Important Changes to the Mortgage Modification Mediation Program

The MMMP – a mediation program sponsored by the U.S. Bankruptcy Court for the Eastern District of Wisconsin – is nearly one year old now.  Between a year’s worth of experiences plus some unfortunate recent developments, the MMMP committee has announced some important changes to the program…
  • The availability of sanctions against parties negotiating in bad faith has been removed.
  • Mortgage lenders now have 30 days (up from 21) to respond to the debtor’s request to mediate.  This is to allow more time for proper identification of the mortgage servicer.
  • Both doomsday provisions have been eliminated.  No more sudden death for the debtor if they fail to make a mortgage payment.  Now, a default in mortgage payments triggers a standard motion for relief from stay AND good faith participation in mediation is a valid defense for the debtor.
  • The lender is no longer required to send someone to mediation with full authority to settle.  They must merely have knowledge of all available loss mitigation programs and direct access to an underwriter or anyone else with authority to settle.
  • The court acknowledges that permanent modifications will not necessarily be the outcome at mediation – debtors should expect a trial modification first.

I’d like to take a moment to talk about the first change I noted – the unavailability of sanctions.
First of all, sanctions are not ENTIRELY off the table.  However, mere failure to follow the court order to negotiate in bad faith is insufficient.  There must be a showing of “manifest injustice”, and the judge must do an in camera review (private, off the record) of the complaint before allowing anything stated in mediation to be admitted as evidence in an action for sanctions.  As of yet, I am not familiar with the legal criteria for showing manifest injustice, but I’m given to understand that it is a very high standard.
Bear in mind, the bankruptcy code does not authorize bankruptcy court judges to modify the terms of a residential mortgage.  Therefore, the MMMP must be voluntary and non-compulsory.  Making mediation compulsory and giving the bankruptcy court judges the authority to create a program with some teeth in it would require an act of Congress.  Short of that, the bankruptcy court’s authority to issue sanctions in a non-core bankruptcy proceeding would have been questionable under Stern v. Marshall.
Notwithstanding any arguments on lack of authority – what prompted the removal of sanctions?
Long before the MMMP was established, I had a long list of clients who complained that they attempted mortgage modification on their own, and were never successful.  Essentially, it appeared that homeowners were being “strung along” by the lender with never ending requests for documents and forms – most of which would be lost or never reach the correct department on-time, forcing the homeowner to start the process over.
Apart from the availability of sanctions – what appeared to be positive about the MMMP was the introduction of attorneys and written records (esp. of transmission) into the process.
Turned out I was wrong.  Creditors were still “losing” papers and finding every excuse in the book to drag the process out – to ridiculous proportions by any normal human being’s standards.
In my opinion and experience, Bank of America is the worst offender.  And in one of my cases, mediation has been strung out since July 2011.  I had intended to file a motion for sanctions just a week and a half ago.  However, one of my colleagues in Oshkosh beat me to the punch – the story of her case was almost identical to my case.  Her client was awarded sanctions.  Bank of America didn’t like that too much, and they announced that they refused to participate in any new mediation proceedings going forward.
Unfortunately, Bank of America is one of the biggest mortgage servicers.  Their lack of participation severely undermines the efficacy of the MMMP.  Though I opposed it, the committee overwhelmingly agreed that – in an effort to bring Bank of America back to the negotiating table – the availability of sanctions ought to be removed.However, I would like to share this note from a colleague of mine from Madison, quoting a recent article:

Homeowners who have trial mortgage loan modification agreements with servicers under the federal Home Affordable Modification Program can sue for breach of contract and other state law claims, the Seventh Circuit said Wednesday, reviving a putative class action claiming Wells Fargo & Co. improperly refused to modify loans.
In a published opinion, a three-judge panel said that while the government program doesn’t confer a private federal right of action on borrowers to enforce its requirements, that doesn’t bar them from bringing state law claims such as breach of contract and fraud against servicers for allegedly violating loan modification agreements forged under HAMP.
The panel rejected Wells Fargo’s argument that named plaintiff Lori Wigod’s claims that the bank violated the terms of her trial loan modification agreement by refusing to permanently modify her loan despite her HAMP eligibility were preempted by the Home Owners Loan Act.

