Sacramento Bankruptcy Lawyer Blog

The loan modification failure rate was 24% in 2 months as reported by the United States Office of Thrift Supervision in June 2009. Within 6 months after modification 24% of the mortgages that had monthly payments reduced by 20 percent or more were 60 or more days past due versus 54% of mortgages with monthly payments if no loan modification.

These statistics give insight on landlord and tenant defaults in the economic climate. Filing a bankruptcy petition is as an automatic stay of acts to begin or continue legal proceedings against the debtor. Consult with a bankruptcy attorney for help.

The tenant's bankruptcy trustee in Chapter 7, or the debtor in Chapter 11 or 13, may assume or reject a lease, subject to bankruptcy court approval. United Sates Bankruptcy Code, 365(a). If the lease is rejected it terminates, and the landlord has a general unsecured claim for damages for breach of the agreement. If a landlord files bankruptcy and rejects a lease, the tenant may continue in possession for the lease term and pay rent. United Sates Bankruptcy Code 365(h)(1)(A).

In California, after proper notice to the tenant, a landlord may terminate tenancy before the end of the term: (a) when the tenant gives up the premises; (b) when the premises are used for an unlawful purpose or in a way contrary to the lease agreement; (c) when the tenant permits or commits waste; or (d) for the failure to pay rent or perform other financial obligations. Code of Civil Procedure Sections 1161 et seq.

Though, the landlord may not terminate a lease for minor tenant defaults, a landlord may recover possession from a tenant by ejectment, unlawful detainer, or summary proceeding to recover possession. Unlawful detainer provides special procedures for a speedy recovery of possession by the landlord. The landlord commences the unlawful detainer proceeding by serving the tenant with a three-day notice to pay rent or quit. If rent is not timely received, the landlord files the unlawful detainer action, and the tenant must respond to the complaint within a shortened five-day period.

For breach by a landlord, a tenant except in the situation of a residential property that is deemed uninhabitable because of health or building code violations, has limited rights to an expedited proceeding, similar to an unlawful detainer, and must file a civil action against the landlord. A tenant is prohibited from withholding rent to offset against the damages caused by the landlord. Should a tenant withhold rent, the tenant would be subject to an unlawful detainer proceeding.

Find a Sacramento bankruptcy attorney for proper counseling on contract matters when facing bankruptcy.

After someone files a Chapter 7 or a Chapter 13 bankruptcy, the person will be required to attend a brief hearing called a Section 341 Meeting of Creditors. Bankruptcy professionals refer to this hearing as a "341 hearing." Consult with a bankruptcy attorney for help.

The 341 hearing is held between 30 and 45 days after a debtor files and it will last about 5 to 10 minutes. At the hearing, the trustee asks a series of questions on any updates to the debtor's petition, such as whether the debtor has lost his job, whether he has filed any lawsuits, whether he has married. The trustee will ask the debtor to raise his/her right hand and take an oath stating that what he/she are about to say is the truth, the whole truth, and nothing but the truth under the penalty of perjury. Failing to tell the truth is a criminal offense. Perjury is investigated and prosecuted by the FBI and the U.S. Attorney. If the debtor does not speak English, he/she should make arrangements for a translator ahead of time.

At the hearing, the debtor has to bring a social security card and photo ID to prove that he/she is the debtor and that his/her information matches what is on the petition. If the person forgets to bring the identification, he/she may be required to return in person with the information.

The hearing is recorded. Nothing final happens at the 341 hearing. Sometimes, there maybe missing information requested from the trustee, such as a review of tax filings or proof on wages earned. The debtor is required to read an information sheet on bankruptcy proceedings, and given instructions on a required education course on finances.

After the 341 hearing, the trustee determines whether there are assets that may be liquidated to pay the debtor's creditors. If there are assets to be liquidated to pay creditors, the creditors are paid based upon their priority established by the Bankruptcy Code on a pro rata basis. If there are no assets, the trustee files what is called a "no asset report" and no creditors receive payments.

