Remarks By
John Walsh
Acting Comptroller of the Currency
Before
The American Banker Regulatory Symposium
Washington, D.C.
September 19, 2011
Good afternoon. Thank you, Rob, for that kind introduction, and thank you for inviting
me to participate in this important symposium. Many months ago, when I agreed that the OCC
would participate in this program, I did so with confidence that a new Comptroller of the
Currency would be nominated and confirmed, and I would never have to write a single word to
say to this audience. But the process did not work quite as I anticipated and here I am.
I expected the role of acting Comptroller to be measured in months, but I have now
started my second year – and a challenging and surprisingly controversial year it has been. It is
an interesting experience to pass from anonymity to notoriety overnight.
For all the challenges of my now extended tenure, I do expect to turn over the OCC in
good condition to the next Comptroller. The pending nominee, Tom Curry, is someone with
whom I have had the pleasure of working on the board of the FDIC for the last year, and he
brings long experience in bank supervision to the job. I wish I could assure him that the road
ahead will be smooth and free of bumps, but of course that wouldn’t be true. As an FDIC board
member, he knows full well that we are continuing to work our way through the worst financial
crisis of our lifetime, and a very stubborn economic downturn. And as Comptroller, he will be
1 dealing with these broad challenges as well as the unique set of issues as the chief prudential
regulator of the nation’s largest banks.
Among the issues that will be front and center for the new Comptroller are mortgage
foreclosures and mortgage servicing. Although the OCC is not the only agency addressing these
issues, we do have substantial responsibilities for them. Federally chartered servicers handle
two-thirds of the nation’s mortgage loans, and as you know, we are in the midst of implementing
a set of enforcement actions that are among the most complex and most significant of any that
the OCC has ever initiated. So, I’d like to spend my time today talking about foreclosures and
servicing. I’ll provide an update on where we are with respect to our enforcement actions, and
I’ll offer a glimpse of the future for the servicing business.
It’s hard to overstate the importance of the foreclosure and servicing issues. They are a
major drag on the struggling housing industry, and a well-functioning housing sector is vital to
the health of local communities and our national economy. Recovery in the housing sector
would move us a long way toward achieving a sustained economic recovery, but it’s hard to
imagine the housing sector recovering until we work through the mortgage modification process,
address the large back-log of foreclosures, and restore a fair and functional foreclosure process in
the housing market.
These are matters of particular concern to me as Comptroller because the mortgage
business has always been a big part of the OCC’s portfolio, and it has assumed even greater
importance with the integration of the OTS’s responsibilities for federal thrift supervision into
the OCC. The thrift industry came into being to support home ownership, and while thrifts have
gotten involved in many areas of consumer lending over time, mortgage lending remains their
major focus.
2 The improper practices in foreclosure processing and mortgage servicing that have come
to light have major safety and soundness implications for banks, in addition to their financial
consequences for troubled homeowners and the economy. They have had a very damaging
effect on the reputation of the institutions involved; in fact, on the reputation of the industry as a
whole. Loss of a home through foreclosure is a financial and personal tragedy for a family; and,
the widespread foreclosures taking place can create economic blight for a community. It is
unfortunately true that significant numbers will face the loss of their homes in the current
economic environment, but it must also be true that troubled borrowers can expect to be treated
fairly and afforded every protection provided under the law. I am confident that our enforcement
actions will do just that: ensure that at-risk borrowers get a fair chance to stay in their homes,
while assuring that those who do find themselves in foreclosure receive appropriate protection
and due process under the law.
I am proud of the excellent work done by our staff in these enforcement actions, but if
confidence in the system is to be restored, it is also important that the full extent of the actions
we are taking is well understood by the public. That has not been the case, in part, because this
is a large and complex undertaking that can’t all be completed at once.
When we announced the actions, I said they were intended to fix what was broken,
compensate those who were harmed, and, where appropriate, assess penalties for abuses. We are
doing just that. We have directed servicers to undertake major systems and processing
improvements that will be quite expensive to implement. And servicers must provide restitution
or other forms of remediation to borrowers who have suffered financial harm, with no limit on
total cost.
3 All of this takes time, and the full effect, full cost, and full benefit of remediation will be
known only at the end. Not knowing what all of this will ultimately cost means we haven’t been
able to announce a big dollar figure to capture the severity of our enforcement actions.
Engagement letters and action plans are the critical steps in resolving the foreclosure processing
mess, but they lack the sex appeal of a big dollar settlement or the sound bite that summarizes
the process in a word or two. Since it is not a story that lends itself to easy synopsis, I’d like to
spend a few minutes highlighting its key elements.
First, the scope of the enforcement actions that we took in April is very broad and
comprehensive, and I think that’s been poorly understood. Looking at the details of the
foreclosure review, the enforcement orders tackle a large number of problems that need to be
fixed. While “robo-signing” has become a shorthand for the broken process, these orders go far
beyond just fixing “robo-signing” of documents. They address the entire system of controls that
must be in place to ensure that those practices don’t occur in the first place.
The orders ensure accountability. They were signed by each member of the board of
directors at each of the banks, and each servicer was directed to establish a compliance
committee including at least three of its directors, each of whom is accountable to the OCC and
the Fed for the oversight and implementation of the corrective actions required by our orders.
