When you send in a dispute letter to the credit reporting agency, they’ve got a responsibility under the law to investigate. If the information can’t be verified within thirty days, it must be removed.

So here’s the trick that many “credit repair companies” use. They send in a dispute letter demanding removal of the bankruptcy as well as anything else you don’t happen to like. If the information is verified, another letter goes out. On and on until someone fails to verify the information, or the credit reporting agency gets sick and tired of being bothered.

At that point, the company proudly shows you that the information is gone.

Sounds Sweet, Right?

Not so much. First of all, you’ve got a company making inaccurate and fraudulent statements to a third party. I’ve never seen a consumer prosecuted, but it doesn’t pass the smell test to me.

Second, you forget that most credit information is updated every 30-90 days. So that negative information is sure to come back at some point.

Third, you’re paying a company to write letters for you. Do you really have that much spare change sitting around that you can afford to throw cash out the window on a futile and dishonest endeavor?

The (Not So) Bad News

The bankruptcy is going to stay on your credit report for up to ten years, and there’s nothing you can do about it. But the truth is that nobody cares – even your future creditors.

Credit is largely a matter of recency. What you did last month is more important than what you did last year assuming, of course, that you’ve done good things in the more immediate past. Set to work on adding good information to your post-bankruptcy credit report and you’ll be just fine.

Jay S. Fleischman is a bankruptcy lawyer who concentrates in helping people fight back against debt collection harassment after bankruptcy. He has never seen a credit repair company that can successfully eliminate accurate information, and hates seeing people get taken for a ride.

Image credit:  cybertoad

Nicholas Gebelt speaking at the “Complex Bankruptcy Issues” Seminar on May 2, 2012

By Nicholas Gebelt on Posted in Chapter 13, Home Mortgage Modification

I will be covering the topics of “Chapter 13: Vehicle and Mortgage Complications” and “Formulating a Confirmable Chapter 13 Plan” at the “Complex Bankruptcy Issues” seminar for the National Business Institute on May 2, 2012 in Orange, California.  This presentation will cover such thorny issues as 910 car claims, rescission and second mortgages,  detail how to structure the Chapter 13 repayment plan, how to handle attorneys’ fees in the plan, deal with plan objections, and deal with post-confirmation issues.  If you have some experience filing bankruptcies and want detailed help with the latest issues and challenges in the consumer bankruptcy arena, I hope to see you there.

Debt Collectors; Sheriff’s Department Corruption; A Justice’s Nutty Opinion

By Nicholas Gebelt on Posted in Automatic Stay, Debt

This post gathers my thoughts on three eye openers.  Some were in the news, and some I experienced first-hand in my bankruptcy practice.  The common thread among these eye openers is a profound threat to the freedom and wellbeing of the citizenry.

I.          Debt Collector Abuses

A.        Whole Lotta Collectin’ Goin’ On

In the February 16, 2012 Los Angeles Times, Jim Puzzanghera reported on the recently formed Consumer Financial Protection Bureau and noted:

Debt collection has been second only to identity theft in consumer complaints to the Federal Trade Commission in recent years. The bureau estimated that 30 million Americans have debts in the collection process.

Thirty million!  Wow!  That’s one-tenth of the entire U.S. population.  So it’s not just my clients who are facing debt collection agencies and their corrupt and abusive tactics.  And given the volume of complaints it appears that abuses by debt collectors are widespread – it’s not just a few bad apples. Continue Reading

Discharging Income Tax In Bankruptcy; Splitting The Tax Year

By Nicholas Gebelt on Posted in Chapter 11, Chapter 13, Chapter 7, Debt

In my last post – the one about the taxation of cancellation of debt income - I promised I’d write about discharging income taxes in bankruptcy.  In fact, I recently published an article on the subject, but the flavor was a bit dry and technical.  I’ll try to make today’s version a bit less so.

By the way, although some articles on that site are ghost-written, I really did write the article.

I.          Discharging Taxes In Bankruptcy

There are two possible scenarios:  discharging taxes in a bankruptcy other than a completed Chapter 13 plan, and discharging them through a completed Chapter 13 plan.  Continue Reading

I Just Received A 1099-C Cancellation Of Debt Form. What Should I Do?