Find a bankruptcy attorney who will be an ally in counseling on bankruptcy proceedings to make the process less intimidating.

Home sales in Contra Costa County rose in September to 1,607, up from 1,587 sold in August. Among the factors contributing to the increase is the Federal Income Tax Credit for first-time homebuyers, which is set to expire at the end of November.

Under the American Recovery and Reinvestment Act of 2009, a first-time home buyer purchasing a new home will receive a tax credit of 10% of the home's purchase price, up to a maximum credit of $8,000. The credit does not have to be repaid. Single taxpayers who make less than $75,000 per year or married taxpayers who make less than $150,000 per year qualify for the full credit. Although under the Act the credit will no longer apply to purchases after November 30, Congress is considering an extension. Furthermore, California is considering re-funding a $10,000 state tax credit for first time buyers, which had been available until the fund ran out of money in July.

These tax credits have helped combat the steady, but slowing, stream of foreclosures. As banks are encouraged by the presence of more buyers on the market, they are more willing to allow struggling homeowners some more time to find a buyer as opposed to going through the expensive foreclosure process.

One option banks have turned to is a short sale. In a short sale, the lender agrees to accept less than the mortgage principal in satisfaction of the mortgage if the borrower sells the home. If the federal and state governments continue tax credits for first time buyers, then short sales will likely grow in popularity amongst homeowners looking to avoid foreclosure.

The figures for the three months ending on September 30 reveal a 37% drop in the number of foreclosures from the same period a year ago. Last year, California foreclosures were at an all-time high. The worst may be over in large part due to a different approach taken by banks.

Unemployment rates persist and a substantial number of homes with adjustable-rate mortgages still have yet to reset their rates, so plenty of homes remain at risk. In fact, the rate of mortgage payment defaults, the first step toward foreclosure, has increased at the same time foreclosures have dropped.

Now, instead of automatically foreclosing, banks are more patient with borrowers. One reason is that they recognize that flooding the market with foreclosures leads to a drop in housing prices, further lowering their assets and leading to more foreclosures. Also, the federal government's $700-billion Troubled Asset Relief Program bought some influence over banks, and the government has pressured lenders to deal more flexibly with borrowers. If lenders anger the government, Congress may revive bills supporting the "cramdown" provision in bankruptcy, which would allow debtors to rewrite the principal on underwater mortgages.

Thus, the banks have every incentive to work with borrowers to abate foreclosures. Borrowers may be well-advised to contact their lender soon while banks remain flexible. Because negotiating with banks can be tricky and time-consuming, borrowers may consider contacting an attorney with experience negotiating loan modifications. An attorney can help borrowers understand their options and how to negotiate with banks.

As foreclosure attorneys, it is observed that after July 1, 2009, it became illegal to act as a Foreclosure Consultant in the State of California unless a person is registered with the Attorney General as required by California Civil Code section 2945.45.

There is the $850 filing fee, application, and a copy of the contract the potential foreclosure consultant will use with its clients, the potential foreclosure consultant must be bonded at a minimum of $100,000.00 and register that bond with the California Secretary of State. Items are submitted to:

Foreclosure Consultant Registration Program
California Attorney General's Office
Consumer Law Section
300 South Spring Street, Suite 1702
Los Angeles, CA 90013

Contact the Secretary of State to obtain the necessary bond forms:

Secretary of State
Special Filings Unit
1500 11th Street
Sacramento, CA 95814

What is a "foreclosure consultant" as defined by California Law?
(California Civil Code 2945.1, "Mortgage Foreclosure Consultant Law")

