Safer in Bankruptcy — Part 2 — The Automatic Stay

The instant that a bankruptcy is filed an order is entered automatically, and it stays (or temporarily stops) all collection activity against the debtor or property of the debtor.  Instantly.  Automatically.  Boom.  All collection activity must stop.  That means lawsuits, wage garnishments, nasty letters, annoying phone calls (Ok, so I don’t know any court that has managed to stop the car warranty calls, but we’re working on it.).

That order remains in place until either the Court modifies or lifts it, the Debtor’s discharge is entered or the case closes without a discharge.  The automatic stay is designed to give someone who has just filed for bankruptcy literally months of breathing room.

Where the automatic stay is most likely to get cut short is when someone files for bankruptcy and doesn’t continue making payments on a secured loan — most commonly a car payment.  In that case the lender has the right to ask the court to lift the stay and let them repossess the car.  A chapter 7 bankruptcy is not the right place to be if you are not current on a vehicle that you need to keep.  If that is the case, file a chapter 13 bankruptcy.

However, if you find yourself with more debt than you can pay, but you are current on your car loans and mortgage (if you have them), but your phone is ringing off the hook, you are afraid to open your mail, and your payroll office has just received a wage garnishment; the automatic stay is the legal equivalent of a Calgon bubble bath commercial from the 70’s.

Elaine

Safer in Bankruptcy – Part 1

One of the things I am working on this weekend is a demand letter to the attorney for a local credit union.  You see, someone at the credit union seems to have thought that taking advantage of an elderly man with early stage dementia was a profitable idea.  I will concede that under ordinary circumstances what they did might qualify as greedy and morally questionable; it should, however, be legal.

Not so fast.

In this case the elderly customer just happened to be in an active Chapter 13 Bankruptcy, and the Credit Union knew this.  They got checks from the Chapter 13 Trustee on this man’s loan accounts up until the events I am upset about happened.

It would be inappropriate and unnecessary to go into what actually happened or why I think it happened.  What is relevant is that when someone is in an active bankruptcy, they are under the protection of the Bankruptcy Court.  That means that there are orders in place that are designed to protect them from their creditors.  The credit union in the case I am currently working on appears to have violated several of those.

Over the next few days I am going to talk about what those orders are and how they can be used to keep you safer inside a bankruptcy than outside — particularly in uncertain times.

Elaine

The Paycheck Protection Program and Bankruptcy

The SBA has a really amazing Corona virus relief program, the Paycheck Protection Program.   It is called a loan program, but it appears to be intended as grants.  Basically, the SBA will give small businesses money to make payroll for two months.  It looks pretty sweet.

There is one problem.  One of the questions on the application is:

Is the Applicant or an owner of the Applicant presently suspended, debarred, proposed for debarment, declared ineligible, voluntarily excluded from participation in this transaction by any Federal department or agency, or presently involved in any bankruptcy?  (Emphasis added).

Ignoring the obvious, which is what the heck does most of this even mean?  Declared ineligible by whom?  Disbarment?  I mean, a lot of lawyers are applying for this; but not that many.  Suspended by a Federal department or agency?  Suspended from what? I’m sorry, but nothing about this question really makes sense.  So, I suppose I shouldn’t be surprised to see this bankruptcy language tacked on to the end.

So, what the heck does “presently involved in any bankruptcy” mean, anyway?  I have no clue.  None.

Taken literally, this would exclude every business who is listed as a creditor in anybody’s bankruptcy.  Somehow, I don’t think that is what it means.  If you check the Statute this may mean that the debtor cannot be a debtor in possession in a bankruptcy.  For all intents and purposes that means the Debtor cannot be in a Chapter 11 reorganization, but the question on the loan application is broader than that.  Oh, and the application says on its face, that answering yes to this question means that your loan will not be approved.  So, getting comfortable with what you think it means might be important.

Regardless of what the statute is supposed to say, or what it means or what the question means; the consensus among lawyers I have discussed this with is that if the business, or the owner of the business, is a debtor in any chapter of bankruptcy at the time a PPP application is completed, odds are very good that the application will be denied out of hand.

So, now what?

