Boston Bankruptcy Attorney Blog

The loss of a job is always devastating, throwing one's life into disarray and uncertainty. It can also be a major factor in the decision to seek personal bankruptcy. As the economy continues to sputter along for many people, these concerns remain a daily fact of life. While the news related to jobs and the economy is often grim, there is hope for people in Boston, both in the economy and in the legal options available to people needing relief from their debts.

A recent report by Fox 25 in Boston looked at job outsourcing by Boston businesses and its effect on jobs and the local economy. The report mentioned specific companies that have cut a substantial number of jobs in the Boston area while setting up operations in China. Some companies are opting to move jobs elsewhere in the country. Fidelity Investments recently moved around 1,100 jobs to Rhode Island and New Hampshire. Statewide, Massachusetts is losing middle-income jobs to competition overseas and within the United States, although it may be gaining more specialized high-tech jobs. According to the U.S. Department of Labor, Massachusetts' overall unemployment rate is dropping, from 8.3 percent in September 2010 to 7.3 percent in September 2011.

A Boston Globe article examines the related issue of seasonal retail employment. Competition for these jobs is greater than ever, as job seekers with advanced and professional degrees have thrown their hats into that ring, figuring that a part-time retail job is better than no job. People entering their second (or greater) year of job searching may expand their search, and seasonal employment has become a sought-after prize.

How does this relate to personal bankruptcy? As people find themselves living below the means to which they had become accustomed in their previous jobs, obligations they took on back then may become difficult to maintain. Mortgages and credit card bills may no longer be serviceable at a part-time retail salary. People who lose a job often also lose health insurance, and they might decide that the money they earn is better put towards current or future medical expenses rather than continuing to pay for past expenses that they can no longer afford. Of course, they signed contracts, and they cannot just walk away from their debts. If the debts become more than they can expect to pay in the foreseeable future, this is when personal bankruptcy may be the answer.

Continue reading "Boston Economy Leads to Job and Bankruptcy Worries" »

People make the decision to file for personal bankruptcy for many reasons, but they all involve one common factor: debts and bills have become greater than the ability to pay. While some people might reach this point through bad decisions or poor planning, many people need bankruptcy protection because of events beyond their control. Medical bills, building over time or resulting from a sudden catastrophic incident, constitute a large percentage of bankruptcy filings in the U.S. Whatever one may think of recent debates over health care in America, the problem of mounting medical bills and the impact on personal finance and the overall economy is undeniable. That people find themselves saddled with such debt is tragic. That they may seek protection from the bankruptcy system is at least a bit comforting.

A 2005 study by researchers at Harvard's medical and law school, reported by MSNBC, found that over half of all personal bankruptcies filed in 2001 resulted from medical bills and related expenses. Subjects of the study cited medical bills and illnesses as a reason for filing in 46.2 percent of the responses received. When researchers added the responses citing expenses related to births, deaths, and addiction treatments, the number increased to 54.5 percent out of a total of 1.46 million personal bankruptcies filed that year. The study also found that the majority of people filing bankruptcy because of medical expenses had health insurance. Therefore, even with the protection of insurance, costs became insurmountable.

A study of 2007 bankruptcy filings, published in the American Journal of Medicine and reported by the Washington Post, found that medical expenses factored into 62 percent of all filings that year, a significant increase in six years. This study also found that a majority, almost 80 percent, of filers had health insurance when they incurred the medical expenses. In the time between the two studies, the number of uninsured people in America increased. The bankruptcy reform statute, which makes filing more difficult for most individuals, also went into effect during that time.

Harvard Medical School took a look at health-related bankruptcy filings again in 2009, as reported by CNN. Researchers found that the percentage of filing attributable to medical expenses had held steady at 62.1 percent of the 1.5 million cases filed. Seventy-eight percent of filers had health insurance. Filers frequently had medical bills totalling well over ten percent of their gross income. Many had mortgaged their homes to pay bills, or had suffered a serious decrease in income because of illness or injury. The study's lead author noted that most Americans are only "one illness away from financial ruin."

Continue reading "Medical Bills and Bankruptcy: Unhappy Partners" »

A Boston bankruptcy judge authorized the sale of a home in Cape Cod in the bankruptcy case of David K. Drumm, an Irish-born former bank CEO who owes more than $14 million to creditors. The bankruptcy trustee expects to sell the property for $3.9 million, according to Bloomberg Businessweek. Drumm purchased the Chatham, Massachusetts house in 2008 for $4.6 million. He lists a property in Wellesley, Massachusetts, allegedly valued at $1.85 million, as his home address in court papers. The trustee will collect an additional $150,000 for personal property still located at the Chatham house. Drumm's case demonstrates the potential complexity of large bankruptcy matters.

