BANKRUPTCY OVERVIEW

Types of Bankruptcy

• Chapter 7 – liquidation – all property of the debtor owned at the date of bankruptcy becomes part of the bankruptcy estate. Individuals can exempt certain property. Personal debtor discharged from personal liability.
• Chapter 13 – individual who owes unsecured less than $336,900 and secured of less than $1,010,650. Debtor gets discharge without losing nonexempt property. Must formulate plan over 3 to 5 years; doesn’t have to be approved by creditors, but by bankruptcy court. Can’t be confirmed over creditor objections unless certain requirements are met.
• Chapter 11 – individuals and business organizations.
• Chapter 12 – family farmer.

Players in Bankruptcy

• Individual debtor
• Corporation-debtor in possession who runs the company during a chapter 11 reorganization.  Is the manager of the company and will only be replaced by a trustee for cause
• Mortgagor – debtor
• Mortgagee – bank/entity that loans money
• Examiner – provided for in chapter 11; examiner does not run the business, but investigates things such as transfers, preferences, and fraudulent transfers
• Trustee-appointed in chapter 7 and chapter 13 as a matter of course.  Trustees are paid as % of estate assets distributed.  Job of trustee – maximize money for unsecured creditors.
• U.S. Trustee-division of Department of Justice. Watchdog that complains about professional fees, conflicts, appoints Ch. 7 private trustee.

Commencing a Bankruptcy Case

1.  Eligibility

• §109 = Who may be a debtor = only a person that resides or has a domicile, a place of business, or property in the US is eligible
• Chapter 13 persons who cannot file: 
• Persons who are not individuals (e.g. partnerships and corporations)
• Individuals whose unsecured debts total $336,900 or more or whose secured debts total $1,010,650 or more
• Individuals who do not have sufficiently stable and regular income

      2.  The Automatic Stay

• The automatic stay is a statutory injunction that takes effect when a bankruptcy petition is filed
• Acts Enjoined
• Proceedings against the Debtor (§362(a)(1))
• Pre-petition judgments (§362(a)(2))
• Acts against the estate property (§362(a)(3))
• Liens against the Debtor’s property (§362(a)(5))
• Collection Efforts (§362(a)(6))
• Any act to collect, recover, or assess a claim against the debtor that arose prior to the bankruptcy  petition is forbidden
• Example:  no telephone calls, no garnishment of wages
• Setoffs (§362(a)(7))
• Post-petition setoffs of mutual debts
• Tax Proceedings (§362(a)(8))
• Expiration of the Stay
• The stay operates form the time that the bankruptcy petition is filed until it is statutorily terminated as follows:
• (1) Stay of an act against estate property is effective until the property no longer constitutes property of the estate (§362(c)(1))
• (2) Stay of any other act continues until a discharge is granted or denied, the case is dismissed, or the case is closed, whichever occurs first (§362(c)(2))
• Relief from the Stay (§362(d))
• (1) For Cause (these are examples not actually in the statute)
• Inability to provide adequate protection
• Bad faith filing
•  (2) Debtor lacks equity in the property and the property is not essential to reorganization
• Property will be deemed not necessary for an effective reorganization upon a finding that the Debtor does no have a reasonable possibility of successfully reorganizing w/in a reasonable time
• Willful Violation of the Stay
• An individual who is injured by a willful violation of the automatic stay may recover actual damages, costs, attorney’s fees, and when warranted, punitive damages (§362(k))

 (2) Exemptions

• §522 is the exemption provision
• §522(b)(1) = debtor may elect either the schedule of federal exemptions under (b)(2), which includes those appearing in subsection (d), or, in the alternative the state exemptions under subsection (b)(3)—unless Debtor’s state has, by statute, taken away the option of federal exemptions
• §522(c) = Property that is exempt carries over to the post-bankruptcy period in order to protect it from the non-dischargeable debts in bankruptcy
• Exception = domestic support claims
• §522(d) = lists the federal exemptions
• §522(l) = Debtor must act to exempt property
• §522(f) = Protecting Impairment of Exemptions
• Property that is exempt may not be seized by a creditor
• In bankruptcy, exempt property is not available for distribution to creditors.  This exemption remains after bankruptcy.  The effect is to allow the debtor who claimed exemptions in bankruptcy to preserve the status of exempt property after bankruptcy with respect to non-dischargeable debt (523).
• The bankruptcy discharge gets ride of the Debtor’s personal liability on the debt, but the secured creditor is still entitled to enforce the security interest in the exempt property
• 522(f) basically says, if you granted someone a security interest in your exempt property, you should still be entitled to your exemptions, so you can nullify certain liens and security interests in the exempt property
• 522(f)(1) allows the debtor to avoid the fixing of a lien on property to the extent the lien impairs an exemption the debtor would otherwise be entitled to
• §522(d) gets property out of the bankruptcy estate; §522(f) protects the property that is exempt under §522(d)

