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Creditor Must Pay If It Loses A Bankruptcy Fight

By Cathy Moran

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The game isn’t very fair when the players are mismatched.

Though bankruptcy court is hardly a game, it’s been unfair when it comes to attorneys fees for the winning party.

California law provides that when a contract allows one party their fees if they prevail, the other party got their fees if they won.  So, even if the contract only provided that you pay my fees if I have to sue you to collect,  the statute made the right to fees reciprocal.

Only, bankruptcy courts have for decades held that the California statute didn’t control if the issue involved bankruptcy.

And then came Penrod in the 9th Circuit.

The firm of bankruptcy icon Ken Klee argued for the consumer that the fight between the car lender and the debtor in the bankruptcy court was “on the contract” and covered by the agreement.  And the 9th Circuit agreed.

A bankruptcy fight over $7000 in negative equity in a Ford ended up with an attorneys fees award for the car buyer of $245,000.

Going forward, when debtors win in fights with creditors in bankruptcy court, they, too, will get the benefit of the contract they made with the creditor.

Chapter 13 Confirmation Fight Covered

The case that lead to a ruling about attorneys fees started out as an objection to confirmation of the Chapter 13 plan.

Prior to filing bankruptcy in 2007,  Marlene Penrod had traded in a car that was worth less than she owed on it for a new Ford Taurus.  The new loan included not only the purchase price of the new wheels but the unpaid balance of her trade in.

When she filed Chapter 13, she proposed to pay in full that part of the new car loan that reflected the purchase price of the new car, but not the part of the loan that payed off her trade in.

That difference, in bankruptcy lingo, was the “negative equity” in the trade in.

The car lender objected to confirmation of the plan, contending that the entire loan taken when the debtor bought the new car was a “purchase money” loan.  Therefore, said the lender, it was protected from cramdown by the”hanging paragraph” added to 1325 by BAPCPA, the mislabeled bankruptcy reform act of 2005.

Several rounds of appeals later, the 9th Circuit held that the “negative equity” portion of the loan was not “purchase money” and therefore, the debtor could confirm a Chapter 13 plan that paid that part of the loan pennies on the dollar.

Who Pays For Debtor’s Win

Winning wasn’t cheap for Marlene.  By the time she got a ruling in her favor from the 9th Circuit in 2011, and beat back the lender’s petition to the Supreme Court, her attorneys fees were $245,000.

Her loan agreement with Americredit said:

“You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts.”

And California’s Civil Code 1717 says:

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

But, said each court considering her request for an award of her fees, the confirmation fight over treatment in bankruptcy of the loan wasn’t an action “to enforce that contract.”  You won, Marlene, but you pay for the victory out of your pocket.

Not so, held the 9th Circuit.  The Supreme Court’s decision in Traveler’s held that nothing in the Bankruptcy Code expressly disallows claims for attorney’s fees simply because the fees are incurred litigating questions of federal bankruptcy law.

Under the language of the attorneys fees provision in the contract, Americredit would have been entitled to its fees had it won on the issue of plan confirmation.  Accordingly, when the bankrupt borrower prevails, that borrower gets an award of attorneys fees.

Attorneys Fees For Winner, Period

The implications of this second Penrod decision are substantial.  It becomes possible for the debtor to challenge creditor actions in the bankruptcy forum and recover the cost of the challenge, if they prevail.

I see it most important in bankruptcy litigation about the amount of mortgage arrearage claims and in relief from stay actions.

Any number of times, I’ve defeated motions for relief from stay, where the lender’s declaration about my client’s alleged defaults were simply untrue.  But because we were in bankruptcy court, fighting over bankruptcy’s automatic stay, my client had to pay the cost of the fight.

To benefit from the newest Penrod holding, debtor’s counsel may need to get a determination from the court that the debtor is the prevailing party.  But the possibility of such may make it possible to negotiate payment of the debtor’s fees without the necessity of trial.

The fruits of victory are now available to both players.

