January 2015

Many ― but not all ― debt collectors working for loan sharks are alleged humans who do the bidding of the dark side of the force.  I have written about abusive debt collectors several times, in unflattering terms.  It turns out that I’m not the only one who has noticed their abusive tactics.  The feds are paying attention too.

 

I.  The Abusive Tactics Epidemic

 

A.  Criminal Charges Against Collectors

 

Writing in the November 18, 2014, issue of the ABA Journal, Martha Neil reported:

A Georgia-based debt-collection company, its owner and six employees have been criminally charged in what is described by federal authorities as a $4.1 million national scheme that took advantage of more than 6,000 people.  U.S. Attorney Preet Bharara of Manhattan, who is overseeing the case, says a larger investigation of “an absolute epidemic of abusive debt-collection practices” is ongoing by the Consumer Financial Protection Bureau, the Federal Trade Commission, the Federal Bureau of Investigation and federal prosecutors in his own office.  This appears to be the first time these agencies have coordinated on such a probe, which could signal that a major enforcement effort is underway, reports CNN Money.  The Atlanta Journal-Constitution, Newsday (sub. req.) and Reuters also have stories.  “[R]uthlessly persistent” collectors at Williams, Scott & Associates in Norcross, Georgia, bullied thousands of people nationwide into paying millions between 2009 and 2014, sometimes even when they didn’t owe money, said Bharara.  Collectors falsely claimed affiliations with government agencies and threatened people with arrest or other enforcement action, he said.

Collectors lied!  I’m shocked, shocked.  Actually, I’m not shocked because I’ve had clients tell me that collectors have threatened to jail them for not paying a debt.

The FBI has an article about the Williams, Scott & Associates case, that provides much more detail about the scope of the abuse.  I mention this to emphasize the fact that the FBI really is interested in going after abusive collectors.  However, they cannot do so unless the victims report the abuse.  Therefore, if you’ve been told by a debt collector that you’re headed for jail unless you pay a debt, call the FBI and the U.S. Attorney’s Office, and tell them about it.  If enough people complain, they will act. Continue Reading The Feds Are Fishing For Loan Shark Collectors

One of the putative motivations for enacting Obamacare (a.k.a. The Patient Protection And Affordable Care Act; have fun reading it, and make sure you have industrial quantities of coffee on hand) was to ensure that no one would be financially ruined by a health care catastrophe.  After all, many bankruptcies are filed because of massive medical debt.  How have things played out in the Obamacare regime?

 

I.  Obamacare And Part-time Employment

 

Lately the White House ― well, not the building, but the chap who lives and works inside it ― has been claiming that the economy has improved considerably in the last year.  For example, in his recent State of the Union address, the President stated:  “Tonight, after a breakthrough year for America, our economy is growing and creating jobs at the fastest pace since 1999.”

This ostensibly rosy economic diagnosis doesn’t match with what I see in my practice, nor with the headlines I’ve seen over the last few weeks announcing layoffs at various companies.  (See, e.g., “Big profits, big layoffs: eBay, AmEx to cut jobs”.)  Therefore, I thought I’d look a little deeper into that job creation claim, and the types of jobs that are being created. Continue Reading Obamacare And Bankruptcy

I recently answered a question posed by a fellow bankruptcy attorney, and thought you might find the discussion interesting.

Here’s an edited version of my colleague’s question:

A Chapter 7 debtor who is a real estate broker had some listings prepetition.  He opened escrow postpetition, and eventually sold the properties.  He received a $20,000 commission, none of which can be exempted.  The Trustee has demanded all the commission received.  What can be done?

Here’s my response:

Three cases that help to answer the question from different vantage points are: In re Fit zsimmons, 725 F. 2d 1208 (9th Cir. 1984), In re Ryerson, 739 F. 2d 1423 (9th Cir. 1984), and In re Wu, 173 B.R. 411 (B.A.P. 9th Cir. 1994).

 

I.    The Key Statutory Provision

 

According to 11 U.S.C. § 541(a), when a debtor files for bankruptcy protection, the act of filing the papers “creates an estate.”    The prepetition debts then become postpetition claims against that estate.

