407 posts categorized "Bankruptcy Generally"

Anna Nicole Smith May Be More Than Just the Only Loser on This One

posted by Bob Lawless

Vickie Lynn Marshall, as she is known to bankruptcy mavens, or Anna Nicole Smith, as she is known to normal people, lost today in her second round before the Supreme Court. In his last post with us, John Pottow provided a good summary of the issues, and guest blogger Troy McKenzie also had offered some thoughts about what the case might mean for some other areas of bankruptcy law (here and here). Now that the opinion is out, I would describe it as scary for the daily workings of the bankruptcy system.

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A New Study on Medically Related Bankruptcies

posted by Bob Lawless

Thanks to our friends over at WSJ's Bankruptcy Beat, a new study caught my eye on the issue of medical bankruptcies. A new study appearing in the Journal of Clinical Oncology documents an increased risk of bankruptcy with certain types of cancers. The full abstract is available.

The study is principally directed at understanding what contributes to bankruptcy risk as between different types of cancers. But, if we can use cancer as an indicator of serious medical problems, the numbers can be used to draw some comparisons between medical problems and general bankruptcy risk. The conclusions provide some support for both sides of the debate about whether medical problems lead to an increased risk of bankruptcy.

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Recommended Reading

posted by Stephen Lubben

As I await the arrival of this semester's exams, and all the fun that those will entail, I'm getting caught up on my reading. The best of the bunch thus far is Emily Kaden's history of the Pitkin Affair, which appears at 84 Am. Bankr. L.J. 483 (2010), and online here. Having read a lot of bankruptcy history, I was generally familiar with the plot, but Emily presents the definitive history of the entire episode, which is so often referenced, but not explained, in latter histories of English and American bankruptcy.

A Deeper Dive into Racial Disparities in Chapter Choice and Women in Bankruptcy

posted by Geoff Smith

Thanks again to Bob Lawless for his excellent post this morning highlighting the findings from our latest report, “Bridging the Gap II: Examining Trends and Patterns of Personal Bankruptcy in Cook County's Communities of Color." The report found evidence of racial disparities in chapter choice in Cook County, IL, as well as a disproportionately high concentration of filings among women living in communities of color. If you don’t have time to read the whole thing, check out our press release and policy brief.

If this report raised any burning questions, feel free to ask them on a conference call we will be hosting on Thursday at 11am CT (follow the link to register and get the call-in information).  If you’re shy, you can also send questions via Facebook or Twitter, and I’ll answer them on the call. I will be joined by Megan Cottrell of the Chicago Reporter.  The Reporter is an investigative magazine that published a companion piece to our report asking why these racial disparities in chapter choice might exist. I will also be joined by Woodstock Institute’s Policy and Communications Associate Katie Buitrago who will close out the call by telling the story of one bankruptcy filer, Roxie King, a grandmother of 20 from an African-American neighborhood in Chicago who went through Chapter 13 bankruptcy after being laid off from her job as an echocardiogram technician. Roxie tells her story in the video below:

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A Conversation with Trailblazing Women

posted by Lois R. Lupica

Yesterday, I attended the International Women's Insolvency and Restructuring Confederal (IWIRC) Annual Spring Program. The featured event was entitlted, "A Conversation with Trailblazing Women in the Insolvency Field." Moderated by the Hon. Marjorie Rendell of the 3rd Cir. Court of Appeals, the panel's participants incuded Norma Corio of JPMorgan Chase, Marcia Goldstein of Weil Gotshal & Manges, Hon. Barbara Houser, Chief Bankruptcy Judge, N.D. Texas, Hon. Mary Walrath, Bankruptcy Judge, District of Delaware, and Bettina Whyte of Alvarez and Marsal. The program opened with a parable. A man cuts himself shaving in the shower. He wonders out loud what is wrong with the razor. A woman cuts herself shaving in the shower. She wonders out loud what she did wrong. 

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Trouble, Scope, Apostrophes, and State Bankruptcy

posted by Jonathan Lipson

When Bob Lawless introduced me a couple of weeks ago, he promised that I would stir up trouble.  If responses to my post on amending the Bankruptcy Code to permit states to file are any indication, I have kept Bob's promise.

While no one seemed especially interested in the merits--does Wisconsin's budget fight show that amending the Bankruptcy Code is unnecessary?--the post nevertheless brought out the mob.

Respondents attacked me and each other (sometimes pretty crudely) for, among other things:

  • Writing about something too "political" for Credit Slips (yes, well, amending the Bankruptcy Code is political, as are state budgets); 
  • Allegedly having a conflict of interest for writing about this at all (not quite:   I am not a member of a union, which is what the fight here is about); and
  • Failing to use apostrophes correctly (sorry, but for some reason the  blogging response function doesn't always pick up apostrophes or quotation marks).

While there were plenty of personal attacks,  no one really responded to the basic observation in the original post:  Why amend the Bankruptcy Code if states have the political will and ability to get their debt under control on their own?  

My view is that negotiated debt restructurings usually preserve more value than other ways of dealing with distress.  This, of course, is a principle underlying much of the Bankruptcy Code (see, e.g., chapter 11).  It would likely be imputed to a "chapter 8" for state bankruptcies--if enacted--as well.

In Wisconsin, Governor Walker has said he won't negotiate with the unions.  But all that tells me is that he has more power than a new chapter 8 would likely give him.  He doesn't need state bankruptcy.

While I am suspicious of Governor Walker's claim that Wisconsin's fiscal "crisis" warrants severe reductions in public employees' power to bargain collectively, he was duly elected governor in a state with Republican majorities in both houses.  I have little doubt that his proposals, unlike Newt Gingrich's on state-bankruptcy, will eventually become law.

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How to Bankrupt a State

posted by Jonathan Lipson

Clearly, Scott Walker, Wisconsin’s newly-elected Republican governor, did not get Newt Gingrich’s memo:  Walker has figured out how to bankrupt a state without any need to amend the Bankruptcy Code.

As discussed in my post last week, a curiosity of Republican proposals to amend the Bankruptcy Code to permit states to declare bankruptcy is that it probably won’t happen.  Even if a Democratic Senate and President approved a new "chapter 8" of the Bankruptcy Code, the Democratic governors of the most profligate debtor-states—California and Illinois—probably wouldn’t use it.

