Unusual Bankruptcy Cases

Most people are aware that there are two types of bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 is the simple discharge of unsecured debts, like credit cards, personal loans, payday loans, medical bills, delinquent utility bills, and civil judgments.  To be eligible for Chapter 7, a person must simply not have filed a prior Chapter 7 bankruptcy in the past 8 years (or a prior Chapter 13 in the past 6 years*), and have no disposable income available for unsecured creditors.
Virtually anyone can qualify for Chapter 13, which is essentially debt consolidation, restructuring, and repayment.  Even people not eligible for a discharge can file Chapter 13.  Anything that might disqualify you or present a problem in Chapter 7 can be mitigated in Chapter 13, such as too much income, too much equity in assets, prior bankruptcy cases, gambling losses, preferential or insider payments, recently-incurred debt, fraudulently-incurred debt, and transfers of assets.  Chapter 13 can also cure arrears on secured loans like mortgages and auto loans, and help you prevent repossession and foreclosure.  Chapter 13 also allows for repayments of debts that are non-dischargeable in Chapter 7, such as student loans, taxes, and child support. 
But did you know there are four more chapters of bankruptcy?
Although this information may not be entirely relevant or useful, I have found many clients are curious to know about the other chapters, so today, I thought I would share this bit of trivia.  Before I continue, I want to point out that Holbus Law Office does not handle any of these other types of bankruptcy cases.  What follows are boiled down summaries from the official U.S. Courts website with certain key differences from Chapter 7 / Chapter 13 highlighted for comparison purposes.  If you need further information about any of these alternate chapters, please consult with an attorney specializing in these areas.
Chapter 11
This would be the next best known form of bankruptcy, and the one you hear most often about in the news.  Chapter 11 is typically ‘bankruptcy for businesses’.  You’ve seen them in the news – particularly with the airline and auto industries over the past two decades.  Specifically, Chapter 11 is reorganization and repayment (like Chapter 13) for businesses who need to restructure their debts but wish to continue to operate.  Business entities are not eligible to be debtors in Chapter 13, so Chapter 11 is their only refuge.  However, individuals can be debtors in Chapter 11.  Why would an individual file Chapter 11?  The only reason I can think of is that they have too much debt.  There are limitations on how much debt you can have in Chapter 13 (very few people fall in this category).
It is worth noting that businesses can file under Chapter 7 if the business intends to fold.  I am of the opinion that most businesses do not need to file under Chapter 7 (though their owners may need to file one personally) because the termination of the business is akin to death of an individual.  Chapter 7 is somewhat redundant.  However, there may be benefits to a business filing under Chapter 7 as a matter of asset distribution, tax consequences, and protecting certain liabilities of the owners.  So speak to a business and/or tax attorney before making a decision here.
Unlike 7/13, most Chapter 11 bankruptcy cases do not have a trustee.  In most cases, the debtor becomes debtor-in-possession, and continues to operate the business and perform many of the functions of the trustee.
In the Chapter 11 reorganization plan, the debtor groups and classifies debts and proposes repayment terms.  Any creditor whose claim is proposed to be paid differently than what is required under the contract must vote by ballot on confirmation of the plan.
The U.S. Trustee appoints a creditor committee – ordinarily consisting of the creditors holding the 7 largest unsecured claims.  The committee performs an oversight function on the debtor in possession, and collaborates on the formulation of the plan.
Chapter 12
Chapter 12 bankruptcy is designed for family farmers or family fishermen.  In a lot of ways, it is very similar to Chapter 13, but offers much greater flexibility to farmers and fisherman, who often have seasonal income and greater debt associated with their operations.  To qualify, the debtors must be engaged in farming operations or commercial fishing operations; said operations must compose at least 50% of the debtors’ income in the preceding tax years, and exclusive of a home mortgage, at least 50% of the debts must be attributable to farming or 80% to fishing.
Chapter 9
I don’t want to go into too much detail here, because anyone reading this who is actually interested in this particular chapter already has an attorney on payroll to consult with.  Chapter 9 bankruptcy is for municipalities (cities, villages, towns, counties, school districts, etc.).
Chapter 15
This chapter is new with the introduction of BAPCPA in 2005, and strives to coordinate with bankruptcy cases that reach across national borders.

Generally, a chapter 15 case is ancillary to a primary proceeding brought in another country, typically the debtor’s home country. As an alternative, the debtor or a creditor may commence a full chapter 7 or chapter 11 case in the United States if the assets in the United States are sufficiently complex to merit a full-blown domestic bankruptcy case. 11 U.S.C. § 1520(c). In addition, under chapter 15 a U.S. court may authorize a trustee or other entity (including an examiner) to act in a foreign country on behalf of a U.S. bankruptcy estate. 11 U.S.C. § 1505.

