Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Reaffirmation: The Fight You Hope To Lose

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reaffirmation lossIt isn’t often I go into bankruptcy court, hoping to lose.

But when the issue is reaffirmation of a car loan, that’s the strategy.  I desperately want the judge to deny approval of my client’s proposed reaffirmation of his car loan.

And most of my judges will deliver, from the bench, the pitch I’ve made to the client:  you are better off if this reaffirmation is denied.

So, how did we get to this state of affairs?

Like many screwups, it started with Congress.

Or rather, it started with the car creditor lobbyists and their boat-load of money earmarked for Congress.

Bankruptcy reform crashes

In a nutshell, before 2005’s bankruptcy amendments, you could keep your car after bankruptcy so long as you kept making the payments.  Simply filing bankruptcy was not a default on the loan; default that allowed repossession required a failure to pay.

In bankruptcy lingo, the idea was called “ride-through”;  the car loan rides through bankruptcy as if there hadn’t been a default.

Then along come the lobbyists who “convince” Congress that it’s unfair to them to make them keep accepting payments on a car after bankruptcy.  Their complaint was that after entry of the bankruptcy discharge, all they would be allowed to do was auction off the car.  The discharge would prevent them from suing the borrower for any deficiency.

So, the law was changed to make filing bankruptcy an event of default.  The only way to cure that default after filing was to reaffirm the car loan.

Reaffirmation waives the discharge as to the car loan.  Reaffirm, and the car creditor can sue you personally if you stop paying.  Even if you got a bankruptcy discharge.

Best laid plans

What the lobbyists didn’t plan for was sloppy drafting of the law they wanted.

The “reformed” law on car loans required the debtor to enter into an agreement to reaffirm the loan AND  gave the bankruptcy judge the responsibility to approve the agreement as being in the debtor’s best interests.

And that’s where they blew it.

Courts have regularly held that all that is necessary to entitle the borrower’s car loan to ride through bankruptcy was the debtor’s agreement to reaffirm.  The law provided no requirement that the judge approve the agreement to give the creditor the right to sue the debtor after bankruptcy.  See Moustafi.

The debtor gets the benefits of ride-through by just entering into the agreement, even if the judge refuses to approve it.  And without approval by the judge, the car creditor can’t sue the debtor if they stop paying on the car later on.

Rooting for disapproval

You see why I want the court to disapprove my client’s proposed reaffirmation agreement.  Without the judge’s blessing, there is no deal with the creditor, but the creditor is limited to repossession if the agreement isn’t approved because the debtor did what the law required:  agreed to reaffirm.

How much should you spend on a car

The reaffirmation process requires the debtor to provide a post-bankruptcy budget that shows that he can afford the car loan going forward.  Too many debtors have budgets that really don’t have enough money available for the existing loan.  And judges see that.

Judges are further concerned about the gap between what the debtor owes on the car versus what the car is worth today.  If the debtor finds that he can’t make the payments, he is exposed to a law suit for the difference between the debt and the value of the car, PLUS the lender’s costs of suing him.  Ouch.

I really appreciate the judges before whom I practice who take their responsibility to review reaffirmation agreements carefully and patiently explain to my clients why disapproval of the agreement is in their best interests.

And I grin when I lose this bankruptcy battle.  Because my client just won.

More

Redemption: the cheaper alternative to reaffirmaion

Car loans in Chapter 13

Car loans after bankruptcy

 

 

Debts You Can’t Wipe Out In Bankruptcy

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nondischargeable debts

 

Nineteen kinds of debt survive a bankruptcy discharge: but three stand out from the rest.

Those three exceptions to discharge look, not at the kind of debt such as taxes, or support or student loans.  Rather the exceptions look at  how the debt arose.

These exceptions prevent bad actors from escaping the consequences in bankruptcy.  Bankruptcy is supposed to help the honest but unfortunate person.

There’s another, significant difference:  a creditor who holds one of these claims has to act, promptly, to except his claim from discharge.

The creditor has to file a timely challenge to the discharge of its debt.

And then, carry the burden of proof at trial.  The debtor gets a presumption that the debt is dischargeable.

So, what kind of bad behavior may keep a debt from being discharged?

Fraud is first

Debts that are created as a result of fraud, misrepresentation or false pretenses aren’t subject to being wiped out.  That’s §523(a)(2).

Note that the exception looks at the transaction at its begining. The statute focuses on money, property, services to the extent obtained by fraud.

While the debtor may have behaved badly after a debt was created. that bad behavior doesn’t exclude the debt from discharge.

There’s another wrinkle. If the alleged false statement is one about the debtor’s financial condition, that statement must be in writing to preclude discharge.

Breach of fiduciary duty survives

The second clutch of bad behaviors that can’t be discharged involve breach of fiduciary duty, embezzlement and larceny. §523(a)(4).

Embezzlement and larceny, which is a kind of theft, are easy to understand.  But not so, fiduciary duty.  Bankruptcy law has a narrow definition of who is a fiduciary.