Limits on the Discharge

• § 523(a)(6) = debts for willful and malicious injury are non-dischargeable
• §523(a)(9) makes DUI debts non-dischargeable
• Educational Loans
• Taxes (and in general owing the government)

Trustee Avoidance Powers and Related Issues

(1) Preferences

• §547 is the preference provision
• §547(b) = the trustee makes a case for a preference by showing that there has been a transfer
• (1) To or for the benefit of a creditor
• (2) on account of an antecedent debt
• (3) If the Debtor is insolvent at the time the transfer was made
•  (4) The transfer was w/in 90 days of filing for BANKRUPTCY (or 1 year is the non-Debtor is an insider)

(2) Fraudulent Conveyances

• §548 and the UFTA are the operative provisions here
• §548(a)(1) = the trustee may avoid any transfer of an interest of the debtor in property incurred by the Debtor, that was made or incurred on or within 2 years before the date of the filing of the bankruptcy petition
• §548(a)(1)(A) and UFTA §4(a)(1) deal with actual fraud
• §548(a)(1)(B) and UFTA §4(a)(2) deal with constructive fraud

(3) Trustee’s Strong Arm Powers

• §544(a) is the strong arm clause; it gives trustee power of  a hypothetical lien creditor under state law to avoid transfers in real and person property

The Consumer Debtor in Chapters 7 and 13

• Chapter 13 has certain advantages to entice Debtor’s to choose it over chapter 7
• (1) Super discharge – chapter 13 discharges more debts than chapter 7
• The 2005 act has eroded this
• (2) The automatic stay applies to Debtor and co-Debtors (e.g. your relatives)
• (3) If there is property that you would really like to keep, you can keep it under chapter 13 by proposing a repayment plan where you keep the property
• 2005 Act Major Changes
• (1) means test
• (2) Credit counseling before filing
• (3) credit counseling before discharge
• (4) Attorney liability provisions
• (5) Limitation on stripping down liens on cars in chapter 13
• (6) more generous to credit card companies
• There were three big changes to Chapter 7 under the 2005 Act
• (1) access to chapter 7 under the means test
• (2) The reaffirmation of no abuse
• (3) “ride through”
• (4)  Debtor audits
• Barriers to BANKRUPTCY
• (1) Debtor must obtain credit counseling
• (2) Debtor must submit information for the means test (very intensive)
• (3) Trustee decides which chapter and looks at the Debtor’s information to see if there is abuse
• (4) If the Debtor has enough income there is a presumption of abuse
•  (6) Those below a certain income can file chapter 7 (no presumption of abuse)
•  (7) Before receiving a discharge, all individuals must complete a course in financial management
• The means test
• § 707(b)(7) – First, you need to be under  the state median income
• §701(b)(1)
• The bankruptcy court on its own motion or on that of the US Trustee, the panel trustee, or a party in interest (e.g. a creditor)
• may dismiss or, with the consent of the Debtor, convert to Chapter 11 or 13
• a case filed by an individual Debtor
• whose debts are primarily consumer debts
• Presumption of abuse
• §707(b)(2)(A)(i) provides the following formula
• In considering under paragraph (b)(1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the Debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii) and (iv) and multiplied by 60 is not less than the lesser of
• (I) 25 percent of the Debtor’s non-priority unsecured claims in the case, or $6,000, whichever is greater; or
• (II) $10,000
• The court shall presume that abuse exists if, [(CMI – expenses) x 60] (hereinafter “excess income”) is not less than the lesser of:

§       (1) the greater of 25% of unsecured claim or $6,000 or

• (2) $10,00

FORECLOSURE OVERVIEW

What is foreclosure?

The legal proceedings initiated by a creditor to repossess the collateral for a loan or debt that is in default.

Two types of foreclosure:

Foreclosure by Trustee Sale

Foreclosure by judicial action.

Foreclosure by Trustee Sale

Notice of foreclosure is posted in “a conspicuous place” on the property.

Usually the front door

The Trustee conducts a public auction of the property.

Judicial Foreclosure

Rare in Washington except for certain homeowner associations and condominium associations.

Cannot be shortened.

Benefits of Foreclosure by Trustee sale

Faster, cheaper, easier than judicial foreclosure.

Approximately $1500 in atty fees for trustee foreclosure, $2500 and up for judicial foreclosure

FREQUENTLY ASKED QUESTIONS REGARDING BANKRUPTCY AND FORECLOSURE IN THE LEGAL CLINIC ARENA

WHAT IS FORECLOSURE

What is Foreclosure?

This is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house.

