In a victory for debtors who own condos, the 9th Circuit Court of Appeals has held that condo fees that come due after a Chapter 13 case is filed are discharged at the conclusion of the case.
Or really, this is a victory for people who no longer want to own a condo but title lingers in their names long after they’ve given up on ownership. Bankruptcy had been an uncertain tool for shedding the HOA entanglement that comes with condo ownership. No longer.
Now, it’s clear that Chapter 13 is effective to cut off ongoing liability even while the property remains titled to you.
The appeals court ruled that the HOA debt that arose during the case is wiped out as a personal liability of the homeowner by the Chapter 13 discharge. [There was no question that the unpaid HOA dues owed from before the case was filed were discharged.
Any rights the homeowner’s association has in the condo itself under state law or the CCR’s of the development survive. But the HOA is prohibited from asserting those fees against the debtor individually.
As a result, this debtor, whose Chapter 13 plan proposed to surrender the condo and made no provision for ongoing HOA dues, had no responsibility for the four years of fees that piled up before the lender foreclosed. The debtor lived elsewhere all this while, so she didn’t benefit from the delay in foreclosing.
She did, however, get a genuinely fresh start, at plan’s end.
(16) for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership, in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case;
The discharge in Chapter 13 is different from that in Chapter 7, and generally more expansive. Section 1328(a) ticks off a much shorter list of debts not discharged in Chapter 13.
the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt—
(1) provided for under section 1322(b)(5);
(2) of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a);
(3) for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime; or
(4) for restitution, or damages, awarded in a civil action against the debtor as a result of willful or malicious injury by the debtor that caused personal injury to an individual or the death of an individual
The HOA provision of §523(a)(16) we saw above isn’t listed in the Chapter 13 exceptions to discharge.
But an earlier decision of the Bankruptcy Appellate Panel in Foster had held otherwise.
Hurdles to get to discharge
So, the questions the 9th Circuit panel had to answer included
when did the homeowner’s debt to the condo association arise, before or after the bankruptcy was filed?
was the omission of HOA dues from the exceptions in §1328 just a drafting mistake by Congress?
did the HOA’s rights in the condo itself alter the analysis of the effect of the discharge?
The HOA debt had its origin in Ms.Goudelock’s purchase of the condo, the court reasoned, so it really was a prepetition debt. (Post petition debts generally aren’t included in the Chapter 13 discharge.)
The dues may be unmatured at filing, and contingent on continued ownership of the unit, but they arose before the bankruptcy was filed.
The court rejected any argument that the Congressional failure to list HOA dues in the exceptions to Chapter 13 discharge provided any cover to the HOA.
Finally, the court reminded the HOA that its rights as a secured creditor in the condo were unaltered by the bankruptcy discharge, and thus the ruling didn’t run afoul of the Constitution’s prohibition on taking private property.
The HOA after bankruptcy
While the debtor’s life was made simpler by this decision, other lives are complicated. Washington state law makes any subsequent owner of the condo responsible for the unpaid dues. One wonders if the foreclosing creditor paid up, or whether the new owner needs to pony up the four years’ worth of dues.
“They can’t take my house, whatever happens. Right?”
The young man in my office “knew” that the substantial equity in his home was exempt as a homestead, even if he filed bankruptcy.
He “knew” that credit card debt was dischargeable.
And that “knowledge” lead to his conviction that , in bankruptcy, he could keep the house and ditch the credit card debt without payment.
In his mind, bits of legal truth got stitched together into a bankruptcy myth. Let’s unravel the truth.
True: every California homeowner can claim a homestead in their principal residence. CCP 704.720
But: the homestead is limited to a certain amount of value. For the single guy sitting across my desk, that amount was $75,000. Equity in his condo in excess of that isn’t protected by the homestead.
Worse, the homestead is only effective against certain kinds of creditors. The tax liens that were of record for old tax years aren’t defeated by a state law homestead. So the tax liens remain enforceable. *
Credit card debt is dischargeable
True: unsecured credit card debt (not incurred by fraud) can be wiped out in bankruptcy.