Filed Under: Strictly California

Your Home Loan May Be Excluded From Homeowner Bill of Rights

By Cathy Moran

Hazard_Warning-openclipartHomeowners whose loans were originally made by a federally chartered savings bank are excluded from protections of HBOR,  a federal judge has ruled.

Dual tracking is back on the rails

California Homeowners Bill of Rights, enacted January, 2013,  prohibited dual tracking of mortgages:  that is, the lender could not simultaneously consider a loan modification and prosecute a non judicial foreclosure.

That’s exactly what Sonoma County homeowner Keni Meyer alleged in her lawsuit that Wells Fargo did.  On April 3, they send her letters discussing the modification of her mortgage loan and on April 8, sent her a notice of foreclosure sale.

Under the provisions of HBOR, a completed loan modification application halts the foreclosure process.

Northern California federal district court ruled in December, 2013 that  HBOR  is preempted by Depression era law creating federal savings banks.  The preemption doctrine holds that federal law on a subject trumps state law on that subject.

Here’s Judge Alsup’s written decision

While the foreclosing bank was Wells Fargo, the loan had originated with World Savings and World Savings was a federal savings bank subject to the federal Home Owners Loan Act of 1933.

The judge held that federal law occupied the field as to servicing mortgages of federally chartered savings banks and the federal law followed the mortgage, even when now held by an institution that isn’t a federal savings bank.

Thus, Ms. Meyer’s claim that Wells Fargo engaged in dual tracking in violation of California law was denied and those claims grounded in HBOR were dismissed.

Mortgages now unprotected

Mortgage servicing in California sometimes feels like the old Laurel and Hardy routine, Who’s On First.  Loans change hands, banks fail, trusts are created, and entities merge.

Below is my preliminary list of entities which may have been federally charted savings banks.  I make no guarantees that I’ve got them all nor that this information is absolutely reliable.

  • World Savings
  • First Federal Bank of California
  • California Federal Bank
  • USAA Federal Savings Bank
  • Glendale Federal Bank

If, however, your loan was initially made by a federal savings bank, you cannot rely on the California Homeowners Bill of Rights to prevent a foreclosure while the servicer considers a loan modification.

I would welcome your comments to flesh out or correct my list of federal savings banks to whom HOLA preemption may apply.

Image courtesy of OpenClipArt.

Filed Under: Strictly California

6 Things You Need To Know About The California Homestead

By Cathy Moran

California homestead

Bill raising homestead amount and tying it to local home prices passed Legislature and was signed by governor September 18, 2020.

super_hero_flying

California’s homestead exemption is the Super Hero of the exemption world.

While other exemptions protect things worth a thousand dollars here and a couple of thousand there, the homestead protects big bucks. 

Starting January 1, 2021, the homestead for every homeowner is at least $300,000 and as much as $600,000, depending on countywide home prices.

The homestead may be powerful and famous but often not well understood.

Here are six things you probably didn’t know about the homestead.

Homestead superior to a judgment creditor

Homesteads protect homeowners from a particular kind of creditor- the judgment creditor.

A judgment results from a lawsuit.  The judgment is a legal determination that  you owe the plaintiff ( the entity who brought the action)  a specific amount of money.  All about California judgments.

The judgment entitles the judgment creditor to use certain legal powers of the state to collect that money through liens, garnishments and levies.

But, that right to collect is limited by the homestead exemption available to every California homeowner.

The homestead exemption was designed to assure judgment debtors a place to live, even if they owed money to creditors. Unfortunately, the amount of the homestead has fallen way behind the value of the typical California home.

Homestead protection not absolute

The California homestead does not guarantee you that a creditor can’t force a sale of your home to pay a debt.

Instead, it guarantees that you get the dollar value of your homestead from the forced sale of your home before the creditor forcing the sale gets any money.

More about the limitations on homestead protection

A creditor who seeks to levy on a homestead has a large burden in court.  The creditor must convince a judge that any sheriff’s sale will return enough money to pay any mortgage, property taxes and the homestead.  All of those claims are senior to the judgment creditor.

