Marlton, NJ—After three decades of practicing bankruptcy law for creditors and debtors alike, as well as serving as a mediator and arbitrator, Steven Neuner knows every side of the federal bankruptcy code. Read More at Law.com
Student loans are one of the largest categories of consumer debt today. Many people are worried or struggling to pay these loans. Worse, any student loan under a government sponsored program or with government guarantees, AND private student loans that meet tax qualifications under section 221(d)(1) of the Internal Revenue Code are not dischargeable in bankruptcy.
However, there are programs that provide assistance with repayment or partial or full discharge of certain types of loans.
Federal loans have a variety of payment plans and options for those who qualify, including partial forgiveness of the loan, income contingent repayment plans, or extended payment terms, up to 25 years. These options are, at present, limited or non-existent for ParentPlus loans
Certain types of public service can qualify you for a partial discharge.
Loan consolidation is available, but has to be approached carefully. Done wrong it could result in loss of available repayment plan benefits.
Loan foregiveness may be available, especially if the loan was given to fund a trade school education where the school failed to pay a refund, falsified certain representations as to student benefit or made other false statements.
The first thing to do in these situations is to find or obtain the loan documents. A financial aid department may be a good resource. Better yet, when you take out the loans, be sure to keep all the paperwork and applications!
This area is complex and the results are very much a product of the particular type of loan and the facts. It never hurts to ask the government agency administering the loan program for advice and information. However, you should do your own research.
Here are some on-line resources we have heard about:
For some people who are drowning in debt, a personal bankruptcy may be what is needed to eliminate other debt so more income can be devoted to repaying student loans.
What is a “residence” that a debtor can claim as exempt? NJ Bankruptcy judge holds that it must be a place of permanent residence.
Commonly, people in financial difficulty own multiple properties that they could claim as a residence. This is important, because bankruptcy code section 522(d)(1) affords a right to protect from sale an “interest” in real estate or other property that serves as a “residence” for the debtor or a “dependent”. Clever attorneys can try to use this to protect property other than the debtor’s principal residence. That right has been limited in a recent decision in New Jersey.
Very recently, bankruptcy Judge Michael Kaplan held in In re Stoner, that the exemption only applies to property that the debtor actually intends to use as a “homestead”, and held that the debtor there could not claim as exempt the proceeds of property owned and occupied by his father until a few days before the bankruptcy filing, because he did not have an intention to live there.
Unbeknownst to the debtor, his father had died a few days before his bankruptcy filing. For two years, the debtor claimed another property where he actually lived as his residence. Since he was the executor of his father’s estate, he sold the father’s property, pocketed the proceeds, then changed his mind and claimed his share of his father’s property as exempt. The trustee successfully challenged this claim.
Judge Kaplan first held that because, as of the date of the bankruptcy filing, the debtor held the legal right to sell the property and a partial interest in it as a beneficiary, he held an “interest” in the property that he could exempt. The next question, which was determinative, was whether that interest was in a “residence” to which section 522(d)(1) applied. Bankruptcy courts have taken different approaches to this question. However, Judge Kaplan looked to the law of New Jersey and other states, seeking a definition of the term “residence”. He also looked at what Congress intended in creating the “homestead” exemption. With all this before him, Judge Kaplan held that the term “residence” requires “some measure as the Debtor’s of permanence” and that “[t]his approach is consistent with the New Jersey state law’s interpretation of the term “homestead,” equating it to a principal residence.”
Applying this standard to the case before him, Judge Kaplan found “no support for any finding that the Debtor considered the decedent’s residence principal residence or that he intended his stay there to be permanent. The Debtor has not submitted any change of mailing address forms, change in driver’s license or indication as to where he was registered to vote at the time of his filing. Further, the fact that the Debtor did not seek to amend his schedules until nearly two years after he filed his Petition lends further support to the Court’s conclusion.”
