Monthly Archives: June 2012

It Appears California’s New Neutral Evaluation Process is a Failure Just Like Debt Consolidation is a Failure

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Stockton California is the first municipality in California, that I am aware of, that has had to comply with AB 506 or Government Code Section 53760 before filing a Chapter 9 municipal bankruptcy.  As of this moment Stockton has not filed for bankruptcy protection yet.  What we do know is that the Neutral Evaluation process failed.  The city was not able to work out agreements with enough of their creditors to prevent having to file for bankruptcy protection.

Why the Neutral Evaluation process envisioned by the California legislature will most likely fail to prevent municipal bankruptcy cases are the same reasons why debt consolidation fails for our clients time and time again.  Creditors rarely choose to actually take less and work out a reasonable settlement that is possible for the city or person that owes the money.  It is also almost impossible to work something out with each and every creditor.  Unfortunately there always seems to be a creditor that files a lawsuit.  Credit card companies force our clients into bankruptcy just like the City of Stockton’s creditors are forcing them to file bankruptcy.  It is no different.

What happens when you miss a few credit card payments?  The first thing that will happen is late charges will be added to the amount owed.  Then your percentage rate will skyrocket to well over 20%.  Both of these things make it very difficult if not impossible for someone who is already having difficulty making the minimum payment to ever get out from under the debt.  Is this in the credit card company’s best interest?  Common sense would tell you no.  They are not making it easier to pay back the debt, but much more difficult.  So if you try and reach a settlement with them to make the terms easier for you to pay back the debt and avoid bankruptcy you will most likely be unsuccessful.

The City of Stockton was forced by California State Law to try and do some sort of debt settlement with their creditors.  The creditors new the other option would be bankruptcy and they still said no to better terms to keep the City of Stockton out of bankruptcy.  They would rather take their chances after the City of Stockton files for bankruptcy protection.  For some reason large credit card corporations and it appears creditors’ owed money by the City of Stockton have crunched the numbers and bankruptcy is better for them too.

HOA Special Assessments and Bankruptcy

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The issue of how homeowner’s association dues are treated when the homeowner files bankruptcy is for the most part settled law.  HOA dues due pre-filing are dischargeable.  HOA dues that are due post-filing are not dischargeable.  Section 523(a)(16) makes sure of this in a Chapter 7 case and provisions of the bankruptcy code in a Chapter 13 do the same.  If you stay you must pay.  The obligation to pay post-petitions is a covenant that runs with the land.

What about a special assessment of $20,000 for painting the complex or repairing a fence surrounding the association?  Was it assessed pre-petition as a lump sum just like the dischargeable HOA dues were assessed pre-filing?  Was there a lien recorded to secure the special assessment?  Was an installment agreement entered into to pay the $20,000 over year?  Some of the installment payments were due pre-filing and some of the installment payments are due post-filing.

If the special assessment was assessed pre-filing and in a lump sum without a lien being recorded it should be dischargeable just like dischargeable HOA dues that were unpaid before filing bankruptcy.  The issue of whether post-petition HOA dues are dischargeable has been litigated and lost.  The post-petition dues must be paid.  There are issues whether the dues are dischargeable if you are not occupying the home and not collecting rent though.

The biggest issue with attempting to discharge a special assessment is most likely a timing issue.  If you attempt to discharge a special assessment in a Chapter 7 bankruptcy case and the special assessment was assessed a couple months before filing the Chapter 7 there are issues under section 523 and the HOA could file an adversary complaint alleging fraud and other causes of action.  In a Chapter 13 case a HOA could argue that the covenant to pay runs with the land and to stay you need to pay the special assessment just like you will need to pay the post-petition HOA dues in a Chapter 13 case.

A larger concern is how your neighbors will treat you.  If you live in a homeowner’s association and discharge some of your unpaid dues word will get around.  If you also discharge a $20,000 special assessment and continue to live there your neighbors will most likely hate you forever.  They will be stuck with paying for your portion of the repaired fence of repainting of the association while you will not.  The long-term effect of discharging the special assessment may far outweigh the financial benefit in the short-term.  Like all legal matters, it depends upon the circumstances.

The Argument For Not Filing an Asset Chapter 7 Bankruptcy Case

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First let us establish what an asset Chapter 7 bankruptcy case is.  An asset Chapter 7 bankruptcy case means that there are assets that cannot be exempted from the bankruptcy estate and creditors are entitled to the value of these unexempt assets.  The Chapter 7 trustee assigned to the case will administer the bankruptcy estate for the benefit of creditors.

