For the last few years, I have witnessed a steady stream of homeowners flowing through my office who are dumbfounded by their inability to get a mortgage modification.  And for years, I have been telling them all the same thing:

YOUR SERVICER DOESN’T WANT TO MODIFY YOUR LOAN!

The truth of the matter is that, of all the options available to a mortgage servicer to deal with a distressed homeowner, mortgage modification is the least desirable for the servicer of your loan.

This phenomenon is discussed at length in a recent Washington Law Review article by attorney Diane E. Thompson entitled Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 WashLRev 755 (© 2011).  Ms. Thompson, who is Of Counsel at the National Consumer Law Center, adeptly dissects the servicer’s incentive to foreclose rather than modify a mortgage.  She concludes:

The financial compensation and constraints imposed on and chosen by servicers generally lead servicers to prefer refinancing, foreclosures, and short-term repayment plans to modifications. Servicers recover all costs in a refinancing or foreclosure, without incurring unreimbursed expenses. Refinancing, where available, will always be preferred: the servicer incurs no costs in a refinancing, other than the staff cost of providing a payoff statement, and may gain some incidental float income from the prepayment. Moreover, if refinancing is available as an option, servicers are likely to be able to replenish their servicing rights and ensure a steady income.

Under the current rules, a foreclosure is the next best option. The servicer’s expenses, other than the costs of financing advances, will be paid first out of the proceeds of a foreclosure. Thus, the servicer will recover all sunk expenditures upon completion of the foreclosure. The servicer’s costs of financing those advances will not be recovered—but all other costs, including those services provided by affiliated entities, like title and property inspection, will be recovered.

The mortgage servicer is paid by the owner, investor or lender to service a mortgage loan.  There is more servicing involved, and therefore more money to be earned, on a defaulted loan than a performing loan.  And when that loan goes into foreclosure, the servicer makes even more dough.  After foreclosure, the servicer gets paid in full regardless of whether the investor ultimately takes a huge loss on the foreclosed property.

When the mortgage servicing industry was bailed out by the U.S. taxpayer, servicers were genuinely afraid that they would be forced by our government to modify mortgages in exchange for taking TARP funds.  However, when the Obama Administration unveiled HAMP as the solution to the foreclosure crisis, mortgage servicers breathed a collective sigh of relief.

HAMP has been universally described as a dismal failure, and the reason is simple.  HAMP gives servicers a way OUT of modification because they only have to modify if that’s a better alternative for the investor than a foreclosure.  But the servicer’s analysis is secretive and subject to no oversight.  In short, HAMP expects the servicer to “do the right thing.”

 Is Obama kidding me?  Do YOU believe Bank of America, Wells Fargo, JP Morgan Chase, CitiMortgage, etc. are doing the right thing?  Me either.

 As Ms. Thompson concludes, “Only mandates on servicers to provide modifications and increased transparency throughout the modification process will increase modifications to a significant level.”

WHAT:  Bankruptcy attorney Chip Parker will join The Honorable Paul M. Glenn, Bankruptcy Judge, and the Chapter 13 Bankruptcy Trustee Douglas Neway to discuss the bankruptcy court’s new Bankruptcy Residential Mortgage Mediation Program.

WHEN:  January 5, 2012 at 9:00 a.m. EST

WHERE:  WJCT 89.9 FM or listen live on the internet

DESCRIPION:  Earlier this month, the Florida Supreme Court announced that the mandatory State Court Residential Mortgage Foreclosure Mediation Program will cease.  This comes as no surprise to the lawyers involved in defending foreclosures in Florida.

Mediation is usually a great way for a plaintiff and defendant to sit down with a neutral arbiter to hash out their differences and come to a resolution that is usually better than continued litigation.  Mediation is successful in all types of disputes including personal injury cases, contract disputes and even divorces.  However, in these cases, circuit court judges will readily punish a party who fails to attend mediation or who attends but fails to comply with the mediation order.

The RMFM Program was a dismal failure because it had no teeth, and judges were reluctant to punish the mortgage companies for failing to mediate in good faith.  In short, the RMFM was a complete waste of time, not because mediation is a bad idea but because most state court judges were not behind the effort.

