Archive for the ‘The Bankruptcy Courts’ Category

Tuesday, November 18th, 2014

Supreme Court to Rule on Second Mortgage Liens

The U.S. Supreme Court will decide whether homeowners can terminate “underwater” second mortgages during bankruptcy.

On Monday, the country’s top court agreed to review two appeals from Bank of America against bankrupt homeowners who are attempting to eliminate bank liens on their properties.

Two Florida homeowners are arguing that filing for Chapter 7 bankruptcy protection with a first mortgage valuing more than their property’s worth permits them to remove the lien from the second mortgage.

The homeowners’ lawyers argue that when both mortgage loans are underwater, the second lien is effectively valueless.

Financial lenders are fighting to keep the second mortgage lien, contending the debt could one day be fully paid—especially as property values increase.

“There is no such thing as a ‘truly valueless’ lien on property capable of appreciating,” as stated in court papers filed by Bank of America lawyers.

The 11th U.S. Circuit Court of Appeals ruled that homeowners currently in Chapter 7 bankruptcy can annul a second mortgage when the owed debt is greater than the value of the first mortgage.

Bank of America appealed the decision, stating their plea “may be the single most important unresolved issue in consumer bankruptcy.”

In 1992, the Supreme Court ruled a bankrupt homeowner does not have the authority to void a lien on a submerged first mortgage; however, the judgment is not clear as to the regulations on a second mortgage.

The last bankruptcy revamp occurred in 1978, when second mortgages were much less common.

Roughly 2.1 million debtors had partially or fully underwater second mortgages by the end of2014’s second quarter, according to a CoreLogic report.

A decision is expected June 2015.

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A contentious relationship between musician Sly Stone and his former manager, Jerry Goldstein, has grown even more heated thanks to a recent bankruptcy filing, according to a report from the Wall Street Journal.


Sources say Goldstein sent two of his music production companies into bankruptcy protection in order to block an effort by Stone’s lawyers to retake the rights to the musicians’ royalty payments.

And the ensuing legal battle promises to grow more interesting, as both parties seem determined to gain access to the music rights, according to reports.

Music Manager Files Bankruptcy to Thwart Former Client

According to reports, Goldstein helped Stone rise to prominence decades ago by co-writing songs like “My Boyfriend’s Back and “Hang on Sloopy.”

But after the two parties struck a management deal in 1989, Goldstein, through his company, Even Street Productions, assumed control over the rights to Stone’s royalties.

Stone’s attorneys, however, believe that Easy Street Productions, which was sent into bankruptcy protection this week along with Majoken, Inc., lacks “corporate formality,” and is merely a shell company designed to hold Goldstein’s assets.

Interestingly, after Goldstein filed for bankruptcy, Stone’s lawyers bought a $1.7 million judgment against the business manager from First California Bank, which won the judgment after Goldstein defaulted on a loan.

The purchase was a savvy move by Stone and his legal team, because it allows them to potentially file for foreclosure against Goldstein’s assets, including the royalties that Stone believes belong to him.

Sly Stone Tussles With Former Manager in Bankruptcy Court

But Goldstein’s attorneys have challenged the validity of Stone’s tactics, accusing the former singer and his attorneys of “attempting an end-run around the royalty litigation, to obtain by purported foreclosure that which they have not obtained in the royalty litigation.”

In response, Stone’s attorneys say the 70-year-old entertainer, who has launched several failed comebacks and has been homeless off and on for several years, is simply trying to recover rights he unwittingly relinquished in 1989.

Before this fight is resolved, however, Goldstein must take care of his bankruptcy, which includes his companies, Majoken and Even Street.

During the bankruptcy, though, Goldstein will also have to contend with a $50 million lawsuit filed by Stone against his former manager. In the lawsuit, Stone alleges that Goldstein stole royalties from him and hid the money in his bankrupt companies.

Goldstein, meanwhile, has filed a slander lawsuit against Stone, claiming that the singer defamed him by calling him a thief at a music festival in 2010.

