Today's Practice-Critical Bankruptcy Bulletins

Monday, October 27, 2008

When Stay Expires at End of 30 Days Because of Prior Dismissed B'cy Case, It Expires Just for Property of Debtor or Also for Property of the Estate?

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

In re Graham
Oregon Bankruptcy Court Case No. 07-62339-fra11
10/17/08 UNPUBLISHED

The Two Issues and the Two Holdings

1) Does an order terminating the automatic stay under BAPCPA's § 362(c)(3)(A), terminate the stay as to only property of the debtor or also as to property of the estate? Held: the stay terminates only as to property of the debtor, NOT property of the estate.

2) Is such a termination of the stay limited only to formal actions (judicial, administrative and other such formal actions) taken before the filing of the case, or is the stay terminated more broadly? Held: § 362(c)(3)(A) terminates the automatic stay only with regard to a formal action taken by a party before the filing of the case.

The Statute

Section 362(c)(3) provides in relevant part:
(3) if a single or joint case is filed by or against debtor who is an individual in a case under chapter 7, 11, or 13, and if a single or joint case of the debtor was pending within the preceding 1-year period but was dismissed. . . --
(A) the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case; [and]
(B) on the motion of a party in interest for continuation of the automatic stay and upon notice and a hearing, the court may extend the stay in particular cases as to any or all creditors (subject to such conditions or limitations as the court may impose) after notice and a hearing completed before the expiration of the 30-day period only if the party in interest demonstrates that the filing of the later case is in good faith as to the creditors to be stayed . . . . [Emphasis added].

The Procedural Context

This personal Chapter 11 case was filed within a month after the debtor's dismissed his Chapter 13 case, which he had dismissed in response to a creditor filing an objection alleging that debtor was not qualified for Chapter 13. In the Chapter 11 case debtor filed a timely motion to extend the stay beyond the initial 30 days, as required by § 362(c)(3)(B) quoted above, which the bankruptcy court denied from the bench, apparently without a written order to that effect. A secured creditor subsequently filed a motion asking for a determination that the stay was terminated not just as to property of the debtor but also property of the estate. This distinction was critical because upon the filing of the Chapter 11 case debtor's property securing the creditor's loans became property of the estate.

Judge Alley's Analysis

1) As to whether the stay had been terminated as to the property of the estate, the judge declined to take the "minority position" that the statute is ambiguous and that other BAPCPA provisions and "the broader context" show that the stay expired entirely. Instead he chose "to adopt the position of the majority of courts . . . which holds that there is no ambiguity in the statute, and that § 362(c)(3)(A) terminates the stay with respect to the debtor and property of the debtor, but not property of the estate."

2) As to the meaning of the termination of the stay "with respect to any action taken," Judge Alley simply followed the "well reasoned" statutory analysis of a North Carolina bankruptcy court (In re Paschal, 337 B.R. 274 (Bankr. E.D.N.C. 2006)) to define "action" in this subsection to mean a “formal action, such as a judicial, administrative, governmental, quasi-judicial, or other essentially formal activity or proceeding.” Furthermore, Pascal held that "action taken" means such formal action taken pre-petition. Thus, the only stay that was terminated was as to formal action taken by the creditor pre-petition. Since the secured creditor did not have any formal action pending pre-petition, the 30-day stay termination did not apply to it or to any future action it were to take. Instead it would have to file a conventional motion for relief from stay under § 362(d).

Friday, October 24, 2008

The Best of the Bulletins: Highlights of Recent Stories on the Economy, Legislation, Housing Prices, & the Effects of BAPCPA

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Here is a handy list of the titles of recent Bulletins from this website on issues of direct relevance to bankruptcy and debtor-creditor attorneys. Just click on the title to link to that story. I have two kinds of daily "Practice-Critical Bankruptcy Bulletins" on this website: 1) summaries of court opinions--mostly from the 9th Circuit Court of Appeals, the Bankruptcy Appellate Panel of the 9th Circuit, and the Oregon U.S. District Court and Bankruptcy Court, with occasional forays elsewhere; and 2) stories about the local and national economy, legislation, bankruptcy statistics and anything else of interest to professionals in this field. The following list is from this second category of Bulletins. A short excerpt follows each title. Please feel free to comment on any story--just click on the blue word "COMMENTS" immediately after the body of that Bulletin. I respond to all comments.

