Unfair Loan Modification Practices Rejected By 9th Circuit

bank lies


Promising a loan modification and failing to deliver, after pocketing trial mod payments, isn’t fair, said the 9th Circuit in Oskoui.

And if it isn’t fair, it can be actionable under California’s Unfair Competition Law (B&P 17200). Not to mention constituting a breach of contract.

Thus, there do seem to be some limits on the shenanigans a lender or mortgage servicer can engage in with impunity.

Bravo ‘Niners.

Just the facts

Ms. Oskoui was a 68 year old single registered nurse.  She refinanced her house in 2007 with Washington Mutual, acquired after its collapse by J.P. Morgan Chase.

When she missed a payment in 2008, Chase sent her a letter proposing trial loan modification payments.  If she made the payments, she would be sent a permanent loan modification for signature.

She made the payments and the bank didn’t send the loan mod.  And it didn’t tell her that she was ineligible for a HAMP modification and had been ineligible since the beginning, by reason of the size of the loan balance and the debt to income ratios in the program regs.

Instead, Chase sent another “offer” of a modification, conditioned on further trial payments, which Oskoui made, bringing the total of “trial payments” to nearly $34,000 before she was turned down for a modification and served with a foreclosure sale notice.

Amazingly, Chase sent another solicitation for a modification within days of the scheduled foreclosure sale.

Facts are familiar

What happened to Mahin Oskoui sounds just like the lender behavior Bill Purdy outlined in his expose of mortgage lender practices:  send conflicting instructions, promise the moon, and blame the borrower.

Hundreds of thousands of homeowners have lived through this nightmare, and courts have too often given lenders a pass on their behavior or swallowed the line that the borrower failed in some critical task.

As Bill points out, the servicers make it almost impossible to build a paper trail of what’s happening until it’s too late.

The good news in Oskoui

Good news from the courts for homeowners since the mortgage meltdown has been slow in coming.  But it’s coming.

What buoys me is that the 9th Circuit’s decision is grounded in California’s unfair and deceptive practices act.  Nearly every state has UDAP laws.

Just as encouraging, the appeals court found that the homeowner had a viable cause of action for breach of contract.  And there’s a contract at the heart of every one of this loan modification farces.

To top it off, Ms. Oskoui filed her complaint with the district court pro se.

What’s needed now

attorneys neededHomeowners can’t count on bringing these actions themselves.

Those abused by unfair and deceptive loan modification practices need a corp of attorneys ready to take on these cases.

Ready to enlist?



Getting Means Test Tax Projections Right

tax calculator-flickr-salfalkoMention tax calculations to a bankruptcy attorney and 7 out of 10 freeze on the spot.

I’m not a tax attorney, they retort.

That’s right, but, if you are a bankruptcy attorney, that doesn’t relieve you  from knowing enough tax to get the means test right.

Not to mention not giving up your client’s tax refund to the Chapter 13 trustee.

Mistakes made simple

It’s so easy to go wrong, when it comes to taxes.

Your petition preparation software has you input the deductions from the debtor’s wages.  By default, those withheld taxes are carried over from the CMI look-back income to the projected future taxes incurred.

Great, no thinking required.

But wait!  Have you verified the connection between the taxes withheld and the actual tax liability?

If not, you’re courting a mistake.

Taxing questions

To figure out whether the withheld taxes are right, or close to right, going forward, you need to ask questions of the documents in your possession and of the client sitting across the table from you.

For the purposes of this exercise, let’s assume that the client tells you that things are essentially unchanged from the situation in the last tax year.

Did client get a refund last year?

A refund indicates that more money is being withheld from the client’s paycheck that he will owe in taxes.  Using the paycheck withholding for projected taxes incurred will overstate the allowable deduction for taxes.

Since we have determined that things are essentially unchanged from the prior year, you need to reduce the tax deduction by 1/12th of the refund received.

If this is a Chapter 13 and your local practice requires the debtor to turn over the tax refund to the trustee, you also need to advise the client to reduce the amount withheld to match the expected tax.  Otherwise, he’ll be living without the amount overwithheld during the year, and handing it to the trustee when the refund arrives.  Not smart.

Because Schedules I and J and the means test are both projections, your  means test income tax number should match the amount withheld for taxes on Schedule I.

Did client owe money last tax year?

If the client wrote a check with his last tax return, or worse yet, owed money and couldn’t write the check, you need to make changes to the tax projections on B-22.

The amount withheld on the pay stubs understates the taxes to be incurred post petition.