A Westport, Connecticut, man has been sentenced to 30 months in jail for bankruptcy fraud crimes of nearly $1 million. Following his time behind bars, Daniel Steinberg will remain under the court’s supervision for three years, according to the Westport Patch.

Here’s a look at Steinberg’s crime and how fraud works in bankruptcy court.

Unauthorized Transfers

The fraud reportedly involved the business bankruptcy case of Reservoir Corporate Group, LLC, which filed a Chapter 11 case in 2009. Over the course of a year during the company’s bankruptcy, it seems that Steinberg transferred more than $700,000 from the company’s coffers to his own.

That money was apparently used to fund personal expenses as well as those of other businesses that Steinberg had a financial stake in. Because part of the Chapter 11 bankruptcy required that Steinberg, as debtor-in-possession of the company, file reports with the bankruptcy court, he also falsified the financial records of the company to cover up his fraudulent activity.

In August 2010, the bankruptcy court discovered Steinberg’s illegal transfers, and also found out that he had begun making such transfers before the company officially filed for bankruptcy.

protection. All told, it seems Steinberg embezzled $968,973 from the company.

Bankruptcy Court Takeover

Once evidence of Steinberg’s fraud came to light, a Chapter 11 bankruptcy trustee took over control of the accounts in question. In addition to his jail time, Steinberg has been ordered to pay full restitution for the funds he embezzled, which might be difficult for someone who was shuffling money from a company in bankruptcy in order to cover his expenses.

But the penalties in Steinberg’s case are not unusual. In personal bankruptcy cases (Chapter 7 or Chapter 13), bankruptcy fraud can lead to penalties that include:

  • Fines of up to $500,000, which usually align with the amount of money or value of property involved in the fraudulent transactions; and
  • Up to five years in prison.

Because bankruptcy is handled at the federal level, bankruptcy fraud is a federal offense. While Steinberg’s case represents a blatant flouting of the rules of bankruptcy court, not all bankruptcy fraud is so glaringly obvious.

One reason the U.S. Court system recommends that individual bankruptcy filers work with an attorney is so that they can avoid accidental fraudulent behavior. In many cases, transferring ownership of property to a friend or family member in the months immediately preceding a bankruptcy filing can be construed as fraudulent by the bankruptcy court.

If you have questions regarding the potentially fraudulent appearance of your plans for a personal bankruptcy case, be sure to consult with a bankruptcy lawyer who practices in your state.

Back in October, T-Boz (born Tionne Watkins), a singer from the group TLC, filed for Chapter 13 bankruptcy protection. Last week, though, T-Boz had her case dismissed by the bankruptcy court, meaning that the singer’s creditors are legally free to pursue any and all claims against her.

Here’s a look at what went wrong with T-Boz’s bankruptcy filing, and what you can do to make sure your case proceeds more smoothly.

In Bankruptcy Court, Follow the Rules

There’s a reason that the U.S. Courts recommend working with a bankruptcy lawyer during a personal bankruptcy filing: the laws that govern the bankruptcy court are complex and outlined in difficult-to-decipher legalese. T-Boz, it seems, failed to follow the rules adequately. Here’s what happened.

  • The bankruptcy petition. T-Boz filed a petition under Chapter 13 of the U.S. Bankruptcy Code, seeking a chance to repay her creditors over a period of three to five years. After filing the initial paperwork with the bankruptcy court, bankruptcy filers have a limited period of time in which to submit supplementary documents and paperwork. Failure to do so could result in the court dismissing your case.
  • The repayment plan. Within 30 days of filing an initial petition, Chapter 13 filers are required to make the first payment according to the repayment plan they submitted. Those who don’t make this payment risk losing the court’s protection. T-Boz apparently listed more than $768,000 in debts, but made no effort to submit her first payment after filing her bankruptcy petition.
  • The creditors’ meeting. Roughly 45 days after filing a bankruptcy petition, filers are required to attend the Creditors Meeting, at which they must attest to the truth and completeness of all information in their bankruptcy petitions. Creditors may attend this meeting (hence its name), but often do not. Because this meeting is required of all bankruptcy filers, those who do not attend risk having their cases dismissed. T-Boz, it seems, did not show up at her Creditors Meeting.

