Student Loans-nondischargeable in bankruptcy-time for a change?

Recently, Sen Richard Durbin of Illinois stated at a hearing on the issue that it was time to reverse a 2005 amendment to the Bankruptcy Code that made it impossible to discharge student loans taken out under government programs or qualified under such programs. We quite agree. Student loans have become another “easy money” disaster in the making, much like the easy mortgage loans that go so many people in trouble and have now generated a long-term housing crisis.

Before 1998, student loans could be discharged after 7 years. Now, the only way such loans can be discharged is by showing special hardship. That showing is very difficult to make, and generally requires that the borrower have no present income, and no prospect of any income any time in the future.

We see plenty of people who are saddled with student loans that are 3-10 times their total annual income. Most have no extra money in which to make any payment, without foregoing basic necessaries like food, transportation, or basic medical care.

Many student loan lenders, unlike mortgage lenders, seem to be far more willing to adjust payment terms to meet the borrower’s financial realities. (They can afford to wait, knowing there is no escape and the interest keeps accruing. The result can be perpetual debt. To be fair, if the bankruptcy law changes, lenders may end up being more aggressive and the cost of student loans could go up. But we think that freely lending to people without regard to their ability to repay and without some avenue for repayment or relief is not in our society’s best interest.

We hope the change comes about. One alternative is to make such loans dischargeable in Chapter 13 through a repayment plan, or to setting easier standards for a court to find them dischargeable. However, even if changes in the law do not come (and the lenders have a powerful lobby), many people can discharge other debts or make other arrangements through bankruptcy that can contribute to solving the student loan problem. This needs a careful and individualized review by a qualified attorney.

Starting over after business failure: your debts can follow you if you get it wrong

We have seen a lot of business owners whose businesses are failing and who want to start over. That is not as simple as it sounds, and doing it wrong could result in the old creditors coming after the new business and its owners.

Usually, the owners want to just start up the same business, with the same customers at the same location with the same owners. That is a recipe for problems. The problems come from two principles.

The first is successor liability. The second is that business owners operating a firm in the “zone of insolvency” have a “fiduciary duty” (or an obligation to serve as a trustee) to their creditors. A detailed discussion of these principles is beyond the scope of this article.

Starting Over After Business Failure

In New Jersey, a new business can have successor liability for the debts of the old if a court finds that a “de facto merger” occurred, or if the business is the “mere continuation” of the old. This means that the old creditors can pursue the new business for payment, providing they can convince a court that this is the case. Courts look for the following to show a defacto merger/mere continuation:

1. the new business has the same ownership, management, personnel, physical location, assets and/or general business operations as the old one;

2. the old business shuts down suddenly at about the time the new business starts up.

3. the new business or its owners assume some but not all debts of the old business, especially those ordinarily needed to continue business;

4. the new business holds itself out to the public as continuing the old business.

Any time business owners start a new business under a new name, successor liability is a risk. There are steps that can be taken to minimize the risk. Each case is different, and a detailed review by a knowledgeable and experienced bankruptcy or business attorney is needed, in advance of any such move.

The second trap is fiduciary liability of business owners. Violating this duty could expose the business owners to a later lawsuit and debts that might not be dischargeable in a personal bankruptcy. Simply put, business owners are held to a high standard of care towards their creditors when a business is failing. They have a duty to maximize the value of the business, and to not take steps which benefit themselves unfairly at the expense of creditors or which treat creditors unfairly. This does not mean that business owners are not entitled to be paid for their services, or that they have to put more of their own money into the failing business.  But lining their own pockets, or transferring assets to themselves or others without the company getting fair value in exchange; engaging in preferential treatment of certain creditors; or making false statements to creditors are some of the “no-no’s” to avoid. Again, this is not a complete list and what can or should be done is very fact sensitive and requires careful review by an experienced attorney. As always, careful planning and advice are critical

Business owners are entitled to try to start over, but without careful planning and the right advice, the result could be that the old debts beleager the new business

Bankruptcy Pros and Cons When facing Foreclosure

People facing foreclosure have a lot of issues and concerns. They are especially in need of advice.

This article I wrote for our local bar journal, to be published in April covers three topics:

(1) liability if the property is vacated before delivery of the Sheriff’s deed;
(2) risks of possible deficiency liability; and
(3) a quick but not dispositive discussion of some possible tax liabilities.

