Monthly Archives: September 2008

Marshalling of Assets

Many, many years ago when the world was young and the biggest bailout around was actually a cleanup of the S & L mess; I was a young lawyer working in an ivory tower briefing issues for RTC, FDIC and FSLIC — among other deep-pocketed clients.   One of those briefs was on whether or not the doctrine of marshalling of assets could be used against the Government.  I don’t remember the details.  I just remember being fascinated by the term “marshalling assets”.  I was young.

Anyway, earlier this month in Massachusetts a court has held that the U.S. Government (IRS) can be forced to marshall its assets in order to allow for a distribution to the unsecured creditors.  It is a creditor’s decision in a bankruptcy case, but I thought it was kind of cool anyway.

Ok, so just in case you didn’t have to research this when you were a young lawyer locked in a library for days on end, marshalling assets is a doctrine that applies when one creditor has more than enough collateral available and another creditor only has access to some of that collateral.  By forcing the over-secured creditor to go after the collateral on which it has an exclusive claim first, more of the other assets are available for other creditors.

In the Massachusetts case the Debtor had exempt equity in a homestead and another asset that was not exempt.  An IRS lien does attach to exempt property (remember, they rank with death and taxes).  Obviously, the unsecured creditors couldn’t reach the Debtor’s exempt homestead equity.  So, the Bankruptcy court required the IRS to go after the exempt homestead equity first.  Then, it could finish satisfying its secured claim from the non-exempt asset.  The remainder of the non-exempt asset would then be available for a distribution to the unsecured creditors.

The case is Houghton v. United States (in re:  Szwyd), BK No. 05-50837-HJB, Adv. No. 06-04274 in the Bankruptcy Court for the District of Massachusetts, Western Division.  The case was decided September 8, 2008.


Mortgage Modifications and Bailouts

As the law stands now a claim secured only by a security interest in real property that is the Debtor’s principal residence may not be modified in a Chapter 13 Bankruptcy.  Debtors’ attorneys have argued since the foreclosure crisis began that allowing debtors to modify their mortgages in a Chapter 13 would go a long way to resolve the problem.

A Chapter 13 Bankruptcy format gives the ability to reduce the principal balance down to the value of the property and reduce the payment accordingly.  At the mere mention of this proposal banks scream bloody murder.  So, when faced with a $700 Billion bailout; you would think that this idea would make more sense.  After all, this would write the mortgages down to the value of the collateral (which is a lesson in valuation we supposedly learned in the S & L mess) and turn a non-performing asset into a performing asset and an income stream to boot!

So, it shouldn’t come as any great surprise that this issue has raised its head again on Capital Hill this week.  The banks are still screaming bloody murder.  It really gives me pause (well, frankly, several things about this bailout give me pause, this is just one of them) when banks scream this loudly about a solution that seems to make this much sense.  Oh, wait a minute, free money is always better.

Sorry.  Not when I am paying the bill.

Write your Congressmen.  This bailout needs accountability, it needs limits, it needs oversight, it needs to be limited to certain kinds of collateralized debt (as of this morning the Treasury wanted to be able to include debt secured by credit cards, car loans and student loans as well — sorry, $700 Bn isn’t even a good start at that point).  It also needs a modicum of sense.  Using the existing Chapter 13 structure to create performing assets is a good start.



Ok, nobody has asked me how to deal with banks and bad mortgages — and there is probably a good reason for that.  However, if you look at the title of this blog in small print below Consumer Law Updates it says — all the things no one has asked me about — yet.  Well, here are a few of those things.

If you want to seriously slow down the foreclosure problem, eliminate the statutory protections given only to residential mortgages in a Chapter 13.  If residential mortgages were freely modifiable in Chapter 13, lenders would take some principal hits but they would retain performing assets.

If you want to encourage banks to loan money to each other, make them priority creditors in the event of a bank dissolution.

If you want to reign in Corporate America’s addiction to outrageously high leverage rates, limit the deductibility of interest and other leverage related costs to a certain percentage of capital.

A whole lot cheaper than the bailout Secretary Paulson is proposing, and it just might work.

This blog will now return to the regular ramblings of an overeducated, consumer debtor’s attorney who swims in way too small a pond.


Dischargeability of Income Taxes

Evidently, you can teach an old dog new tricks.

I have a case pending with a significant pre-petition income tax liability and complicated tax transcripts.  I’ve read the statute, I’ve sat through the CLE lectures.  I missed something.  Offers of compromise only toll one of the three deadlines for determining dischargeability of taxes in a Bankruptcy.

Anybody care to guess which one?


But I make too much money to file for bankruptcy.

If I hear that one more time I am going to scream. Ok, so usually what I hear is, “but <so and so> told me that I make too much money to file for bankruptcy.”

First of all, the only strictly true statement is that no one makes too much money to file for Bankruptcy.

What most people mean is that they believe that they make too much money to qualify for a Chapter 7 Bankruptcy filing. The problem with that statement is that qualifying for a Chapter 7 actually has more to do with what kinds of debt you have and what you actually spend your money on than it does with how much money you make.

The root of all of this misinformation is something called the Means Test. The Means Test was ostensibly created as a kind of gatekeeper for Chapter 7 Bankruptcy filings. I say ostensibly. I don’t think that was the real reason, but hey what do I know about politics and lobbyists paid by institutional creditors. The Means Test is an 8-page exercise in accounting trivia. It starts with income, then swings through expenses and certain kinds of debt. Having a problem passing the Means Test? Wait a few months to file and CHANGE THE THINGS YOU SPEND YOUR MONEY ON. Yep, it really can be that simple.

If you have been told that you make too much money to file for Bankruptcy and feel that you need to anyway, call a member of the National Association of Consumer Bankruptcy Attorneys for a second opinion.


Senior Citizens and Bankruptcy

For too many years the press has painted a false picture of the people who file for bankruptcy.  If you have read the mainstream press articles on bankruptcy written during the last few years, you are probably convinced that the typical bankruptcy filer is young or early middle-aged, who is at Starbucks every morning and out to dinner every night and has to have every new gadget on the market.  In other words, young, short-sighted spendthrifts.

There is just one problem with that picture.  Those people aren’t my clients, and there aren’t a lot of them at 341 dockets either.  Finally, the mainstream press is starting to figure this out.  Today, USAToday ran an article pointing out that Senior Citizens are filing for bankruptcy in increasing numbers.

Well, DUH.

Let’s think about this for a minute.  What has happened to health care costs over the last few years?  How about food and energy costs?  Ok, so consider what percentage of a retiree’s income is consumed by those expenses?

Every age group under 55 has seen double-digit declines in their bankruptcy filing rates since 1991.  Every age group over 55 has not.  In fact, since 1991 filings for people between the ages of 55 and 64 is up 40%.  For 65 – 74 year-olds, it is up 125%; and for 75-84-year-olds the filing rate is up a staggering 433%.

So, the next time AARP tries to get you to join; ask them if they have added a benefit to provide Bankruptcy representation.

Elaine Dowling