The scope of compliance responsibilities that this committee is accountable for is extensive, and
failure to deliver effective compliance can carry personal consequence for directors, as well as
for the servicers.
The orders also raise the bar for the oversight and management of third-party service
providers who process loss mitigation applications and foreclosures, and manage acquired
properties, including law firms that provide services and counsel for all of these processes. You
4 can delegate and outsource the work, but you can’t outsource the responsibility for ensuring the
work is carried out in a safe and sound manner.
Because of the complexity of these processes and the amount of detail involved in every
mortgage serviced by these large companies, our orders also require significant enhancement to
the management information systems used by these companies. Of course, reliable MIS is a
basic requirement for doing the business of banking. But the reality is that the rapid
consolidation of the industry meant that very large firms often had multiple systems performing
servicing and loss mitigation functions, and the integration and functionality of these systems did
not always keep pace. That is a criticism, not an excuse, but it is a fair description of how things
evolved that must now be fixed under our enforcement actions.
Improving accountability, third-party oversight, and information systems won’t fix the
problem unless the basic standard of mortgage servicing is reformed. Consequently, we targeted
several aspects of these standards and practices that posed the greatest risk to the process. For
example, we are requiring servicers to establish a single point of contact for borrowers and to
establish procedures to end dual tracking: that is, to ensure foreclosure actions stop when a
borrower is approved for a trial or permanent modification.
All of the steps I’ve described thus far are aimed at ensuring the process works going
forward – the “fixing what’s broken” piece. But for homeowners who ended up in foreclosure,
the critical issue is whether they were financially harmed due to servicer deficiencies, errors or
misrepresentation and, if they were, what kind of restitution should be provided. That is the
most ambitious and complex aspect of our enforcement actions – the independent foreclosure
review.
5 This independent review sets out to identify borrowers who suffered financial injury as a
result of errors, misrepresentations, or other deficiencies in the foreclosure process. The scope of
this review includes any mortgage serviced by these companies on a borrower’s primary
residence that was in any stage of foreclosure between January 1, 2009 and December 31, 2010.
So we are looking not just at those foreclosures that resulted in foreclosures sales, but at
foreclosures that were pending at any point in that period. They could have been cancelled or
still pending, given how long foreclosures take today: nearly four and a half million mortgages
are in that total pool, each with its own special facts and circumstances.
In our initial examination of this problem, we looked at a sample of 200 loans at each of
the 14 institutions – enough to make a judgment about whether enforcement actions were
justified, but not nearly enough to answer all questions. Foreclosure file reviews conducted by
examiners were very labor intensive, and this phase of the process took about three months to
complete. The banking agencies certainly don’t have the examiner and legal resources to expand
our file reviews to identify financial injury or harm in this huge potential population of
foreclosures. So a basic requirement we placed on the servicers at the outset was to devise a
comprehensive process that could provide an independent review of a large number of
foreclosure cases, determine if there was any harm to the borrower, and provide restitution
where appropriate.
We had begun defining an acceptable process even before we issued the enforcement
orders in April: independent consultants and law firms to advise them would have to be hired to
administer the review under our direction; a comprehensive complaint process for borrowers to
submit claims was deemed a critical and necessary component of the foreclosure review; and
sampling was greatly expanded to help catch foreclosure cases with potential for financial injury.
6 These elements are reflected in the engagement letters developed by the independent consultants
and submitted by the servicers.
We have coordinated with the Department of Justice throughout this process, and as you
know, we agreed to delay submission of the action plans by 30 days to allow time for additional
coordination with the states. We continue to work with the Department of Justice and other
federal and state regulators to harmonize new mortgage servicing standards. I continue to
believe that we will be able to harmonize the mortgage servicing requirements in our orders with
those of other regulators if and when they are reached. In fact, I think it is absolutely essential
that we do so.
Since the submission of plans in July, we have been working with the servicers and
independent consultants to refine the plans so that the reviews meet our high expectations. The
independent foreclosure review was the most public and highly anticipated aspect of our orders,
so it was especially important to get it right. For example, we set detailed expectations for the
sampling process. The foreclosure population is being divided into targeted segments to identify
foreclosure cases that have the highest potential for financial injury. In some cases, independent
consultants will be reviewing hundreds of thousands of case files for just one servicer. Sampling
can be an extremely useful tool for identifying errors in a large population, but it is only a
starting point that may require more thorough investigation if issues are identified.
As we explored the best means of ensuring that injured homeowners had the opportunity
to seek relief, it became clear that what was needed was a robust, transparent, and accessible
complaint process that will give borrowers the opportunity to request an independent foreclosure
review. I’m happy to say in the next several weeks you’ll see the roll out of just such a process.
7 Homeowners who faced foreclosure of their primary residence will be able to request a
review of their case if they believe they suffered financial injury as a result of errors,
misrepresentations, or other deficiencies in the foreclosure process between January 1, 2009 and
December 31, 2010. Affected borrowers in this timeframe will be contacted through direct
mailings and other tracing techniques. The independent consultants will also launch a
coordinated advertising campaign to help contact borrowers who cannot be reached through
direct mailings or other means.
Rather than instituting 14 different servicer processes, which would surely be a source of
confusion for homeowners, we insisted that all of the independent consultants use a single claims
processing vendor that will provide common intake forms, a single Web site, and a common
phone number for eligible individuals who want a review of their case. We expect this process
to kick off in the next few weeks. Individuals seeking a review will be able to go to a Web site
and either file a request for review online or ask for a form that can be filled out and submitted
by mail. There will be a toll-free number for individuals who need assistance filing their request
or who want to ask questions about the review.