But: the discharge speaks to whether the debt survives the bankruptcy and is enforceable afterwards. Being dischargeable doesn’t mean that creditors don’t share in the bankruptcy distribution.
Asset value matters in bankruptcy
True: every debtor can claim exemptions that protect the exempt amount from being paid out to creditors in the bankruptcy case.
But: the asset value not protected by an exemption is available to pay the claims of creditors, as far as that value goes. For most unsecured creditors, all they get from the debtor is their pro rata share of the non exempt property of the estate. Any unpaid balance is discharged.
So when the bits of the law my client got right are expanded and seen as a whole, any bankruptcy discharge was unlikely to result in paying less to his creditors, because his house represented far more value than the debts, dischargeable and non dischargeable, that he owed.
Likely, in either Chapter 7 or Chapter 13, his creditors would get 100% of their claims. In my view, any amount he might save in reducing the interest accruing on those claims to the bankruptcy interest rate would be eaten up by the legal fees to file the case, and the credit hit he would incur.
The one critical bankruptcy advantage might be the power of the automatic stay: if the mortgage lender threatened a foreclosure before he could cure the secured arrears, bankruptcy could stop foreclosure long enough to either propose a Chapter 13 plan, or arrange family help to keep the house.
* In Chapter 13, the homeowner could strip a tax lien down to the value of the home after all senior liens were subtracted. The stripped down lien would have to be paid in full through the plan. The balance of the tax lien would be treated as an unsecured claim.
We Fight For You! screamed the on-line headline for a bankruptcy law firm.
While I applaud the firm’s energy and commitment, I question their focus.
Filing for bankruptcy shouldn’t result in a fight.
It’s a remedy, not a rumble.
If you’ve struggled with yourself about with the decision to file bankruptcy, actually doing it may seem mundane by comparison. No fights necessary.
So, I thought about what was wrong with the “bankruptcy as a fight” analogy.
Turns out, it was simple.
My motto: We Analyze So There Won’t Be A Fight.
Kinda nerdy, isn’t it. It lacks drama, and doesn’t suggest any vivid photos.
But it represents much better client service.
What a bankruptcy lawyer does for you
A skilled bankruptcy lawyer gathers more facts about you, your debts, your assets, your prospects, your marriage, your income and your dependents than you can imagine.
Having determined what brings you to consider bankruptcy, the lawyer assesses three big things:
Which chapter of bankruptcy furthers your goals
Is there anything that creditors or trustees could challenge to keep you from your goal
What things could make it easier to reach that goal.
Your lawyer should be looking for those issues which might provoke a fight, and figuring out how to keep you out of a tussle with any party in the bankruptcy system.
Tools for avoiding conflicts include better information, choice of timing and refining your goals.
A good bankruptcy attorney uses each tool to avoid the fight.
What fights arise in bankruptcy
The most common disputes in bankruptcy cases, Chapter 7’s and Chapter 13’s, revolve around
Values of assets
Means test income and deductions
Transfers of assets made before filing
Careful collection of information and analysis of that information will tell a good bankruptcy lawyer where disputes might arise.
You and your lawyer need to discuss any points of possible conflict and find the best way around them.
Bankruptcy fights I love
The only kind of fight in bankruptcy that I relish is the fight that a creditor picks with my client. The fight usually arises when the creditor does something the law doesn’t allow. Often it involves failing to honor the automatic stay.
The stay requires each and every creditor to stop collection action against the person who has filed bankruptcy and against the person’s property. In Chapter 13, it also protects guarantors and co signors on consumer debts.
Some creditors are too pig headed, ill organized, or simply spiteful to honor the stay. I love a fight to get creditors to do what the law provides. My clients are entitled to the peace the law contemplates.
Most bankruptcies are a snooze not a fight
A well thought out bankruptcy case is generally without conflict or dispute.
Carefully prepared schedules tell the whole story. The trustee reads them, sees no issues, and moves on.
And that’s how it ought to be. It’s not Fight Night. It’s more like yoga. You work hard, but you leave without bruises.
Homeowners whose loans were originally made by a federally chartered savings bank are excluded from protections of HBOR, a federal judge has ruled.