The following definitions apply: (a) "Foreclosure consultant" means any person who makes any solicitation, representation, or offer to any owner to perform for pay or who, for pay, performs any service which the person represents will do any of the following: (1) Stop or postpone the foreclosure sale. (2) Obtain any forbearance from any beneficiary or mortgagee. (3) Assist the owner to exercise the right of reinstatement provided in Section 2924c. (4) Obtain any extension of the period within which the owner may reinstate an obligation. (5) Obtain any waiver of an acceleration clause contained in any promissory note or contract secured by a deed of trust or mortgage on a residence in foreclosure or contained in a deed of trust or mortgage. (6) Assist the owner to obtain a loan or advance of funds. (7) Avoid or ameliorate the impairment of the owner's credit resulting from the recording of a notice of default or the conduct of a foreclosure sale. (8) Save the owner's residence from foreclosure. (9) Assist the owner in obtaining from the beneficiary, mortgagee, trustee under a power of sale, or counsel for the beneficiary, mortgagee, or trustee, the remaining proceeds from the foreclosure sale of the owner's residence.

Find a foreclosure attorney who is an ally and advisor when dealing with foreclosure matters.

After Congress passed bankruptcy reform in 2005, many people wrongly believed that they could no longer file bankruptcy. While it did impose barriers for some people, the reform included a significant provision that enables many people to file bankruptcy much as they would have before the law change.

The reformed laws included a safe harbor provision that allows most low-income debtors a clear path to Chapter 7 relief. The safe harbor exempts low-income debtors from the possibility of having their Chapter 7 filings dismissed on the basis of the means test, which is a formula in the Bankruptcy Code that determines debtors' ability to repay based on past income and expenses. Under 11 U.S.C. § 707(b)(7), if a debtor makes less than the state median family income, then he or she may not have their case converted to a Chapter 13 repayment plan based on the means test. In Sacramento, the median for a four-person family in 2008 was $60,162. Preliminary data indicates that less than 5% of those who seek relief under Chapter 7 are excluded by the means test.

Despite the safe harbor, a debtor still must submit the same financial disclosure forms upon filing bankruptcy because the case is still subject to review by the court and the United States Trustee. Bankruptcy is a complicated process, and it is important to discuss the option with a local bankruptcy attorney before proceeding.

A Roseville real estate developer who owns six Jack in the Box restaurants in Sacramento filed for bankruptcy protection a few weeks ago. The filing highlights the importance of the Chapter 11 option.

Abe Alizadeh, who owns 70 Jack in the Box restaurants in Northern California, owes millions of dollars to the state, insurance companies, utilities, and the Jack in the Box corporation. His financial trouble caused the sudden closure of his restaurants, leaving 2100 employees and many more would-be customers stranded. After filing a Chapter 11 petition the next day in U.S. Bankruptcy Court for the Eastern District of California, the restaurants reopened.

Without protection under Chapter 11, Alizadeh's creditors could have initiated proceedings that would have caused the long-term closure of the restaurants. Under Chapter 11, Alizadeh's creditors will have to be patient. Alizadeh will have an opportunity to operate his businesses, pay his employees, and continue a relationship with his clientele.

Last week, Congresswoman Doris Matsui (D - Sacramento) announced her support for a public option in pending health care legislation. "I want to make sure no family in Sacramento risks bankruptcy just because a loved one gets sick," Matsui said. "Right now, 100,000 people in this community are uninsured."

A serious illness can burden an uninsured family with tens and hundreds of thousands of dollars in hospital bills. With no ability to repay debt of that magnitude, bankruptcy becomes the only option. By extending coverage, health care reform is designed to prevent bankruptcies brought on by no fault of the sick.

Moreover, when bankruptcy discharges hospital bills, taxpayers pick up the bills. Thus, when any of the 100,000 uninsured in Sacramento visits a county hospital for emergency treatment, Sacramento's citizens often pay for the care.
Until health care reform passes, if you have incurred hospital bills that go beyond your ability to repay, you may benefit from speaking with a Sacramento bankruptcy attorney.

To update observations on the housing market and foreclosures, on October 8 2009, the Senate Banking Committee held a hearing "Future of the Mortgage Market and the Housing Enterprises" to talk about the state of the mortgage market, changing regulations, the future of Fannie Mae and Freddie, the Federal Housing Finance Agency. The federal government is supplying over $1 trillion to the mortgage market.

