Author Archives: Admin

City of Detroit Chapter 9 Bankruptcy

By

The City of Detroit filed for bankruptcy protection under Chapter 9 of the Bankruptcy Code on July 18, 2013, Bankruptcy Case No. 13-53846. Detroit lists its major creditors as General Retirement System of the City of Detroit is owed a little over $2 billion, Police and Fire Retirement System $1.4 billion, U.S. Bank N.A. $801 million in pension related certificates of participation, U.S. Bank N.A. certificate of participation $516 million, U.S. Bank N.A. certificate of participation $153 million, U.S. Bank N.A. $78 million in tax general obligation bonds, U.S. Bank N.A. $60 million in general obligation capital improvement bonds, U.S. Bank N.A. tax general obligation bonds of $183 million and more.

As you can see the vast majority of Detroit’s debts are pension related unfunded benefits for retirees. Detroit’s bankruptcy attorneys will have to seek reduction of retirees’ future benefits to pull Detroit out of the whole. It is estimated that Detroit has at least 20,000 retirees as of the date of the bankruptcy filing.

One of the issues in every municipal bankruptcy case is eligibility. Unlike other chapters under the bankruptcy code a municipality must prove it is eligible to be a debtor pursuant to Section 109(c) of the Bankruptcy Code. Detroit must prove that it is a municipality, specifically authorized to be a debtor under Michigan state law, is insolvent, desires to affect a plan to adjust its debts and has negotiated in good faith with creditors holding a majority in amount of claims. This will be the first major battle in the case. Creditors such as the Public Finance Guarantee Corporation will argue that Detroit is not eligible under section 109(c)to be a debtor. Public Finance Guarantee Corporation is involved in almost each and every municipal bankruptcy case. They have insured the bond cities issue to pay for capital improvements and recently budget and retirement benefit shortfalls. If Detroit is allowed to reduce the amount of their bond debt the guarantor Public Finance Guarantee Corporation will have to pay the difference. Given that Public Finance Guarantee Corporation is very active in municipal bankruptcy cases.

The insolvency prong is what is screaming out right now. The City of Detroit is facing a $115.5 million cash flow shortfall for fiscal 2012. In the past Detroit issued long term and short term debt. In 2008 Detroit issued $75 million, 2010 $250 million and then again in 2012 $129.5 million. Detroit has been getting along by wage cuts, layoffs, employee furloughs, cash pooling and borrowing from city funds. Detroit also deferred payments for pension contributions for 2012 and 2013 totaling $216 million. Detroit’s bankruptcy lawyer filings project the cash shortfall for fiscal year 2014 will be $198.5 million without restructuring. More than half of Detroit’s budget goes to service its debts and not to provide services to the public. The amount of the budget that must be used to pay debts will only increase in Detroit’s future if they do not successfully reorganize under Chapter 9.

What Should I Expect At My Chapter 13 Meeting of the Creditors?

By

It is called the 341 hearing or meeting of the creditors. Section 341 of the Bankruptcy Code provides what is to take place at the meeting of the creditors, but Section 343 of the Bankruptcy Code is actually the section that is entitled “Examination of the Debtor” and provides the bankruptcy filer must appear for examination and provide testimony under oath.

At least a week before the meeting of the creditors your bankruptcy lawyer should provide the trustee’s office with at least your federal tax return. Some trustees require additional information depending upon the circumstances. Most trustees will also inform your bankruptcy attorney of the issues that need to be resolved before the trustee and recommend approval/confirmation of your Chapter 13 plan.

The meeting of the creditors is administered by the Chapter 13 trustee’s office. Either the actual Chapter 13 Trustee or his/her attorney will conduct the meeting. You will need valid identification and proof of your social security number for the meeting. The trustee must verify you are the person listed in the bankruptcy petition. For identification a valid driver’s license or passport will work and your social security card, an original W-2 or government document with your social security number on it will work to prove your social security number.

