Justice Kagan Upholds SF Judges Ruling in Ransom v. FIA Card Services
In January 2011, the U.S. Supreme Court decided Ransom v. FIA Card Services, which originated here in San Francisco. Writing for an 8-1 majority in her first opinion for the Court, Justice Kagan treated the case as one of straightforward statutory construction, coming down on the same side as the trial judge (Dennis Montali, U.S. Bankruptcy Court, N.D. Ca.).
The decision's bottom line is that when a Chapter 13 debtor calculates the "Means Test" (which determines the minimum monthly amount that the debtor is supposedly able to repay to unsecured creditors), she cannot take a deduction for a vehicle "ownership expense" that she does not actually incur.
For example: If the debtor owns 1 vehicle free & clear, she may take an "operating expense" for that vehicle, but not an "ownership expense". But if she owns 2 cars, one free & clear, and the other encumbered by a loan, then she can take the operating expense for both and the ownership expense for one. In other words, she cannot take the ownership expense for cars she owns free & clear.
The decision is likely not to have much impact here in the Northern District of California, where Ransom has been prevailing law for some time.
New SF Procedures Help Chapter 13 Debtors Seeking Home Loan Modifications
Until recently, San Francisco Chapter 13 debtors who wanted modification of their home mortgages faced serious difficulties.
They had two options: They could propose a Chapter 13 plan that paid off the amount they were behind on their mortgage, hoping to remove this amount later when the bank (hopefully) approved the modification. But mortgage arrears are frequently in the tens of thousands of dollars, so that debtors often had to pay more per month than they could afford while they waited for the bank to decide. On top of that, modifying a confirmed Chapter 13 plan can be a very tricky and by no means certain thing.
The other option was propose a Chapter 13 plan that assumed the success of the modification. However, the Court did not confirm these plans until the banks actually gave their approval. The case would sit there, with no progress being made by the bank, causing difficulty to the Trustee. The bank meanwhile would claim that the modification was pending, simultaneously claiming out of the other side of its mouth that it was not aware of any loan modification.
New procedures adopted by the San Francisco Division of the United States Bankruptcy court for the Northern District of California eliminate this problem. The Division’s Model Chapter 13 Plan, effective January 1, 2011, includes a new provision. Debtors list the amount they think they will pay per month on their mortgage, assuming a successful modification (under the HAMP guidelines, 31% of gross income). They also list the amount they are behind on their mortgage, which will presumably be incorporated into the modified loan. The amount of the proposed monthly payments to the Trustee then reflects an assumption that the modification will succeed, so that arrearage amount does not have to be paid through the plan.
Problem solved. The Court confirms the plan, the bank hopefully approves the modification, and the debtor continues paying the Trustee.
But what happens if the modification is denied? Under the new provision, the debtors have 14 days to file an amended plan that pays off the mortgage arrears. However, debtors should also note that the new Model Plan includes a very important self-execution clause: If the debtors fail to file an amended plan, the Plan by its own terms is deemed to include that arrearage amount, putting the debtors in material default of the Plan and opening them up to a Motion for Relief from Stay (i.e. permission to foreclose) by the bank or a Motion to Dismiss by the Trustee.
14 days is not a long time, but overall this new provision provides an enormous benefit to homeowners filing Chapter 13 cases to try to save their homes. It prevents cases from either getting stuck in pre-confirmation limbo or from requiring unreasonably high payments. It also puts lenders on the hot seat, telling them that until they say “no” to a loan modification, the Court will treat them as is they’re going to say “yes”.
Massachusetts High Court Invalidates Foreclosures Due to Errors
On January 7. 2011, the Massachusetts Supreme Judicial Court decided companion cases U.S. Bank N.A. v. Ibanez and Wells Fargo Bank, N.A. vs. LaRace. Both were cases where the banks had acted as trustees selling the houses, and as buyers in foreclosure. They brought suit seeking declarations that they held clear title to the properties.
In both cases, the mortgages had been bundled with other mortgages and converted into mortgage-backed securities. The banks claimed to have power to foreclose, having been assigned the mortgages under the terms of the securitization documents. However, the banks failed to show that these specific mortgages had been bundled into these specific securities, and they failed to show that the entities claiming that they assigned the mortgages to the banks were themselves ever the holders of these mortgages. Because the banks could not show that they were the holders of the mortgages at the time of the Foreclosure Notices (even though the notices listed them as such), the notices and the subsequent foreclosures were invalid.
The potential impact of these cases is enormous, raising questions about every foreclosure where the mortgage had been pooled and securitized, even outside Massachusetts. For homeowners before the bankruptcy court, these cases add one more to the array of very powerful tools that debtors can employ.
Chapter 7 Debtors Get 15 More Days to Finish Financial Management Course
Debtors in consumer Bankruptcy proceedings must complete two courses: one before you file (the Credit Counseling Course), and one after you file (the Financial Management Course). If a Debtor files without completing the first course, the case will be dismissed. If a Debtor fails to complete the second course by a certain deadline, the case will be closed without the Debtor receiving a discharge.
On December 1, 2010, an amendment to Rule 1007(c) of the Federal Rules of Bankruptcy Procedure came into effect. This amendment extends the time a Chapter 7 Debtor has to compete the second course from 45 days from the original date for the Meeting of Creditors to 60 days from that date.
Of course, it probably behooves most Debtors to complete the course well before the old deadline, much less the new one. Nevertheless, the extension of time may prove helpful to Debtors who, due to unusual circumstances, are unable to complete the course within the former 45-day window.
Filing for Bankruptcy Does Not Make You Ineligible for a HAMP Loan Modification
HAMP (Home Affordable Modification Program), a program created by the federal government, provides a set of guidelines to lenders when modifying home mortgages: qualifying homeowners can (1) have their interest rates lowered, (2) their loan periods extended, or (3) receive a deferment on a portion of the principal, so that the monthly mortgage payment is reduced to 31% of the borrower's monthly pretax income. The program also gives lenders an incentive to engage in modification: HAMP shares with the lender the cost of those monthly payments reductions. HAMP is now the standard protocol for people seeking a home loan modification.
However, many homeowners are concerned that filing for bankruptcy will disqualify them from participating the in the HAMP program.
Supplemental Directive 10-2 (dated March 24, 2010) clearly provides that borrowers cannot be denied a HAMP modification on the basis of a bankruptcy filing. Indeed, the Directive requires that mortgage servicers must consider borrowers in active bankruptcy cases for HAMP if the borrower, his or her lawyer, or the bankruptcy trustee submits a request.
Moreover, for people concerned that delays in obtaining court approval will cause problems with the three-month trial period deadline, the Directive also provides that mortgage servicers should extend the trial period for borrowers with active bankruptcy cases by an additional two months.
Circuit City files for bankruptcy and plans on laying off thousands of workers
The downturn in the economy is hard on individuals and businesses. Circuit City, the big electronics store, filed for bankruptcy on Monday November 10. 2008. The company which has reported only one profitable quarter in the last year announced last week that it planned on closing 20% of its stores and laying off thousands of employees. Such layoffs have a ripple effect. Many individuals who are facing bankruptcy are doing so because they have been laid off from work and are unable to pay their monthly bills. Unfortunately many of the Circuit City employees who will be laid off will end up in a financial bind and some may be looking at bankruptcy as an option for relief from debts.