Involuntary Petition
Finally, I wanted to address one other quirky aspect.  Those of you who have filed for bankruptcy and actually looked at the papers closely have probably noticed that the top of the first page of the packet of forms contains the words “Voluntary Petition”, which begs the question: is there an Involuntary Petition?
Yes there is.  You can read the details at 11 U.S.C. § 303.  The involuntary petition does not result in automatic bankruptcy, but does invoke an automatic stay.  If there are more than 12 qualified creditors, at least 3 must join in the petition.  Fewer than 12 qualified creditors, only one must file.  The debtor must also generally not be paying their debts as they come contractually due.  Bankruptcy cases such as these are extremely rare, and typically only invoked when fraud is strongly suspected.  Source: http://bankruptcy.cooley.com/2012/05/articles/business-bankruptcy-issues/forced-into-bankruptcy-the-involuntary-bankruptcy-process/

When your mortgage is your only debt…

I don’t believe in pre-screening clients.  I’ve worked for law firms in the past that pre-screened clients to maximize their productivity (read: profit).  In my experience, there are a number of nuances and details that one only picks up in a full interview, and since our initial consultations are free – there is certainly no harm to the potential client to undergo a full consult.
That being said, I have encountered about a half dozen similar cases in recent weeks where the potential client thought they needed a bankruptcy, but they didn’t.  And I’d like to run through the scenario here just for the benefit of people who are wondering if they actually need to speak to a bankruptcy attorney.
Scenario:  John and Jane Doe have a home mortgage that they have defaulted on.  The home is now in foreclosure, and they have received a summons to appear in court.  They have decided that their financial circumstances have changed such that they have no hope of affording their home mortgage, so they do not intend to contest or try to stop the foreclosure.  Instead, they will let the house go and rent a cheaper home.  John and Jane Doe have no other debt other than their mortgage, or if they do, it is a small and manageable amount.
Do John and Jane need a bankruptcy attorney?  Probably not.  In Wisconsin, in the vast majority of cases (I’d say better than 90%, based on my observations), mortgage lenders opt to waive a deficiency judgment against the homeowners in favor of getting a shorter redemption period (traditionally, reducing it from 12 months to 6 months in an owner-occupied residential property).  That means that with or without bankruptcy, the Does will not be responsible for the mortgage, and they can walk away from the home free and clear, with the foreclosure itself being the only negative impact as far as their credit is concerned.
Now, of course, there are some caveats.

  1. This only applies to Wisconsin residents.  If you live in another state, you’ll need to consult an attorney who is familiar with foreclosure laws of your state, particularly the rights of a mortgage company to collect on a deficiency.
  2. Mortgage companies do not waive seeking a deficiency judgment in 100% of all cases.  You’ll need to be sure that you’re not part of that small minority.  You can self-check.  Look at the complaint or the judgment of foreclosure.  Somewhere in both of those documents should be language to the effect of the mortgage company waiving a deficiency judgment.  If you see a redemption period of 12 months, you are probably going to need to talk to an attorney.  If you’re not confident that you are reading the court documents correctly, take it to me or another attorney experienced in foreclosures to double-check.  I will gladly look over these papers to verify waiver of deficiency for no charge.
  3. If you have a second (or third, or fourth, etc.) mortgage, you will almost certainly be liable for a deficiency on the junior mortgages.  Based on my experience, I can tell you that virtually no property going through auction via foreclosure sells for more than what is owed on the first mortgage, so you can bet that you’ll be liable for the full amount of any junior mortgages.  The junior mortgagors are not obligated to waive deficiency if the primary mortgage does.
  4. Since I am not a tax attorney, I am not going to make any assertions about impacts to tax liability.
  5. If your intention is to save your home, then none of this applies to you.  Either hire an attorney to defend you in the foreclosure lawsuit, or hire a Chapter 13 bankruptcy attorney to explore the possibility of curing the arrears.

In no way do I mean to suggest that if you find yourself in the shoes of John or Jane Doe, that we do not want to meet with you.  I take great pleasure in occasionally being able to tell prospective clients that they don’t need to hire us.  Sure, it means less business for us, but it’s nice to give good news once in a while.  And, as I said at the beginning of this article, there are nuances that get flushed out during a full consultation, so we certainly don’t want to discourage people from meeting with an attorney, just in case it turns out there is something we can help with.  Worst case scenario – you spend a half hour with us and walk out with good news, and all it cost you was some fuel to travel.