Dual tracking is back on the rails
California Homeowners Bill of Rights, enacted January, 2013, prohibited dual tracking of mortgages: that is, the lender could not simultaneously consider a loan modification and prosecute a non judicial foreclosure.
That’s exactly what Sonoma County homeowner Keni Meyer alleged in her lawsuit that Wells Fargo did. On April 3, they send her letters discussing the modification of her mortgage loan and on April 8, sent her a notice of foreclosure sale.
Northern California federal district court ruled in December, 2013 that HBOR is preempted by Depression era law creating federal savings banks. The preemption doctrine holds that federal law on a subject trumps state law on that subject.
While the foreclosing bank was Wells Fargo, the loan had originated with World Savings and World Savings was a federal savings bank subject to the federal Home Owners Loan Act of 1933.
The judge held that federal law occupied the field as to servicing mortgages of federally chartered savings banks and the federal law followed the mortgage, even when now held by an institution that isn’t a federal savings bank.
Thus, Ms. Meyer’s claim that Wells Fargo engaged in dual tracking in violation of California law was denied and those claims grounded in HBOR were dismissed.
Mortgages now unprotected
Mortgage servicing in California sometimes feels like the old Laurel and Hardy routine, Who’s On First. Loans change hands, banks fail, trusts are created, and entities merge.
Below is my preliminary list of entities which may have been federally charted savings banks. I make no guarantees that I’ve got them all nor that this information is absolutely reliable.
First Federal Bank of California
California Federal Bank
USAA Federal Savings Bank
Glendale Federal Bank
If, however, your loan was initially made by a federal savings bank, you cannot rely on the California Homeowners Bill of Rights to prevent a foreclosure while the servicer considers a loan modification.
I would welcome your comments to flesh out or correct my list of federal savings banks to whom HOLA preemption may apply.
Business owners with unpaid payroll taxes are in deep trouble.
There’s no corporate shield when it comes to payroll taxes. Even if the employer is a corporation, the corporation’s managers are personally liable for the trust fund portion of unpaid payroll taxes.
The trust fund portion of the tax (the amount withheld from employees’ checks) can be assessed against anyone who could have paid that money to the IRS.
You are in the IRS’s cross hairs, personally, if the business hands out “net” checks to employees with sending the withheld money in. A bankruptcy discharge is no help here.
What’s the payroll tax
What we refer to as “payroll tax” is really a combination of two elements: the employee’s taxes that the employer has withheld and the employer’s share of FICA (Social Security) tax.
Usually, trust funds make up about 2/3rds of the payroll tax. The balance is the business’s matching contribution to Social Security.
Trust fund liability is not dischargeable in bankruptcy. The statute of limitations is 10 years and the IRS is a fearsome creditor.
Earmark tax payments
If you find yourself in this pickle, you, and the business itself, bail yourself out with an earmark of any payment you make toward Form 941 liability.
A taxpayer who makes voluntary payments to the IRS has the right to designate to which liability the payment will be applied. In re Ribs-R-Us, Inc., 828 F.2d 199, 201 (3rd Cir. 1987).
An earmark allows the IRS to distinguish your payment from others, like a cropped ear let a cattleman tell his cows from his neighbors.
It is simply a direction to the IRS as to how the payment is to be credited. Pay voluntarily and you have the right to tell the IRS what to do with the money.
Without instructions, the IRS is free to apply payment it receives on the tax debt as it chooses. And it chooses the manner of application that benefits it best.
Send a check for payroll taxes and if the check is not enough to pay the entire liability, the IRS applies it first to the dischargeable portion of the tax first, preserving the personal liability of the business owners for the remaining tax.
Likewise, if the IRS levies an account, they may apply the levied funds as they wish.
How to earmark
If the business finds itself with insufficient funds to pay the entire tax owed, you can reduce your personal liability for the unpaid tax by earmarking the payment.
Write directions on the check specifying how the payment is to be applied like this: Trust Fund liability, 4th Quarter 2015 941. Send a cover letter with the check with the same instructions. Keep a copy of the letter for your records.
Of course, the better course of action is to remain current on payroll taxes.
Use a payroll service that won’t cut the checks unless the taxes are paid, or make a tax deposit with each payroll.
