Monthly Archives: November 2008

Getting Paid by the U.S. Trustee

I love reading opinions where the winning attorney had way more in the guts category than I do.  Dennis Feld, a fellow NACBA member from New Mexico, has just gotten a written opinion out of the Bankruptcy Court in New Mexico to the extent that a withdrawal of a 707(b) motion by the U.S. Trustee qualifies the debtor as a prevailing party under the Equal Access to Justice Act.

Ok, so in English?

The Equal Access to Justice Act allows an award of attorneys fees against the U.S. Government if four conditions are met:

  1. First, the petitioner must be the prevailing party;
  2. The government’s position in the litigation must not have been substantially justified (which means a reasonable basis in both fact and law);
  3. A motion requsting an assessment of fees must be timely filed; and
  4. No special circumstances exist that would make the award unjust

See, In re: Mendez, No. 7-07-11092 Bankr. N.M. decision date September 26, 2008.

The Mendez court found that the Trustee’s withdrawal of its 707(b) motion to dismiss qualified the debtors as a prevailing party. The opinion does not address the remaining three factors. However, I expect to see more litigation on this issue in the near future.

Oh, and as much fun as it is to spend Capital One’s money — and it is, trust me. It must be even more fun to cash that Treasury check.


Discharge Violations

Countrywide has just been spanked to the tune of $55,000 for a discharge violation involving a mortgage.  Debtor’s counsel is providing the details here. The basic facts are that Debtor filed a Chapter 7, did not reaffirm the mortgage, received discharge, surrendered the property and then got harassed (pretty endlessly from the looks of things) by Countrywide trying to collect on the debt.

Countrywide’s collection actions included phone calls, billing statements, and reporting the balance as still owed on the Debtor’s credit report.  Debtor’s counsel claims that Countrywide received no less than 16 notices of Bankruptcy and demands to stop the improper conduct.

The debtor claimed damages in the form of emotional distress, credit problems resulting in higher interest rates and a lower credit score, and some kind of problem with an adoption.

Clearly, this is not your run of the mill discharge violation.  Countrywide was not only persistent but when your counsel tells debtor’s counsel on the phone to “take it to court” you are really asking for trouble.

It has been my experience that Judge’s hate discharge violation cases.  They want to be sure that it isn’t just a stupid mistake and that Debtor’s counsel has fired a warning shot before filing the Adversary Proceeding.  Even so, they appear to be reluctant to award serious damages.

When I was a young lawyer representing creditors, I was taught to be terrified of violating the automatic stay or the discharge violation.  That doesn’t seem to be the case anymore, and frankly, a lot of the problem comes from Courts who don’t have a whole lot of respect for their own orders.  That needs to change, and in my office it is going to.


Honesty Really is the Best Policy

Federal prosecutors have arrested four people in West Virginia for attempted bankruptcy fraud.  (According to story reported by  Pretty straight forward stuff really.  They were all caught attempting to hide assets.  The examples listed in the story were concealing income from the sale of real estate in 2003, concealment of a workers compensation claim and collecting disability benefits while concealing employment income by using a false Social Security Number.

What is it with people?  It isn’t just these four.  One of the most important parts of my job is keeping clients from lying about  stuff — generally stupid stuff.

Now, I don’t know much about West Virginia exemptions; but in Oklahoma the proceeds from the 2003 land sale could almost certainly have been protected given a little bit of time.  The workers compensation award is just exempt in Oklahoma — regardless of value.  Well, until it was concealed.  Once you try to conceal an otherwise exempt asset, it loses its exempt nature.  Yep, disclose it and keep it; conceal it, and lose it.  Oh, and that whole fake Social Security Number thing; is there anyway you could not get caught?

Thou shalt not lie, cheat or steal and file for bankruptcy.  Oh, and if you do — I ain’t sharing your jail cell.

So, what exactly is the point of this?  These arrests were part of a crackdown by a joint team of US Trustees and US Attorneys.  This particular effort was focused on 23 counties in West Virginia.  If it happens there, it will happen here.  Of course, it doesn’t hurt that the W.D. of Oklahoma has traditionally had one of the toughest U.S. Trustees offices when it comes to bankruptcy fraud; and our Trustees are really good at finding things debtors decide to try and hide.

So, repeat after me.  Thou shalt not lie, cheat or steal and file for bankruptcy.  If you have any questions, ask your Mother to finish teaching you the concept of honesty.


Interest Rates and Bankruptcy Reform

Anyone else remember the arguments being made by the credit card industry that abusive bankruptcy filings were forcing up interst costs?  Bankruptcies under the old law were supposed to be costing everyone of us $400 a year in excess interest charges.  We had to pass the Bankruptcy reform bill to stop that.