The bankruptcy case is just one of several legal matters he faces. Drumm was the chief executive officer of Anglo Irish Bank, a Dublin-based bank that sent him to Boston in the 1990's to create an American base. After several years building the bank's business in the United States, he returned to Dublin in 2003 and became CEO of the bank in 2005. He substantially increased the bank's lending until the global credit crisis began in 2008. Once the crisis hit, the bank needed a guarantee of its deposit from the Irish government, and this led to the discovery of various irregularities in the bank's finances.

Drumm resigned as CEO in December 2008 in the wake of a scandal involving hundreds of millions of euros worth of loans allegedly made to bank directors. Multiple major investors sued the bank, alleging various acts of fraud. The Irish government nationalized the bank in 2009, leading it to be delisted from stock exchanges in Ireland and Great Britain. As of late 2010, Ireland estimated the cost of the bailout of the bank at about 29 million euros. The bank was merged into a new company in July 2011, called the Irish Bank Resolution Company.

Drumm filed for Chapter 7 bankruptcy in Boston in October 2010. In his petition, he declared debts totalling $14.2 million and assets totalling $13.9 million, which includes the two Massachusetts houses.

Continue reading "Boston CEO's Bankruptcy Leads to Sale of Multi-Million Dollar Home" »

Chapter 13 bankruptcy filings have declined in Boston and throughout Massachusetts since 2010, according to a report in the Boston Business Journal. A review of filings for the third quarter of 2011, measured through September 29, found that the total number of Chapter 13 filings during that quarter, compared to the third quarter of 2010, was seven percent lower statewide and eight percent lower in Boston. Comparing the first nine months of 2011 to the first nine months of 2010, the Business Journal found that Chapter 13 filings declined by eighteen percent for the state and nineteen percent for Boston.

"Chapter 13" refers to a chapter in the United States Bankruptcy Code, the laws passed by Congress governing the bankruptcy process. While some forms of bankruptcy involve mass liquidation of assets and dissolution of a business organization, Chapter 13 aims to restructure assets and debts to allow them to be paid efficiently and on favorable terms to the debtor. This is ideal for individuals with regular income, as they can keep most or all of their property and can develop a payment plan for their debts. A plan under Chapter 13 typically lasts three to five years, during which time the debtor must make regular payments to certain creditors and to an appointed Trustee accordance with a plan approved by the bankruptcy court.

With regard to the current decline in the number of Chapter 13 filings, the Business Journal identifies the declining housing market as a possible explanation. Many Boston homes are now valued below the principal of their mortgages, meaning that selling the house would not bring in enough money to pay the full balance of the mortgage. The story notes that homeowners may be giving up on trying to save the homes.

However, filings in the other two major forms of bankruptcy, Chapters 7 and 11, have also declined in Boston and throughout Massachusetts. This may be counter-intuitive, because liquidation under Chapter 7 may just be the best way for an underwater homeowner to achieve a fresh start with a clean walk-away from the home and a discharge of most other debts.

Debtors often ask whether a foreclosure or a bankruptcy would be a better (or worse) option when dealing with a distressed property. These are not necessarily mutually exclusive, as they serve different purposes in different points in time. In most cases, a properly filed bankruptcy will temporarily delay a foreclosure. But this may not be enough to save the home, as a bankruptcy generally does not affect a mortgage secured by a primary residence, which would still need to be paid in order to have the foreclosure stop for good.

But if a foreclosure does take place, a bankruptcy afterwards is often the only way to discharge the hundreds of thousands of dollars of deficiency and second mortgage debts that do not go away just because the house does.

Continue reading "Bad Housing Market Leads to Decrease in Boston Personal Bankruptcy Filings in 2011" »

All the recent stimulus and bailouts made absolutely no changes to the bankruptcy laws. Clients constantly ask me when the "Obama Plan" will help them file bankruptcy and, for instance, reduce their mortgage payment. Unfortunately, it will not, because the Obama plan, all 400+ pages of it - which I read - does not mention bankruptcy at all. The Homeowner Affordability and Stability Plan Executive Summary makes a vague reference that bankruptcy judges should be allowed to modify certain home loans when all other avenues fail and the borrower has no other options. But that was just it - a mere suggestion that Congress may want to consider this issue at some point in the future - far from being law.

We know that the President does not make laws - laws are passed by Congress in a multi-step process that includes both the House of Representatives and the Senate. Each step involves various hurdles and opposing interests that the politicians must try to appease. The Bankruptcy Code is a thick federal statute, specifically Title XI of the United States Code, that can only be modified by an act of Congress, and not the President. As of this writing, NO CHANGES TO THE BANKRUPTCY CODE HAVE BEEN MADE SINCE PRESIDENT OBAMA TOOK OFFICE.

