Sacramento Bankruptcy Lawyer Blog

A Ninth Circuit Bankruptcy Appellate Panel (BAP) opinion in the City of Vallejo, California municipal bankruptcy case became final after appellant city labor unions voluntarily withdrew further appeal to the Ninth Circuit.

The appeal followed an 8-day bankruptcy court trial on whether Vallejo was eligible to be a Chapter 9 debtor. Section 109(c) of the Bankruptcy Codes sets forth eligibility requirements for Chapter 9.

Several issues were dealt with on municipal bankruptcy law, and the court concluded the following:

1. Vallejo was "insolvent" under the provisions of Bankruptcy Code Section 109(c)(3).
2. Vallejo demonstrated it wanted to effect a plan to adjust its debts under Section 109(c)(4).
3. Vallejo negotiated with its creditors in good faith as required by section 109(c)(5)(B), unless Vallejo was unable to negotiate with its creditors because doing so was impracticable under section 109(c)(5)(C).

Bankruptcy Code Section 101(32)(C)(ii) defines insolvency in municipalities as the inability to pay debts as they become due, or the failure to pay debts as they become due. A cash flow analysis was the means to test insolvency. Vallejo argued it would be unable to pay debts as they became due during the next year because its cash flow was insufficient to meet budgeted obligations. Cash was held in funds that were restricted by law or contract, and was unavailable for payment of general fund obligations.

The BAP found evidence showing that because the general fund was not balanced, with projected falling tax, Vallejo was insolvent. Municipal accounting is not based on GAAP, but on standards established by the Governmental Accounting Standards Board. Some funds are designated to particular purposes and can only be used for specific purposes. For example, the use of certain funds was restricted by the bond documents to water department-related expenditures.

Vallejo is required by law to adopt its annual budget by a specific date and it must be a balanced budget. Though it was suggested Vallejo could cut its budget to avoid insolvency, the BAP found budget cutting to leave the city financially debilitated and less able to face the next fiscal year.

Vallejo negotiated with its creditors before filing the bankruptcy petition. The effort to reach solutions with creditors demonstrated Vallejo's desire to effect a reorganization plan.

Continue reading "City of Vallejo Chapter 9 Bankruptcy" »

In Sacramento last week, legislators revealed that they are considering a mediation program to help borrowers work out home loan modifications. The mediation program is patterned after similar programs that a dozen other states have adopted.

Many borrowers who are looking for options to avoid foreclosure are having trouble contacting their lenders. The program would force lenders to sit down with borrowers and attempt to come up with solutions other than foreclosure.

As part of the program, a borrower could request a mediation with the lender. The lender would be legally required to participate in discussions with the borrower. To finance the cost of hiring a mediator, both parties would pay a fee. In Nevada, the fee is $200 each.

Banks have argued that a mediation program is unnecessary because the federal Making Home Affordable program is effective. Indeed, President Obama's program has led to hundreds of thousands of loan modifications. Still, California legislators are unnerved by the number of stories they hear of borrowers' inability to reach lenders.

Legislators are still in the exploratory phase, but at the very least the prospect of a mandatory mediation program should prompt more banks to return borrowers' calls. With plenty of people still struggling with their mortgages, the economy will continue to suffer if more foreclosures are not averted.

In describing the need for health care reform, President Obama noted the importance of insuring the middle class against financial catastrophe. When he addressed a joint session of Congress in September, he described the need to protect Americans "who live every day just one accident or illness away from bankruptcy."

A recent New York Times article describes how health care reform would improve the problem. The proposed bills in the House and Senate would expand Medicare eligibility and provide health insurance subsidies for those making up to four times the federal poverty level, which in 2009 was $22,050 for a family of four. The bills would prohibit insurers from denying coverage to those with pre-existing health conditions and would cap annual out-of-pocket medical costs.

As health reform has remained in the national consciousness, there is a growing awareness of just how big a role medical expenses play in the over one million bankruptcies filed by individuals and families every year. As one bankruptcy attorney described it, bankruptcy has become the insurance system for the country. A growing number of Chapter 7 liquidation cases discharge significant medical debt. For many middle class families who already have plenty of financial pressures, dealing with unanticipated medical expenses can prove to be overwhelming.

And medical debt is not limited to the uninsured. With deductibles in the thousands or policies that only cover a percentage of the cost, many insured are forced into bankruptcy by expensive and necessary medical procedures.

Hopefully, health care reform will be able to reverse the trend of medical bankruptcies. Until Congress passes reform, contact a bankruptcy attorney if you need some advice on how to deal with medical debt that has upset your finances.

The New York Times recently reported about an encouraging trend where the interests of Wall Street and borrowers intersect. Hedge funds have been purchasing mortgages from banks and persuading homeowners to refinance the mortgages to reduce the principal owed.

Investors are able to reduce the principal on loans because they purchase the mortgages from banks at a steep discount. Banks that are suffering with liquidity problems may prefer the upfront cash offered by a hedge fund rather than waiting and hoping that they receive a superior return in the long run.

Thus, a fund might purchase a $100 million portfolio of mortgages from a lender for less than half the face value. The fund can then contact the borrowers and try to refinance the mortgages. Once refinanced, the fund can sell the mortgage to a company who will ultimately collect the mortgage payments. As long as the fund refinances the mortgages and sells them for more than it spent, the fund will make a profit.

This practice appears rife with risks, especially the risks that hedge funds are stuck with mortgages that go into foreclosure or that hedge funds cannot find a buyer for the refinanced mortgages. But, once refinanced, the Federal Housing Administration will insure the refinanced loans against loss. Then, the hedge fund can sell the government-insured loan to other federal agencies, such as Ginnie Mae. The taxpayers bare the risk.

