June 2, 2011

We've Moved!

Our new home is http://blog.nolo.com/bankruptcy/.
May 12, 2011

Protection From Garnishment for Social Security, Veterans Benefits

A new treasury rule, effective May 1, 2011, will provide more protection to receipients of federal benefits from garnishment of their bank accounts.

ManGrabbingPiggyBank_iStock.jpgGarnishment and Federal Benefits: The Basics

If a creditor gets a judgment against you, it has various tools to collect on that judgment. One tool allows the creditor to garnish (grab the money in) your bank account. But there are limits to garnishment. Judgment creditors cannot grab funds that come from certain sources, including some types of federal benefits such as Social Security, Supplemental Security Income, veterans benefits, and a few others.

Although these types of funds cannot be seized by creditors, in practice, when banks got a garnishment order in the past, they often froze all funds in the account (up to the amount of the debt), without regard to whether the funds were protected from garnishment. This means the bank accountholder would not be able to access those funds for weeks or months. The accountholder could object to the garnishment of the protected funds to prevent the bank from turning them over to the judgment creditor. But many people were unable to complete the paperwork and procedure to do so, and so lost funds that never should have been seized.

The New Rule: The Onus is on the Bank

The new rule puts the onus on the banks. Banks receiving garnishment orders must now determine if the bank account has protected federal benefits that have been electronically deposited into the account within the previous two months. If the bank discovers that there are protected funds, it cannot include those funds in the account freeze.

What This Means for Accountholders

Federal benefits received and deposited in a bank account via paper check are not protected by this new rule. Nor are funds received (even if received electronically) more than two months prior to the garnishment order. However, the regular state procedures for challenging a garnishment order will still be available for these types of funds. Federal benefit recipients currently receiving paper checks should consider switching to electronic deposit of their benefits.

For More Information

If you receive federal benefits and think you might need protection from bank garnishments, be sure to read about the nitty, gritty details of this new rule (this post just covers the very basics). For the short term, you can get an excellent summary of the new rule, as well as recommendations for how beneficiaries of federal benefits can best protect themselves, from the National Consumer Law Center at http://shop.consumerlaw.org/pdf/nclc-rpts-repo-jan-feb-2011.pdf.

By Guest Blogger Kathleen Michon

April 26, 2011

How and When to Reopen a Bankruptcy Case

Sometimes people want to reopen a closed bankruptcy case because they failed to invoke important procedures while their bankruptcy case was open.

BankruptcyPetitioniStockPhoto.jpgFortunately it's usually possible to reopen the bankruptcy and play catch-up. Common reasons for wanting to reopen a bankruptcy case include:

  • failing to timely file an Official Form 23 (pre-discharge counseling certification)
  • failing to name an important creditor or list valuable property, or
  • failing to take necessary steps to remove a judgment lien from real estate.

The process for reopening a bankruptcy case involves two steps.

Step One: Ex Parte Motion to Reopen. The first step is what's known as an ex-parte motion to reopen the case. This is a request to the judge that the case be reopened without giving advance notice to the creditors or scheduling a hearing. The paperwork, which consists of the motion or request, and an order granting the request, is pretty simple and widely available, both in Nolo's How to File for Chapter 7 Bankruptcy, by Albin Renauer, Steve Elias, and Robin Leonard, and various bankruptcy lawyer websites.

Step Two: Request for the Desired Action. The second step is to request (by motion and order) that the judge allow the desired action, for instance the removal of a judicial lien on real estate, or the entry of an order of discharge.

The fee for reopening a bankruptcy case is $274, so it's obviously less expensive to get everything done while you case is open. However, if you are trying to remove a lien worth many thousands of dollars, or asking for a discharge an expensive student loan, the fee to reopen the case is relatively unimportant.

April 18, 2011

New Mexico Debt Collection Rule Is a Victory for Debtors

FinalNoticeIStock.jpgNew Mexico's Attorney General will begin enforcing a new Rule which requires debt collectors doing business in New Mexico to (1) make a good faith effort to determine if collection of a debt is time-barred (meaning it is too late to sue for recovery of the debt in court) and (2) if it is time-barred, to so inform the debtor. The collector must also tell the debtor that signing a new agreement to pay the debt, or making a partial payment might "revive" the debt, resetting the time period that the collector has to sue on the debt. (To learn more about time-barred debts, and what that means for collection of the debt, read Nolo's article Time-Barred Debts: When Collectors Cannot Sue You for Unpaid Debts.)