These are all important to deciding whether to do a short sale or deed in lieu of foreclosure, file for bankruptcy, or ride it out to the Sheriff’s sale.

Read article here.

NJ Supreme Court to borrowers: don’t sleep on your rights when faced with foreclosure

In late February 2012, the New Jersey Supreme Court came down with a major decision in US Bank NA v Guillaume. While the ruling addressed important legal issues, its history and result shows why homeowners facing judicial foreclosure cannot assume that a possible mortgage modification will make their problems go away. The Guillaumes, it turned out, had some valid defenses to the foreclosure Complaint when it was served upon them. Instead of filing an Answer raising those defenses, they went to a housing counsellor and tried for a loan modification, which was eventually denied. During the eight months while that request was pending, the foreclosure process marched on. The lender filed a motion for entry of  judgment of foreclosure, and gave the Guillaumes the required notice they were doing so. Still the Guillaumes ignored the process. Six months after that motion was filed a judgment was entered against them. Again, they asked for a loan modification. About a month later they received notice of a sheriff’s sale. Only then did they hire an attorney who sought to set aside the judgment of foreclosure and asserted various defenses. That request was denied. Eventually the issues got to the Supreme Court which held in essence that the Guillaumes had slept on their rights and had lost the right to defend the foreclosure.

This is a pattern of denial that we see too often. While the defenses to a foreclosure are limited, they do exist, but the time to seek legal advice is at the start of the process not the end. Too often also, people think that their chances of getting a loan modification  are better than they are. No matter what the situation, it does not get better over time. The best time to assess the options available and to work towards a suitable outcome is right away. Whether the solution is bankruptcy, or a vigorous foreclosure defense, or some other option, a foreclosure should be a wake-up call.

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An object lesson for creditors: Countrywide Home Loans hit with $85000.00 in legal fees for violation of the automatic stay

On February 22, 2012, Judge Kaplan in the US Bankruptcy Court for the District of New Jersey hit Countrywide with an $85,000.00 tax bill for attempting to collect prepetition mortgage escrow deficiencies from debtors in Chapter 13 bankruptcies. In re Rodriguez, case no. 07-24687. The decision highlights the importance for all creditors not to “shoot first and ask questions later”.  Doing so, as Countrywide learned, can be expensive.

In this case, Countrywide claimed it was entitled to add to the post-bankruptcy mortgage payments an amount to pay back pre-bankruptcy shortfalls in the debtor’s escrow account. The debtors claimed this was an unlawful attempt to collect a pre-petition debt, and that the deficiency amount should have been included instead in Countrywide’s claim which would be paid in the bankruptcy. The debtors originally claimed that Countrywide was violating the “automatic stay” that renders illegal any attempt after a bankruptcy is filed to collect a debt that pre-existed that filing. The question went all the way to the Third Circuit Court of Appeals which ruled that Countrywide was wrong.

Under section 362(k) of the Bankruptcy Code, an individual who suffers any actual injury from a wilful violation of the automatic stay may seek damages, punitive damages and counsel fees. A violation is wilful so long was the collection effort was intentional and made by someone who knew about the bankruptcy. The Third Circuit sent the case back to Judge Kaplan to determine whether Countrywide wilfully violated the automatic stay and what damages the debtors were entitled to.

Here Judge Kaplan found that Countrywide wilfully violated the automatic stay because it proceeded, without seeking permission from the bankruptcy court, to demand payment of escrow monies after receiving notice of the bankruptcy filing. He hit Countrywide with payment of all the resulting counsel fees incurred by the debtors as they fought the issue up to the Third Circuit. Since Countrywide chose to litigate the issues, Judge Kaplan found, they should not be faulted for defending their rights.

This case underscores  important lessons for any creditor receiving notice of a bankruptcy:

1. Get qualified legal advice right away;

2. Do not attempt to collect the debt except through the bankruptcy court process, without first seeking permission and authority to do so.  When in doubt, err on the side of caution.

