Yearly Archives: 2011

Dodgers and Major League Baseball Enter into Financing Agreement

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The fact that the Los Angeles Dodgers have filed for bankruptcy protection is widely known after a month of headlines and sparring with Major League Baseball and Commissioner Bud Selig.  In most Chapter 11 bankruptcy cases the entity that files for bankruptcy protection seeks financing to continue to operate while it restructures its finances in bankruptcy.  The Dodgers are no different.  After all the legal wrangling and accusations, the Dodgers and MLB entered into a $150 million financing agreement on August 5, 2011.

The Dodgers wanted to enter into a financing agreement with Highbridge, a hedge fund.  Major League Baseball submitted its own offer to provide financing to the Dodgers with better terms.  The problem is the Dodgers believe MLB is conspiring to take the Dodgers over.  It also appears Frank McCourt is infusing his poor decision making into the bankruptcy case.

The MLB financing provides significantly better terms than Highbridge, such as the elimination of $9,750,000 in fees, reduced the percentage rate by 3 percentage points, did not require the Dodgers to encumber assets, contained fewer ways to default on the financing.  Even though the MLB financing is superior the Dodgers still did not entertain MLB offer.  One reason appears that McCourt personally guaranteed millions of dollars in closing fees if the Highbridge financing proposal was not entered into by the Dodgers.  So even though the MLB financing is superior and in the best interests of the Dodgers, it is not in the best interests of Mr. McCourt personally.

For the Dodgers to obtain financing the Bankruptcy Code requires the Dodgers to establish they are not able to obtain unsecured credit, the credit transaction is necessary to preserve the assets of the Dodgers and the terms of the transaction are fair, reasonable  and adequate given the circumstances of the Dodgers and the proposed lender; and that no better offers are on the table for consideration.  MLB has a vested interest and an obligation to preserve its brand and making sure that each franchise is successful.

The Dodgers then argued that MLB did not have the ability to provide financing for the Dodgers.  According to court documents MLB has a credit line of $250 million to draw from and approximately $400 million in the Major League Central Fund.  Even in the face of superior financing terms and the ability to provide the financing, the Dodgers and Mr. McCourt still refused to allow MLB to help them.  The Dodgers and Mr. McCourt believed that any financing accepted from MLB would come with control and the ability to harm the Dodgers.  The Dodgers even unsuccessfully tried to require the deposition of Commission Bud Selig.  Traditionally courts have shielded high level executives from such depositions when other witnesses can provide the same testimony.  On July 14, 2011, the Honorable Kevin Gross denied the Dodgers request to depose Commission Selig and denied almost all of the Dodgers document requests.

Today the Dodgers filed documents with the bankruptcy court detailing agreed upon terms of the financing deal with MLB totaling $150 million.  The maturity date of the financing is November 30, 2012.  For more information about bankruptcy contact one of our Redwood City bankruptcy lawyers or Chapter 13 bankruptcy lawyers in Redwood City.

City of Central Falls Seeks to Reject Collective Bargaining Agreements

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On August 1, 2011, The City of Central Falls, Rhode Island, made history by joining the short list of municipalities to file for bankruptcy protection under Chapter 9, Bankruptcy Case No. 11-13105.  Central Falls joins another recent municipal bankruptcy that is wrapping up, The City of Vallejo, California.  Central Falls will have to rely upon some of the rulings from the City of Vallejo case given that few municipalities have actually filed under Chapter 9 of the bankruptcy code.  This result in little case law or precedent to help guide Central Falls through this process.  Central Falls is facing a $5.6 million shortfall for fiscal year 2012 and their general fund will be depleted in August 2011.  Hopefully municipal bankruptcy filings will not become common place in the United States.  Unfortunately the reductions in Federal spending, reductions in sales tax and property tax, reductions of other sources of income for local governments do not make the outlook very good.

Like many individuals that have to file for bankruptcy protection under Chapter 7 or Chapter 13, Central Falls tried to stay out of bankruptcy court.  Central Falls raised taxes on its population of approximately 20,000 residents a staggering 19.32% in 2011.  Central Falls also restricted overtime pay, reduced the number of city employees eligible to receive benefits, eliminate benefits for part-time employees, closed the public library, closed the community center and even shared services with surrounding communities to try and prevent filing for bankruptcy protection.  These drastic cuts in services and benefits to existing city employees still did not close the projected depletion of their general fund or $5.6 million budget shortfall.