When will the changes be made? Proposed changes are being heavily pushed by consumer-friendly entities like the National Association of Consumer Bankruptcy Attorneys (of which I am a member), and heavily opposed by the banking industry. A small but important victory for consumers came recently when the House of Representatives narrowly passed a bill titled H.R. 1106 -- a proposed law that upon passage in the Senate and approval by the President would finally allow bankruptcy judges to "cram down" (modify) the principal amounts and other terms of home mortgages in Chapter 13 cases after certain requirements have been met. However, the passage of this proposed law in the House is just the beginning of a long and possibly losing battle. The Senate companion bill, known as S.61, appears to be dying, lacking the needed support to gather enough votes to pass. Senate leaders just this week indicated that they will be focusing their efforts on revamping regulatory rules leading to more Federal oversight of banking practices. The changes to the bankruptcy code are not on the immediate agenda and may not reach the Senate floor any time soon.

Where does that leave consumers? The current bankruptcy laws already provide various degrees of relief, including ways to stop or delay foreclosure (see my article The foreclosure that never was), ability to catch up on late mortgage payments, an opportunity to get rid of a second mortgage (see my article Goodbye Second Mortgage!), or the ability to walk away from a piece of real estate without owing any deficiencies to the banks.

The author of this article may be contacted at the Law Offices of D. Lev, PC.

The power of bankruptcy is often misunderstood, or altogether unknown. Most think that a bankruptcy means "having to lose everything in order to pay your debts." This couldn't be further from the truth.

Today's Bankruptcy is a set of federal laws that have the power to override certain state laws, contracts, and other financial arrangements. How exactly these federal laws affect each situation depends on the specific facts, and there is no uniform answer. But let's talk about Massachusetts foreclosure as an example.

If you are at the end of your rope, and your mortgage lender is at the end of theirs, you likely received a notice of a foreclosure sale in the mail. If the notice came by certified mail and has a concrete sale date and time, that means that you're probably past the initial threats, collection notices, acceleration and default letters, and phone calls from the bank. A sale date is the real deal. In most cases this means that the bank thinks it has exhausted all other means of resolving the situation, that it has already obtained the permission of the state's land court to hold a foreclosure sale, and that it ran the advertisements as it is required to do in the local papers. You have a sale date. You have a foreclosure. You have a problem.

Bankruptcy to the rescue. Filing a petition in the United States Bankruptcy Court even one minute before the scheduled foreclosure sale will legally void any sale. Simply put, any transfer of ownership as a result of the scheduled foreclosure will have no legal validity. As a practical matter, it's usually easier to have the petition filed at least a few hours, preferably a few days, before the scheduled foreclosure sale. In that case, once the bank's law firm in charge of the foreclosure is notified, a sale would immediately be canceled and would not be held at all. FORECLOSURE STOPPED. Exhale...

But if the filing is truly last minute, or last second, the parties may not get notified in time to cancel the sale, however that sale will not be legally binding - it would be void, as if it never took place.

Does that mean that you could keep your house indefinitely without making payments? Unfortunately, no. Under the current laws, a bankruptcy does not fully take away the bank's right to foreclose. It does, however, modify the bank's rights. For starters, a bankruptcy will certainly delay any foreclosure at least long enough to see what other options may now be available with the help of the bankruptcy laws. In addition to delaying the foreclosure, a bankruptcy could:

• wipe out other unsecured debts, like credit cards and medical bills. With those bills gone, a family may be able to resume making mortgage payments and keep the house.
• force the bank to accept catch-up payments over a period of time up to five years. During this time, the bank is forbidden from trying to foreclose. The bank must sit bank and give the family a lengthy five year window to catch up.
• bring your attorney and the bank's attorney together in a discussion that is likely to be more fruitful than the consumer trying to call the bank's toll free "workout department" day and night, with infinite hold times and less-than-knowledgeable representatives.

Incidentally, if a bank were to disobey the federal bankruptcy laws and attempt to foreclose anyway, the Bankruptcy Court has the power to severely penalize the bank, potentially in the hundreds of thousands of dollars, and award that money to you. This is called a Violation of the Automatic Stay.

A bankruptcy is not always the cure for all financial ills, but it is also not the disaster that some mistakenly view it to be. At times, a bankruptcy is a blessing in disguise, especially when it allows a family to save their home from foreclosure. That power is there - even on a minute's notice.

The author of this article may be contacted at the Law Offices of D. Lev, PC.