The Attorney General implemented the rule in order to end "an industry-wide [debt collection] practice that tends to or does mislead or deceive" consumers by failing to provide important information to consumers - that is, that a debt is so old that it is legally unenforceable in court. The new Rule is a victory for consumers. As New Mexico Attorney General King said: "This Rule is intended to ensure that debt collectors provide important information to consumers so that they can make informed decisions when they are confronted with a demand to pay an old unenforceable debt."

The law went into effect on December 15, 2010, but the Attorney General delayed enforcement until March 15, 2011 in order to give debt collectors time to revamp their practices. You can read the Attorney General's announcement here. The announcement contains a link to the text of the new rule.

By: Guest Blogger Kathleen Michon 

April 14, 2011

Foreclosures Down, But Not for the Right Reasons

ForeclosureIStock.jpgAccording to RealtyTrac, foreclosures in the first three months of 2011 are trending down as compared to 2010. Foreclosures in January, Februrary, and March of 2011 are down by 27% as compared to foreclosures in the same months of 2010.

Unfortunately, most experts agree that this trend is not due to a healthier economy and housing market, but instead to bank backlogs in the foreclosure process. In 2010/2011 the media called attention to banks' shoddy foreclosure practices (for more on this see Nolo's article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners). Courts slapped banks for taking shortcuts on foreclosure paperwork and bypassing procedures meant to protect mortgage holders. Because some banks can no longer ram through foreclosures, a backlog has built, slowing the foreclosure rate.

By: Guest Blogger Kathleen Michon

April 12, 2011

Watch Out For the Newest Foreclosure Scam in California

Scams involving purported mortgage modifications and foreclosure assistance have abounded since the California foreclosure crisis in 2009. The California Department of Real Estate recently warned consumers about the newest version of these scams. (To learn more about foreclosure, check out Nolo's Real Estate & Rental Property area.)

In this scam, a "lawyer" invites homeowners to join a mass joinder or class action against a bank or mortgage company. The "lawyer" promises results such as stopping foreclosures, lowering mortgage payments, lowering principal balances, or eliminating mortgages altogether. "Clients" must pay a nonrefundable fee, often between $3,000 and $9,000 to join the litigation. The litigation is a sham, and the clients receive nothing.

Scammers often solicit victims by mass mail or advertise the "litigation" on the Internet. The solicitations often sound legitimate, and require clients to sign lengthy retainer agreements.

To learn more about this scam, and how to protect yourself, check out the California Department of Real Estate's consumer alert.

by Guest Blogger Kathleen Michon

March 28, 2011

Reestablishing Credit During the Recession

CreditCardsIStock.jpgA number of the people I counsel want to know how soon they can restore their credit after bankruptcy. The prerecession standard advice was two years for a credit card with decent interest and four years for a mortgage with indecent interest.

But that was then. Now, because so many people have bad credit because of foreclosures, late payments, and bankruptcies, it's hard to say what decisions the credit issuers will be making in the next several years. Will they be more forgiving because of the need to pull in people who might not have qualified a few years ago, or will they get tighter and not give credit at all until more time has elapsed after the bankruptcy? Only Fair Isaac (FICO) knows for sure, sort of.

For sure, if you want to reestablish credit, the old ways are probably still the best ways. Get a major credit card, periodically make purchases, scrupulously make your payments on time, get a second card, same thing, work to build your credit line, never max-out your cards, and so on. There are a number of other tips on the Fair Isaac website at http://www.myfico.com that will help you lift your credit score to the maximum extent possible. The more you follow that advice, the better off you'll be. You can get Nolo's Credit Repair, by Robin Leonard and Margaret Reiter (Nolo) for even more on this subject. Or check out the free articles and FAQs in Nolo's Credit Repair for Bad Credit area of its website.

But should you even try to get your credit back? I often tell people I'm counseling that working to get your credit back is like an alcoholic learning how to drink better. Credit is simply the opportunity to go into debt, and once in debt it's really hard to get out. When you've received your bankruptcy discharge you will usually be completely solvent (except perhaps for debts like student loans and recent income taxes). Why spend energy for the privilege of going back into debt? There are lots of reasons why people feel it's a rational thing to do, but all you're really doing is preparing to live beyond your means.