This past summer, the Bankruptcy Court in the Orlando Division of the Middle District of Florida implemented its own version of the failed RMFM, but unlike the state court version, it has seen a much higher success rate.  One Orlando debtor attorney even boasts a 90% success rate, with 18% of his modifications involving principal reduction.

What is the Bankruptcy Court doing differently?  Quite simply, it is forcing the mortgage industry to do what it was required to do as a condition to receiving hundreds of billions (not to mention U.S. Treasury’s  $7 trillion secret loan program ) of taxpayer bailout money, including the government takeover of Fannie Mae and Freddie Mac.

Those mortgage companies and banks who took TARP funds are required to extend a HAMP modification to any homeowner who qualifies.  Basically, if a homeowner is unable to currently pay his mortgage, HAMP allows the homeowner to pay 31% of gross monthly income as their new mortgage payment (principal, interest, taxes, insurance and association fees) if the homeowner can demonstrate that he can pay all other existing expenses with the remaining 69% of gross.

New terms will be calculated  to make the new mortgage payment sufficient to pay off the loan.  That amount must be enough to pay off your mortgage. The mortgage servicer can lower the interest rate, stretch out the mortgage and even add a balloon payment in order to make it work.  In some circumstances, the mod may make sense, or there may be too much negative equity in the home to justify walking away or fighting the foreclosure in state court.

Does the bankruptcy mediation program guarantee a residential loan modification?  No, but it does make it much harder for a mortgage servicer to reject a modification because of the stringent requirement to act in good faith.  For instance, if a servicer rejects a HAMP application, it will have to explain why.  Often, a rejection is based upon a miscalculation, and in mediation, the debtor’s attorney can demand that the servicer’s representative explain his calculations.  Often, the mistakes are found and corrected, resulting in HAMP acceptance rather than rejection.

Mortgage modification isn’t for everyone, and bankruptcy isn’t for everyone.  However, the bankruptcy mortgage mediation program is another option for homeowners facing foreclosure.

TO LEARN MORE about the program, tune in January 5^th.

In the latest foreclosure decision out of Florida,  the 4^th District Court of Appeal, in the case of McLean v. JP Morgan Chase, ruled that the plaintiff in a foreclosure must prove it owns and holds the note at the time the foreclosure case is filed.

In the McLean case, the appellate court reversed the trial court’s entry of summary final judgment in favor of the bank because the bank failed to provide evidence that, at the time the case was filed, it “obtained its rights and standing to proceed in this cause” prior to the filing date.  Instead, it presented to the trial court an Assignment of Mortgage dated three days AFTER the case was filed.

The trial judge, apparently not understanding the basic concept of chronology, denied the homeowner’s motion to dismiss the case and granted the bank’s motion for summary judgment.  In reversing this decision, the 4^th DCA said:

While it is true that standing to foreclose can be demonstrated by the filing of the original note with a special endorsement in favor of the plaintiff, this does not alter the rule that a party’s standing is determined at the time the lawsuit was filed. Stated another way, the plaintiff’s lack of standing at the inception of the case is not a defect that may be cured by the acquisition of standing after the case is filed. Thus, a party is not permitted to establish the right to maintain an action retroactively by acquiring standing to file a lawsuit after the fact. [Cites omitted]

While this ruling may seemingly state the obvious that you can’t put the cart before the horse, please understand that many Florida trial judges treat foreclosure cases differently.  They tend to allow plaintiff lawyers to “dumb down” the practice of law.

I’m not saying plaintiff’s lawyers are stupid.  To the contrary, they are smart enough to know that most foreclosures are impossible to win by applying 150 years of Florida real estate law.  So, they have waged a campaign to convince trial judges to relax Florida Statutes, Florida case law, the Rules of Evidence and Rules of Procedure.   Because of the sheer volume of uncontested foreclosure cases winding their way through Florida’s courts, it is easier for these judges to “clear out the backlog” by forgetting the stuff they learned in their first year of law school.  Sadly, many lawyers defending homeowners allow the “dumbing down” because they, too, forgot (or never learned) how to litigate.  Many are converted real estate lawyers with little or no trial practice.

Just a couple of days ago, I attended a hearing where the judge accepted as evidence an unproved allegation in the plaintiff’s motion.  This essential factual element was just “presumed” because the plaintiff’s lawyer said so, even as I vigorously demanded that the plaintiff lawyer provide some piece of evidence to back up the assertion.  Call it “par for the course.”