Cases of Note: Stern v. Marshall

Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011)
This case is also known as the “Anna Nicole Smith” case because the bankruptcy debtor was the former Playboy Playmate (whose real name was Vickie L. Marshall).  Pierce Marshall, son of Vickie’s late husband J. Howard Marshall, filed a proof of claim and an adversary proceeding to recover damages from Vickie’s bankruptcy estate for defamation when Vickie’s lawyers told the press that Pierce engaged in fraud in controlling his father’s estate.  Vickie then filed a counterclaim for tortious interference with an intended gift (J. Howard Marshall had allegedly set-up a trust fund to provide for Vickie).
At issue was whether the bankruptcy court had jurisdiction to make a ruling on Vickie’s counterclaim, because it was not a core bankruptcy proceeding.  The U.S. Supreme Court held that the bankruptcy court only had statutory authority to resolve core bankruptcy proceedings under 28 U.S.C. § 157, and did not have authority to issue decisions in non-core bankruptcy proceedings.  Although 28 U.S.C. § 157(b)(2)(C) does permit the bankruptcy court to rule on counterclaims to claims against the bankruptcy estate, the Court held that § 157(b)(2)(C) was unconstitutional.
Well, first, we need to understand the history and purpose of bankruptcy judges.  Compared to torts, breaches of contract, and other claims arising from state laws, bankruptcy is a “public right” matter – much like social security.  Bankruptcy Courts were established to reduce the workload on the federal district courts, and to employ judges with specialized understanding of complex bankruptcy laws.  The federal district courts were initially given discretion to refer bankruptcy cases to the bankruptcy courts.  During this year’s bankruptcy conference in Kohler, one of my colleagues (in a very passionate and hilarious rant) pointed out that the district courts despised bankruptcy cases so much that every single district court issued a standing order to refer all bankruptcy cases to the bankruptcy courts within 5 minutes of their creation.
The Supreme Court held that Congress could not extend the jurisdictional province of bankruptcy courts to resolve non-core bankruptcy proceedings that fell within the scope of state laws (i.e. that § 157(b)(2)(C) was unconstitutional) because only Article III judges – who had guaranteed salaries and life tenure – could be granted this authority.  In contrast to Article III judges, bankruptcy judges serve 14 year terms and their salaries can be reduced.  As such, they lack judicial independence and “purity” such that they are limited to the subject matter that they were expressly created to deal with: core bankruptcy proceedings 
Why is this important?
Ortiz v. Aurora Health Care, Inc., 665 F.3d 906 (7th Cir. Wis. 2011)
Former bankruptcy debtors filed a class action against Aurora Health Care for violating medical privacy laws when Aurora filed proofs of claim in the debtors’ respective bankruptcy cases containing sensitive medical information which was publicly accessible.
The 7th Circuit claims it has no appellate jurisdiction in this case, because no Article III judge rendered judgment on the issues.  Because the counterclaim against Aurora arose from “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,” the bankruptcy judge lacked authority to issue a final judgment.  At best, the bankruptcy judge could have referred the case to the district court with a recommendation, but the district court would have to review the conflict de novo.  Or, it is suggested that all parties could have consented to judgment by the bankruptcy court – but the evidence presented did not demonstrate that the debtors consented to such jurisdiction.