The Hope for Homeowners Program Launched on Oct. 1, 2008: What Do I Need to Know About It?
Excerpt: "In the rush of events on the national financial scene of the last few weeks and months it is difficult for a bankruptcy practitioner to to keep straight the various governmental interventions much less understand their consequences on her clients and on her practice. This Bulletin shines some light on one of the initial major events--The Housing and Economic Recovery Act signed into law on July 30, 2008-- and critical aspects of its Hope for Homeowners Program, which has now been in effect since October 1."
Posted: October 22, 2008

What Post-Bankruptcy Credit Solicitations Reveal About the Creditor Industry's Public Policy Arguments
Excerpt: "A recent law review article, Bankrupt Profits: The Credit Industry’s Business Model for Postbankruptcy Lending, "examines what the credit industry’s behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy." This article looks at the contentious issue of what causes debtors to file bankruptcy by analyzing "original empirical data from the first-ever detailed longitudinal study of bankrupt families," the Consumer Bankruptcy Project. The phase of the study pertinent to this article involved a dozen interdisciplinary researchers and more than a thousand Chapter 7 and Chapter 13 debtors from five federal judicial districts. Here are the most important aspects of this lengthy but fascinating article."
Posted: October 20, 2008

Ratio of Ch. 13's Is Declining in U.S. After Big Post-BAPCPA Increase, Oregon's Ch. 13 Ratio Is Holding Steady
Excerpt:"As reported in a prior Bulletin on this website entitled Oregon's Slice of the Bankruptcy Pie, although Oregon's recent per capita Chapter 7 filing rate is virtually the same as the national rate, Oregon's per capita Chapter 13 filing rate is much LESS than the national rate. This Bulletin will compare the trends in the ratio of Chapter 13's to Chapter 7's nationally to the trends in Oregon. These two trends are quite different. Examining both of them may tell us more where Oregon is heading than looking just at Oregon's.
Posted: October 16, 2008

What Must I Know about the NEW Nat'l Guard & Reservists Debt Relief Act of 2008? (Passed by Congress, & Presented to the President on Oct. 9, 2008)
Excerpt: "The National Guard and Reservists Debt Relief Act of 2008 passed the U.S. Senate by Unanimous Consent on September 30, 2008, and the House passed it with a roll call vote on October 3. The bill was presented on October 9 to the President to sign into law. Here is the Act as passed by Congress. I was not able to find any statements whether or not the President intends to sign it, but given the overwhelming Congressional support and the politically sensitive population assisted, I presume he will . The law primarily changes one subsection of the Bankruptcy Code, so it is easy to become familiar with it before its effective date."
Posted: October 14, 2008

What You and Your Clients Need to Know About Yesterday's $8.6 Billion Countrywide/Bank of America Settlement
Excerpt: "What is this a settlement of? It is the largest ever predatory lending settlement in history. It resolves many but not all lawsuits filed by states' attorneys general alleging that Countrywide Financial or one of its affiliates intentionally sold customers risky loans that it knew were unaffordable, using deceptive advertising and rewarding staff for promoting loans with higher rates and fees than customers qualified for."
Posted: October 7, 2008

Oregon's Economy Continues to Weaken, Says U. of Oregon Index of Economic Indicators (and That Was BEFORE the Events of the Last Few Weeks)
Excerpt: "The Oregon Economic Forum announced last week that the University of Oregon Index of Economic Indicators fell in August 2008 by 0.8% to 100.3 (100.0 = 1997 benchmark). That index is down from 102.4 six months earlier in February, down from 103.1 a year earlier in August 2007, and down from 106.8 & 106.2 two and three years earlier, in August 2006 and 2005, respectively."
Posted: October 6, 2008

Portland Housing Prices Continue to Decline
Excerpt: "So much of what is going on in this country's economy appears tied to the value of real estate, as in how much those "Troubled Assets" addressed by the $700 billion Congressional bailout bill are really worth. And perhaps no other index is tied so closely to the pace of personal bankruptcy filings than that of home values. So to get some good ideas where the Portland area's bankruptcy filings are heading and how quickly, here's a quick but enlightening look at Portland's home values."
Posted: October 1, 2008