Fortunately, albeit reluctantly at times, the appellate courts routinely reverse these horrid trial court decisions, but if the trial judges continue to ignore Florida appellate decisions favoring homeowners (and the 150 years of jurisprudence), who cares?

Many trial judges forget that their job is simply to interpret the laws on the books.  Instead, they often ignore the laws because they fear “giving a homeowner a free house.”  This is known a “legislating from the bench.”  Our American democracy is based upon the notion of “separation of powers,” wherein government is divided into the executive, legislative and judicial branches, each with separate and independent powers and areas of responsibility so that no one branch has more power than the other branches.  When a trial judge factors his social view into his decision, he has essentially stolen power from the state legislature.

In a recent BLN post, I suggested that student loans used for “for-profit” colleges be dischargable in bankruptcy since they make up only 10% of the guaranteed student loan market but account for 50% of the defaulted student loans.   However, lest you think your sacred alma mater is above reproach, the evidence is clear that public universities are ripping off the middle class as well.

We often hear that entitlement programs are out of control and that the middle class can no longer support the elderly and poor.   However, guaranteed student loans are the crack cocaine of higher education, and College Board’s recently released annual study proves it.  The 2011 Trends in College Pricing Report lays bare the disturbing trend in higher education – We are getting less for more.

According to the study, in the last year alone, the average in-state tuition rose 8.3% (11.8 % in Florida and 20.5% in California), and during the last ten-year period at public universities (BTW, not much different for private universities):

• The cost of one year of tuition, fees, room and board has risen more than 36% after adjusting for inflation.
• The rate of annual increases of these annual costs has grown 75% over the previous ten year period.
• Populations at these same universities has grown by more than 27%.
• The number of undergraduate degrees has increased by more than 33%.
• Inflation-adjusted faculty salary has grown only 1% with total compensation growing only 4%.
• The number of instructors per 100 students has decreased by 6.8%!
• The percentage of full-time instructors has decreased by 33%!

If the professors are not getting this booty, it must mean the administrators are. Have you been to a university campus recently?  I have two children enrolled in Florida’s public university system, and I have two more entering in the next two years.  So, I recently visited the University of Florida and Florida State University, and they are, in fact, amazing campuses.

Modern public universities proudly display beautiful ivory towers that are shrines to elitism and arrogance, and students are footing the trillion dollar bill.  While student loans, like mortgages, are necessary evils in a modern society, the carte blanche given to Sallie Mae and other lenders has resulted in an unsustainable crisis that threatens long-term growth of our nation.

This is just another example of how a few get rich at the expense of many, but what do we do about it?  My colleague, Kurt O’Keefe, recently discussed that Australia places a dollar cap on its student loan guarantees.  Another approach could be limiting government guarantees based upon academic performance, test scores and hardship criteria.

In fact, there are many ways to curtail the flow of easy money to higher education, but we must first identify and recognize the problem.

Is there any wonder there is so much discontent in this country? Nationwide, HAMP has been nothing less than a dismal failure for struggling homeowners trying to get some kind of return on the hundreds of billions of dollars dolled out to Wall Street in taxpayer TARP bailout, and our inept Congress has done virtually nothing to address the inequity or force the banks to make good on their promise to help the Middle Class.  And now banks are tearing down houses they wanted so badly, they committed fraud to get them.

One thing is certain. The Middle Class is mostly on its own. However, something special is happening in Orlando that should be happening everywhere, and I’m not talking about magical theme parks. I’m referring to the Orlando Division’s innovative program to modify mortgages in bankruptcy. With the crucial support of her bankruptcy judges, Orlando’s Chapter 13 Trustee, Laurie K. Weatherford, is spearheading the Bankruptcy Mortgage Modification Mediation Program, which has boasted a mind-blowing 75% success rate. I spoke with one Orlando lawyer who claims his personal success rate is 90% with 18% of his clients receiving principal reductions.

HAMP is scheduled to terminate at the end of 2012, but it would almost certainly be extended if it were as effective everywhere as it is in Central Florida. Maybe Orlando IS a magical land where imagineering makes dreams come true. Can you imagineer where this slumping housing market would be if HAMP were this effective nationwide? Even a successful HAMP cannot cure the economy, but it may keep us from sliding into a second recession that Goldman Sachs suggests is a 40% probability.