Contact Your Lender As Soon As You Have A Problem

Many people avoid calling their lenders when they have money troubles. Most of us are embarrassed to discuss our money problems with others or believe that if lenders know we are in trouble, they will rush to collection or foreclosure. Some lenders have workout options to help you keep your home. However, these options work best when your loan is only one or two payments behind. The farther behind you are on your payments, the fewer options are available.

Finding Your Lender - Check the following sources for lender contact:

•  Your monthly mortgage billing statement 
•  Your payment coupon book 
• Web links or customer service numbers found under "help for homeowners" lenders  

Information To Have Ready When You Call:

• Your loan account number 
• A short account of your situation

·         Recent income documents (such as Pay stubs; Benefit Statements from Social Security, Disability, Unemployment, Retirement, or Public Assistance. If you are Self-Employed, have your tax returns or a Year-to-date Profit and Loss Statement available for reference) 

• List of household expenses 

Expect to have more than one phone conversation with your lender. Typically, your lender will mail you a "loan workout" package. This package contains information, forms and instructions. If you want to be considered for assistance, you must complete the forms and return them to your lender quickly. The completed package will be reviewed before the lender talks about a solution with you. The sooner you call; the sooner help is available.

Do Not Ignore Mail or Phone Calls From Your Lender

If you do not contact your lender, your lender will try to contact you by mail and phone soon after you stop making payments. It is very important that you respond to the mail and the phone calls offering help. If your lender does not hear from you they will be required to start legal action leading to foreclosure. This will substantially increase the cost of bringing your loan current.

If You are only one month behind - Call Your Lender

• Reinstatement: Your lender is always willing to discuss accepting the total amount owed to them in a lump sum by a specific date. They will often combine this option with a Forbearance.
• Forbearance: Your lender may allow you to reduce or suspend payments for a short period of time after which another option must be agreed upon to bring your loan current. A forbearance option is often combined with a Reinstatement when you know you will have enough money to bring the account current at a specific time in the future. The money might come from a hiring bonus, investment, insurance settlement, or a tax refund.
• Repayment Plan: You may be able to get an agreement to resume making your regular monthly payments, in addition to a portion of the past due payments each month until you are caught up. 

If it appears that your situation is long-term or will permanently affect your ability to bring your account current – Call Your Lender

• Mortgage Modification: If you can make the payments on your loan, but you do not have enough money to bring your account current or you cannot afford the total amount of your current payment, your lender may be able to change one or more terms of your original loan to make the payments more affordable. Your loan could be permanently changed in one or more of the following ways:
•  Adding the missed payments to the existing loan balance.
• Changing the interest rate, including making an adjustable rate into a fixed rate. 
• Extending the number of years you have to repay.
• Claim Advance: If your mortgage is insured, you may qualify for an interest-free loan from your mortgage guarantor to bring your account current. The repayment of this loan may be delayed for several years. 

If Keeping Your Home is Not an Option -- Call Your Lender

• Sale: If you can no longer afford your home, your lender will usually agree to give you a specific amount of time to find a purchaser and pay off the total amount owed. You will be expected to obtain the services of a real estate professional who can aggressively market the property.
• Pre-Foreclosure Sale or Short Payoff: If the property's sales value is not enough to pay the loan in full, your lender may be able to accept less than the full amount owed. This option can also include a period of time to allow your real estate agent to market the property and find a qualified buyer. Monetary help may also be available to pay other lien holders and/or help toward paying a few moving costs.
• Assumption: A qualified buyer may be allowed to assume your mortgage, even if your original loan documents state that it is non-assumable.
• Deed-in-lieu: Your lender may agree to allow you to voluntarily "give back" your property and forgive the debt. Although this option sounds like the easiest way out for you, generally, you must attempt to sell the home for its fair market value for at least 90 days before the lender will consider this option. Also, this option may not be available if you have other liens such as judgments of other creditors, second mortgages, and IRS or State Tax liens. 

Selling Your Home

If you need to sell your home, there will be many questions you have to answer. You will need to find how much your house is actually worth, and you will have to find a real estate agent you are comfortable with.

Avoid foreclosure prevention companies.
You don't need to pay fees for foreclosure prevention help-use that money to pay the mortgage instead. Many for-profit companies will contact you promising to negotiate with your lender.  

 Don't lose your house to foreclosure recovery scams!
If any firm claims they can stop your foreclosure immediately if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property and becoming a renter in your own home!  Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional, or a HUD approved counselor.

Special Disaster Relief Options - Call Your Lender

If your property has been damaged by a natural disaster; or if you have been called up for active military duty or affected by a national tragedy, there may be additional assistance available.

THE FORECLOSURE PROCESS

Can a lender sell my property?