Walker has shown another reason a state bankruptcy amendment won’t become law:  It isn’t necessary. 

In just a few short months, Walker has allegedly given away hundreds of millions of dollars to wealthy donors, thereby driving up the state's deficit, creating a fiscal "crisis" that some claim didn't previously exist.  He cancelled the federally subsidized high-speed rail proposal, apparently costing the state over $800 million in federal funds, a significant number of jobs, and presumably some contract damages.  And, most important, he has decided to pay for this by unilaterally cutting middle-class wages for public employees, and eliminating their right to bargain collectively. 

Eliminating middle class jobs and breaking unions has certainly been the goal of some bankruptcies.  But if, as Walker has shown us, states can do that without bankruptcy, why bother to amend the statute? 

Maybe Newt should talk to Scott.

From the Sixth Circuit with Love (for Creditors)

posted by Bob Lawless

Last Friday, the U.S. Court of Appeals for the Sixth Circuit released an opinion in a case called Carroll v. Baud. The decision, which generally ended badly for the consumer bankruptcy filers involved in the case, involved technical interpretive issues caused by the drafting mess that was the 2005 bankruptcy law. What caught my eye were not the holdings themselves, but the way the court got there.

After an extensive analysis finding that the plain language of the statute could support a result either for the debtor or the creditor, the court came up with its own statutory tie-breaker: in doubtful cases, rule for the creditor. The Sixth Circuit explained, "Where each competing interpretation of a Code provision amended by BAPCPA is consistent with the plain language of the statute, we must, as the Supreme Court did in Lanning and Ransom, apply the interpretation that has the best chance of fulfilling BAPCPA’s purpose of maximizing creditor recoveries." This statement is hardly a passing fancy of the court. It repeats the point in several places, including an extensive analysis of the idea in several pages in the middle of the opinion.

The court puts its thumb on the scale for haves instead of have-notes. Its reasoning is simply outrageous, not least of all because the Supreme Court cases it cited do not support its result.

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The Upside of High Fees

posted by Troy McKenzie

Some of the comments to Stephen Lubben's post on "overhead" raised the longstanding complaint about high fee awards in New York and Delaware Chapter 11 cases. We all know the academic and political condemnations of Chapter 11 as merely a feast for lawyers.

It's important to remember, though, that the possibility of higher attorney's fees was considered a feature, not a bug, when the Code was enacted in 1978. Or, more precisely, the liberalization of fee awards was intended to attract lawyers (the elite bar) who had largely shunned bankruptcy practice after the New Deal-era bankruptcy reforms. There's no doubt that the overall quality of representation in business bankruptcy cases has increased markedly since 1978, along with the cost of that representation. That's why I don't understand those critics whose objections really seem to be about the presence of large, sophisticated (and expensive) national law firms in Chapter 11 cases.  

Of course, high fee awards come out of the pockets of unsecured creditors, who don't have much say in hiring the attorneys. The system needs an outsider monitor to take account of that inherent principal-agent problem, and that's where the US Trustee plays a crucial role. But anyone who has practiced in New York knows that the US Trustee's Office has not always been predictable in its fee objections. The overhead argument is an example.


Anna Nicole Smith and Mass Torts in Bankruptcy

posted by Troy McKenzie

Stern v. Marshall presents another issue that deserves attention. In addition to the constitutional arguments, the respondent (the creditor) raised a statutory objection to the bankruptcy court's ability to hear and decide the debtor's counterclaim as a core proceeding. The judicial code (28 U.S.C. § 157(b)(2) and (b)(5)) limits the power of bankruptcy courts to adjudicate "personal injury tort and wrongful death claims" as core proceedings--provisions that come into play in mass tort bankruptcy cases.

I'd like to focus on why we have such a genuinely odd qualification of the jurisdiction of the bankruptcy courts.

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Anna Nicole Smith, Equity, and Article III

posted by Troy McKenzie

As John Pottow previewed in this post, the Supreme Court heard oral argument last week in Stern v. Marshall, better known as "The Anna Nicole Smith Case II." Justice Sotomayor put the first question to Kent Richland, lawyer for Vickie Lynn Marshall (aka Anna Nicole Smith), and it was a doozy:

JUSTICE SOTOMAYOR: What’s the authority at all for a bankruptcy court to adjudicate proof[s] of claims, without violating Article III? I don’t think we have ever had a case that’s actually said that.

MR. RICHLAND: This Court has never approached that issue directly. . . .

Despite that opening, by the end of the argument the Court seemed sufficiently receptive to Anna Nicole Smith's side (albeit with serious skepticism by the Chief Justice and Justice Scalia) that I wouldn't be surprised if they reverse the Ninth Circuit. What is very surprising, though, is that the questions presented in this case are still undecided in 2011. Northern Pipeline is a 1982 case, and Congress created the current system of bankruptcy courts in 1984. What's taken the Supreme Court so long?

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Republicans back Bankruptcy Expansion

posted by Alan White

For states.  Republicans including Newt Gingrich and Texas Senator John Cornyn are advocating amendments to the Bankruptcy Code to permit states to file for relief from their debts.  Last week's New York Times front-page article gives added heft to this idea, as did Penn law prof David Skeel's article in the Weekly Standard.

Obviously, these Republicans' agenda is to shift credit crisis losses from state taxpayers to public sector union employees, consistent with their efforts to shift auto industry losses to workers in that industry.  Bankruptcy reform for homeowners is anathema, because it shifts losses from middle class people to banks and institutional investors.  It is unclear how bankruptcy for the states could be used to stiff union pension funds without also wreaking havoc with the bond market, and bond investors would normally be a favored Republican constituency.  For this reason, other conservatives are not so crazy about this idea.  Presumably, any legislative proposals for Chapter 9.5 would carefully craft priorities for favored constituencies.

One More Time on Ransom

posted by Bob Lawless

Yesterday, the Supreme Court decided Ransom v. FIA Card Services (née MBNA Bank). The issue was whether, to determine the amount of income available to pay creditors, a debtor could deduct hypothetical car payments on a car he already owned. That would seem to be result Congress directed in the 2005 bankruptcy amendments, but the Supreme Court disagreed. We already have blogged about the case a lot (here, here, here, and here).