So what is the argument against filing an asset Chapter 7 bankruptcy case?  The issue is what is in the best interest of creditors, or those who are owed money?  Let’s say the assets available to creditors’ totals about $20,000.  The Chapter 7 trustee will receive 25% of the first $5,000; 10% of the next $45,000; 5% of the next $950,000; and 3% of the balance.  This is a sliding scale.  So an estate totaling $20,000 the Chapter 7 trustee will get approximately $3,500.  These fees are statutory.  In contrast a typical Chapter 13 trustee will receive about 10% of the estate for administering the case depending upon the jurisdiction.  So if the estate totals $20,000, the Chapter 13 trustee will receive approximately $2,000 for administering the estate.

So what is the problem here?  There is not a huge difference in the trustee fees right?  Well, in the Chapter 7 case the trustee will most likely hire an attorney to assist with the case.  Most attorneys that work for trustee’s charge anywhere from $300 to $600 an hour.  If the attorney for the Chapter 7 trustee spends a mere 10 hours on the case in the example above, the attorney for the Chapter 7 trustee would receive around 25% of the total estate of $20,000.  So the Chapter 7 trustee gets about $3,500 plus their attorney fees of $5,000 equals $8,500 in fees.  This represents almost half of the money available to creditors.  In contract the Chapter 13 trustee only receives about $2,000 total.  What is in the best interest of the creditors then?

To be fair, most bankruptcy attorneys must charge higher fees for a Chapter 13 given the additional work that is required.  So the bankruptcy attorney fees in theory could equal what the Chapter 7 trustee’s attorney may charge.  But most jurisdictions cap what can be charged for a basic Chapter 13 case.  These caps can vary widely depending upon the jurisdiction.  Also to be fair, some Chapter 7 cases absolutely need the trustee to hire an attorney to help administer the bankruptcy estate.  This is especially true when there are issues regarding the value of assets and what assets are part of the bankruptcy estate or not.  Recent there has been news from major news organizations about the amount bankruptcy professionals charge in Chapter 11 reorganization cases.  Some of the hourly rates are as high as $1,000 an hour.  It is hard to balance what is in the best interest of creditors, especially when most creditors do not participate in small asset Chapter 7 cases and Chapter 13 cases.

I Received A Notice of Possible Dividend, What Now?

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The vast majority of Chapter 7 bankruptcy cases are no asset cases.  This means that the person filing for bankruptcy protection does not own assets that cannot be protect and kept.  California has two sets of exemptions that protect assets, or exempt them from the bankruptcy estate that is created when filing bankruptcy.  But what if someone owns $75,000 in stock or bonds and has $150,000 in debt.  There is no exemption to protect $75,000 in a normal stock trading account.  If this person files for a Chapter 7 bankruptcy a portion of the stock can be protected depending upon the circumstances and the rest will be part of the bankruptcy estate to be paid to those who are owed money.

This process is started by the Chapter 7 Trustee appointed to administer the bankruptcy estate filing a “Notice of Possible Dividend” (NPD) to all they creditors listed in the bankruptcy petition that are owed money.  The NPD is filed to give notice to everyone that there could get some of their money back from the bankruptcy filer.  The money or amount received is called a dividend.  The NPD requests that creditors file proof of claims, or proof of the amount they believed they are owed by the bankruptcy filer.

This may seem like a straightforward process, but there have been lawsuits proving that creditors have filed fraudulent claims to get paid more than they are actually owed.  The claims process includes procedures for objecting to a claim for payment that is made.  Proofs of claims are supposed to include documentation that proves the amount that is owed at the time the bankruptcy case was filed.  Unfortunately many claims are filed will a simple summary of the accounting that proves nothing.  Anyone can write numbers on a piece of paper and attach it to the claim.  It proves nothing and should be objected to.  If you believe a creditor in your bankruptcy case filed a fraudulent claim you need to tell your bankruptcy lawyer to object to it.

Sometimes a trustee files a NPD because the merely think there are assets available to creditors.  Once they file the NPD they will then further investigate the value of the bankruptcy filers assets and determine if in fact creditors can or should receive a dividend.  This is okay as long as the trustee actually does something after filing the NPD.  What if a trustee files a NPD and then does nothing?  This is a very troublesome occurrence and should never happen.  When this happens creditors waste valuable time and money filing claims for nothing.  The bankruptcy court cannot sign the order of discharge or close the bankruptcy case.  If this has happened in your bankruptcy case you need to consult your bankruptcy attorney regarding what can be done about it.

