By the end of foreclosure Tuesday, the lender’s law firm had learned of the Chapter 13 filing so the law firm did not “record” the foreclosure deed.  Instead, the lender filed a motion to “validate foreclosure” asking the judge to permit the foreclosure to go through thereby divesting the debtor of title.

The debtor painted a very sad picture – he and his wife had four children of their own and a sister and her three children were also living in the home – and they faced  homelessness if the foreclosure was allowed to go through.  Further, the debtor claimed that he and his wife had been victimized by a “paralegal service” that had prepared emergency “two page” petitions then did nothing more.

The lender’s attorney took a very hard line – between the husband and wife, these debtors had filed 5 previous cases only one of which actually worked for more than a few months.  The debtor was trying to scam the system and the court ought not permit such an action.  Further, the debtor had used the same paralegal service twice – if they were a ripoff why did he use them a second time?

The judge, who is a compassionate and decent man,  was clearly struggling with what to do.  I felt that the lender’s attorney took the wrong approach.  In my view the debtor and his wife came across more confused than pathologically dishonest.  They clearly did not have entirely clean hands when it came to using the bankruptcy process to stop a foreclosure, but I could see that the judge was bothered by the idea that 7 children and two families might end up on the street.

In my previous post I asked what you thought would happen.  Here’s what the judge did:

The judge decided to validate the foreclosure and lift the stay.  He was very concerned about the multiple filings and by the fact that there was no equity and an almost impossible likelihood that the debtor could actually fund a Chapter 13 that included over 2 years of mortgage arrearage.  He did note that Georgia law now provides that foreclosure notices must include the name and contact information of a human being at the mortgage company who has the authority to enter into loan modifications.  He directed the lender’s lawyer to include this information in the order that would be issued granting the lender’s motion (in most cases, the moving party in a motion hearing has the obligation to draft a proposed order for the judge to sign).

In case you are wondering, I would not have a lot of hope that the lender will be very cooperative in working out a deal with the debtor.

He also directed the debtor to cooperate with the U.S. Attorney in investigating the paralegal service.

What can you take from this case?  First and foremost, any Chapter 13 case that you file must be viable on its face.  In other words if you have only $200 disposable each month, and you have to pay $20,000 over five years, your case is not viable.  You have to present a workable plan.

Second, multiple filings make judges very concerned.   I am not a big fan of petition preparation services or paralegal services.  Bankruptcy has become a lot more complicated over the past 10 years or so.  I think that you take a very big chance when you use a non-attorney for your bankruptcy filing.  If you are going back a second or third time you should never do so without a lawyer as the Bankruptcy Code has been amended specifically to make repeat filings more difficult.

The mortgage creditor went first and presented her client’s case:  the debtor had filed a bankruptcy on the morning of July 7, 2009 minutes before the lender sold the debtor’s house on the courthouse steps.  The lender was not aware of the filing and proceeded to foreclose.  When the lender’s attorney returned from the courthouse, he discovered that a bankruptcy had been filed, so he did not record the deed.

Instead, the lender retained bankruptcy counsel who filed a motion have the bankruptcy annulled and the foreclosure validated.   If validated title would pass and the lender would now be the title owner of the property.  In such a situation the debtor’s bankruptcy would offer no protection and the debtor would be subject to eviction.

The mortgage company’s attorney noted that this was the fifth bankruptcy filed by the debtor and his wife, and the third case filed this year to stop a foreclosure.   In none of the cases filed this year did the debtor or his wife make any payments to the trustee or pay anything to the mortgage company.  In none of these cases did the debtor or his wife file any of the required bankruptcy paperwork.

Clearly the debtor and his wife were acting in bad faith, argued the mortgage company’s lawyer, and they should not be allowed to misuse the bankruptcy process.

What would the debtors have to say?  The debtor and his wife appeared pro se (without an attorney).  They told the judge that they filed this bankruptcy to save their home, where they lived with their 4 children, and the wife’s sister and her 3 children.

They further explained that the bankruptcy paperwork they filed was prepared by a “paralegal” from a “foreclosure prevention” company.   The paralegal had instructed them to file the Chapter 13 to stop the foreclosure and to give the company a chance to continue its negotiations with the mortgage lender.  Now, however, the foreclosure prevention company did not seem to be in business anymore – its telephone number was disconnected and its st0refront abandoned.

Now, they just needed some time to obtain representation and to restart negotiations with the lender.   They were victims of a foreclosure rescue scam (the same company that had misled them twice before this year) and now they finally realized that they were on their own.