Dip into the money withheld from employees and you’ve taken a “loan” that lives very nearly forever.
Before a foreclosure is begun, the lender or their servicer must take steps to let the borrower know what options exist to keep the house. The mandated timeline creates a four month interval between delinquency and starting the foreclosure in which alternatives can be explored.
Live contact with borrower
Mortgage servicers must attempt to make live contact with borrowers who become delinquent within 36 days of the delinquency. A voicemail message doesn’t cut it. Reg. X §1024.39
The servicer must describe the kinds of loss mitigation options that are available and they must establish a single point of contact for the borrower with the servicer. Reg. X § 1024.40
No foreclosure can be instituted until 120 days have passed from the first delinquency. More importantly, if a complete loan modification application has been submitted to the the servicer by the 120 day point, no foreclosure can be begun. Reg. X §1024.41
Last minute help
If the borrower misses the 120 day deadline for submitting a loan modification application, there’s still protection in the new rules.
If a loan mod application is made more than 37 days before the foreclosure sale, the servicer cannot conduct a foreclosure sale until it issues a decision on the application.
The new rules deal with a myriad of variations on these timelines. The theme in the rules is consistent: federal law requires a decision on a loan modification application before the foreclosure train chugs down that track.
If the servicer breaks the rules
The new rules have teeth.
Borrowers who believe their servicer has failed to follow the rules can sue the servicer. If you can prove your case, you can collect your actual damages as a result of the violation; your costs of suit; and your attorneys’ fees.
These regulations implement provisions of the Dodd Frank legislation; they became effective January 10, 2014.
Another arrow in homeowner’s quiver
These rules do not preempt other rights that homeowner’s have in this arena that give them greater rights.
Like any new law, we will have to see how they work over time.
While the rules don’t require servicers to modify loans, they do require servicers to refrain from foreclosing while a loan modification application is pending.
At the most basic level, anytime the case is open in the bankruptcy court’s clerks office, you can file an amendment to your schedules.
Adding a name to the schedules gets the new name added to the master address list which parties use to give interested parties notice about the case.
Just because the filing is accepted doesn’t decide anything about the effect of the filing. But it’s universally true that the sooner an omitted creditor is added, the better for the debtor.
There’s a fee for amending the lists of creditors, currently $30.
Does addition give timely notice?
Getting a creditor on the mailing list doesn’t necessary get them actual and timely notice of the case.
The clerk’s office sends out the notice of the bankruptcy filing at the beginning of the case. The notice of the case sets out the deadlines for creditor action in the case:
date of the first meeting of creditors
last day to object to discharge or dischargeability
bar date for filing proofs of claim
Unless the added creditor gets actual notice, just getting them in the bankruptcy papers may not be enough to bind that creditor to the deadlines in the case.
In my office, then, we amend the schedules, mail a copy of the notice of commencement of the case to the added creditor, and file a certificate of service showing that we gave the new creditor actual notice.
That way, there is no doubt that the creditor got notice.
When important deadlines have already passed
This is when the effect of adding a creditor gets dicey.
If the added creditor misses the first meeting of creditors, there are generally no adverse consequences.
Different story if the added creditor doesn’t get notice in time to challenge the discharge of that creditor’s debt. As we discussed in our post on Missing Creditors, if there will be a distribution to creditors in the case, a debt not listed survives the discharge.
Further if the added creditor has a claim that may be non dischargeable, the window for bringing an adversary to contest discharge remains open.
If the missed deadline is the deadline to file a proof of claim, often a late filed claim will be allowed on the grounds that the creditor didn’t get notice.
Chapter 13 is unforgiving
While the law makes varying accommodations for an omitted creditor in Chapter 7, the approach to the omitted creditor in Chapter 13 is more rigid.
Almost all courts hold that a creditor who doesn’t get notice of the filing of a Chapter 13 case in time to object to confirmation is not bound by the discharge. So, skipping a creditor in Chapter 13 stands to hurt the debtor’s fresh start by allowing the claim to survive
It’s worth a lot to get everyone affected by your bankruptcy case actual and timely notice of the case for the broadest possible discharge.