This will be of significance to anyone with multiple properties. Clearly, anyone who wants to claim an exempt residence a vacation home or property in which parents reside will have a harder time, if other courts follow Judge Kaplan’s lead. Careful planning and guidance by an experienced bankruptcy attorney is more important than ever.
Mortgage lender sanctioned for violating discharge injunction by repeated calls to discuss alternatives to foreclosure after being told to stop and after debtors locked out of home
An Oregon bankruptcy court slapped Wells Fargo Bank with counsel fees and $4000.00 in damages based on its repeated calls to the borrowers to discuss “alternatives to foreclosure”. (In re Culpepper, 451 B.R. 650 (2012)). The facts of this case are important to understand this result.
The homeowners filed a bankruptcy and initially stated they wanted to surrender their home. Despite this they made three applications for a loan modificatoin, none of which were put into effect. At some point in time they were locked out of the house. Shortly afterwards, they began getting a series of telephone calls. sometimes twice a day to discuss “alternatives to foreclosure”. The savvy homeowner, Ms. Culpepper, recorded these calls (Note: many states make this illegal unless the caller is informed the call is being recorded). The callers were knowledgeable and professional. However, Ms. Culpepper was clearly distressed and repeatedly told them to stop. Each time she was told the calls would stop only if she sent a “cease and desist” letter to a fax number. A total of about 100 such calls continued, even after Ms. Culpepper’s attorney sent a letter to Wells Fargo demanding the calls stop. Fed up, the Culpeppers reopened their case and filea a motion to hold Wells Fargo in contempt of the discharge order.
The court granted that relief, finding that the Culpeppers had met their burden of producing “clear and convincing” evidence that Wells Fargo knowingly persisted after knowledge of the bankruptcy discharge. In awarding damages, the Court had some cogent remarks:
“I find that Wells Fargo knew that the discharge injunction applied with respect to Ms. Culpepper, and I find that Wells Fargo intended to continue to route calls to Ms. Culpepper in an effort to reinstate all of some of a discharged debt, i.e., the Loan, through a loan modification, after Ms. Culpepper had clearly advised knowledgeable, thinking Wells Fargo employees that she was not interested in pursuing a modification of the Loan with Wells Fargo and wanted the calls to stop. Accordingly, I conclude that Ms. Culpepper has established by clear and convincing evidence that Wells Fargo violated the discharge injunction under § 524(a)(2).
A bankruptcy discharge makes most but not all debts legally noncollectable against the person who is discharged. When despite this a creditor tries to collect the discharged debt, the result can be a lawsuit to hold the creditor in contempt for violating the bankruptcy discharge. But not all creditors are prevented from collecting or enforcing their rights.
A bankruptcy discharge does not prevent collection of debts incurred or which arose after the bankruptcy filing. It does not prevent collection of domestic support obligations (eg alimony or child support), most student loans or most taxes. It does not prevent collection of debts which have been voluntarily “reaffirmed” in the bankruptcy (typically car loans and leases)
Those creditors who hold a mortgage or collateral (eg a car loan or lease) are still allowed to enforce their rights as a lien holder. Thus, pursuing foreclosure of a home or repossession of a motor vehicle is allowed. But in these situations, a mortgage lender or other lien-holder can sometimes step over the line if they take action that goes beyond merely enforcing their rights to property, and has the effort of coercing a payment by the individual on the personal debt that was discharged.
This concept that a debt is discharged against the individual, but not against property which is collateral for the debt is difficult from some to grasp. Think of it this way. When we get a mortgage loan or a car loan, we are really making two promises. One is the “IOU” promise to pay back the debt. The other is backing that promise up by giving the lender legal rights to property, eg the home or car. The IOU is what the discharge takes away, but the lender still has the right to get and sell its collateral if the loan is not paid. After a discharge, that is all a mortgage lender has left.