What would you do in this situation?  What did the judge do?  The answer – see my next post….

I know that in some bankruptcy filing districts, on-going payments are collected by the trustee and paid through the trustee’s office.   The trustees in the Northern District of Georgia do not do this as a matter of course.

This means, therefore that Chapter 13 debtors have the significant responsibility for paying their mortgage payments on time each month after their cases are filed.  If you miss one or two payments, the mortgage lender can and will file a Motion for Relief from Stay.  They will argue that your missed payments reflect your inability to afford your mortgage and that bankruptcy protection ought to be lifted so that the mortgage lender can foreclose.

As a rule, bankruptcy judges are reluctant to lift the stay because doing so would mean that you will lose your homes, perhaps because of an emergency or unexpected situation beyond your control.  I have argued a number of Motion for Relief hearings and in almost every case, the judge will give my client “one more chance” to keep his home.  Usually this means that you will have to cure the “post-petition” arrearage over the next  six months.

Attorneys that represent mortgage companies know that they are unlikely to get the stay lifted, so they are usually agreeable to a deal, at least the first time a post-petition delinquency happens.

However, and this is a big however, the a consent agreement with your mortgage company to deny its motion for relief from stay comes at a cost.  Not only will you have to repay your missed post-petition payments over a short (usually 6 month) period of time, but you will also have include late payments in this agreement.  The lender’s attorney will also include a hefty attorney’s fee provision – usually $600 to $750 for the privilege.

A case I am working on right now should give you and idea about how this consent order process works.   My client fell behind on his mortgage payments by two months in October and November.  I did get a letter from the mortgage company’s attorney but my client did not have the cash.  The creditor’s attorney filed a motion for relief in December with a hearing scheduled for mid-January.  Just a few days ago, my client called to say that he had the missed two months payments and that he had sent the money in to the mortgage company.

The lender’s attorney takes the position that it had to file a motion and that it will go forward with its motion.  Our options are to settle by paying the $750 + the two missed late payments of about $90 each – a total of $930, or we can take our chances in front of the judge.   Will the judge deny the motion on the grounds that the payments have been made, but still award attorney’s fees because the lender had to retain counsel?  What if the judge is in a really bad mood and decides to lift the stay on the grounds that the debtor was technically in default?

The choice, of course, is the hands of my clients, but I can guess what they will decide.  Even though they feel that they are being held up by the mortgage lender, they will take the deal and pay the $930 so they can sleep at night and not worry about possibly losing their house.

This particular case is probably a winner – I believe I could convince the judge to reduce the attorney’s fee demand because the missing two months have been paid.   Usually, the consent deal involves paying two or three months over time and my argument that fees ought not be added is much weaker.

So, bottom line – if you are in a Chapter 13 and you fall behind on your mortgage, or insurance lapses on your house and the lender files a legitimate motion for relief from stay, you can figure that you are going to get stuck paying $600 to $750 in attorney’s fees to the mortgage company’s lawyers.

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I encourage you to do so.

In addition to writing for the BLN family of blogs, most of my colleagues in this endeavor publish their own websites and blogs that address more local concerns.  Just as this blog focuses on bankruptcy issues relevant to the Northern District of Georgia, frequently the BLN member blogs will have a local focus as well.  However, there are some bankruptcy and consumer protection issues that have a national focus.  I subscribe (using RSS and my iGoogle page) to a variety of bankruptcy and consumer bankruptcy blogs from around the country for the purpose of picking up trends and learning about case strategies that may very well work for me in my local practice.  If you are a bankruptcy lawyer or individual interested in keeping track of what is going on in the bankruptcy world, I invite you to subscribe not just to this blog, but to several of the bankruptcy related blogs listed on my blogroll.

BLN member (and founder) Jay Fleischman recently posted a blog article that has relevance in any bankruptcy jurisdisction.  His post entitled “Chase Home Finance, Caught Manufacturing Defaults in Bankruptcy Court, Nears Deal with U.S. Trustee” discusses a problem that I believe has existed for years with many mortgage lenders who file claims in bankruptcy court.

Mortgage lenders use very complex mathmatical formulas to keep track of your monthy payments.  These formulas have to account for grace periods, daily interest calculations, adjustments for extra principal payments, adjustments for incorrectly low payments amounts, adjustible rate fluctuations where applicable, mortgage insurance, always changing property tax payment obligations and adjustments, and other variables.  Add to this separate rules that may apply in the various States, and you can imagine how difficult it would be for a mortgage lender to accurately calculate exactly what you owe and how to apply your payments.  I would suspect that if you presented an identical mortgage and payment history to five different mortgage companies and looked at the “bottom line” numbers at the end of 5 years, you would have five different numbers.