I know that many who went through foreclosure in recent years emerged pretty jaded by
the confusion and inefficiency of the experience, so I’d like to explain just what they can expect
if they request review of a foreclosure on their primary residence during the review period. First,
their case will be reviewed by an independent consultant to identify financial injury or harm
under the terms of the OCC’s enforcement orders. If the consultant identifies cases of financial
harm, servicers will be required to develop a remediation plan and make appropriate restitution.
Remediation plans are subject to OCC and Federal Reserve approval.
8 Everyone who asks for a review of their case will receive confirmation that the request
has been received, and they may be asked for additional detail and information. While the
reviews are independent, the servicer will provide relevant documentation related to the case and
may be asked to clarify or confirm facts and disclose reasons for decisions made or actions taken
during the process. At the conclusion of the review, which will take several months, a letter will
be provided explaining the outcome, and providing information about restitution where
appropriate.
The nature and severity of any financial injury will be case specific, so remedies could
vary substantially. Remediation and restitution will not be approached as a one-size-fits-all
proposition. It will depend on the facts of the individual case and that requires thorough and
careful consideration, as well as a strong quality control process to ensure each institution is
treating cases of financial harm in a consistent way.
The OCC expects independent consultants to employ a robust quality assurance process,
and our examiners will review and assess this process on a continuing basis. If we find material
issues, we will require prompt corrective action. To ensure consistency, we issued guidance on
financial injury, and instructed the independent consultants to use it.
Our enforcement actions require independent consultants to develop a Foreclosure
Review Report identifying financial injuries with recommendations for remediation. We will
review these reports individually, and we also plan to conduct a horizontal review of the reports
to ensure there are no material inconsistencies. These reports will be used by servicers to
develop and submit the remediation plans required by our orders.
While I wish that there was a faster way to address the problems, provide relief, and
restore the smooth functioning of the housing market, the fact is that this process will take some
9 time to complete. Then there are the other federal enforcement actions and negotiations with
state AGs, private lawsuits over foreclosures and securitizations, and an extensive agenda of
rulemaking in the mortgage area that will further cloud the industry’s outlook for some time to
come.
While it may seem hard to be optimistic in the near term, we are focused on putting the
process right for the long term by establishing uniform national mortgage servicing standards
that apply to all mortgages and protect all borrowers. We have already begun this effort, and are
working with the Fed, the FDIC, the FHFA, and the CFPB on new and comprehensive standards.
In fact, our enforcement actions have already set some of the standards that will be part of an
eventual package, including the ban on dual tracking and the requirement for a single point of
contact. So we are well on the way.
The challenges before us are substantial, but we have taken substantial steps to resolve
them. The path to recovery will be longer than anyone would like, but we are clearing the path
forward and finding ways to settle outstanding issues as quickly as possible so as to restore
confidence in the system and respect the needs of all who have suffered in the process.
Thank you.
10
Tuesday, September 20, 2011
Thursday, September 8, 2011
Chapter 7 or Chapter 13 Bankruptcy.... What's the Difference?
Dear Readers:
As you know there are two types of bankruptcy which are relevant to most consumer debtors. Those are Chapter 7 which is considered a financial mulligan, start over, start fresh (Yes David you can still keep your House, your Car, your Boat and the Helicopter!). A Chapter 13 is a reorganization.... essentially, you need some time due to get caught up without being penalized. This information is not intended to constitute legal advice, it is purely for entertainment purposes. Always consult with a lawyer who is in your community to know how much of this applies to you!
With that being said, there are advantages and disadvantages of both Chapter 7 and Chapter 13. Under Chapter 13 the Debtor will make regular payments on a plan to pay all or part of the debts. Under Chapter 7 there is no plan to repay creditors and all debts that are “dischargeable” are simply liquidated. The absence of regular payments is a powerful inducement for many Debtors, which may explain why there are more Chapter 7 cases than Chapter 13 cases. Under Chapter 7 a Debtor will generally lose “non-exempt” property, while under Chapter 13 Debtors are normally able to keep both “exempt” and “non-exempt” property. Of course, this is of no concern if a Debtor has little or no property or only property which is “exempt” - moreover, the exemptions have been liberalized over the years and many Debtors keep property of significant value.
A Chapter 13 discharge is also broader than a Chapter 7 discharge in that it covers certain types of debts not “dischargeable” under a Chapter 7. However, the 2005 Bankruptcy Law did add several categories of debts that are no longer dischargeable in a Chapter 13. The debts dischargeable in a Chapter 7 are discussed below. All Debts dischargeable under Chapter 7 are also dischargeable under Chapter 13, but several categories of debts can be discharged in a Chapter 13 but not under a Chapter 7 such as debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax bills and certain debts arising from property settlements in divorce of marital separation cases.
Secured debts, even when the Debtor is behind on payments, can be handled in a Chapter 13, giving the Debtor additional time to come up with money to save the secured property. Chapter 13 can also be used to protect co-signers, who cannot be protected through a Chapter 7.
