Chapter 7 and 13 Bankruptcy Blog

Dear Victoria Ring:

Thanks for all you do.  And I appreciate the information you provide to us.  I just wanted to add that I currently work for a major bank.  I work with borrowers with defaulted business loans.  And let me tell you that on a lot of the deals we have, I have seen quite a few attorneys propose cram downs.  And a lot of our mortgages have been stripped off because there is no equity in the home.

One of the things we talk about all of the time is why many other attorneys are not doing this.  It is a great tool for the consumer.  No additional litigation is involved.  Once an attorney files the motion during the proceeding, it is up to the trustee.  We do not file responses to these requests.  Especially if there is no equity in the home.  And banks and mortgage lenders know that the bankruptcy court favors the debtor.  We have never been successful in blocking these.  You have to remember the cost that the banks incur in pursuing foreclosure or trying to liquidate the collateral.  We weigh the costs.  Banks make no money on homes they have to take back.  You may find that you will get more with negotiating with the lender too.  The attorney for the debtor is in a greater position than attorneys for the banks.

We knew that most of the mortgages we took at loan inception were abundance of caution.  And unfortunately, many people are filing for bankruptcy and having their debts discharged.  But if they do not do anything to release the liens on their home, then they still end up paying when there is equity in the future or if they want to sell their home.  As long as the lien stays on the home, you are basically giving the banks a long term investment.

I can tell you that many of our borrowers who filed for bankruptcy and were discharged are stunned when they see our lien is still on their home.  And the only way we will release it is if they give us all of the available equity in their house.  I just had a deal where the borrowers had filed for bankruptcy several years ago.  Unfortunately, the attorney did not contest our lien or ask that it be removed.  If the attorney had done this or at least proposed a settlement, we would not be in the great position we are now.  As opposed to getting $25,000 several years ago, we are now looking at almost $80,000.  The owners are senior citizens.  If they ever decide to sell their home, they will have to deal with the fact that we will be getting the bulk of the proceeds.  I believe they assumed when they reaffirmed the first mortgage, that ours was released.  And that was not the case.

From what we have seen, many trustees and bankruptcy judges side with the debtor in these cases.  We do everything we can by filing a proof of claim.  But at the end of the day, if there is no equity available at the time of filing (or equity of sizable value), we anticipate having our mortgage stripped and being put in the category of unsecured creditor.  That is why I am happy to see you offering this training to VBAs and attorneys.  Proposing this makes you a much added value to your clients.    So, for all of the attorneys who fear the drawn out litigation with mortgage lenders and banks, there is no need to worry.  You have to remember that banks have to pay outside attorneys.  And I can tell you that we just as soon not have to pay attorney fees fighting for properties that have little value.  I would tell them to do what is best for the consumer.  They are hiring you for your help.  So I implore them to pursue every avenue possible.

Crystal Brooks Email:  clbrooks67@comcast.net

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** This article will help you to understand important basic information if you are an attorney just getting started or transitioning to the field of debtor bankruptcy law.

An attorney called me today.  She was in a hurry and wanted to know what software she needed that would prepare a bankruptcy petition in about an hour.  I told her that none existed.  She then proceeded to tell me about an attorney who had a software program that imported credit reports, filled in all the creditor addresses and did everything, including filing her petition at the press of a button.  I explained to her that almost all bankruptcy software programs perform these same functions; but there is no bankruptcy software program that is going to practice law for her.  She was disgusted at my response but it is the same response I get from new attorneys quite often.

Remember the old saying: What looks too good to be true, probably is?  All adults should know by now that anything that appears to be simple and easy actually requires a skill.  I wrote an article one time about how horrible I was at trying to bag my own groceries at the store.  I explained that even something that sounds like it could be simple (like bagging groceries) still takes a skill that is only learned by practice.