To the homeowner, though, the arrangement seems too good to be true. In the example provided in the New York Times article, a couple had its $440,000 mortgage reduced to $314,000, a reduction of almost 30 percent. The hedge fund that owns the mortgage does not interact directly with borrowers. Instead, it hires intermediaries to make the arrangements.

The hedge fund is solely motivated to refinance the mortgage and may aggressively push the refinance. However, a refinance is not always in the borrower's best interests. A homeowner should be careful in considering the offer. Contact an attorney experienced in working with lenders and ensuring that a loan modification works to your benefit.

USA Today reported that an as-yet-unreleased study by noted bankruptcy expert Elizabeth Warren finds that an increasing number of members of the middle class are filing for bankruptcy. Today, the typical bankruptcy filer is from the middle class.

In 2007, more than 100,000 middle-class families filed for personal bankruptcy every month. These families included high numbers of college-educated and homeowners. Almost 60 percent of filers in 2007 had attended college, and Warren predicts that the number would be much higher if calculated today. Unlike those in the lower classes, the middle class has had seemingly endless access to debt and has not done a good enough job using this access judiciously.

In the past, a college education and home ownership were seen as near guarantees of financial stability. However, that mindset bred overconfidence. The middle class spent too much, relied on debt, and figured that education guaranteed a job and that home equity would provide a buffer against bad times. But the tough job market and severe reduction in home values has debunked that theory and caused many to see bankruptcy as necessary in order to move forward.

Consumers interested in protecting their privacy, and preventing identity theft need to be careful of the systems they leave their information. They should monitor and manage where their name is online. Any identity theft could lead to poor credit ratings and bankruptcy concerns.

Google Voice, available by invitation, lets people access voicemails online from email inboxes.

Those leaving messages on people's phones should be careful of what they say when what they say can be turned into transcripts on the receiver's email account easily forwarded to other people. For example, do not leave any personal identifiable information such as social security numbers. If you must provide personal information to someone, wait to speak with a live person.

Continue reading "Google Voice" »

Companies in financial distress are looking to asset sales to save a business and jobs. Under Section 363(b) of the Bankruptcy Code, an asset sale may be conducted outside of a reorganization plan.

A bankruptcy sale has the advantage of transferring title to assets free and clear of any interest in the property sold, such as liens, claims and encumbrances, leaving the purchaser with clear title.

Continue reading "363 Asset Sales" »

Staying out of debt may not be so easy even for those who pay off their credit card charges in full or who do not use their credit cards often. On September 29, 2009, the Federal Reserve Board proposed rules amending Regulation Z (part of the Truth in Lending Act) to protect consumers who use credit cards from a number of costly practices. The proposed rule seeks to generally: (1) stop increases in a credit card interest rate during the first year after an account is opened; (2) stop creditors from issuing a credit card to a consumer who is under the age of 21; (3) require creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit; (4) limit high fees associated with subprime credit cards; (5) ban creditors from using the "two-cycle" billing method to impose interest charges; and (6) stop creditors from allocating payments in ways that maximize interest charges.

Continue reading "Credit Card Fees" »

While countrywide foreclosures slowed, California had the second-highest foreclosure rate in the country for October, reflecting a slowdown in new-home sales. With credit still tight, potential homeowners are unable to find loans. There is also a glut of foreclosed homes on the market, which is dissuading potential buyers from jumping into the market.

A total of 85,420 homes received a foreclosure filing, and nearly 20 percent of those were in the top tier of local home values. As the housing market continues to suffer, higher-end homes lack the value that the wealthy had become used to borrowing against to help them through tough times. Wealthy homeowners' lack of equity also keeps them out of the buying market, as they are not upgrading or purchasing second homes. Foreclosures at the higher end of the housing market likely reflect the thinking that if a home is worth substantially less than what is owed, the homeowner might as well just walk away.

Though walking away is simple on its face, it risks a much more substantial loss than if the homeowner explored other options. A home sold through foreclosure leaves the homeowner with much more debt than if he or she worked out an arrangement with the lender, such as a short sale, forbearance, or a deed in lieu of foreclosure. Banks may impose hefty fees and penalties during foreclosure. And with bankruptcy laws designed to prevent those with above-median income from filing Chapter 7 and discharging all unsecured debt, it is important to understand the long-term ramifications of walking away. A walker could potentially end up with monthly bankruptcy payments in the thousands. Consult a bankruptcy attorney to discuss how best to handle a home headed to foreclosure.

Some experts are predicting that a second wave of foreclosures may hit the housing market in 2010. Data indicates that there are millions of homes with delinquent payments that have yet to go into foreclosure. An economist at Moody's predicts that 2.4 million homes may be lost in 2010 due to foreclosure, short sales, and deeds in lieu of foreclosure, compared to 2 million homes this year.

The foreclosure process can take months if not years. For banks, foreclosing on a home is a resource-intensive process. The bank must adhere to complicated legal guidelines in taking over ownership. It must also find a purchaser and re-transfer ownership.

When the housing downturn began, banks were quick to foreclose on homes because there were few preexisting homes in foreclosure. As the pace of delinquencies quickened, banks have been overwhelmed and have not had the resources to foreclose on properties as quickly. They have also been reluctant to takeover and sell homes in a depressed housing market. If the market rebounds, then banks may see more reward in owning the homes.

Recently, banks have been showing more lenience with borrowers and been open to working out loan modifications. However, modifications do not address the underlying problem of insufficient income. Hence, some modifications only offer temporary relief and do not succeed in preventing further defaulted payments.

The government has also intervened this year to stem the tide of foreclosures. The Obama administration has applied pressure to the lending industry to work with borrowers on options to keep them in their homes. Some states have imposed short-term moratoriums that have slowed the timeline from delinquency to foreclosure.

In sum, optimism about the end of the housing crisis may be premature. Another wave of foreclosures would further depress housing prices. Until the number of properties with delinquent payments begins to drop, we may not see the true beginnings of a recovery in the housing market.