Is it more difficult for someone to file bankruptcy? Under the new law Chapter 7 or Chapter 13 will make it easier for some people to file and harder for others. We discuss many of the advantages and disadvantages below. The new law was a major revision and space does not permit a discussion of all the changes. However, there are some new requirements for credit counseling and debtor education which
will affect almost everybody. The Debtor must file a certificate of completion of credit counseling. Average pre filing counseling typically requires about 90 minutes (actual time may vary). This requirement may be waived in only a limited number of circumstances. A list of the agencies offering such briefing can be found in the Appendix at the end of this document. The Debtor must also prove completion of a financial management course before a discharge is granted. It may be possible to take this course over the telephone and will last at least 2 hours. The new law also requires the filing of the Debtor’s tax return or transcript and some of the Debtor’s pay stubs may have to be filed as well. The Debtor will have to provide proof of identity and certain financial records, if requested.
CHAPTER 7 - DO NOT USE THIS CHAPTER TO STOP A FORECLOSURE SALE!
What is Chapter 7? Chapter 7 is the most popular type of bankruptcy. It is a legal proceeding in a special federal court, the United States Bankruptcy Court. At the end of this proceeding, certain debts are said to be discharged. [11 U.S.C. §727]. “Discharged” means, among other things, that the Debtor no longer has to pay the debt. However, not all debts are dischargeable under Chapter 7. Most Chapter 7 cases are “no assets” cases. In a no assets case, none of the assets of the Debtor are used to pay creditors. Assets are unavailable to pay creditors if they are already encumbered by liens at least equal to the value of the asset. An asset is unavailable if it does not become part of the bankruptcy case — many, but not all, pensions may
fall into this category. Also, an asset is unavailable if the Debtor is able to claim it is “exempt”.
How does Chapter 7 protect Debtors? As soon as a bankruptcy is filed a Debtor is protected by a part of the Bankruptcy Code called the “Automatic Stay”. [11 U.S.C. §362]. YES David, this means that the foreclosure sale cannot go forward provided that you file your bankruptcy BEFORE the sale with enough time to GIVE CREDITOR NOTICE that you have filed. In California this means well before 8:00 a.m. the day of a sale. If you want to make sure your house doesn't go to sale PLEASE FILE THE DAY BEFORE!!!! However, if you use this Chapter 7 to stop the sale, you put yourself at risk of losing your home if you cannot pay back everything you are behind immediately or if you do not get a loan modification!
This stay functions as an Order or injunction from the Bankruptcy Court and can be enforced by proceedings in the Bankruptcy Court. The stay stops most legal proceedings against the Debtor. The Automatic Stay prohibits almost all attempts to collect debts owed by the Debtor while the bankruptcy is pending. Most Chapter 7 cases will remain pending for three to four months.
The 2005 Bankruptcy law created some new exceptions to the Automatic Stay, for the most part dealing with serial filers of repeat bankruptcies, and some actions against tenants involved in eviction actions. The law also changed to permit certain actions such as setoffs of tax refunds and withholding of wages to repay loans from retirement funds. Therefore you MUST CONSULT an Attorney, if you are filing another bankruptcy there may be no automatic stay in place. So protect yourself by knowing your rights.
The Automatic Stay provision is a very important part of the Bankruptcy Code. It can be even more important than the discharge of debts. It will stop harassment by creditors over the phone or by letter. And it can be used to stop, at least temporarily, a foreclosure and give a Debtor more time to come up with a mortgage arrearage. However, this protection is not absolute. For instance, a secured creditor who is found to by the Bankruptcy Court to be inadequately protected can be granted permission to repossess or foreclose on secured property. In most cases the Automatic Stay expires when the debts of the Debtor are discharged. The discharge provisions of the Bankruptcy Code will then generally prohibit almost all attempts to collect debts which have been discharged. However, after the discharge, creditors will be free to pursue debts which have not been discharged and debts which have been reaffirmed.
Who qualifies for Chapter 7? Any person who resides in the United States, or is domiciled here or who has business or property in the United States can be a Debtor under Chapter 7. [11 U.S.C. §109]. NOTE you DO NOT NEED TO BE A US CITIZEN! A special exception to this rule prohibits some people whose bankruptcy case was involuntarily dismissed in the previous 180 days from refiling. A person who has received a discharge in another Chapter 7 (or Chapter 11) case filed within the preceding 8 years cannot be granted a Chapter 7 discharge. [11 U.S.C. §727(a)(8)]. Also, a Chapter 7 discharge cannot be granted to someone until 6 years after a Chapter 13 discharge.
The 2005 Bankruptcy Law created an additional barrier for some who seek Chapter 7 protection. A presumption of abuse is created unless a Debtor can meet a new means test. This change will not affect most people who wish to file a Chapter 7 case. A “safe harbor” is created if a Debtor’s income is below the statewide median income for the Debtor’s family size. Please check with an attorney to see what your limits may be.
However, do not despair, even a Debtor with income over the median may still qualify by demonstrating an
inability to repay creditors. In this case, IRS standards for various normal expenses such as food, clothing, personal care, etc. are compared to the Debtor’s income. Deductions of standard amounts from IRS tables are permitted for transportation. Other necessary expenses from the IRS list of necessary expenses may also be deducted. These expenses include costs as child care, alimony, medical/dental care, expenses to avoid being a victim of domestic violence, taxes, or support of elderly and disable family members and various other expenses. Obviously, if your income is over the statewide median, your attorney may have to help you determine if a Chapter 7 filing is feasible.