However, as anyone who has attempted mortgage modification knows, there is complete lack of communication by the servicers. I have literally heard hundreds of stories of homeowners fulfilling every request of the servicers in vain. Despite many hours on the phone and despite submitting the same information multiple times, homeowners are usually told they do not qualify or that their application was incomplete.

So, why does HAMP work so much better IN bankruptcy? While bankruptcy judges cannot force lenders to modify mortgage, they can force them to mediate in good faith. As a result and under a fear of possible court sanctions, there is a heightened level of communication between debtors and mortgage servicers. Additionally, creditor lawyers tend to be more experienced and less adversarial than their state foreclosure counterparts. Finally, once a mortgage modification is accepted, it is ratified by the court, making it difficult for the lender to back out of the deal.

In short, bankruptcy seems to push the debtor’s loan modification to the top of the stack, making it a priority for the mortgage company – sort of like a theme park Express Pass that let’s you skip the long line. The loan modification process is, on average, three times faster in a Chapter 13 bankruptcy than outside of it.

The Tampa Division isn’t wasting any time injecting Ms. Weatherford’s system into it’s collapsing housing market, and I am hoping Jacksonville will soon follow Orlando’s lead. In a couple of weeks, I will be speaking on this topic at the upcoming Jacksonville Bankruptcy Bar Association Annual Bankruptcy Seminar, and hopefully, Jacksonville’s bankruptcy lawyers can generate enough momentum to implement our own mortgage modification magic on Florida’s First Coast.

Although for-profit colleges, which typically serve low-income students, enroll only about 10 percent of the nation’s undergraduates, they are responsible for nearly half of all defaults.  Sound familiar?  Think subprime lending housing crisis.

There is a proven formula in this country of profiteering at the expense of the poor, and these for-profit colleges are no exception.  These businesses get 80% of their revenue from student loans and have dropout rates nearly as high.  Senator Tom Harkin (D-IA), Chairman of the Senate Health Education Labor and Pensions Committee, recently stated:

For any student, loan default is a heartbreaking situation with long term consequences. . .  Today’s data should give us further concerns about whether some for-profit colleges are doing enough to help their students succeed.  The cohort default rate at for-profit schools rose much faster than at public and nonprofit private colleges in 2009, and for-profit college students are more than twice as likely to default on their loans as public college students, and three times more likely than private nonprofit college students.  Coupled with sky-high tuition costs, alarming drop-out rates, poor job placement services and the many other bad practices that we’ve uncovered in the HELP Committee’s investigation, it is clear that the for-profit education industry needs greater oversight in order to ensure that students and taxpayers are getting a good value for their investment in these schools.

Okay, so they’ve identified the problem, but what’s the solution?  Congressman Hansen Clarke (D-Mich.), has the right idea – make these for-profit college student loans dischargeable in bankruptcy.  Currently, student loans are a rare exception to the bankruptcy discharge, meaning that only in extreme circumstances will a debtor be able to escape that financial obligation.

While it might seem fair to make student loans “bankruptcy-proof,” the result of this exception has been an erosion of our stature in the educated world.  The United States is no longer viewed as the pinnacle of higher education.

A couple years ago, I discussed the inverse relationship between the rising cost of education in this country versus the quality of education.  According to The National Center for Public Policy and Higher Education in its 2008 “Measuring Up” Report, the cost of obtaining a college degree historically grows at a pace 4 times faster than the rate of inflation. By comparison, medical costs, which are routinely described as “soaring”, grow half as fast as education costs.  At the same time, the U.S. inexplicably ranks a dismal 15th in the percentage of population with a higher education degree.

There has been a flood of investment dollars into the student loan industry over the last two decades as a direct result of excepting student loans from discharge. The investor’s capital is more secure, as there is a greater probability of eventual repayment.

The desire to maximize the student loan market has frequently lead to abuse and fraud by lenders and educators.  Remember back in 2007 when Sallie Mae, the nation’s largest student loan lender, was fined $2M for creating a student loan scheme involving 19 universities?