Sacramento-based developer Reynen & Bardis left two large unfinished lots in an area south of Elk Grove Boulevard. But the visual blight is not the only way the developer's wayward project is harming Elk Grove. The bankrupt developer still owes $1.4 million in property taxes to the city, money that is counted on to pay bond debt that the city took out to pay for the public improvements and services necessary to sustain expanding development. It owes another $135,000 in late fees. Elk Grove has filed two lawsuits to reclaim the money.

This is another example of how the struggles of homeowners, builders, and government are all intertwined. Reynan & Bardis, like many Sacramento-area developers, kept building based on past demand and could not un-build once the music stopped. John D. Reynen and Christo Bardis each filed separately for personal bankruptcy with millions of dollars of debt. The taxes they owe must be repaid before debt to private institutions. But, considering the scale of the debt they accumulated (Reynen alone owes $972 million), their bankruptcy surely represents many millions of counted-upon tax revenue that has vanished.

Large bankruptcy cases, such as those of many Sacramento developers, can take years to come to an end. Thus, it will take some time for the fallout of the recession to run its course. Bankrupt developers and tax-starved local governments are prime illustrations of how the damage from the housing bubble bursting resonates through the economy and society.

The recession has uncovered a number of Ponzi schemes. While Bernie Madoff has become synonymous with Ponzi schemes, many smaller-scale frauds that have followed the same formula have been similarly undone by the downturn in the economy. Recently, California Attorney General Jerry Brown accused Sacramento insurance agent William Arthur Sassman II of running a $4 million-plus Ponzi scheme. He allegedly persuaded more than 50 investors, many of them elderly, to hand over at least $4.4 million and maybe as much as $3 million more.

Sassman and several of his companies filed for Chapter 7 bankruptcy in September. His filing brought to light a lavish lifestyle that included a $158,000 Ferrari, $1.1 million in American Express purchases, and three homes - two in Sacramento and one in Escondido. He was able to purchase these luxuries by luring investors with promises of outsized returns. He then made small payments to older investors with money he received from new investors. He did invest some of the money he received, but his investments included Nigerian scams, a stock trading program run by Ponzi schemers, and a Folsom man's $40 million Ponzi scheme. Ironically, just one month before filing for bankruptcy, Sassman sued a European investment group, claiming that it swindled $1.3 million from him.

Sassman's bankruptcy filing listed $3.3 million in debts, but did not list any of his investors as creditors. Disentangling the damage done by Sassman will take months if not years. Just as with Madoff, the bankruptcy court will be very involved in finding Sassman's assets, identifying victims, and pursuing any money wrongfully spent. Because he incurred the debt fraudulently, the bankruptcy court will not discharge the debt he owes to his investors. Still, with Sassman likely headed to jail, he faces up to 52 years if convicted, investors are unlikely to recoup much, even if the court preserves investors' claims.

The tragedy of Sassman's scheme is just as real to those he cheated as what Madoff wrought on his victims. Hopefully, Sassman's bankruptcy estate will provide some relief.

The high cost of medical care has been a much-discussed topic as President Obama and Congress wrangle over healthcare reform. One major purpose of reform is to insure many of the millions without insurance. The saga of a slain Sacramento State student illustrates how necessary reform is.

On October 21, a Sacramento State student was rushed to the UC-Davis Medical Center Emergency Room after his roommate savagely beat him. The trauma team frantically tried to save him, but the student died five minutes after arrival. A few weeks later and one day after the student's memorial service, the parents received a bill from the Medical Center for $29,186.50, $19,000 of which was for trauma rescue service.

Certainly, life-saving services are close to priceless, and thoughts of treatment's cost do not factor in the minds of the injured and the injured's family during a crisis. But, afterwards, the reality of the costs can overwhelm middle-income families just as easily as lower-income families. Emergency medical bills understandably contribute to a large number of bankruptcies, as necessary and important life-saving services for the millions of uninsured lead inexorably to financial troubles. A family with steady income and no prior debt can still face an impossible task when suddenly faced with a bill in the tens of thousands.

The maddening thing is that insurance companies are often able to negotiate the bill down, possibly to a fraction of the original price quote, whereas the uninsured are stuck with the sticker price. As such, those with a better ability to pay (those who have insurance) receive lower prices for healthcare than those who are in a worse position to pay (the uninsured). What's even odder is that hospitals are inflexible with the uninsured even though many see repayment as so hopeless that they do not even make an attempt to repay. Thus, the treatment facility is left with nothing in return for their very expensive services. The system is quite obviously broken.

Thankfully, the Sacramento State student did have insurance, and the bill to the parents was a painful mistake. Still, the story and the resulting publicity have provided important evidence to many about just how expensive it can be to try to save someone's life. Since in those moments there is no decision to be made, it is unfair and cruel that life-saving services can wipe out a family's finances overnight.

There is a common misconception that filing bankruptcy will permanently prevent a person from being able to purchase a home. The reality is that there is no rule that banks cannot provide loans to those who have recently filed for bankruptcy. In fact, many people obtain home loans mere years after filing.

A bankruptcy filing will significantly affect a person's credit report initially, but the effect diminishes over time, especially as the filer actively rehabilitates their credit. A Chapter 7 filing may remain on a person's credit report for up to 10 years after the date that the bankruptcy court finalized the bankruptcy, which may be more than a year after the initial filing.

Still, banks will not necessarily reject a home loan application based on a years-old filing. Likely, the bank will evaluate how the applicant has handled debts that have accumulated post-filing. Additionally, if within the bankruptcy plan, a debtor has agreed to repay certain debts, then the potential lender may follow up to find out whether the debt has been repaid. If a potential borrower has collateral up front and has evidenced a responsible recent credit history, then the bank will not necessarily be scared away by past financial troubles.

