Property Taxes in Bankruptcy

      I wrote a post a few months ago on Property taxes is bankruptcy because we argued the case and the decision had yet to come down. Well, a couple of weeks after that post was written we the judge issued his opinion and the decision was split, partially granted and partially denied. 

      First, we won on the issue that "penalities" are not "fees, costs, or charges" that could be allowed for the secured creditor.  Therefore, a debtor's delinquent property taxes would be charged a 12% interest rate and not an 18% interest rate; moreover, the secured claim would only grow at 12% and not 18%.  One part of the decision the judge added in, and it was not argued by us nor the Metro Trustee's office, but was argued in the Chapter 13 Trustee's brief.  That issue was the fact that since, in this case, the debtor was solvent the Metro Trustee's office should be allowed an unsecured claim of the 6% penalty, but only from the date of filing to the date of the confirmation order. 

When Can Someone File Bankruptcy Again?

       A common question we receive is: "I filed bankruptcy [x] years ago, does that affect me?"   Section 727 of the Bankruptcy Code lists the amount of time that a person must wait if he has received a bankruptcy discharge.  The following are the amounts of years that must be between the filing dates of the bankruptcy cases and their respective Chapters:

                                     Between Chapter 7 and Chapter 7:   8 Years
                                     Between Chapter 7 and Chapter 13:  4 Years
                                     Between Chapter 13 and Chapter 7:  6 Years
                                     Between Chapter 13 and Chapter 13: 2 Years

       The six year requirement between a Chapter 13 and a Chapter 7 has two exceptions: (1) the debtor paid all "allowed unsecured" claims in the earlier case in full, or (2) the debtor made payments under the plan in the earlier case totaling at least 70 percent of the allowed unsecured claims and the debtor's plan was proposed in good faith and the payments represented the debtor's best effort.

New York Law Firm Likely to File Bankruptcy

       New York law Firm Dewey & LeBoeuf seems it is on the track to filing a Chapter 11 bankruptcy.  My first thought when seeing this headline was, "Why does a law firm have any debt at all in the first place?"  Answer #1: Many times as a firm grows, the next step to becoming a "big firm" is to purchase real estate and own its office rather than being a "mere tenant." The problem with this line of traditional thought is once the firm purchases real estate, it is no longer a law firm.  It is now a landlord, developer, and investor.  I understand the benefits of a firm purchasing real estate, and in many cases it is a good choice. Earn equity instead of paying rent.  The problem comes when the business uses debt to purchase the real estate.  I like to follow Dave Ramsey's advice of paying cash for everything, especially in business. 

       Answer #2: Another reason a law firm takes on debt is to fund a large case.  Many clients have great winnable lucrative cases but not the cash to fund one.  Therefore, it becomes the lawyer to fund the case and then take his fee through the winnings.  The problem here is (1) if you lose, you get lots of debt and no money to pay for it; (2) the winnings do not turn out to be that big; or (3) you win but the defendant has no assets for you to take.  If that were the case with Dewey & LeBoeuf, again what I cannot wrap my head around is why get debt? Dewey & LeBoeuf had over 300 partners and 500 employees. A firm that large should be able to handle litigation costs on a contingent fee case.  According to the following attached article, the firm had bondholders, which means the debt is more likely tied to litigation than real estate (my best guest). 

       More Dave Ramsey advice for businesses in general: if you are taking on a project, joint venture, expansion, etc., think about the risks and ask yourself, "If everything in this project were to fail would that bankrupt the business?"  If the answer is "yes", then do not take on such a project. 

For more on this likely Bankruptcy:

http://finance.yahoo.com/news/dewey-consider-bankruptcy-filing-source-030341955.html

The Automatic Stay and Creditor Harassment on Surrendered Property

       One of the most important and influential aspects of Bankruptcy is the Automatic Stay.  The Automatic Stay is just that, automatic.  As soon as the bankruptcy petition is filed, all of a debtor’s creditors are stayed (prohibited) from making any attempts whatsoever to take any property, money, income, etc., from the debtor.  This means that all lawsuits, phone calls, repossessions, foreclosure proceedings, EVERYTHING must immediately stop otherwise the debtor can receive money damages from the creditor for a stay violation. 