Sure it's nice to have credit for an emergency, but people would be much better off reigning in their spending and saving as much and as fast as possible, and using their savings if necessary for an emergency. You may not feel like you're addicted to credit or spending (same thing), but chances are you are and are just in denial. Now I would never say this to your face because you would just deny it and be angry at me. Well, maybe you're still angry at me but at least I don't have to see it. Please accept the fact that my intentions are good -- to keep you solvent and out of debt.

March 16, 2011

Same Sex Couple Files Joint Chapter 13 Bankruptcy Petition

On February 24, 2011, a same-sex couple filed a joint Chapter 13 bankruptcy petition in Los Angeles, California. Why is this big news?

Bankruptcy is one of the many (thousands, actually) areas in which same-sex couples are treated differently from opposite-sex couples. Even if a same-sex couple is legally married (for example, the couple lives and marries in Massachusetts) or has formed a domestic partnership in a state that provides such partnerships with the same benefits as marriages (as in California), because federal law does not recognize the marriage or partnership, the couple must act as if they are not married when it comes to bankruptcy. That means filing separate bankruptcies, even if filing a joint bankruptcy would make more sense or confer legal benefits. And filing two separate bankruptcy petitions is always more expensive than filing a joint petition. Not only does the couple have to pay two filing fees, but same sex couples also pay double attorneys fees since the attorney must prepare not one, but two, petitions. (Some bankruptcy attorneys waive the fees incurred in preparing the second petition because they recognize and loathe the unfairness of the system. Of course, this means that the attorney must eat those fees.)

In some instances couples who are not considered married under DOMA are better off filing separately in that they each are able to independently claim exemptions on their property --which may lessen the amount required to be paid under the plan -- and aren't required to include all "marital" property in one petition, as is the case with community property belonging to a married couple. Still, if called on to choose between a better result in the bankruptcy and equal treatment currently being denied under DOMA, most filers would likely opt for equal treatment.   

Amidst this backdrop comes big news in the bankruptcy world: On February 24, 2011 a same sex couple filed a joint petition for Chapter 13 bankruptcy in the Los Angeles bankruptcy courts. The filing came on the coattails of the Obama administration's announcement that it would not defend the Defense of Marriage Act in court (although it will continue to enforce DOMA unless and until the courts rule it unconstitutional). Many bankruptcy attorneys and same-sex couples are waiting to see how the court treats this bankruptcy case.

By Guest Blogger Kathleen Michon

March 5, 2011

MERS: The Elephant in the Foreclosure Room

If you are a homeowner, chances are that the current owner of your mortgage is an entity known as MERS (Mortgage Electronic Recording System). This is true even though you are making your payments to one of the major banks or a dedicated mortgage servicing company. Nobody borrows from MERS in the first instance but somewhere in the chain of title the likelihood is that MERS became (and continues to be) the owner despite a series of transfers to banks, trusts, and investment vehicles. In legal parlance, MERS will be identified in your mortgage documents as the "mortgagee of record," and will also be identified as the "nominee," or agent for the purpose of making future transfers to other entities. 

What Is MERS and How Does It Work?

Like a lot of what has transpired in the mortgage industry, it's hard to get a handle on how MERS works and what exactly is wrong with it. Fortunately, very-readable testimony offered by Professor Christopher Peterson before the House Judiciary Committee casts much light on the subject and is available for your reading pleasure.    

MERS is essentially a large electronic database of mortgages and mortgage transactions. It was invented in the mid 1990s as a legal device to replace the county land title recording system. It is MERS that made the real estate boom feasible by (supposedly) allowing electronic transfers of mortgage ownership among bank and investors in a variety of forms known as real estate trusts, securitized mortgage bonds, and other miscellaneous financial derivatives -- all backed by packages of mortgages consisting of various risk levels.

The lion's share of the financial entities dealing with mortgages were and are members of MERS, and under the MERS rules are also agents which are authorized to effect transfers to other members. These transfers have seldom been recorded in county land records offices -- since ownership never (supposedly) changed but rather remained with MERS. Thus, not only does MERS facilitate transfers of real estate interests, it saves the real estate and banking industries millions if not billions of dollars in recording fees by eliminating all those recording transactions that would otherwise have to be made, at an average pop of $35 per transaction. Avoiding these fees was a major reason that MERS was created in the first place.

Problems Created by the MERS System

The most profound problem that the courts and commentators have with MERS is that it purports to replace the way in which land transaction records have been created and stored since the beginning of the country -- all without  the benefit of authorizing legislation. Under the traditional (and legally authorized) method of keeping track of who owns what, any person is free to walk into a land records office and search the entire historical record of who bought and sold any particular piece of property. This is what is known as a "title search." Under the MERS system, however, no such search is possible. MERS Members are not required to report transfers to the database and so there is no real way to be sure about who owns what.