The Court has spoken, and there is little point to repeating why I thought the case should come out differently. The Court's need to parse hopelessly muddled language is striking. Buce, writing at Underbelly, has written a fantastic post along this theme ("Justice Kagan's Torture Memo"). He makes an important point:

Rather, there seems to have developed a sense among the lower courts that what Congress intended to do was jam it to the debtor good and hard, and that if Congress get it right the first time, then we must help them. Bankruptcy lawyers have fashioned a new canon of statutory interpretation: if the statute seems to favor the creditor, apply the statute; if it seems to favor the debtor, assume it's a mistake and favor the creditor anyway.

Exactly. I agree with every single word Buce writes (with one exception), and I can't write as well as him. Go read the post.

The one tangential point where I disagree with Buce is that he should give Justice Thurgood Marshall more credit. Justice Marshall wrote some great bankruptcy opinions because his law practice often involved the problems of everyday persons, an experience that most every other Supreme Court justice lacks.

Technical Corrections to Bankruptcy Code

posted by Bob Lawless

On December 23, President Obama signed a bill that made technical corrections to the Bankruptcy Code. As the term "technical corrections" suggests, this is a topic of interest probably only to the bankruptcy geeks in the crowd. The bill was not intended to make any substantive changes but only to correct drafting mistakes from the 2005 changes to the bankruptcy law.

It only took five years and even the technical corrections are too few for a horribly drafted law. Maybe there is a nugget for the persons who have a more general interest in bankruptcy. In addition to being a huge policy mistake, the 2005 law created a lot of problems for lawyers and judges because of its poor drafting. As a service to our readers, here is a copy of the enrolled bill. The public law version is not available as of this writing.

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Pension Insurance for Public Employees?

posted by Adam Levitin

The New York Times' story about the insolvent pension plan of Pritchard, Alabama notes that while the Pension Benefit Guaranty Corporation (PBGC) partially insures private employers defined-benefit pension plans, it does not insure public employers' defined-benefit pension plans ("government plans" in ERISA-speak).  

This left me wondering why?

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US News & Unintended Consequences for Bankruptcy Judges (and the Law Clerks They Hire)

posted by Bob Lawless

A post over at Law School Transparency caught my eye (hat tip to Leiter's Law School Reports), and it should be catching the eyes of U.S. bankruptcy judges. Law School Transparency, started by law students, advocates for more transparency in the way law schools report employment data. This is undoubtedly a good thing.

The post describes correspondence with Bob Morse, the keeper of the U.S. News law school rankings. To the uninitiated, these rankings have a incredibly outsized influence on the legal academy and can influence how law schools make decisions about everything from career services to admitting part-time students. This is undoubtedly a bad thing.

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Google, Bankruptcy & Bieber

posted by Bob Lawless

One of the many wonderful things about university teaching is that you get to hang around lots of smart people who tell you lots of interesting things. One of my students, David Henken, pointed out to me a very interesting pattern that comes from Google Insights for Search. People use Google to search for the word "bankruptcy" much more often during the week than the weekend. Does this pattern tell us something about how people think about bankruptcy? Perhaps.

Compared to the weekly pattern for other search terms, "bankruptcy" seems to have its own rhythm. This includes a search I did for "Justin Bieber," perhaps the most useful Bieber-related search that has ever occurred. And, yes, my invocation of Justin Bieber is largely motivated by a shameless attempt to increase blog readership among girls aged 10-14, especially those living at Casa Lawless.

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BP Claims in Bankruptcy

posted by Bob Lawless

A few weeks ago, an Alabama attorney on the Bankr-L list noted more of his clients were showing up with claims against BP (née British Petroleum). It is hardly surprising that the same job disruptions, dislocations, and general economic losses recognized through a BP claim also are driving people to bankruptcy court. The irony, however, is that in a bankruptcy filing, a debtor's claim against BP is just another asset. Unless those claims are protected by bankruptcy law, they will go to pay credit card companies and banks rather than serving as insurance against the losses that have been incurred. It would be a good idea for Congress to act to clarify the status of BP claims in bankruptcy and to do so around existing principles of bankruptcy law.

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What Is the Government Interest in Bankruptcy Cases?

posted by Katie Porter

On Monday, the Supreme Court will hear arguments in Ransom v. MBNA, an appeal of a decision in a consumer bankruptcy case. The Bankruptcy Code requires chapter 13 debtors to commit all their "projected disposable income" to repaying their creditors. After 2005, for debtors whose income exceeds the median in their state, disposable income is determined by deducting certain expenses. In the Ransom case, the issue is whether a "debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards [of the IRS]” includes the cost of ownership for a vehicle that is not encumbered by a loan or lease.The statutory language is unclear, to put it mildly, and there are plausible readings of the statute that support either permitting or denying the expense.  So why is the U.S. government throwing its weight behind MBNA Bank and arguing that debtors should not be permitted to take the ownership deduction for vehicles that a debtor owns outright? What exactly is the government's interest in this case? Why are our taxpayer dollars at work here in briefing and arguing a dispute in which the adversarial aspect of bankruptcy (debtor and creditor litigating) seems to be fully functional?

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A Lot of Wisdom over at the NYT

posted by Bob Lawless

Tara Siegel Bernard has a post up over at the New York Times Bucks blog about economic indicators, outstanding credit, and bankruptcy filings. She quoted some guy named "Lawless" who really sounds like he knows what he is talking about--probably a good-looking guy too. Punch line -- less credit means fewer bankruptcies all other things being equal (which they rarely are).

The U.S. Trustee's Office Already Has Decided Ransom

posted by Bob Lawless

During this past week in Bankruptcy with Bob, otherwise known as my bankruptcy course, we covered the means test. As my students now know, the means test is the screen that the U.S. Congress put on chapter 7 back in 2005. If you're below the state median income for a household of your size, you can file chapter 7. If you're above median income, the means test starts with your gross income and takes a series of deductions based on IRS guidelines to determine your disposable income. If your disposable income meets certain thresholds, meaning you can afford to pay back unsecured creditors some part of what you owe, you must file chapter 13. There are exceptions and more details, but that description works as a general matter. The Executive Office of U.S. Trustee (EOUST) helps keep track of the numbers to plug into the test, but in one particular way, it has taken a legal position on a contested issue without making clear its position is contested.

