Tax Lien and Civil Judgment Removals from Credit Reports to take effect July 1, 2017

The three major credit reporting agencies, Transunion, Equifax, and Experian, have made a decision to exclude tax liens and collection lawsuit judgments from their credit reports.  This is expected to increase credit scores by more than 40 points for three quarters of a million people and by less than 20 points for about 11 million.

This may make creditors more likely to extend credit.  The information is still available of course – such things are a matter of public record.  However, excluding it from the credit reports will make sure information more costly to obtain.  Furthermore, for major credit cards, it will probably never show up on their radar unless they change their internal procedures to include other credit reports that are not associated with the big three.

The changes may increase the risks creditors take, since those with judgments are twice as likely to default on a loan.   Although most people have some sort of inaccurate information on their credit reports, statistics are inconclusive as to how much of the inaccuracies actually effect credit-worthiness.  Much of this has been probably the result of lawsuits filed by the New York attorney general.

Holding onto repossessed collateral is not a violation of the automatic stay in 10th Circuit

In a newly decided case, WD Equipment v. Cowen (In re Cowen), 15-1413 (10th Cir. Feb. 27, 2017), the 10th Circuit ruled that holding onto repossessed collateral is not a violation of the automatic stay.  In the 9th Circuit, which encompasses all of California, it is.  The 10th Circuit case creates a wider split between the two interpretations, which may pressure the Supreme Court to make decision regarding this issue to resolve the controversy.

Typically, the scenario where this is relevant would occur when secured property like a car is repossessed or a home is foreclosed after the bankruptcy is filed.  Ordinarily, the car would be returned or the sale of the home reversed.  However, during the interim period, while the bankruptcy is pending, the creditor may or may not have to return the property to you depending on which circuit you are in.  This creates leverage issues, such as reaffirming debt that would otherwise be discharged for debtors who may need the property during the three or four months that a Chapter 7 bankruptcy takes.

Bankruptcy Estate in Chapter 11 and 13

Chapter 11 allows the Debtor to stay in possession of all his property, even though the property is above the exemption amount. (or threshold amount, as I labelled it in my Bankruptcy Estate in Chapter 7 post)  Chapter 13 is only for human beings, and legal entities are excluded – Chapter 11 can be filed by both individuals and corporations.  The role of the Chapter 13 Trustee is to screen a Chapter 13 plan (prepared and filed by the Debtor) that conforms to the bankruptcy code before it goes before and gets signed by the Judge.  Similarly, the US Trustee, who is the main player in a Chapter 11, is present to make sure that the Chapter 11 process is not being abused, and that creditors are not compromised by the extensive 120 day period where the Debtor comes up with a plan.  (the timing is much shorter in 13)

The two types of trustees are very different – Chapter 13 Trustees are motivated by plans that make logical sense per the Bankruptcy Code.  The Chapter 7 Trustee has an equal interest in making sure that documents conform properly to the code, but on the other hand, is also motivated by profit – oftentimes Standing Chapter 7 Trustee are successful bankruptcy or creditor lawyers or accountants that have extensive business knowledge.  This results in a focus on unexempt assets.  A Chapter 13 Trustee on the other hand is more focused on your income and expenses because your future income is what determines whether or not your repayment plan is successful.

A Chapter 11 is probably the most tricky because the Trustee is very vigilant about making sure that the Debtor is solvent enough pay because the time frames are much longer – you can get up to a six months to put together a plan.  Not only that, they are vigilant about the attorneys who are handling the case and will often object based on an attorneys experience or track record. (e.g. is this your first case?  Do you have co-counsel?  Do you file too many failed Chapter 11’s?)

Creditors are hosed because the automatic stay doesn’t allow them to collect the amounts they are owed, and they have a sharp learning curve with regards to figuring out what they need to do and if not, have to scramble to get lawyers if they are not well versed in the law. Therefore, it is essential that proper planning take place before a 11 or 13, as the Trustee may try to dismiss your case if you cannot come up with a feasible way of paying back who needs to be paid.  In a Chapter 11 and 13, there are creditors who MUST get paid, and there are creditors who MAY get paid.

