Monthly Archives: June 2013

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

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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

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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

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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

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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.