Steven R. Neuner has over 29 years of experience helping creditors, trustees and debtors protect their rights in bankruptcy court. For more information about these and related topics, see our website at

Buyers needing FHA mortgages will pay higher fees

The New York Times reports that the FHA will charge higher fees to buyers seeking mortgages, to restore depleted reserves. In the current environment, many buyers have been seeking FHA mortgages (40% of all new mortgages in 2010). The FHA does not make loans; it only insures them. But its underwriting standards allowed people with a credit score of 580 or more to put down as little as 3.5 % of the purchase price, according to the article.

For those who have better credit or who can put more money down, a conventional loan may be better. But for many, FHA loans are the best game in town.

The increase in fees will be .1 % to .35 % of the loan amount with additional charges planned in the future.

Increasing numbers of million dollar homes going to foreclosure

CNN Money reports that Realty Trac is showing over 36o00 homes valued at $1 million or more were foreclosed or served with a notice of default. This is a 115% increase in this market segment while  the percentage of homes in the $500,000 to $1 million range has fallen by 21%. These, the article reports, are “strategic defaults” by homeowners whose homes have negative equity.

While the downsides of such a strategy need to be carefully considered, including the inevitable damage to credit, the fact is that in many states, including New Jersey the judicial foreclosure process is so slow that homeowners can enjoy substantial “free rent” before having to move, and the risks of personal liability, while present, are low. (In New Jersey, a first mortgage lender on a typical home mortgage must complete the foreclosure sale and has 3 months to file suit against the borrower personally). For many people, this may be a worthwile alternative to bankruptcy that allows distressed homeowners to regain their financial balance and re-take control over their lives.

This strategy should not be pursued except after receiving competent legal and tax advice.

For more information on this and related topics, visit our website at

Foreclosure Advice

California audit exposes widespread irregularities in foreclosures there

The New York Times reports that a San Francisco County audit of 400 bank  foreclosures of deeds of trust (the equivalent of a mortgage)  there found serious irregularities. The problems ranged from the technical, eg  “a failure to warn borrowers that they were in default on their loans as required by law” to serious questions about ownership of the loans and validity of titles obtained at the foreclosure sale. Just as a property owner has to have a “chain of title” that is valid and unbroken, the validity of a foreclosure or, where the lender takes the property back at the foreclosure sale, the resulting title to the property, depends on the validity of every transfer of the loan from the original mortgage to the current owner of the loan. To cover up poor record-keeping and document maintenance, a lender might sell or assign a mortgage loan that it no longer controls due to a previous assignment to someone else. The result is the same as if I first deed my home to buyer A, then later give a deed to buyer B. My deed to buyer B is bogus and fraudulent because I no longer own the property I am purporting to sell.

The California study uncovered an amazing 45% of cases where the property was “taken back” at the sale by someone erroneously claiming to be the beneficiary of the deed of trust, ie the mortgage lender. Thus, the report is quoted as concluding, “a ‘stranger’ to the deed of trust,” gained ownership of the property, and the resulting sale may be invalid.

The report has been turned over to the California Attorney General, which is already investigating widespread irregularities in the foreclosure process. Here in New Jersey, persons facing foreclosure or buying at a sheriff sale should be skeptical and demand proof  that the foreclosing lender holds valid “title” to the loan.

For more on these and related subjects, please visit our website at

MF Global Trustee waives attorney client privilege and turns over emails to investigators- a cautionary tale how a bankruptcy can open a can of worms for the unwary.

In a February 14, 2012 article, “Federal Investigators Gain Access to Thousands of Internal MF Global Documents” the New York Times reports that the trustee for bankrupt MF Global has agreed to partially waive the corporation’s attorney client privilege so as to turn over  “thousands of internal e-mails and documents to federal investigators, ending a dispute over the privacy of decisions made in the days before the firm collapsed”