So how far can a mortgage lender go? A creditor violates the discharge injunction when it: (1) intentionally takes action after a discharge, with knowledge that a discharge has been ordered and where (2) the creditor’s action operates to coerce or harass the debtor into paying a discharged obligation. The First Circuit Court of Appeals defined the “objectively coercive” standard in stating that “even legitimate state-law rights exercised in a coercive manner might impinge upon the important federal interest served by the discharge injunction, which is to ensure that debtors receive a ‘fresh start’ and are not unfairly coerced into repaying discharged prepetition debts.”
The line between what is allowed and what is not is not always clear. Here are some recent examples how this might play out:
1. After the debtors had abandoned a home and a foreclosure had proceeded to the point that they no longer had any rights of ownership, a mortgage servicer violated the discharge by sending a letter, entitled “Validation of Debt”, contained information notifying the debtors of the transfer of the loan, the amounts due under the note, and pertinent information for making future mortgage payments, and later letters with additional information about the assignment,
alternatives to foreclosure, and property insurance. . Included in all but one letter was a generic disclaimer stating that the communications were not attempts to collect debts from customers in pending bankruptcy cases, or those who had already obtained a discharge under the Code. The Maine bankruptcy court found the lender in contempt because at the time these letters were sent, they served no valid purpose served relating to enforcement of the security interest because the lender already had its collateral.
2. In another case, the lender did not violate the discharge when they refused to pursue a foreclosure to completion or to release their mortgage lien, even though this forced the debtors to incure additional expense for insurance and property maintenance.
3. In that same case, the lender did face contempt penalties for demanding payment on the mortgage loan and telling the borrowers their personal obligation to pay on the mortgage loan was not discharged in bankruptcy.
4. In another case, the creditor filed suit against the debtor’s business, naming them individually as nominal parties against whom no judgment was sought individually. Even though the suit looked to be questionable and possibly meant for harassment, this did not rise to a discharge violation. That the debtors had to take time and effort to provide discovey of facts as witnesses in the litigation, that was not enough.
The point is that mortgage lenders and secured creditors do have certain rights, but sometimes they go too far. When that happens it is time to seek legal advice.
A bankruptcy trustee colleague of mine related the following story about a recent case where he was the trustee for an “interesting” debtor in bankruptcy:
After hearing the case about a year ago and doing his usual investigation, he filed a final “no asset” report that there was nothing for creditors. He said it “sure looked like” a “No Asset” case to him. Then he got a call from ”every Trustee’s best friend, the ex-wife.” It turns out our intrepid debtor had gotten the house in their divorce, had moved in, but had never transferred title into his name. This gentleman ”must have thought listing his interest on his bankruptcy schedules wasn’t important.” He then tries to sell the house, but the title officer, seeing the bankruptcy, calls the trustee about it. The trustee sells the house, using the money to pay creditors including the IRS. He also refers the debtor to the United States Trustee for possible investigation of bankruptcy fraud.
But that’s not the end of the story. My trustee friend found out a few months ago that this debtor also had an undisclosed malpractice claim against a chiropractor and the case is going to trial in the spring. Even more recently, he learned that someone set off a massive amount of explosives on property owned by local dentist. There was damage to surrounding homes: busted windows, one house reportedly knocked off its foundation, blackened trees and a 10 foot diameter blast crater. The rumor was that it was this same debtor who set off the explosion, using an old C4 explosive and that this gentleman may have a license to handle explosives, “which is itself a frightening thought.” Sure enough, the individual in question has been arrested.
Just another day in the life of a trustee… those of us who have been there know how challenging the job of a trustee can be. But the other point for the rest of us is that those who commit fraud have to remember that there is always someone, usually an “ex” someone, who knows the truth and wants to tell it.
A large portion of past due debts are bought by professional “debt buyers” who then attempt to collect the bad debt. The Federal Trade Commission just issued a 162 page report after studying this practice for over 3 years. The report is eye-opening.
The FTC notes that it “receives more consumer complaints about debt collectors, including debt buyers, than about any other single industry. Many of these complaints appear to have their origins in the quantity and quality of information that collectors have about debts.”