So.  You got your $400 in savings yet?  Neither have I.

In fact, credit card interest rates are SOARING.  USAToday is reporting that more and more people who have never missed a payment are having their interest rates hiked to 27, 28% or more.  Why?  Well, one credit card company allegedly admitted to a customer that it was because they could.  Doesn’t that make you feel all warm and fuzzy.

A more complicated reason is that it all has to do with securitization.  You know, that whole structured finance mess that is causing so much grief in the world’s financial markets.  You know, that stuff that is all about sub-prime mortgages?  Yea, well, its about credit cards too.  Oh, and car loans; but that is another post.

You see, credit card companies use credit card accounts, with their resulting cash flow, to securitize bonds.  Just like gets done with mortgages.  Another thing that is just like with mortgages is that any increases in fees or interest may not be required to be passed on the investors.  The servicing lender may be able to pocket that.  Banks deny that this has anything to do with it, of course.  After all, this might create a conflict of interest between the servicer and the ultimate investor — especially since bankruptcy filings are heading back up.

Let’s see.  Bankruptcy reform was passed to stop losses to lenders from people who filed for bankruptcy.  So, lenders securitize debt in such a way that it makes sense for them to up interest rates which the borrowers now can’t afford to pay forcing more people into bankruptcy.

Something tells me I won’t be seeing that $400 in interest savings this year either


Can You Still Stiff the Trustee and Get Your Taxes Paid Too?

This is the last post on In re: Graves — unless, I think of something else.

The Graves opinion mentioned something in passing that I had almost forgotten about. Gee, does that mean that I am starting to forget things that other people never knew? Really? Cool! Anyway, the Graves court mentioned in passing that the Debtors did not elect a short tax year pursuant to 26 U.S.C. Section 1398(d)(2).

I’ve done this once. It was way cool. Even Special Procedures was impressed. Ok, here is the scoop. Debtor was going to file an asset Chapter 7. It was just going to happen. On the other hand, Debtor was going to owe taxes for the current tax year — if he filed now. His withholding might catch him up by the end of the year, but as of right now he was going to owe taxes. So, I had him elect a short tax year. Basically, for the year that he filed for Bankruptcy he filed two tax returns. The first covered the year up to the day before his bankruptcy petition was filed. The second covered the petition date through the end of the year. The tax liability and payments made by the Debtor were allocated between the two returns as if they were separate years.

So, the Debtor filed a Chapter 7 with assets for the Trustee to administer. The Debtor also declared a short tax year that bifurcated his pre-petition tax liability from his post-petition tax liability (and his post-petition withholding). The Debtor then could present to the Trustee a pre-petition (and in those days priority) tax claim to pay with the asset available for administration. By the way, there is an IRS publication explaining how this works, and it only works in Chapters 7 and 13. The publication used to be IRS Publication 908. I’m not sure if that is current.

Unfortunately, I can’t come up with a use for this in a post-BAPCPA world. Anyone have any ideas how to make use of this with the current state of Section 507?


It’s the Economy Stupid

I was watching election results, and saw a segment on Pennsylvania.  The gist of the segment is the reporter’s belief that Pennsylvania would have gone heavily for John McCain last spring, but the decline in the economy caused the shift to favor Obama today.  With our without Pennsylvania, the economy has certainly had a significant impact on the election.

That made me think of an article I read in USA Today this morning that Bankruptcy filings nationwide are up 40% for October, 2008 over October 2007.  That made me wonder what has happened with Oklahoma bankruptcy filings.  So, I checked.  I love Pacer.

In October, 2007 in the Western District of Oklahoma there were a total of 461 Bankruptcy cases filed.  In October, 2008 there were a total of 573 cases filed.  That is an increase of 24%.  I have done entries comparing national filing rates with ours before, and we are following an upward trend but not at nearly the same rate as nationally.  So, we are staying fairly consistent.  That is also consistent with our oil and gas economy which does tend to be somewhat counter-cyclical.

I also looked at our Chapter 13 filing rate.  As I have mentioned more than once, Chapter 13 filing rates really should not be heavily influenced by the Means Test which is the centerpiece of the Bankruptcy Reform Act of 2005 —  regardless of what you read in the press.  What should be the major influence on Chapter 13 filings is foreclosure rates. If you are in foreclosure, trying to save your house, and the mortgage company isn’t being helpful; a Chapter 13 can be the best thing that ever happened to you.

