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.

Elaine

Federal prosecutors have arrested four people in West Virginia for attempted bankruptcy fraud.  (According to story reported by WSAZ.com.)  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.

Elaine

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?

Elaine

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.

Elaine