Chapter 11 is also full of ethical landmines for the unsuspecting attorney.  A Chapter 11 attorney sometimes represents the individual, the Corporation, and the Bankruptcy Estate.  The interests of each may come into conflict.

For example, suppose the CEO of a Corporation with five employees, all of whom are family members, pays you to file and defend a Chapter 11 to save his company. All your dealings are between you and this CEO.  A time may come when the CEO decides that he doesn’t care anymore and just wants to walk away with the skin on his back.   An attorney’s primary responsibility may still be to the Corporation, which means maximizing profits for creditors, or keeping the company afloat – not minimizing the exposure of the CEO and his family.   This is because technically, the corporation is paying you, and the CEO is only acting on the Corporation’s behalf.

Believe me – that’s an awkward conversation to have.

Proving Parentage through DNA

It’s not an issue that comes up often but recently I had to deal with a parentage challenge where the father found out three years into his marriage that his daughter was not his.  Ordinarily, the process would be to get a blood test to disprove parentage and therefore, he would be absolved of any financial responsibility.  However, in this case, the statute of limitations for a blood test had passed already (2 years).

The general rule is that parentage is presumed (the formal term is conclusively presumed, although it is rebuttable, meaning it can be challenged – don’t ask, I don’t know why either) if the husband and wife are married at the time of conception.  Not nine months before the conception, but at the time of conception.  Again, doesn’t make much sense but I suppose it makes it easier for measuring and there’s less potential for abuse.  It’s another example where efficiency trumps rationality.

Unless the father can either prove he was 1)impotent or sterile at the time of conception or 2) father requests a blood within two years of the conception, he is stuck being the father, whether or not any subsequent blood test proves otherwise.  Furthermore, the blood test that is required needs to be done by a court expert and through a court filed motion by the father.   Otherwise, he is pretty much shit out of luck.

It gets more complicated when a voluntary declaration of paternity is involved, but I will address that some other time.  Also, if the Department of Social Services is involved, the requirements also are different.  Suffice to say, this is a complicated area of the law, but the general rule itself can create some pretty unfair results.

Disclaimers as a defense to FDCPA Violations

In the lead-up to the Supreme Court case Midland Funding LLC v. Johnson, the 4th circuit recently ruled that a disclaimer was sufficient to protect creditors from violating the FDCPA when filing proofs of claim.

In a bankruptcy, creditors get paid through filing proofs of claim – however, the Midland case mentioned above may soon resolve whether or not filing a stale proof of claim (one that has passed the statute of limitations) violates the FDCPA.

The Fair Debt Collections Practices Act was passed to protect consumers from predatory debt collectors.  One of the protections offered was that communications be truthful, which would include whether or not a debt is owed.  By filing a proof of claim on a time barred debt, there is a colorable argument that the FDCPA is being violated.  However, debt collectors can still call debtors to request payment on time barred debt, they just cannot try to enforce it in court, or explicitly state that there is a legal obligation to pay.

In the present case (not the Supreme Court case which is pending) the 4th Circuit ruled that the boiler plate language found on most bankruptcy collection letters that “this is not an attempt to collect a debt” was sufficient to obviate the sanctions of the FDCPA.  In a sense, it is creating an avenue for creditors in the event of a pro-debtor decision being handed down by the Supreme Court.

Child Support Case in Kimball

A case recently came before the 10th Circuit regarding whether or not payments made after the statute of limitations on child support arrearages constituted an extension of the statute of limitations.

Every claim, or lawsuit, has an expiration date – this carries over into bankruptcy and those who are looking to get paid out of the bankruptcy estate can only collect if their claims are within the statute of limitations, which varies depending on the claim.  For instance, a breach of contract claim must be brought within four years, and a personal injury case must be brought within 2 years.  Failure to do so will get your case dismissed, even if all the facts are on your side.  The logic behind this is obvious – they want to encourage punctual litigants.  Evidence gets old, or lost, and no one remembers what happened ten years after a car crash.