On August 1, 2011, Central Falls filed a motion with the Bankruptcy Court seeking approval to reject collective bargaining agreements with the Central Falls Police Department Fraternal Order of Police, International Association of Fire Fighters Local 1485 AFL-CIO and the Rhode Island Council 94 American Federation of State County and Municipal Employees AFL-CIO Local 1627.  According to Central Falls court documents this is the single most important step in getting their fiscal budget balanced and eliminating future shortfalls.  Two of these three collective bargaining agreements expire in June of 2012 while one agreement has already expired.  One of the requirements for a municipality to file for bankruptcy protection under Chapter 9 is that a good faith effort is made to negotiate concessions and try to reach an acceptable agreement prior to the bankruptcy filing.  Unfortunately Central Falls and the unions were not able to agree on concessions that would provide enough cuts to allow Central Falls to stay out of bankruptcy court.  The main issue to watch will be if Central Falls goes after the retirement benefits of retirees of the three unions.  Time will tell.

You may obtain more information about personal and small business bankruptcy from our Redwood City Bankruptcy Lawyer or Chapter 7 bankruptcy lawyer in Redwood City.

Debt Settlement Prior to Filing Bankruptcy

By Kitty J. Lin, Attorney at Law

Once you start missing payments to your creditors, chances are, after attempting to collect from you, your creditors will sell or transfer your debt to third party collection agency.  The objective of these collection agencies is to try to get some sort of payment from you.  Most of these agencies try to call you or send you letters indicating that they are willing to settle your debt for less than what you owe to the original creditors.  The question then becomes, should you take them up on that offer?  The answer is, it depends.  Here are some scenarios:

You are about to file for a Chapter 7 bankruptcy

If you are about to file for a Chapter 7 bankruptcy, which discharges all unsecured debt, then the obvious answer to the question of whether you should take the collection agencies up on their offer to settle the debt is “NO.”  There is no point in settling a debt which you intend on discharging through your Chapter 7 bankruptcy case.  Additionally, any debt you pay to creditors within 90 days prior to filing your bankruptcy case is considered a preference payment.  This means that the trustee may potentially go after the creditor and request the money (paid within 90 days) be paid back to your bankruptcy estate.  The trustee will then pay the money to your creditors equally.

You are about to file for a Chapter 13 bankruptcy, and you will pay less than 100%

If you are about to file for a Chapter 13 bankruptcy, and your monthly Chapter 13 payments will not pay 100% of the debt, the answer will depend on what percentage will be paid to unsecured creditors.  If your creditors are offering to settle your debt for 50% of what you owe, and you will only be paying 10% to your unsecured creditors, then the obvious choice is to reject the settlement offer.  If you will be paying 50% to your unsecured creditors in your Chapter 13 plan, and the creditor is offering to settle your debt for 25% of your debt, then it may be a good idea to take the creditors up on their offer and settle the debt for less than what you owe.  If you do not know approximately what percentage you will be paying to your unsecured creditors in your Chapter 13 plan, then it may be better to err on the side of caution and reject the settlement.  Remember, your creditors only get paid if they file a proof of claim in your Chapter 13 bankruptcy case.  If they do not file a proof of claim, they will not be paid.

You are about to file for a 100 % Chapter 13 bankruptcy

If, based on your circumstances, you know you will be paying off 100% of your creditors in your Chapter 13 plan, then your best bet would be to take the creditors up on their offers and settle your debt prior to filing for your Chapter 13 bankruptcy.  Chances are, if you are a 100% plan, you will need to pay a little interest on top of the 100% payment as well in the plan.  Thus, whatever offer your creditors are giving you would most likely be more favorable than if you were to pay them through your Chapter 13 plan, as you will be paying them over 100% in the plan if they file a proof of claim.  The preference payment issue would not come up in a 100% Chapter 13 plan, as all your creditors will be paid at least 100% of the debt

You do not qualify for bankruptcy

If you do not qualify for bankruptcy, or would like to avoid bankruptcy, then negotiating with these creditors is your best option to settle your debt.  Remember, you can always negotiate with these creditors!  You do not have to take their first offer!