If you are experiencing financial difficulties but are worried about bankruptcy ruining your hard-earned credit score and dreams of owning a home, understand that bankruptcy will not rule out homeownership. It may delay the dream, but that delay does not have to be for too long. Post-filing, you have the power to ensure that the delay is short. Consult with a bankruptcy attorney about how bankruptcy would affect you and how you can rehabilitate your credit after you file.

Ben Catlin, a prominent Sacramento developer, filed for bankruptcy reorganization on October 30. Catlin follows in the footsteps of fellow Sacramento developers C.C. Myers, John Reynen, and Christo Bardis, as casualties of the bubble bursting in the once thriving Sacramento-area construction business. Catlin founded Catlin Properties Inc., a commercial development company based in Rancho Cordova that has built office and retail facilities throughout Northern California.

Catlin's Chapter 11 filing indicates that he has between $50 million and $100 million in debts, including about $27 million in bank loans. These loans were "recourse loans," which means that Catlin, as did Myers, Reynen, and Bardis, put up his own personal assets to secure the loans from banks. In the event of a default of a recourse loan, the lender can pursue recovery from the borrower's assets. Recourse loans charge lower interest rates than "non-recourse loans," for which the borrower does not have personal liability. A few years ago, the real estate market was so robust, that Catlin and other developers likely foresaw no risk in putting up their own assets in exchange for cheaper recourse loans.

Catlin and his wife reported assets worth $1 million to $10 million, so even the lenders that issued recourse loans will be left with a loss. Catlin's case illustrates the need for careful planning and risk assessment before using personal assets as collateral for business loans. Once-thriving and stable personal finances can quickly come undone by exposure to large-scale business debt.

In mid-October 2009, President Obama speaking before Treasury Secretary Geithner, FDIC Chairman Bair and members of Congress reflected on the Administration's efforts on consumer financial protection reform and reaffirmed support for the Consumer Financial Protection Agency (CFPA).

The "Consumer Financial Agency Protection Act of 2009", presently in draft legislation proposed an authority over statutes that affect banking consumers.

President Obama discussed continuing support to reform consumer financial protection should seek to launch safeguards that protect consumers who purchase financial products from predatory practices that have lead to financial crisis. The CFPA will help small business entrepreneurs that rely on credit cards and home equity loans for financing.

This comes at the heels of financial crises with brand name companies such as General Motors (GM) where consumers have seen government bail outs in the past year and a half. For GM, President Obama announced the government's continued assistance was contingent on GM achieving a restructuring, or filing for bankruptcy protection by June 1, 2009.

On June 1, 2009, GM filed for Chapter 11 protection in the Southern District of New York. GM sought the Bankruptcy Court's approval to sell almost all of its assets to New GM, a newly created entity owned by the governments of the United States and Canada, and by an entity controlled by the United Auto Workers.

On July 5, 2009, Judge Gerber granted GM's motion to sell substantially all of its assets to New GM. On July 10, 2009, the GM sale closed.

The Bankruptcy Court rejected the argument that U.S. Treasury pre-bankruptcy petition loans to GM should be recharacterized as equity based on the lenders not intending to be repaid and wanting to convert loans to equity in New GM. GM was inadequately capitalized when the U.S. Treasury loaned to GM, GM could not obtain financing from outside lending institutions.

The transaction was (i) documented as a loan, (ii) constituted secured debt, (iii) included agreements to address priority issues with secured lenders, (iv) had interest and maturity terms and, (v) had separate equity features which provided for warrants to accompany the debt instruments. Judge Gerber concluded recharacterization was inappropriate and held U.S. Treasury pre-bankruptcy petition loans to GM constituted debt.

The U.S. Treasury had not acted inequitably, with no harm done to GM's creditors. Treating the U.S. Treasury as a lender was consistent with the Bankruptcy Code.

Contact a bankruptcy counsel to learn more on the impact of bankruptcy court decisions on the administration of a bankruptcy estate.

The United States Senate confirmed Justice Sonia Sotomayor on August 6, 2009 to the Supreme Court of the United States. Judge Sotomayor was a former Judge on the Court of Appeals for the Second Circuit. She ruled on several bankruptcy cases.

In one of her cases, In re Worldcom, Inc., a bankruptcy case, the Securities and Exchange Commission (SEC) settled certain claims against the debtors (Worldcom) that required Worldcom to pay a penalty of $750 million for violating securities laws. The Bankruptcy Court approved the settlement.

When Worldcom emerged from bankruptcy, the SEC sought the district court's approval to distribute Worldcom's settlement payment to defrauded investors according to a distribution plan, as mandated by the "Fair Fund provision" of the Sarbanes-Oxley Act of 2002 (the Distribution Plan).

The Distribution Plan did not have enough funds to pay back all of the victims of Worldcom's securities fraud. The Distribution Plan kept out investors that had recovered thirty-six cents or more on the dollar under the Chapter 11 reorganization or through the sale of securities, and investors making a net profit through trading securities during the period in which the fraud occurred. The district court approved the Distribution Plan.

Judge Sotomayor observed a tension between the priority assigned to claims under the Bankruptcy Code and the Fair Fund provision, that empowers the SEC to distribute funds between victim investors outside the bankruptcy proceeding. But, there was "no indication in the Fair Fund provision" of the Sarbanes-Oxley legislation requiring the SEC to follow the Bankruptcy Code's claim priorities when developing a distribution. Judge Sotomayor held, "it is not our role to mitigate this tension" and the Distribution Plan as approved by the district court is not an abuse of its discretion.

Contact a bankruptcy counsel to learn more on the impact of bankruptcy court decisions on the administration of a bankruptcy estate.

Although the recent Mortgage Electronic Regulation Systems (MERS) foreclosure and bankruptcy claim decisions have received publicity, there are numerous lower court decisions initially refusing judicial foreclosure relief to lenders in states like New York. In mortgage foreclosure cases, the plaintiff has standing as note and mortgage holder.