Therefore, every person reading this article needs to reprogram their brain to understand that no bankruptcy software program is going to THINK for you.  Software programs only make some jobs easier.  You still need to go in and check data, categorize it, determine priorities and much more.  No software program is going to do that no matter how much you pay for it.

HOW DID THIS RUMOR GET STARTED?  LETS EXAMINE A REAL LIFE SITUATION:

John Q Public is sitting at home watching television.  He hears the rumor (started by the new media) that he can save his home if he files a Chapter 13 bankruptcy.  John Q Public is 9 months behind on his mortgage and facing a foreclosure because he lost his job.  Mr. Public rushes to the phone to call Ms. Attorney and tell her he wants to file a Chapter 13.

Note: For those of you who work within the bankruptcy system, you already know this statement by the media is only partially true.  The media conveniently leaves out the fact that a person cannot qualify to file a Chapter 13 if they are unemployed and have no money left after paying their basic living expenses.  That is the catch; however, John Q Public does not know that.

Ms. Attorney, who, through a lack of training, offers to file a Chapter 13 for John Q, Public.  Ms. Attorney uses her bankruptcy software program to prepare the bankruptcy petition.  Ms. Attorney has little or no training in preparing the petition and she spends from 6 to 8 hours just correcting and adjusting information (that the software cannot do).  She was unaware of this when she purchased the software because she was under the assumption that it did everything for her.

Next, Ms. Attorney is overwhelmed by the fact that she has also not been properly trained in how to gather all the necessary information for preparing petitions, properly counseling her clients and how to filter out clients who do not qualify for bankruptcy and help them through debt counseling or some other form of assistance.  Without this basic knowledge, new bankruptcy attorneys are going to be in for a very rocky road ahead; especially since there is no software program that is going to do all of this for them.

What happens next is another nightmare.  After Ms. Attorney enters in all the income for John Q Public and his wife, John Q Public does not qualify for a Chapter 13.  In a situation like this some attorneys will try to still push the bankruptcy through by finding an income from another source or suggest the debtor get a part-time job so he or his wife can qualify to file a Chapter 13.

Or, if Ms. Attorney manages to get the bankruptcy petition filed by some other method, she will still risk extreme embarrassment at the 341 Meeting when she is in front of the client, creditors and the Trustee.  When the Trustee finds these issues and brings them to the table, many attorneys will simply stop accepting Chapter 13s or stop doing bankruptcy altogether rather than face this situation again.  This is sad; because the result was only caused from a lack of training and knowledge in building her practice.  Another old saying: An ounce of prevention is worth a pound of cure.

LOGICAL POINTS TO CONSIDER

If you are a seasoned bankruptcy attorney, I urge you to pass this information on to new attorneys.  In doing so, you and I are helping to improve professionalism and positive growth within the bankruptcy field.  If you are a new attorney, I urge you to study the following logical points:

1.   If a bankruptcy software program existed that could do all the thinking for you, why would someone need to hire a bankruptcy attorney?  Why not just buy the software and call it a day?

2.   If the bankruptcy court allows an attorney to charge $1,000 or more for a Chapter 13, do you not think there must be more work involved?  Some attorneys think the software does the work for them; but remember that the court does not just grant a large sum like this to an attorney without good reason.

3.   If you were going to open a pizza shop, would it be a good idea to learn how to make pizza first?  If you are going to start a new bankruptcy practice, would it be a good idea then to learn about the process first?  The least a new attorney can do is login to the American Bankruptcy Institute and view the free training videos at:

http://www.uscourts.gov/video/bankruptcybasics/bankruptcyBasics.cfm

Although these videos were made for attorneys to place on their websites to inform their clients about bankruptcy, they are still excellent in helping new attorneys understand the basics.  I always tell my students to study the law from a legal perspective as well s the consumer perspective.  It provides you with a better balance of knowledge that will carry throughout the life of your law career.

ONE SOLUTION TO CONSIDER

The videos from the American Bankruptcy Institute will NOT show you how to gather information from your clients, prepare the petition or run your practice.  That education has never been taught to attorneys and either they learn the skill through trial and error or from an experienced paralegal.