The cost of making sure that the homeowner gets their homestead first restrains judgment creditors from  trying to enforce judgment liens against homes.  It’s just too expensive and uncertain in most cases.

Homestead no protection from foreclosure

California law allows you to pledge your homestead as collateral for a loan.

So, when you encumber your home as part of the purchase transaction, or tap the equity through a HELOC or refinance, you give the lender the right to foreclose on your home without regard to your homestead.

The law says a foreclosure that doesn’t pay you your homestead is OK, because you voluntarily chose to put your homestead at risk when you signed the deed of trust.

Homesteads come in two styles

Own your home and you automatically have a homestead exemption.  You don’t have to do anything to get certain protection of your equity from judicial creditors.  CCP 704.710.

The automatic homestead has the same monetary measurements as its beefier, more powerful sibling, the declared homestead. The automatic homestead only protects the home against a forced sale that wouldn’t yield enough proceeds to pay the homestead before paying the creditor.

If you choose to sell your home and a creditor has recorded a judgment lien that attaches to your property, the judgment creditor gets paid from the sale before you get your homestead.

The declared homestead operates differently:  the homestead amounts are the same, but the declared homestead protects exempt equity if you voluntarily sell your home.  CCP 704.910.

The exempt proceeds remain protected for six months from the voluntary sale of the home.   That six month period is intended to provide a window in which you can reinvest the homestead in a replacement home.  But, as we said before, the homestead amount often won’t buy a new house and the proceeds lose their protection in six months.  We need a legislative fix.

Either spouse can claim the entire exemption

When a married couple is entitled to a homestead, but the debt is an obligation of only one spouse, the debtor spouse can assert the entire homestead available to a married couple.

One of my cases established this proposition in a bankruptcy case.  When only one spouse filed bankruptcy and only his half of a tenancy in common came into the bankruptcy estate, he could still claim the entire exemption available to a married man.  McFall.

California homestead powerless against the feds

Since the homestead is found in state law, it does not limit the collection powers of the IRS or other federal agencies.  The Supremacy Clause of the Constitution says federal law trumps state law.

The IRS has its own, much smaller, set of exemptions for delinquent tax payers.  Those exemptions aren’t much force protecting a California home.

In the real world, however,  the IRS seldom tries to force the sale of homes.

Like most other creditors with a lien on real property, the IRS simply waits til the homeowner wants to sell or refinance.  Either sale or refinance generally require that tax liens be paid before the transaction closes.

Now, you know about California homestead exemptions

More important California law:

New exemption protections for money in the bank

How long before foreclosing lender takes my house?

California protections after foreclosure

California bankruptcy law

Image courtesy of Laobc. 

Filed Under: Strictly California Tagged With: 2016

California’s Good Deed: Passing Real Property At Death

By Cathy Moran

property upon death

property upon death

The horror stories about do-it-yourself estate planning are both plentiful and tragic.

Between the fear of probate and the fear of legal fees, inventive people invent inexpensive strategies for passing property to the next generation.

Adding someone to the deed is the most common one I see.

It works like this: in order to see that her house passes to her kids at her death, Mom puts the “kids” on the deed to her house today.

She thinks that will assure that, at her passing, real property law will automatically make the kids the owners.  No probate, no fuss, no delay.

What Mom doesn’t fully understand is that her deed to the kids gives them an interest in the house, TODAY.

So, if there is a economic melt-down the the kids’ financial lives, the kid’s creditors can lien and levy their interest in Mom’s house.

If one of the kids files bankruptcy, the kid’s share of the house passes to the bankruptcy trustee, TODAY.

Far from creating stability and simplicity, the add-them-to-the-deed trick can create chaos.  And land Mom in bankruptcy court, fighting a bankruptcy trustee.

California, bless its heart, has enacted a solution:  a deed effective only on death.