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State-sanctioned Federal Bankruptcy

posted by Katie Porter

If Credit Slips had a category for "Beyond the Comfort Zone," I'd put this blog post here. But I'm curious about the pending California legislation, Assembly Bill 155, that would restrict municipal (Chapter 9) bankruptcy filings. The bill would require municipalities to obtain approval from the state-run California Debt and Investment Advisory Commission before filing bankruptcy. The political story is easy; this is the fall-out of the bankruptcy of Vallejo, CA last year. Among other concerns, unions whose members had their pay or benefits reduced want to restrict access of local governments to chapter 9. Cash-strapped cities, facing a double-whammy of lower taxes and higher claims on social services, feel differently.

Now my bankruptcy teacher was pretty decent but I never learned that the Bankruptcy Code gives states the power to limit their municipalities' ability to file a chapter 9 case. But it's right there in 11 USC 109(c)(2). (Of course, this means that I also didn't know that municipalities must be "insolvent" to file chapter 9, a requirement that is notably absent for debtors in other chapters.) Apparently, states take a variety of approaches to this--some prohibiting chapter 9, some remaining silent leaving things unclear, and some conditioning chapter 9 on some thing, as California's proposed legislation would do. I'm  struck by the remarkably different approach in chapter 9 than in chapter 11, where the doors are really wide open to bankruptcy relief. Are the public harms that different? The bankruptcy of a company, including the rewriting of its union contracts and the devaluation/cancellation of its stock, can have similar harms on communities. I'd be very grateful to Credit Slips readers who will share their thoughts about these issues; I have a feeling the future will bring more chapter 9 filings.

There Is a Jury Trial for that Proof of Claim

posted by Bob Lawless

Imagine the following. A debtor files bankruptcy and schedules a $10,000 bill owing to a credit card company. The credit card company files a proof of claim, saying the debt is $20,000. The debtor objects. OK, at that point, the dispute sounds like a pretty routine procedural matter requiring a hearing before the bankruptcy judge to resolve the disputed claim. Bankruptcy mavens would call it a "contested matter" under Federal Rule of Bankruptcy Procedure 9014.

Suppose the credit card company objects to this procedure and instead insists on a jury trial to resolve the disputed claim, arguing the Seventh Amendment requires a jury trial unless the parties waive it. Well, that's just crazy talk.

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Real Housewives of New Jersey Bankruptcy

posted by Adam Levitin

OK, I'm way, way late on this story, but I thought it was worth a few lines.  Teresa Guidice, one of the Real Housewives of New Jersey has filed a Chapter 7.  Here's the petition for all you financial voyuers.  It's a nice window on the noveau lifestyle, and reasonably comparable to the other Real Housewives' petition (the White House crashing Salahis').  

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Winning While Losing in the Supreme Court - Schwab v. Reilly

posted by Henry Sommer
A few weeks ago, Bob Lawless called the Supreme Court’s decision in Schwab v. Reilly  a non-event.  Some commenters expressed the view that it was a victory for trustees.  I have to disagree. I think it settled a very important issue that has been splitting courts and trustee practice for many years.  While technically a win for the trustee in the case, the opinion really represents a victory for debtors.

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Guns and Bankruptcy

posted by Adam Levitin

Mike Konczal at Rortybomb has an interesting post about the Protecting Gun Owners in Bankruptcy Act of 2010 (the Pro-GOB Act).  This legislation would make firearms exempt from creditors' claims in bankruptcy.  I'm still not sure if it is a joke or real legislation; I haven't been able to find the text of a proposed bill.  Even if one thinks this legislation is a good idea (which it isn't), it is all sizzle, no steak.  It would be inapplicable to almost all bankruptcy cases.  It would only affect Chapter 7 debtors who own firearms and live in 16 states.  

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Debt Settlement Firms--Fraudulent Transfers

posted by Adam Levitin

There's a nice piece about debt settlement companies in the NYTimes.  

The story left me wondering whether Ms. Robertson, who paid $4,000 to the debt settlement firm without getting any debt relief might have a fraudulent transfer claim against them.  I recognize that it is far from clear whether such a suit would succeed; there is a REV question and an insolvency question at the very least, and the trustee might not want to litigate over what is at most a few thousand dollars in most cases.  Yet especially for no-asset cases, the avoidance action might be the only real value available for creditors.  

Does anyone know of fraudulent transfer suits being filed against debt settlement firms?  Are trustees or creditors starting to inquire at 341 meetings whether the debtor has been making debt settlement payments?  I'm curious to here whether practitioners have started to account for pre-bankruptcy debt settlement attempts.  

Courts are Signaling, but is Congress Listening?

posted by Michelle Harner

As I previously mentioned, recent amendments to the U.S. Bankruptcy Code have been significant and driven in large part by special interest groups.  Yet, Congress has ignored ambiguity in the Code that has persisted for years, causing confusion, uncertainty and additional expense in numerous chapter 11 cases.  One prime example is section 365 of the Code; in particular, sections 365(c) and (n) in the context of intellectual property licenses.

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Decision in Schwab Is an Irritating Nonevent

posted by Bob Lawless

The Supreme Court handed down its decision in Schwab v. Reilly today. Schwab looks like a technical case only of interest to bankruptcy specialists because it requires the parsing of specific language in section 522(l) of the Bankruptcy Code and rule 4003(b) of the Federal Rules of Bankruptcy Procedure. In fact, Schwab is of great practical importance and could have had an effect on almost every one of the more than 1.6 million bankruptcy cases that consumers will file this year.

Schwab revolves around how debtors may claim their bankruptcy exemptions--the property that bankruptcy law allows the debtor to keep and is part of the fresh start the bankruptcy system is supposed to give debtors. Exemptions are important in most every consumer bankruptcy case (including chapter 13 where they determine the amount debtors must pay in the chapter 13 plan). For nonspecialists, here is some background on the case. If you're familiar with Schwab and the Bankruptcy Code and rules, you might want to skip the next two paragraphs.