Being able to file does not mean it is advisable to file under Chapter 7. A person who has substantial bills that are not dischargeable often will not benefit from Chapter 7. A person who owns substantial assets that would not be exempt may not benefit unless the debt that could be discharged would be substantially in excess of the assets that would be lost. Also, the Court may dismiss the case of someone who could repay a substantial portion of his or her debt within a reasonable time it found the case amounted to an abuse of Chapter 7. There are other instances in which the filing of a Chapter 7 case would not benefit a Debtor. It is important for people to seek competent legal advice before filing a bankruptcy petition.
How much does it cost to file a Chapter 7 Bankruptcy? The filing fee for a Chapter 7 case is $299. While it is possible for a Debtor to file without the help of an attorney or professional preparer, unassisted “pro se” filings are unusual. Since added requirements of the new Bankruptcy Law mean much more work and responsibility for the lawyer, attorney fees have gone up recently. The amount charged for attorney fees normally reflects the difficulty of the case. Such factors as a large number of creditors, a debtor engaged in business or a unique legal situation requiring additional legal research will normally increase the attorney fee.
What property will a Debtor lose in a Chapter 7 case? In most Chapter 7 cases, the Debtor does not lose any property. The Debtor is allowed to keep all property that does not become part of the bankruptcy estate or that is exempt. The Debtor’s attorney first divides the property into various classifications such as the Debtor’s homestead, household goods or tools of the Debtor’s trade. The value of property in each classification is then determined. It is sometimes difficult to figure the exemptions a Debtor is entitled to.
In California there are two sets of exemption codes which basically break down to whether the Debtor has a home with equity or without equity. There are many factors which go into determining which set of California exemptions will apply. Additionally, in some instances California Debtors qualify for using some Federal exemptions. You practically need an attorney to really figure out what can be exempted. If you don't own much, more than likely you won't need an attorney to do a Chapter 7 bankruptcy. If you are contemplating a Chapter 13, I strongly suggest you hire a bankruptcy attorney. All these exemptions all have various limitations and are broad categories often requiring more exact definitions. Ask your lawyer about any property you are concerned about.
Finally, valuation of property is sometimes a problem. The current value of the property is used, not the value of the time of purchase or at some future date when the Debtor might sell. Also, only the Debtor’s interest in property is valued. If the Debtor owns property along with someone else, only the Debtor’s part is valued. Also, if there is a lien on property the Debtor’s interest in the property is reduced by the amount of the lien. For instance, the Debtor’s interest in a home with a market value of $100,000 and a mortgage of $90,000 is $10,000. If the amount of the lien is greater than the property the Debtor may elect to keep the property but it may be in the Debtor’s interest to give up the property (see the next section).
Liens and Secured Debts. Secured creditors are those protected by a lien or mortgage against the Debtor’s property (often referred to as the “collateral”). Secured creditors have an interest in a specified item of property in the amount of their lien. A secured creditor will generally be permitted to repossess or foreclose on the secured property unless the Debtor elects to retain the property and reaffirm the debt. If the Debtor reaffirms the debt, the secured creditor will be allowed to retain its rights to the collateral but the Debtor will be permitted to retain the property subject to the terms and conditions of the security agreement. In some cases the amount of the lien will exceed the value of the collateral. In many of these cases the Debtor will want to return the property to the secured creditor and discharge the debt. In some cases a Debtor may
wish to retain collateral even though the amount of the lien exceeds its value. This situation may be somewhat more complicated and Debtors are advised to seek their lawyer’s advice.
What debts can be discharged in a Chapter 7 case? All debts are discharged unless they are excepted from discharge by a section of the Bankruptcy Code. [11 U.S.C. §523] The major EXCEPTIONS TO DISCHARGE are these:
1. Some Income Taxes. See your attorney to figure out which ones. Old Income taxes may be dischargeable!
2. Debts for money, property or related to the extension, renewal or refinancing if procured through false pretenses, false representations or fraudulent financial statement; included are certain debts for luxury goods or services within 90 days before the bankruptcy was filed or certain cash advances within 70 days before filing; Note that some lenders will go back up to one year asking for you to pay them.
3. Unlisted debts, if the failure to notify the creditor prevented the creditor from filing a claim or objecting to the discharge of the debt.
4. Debts for fraud or embezzlement by a Debtor in a position of trust;
5. Most domestic support obligations (including alimony, spousal maintenance or child support);
6. Debts for willful and malicious injury by the Debtor;
7. Fines, penalties or forfeitures owed to a government;
8. Student loans and educational benefits, unless the debt poses an undue hardship on the Debtor and Debtor’s dependents; This requires a lawsuit to get ride of this debt. IT CAN BE DONE.