Add bankruptcy to this already complex math and it is not surprising that mistakes will be made.  I have seen this myself when looking at motions for relief from stay.  The payment history documentation produced by mortgage companies is all but unreadable and there is almost no way to identify how various payments and charges were calculated or applied.

Jay’s blog post about Chase discusses this problem.  In the Pawson case, which was filed in the Southern District of New York, Chase had filed a motion for relief from stay alleging that the debtor was delinquent with on-going mortgage payments.   Unfortuntely for Chase, the debtor had been attempting to make on-going payments electronically and those payments were being rejected.  At the time of the motion, Chase alleged both a default as well as extra bankruptcy related charges.  Chase made little or no effort to investigate or resolve this matter and instead filed a motion that, if granted, would have resulted in a significant loss to the debtor.

Debtor Pawson’s attorney responded aggressively to Chase’s motion and counterclaimed for damages.  In the final resolution of the case, Chase paid damages to the debtor but also found itself in a more global agreement with the U.S. Trustee to change its procedure for dealing with real or imagined mortgage delinquencies.  Judges in the Southern District of New York are now developing a procedure that all mortgage companies must follow in that district prior to filing a motion for relief from stay.  A copy of the proposed settlement is available within Jay’s post.  Interestingly part of the resolution would be for mortgage lenders to provide debtors and their counsel with clear and easy to understand documentation of how payments and charges are applied to a particular mortgage account.  Such a procedure would be a welcome change here in the Northern District of Georgia.

Georgia, as you may know is a “non-judicial foreclosure” state, meaning that in the event of a default in payments, a lender does not have to go to court to retake his property.  Instead, the lender need only give notice of the pending foreclosure to the homeowner, then advertise for four consecutive weeks the foreclosure sale in the official newspaper of the county where the property is located.  Then the lender’s attorney can sell the property at open auction on the first Tuesday of the following month.  In a worst case scenario, a foreclosure in Georgia can be completed in as little as 45 days.

Eviction, too, is not forgiving.  Georgia law offers no safe haven or notice period for a tenant who discovers too late that his rental payments were ending up in the pocket of his landlord, rather than as payments to a mortgage company.

Unfortunately, however, bad facts truly do make bad law.  Now we have a case where a sincere, well-intentioned creditor is being hit with sanctions for what appear to be innocent actions against a debtor with less than clean hands.   The case involves a Connecticut homeowner named Mark Poveromo who got slammed for sanctions after he pursued criminal sanctions against a dishonest contractor who used a bad address for Mr. Poveromo in this Missouri bankruptcy filing.  You can read the details of this story in an AP news release called Bankruptcy Judge Orders Victim to Pay Back Thief.

I suspect that most objective observers would conclude that creditor Poveromo was the wronged party here, after being ripped off by his contractor, spending money for two plane tickets and dealing with a judge who refused to let him appear telephonically.  Nevertheless, this case shows how seriously bankruptcy judges treat stay violations even in situations where the debtors are very unsympathetic.

A bigger concern, however, is the likelihood that creditor advocates will use cases like this one to push Congress to erode automatic stay protections.  My experience has been that most stay violation cases involve bullying creditors and fact patterns like the one in this case are rare.  I will not be surprised to see efforts by lawmakers to reduce automatic stay protections.

More and more, it seems, creditors and collection agencies are pursuing discharged debt despite the absolute illegality of such activity.

My Bankruptcy Law Network colleague Kent Anderson offers an informative overview of this “zombie debt” in a recent BLN blog post.

I have not previously included Fair Debt Collection or Fair Credit Reporting work as part of my practice, but I am thinking about doing so.  Amazingly, there are some large, highly respectable companies involved in the zombie debt business.  Business Week published an interesting article about this phenomenon in 2007 called “Prisoners of Debt,” an article that is worth a read.

Apparently the zombie debt collectors are trained to walk a very fine line in terms what they say in collection phone calls.  These bill collectors are given scripts that often imply legal liability without specifically asserting that the debt is legally collectible.  Attorneys who pursue discharge violation actions, Fair Debt Practices action or Fair Credit Reporting actions often do not have a paper trail.  Zombie debt collectors rarely put anything incriminating in writing and they rely on the fact that most people do not have the equipment to record calls.