Divorce and Bankruptcy

Divorce and bankruptcy tend to go hand in hand.  Either the financial stresses that led to bankruptcy also break down the marriage, or ex-spouses use bankruptcy as a way to clean-up and get a fresh start after divorce.
However, the issue of divorce can weak havoc on bankruptcy, and vice-versa.  So it’s good to revisit some of these themes.  Particularly when you’re trying to decide which to do first: file for divorce or file for bankruptcy, and whether to file joint or individual.  Many of these themes have circular reasoning, so there really was no linear way to present these, other than randomly…
  • Filing a joint bankruptcy before a divorce is finalized is almost always the preferred route.  It’s cheaper to file one joint petition rather than two separate individual petitions.  Both debtors benefit equally from the discharge, neither one has to rely on the “phantom discharge”, and it renders most “hold harmless” clauses in divorce papers moot.
  • On the other hand, some debtors don’t want to file joint because of impact on credit scores, because bankruptcy causes the revelation of certain financial information that could give one of the spouses leverage in divorce proceedings, or because the income potential of one debtor disqualifies both debtors – as a married couple – from Chapter 7.
  • For reasons beyond my comprehension, creditors are not required to abide by the terms of divorce orders.  Which means that a bankruptcy filed after divorce may not be as effective as a bankruptcy filed before divorce.  Divorce orders usually contain “hold harmless” clauses.  Which means if one spouse gets a debt discharged in bankruptcy that was assigned to him or her in the divorce, and the creditor then pursues the other spouse for payment, the second spouse can go into family court and get a non-dischargeable support order from the first spouse for damages resulting from their failure to pay the debt assigned to them in divorce.  So, if you do file divorce before bankruptcy, make sure that your attorney knows of your intent to file for bankruptcy and that your divorce papers do not include “hold harmless” clauses.  (DO NOT FILE FOR DIVORCE WITHOUT AN ATTORNEY!  Most divorcees who have done so will tell you that it was a mistake.)
  • Get rid of the mentality that you and your spouse split everything 50-50, or that credit cards in one spouse’s name are not the responsibility of the other spouse.  Wisconsin is a community property state, which means that married spouses are deemed a single legal entity, and each spouse is presumed to own a whole and undivided interest in all assets (and share a whole and undivided liability in all debts).
  • Consequently, a bankruptcy petition must disclose the assets of both spouses (if the divorce is not yet finalized), even if one spouse is filing without the other spouse.  Assets of the non-filing spouse that are not disclosed (even if it is due to the non-filing spouse’s lack of cooperation) cannot be taken as exempt, which means the trustee can seize and liquidate unreported and non-exempt assets of the non-filing spouse.  While the filing spouse might not care, this adverse impact on the non-filing spouse could hurt the filing spouse when it comes time to settle the divorce.
  • Additionally, in a non-filing spouse scenario, only the filing spouse can claim exemptions (which are generally half of the exemptions available to joint filers), often creating non-exempt assets where there would be none of both spouses filed.
  • Bankruptcy filed after divorce also must contend with a potential fraudulent conveyance issue.  Were the assets in divorce split roughly 50-50?  If not, why?  If the non-filing spouse got the house, both cars, and all the jewelry, and the filing spouse got stuck with nothing, there could be a fraud issue.  It is not unheard of for a married couple to get divorced just to protect assets from unsecured creditors (in fact, I had a client once myself who tried to pull this stunt, and I fired her as a client).
  • In the event that a single filer has enough exemptions on his own to cover the assets of both spouses, then the question becomes whether the filing spouse can exempt the non-filing spouse’s interest.  If that seems strange to you in light of what I said earlier about community property, you’re not alone.  It seems that this is where the “whole and undivided interest” standard breaks down into a 50-50 theory, again for reasons beyond my comprehension.  At any rate, the court then looks at the non-exempt asset.  Is it readily divisible – like a bank account?  If yes, the debtor can only exempt their half share.  If it is not readily divisible (like a house or single vehicle), then the debtor can exempt both spouse’s share in the asset, provided enough exemptions exist to cover the asset.
  • Once a divorce is final, former spouses can no longer file a joint petition.  A joint bankruptcy petition must be filed before the divorce is finalized.
  • As you may have gathered, it is quite simple for one spouse to adversely impact the spouse by filing for bankruptcy.  Some people would say this is unfair.  I agree.  But it is also part of the cost of marriage that too few people understand and appreciate before they get married.
  • I get a number of clients who cannot provide me with the information of their non-filing spouse because they have been estranged for so long.  They may not be on speaking terms, or they may not even know how to contact the spouse anymore.  Does that mean the filing spouse is off the hook for disclosing the information of the non-filing spouse?  Unfortunately, no.  As stated earlier, unreported assets could potentially be liquidated by the trustee, and even if the filing spouse doesn’t care, it would impact the divorce proceedings when they come.  The solution – if you are unable or unwilling to work with your spouse in a joint filing is to file for divorce first.  Newspaper publication resolves any problems with being unable to locate/contact the other spouse.  Just remember that in filing divorce before filing bankruptcy, to be on the lookout for “hold harmless” clauses that can affect your discharge.