If you would like to know more about your options, feel free to contact an experienced Fremont bankruptcy attorney or San Mateo bankruptcy attorney today at 877-9NEW-LIFE or 877-963-9543 for a free consultation.

Can a State, County, or City Government File for Bankruptcy?

By Ryan C. Wood, Attorney at Law

The answer is no, yes, and yes.  During recent budget sessions in the California assembly a representative suggested that the State of California should file bankruptcy.  It is not possible under the United States Constitution for a state to file for bankruptcy and discharge debts.  County governments and municipal governments are able to file for bankruptcy and reorganize their debts in Chapter 9 of the bankruptcy code.

What Government Entities May File for Bankruptcy?

Chapter 9 provides that municipalities may reorganize their debts.  The Bankruptcy Code defines a municipality as a “political subdivision or public agency or instrumentality of a State.”  Municipalities include cities, towns, villages, counties, taxing districts municipal utilities, water districts, school districts, bridge authorities, highway authorities and gas authorities.  Congress created this legislation during the Great Depression.  To date, the most famous municipality bankruptcy is Orange County, California.  The Bankruptcy Code has four other requirements: (1) the municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor; (2) the municipality must be insolvent, as defined in the Bankruptcy Code; (3) the municipality must desire to effect a plan to adjust its debts; and (4) the municipality must either: obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan in a case under chapter 9, negotiate in good faith with creditors and fail to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan, be unable to negotiate with creditors because such negotiation is impracticable, or reasonably believe that a creditor may attempt to obtain a preference.  The Bankruptcy Code defines insolvency as a municipality generally not pay its debts as they become due unless such debts are the subject of a bona fide dispute, or unable to pay its debts as they become due.

Why Would a Municipality file for Bankruptcy?

So why would a municipality file for bankruptcy protection?  Like corporations or individuals the money coming in is not enough to pay ongoing expenses and service or pay for the existing debt of the municipality.  Why not just raise taxes?  How municipalities receive funding is very complicated and the ability to just raise taxes is very restricted to product us, the taxpayers.  The purpose of the municipal bankruptcy is to get rid of unfavorable financial arrangements such as unexpired leases, executory contracts and even restructure collective bargaining agreements and retiree benefit plans.  Many cities and counties are being squeezed by generous retirement packages for retirees, but can filing Chapter 9 reduce these expenses?

A problem with a municipality filing for Chapter 9 bankruptcy is that so few municipalities have done so.  There is not a lot of case law or decisions to know what can and cannot be accomplished when a municipality files Chapter 9.  In the recent bankruptcy filing of Vallejo, California, the City of Vallejo, according to court records, the city obtained a favorable ruling that California State law did not protect the contracts of city employees.  The City of Vallejo did not try to reduce retiree pension plans, a huge expense the City of Vallejo will struggle to pay for years to come.  Jefferson County, Alabama could be the largest municipal bankruptcy case if they choose to file in the next week or so.  Hopefully the economy will pick up enough so that many municipalities across the United States will realize increase revenues and prevent an epidemic of municipal bankruptcy filings.

For more information about municipal bankruptcy, Chapter 7 bankruptcy or Chapter 13 bankruptcy, contact our Fremont Bankruptcy Lawyers or San Mateo Bankruptcy Lawyers toll free at 1-877-963-9543.

What Happens if I Cannot Afford to Continue Making My Chapter 13 Plan Payments?

By Kitty J. Lin, Attorney at Law

Let’s face it – the economy is unstable.  If you’re one of the lucky few people that are 100% certain that your job is secure, then you are in the minority.  Most people don’t know if they will still have a job a month from now.  Therefore, it’s not surprising that even if you file a Chapter 13 bankruptcy case, that doesn’t mean your income will be the same throughout the term of your plan.  The basic concept behind the Chapter 13 “Wage Earner” bankruptcy plan is that, taking into account the income that you earn, minus all the allowable deductions, you have some money left over at the end of the month to pay your creditors.  To be considered a good faith filing you need to make sure that all your disposable income is being paid into the Chapter 13 plan. That may be easy to do in the beginning of your Chapter 13 bankruptcy term, but what happens when you receive a pay cut, or worse, lose your job?  Your expenses don’t decrease just because your income does.  Most expenses, like utilities, food and car insurance remain constant.  If there is a loss of income, you may not have sufficient funds each month for your Chapter 13 plan payment.  Therefore, what are some of the options that are available for you?