MERS simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS does away with the need to prepare and record assignments when trading residential and commercial mortgage loans. Its mission is to register every mortgage loan in the United States on the MERS® System.

As courts see an increase in foreclosure, a few of courts are refusing summary judgment in judicial foreclosures, denying motions for the appointment of a receiver, because of what might be lack of diligence by a mortgage loan servicer.

Some courts and lenders may have confusion on the authority of a securitization servicer to foreclose. There may be incomplete or ineffectual lender affidavits, such as not discussing chain of title or other factual and legal deficiencies. If the deficiencies are not fixed, the parties face dismissal of the foreclosure cases with prejudice to file again and/or be court sanctioned. Dismissal with prejudice means a case is dismissed for good reason and the plaintiff is barred from bringing an action on the same claim.

A foreclosure attorney should be a key ally and advisor for any residential foreclosure matters.

Newsweek recently published an article that reveals that many Americans lack essential knowledge on fundamental financial matters. For instance, most responders in a University of Michigan survey did not understand concepts such as compound interest, the safety of diversifying investments, and the higher long-term yield of stocks than bonds or savings accounts.

Schools have largely ignored financial education in their curricula, and the result is generations of adults who are ill-equipped to handle complex financial instruments, including credit cards and home loans. Americans' overindulgence on debt and their near zero savings rate have greatly contributed to the recession. It is very important for the health of the economy that everyone receive a basic financial education.

Thankfully, people are waking up to the crisis. The economy's downturn has exposed the need for change, and financial education has finally become a priority. People have awakened for the need for savings because income and prosperity are no longer treated as a given.

The federal government has started working on the problem. A President's Advisory Council issued a report in January that recommended financial education from kindergarten through twelfth grade and a mandatory literacy course before college students can take out loans. There are several bills in Congress that would fund financial education in schools. The Financial Literacy & Education Commission established a web site, MyMoney.gov, and a hotline (888-MY-MONEY) so that Americans have a resource to help with their financial questions. President Obama has proposed a Consumer Financial Protection Agency, which would have regulatory power over companies that offer financial products. Still, there has been so much inaction on the issue that proposals are hard to take much stock in.

Much of the recession can be traced to the explosion of subprime mortgages. Many of these mortgages were sold by real estate professionals preying on unwitting borrowers. The financial and real estate sectors would not be as able to market destructive products like subprime mortgages if people had a stronger foundation of knowledge. Hopefully, the government takes action to ensure that all students receive financial education. Otherwise, the financial sector will surely continue to prey on people's ignorance.

After receiving aid from the United States government in late December 2008, Chrysler approached the government for additional assistance in early 2009. The government provided funding conditioned on Chrysler setting forth plans to restructure to sustain long-term viability. President Obama announced that the government's assistance was contingent upon Chrysler's compliance with a May 1, 2009 deadline for it to accomplish a restructuring, or otherwise file for bankruptcy protection.

In early 2009, Courts from the Bankruptcy Courts for the Southern District of New York to the United States Supreme Court issued a number of rulings approving the asset sales by Chrysler.

The Courts' rulings are likely to affect future bankruptcies:

The Second Circuit and the Bankruptcy Courts addressed asset sales, "the [Chrysler asset sale] has inevitable and enormous influence on any eventual plan of reorganization or liquidation . . . it is not a 'sub rosa plan' . . . because it does not specifically 'dictate' or 'arrange' ex ante, by contract, the terms of any subsequent plan."

A sale is considered a sub rosa plan if it is essentially a "de facto plan" or "creeping plan of reorganization" that disposes assets and pays creditors without a formal disclosure statement, written plan, ballot, or meaningful opportunity for creditors to participate in the process.

On a debtor's ability to sell assets free and clear of future claims, the Second Circuit affirmed the Bankruptcy Court's decision that future claims are "interests in property such that they are extinguished by a free and clear sale under Bankruptcy Code Section 363(f)(5). . . ."

After failing to obtain consents from senior lenders to achieve a restructuring within the government's deadline, Chrysler on April 30, 2009, filed for Chapter 11 protection in the Southern District of New York. Chrysler sought the Bankruptcy Court's approval to sell almost all of its assets to New Chrysler, a newly created company. Upon Chrysler's entering bankruptcy, the collateral trustee had "the power to take any action necessary to realize upon the collateral - including giving consent to the sale of the collateral free and clear of all interests under § 363". The collateral trustee "could take such action only at the direction of the lenders' agent, and the agent could only direct the trustee at the request of the lenders holding a majority of Chrysler's debt."

New Chrysler was to be owned by Fiat, the United States and Canada governments, and a voluntary employees' benefit association (VEBA) controlled by the United Auto Workers (UAW). The United States Treasury and Canada agreed to lend New Chrysler $2 billion. The UAW agreed to a collective bargaining agreement with a reduced wage structure, and created a VEBA structure to finance legacy UAW retiree health care obligations.

Fiat offered technology and management for fuel-efficient vehicles.

The Chrysler sale had "inevitable and enormous influence on any eventual plan of reorganization or liquidation", but this was not enough reason to disapprove the sale. Chrysler's motion to sell substantially all of its assets and dismissing all of the objections to the sale motion was granted. The Chrysler sale closed on June 9, 2009.

The Court held the Chrysler sale in no way upset the priority between creditors, and affirmed findings that "'[n]ot one penny of value of the Debtors' assets is going to anyone other than the [secured creditors].'" "...all the equity stakes in New Chrysler were entirely attributable to new value - including governmental loans, new technology, and new management - which were not assets of the debtor's estate."

Contact a bankruptcy counsel to learn more on the impact of bankruptcy court decisions on the administration of a bankruptcy estate.