For breach of fiduciary duty to be nondischargeable, the duty must arise under an express trust.  So trusts that are created by law to further equity or prevent undue enrichment don’t fall under this subsection.

One of the first judges I practiced before used to say that under California law, everyone is a fiduciary for everyone else.  But not in his federal court.

Willful and malicious injury gets no discharge

Debts grounded in intentional injury to person or property live on after bankruptcy. Section 523(a)(6)makes non dischargeable debts for willful and malicious injury by the debtor to another entity or to the property of another entity;

There’s a huge body of law tussling with the meaning of “willful” and “malicious”.  And the plot thickens when you realize that the protections for creditors created by this subsection is greater in Chapter 13 than in Chapter 7.

In Chapter 13 a debt for damages for personal injury is non dischargeable if it results from either willfulness or malice!  Damage property willfully or maliciously and you’re OK in Chapter 13.

Timing is everything

There’s a timing issue for both creditors and debtors in these three discharge exception cases.

Debtors facing state court litigation may want to file bankruptcy before trial of the matter.  Findings of fact made in a state court trial will be entitled to finality in a  bankruptcy trial.

So,  suffer an adverse finding in state court and you’re stuck with that finding in bankruptcy.

But since the standards of what is fraud or false representations is slightly different in federal law than in state law, you may have a dispute about whether the finding is really on the same issue that the bankruptcy court is focused on.

It may be cheaper to try the issue once, in bankruptcy court, than risk having to defend yourself twice in state court, then bankruptcy court.

Creditors must be diligent once a bankruptcy case is filed, to meet the filing deadline for challenging the discharge of their debt.  Generally, the bankruptcy court sets a deadline 60 days after the date set for the first meeting of creditors by which challenges to dischargeability must be filed.

Miss that deadline for one of these kinds of debts and you’re out of luck.  The debt will be discharged regardless of the merits of the challenge you could have brought to exclude it from discharge.

More

How bankruptcy treats debts to the government

What happens to judgment liens in bankruptcy

Does a bankruptcy discharge last forever?

 

SuperLawyer

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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.

Congress Considers Making Student Loans Dischargeable in Bankruptcy

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student loan discharge legislation

A newly introduced bill in Congress would make student loans dischargeable in bankruptcy, as they were decades ago.

The bi-partisan bill is sponsored  by  Democrat John Delaney of Maryland and Republican John Katco of New York.

Any change to the law touching discharging student loans is a long way down the pike.  But this is a start.

And start we must when student loan debt debt is $1.4 TRILLION dollars, dwarfing outstanding credit card debt.

That debt suppresses home buying; family formation; and entrepreneurship.

I heard a telling comment from another bankruptcy lawyer testifying to the ABI Commission on Consumer Bankruptcy Law:  how is it that we allow the discharge of income taxes after the passage of time but not student loans?

How?

History of student loan discharge

It’s important to remember that student loans have not always been a life sentence.  In the 80’s, a student loan was dischargeable when it had been in pay-status for 5 years.  In 1990, the pay-period element of dichargeability was extended to 7 years.

That required that the borrower make an effort to pay the loan.

In 1998, the rules changed.  A federally insured student loan could only be discharged if the borrower could prove that repayment constituted “undue hardship”.

As if that wasn’t harsh enough, the amendments of 2005 made privately funded student loans non dischargeable in bankruptcy.

Private student loans are as poisonous a debt as you can image:  made at market rates of interest they ensnare students and their families, without income-based repayment plans or procedures to rehabilitate the loan.

Chinks in the no-discharge armor

Bankruptcy courts in most judicial circuits use the Brunner test to determine if repayment of a student loan debt after bankruptcy would cause an “undue hardship”.

To achieve a bankruptcy discharge of a student loan, the debtor has to the burden to show

“(1) the debtor[s] cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for [themselves and dependents] if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor[s have] made good faith efforts to repay the loans.”

The test has acquired levels of interpretation such that discharge requires a showing of efforts to pay and assured, hopeless, unchanging poverty in the future.  That’s what you get, now, for trying to get an education.

Bankruptcy Judge Jim Pappas took up the gauntlet from Judge Easterbrook in challenging whether this hoary test from the 1980’s is properly reflective of bankruptcy law today in a persuasive concurrence in a 9th Circuit BAP case Roth.  Said Judge Pappas

the analysis required by Pena/Brunner to determine the existence of an undue hardship is too narrow, no longer reflects reality, and should be revised by the Ninth Circuit when it has the opportunity to do so. Put simply, in this era, bankruptcy courts should be free to consider the totality of a debtor’s circumstances in deciding whether a discharge of student loan debt for undue hardship is warranted.

Student loan relief in Congress

H.R. 2366 has, undoubtedly, a tortuous path forward in Congress.  But it is a clean, straight-forward approach to a complicated problem.  Without a solution to student loan debt that threatens to crush both students and their parents, it is a vehicle to start the discussion.

Let your representatives in Congress hear from you on the impact of student loan debt on the life of your family, starting here.