One Court Says: MERS Doesn't Deliver Clear Title

In In re Agard, a bankruptcy judge analyzed MERS for the purpose of deciding whether a bank seeking foreclosure could prove that it owned the promissory note accompanying the mortgage -- a prerequisite in bankruptcy court when asking the court for permission to proceed with the foreclosure. Previously, MERS had attempted to assign the mortgage and promissory note to the foreclosing bank and the question was whether it successfully did so. 

Although for procedural reasons the Court allowed the bank to proceed with the foreclosure, the Court went on to analyze the role of MERS in the chain of title for the debtors' home. It concluded that MERS, as currently structured, did not deliver clear title to the foreclosing bank. Although the court's analysis does not, strictly speaking, count as precedent because it wasn't necessary to the court's ultimate decision (that is, it was dicta only), it should still prove persuasive with other courts dealing with cases involving MERS ownership.  

MERS Announces Some Changes

Because of the various problems it faces in the Courts, MERS has recently announced that it is changing one of its membership rules (Rule 8) to require that members no longer foreclose in MERS name. MERS has also told its members that assignments out of MERS's name should be recorded in the county land records even if the state law doesn't require it. In short, MERS is on the defensive. These are welcome changes for the future, but the degree to which MERS past practices have placed clouds on current real estate titles remains to be seen. 


March 2, 2011

Bankruptcy and Foreclosure

The most common question I get these days is whether filing Chapter 7 or Chapter 13 bankruptcy will stop a foreclosure.

Chapter 7 Bankruptcy and Foreclosure

The simple answer is, Chapter 7 bankruptcy can keep you in your home for an additional two to three months, and that's about it. But, and it's a big "but," because you will be getting free shelter when you aren't paying your mortgage, a three month delay can be worth three times what you would be paying for a monthly rental, or a total of between $4,000 and $6,000 for the typical family.

To learn more about what happens to your home when you file for Chapter 7 bankruptcy, read Nolo's article Your Home in Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy and Foreclosure

If you file a Chapter 13 bankruptcy and can propose a feasible repayment plan, you may be able to stave off the foreclosure for up to five years. Just how long will depend on your income and basic living expenses, and how far behind you are on your payments.

Even if can't propose a feasible plan, you may be able to put off the foreclosure for a much longer time than would be the case under Chapter 7. The rub is that you will probably need an attorney to achieve this result. But because you aren't paying your mortgage you can divert some of your "shelter money" to hiring an attorney, who will typically charge between three and four thousand dollars to handle a Chapter 13 bankruptcy. While this may seem like a lot, it likely will be only two or three months worth of mortgage payment and you'll likely come out ahead in terms of the total amount saved by staying in your home payment free.

To learn more about what happens to your home in Chapter 13 bankruptcy, read Nolo's article Your Home in Chapter 13 Bankruptcy.

Chapter 13 bankruptcy can have other advantages over Chapter 7. Bankruptcy attorneys are starting to successfully use Chapter 13 procedures to challenge the very validity of the mortgage, which means you may have a shot either at never having to pay the mortgage or at least being able to negotiate lower principle and payment amounts. You also can use Chapter 13 to get rid of second mortgage liens when your home's value is not enough to provide security for the amount owed on the second mortgage (called mortgage lien strip-offs).

To learn more about the interplay between bankruptcy and foreclosure, read Nolo's article How Bankruptcy Can Help With Foreclosure.

February 23, 2011

Reaffirming Car Loans in Bankruptcy

If you file for Chapter 7 bankruptcy, the lender may require you to reaffirm your car loan in order to keep the car. Here's why, and what happens if the reaffirmation agreement is, or is not, approved by the bankruptcy court.

When you are making payments on a car, your car note has two different parts -- the promissory note that makes you personally liable for the debt and the security agreement that allows the lender to repossess the car if you default on the payments. To be enforceable, the security agreement must be registered with the DMV or other state registry -- which results in a lien being placed on your car.

When you file Chapter 7 bankruptcy you can get rid of the promissory note (the amount you owe pursuant to the promissory note is discharged in the bankruptcy) -- and your personal liability -- but you can't get rid of the lien. This means you will have to continue making your payments if you want to keep the car, even though you don't actually owe anything on it. If your head is spinning by now, don't worry. It's hard to get a grasp on this principle.