9. Debts for death or personal injury caused by the Debtor’s use of a motor vehicle while intoxicated by alcohol, a drug or other intoxicant;
10. Debts which were or could have been listed in a previous bankruptcy and which were not discharged;
11. Certain debts owed to a spouse or ex-spouse arising in a divorce or separation - in these cases the Bankruptcy Court weighs various equities to determine whether the benefits of discharge to the Debtor outweigh the detrimental consequences to the spouse or ex-spouse;
12. Certain fees or assessment connected to membership associations related to the Debtor’s interest in his or her dwelling;
13. Debts incurred to pay non-dischargeable state or local taxes;
14. Federal election law fines and penalties;
15. Property settlements owed to a former spouse or to a child;16. Condo or homeowner’s association fees;
17. Certain fees imposed on prisoners by a court.
18. Loans on pensions; and
19. Certain debts arising from securities violations or wrongful acts of a fiduciary.
Objections to discharge. In addition to objecting to discharge of a given debt, a creditor may also object to the grant of a discharge to the Debtor. These cases are fairly rare. The most common grounds for objecting to discharge are [11 U.S.C. §727]:
1. Intentional concealment, transfer or destruction of property by the Debtor;
2. Failure to keep books or financial records;
3. Dishonesty in connection with the bankruptcy;
4. Unexplained loss of assets of the Debtor;
5. Refusal to cooperate, obey court orders or to testify in a bankruptcy proceeding;
6. The Debtor has been involved in prohibited transactions with insiders (persons closely related to the Debtor);
7. A prior discharge was granted to the Debtor in another Chapter 7 case within eight years; and
8. A prior discharge was granted to the Debtor in a Chapter 13 case within six years - but a discharge may be granted if more than 70% of the unsecured claims were paid and the Debtor made a good faith best effort to pay creditors in the Chapter 13 case.
Moreover, once granted a discharge may be revoked if the Debtor obtained his or her
discharge through fraud and the party requesting revocation was unaware of the fraud prior to the
discharge or if the Debtor fraudulently failed to report the acquisition of property that may have
been part of the bankruptcy estate.
In Part II of this series of articles, I will tell you more about Chapter 13. Stay tuned!!!
As you know there are two types of bankruptcy which are relevant to most consumer debtors. Those are Chapter 7 which is considered a financial mulligan, start over, start fresh (Yes David you can still keep your House, your Car, your Boat and the Helicopter!). A Chapter 13 is a reorganization.... essentially, you need some time due to get caught up without being penalized. This information is not intended to constitute legal advice, it is purely for entertainment purposes. Always consult with a lawyer who is in your community to know how much of this applies to you!
With that being said, there are advantages and disadvantages of both Chapter 7 and Chapter 13. Under Chapter 13 the Debtor will make regular payments on a plan to pay all or part of the debts. Under Chapter 7 there is no plan to repay creditors and all debts that are “dischargeable” are simply liquidated. The absence of regular payments is a powerful inducement for many Debtors, which may explain why there are more Chapter 7 cases than Chapter 13 cases. Under Chapter 7 a Debtor will generally lose “non-exempt” property, while under Chapter 13 Debtors are normally able to keep both “exempt” and “non-exempt” property. Of course, this is of no concern if a Debtor has little or no property or only property which is “exempt” - moreover, the exemptions have been liberalized over the years and many Debtors keep property of significant value.
A Chapter 13 discharge is also broader than a Chapter 7 discharge in that it covers certain types of debts not “dischargeable” under a Chapter 7. However, the 2005 Bankruptcy Law did add several categories of debts that are no longer dischargeable in a Chapter 13. The debts dischargeable in a Chapter 7 are discussed below. All Debts dischargeable under Chapter 7 are also dischargeable under Chapter 13, but several categories of debts can be discharged in a Chapter 13 but not under a Chapter 7 such as debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax bills and certain debts arising from property settlements in divorce of marital separation cases.
Secured debts, even when the Debtor is behind on payments, can be handled in a Chapter 13, giving the Debtor additional time to come up with money to save the secured property. Chapter 13 can also be used to protect co-signers, who cannot be protected through a Chapter 7.
Is it more difficult for someone to file bankruptcy? Under the new law Chapter 7 or Chapter 13 will make it easier for some people to file and harder for others. We discuss many of the advantages and disadvantages below. The new law was a major revision and space does not permit a discussion of all the changes. However, there are some new requirements for credit counseling and debtor education which
will affect almost everybody. The Debtor must file a certificate of completion of credit counseling. Average pre filing counseling typically requires about 90 minutes (actual time may vary). This requirement may be waived in only a limited number of circumstances. A list of the agencies offering such briefing can be found in the Appendix at the end of this document. The Debtor must also prove completion of a financial management course before a discharge is granted. It may be possible to take this course over the telephone and will last at least 2 hours. The new law also requires the filing of the Debtor’s tax return or transcript and some of the Debtor’s pay stubs may have to be filed as well. The Debtor will have to provide proof of identity and certain financial records, if requested.
CHAPTER 7 - DO NOT USE THIS CHAPTER TO STOP A FORECLOSURE SALE!
What is Chapter 7? Chapter 7 is the most popular type of bankruptcy. It is a legal proceeding in a special federal court, the United States Bankruptcy Court. At the end of this proceeding, certain debts are said to be discharged. [11 U.S.C. §727]. “Discharged” means, among other things, that the Debtor no longer has to pay the debt. However, not all debts are dischargeable under Chapter 7. Most Chapter 7 cases are “no assets” cases. In a no assets case, none of the assets of the Debtor are used to pay creditors. Assets are unavailable to pay creditors if they are already encumbered by liens at least equal to the value of the asset. An asset is unavailable if it does not become part of the bankruptcy case — many, but not all, pensions may
fall into this category. Also, an asset is unavailable if the Debtor is able to claim it is “exempt”.
