Attorney David Shook

This is the first in a series of guest blog posts from Clarkston-based Attorney David Shook, who has a law practice focused on consumer and small business bankruptcy.

As dad said, you can do that, but be prepared for the results.  Folks are terrified they are going to “loose everything” in a bankruptcy. 

The fact is the Bankruptcy Code allows the debtor to keep assets with no equity or up to a fixed dollar amount, through a process of exemptions.  The vast majority of bankruptcy cases are no asset cases where the debtor loses nothing. 

While the billboards I see proclaiming, “lose the debt, keep your stuff”, are rather extreme, this proclamation is more accurate than the misconception that the bankruptcy court takes all your possessions. 

In spite of the facts, too many people transfer assets to friends and family as the creditors begin to circle; in some cases with bad results. 

The Bankruptcy Code makes the results of transferring an asset very clear. “Transfers made with the intent to hinder defraud or delay creditors,” within one year of filing a bankruptcy is a basis to deny or revoke the discharge of a debtor.  In addition, transfers made in up to 6-years prior to filing the bankruptcy petition, regardless of the intent of the Debtor, may be avoided by a creditor or bankruptcy trustee, and can be liquidated to benefit creditors. 

I tell clients on a regular basis, people do things in the normal course of life that are not an issue, until you file a bankruptcy.  There may be legal defenses, in addition to practical considerations, but the graduation gift of $10,000 five years ago could very well be an issue in today’s bankruptcy filing.

The most extreme result of transferring an asset is rather nasty.  The Debtor’s discharge may be denied, and the person you transfer the asset to may very well be sued.  If the Trustee is successful, the asset is returned to the Estate, and sold for the benefit of the creditors. 

Thus every debt included in the bankruptcy is ruled non-dischargeable in the case, and any future cases.  The brother (or son) is on the bad side of a federal lawsuit, and if the Trustee wins, the Corvette is sold and the proceeds paid to creditors. This is not what I would call a good outcome.

Payments to creditors on legitimate debts may also cause issues in a bankruptcy case. Payments within 90 days to any creditor, or 1 year to “Insiders” (think family, and business associates), called preferences in bankruptcy-speak, may be avoided and used to pay all creditors.  Thus, using your tax refund to pay off the $3,000 loan from your sister, on the eve of bankruptcy, is never a good move. 

To add to the penalty for voluntary preferences, or any other transfer for that matter, normally a debtor can exempt and keep (I will address exemptions in a future post) the same $3,000.00 as part of a bankruptcy proceeding and pay the family after the case has completed.  However, if the same amount is voluntary transferred (vs. garnishment or other creditor action), and then recovered by the Trustee, the Debtor is not allowed an exemption in the recovered asset.     

                   

The issues surrounding the return of preferential payments to the estate are normally much less of concern to a client.  Most Debtors have little concern over the fact any one credit card company is forced to return the $1,000 payment made within 90 days of filing.  However, having to wait 7 months to allow the year to run on the money paid to mom, or any other close family member, can rattle the nerves.

Involuntary transfers (again think garnishment of wages) made within the 90 days may also be recovered, quite possibly to the benefit of the debtor.  In certain circumstances, a bankruptcy will not only force the creditor to stop garnishment, but allow the debtor to recover and keep the amount taken by the creditor.

As with any legal issue, get professional advice from an attorney who practices in your area of concern.  No matter how skilled the practitioner, the web is no substitute for a legal consultation.

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 This post is the original content of the Colorado law firm of Wink & Wink, bankruptcy specialists.  They maintain an excellent law blog with frequent updates on matters of bankruptcy that are as relevant here in Michigan as they are in Colorado.  We hope you find this post as informative as we did!

For many bankruptcy filers, the prospect of the §341 Meeting of Creditors causes some stress and anxiety. It’s normal to be apprehensive about your 341 Meeting, but at the same time it’s nothing to be afraid of because most 341 hearings go quickly and smoothly. As with all other aspects of your bankruptcy case, preparation is the key. So what follows is an overview of the 341 process to ease your worried mind.
What Is A 341 Meeting?

The Meeting of Creditors is described in section 341 of the Bankruptcy Code, hence the name “341 Hearing”. It provides for a United States Trustee to convene and preside at a meeting of creditors and directs the Trustee to “orally examine the debtor” in a Chapter 7 case to make sure they are aware of 1) the consequences of filing for bankruptcy, 2) their ability to file a petition under another chapter, 3) the effect of any discharge of debts and 4) the effect of reaffirming any debt.

What happens in reality is that the bankruptcy trustee reads an advisement and then begins calling cases by debtor name. Once you hear your name called, you and your attorney walk up to the desk or podium and the panel trustee places you under oath, checks your identification and asks you questions on the record about your bankruptcy petition and your financial situation.

In Colorado, where I practice bankruptcy law, you will also hand a completed “Trustee Information Sheet” to the panel trustee along with a bank statement and pay stub that covers the date your case was filed. Additionally, the trustee must already have received a copy of your most recent tax return. As I will discuss below, these requirements alone are enough reason to make sure you are represented by an attorney at your 341 Hearing.