Many Lenders Require Reaffirmation Agreements

Lots of lenders don't like the idea of borrowers being off the liability hook for the car note, especially if the loan is for a new model car. Not surprisingly, lenders look for ways to keep borrowers on the hook, so that the borrower is liable for any deficiency if the car is turned in or repossessed after the bankruptcy.

In 2005 Congress gave lenders the option of requiring borrowers to sign a reaffirmation agreement in order to keep the car after bankruptcy. In bankruptcy, reaffirmation simply means that the borrower will be liable after bankruptcy on the debt that is reaffirmed, whereas the borrower will not be liable without the reaffirmation.

If the lender requires you to reaffirm, you'll have to sign an agreement the lender will send you, and file the agreement with the court. The court will give you a date for a court hearing at which the judge will decide whether you can afford to make the car payments.

The Best Case Scenario: The Judge Doesn't Approve the Reaffirmation

If the judge decides you can't make the car payments, the judge will disapprove the reaffirmation agreement and you'll be off the hook. But what if you remain current on the payments, even though there is no reaffirmation agreement? In this case, you can keep the car.

Here's the rule: If the only reason you don't reaffirm the car note is because the judge has disapproved the agreement, you can keep the car just as if the lender had not required the reaffirmation the first place. If you want to read an explanation of this confusing and non-intuitive process, read the opinion in In re Moustafi, 371 Bankruptcy Reporter 434 (Bankr. Ariz. 2007). 

This means the best case scenario is that the judge disapproves the reaffirmation agreement. If the judge approves it, you'll be on the hook for the car note after your bankruptcy, which can be catastrophic if you later default on your payments and have the car repossessed.

To learn more about reaffirming a car loan in bankruptcy, and your other options for keeping your car in bankruptcy, read Nolo's article Your Car in Chapter 7 Bankrupty.

February 15, 2011

Bankruptcy and Second-Mortgage Liens

If you file for Chapter 7 or Chapter 13 bankruptcy, what happens to second or third mortgages and liens on your home? The real estate crash, and the resulting depreciation in home values, may mean that as a practical matter, many people won't have to worry about those liens. Here's why.

The Real Estate Crash Has Resulted in Many Unsecured Second and Third Mortgages

Because of the real estate crash, many people have second and third mortgages on their homes that are no longer secured by the home's value. For instance if your home is now worth $200,000 and you owe $200,000 on your first mortgage and $50,000 on your second mortgage, your home's value secures the first mortgage, but after that, there is no equity left to secure the second mortgage.

What Happens to Those Mortgages if You File for Bankruptcy?

In Chapter 7 bankruptcy, your bankruptcy discharge will eliminate your personal liability on the second mortgage but will not eliminate the lien. In Chapter 13 bankruptcy, you can eliminate both your personal liability and the lien in a procedure called lien stripping. The basic lien stripping rule is: You can eliminate a lien that has no security in the home, but you can't eliminate the lien if part of it is secured by the home's value.

Here's an example. Say your home is worth $210,000, your first mortgage is $205,000, and your second mortgage is $25,000. You can't strip off the second lien because it is secured by at least $5,000 of your home's value.

What if a Lien Remains on Your Home After Chapter 7 Bankruptcy?

Although you can't lien strip in a Chapter 7 bankruptcy, the lien may have very little effect on your future financial affairs. The Chapter 7 bankruptcy will discharge your personal liability for the second mortgage (meaning you can't be sued for money owed on it). And, absent value in the house securing the second mortgage, the holder wouldn't benefit from a foreclosure (since all the value of the home would go to the first mortgage holder in a foreclosure sale).

This means there won't be negative consequence from the lien remaining on the home after your bankruptcy -- unless of course your home's value comes back to a point that would allow you to sell the home or support a foreclosure action by the second mortgage lender. This is clearly less likely when your home is way underwater (50% is common) than when you are just a tad underwater.

The bottom line? Even though you might have a better result in Chapter 13 -- where you can lien strip -- from a practical standpoint, people with severely underwater second mortgages may do just as well in a Chapter 7 bankruptcy.

In some cases it needn't be one choice or the other. It used to be that you could file a Chapter 7 bankruptcy, discharge your personal liabilities and then immediately file a Chapter 13 bankruptcy to strip off the lien. This was called a "Chapter 20" bankruptcy. Now it's not quite that simple. You are still entitled to file a Chapter 13 bankruptcy right after your Chapter 7 discharge but you won't qualify for a Chapter 13 discharge. Still, at least one bankruptcy court said that you don't need a discharge to strip off a second lien in a Chapter 13 case filed on top of a Chapter 7 case, as long as you filed the Chapter 13 in good faith. 