However, the judge in In Re: Kimball dodged the issue of statute of limitations, and addressed the choice of law provisions, something that is adopted in Federal courts but has not been done so in bankruptcy.  The general idea is that even though a case is brought in federal court, the substantive law of the state will still be applied.  Here, the law of Utah would be applied since that is where most of the marriage occurred, even though Oklahoma was also an option.  Because of this, the statute of limitations was not based on whether payments were made beyond the applicable time period (which both husband and wife agreed on) but whether or not Oklahoma or Utah law applied, something neither spouse brought up.

The wife ended up winning and is probably oblivious to the reasons why – however, for lawyers, this is an example of kicking the can down the road.  Making a decision about payments resetting the clock on a statute of limitations may have seemed fraught with unintended consequences (since it would bind lower courts) so the Honorable Judge Loyd most likely decided to exercise judicial discretion and based his decision on something much less controversial.

Date of Separation and In Re: Davis

A bill was signed by Governor Brown on July 25, 2016 which would amend the law regarding family law divorce date of separation; the bill takes effect January 1, 2017. The term “living separate and apart” was interpreted by the California Supreme Court last year in the controversial case In Re Davis (2015) as requiring a spouse to take the action of leaving the marital residence.

The main areas where this has affected divorce law in California has been in the area of property division and spousal support. Property is divided fifty fifty in California so long as it was acquired during marriage. (with a few exceptions)

The problems Davis created are primarily financial. Forcing someone to move out of a home before being considered separated ignores many of the financial issues that Californians face. In the past, courts evaluated multiple factors. Were the couple still sleeping in the same bedroom? Did they go to events together? Were they still intimate? The strength of the Davis case is clarity – it creates a bright line rule and discourages litigation over when the couple separated. The family court system is clogged already, and Davis cleared a lot of the uncertainty that surrounds property separation.

However, the problems were also formidable.

A hypothetical spouse who is sleeping on the couch for months would no longer be considered separated from his spouse for the purposes of California law, resulting in community property continuing to be accumulated. Supposing a wife were to get a bonus on July 1, 2016 for $2,000. This would be considered her money if the date of separation were June 30, 2016. It would not be split in the divorce. However, if the date of separation were July 2, 2016, the bonus would be split and the wife would only get $1,000, and her husband would get the other half, even if one of them were sleeping on the couch, so to speak.

Another problem was spousal support. Spousal support (alimony or patrimony) is based on the length of the marriage. Spousal support is temporary or permanent based on whether or not it exceeds or is under ten years, and the length of temporary spousal support is also determiend by the marriage’s length. Hence, the Davis ruling allowed spouses to game the system by maintaining the marriage despite a subjective intent to end it, with the underlying motive of receiving additional financial support.

Finally, there was the problem of the “in-spouse out-spouse” as it relates to home-owners. As they say, possession is nine-tenths of the law. Where a spouse has left the home, it is hard for him or her to get it back. If home ownership is involved, a spouse would have to get an order for the court to get the in-spouse to move out. This would be hard since courts tends to favor the status quo. The problem is compounded even further when there a children involved. The spouse who wants to definitively end the marriage but at the same time wants to keep living in the house would have to execute the legal gymnastics of moving out, and then filing a motion, getting a hearing, and then showing the judge why he or she should stay in the house, and then get a court order to move back in. This could easily take months.

The average median individual income in the state is around $50,000 – taking into account taxes, medicare, and social security, this leaves roughly $3,000 per month for the average Californian. (forget about retirement) Assuming that he or she spends the suggested 28% to 33% of net monthly income on housing, this means that the average person shouldn’t be spending no more than a $1,000 per month on rent.

Most Californians live in the San Francisco Bay or Southern California coastal area where rents can easily exceed $2,000 per month for a two bedroom apartment. As a result, the Davis case was tone deaf to many of the financial issues that result from a divorce, which results in a decrease in actual income for everyone (since the cost of living is less per head when buying in bulk) even without the doubling of housing expenses.

All in all, this law has been anticipated for months as Davis has created all sorts of unfair results and has been very unpopular, especially among practitioners. However, whether or not courts will continue to apply pending cases based on Davis remains to be seen, as it may trigger the rule against the due process prohibition of laws being applied retroactively.