As the author of this article, I would be more than happy to talk with any attorney who is considering getting involved in the bankruptcy field. You can email me at: victoriaring1958@gmail.com

I hope this information helps you.

The following questions and answers were submitted to Victoria Ring either at a teleconference or by email during this past week. The best of the best were chosen to be published below.  The answers are provided by Victoria Ring who is not an attorney.  Therefore, the information provided in this material is for training purposes only and no whole or part should be regarded as legal advice.

DEAR VICTORIA:

If a lady is filing bankruptcy and she is pregnant at the time of filing, is the unborn child considered a dependent on Schedule I of the bankruptcy petition?

ANSWER:

No. An attorney explained it like this to a client one time who asked the same question: We do not know if your child will die at birth, be given up for adoption, raised by a family member or any other number of factors that could alter the dependent status of the unborn child.  Therefore, the child is not eligible to be a dependent until after the birth.

But, if the bankruptcy is still ongoing at the time the child is born and the child will be the dependent of the female filing bankruptcy, Schedule I and J would need to be Amended to allow for the dependent claim as well as the monthly expenses to care for the infant.

DEAR VICTORIA:

Am I to understand that I do not have to use a Certificate of Service when I initially file the bankruptcy petition?  That means I only need to use the Certificate of Service afterwards?

ANSWER:

You are correct.  The Creditors Matrix within the bankruptcy petition serves the place of the Certificate of Service.

DEAR VICTORIA:

If a bankruptcy case is closed, can it be reopened so the attorney can file an amendment?

ANSWER:

It depends on several factors.  How long has the case been closed? What are the reasons for reopening the case? Can the attorney prove to the Judge that there is good enough reason to reopen the case?  Was the case discharged or dismissed? (There is a big difference.)  Therefore, in order to sufficiently answer this question, you need to contact the Help Desk of your local bankruptcy court and obtain the rules for reopening a closed bankruptcy case so that your attorney can review them and make a decision whether to do so or not.

DEAR VICTORIA:

During an online search I found a motorcycle that was titled in the name of the debtor but the motorcycle was not reported on the client intake forms.  When I asked the debtors about it, the wife said it was repossessed and the husband said it was sitting in their garage.  Who should I believe?

ANSWER:

No one.  Your job as a non-attorney is not to make legal decisions. Make sure you document this problem and point it out to the attorney.  The attorney will need to determine the best way to handle the situation.

DEAR VICTORIA:

Do you really train attorneys?  I find that hard to understand.

ANSWER:

Why is it so hard to understand? Attorneys do not obtain training in how to prepare bankruptcy petitions and pleadings when they attend law school. They are trained in the legal aspects of the various chapters within bankruptcy; but they are not trained in the actual day-to-day operation of the bankruptcy law firm.  This is where I provide the service and it is one of the most fulfilling jobs I have.

DEAR VICTORIA:

I am interviewing a prospective attorney client whose full-service bankruptcy practice includes Chapters 7, 11, and 13, and creditor representation.  He is a solo practitioner (25 yrs in bankruptcy) and is done with the hassle of training staff.  Do you (at a fee, of course) provide any personalized training in Chapter 11 and creditor representation?

ANSWER:

I would never recommend that a Chapter 11 be done virtually.  You must be able to work in the law firm office.  Why?  In a Chapter 11 there is no trustee so the rules change considerably compared to a Chapter 7 and 13.  Additionally, a CPA is normally hired to maintain bookkeeping records and report to the bankruptcy court every month.  Finally, you also should have some working knowledge of corporate law to work with Chapter 11s.

As you know, I am solely dedicated to John Q public which is why I ONLY provide training in Chapter 7 and Chapter 13. Perhaps you have a Chapter 11 confused with a small business owned by a debtor.  Unless a debtor owes $1 million in Schedule F debts, the debtor still can file a Chapter 7 or Chapter 13 for their sole proprietorship business.