February 7, 2011

Lawsuits Allege Banks Broke Promises to Homeowners Facing Foreclosure

Two recent lawsuits, in Washington and California, use "promissory estoppel" (a legal theory in contract cases) to get monetary damages from banks that broke their promises to homeowners facing foreclosure

The Washington Case: Promissory Estoppel as a Cause of Action

Abuses by mortgage banks and servicers committed while dealing with homeowners seeking foreclosure relief or mortgage modifications have been well documented. They are especially and eloquently detailed in a class action lawsuit filed on January 10, 2011 in the State of Washington. Reading the Introduction to the complaint (if not the whole document) will be well worth your while. 

Among the claims contained in the class action complaint is a type of breach of contract known as promissory estoppel. Promissory estoppel may seem like an impossible-to-understand example of legal jargon but i'ts actually relatively simple. It means that a party making a promise is prevented (estopped) from reneging on the promise. You can sue for promissory estoppel if 1) someone makes you a promise that is clear and unambiguous, 2) your reliance on the promise is reasonable and foreseeable, and 3) you suffered damages as a result of your reliance. 

You can't hold someone to a naked promise just by itself. In other words forget about suing your parents who failed to deliver on their promise to send you to Harvard. But if you go through all the motions of enrolling, signing a lease for your housing, and buying textbooks, and your parents had good reason to believe that you would act on their promise, you may have a winning case to recover, at the very least, your out-of-pocket expenses, and possibly even for other liabilities you incurred. 

In the class action complaint the promissory estoppel claim deals with a common practice in the mortgage industry. There the bank promised the named plaintiff a permanent mortgage modification if she completed a trial period during which the modified payments were to be paid to the bank. The plaintiff did, in fact, complete the trial period but the bank refused to give her the modification as promised. Here, the requirements for promissory estoppel were clearly met. The bank promised a permanent modification in exchange for three (or more) trial payments. The homeowner reasonably and foreseeably relied on the promise and made the payments. The bank reneged on the promise, and the homeowner suffered damages in that the trial payments would not have been made absent the promise.

You might wonder why this isn't a common-variety breach of contract case. For a contract to be enforceable both sides have to receive something of value (called consideration) in exchange for their agreement to perform the terms of the contract. Also, there has to be an offer and an acceptance. In the situation where the bank makes a promise to modify, it's arguable that only the homeowner is receiving consideration and so a valid contract has not been made. But the law, through the doctrine of promissory estoppel, eliminates the need for mutual consideration and will, under the appropriate circumstances, enforce the promise or award damages if it is not carried out.

Promissory Estoppel in a Recent California Foreclosure Case

The doctrine of promissory estoppel was recently applied to a mortgage workout situation in a California appellate court case titled Claudio Aceves v U.S. Bank (Court of Appeal, Second Appellate District, Div One (1/27/11)). Here Ms. Aceves fell behind on her mortgage and filed for Chapter 7 bankruptcy after the bank served a Notice of Default, a required step in the California foreclosure process. She decided to convert the case to chapter 13 bankruptcy and raise the necessary money to reinstate the loan and pay off the arrearage over the course of the chapter 13 plan. The bank told her they would work with her and that she needn't pursue her Chapter 13 remedy. Relying on this representation, Ms Aceves did not file Chapter 13 and also did not object when the bank filed a motion in her Chapter 7 case to lift the automatic stay (which legally enabled the bank to continue with its foreclosure remedy).

In fact the bank failed to enter into good faith negotiations and instead completed the foreclosure. Ms. Aceves sued the bank alleging a cause of action for promissory estoppel, among others. She argued that 1) the bank's promise to work with her in reinstating and modifying the loan was clear and unambiguous, 2) the bank in fact failed to negotiate the modification, 3) she relied on the bank's promise by forgoing bankruptcy protection under chapter 13 and failing to oppose the motion to lift the stay, 4) her reliance was reasonable and foreseeable, and 5) she suffered damages in the form of losing her house. 

The lower court dismissed the action but the court of appeals ruled that in fact Ms. Aceves had stated a claim for promissory estoppel and should be allowed to proceed with her lawsuit in the trial court. In making its ruling the court specifically found that "U.S. Bank never intended to work with Aceves to reinstate and modify the loan. The bank so promised only to convince Aceves to forgo further bankruptcy proceedings, thereby permitting the bank to lift the automatic stay and foreclose on the property."