How to Keep the Bankruptcy Court’s Protection

Those who follow the rules of the bankruptcy court enjoy a powerful legal protection called the automatic stay, which prevents creditors of all types from making collection actions while a bankruptcy case is pending.

When the automatic stay is lifted, creditors are free to pursue debt collection by normal means. Because T-Boz failed to adhere to the rules set out by the bankruptcy court, she will now likely have to deal with collection actions from her creditors until she files for bankruptcy a second time, which she will be eligible to do 180 days after the dismissal of her original case.

Generally speaking, those who wish to avoid the unpleasantness of bankruptcy court dismissal may benefit from the guidance and instruction offered by a bankruptcy lawyer practicing in their state.

A new trend in the Southwest suggests that the country’s bankruptcy courts are finally taking advantage of technology that many other industries have already adopted: online chat forums. Sources note that bankruptcy courts in Arizona, New Mexico and Nevada have all started dabbling in online contact for court users.

As many other companies have discovered, offering online chat forums provides consumers with a convenient way to get information about the nuts and bolts of bankruptcy law.

Help for Real Estate and Bankruptcy Lawyers

One interesting element of the new trend, according to sources, is that some of the first to take advantage of the online chat forums have been real estate lawyers who have expanded their practices to represent clients interested in filing for bankruptcy.

Likely a result of the implosion of the housing bubble (which hit especially hard in the Southwest), many real estate lawyers have apparently seen bankruptcy proceedings become a much larger part of their clients’ daily needs. This can be attributed to the fact that Chapter 13 bankruptcy can be used as a means of halting or delaying mortgage foreclosure.

But because most real estate lawyers lack the training and experience in bankruptcy laws and bankruptcy court proceedings, they have more questions about navigating the bankruptcy court system than traditional bankruptcy lawyers do, it seems.

Enter the online chat forums.

Online Forums Available to Bankruptcy Filers, Too

In addition to providing pointers to lawyers representing bankruptcy filers, the bankruptcy courts with online chat forums also offer valuable services to individual bankruptcy filers interested in learning more about the process or nitty-gritty details of filing a bankruptcy case.

Those interested in filing for personal bankruptcy can use the online chat system to:

  • Ask for direction about where to find necessary forms or schedules for filing a bankruptcy case;
  • Clarify parts of the Bankruptcy Code that they cannot decipher for themselves;
  • Learn about deadlines, procedures, and requirements of the bankruptcy court; and
  • Get general information about how bankruptcy works and what they can do to prepare for bankruptcy or recover from a bankruptcy filing.

The Internet as a Bankruptcy Tool

Since the Internet went mainstream, potential bankruptcy filers have used it to research the bankruptcy process and potential effects of filing for bankruptcy on their financial lives. The introduction of a venue where filers can get their questions answered directly marks a natural progression toward more and more consumer-oriented online offerings.

At present, the online chat forums are only available for filers in a few states; however, if their success continues to grow, other areas of the country may introduce similar tools for filers and potential filers.

Tuesday, October 18th, 2011

New Bankruptcy Court Fee Schedules

Effective November 1, 2011, a new fee schedule will apply to all bankruptcy cases. The Judicial Conference of the United States agreed on the fee increases in mid-September and will use the proceeds generated to fund Judiciary needs.

Here’s a look at the new fees, the old fees, and what the changes might mean for you.

New Bankruptcy Fees

Most bankruptcy filers’ primary concern is the fee charged to file the bankruptcy petition with the court.

  • Chapter 13 bankruptcy: Formerly $274, the fee is now $281.
  • Chapter 11 bankruptcy: Formerly $1,039, the fee has been raised to $1,046.
  • Chapter 7 bankruptcy: Formerly $299, the fee has been raised to $306.