And now, with the news about astronomically high default rates in the “for-profit college” market, coupled with their sky-high tuition costs, alarming drop-out rates, poor job placement services and the many other bad practices, the time has come to discourage funding these enterprises by removing the bankruptcy discharge exception for these types of student loans.

If student loans used to fund for-profit colleges become dischargeable, the money investors put into that industry would dry up, which is a good thing.

 If the mortgage industry has its way, the passage of a new bill floating around Tallahassee will ensure that Floridians will be displaced from their homes without legal representation or due process.  In typical Orwellian style, this bill is entitled the Fair Foreclosure Act – it’s anything but . . .

Florida often makes the national news when it comes to foreclosures, and it’s never positive.  According to a recent 24/7 Wall Street study, three of the ten housing markets most likely to collapse in 2012 are in Florida.  Naples, Miami and Ft. Lauderdale all make the top 10, and the rest of the Sunshine State isn’t far behind.

In its preamble, the FFA actually says, “Once suit has been filed, the public interest is served by moving foreclosure cases to final resolution expeditiously in order to get real property back into the stream of commerce.”  Of course, it is this glut of foreclosed homes flooding the real estate market that has all but ensured its collapse.  REO properties typically sell far below market value, and when so many REOs exist, it drives the overall market to new lows.  The vicious cycle is complete as more homeowners suffer increased losses from a down market.

So the bill’s stated purpose is flawed right from the outset, but getting our homes back into the “stream of commerce” really isn’t the purpose of the Fair Foreclosure Act.  Its sole design is to take Floridians’ property without due process or equal protection under the law.

Florida has a proud history of whoring for the mortgage industry, and while states across the country are fighting to restore honor and integrity to our judicial system, Florida has taken a different approach.  In Florida, the Supreme Court and our elected state officials are doing what they can to ensure their benefactors . . . the banks . . . get what they want.

Remember Foreclosure Court?   It unconstitutionally employed retired senior judges to act as mortgage mercenaries – ramrodding defective foreclosures through the judicial system despite national ridicule.  I am actually shocked it fell victim to Governor Scott’s massive spending cuts.  That must have been a mistake.

Then, with the addition of Pam Bondi as our new Attorney General, the mortgage industry took firm control of our prosecutors as well.  Ms. Bondi all but killed any investigation into foreclosure fraud, and fired two assistant prosecutors who gained national attention for piecing together a massive conspiracy by the mortgage industry to defraud our state court judges in foreclosure cases.

BUT, these acts of treason pale in comparison to the Fair Foreclosure Act, which proposes to do the following:

• Where the amount of principal and interest equals or exceeds 120% of the just value of the home, it will allow the mortgage company to foreclose without going through the judicial process.  That means no foreclosure complaint, no defense, no due process, no justice.  It will be as easy to take your home as it is to repo a car.
• It will repeal Florida Statutes § 57.105, which awards attorney fees to homeowners who successfully defeat mortgage companies in court.  At the same time, it assesses attorney fees against a homeowner and his lawyer (in equal parts) if the mortgage company prevails.  The design here is to stop consumer lawyers from taking any more foreclosure cases by making it impossible to make money and even personally expose the lawyer to penalties.  Consumer lawyers will have no upside potential and all downside risk.
• It will eliminate the right of a homeowner to set aside a wrongful foreclosure, even if the plaintiff committed fraud in the process of taking the home.  The ONLY recourse would be awarding money damages.  This language is to appease the title companies by retroactively ratifying all that foreclosure fraud that has taken place over the last decade.  Once the bank takes your home, you’ll never get it back, no matter what.

The typical knee-jerk response is always that these homeowners are people who “got in over their head.”  But such banking propaganda ignores the fact that 1 in 2 houses in Florida have no equity.  So, according to bankers, half of Floridians are irresponsible homebuyers. Wall Street and greedy bankers created this horrible mess, but they want no part of shared sacrifice in cleaning it up.  Middle class America didn’t cause this problem, and Middle class America shouldn’t pay for it.

We Floridians suffer from foreclosure fatigue, and the FFA will send us all over the edge.

Cash or Keys?

Not if you hire an experienced bankruptcy lawyer.

As I previously reported, we have a problem in the state of Florida with a few rogue bankruptcy trustees using unsavory tactics to shakedown Chapter 7 debtors.