Converting Your Chapter 13 Bankruptcy into a Chapter 7 Bankruptcy Case

One of the first things to be determined is whether you would otherwise qualify for a Chapter 7 based on your current circumstances.  If you do qualify for a Chapter 7, then you can file a motion with the court to convert your case to a Chapter 7, and have your case be treated like it was a Chapter 7.   This means that you would receive a discharge of all your allowable unsecured debt within three to four months after the conversion to a Chapter 7, and then your case will be closed.

This option is good if you have no arrears for secured debt that you were paying through the Chapter 13 plan.  If there were arrears (for example, if you owed money to your first mortgage lender), then those arrears would need to be paid off.  If you cannot afford to pay back the remainder of the arrears, your collateral may be repossessed or foreclosed.

Essentially, all benefits that you enjoy in a Chapter 13 would no longer be applicable if your case is converted to Chapter 7, such as the lien stripping of a junior mortgage.  Even if the judge granted the motion to strip your junior mortgage, the lien is not taken off your property unless there is a successful completion of your Chapter 13 plan.  Converting your Chapter 13 case into a Chapter 7 case means that your Chapter 13 plan was not successfully completed, and therefore, no lien stripping.

Modifying Your Chapter 13 Plan

If you cannot qualify for a Chapter 7 or it is not in your best financial interest to convert to Chapter 7, the next option is to try to modify your Chapter 13 plan payments to a lower amount.  The judge may allow you to modify your Chapter 13 plan if you can show that there are changed circumstances which make it hard for you to continue making your plan payments.  The amount lowered depends on your specific case.  In some cases the Chapter 13 plan payments are already the lowest possible, and therefore a lower payment will not be feasible in the case.  If that were to occur, then the other possible option is to have your Chapter 13 case be dismissed.

Dismissal of Your Chapter 13 Case

Your Chapter 13 bankruptcy case may be dismissed either voluntarily or involuntarily (by the request of the trustee or creditors) due to non-payment.  If your case is dismissed, then your debts are not discharged, and you are back in the same position as before you filed your bankruptcy case.  Any amounts that were paid to creditors through the Chapter 13 plan will be credited towards your accounts with these creditors, but you will still owe the remaining balance.  If you were behind on your mortgage or car payments at the time the Chapter 13 case was filed, then your house may be foreclosed on and your car can be repossessed after dismissal and loss the protection from the bankruptcy court.

If you are facing some difficulties in your current Chapter 13 case, and you need to seek the advice of an experienced Fremont bankruptcy lawyer or San Jose bankruptcy lawyer, please contact us at 877-9NEW-LIFE or 877-963-9543 for a free consultation.

Los Angeles Dodgers File for Bankruptcy Protection

By Ryan C. Wood, Attorney at Law

On June 27, 2011, the Los Angeles Dodgers, LLC (11-12010-KG), and Los Angeles Dodgers Holding Company, LLC (11-12011-KG), filed for bankruptcy protection in the United States Bankruptcy Court, District of Delaware under Chapter 11 of the Bankruptcy Code.  After weeks of speculation, reports that the Dodgers would not be able to make future payroll obligations, and numerous complications due to the McCourt divorce, the Dodgers have sought the same bankruptcy protection millions of Americans have sought over the last five years.

Like so many people struggling with burdensome debt, the Dodgers finally succumbed to their mounting debt and uncertain future.  Hopefully the Dodgers have made a sound business decision to file for bankruptcy protection.  Just like individuals who file for bankruptcy protection, bankruptcy provides structure and certainty when finances are stretched too thin.  Millions of Americans have filed bankruptcy to get a fresh start and obtain relief bankruptcy can provide.  What many critics of bankruptcy do not understand is that financial turmoil can happen to anyone.  Look at the Dodgers now.