The Bankruptcy Court for the District of Delaware handed down a decision in In re Arclin US Holding, Inc., No. 09-12628 (Bankr. D. Del. Oct. 9, 2009) concluding that company-paid medical coverage offered as part of an employee severance package is a retiree benefit that cannot be unilaterally modified by a company in bankruptcy, except under Bankruptcy Code Section 1114.

Section 1114 defines "retiree benefits" to include benefits for medical, surgical or hospital care benefits or in case of sickness, accident, disability or death that are paid to retired employees, their surviving spouses, spouses or dependents pursuant to a plan, fund or program by the company in Chapter 11 prior to its filing a Chapter 11 petition. "Retiree benefits" does not include pension benefits or deferred compensation.

Under Section 1114, a Chapter 11 bankruptcy company pays, throughout the reorganization, retiree medical benefits under a "plan, fund, or program" throughout the bankruptcy process unless the court grants it the right to modify the benefits or unless agreed upon by the retirees' representatives such as a union.

In Arclin, before filing for bankruptcy the company had a reduction-in-force. The issue was whether payments to an employee for 29 months health insurance premiums under a severance package constituted "retiree benefits," as defined in Section 1114. On the petition date after the employee severance offer, the company stopped paying the employee the health premiums.

The court based its decision on the company's description of the severance offer as "an early retirement package" in recognition of years of service. The court ordered the company to reimburse the employee for payments the employee personally made for medical benefits otherwise covered by the severance package, and to pay all premiums going forward, unless and until the court approves any termination or modification of the retiree benefits.

Other payments under a severance package, such as salary and car allowance are not retiree benefits under Section 1114.

Bankruptcy counsel should be consulted to determine the impact that the company's policies will have on the administration of a company's bankruptcy estate.

A Chapter 7 bankruptcy filer typically must liquidate many non-essential assets. However, the Bankruptcy Code exempts a debtor's "implements, professional books, or tools of the trade" from attachment of judicial lien or seizure by the bankruptcy estate. Under 11 U.S.C. sections 522(f)(1) and (2), the debtor can protect the fair market value of the exempted property up to the amount of all consensual liens on the property plus the applicable tools of trade exemption. If the property's value exceeds the exemption plus consensual liens, then the bankruptcy estate may attach a lien on the property.

By codifying the tools of trade exemption, Congress wants to ensure that the self-employed have the ability to earn a living post-bankruptcy and to rebuild their financial situations. For example, a barber can protect his personally-owned scissors and a computer programmer can protect his computer. Post-bankruptcy, both can resume with their jobs.

In California, a single debtor can exempt up to $6,750 for tools of trade. This amount doubles to $13,475 if two spouses file who are employed in the same occupation.

If you are considering bankruptcy, it is important to consult an attorney to determine what assets can be protected by the tools of trade exemption and any other exemptions in the Bankruptcy Code.

Imagine you are at work very busy, and you review your new emails without really paying attention on where the messages are coming from. One message appears to come from your bank, but the message doesn't make much sense. You click on a link, tired from reading so many emails, suggesting a winning offer if you complete personal information or confirm your identity. Without really reading the message, you fill out the information in hopes of the prize advertised or getting the special coupon.

Many people, especially those who are in the middle of financial crises, fall victim to online fraud called spoofing. It is designed to dupe innocent consumers into purchasing counterfeit goods or wiring funds to spoofers. Spoofers operate by knocking off the brand reputation of known businesses. They do so by hacking or redirecting websites. With the expense to set up a web site at a very low rate, it is easy to set up a copycat website at a domain name that is similar to a legitimate business, and then illegally copy and republish information from the real site to make the spoofer website appear legitimate.

Financial services companies are targets for online scammers. With many people using online banking, or saving their information on email accounts that are not tangible to them, but on the servers or outside entities, many consumers can get their information taken easily by scammers. This is how some people may lose money they really need to pay their bills, mortgages, or households. This is how some people strapped for money may fall into bankruptcy.

When a consumer gets a message, the consumer should hesitate on clicking any links. Instead, go onto the company's web site by typing the website address and then going to the page on the website itself.

Each ISP may have its takedown policies, but they require people to prove who they are and what rights they are complaining of. To avoid unnecessary delays by falling victim to spoof, take steps to be more cautious while reading emails and conducting Internet activities.

The American Bankruptcy Institute reported that the number of consumers who filed bankruptcy jumped 9 percent in October. In total, 135,914 people filed bankruptcy, which puts the number of filings on pace for 1.4 million in 2009. That would be a 30% increase over 2008 and the highest total since 2005, which was the year Congress enacted bankruptcy reform and consumers rushed to file bankruptcy before the new law took effect.

The rise in bankruptcies reflects a number of different elements tied to the recession. Unemployment is higher and wages are stagnant, so consumers have relied more on revolving debt, such as credit cards, to get them through the tough times. Home values remain low, preventing homeowners from tapping into their home equity, which offers better rates and repayment terms than credit cards. As the down times continue, families are struggling longer than expected, and often their savings have been stretched too far. Credit flowed freely before the recession, but has become harder for consumers to access. And because credit was easy to obtain before the recession, families carried too much debt, and the recession exposed their vulnerability.

Until employment figures rebound, bankruptcy filings will likely remain high. Also, there are still many adjustable-rate mortgages, given to home buyers years ago, that have yet to reset to higher rates.

All of these factors have descended on consumers at the same time, creating a perfect storm of economic distress. The high number of bankruptcy filings is understandable as consumers are eager for relief. They recognize that filing for bankruptcy may be the quicker, more painless option rather than continuing to struggle with no end in sight.

In private money lending, the lender should be aware on whether entering an agreement with a broker that allows for protective advances creates an agency coupled with an interest. Contact a skilled California foreclosure attorney to help guide through the legal process when obtaining loan modifications or second mortgages.