How does Chapter 7 protect Debtors? As soon as a bankruptcy is filed a Debtor is protected by a part of the Bankruptcy Code called the “Automatic Stay”. [11 U.S.C. §362]. YES David, this means that the foreclosure sale cannot go forward provided that you file your bankruptcy BEFORE the sale with enough time to GIVE CREDITOR NOTICE that you have filed. In California this means well before 8:00 a.m. the day of a sale. If you want to make sure your house doesn't go to sale PLEASE FILE THE DAY BEFORE!!!! However, if you use this Chapter 7 to stop the sale, you put yourself at risk of losing your home if you cannot pay back everything you are behind immediately or if you do not get a loan modification!
This stay functions as an Order or injunction from the Bankruptcy Court and can be enforced by proceedings in the Bankruptcy Court. The stay stops most legal proceedings against the Debtor. The Automatic Stay prohibits almost all attempts to collect debts owed by the Debtor while the bankruptcy is pending. Most Chapter 7 cases will remain pending for three to four months.
The 2005 Bankruptcy law created some new exceptions to the Automatic Stay, for the most part dealing with serial filers of repeat bankruptcies, and some actions against tenants involved in eviction actions. The law also changed to permit certain actions such as setoffs of tax refunds and withholding of wages to repay loans from retirement funds. Therefore you MUST CONSULT an Attorney, if you are filing another bankruptcy there may be no automatic stay in place. So protect yourself by knowing your rights.
The Automatic Stay provision is a very important part of the Bankruptcy Code. It can be even more important than the discharge of debts. It will stop harassment by creditors over the phone or by letter. And it can be used to stop, at least temporarily, a foreclosure and give a Debtor more time to come up with a mortgage arrearage. However, this protection is not absolute. For instance, a secured creditor who is found to by the Bankruptcy Court to be inadequately protected can be granted permission to repossess or foreclose on secured property. In most cases the Automatic Stay expires when the debts of the Debtor are discharged. The discharge provisions of the Bankruptcy Code will then generally prohibit almost all attempts to collect debts which have been discharged. However, after the discharge, creditors will be free to pursue debts which have not been discharged and debts which have been reaffirmed.
Who qualifies for Chapter 7? Any person who resides in the United States, or is domiciled here or who has business or property in the United States can be a Debtor under Chapter 7. [11 U.S.C. §109]. NOTE you DO NOT NEED TO BE A US CITIZEN! A special exception to this rule prohibits some people whose bankruptcy case was involuntarily dismissed in the previous 180 days from refiling. A person who has received a discharge in another Chapter 7 (or Chapter 11) case filed within the preceding 8 years cannot be granted a Chapter 7 discharge. [11 U.S.C. §727(a)(8)]. Also, a Chapter 7 discharge cannot be granted to someone until 6 years after a Chapter 13 discharge.
The 2005 Bankruptcy Law created an additional barrier for some who seek Chapter 7 protection. A presumption of abuse is created unless a Debtor can meet a new means test. This change will not affect most people who wish to file a Chapter 7 case. A “safe harbor” is created if a Debtor’s income is below the statewide median income for the Debtor’s family size. Please check with an attorney to see what your limits may be.
However, do not despair, even a Debtor with income over the median may still qualify by demonstrating an
inability to repay creditors. In this case, IRS standards for various normal expenses such as food, clothing, personal care, etc. are compared to the Debtor’s income. Deductions of standard amounts from IRS tables are permitted for transportation. Other necessary expenses from the IRS list of necessary expenses may also be deducted. These expenses include costs as child care, alimony, medical/dental care, expenses to avoid being a victim of domestic violence, taxes, or support of elderly and disable family members and various other expenses. Obviously, if your income is over the statewide median, your attorney may have to help you determine if a Chapter 7 filing is feasible.
Being able to file does not mean it is advisable to file under Chapter 7. A person who has substantial bills that are not dischargeable often will not benefit from Chapter 7. A person who owns substantial assets that would not be exempt may not benefit unless the debt that could be discharged would be substantially in excess of the assets that would be lost. Also, the Court may dismiss the case of someone who could repay a substantial portion of his or her debt within a reasonable time it found the case amounted to an abuse of Chapter 7. There are other instances in which the filing of a Chapter 7 case would not benefit a Debtor. It is important for people to seek competent legal advice before filing a bankruptcy petition.
How much does it cost to file a Chapter 7 Bankruptcy? The filing fee for a Chapter 7 case is $299. While it is possible for a Debtor to file without the help of an attorney or professional preparer, unassisted “pro se” filings are unusual. Since added requirements of the new Bankruptcy Law mean much more work and responsibility for the lawyer, attorney fees have gone up recently. The amount charged for attorney fees normally reflects the difficulty of the case. Such factors as a large number of creditors, a debtor engaged in business or a unique legal situation requiring additional legal research will normally increase the attorney fee.
What property will a Debtor lose in a Chapter 7 case? In most Chapter 7 cases, the Debtor does not lose any property. The Debtor is allowed to keep all property that does not become part of the bankruptcy estate or that is exempt. The Debtor’s attorney first divides the property into various classifications such as the Debtor’s homestead, household goods or tools of the Debtor’s trade. The value of property in each classification is then determined. It is sometimes difficult to figure the exemptions a Debtor is entitled to.