According to Court documents the single largest creditor of the Dodgers is Manny Ramirez.  Mr. Ramirez is still owed a whopping $20,992,086.  The next largest creditor is Andruw Jones, who is owed $11,075,000.  The Dodgers petition for bankruptcy protection also listed the following creditors and amounts owed at the time of the filing: Hiroki Kuroda $4,483,516; Rafael Furcal $3,725,275; Chicago White Sox $3,500,000; Theodore Lilly $3,423,077; Zach Lee $3,400,000; Kazuhisi Ishii $3,300,000; Juan Uribe $3,241,758; Matthew O. Guerrier $3,090,659; Juan Pierre $3,050,000; Marquis Grissom $2,719,146; Jon S. Garland $1,211,538; Levy Restaurants $588,322; Andre E. Ethier $559,066; Jamey Caroll $508,791; Alexander Santana $499,500; Jonathan R. Broxton $423,077; Chad Billingsly $379,258; Continental Airlines $339,403; Vincent E. Scully $152,778.

Frank McCourt originally purchased the Dodgers from Fox Entertainment Group, Inc. in 2004 for $350 million.  Mr. McCourt purchased the Dodgers stadium, the land under the stadium and some 250 acres around the stadium including the parking lots.  Part of the purchase price was financed by Fox Entertainment Group, Inc. totaling some $125 million.  Mr. McCourt secured the financing by using 24 acres of undeveloped land in Boston as collateral.  In an early signed of what was to come, Mr. McCourt had to transfer the 24 acres to the Fox Entertainment Group, Inc. to repay the $125 million in financing.

In 2005 and then in 2007, Mr. McCourt and the Dodgers refinanced debt and obtained an additional $140 million in funds to improve and upgrade Dodger Stadium.  The refinance of existing debt in 2005 and the funds obtained in 2007 were secured by the income stream from future tickets sales.  The main problem forcing the Dodgers into bankruptcy was the falling attendance numbers this year following their success during the 2008 and 2009 seasons.  The fact that the collective bargaining agreement is ending did not help either.  Given that the collective bargaining agreement is ending, certain cash reserves have to be kept to pay deferred compensation and other compensation, which would not normally have to exist.  The Dodgers also cite the appointment of a monitor by Major League Baseball as a cause for decreased ticket sales.

The Dodger’s story is not much different than many stories of Americans around the United States.  Due to layoffs, reductions in pay and reductions in hours worked many Americans are facing the same cash crunch the Dodgers experienced when attendance fell in 2011.  The bottom line is bankruptcy can happen to anyone depending upon the circumstances.  The perfect storm of financial struggle is unfortunately waiting for many.  For more information about bankruptcy from an experienced San Mateo bankruptcy lawyer or San Jose bankruptcy lawyer, call toll free 1-877-9NEW-LIFE.

Loan Modifications in Bankruptcy

By Ryan C. Wood

If you have a house that is underwater, and you have problems making your monthly payments, or you know you will have problems making your monthly payments in the future, chances are you have or will be trying to obtain a loan modification.  For those of you that are seriously delinquent in your monthly payments, you may have tried to hire a loan modification company that promises to help you obtain a loan modification.  Be sure you are hiring a reputable loan modification company.  California law does not allow anyone to receive upfront fees when providing loan modification services.  If you have paid upfront fees you are not dealing with a reputable loan modification company and they have violated California law.

Far too often whether you are trying to obtain a loan modification or hired someone to help, the only result you see is the fact that your house is edging closer to foreclosure than it is to a loan modification.  One of the biggest trends that we currently see today is a homeowner filing for bankruptcy the day before the foreclosure date to try and stop the foreclosure sale.  Most of the time, they are filing their bankruptcy case without an attorney, so they are unaware of what needs to take place to correctly file a bankruptcy case. There are a lot of issues involved in a scenario such as this, and finding a bankruptcy attorney that can guide you in these rough waters may be what you need.

Issue #1 – Credit Counseling Course

As discussed in “What are the Required Courses to File Bankruptcy” the credit counseling certificate is mandatory.  You need to complete the class and obtain the certificate prior to filing for bankruptcy, or your case will be dismissed.  Most people that file for bankruptcy by themselves do not know this, and therefore do not know that their case is doomed to fail from the start.  If your case is dismissed, the mortgage lender can proceed with the foreclosure process.

