Archives for October 2012

Penny-wise and pound-foolish: phony bankruptcy law firm caught and shut down, but what about their clients?

The New Jersey Law Journal reported  that a Baltimore bankruptcy judge shut down  a fictitious law firm run by a  man with only a high school education, and imposed heavy fines. This person is reported to have represented over 50 clients, charging a flat rate of $400.00 to prepare and file bankruptcy petitions and other papers needed to start bankruptcy proceedings. According to the United States Trustee, his Baltimore office  was “decorated with law books to give the impression of a legitimate practice”

What about all those people who relied on this person? We know from practice (and our clients soon learn) that bankruptcy only looks simple. There are many “land mines” that can trip up the ill informed, resulting in civil or criminal liability, loss of assets, or complete loss of a discharge, forever.

To do the job right requires a lot of time, even in the simplest cases. Proper advice and representation requires that those anticipating bankruptcy be asked a lot of questions, and that they be given a careful and complete understanding of what they are getting into, and why it is or is not their best course of action.

This is an area where a few extra dollars to hire someone to do the job right is money well spent. After all, once a bankruptcy is filed, it may take on a life of its own, and it often cannot be “withdrawn”. Just as important, a bankruptcy discharge is not a “cure-all”. We think it is just as important for our clients to develop a plan so they can get back on a balanced budget, and once and for all take control of their lives.

So this story is an object lesson…

Judgments have life after bankruptcy, a New Jersey Court rules

We recently posted a discussion of Gaskill v Citi Mortgage, a September 2012 decision by the New Jersey Appellate Division where it denied an application to cancel a judgment under a New Jersey statute allowing that relief any time more than 12 months after a bankruptcy discharge. There is another point the court made: even though the personal obligation underlying a judgment may be discharged and uncollectible against the debtor personally, the judgment creditor can continue to levy on the residence and try to have it sold at Sheriff sale,  for another year! At first this sounds surprising, (how can they collect against my house a debt I do not have to pay?) but on this point, the court got it right. As we will see, this is a problem that can be easily prevented.

The reason is that a judgment in New Jersey becomes a lien on real estate until it is satisfied or removed. A bankruptcy discharge does neither. In most cases, the judgment creditor does not bother trying to have the Sheriff levy and sell post bankruptcy. The reason is simple: most houses have no equity or substantial mortgages. Any money from a Sheriff sale on a judgment must first satisfy the existing taxes and mortgages, and few houses have enough equity to risk the sale price being too low to leave anything for the judgment holder.

Happily, if the homeowner is in a position to keep their home after bankruptcy, there is an easy solution. The Bankruptcy Code has a provision for homeowners to “avoid” a judgment lien to the extent it “impairs an exemption”. In most cases this is the case. [There is a seemingly complicated formula, found at 11 USC 522(f)]. For our clients who want to keep their home and have judgments this is an option. The additional cost of these motions (which are rarely challenged) is worth the peace of mind. The result is a federal court order removing the judgment as a valid lien right away.

This little wrinkle is just one of the many “gotchas” that can lie in wait for the unsuspecting and poorly advised debtor. As in so much more in life, when it comes to hiring the right bankruptcy lawyer, “penny-wise is pound-foolish”. The small extra cost to have it done right is worth it.

Creditors, especially medical bill collectors, ignoring bankruptcy and becoming lawbreakers

In the past year or so I have seen something I hadn’t seen before. More and more clients are continuing to get notices and collection demands from medical bill collectors, even after they filed bankruptcy and even after they received a discharge.

Perhaps they do not realize the penalties that can flow from this kind of behavior.

Once a bankruptcy is filed, the automatic stay goes into effect. Any creditor or bill collector who becomes aware that the debtor is in bankruptcy is presumed to have “wilfully” violated the automatic stay by continuing efforts to collect. The vast majority of creditors and collectors know this, and obey the law. Those who persist with calls or other collection efforts face a possible motion in the bankruptcy court, seeking damages, payment of the debtor’s attorneys fees, and possibly punitive damages. Usually a simple “cease and desist” letter is sufficient to stop these efforts in their tracks.

But we have seen cases where the notices and calls continue. This should not be tolerated. Bankruptcy protection is a right by federal law.

The authomatic stay ends when the person in bankruptcy receives a discharge. The discharge makes the protections of the automatic stay permanent for most debts. (however, it does not protect against enforcement of mortgages or liens, most taxes or domestic support obligations, student loans and other non-dischargeable debts).

Even here, we have seen collectors continuing to pursue collection. When this happens, post-discharge, the remedy is legal action to hold the creditor in contempt.

In New Jersey, Delaware and Pennsylvania, the disharge protects debtors against collection even if they forgot to list the particular creditor, so long as there was no money paid out to creditors in the bankruptcy.  (We always try hard to make sure everyone who is owed, or who might claim to be owed money, is listed)

This situation needs monitoring and appropriate action. Perhaps too many people have not called the offenders to account….

NJ Court rules that failure to properly list a judgment holder in bankruptcy prevents later removal of lien from real estate

We have always told our bankruptcy clients how important it is to  accurately listing every possible creditor. The New Jersey Courts have reminded us again why that is so.

First, a common misconception. People think that if they have gotten a bankruptcy discharge, all judgments or liens against their home are removed. This is not so. Mortgages and judgments, and certain other liens cannot be collected post-discharge against the debtor personally, but they stay attached to real estate. This usually comes up when the debtor in bankruptcy wants to sell or refinance a home. The judgments are still there, clouding title to the home. They can be removed, but extra steps are involved, either a motion during the bankruptcy case, or a motion in the New Jersey courts under its “cancellation of judgments” statute,  filed a year or more after the bankruptcy discharge. This is usually pretty straightforward, assuming the attorney filing the motion knows what they are doing and the proper steps were taken in the bankruptcy case.

In Gaskill v Citi Mortgage Inc., (Appellate Division Sept. 28, 2012) however, the Gaskills could not get that relief to remove a judgment Citi had  against them. The reason? In their bankruptcy they had never listed Citi as a creditor but instead had listed as the “creditor” only the collection law firm that had represented Citi in obtaining the judgment. Because of this, the Appellate Division held tht Citi itself never got information sufficient in time to protect its rights in the bankruptcy;  its first notice of the bankruptcy, according to the opinion, came after the discharge was entered.  As a result, the New Jersey Appellate Division held that the Gaskills were not entitled to the benefit of cancellation of the judgment as a lien on their home. (BUT See Note Below)

The take-away here is that those who need bankruptcy relief need to pay attention to the details. We routinely pull a judgment search as well as a full credit report for our clients. As the Gaskill case reminds us, not everyone does this. And those who intend to keep their home, or possibly buy another, need to be careful as well. As always, having the right attorney and sweating the details pays off.

NOTE: The Third Circuit Court of Appeals has held that in the typical “no asset” bankruptcy were the trustee has no money to pay claims of creditors, a bankruptcy discharge applies to everyone who was owed money,whether or not listed. Here, however, that was not the case, since the trustee arranged for creditors to get notice to file claims. Oddly, Citi actually filed a claim in the bankruptcy and even filed and lost a motion in the bankruptcy court seeking a declaration that its lien was not to be discharged. One has to question the logic or validity of the Appellate Division’s ruling, since Citi clearly knew about the bankruptcy in time to protects its rights. Further, Citi lost on nearly the same issue that the Appellate Division ruled the other way. For now, this ruling signals that those who rely on New Jersey statutes to clear their home of judgments has better turn square corners.

For help with debt or related problems, please feel free to contact us.

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