The FTC found that debt buyers pay an average of 4 percent of face value, and for older debts, the cost is “significantly lower”. The debt is still fully due, but the buyer’s have a large profit percentage. This reflects, we believe, the inherent riskiness of what is being purchased.
Debt buyers will commonly buy these debts in bulk on an “AS IS” basis. Buyers typically received the basic information required for notices required under federal law, such as the amount of the debt. They also commonly had other information which has to be requested by the debtor by disputing the debt in writing. This information, the FTC found “ included the name of the original creditor, the original creditor’s account number, the debtor’s social security number, the date of last payment, and the date of charge-off.”
What is revealing is what Debt Buyers did not receive upon buying the debt. This includes the history of previous disputes on the account or information that would allow them to break down the outstanding balance into principal, interest, and fees. Most of the time, the FTC found, Debt Buyers received “few underlying documents about debts” such as account statements, loan agreements or other documents showing the terms and conditions of credit. Yet these are the very kinds of proof that a court of law is likely to require if suit is filed.
The FTC found that some debt that was purchased was beyond the statute of limitations, meaning that a suit on the claim could be readily dismissed as time barred, IF the defendant asked.
These findings square with our experience. It usually pays if there is a basis for question to demand the underlying documents and proof of the debt. The results may not be immediate. We have found the same disputed debt being passed from collection agency to collection agency. But many times, the original signed agreements or purchase or charge records simply do not exist.
Of course, no one should ignore collection efforts. It just pays to be savvy and demand proof when appropriate.
Commonly we have clients who have added their name to a bank account belonging to an elderly parent or an adult child. Even more common are clients facing collection suits who have a joint account with a working spouse who is not facing financial problems. While these arrangements are entirely understandable in normal situations, when you are facing a lawsuit or other financial problems arise they can and often do create serious headaches.
Bank Levies-”my money is frozen!” Once creditors obtain a judgment against you, they will commonly try a “bank levy” to have a Sheriff seize the money in the joint account. If you are the defendenat and your name is on a joint account with someone else, this can result in the other account holder’s money being frozen without notice.
Fortunately, under New Jersey law (and the law in many other states) ownership of a joint account belongs to the person who put the money there, unless there is clear and convincing evidence of an intent by the other person to make a gift of the money deposited. That is the good news. The bad news is that faced with a levy on a joint account, the “non-debtor” whose money is in the joint account will have to go to court to get the bank levy released. At best, this is an unwanted expense (which can run into thousands of dollars in legal fees), and the frozen funds may not be released for weeks until a court rules.
Bankruptcy- whose money is it anyway? If a client files a personal bankruptcy, his ownership interest in the account becomes property of a bankruptcy estate which a bankruptcy trustee will look at as a potential asset. In the bankruptcy, the joint account must be listed as an asset, and it will be necessary to convince the bankruptcy Trustee that the money does not belong to the debtor in bankruptcy. With proper documentation and citation to the proper state and federal statutes, most– but not all–trustees will readlily agree. Meanwhile, there is uncertainty and the possibility of having to go to court, before the money is free for use.
With proper planning and guidance many of these problems can be avoided. We commonly recommend that if the purpose is for a child to be able to access funds to pay an elderly parent’s bills, the better course of action is to go to the bank and get signature authority or file a power of attorney that the bank will recognize. In every case, keeping good documentation about the source of funds is a very good idea.
Otherwise, in the spousal joint account, it is better in these situations for the non-debtor spouse to set up a separate individual account and keep her funds separate. Again, this requires good documentation. Merely transferring the debtor’s money into a spouse’s account will create other problems.
Note that these concerns will usually not apply to a bona-fide “Minor’s Account” where the parent is named on the account merely as a custodian for a minor child, AND where the account contains the child’s own money from normal gifts or the child’s own earnings. But again, transferring your money into a child’s account to hide it or protect it from creditors is unwise and can create “fraudulent transfer” claims.