Bankruptcy Mortgage Modification Cut Out of Bailout Bill: So What's In This Weekend's Emergency Economic Stabilization Act of 2008 for Homeowners?
Excerpt: "As of Friday the mortgage modification amendment to the Bankruptcy Code was taken off the table by Democrats during the intense negotiations In the Capitol over the bailout bill, as announced in a closed-door meeting to Democrat legislators by Barney Frank, Chairman of the House Financial Services Committee. Despite this bankruptcy provision being one of the main provisions of Barney Frank's and Senate Banking Committee Chairman Christopher Dodd's responses to Treasury Secretary Henry Paulson's original proposal, it apparently became a "poison pill" sacrificed in order to reach compromise during the weekend."
Posted: September 29, 2008

Is BAPCPA Meeting the Goals of its Proponants?
Excerpt: "Those who work in the bankruptcy world day in and day out have infinite anecdotal experience on the effects of BAPCPA on their clients, whether creditors or debtors. Especially for those who represent only creditors or only debtors, their one-sided experience may mostly just reinforce their preconceived opinions about the Act. Especially for them, but for everybody in this bankruptcy world, it is good to get out of their trenches, now nearly two years after BAPCPA's effective date, and look at a purportedly neutral analysis of the law's effects."
Posted: September 26, 2008

BAPCPA's Effect on Trustees, US Trustees & the Bankruptcy Courts
Excerpt: "This summer the U.S. Government Accountability Office (GAO), on request of a number of members of Congress, released a report entitled Dollar Costs Associated with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In it the GAO presents the financial effect of BAPCPA on the U.S. Trustee Program, on trustees, and on the federal judiciary."
Posted: September 19, 2008

BAPCPA's Increase in Debtors' Attorney Fees and Costs
Excerpt: "This summer the U.S. Government Accountability Office (GAO), on request of a number of members of Congress, released a report entitled Dollar Costs Associated with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In it the GAO presents its conclusions about post-BAPCPA increases in the cost of filing bankruptcy for consumer debtors ."
Posted: September 18, 2008

Oregon Chapter 13 Distributions to General Unsecured Creditors: How Different from the Rest of the Country? Differences Btw. Trustees Long and Lynch?
Excerpt: "Comparing the Oregon Chapter 13 cases administered by the trustees Fred Long and Brian Lynch against the national averages, for the Chapter 13 cases which were successfully completed during Fiscal Year 2007 (Oct. '06 - Sept. '07), 1) there is a substantially larger portion of 0% plans in the Oregon cases than the national average; 2) the portion that had paid 70% or more to general unsecured creditors is about the same as the national average; and 3) the portion that paid between 1% and 69% is somewhat lower than the national average."
Posted: September 16, 2008

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Thursday, October 23, 2008

Under BAPCPA Must a Debtor Who Converts to Chapter 7 from Chapter 13 File a Form B22A and Comply With the "Means Test"?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

n re Kellett, Oregon Bankruptcy Court Case No. 06-30047-rld7
In re Corbin, Oregon Bankruptcy Court Case No. 07-31645-tmb7
12/03/07

The Issue
Under BAPCPA must a debtor who convert to Chapter 7 from Chapter 13 file a Form B22A in that Chapter 7 case, even after having filed a Form B22C in the prior Chapter 13 case?

The Not-So-Quick Answer
In 17 pages, Judge Dunn answers: Yes, with exceptions possible on a case by case basis. Why does that take 17 pages? His honest answer: "The Motions [to Strike Requirement to File Official Form B22A by the debtors in the two different cases] present issues that appear to be fairly limited and straightforward at face, but as with virtually all issues that have arisen in relation to interpretation of BAPCPA provisions, there is more to these matters than at first meets the eye."

The Key Point in the Analysis
As to a debtor who FILED her Chapter 13 case but then CONVERTED to a Chapter 7 case, was that Chapter 7 case "FILED" for purpose of the "means test" requirement of § 707(b)? The § 707(b) "means test" provides that the court "may dismiss a case FILED by an individual debtor under this chapter whose debts are primarily consumer debts . . . if it finds that the granting of relief would be an abuse of this chapter . . . ." [emphasis added]. If a converted case is not a "filed" Chapter 7 case, then "the 'means test' provisions of § 707(b) are not triggered, and any requirement(s) of the FRBPs or local bankruptcy rules that the Debtors file Forms B22A in their converted cases are precluded as inconsistent with the provisions of the Bankruptcy Code itself."