Issue #2 – Dismissal of case due to lack of paperwork

If you file a bankruptcy petition to stop the foreclosure you probably did not have an opportunity to file all the schedules and forms that are required in your bankruptcy case, such as Schedules A through J, Statement of Financial Affairs or Means Test.  The Bankruptcy Court normally issues an order in your case to file all missing documents within 14 days from the date of the order or your case will be dismissed.  You may file a motion with the Bankruptcy Court to ask the Court to extend the deadline to complete the bankruptcy petition.  If the Court grants your motion, you have a little more time, normally 30 days.

Issue #3 – Short term effect on foreclosure process

Even if you file the credit counseling certificate, and file all the paperwork, bankruptcy only acts as a temporary stay on the foreclosure process.  If you filed a Chapter 7 bankruptcy, your mortgage lenders can file a motion to lift the automatic stay and proceed with foreclosure proceedings.  Your bankruptcy lawyer will have to spend the time and money to oppose the motion for relief from stay.  If you filed a Chapter 13 case, and you do not make monthly mortgage payments to your mortgage company, your mortgage lender may ask for relief from the automatic stay and continue to foreclose on your home.  If the Chapter 13 plan filed does not provide for your missed mortgage payments, your mortgage lenders may file an objection to the confirmation of your case and seek relief from the automatic stay.  If the objection is not resolved, your Chapter 13 plan will not be approved/confirmed and your case will most likely be dismissed.  The bottom line is this:  unless you can provide for some way to pay back all of the arrears in the plan, or come up with some payment plan that will satisfy the lender, your case is doomed.

After you overcome these obstacles, and your bankruptcy case is still in good standing, you now have some breathing room to try to obtain a permanent loan modification while you are in a Chapter 13 plan.  It may be easier, since most of your debt will be taken care of in the Chapter 13 plan, but there are no guarantees that you will receive a loan modification.  Be sure to keep copies and records of all communications and paperwork sent to the lenders to prove that you have indeed provided the information to them in the event the paperwork is claimed as lost or not received.

If you need the help of an experienced bankruptcy attorney to help you navigate the complications of a bankruptcy case to achieve the long term goal of saving and keeping your home we can help.

What Income Must be Included in the Means Test When Filing Bankruptcy?

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In 2005 Congress reformed the Bankruptcy Code and created what is called the Means Test.  One of the key components of the Means Test is the calculation of current monthly income to determination if someone has monthly disposable income.  Disposable income is theoretically the amount of money someone can afford to pay back their debts each month.  If there is disposable income, then that income should be paid to creditors in a Chapter 13 bankruptcy case and a Chapter 7 bankruptcy should not be filed.  So what is income when filling out the Means Test?

Generally all income earned or received during the six-month period prior to a bankruptcy case being filed must be included in the Means Test, or “All figures must reflect average monthly income received from all sources, derived during the six calendar months prior to filing the bankruptcy case, ending on the last day of the month before the filing.  If the amount of monthly income varied during the six months, you must divide the six-month total by six, and enter the result on the appropriate line.”  The income listed is therefore a six-month average.  The result of the six-month average can vary widely depending upon whether income is received from self-employment, or someone is employed and receives a salary that stays the same each month.

Income That Should Be Included

There are many types of income that must be listed or counted in the six-month average of income received prior to filing bankruptcy.  The most common are wages, tips, self-employment income, income from operation of business or farm, child support, family support, alimony, pension income or retirement income.  Some of the not so common sources of income are food stamps, rental income, sale of stocks, interest, dividends, royalties, retirement account withdrawals, life insurance income or income from trust accounts.

Income That is Not Included

When creating the Means Test Congress carved out an area that is not included as income in the Means Test.  Social Security Act income is not income that will be counted in the six-month average.  There is a difference of opinion from jurisdiction to jurisdiction whether unemployment income is considered Social Security Act income.  You will need to consult an attorney in your jurisdiction to determine how the Courts make that determination.

Determining whether any monthly disposable income exists is a very important part of deciding what type of bankruptcy case to file.  Filing out the Means Test is a complicated process that is different in each case depending upon sources of income and the specific facts of the case.

For more information regarding income and the Means Test, contact our bankruptcy attorney or bankruptcy attorney.

Are Banks Allowed to Freeze My Bank Account After Filing Bankruptcy?