November 2012 Median Income Levels

It’s that time of year again, when the new median income level figures are released.  These numbers take effect November 1, 2012, so if you’re on the border – you may want to pay attention closely.
This time, we have good news, bad news, and no news – depending on your household size.  Here are the numbers for Wisconsin:
                      1       2       3       4      +1
OLD: $43,202 $57,428 $66,767 $78,520 + $7500
NEW: $42,776 $57,479 $64,441 $79,648 + $7500
Now, the numbers at the top represent the size of the household (e.g. a husband and wife and two kids constitute a household of four).  The means test looks at your past six months of GROSS income, which is then extrapolated to compute your gross annual income.
If your income exceeds the numbers listed above, you are presumed to be disqualified from Chapter 7, and have to file Chapter 13 (although this presumption is refutable).
So, the good news is for the household of four, which increased by over $1k.  People on the fence should consider filing after November 1.
No news for a household of two, which basically stayed the same.
Bad news for households of one and three, which both decreased.  People on the fence should consider filing before November 1.

The Foreclosure Walkaway Problem

Problem Scenario:
Homeowner loses his job and can no longer afford to keep his home.  He decides to let it go through foreclosure.  Several months pass by and the mortgage lender never files foreclosure.  Or – the more likely scenario – the mortgage lender files for foreclosure and gets a judgment.  The mortgage lender then appraises the property and decides it’s not worth taking possession of and abandons the foreclosure judgment.
On the bright side, the homeowner could potentially stay in the home for many months or even years longer than ordinary homeowners do (in the state of Wisconsin, the average redemption period is only six months).  On the other hand, what if the homeowner abandons the property believing that he had to do so because of the foreclosure, but the home is never sold?
This is called a foreclosure walkaway, and while it certainly isn’t a new concept, it is a problem that is emerging in importance with the housing market collapse.  Increasing numbers of homes are sitting vacant for extended periods of time without any foreclosure action.  The depth of this issue varies across different parts of the country, and while the problem isn’t as bad in northeastern Wisconsin as it is in other parts of the country, it occasionally does occur here.
The problems get really bad for the homeowner when he starts getting fines for not keeping insurance on the home, failing to winterize the property, failing to pay property taxes, and failing to keep the lawn mowed or the building maintained.
Attempted Remedy through Bankruptcy:

Simply filing a bankruptcy doesn’t instantly solve all problems, either.  There is nothing in the bankruptcy code that forces a lienholder to exercise its security and take possession of collateral.  This can be a problem for any secured collateral, including vehicles.  The owner cannot afford to make loan payments, the owner cannot afford various fees and costs associated with maintaining possession.  And yet the owner cannot – under state law – dispose of the property because it is subject to a lien.
Furthermore, most bankruptcy courts have held that failure to repossess or foreclose property surrendered through bankruptcy does NOT constitute a violation of the discharge.
So, the homeowner attempts to file for bankruptcy.  However, bankruptcy only eliminates debt.  It does not eliminate liens.  Ordinarily, this fact is good for the owner who wants to surrender collateral, because it means the lender will repossess or foreclose for nonpayment.  But suppose the lender doesn’t.  The owner can still be liable for costs and fees of ownership, but because the lien exists, the owner still cannot legally dispose (sell, gift, or destroy) the property.
Yesterday’s Conference:
As part of the local bankruptcy bar’s monthly Lou Jones conferences – yesterday, the topic of foreclosure walkaways (and how to deal with them) was discussed.
Ideas Floated and Options Suggested:
  1. Most court orders for foreclosure specify that the sale cannot occur until after a certain date (to allow those homeowners who wish to keep their home adequate time to save their home).  However, you or your attorney might suggest to the judge that a “maximum date” be included in the order as well, to force the eventual sale of the property.
  2. Some state courts have expressed a willingness to nail mortgage lenders for negligent infliction of emotional distress, for example, in a case where a man was arrested for failure to pay municipal fines he was unaware of resulting from a foreclosure walkaway.
  3. Chapter 13 debtors may be able to file a motion to sell under 11 U.S.C. § 1303, § 363(b), and § 363(f).
  4. Change in legislation at the state or federal level (write your Congressman!).

Slight Adjustment to Office Hours

Now that we’ve had some time to get used to our new schedule and determine whether we made any oversights, we are going to make a very slight adjustment to the our office hours.  From Monday through Wednesday, instead of having appointments available from 2-10pm, they will be available from 1-9pm.
So in summary…
Michelle’s availability:
Monday through Friday, 9am to 5pm.
Greg’s availability:
Monday through Wednesday, 1pm to 9pm
Thursday through Friday, 9am to 5pm.
Overall office hours:
Monday through Wednesday, 9am to 9pm
Thursday through Friday, 9am to 5pm.
These hours will be permanent until further notice.  Please bear in mind – as always – to schedule an appointment or call ahead before dropping in without an appointment.  The hours listed above are potential availability.  If either Michelle or Greg are sick or on vacation, or if Greg is away at court hearings or tied up with other meetings – all of this affects our actual availability.