Once your identity is verified you will be sworn in and placed under penalty of perjury. Most of the time the standard questions are as follows: Do you review and sign the petition before it was filed? Did you list all of your assets? Did you list all of your debts? Did you list all of your income? Has there been any changes to your income since the case was filed? Is this your only source of income? How many consecutive years have you lived in California? Do you own any vehicles? If so, are your vehicles insured? Do you own any real property? If so, are the mortgage payments current or have you made your mortgage payments since the bankruptcy case was filed? Are the property taxes current? Is the real property insured? Have you stopped using all of your credit cards? Have you made a payment of $1,000 or more to any single entity in the last six months outside the normal course of business? Are there any changes to the petition that need to be made that you are aware of?

There are usually a few questions directly related to your circumstances too. By the time the meeting of the creditors you will have had to make at least one Chapter 13 Plan payment. They will then verify you either made the payment or not and let you know when the next payment is due. If everything is in order the trustee can let you know if they are recommending confirmation/approval of your Chapter 13 Plan. If there are any creditor objections to confirmation filed there may be a brief discussion about what needs to take place to resolve the objections. If there are no creditors that wish to be heard in the matter the meeting will be concluded. Creditors have the right to attend the meeting and ask you questions about the bankruptcy petition, your income, assets or ability to pay your debts. It is usually not worth the time and money for a creditor to pay an attorney to show up at the meeting of creditors and ask questions.

Who Files for Bankruptcy and Why?

By

The “who” files bankruptcy is easy. Anyone from every different walk of life files for bankruptcy protection. You just never really understand until you find yourself thinking about what can help your financial situation? You never thought it would be true, but bankruptcy became a viable option for you. You never know what the future holds and bad things happen every single day. A lost job, depression, decrease in property value, failed marriage or an illness that does not allow you to work can happen to anyone. Whether these bad things results in filing bankruptcy is the question and usually depends upon how much debt a person has when the bad thing happens.

The “why” is a little more difficult to answer. In the last five or six years the mortgage meltdown was driving the increase in bankruptcy filings. Interest only mortgages and adjustable rate mortgages along with decreasing home prices was a recipe for disaster. A bankruptcy attorney could expect a mortgage issues or housing problem to part of the potential clients financial problems.

Credit Card Interest Rates Are the Number One Problem

In my opinion the real number one reason why the vast majority of people seek bankruptcy protection is because of out of control credit card debts. It is not medical debts. It is not car loans. It is not unaffordable mortgages and decreased housing values. These things do not help, but by far credit cards and their high interest rates are the problem. It is high interest rates that make paying back even reasonable amounts of credit card debt take years if ever. Most people have some credit card debt and are able to make the payments. The problem is when the bad thing happens it is not possible to make the minimum payments any longer and something has to give. Each state has or had usury laws to protect us consumers. The Supreme Court of the United States found a way around that for credit card companies. They held that a credit card issuer could charge the amount of interest allowed by state law in the state the credit card issuer resides, not the interest rate your state law allows. So what happened? A couple of states rescinded their usury laws and credit card companies set up shop in those states and the 28% interest rate became legally possible on a credit card. The rest is history. If credit card companies actually made a good faith effort to negotiate reductions in accrued interest and interest rates the number of people that could pay back the original amount they charged would be huge. Bankruptcy lawyers everywhere would see a decrease in bankruptcy filings.

Tax Debts are Becoming More of a Problem

Another major cause of bankruptcy filings is tax debt. Unfortunately taxes are only increasing and it appears will have to continue to increase as our federal, state and local governments struggle to keep up with employee benefits and retirement for retirees with generous retirement and pay packages. I believe we will see more and more potential clients with dischargeable taxes choosing to file for bankruptcy to discharge their taxes or pay a portion of the taxes back in a Chapter 13 bankruptcy.

Can My Mortgage Company Foreclose on My House If I Have a Confirmed Chapter 13 Plan?

By

There are a number of issues regarding your home and filing a Chapter 13 bankruptcy case. Were you current on the mortgage payments at the time of filing of the bankruptcy case? Did you miss payments after the bankruptcy case was filed? For arguments sake we will assume for this article that: (1) You missed 10 months of mortgage payments before the case was filed (2) you intend to save the house and make up the missed mortgage payments in the Chapter 13 Plan. You are filing the Chapter 13 to payback the 10 missed mortgage payments and make all of your normal mortgage payments as they come due after the bankruptcy case is filed.