Cases of Note: Seafort

Seafort v. Burden (In re Seafort), 2012 U.S. App. LEXIS 2927 (6th Cir. 2012)
Here is a case from a foreign circuit – not necessarily applicable to the Eastern District of Wisconsin.  But as with all opinions, we keep an eye on these because courts locally can adopt the policies of foreign courts.
When one files a Chapter 13 case, the debtor is required to submit all projected disposable income to the plan.  Many debtors have obligations to repay 401(k) loans which are treated outside of the bankruptcy.  When the 401(k) loan matures (often in the middle of the bankruptcy), the payment terminates and the debtor is left with additional disposable income.  Trustees want the additional disposable income to come into the plan.  In this case, the debtor wanted to use the money that had been going to pay the 401(k) loan to resume previously suspended 401(k) contributions.
The bankruptcy code itself excludes disposable income from the bankruptcy estate that is used for 401(k) contributions and 401(k) loans.
The essence of the analysis in Seafort is one of statutory interpretation – in how one code provision relates to another – and deciphering Congress’ intent based on the presence and absence of certain language in certain locations.  I am not going to get into that discussion, because nobody wants to see how the sausage gets made.  And it’s no secret that Congress made one really bad sausage when it passed BAPCPA in 2005.
Instead, I’ll skip to the court’s conclusion.  The exclusion of 401(k) contributions from the bankruptcy estate is limited to the contributions made at the time the case was filed.  The debtor cannot increase 401(k) contributions in the middle of the Chapter 13 Plan to the detriment of his or her unsecured creditors.  And if a 401(k) loan is paid off in the course of a Chapter 13, the new-found disposable income becomes part of the bankruptcy estate and cannot be redirected to new 401(k) contributions.

Cases of Note: Fair v. GMAC Mortgage

In re Fair, 450 B.R. 853 (E.D. Wis. 2011)
This case involves a rapid-succession bankruptcy cases – a Chapter 7 immediately followed by a Chapter 13 – coined as a “Chapter 20” scenario.
First of all, why would someone file back-to-back bankruptcy cases like this?  Simple.  By having unsecured debts discharged in a Chapter 7, a debtor can use a Chapter 13 case to do things that the Chapter 7 cannot, and do so without having to pay anything to unsecured creditors.  In this particular case, the Chapter 13 case was filed to strip off a wholly-unsecured junior mortgage.
Procedurally, the bankruptcy court dismissed the adversary proceeding to strip the mortgage because the debtor – as a result of her prior Chapter 7 discharge – was ineligible for a Chapter 13 discharge.  The case was appealed to the district court, which held that there was nothing in the bankruptcy code that required the debtor to be eligible for a discharge in order to strip off a mortgage.  However, the district court remanded the case back to the bankruptcy court to determine whether the filing was made in good faith.  On remand, the Judge Pepper opted not to dismiss the case, because the debtor had not filed Chapter 13 solely for the purpose of stripping the second mortgage, but also in order to cure arrears on the first mortgage.
In this case, the court had determined that despite the short time between the Chapter 7 discharge and Chapter 13 filing (approx. 30 days) that there was a legitimate change in circumstances which explained why a Chapter 13 was not initially filed.  The court also noted that whether the case was dismissed or continued with the lien strip, GMAC (the second mortgage holder) would not be getting paid either way (as they were discharged in the first bankruptcy).  Finding that the Chapter 13 was filed for more than just the reason of stripping off the second mortgage, and based on instruction from the District Court that a lien could be stripped off without a discharge, the court permitted the Chapter 13 to continue.
On remand, considerable emphasis was placed on whether it appeared at the onset as to whether the Chapter 20 was “planned all along”.  Given all of the facts of this case, the court determined that the only two things that made it seem this way was the short time before the second case was filed and lack of any other debts besides mortgage debts.  Everything else pointed to an aggregation of events that made a Chapter 13 a bad initial filing, but a feasible second filing.
Lesson learned: don’t PLAN on doing a Chapter 20.
There’s really no reason to plan on a Chapter 20 anyway.  If you qualify for the Chapter 7, then you qualify for what is known as a “pot plan” in Chapter 13, which essentially means that none of your unsecured debts get paid – just like in the Chapter 7.
Of course, there are some catches to what I just said.  For one thing, below median debtors in Chapter 13 are required to forfeit one half of their tax refunds to unsecured creditors – which wouldn’t be an issue in the Chapter 20 scenario since the unsecured debts are discharged in the Chapter 7 and have no claim to refunds in the Chapter 13.  Further, by reducing the amount of debt required to be paid in the Chapter 13, the debtor saves money on the trustee’s fee.
That being said, the savings are relatively minor in the majority of cases.  So, if you think you’re going to need to file Chapter 13, I do not recommend filing Chapter 7 first.  Just do the pot plan in Chapter 13.