An agency is terminated by death of the principal unless the power of the agent is coupled with an interest in the subject of the agency. California Civil Code §2356(a)(2). Requirements for the creation of an agency coupled with an interest are (1) agency be held for the benefit of the agent and not the principal, (2) agency is created to secure the performance of a duty to the agent or to protect a title in him, and (3) agency is created at the same time the duty or title is created or is created for consideration.

Some loan servicing agreement forms contain a protective advances provision as follows: "Lender shall make such advances as approved by the Majority or, if Lender is the only owner of the Loan, such advances that are necessary and prudent to protect and to collect Lender's interest in the Loan. If the Loan is a Multi-Lender Loan, and Lender fails to make advances approved by the Majority, other owners of the Loan are authorized to advance the amount Lender failed to advance and to receive payment in full with interest at 10% per annum before any further payments to Lender and, if this box is checked [ ] the non-defaulting Loan owners shall also have the option, exercisable within 30 days after Lender's default, to purchase Lender's interest in the Loan at _______% of what is owed to Lender, payable within 15 days after the election to purchase is made. Servicer, in its absolute discretion, may advance its own funds to protect the security of Lender's Loan, including advances to cure senior liens, property insurance, foreclosure expenses, repair, advertising, litigation expenses and similar items, but not Loan payments. Servicer shall be reimbursed such advances, with interest at the Loan rate, from the next Loan payment, or within 10 days after a written request to Lender. To secure Servicer's advances, Lender hereby irrevocably assigns to Servicer, to the extent of advances owed to Servicer, the first Loan payments received after an advance is made. Lender will be liable to the remaining investors for all damages incurred as result of the Lender's failure to act or failure to advance funds. Lender will be liable for actual attorneys' fees incurred as result of said failure to act or failure to advance funds."

The forms are from Applied Business Software, 2847 Gundry Avenue, Long Beach, CA 90755, Tel: (800) 833-3343. This company manufactures mortgage software products designed for those who originate and service loans and mortgage pools. Users of the form include: PLM Lender Services, Inc., Yeva, Inc. DBA Saxe Mortgage Company, Del Toro Loan Servicing.

Protective advances are advances made for preserving and protecting the collateral where the debtor has failed to, will not, or cannot meet its obligations. California Business and Professions Code doesn't require any protective advances by brokers. Agreement on protective advances by the broker is optional, and not required by statute.

The protective advances provision gives the broker "absolute discretion" to make the advances. The broker submits notices on defaults, delinquencies, and other similar occurrences to the lender within 15 days of the events so the lender knows about possible advances ahead of time according to California Business and Professions Code 10233.

In early 2008, Silver State Helicopters, a flight-training school that operated a branch with about 200 students out of McClellan Business Park in Sacramento, filed for Chapter 7 bankruptcy. As a result, hundreds of would-be pilots, who had taken out tens of thousands of dollars in student loans, were left stranded with debt and short of the Federal Aviation Administration certifications they expected for their investments.

On October 28, California Attorney General Jerry Brown's office announced that those students would receive significant student loan forgiveness. Though it made no admission of wrongdoing, Student Loan Xpress will waive $112.7 million of the $174 million owed by Silver State students. Student Loan Xpress is owned by CIT Group, which itself recently filed for Chapter 11 bankruptcy.

In a news release, Brown stated that the loan forgiveness will save students from "a mountain of debt for training they never received." Brown's office stated that Student Loan Xpress, which had lent money to most of Silver State's students, "had reason to believe that the school was in serious financial difficulty" and provided students with loans anyways.

In the settlement, the California students will receive about $25.5 million in debt relief. Students borrowed an average of $69,900, but the slate will not automatically be wiped clean. Borrowers will receive debt relief in proportion to the progress made in their training. Thus, a student who received more FAA certifications will receive less debt relief.

This story illustrates the important role that regulators play in ensuring that the lending industry remains honest and treats customers equitably. Attorneys must also remain vigilant in advocating for their clients in negotiations with lenders.

The lawyers who prey on these homeowners are getting sued now by the California Attorney General, Jerry Brown.

Several foreclosure defense lawsuits in California were filed by Mitchell W. Roth, an attorney. These lawsuits did nothing more than buy the homeowners a few more months in a house. These lawsuits were often meritless. Contact an experienced foreclosure attorney for proper assistance in lowering mortgage interest rates, resolving defaults, or lowering loan principal balance.

The California Attorney General reported that the attorney in rip off cases charged homeowners desperate for help for possibly phony lawsuits. Though not all the lawsuits were likely phony, some of the issues that arose involved a homeowner paying a mortgage, suing a lender to "produce the note, and a homeowner not paying a mortgage, arguing reasons not pay a mortgage and keep a house.

Homeowners who engage attorneys should be wary of the attorneys who do not return phone calls, emails, or other types of messages, and when the communications are through secretaries and paralegals. Sometimes, attorneys who act like they do not have the time to meet in person, have as their main goal to only collect client fees.

Jerry Brown's July 06, 2009 press release reported that beginning in mid-2008, homeowners facing foreclosure or default were promised assistance to lower mortgage debt. After filing the lawsuits, Roth apparently did nothing to advance the cases, failing often to make required court filings, responding to legal motions, complying with court deadlines, or appearing at court hearings.

Homeowners should be aware of these negatives when hiring an attorney. For instance, an attorney who engages too many special appearance attorneys may just be extending lawsuits in order to collect additional fees. A special appearance attorney is an attorney who usually appears for: a) only a particular session of the court; b) on behalf of a client's regular attorney of record; c) as a favor for an unrepresented person. A special appearance attorney is different from an attorney of record who commits to represent the client in all matters, hearings, and trial of the case unless he/she is allowed to withdraw or is substituted "out of" the case by the client.

Often special appearance attorneys do not know much about the facts of a case, and are engaged at the last minute to fill in on hearings for the purpose of requesting continuances or merely to take notes to report back to the attorney of record. Sometimes lawyers give struggling homeowners false hope and pocket fees that could be applied to the loan.