What happens if you omit a creditor from your bankruptcy schedules? In the bustle of preparing to file bankruptcy, a slip up is not uncommon.
Notice is one of the fundamental rules of bankruptcy. Everyone to be affected by a bankruptcy case gets notice. That notice provides the creditor with an opportunity to participate in the case. It all amounts to due process.
So, what if a creditor didn’t get notice?
The consequences range all the way from “nothing ” to “you lose your discharge”. In a lawyer’s favorite phrase, it depends.
Omission is no big deal
Let’s start with the plain-vanilla creditor innocently missed when the bankruptcy schedules were prepared. The Bankruptcy Code lists a creditor without notice of the bankruptcy case as one of the exceptions to the discharge. A debtor isn’t relieved of liability for
523(a)(3)neither listed nor scheduled …. with the name, if known to the debtor, of the creditor to whom such debt is owed …
But the statute goes on to qualify the exception to dischargeable debts and the filing of a proof of claim. Case law says that if there were no assets from which claims could be paid to creditors, then notice is irrelevant. The case in the 9th Circuit, which includes California, is Beezley.
The omitted creditor is discharged.
A creditor who learns of the bankruptcy in time to act is treated as though the creditor was formally noticed of the case.
Nondischargeable claims survive
When the creditor without notice asserts that his claim is non dischargeable, the claim survives, at least until a court rules on the issue.
Remember that three of the exceptions to discharge, where the debt was created by dishonesty or intentions bad acts, require that the holder of the claim seek a court determination that, in fact, his claim fits within those “bad acts” exception to discharge.
When the creditor isn’t included in the schedules, the time for bringing an adversary proceeding to exclude a debt from discharge is extended. Most courts will limit the time a creditor has after learning of the bankruptcy to bring a non dischargeability action. Just how long the creditor has is up to the judge.
Often, the problem of the omitted creditor comes up when the creditor tries to collect the debt after the discharge and the debtor cries foul: My debts were discharged in bankruptcy!
The debtor may choose to reopen the bankruptcy case and get a determination about whether the debt in question is really grounded in “bad acts”.
Lienholders get mixed bag
Creditors with a lien have two kinds of rights: they may have a claim against the debtor in the debtor’s individual capacity. They also have a bundle of rights against the collateral to which their lien attaches.
Bankruptcy alone does not alter or affect a creditor’s lien rights. Liens can be affected in bankruptcy, but generally a separate motion or adversary proceeding must be filed to alter those rights, and the lien holder must get notice.
So, absent notice, a lienholder’s rights are safe.
The secured creditor’s rights to pursue the debtor on account of the debtor’s personal liability (rather than pursue the collateral) are subject to the same rules about notice as we discussed above.
Knowing omission of creditor risks discharge
Sometimes, a debtor intentionally skips a creditor in the schedules. Reasons (really, excuses) for omitting a creditor boil down to these:
the creditor knows “stuff” the debtor doesn’t want the bankruptcy system to know
the debtor thinks omitting the creditor assures that the omitted creditor’s claim survives
the debtor wants to avoid personal embarrassment that comes with knowing
Two problems arise when the omission is deliberate. One is that, as we saw earlier, not being formally listed in the schedules doesn’t assure that the debt survives.
The second problem is more serious: intentional misstatements on the schedules constitute the crime of perjury and also constitute grounds for denial of discharge.
Criminal prosecution is rare, but it’s still a risk.
Denial of discharge is a more likely outcome of deliberate lies on the schedules. Again, it’s not often that trustees seek denial of discharge, but the chance exists.
Trying to spend down cash before filing bankruptcy?
It’s time to talk about the float.
Not the root beer float, though that would be more fun.
The bank “float”: the period between writing a check and it clearing your bank.
(We’ll talk about what to spend on before filing bankruptcy, too).
When you file bankruptcy, your schedules are supposed to show what you own on that day. For checking accounts, that’s the balance that the bank shows.
If you’ve written a bunch of checks right before filing, checks still floating out there on their way to the bank make your bank balance higher than the balance in your checkbook.