Is it really possible to get rid of that second mortgage, but keep the home? Quite possible. Certain things must be in place for this to happen. First, a "strip off" of a second mortgage is not possible in Chapter 7 if the debtors wish to keep the property. In Chapter 7, the only real options are to keep the home and pay the 2nd mortgage, or to surrender the home and then the mortgage as well as any potential deficiency go away.

In Chapter 13, however, it is possible to strip off the second mortgage as long as it is wholly unsecured. What does that mean? Say you have a home worth $335,000. First mortgage loan balance is $300,000, while the second mortgage loan balance is $100,000. This is NOT a wholly unsecured mortgage. This second mortgage is undersecured, as opposed to unsecured, because the second mortgage lender has a security interest of $35,000. While it is less than the balance of the loan, some amount is still secured, and there is nothing that can be done here, even with the help of bankruptcy laws, to get rid of that second mortgage.

On the other hand, if the property is worth $335,000, and the first mortgage loan balance is $350,000, no matter what the balance of the second mortgage loan might be, that second mortgage is now wholly unsecured. There isn't enough value in the property to cover even the first mortgage, let alone any of the second. In this scenario, it is possible to treat the second mortgage loan as wholly unsecured in Chapter 13, and upon successful completion of the Chapter 13 plan and an entry of discharge, an order of the court may be sought that clears the lien of the second mortgage as well.

In the above example, it is clear that the second mortgage is wholly unsecured. In reality, however, not every instance will be as clear. What if the debtors' broker says that the property is worth $335,000, as above, but the mortgage lender got its own broker, and according to their broker, the value of the home is $350,001? If there is even $1 of security for the second mortgage lender, a "strip off" is not possible and the mortgage lien will remain on the property. What happens in these situations? Answer: the judge decides. To do this, the court may need to take evidence from brokers to make a determination of value.

When a second mortgage is stripped, it is treated like other unsecured debts in Chapter 13, meaning, the plan may provide for a repayment of some percentage of the loan, but this could be as low as 5%, or even less. The key to the strip-off is successful completion of the plan.

What if my car is upside down? And I don't mean lying on its roof with the wheels pointing upwards and spinning. Being "upside down" refers to a loan secured by a car where the balance due is higher than what the car is worth. For instance, a 2003 Chevy Blazer may be worth $8,000, but the balance on the loan may be $14,000!

How does this happen? There are several ways... It may be that a trade-in was rolled into a new car loan, causing the new loan to be much higher from the beginning. It may be that the term of the loan was longer than the usual 36-48 months, causing a balance to exist as the car nears the end of its useful life. Or it may be that the interest rate on the loan was unusually high, slowing down the pay down of the principal balance.

In any event, what do you do with a car that's upside down? In a Chapter 7 bankruptcy, one has three options. The first option is to keep making timely payments on the car as always. This would enable the owner to keep their car with no changes to the payment or total amount due. This option may be sensible if one is not behind on the payments and where the negative equity (the "upside down" factor) is not significant.

Another option is to "surrender" the car -- simply give it bank to the finance company and walk away. The key difference between doing so while in a Chapter 7 bankruptcy as opposed to a voluntary surrender or repossession is that when done through the bankruptcy the consumer will not be responsible for the difference between the car's value and the balance of loan. This is called a "deficiency." In our example above, if the person decided to surrender the 2003 Chevy Blazer without a bankruptcy, the finance company could potentially sue the person for $6,000 -- that is the difference between the value of the car, $8,000, and the balance due on the loan, $14,000. However, when a car is surrendered through a bankruptcy, the person will NOT be responsible for any deficiency, which in most cases is discharged along with the other debts.

The third and the most interesting of the options is called "redemption." This is a right granted by Section 722 of the United States Bankruptcy Code. In short, the section applies to tangible personal property (meaning, it cannot be a house) that is intended primarily for family or household use and that has been exempted or abandoned by the Trustee. In most cases, a family car will be exempted and the Trustee won't be interested in it.

To redeem something means to pay the finance company the current value of the property in exchange for full ownership. Going back to our 2003 Chevy Blazer example, the finance company MUST release all liens and turn over a clean title to the car upon receiving a payment of $8,000, which is the current value of the car. It does not matter that the balance on the loan is $14,000. The company will have to eat the $6,000 difference and take it as a loss.

One might ask, where does someone going through a bankruptcy get $8,000? Sometimes this money comes from family or friends. For others, certain companies offer special redemption loans to persons going through bankruptcy for this very purpose. In our example, one would get a new loan for $8,000 from one of these companies, essentially refinancing the car for almost half the amount of the prior loan. Naturally, the interest rate on a redemption loan would be higher than regular car loans, but in most cases the monthly payment will be substantially lower than before. In addition, one can do a redemption even if they were many months behind on their car payments, as long as the car has not yet been sold at auction, without being held responsible for the missed payments.