Anyone with these types of concerns needs to get qualified legal advice to avoid the several pitfalls. As with many other situations, there is a right way and a wrong way to handle these situations, to avoid needless unpleasant surpises and legal expense.
Call us- we can help. If you are a New Jersey or southeastern Pennsylvania resident, we can help. Call us at 856-596-2828 for a free initial consultation. For information about us or about other issues, please feel free to browse our website or our blog.
On December 6, 2012, New Jersey Governor Christie signed a new law that allows a “fast track” of foreclosure of vacant and abandoned residences. For those who have moved out of their homes, only to be faced with continuing liability or expense waiting for a foreclosure sale, this is a major benefit. For lenders who have to maintain and secure these properties waiting for the sale, it is just as beneficial. And since condominium and association fees remain the owner’s responsibility until sale, this could mean major savings for the homeowner.
The law is not automatic. The lender has to request “summary action”, and show by clear and convincing evidence that the property is in fact vacant and abandoned. For these purposes, if the property has been leased after the owner was served with a Notice of Intention to Foreclose, it may still be treated as abandoned. In addition to proof that the owner has moved out, the lender has to show that at least two of the following conditions exist:
(1) overgrown or neglected vegetation;(2) the accumulation of newspapers, circulars, flyers or mail on the property; (3) disconnected gas, electric, or water utility services to the property;(4) the accumulation of hazardous, noxious, or unhealthy substances or materials on the property; (5) the accumulation of junk, litter, trash or debris on the property; (6) the absence of window treatments such as blinds, curtains or shutters; (7) the absence of furnishings and personal items; (8) statements of neighbors, delivery persons, or government employees indicating that the residence is vacant and abandoned; (9) windows or entrances to the property that are boarded up or closed off or multiple window panes that are damaged, broken and unrepaired; (10) doors to the property that are smashed through, broken off, unhinged, or continuously unlocked; (11) a risk to the health, safety or welfare of the public, or any adjoining or adjacent property owners, exists due to acts of vandalism, loitering, criminal conduct, or the physical destruction or deterioration of the property; (12) an uncorrected violation of a municipal building, housing, or similar code during the preceding year, or an order by municipal authorities declaring the property to be unfit for occupancy and to remain vacant and unoccupied; (13) the mortgagee or other 1 authorized party has secured or winterized the property due to the property being deemed vacant and unprotected or in danger of freezing; (14) a written statement issued by any borrower expressing the clear intent of all borrowers to abandon the property; (15) any other reasonable indicia of abandonment.
Owners who are vacating a property or who intend to do so should encourage the lender to fast track their foreclosure, to avoid unnecessary liability and expense. As always, it is wise to consult with qualified legal counsel.
For more about this and related topics, please visit our website.
Homeowners who want to negotiate a write off of too-large mortgage debt through a short sale or loan modification have been given some extra help. The recently passed “fiscal cliff” avoidance law also extends the Mortgage Debt Foregiveness Act, (MDFA) due to expire on December 31, 2012, for another year. This is the law that provides protection to homeowners doing short sales or deeds in lieu of foreclosure, under limited circumstances.
Normally, when a lender cancels part of a debt, (even after a foreclosure sale) the amount cancelled is treated as income, taxed at the same rate as a salary. This can result in a large and unwelcome tax bill unless the cancellation is due to a bankruptcy discharge or to the extent the borrower can prove
The MDFA created another exception. Those trying to work deals with mortgage lenders have another year before the “tax break” ends.
As always, the devil is in the details. The exception only applies to mortgage debt used to purchase or improve a residence. Additional debt used for other purposes is not protected, and will be counted first. This can result in a substantial tax.
There are several important considerations before embarking on a short sale or deed in lieu of foreclosure. But getting early and qualified tax advice and legal advice is essential to avoid nasty and unpleasant surprises down the orad. While we are not tax advisers, we can help you understand the issues and alternatives, and are prepared to work closely with your tax advisers.
IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.