Getting a number good for the year as a whole simply requires that you add 1/12th of the amount owing in excess of withholding at the end of the tax year to the “taxes withheld” number from the pay stubs on B-22.

But the problem is a bit stickier.

Suppose it’s July 1 when you’re doing your calculation, and the client is $500 a month underwithheld.  You can add $500/month to his taxes, and going forward, that keeps him from falling any further behind.

But when April comes around, if the client has only added $500/month to withholding for the last half of the year, he’s still facing a $3000 shortfall representing January through June’s underwithholding.

It’s not clear to me whether you can add that amount to the means test deduction, but you certainly want to budget on Schedule J for a “current year income tax catch up” amount.

Otherwise the debtor faces a tax bill for which he has made no provision.

When things change

As we know, not all of our clients live lives without substantial changes.

Another time, we’ll walk through how to approximate the tax numbers when the current year and/or the years to come are not the same as the year represented in the prior year’s income tax return.

More on the means test

Means test and health insurance

Business income and the means test

Escaping the means test altogether

Image courtesy of Flickr and SalFalko. 



The Hazards Of Self Employment In Chapter 7

896429958_6b49a68f2d_zWhy would a Chapter 7 trustee shut down a proprietorship business with no value?

That question comes up again and again from newish bankruptcy lawyers who can’t imagine that a trustee would demand the closing of the debtor’s business.

After all, goes the argument, the debtor needs to make a living and the business has no non-exempt value.

The trustee’s  insistance on closing the business is more understandable when you hear this nightmare.

The postman, the pit bull and the priority claim

Our Chapter 11 debtor had a rental property leased to a tenant with a pair of large dogs.  During the pendency of the case, the dogs bit the postman.

The postman sued the debtor in possession along with the tenant on the grounds that the owner was liable for injury incurred on the property.

Assuming a verdict in favor of the postman, not only is the bankruptcy estate liable, but the claim is a cost of administration, payable ahead of the prepetition creditors.

Not a good state of affairs for the debtor in possession who is supposed to be operating as a fiduciary for his creditors.

Granted, I don’t know if the estate was adequately insured nor how liability was allocated among the defendants in the dog bite case.

I do know, from representing a creditor in the case upon conversion to Chapter 7, that there was far too little money in the estate to make a dent in the claims of prepetition creditors, even before an administrative tort claim.

Proprietorships in Chapter 7

Apply the lessons of that premises liability case to your typical, self employed debtor.

Let’s assume the debtor is a hairdresser whose only business assets is a market rate lease on a beauty shop, and her tools of the trade.

Consider the liability of the estate should the trustee permit continued operation of the shop.  A customer trips over the debtor’s pet Chihuahua, who accompanies the debtor to work each day, and cracks her head in the fall.

Or, the customer suffers an adverse reaction to hair products.

One can well imagine that the bankruptcy trustee, the nominal owner of the business and its assets upon filing of the Chapter 7, will be named as a defendant in the resulting suit.

And if the suit is successful, the judgment becomes an expense of administration, with priority equal to the trustee’s commission, and ahead of the prepetition creditors.

No Chapter 7 trustee wants to have to explain that state of affairs to his boss or to the creditors.

Incorporate or file Chapter 13

My rule in situations where the prospective debtor has a proprietorship that she wants to continue to operate is simple:

Either incorporate the business in advance of filing Chapter 7 or file Chapter 13.

In Chapter 13, the continued operation of the debtor’s business is expressly authorized.  The debtor can continue to make a living and get a discharge of debts at plan completion.

 Image courtesy Flickr and Darwin Bell

When Chapter 13 Debtors Run Amok

8632883494_62b7ddd71f_zWe’ve had a string of them….

[Hint: in a small practice, a “string” means “three. ” ]

But three clients in the past month with confirmed Chapter 13 plans have contracted to sell their homes without mentioning it to us, their attorneys.

The degree of chaos varied:  inadequate time to get approval of the sale from the trustee within the contractual closing date;  mortgage stripping issues when the plan is paid off early; and taxing authorities who decided to claim the post petition appreciation.

But the bigger problem is clear:  operating successfully in Chapter 13 requires debtors to absorb a bunch of information about how bankruptcy works.

  • What can they, and can’t they, do without prior consent?
  • What does the vesting option mean in the real world?
  • What are their disclosure obligations?

When is the best time to learn?

When we first meet prospective debtors, we’re dealing with people experiencing stress, shame, and overload.

Clients are overwhelmed with the information they must process on bankruptcy choices, procedure, and consequences.