Chairman Christopher Dodd (D-CT) outlined goals for the mortgage market and housing enterprises: (1) the mortgage market must remain liquid and stable; (2) encourage product standardization and widespread availability of 30 year fixed rate mortgages without prepay penalties; (3) mortgage credit must remain available, accessible, sustainable.

Testifying at the hearing were: Edward J. DeMarco , Acting Director for the Federal Housing Finance Agency; William Shear, Director, Financial Markets and Community Investment, U.S. Government Accountability Office; Andrew Jakabovics, Associate Director for Housing and Economics, Center for American Progress Action Fund; Susan M. Wachter, Worley Professor of Financial Management, Wharton School of Business, University of Pennsylvania;
Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute.

Meanwhile, also on October 8, 2009, the House Financial Services Committee's Subcommittee on Housing and Community Opportunity held a hearing entitled, "The Future of the Federal Housing Administration's (FHA) Capital Reserves: Assumptions, Predictions and Implications for Homebuyers." Due to a decline in long-term interest rates and the tax credit for first-time homebuyers, housing prices are stabilizing nationally. The tax credit stimulated demand, with about 1.6 million of the 3.9 million homes sold through mid-September 2009 to first-time homebuyers.

Subcommittee Chair Maxine Waters (D-CA) expressed that the FHA has emerged as an alternative to the sub-prime mortgage market. FHA recently announced its capital reserve ratio is predicted to decrease below the congressionally mandated threshold of two percent. Presumably, the FHA expects higher net losses than previously estimated on outstanding loan guarantees, over the next thirty years and more than currently reserved in the financing account.

Testimony at this Committee came from: David Stevens, Assistant Secretary for Housing and Federal Housing Administration (FHA) Commissioner, U.S. Department of Housing and Urban Development; Patrick Newport, U.S. Economist, IHS Global Insight; Edward Pinto, Real Estate Financial Services Consultant; Boyd Campbell, Member, Executive Board of the Maryland Association of Realtors, GSE Presidential Advisory Group, National Association of Realtors (NAR); David Kittle, Chairman, Mortgage Bankers Association (MBA); John L. Councilman, CMC, CRMS, Federal Housing Committee Chair, National Association of Mortgage Brokers (NAMB); Peter Bell, President, National Reverse Mortgage Lenders Association (NRMLA); Teresa Bryce, President, Radian Guaranty Inc., Mortgage Insurance Companies of America.

As a follow up to discussions on identity theft on October 12, 2009, ABC News reports a lawsuit filed in Illinois charging four teens with defamation, intentional infliction of emotional distress for impersonating an Illinois mother's teenage son. The lawsuit, filed in the Circuit Court of Cook County, Illinois alleges that the four teens created a fake profile page impersonating the plaintiff that included racist and explicitly sexual comments. The mother claims that the false profile could ruin her child's reputation and force him to face the lifelong consequences of a negative online image.

Facebook took the appropriate steps to resolve the incident, but there does not appear to be any laws compelling websites to take down such false profiles. In fact, there is a debate between copyright ownership of the posters for the content and the issues of defamation and identity theft on the part of the person or subject discussed.

Given the growth of social media, there is bound to be an increase in the number of incidences like the one faced by the Illinois mother. At the same time, hacker leaks on web email accounts continues to grow. More than 10,000 user names and passwords from Hotmail were posted by an anonymous user on the site pastebin.com. Affected companies believed that the breaches occurred because of phishing attacks.

Some pointers on preventing identity theft while using social networks and web email accounts include:

1. Use email services that are less likely targeted by spammers and phishers. For instance, Laszlomail may be less targeted that Gmail and Hotmail when it comes to virus attacks and bulk messages.
2. Change passwords in email accounts often, perhaps once/month.
3. Use non-obvious passwords. Avoid "password" for example.
4. Download Google Toolbar, which has a warning feature for users when they are visiting sites that have been reported as phishing.
5. Be wary when job searching not to put personally identifiable information on the Internet, such as date of birth or home address. These days, most employers communicate by email so there is little need to put postal addresses in resumes.
6. Use a PO Box instead of a home address on checks.
7. Do not give out home telephone numbers which can be traced to a resident address. There are online services for free temporary telephone numbers.