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Overcoming Overconfidence in Bankruptcy

posted by Katie Porter

Elizabeth Loftus (UC-Irvine Law) has co-authored a new paper on lawyers' abiliy to predict outcomes in litigation. She and her colleagues surveyed about 500 lawyers with pending litigation, asking them to specify a minimum goal for their case and providing a confidence estimate for the chances of meeting that goal. The key finding: "Overall, lawyers were overconfident in their predictions."  The researchers find that lawyers don't get better at estimating outcomes with more years of experience; recent grads and old hands are equally likely to overestimate their odds of success. The article lays out all the ways that this can be harmful to clients, and to our legal system in general.

I've been thinking about this optimism bias in the context of bankruptcy law (and in the context of legal education). To what extent do bankruptcy lawyers exhibit this phenomenon? We know, for example, that only one in three chapter 13 bankruptcy cases gets to plan completion, and that many chapter 11 cases, particularly those of small businesses, are really liquidations and not reorganizations. And we know that what gets promised in a plan is often not what gets paid Do lawyers reflect these realities to their incoming consumer and business clients who are in financial trouble, or to their creditor clients? Perhaps bankruptcy lawyers, used to dealing with clients who have tried to be positive-think their way out of negative cash flows or buried their heads in the sand while financial problems mounted, are better at straight-talking to clients about their prospects of financial recovery.

Electronic Copy of Bankruptcy Code and Rules

posted by Bob Lawless

There are online versions of the Bankruptcy Code such as BankrLaw, which I maintain and which allows for retrieval of historical versions of the code or the one at the Legal Information Institute. These sites divide the Code into individual sections. But, I have been wanting a single file with the full Bankruptcy Code that I could put on my Kindle and laptop for quick access while working or during conferences and classes. Because more than a few Credit Slips readers might have need for such a thing, I was contemplating putting such a file together myself and posting it here, but I just made a great discovery. The Office of the Law Revision Counsel of the U.S. House of Representatives has done the job already. You can get PDF versions of the full U.S. Bankruptcy Code and the Federal Rules of Bankruptcy Procedure with Official Forms (actually a pretty big file). The files are current through the first session of the 111th Congress (i.e., 2009). If you click around, you'll be able to find versions in other electronic formats. If readers have other suggestions for electronic bankruptcy resources, please post them in the comments Internet.

Irrelevant Postscript: I always try to spell check posts before putting them online, and it always seems especially ironic that our blog hosting service's spell checker does not have the word "online" in its dictionary. "Cramdown" I can understand being absent, but one would think that a blog-hosting service would have "online" down pat. And, before any former colleagues who are sticklers for correct usage try to claim the hyphenated "on-line" should be preferred, OED says "online" is correct.

The Utility of Chapter 11

posted by Michelle Harner

First, I want to thank Bob Lawless and the other authors of Credit Slips for inviting me to guest blog this week. I am honored to share this space with you, and I look forward to a robust dialogue.

Second, I have to say that guest blogging at Credit Slips feels like coming home to me. Before changing careers, I had the privilege of serving as a law clerk to the Honorable William T. Bodoh, and I practiced as an associate and then a partner in Jones Day’s corporate restructuring practice group for about ten years. I welcome this opportunity to share my passion for everything bankruptcy with others interested in the field.

As you might suspect from my days in practice, I am a strong proponent of the utility of chapter 11 of the U.S. Bankruptcy Code as a restructuring tool. I want to emphasize that I view chapter 11 as a "tool"—not a "fix"—in the context of financial distress. The effectiveness of this tool depends largely on who is using it and how it is being used. Companies do not fail because of chapter 11; rather, companies fail because, among other things, they wait too long to invoke the chapter 11 tool (see here), they do not understand how best to use that tool (see here), or perhaps they simply have outlived their economic utility (see here).

The effectiveness, however, also depends on the construction of the tool itself. So how do we assess its construction? Although there are a number of very useful studies on the topic, I suggest we look back at the origins of chapter 11 and three of its important features: its dual goals of rehabilitation and value maximization (referenced recently here in Congressional testimony); its design to mitigate the collective action problem (see here at pp. 95-98 for an interesting discussion); and its ability to promote negotiation and consensual resolution.

The dual goals of rehabilitation and value maximization require transparency and information sharing to all, and by all, key constituents. The collective action problem merits strong rules maintaining the status quo while constituencies gather around the negotiating table. And negotiation needs a flexible framework and a neutral third party with the discretion and power to adapt the rules to the particular needs of the case. Does chapter 11 currently measure up?

Over the years, chapter 11 has increasingly moved away from its original objectives and, in many respects, been captured by special interest groups. This shift has created weaker rules and less flexibility. It also has limited the contributions of our specialized and very talented bankruptcy bench.

During my time at Credit Slips, I hope to explore the strengths and weaknesses of chapter 11 in its current state, including its role in facilitating obsolescence (see here), creating value and exploiting information asymmetries (see generally here and here). Chapter 11 has changed and perhaps not all for the best. I suggest that we might best move it forward by looking backward.

$108 Million Settlement on Countrywide's Servicing Practices

posted by Katie Porter

Last week, the FTC announced a $108 million settlement with Countrywide based on allegations that Countrywide's loan servicing operations collected excessive fees. The complaint describes Countrywide's servicing practices for default fees as part of its strategy to keep on profiting from consumers, even in hard economic times. I've previously commented on Countrywide's description of this as a "countercyclical diversification strategy" that it trumpeted to investors, and what Senator Schumer thought of such a strategy. The complaint alleges that Countrywide used subsidiaries to mark-up fees--often by 50-100%--on default services such as property inspections. Instead of Countrywide loan servicing working directly with vendors for these default services, Countrywide loan servicing would contract with its subsidiary, who would then work with the vendor. And that extra step--from one Countrywide entity to another--dramatically boosted the fees that got charged to struggling homeowners. To me, the lesson of the FTC's enforcement action is that businesses can use subsidiaries but they can't use subsidiaries to upcharge consumers and obscure the real costs of services.

The settlement also addresses the problems with Countrywide's mortgage servicing in bankruptcy. The FTC alleged many of the same wrongs that I identified in a law review article on mortgage servicing in 2008, including that filing claims that it could not substantiate. The UST Program cooperated with the FTC on the enforcement activity, and the settlement also resolves the UST litigation against Countrywide.

If you are a consumer who filed a chapter 13 bankruptcy case with a mortgage serviced by Countrywide, you may be eligible for a cash award. The FTC website has more details.