By Ryan C. Wood

There are NOT several banks that choose to freeze their customer’s bank accounts if their customers file for Chapter 7 bankruptcy.  There is only one and that nefarious bank is Wells Fargo Bank.  Why would Wells Fargo Bank freeze the money their customer needs to feed their children or pay their rent when filing for Chapter 7 bankruptcy?  How can that be good for business?  It should not be good for business yet people still choose to do business with Wells Fargo Bank.  It is like Walmart.  Walmart receives all kinds of government tax breaks and subsidies yet Walmart does not pay their employees well in light of billions of dollars in quarterly profits.  So many people complain about how Walmart pays their employees yet still shop at Walmart perpetuating the harm and encouraging it.  Same is true of Wells Fargo Bank.

Why Freeze Bank Accounts When Filing Chapter 7 Bankruptcy?

The bank’s reasoning is that they are freezing the bank accounts to preserve the bankruptcy estate, and will release the funds once the trustee authorizes the turnover of the funds back to the bank customer.  The problem is, the trustees have huge caseloads, and they may not be able to send a letter to the banks immediately to release the funds.  Also certain trustees choose to not get involved at all.  Until the trustee sends a letter of release to a bank, the customers’ bank accounts remain frozen.  This is a huge problem, especially if that is your only bank account, and you have bills that need to be paid, like mortgage payments and utility bills.  The bills will remain unpaid until the bank account is released, and in the meantime, you may end up being evicted or have your power turned off.

The bank’s method of freezing their customer’s accounts was challenged in Mwangi v. Wells Fargo Bank, N.A.  In Mwangi, the Mwangis’ had several bank accounts with Wells Fargo, and Wells Fargo was also a creditor in the Mwangi bankruptcy case.  Wells Fargo placed an administrative freeze on Mwangi’s bank accounts after it found out the Mwangis filed for bankruptcy.  Mwangi demanded that the exempted portion of the funds in their bank accounts be released, but Wells Fargo refused.  The bankruptcy court concluded that Wells Fargo’s policy did not violate the automatic stay because the funds were part of the bankruptcy estate and Wells Fargo was not attempting to collect a debt; they were only placing an administrative freeze on the bank account to preserve the bankruptcy estate until further notice.  Well, as most bankruptcy lawyers can attest to, most bank account money is exempted/protected so teh bankruptcy filer keeps the funds and can use the funds to eat and live.  

The case then went to the 9th Circuit Bankruptcy Appellate Panel (BAP).  The BAP consists of a group of judges under the supervision of the US Court of Appeals who are appointed to hear appeals from bankruptcy cases.  The BAP disagreed with the lower bankruptcy court’s decision.  It distinguished the Mwangi case from Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  In Strumpf, the Supreme Court held that banks may place administrative freezes on a debtor’s bank account while the bank pursues relief from the automatic stay to exercise its right of setoff against the account.  In Mwangi, the freeze was not held to assert any right to a setoff that Wells Fargo had; it was a blanket policy that froze the accounts of all customers that filed for bankruptcy.  The BAP held that the administrative freeze Wells Fargo placed on Mwangi’s accounts was considered a violation of the automatic stay pursuant to 11. U.S.C §362(a)(3), which provides “…a petition filed under section §301, 302, 303 of this title… operates as a stay, applicable to all entities, of…any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate…”  By holding an administrative freeze on Mwangi’s account, Wells Fargo was exercising control over Mwangi’s property, despite Wells Fargo’s objections otherwise.  The BAP said, “Wells Fargo could have paid the account funds to the trustee; it did not.  Wells Fargo could have released the account funds claimed exempt to the Appellants when demand was made; it did not.  Wells Fargo could have sought direction from the bankruptcy court….it did not.  Instead, it chose to hold the funds until a demand was made for payment that it alone deemed appropriate.  If that is not “exercising control over” the funds, we don’t know what is.”  Mwangi v. Wells Fargo Bank, N.A., BAP No. NV-09-1408-DHPa, 09-24057-BAM 2010 WL 2723204 (9th Cir. BAP. June 30, 2010).  The BAP reversed the bankruptcy court’s decision and remanded the case back to the bankruptcy court.