Luckily for most filers, the total increase in basic filing fees is not drastic; however, some critics of the bankruptcy system have complained that the fees were already prohibitively high for individuals truly struggling to make ends meet.

Other Bankruptcy-Related Fee Increases

In addition to the basic filing fee increases, the Judicial Conference also hiked fees associated with other parts of the bankruptcy process. The services whose fees have been altered include:

  • Certification: Formerly $9, now $11;
  • Exemplification: Formerly $18, now $21;
  • Audio Recording: Formerly $26, now $30;
  • Amended Bankruptcy Schedules: Formerly $26, now $30;
  • Record Search: Formerly $26, now $30;
  • Adversary Proceeding Fee: Formerly $250, now $293;
  • Document Filing/Indexing: Formerly $39, now $46;
  • Title 11 Administrative Fee: Formerly $39, now $46;
  • Record Retrieval Fee: Formerly $45, now $53;
  • Returned Check Fee: Formerly $45, now $53;
  • Notice of Appeal Fee: Formerly $250, now $293; and
  • Lift/Stay Fee: Formerly $150, now $176.

Which Fees Apply to My Case?

Because no two bankruptcy cases are exactly alike, it’s not easy to determine which of the fees listed might affect your bankruptcy case. As a bankruptcy lawyer can explain to you, the complexity and intricacy of your bankruptcy filing can affect the duration and costs of the case, which is affected not only by bankruptcy court fees but often by certain legal fees as well.

One way to keep bankruptcy fees to a minimum is to pay careful attention to the advice you receive from your lawyer. A lawyer may guide filers on what paperwork to prepare, how to complete bankruptcy forms, and otherwise how to proceed with a case.

Taking note of the rules and regulations that govern bankruptcy court early on in the proceedings may prevent you (and the bankruptcy judge, your trustee, or creditors) from having to return to the bankruptcy case to investigate or contest part of the information.

If you are truly unable to afford the fees associated with filing for bankruptcy, you may qualify for a bankruptcy fee waiver, about which a bankruptcy lawyer can tell you more.

Washington Mutual, Inc., the holding company for failed bank Washington Mutual, has faced some trouble having its reorganization plan accepted in bankruptcy court. The company filed for bankruptcy three years ago, but the court has twice rejected its plans for reorganizing and emerging from bankruptcy.

Here’s a look at what’s going on with this particular bankruptcy case and what kinds of issues might prevent an individual’s Chapter 13 repayment plan from earning court approval.

Insider Trading Accusations

At present, the bankruptcy judge overseeing Washington Mutual, Inc.’s bankruptcy case has ordered the company to undergo thorough mediation with its creditors in an attempt to work out a settlement that pleases everyone.

The judge suggested this course of action because, according to reports from the Associated Press, hedge funds supporting the company’s bankruptcy used information from the filing to engage in insider trading. Had the judge approved the current repayment plan, she believed creditors would have contested the ruling because of that insider trading.

Of course, such an issue is something that only a business seeking bankruptcy protection would have to worry about. Still, in individual bankruptcy reorganizations, a court might find reason to reject a reorganization plan.

Common Reasons for Chapter 13 Plan Rejection

In Chapter 13 bankruptcy filing, filers commit to a three- to five-year repayment plan designed to help them repay debts to some or all of their creditors. Filers submit their plan to the court, which approves it depending on a number of factors. Common reasons a Chapter 13 repayment plan might be rejected include:

  • Creditor objections to repayment terms: If creditors can show that they would have received more money from a Chapter 7 liquidation, they might object to the repayment plan. In the case that a Chapter 7 case would indeed better benefit creditors, the court may require a filer to file again, under Chapter 7. This is because the bankruptcy court has an obligation to both filers and their creditors.
  • Insufficient commitment of disposable income: Another common problem with Chapter 13 repayment plans is that a debtor has not committed all her disposable income to the repayment plan. Chapter 13 bankruptcy is designed to help both debtors and creditors, and it is most effective when both groups adhere to its rules – for filers, that means committing the entirety of disposable income to the repayment plan.
  • The repayment plan is not feasible: A plan that requires too great a commitment of money from the filer might be rejected as unrealistic, based on figures about a filer’s income and expenses. If a filer is unlikely to stick with the repayment plan for its full three- to five-year duration, the court is unlikely to approve it.