Supreme Court Rules in Lanning

posted by Katie Porter

The Supreme Court has just issued its opinion in Hamilton v. Lanning, a case interpreting the "means test" that the 2005 bankruptcy amendments added to chapter 13. The issue was chapter 13's requirement that the debtor commit his or her "projected disposable income" to a plan, and whether projected disposable income should be determined in a mechanical way (based on the debtor's income for the past six months as defined in the means test) or whether projected disposable income should include reliance on some estimate of the debtor's income in the future during the plan period. The Supreme Court rejected the mechanical approach, which was argued for by the debtor trustee and the National Association of Consumer Bankruptcy Attorneys, and adopted the forward-looking approach. The decision, authored by Justice Alito, was 8-1, with a dissent by Justice Scalia arguing the plain meaning of the text supported the mechanical approach.

I'm certain there will be loads of technical commentary forthcoming on this case, debating whether the Supreme Court's interpretation of the statute was correct. I have some non-technical observations.

First, it isn't clear that debtors are "hurt" or "helped" by this decision in terms of what they will be required to pay. Some debtors will have incomes that have picked up right on the eve of filing, so their forward-looking income is higher. But other debtors will have earned more in the past six months, filing in an income trough with bleak prospects. We could empirically test which system is better, but of course, to the best of my knowledge, nobody did this. (Query whether such data would have been persuasive to the Court if it had existed).

Second, I am quite sure this decision hurts debtors. How can I reconcile that with my first observation? Because it's not just the law that matters. In many contexts, including this one, the cost of the law will determine the justice received. The mechanical approach is easier to apply and is less likely to spawn litigation, which consumers filing bankruptcy can ill afford. Faced with a choice of filing a plan that is likely to begin a lawsuit, some consumers will just give up and drop out of chapter 13 or not bother to file at all. By holding that "only in 'unusual' cases, a court may go further and take into account other 'known or virtually certain information' about the debtor's future income or expenses," the Court will add a layer of complexity to lawyers' and debtors' decisionmaking in chapter 13. And legal decisions don't come free.

Bankruptcy Fees

posted by Adam Levitin

Bankruptcy fees in megacases are getting some media attention.  I can't say whether Weil's fees have been too high or not, I think a little context would help.  Stating the billing dollars alone makes things look shocking, but how many attorney hours were involved?  I'm guessing that cost/attorney hour is actually relatively low compared with other high-end transactional or litigation work.  There might be a reasonable complaint about the cost of top-end legal services, but it makes little sense to single out bankruptcy attorneys.  You've gotta pay the gravedigger if you don't want the corpse putrefying in the street. 

Bankruptcy is the only area of law, other than class actions, where attorneys' fees are subject to court approval.  And because of this, in part, bankruptcy professionals' fees have long been subject to an unspoken spirit of economy.  Top bankruptcy attorneys are reluctant to break the $1000/hr billing mark, which their corporate and litigation counterparts have long ago crossed.  While there are sometimes unseemly items on bankruptcy fees applications, such as first-class seats, what the article missed is that there are a lot of costs for which debtor's counsel does not bill.  There are plenty of costs that get written off by debtor's counsel, if only to avoid the pain in the ass of haggling about them in court. 

There's also tremendous wasted transaction costs involved with court review of billing.  I once witnessed the sorry sight of a bankruptcy judge raising sua sponte the question of whether debtor's counsel was paying too much for airline tickets based on his own on-line research into ticket prices.  Somehow the judge didn't get that by extending the hearing for half an hour, he caused several additional hours of billing for the debtor's counsel, the committee's counsel, and various creditors' counsels.  The debtor's counsel agreed to eat a couple thousand dollars, but the hearing probably cost the estate far more than that. 

I know that the appearances of high professionals' fees in bankruptcy cases are unsightly, but when viewed in the context of biglaw practice, I don't think it is anything so remarkable.  I'm hoping that we'll get some thoughts from Stephen, our resident fee expert.

Can You Deduct an Expense for a Car You Own?

posted by Bob Lawless

The news came today that the Supreme Court has granted cert in Ransom v. MBNA Bank. The issue is whether the Bankruptcy Code means what it says. OK, I'm giving away what I think is the right answer.

The question is whether an above-median income chapter 13 debtor, in calculating "projected disposable income," can deduct an ownership expense for a car even if the debtor owns the car free and clear such that the debtor is not making an debt or lease payments on the car. The Fifth and Seventh Circuits said the plain meaning of the statute clearly allowed the debtor to do so. The Ninth Circuit said the statutory language directed a different result. If you're wondering how so many federal judges can differ over the "plain meaning" of a statute, you're obviously not a lawyer.

Continue reading "Can You Deduct an Expense for a Car You Own?" »

Early Thoughts on Milavetz

posted by Bob Lawless
This morning, the Supreme Court issued its decision in Milavetz on prebankruptcy attorney-client counseling and bankruptcy attorney disclosures. I've got to get to a meeting so I don't have time for an extended post. The early reporting has been technically correct but misleading, e.g., Reuters, "US top court upholds lawyer bankruptcy advice law." The decision upheld the law but construed its most troubling provision--section 526(a)(4)--in a very narrow way, eliminating almost all concerns about the statute. It appears to come out about the way I expected.

Fringe Banking and Financial Distress

posted by Jim Hawkins

The answers to the question about the definition of financial distress track with my thinking too.  On the one hand, we could define financial distress loosely and almost everything counts (like forgetting your wallet and needing to pay for parking).  Stephen Ware once wrote that financial distress could mean having wants that exceed your ability to pay.  For me, such a loose conception of the term causes it to lose any meaning.  Wants exceeding needs could be the owner of the Yankees wanting to own a NBA team but not having enough money.  This expansive of a definition misses the heart of distress which seems to relate to not meeting basic needs or getting collection calls, etc.  

On the other hand, some definitions are so restrictive that they miss a large group of people we’d commonly think of as in distress.  If we define distress as declaring bankruptcy or even getting sued or called for collection, we miss all the people who are going without basic medications to pay their credit card bills or skipping meals to service other debt.  And, we miss all the people who do not declare bankruptcy but for whom it would be efficient to do so.