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

After bailing out the banking industry, the Obama administration holds strong influence over banks. Obama is using this influence to pressure banks to stem the tide of foreclosures and work with borrowers on alternatives to foreclosure. Thus, banks are increasingly willing to work out short sale agreements with borrowers.

In a short sale, the borrower receives permission from the bank to sell the home for less than the principal the borrower still owes the bank. If the borrower finds a buyer, the bank will forgive whatever debt remains after the sale. The borrower may have to pay taxes on the loan forgiveness, but otherwise walks away without the damage of a foreclosure on the credit report.

Traditionally, short sales are hard to execute because lenders must approve the sales, and it was not uncommon for banks to take three to six months to respond to a short sale offer. Buyers were deterred from making offers on short sale homes because of the potential for a long delay and for the bank to ultimately reject the offer.

Now, banks are responding to offers much sooner. The three to six month wait has turned into a month or month-and-a-half. As a result, more buyers are making offers, and more borrowers are pursuing short sales.

As a borrower, your first step should be to contact your lender and find out how the short sale process with your lender will work.

It is important to contact an attorney to review your short sale agreements and ensure that your legal rights are protected. Some banks have attempted to coerce borrowers to sign promissory notes for the balance of the loan not covered by the short sale purchase price. In a true short sale, that bank forgives that balance. An attorney will help you avoid such pitfalls.

With the economy based on consumer spending, it's important to evaluate how credit card debt, second mortgage obligations, medical bills or rental property liabilities affect consumer credit reports. The Fair Credit Reporting Act regulates the collection, dissemination, and use of consumer information, including consumer credit information.

California law defines a "consumer report" as any information by a consumer credit reporting agency bearing on a consumer's credit worthiness, credit standing or credit capacity which is used or expected to be used for establishing the consumer's eligibility for, among other things, employment purposes.

An "investigative consumer report" is defined under California law as a consumer report in which information on a consumer's character, general reputation, personal characteristics, or mode of living is obtained through any means.

Anyone who has had prior credit issues, should attempt to obtain explanations for why they are rejected credit or employment. California law requires a credit applicant or employee to have the opportunity to check a box on the disclosure and consent form, which, if checked, requires the applicant/employee to receive a copy of the consumer credit report from the credit reporting agency at the same time it is sent to the employer or potential creditor. This applies to simple credit sign ups such as a credit card application at a department store. In California, a consent and disclosure to obtain a consumer credit report must be obtained prior to each time that such a report is requested.

In employment situations, the disclosure and consent form requesting an investigative consumer report under California law must also contain a box to check, which, if checked, obligates the employer to send the report to the potential employee within three business days of the report being provided to the employer. If the consumer reporting agency reports information that may be used as a basis for an adverse employment action, the applicant must receive notice before a final decision is made on hire or promotion.

Contact a bankruptcy counsel to learn more on the impact of bankruptcy on credit issues.

The job market continues to flounder and many Americans with jobs face reduced hours or reduced pay. So while toxic adjustable-rate mortgages and the dive in housing prices drove many homeowners' difficulties a year ago, insufficient income is quickly becoming the dominant concern.

Recent efforts by those in the mortgage modification field have targeted lowering homeowners' monthly payments to affordable levels. Despite their best intentions, those looking to help homeowners with modifications face resistance from the very people they are trying to help. Modification can be a long, complicated process. Homeowners are uneasy about a loan modification lowering their credit score, despite the promise of better payment terms that will make it easier to make timely payments and rehabilitate their scores. And, possibly the biggest barrier is that homeowners resist aid because of a perceived stigma against people unable to pay their mortgages.

Despite these concerns, over 2 million borrowers since July 2007 have accepted loan modifications in order to avoid foreclosure. And a disproportionate number of those modifications have occurred in 2009, as about 800,000 modifications occurred in the first eight months of 2009. These modifications have included reduced interest rates, longer loan lengths, reduced principal, or a repayment arrangement for delinquent payments.

Modifications make sense for banks as well. The foreclosure process costs banks heavily in legal fees and time. And upon foreclosure, banks become responsible for maintenance and upkeep of the home, which can drag on for many months or years. Also, the federal government is applying pressure on banks to work with borrowers. Thus, loan modifications are increasingly seen as an attractive option for struggling homeowners, who should contact a loan modification specialist to help them with the process.

Under section 523(a)(8) of the Bankruptcy Code, student loans are generally non-dischargeable in bankruptcy. Still, the court can grant a discharge if making the debtor repay would cause an "undue hardship." In imposing this restriction on discharge, Congress wants to encourage lenders to provide educational loans to as many people as possible, even those without strong credit. By making the loans non-dischargeable, lenders will more freely lend because they are much less fearful of non-payment.
Bankruptcy courts have taken two approaches to determining that "undue hardship" exists and a discharge of student loan debt is warranted. The first looks at the totality of the debtor's circumstances and appraises the difficulty the debtor may have if forced to repay the debt.

The second approach involves a three-part test. The debtor must show that (1) he cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to repay the loan; (2) that additional circumstances exist indicating that this state of affairs will persist for a significant portion of the loan's repayment period; and (3) that the debtor has made good faith efforts to repay the loan.

The third prong of the test has caused problems for some debtors. Courts have looked at a debtor's payment history from the time the debtor left school through the bankruptcy filing. If the debtor has evidenced any unexcused inability or unwillingness to pay, then the court may decide not to discharge the debt.

Many courts grant partial discharges. Whether to grant a partial discharge and what amount to grant are entirely up to the court's discretion.

Because courts have significant discretion, both in determining whether "undue hardship" exists or whether the debtor should receive a partial discharge, it is very important to have a strong advocate on your side to ensure that you receive the best result. Contact a bankruptcy attorney to find out how bankruptcy will affect your student loan debt.