Judge Dunn's Rationale and Ruling
Most of the judge's analysis involved weighing the arguments contained in two recent competing bankruptcy court opinions, In re Fox, 370 B.R. 639 (Bankr. D. N. J. 2007), championed by the debtors, and In re Kerr, 2007 WL 2119291 at *5 (Bankr. W.D. Wash. July 18, 2007), favoring the U.S. Trustee's position. The former interpreted the "case filed . . . under this chapter" phrase strictly, the latter "holistically." "[T]he bankruptcy court in Fox found nothing ambiguous in Congress’s use of the phrase 'filed...under this chapter' in § 707(b)(1) and determined that § 707(b) did not apply to cases converted from another chapter." Whereas in Kerr: "The cases are now [upon conversion] entered on the Court’s docket under Chapter 7 as a result of the debtors’ filing motions for conversion. While the cases were filed under Chapter 13, they are now filed under Chapter 7."

After acknowledging that "[l]egitimate points are made on both sides of this argument," the judge was "ultimately . . . persuaded that the phrase 'case filed by an individual debtor under this chapter' does not make appropriate sense viewed in isolation and must be interpreted to encompass cases converted to chapter 7 from other chapters as well as cases filed originally in chapter 7." Beyond the statutory construction analysis, Judge Dunn also referred to the public policy argument that to decide otherwise "opens the door to abuses": "A debtor seeking to avoid the chapter 7 'means test' and § 707(b) 'abuse' scrutiny could file a petition in chapter 13 and then turn around and convert the case to chapter 7."

The Judge's Explicit Limitations to His Holding
1) The judge acknowledged the potential practical problem of Chapter 13's which get converted to Chapter 7 because the debtor, in spite of her best efforts, could not meet the terms of the plan, but then get dismissed for "abuse" in the Chapter 7 case, leaving the debtor "with no realistic remedy in bankruptcy." Or if reconverted into Chapter 13, "the debtor could begin cycling through a perpetual 'do loop' of failures" back and forth between the two Chapters. The solution: "I hope and expect that" the U.S. Trustee will exercise discretion to avoid this.

2) Under § 348(a), conversion does not change the date of the original "petition filing," that is, it is still fixed to when the original Chapter 13 was filed. So Form B22A in the "converted case is prepared based on the debtor’s income averaged over the six months preceding the month during which the debtor’s original [Chapter 13] bankruptcy petition was filed." Since this could be years later "[i]t is questionable how meaningful an analysis based on [this] 'current monthly income' can be. Judge Dunn's solutions: 1) The debtor can rebut the presumption of abuse.; or 2) can file a motion for waiver of the requirement to file Form B22A.

3) In the two cases here, the judge exercised the case by case discretion that he promoted in his holding, waived the filing of Form B22A because in the meantime in both cases the U.S. Trustee had investigated and decided not to pursue abuse determinations, and the time for raising objections to discharge and filing motions to dismiss for abuse had expired.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Wednesday, October 22, 2008

The Hope for Homeowners Program Launched on Oct. 1, 2008: What Do I Need to Know About It?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

In the rush of events on the national financial scene of the last few weeks and months it is difficult for a bankruptcy practitioner to to keep straight the various governmental interventions much less understand their consequences on her clients and on her practice. This Bulletin shines some light on one of the initial major events--The Housing and Economic Recovery Act signed into law on July 30, 2008-- and critical aspects of its Hope for Homeowners Program, which has now been in effect since October 1.

Background

This Act was the one promoted by Treasury Secretary Paulson as the means to restore investor confidence in Fannie Mae and Freddie Mac, by giving him the capacity to use taxpayer funds to intervene. At a July 15 Senate Banking Committee hearing he famously said "If you have a bazooka in your pocket and people know it, you probably won't have to use it." By early September, he had to use that bazooka with the federal takeover of those critical institutions.

Within the Housing and Economic Recovery Act umbrella was a distinct Hope for Homeowners Act. This created a new program within the Federal Housing Administration (FHA)--voluntary for both lender and borrower--to back up to $300 billion in FHA-insured mortgages to distressed homeowners. Through this program an owner-occupant may be able to refinance his unaffordable mortgage to an affordable fixed-rate 30-year mortgage at the lowered principal of 90% of their present home appraised value, IF the homeowner meets a series of conditions, and IF the lender agrees. In the two and a half months since the Act's passage the agency says that it "has worked diligently to develop and implement the program as directed by Congress . . . establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage." The FHA has also compiled a list of participating lenders, which it anticipates updating every Friday.