Transfer on Death Deed

Created by Probate Code 5642, a Transfer on Death deed gives the “kids”, in my example, an interest in the house effective only at Mom’s death.

The deed is revocable as long as Mom is competent.  It can be used only for a home or a multi-family unit of 4 units or less.

It doesn’t protect the kids’ interest in the house from Mom’s debts, but a recent amendment protects the transfer from Medi-Cal Recovery claims.

The deed must be recorded within 60 days of execution.  Unlike other deeds, it doesn’t need to be delivered to the beneficiaries to be effective.

Why Deed on Death works

What’s magic about the Deed On Death is that the next generation has no interest in the property until Mom’s death.

There is nothing for the kid’s creditors until Mom’s passing.

So, if the kids end up in bankruptcy, they don’t drag Mom along and find the trustee selling Mom’s share of the house.

Stay out of bankruptcy and we may never meet.

There’s a form for that

The statute provides a form which must be used and has a FAQ page.

You can get more information online from the Sacramento Public  Library (yeah, libraries!) or from CANHR.

Let’s keep DIY estate planning disasters out of California bankruptcy courts.

More

The huge cost of avoiding probate

Joint bank accounts in bankruptcy

The problem your bankruptcy lawyer can’t fix

 

 

 

Filed Under: Strictly California Tagged With: 2017

SuperLawyer

By Cathy Moran

Cathy Moran Super Lawyer

Cathy Moran

I’ve been named a SuperLawyer among Bay Area bankruptcy lawyers. That makes 10 years running.

It’s flattering, but probably not much more than that.

The real measure of my skills is in the clients’ lives whom I’ve impacted and the young bankruptcy lawyers I’ve mentored.

And I’m going to be teaching new bankruptcy lawyers and their staffs at the NACBA convention in Denver in April.  I love sharing what I know about this practice.

In the meantime, I’m waiting for my cape to be delivered, along with flight instructions.

Filed Under: Strictly California, Uncategorized Tagged With: 2018

Your Creditors Lie In Wait For Your Kids

By Cathy Moran

creditor lurks to prey on heirs

creditor lurks to prey on heirsIs your legacy to your kids an encounter with your unpaid creditors?

Debt problems for those over 65 may not be problems for the elder at all.  Income and assets are largely protected by law from creditors.

But that doesn’t trouble creditors:  they’ll simply wait and get their money from your kids.

Seniors enjoy protection from collection

Elders  in California have a raft of legal protections from creditors.  Exemption laws, pension law, and the Social Security Act often make it hard for creditors to seize the assets of elders, even to pay legitimate debts.

The argument against bankruptcy for the elderly relies on the relative legal impunity of seniors to debt collectors.

  • Social security is absolutely protected from non governmental creditors.
  • Pensions and other retirement savings are beyond the reach of even those with a judgment.
  • Houses are illiquid and it’s difficult for creditors to force a sale.
  • Seniors usually have no wages to be garnished.

Seniors often have the option to use those legal and practical protections to ignore paying old debts in favor of paying today’s expenses.

But just because you can ignore old debt, is that consistent with your bigger vision? [Read more…]

Filed Under: Consumer Rights, Managing Money, Strictly California Tagged With: 2016

The Killer Rule That Zaps Private Student Loans

By Cathy Moran

private student loan

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Got private student loans?

I’ve got good news and bad news.

Bad news first.

Private Student Loans Inflexible

Private student loans have no built in mechanisms for deferment and forbearances, like government-backed loans do.

There are no income based repayment plans, as there are with federal student loans.’  No “outs” for disability or schools that close and leave you stranded.

No discharge in bankruptcy.

So, regardless of what life hands you, you have to pay according to the terms of the note.

But I promised you some good news.

Private Student Loans Must Play By The Rules

The promising news is that private student loans are hardy different in the eyes of the law than credit cards.  That makes them subject to all the rules about collection that apply to any other debt.

One of those rules is timeliness.  Lawyers call it the statute of limitations.