The two most common definitions that came up in law review articles were (1) having unmanageable debt; and (2) not being able to have your financial ends meet.  I think the first is a better definition because most measures of financial distress relate to debt (debt to income ratio; negative net worth; debt service ratio, etc).  But, because the concept is indeterminate and people accept both, I use both.

Using these two definitions, I started to think about whether fringe banking products cause financial distress.  Academics and policymakers often assert that they do.  And, the argument makes a lot of sense: Fringe borrowers are on the financial fringe already, and fringe banking products cost ridiculous amounts of money.  It seems likely that using fringe credit would cause distress.  But I don’t think so.

Continue reading "Fringe Banking and Financial Distress" »

What is Financial Distress?

posted by Jim Hawkins

I’m new to teaching, so a lot of times I encounter new terms.  I started working on a paper last year about the relationship between fringe banking (payday loans, rent-to-own, etc.) and financial distress.  I realized half way into the project that I really didn’t know what financial distress meant.  The concept comes up a lotSeriously, I mean really a lot.  But, it is not defined very often.

I’ve looked at the 300 or so times financial distress comes up in law review articles on Lexis, and I still am left without a clear sense of what the word means.  I’ve settled on two definitions for my paper, but I’m curious about what people mean when they say “financial distress.”

Anna Nicole Smith --The Bankruptcy That Keeps on Giving

posted by Bob Lawless

It can really bug me when blogs have posts that are just a naked attempt to draw traffic to their site. These posts always are sure to contain a few words that will attract the attention of search engine users seeking porn or the usual titillating web sites. Seemingly random references to celebrities such as Brittany Spears, Rihanna, or Paris Hilton will be put into the blog. And, worse of all, these naked attempts at self-promotion will use word repetition and appear near the beginning of the web page to optimize their search engine placement. Therefore, I was not surprised to find references to the 15-year old bankruptcy case of the late Anna Nicole Smith, who was often described as sexy and buxom.

On a more serious note, it was somewhat puzzling to see references to this old bankruptcy case. It was dredged up for an AP story that was sourced to "newly released government files" obtained by a Freedom of Information Act (FOIA) request directed to the Department of Justice. The article cites to "the bankruptcy examiner's report." I don't give a rat's pa-too-tee about the contents of the report, but I wondered about the whole FOIA thing. If this was a bankruptcy examiner's report, wouldn't it be part of the public court record? Why did they need to use FOIA? If the court ordered the report filed under seal or otherwise made the report unavailable, then why can a FOIA request effectively circumvent the court order? Or, was this not a bankruptcy examiner's report in the technical sense of the term and, if so, what was it?

Continue reading "Anna Nicole Smith --The Bankruptcy That Keeps on Giving" »

How Many Bankruptcy Appeals?

posted by Bob Lawless

Classes started today. This semester I am teaching Business Bankruptcy, which principally covers chapter 11. We were talking about the bankruptcy court system, a topic that does not always get covered in great detail in the other bankruptcy courses, and the appellate steps in the bankruptcy system. A student asked how many U.S. Court of Appeals cases each year involve bankruptcy.

That was a good question, so I looked it up. What's your guess for the number of U.S. Court of Appeals cases, as reported by the U.S. judiciary, that involve bankruptcy each year? Answer after the jump.

Continue reading "How Many Bankruptcy Appeals?" »

Holiday Reading

posted by Bob Lawless

We get all kinds of visitors, from top experts in the field to neophytes looking for information, but I thought there was something for everyone on two recommended reading lists from Underbelly. I don't think I'm blowing his cover to note that Underbelly is written by Jack Ayer, a former bankruptcy judge turned law prof. At what was undoubtedly the pinnacle of his career, Ayer was even a Credit Slips guest blogger.

The first is a list of books he recommends to his students as general background reading in finance. The second list is background reading for his bankruptcy class. The original post linking to these two lists explains them both. If visitors have other reading recommendations related to bankruptcy and credit, please feel welcome to leave them in the comments.

For what it's worth, I find Underbelly to be one of the wittiest blogs around, including this post which still has me laughing. The pie chart has been been reported elsewhere, but leave it to Underbelly to put it in the right context.

Looking Forward in the Supreme Court

posted by Bob Lawless

This just in from our Washington, DC, bureau: the Supreme Court has granted certiorari in Hamilton v. Lanning, No. 08-3009 (10th Cir. Nov. 13, 2008), where the Tenth Circuit adopted the "forward-looking test" for how much a chapter 13 debtor has to pay creditors. The alternative is the "mechanical test" adopted by the Ninth Circuit in an often-discussed and often-criticized decision called Kagenveama.

The forward-looking test allows for a more flexible consideration of the debtor's circumstances in the future. The mechanical test, as the name implies, requires only the application of the amounts fixed in the statute. As the Tenth Circuit said, reasonable people could read the Bankruptcy Code to reach either result. The forward-looking test can account for changed circumstances of the debtor, such as a decline in income that often precedes a bankruptcy filing.

Of the four bankruptcy cases the Supreme Court has on its docket right now, Hamilton may have the greatest practical effect on real people. It will not only determine the rules for those who file chapter 13 but, as a result, also play a big role in whether chapter 13 will be a good solution for many persons with financial problems, especially homeowners facing foreclosure.

Spookiest Bankruptcy Opinion of 2009

posted by Katie Porter

It's Halloween, and time for nominations for the Spookiest Bankruptcy Opinion of the Year. Comments are open. Name the opinion that gives you goosebumps, and explain why others should be scared . . . very, very scared.

My own nomination is Sternberg v. Johnston, ___F. 3d. ___, 2009 WL 3381162 (9th Cir. Oct. 22, 2009). This gem not only creates a Circuit Split (always scary to invite the Supreme Court into bankruptcy jurisprudence), but will harm both creditors and debtors. Why? Because the opinion will deter debtors and their attorneys from pursuing creditors who commit willful violations of the automatic stay. This is frightening because the stay is so key to the collective nature of bankruptcy; the stay protects both debtors and creditors and ensures an orderly bankruptcy process. The words of the stay won't have much teeth if nobody sues for damages in willful violations. Sternberg will dramatically reduce the enforcement of the automatic stay because it holds that attorney fees for pursuing a damage award for a willful stay violation may not be recovered as "actual damages" under 362(k)(1). A law without enforcement . . . that's a ghost that won't scare anyone.