More

The Parent Loan Trap

The Public Service Route Out Of Student Loans

Money management and the things we “deserve”

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American Express radio commercials are touting a women’s money group, The Smart Cookies, who, we’re told, got control of their personal debt problems within two years.

The five women they featured collectively owed $50,000, which seems small relative to the clients I see.

But what set my teeth to grinding was one woman’s assurance that it is possible to master debt problems “and still get the things you deserve”.

Arghhhh!

In my view, it is this sense that one “deserves” certain purchases that underlies a significant portion of the overspending problem.  What is the source of this belief that we are entitled to a certain standard of living or accumulation of goods and experiences?

Mercifully, the radio spot I heard didn’t go into the details of the Smart Cookies’ approach to money, but if their connection with American Express didn’t put me off, their announced sense of financial entitlement did.

Bankruptcy info by email

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My colleague Jonathan Ginsberg writes about his reluctance to provide legal advice or second opinions by email. After all, he points out, it is our command of the law that is our inventory. Give it away and you go out of business.

I have a more profound reason to approach questions by strangers with caution: I have only the facts that the sender has chosen to disclose for purposes of my analysis. Often, the facts the writer thinks are central are either irrelevant or incomplete. Without all of the necessary facts, my opinion may be fatally flawed.

When I meet with a client, I have an opportunity to ask questions, develop the facts, and look for other pieces of the picture that either support or counter the facts the client has proffered. That back and forth allows me to establish the facts, then offer an opinion that is grounded in the complete factual picture.

Sell first, litigate later

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Meeting with a client with Truth in Lending claims the other day reminded me about the power of the Bankruptcy Code to facilitate the sale of property subject to disputed liens while preserving the claims against a secured creditor.

These clients had property they wanted to sell but the amount they owed the holder of the first was in dispute. They asserted that the lender had violated Truth in Lending and had elected to rescind the loan. The parties were fighting about how much the clients had to tender to the lender as a result of the rescission.

Generally, a seller has to pay off all the liens on the property in order to deliver clear title to the buyer. Outside of bankruptcy, they might have to pay the creditor’s claim and sue to get it back. There is some risk of losing a TILA claim upon sale, as well.
Under Section 363 (f), the bankruptcy court can order the property sold and the liens to attach to the proceeds of sale. Thus, the debtor/seller and the secured creditor can argue later over the fund of money created by the sale, rather than having to resolve disputes before sale of the property. The costs of preserving the property in the interim are eliminated.

This section of the code speaks of the trustee as the seller, but the Chapter 13 debtor has most of the same powers as are granted to a Chapter 7 trustee. One more in my long list of why I love Chapter 13.

30 day respite saves no homes

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The latest governmental response to the mortgage mess is an offer for a 30 day hold on foreclosures offered as a voluntary program by six large mortgage servicers. Sorry, folks, but 30 days is not enough time to solve any one family’s housing problem, let alone the country’s problem.

The two things that are necessary to make any meaningful difference in houses lost to foreclosure is 1) a real willingness on the part of lenders to change the terms and perhaps the principle balance on loans, and 2) the manpower to staff a loss mitigation effort. Right now, I’m seeing neither.

Thirty days or an offer to tack the arrears on to the end of the loan does not solve the problem where the house is worth less than is owed or the arrears have arisen on a negatively amortized loan on impossible terms. Those are fundamental, structural problems in the loan. A remedy requires not a Boy Scout with a band aid but a surgeon with a scalpel.

Behind the numbers of rising bankruptcy filings

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My colleague Jonathan Ginsberg pointed out the play that the bankruptcy filing numbers are getting in the press: his local paper reports that bankruptcy filings are soaring.
In looking at the filing numbers, it is important to remember that 2006 was an aberrational year in consumer bankruptcy. The bankruptcy “reform” act became effective mid October, 2005. Huge numbers of people rushed to file bankruptcy before the law changed.

After the law changed, there was a lull in bankruptcy filings. I think two things are behind the low filing numbers in 2006. People who were on the fence about filing bankruptcy accelerated their decision to file because of the consumer-hostile provisions of BAPCPA, so those folks who normally would have filed in 2006, filed in 2005 to beat the change.

Secondly, after the amendments became effective, it took a while for the public to realize that bankruptcy relief was still available and for bankruptcy lawyers to master the changes in the law. Some bankruptcy lawyers left the practice and debt collectors told debtors that bankruptcy was not longer available to them or for the kind of debt that collector was trying to collect.
Certainly, there was no drop off in 2006 of people up to their ears in impossible debt; prosperity did not break out because we erected barriers at the bankruptcy court door. People’s ability to deal with the debt they had remained unchanged.

So, one should be cautious in drawing conclusions from a comparison between bankruptcy filing numbers between 2006 and 2007. That said, my experience suggests that there will be an onslaught of bankruptcy filings in 2008: the mortgage meltdown, slowing economy, and higher awareness of bankruptcy’s continuing availability will make debt relief look good to the consumer.

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