After you filed your Chapter 13 case your mortgage holder filed a motion for relief from stay and the bankruptcy court for whatever reason granted them relief. The mortgage company now has permission to continue the foreclosure process. The issues here is whether a mortgage company that has already received relief from the automatic stay can initiate foreclosure proceedings against you to foreclosure on your home while you are making payments in a confirmed/approved Chapter 13 Plan? The quick answer is no. The first issue is that the mortgage company has already obtained relief from stay. That means the mortgage companies bankruptcy lawyer has obtained permission from the bankruptcy court to continue to foreclose on your home even though you have filed for bankruptcy. You then proceeded with the Chapter 13 case and included the mortgage company in the Chapter 13 Plan to pay back the 10 missed mortgage payments in the Chapter 13 Plan. The mortgage company’s bankruptcy lawyers did not object to the Chapter 13 Plan when they had a chance to. The bankruptcy court then approves/confirms your Chapter 13 Plan. So can the mortgage company continue with foreclosure now that the confirmed/approved Chapter 13 Plan is paying them back the missed mortgage payments? The answer is again no.

The mortgage company is bound by the terms of the confirmed/approved Chapter 13 Plan. In In re Hilemand, 451 B.R. 522 (Bkrtcy C.C. CA. June 2011) Judge Tighe held that the mortgage company should have objected to confirmation of the Chapter 13 Plan or if there is a post-confirmation default by the bankruptcy filer then obtain a decision that the Chapter 13 Plan is no longer binding and therefore a foreclosure can proceeds. The mortgage company needs to file a motion to dismiss the case or modify the confirmed chapter 13 plan. What we normally see is the mortgage company files another motion for relief from stay after the Chapter 13 plan is confirmed if any mortgage payments are missed after bankruptcy case is filed.

Bankruptcy and Death

By

Obviously a dead person cannot file for bankruptcy protection. What happens is a person who filed for bankruptcy dies before the bankruptcy case is closed? The answer depends upon whether the case is a Chapter 7, Chapter 11, Chapter 12 or Chapter 13 bankruptcy case.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy case the case can continue even though the bankruptcy filer has passed away. Once a bankruptcy estate is created the bankruptcy filer has no interest in property of the bankruptcy estate. Of course there are exemptions that protect/exempt your property from the bankruptcy estate so you can keep it. Whether the bankruptcy exemptions can protect all of your stuff depends upon what you own and its value. So at the time of the bankruptcy filer’s death in a Chapter 7 case only the exempted property will be available to probate or be distributed to beneficiaries. Federal Rule of Bankruptcy Procedure 1016 governs what happens upon the death of a bankruptcy filer. The bankruptcy lawyer that filed the case must inform the court and trustee of the death of the client and the case is administered, so far as possible, in the same manner as if the death had not taken place. So nothing really needs to be one if the debtor dies in a Chapter 7 case. At the same time, what if the meeting of the creditors has not been held? What if the debtor has not completed the second course and therefore is not eligible for a discharge?

Chapter 13, Chapter 11 or Chapter 12 Reorganization

If the bankruptcy case is a reorganization case then the case may be dismissed or if further administration is possible and is in the best interest of the parties, the reorganization case may proceed and concluded as if the bankruptcy filer had not passed away. Like in a Chapter 7 case the bankruptcy attorney that filed the case must inform the court and the trustee that the client has passed away.

In a Chapter 13 timing will make a difference. If the Chapter 13 plan has not been confirmed/approved by the Bankruptcy Court the case will most likely have to be dismissed. In a Chapter 13 the debtor usually funds the plan from income and makes Chapter 13 Plan payments over three to five years. So if the debtor dies in the middle of the confirmed Chapter 13 plan how can they complete the plan and obtain a discharge? The case will most likely be dismissed for nonpayment by the Chapter 13 Trustee.