Tightening the Bankruptcy Laws in the Midst of a Deep Recession

posted by Bob Lawless

Beginning on November 1, some people might suddenly find they are now ineligible for chapter 7 bankruptcy. Making it harder to file bankruptcy in the middle of our financial crisis may not be the best policy idea to come down the pike, but it is exactly what Congress set in motion in 2005. Here is why.

Continue reading "Tightening the Bankruptcy Laws in the Midst of a Deep Recession" »

Schwab v. Reilly -- The Amicus Brief

posted by Bob Lawless

Last week, I agreed to join an amicus brief in the pending U.S. Supreme Court case of Schwab v. Reilly. This case will not receive a lot of medial attention, but it could have a big practical effect on the approximately 1.5 million bankruptcy cases that it looks like the U.S. will be experiencing each year. The amicus brief was filed on behalf of the National Association of Consumer Bankruptcy Attorneys (NACBA) and four law professors (Ken Klee of UCLA, Richard Lieb of St. John's, Michael D. Sousa of Denver, and myself).

The amicus brief supports a debtor, Nadejda Reilly, who claimed an exemption in her bankruptcy for tools of the trade, namely kitchen equipment for her restaurant. On the schedule where she was to claim her exemptions, Reilly listed the value of the equipment as $10,718 and claimed an exemption in the equipment of the same amount, combining the federal $1,850 tools-of-the-trade exemption with $8,868 of her federal "wild-card exemption." More than 30 days after the meeting of creditors, the trustee filed a motion to sell the equipment because, based on an appraisal, he believed it to be worth more than $17,000.

Nobody disputes that the equipment is eligible for the exemption. Rather, the question is whether the trustee procedurally defaulted by not acting more promptly. Federal Rule of Bankruptcy Procedure (FRBP) 4003(b) requires that any objection to an exemption be made within 30 days after the meeting of creditors, and section 522(l) of the Bankruptcy Code states that absent an exemption, the property claimed on the list of exemptions "is exempt." Despite these clear rules, my initial instinct was that the trustee should win. The more I thought about the case, however, the more I became convinced the debtor is right.

Continue reading "Schwab v. Reilly -- The Amicus Brief" »

The Lack of Evidentiary Foundations Fosters Fraud

posted by O. Max Gardner III

The expanding market for that buying, selling and securitization of consumer debts has resulted in a serious problem regarding the “quality and admissibility” of the computer data that is being tendered to the United States Bankruptcy Courts to prove the nature and extent of consumer debt obligations. The same thing can be said with respect to the quality of the evidence that is being offered by Mortgage Servicers with respect to the nature and extent of the mortgage obligations of homeowners in bankruptcy cases. The analysis of these records by the attorneys for the debtors and by the Court has tended to overlook the underlying evidentiary foundations necessary to authenticate the same in order to create admissible and competent evidence. Also, since none of these records are generated in the normal course of business of an entity other than the proponent of the evidence in court, the business record foundation has also been either ignored or overlooked by the litigants and the courts. These are all important concepts in a consumer bankruptcy practice since the evidence presented in a proof of claim and in support of motion for relief from stay normally consist exclusively of “electronic evidence.”

Continue reading "The Lack of Evidentiary Foundations Fosters Fraud" »

Show Me the Original Note and I Will Show You the Money

posted by O. Max Gardner III

As mortgage delinquencies rise each month, and as the number of foreclosures increase each quarter, the “new mantra” of many pro-se and represented consumers is to demand that the mortgage servicer “prove up the original note.” Is this just some new and creative gimmick that has been sold to the desperate homeowners and to a few lawyers who have attended “progressive” seminars or is there really something to it? I submit that there is really something to it.

In my last Credit Slips post, I wrote about what I call the “Alphabet Problem.” Succinctly stated, this problem arises out of the necessity for a true sale of the mortgage note and mortgage from the originator to the sponsor for the securitized trust; then from the sponsor to the depositor for the securitized trust; and finally from the depositor to the owner Trustee for the trust. These multiple “true sales” are necessary in order to make the original asset (the note and mortgage) bankruptcy-remote and FDIC-remote frin the originator in the event the originator files for bankruptcy or is taken over by the FDIC.

Continue reading "Show Me the Original Note and I Will Show You the Money" »

The Alphabet Problem and the Pooling and Servicing Agreements

posted by O. Max Gardner III

The securitization of residential mortgage notes has created a maze of complex issues and problems for the bankruptcy and foreclosure courts. One fundamental issue is who is the actual holder and owner of the mortgage note. In order to answer this question, it is necessary to dig deep into the contracts, warranties and representations that were executed in the formation of the securitized trust.

The Pooling and Servicing Agreement (PSA) is the document that actually creates a residential mortgage backed securitized trust and establishes the obligations and authority of the Master Servicer and the Primary Servicer. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. It is this unbroken chain of assignments and negotiations that creates what I have called “The Alphabet Problem.”

Continue reading "The Alphabet Problem and the Pooling and Servicing Agreements" »

What Does RESPA Have to do with Consumer Bankruptcy Cases?

posted by O. Max Gardner III

I have trained over 350 attorneys at my Bankruptcy Boot Camps and to my surprise less than 10 percent know what I mean when I refer to a "QWR." This is shocking in that a reasonable QWR can provide the attorney for the Chapter 13 debtor with some of the very best discovery outside of a contested case or Adversary Proceeding. The QWR can be used to find out how the servicer for the securitized trust is applying the debtor's money and the disbursements on the arrearage claim from the Chapter 13 Trustee. It can also be used to identify all of the "ancillary fees" and "collateral charges" that mortgage servicers are so fond of unilaterally adding to the debtor’s mortgage account, without any notice or the right to a hearing.

The provisions of RESPA which deal with mortgage servicing are generally found in either 12 U.S.C. § 2605 or § 2609. Section 2605, known as the "Servicer Act," requires servicers to respond to borrower requests for information and correction of account errors. The "Servicer Act" provisions are where you find the authority for a Qualified Written Request. The Servicer Act provisions in § 2605 are significant because borrowers are given the right to sue for violations based on the express private right of action found in § 2605(f).

Continue reading "What Does RESPA Have to do with Consumer Bankruptcy Cases?" »


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