Although, I have seen some disturbing things in the local foreclosure statistics; I have not seen a big spike in numbers over last year.  So, I would expect our Chapter 13 numbers to have stayed pretty close to last year’s.  No surprise, there.  In October, 2007 we filed 131 Chapter 13 cases  or 28%  of the total filings.  In October, 2008 we filed 157 Chapter 13 cases or 27% of the total filings.  So, no great change there.

Well, I don’t know if anyone else found this interesting; but I did.


Graves Pt. 2 — or, Why the Trustee Still Loses

My last post was about a scintillating BAP opinion that used language like, “blood out of a turnip” and “contingent reversionary interest”. In that post I explained why a Trustee cannot recover from the Debtor a pre-petition tax refund that the Debtor applied to a post-petition tax year. In other words, the Debtor filed a tax refund that resulted in a large refund. The Debtor checked the box to apply that refund to the following year’s tax liability. The Trustee wanted his money, by golly. He’s the Trustee! He’s entitled. BAP ruled against him.

My first question reading the opinion was why the Trustee couldn’t recover the money from the IRS? Now, if we are going to be picky, Graves expressly states that it is not deciding that issue. However, Graves cites two other cases on this issue and appears to agree with them. So, according to In Re: Middendorf, 381 B.R. 774 (Bankr. Kan. 2008), the pre-petition transfer to the IRS cannot be avoided, because it is nether a preference nor a fraudulent transfer. It is not a preference, because it is not a payment on an antecedent debt. It is not a fraudulent transfer, because the Debtor received value for the transfer. The Graves Court also cited another case, Grant v. United States (In re: Simmons), 124 B.R. 606 (Bankr. M.D. Fla. 1991) for the point that this pre-petition transfer to the IRS was not property of the Estate, because it becomes a payment of the Debtor’s estimated tax rather than overpayment of his prior year’s taxes.

However, the Graves Court did find that the Trustee would be entitled to a share of whatever refund resulted from that post-petition tax year. Of course, the Debtors then have a whole year to crank their withholding down. They should be able to deal.

This isn’t all folks. There is still more to come from the fascinating and scintillating, in re: Graves.


Credit Card Issuers Wanna Do You a Deal! is reporting that Credit Card issuers are looking for a little regulatory help to make it cheaper for them to forgive some credit card debt. (Article is called, Banks seek help to forgive some credit card debt.) Essentially, some banks, who are also credit card issuers, are requesting a regulatory change; so that if they forgive some credit card debt in the form of workout agreements with card holders, the banks do not have to have to book the entire amount forgiven at one time.

The way this would work is banks would identify the customers most likely to file for bankruptcy (and pay them nothing). The banks would offer those people a deal where the bank would write off up to 40% of the total oustanding balance. The remainder would then be repaid at 0% interest over 5 years. The catch from the banks’ point of view is that the total amount of the forgiven debt would have to be taken as a loss at the time the workout was done — and, as the article points out, most banks don’t need more losses right now.

From the cardholder’s perspective there are two reasons why this isn’t the world’s greatest deal. First of all, assuming that you get the maximum 40% discount and that you are approved for the program at all means that you first, have been identified as likely to file for Bankruptcy. That tells me that this credit card account is probably not your only problem. Second, let’s say that you have a $10,000 account. Subtract 40%, and you have a $6,000 account. Pay that back over 60 months, and you have a $100 a month payment — except for all the rest of the debt you are trying to pay. Most people who file for bankruptcy have already stopped making payments on their credit cards and still can’t make ends meet. This deal might prolong the pain a little (and increase the guilt), but for most people I don’t see that it is a deal changer. The difference would be if there was some cooperation between issuers so that people in serious trouble could get this deal on all their credit card accounts. I’m not seeing that as a possibility from the terms of this article.

The second problem, and one that I harp on a lot here, is that this forgiven debt will constitute taxable income; and the banks will be sending 1099’s to the IRS on your behalf. Now, the easy answer is that the people this is targeted to should all qualify as insolvent at the time that the workout deal is made; and therefore, should be entitled to not pay taxes on this forgiveness of debt income by proving to the IRS that they were insolvent. Well, unless, they have substantial equity in either a homestead or a tax qualified retirement account (both of which are fully exempt in Oklahoma and can be kept by the debtor even if they file for bankruptcy); in which case, they might not qualify as insolvent and would have to pay the taxes due on the forgiven debt — including, of course, all that forgiven interest.

Umm, yea. Sure. How many people do you know who are in over their heads with credit card debt who 1. know that they need to present the IRS with evidence of insolvency in order to avoid paying taxes on forgiven debt; and 2. know how to go about doing that? Yea, that’s what I thought. Ultimately, these people will just trade freely dischargeable credit card debt for non-dischargeable tax debt.

Not quite the deal they thought they were getting.