On October 11, Governor Schwarzenegger signed seven new laws that provide additional consumer protections to home-mortgage holders.

Among the new laws, Assembly Bill (AB) 260 bans negative amortization loans (often referred to as "NegAm" or "pay option loans"). NegAm loans have minimum payments so low that they do not cover even interest costs, so with each minimum payment the homeowner's balance rises.

AB 260 also imposes a fiduciary duty on mortgage brokers that requires them to put borrowers' financial interests above their own when making loans. This provision should curb many of the worst subprime loans that many homeowners are still stuck with.
The new law goes into effect on January 1, 2010, so it does not affect the thousands of currently struggling Sacramento-area homeowners. Many of these homeowners could benefit from a Sacramento attorney who specializes in loan modifications. An attorney can help negotiate more affordable payment terms, including a better interest rate, repayment options for late payments, and lower the principal balance.

In Sacramento on Thursday, Attorney General Edmund G. Brown Jr. warned California homeowners to avoid a scam that has grown widespread over the past few years as foreclosures have spiked.

Unscrupulous loan modification consultants exploit homeowners' desperation to stay in their homes. Though they would be better served speaking to an attorney about a loan modification or bankruptcy, homeowners are enchanted by consultants' promises, which end up being too good to be true. Consultants attract homeowners with promises of being able to save their homes. These consultants ask for money upfront, mortgage payments to be paid to them, or for the homeowner to transfer title to them. Thinking that the consultants are taking care of the bank, the homeowner ignores the bank notices and doesn't realize that the consultant has taken their money and not fixed anything until it's too late.

Brown's office has fielded over 2500 complaints in 2009 against loan modification consultants. In response, in August Brown ordered 386 mortgage foreclosure consultants to register with the Attorney General and post a $100,000 bonds. Still, the problem persists and Brown issued some specific warnings for consumers:

-Don't pay up-front fees. Foreclosure consultants are prohibited by law from collecting money before services are performed.
-Don't ignore letters from your lender or loan servicer. Responding to those letters is your best bet for saving your house.
-Don't transfer title or sell your house to a "foreclosure rescuer." Beware! This is a scam to convince homeowners they can stay in the home as renters and buy their home back later. It might also be part of a fraudulent bankruptcy filing. Either way, a scammer can then evict the victim and take the home.
-Don't pay your mortgage payments to anyone other than your lender or loan servicer. Mortgage consultants often keep the money for themselves.
-Never sign any documents without reading them first. Many homeowners think they are signing documents for a loan modification or for a new loan to pay off the mortgage they are behind on. Later, they discover that they actually transferred ownership of their home to someone who is now trying to evict them.
-If someone demands an upfront fee for foreclosure assistance services, you can report them to the Atttorney General's office at 1-800-952-5225, or file a complaint online at: www.ag.ca.gov/consumers/general.php

According to ForeclosureRadar.com and the Sacramento Business Journal, there was substantial drop in foreclosures in the Sacramento area from the previous year. In 2008, the four-county Sacramento region, there were 1865 foreclosures. This year, there were 1119. These numbers do not include foreclosed homes resold to buyers.

The figures indicate that the Sacramento area may be facing downward trend of foreclosed homes hitting the housing market. Such a trend is important for rehabilitating housing prices, as fewer homes on the market raises the demand for homes not in foreclosure.

These numbers may also reflect a couple of other positive trends: the growing number of homeowners who are proactively exploring their options outside of foreclosure and banks which are more willing to negotiate alternative arrangements to foreclosure. These options include loan modifications under the Obama Rescue Plan and short sales. If you would like to speak with an expert on these options, contact a Sacramento-area attorney, who has significant experience working with banks on behalf of homeowners.