As long as this case remains published (and isn't ordered de-published by the California Supreme Court) it provides great precedent if you decide to sue your mortgage lender or servicer for breaking its promises. If you can't find an affordable lawyer, you might consider doing your own state court lawsuit with the help of Nolo resources such as Represent Yourself in Court, by Paul Bergman and Sara Berman-Barrett, and Everybody's Guide to Small Claims Court, by Ralph Warner.

While you may be invited to join a class action, those types of cases usually are much more  beneficial to the lawyers bringing them than they are to the plaintiffs. If possible, you should consider going your own way. However, sometimes a class action is the only way to find a lawyer without parting with an arm or a leg and if that is your situation, and self-help is not an option, by all means sign up as a class action plaintiff. . 

January 31, 2011

Bankruptcy and Foreclosure: Fighting a Motion to Lift the Automatic Stay

Recently, homeowners are having more success in preventing mortgage lenders from continuing with a foreclosure (by lifting the "automatic stay") after the homeowner has filed for bankruptcy.

Bankruptcy's Automatic Stay

When you file bankruptcy your creditors must stop all activities related to collecting a debt, with a few exceptions (usually involving child support and taxes). The prohibition against collection activities is part of what's called the automatic stay, meaning that collection activity is stayed while your bankruptcy case is pending, and that this stay occurs automatically upon your filing. In some situations creditors can file a document known as a "motion to lift the automatic stay" which requests the bankruptcy court to give them permission to proceed with the desired activity listed in the motion.

The most common reasons for requesting that the court lift the stay are:

  • when a landlord is attempting to evict a tenant
  • when a mortgage lender is attempting to proceed with foreclosure activities, and
  • when a lender on a car note is seeking to repossess the car because of non-payment.

As a general rule the bankruptcy court will lift the stay as to a particular creditor when the bankruptcy filer (the debtor) has no equity in the property (for instance when premises are being rented) or when the creditor will suffer economic harm regarding the property at issue if the stay is not lifted (as in the case of a foreclosure or car repossession).

Change in How Courts Treat Motions to Lift the Stay in Foreclosures

Until recently, courts routinely granted motions to lift the automatic stay and there wasn't any reason for the bankruptcy debtor to show up at the scheduled hearing. However, in the last year or so, bankruptcy attorneys are having some degree of success in fighting motions brought by mortgage lenders on the ground that the lender can't establish who owns the mortgage and therefore has no legal right to ask the bankruptcy court for relief (this is called "lack of standing."). The main reason why ownership can't be established is that during the housing boom many mortgages were transformed into securities that could be sold on the bond market and then sold and resold so many times that proof of ownership became lost or unavailable.

What Happens if the Motion is Denied?

In a Chapter 7 bankruptcy, success in fighting a motion to lift the stay would typically mean a one or two month extra delay in implementing foreclosure proceedings (which without the stay being lifted couldn't proceed until you received your discharge). In a Chapter 13 bankruptcy, however, successfully fighting a motion to lift the stay might mean that the mortgage may not be enforceable at all--although the more common outcome is for the lender and homeowner to settle the dispute on terms greatly favorable to the homeowner. 

Other Ways to Raise Ownership Issues and Fight the Foreclosure

The ownership issues that can be raised in a hearing on the motion to lift the stay can also be raised in state court after you receive your Chapter 7 discharge. That is, if you are in a state where the foreclosures go through state court, you can use the failure to prove ownership as a defense that may stall your foreclosure indefinitely--or produce a favorable settlement. And if you live in a state where foreclosures occur outside of court (as in California and about half of the other states), you can file an action in the state court challenging the foreclosure on the same grounds, and with the same outcome. (To learn more about challenging foreclosure in state court, see Nolo's article False Affidavits in Foreclosure: What the Robo-Signing Mess Means for Homeowners.)

Because bankruptcy is a federal court, and because federal courts often have different "standing" rules than state courts, you may not have as much success in the state court as would be true in federal court.

Get Help From a Lawyer

Obviously this can all get pretty complex in a hurry and you would be well advised to shop for a lawyer who knows this stuff inside and out. But beware paying a lawyer (or anyone else) very much money up front to fight your foreclosure in state court. At the very least, negotiate a fee agreement with the lawyer that will give you a healthy refund if the case is not successful. And make sure the lawyer you choose knows the likelihood of your case being successful, however success is defined.

