The United States Congress is currently considering legislation that would allow bankruptcy judges to rewrite some of the terms of a mortgage to reflect the value of a homeowner’s property and the current mortgage investment climate. My colleague Wendell Sherk of the Bankruptcy Law Network notes the following about the legislation currently before Congress:
The legislation now pending in Congress would allow homeowners in Chapter 13 to rewrite their mortgages to reflect current market value with market interest rates for the long haul. In other words, it asks the investors to take a small loss to avoid a bigger one. The investor still has a lien on the debtor’s home and has the remaining investment protected from inflation by a market rate of interest. The investor doesn’t have to absorb the costs of foreclosure or the added losses from a fire sale real estate market. The mortgage servicer gets a performing mortgage in the portfolio again, although it loses all those additional fees it would charge for processing the foreclosure.
Traditionally, the Chapter 13 process has allowed debtors to rewrite the terms of credit card lenders, vehicle lenders, furniture lenders and pretty much every other kind of lender – except mortgage lenders. Perhaps it is time for mortgage lenders to become full participants in bankruptcy. Is it possible that the many abuses we see from the mortgage industry arise from their special status?
As a proponent of the free market, I have some concerns about empowering bankruptcy judges to rewrite mortgage loans. Such a change will impact the mortgage markets – good, bad or indifferent and no one knows exactly what such a change would mean. On the other hand, mortgage lenders have brought this rather significant change upon themselves with a litany of questionable and abusive practices:
- teaser rates
- balloon notes
- interest only loans
- negative amortization
- lack of tranparency with fees
- unexplained fees, costs and charges
All this brings to mind the observations of Robert Peroni, my tax law professor at Tulane Law back in the early 1980′s – greedy people lead to the enactment of bad law. Professor Peroni was fond of noting that attempts by wealthy doctors to shelter income from taxes led to the closing of otherwise legitimate tax shelters. I think that the same process is at work here.
Filed under Consumer protection, Foreclosure issues by 
Whenever I teach a continuing legal education bankruptcy seminar, I always get questions about fraudulent transfers. Bankruptcy Code Section 544 as well as the Official Code of Georgia make transfers by an insolvent debtor to another person for less than market value a fraudulent transfer.
The Bankruptcy Code gives trustees the right to recover fraudulent transfers and Section 727 of the Code makes a fraudulent transfer grounds to deny a debtor’s discharge.
I think that fraudulent transfer cases can be especially dangerous because the law that has developed around this area often defies common sense. Often the neither the debtor nor the transferee has any bad intention and, in the 11th Circuit, you cannot "undo" the transfer. Attorneys not famliar with this area of the law are often surprised at the harsh results that follow.
I recently came across a case out of Ohio that illustrates how unforgiving the fraudulent transfer law can be. The Ohio case involved a situation where a young man transferred title to a motorcycle to his father. The young man’s wife did not like having the motorcycle around. The father never drove the motorcycle nor did he ever insure it. My guess – although the case does not say this – is that the son periodically drove the motorcycle away from the watchful eye of his wife.
In any case, the father found himself in financial trouble and in need of bankruptcy relief. Prior to filing the father "gave" the motorcycle back to his son.
When the father filed bankruptcy, the trustee asserted that the transfer was fraudulent and demanded that the motorcycle be turned over to the bankruptcy estate. The Ohio bankruptcy judge agreed with the trustee and found that the transfer was, indeed fraudulent.
My collegues in the Bankruptcy Law Network have written extensively about fraudulent transfers and I urge you to review their postings. The point here – if you are considering bankruptcy, think hard about any transfer that you might have made even if you never really considered the property to be yours. These type of "oh, by the way" matters are the statements that keep bankruptcy lawyers up at night.
Filed under Fraudulent transfers by
I am considering chapter 7. I am not sure about the median income info because I am no longer employed and working a temp job and used my retirement to live on. My question has to do with income tax refund check. I don’t think I will be getting a refund this year because of my retirement penalty, but if I did get one would I have give to the bankruptcy courts because I filed bankruptcy?
Sheila
Jonathan Ginsberg responds: Sheila, you raise a number of points in your question – let me address one by one:
First you ask how to calculate your median income given your change in employment. When you file bankruptcy, the law requires us to look at your income over the 6 month period preceding the month you actually file. For example if you were planning on filing in December, we would look at your median income from June through November.
If your income is lower than it "normally" is because of a job loss, that’s fine. You would have an easier time passing the "median income" test. The reverse, unfortunately, is also true – if you currently have no income but had a large income during the six month look back, your median income may exceed the limit and you would have to go into a means test calculation.
Additionally if you pass the means test but now have a high salary going forward, then you might have trouble fitting into Chapter 7 because of your budget.
Secondly, you raise the issue of your tax refund. Your tax refund does count when looking at your median income. Don’t be confused – all sources of income or revenue count in a median income calculation.
Third, you raise the question about what to do about your tax refund. Your tax refund is an asset that would have to be listed on Schedule B of your petition. Depending on how much you have or will receive, your tax refund may or may not be "exempt." In Georgia, you can use 1/2 of your unused real estate exemption + your wildcard exemption and shelter up to $5,400 of cash or cash equivalent like a tax refund. A qualified attorney can help you plan the timing of your filing to preserve as much of your tax refund as possible.
Filed under Bankruptcy budgets, Chapter 7 issues, Means Test issues, Median income test issues by