The rule essentially says that a creditor who isn’t being paid must sue within a fixed period, or lose the right to use the courts to enforce its debt.

The statute of limitations doesn’t prevent a debt collector for a private student loan lender from using all the usual tools of collection:  fear, shame, and annoyance.

It just means they can’t win in court.  Or, more precisely, they can’t win if you show up in court and assert the statute of limitations. [Read more…]

Filed Under: Strictly California, Student loans

Foreclosure: The Unseen Hazards

By Cathy Moran

It’s not the foreclosing creditor that really threaten California homeowners.

It’s the forces that follow foreclosure.

The junior lender and the tax man can deliver  truly punishing blows to a family losing a home.

Cut-off Junior Lienholders

Californians enjoy the protection of the one action rule governing foreclosures.

A creditor who conducts a non judicial foreclosure of its security interest cannot collect anything more than the property it forecloses on.

Foreclosure is, as lawyers say, an election of remedies. When the lender chooses to foreclose, it gives up the right to pursue the borrower for anything more.

But, the typical foreclosure sale destroys all liens on the property that are junior (inferior) to the foreclosing creditor.

The HELOC lender, the second deed of trust, the SBA loan are rendered unsecured by the sale. Even though they no longer have a lien on the foreclosed property, those cut off lienholders CAN sue you for what’s owed on the debt.

The exception is the California purchase money rule:   [Read more…]

Filed Under: Strictly California

Claiming California Exemptions

By Cathy Moran

16332750190_7d336569e5_zWhen the sheriff arrives at your employer,

or your bank,

or your business

with a levy for your money, you  need good information fast.

You need to know NOW, and FOR CERTAIN, what part of your assets are protected by an exemption under California law.

You keep exempt assets

Exemptions define the property that you can keep even when you owe money or have a judgment against you.

What a judgment against you really means

Exemptions keep debtors from being stripped of everything they own.

Exemptions are measured in dollars:   $X of equity in a car, for example, is exempt.

To be meaningful, those dollar amounts change over time and with new legislation.

Yet my Google search this morning returned in first place the exemption amounts for 2005. 

In fact, all but one of the first page results returned by Google on a search for “California exemptions” was outdated.

California exemptions

The 2016 edition of California exemptions, available in bankruptcy and in state law collections, are found, largely, in the California Code of Civil Procedure, starting with Section 704.

The dollar amount of most California exemptions are adjusted every three years.

But most of the online versions of the CCP are several years behind the times.  Look in the statutes and you are likely to get stale information.

The Judicial Council form is the only reliable online source of the dollar amounts in effect today.

Surprisingly, the state form also lists the exemptions available in a bankruptcy case filed in California.  Those exemptions start in the Code of Civil Procedure at Section 703.140.

In a bankruptcy case, the debtor, the person who owes debts, can choose between the two different exemption sets.

You have to choose one, or the other.  You can’t take one from this column, and another from the other list.

In bankruptcy, the debtor also gets the benefit of exemptions in federal law other than the exemptions in the Bankruptcy Code.

Outside of bankruptcy, only the CCP 704 series of exemptions are available.

Claiming exemptions

In a California collection action Form EJ-156 must be delivered to a judgment debtor any time there is action to enforce a judgment. With the list and amount of assets that can be protected by an exemption comes a form for claiming an exemption.

Exemptions are not self-executing.  You have to claim the exemption to get its benefit.

Complete the form (the link above takes you to a fillable pdf form) and return it to the levying officer.  It does not get filed with the court.

The levying officer’s contact information is on the writ of execution.

If the judgment creditor opposes the claim of exemption, a hearing before the court will be scheduled.

Researching law on the internet

My experience in looking for the current dollar amounts of exemptions should highlight the complexity and the danger of relying on DIY research on the law.

The first list of exemptions I found via Google was 10 years out of date.

And more than any other aspect of bankruptcy law, people who represent themselves in bankruptcy screw up the claims of exemption.