        Now just focusing only on Chapter 13 cases, a creditor does have the right to ask the court for permission to be relieved from the stay (Motion for Relief from Stay), for instance, in order to repossess a car that the debtor is not paying for or is uninsured.  Furthermore, many times in a bankruptcy a debtor will voluntarily surrender a car or home to the creditor. When this happens, the creditor usually does not need permission from the court to recover the collateral, as such permission is typically included in a confirmation order.  Here is an example from an actual order:  “The plan surrenders the debtors interest in collateral to the creditors listed below. The automatic stay has been lifted to allow these creditors to repossess the collateral upon which they have liens.”  Well when the stay is lifted, does that mean the creditor can begin harassing the debtor again?  As counsel for debtors, we say no; however, there are creditors who say yes!  While in my research I have yet to find a case that addresses this particular issue, I found many cases that are analogous. 

       For example, a reaffirmation agreement is a voluntary agreement between a debtor and creditor that allows a debt to be exempt from discharge and remain in effect after the bankruptcy (This is done for debtors who wish to keep cars or houses).  It has been held by many bankruptcy courts that a creditor can contact debtors about such an agreement since both parties have this right. However, litigation soon followed because the creditor was trying to harass the debtor into such an agreement.  Courts have held that while a creditor is allowed to contact the debtor for this purpose, the creditor cannot do so through harassment, threats, or coercion, as this defeats the purpose of the Bankruptcy Code protections.

       Usually, when property is being surrendered, the discourse between the creditor and debtor is tranquil and they arrange a time for the surrendered car to be picked up or a time limit for the debtor to move out of a house.  There is currently a case going on right now where the debtors moved out of their house, which was surrendered, two years prior but are still getting harassing and threatening phone calls about transferring the property.  Though the stay had been lifted, the debtors are contending that like reaffirmation agreements, surrenders cannot be coercive.  It will be interesting to see how the case turns out.

QWR: Qualified Written Request

Practice Tip for practicing Bankruptcy attorneys:  Qualified Written Request (QWR). 

      One thing we do at Nevin Law Firm is send out a QWR for any bankruptcy client who has a mortgage.  What is a QWR? Glad you asked.  A qualified written request gets its name from RESPA, the Real Estate Settlement Procedures Act.  This act, and Section 6 dealing with a QWR, was put in place to give borrowers of a mortgage a dispute resolution mechanism.  As most of us know, it is really hard to deal with large institutions such as a bank.  Always receive a recording, voicemail, put on hold, or told you called the wrong department.  Well a QWR was Congress's giving borrowers a weapon to combat this type of customer service when a borrower has a legitimate concern regarding his mortgage. Specifically, the QWR is for when a borrower is concerned that an error has occurred in calculating how much money is owed.  RESPA requires that when a QWR is received by a mortgage lender, the lender must send an acknowledgement of receipt within 5 days and answer or correct any alleged miscalucaltions and provide any requested information within 30 days (as modified by the Dodd-Frank Act).  If the bank fails to abide by these deadlines then a borrower is allowed actual damages, statutory damages (not to exceed $1,000), and attorney fees.  The bank, however, is allowed to give the borrower notice that they are extending the time to respond by up to 15 days so long as in the notice the provide reason for the delay. 

       Now, there are specific requirements of what makes a letter a QWR and just a letter.  The letter must state that it is a Qualified Written Request, state that the bank must abide by the requirements of RESPA, be mailed to the actual servicer (not servicer's attorney), and allege errors, omissions, of defects occurred in calculating payments, fees, costs, charges, notice, etc. (These requirements are not an exhaustive list). This is a great tool for attorneys because it does a number of things: (1) if it goes unanswered you get fees; (2) forces the bank to provide you with mortgage documentation so you can look for errors; and (3) allows you to dispute any differences made on a proof of claim filed by the servicer in the bankruptcy case. 

      Major Caveat!! A couple things you need to be careful about.  QWRs are not to be used as a "fishing expedition" and doing so can have the potential to adversely affect a client.  A Deed of Trust may have a provision that in a dispute the borrower is responsible for legal fees.  In such a case, if used as a "fishing expedition" and there is no actual specific error alleged, you may have added a few hundred more dollars to the balance of your clients mortgage.
 

      Before sending out your own QWR and taking action to recover damages and fees if no response is given, be sure to read section 6 of RESPA and research the caselaw as this article only scratches the surface.