In fact, if you meet with an attorney who does not provide representation at the 341 Hearing as part of their services, you should keep looking. If there is ever a time to have the services of a bankruptcy lawyer, it is when you are answering questions about your case under oath.

Who Is the Bankruptcy Trustee?

In a Chapter 7 bankruptcy, private trustees—or panel trustees—are appointed to administer estates under the supervision of the United States Trustee for their judicial district. That means there is a U.S. Trustee’s office in each judicial district (part of the Department of Justice), and then each U.S. Trustee’s office has a panel of private trustees who do the day-to-day work of administering Chapter 7 cases, which includes presiding at the 341 Hearings.

These panel trustees are usually private bankruptcy attorneys who do the work on a part-time basis. They take a cut of any assets they find in the bankruptcy estate, along with a flat fee for each case they administer.

So, in a Chapter 7 case, you have two levels of trustee involvement: 1) the U.S. Trustee, who is reviewing your case to make sure you qualify for chapter 7 and that your case is not an ‘abusive filing’; and 2) the panel trustee who is looking for assets they can sell to make some money.

What Is the Trustee Looking For?

Because the panel trustee has a financial stake in every Chapter 7 case they see, the 341 Hearing really boils down to one thing: money. The panel trustee is looking to see if you have assets they can liquidate because that is how they get paid. (The panel trustee takes 25% of the first $5,000, 10% of the next $45,000, etc.) Therefore, the questions you are asked are tailored to determine if your estate has any non-exempt assets.

For example, if you own a car, the trustee will want to know how you came to the value the vehicle(s) you listed for the car in your bankruptcy petition. If the trustee thinks the value is too low, they may order an appraisal.

A bankruptcy attorney is invaluable in preparing you for the types of questions you may be asked at the 341 Hearing.  This is because your attorney, in preparing your bankruptcy case, will know what property or interests you have that will be of interest to the trustee and can prepare you accordingly.

What About the Creditors?

Since the 341 is technically called the Meeting of Creditors, you may be wondering where the creditors are in the process. All of your creditors receive notice of your bankruptcy and also the date of your 341 Hearing. However, it is very rare for a creditor to appear at this meeting.

In fact, the only time you usually see creditors at the 341 Hearing is when the creditor is an ex: ex-wife, ex-husband or ex-business partner, someone with an opinion about your bankruptcy or who wants the trustee to know that they think you have some very fancy golf clubs in the garage that you didn’t list on your petition (another reason to have an attorney prepare your bankruptcy case!). In other words, you probably will never see Bank of America at the 341 meeting, they just aren’t emotionally involved and they don’t have the staff or money to send someone to every meeting of creditors when one of their customers files for bankruptcy.

The Role of the Attorney

The 341 Hearing is a perfect example of why having a lawyer prepare your bankruptcy AND represent you at the trustee meeting is essential. If you spend any time at all in the hearing room, listening to other cases as they go before the panel trustee, the benefits are obvious.

Last month, I saw an extreme example of what can happen when you aren’t prepared for or represented at the 341 Hearing. The trustee called the next case and the debtor approached the table, raised his right hand and took an oath. Once he sat down he was shaking and obviously nervous. The trustee asked him a few preliminary questions, checked his identification and then asked him if he had personal knowledge of the contents of his bankruptcy petition. This very basic question threw this guy for a loop. He asked to have the question repeated, and repeated again. And then he turned very, very pale and passed out. It was scary and sad because the poor guy was obviously nervous about his case and his petition and would have benefitted greatly from professional advice and representation. My client actually turned to me and said “Am I ever glad we have a good bankruptcy attorney!”

Fainting at the 341 Hearing is not at all common, but having your case dismissed for failure to provide your tax return to the trustee is, along with having to surrender property (like your tax refund) that you could have kept if you’d had legal advice.

Overall, the 341 Hearing is nothing to be scared of, as long as you are prepared and accompanied by an attorney who has prepped you for the meeting. Most 341’s go quickly and painlessly, especially when your case was properly prepared, you know what to except, and are ready for the specific questions that might come your way.

This is the original post and content of the Wink & Wink bankruptcy law firm of Denver, Colorado.  The topic is timely here in Michigan as many homeowners and divorcing couples, struggle to keep their homes.

Strategic Default. You Walk Away. “Should you walk away from your underwater mortgage?”

These phrases have been reaching fever pitch in the news media lately because of the continuing economic crisis and its huge toll on house values nationwide. The gist of the idea is that if your house is underwater, chances of you ever regaining the equity you have lost are slim to none. However, the media seems to be silent with regard to the risk of deficiency judgment, which often lurks out there like a predator waiting to attack!