An applicant who is a debtor in a chapter 7 or chapter 11 is probably out of luck.  There is no right to dismiss a chapter 7, and if you are in a chapter 11, dismissing it so that you can get two months payroll out of the SBA is almost certainly not a good idea.

The real issue is if the applicant (or the owner of the applicant) is a debtor in a chapter 13 bankruptcy.  In that case it should be possible to dismiss the chapter 13, collect the PPP, spend the PPP on approved expenses, apply for forgiveness of the amount spent on appropriate expenses, and then refile a new Chapter 13 in order to finish out your plan of reorganization.  How much time this will take depends in large part on the local rules for your court.  However, if the money is worth it to you, talk to your lawyer.  You may be able to get a dismissal in a few days.

Elaine

Bankruptcy is Becoming a Virtual World

Friday I did my first initial consult with a prospective bankruptcy client by video conference.   A little over two hours later, we were done; and I thought the format was functional enough that it can replace a face-to-face, take off half a day to go meet the lawyer, traditional, in-office meeting.

The next step will be passing paperwork back and forth via my secure portal.  Of course, without a scanner, regular mail is an option as well.

Currently, most bankruptcy courts are allowing for the signing of the documents necessary to file a bankruptcy to be done remotely.  I am hopeful that we will be able to establish sufficiently secure procedures that we will be able to retain this.

Then, there is the First Meeting of Creditors (a/k/a the 341 hearing) which for most consumer debtors is the only time they have to go to the courthouse — except — currently, those are being conducted by telephone.  It has occurred to me that the client I met with by video on Friday and I might go all the way through the bankruptcy process and never be in the same room.

Elaine

What Can I Do NOW — I Can’t Pay My Bills

One of the worst parts of the Coronavirus shutdown is the uncertainty.  When will it end?  What bills will still have to be paid?  When will they have to be paid?  Will my job still be there?

No matter what the answers are to any of those questions, there are some things you can start doing now to be prepared for whatever the answers are.

Here is a list:

  • Check your credit report;
  • Make a list of everyone you owe money to — names, addresses, account  numbers, contact telephone number, total amount owed, payment amount due;
  • Get your 2019 taxes prepared if they aren’t already (and any missing prior years while you are at it);
  • Review your household budget;
  • Collect pay stubs or other evidence of income for at least six months.

This information will help you deal with creditors when it is time to do that.  It will help you apply for whatever forms of assistance may be available for you.  It will help you prioritize what income you have (now or later); and, if necessary, it will facilitate a bankruptcy filing if that becomes necessary.

Elaine

Bored? Check Your Credit Report

Nobody ever has the time to check their credit reports, go through them carefully, decipher the codes and columns — until they are closing on a new house on Tuesday, and there is a problem.  Then, I get to explain that a credit report dispute takes at least 30 days.

However, when you are sheltering in place or quarantined or social distancing that’s a great time.  You an get a free copy of your credit report from www.annualcreditreport.com  .  You are entitled to one free report from each of the three major Credit Reporting Agencies (CRA’s) every year.  (You can get additional free copies for other reasons, like a denial of credit.)  So, start by downloading your credit report.  Then, go through it carefully.  This is the hard part.  Don’t just check the names of the creditors, like with so many things, the Devil is in the details.  Check the payment history, the outstanding balance, the monthly payment amount, the date of last activity (which should be the last time you used or made a payment on the account, it should not be the time the present owner of the account bought it).   Those things can make huge differences in your access to credit.  Make sure they are all correct.

If you find something that is not correct, dispute it.  You will get information for disputing it online.  If you want to do that for a first dispute, fine; but do a screen shot or otherwise record the terms and time of the dispute just in case.  Remember, the Credit Reporting Agencies don’t work for you.  You are not their customer.  Their customers are the people who pay them, and those people are the creditors who report to the CRA’s.  If the first dispute is not successful.  I suggest doing it again, and doing it in writing and sent by certified mail.  Although, I also suggest talking to a lawyer at that point in time.

Elaine

Mortgage Payments and Coronavirus

Before you call your mortgage company to find out what they can, or will, do to help you through this current mess we all find ourselves in, there are a couple of things you should know.