Borrower Eligibility

Here is a partial list of conditions from an October 1 news release from the Department of Housing and Urban Development (HUD):

The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.

Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.

They are not able to pay their existing mortgage without help.

As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.

They certify they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgage(s).

How a Homeowner Gets Started

The FHA has detailed information on its website about the Hope for Homeowners program. As for how to get started it suggests:

Primary Resource for Following Through

The FHA website on the Hope for Homeowners program has tremendous amount of information about the program, including detailed procedural steps for borrowers as well as lenders, sample letters and forms, examples of how the program would work for certain kinds of borrowers, and even the 34 pages of last-second promulgated regulations.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Tuesday, October 21, 2008

Self-Employed Ch. 13 Debtor Can't Deduct Business Expenses to Determine Whether Debtor Has Above/Below Median Income, and Thus a 3 or 5-Year Plan

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Drummond v. Wiegand (In re Wiegand)
9th Circuit BAP No. MT-07-1431 JuPaD, 2008 WL 1733148 (9th Cir. B.A.P. 2008)
April 3, 2008

A 9th Circuit Bankruptcy Appellate Panel (which included Judge Randy Dunn) has ruled that a self-employed Chapter 13 debtor may not subtract business expenses from gross business income in arriving at "current monthly income," even though Form 22C clearly provides for this subtraction. So individual debtors must use their gross monthly business income to calculate whether they are above or below median income, which in turn determines whether their plan's applicable commitment period is 3 years or 5 years.

The BAP's Analysis

In this post-BAPCPA statutory construction case, the BAP used a combination of "the plain meaning rule" and "a holistic approach" to resolve the new law's lack of clarity in its definition of "current monthly income" in § 101(10A)," whether for a self-employed debtor this term includes all monthly gross business receipts or rather only net business income after deducting business expenses.

The Court put much weight on the "plain and unambiguous" § 1325(b)(2), which defines "disposable income" to be "current monthly income" minus, "if the debtor is engaged in business, the payment of expenditures necessary for the continuation, preservation, and operation of such business." If the Code clearly defines "disposable income" to be "current monthly income" minus business expenses in § 1325(b)(2), then "current monthly income" itself must include all business income before deducting business expenses. Otherwise, "[I]f business expenses are deducted from gross receipts to determine a chapter 13 debtor’s current monthly income, then there would be no need for § 1325(b)(2)(B), which provides for the same deductions."

In addition, "current monthly income" is defined in § 101(10A), as the “average monthly income from all sources that the debtor receives . . . without regard to whether such income is taxable income.” After acknowledging that the Code does not define "income," the BAP "conclude[d] that the plain language of the statute demonstrates that the bankruptcy court’s reliance on the Tax Code and Form 1040 to determine the meaning of income under § 101(10A) was misplaced. The phrase “without regard to whether such income is taxable income” in § 101(10A) reflects a clear congressional intent that Tax Code concepts for determining taxable income are inapplicable to a determination of current monthly income."

Practical Consequences on the Use of Flawed Official Form 22B

But what about Official Form 22B, promulgated by the U.S. Judicial Conference last November and effective January 1, 2008 (just 4 months prior to this Wiegand opinion)? In its Section I "Report of Income" used to determine the "applicable commitment period" of 3 or 5 years in Part II, the form explicitly has debtors with "Income from the operation of a business, profession, or farm" subtract their "Ordinary and necessary business expenses" from their "Gross receipts"in order to arrive at their "Business income." Here the BAP holds that "[t]his mandate compels us to conclude that Form 22C ought to be changed to comply with the statute."

But Form 22C was not on the list of Official Forms that were approved at the U.S. Judicial Conference last month to be effective this December. What to do in the many months or even years in the meantime? The BAP made the following suggestion in its final footnote:

Interestingly, the successful appellant in this case, the Chapter 13 Trustee in Montana, Robert Drummond, has subsequently provided his own subsequent analysis of the case, and on this Form 22C matter states:

Impact of 9th Circuit's In re Kagenveama

This Wiegand opinion was decided two months before before the 9th Circuit's In re Kagenveama, in my view the most important 9th Circuit bankruptcy opinion of the year. Kagenveama applied a strict reading to BAPCPA's new terms, "projected disposable income" and "applicable commitment period," with the result that an above-median income debtor who had a negative income on Form B22C, and thus no "projected disposable income," had no requirement to pay unsecured creditors and no requirement to pay into the Chapter 13 plan for 5 years, or for any other particular period of time. (Please see my Bulletin of 9/3/08 on Kagenveama.) It is beyond the scope of this Bulletin to definitively analyze the impact of Kagenveama on Wiegand, but here are some thoughts.

