Articles Posted in Bankruptcy

A layperson is often at a disadvantage when defending against a debt collection suit filed by an attorney. The debtor as a defendant does not know the “rules of the game” and sometimes takes the advice or direction of court staff (who by the way should not be giving legal advice but often do.)

Talking to clients who have appeared to defend in small claim collection suits in this area (Northern Virginia, suburban Maryland and DC), I am surprised that many will meekly follow court staff instructions to come back to court on another date — when the collector’s attorney fails to show up or is late! This failing is a perfect opportunity to have the case thrown out!

You have a right to ask the court to proceed on the case. Tell the clerk that you are present and ready for the case to be called. When the case is called, proceed to the podium and ask the court to have the case “dismissed with prejudice.” That very important qualifier — “with prejudice” — means that you are asking the court to dismiss forever.

A blog post here last month discussed the growing wave of lawsuits by lenders for the balance of mortgage loans left over from foreclosures (and in some cases short sales), known legally as lawsuits for the recovery of “deficiencies.”

As discussed, in most foreclosures the lender bids only a part of his loan to win the collateral (the house) at the auction. In most jurisdictions, including Virginia, Maryland and the District of Columbia, the balance will still be owing and the lender has a right to sue the signer of the mortgage for that balance, and many are beginning to do just that.

So you had a foreclosure on your house a few years ago. How do you know if there is still a balance owing and whether you may be facing a lawsuit? The bad news is, unless the value of the house was more than the loan, you are probably owing something, since lenders will only bid a part of the loan, especially if the house is devalued, and that is the case for houses bought during the peak of the market, around 2007, before the crash.

It’s just another kick in the teeth. After losing homes in foreclosure a few years ago, borrowers may be getting another big surprise soon as mortgage lenders are now gearing up to file lawsuits against homeowners for the balance of the mortgage.

A Washington Post article this past weekend highlighted the rise in so-called mortgage “deficiency” court actions.

Many homeowners who were foreclosed upon don’t know it, but most still owe money to the mortgage lender.

Despite the image and stigma associated with bankruptcy, financial reorganization of failing businesses (and nonprofit organizations) through Chapter 11 bankruptcy is actually helping the economy by giving companies a chance to find new financing, reject onerous contracts, renegotiate leases, and expedite the sale of assets.

Harvard Business School recently published an article reviewing comments made by Stuart C. Gilson, a Harvard business professor and advocate of Chapter 11 bankruptcies in his new book, “Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups.” Gilson believes that the first step is getting the public to realize that Chapter 11 is not about “dying companies,” but about “reviving” them.

During the financial crisis of 2008, debt restructuring and Chapter 11 played a heroic role in reviving the US economy. Not only does it speed up a company’s reorganization process, but it focuses in on what is necessary to “rehabilitate” the company rather than focusing solely on paying back creditors and stakeholders. (US bankruptcy laws differ from other countries in that they strive to restore the companies facing bankruptcy in order to make them viable and competitive rather than simply liquidating them.)

Bankruptcy is designed as a way for an insolvent debtor, one who cannot pay his or her creditors, to get a fresh start. Depending on the type of bankruptcy involved–Chapter 7, Chapter 11, or Chapter 13 for example–among the main functions of a bankruptcy court are to liquidate assets, discharge certain debts, or confirm a payment plan for non-dischargeable debts.

It can also serve as a way to dispute taxes, as illustrated in a recent Virginia bankruptcy court decision . In Harris v. Commonwealth, the debtor and his wife filed for Chapter 7 bankruptcy.

In Chapter 7, also known as a liquidation bankruptcy, a trustee takes control of the “nonexempt” assets of the debtor’s and reduces them to cash from which creditors will be paid. (Note that before the case is filed you and your attorney will know if there are any nonexempt assets, and can plan accordingly.) While certain unsecured debts are discharged under Chapter 7, certain types of debt, like child support and income taxes less than three years old, are not dischargeable.

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By now, many have heard the news that well-known former baseball player Jose Canseco recently filed for bankruptcy, mainly to deal with back taxes. What many have not seen, however, is the screed he published on the website, Vice.Com, and titled: “Jose Can Say So – I’m Broke and It’s the Government’s Fault.”

Undoubtedly he intended it as a tirade against the government. But interestingly it also serves very well as a testimonial to the dangers of tax debt I have written about in the website of our DC-based tax and bankruptcy law firm. Some excerpts from his harangue and my comments:

” . . . [I]t’s my duty to warn you: It can happen to anyone.

The emerging trend, according to a recent CNN Money article, is that the economy has tanked to the point people can’t even afford to file for bankruptcy.

Probably true, based on the experience of this law firm. When the crash hit in 2007, the biggest problem was the wave of toxic mortgages re-setting to interest rates, and consequently payments, that shot to absurd amounts. Home owners couldn’t make the payments, so bankruptcy was one way to eliminate the debt and stop the foreclosure long enough to get out of the house and not have to abandon your toothbrush and Fido. This event, in turn, triggered the economic down-turn, the lay-offs and decline in income that bring us to where we are today.

The 2005 “reform” of bankruptcy law has compounded the problem for debtors by requiring more paperwork and thereby increasing costs. Among the most ludicrous requirements is pre-filing debt counseling. Bankruptcy is the last thing debtors want to do. If debt management re-payment plans were a solution, they would be doing them.

Samuel Clemens’ (or Mark Twain, under his better-known pen name) complaint about the reports of his death having been greatly exaggerated is apt also for what most people think about bankruptcy: It’s NOT the end of your life.

An essay by a high-tech entrepreneur and his personal bankruptcy that was published recently in the Washington Post makes this point very well.

I won’t bother to comment on it, because the author himself does a masterful job of describing how his own financial problem developed, his bankruptcy filing, and the changes in his attitude about bankruptcy as he launches another new start-up company.

Often, debtors come to the bankruptcy lawyer’s office after already having made costly mistakes that could easily have been avoided, including:

  • Borrowing against a home to pay down credit cards. Now the debtor has turned what, in many cases, was unsecured debt, which could have been wiped out completely, into secured debt that the debtor must pay off or lose the house. Worst yet are predatory loans where the payments are so onerous as to make foreclosure almost a certainty.
  • Borrowing against a 401K plan. The debtor takes a loan out against a 401K plan and then finds he can’t make the payments. If the debtor defaults, a distribution of the full loan proceeds will be declared for that tax year. The debtor will now have a tax liability (that cannot be discharged) equaling about a third to a half of the loan taken out to pay debt that was probably dischargeable in the first place.

Abraham Lincoln, a lawyer by profession, was exactly on the mark when he said: “A lawyer’s advice and time are his stock in trade.” That’s what we sell — our time (as well as our knowledge).

Now put that together with another old, but very true, saying: “You get what you pay for.” So. . . when you go for cheap, you are bound to get less of that lawyer’s time and attention. I have explained how this works before here in a prior blog posting about cheap lawyers and bankruptcy mills.

I state the foregoing (if you will indulge me in a little legalese) as an introduction to the present rant. Excuse me while I spout.

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