First, your mortgage company is going to have lots of options, and the first person you talk to may – or may not – know all of them.

Second, what your mortgage company can do for you will depend in large part on one thing — do they own your mortgage or are they merely the servicer.  You probably have no idea, but it doesn’t hurt to ask when you call.  If you write your mortgage check to Bank of America, they may actually own your loan — which is kind of what you expect.  On the other hand, your loan might be owned by a securitized trust that hires Bank of America to accept and process payments, make sure the taxes and insurance get paid that sort of thing, i.e., service the loan.  If your mortgage company is just the servicer and not actually the owner (or holder) of your note and mortgage, what they can do for you will be determined by their contract with the actual owner (sometimes referred to as the investors, although, that is not technically accurate).

Third, if your mortgage loan is insured by a U.S. Government program, that will also control, at least in part, what options your mortgage lender has.  That means that if you have an FHA insured loan or a VA insured loan or Fannie or Freddie, you can expect there to be regulations from FHA or VA or Fannie or Freddie or USDA Rural housing or whomever that will tell your mortgage company what they can and can’t do and what they should and shouldn’t do.

I know it is confusing, but knowing enough to ask your servicer for specifics can take some of the frustration out of the process.  You may read a news article about things that your mortgage company says it will do for home owners, only to call and be told that what you read in the news doesn’t apply to you.  Ask why it doesn’t apply to you, and then make sure it is right.  Mortgage companies really do make mistakes — often.

The next thing you need to know is to ask follow up questions.  You call your mortgage company, you are out of work until your employer reopens, what can they do for you.   They say they can agree to a 3 month deferment on your mortgage payments.  No payment necessary for three whole months!  Not so fast.  Your next question should be — and then what?  What happens to those three missing mortgage payments?  I can promise you that they won’t just go away.  There are a number of possibilities (including the one that I’m not thinking of, so please don’t assume this is a complete list).

One answer to this that I am already hearing is that after the three month deferment the missing mortgage payments are all due at once — along with the next month’s payment too.  So, the mortgage company won’t expect you to make payments for three months, but it will then expect you to bring those missing payments current at the end of the deferment period.  That is probably not a great option.

Another answer is that the missing payments will be added to the end of your mortgage loan.   That is a better option, but it is also not a great option.  Here is why.  Let’s say that your mortgage payment is $1000 a month on a 30-year-loan (360 months) with interest at 6%, and you are in month 99 (almost through with year 9).  Those three mortgage payments will defer to the end — with interest accruing for the next 21 years.  Now, I was an English major, and someone else should always check my math; but according to my calculations that means when you complete the 30 years of your original mortgage term, you will still owe over $10,000 — all because of those three missed payments.  So, if you are going to do this put yourself on a schedule to pay extra every month.  Then, at least once a year check your payoff against an amortization schedule to make sure you are getting those missing payments paid before the interest gets out of hand.  Oh, also ask how the escrow payments (taxes and insurance) will be handled.  If the lender advances the escrow portion of those payments you could wind up with a significant payment increase in the next year after your next escrow account analysis.

The next option is that you may be eligible for a loan modification at the end of the three months.  If you are, certainly apply for whatever you are eligible for.  Again, I will caution you to read the terms of the proposed modification carefully.  Historically, principal reductions have been rare on mortgage mods.

Probably the best option is for the mortgage company to put you on a schedule after the deferment period to cure the missed payments over a reasonable period of time.  If you can get it done in no more than a year, that is probably your best option.

Ultimately, however, if you and your mortgage lender can’t come to an agreement that you think is in your best interests, you might want to consider what a chapter 13 bankruptcy can do for you.  Chapter 13 is designed to give home owners an affordable means to cure a an arrearage or default on their mortgage.  In a chapter 13 you can take up to 5 years to cure a default, and deal with whatever other debt you have accrued along the way as well.

Elaine

The Bankruptcy Courts Remain Open for Business — Sort Of

The Bankruptcy Courts — even the Oklahoma Bankruptcy courts remain open for business — sort of — despite the order entered Friday afternoon by the Oklahoma Supreme Court basically closing all Oklahoma State courts until May 15, 2020 except for emergency matters in response to the COVID-19 pandemic.