This reminds us that many years ago, the United States Supreme Court ruled that a corporation’s bankruptcy trustee controls the attorney client privilege and can waive it. This same rationale has been extended to corporations, Limited Liability Companies, and even partnerships. Under limited circumstances, it has been applied to individuals. As a bankruptcy trustee, I used this power more than once to pry open important information, sometimes yielding a treasure trove of information.
Normally, what a person, or the management of a business tells their attorney in private is privileged and protected against disclosure. However, by putting itself into bankruptcy, a business entity enters a “fishbowl”, and where a trustee is appointed (routine in Chapter 7 bankruptcies but far less common in Chapter 11) the Trustee becomes the new management, and gains control of the attorney client privilege. Confidential discussions between corporate officers or business partners and their attorney can potentially no longer be private if a trustee so chooses.
That is why we regularly recommend that the individual shareholders, partners or members of a business in trouble retain personal counsel. When we act as counsel for the business, we caution our clients about the potential for otherwise privileged discussions to lose that status.
Steering a business out of financial trouble is rarely simple. Litigation in bankruptcy court is always possible. Disputes with creditors are likely. Experience is essential. For more information about these and related subjects, please visit our websites at or

Changes coming to judicial foreclosure in New Jersey?? Is the process speeding up? Is “cash for keys” going to be a real solution? Welcome developments but uncertainty.

In the past we have reported that residential foreclosures in New Jersey were taking three years on average from start to sheriff’s sale. We have also reported that short sales and deed in lieu of foreclosures were laborious to obtain and results uncertain. Both patterns might be changing.

Recent reports have some sheriff sales coming after only 6 to 9 months. If this develops as a pattern there are several possible reasons for it. Our information is that 85% of foreclosures are filed through an electronic filing system called JEFIS. Those filings can be processed much more quickly by the clerk’s office. Initially, we are told, this system became quickly overloaded and broke down, but more recently is up and running.

Another reason may be because in late 2010 or early 2011, the Superior Court in Mercer County issued an order directing the Office of Foreclosure (located in that county) to cease processing foreclosure Complaints filed by any of six major major mortgage lender/processors and holding up Sheriff’s sales for those lenders. This arose from challenges to possible irregularities in their legal procedures. Other controversies have arisen concerning the required Notice of Intent to Foreclose, and the backup to establish that the foreclosure plaintiff really “owns” the loan being processed. With the pipeline “blocked” the backlog in the clerk’s office or at the local Sheriff’s office could be expected to clear.

However, large backlogs now and the future may mean a change to quicker foreclosures is going to be a long time in coming. According to are report in Bloomberg News, the Acting Commissioner of the NJ Community Affairs Department reports there are 50,000 to 100,000 existing judicial foreclosures in the system.  And we are told that something like 20,000 to 30,000 judicial foreclosure Complaints in New Jersey were ready to go but were held up by these legal challenges. However, in August 2011, the court issued a new order allowing processing of uncontested foreclosures by four of the six lenders to resume. (Bank of America/BAC Home Loan Servicing LP; JP Morgan Chase/Chase Home Finance LLC; Wells Fargo/Wells Fargo Bank NA/Wells FargoFinancial New Jersey, Inc.; and CitiBank, NA/CitiResidential Lending). Ally Financial (f/k/a GMAC) and One West Bank FSB (f/k/a Indymac) are still stayed.

So the volume of new foreclosures may resume. Whether this will engender the delays we saw recently is an open question. Whenever a judicial foreclosure is challenged by a borrower with meaningful and valid defenses, the process will be delayed. If a borrower files a Chapter 13 Bankruptcy to try to save the home, that will delay the process.

Any way you look at it, the foreclosure mess is bad for borrowers and lenders alike. What has been missing until now was a consistent and practical approach to a solution. But recent reports by the Bloomberg new service (February 7, 2012 “Banks Paying Homeowners to Avoid Foreclosures”) suggests that some large lenders are finally seeing their way to offering incentives for cash strapped borrowers to cooperate in an early short sale of their home. The article notes instances where borrowers have received thousands of dollars to facilitate a move out and move own to rental housing, along with offers to cancel any personal indebtedness. These offers appear to be prevalent in those states where judicial foreclosures result in long and costly delays before the foreclosed home can be sold. JPMorganChase, Wells Fargo, Citigroup and Bank of America are mentioned in the article.

There are good reasons to consider such offers seriously, but the devil is in the details. But “buyer beware” is still the watchword. Borrowers need to consider the tax consequences and the alternatives. All in all, a cooperative and bottom-line approach by lenders is long overdue and a welcome development. But the situation is fluid, and we have seen promising developments fail to materialize in the past. Time will tell.

For more about the judicial foreclosure process in New Jersey, deeds in lieu of foreclosure, and alternatives to foreclosure, visit our website at

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