There appear to be some aspects of Wiegand that are not perfectly consistent with Kagenveama--for example the BAP's reference in a footnote that "[w]e have found the applicable commitment period to be a temporal requirement.". But in my judgment Kagenveama did not effectively overturn Wiegand. There is no direct reference to Wiegand in Kagenveama, because oral arguments in the latter occurred many months before Wiegand was published. And Weigand did not rely on the only 9th Circuit BAP opinion which Kagenveama expressly overturned, In re Pak, 378 B.R. 257, 267 (9th Cir. BAP 2007).

But the cases do overlap, slightly but with potentially huge consequences for a certain population of debtors. Wiegand deals with how a Chapter 13 business owners calculate their "current monthly income" in order to arrive at their "applicable commitment period," whereas Kagenveama interprets "applicable commitment period" in the limited context of above-median income debtors who show negative "monthly disposable income" after deducting expense at the end of Form 22C. Wiegand will push more Chapter 13 business owners above median income in Part I of Form 22C, which paradoxically will qualify them for the huge potential benefits of Kagenveama, IF their expenses in Part IV (apparently including some business expenses per the BAP's suggestion above) exceed their income.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Monday, October 20, 2008

What Post-Bankruptcy Credit Solicitations Reveal About the Creditor Industry's Public Policy Arguments

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

A recent law review article, Bankrupt Profits: The Credit Industry’s Business Model for Postbankruptcy Lending, "examines what the credit industry’s behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy." This article looks at the contentious issue of what causes debtors to file bankruptcy by analyzing "original empirical data from the first-ever detailed longitudinal study of bankrupt families," the Consumer Bankruptcy Project. The phase of the study pertinent to this article involved a dozen interdisciplinary researchers and more than a thousand Chapter 7 and Chapter 13 debtors from five federal judicial districts. Here are the most important aspects of this lengthy but fascinating article.

Background

In arguments promoting BAPCPA, the credit industry, members of Congress, and President Bush focused on a perceived abundance of people who irresponsibly overborrow and then lack the moral conviction to repay their debts. Thus, according to this line of argument, these people abuse the credit system to the detriment of creditors and other responsible borrowers. Therefore the intent of many of the new law's provisions was to make bankruptcy relief more restricted, more expensive and more burdensome for potential filers, thereby reducing its availability. Accordingly through this legislation, intentionally and unintentionally irresponsible consumers were being encouraged to make better moral and sensible financial decisions.

But a competing argument

The 1st of these two arguments focuses on debtors' behaviors and decisions in attempting to reduce bankruptcy filings; the 2nd argument leads to questions about reforming "creditors' lending practices and the scope of social programs" to reduce filings. The lengthy legislative process that eventually led to BAPCPA fixated on the former, with very little attention given to creditors' business practices and its consequences on bankruptcy filings. All the effort was on changing consumers' behavior and virtually none on how bankruptcy or other laws could influence creditors' behavior.

Study Findings

The key finding is that contrary to the credit industry's public arguments that consumers who file bankruptcies are irresponsible and immoral, many subsets of the industry repeatedly solicit debtors to borrow after their bankruptcies. If creditors would believe their own public arguments, they would avoid soliciting to these consumers after they file bankruptcy, but the evidence is far to the contrary.

During the one year after bankruptcy, 96.1% of the debtors reported receiving credit solicitations. On average they received more than 14 solicitations per month.

Post-bankruptcy debtors are specifically targeted, with nearly a third of debtors reporting receiving solicitations from the same creditors who were creditors in their bankruptcies, and nearly 90% reporting receiving solicitations which specifically referred to their bankruptcy filing.

Note the following from the Federal Reserve's Report on Soliciting and Extending Credit (2006):

Former bankruptcy debtors, especially those who filed Chapter 7, are high-profit customers because they often continue to have financial difficulties after their bankruptcies and therefore generate a higher proportion of late and other types of fees, and to use higher interest cash advances.