In a Chapter 7 bankruptcy, the Chapter 7 Trustee liquidates the estate to produce a dividend to the debtor’s creditors.  The debtor can exclude assets from that estate by appealing to an appropriate exemption table (Cal. Civ. Proc. Code § 704 for homeowners with equity in their principal residence, and Cal. Civ. Proc. Code § 703.140 for everyone else).  Anything the debtor cannot exempt is fair game for the Trustee to seize.

What goes into the estate?  The gist of 11 U.S.C. § 541(a) is that everything the debtor owns or has an interest in on the day of filing the bankruptcy papers, anything the debtor becomes entitled to through bequest, inheritance, devise, or through life insurance proceeds during the 180 days after the petition day, and anything that is the fruit of estate assets (e.g., interest earned on an estate asset) is part of the estate.

But § 541(a)(6) has a carve-out for income earned by the debtor for services rendered postpetition.  It is this provision that is at the heart of the answer to my colleague’s question. Continue Reading Can The Chapter 7 Bankruptcy Trustee Seize Your Postpetition Commissions?

I have already written about discharging student loans in bankruptcy.  As I discussed in that previous blog post, although under special circumstances it is possible to discharge them, it is devilishly hard.

I recently came across an interesting twist on student loans in the bankruptcy context that I thought might interest you.  The setting:  A debtor wants to file for Chapter 7 bankruptcy protection.  The nonfiling spouse died prior to the bankruptcy filing, and left a large student loan debt, for which the debtor did not cosign.  What happens to the student debt?  What happens to the deceased spouse’s other debts?  Can the creditors attach heaven’s streets of gold to satisfy the debts?

 

I.   Community Property/Community Debt

 

If you live in a community property state such as California, you can have some liability for your spouse’s debts.  Why?

A.  Dividing The Marital Assets

 

When a couple gets married in a community property state, all of the assets are divided into three categories:  The husband’s separate property, the wife’s separate property, and the community property.  How is this done?  In the absence of a prenuptial agreement, community property consists of all assets except those assets with which a spouse enters the marriage, those assets a spouse inherits, and the offspring of such assets.  See Cal. Fam. Code § 770.  A moment’s thought reveals that community property must include post-wedding day wages, and anything purchased with those wages, because the wage earner didn’t enter the marriage with the wages or the stuff bought with the wages, and didn’t inherit them.

By default then, a spouse’s separate property is comprised of those assets that that spouse enters the marriage with, anything that spouse inherits, and the offspring of those assets.

Why do we care about this asset taxonomy?  There are two contexts in which this breakdown is important. Continue Reading Death And Student Loans

Ocwen is familiar to bankruptcy attorneys because it is the name of a dark force in real estate predation.  (At the end of this post I’ll tell you an Ocwen war story from my own practice that gives a little taste of what my clients have faced with them.)  It is also a name that has been in several recent articles in the Los Angeles Times.  The articles chronicle the fall of Ocwen in California, leading up to California’s move to deport Ocwen from the Golden State.  It couldn’t happen to a more deserving entity.

 

I.  Insurance Fraud

 

I’ll start with the September 17, 2014, L.A. Times article, which is really beginning near the end of California’s Ocwen story, because one can only take just so much wallowing in a cesspool of moral and financial degradation.  In that article, E. Scott Reckard reported:

Tyesha Hansborough and her husband, Christley Paton, had paid the property insurance on their Inglewood home along with their mortgage, putting the money in escrow like most homeowners.  Trouble is, the couple said, their mortgage servicer — Ocwen Financial Corp. — didn’t pass that money on to the insurance company for this year’s premiums.  They battled unsuccessfully for months to reinstate the lapsed policy without additional costs, the couple said.  Ocwen instead imposed so-called force-placed insurance — expensive coverage that protects the lender’s interest but doesn’t shield the homeowners from loss.

Isn’t that a cute trick?  Collect insurance premiums from the homeowner and then charge them again, for Rolls-Royce priced insurance.  That’s how to turn a real profit.  Don’t waste time with honest business practices:  That’s for suckers.

Picking up on the same insurance fraud theme, in the September 21, 2014, L.A. Times Lew Sichelman reported: Continue Reading California Seeks To Divorce Itself From Ocwen

In 2013 the U.S. Supreme Court handed down an opinion that shed light on the meaning of the word “defalcation” as it is used in the Bankruptcy Code’s list of nondischargeable debts.  The opinion disabuses of their error those who thought the word had something to do with a bathroom bodily function.  In this post we will look at the Supremes’ decision in the larger context of nondischargeability under 11 U.S.C. § 523(a)(4).