January 12, 2011

Massachusetts Court Refuses to Give Clear Title in Foreclosures

In earlier blogs I've mentioned some of the ways that homeowners can resist foreclosures. For at least a year some state and federal courts have favorably entertained homeowner arguments regarding shoddy paperwork, robo-signings, and the inability of those bringing the foreclosure action to "show me the note."

As I've noted these decisions I've cautioned that it's too early to know whether these decisions will be widely followed by other courts or whether these cases will be upheld--or tossed out--on appeal. This can be a problem when you are paying an attorney megabucks to advance your argument. Few of us want to sacrifice thousands of dollars to a lost cause.

Massachusetts Supreme Judicial Court Refuses to Give Clear Title to Improperly Foreclosed Homes

Suddenly things have changed a whole lot--for the better from the homeowners' perspective. Late last week the Massachusetts Supreme Judicial Court--the highest court in that state--unanimously decided that the foreclosures in the cases before it were improper because the all important notice of foreclosure was recorded and published before the banks bringing the foreclosures actually owned the mortgages by way of legal assignments from the original issuers of the mortgage.

In the Massachusetts cases, foreclosures had already occurred and the homeowners had moved out after the bank bought the property at the foreclosure auction. When the banks initiated the foreclosures, they had no proof of the chain of title showing that they now were the mortgage owners.  For example, in one of the cases the original mortgage traveled through six different institutions including the initial issuer and the foreclosing bank.

After the banks decided to clean up their act--and after the foreclosures--they recorded what they alleged was proof of ownership with the local land records office. They then filed actions requesting that a judge issue a "quiet title" order--an order stating that the banks had proven clear title to the properties. Much to the surprise of the banks, the court refused to award them clear title, given that the foreclosure was legally deficient. The fact that the banks tried to correct the record after the foreclosures could not retroactively legitimize the foreclosures themselves or the titles to the property taken by the bank as a result.

The banks appealed this decision to the Massachusetts Supreme Judicial Court, which affirmed the lower court and also ruled that the title held by the banks in the improperly foreclosed property was not clear title--that is, the banks had no legal claim on the property.

This Case Will Likely Affect Foreclosures Nationwide

The potential implications of this decision are staggering. It means, in essence, that an unknown number of homes that have been improperly foreclosed on by the nation's mortgage lenders have title problems that may be difficult or impossible to clear up. This can only result in a brand new real estate crash of gargantuan proportions.

How important is the Massachusetts case? The way law works in the United States, once a major state's highest court decides a new point of law, that decision quickly travels to other states where lawyers use it to achieve the same or similar result. Homeowners who are called on to invest in litigating their foreclosure will be much more willing to part with their money knowing that they have a Massachusetts Supreme Court arrow in their quiver. While every state's foreclosure laws are at least somewhat unique, the basic premise of the Massachusetts case will likely be upheld by most courts that consider it--that is, a bank can't legally foreclose on a mortgage if it can't prove it owns it, and a bank can't go back in time and undo an illegal foreclosure  by obtaining a judicial declaration of clear title.

But in many cases litigation may not be necessary. Banks throughout the country are now on notice that the houses they still own as a result of foreclosure might well be worthless in that they won't be able to prove ownership at the time the foreclosure was initiated and therefore won't be able to pass clear title to prospective purchasers. And future foreclosures may be impossible given the chaotic state of mortgage-related records caused by the mortgage securitization process and sloppy bank practices. The only value banks may be able to glean from their huge stock of houses--whether before or after foreclosure--is whatever they can negotiate with the current owners.

Banks also will likely face class actions brought by thousands or hundreds of thousands of former homeowners who have been illegally foreclosed on. Investors are also likely to sue the banks for illegally jeopardizing their investments, and while banks may be forced to cut fire sale deals with homeowners, investors are unlikely to settle for anything less than they think they are owed. Undecided at present is what will happen to illegally foreclosed homes that have been subsequently purchased by buyers who had no reason to doubt the validity of their title. Will the invalid foreclosure apply to their title or will a doctrine known as "bona fide purchaser for value" invest the buyer with clear title? One thing for sure, the title to these properties is not as secure as was once thought, and the value of these properties may plummet even further because of a possible shaky title.

In closing, I offer a brief quote by concurring Justice Cordy:

"I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that this legal paperwork is in order. Although there was no apparent actual unfairness here to the mortgagors, that is not the point. Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it....."