Cases of Note: Halling and Bronk

Two recent cases out of the Western District of Wisconsin (by Judge Utschig, who is retiring at the end of the year) I’d like to share with you.  Neither of these creates mandatory precedent in the Eastern District.  However, it’s good to be aware that these cases are out there, because both decisions end with terrible results.
The first case is Osberg v. Halling (In re Halling), 449 B.R. 911, 913 (Bankr. W.D. Wis. 2011).
In this case, the debtor attempted to obtain a $45k loan from a bank, but was denied.  In order to secure the loan, the debtor’s son agreed to guarantee the loan and put his real estate up as collateral.  The debtor made payments to the bank – and in the 12 months prior to filing the bankruptcy case – paid in a total amount of $4,100.
Ordinarily, a trustee can recover “preferential payments” to a creditor if the amount exceeds $600 in the 90 days prior to filing the bankruptcy case.  The public policy rationale is as follows:

A preferential transfer occurs when a debtor favors one creditor over another by paying that creditor to the detriment of other creditors. Preferences are treated with disfavor in bankruptcy because they contradict the fundamental bankruptcy policy of ensuring the equitable distribution of a debtor’s nonexempt assets among similarly situated creditors.  In re Eckman, 447 B.R. 546, (Bankr. N.D. Ohio 2010)

However, when the beneficiary of payments is an insider (someone close to the debtor, such as corporate partners or relatives), the trustee can recover preferential payments going back 12 months prior to filing bankruptcy.

The reason that Congress created an extended period for insider transactions is simple. In a corporate setting, insiders are typically the first to recognize that a company is failing, and they may have an incentive to pay themselves, or to pay obligations which might otherwise result in their personal liability. The longer preference period was established to address the concern that a corporate insider (such as an officer or director who is a creditor of his or her own corporation) has an unfair advantage  over outside creditors.  […]  Likewise, in a personal bankruptcy a debtor is likely to want to avoid harming family members and will pay (or “prefer”) debts which would impact them. The bankruptcy code strives to eliminate the incentive for doing so by providing that these payments (or transfers) can be brought back into the bankruptcy estate for the benefit of all unsecured creditors, not simply those closest to the debtor.

In this case, the court rules that because the debtor was making payments to the bank, that it caused a decrease in liability from the debtor’s son to the bank.  That benefit created a preference to an insider, which was recoverable against the insider.  Since the look-back period was longer for insiders than it was for ordinary creditors, the trustee could recover more by voiding the benefit bestowed upon the debtor’s son, rather than voiding the benefit bestowed upon the bank.

Payments to the “lender” in such a scenario are “for the benefit of” the guarantor because every reduction of the debt reduces the guarantor’s potential liability to the lender.  Osberg v. Halling (In re Halling), 449 B.R. 911, 915 (Bankr. W.D. Wis. 2011)

The result: the debtor’s son was a creditor of the bankruptcy estate, received a benefit of decreased liability to the bank in the amount of $4,100 which was recoverable from the son as an insider preference.
The lesson: If you have a loan cosigned by a relative, consider having the relative make payments on the loan in the 12 months prior to filing bankruptcy, or consider filing Chapter 13.
Again, this is a Western District of Wisconsin case with no mandatory authority over any other federal district.  To date, it has not been appealed, nor has it been cited as authority in any other case.  But that could change, which is why I share the story.
The second case is Cirilli v. Bronk (In re Bronk), 444 B.R. 902 (Bankr. W.D. Wis. 2011).
In this case, the debtor had a considerable amount of non-exempt assets, owing partly to his residence which was owned free and clear of any mortgages.  Prior to filing his case, he took a mortgage out on the home to reduce equity, and converted the cash he received from the mortgage into college savings plans (EdVest accounts) for his grandchildren, which he could exempt.
What is described above is one of the more extreme examples I’ve read of “exemption planning” which converts non-exempt assets into exempt assets.  Does that seem wrong to you?  It is.  You can be denied discharge for these transfers if it can be shown that you intended to hinder, delay, or defraud creditors.  Curiously enough, the court held in this particular case that there was insufficient evidence to prove fraud – presumably because either not all elements were proven or the trustee did not meet his burden of proof.
Nevertheless, this is a practice I hear about repeatedly from my clients who have non-exempt assets, and this is why I discourage the practice of intentionally converting non-exempt assets into exempt assets.
Though the debtor in this case retained his discharge, he wasn’t completely off the hook, and in that sense, there is some justice in this case.  (Although the way in which the debtor was nailed doesn’t seem to make much sense, either.)
The court held that the debtor could not exempt the EdVest accounts because the exemption statute Wis. Stat. § 815.18 only covers the beneficiary’s interest in the account.  In other words, if the grandchildren had filed for bankruptcy, they would be able to exempt the EdVest accounts, but the creator of the account (the debtor in this case) could not.
The reason this is odd is because the money in an EdVest account is completely in the control of the creator.  The beneficiaries cannot touch the funds.
Lesson: Don’t convert assets from one form to another – you could be denied discharge for fraud.  And if you are the creator of an EdVest account, you may encounter exemption issues.
This case has been followed by the Northern District of Illinois.