 

Termination of a Lease

The Sports Authority bankruptcy has been running into difficulty as landlords are litigating the issue of lease termination, and when the damages regarding a breached lease ends.  The statute language in 11 USC 502(b)(6) limits damages to the termination of a lease.  In the majority of jurisdictions, including our own, the courts follow state law, which tends to acknowledge the date that the business decided to surrender or vacate the premises.  However, landlords in Sports Authority (and similarly in Radio Shack and Fresh and Easy) have run into opposition from landlords who wish to have a later date, particularly the date of the bankruptcy or the date in which the property was recovered.  (the later being a dictionary definition, more than a state statutory definition)

This means they would receive more, as charges would continue to accrue, even though the tenant (i.e. Sports Authority)  communicated its attempt to vacate the premises at an earlier date.

When a living expense is a business expenses

Once again, as with all my posts, this is not legal advice, and applies only to California, and sometimes only to the Northern District of California.

The Ninth Circuit Bankruptcy Appellate Panel (which is persuasive but non binding, but oftentimes is) issued a difficult to apply decision which characterized living expenses as business expenses when there is an underlying profit motive.  A similar opinion was issued regarding mortgages in Aspen Skiing Co. v. Cherrett (In re Cherrett)  (2014) and which the current case is based.

In the present case, the debtor borrowed money to write a book, and had an agreement that the money made from the book would be split with the lender if the book made money.  If it did not do well, then the loan would be repaid in full to the tune of $150,000.  11 USC 523(d), which concerns nondischargeable debt, addresses “consumer debt” which is defined as a debt incurred “for a personal, family, or household purpose.  The lender objected to the discharge of the debt and lost because he did not file the complaint on time- however, attorneys fee’s could not be recovered because it was consumer debt.

The case however may be less about the classification of debts and business or consumer, and more regarding the antagonism of courts to award attorneys fees and the shifting of fees from Debtor to Lender.

 

The Bankruptcy Estate in Chapter 7

I use the term “bankruptcy estate” repeatedly  – but what is a bankruptcy estate?

A legal fiction takes place when you file a bankruptcy.  This fiction is that an estate is created at the time of filing, and this estate is distinct from the individual who is filing.  This estate is administered by a Trustee, who is given the responsibility of maximizing profits for the creditors, while maintaining the fresh start of the Debtor, who gets to keep a certain amount of property.  A trust is a separate legal entity.  A Corporation is a good analogy – similarly, a corporation is a legal entity that exists separately from you.

Another way to think about it is that you lose control over your property for a limited period of time.  (Less so in Chapter 11 and 13, but very much so in a Chapter 7)  This is the price that Debtors pay for filing a bankruptcy.

Trustee’s make sure that the rules of bankruptcy procedure and the petitions are being prepared in a professional way but they are also incentivized by profit.  This happens because they get to keep some of what they recover from a Debtor, in the event there is something to recover.   Standing Chapter 7 Trustees are independent contractors, not employees of the government.  They get paid a nominal sum (less than a hundred dollars) to speak with you at a hearing called a Meeting of Creditors.  In a  no asset case this is all they would receive.   (By the way, this doesn’t mean there are no assets – it just means your assets are below a threshold amount that varies from state to state.)

In an asset case (meaning there are assets above the threshold amount) they are able to distribute the property to the creditors.  If it is not a liquid asset, an auction is held where they solicit bids for a certain length of time.  When it is sold, the trustee gets a percentage of the sale, and the rest is distributed to the creditors pro rata.

Chapter 7 is still the most preferred form of bankruptcy because most people don’t own that much, and don’t earn that much to be at risk.  Because it only take a few weeks, and all your debts are discharged, it oftentimes seems like a straightforward and easy process.  However, unlike Chapter 11 and Chapter 13, there is no turning back with a Chapter 7; once you have filed, you have put your assets in the hands of the bankruptcy estate.  The risk may be low, but if you miscalculate, the consequences can be devastating.