In California there are two sets of exemption codes which basically break down to whether the Debtor has a home with equity or without equity. There are many factors which go into determining which set of California exemptions will apply. Additionally, in some instances California Debtors qualify for using some Federal exemptions. You practically need an attorney to really figure out what can be exempted. If you don't own much, more than likely you won't need an attorney to do a Chapter 7 bankruptcy. If you are contemplating a Chapter 13, I strongly suggest you hire a bankruptcy attorney. All these exemptions all have various limitations and are broad categories often requiring more exact definitions. Ask your lawyer about any property you are concerned about.
Finally, valuation of property is sometimes a problem. The current value of the property is used, not the value of the time of purchase or at some future date when the Debtor might sell. Also, only the Debtor’s interest in property is valued. If the Debtor owns property along with someone else, only the Debtor’s part is valued. Also, if there is a lien on property the Debtor’s interest in the property is reduced by the amount of the lien. For instance, the Debtor’s interest in a home with a market value of $100,000 and a mortgage of $90,000 is $10,000. If the amount of the lien is greater than the property the Debtor may elect to keep the property but it may be in the Debtor’s interest to give up the property (see the next section).
Liens and Secured Debts. Secured creditors are those protected by a lien or mortgage against the Debtor’s property (often referred to as the “collateral”). Secured creditors have an interest in a specified item of property in the amount of their lien. A secured creditor will generally be permitted to repossess or foreclose on the secured property unless the Debtor elects to retain the property and reaffirm the debt. If the Debtor reaffirms the debt, the secured creditor will be allowed to retain its rights to the collateral but the Debtor will be permitted to retain the property subject to the terms and conditions of the security agreement. In some cases the amount of the lien will exceed the value of the collateral. In many of these cases the Debtor will want to return the property to the secured creditor and discharge the debt. In some cases a Debtor may
wish to retain collateral even though the amount of the lien exceeds its value. This situation may be somewhat more complicated and Debtors are advised to seek their lawyer’s advice.
What debts can be discharged in a Chapter 7 case? All debts are discharged unless they are excepted from discharge by a section of the Bankruptcy Code. [11 U.S.C. §523] The major EXCEPTIONS TO DISCHARGE are these:
1. Some Income Taxes. See your attorney to figure out which ones. Old Income taxes may be dischargeable!
2. Debts for money, property or related to the extension, renewal or refinancing if procured through false pretenses, false representations or fraudulent financial statement; included are certain debts for luxury goods or services within 90 days before the bankruptcy was filed or certain cash advances within 70 days before filing; Note that some lenders will go back up to one year asking for you to pay them.
3. Unlisted debts, if the failure to notify the creditor prevented the creditor from filing a claim or objecting to the discharge of the debt.
4. Debts for fraud or embezzlement by a Debtor in a position of trust;
5. Most domestic support obligations (including alimony, spousal maintenance or child support);
6. Debts for willful and malicious injury by the Debtor;
7. Fines, penalties or forfeitures owed to a government;
8. Student loans and educational benefits, unless the debt poses an undue hardship on the Debtor and Debtor’s dependents; This requires a lawsuit to get ride of this debt. IT CAN BE DONE.
9. Debts for death or personal injury caused by the Debtor’s use of a motor vehicle while intoxicated by alcohol, a drug or other intoxicant;
10. Debts which were or could have been listed in a previous bankruptcy and which were not discharged;
11. Certain debts owed to a spouse or ex-spouse arising in a divorce or separation - in these cases the Bankruptcy Court weighs various equities to determine whether the benefits of discharge to the Debtor outweigh the detrimental consequences to the spouse or ex-spouse;
12. Certain fees or assessment connected to membership associations related to the Debtor’s interest in his or her dwelling;
13. Debts incurred to pay non-dischargeable state or local taxes;
14. Federal election law fines and penalties;
15. Property settlements owed to a former spouse or to a child;16. Condo or homeowner’s association fees;
17. Certain fees imposed on prisoners by a court.
18. Loans on pensions; and
19. Certain debts arising from securities violations or wrongful acts of a fiduciary.
Objections to discharge. In addition to objecting to discharge of a given debt, a creditor may also object to the grant of a discharge to the Debtor. These cases are fairly rare. The most common grounds for objecting to discharge are [11 U.S.C. §727]:
1. Intentional concealment, transfer or destruction of property by the Debtor;
2. Failure to keep books or financial records;
3. Dishonesty in connection with the bankruptcy;
4. Unexplained loss of assets of the Debtor;
5. Refusal to cooperate, obey court orders or to testify in a bankruptcy proceeding;
6. The Debtor has been involved in prohibited transactions with insiders (persons closely related to the Debtor);
7. A prior discharge was granted to the Debtor in another Chapter 7 case within eight years; and
8. A prior discharge was granted to the Debtor in a Chapter 13 case within six years - but a discharge may be granted if more than 70% of the unsecured claims were paid and the Debtor made a good faith best effort to pay creditors in the Chapter 13 case.
Moreover, once granted a discharge may be revoked if the Debtor obtained his or her
discharge through fraud and the party requesting revocation was unaware of the fraud prior to the
discharge or if the Debtor fraudulently failed to report the acquisition of property that may have
been part of the bankruptcy estate.
In Part II of this series of articles, I will tell you more about Chapter 13. Stay tuned!!!
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