Practically speaking to perform a redemption one has to file a motion with the bankruptcy court and propose a value of the redemption. The financing company can then propose their own value, in which case the judge will decide what the redemption value should be. Even though everyone uses Kelley Blue Book and NADA guides as the standard for determining value, disagreements occur because of issues like mileage, mechanical condition, cosmetic damage, etc. In the end, the redemption price is either agreed upon or court ordered. The process usually takes less than a month from start to finish, and is done seamlessly within the ongoing bankruptcy case.

It must be noted that some attorneys charge extra to do redemptions in addition to their regular Chapter 7 fees. One must consult their attorney fee agreement to see if additional costs will be involved.

In the end, a redemption is an excellent and powerful choice for consumers whose car loans are upside down and who wish to keep their cars. It forces the finance company to accept less than the balance of the loan, a figure based on the car's current value, which may end up saving the consumer thousands of dollars.

Questions often arise on the treatment of tax debt in bankruptcy. With the 2005 changes in mind, taxes are generally dischargeable in Chapter 7 if they meet five rules:

1. The tax was due more than 3 years prior to the date of filing bankruptcy. Extensions count!
2. The tax return was filed more than 2 years prior to the date of the bankruptcy. If no return was filed and the IRS did an SFR (substitute for return), this is not considered a filing. On the other hand, if the IRS did an SFR with assistance from the taxpayer, this would be considered a filed return.
3. There was an assessment more than 240 days before the date of the bankruptcy filing.
4. The tax returns were not fraudulent.
5. There was no willful attempt to evade the tax.

Keep in mind that Federal tax problems usually means that there are also looming state tax issues.

Chapter 13 has a few other important points to keep in mind, and we will visit these in another post.

Attorney Dmitry Lev was quoted in Business Week in a feature article Bonus Babies: Digging Into the Lifestyle on new business school grads and on the best ways for them to spend their sign-on bonuses. The feature was written by Julie Gordon and published in the October 10, 2006, issue.

"Most experts agree that recent graduates should invest in a Roth IRA, for which most people qualify. "Giving themselves this kind of head start on saving for retirement will also give these new grads the incentive to contribute year after year going forward. On the other hand, those who do not start a retirement plan at this stage are more likely to put it off for another year, then another," says Dmitry Lev, a consumer bankruptcy and tax attorney based in Boston. If an investor begins contributing the current annual maximum ($4,000) early in his career, he will easily have $1 million by retirement, if not sooner, says Lev."

To expand on the issues raised in the article -- first of all -- what a dilemma: how to spend bonus money! But the same concepts I suggested for new business school grads are still sensible advice whenever a person walks into a not-so-small (and not-so-big) lump sum of money. This can happen unexpectedly, on a happy occasion, such as winning the lottery, or on a solemn note, like a small inheritance or a life insurance policy payment upon a passing of a family member.

My first suggestion to new grads and others alike, assuming there is no pressing financial emergency or overwhelming debt, is to invest in a Roth IRA. As I suggested in the article, disciplined annual Roth IRA contributions lead to great rewards with little required effort. And this is without considering the employer sponsored 401k type retirement plans, where regular contributions pay off even more with benefits like matching. Yes, I am advocating that anyone who qualifies should contribute to both their employers' 401k plans and Roth IRAs.

Clearly if a person is driving a clunker and needs a new set of wheels to get to work, this is a necessary expense. But instead of buying a brand new $50,000 Lexus and financing it for 8 years, a more sensible approach would be to purchase a sub-$15,000 car, which would be sufficient (though not extravagant) for most, and finance it for no longer than 3 years. My personal rule of thumb is that if one cannot afford monthly payments based on a 3 year car loan, then they cannot afford that car at that price.

For most students, paying off their student loans at once is probably not a good idea. Federal student loans have relatively low interest rates, and for that reason they are "good debt" rather than bad debt. Certain private student loans may carry significantly higher rates, and these should be paid down sooner.

In short, there is no better time to learn about the rewards of delayed gratification than when a new grad receives a chunk of money in hand. That money will take our grad much further and last him or her much longer if it is not immediately spent on the luxuries of "starting a new life."

Attorney Dmitry Lev assists persons seeking Bankruptcy protection in Massachusetts. In addition, Attorney Lev counsels and represents persons in taxation matters with the IRS and state agencies, and victims of unfair debt collection practices. Law Offices of D. Lev may be reached at (617) 556-9990 for a free consultation regarding a specific matter.