When the case is confirmed, and all the client has to do (they think) is make the plan payments, they relax and tune out.

Yet we find clients borrowing money without the trustee’s consent; signing car contracts without considering their Chapter 13 plan; and selling stock to make ends meet.

If the only issue is covering our behinds, as professionals, we can write all the do’s and don’ts down, hand the client the tome, and get a receipt for its delivery.

That solves my problem, but isn’t likely to assure that the client reads, absorbs and recalls the admonitions when an issue arises a couple of years down the road.  The client who screws up is unlikely to be comforted by the fact I clearly told him what the rules were.

And the client who is injured by transgressing is likely to be resentful, at best, and vocal at worst, about the quality of the representation that he got.

Let’s trade fixes

What I learned from this string of fiascoes is that I need to deliver the “living in Chapter 13” commandments, in writing, after confirmation of the plan.  That doesn’t assure they get read or followed, but it ups the odds.

I can see a web page on the firm’s site, reciting the rules.

Maybe an instruction in our Chapter 13 representation agreement should reinforce the “ask first” directive.

How do you deliver this kind of information to clients?  What works better than others?

I’ve shared my train wrecks- it’s your turn to share solutions.

Image courtesy of Flickr and Shoji.k

How Lien Stripping Differs From Lien Avoidance

The draft of a lien avoidance motion my paralegal presented me was garbled.  Lien stripping concepts sat next to a cite to §522.

I doubt my staff is alone in missing the critical differences between lien stripping under (or despite) §1322 and lien avoidance pursuant to §522(f).

So let’s try some compare and contrast on liens we want to excise.

Avoid liens that impair exemptions

Section 522(f) enables the debtor to eliminate, in whole or in part, liens that impair an exemption to which the debtor is entitled.

With an small exception, it is only judicial liens that may be avoided.  Tax liens are statutory, so they aren’t avoidable under § 522.

The exception to the rule confining avoidance to judicial liens is that for a nonpossessory, nonpurchase money lien on household goods, tools of the trade, or professionally prescribed health aids.  This exception is drafted to extract the debtor from the tentacles of finance company loans where the lender took a security interest in everything the debtor owned,  not because the collateral had value but because it was essential to the debtor.

Avoidance under §522 works in Chapter 7 and in Chapter 13.

Because the aim of the exercise is to see that the debtor gets the benefit of the available exemptions, a creditor with a judgment lien might find itself secured in part and avoided in part.  Once the debtor gets the full exemption, if there is equity remaining to which the lien attaches, it survives.

Lien stripping in Chapter 13

What we call lien stripping is exploiting the §1322 workaround.  Section 1322 prohibits the modification of a mortgage lien on the debtor’s principal residence.  But if there is no equity whatsoever for the mortgage lien to attach to, most circuits permit the lien to be voided in Chapter 13.

So, here we’re eliminating a voluntary lien.  It’s all or nothing:  either there’s some value to support the lien or there isn’t.  But see my post on settling disputes about value.

Up until recently, all circuits held that you could only strip voluntary liens in Chapter 13.  Then came Mcneal  in the 11th Circuit.

Then there’s 506

Section 506 is the utility player in Chapter 13.  This section defines an secured claim.  A claim is secured if there is value in the estate’s interest in an asset to which the lien can attach.

If there is no value for the lien to attach to, then it is not a secured claim and at the end of the Chapter 13, the lien is void.

For the purposes of §506, it doesn’t matter whether the lien is voluntary, statutory or judicial (so long as it isn’t a mortgage lien on a principal residence or a long term debt).  It’s gone at plan completion.


Image courtesy of automania.

Use All Channels to Educate Bankruptcy Debtors

teach clientsThe skill set of a consumer bankruptcy lawyer must include a healthy dose of  the skills of a teacher.

The client has to master any number of legal issues and procedures to make informed decisions about the case.  An effective lawyer has a plan for how to convey all those things the debtors need to know.

As the parent of children with learning disabilities, I learned that each person has a preferred learning style:  some learn best by seeing; others learn best by hearing; others by feeling; and some by movement.

And the indisputable fact is that individuals contemplating bankruptcy are generally not functioning at their best.

Stress makes us stupid

The challenge for a bankruptcy lawyer  to teach the client enough about bankruptcy to make the necessary decisions is daunting.

So, how to do it?

Many roads to wisdom

Maybe we don’t need to aim for “wisdom”.  Maybe it’s enough to convey sufficient information that the client can participate in the necessary decision making.

After all, there are lots of decisions to be made in filing a bankruptcy case.