First of all, the Bankruptcy courts are part of the Federal court system, not the State court system.  So, this order from the Oklahoma Supreme Court does not effect them in the least.  That does not mean that the Federal Court system, including the Bankruptcy courts, are insensitive to the current pandemic and changes in daily life.

What it does mean is that the Federal court system, including the Bankruptcy courts, are much better positioned to respond to current events.  Essentially all Federal courts went to electronic systems years ago.   The Bankruptcy Court for the Western District of Oklahoma has been an all electronic courthouse since 2006.  What that means is that for most purposes the Courthouse doesn’t accept paper.  All filings, including new cases, are done electronically.  Instead of walking into the Court Clerk’s office, standing in line with a bunch of other germy lawyers, then coming face to face with a Deputy Court Clerk to file pleadings, my computer dials up the Court’s computer and they exchange files — quickly, efficiently and antiseptically.  Filing fees are likewise done electronically.

Now, that doesn’t mean that there haven’t had to be some hasty changes at the Bankruptcy Courts.  Traditionally (which means prior to last week) most courts required that all pleadings (like a Bankruptcy Petition) be signed in the lawyer or his staff’s presence, and the lawyer had to retain the original signature on behalf of the court clerk’s office.  More and more Bankruptcy courts around the Country have been changing those rules in the last week or so.  The Western District of Oklahoma, which includes the Oklahoma City metro area and all parts west, entered an order on Thursday March 26, 2020 allowing for the execution of pleadings with electronic signatures.

Traditionally (again that means prior to last week) First Meetings of Creditors (a/k/a 341 hearings) were held in person, at the courthouse in a packed meeting room.  Procedures have come down very recently for those to now be held telephonically.  Hearing dockets are likewise being conducted telephonically.  Now, large contested hearings with witnesses and exhibits and arguments and stuff?  Good luck getting one of those set; but this too shall be accommodated eventually.

Hurricane Katrina really exposed the greater ability of the Federal system to adapt to disaster.  You would think that in the 15 years since then, State courts would have learned a thing or two from their Federal peers.  You would be wrong.

Elaine

Student Loans and the Coronavirus Relief Bills

More details coming soon — like after I’ve read all this stuff; but if you have federally held student loans (as opposed to federally guaranteed or private loans) the current relief bills just became your new best friend.  Ok, so we can complain all we want to about the HUMONGOUS tax breaks for real estate investors included in the bills, but these bills also give considerable benefits for both loans in good standing and loans in default.  More information coming soon.

Elaine

Keep in Touch with your Lawyer!

It is even more important than usual during Coronavirus days to keep in touch with your lawyer — even if all businesses in your area are closed.  Sure, it is always important for all kinds of mundane reasons, like a change of address; but now those worries that are keeping you awake at night?  Call or email your lawyer.  You never know what tricks your lawyer may have stuck up a sleeve, and even if all businesses are closed, lawyers are pretty good about keeping an eye on email.  You might also call the office number.  It might be answered, and it might have a recording giving you information on how to get in touch.

First of all, your lawyer should be keeping a close eye on the various Coronavirus relief bills passing through Congress.  Second, your lawyer should have copies of the actual administrative orders from your Mayor or your Governor closing businesses, etc.  Your lawyer can tell you if they apply to you and how they are or can be enforced.  Your lawyer should also have a feel for employment law issues that may be effecting you, whether you are being told to work or not to work.

A bankruptcy lawyer can also help you with deciding which bills to pay and which not to when money gets really tight.

If you are in a bankruptcy, your lawyer can help you with issues like the reach of the automatic stay and the discharge injunction — that includes helping you shut down the phone calls if some creditor decides bankruptcy doesn’t really apply to them.  If you are in a Chapter 13 plan your lawyer can explain to you what remedies are available to you if you can’t make your plan payments or you need to change your plan terms.

Your  lawyer can also explain to you what court activity is ongoing in your area — are Sheriff’s sales still being held, are foreclosure cases being filed and heard, what about garnishments and collection cases?

Do not just sit at home and make yourself sick with worry.  Lawyers are trained problem solvers.  Sure, we can’t solve all of them, but we can try.

Elaine