Cathy Moran wrote an excellent article describing why the the Means Test makes little sense and I saw from reading her article that she is just as frustrated as I am with this pointless test. As a bankruptcy lawyer, it is my job to help my clients get as fair a treatment as possible. Luckily, much of the “old” bankruptcy laws remains buried beneath the veil of the new requirements of the bankruptcy law, and bankruptcy lawyers are trying hard to lift the veil so that clients who can’t pay their debts are not turned away from help in bankruptcy court.

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This third article follows Cancel That Mortgage! and Cancel That Mortgage:  The Grounds. We’ve seen that a mortgage can be cancelled but the unpaid principal of the loan, the total amount borrowed less all payments including closing costs, must be returned (tendered) to the lender.

Bankruptcy courts split on whether this obligation to return the money is a condition before a mortgage can be cancelled, or whether it is a regular, unsecured debt like a credit card which gets discharged.  In Chapter 13, a regular unsecured debt get paid a dividend, which can be quite small.

Massachusetts has a strong line of cases allowing cancellation of a mortgage without requiring a full return of all the unpaid borrowed money.  This was recently affirmed by U.S. Bankruptcy Judge William C. Hillman in Kaaskelainen, et ux v. Wells Fargo Bank, N.A. et al (In re Jaaskelainen).  His ruling added that a perfect “chain of custody” for the closing documents is not necessary, since a “closing booklet is not a murder weapon or controlled substance whith requires a perfect chain of custody to prove guilt.”  A reasonable account for the closing papers is all that is required.

In declaring that the closing papers were defective because the married borrowers did not each receive two copies of the required notice of right to cancel, Judge Hillman went on to rule that the bona fide (good faith) error defense was not available where the lender’s compliance procedures unreasonably relied on the same closing agent to present the proper papers, and then to verify that the proper papers were presented.  Verification must be peformed by an independent party, or the error is not bona fide.

Mortgages can be cancelled in a process called rescission. Here’s an overview. Grounds for exercising this right given borrowers by Congress are found in problems with the mortgage closing documents for a residential second mortgage or refinanced mortgage.

Problems include the absence of Truth In Lending Disclosures, such as the Annual Percentage Rate (APR) for interest and the amounts and schedule of payments. The absence of “monthly” in the payment schedule has been held to be a defect allowing rescission. The APR might not be calculated correctly, or the Truth In Lending Disclosure form might never have been given at all.

Another problem can be a failure to give two separate cancellation notices to each borrower. For example, a married couple should get a total of four cancellation notices. Here’s an earlier discussion of this.

A third problem can be the use of incomplete cancellation notices. Read the rest »

Borrowers have three days to cancel a mortgage after signing the papers.  That three days is extended to three years (four years in Massachusetts), if the papers have certain problems.  The extension can even be forever, meaning that it can be used as a defense called recoupment, to oppose a foreclosure.

Cancellation is also called rescission.  One can rescind the mortgage if the designated problems exist.  But, a notable but, one must return the principal amount borrowed less all payments made.  This is called “tender.”  The credit for payments made includes payments for interest, attorney fees, broker fees, and closing costs.  The remaining amount to be returned can still be a lot, unless you’ve made payments for quite some time.

Tender must be made after the mortgage is rescinded, although mortgage lenders usually require that it be at the same time or they go to court for a special order.  The money to tender can come from a refinancing, but one needs equity to do a refinancing.

Next, I’ll discuss some of the problems which allow cancellation, or rescission, and how bankruptcy can help with the obligation to tender, or return, the unpaid principal amount.

The government’s accountability office reports a 50% increase in the cost of bankruptcy. A large part of the increased expense can be traced to the means test, that supposedly objective measure of whether an individual has the ability to repay his creditors some of the debt he owes.

On this site, Kurt O’Keefe looked at the hollow promise that reducing bankruptcies would reduce the cost of credit for those who avoided bankruptcy. We were told by the banking lobby that consumers who sought bankruptcy relief increased the cost of credit to each American family by $400. We’re two and a half years into “reform” and there is no sign of the cost of credit falling.

A bit of critical thinking would have told you that it is not bankruptcy that causes losses to lenders, it’s insolvent borrowers. Read the rest »

Massachusetts Bankruptcy Judge Rosenthal in the recent case in re Zmijewski, 2008 WL 2705508 (Bankr.D.Mass.2008), added a decision to the many dealing with trusts and homesteads in Massachusetts. The Chapter 7 debtors, before their case was filed, conveyed real estate to a self-settled trust. The debtors were sole trustees and beneficiaries. However, they only conveyed a remainder interest to the trust and retained life estates in their own names. They then sought to exempt all equity in the real estate with a homestead. The trustee objected and judge sustained with the objection.

The judge held that even if there were no trust involved, the debtors could not exempt two estates (the life estate being one and the remainder interest being the other) with a homestead. No individual can claim more than one homestead. Moreover, since the remainder interest was in trust, the debtors did not own real estate with respect to the remainder interest–they owned personal property. The debtors relied on the recent cases allowing debtors to exempt real estate held in trust. However, these cases relied on the doctrine of merger–an equitable doctrine that can impute ownership of trust property to a sole trustee and beneficiary. The judge stated that this was not argued by the parties.

Bankruptcy laws were massively changed effective October 17, 2005.

One of the selling points, was that too many people were filing, and this cost the rest of us $400 per year, because our cost of borrowing was higher to cover the losses from all those deadbeats filing Chapter 7.

Well, the credit card company losses were decreased, fewer people filing, fewer credit card balances discharged in bankruptcy.

Did you get your $400 check?

An academic study of the effects of the new law concludes the cost of credit to consumers actually increased.

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No!  Objections to claims do not need to be served in the same manner under Bankruptcy Rule 7004 as Adversary Proceedings.  This is because even though an Objection to Claim is a Contested Matter generally covered by Bankruptcy Rule 9014, the claims objection process is further governed by Bankruptcy Rule 3007. Read the rest »

Jacksonville bankruptcy attorney Robert Wilbert is accustomed to giving away his legal expertise as a staff attorney for Jacksonville Area Legal Aid, but the free service he provides thousands of his colleagues is just as priceless.

Since the enactment of The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in late 2005, practicing consumer bankruptcy law has become a very complicated task.  The amended code is so poorly written that interpretation of its many provisions has created an avalanche of court decisions which must be read, digested and integrated into a lawyer’s practice.  Any bankruptcy lawyer ignoring the directives of bankruptcy judges, even from courts in other parts of the country, miss opportunities to better serve their clients.

However, the reality is that attorneys are always pressed for time, and consumer bankruptcy lawyers are especially busy because of the weak economy and the tidal wave of foreclosures.  Fortunately, the consumer debtor bankruptcy bar has an invaluable resource to help us all stay on top of the latest court rulings.

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So your attorney objected to a claim and got it disallowed in your Chapter 13 case.  A year later, the creditor decides to move the court to reconsider the claim.  Can they do this? Read the rest »