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:
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A fellow bankruptcy attorney recently posed an interesting question regarding a threatened foreclosure sale before the automatic stay is lifted in a Chapter 13 bankruptcy.  Here is the exchange I had with her:

Question:

            Background Facts:

I just got an email from a Chapter 13 client who has a confirmation hearing on 8/21.  She told me that auction.com just came by her house and posted a sign that her house is up for auction on 8/14.  There has been no relief from the automatic stay issued in this case, nor has a motion for relief from the automatic stay been filed.  When we filed the case in March, we stopped a foreclosure action and the client was going to try to save her home so we put the arrears and some IRS tax debt in the plan.  Her original confirmation hearing was on 6/21 but the Chapter 13 Trustee’s office continued it to 8/21.  In the interim she lost one of her jobs and decided that she would just surrender the home and pay the priority tax debt in the plan.  We amended the plan indicating that she would be surrendering the home, but no arrangements have been made yet on the terms of the surrender.

            The Question:

Doesn’t the bank still need relief from the automatic stay to auction the house?

My Answer:

I.          The Terms Of The Confirmed Plan Will Bind The Debtor

The Bankruptcy Code provides:  “[T]he court shall confirm a plan if — . . .  [for an] allowed secured claim provided for by the plan — . . . the debtor surrenders the property securing such claim to such holder . . .”  11 U.S.C. § 1325(a)(5)(c).  Thus, your client is entitled to propose a plan in which she surrenders her home to the creditor holding the first mortgage.  Once the Court confirms the plan, its provisions will “bind the debtor . . .”  11 U.S.C. § 1327(a), meaning that she will have to surrender the home.
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I recently had an interesting email exchange with a couple of fellow bankruptcy attorneys on the subject of foreclosure.  The specific question we discussed was whether a second mortgage holder’s claim is extinguished after the holder of the first mortgage conducts a foreclosure sale.

The question is complicated by the fact that there are three relevant statutes at work, and they don’t have the same foci.

I.          The “One-Action” Rule

The first statute is Cal. Civ. Proc. Code § 726, which states in relevant part:

There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter.

This means that if a creditor holds a mortgage on a piece of property, it has one bite at the apple:  it can either foreclose on the property, or sue the borrower to collect on the debt, but not both.  Thus, if the lender conducts a foreclosure sale and comes up short, it cannot sue the borrower to collect the post-resale deficiency.  The shortfall has to be cancelled, which is why the (former) homeowner can face a nasty tax bill after losing the home.
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Bankruptcy filings should surge in 2012 because the foreclosure pace is picking up speed, and because the world and U.S. economies are not headed for improvement in the near future.

I.          Foreclosures In 2012

I haven’t written about foreclosure in a while, but an article in the Thursday Los Angeles Times has given me the impetus to do so.

In the January 12, 2012 Business Section, E. Scott Reckard reported:

California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages.  And experts said that dealing with the foreclosure process, from issuing notices of default to selling repossessed homes, is likely to push housing prices lower this year before the real estate market has a chance to recover.

Wow!  Three and a half million seriously delinquent mortgages.  That’s a lot of toxic real estate.  If you’re one of those 3.5 million people with a seriously delinquent mortgage, isn’t it time you considered bankruptcy?

II.        The World Economy

Is that the only bad financial news?  You know better than that.  Here’s what Sue Chang of the Wall Street Journal’s Market Watch reported on Friday, January 13, 2012:

Standard & Poor’s late Friday stripped France and Austria of their triple-A ratings and also downgraded Spain, Italy, and Portugal.  France and Austria are now both rated AA+ while Spain is at A and Italy is rated BBB+.  Meanwhile, Portugal’s rating was slashed to a junk grade of BB.  The move had been anticipated after the ratings agency placed 15 euro-zone countries on CreditWatch negative in early December.
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When the foreclosure sale looms large, filing for bankruptcy protection prior to the sale date is probably the only smart move. It avoids the unpleasant post-foreclosure sale tax hit, and frees you from owing the bank anything.

Those of you who have followed these posts for a while know that I have predicted a new wave of residential and commercial foreclosures. I stand by that prediction, the residential portion of which has just been bolstered by a recent article by Don Lee in the Los Angeles Times:
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A recent corrupting trend in Chapter 13 bankruptcy is creating serious challenges for honest Chapter 13 debtors, their attorneys, mortgage companies, and Bankruptcy Courts.  The problem is a new foreclosure scam called property dumping, and it illustrates the ingeniously evil thinking of some real estate crooks.

Property dumping has cropped up in response to the

It is not news to say that today’s real estate market is terrible.  Many “homeowners” are quite literally hundreds of thousands of dollars underwater.  I put homeowners in quotation marks because someone who is underwater does not really own a single molecule of the house.

This leads many to surrender their houses as part of the bankruptcy process.  Surrender of the house can be very sensible if the debtor can’t make the payments, and has negative equity.  When the Bankruptcy Court grants the debtor a discharge, the personal liability on the mortgage is discharged.  Moreover, since the debt is discharged in the bankruptcy, there is no cancellation of debt income, so there is no adverse tax consequence to the surrender.  In addition, any prepetition homeowners association (HOA) dues are discharged because they were incurred prior to filing the bankruptcy papers.

However, postpetition HOA dues are not discharged in the bankruptcy because they are incurred after the filing of the bankruptcy papers.  See 11 U.S.C. § 523(a)(16).  In the current real estate market this unfortunate fact can create a real problem because if the debtor surrenders the property the lender is not required to take possession of it, or record a transfer of title.  In the vernacular:  you take force someone to accept a gift.
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I.          The Basic Idea:  Cancellation Of Debt Income

Let’s first understand the basic idea with a simple non-real estate example.  Suppose you owed me $100,000.  I’m such a nice guy that I forgive the debt.  It turns out that this becomes a mixed blessing because now the IRS and the Franchise Tax Board (FTB) both