Specifically, in the State of Florida, a debtor can choose between his homestead exemption and his wildcard exemption.  The homestead exemption grants the debtor protection of all his home equity while the wildcard exemption grants $4,000 per debtor that can be applied to any property.

Since, according to CoreLogic, half of all Florida homes have zero or negative equity, the home equity exemption is worthless.  Therefore, debtors are opting to select the wildcard exemption to protect more of their personal property from the bankruptcy estate.

The trustee’s job is to maximize the bankruptcy estate for the benefit of creditors, and he’s none too happy about the size of the estate being shrunk by up to $8,000 in a joint case where debtors elect the wildcard exemption.  While the mainstream trustees have accepted this new reality, the rogue trustees have deployed guerrilla-like tactics against Florida debtors.

Specifically, the rogue bankruptcy trustee demands that the debtor “turn over the keys” to their home if they fail to claim the homestead exemption.  Now, we all know the trustee doesn’t want the house or the keys.  He is merely attempting to extort money from a frightened debtor with visions of being booted to the curb.

In a recent Jacksonville case, Jacksonville bankruptcy lawyer Ed Jackson demanded (in a motion) that the trustee “administer or abandon” the house, and Judge Paul Glenn agreed.  He ordered the trustee to present a “bona fide contract to sell or otherwise administer” the debtor’s house within 60 days.

So, can the trustee get a real estate agent to agree to short sell an underwater house?  Sure, but no credible realtor would ever testify that the bankruptcy estate would get any money from the short sale.  Therefore, the house would be “inconsequential” to the estate and therefore NOT subject to administration. Checkmate!  Debtor wins.

If a bankruptcy trustee demands that you turn over the keys to your home because the house isn’t claimed as exempt, what should you do?

The issue is whether the house will generate money for the estate.  A house will only generate money if it can be sold at a net profit for the estate or if it is rented for an amount greater than the mortgage payment and maintenance costs (that means homeowners association dues, taxes, insurance, etc.).

Therefore, the first thing you do is file a Motion to Compel Trustee to Abandon or Administer Property.  Second, set the trustee’s deposition, and ask him to explain his plan for generating money for the bankruptcy estate.

Some trustees are ruthless, but they are all smart.  None of them want to look stupid at a deposition, and the rogue trustee knows a decent lawyer will box him in a corner.  Rather than lose some teeth in a street fight, the trustee will back down.

If your bankruptcy lawyer won’t go to bat for you, it’s time to start looking for new representation.

Technically, you can file a bankruptcy the same day you meet with a lawyer.  However, this is advisable only under the most extreme circumstances.  Under normal conditions, you can expect the process to take a couple of weeks from the time all of your paperwork is returned to your lawyer’s office.

If you need to file a bankruptcy as quickly as possible to, for instance, stop a wage garnishment, your attorney can file a “skeleton petition” which consists of only two pages.  This is enough to trigger the automatic stay, protecting you from all manner of debt collection.  The only prerequisite is that you must complete an approved credit counseling class as late as the same date as the filing.

If you must file a skeleton petition, the court will allow you two weeks to file the rest of your paperwork – including Schedules A through J, Statement of Financial Affairs, Statement of Intentions (Chapter 7) and a Plan of Reorganization (Chapter 13).  Often, two weeks is not enough time for you and your lawyer to get all of the paperwork filed.  Not to worry, though.  Your lawyer can file a request with the bankruptcy judge to allow you additional time (7 – 10 days) to get the rest of your paperwork filed.

Generally speaking, lawyers are a cautious lot, and we are never too keen on filing emergency petitions because we like to thoroughly analyze all of our clients’ financial data, including assets and liabilities, before we file a new bankruptcy case.  Ideally, a debtor with some time to spare can benefit from some pre-bankruptcy planning.

For instance, in the State of Florida, a head of household can protect up to six month of his or her wages in a “wage account.”  So, let’s say Joe needs to file a Chapter 7 liquidation bankruptcy, but he has $30,000 in the bank from a recent inheritance.  If Joe is not in a hurry to file, he can open a wage account and have all his wages directly deposited into that new account while living off of the $30,000 of non-exempt funds.  If he nets $5,000 per month, in six months he will have $30,000 of exempt wages in that account.  He could file a bankruptcy, and that money would be untouchable by the trustee or the creditors.