Contrary to expectations that post-bankruptcy creditors would want collateral to protect themselves against conniving and foolish debtors, unsecured credit is more available than secured credit.

The Bottom Line

Many sectors of the credit industry aggressively and purposely solicit to post-bankruptcy consumers. This behavior reveals that these creditors believe the "adverse-events" argument--that most consumers who file bankruptcy are honest and responsible. Therefore to reduce bankruptcy filings, more attention needs to be paid to reforming creditors' lending practices.

Very interestingly and not coincidentally, in the few months since this law review article was written the worsening economy has indeed focused public attention particularly on the practices of sub-prime mortgage creditors and the dizzyingly elaborate system built up in the financial world to support those practices It is now painfully obvious that instead of scapegoating consumers filing bankruptcy, infinitely more public, regulatory, and legislative attention should have been paid to the creditor side of the table.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Friday, October 17, 2008

Judgment Lien On Homestead Avoidable Even As to Spouse's Unrecorded Equitable Interest, According to New Judge Dunn Published Opinion

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

In re Lindquist
Oregon Bankruptcy Case No. 03-35895-rld7
October 5, 2008

In this first published opinion from the Oregon Bankruptcy Court since April, Judge Dunn held that under Oregon law the homestead exemption extends to equitable interests in residential property, enabling both spouses to claim a homestead exemption, the one who held legal title and the other who held an equitable interest, thus allowing them, in their motion to avoid a creditor's lien on their residence, to use the joint $30,000 mobile home exemption instead of the $23,000 one for an individual debtor.

Essential Facts
On the date of their joint Chapter 7 petition, wife was the sole title owner of record of the residence, a manufactured home with land, although she and her husband had lived there together for 15 years. Husband had been the sole record owner for about 12 years, but less than three months before filing the Chapter 7 case he transferred title to wife in order to try to refinance the property. (The Judge makes no issue of the short time between that transfer and the case filing.) Husband made all payments on the residence, both for the initial purchase and monthly for the mortgage., since she had no income. When he signed title over to his wife he understood that he was retaining an equitable interest in the residence.

The Judge's Analysis
Homestead exemptions are to be liberally construed, and Oregon case law has supported extensions of the homestead exemption beyond simple fee ownership, although without ever addressing this particular question. Here the residence is the actual abode of both spouses. The husband made all payments on the property. "Recognizing [husband’s] homestead exemption claim for lien avoidance purposes is consistent with the objective of O.R.S. § 18.428(1) [the and is not inconsistent with its terms." So the debtors were entitled to the $30,000 exemption of joint owners instead of the $23,000 one of a single owner.

Judge Dunn distinguished an Oregon bankruptcy court's opinion disallowing a spouse's unrecorded interest in a homestead (In re Mitchell, 9 B.R. 577 (Bankr. D. Or. 1981)) since that case turned on the Chapter 7 trustee's bona fide purchaser status under § 544(a)(3) of the Bankruptcy Code and O.R.S. § 93.640(1) to defeat the unrecorded equitable interest. But the judgment lien holder here is "neither an actual purchaser of the Property in good faith and for value protected by O.R.S. § 93.640(1) [the bona fide purchaser statute], nor a trustee entitled to hypothetical bona fide purchaser status under § 544(a)(3)."

Other Helpful Details

Timing: This motion to avoid judgment lien was filed more than four years after the debtors had received their discharge and their Chapter 7 case had been closed. To determine the value of the residence and the amount of the senior liens and the judgment lien, the Court looked back to the date of filing the Chapter 7 case.
State law: § 522(f)(1) of the Bankruptcy Code provides for the avoidance of a judgment lien that impairs an exemption provided for under § 522(b), and since Oregon opted out of the federal exemptions the applicable homestead exemptions are those provided for under state statute. The limits of Oregon's manufactured home exemption thus involves analysis of Oregon case law.
The accounting: $175,000 residence value less $141,000 in senior, unavoidable liens, left a balance of $4,000 after the $30,000 homestead exemption. This means that of the nearly $11,000 judgment as of the date of the Chapter 7 case, all but $4,000 would be avoided. Interest at the Oregon judgment rate would accrue from the Chapter 7 filing date, May 27, 2003, substantially increasing the balance.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Thursday, October 16, 2008

Ratio of Ch. 13's Is Declining in U.S. After Big Post-BAPCPA Increase, Oregon's Ch. 13 Ratio is Holding Steady