Is Debt Consolidation a Good Idea? Does Debt Settlement Work?

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Well, no, usually not.  Debt settlement is different than debt consolidation.  Debt settlement is offering lump sum cash payments to settle the debt and have the credit card company forgive some of the debt owed.  You absolutely do not need to pay someone to do this.  The problem most people run into is they do not have the cash to settle all of their debts.

Let me tell you about debt consolidation.  First of all, you do not want to do business over the phone with a company in Florida or Southern California if you live in the Bay Area or another state.  It is best to be able to go to a business’ offices and look the person in the eye you will be giving your hard earned money to.  Especially when considering a debt consolidation company or bankruptcy for that matter.  I think that goes for everything these days unfortunately, unless it is a large corporation like Amazon.com.   I cannot tell you have many clients we have had to fix their bankruptcy cases because they chose to use some attorney that is hundreds of miles away and that they have never met.  If something goes wrong what jurisdiction would you have to sue the debt consolidation company in?  I can tell you that the agreement you sign will probably have a jurisdiction listed that is where the company you retained is located and not where you live.  That is a huge problem if you have to sue them in Florida or some other part of California where you do not live.  It makes the cost of litigation sky rocket and makes it not worth suing to begin with most of the time.  This is what these companies are counting on too.  If you pay them $1,000 – $4,000 or make a monthly payment to them at around $100 a month, are you going to pay an attorney $200 plus an hour to sue them in the hope of getting your money back?  Litigation is expensive and the cost of litigation is unfortunately a roadblock to getting justice.

Second, debt consolidation is the wild wild west.  There is unfortunately little government oversight of these companies.  If you are thinking about calling a debt consolidation company please Google their name before calling.  Google is very good at what they do and will find all the information you need about the company.  Also Google the companies name and the word complaints to see what pops up.  Unfortunately anyone can post negative reviews on many different types of websites without a shred of truth to the complaint.  It is a big problem, but at the same time, if there is complaint after complaint year after year you know something is not right with that company.  You can also Google the companies phone number to see what comes up.  Many times these debt consolidation companies change names over and over again to trap new unsuspecting people.  In my opinion any company asking you for money to provide any type of debt consolidation is a crook.  You can do it yourself for free and see what happens.  When the mortgage crisis first hit many crooks started loan modification companies and charged thousands of people upfront fees for loan modifications without doing anything to obtain loan modifications for the clients.  The percentage of successful loan modifications is so low that California passed a law that makes accepting upfront fees for loan modifications a criminal act.  Loan modification companies in California may only accept a fee once a loan modification is signed and recorded.  The same needs to happen under Federal Law for debt consolidation companies.  They should only get paid if they actually do what they say they can do.  Right now that is not the case.

A debt consolidation company will say they can negotiate a better percentage rate of reduce the amount you owe to a credit card company.  Ask them for proof in writing from the credit card company regarding any reduction in amount owed or percentage rate.  Do not trust what they send you on their letterhead.  Anyone can list your credit cards and reduce the amount owed and the percentage rate to show you how you can save money.  Again, why can you not do that yourself?  Believe me, you can.  Bankruptcy lawyers do not worry about these issues when filing bankruptcy cases for people in need.  Everything bankruptcy attorneys do is pursuant to the Bankruptcy Code and by court order.

Finally, if you do not pay your credit cards for long enough credit card companies will send you settlement offers for lump sum cash payments without paying anyone anything.  The problem is that usually one of your credit card companies will sue you and that is when you should give a bankruptcy attorney a call.  Most people do not want their wages garnished or bank accounts levied on to satisfy a judgment.  Others are more proactive and seek the advice of a bankruptcy lawyer well before a lawsuit is filed to stop the harassing phone calls and tie everything up in a nice neat bow and just move on with life.  Everyone is different and there is no right or wrong way to approach your debts if you can no longer pay them each month.  Just please, please, please thoroughly investigate a debt consolidation company before giving them any money.  I hate it when a client comes in and has paid a debt consolidation firm thousands of dollars for nothing and I have to file bankruptcy for them to once and for all make it all go away.  To add injury to insult, our fees for a no asset Chapter 7 bankruptcy case are usually far less than what a debt consolidation company charges.