Why does the float matter
The money in your bank account on the day you file belongs to your bankruptcy estate. Now, it may be fully exempt or it may be too little to interest a trustee in administering it, but that’s another story.
In the eyes of the law, it’s yours, even though you’ve written directions to the bank to pay some of it out to the holders of your checks. Those directions (your checks) just haven’t arrived at the bank.
A bankruptcy trustee can demand that you pay over to the estate that balance, even though the money has long since been paid out by the bank, who knew nothing of the bankruptcy case when it honored your check.
Spending before filing
If you are in the lucky position of having more cash on hand than you can exempt in your bankruptcy case, you may want to spend that money on things you’ll need after bankruptcy.
My list of purchases/expenditures that generally pass muster with bankruptcy trustees include
Stocking your kitchen
Repairing your car
Paying insurance premiums
Getting needed health or dental care
Replacing aged appliances
But if you pay for them with a check, right on the eve of bankruptcy, you run the risk that the checks haven’t cleared the bank when your case is filed.
Instead of paying by personal check, you can pay cash for your purchases. Be sure to keep a record of what you bought so you can trace the money for the trustee.
Or, you can buy cashier’s checks from the bank, and make your purchases with certified funds. The funds to buy a cashier’s check come immediately from your account at the bank. A cashier’s check is a check on the bank’s checking account, not yours.
By using cashier’s checks, you spend down your funds and eliminate the risk that your bank balance will be artificially high on the day you file your bankruptcy case. And that’s good.
While it may stretch the truth as to whether you owe it, it’s simple and safe. It keeps you from adding to your exposure to old debts.
Avoid extending the statute of limitations
The statute of limitations allows enforcement of a legal right through the courts only if brought before the running of the statute.
Broad brush, you can extend your legal exposure to an old debt in two ways:
Make a payment on the debt
Admit that you owe the debt
Important to note that either of these ways of extending the life of a debt are acts that you, the person who owes the money, take. The debt collector can’t extend the statute unilaterally. Only by getting you to do something against your interests is the life of the debt prolonged.
Payment breathes new life
Making a payment on the debt is putting your money where your mouth is: you wouldn’t pay anything if you thought you didn’t owe money.
So payment is seen as proof that you owe the money.
Payment starts the statute of limitations clock running again, from the beginning.
That’s where the debt collector’s request for a “good faith” payment on a debt you can’t pay off at this time is so insidious. The debt collector cares far less about the amount of that “good faith” payment than he does about the fact that you’ve just extended your legal exposure to the debt for an entirely new period. What that period is we’ll discuss below.
Admitting the debt is fatal
An admission that you owe the debt, even without payment, can reset the SOL clock.
California law provides that only an admission of the debt in writing can extend the statute:
No acknowledgment or promise is sufficient evidence of a new or continuing contract, by which to take the case out of the operation of this title, unless the same is contained in some writing, signed by the party to be charged thereby, provided that any payment on account of principal or interest due on a promissory note made by the party to be charged shall be deemed a sufficient acknowledgment or promise of a continuing contract to stop, from time to time as any such payment is made, the running of the time within which an action may be commenced upon the principal sum or upon any installment of principal or interest due on such note, and to start the running of a new period of time, but no such payment of itself shall revive a cause of action once barred. Code of Civil Procedure 360.
Yet there are precious few cases on the subject.
And while traditionally, the statute of limitations that applies to any collection suit was the law of the state where the defendant lives, recent cases make that less certain. Topping off the uncertainty, the 9th Circuit Court of Appeals recently ruled that in bankruptcy, the statute of limitations of the state whose law applied to the contract controlled, not the shorter statute where the debtor lived. Sterba
All of which makes saying nothing, or saying no, the safest course of action if you have an old debt that you can’t pay.
Why have a statute of limitations
Pubic policy says we want legal disputes resolved sooner rather than later. If a lawsuit is involved, we want the evidence available and memories fresh.
It’s the legal version of SNOOZE, YOU LOSE.
A debt collector or a debt buyer has the same statute of limitation as the original creditor.
When does the limitations clock start running
The SOL clock starts running on the limitations period upon the last activity on the debt. That activity could be a payment on a debt; it could be a charge on an open account.