If you bought a home and signed a deed of trust giving a lender a security interest in your property, the lender can start a process to take legal action to sell the property at a Trustee's Sale. The legal process can be started if you are in default - if you do not do what you agreed when the loan was given. Usually this happens if you are behind on your payments. It also could happen if you fail to pay your property insurance or real estate taxes on the property or don't maintain the property.

 What must a lender do to sell my property?

1. The lender will make a demand that you make your payment. Usually this is required in the agreement.
2. If the lender sends this notice by certified mail, and will post a notice on your door.  The process of forcing sale of your home can continue even if you refuse to pick up the certified letter.

 What can I do to prevent the sale?

1. If you can afford to get up to date on your payments, it is best to do this as soon as possible. If your lender has to take other legal steps, you will end up paying for all of the costs, so it is better to try to stop the process at this point, if you can afford to catch up.
2. If possible, work out a plan to catch up on your payments. Contact the lender to see if you can reach agreement about how much you will pay and when to catch up.
3. Be sure that any repayment agreement is in writing. Send a letter saying that you confirm that they have agreed to accept payments and what amounts and dates the payments will be made. Be sure to make the payments on time that you agreed to make.
4. If possible, get additional funds to be able to catch up on your payments. Some people are able to borrow from relatives. Others arrange roommates or are able to have someone in the family get an additional job to increase income so they can afford to get caught up.
5. If you have a VA loan, it is especially important that you attempt to work with the VA to avoid possibly being responsible for the full loan amount even if your house later sells for less than you owe and to see if you can remain eligible for a VA loan in the future.

 What if I don’t get caught up on payments?

1. The lender can start plans to sell the home by recording a Notice of Trustee's Sale & Substitution of Trustee with the County Assessor's office This Notice sets the date, time and location that the Trustee's Sale of your home will take place.
2. You should receive a copy of this Notice of Trustee's Sale.

What can I do if I can’t get caught up on payments?

1. Talk with a lawyer to find out more about your options and get advice. You may be able to hire an attorney to advise or assist you.
2. Do not pay money to someone else to negotiate for you with your lender. Some people take your money and make promises that they don't keep.

After I receive notice of a trustee's sale, what are my options?

1. Pay the amount that you owe if you can pay the full amount including back payments, late charges, penalties and trustee fees before the date of the Trustee's Sale.
•  Ask in writing for the "reinstatement" amount and keep a copy for your records.
• Send the amount by certified mail, return receipt requested (arranged at the Post Office) so you can prove that you sent the money and that the lender received it.
•  IF YOU PAY ALL THAT YOU OWE, BE SURE THAT YOU HAVE IN WRITING FROM THE LENDER AND TRUSTEE THAT THE TRUSTEE'S SALE HAS BEEN CANCELLED.
• If you have trouble getting the lender to tell you the exact amount that will be due on the date you can pay it, there are steps you can take to find out this amount and complain if the lender refuses to give you the information you need.
2. Refinance, if you can qualify for the amount you owe including the past due mortgage payments.
• Contact several mortgage companies to see if you can qualify.
•  It can be difficult or impossible to get refinancing if you are behind on your payments (in default) already.
• DO NOT AGREE TO A SHORT TERM LOAN AT HIGH INTEREST WITH PAYMENTS TOO HIGH FOR YOU TO AFFORD.
•  If you are able to refinance, the arrangements need to be made and documents signed and your lender paid before the date that the Trustee's Sale is scheduled to happen.
3. Sell the home yourself before the date scheduled for the Trustee's Sale.
• If your home will sell for significantly more than you owe, this option can allow you to pay off the mortgage and costs and also get some money you can use to arrange another place to live and pay moving costs.

4. File a Chapter 13 Bankruptcy, if you have enough income to pay your regular payments and also pay your back payments during a period of years.
• IF YOU ARE CONSIDERING THIS OPTION, CONSULT WITH AN ATTORNEY AND HANDLES CHAPTER 13 BANKRUPTCY CASES.
• If you qualify for this type of bankruptcy, the bankruptcy papers need to be filed with the bankruptcy court before the date and time set for the Trustee's Sale.
• IF YOU FILE A BANKRUPTCY THAT POSTPONES THE TRUSTEE'S SALE AND THE BANKRUPTCY CASE IS LATER DISMISSED, THE TRUSTEE'S SALE CAN TAKE PLACE LATER, AND YOU WILL NOT BE ENTITLED TO BE NOTIFIED AGAIN ABOUT THE TRUSTEE'S SALE.
5. If you cannot use any of the options above -- catch up on your payments or refinance or sell the home or qualify for a Chapter 13 bankruptcy-- the lender can proceed with the Trustee's Sale as scheduled.

What can I do after my home is sold at a trustee's sale?

1. Make arrangements to move.
1. After the Trustee's Sale, the home belongs to the lender or whoever bought it at the sale.
2. The new owner has a right to have you move out so they can use the home.