In a Chapter 11 or Chapter 12 individual filing it is possible that a confirmed plan is completed and the debtor dies. Sometimes in these chapters the plan of reorganization is not funded by the monthly income of the debtor but from the sale of assets or other means. If the plan is already confirmed/approved by the Bankruptcy Court in theory a Chapter 11 or Chapter 12 reorganization filed by an individual could continue.

Adversary Proceedings in Chapter 7 Cases

An adversary proceeding is a lawsuit that is filed in the bankruptcy case to resolve an issue that is related to the bankruptcy filing. The most common is the object to the discharge of a debt or object to the debtor receiving a discharge at all.

An adversary proceeding would continue if the debtor passed away while it was ongoing. As mentioned above, if a Chapter 7 case can continue when the debtor passes away, then why can’t an adversary proceeding objecting to the discharge of the debtor continue?

Creditors Garnishing Wages in California

By

Yes, creditors can garnish wages in California. But can two creditors garnish your wages at the same time? The answer appears to be no. California Code of Civil Procedure Section 706.230(c) provides that an employer is to honor or comply with the first earnings withholding order served upon the employer. So what if your employer receives an earnings withholding order that was to withhold $50.00 from your check each pay period to satisfy a judgment totaling $20,000 and then your employer receives another withholding order that is attempting to withhold from your earnings the full statutory allowed about of 25%? According to CCP §706.023(c) your employer should return the second earnings withholding order as ineffective given that they have to honor the first earnings withholding order and start the wage garnishment at $50 a pay period.

What is the effect of this? To satisfy a $20,000 judgment at $100 a month, assuming the person is getting paid twice a month and $50 is withheld each check; it will take approximately 200 months or about 16 years to satisfy the judgment of the first earnings withholding order. So it would appear that a debtor could collude with a friendly creditor to have his wages garnished at a very low amount and thwart any other attempts to garnish their wages until the first earnings withholding order is satisfied and released levying officer.

The Ninth Circuit Bankruptcy Appellate Panel had to address this issue in a 2007 in the bankruptcy case of In re Tiffany, Bankr. Case No. 93-58255. In this case a creditor of the debtor obtained a judgment against the debtor for a not dischargeable debt totaling $1,147,054.79. The creditor then tried to garnish the debtor’s wages, but another creditor had already served an earnings withholding order on the debtor’s employer. The employer returned the earnings withholding order to the creditor as ineffective and the creditor litigated the issue all the way to the Ninth Circuit Bankruptcy Appellate Panel.

The opinion is not for publication though and can only be used for persuasive purposes. Nonetheless, the Ninth Circuit BAP held that the statutory language is not ambiguous and it clearly says that an employer has to comply with the first earnings withholding order received and return the second as ineffective.

In the Tiffany case the creditor also tried to argue that given that the first creditor only ordered $50 per check to be withheld that leaves plenty of disposable income of the debtor for them to garnish wages of the creditor. Again, the court held that this does not matter pursuant to the plain language of CCP §706.050. This section clearly says to withhold earnings pursuant to CCP §706.050 or such other amounts specified in the earnings withholding order. In this case a mere $50 per paycheck even though the debt could arguably afford to have much more withheld.

The legislature could change the law regarding this issue at any time to prevent this result. There also could be equitable remedies pursued to prevent this result also. This article is only addressing when two creditors seek to have your wages garnished close in time and does not address when a taxing authority or other entity issues an earnings withholding order along with a normal judgment creditor.

Improper Service of Summons and Complaint in California

By

Unfortunately more than a few times we have had potential clients come to us and describe how they were improperly served with a summons and complaint in a California State court lawsuit. They are usually not personally served properly or the substitute service was not completed properly. California Civil Procedure Section 415.20 provides the proper forms of service. For some potential clients this is all irrelevant since they have other debts too that need to go away as well and seeking the counsel of a bankruptcy attorney to file bankruptcy and just make it all go away once and for all.

The problem is if you do not know about the lawsuit how do you defend it? The answer is you do not defend it and a default judgment is usually entered against you. The default judgment is then enforceable and attorney fees and costs can be added to the original amount of the debt plus interest will start to accrue. A $4,000 default judgment can turn into a $8,000 default judgment real quick.