By Nicholas Gebelt on Posted in Debt, Foreclosure

Although I posted an article on this topic of tax debts after foreclosure on July 12, 2011, this question still comes up fairly frequently.  Therefore, another blog post on it is in order.  However, this one will not be a carbon copy of the July 12 post.

I.          The Five Exceptions To Cancellation Of Debt Income Tax

When a creditor forgives a debt you owe, the forgiven debt is usually credited to you as income for tax purposes.  The typical scenario these days involves the loss of a home in a foreclosure or a short sale.

Due to a provision in California real estate law, if the lender comes up short after the sale, it cannot come after you for the deficiency.  Instead, it will report the loss to the IRS and the Franchise Tax Board (“FTB”).  When it does, it will send you a 1099-C Form, listing the amount of debt it had to cancel.  This is your cancellation of debt income, and it’s taxable unless it falls within five exceptions listed in the Internal Revenue Code, and incorporated into the California Revenue & Taxation Code.

Those five exceptions are:

• the discharge – i.e., the debt forgiveness – occurred in a bankruptcy,

•the discharge occurred when you were insolvent,

•the indebtedness discharged was qualified farm indebtedness,

•in the case of a taxpayer other than a C corporation, the indebtedness discharged was qualified real property business indebtedness, or

•the indebtedness discharged was qualified principal residence indebtedness which was discharged before January 1, 2013.

For the first exception to apply, you have to have filed the bankruptcy before the debt was forgiven.  That way the debt is discharged in the bankruptcy.  If the debt is forgiven before you file the bankruptcy, then at the point of forgiveness the identity of the creditor changes from the bank to the taxing authority, and the debt you have is a tax debt instead of a mortgage debt.  Tax debts are usually not dischargeable in bankruptcy, so you could be out of luck.  (I’ll discuss the dischargeability of income tax debt in bankruptcy in my next post.)

For the second exception to apply you have to still be insolvent immediately after the debt was forgiven.  To illustrate what could go wrong, let’s use an example.  Suppose just before a foreclosure sale on your home your total debt was $525,000 – of which $500,000 was your mortgage debt.  And suppose your assets including the house were worth $450,000, with the house being worth $300,000.  At that point you would certainly be insolvent because the value of your debts ($525,000) exceeds your liabilities ($450,000).  However, insolvency for the second exception is measured after the sale, not before.  Thus, if the house sold for its market value of $300,000, and the bank forgave the post-sale shortfall, then after the sale your assets would be in value $150,000 (= $450,000 – $300,000), and your liabilities would be $25,000 (= $525,000 – $500,000).  This would mean that the value of your assets ($150,000) would be greater than your liabilities ($25,000), so you would no longer be insolvent – and you would be ineligible for the insolvency exception.  Ouch.

The third and fourth exceptions generally do not arise in the typical consumer bankruptcy case.  Therefore, if you think you might be eligible for either of them, consult a competent tax professional.

The final exception sunsets on January 1, 2013, and was enacted in response to the current housing mess.  If you lost your principal residence – this one does not apply to a rental property – and the debt that was forgiven was the original purchase money debt, then the amount forgiven after the sale does not get added to your gross taxable income.  Unfortunately, if you refinanced your home, and later lose the property, the debt forgiven would not qualify for this exception – unless you could prove to the taxing authority’s satisfaction that every penny of the refi went into home improvement.

If the forgiven debt does not fall within the ambit of any of these five exceptions, prepare for a tax hit.

II.        Filing The Tax Return

Suppose you were smart and filed for bankruptcy protection before the debt was forgiven.  Then the debt was discharged in a bankruptcy, so you don’t get the tax hit.  But the taxing authority won’t know that the debt was discharged in bankruptcy.  Contrary to what you see in the highly entertaining Bourne movies, the federal and California governments, and in particular, the IRS and the FTB, are not omniscient.

Therefore, when the taxing authority receives the 1099-C from the (former) creditor, it will assume that the cancelled debt should be credited to you as income.  To obviate this problem you should include the one-page Form 982 with your tax return – both state and federal – and check box 1 a because the debt was discharged in a title 11 case; title 11 of the U.S. Code being the U.S. Bankruptcy Code.

You may wish to consult a tax professional to help you complete your tax returns.

If you’re close to losing a home in foreclosure, or expect to have a creditor forgive a debt you owe, hire an expert los angeles bankruptcy attorney to help you before it’s too late.  Good luck.