Another reason to disclose your assets…

Something I try to impart on all of my clients over and over and over again.  Disclose all of your income.  Disclose all of your assets.  It probably won’t affect your case.  And even if it does, it will be less painful to disclose everything than to deal with the consequences if you get busted concealing assets.
Trustees have a new tool to help discover unreported assets – American InfoSource.  American InfoSource provides free services to bankruptcy trustees to locate potential real estate, vehicles, trusts, and other assets that you may have an interest in.
So do yourself a favor, and tell your attorney EVERYTHING.  We can resolve potential issues so much more easily before your case is filed than when you get caught lying after your case is filed.

Open Letter to Congress

Copy of a letter that was sent to each Wisconsin Representative and Senator…
I am a consumer bankruptcy attorney based out of Green Bay.  Although the majority of my clients come from northeast Wisconsin, I have – at one time or another – represented constituents in each and every one of your districts.
I am writing today to implore you to pass a simple piece of legislation: to amend 11 U.S.C. § 1322(b)(2) to remove the words “other than a claim secured only by a security interest in real property that is the debtor’s principal residence”.
Mortgage cram-down bills have – for reasons beyond comprehension – been defeated each and every time they have been introduced.  Yet the removal of this language represents considerable hope for homeowners now struggling to make mortgage payments, and who are at the mercy of the lenders whose predatory lending practices put them in this situation.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), a debtor in Chapter 13 can potentially “cram-down” any loan secured by collateral to its replacement value.  In other words, a debtor who owns $10,000 on a car loan secured by a vehicle that is worth $6,000 – only has to treat the $6,000 as a secured debt, and the remaining $4,000 is treated as unsecured debt.  Apart from certain restrictions on time, a cram-down can be performed on any secured loan, whether the collateral is a car, a couch, a wedding ring, or even recreational land.
The only type of secured loan that cannot be treated this way is a mortgage secured by the debtor’s primary residence, thanks to the current wording of § 1322(b)(2).  This is ironic, because it is these residential mortgages which represent a staggering proportion of the cause of our nation’s current economic crisis.
Amending § 1322(b)(2) would have the following benefits:
More debtors would opt to file bankruptcy under Chapter 13 if this benefit were afforded them, even if they otherwise qualify for Chapter 7.  (Increased filings under Chapter 13 were clearly the intent of BAPCPA.)
All creditors – particularly unsecured creditors – would benefit from a decrease in Chapter 7 bankruptcy cases in favor of an increase in Chapter 13 cases.
Fewer homes would go through foreclosure, which would decrease workloads on state circuit court judges.
Fewer homeowners would surrender their homes to foreclosure.  Most homeowners can walk away from their house free-and-clear under Wis. Stat. § 846.101.  Those that cannot can have the deficiency discharged in bankruptcy.  The ability to cram-down a mortgage means that the mortgage lender can be paid more money than they could ever hope to receive at auction, particularly given the current housing market.
You may be asking yourself why it is necessary to allow mortgage cram-downs in bankruptcy when a homeowner can conceivably get a loan modification on their own.  It has been my experience that most loan modification programs are scams.  Many of us are already aware of the third-party companies who, for a substantial fee, promise to broker a deal between the homeowner and lender – but never do.  However, very few people are aware of the pedantic stalling tactics employed by the mortgage servicers themselves (which I could speak at great length about).
In an effort to reduce the amount of foreclosures, a committee here in the Eastern District of Wisconsin established a Mortgage Modification Mediation Program (MMMP) in May 2011, modeled off of the Marquette University Law School’s program.  However, because the bankruptcy code does not grant authority to judges to modify these home loans, our program is necessarily voluntary.  What we have found is that the mortgage servicers treat the MMMP with the same amount of ambivalence as they do when a homeowner tries to negotiate with the servicer directly.  The participation of attorneys in the process and the existence of detailed records have proven to be ineffective at stopping the servicers from continuing the aforementioned stalling tactics.
The court’s authority to sanction the servicers for negotiating in bad faith is limited (at best) because this is necessarily a voluntary program, and questionable in light of the recent U.S. Supreme Court decision in Stern v. Marshall.
Giving bankruptcy judges authority to do to residential mortgages what can already been done to every single other type of secured loan is a major step in bringing some semblance of justice and order to the chaotic world of home mortgages.
In the interest of brevity, I have omitted a great amount of detail about nuances of bankruptcy, mortgage servicer stalling tactics, and the MMMP.  I would be more than happy to field any additional questions you may have, and invite you to contact me directly to do so.
I beseech you to do that which is necessary – amend 11 U.S.C. § 1322(b)(2).  I appreciate your time and consideration.