Texas attorney Brian Allen has an interesting post on his blog in July, 2008 in which he reproduces a recording from a zombie debt collector.  As Brian notes, the bill collector is attempting to get as close to the line of illegal activity as possible – and perhaps this collector crosses the line – what do you think:

”

In any case, if you get calls from debts that were discharged or that are extremely old, you may have a claim for damages based on violation of federal law.  I plan to explore these issues in future posts where I can hopefully give readers of my blog more guidance as to what to do.

Now, some 6 weeks later, the mortgage company has started foreclosure proceedings and my visitor wants to know if he can refile the Chapter 13 to stop the foreclosure.

Here are my thoughts:  under the BAPCPA changes to the bankruptcy law, a debtor can refile his Chapter 13 case.  However, if case #2 is filed within 12 months that case #1 was pending, then the automatic stay is not absolute.  Instead, the automatic stay does go into effect, but it terminates in 30 days unless the debtor files a motion with the court and convinces the judge to extend the stay.

Thus, my site visitor can refile his case, but he and his lawyer need to immediately file a Motion to Extend the Stay.  Some judges will extend the stay for pretty much any reason, while others will want to see a significant change in the debtor’s circumstances.

If the judge does not extend the stay, then it would come to an end in 30 days and the mortgage company would be free to re-start foreclosure proceedings.

Note that there are different rules for a 3rd case filed within any 12 months when prior cases were pending, or if the debtor had voluntarily dismissed his prior case – subjects for a different blog post.  In the meantime, my colleague Rachel Lynn Foley does tackle some of these issues in a helpful post published on the Bankruptcy Law Network blog.

Jonathan Ginsberg responds:  Fana, the minute you file a bankruptcy, all creditor action stops because of something called the "automatic stay."   There are a few exceptions to the automatic stay (i.e. multiple filings, child support debt, and a few other limited categories), but as a rule, all creditor action stops the minute you file.

Chapter 7 is primarily designed to get rid of unsecured debts like credit cards and medical bills.  In a Chapter 7, secured debts must be either reaffirmed or the collateral must be surrendered to the secured creditor.

Automobile loans are considered secured debts because the vehicle you purchased serves as security for the loan.  If you want to keep your vehicle in a Chapter 7, you must reaffirm it.  Reaffirmation of a vehicle loan is voluntary on the part of the secured creditor.  Generally, most car lenders will reaffirm if:

you are current with your payments

you have enough income to pay for the reaffirmed debt in your budget

your are able to shelter (exempt) your equity, if any, as part of your Chapter 7 petition

If the creditor refuses to reaffirm your choices are to surrender the vehicle or to convert to Chapter 13 where you can try to force a repayment down the lender’s throat.

If you do nothing – do not reaffirm and do not state any intention, the Bankruptcy Code will presume that your intention was to surrender and after the bankruptcy is over, the secured lender can repossess the vehicle.  Note that in this situation you would have no personal liability for a repossession deficiency – the Chapter 7 discharge serves to wipe out your personal liability.  However, the lien (in rem jurisdiction) that encumbers the vehicle remains and survives the bankruptcy.

So, if you are financing a vehicle and you file Chapter 7, there is a good chance that you can keep your vehicle if you qualify for a reaffirmation.

They judge did not say anything about re-affirming the summary judgment he just said he denied our motion to reconsider and right after that I gave him the paperwork where we hired attorney and paid to start BK proceedings.  We are pretty sure we are going to have to file chapter 13.  My question is this – we received paperwork today – 9/13 that since the court entered judgment against us on 8/13 they were filing a judgment lien- it did not specify on what.
My question is can this be enforced or will the BK stay or stop the judgment/lien?

Jonathan Ginsberg’s response:  First, thank you for the kind words about my blog.  I can alreay tell that you are a perceptive and intelligent reader. 

You did not say where you live, so I’ll answer as if you were in Georgia, where I practice.  If you live outside of Georgia, my observations may not be correct.

A judgment lien in Georgia attaches to any and all property you own.  It can also be used to garnish your wages.  As such a judgment lien is considered a secured debt since all of your property secures it.

If you file a bankruptcy, all action to enforce or perfect the lien would stop immediately pursuant to the automatic stay.  During the course of your bankruptcy you and your counsel should consider filing a Motion to Avoid the Judicial Lien pursuant to Section 522 of the Bankruptcy Code.  If the judicial lien is avoided the secured judgment lien becomes an unsecured debt paid at the same percentage as your other unsecured debts.  If you don’t avoid the lien, the judgment lien will be paid in full by the trustee as a secured claim.

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