There are many legal, strategic maneuvers a qualified lawyer can suggest for your situation, but they often require some time to implement.  However, circumstances don’t always allow much time, and you might be better off filing immediately.

The moral of the story is that you should meet with a bankruptcy lawyer at the first sign of serious financial trouble.

Now more than ever, Florida bankruptcy debtors need court protection from some money-grubbing Chapter 7 trustees.

As previously reported on Bankruptcy Law Network, the Florida legislature approved a $4,000 wildcard exemption for those debtors not claiming the benefit of a homestead exemption.  At the time it was passed in 2007, bankruptcy experts believed it would be a narrowly used exemption by non-homeowners, but with the collapse of Florida’s real estate market, debtors abandoning their homes in bankruptcy use the Wildcard exemption to protect more of their personal property.

Since bankruptcy trustees get to keep 25% of whatever they collect for the estate as their fee, the law change has meant that they miss out on $1,000 in fees for an individual filer and $2,000 in fees for joint filers whenever the wildcard is used.

Predictably, most bankruptcy trustees have accepted this new exemption without much complaint, but some of them can’t let go of the gravy train.  They have developed cockamamie legal theories in an effort to circumvent the wildcard exemption.

The favorite tactic of a rogue bankruptcy trustee is to demand that the debtor immediately vacate his abandoned home or pays him rent for its use.  Fortunately, federal and state court judges aren’t having any part of the shakedown.

As previously reported here, the Supreme Court of Florida, in Osborne v. Dumoulin, ruled that a bankruptcy debtor doesn’t need to do anything special to “not claim or receive the benefit of the homestead exemption.” Chief Justice Canady explained that a homeowner can just choose the $4000 wildcard exemption if it provides a greater protection than the homestead exemption would.  Actual abandonment of the homestead is not necessary.

In Osborne, Justice Canady concludes, “Accordingly, . . . where a debtor in bankruptcy elects not to claim the article X, section 4, homestead exemption and the trustee’s administration of the bankruptcy estate is not otherwise obstructed by the existence of the homestead exemption, the debtor . . . may claim the [wildcard] exemption of $4000.  [Emphasis added.]

But hard-headed trustees have interpreted this sentence to (somehow) mean that the debtor’s continued occupation of the house obstructs the trustee’s administration of the house.  Please don’t email me and ask that I explain this because it’s just stupid.  I cannot fathom this logic.  Fortunately, neither can judges.

Following the lead of Florida’s highest state court, The Federal District Court for the Middle District of Florida has recently expanded the Osborne decision in the case of Iuliano v. Brook, 2011 U.S. Dist. LEXIS 47156 (M.D. Fla. Apr. 29, 2011) to specifically prevent a trustee from forcing a debtor to vacate his home just because he claims the wildcard exemption.

In the Iuliano case, the Trustee argued that a debtor who does do not claim his homestead as exempt in his bankruptcy petition, but opposes delivering exclusive possession to the Trustee for administration, is “otherwise” impeding the Trustee’s administration of the property. United States District Judge James Moody disagreed, stating, “But this contention assumes a trustee cannot, for all practicable purposes, sell an occupied home.  And the argument is refuted by existing bankruptcy law and the explanation by the Florida Supreme Court of its Osborne decision.”

Judge Moody also pointed out the obvious.  If a debtor’s house has negative equity, it is of no benefit to the bankruptcy trustee or the creditors:

11 U.S.C. § 542(a) requires a debtor to deliver to a trustee the property of the estate, “unless such property is of inconsequential value or benefit to the estate.” Where the estate has no equity in an asset, so that unsecured creditors are unlikely to benefit from a sale of the property, it is generally recognized that abandonment is the appropriate method of dealing with the asset, not liquidation.  [Cite omitted.]  Where there is no equity, it makes no sense for a Bankruptcy Court to order the surrender of possession of property to the Trustee.

It is obvious that the ONLY reason a trustee would want to threaten a debtor with eviction is to force the debtor to abandon the wildcard exemption, thereby extorting $4,000 – $8,000 of money from his pockets.  It is a brutish scare tactic that preys on an already stressed out debtor, and it is good to see that judges are putting an end to the practice.