Bankruptcy Petition Preparers

The bankruptcy judges continue to ask us to help them and help you with the problem of bankruptcy petition preparers.  BPP’s are more prolific in the Milwaukee area, but there are BPP’s all over the state, the country, and online.
Bankruptcy Petition Preparers are not attorneys.  To be law-abiding, a BPP can be nothing more than a transcriptionist with a mildly-fancy job title.  In other words, they can type into the bankruptcy forms what you tell them to type, and nothing more.  The court has fillable PDF forms on their website, so really, there is no need for a BPP.
BPP’s can’t do more than transcribe for you without giving legal advice, and since they are not attorneys, they are engaged in the unlawful practice of law.  This is problematic, because these individuals do not have legal training.  They cannot help you with exemption planning, they cannot help you with means testing, or anything else of a legal nature.
If you don’t want to file with an attorney, then file pro se.  If you can’t file with an attorney because you genuinely cannot afford to hire an attorney, then please take advantage of the free resources available through the bankruptcy court, including the Pro Se Help Desks located in Milwaukee and Green Bay, which are staffed by volunteer bankruptcy attorneys, including yours truly.

The Junked Vehicle Conundrum

All too often, I am encountering debtors who have – in one way or another – disposed of an asset which was collateral on a secured loan.  And that casts doubt as to dischargeability of that debt.
The 3 most common scenarios:

  1. Debtor owns a car with a loan on it, cannot afford the payments, and sells the car to a friend who assumes the loan.
  2. Debtor owns a car with a loan on it, the car breaks down, and the debtor sells the car to a junkyard for scrap value.
  3. Debtor gets into an accident that totals the car, and is uninsured.

Of course, this problem doesn’t just revolve around cars.  This issue can crop up with any secured loan.  It just happens most commonly with motor vehicles (and sometimes jewelry from a broken-off engagement).
Problems arise in both the federal bankruptcy code and state statutes…

Plaintiff bank had a security agreement on an old automobile owned by defendant debtor. Defendant sold this car without certificate of title to a junk dealer for $25.00. Defendant later filed for Chapter 7, and plaintiff moved the court to deny defendant discharge under 11 U.S.C.S. § 727(a)(2)(A), or alternatively to exclude this debt from discharge under 11 U.S.C.S. § 523(a)(6) for willful and malicious injury by defendant to the property which plaintiff had a security interest in. The court held that defendant had willfully and maliciously caused injury to the collateral under § 523(a)(6).  First of Am. Bank v. Afonica (In re Afonica), 174 B.R. 242 (Bankr. N.D. Ohio 1994).

Some of you might be asking why there is a dischargeability problem in the case of the auto accident, since it is – by definition – an accident, and ergo, no malicious intent.  However, the lack of insurance as required by the lender can be construed as a failure of fiduciary duty to maintain and preserve the collateral.  I.e. – most insurance policies list the lienholder as a loss payee, so there is adequate protection to the lender for the debt owed in the event of loss of collateral.  Failure to maintain insurance – not the accident itself – is what can land you into trouble.
The right to recover collateral is found in the Wisconsin Consumer Act (Wis. Stat. § 425.201, et seq.), and in addition to a lack of discharge – criminal penalties could even be assessed (Wis. Stat. § 425.401).
The lesson: if you have a secured loan, make sure the collateral is insured and do not sell, gift, or dispose of the collateral!