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

As reported in a prior Bulletin on this website entitled Oregon's Slice of the Bankruptcy Pie, although Oregon's recent per capita Chapter 7 filing rate is virtually the same as the national rate, Oregon's per capita Chapter 13 filing rate is much LESS than the national rate. For example, for the 12-month period through the 2nd quarter of this year, in Oregon the Chapter 7 filing rate was 2.03 filings per 1,000 residents, almost the same as the 2.00 national rate, whereas Oregon's Chapter 13 filing rate for that period was .74 filings per 1,000 residents, only about 2/3rds the 1.12 national rate. The complicated question why Oregon's Chapter 13 filing rate is lower than the national one is beyond the scope of this Bulletin, which will instead compare the trends in the ratio of Chapter 13's to Chapter 7's nationally to the trends in Oregon. These two trends are quite different. Examining both of them may tell us more where Oregon is heading than looking just at Oregon's.

Nationally, using nonbusiness cases as tracked by the Administrative Office of the US Courts, after a significant increase in the ratio of Chapter 13's to Chapter 7's immediately after BAPCPA, that ratio has been declining. The first quarter of 2006, the first full quarter after BAPCPA, the ratio of the number of Chapter 13's filed to the number of Chapter 7's was 78%. After falling to 65% by the 1st quarter of 2007 and holding close to that ratio through 2007, it has fallen to 55% in the 1st quarter of 2008 and then down to only 48% by the 2nd quarter.

If this national trend continues, the ratio may well return to its pre-BAPCPA numbers. From 1998 through 2004, using the 2nd quarter of each year for the sake of comparison, the ration held very steady, no lower than 36% and no higher than 42%.
In contrast, the Oregon rate of Chapter 13's, both before and after BAPCPA, has been significantly lower. During the same 1998 through 2004 period, this rate also held relatively (although not quite as) steady in Oregon, with a low of 12% to a high of 20% Chapter 13 filings to Chapter 7 ones, generally between a third to a half of the national ratios.

In Oregon after BAPCPA, in contrast to the national declining trend, there has not been a clear direction in this Chapter 13 ratio. There has been a definite post-BAPCPA increase in the ratio, from the 12% to 20% pre-BAPCPA range to a 27% to 40% range. But after starting the 1st quarter at 28% the ratio bounced around with generally an upward trend until peaking at 40% during the 4th quarter of 2007, with 2008 seeming to trend back downward, with 37% and 32% during the 1st and 2nd quarters of this year respectively.

Bottom Line
So what do these trends or non-trends mean? Nationally, debtors and their attorneys were induced under BAPCPA to turn to Chapter 13's in large numbers at the outset. I speculate that three main factors are bringing the ratio back closer to earlier averages: 1) the system's--primarily debtors' attorneys but also judges, trustees, US trustees--greater familiarity with the new law; 2) the judicial developments interpreting BAPCPA, in some cases whittling away at some of its more onerous provisions; and 3) the worsening economy both qualifying more debtors for Chapter 7 and giving them less means and inclination to use the advantages of Chapter 13 (especially in light of the continued inability to modify mortgages). Whether the Chapter 13 ratio continues to go down will turn on future direction of the economy, and particularly on what tools homeowners will be given to re-negotiate their mortgages, inside or outside of bankruptcy.

As for Oregon, although it started from a much lower pre-BAPCPA Chapter 13 ratio, that ratio nearly doubled after BAPCPA (as did the national averages) and is still at a higher rate than the first three quarters immediately after BAPCPA. But the trend in that ratio seems to be heading downward during 2008, which would be consistent with the reality that Oregon's economy, as measured by home values especially but also other indices, stayed healthier generally about a year longer than the national average.
There are huge regional variations in the application of bankruptcy laws. Case in point: in most of the South, Chapter 13's actually OUTNUMBER Chapter 7's. Contrast that to Oregon's current 1/3rd as many 13's as 7's. There are so many factors at play in any federal district--legal, economic, even the tendencies of a few particular individuals--the five judges and the three Chapter 13 trustees, for instance--that making principled statements about the reasons that a Chapter 13 ratio is high or low is difficult. Predicting what direction that ratio is going to go is that much harder.

Source: The calculations reflected in this Bulletin were based on data provided by the Administrative Office of the U.S. Courts.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Monday, October 27, 2008

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