Bankruptcy fraud is a serious crime, as the story of Brent Farris illustrates.  According to the Kansas City Star, St. Louis resident Farris pleaded guilty to bankruptcy fraud in 2004 but fled the country and avoided getting caught until earlier this year.

Here’s a look at his somewhat sensational case.

  • In 2002, Farris, who at the time owned an art gallery in St. Louis, reportedly filed for bankruptcy.
  • During the case, he concealed from his bankruptcy trustee a painting worth about $300,000 with the intention of selling it later and keeping the profits.
  • The trustee suspected fraud and when Farris faced charges in 2004, he pleaded guilty and was sentenced to 20 months in prison and a fine of $300,000.
  • Farris reportedly fled the country before his sentence began and spent the next five years (from 2004 to 2009) on the lam, hopping between 14 countries.
  • In 2009, sources note that Italian authorities apprehended Farris, but he managed to break his house arrest and flee again.
  • Last year, Farris was discovered in Mexico. In March, he apparently pleaded guilty to the charges of failing to appear in court and was sentenced to 14 months in prison.

Who Does Bankruptcy Fraud Hurt?

In order to understand why the penalties for bankruptcy fraud are so severe (the maximum sentence is a five-year prison sentence and damages or fines up to $500,000), it helps to understand who’s hurt by bankruptcy fraud.

Consider this:

  • Bankruptcy protection is designed to help consumers. By giving consumers an alternative to repaying their financial obligations as originally agreed, bankruptcy provides a sort of emergency exit for those who get in over their heads financially.
  • Bankruptcy can hurt creditors. Of course, when a person does not repay a debt, someone loses out. Both Chapter 7 and Chapter 13 bankruptcy are designed so that creditors are often able to recover some of the money they lent to filers, though usually not the full amount the filer owes.
  • Bankruptcy fraud cuts into the creditors’ repayment. Concealing or transferring property before bankruptcy (or otherwise engaging in fraudulent behavior) reduces the amount of money creditors get from a bankruptcy case. And while it’s easy to paint the creditors as the bad guys, it’s important to remember that they’re often powerful organizations. Translation: if too many big companies are unhappy with the way bankruptcy laws work, they’ll likely lobby Congress until those laws are changed. After all, such changes were already introduced in the form of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

If you’re considering a bankruptcy filing, it’s important to make sure you avoid committing fraud, either intentionally or accidentally. A bankruptcy lawyer in your state can explain the laws more explicitly and help you keep your paperwork aboveboard.

Wednesday, June 22nd, 2011

Bankruptcy Court Challenges DOMA

The Defense of Marriage Act, which bars federally recognized same-sex marriage, got a surprise challenge from a California bankruptcy court last week. Here’s a look at what happened and what it might mean in the future.

  • A gay couple married in California. In 2008, when gay marriage was briefly legalized in the Golden State, Gene Balas and Carlos Morales wed.
  • Later that year, Proposition 8 was passed. This law amended California’s constitution to exclude the right for gay couples to marry, though the state acknowledged the legitimacy of marriages that had already occurred.
  • The couple filed jointly for Chapter 13 bankruptcy protection. In February 2011, the couple was pushed by illness and unemployment to seek bankruptcy protection. They filed under Chapter 13, which allows filers to catch up on past debts with the help of a three- to five-year repayment plan.
  • The U.S. Trustee’s office requested dismissal of the case. Because bankruptcy is governed by federal laws and the federal government does not recognize same-sex marriages, the U.S. Trustee wanted the California court to deny the joint bankruptcy protection. If this request had been granted, the two men would have had to file for bankruptcy individually. This could have been more expensive, both in initial filing fees and long-term debt repayment.
  • The California judges refused dismissal. Instead of tossing the case out, twenty judges signed a ruling asserting that DOMA is unconstitutional and infringed the rights of the two men seeking bankruptcy protection.