As a practicing bankruptcy lawyer this is troubling. What is even more troubling is when the lawsuit was filed more than five years ago and the potential client did not even know about the lawsuit until their bank account was levied on or the creditor attempts to garnish their wages. So what can be done to combat this?

First a motion to quash the service of the summons and complaint should be filed and a motion to set aside the default judgment. California Civil Procedure Section 418.10 governs motions to quash or overturn the service of the summons and complaint because service was improper. The default judgment should be therefore be void and set aside or overturned. Unfortunately you will have to pay the appearance fee which will be at least $255.00 or more depending upon if the case is a limited civil case or an unlimited civil case. This is a special appearance and not a general appearance. A general appearance in a case will provide the court jurisdiction over the party making the appearance. This is a key point. The special appearance is only to bring to the attention of the court that you were not served properly so the default judgment is void. You will have to prove by a preponderance of evidence the service of the summons and complaint was not proper.

Next step in getting rid of the case or having it dismissed gets tricky. California Civil Procedure Section 583.210 provides the summons and complaint shall be served upon a defendant within three years after the action is commenced against the defendant. The party suing you must serve you within three years of the case being filed or bring it to trial within five years. Both of these time restrictions can be tolled. Tolled means that the clock does not tick on the amount of time from the date the case was filed. There have been a number of cases litigated on whether the clock should be ticking or stopped and allow the party suing you more time to either serve you properly or bring the case to trial. Whether the court will dismiss the case outright could be challenging.

Assets and Bankruptcy

By

There is a lot of confusion about assets and bankruptcy. Believe it or not most people that choose to file for bankruptcy protection keep all of their stuff. They even keep their house and cars. California has generous exemptions that protect the stuff you own and allow you to keep it. If filing bankruptcy left you barefoot and without a car how can you start over?

Houses and Bankruptcy

If you own a home and are current on the payments you can file a Chapter 7 bankruptcy case and get rid of all your unsecured debts like credit cards, personal loans or medical debts. This is assuming you qualify to file a Chapter 7 case based upon your income, expenses and assets. What if your house has some equity? This means the house is worth more than what you owe. California allows you to protect up to $75,000 in equity if singe and $100,000 if married. If you are disabled or older than 65 years old you can keep $175,000 of the equity. You also need to include the cost of sale of the house and if there are any capital gains taxes you will have to pay when selling the house. So if the amount of your first mortgage, plus the applicable exemption, plus the cost of sale and plus any capital gains tax is the same or more than your house is worth there is no value to the bankruptcy estate or your creditors. You keep the house. Make sure you speak with an experienced bankruptcy attorney in your area. Especially since home values are increasing in most California communities. If you are behind on your mortgage payments then you need to take a look at filing a Chapter 13 bankruptcy case to save your home.

Cars and Bankruptcy

If your car or cars are paid in full whether we can protect the vehicles depends upon their value. California just increased the vehicle exemption amount to $5,100 to be applied to one car. California also has the wildcard exemption which totals $26,425. So in theory you could have two or more vehicles worth a total of $31,525 and still keep them. Keep in mind if you are still making payments you need to deduct the amount you still owe on the loan from the value to figure out how much your vehicle is worth. If you do have payments still you just need to keep them current. If you are behind on your car payments or want to lower your monthly car payment you should look into filing a Chapter 13 bankruptcy case. Speak with a bankruptcy lawyer in your area about how Chapter 13 can lower your vehicle loan amount and percentage rate.

Your Other Stuff

For the most part all of your used household goods are not worth much. Once you purchase most things the value decreases rapidly. The exception is jewelry and other collectibles. You may need to have your jewelry appraised to make sure it can be protected. The jewelry exemption under the California 703 exemptions is $1,525 and under the 704 exemptions $7,625.

Involuntary Bankruptcy

By

Yes, your creditors can file bankruptcy for you without your permission. Section 303 of the Bankruptcy Code governs involuntary bankruptcy. These cases are very rare and even rarer if filed against an individual. If may be difficult to find a bankruptcy lawyer that has experience filing one of these cases. Mostly businesses are forced into bankruptcy by their creditors. In involuntary case may only be filed under Chapter 7 or Chapter 11 of the Bankruptcy Code.

