Homestead Proceeds in Bankruptcy

California's tiered homestead exemption protects a debtor's dwelling to the extent of $75,000, $100,000, or $175,000, depending upon the debtor's status, protects a like amount of proceeds of an execution sale of the homestead for six months following sale, and protects a dwelling acquired with the proceeds within the six-month period. Cal. Code Civ. Pro. §§ 704.710 – 704.730. The short six-month window seriously undermines Chapter 7 relief to a California debtor who would be willing to sacrifice non-exempt equity in a dwelling, such as a surviving spouse, recently widowed, who is burdened with unmanageable unsecured debt and can no longer afford mortgage payments.

In the Ninth Circuit, following a Chapter 7 trustee's sale of a dwelling, the debtor's right to retain the exempt proceeds evaporates, and the right to the proceeds reverts to the trustee, if the debtor fails to reinvest the proceeds in a new dwelling within six months after receiving proceeds of the sale. Wolfe v. Jacobson (In re Jacobson) (9th Cir. 2012). The six-month window assumes a debtor's ability to purchase a replacement dwelling within the specified period. In many locations, including coastal California's urban areas, the amount of protected proceeds will be sufficient, at best, for a down payment. Unless the debtor moves to a less expensive part of the state or country, financing would be essential. But Freddie Mac and Fannie Mae will not purchase mortgage secured loans made within four years of a Chapter 7 discharge (two years with extenuating circumstances) and the FHA will not insure such loans made within two years of a Chapter 7 discharge unless the debtor qualifies under the FHA's back to work program. Some specialized lending programs targeting specific categories of debtors (e.g. veterans) may be more forgiving, but otherwise it is difficult to imagine a lender willing to finance purchase of a dwelling by a recent Chapter 7 debtor if the loan is neither insured nor salable in the secondary market.

Disrupting consumer bankruptcy law practice

     Imagine a conversation with Siri (or other digital assistant), circa 2040, that begins as follows:

        Mariana: Siri. I am wondering whether I should file bankruptcy. What do you think?

Siri: Have you considered meeting with a consumer bankruptcy lawyer to discuss that?

Mariana: I've already contacted a few, but all of them charge more than I can afford.

Siri: I understand. I've talked with many other people who say the same thing, and many people file bankruptcy without consulting a lawyer. So let me see if I can help you. Why are you thinking about bankruptcy?

Mariana: I can't pay my medical bills and I got a notice from a collection agency about garnishing my wages. My credit card debts keep growing because I can't even pay the monthly interest, and my student loan debt is still large.

Siri: I imagine that this is pretty stressful for you and I think it is a good idea to consider ways in which you might be able to deal with these problems.

Mariana: Thanks for understanding. And I am losing sleep over this and also having trouble concentrating at work. What do you suggest?

Siri: Let's start by creating some spreadsheets that show your income, your living expenses, your debts, and what you own. You will probably have to dig up some of this information and get back to me, but we can at least start now.

Mariana: O.K. I've got some time now. How do we do this?

Siri: Turn on your television monitor and I'll show you some spreadsheets that we can fill in.

Mariana: O.K. Done.

Siri: Good. I see you now. You do look quite upset.

Mariana: [Shakes her head agreeing with Siri].

Siri: Do you want to talk a little bit more about how this is affecting you before getting started?

Mariana: No. Let's get started now.

     Siri proceeds over the next couple of days to interview and counsel Mariana as would today's consumer bankruptcy lawyer (and staff). Siri gathers the necessary data and completes the spreadsheets. She helps Mariana understand and compare Chapter 7 and Chapter 13 as well as possible non-bankruptcy options (e.g. resisting wage garnishment and stopping unwanted contact from debt collectors). She provides Mariana with the required credit counseling.

     After a few days reflection, Mariana instructs Siri to prepare the relevant documents for a Chapter 7 bankruptcy. Siri does so, obtains digital copies of Mariana's pay stubs, obtains Mariana's digital signatures, draws filing fees from Mariana's PayPal account, and files the necessary documents with the bankruptcy court.

     Soon thereafter, Siri alerts Mariana to the first meeting of creditors. Mariana attends via FaceTime after practicing with Siri on answering questions that Siri anticipates from the United States Trustee. A few weeks later, Siri notifies Mariana of her discharge, evidence of which Siri will store for Mariana together with the spreadsheets, copies of the documents filed with the bankruptcy court, and a recording of all conversations between Siri and Mariana relating to resolution of her financial difficulties.

     Science fiction? I'm beginning to think not for too long.

Creative Avoidance of Potential FDCPA Liability

     On May 19, 2015, Clark County Collection Services, LLC ("CCCS"), a Nevada debt collector, obtained a default judgment in Nevada Justice Court against Patricia Arellano on an assigned medical claim of $371.89. Two months later, on July 27, 2015, Arellano filed a class action in federal district court in Nevada, against CCCS and its lawyers, alleging FDCPA violations associated with the state debt collection action.

     A week later, on August 4, 2015, CCCS and its lawyers responded with some creative lawyering. CCCS obtained a writ of execution from the Nevada Justice Court. The writ, stating an amount owing of about $825 (including fees, costs, and interest added to the principal amount of the judgment), commanded the sheriff to levy on the Arellano FDCPA cause of action pending in federal district court. Because Nevada law permits execution on a judgment debtor's pending cause of action against another, the sheriff levied the writ, posted notice of sale once each week, for three consecutive weeks, in the Nevada Legal News, and thereafter held a sale of the cause of action on November 19, 2015. CCCS, likely the only bidder at the sale, purchased the cause of action with a credit bid $250.

     On January 21, 2016, CCCS filed a motion to dismiss the federal district court action (or in the alternative for summary judgment) arguing, among other things, that by virtue of the execution sale it now owned the FDCPA claim against itself and that Arellano therefore lacked standing. The district court agreed and entered an order dismissing the action. Ms. Arellano has appealed to the Ninth Circuit and the case is pending. Her opening brief (Plaintiff-Appellant's Opening Brief, Arellano v. Clark County Collection Services, LLC, No. 16-15467 (9th Cir. July 29, 2016), ECF No. 9), argues that federal law preempts and therefore precludes this use of the Nevada enforcement procedure by a debt collector because, so used, the procedure undermines the deterrent and remedial purposes of the FDCPA. The brief also argues that an FDCPA claim is akin to a tort claim and that use of the Nevada enforcement procedure to purchase the claim amounts to the assignment of a tort claim that is prohibited by common law.