Joint Bankruptcy, DOMA & Civil Rights

Right now, married couples seeking bankruptcy protection can choose between filing individually or jointly. The decision usually depends on state laws, the types of debts a couple has, a couple’s income and a number of other factors.

But because DOMA only permits marriage to a certain group of citizens, it automatically excludes others from joint bankruptcy protection. This exclusion, say California bankruptcy judges, is not in line with the rights guaranteed by the Constitution.

The judges used the language of the DOMA law to dispute its validity:

  • The joint Chapter 13 bankruptcy, noted the judges, would have “no effect on procreation.” One of DOMA’s professed goals is to promote childbearing.
  • The bankruptcy case, too, would be in no danger of “harm[ing] any marriage of heterosexual persons,” according to the California ruling. Another of DOMA’s stated goals was to defend and nurture the tradition of heterosexual marriage.

The case is getting a lot of attention because it attacks the controversial anti-gay marriage law from an unexpected angle. It also comes only months after the Obama administration announced that it would no longer defend DOMA in court, as it deemed the law unconstitutional.

Monday, October 11th, 2010

Supreme Court Considers Means Test Case

The Case Ransom v. MNBA appeared before the Supreme Court last week and raised interesting questions about the role of the means test bankruptcy filers must pass in order to qualify for protection under Chapter 7 of the U.S. Bankruptcy Code. Here's a look at what's involved in the case and what it might mean for future bankruptcy filers.

Car Payments and Income in the Means Test

The court case involves the bankruptcy petition of man named Jason Ransom.

  • No car loan: Sources note that Ransom has a car that he owns fully – that is, he is no longer making payments on the vehicle.
  • Ownership deduction: In his bankruptcy petition, Ransom reportedly claimed an ownership deduction of $471 per month for his vehicle.
  • Court rejection: Because he had no car payment, though, the bankruptcy court rejected this deduction in his initial case filing. An appellate court upheld the decision. The Supreme Court must make a final decision.
  • IRS definition: Apparently, both the district court and the appellate court denied Ransom's deduction claim based on the Internal Revenue Service's definition of an allowable deduction for car owners, which limits such deductions to people who are currently making payments on their vehicles.

So the issue at hand is whether or not a Chapter 13 filer (that is, a bankruptcy petitioner who has above-median-income levels and so does not pass the Chapter 7 means test) can keep money each month (instead of paying it to creditors) under the car ownership deduction if he or she is not currently making payments on a car.

Why It Matters: Your Money in Chapter 13 Bankruptcy

The issue may sound fuzzy, but the Supreme Court's decision could have real impact on future bankruptcy cases. Here's a look at why and how.

  • The language of the Bankruptcy Code: While the language of the U.S. tax code is clear that an ownership deduction is only available to those still making payments on a vehicle, the language of the U.S. Bankruptcy Code is a bit fuzzier.
  • The cost of owning a car: As Ransom's lawyers are reportedly arguing, the "ownership deduction" should be available to those who own their cars outright because such vehicles require maintenance and repairs – especially if they're older.
  • The expensive car loan argument: One of the reasons that this issue is so interesting is because it essentially rewards people who have expensive car loans and newer cars and punishes those who are (perhaps more fiscally responsibly) driving older vehicles they've already paid for.
  • The freedom of extra money: If the Supreme Court decides to grant the ownership deduction to people who own their cars outright, it could mean greater financial independence for car owners who file for bankruptcy. Because they'd be able to save more money each month, they could potentially catch up on other payments more easily and possibly even build savings, thus preparing themselves more fully for post-bankruptcy life.