Wells Fargo then tried to appeal the case to the 9th Circuit Court of Appeals.  However, on December 10, 2010, the 9th Circuit Court of Appeals dismissed the case due to lack of jurisdiction.

Hopefully you will retain an experienced bankruptcy attorney that properly advised you about your bank accounts and filing for bankruptcy.  The moral of the story:  do not have your bank accounts at bank you also owe money with credit cards, vehicle loans or home mortgages.  There are no shortages of banks for you to choose from in your area that would be convenient for you to bank with – just choose one where you don’t owe any money to.  Always keep your bank account accounts separate from your debts.

Why are Adjustable Rate Mortgages Still Being Sold?

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Our country is still trying to overcome the mortgage meltdown and stop home after home from being foreclosed on.  Adjustable rate mortgages (ARMs) were one the leading causes of the mortgage meltdown.  ARMSs are exactly what they sound like.  They are mortgages that do not have a fixed interest rate for the whole loan term.  The typical adjustable rate mortgage lures an unsuspecting borrower in with a low fixed interest rate for the first five to ten years.  After the fixed interest rate period the interest rate then becomes variable.  Variable to a mortgage company means the interest rate will increase and you will have to make higher mortgage payments.  Many new homeowners were able to afford the fixed monthly mortgage payments during the first five years, but when the interest rate adjusted up many homeowners could no longer afford to keep their homes.  This led to thousands if not millions of foreclosures.

ARMs are being advertised as beneficial given that the average person only keeps a mortgage for a few years.  So naturally you should pay a lower interest rate and therefore a lower mortgage payment.  Then just get rid of the mortgage after five years by selling the home or refinancing the existing ARM.  Okay, so why buy a house at all then?  The home will probably not go up in value any time soon and you will now have the pleasure of paying property taxes and most likely pay more for utilities.  These mortgages are also advertised as having more controls on them so that when the fixed period ends the mortgage cannot increase too much.  Also there are no longer prepayment penalties with most adjustable rate mortgages.

So why are adjustable rate mortgages still being offered by lenders?  The answer is simple, because mortgage companies make money off of them in the long run.    They make money when you obtained the adjustable rate mortgage to purchase a home, and then make more money when you have to refinance or sell the home.  In California, a homeowner is protected by what is called a purchase money security interest.  An original mortgage that is obtained for the purchase of a home protects a homeowner in California if they can no longer make the mortgage payments.  A mortgage company cannot seek any money from the ex-homeowner if they choose to walk away and the purchase money security interest is still in place.  But what happens in the event of refinancing a home?  The refinanced loan is not obtained to purchase the home, so no purchase money security interest and the mortgage company can seek any difference between the value of the house and what is owed at the time of foreclosure.  To recap; the mortgage company made money by issuing the adjustable rate mortgage, then made money when you had to refinance the mortgage to a fixed rate mortgage so you could afford the payment again, and then you lost your ability to walk away from the home debt free by refinancing and the mortgage company can now make more money after they get the house back in foreclosure.

A major bank here in the Bay Area offers an adjustable rate mortgage that is fixed for the first five or seven years at 3.125 percent.  After that the interest rate is described as projected.  So what is a projected interest rate?  The mortgage company provides the following definition:   “The government requires us to display this information.  So what does it mean? The Adjustable Rate Mortgage has a fixed rate and monthly payment for the first five or seven years. After that the rate can adjust up or down annually. As a result, we’re required to display what the rate and payment will be after the fixed rate period ends. Keep in mind, since we don’t know what rates will be in the future, the actual interest rate and payment may be higher or lower.” With interest rates at historical lows the interest rate on this loan will most likely increase significantly during the twenty-five years the interest rate can adjust.  The question is will the person who chooses this loan be able to make the higher payments after the mortgage adjusts up?  The last six years tells us no.

The only logical answer as to why adjustable rate mortgages are being sold by mortgage companies is mortgage companies make a lot of money issuing loans whether the homeowner is successful in making the payments long term or not.  This is a transaction driven industry.  Sell the original mortgage, refinance the mortgage, issue a line of credit, foreclose on the property, auction off the property and make money on each transaction.

For information about how bankruptcy can help homeowners in distress please contact our San Mateo bankruptcy attorney or San Jose bankruptcy attorney toll free at 877-963-9543 to schedule a free consultation.