Use each learning channel:

tell the client what they need to know, and,

give them written summaries of the material.

Different clients will pick up the information better in one fashion than another.

Put basic information on your web site.  Remind them of basic points when you meet.  Summarize important decision points in a letter.

Belt and suspenders, put the information in several forms and you increase the chances that your client absorbs the information.

When all else fails

Recall that there is a another learning channel:  some folks are tactile learners.

So I am often tempted slap them alongside the head, and pound the information in.  I try, however, to resist temptation….


What makes a bankruptcy lawyer great

Image courtesy of Pixabay.

One Trait Makes A Bankruptcy Lawyer Great

8677091677_b76c713b76_z (1)

One trait makes a bankruptcy lawyers  stand out.

Bankruptcy forms promote the view that filing a case is just recording what the debtor owns and owes today.  If all you focus on is the here and now, you can assemble a bankruptcy petition.

But if there is one, uniform failing in average bankruptcy lawyers, it’s that they confine their attention to the here and now-what does the client have, owe, and earn.

Great bankruptcy lawyers take the broad view.  They look backwards and forwards from the filing date before uploading the petition.  Because bankruptcy rights and consequences flow from both the past and the future.

Let me count the ways this works.

Past events impact today’s petition

Our client’s present circumstances didn’t just pop up, overnight, like a mushroom.  They are the product of years of interlayered events.  The better we understand those events, the better we can advise the debtor.

  1. Means test income and Lanning :  does the 6 month look back income include a unique event, like a bonus, that won’t occur again?
  2. Preferences:  in the last 90 days, did they settle a suit, pay their student loans, make any transfer they don’t want undone?
  3. Transfers to insiders: in the last year-  if client has been repaying family loans, you don’t want them surprised when trustee sues their parents
  4. Conveyances to “protect” assets: move title from debtor to buddy, and debtor may have set buddy up for suit and imperiled their discharge
  5. Contributions to 529 accounts:  money contributed to government sanctioned college savings accounts within two years may be recoverable by trustee
  6. Interstate moves:  a move between states within two years of filing may drive exemption options
  7. Fraudulent transfers under state law:  the statute of limitations on fraudulent transfers where I practice is four years, and the trustee assumes the creditor’s rights to recover the transfer
  8. Tax filings: if there’s tax debt, it matters whether client got an extension of time to file return and whether tax day fell on the 15th, 16th, or 17th three years ago
  9. Transfers with intent to hinder, delay or defraud within 10 years: §  522(0) provides for reduction of homestead exemption for bad acts within a decade

So, you may have to get the client’s life story to see all the issues in their bankruptcy filing.

Events after filing matter, too

We’d like to think that things are locked down, right and tight, when the case is filed.  But some post petition events will augment the property of the estate in ways that don’t benefit the client.

  1. Inheritances–  541 expands the scope of property of the estate to assets acquired by testate or intestate succession.  Did you inquire about the health of client’s relatives and their succession instrument of choice?
  2. Additional debts if it’s likely that the debtor will accrue more debts, perhaps from ongoing illness, those debts won’t be dischargeable for years if you file a Chapter 7 prematurely
  3. Mortgage payment adjustments coming  a mortgage payment reset may affect the means test and the money available to fund a Chapter 13.
  4. Real estate appreciation  post petition appreciation belongs to the estate.  In a rising real estate market, you may need to compel abandonment of property before it becomes attractive to the trustee
  5. Tax refunds – a fraction of any tax refund for the year of filing may belong to the estate.  If the client is overwithheld, did you advise reducing withholding to eliminate refund come April?
  6. Expiration of limitations on sale  when prepetition options vest, or restrictions on sale of stock expire, the trustee may be able to sell something previously worthless.

The bigger picture yet

Going through bankruptcy can be a teachable moment:  if the client considers how he got here, a great bankruptcy lawyer may have thoughts for a sounder financial future.

The lawyer may ask:

  • Can you afford this house or this car in the long run?
  • Can you avoid taking on student loans that will cloud your future?
  • Can you utilize the financial discipline you used to survive this long to prepare for old age?

It’s not just filling out forms

The attorneys who see bankruptcy as “just filling out forms” set their clients up for unpleasant surprises.  It’s not easy or quick to extract all this information from a client who is stressed and self condemning.

Not easy, but the difference between adequate and great.

If you’re reading here, I’d like to think you’re a member of the Lake Wobegon Bar Association, where all the lawyers are above average.  Cheers.


How to educate your client

Where to start when you encounter a problem

Image courtesy of Flickr and Kim Seng