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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Chapter 13 bankruptcy has an important limitation.  If the debtor’s debts are too large, Chapter 13 is unavailable:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175  and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).

By the way, the numbers at the Cornell Law School site to which this links haven’t been updated for some time.  I corrected them in the quote above.  The modified quote is correct as of September 2014.

If either debt ceiling — either the secured, or unsecured — is exceeded, the debtor is ineligible for Chapter 13 protection, and must consider Chapter 11 bankruptcy.  This leads to the following question that was posed by a fellow bankruptcy attorney:

Question:

Suppose a debtor has a mortgage — for simplicity let’s say a first mortgage — that is undersecured, i.e., the value of the house is less than the current balance on the mortgage.  Does the unsecured portion of the mortgage count toward the $383,175 unsecured debt ceiling?

My answer was:  It depends on whether or not the house is the debtor’s principal residence.  But it’s a bit more complicated than you might imagine.  Let’s start with the simpler “nonprincipal residence” scenario.
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Many potential bankruptcy clients tell me that they are concerned about the possible ill effects of bankruptcy on their future credit rating.  They are surprised and pleased to learn my tips for rebuilding credit after bankruptcy.  Let me begin with a bit of background.

I.          Your Current Credit Is Poor

When someone calls a bankruptcy

In my last post I focused on housing because I think it’s the most important factor in the current mess.  This post discusses the programs set up to address the mortgage meltdown.  The feds also view housing as the linchpin.

I.          HAMP, HAUP, HAFA, HARP

These stand for “Home Affordable Modification Program”, “Home Affordable Unemployment Program”, “Home Affordable Foreclosure Alternatives Program”, and “Home Affordable Refinance Program”.

            A.        HAMP

Freddie Mac states:

HAMP is a loan modification program designed to reduce delinquent and at-risk borrowers’ monthly mortgage payments.  HAMP is effective for mortgages originated on or prior to January 1, 2009, and will expire on December 31, 2012.

Contractually the borrower agrees to repay the loan with interest according to the contract’s terms.  In modifying the loan, what is the borrower trying to do?  Some combination of:  lower the balance, lower the monthly payments, lower the interest rate.  The common theme:  the borrower wants free money. 

If a bank gives away free money it dies.  For example, if a bank has 100,000 mortgages and lowers the principal balances by $10,000, it loses one billion dollars.  If it lowers the payments by $500 each, it loses fifty million dollars a month.  The $500 figure is the Treasury Department’s standard HAMP monthly mortgage reduction.

Banks have an incentive to modify mortgages:

Servicers will receive $1,000-$1,500 for each eligible modification they establish, and a “Pay for Success” incentive of up to $1,000 each year for three years as long as the borrower does not become 90-days or more delinquent.

But this puny incentive won’t coax a bank into giving a borrower $10,000, or $500 per month, in free money. 
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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

In a previous posting I discussed the concept of preferential transfer.  A somewhat related topic that has serious implications to bankruptcy filers is fraudulent transfer – also known as fraudulent conveyance. 

I.          Fraudulent Transfer Outside Of Bankruptcy

            A.        The Origins Of Fraudulent Transfer Law

The concept of fraudulent transfer has its origins in ancient