The following questions and comments were submitted through email to Victoria Ring. The answers are provided by Victoria Ring who is not an attorney.  Therefore, the information provided in this article is for training purposes only and no whole or part should not be regarded as legal advice.

DEAR VICTORIA:

I have a debtor that owns a home based business.  In addition to what her company grosses, she has paid herself a salary for the past 6 months from her business.  On the Means Test, do I have to average the amount she paid herself from the business (Line 3), and in addition, average the monthly net business income (Line 4)?  Or, do I fill in Line 4, only?  Please help!!! First time I’ve had this situation.   My attorney is waiting for Form.

RESPONSE FROM VICTORIA:

First of all you need to fill out the Business Income and Expense worksheet that is included in most of the bankruptcy software programs. If you are using Best Case software, scroll down to the VERY BOTTOM of the list of forms. There is a folder named SUPPLEMENTAL FORMS.  Inside that folder is a form named BUSINESS INCOME AND EXPENSES.

Fill this form out and make sure it is filed as an attachment to Schedule I when the petition is filed.

Take the AVERAGE NET INCOME (Line 23) and enter this figure into Line 3 of the Means Test.  If you refer to the form you will see that Line 3 states: Net Payroll Other Than Debtor.)  Therefore, you will NOT include the money the debtor pays herself from the business on this particular worksheet form.

Since we now understand this information, we can reasonably deduce that the money the debtor pays to herself needs to be listed on LINE 7 or LINE 13 of Schedule I.  Check with your attorney to be sure.

Also remember to remind the attorney that he or she needs to obtain 6 months of bank statements from the debtor’s business account as well as her personal account.  The attorney will need this to verify the debtors’ earnings reported within the bankruptcy schedules.

Note: In some states, the attorney will simply take the bank statements with them to the 341 Meeting and hand to the Trustee. In other states, when the bank statements are used as pay advices, they would need to be filed with the bankruptcy petition (sometimes the court even requires a cover sheet.)  Always check your local rules of procedure to address questions at this level.

DEAR VICTORIA:

The debtor is married but is filing as an individual.  I included the husbands’ income in the Means Test because they do not live in separate households.  My problem is that I am not sure how to complete the Statement of Affairs for the husband.  I put the wifes income for 2009, 2008, and 2007 but do I also need to include the husband income for the same years even though he is not filing bankruptcy?  I was told only put 2009 for the husband because its only this year that counts for CMI.  It just does not look right to me and I wanted to run it by you.

RESPONSE FROM VICTORIA:

They may do things different in California but in all the petitions I have done (if the husband is not filing) we would place the husband’s income under Item 2 of the Statement of Affairs.  It would be listed as Spousal Contribution.  The husbands income would also be listed under Schedule I as well as the Means Test.

However, you may want to call your local California Help Desk because I have found that California has many strange customs that is totally different from other states.  I learn so much when I visit California, so make sure you check out my response to make sure you are complying with the court rules.

DEAR VICTORIA:

This is my first bankruptcy petition and I need some help.  I am filing a petition for my client and I am in California.  As you know, this is a community property state.  If a husband and wife are divorced and living in separate residences, and the husband wants to file bankruptcy without his wife, will the wife be responsible for the debts that are discharged and the husband does not pay?

RESPONSE FROM VICTORIA:

I did a little online research and I found the following information at http://bankruptcy-law.freeadvice.com/consumer_bankruptcy/spouse_bankruptcy.htm which states (in part):

…. Community property and common law (also called “equitable distribution”) are the two types of martial property ownership. The vast majority of states apply the equitable distribution rules; nine states apply the community property rules. If you live in a common law property state, your spouse’s bankrupt estate will include his/her separate property and half of the jointly-held marital property. The non-bankrupt spouse will not have to worry about the effects of the bankruptcy on his or her separate property.