The Real Price of Filing Bankruptcy Without A Lawyer

Even the petition preparers, who take your money to “fill out the forms”,  often botch claims of exemption.

Proceed by yourself with caution and with attention to the “use by” date on the law.

More

The secret exemptions

What’s included in bankruptcy

Is it too late to file bankruptcy

Wage garnishment survival guide

Image courtesy of Clement127.

Filed Under: Strictly California

Bank Has No Remedy After Foreclosure

By Cathy Moran

shield 2_optlaw shields homeowners

Facing foreclosure is bad enough; worrying about your exposure afterwards is worse.

Breathe deeply.

California laws shield homeowners from further collection by a lender who has foreclosed.

Understanding Foreclosure Sales

To understand California’s protections for homeowners, you have to understand how a typical foreclosure sale works.

The deed of trust, given to the lender when a loan is made, grants the lender a lien on the home.  If the borrower doesn’t pay as promised, the lender can exercise the power of sale in the deed of trust to conduct a public auction of the home that is security for the loan.

The lender can decide where to start the bidding at the foreclosure sale.  While the lender can bid the entire amount that the lender is then owed, the lender can bid less when the property is worth less than the total debt.

So whether because the debt has grown large because it’s been in default for a long time, or whether the value of the house has dropped,  the winning bid at a foreclosure sale may well be less than the total debt.

What happens to the difference between what the sale price at auction and the amount owed to the foreclosing creditor?

Antideficiency Law

Nothing happens to the deficiency if California Code of Civil Procedure 580(b) applies.  This Depression-era statute says that if the loan at issue was made to buy the house and the borrower lived in the house, then the lender gets only whatever the foreclosure sale brought.

No deficiency judgment is available to the lender.

A non judicial foreclosure is not available to the lender on a purchase money loan for the borrower’s home.

That protection has been extended to refinances of the purchase money loan, to the extent of the amount of original loan.

c) No deficiency judgment shall lie in any event on any loan, refinance, or other credit transaction (collectively, a “credit transaction”) which is used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, except to the extent that in a credit transaction, the lender or creditor advances new principal (hereafter “new advance”) which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the credit transaction.

So, if the lender made the loan for you to buy a property that you used as your principal residence, or the lender refinanced the loan used to buy your home, you have no risk of suit by the lender.  Any shortfall between the value of the property and the amount of the debt is uncollectable.

But California law provides a second protection against mortgage deficiencies available to almost everyone.

Non Judicial Foreclosure Is Only Remedy

The broader protection from deficiencies is California’s one-action rule.

foreclosure is one bite of appleIt holds that a lender with a lien created by a deed of trust gets only one bite of the apple.  If the lender chooses to foreclose under the power of sale in the deed of trust, that’s all the recovery it gets.

The statute reads

There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property” Cal. Code Civ. Proc. § 726(a)

The foreclosure sale is the lender’s one action, and the borrower has no further exposure to the foreclosing creditor.

If there are junior liens that go unpaid as a result of the foreclosure, those creditors may have a right to sue for their debt, if they are not barred by the antideficiency statute we talked about above.

Virtually every foreclosure sale of a home or small multi family property goes by non-judicial foreclosure.

So, if you are worried about more grief from the mortgage company following a foreclosure, scratch that worry off your list.

More

Your rights while in foreclosure

You won’t believe how long this foreclosure took

After the foreclosure: cash for keys

Images:  Shields courtesy of The Happy Rower and Flickr.

Apple courtesy of Wikimedia.

Filed Under: Strictly California

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About The Soapbox

You've arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said "try").

Here, I allow myself to tell stories and express strong opinions on how I think law should work for the consumer and small businesses when it comes to debt.

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When Can I File Bankruptcy Again

You can file bankruptcy tomorrow, so long as you don't currently have a bankruptcy case pending. When you can get a discharge in that case is a different story. The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case. My friend Gene Melchionne wrote … Read more

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