When considering bankruptcy as an option, consumers often ask what bankruptcy will do to their credit scores. While the effect will certainly be negative, no one can predict how much a consumer's FICO score will drop. The Fair Isaac Corporation has never released its FICO formula and has only provided general parameters to what goes into its calculation.

Dayana Yochim explains in an article about credit score the breakdown of FICO components: Payment History 35%, Credit Utilization 30%, Length of Credit History 15%, Types of Credit Used 10%, and Recent Credit Searches and Recent Usage 10%. There are other factors of indeterminable effect such as court judgments, multiple consumer finance accounts, and tax liens.

Much of the fear and worry that credit scores generate among consumers derives from the mystery that shrouds how they operate. Too often, this fear causes consumers to avoid bankruptcy even when it is a sensible option. Consumers fret about bankruptcy's effect on their credit scores even as they lack enough money to cover the essentials - a roof, food, and transportation. As a result, they dig themselves deeper and prolong the inevitable.

If you would like to discuss your credit score and how bankruptcy may affect you, please contact a bankruptcy attorney.

Continue reading "Formula for FICO Score a Closely-Guarded Secret" »

Health care reform will have wide-ranging effects on the entire economy. One potential area ripe for transformation is the disturbing upward trend of medical bankruptcies.
According to an article in the American Journal of Medicine in 2007, 62 percent of bankruptcies involved medical expenses. The share of bankruptcies attributable to medical problems rose by 50% from 2001 to 2007. Eighty percent of filers had medical insurance, and their average debt upon filing was $18,000. Those without medical insurance had an average medical debt of $27,000. And these figures are sure to have worsened over the last two years.

The prime culprits are the astronomical cost of medical care and the paltry coverage insurance provides. Frequently, procedures covered substantially by medical insurance still leave an out-of-pocket obligation of thousands of dollars. Those without insurance may face bills that are many times more. Sometimes, the sick can no longer work, leaving them unable to cope with even modest debt. Most middle class families have little room in their budgets and insufficient savings to absorb sudden, unexpected four or five-figure medical bills. Thus, a solvent household can turn insolvent, with bankruptcy as the only solution.

Hopefully, health care reform will alleviate this runaway trend of rising medical debt and medical bankruptcies.

Continue reading "Upward trend in medical bankruptcy" »

Sometimes debtors may be able to negotiate with their creditors to decrease their debts. Elisabeth Leamy, an ABC News Consumer Correspondent wrote in January 2009 that if someone is in the brink of bankruptcy, he/she might want to approach any credit card companies and ask to pay off less than the full amount. According to Leamy, some banks have forgiven up to 70 percent of a consumer's debt. Banks fear that the economic climate is only going to get worse so they're taking what they can.

Whenever debt is cancelled, the debtor should review whether there is a loss deduction to use to offset it so that the debtor does not come out with a gain or income to report for taxes.

As a general rule, when a debt is cancelled, the debtor recognizes cancellation of debt income, except in the following situations:

1. The discharge occurs in a Title 11 bankruptcy case. The debtor is under the jurisdiction of the bankruptcy court and the discharge is granted by the court or under a court approved plan approved.
2. The discharge occurs when the debtor is insolvent, with insolvency determination based on the amount of liabilities and the value of the assets immediately before the discharge.
3. The debt discharged is qualified farm indebtedness, meaning debt incurred directly in the operation of a farm.
4. If other than a C corporation, the indebtedness discharged is qualified real property indebtedness, meaning debt incurred or assumed after 1992 to acquire, construct, or substantially improve real property used in a trade or business that is discharged after 2006 and before 2013. The exclusion is available for debt secured by a principal residence and if the discharge relates to a decline in the value of the residence or to the financial condition of the taxpayer.

Cancellation of debt income reduces tax attributes in:

1. Net operating loss carryovers;
2. General business credits;
3. Minimum tax credits;
4. Capital loss carryovers;
5. Basis of depreciable property;
6. Passive activity loss and credit carryovers; and
7. Foreign tax credit carryovers.