The thought of continuing to pay the debt on your mortgage, knowing that your house is now worth much less than the amount you will be struggling to pay for the next few decades, drives people to look for a way out. This is the reason “strategic default”, which occurs when people stop paying the mortgage, even though they can technically afford to keep paying. Because the housing market is in the dumps and appears unlikely to bounce back anytime soon, ‘strategic default’ is becoming more and more common. So common, in fact, that it has been linked to the recent uptick in consumer spending.

The decision to walk away is definitely a way out from underneath that mortgage. But it does not come without a cost. This is because when you walk away, you aren’t simply leaving the debt behind. Oh, No. In most cases the debt is likely still following you, stalking you. Waiting to pounce. Walking away from your mortgage has consequences in most states, such as Colorado, and they go by the name of a deficiency judgment.

What Is A Deficiency Judgment?

When you take out a mortgage, or two, you are liable on the note or deed for that debt in the amount your contract states. When you stop paying your mortgage (either strategically or because you can no longer keep up with the payments) the end result in most cases is a foreclosure sale of the property. At that foreclosure sale, the property is sold, usually at a loss.

If the property is sold for less than you agreed to pay on the mortgage, you are still liable for the difference—the deficiency—between what you agreed to pay by contract and what the lender received through the foreclosure sale. So, if your mortgage is for $300,000 and the property sells at foreclosure for $250,000, you are still liable for the $50,000 your lender is still owed under your mortgage contract.

When you have two mortgages, a first and a second, what often happens is that the first lender often “bids the note” at the foreclosure sale, which means they purchase the property for the same amount as the note. This means there is no deficiency as to the first mortgage. However, it also leaves the second mortgage lender unfulfilled, and holding a claim against you for the entire amount of the second mortgage. (Don’t forget that all these amounts generally increase as a result of the fees and charges that get tacked on as a result of the foreclosure process. They never miss an opportunity to lop on some fees!)

A deficiency judgment is what happens when one of the lenders to which you owe a deficiency decides to sue you to collect on that amount. After the lawsuit, the amount gets converted into a judgment against you, a deficiency judgment. And in Colorado, where I practice bankruptcy law, the holder of a deficiency judgment can garnish your wages – 25% of your wages, to be exact. That is not a risk to be taken lightly.

How Likely Is A Deficiency Judgment?

You may be thinking “but I haven’t heard of anyone getting sued for a deficiency judgment.” And at this point in time, this is mostly true. But this is changing, see “Lenders Pursue Mortgage Payoffs Long After Owners Default”.  The predators (eh..I mean creditors) are getting hungry!

What is very likely to happen with the huge amounts of deficiency claims lenders are sitting, and that will continue to pile up as the foreclosure rates soar (yes, foreclosures are still spiking, we are far from out of the woods yet) is that lenders will begin to package these debts and sell them to third-party collection agencies, just like the credit card companies. When that starts happening, everyone who though they got out Scott-Free will have to face a painful reality. And they have plenty of time to wait to nail you, too.

In Colorado, they have Six years to wait before they sue you. Six years to sit back and wait to get there ducks in a row, maybe even wait for you to start earning more money, and then Whammo! You’re served a Summons to appear in court and you end up with your wages garnished or your bank account seized to satisfy the judgment.

Bankruptcy Can Shut the Door on a Deficiency Judgment

Bankruptcy generally removes your liability to repay the note on your home. So, whether you file for bankruptcy before or after foreclosure, the lender cannot pursue a deficiency judgment against you. If you file after the deficiency judgment is secured, the bankruptcy can still wipe out your liability for the judgment. It can even stop the garnishment if the lender has proceeded to that level.

All of this means that you should consult a bankruptcy attorney if you are considering defaulting on your mortgage.

For most other people, stopping mortgage payments on an underwater home is not a choice. It is something that the current economic situation has forced them into, and the idea of bankruptcy is likely part of the mix, along with rising credit card debt and stress levels.

However, for the true “Strategic Default”, where the decision to stop paying the mortgage is made even though the money to pay the mortgage is there, bankruptcy is usually the last thing on the radar. Most in this position look at the default as a business decision. They made an investment, it went belly-up, and they are cutting their losses. However, even “strategic” defaulters should take the time to understand their rights.

Bankruptcy can not only shut the door on a possible deficiency judgment, enabling you to move forward without worrying about what lurks behind, it can help you rebuild your credit faster. Think about it – if you walk away from the mortgage without filing for bankruptcy your credit takes a hit (foreclosures stay on your credit report for 7 years) AND you still may be liable for the deficiency, just when you are getting back on your feet and have regained your credit score. If you file for bankruptcy, you get rid of any chance of a deficiency judgment, wipe out any other dischargeable debt you’re struggling with, and start rebuilding your credit from day one.

Additionally, if you plan it correctly you can live in your house rent free until the foreclosure, which in Colorado usually means 8-12 months.

The bottom line is to be prepared, have a plan and explore your options. Walking away without knowing the risks exposes you to what I like to call the stalking predatory of the deficiency judgment. It’s only a matter of time before these debts start being sold to collection agencies, and with those creditors – you need to watch your back!

info@clarkstonlegal.com
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