 

I.  Nondischargeable Debts In A Personal Bankruptcy:  Section 523(a)(4)

 

As readers of this blog know, 11 U.S.C. § 523(a) contains the exceptions to discharge in Chapter 7, 11, 12, and 11 U.S.C. § 1328(b) hardship discharge Chapter 13 bankruptcies.  Included in that list is the following:

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

11 U.S.C. § 523(a)(4).

The list of debts that are nondischargeable in a completed Chapter 13 plan discharge ― found in 11 U.S.C. § 1328(a) ― is shorter than the list of exceptions to discharge found in 11 U.S.C. § 523(a).  However, § 1328(a) includes § 523(a)(4) by reference, so a debt incurred through “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” is never dischargeable in any personal bankruptcy.

However, § 523(a)(4) is not self-executing.  According to 11 U.S.C. § 523(c)(1):

[T]he debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.

Thus, the creditor can only make the debt survive the bankruptcy discharge by successfully prosecuting a special kind of lawsuit in the Bankruptcy Court.  That kind of lawsuit is called an adversary proceeding. Continue Reading What Is Defalcation In Bankruptcy?

I recently received an email that posed an interesting scenario in Chapter 7 bankruptcy liquidation.  Although I have written on the subject of Chapter 7 liquidation I haven’t addressed the specific fact pattern in detail.  This post fills that lacuna.

The question posed was a bit long, so I will summarize it.  The questioner asked whether a sufficiently large tax lien on a debtor’s principal residence would dissuade a Chapter 7 Trustee from seizing and liquidating the house.  My answer not only deals with the question posed, it also includes a discussion of the exemption implications as well.

The analysis depends primarily on 724(a), 726(a)(4), and 11 U.S.C. §§ 551.  Based on these Code sections, the tax lien has two potentially negative implications to the case.

 

I.  The Trustee Can Avoid The Tax Lien To Create Equity For The Estate

 

A.  The Taxing Authority Will Release The Lien

 

If there appears to be no realizable equity solely because of a tax lien, the Trustee is free to ask the taxing authority ― whether the IRS, or the FTB, or both ― to release the lien to create realizable equity for the bankruptcy estate.  A taxing authority is willing to release a lien in this context because upon liquidation of the asset, its priority tax claim will be paid ahead of the general unsecured debt ― meaning that the taxing authority will get money right away rather than having to wait for the debtor to sell or refinance the property.  In addition, after the Court grants the debtor a discharge, the taxing authority will still have a claim against the debtor for the unpaid, nondischargeable portion of the tax debt.  Thus, from the taxing authority’s perspective, there is no down side to releasing the lien. Continue Reading Liquidation Of An Asset In A Chapter 7 Bankruptcy II

Is a debt incurred as a result of a DUI (or DWI depending on the argot used where you live) dischargeable in bankruptcy?  There are three parts to the answer.  Although my discussion makes use of California and Ninth Circuit law, its substance will undoubtedly apply, mutatis mutandis, to any jurisdiction in the United States.

 

I.   A DUI Fine Is Not A Dischargeable Debt

 

If a debtor tied one on, got behind the wheel, and received a citation for drunk driving, the resultant fine is not dischargeable in bankruptcy.  To establish this requires a two-step analysis.

 

A.  Bankruptcy Other Than In A Completed Chapter 13 Plan

 

11 U.S.C. § 523(a) contains the exceptions to discharge in Chapter 7, 11, 12, and 11 U.S.C. § 1328(b) hardship discharge Chapter 13 bankruptcies.  Included in that list is the following:

A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt— . . . to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit . . .

11 U.S.C. § 523(a)(7) (emphasis added).

 

B.  A Completed Chapter 13 Plan Discharge

 

The list of debts that are nondischargeable in a completed Chapter 13 plan discharge ― found in 11 U.S.C. § 1328(a) ― is shorter than the list of exceptions to discharge found in 11 U.S.C. § 523(a).  In particular, § 523(a)(7) is not included in the Chapter 13 list.  However, 11 U.S.C. § 1328(a)(3) excludes from discharge (emphasis added):  “any debt— . . . for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime . . .”

Is a DUI a crime?  Yes.  Here is the reasoning: Continue Reading Is A DUI/DWI Debt Dischargeable In Bankruptcy?