What are private mortgages? Private mortgages are mortgage loans, which are funded by a private individual, trusts, partnerships, real estate investment groups and retirement funds. There are so many institutions these days that some brokers are using YouTube videos to promote their services.

Private money mortgages are sometimes called a hard money loan. The private lending is not offered by banks or commercial companies. Consumers who think private lending might be lucrative, witnessing rising foreclosures, should take care to read the loan serving agreement. According to Mortgage Loan Broker Compliance Evaluation Manual published by the Department of Real Estate, July 2008, section 8, article 5, item 6, servicing agreements must satisfy the requirements of the Business and Professions Code section 10238(k)(1), (2), (4) and (5).

The lender should review payment transactions with the broker to prevent the broker obtaining any unauthorized interests in the real estate. Business and Professions Code section 10238(k)(2) states that a broker that transmits its own funds to cover payments due from the borrower but unpaid as a result of a dishonored check may recover the advances when the past due payment is received, but the broker is not authorized to engage in the practice of advancing payments on behalf of the borrower.

The lender should investigate the integrity of the broker. In California, the broker must comply with the Business and Professions Code. The broker has no excuse on what the code contains because the code provisions are part of his/her license exam test. If he/she does not remember a provision in the code, he/she has an obligation to review the code to find the answer.

For example, if the broker withholds the deed of trust from recording, it is a violation of Business and Professions Code section 10141.5, which states "the broker in which real property is conveyed from a seller to a purchaser and a deed of trust secured by real property is executed, such broker shall cause such deed of trust to be recorded" within a week after the closing of the transaction, unless written instructions not to record are received from the beneficiary. There are no exceptions allowing for the withholding of the deed of trust from recording when a broker is not paid fees.

What is a preferential transfer? Investors who withdrew money from Bernard L. Madoff Investment Securities, Inc. before the discovery of the massive alleged fraud may find themselves on the hook as the bankruptcy trustee pursues claims for the return of profits. Federal bankruptcy law allows a debtor to recover certain payments or "preferential transfers" that were made to a creditor a short time before the filing of the debtor's bankruptcy.

For example, the trustee for Bernard L. Madoff Investment Securities, Inc. sued Jeffrey M. Picower, along with investment funds and philanthropies he controlled in a complaint seeking the return of $6.7 billion paid since 1995, with at least $5 billion representing "fictitious profits" made possible by using other people's money. The trustee's complaint alleges that Picower knew about the fraud by having the Madoff firm backdate transactions to create annual profits as high as 950 percent for some accounts.

Once a trustee obtains a judgment from a preference transfer against a creditor, how would the trustee collect? The judgment is only good within the boundaries of the state that it was issued so the attorney for the trustee will likely register the judgment in the state where the judgment debtor resides. In California, a judgment from another state would be registered under the Sister State Money-Judgment Act. Then the bankruptcy trustee can use state law to go after any assets the judgment debtor owns in the state.

To register a judgment in California, the trustee may need to complete judicial council forms EJ-105 Application for Entry of Judgment on Sister-State Judgment and form EJ-110 Notice of Entry of Judgment on Sister-State Judgment. The trustee may need to attach a certified copy of the sister-state judgment to the application for entry of judgment. A declaration showing how it calculated the post-judgment interest may be required. California counties may have additional local procedures.

Once the state court enters the judgment, the trustee must serve the Notice of Entry of Judgment on the judgment debtor. Enforcement of the judgment is automatically stayed until 30 days after service of the Notice of Entry of Judgment. The judgment debtor has 30 days to challenge the judgment. Sometimes the challenge is that the sister-state court lacked jurisdiction against the judgment debtor.

If the judgment debtor does not challenge the judgment, then the trustee can take whatever steps are necessary to collect on the judgment, such as a writ of execution from the US Marshal's. The trustee may do an asset investigation, or place liens on property.