One unsecured creditor can file the petition for bankruptcy against the company or individual and then at least two more unsecured creditors must join the petition for a total of $14,425 in unsecured non-contingent claims and not subject to a bona fide dispute as to liability or amount.

After the initial petition is filed and the required creditors joins the petition the next issue is whether the case will be allowed to continue or be dismissed. If the debtor does not respond to the petition being filed then the bankruptcy case will continue and the debtor will have no choice but to participate. If the debtor does oppose the filing then a hearing will be held to determine if the bankruptcy case should continue.

If you are considering filing an involuntary case against a nonpaying company or individual be careful. You may have to file a bond to indemnify the debtor for attorney fees and costs or more that the court could allow. If the petition is dismissed for reasons other than on consent of all petitioners and the debtor, the court may grant a judgment against the filing creditors for reasonable attorney’s fees, costs, any damages proximately caused by the petition filing and even punitive damages.

If you are owed money and the individual or company that owes the money is not paying its debts regularly you may consider filing an involuntary bankruptcy case. You will need to know that there are also other creditors in the same position as you to join the petition though. Choose wisely the bankruptcy attorney you retain to lead you down this path. It is a difficult and rare area of practice for bankruptcy filers. Please note that you may not force an individual into a Chapter 13 bankruptcy case. Before filing a petition for bankruptcy against an individual you should research the assets of the individual. If they have few assets you may have put yourself in a worse position to be paid on your claim. At the same time there are some advantages. Think about the 90-day preference period. This is the 90-days prior to the bankruptcy petition being filed. If the alleged debtor made a large payment to some other creditor during the 90-days prior, then the payment could be avoided for the benefit of all creditors. Of course everything depends upon the circumstances and this article only addresses some general issues to consider.

What is a Fraudulent Transfer in Bankruptcy?

By

The good news is that fraudulent transfers in bankruptcy are relatively uncommon. Section 548 of the Bankruptcy Code defines these types of transfers. Hopefully prior to filing the case your bankruptcy lawyer asked the right questions and learned about possible transfers of the client’s assets and to whom. But there is light at the end of the tunnel. Please read all the way to the end of this article to find how to fix bankruptcy fraudulent transfers.

Transfers for Less Than Fair Market Value

Probably the most common fraudulent transfer is selling an asset or giving away an asset for less than fair market value. If your car is worth $10,000 and it is paid in full you have the right to transfer title or sell to anyone you want. The issue is for how much? If you know that the California bankruptcy exemptions cannot protect all of your assets you may be tempted to sell or transfer title to a friend or family member for less than fair market value. It is not okay to give away assets to the detriment of your creditors. It is just not fair and that is what bankruptcy is all about. It is about treating all parties fairly given not so good financial circumstances. You must get fair market value for your stuff if you sell it prior to filing bankruptcy.

Transfer to Insiders 2 Years Prior to Filing Bankruptcy

The Chapter 7 or Chapter 13 trustee assigned to your case may avoid (undo) any transfer of an interest of the bankruptcy filer in property, or any obligation incurred by the debtor, which was made or incurred on or within 2 years before the date of the filing of the bankruptcy petition.

So What Can be Don About Fraudulent Transfers?

In the Ninth Circuit at least get the thing or money back that you transferred prior to filing for bankruptcy protection. See In re Adeeb, 787 F.2d 1339 (9th Cir.1986). Faced with financial difficulties Mr. Adeeb transferred some of his real property to friends and family members on the advice of an attorney that did not practice bankruptcy law. Once Mr. Adeeb spoke with a bankruptcy lawyer he tried to undo the transfers, but while transferring title back to his name three of his creditors filed an involuntary bankruptcy petition against him. He acquiesced and filed a voluntary petition for bankruptcy not long after. The bankruptcy court ruled Mr. Adeeb should not receive a discharge due to his transfer of assets within one year of filing for bankruptcy. On appeal to the Ninth Circuit Court of Appeals held that if a debtor reveals the transfers to their creditors, recovers substantially all of the transferred property before he/she files a bankruptcy petition they should still be eligible to receive a discharge.