Bankruptcy Law Blog

Friday, July 3, 2015

Supreme Court Issues Ruling on ‘Underwater Mortgages’ & Bankruptcy

I currently owe more on my home than it is worth, and I currently have two mortgages on the property. If I pursue Chapter 7 bankruptcy, will the debts be discharged? 

The phrase “Chapter 7 bankruptcy” derives its name from the seventh chapter of the U.S. Bankruptcy Code wherein debtors are afforded an opportunity to liquidate a number of debts and forever discharge the obligations. While not all debts are dischargeable (e.g., child support arrears), a number of both secured and unsecured debts may be voided following the Chapter 7 procedure. 

In a recent case before the U.S. Supreme Court, the nine Justices were tasked with determining whether, in the event a debtor is ‘upside down’ on his residential home loan, he could discharge junior liens when the value of the property does not even cover the outstanding balance of the primary mortgage. In other words, if a property is encumbered by two or more outstanding mortgages, can its diminished value work to eliminate those mortgages executed at some point after the first and primary mortgage. 

And, in a rare, resounding, unanimous opinion: No. 

With all nine justices in agreement, the Court held that Chapter 7 liquidation proceedings are not designed to allow for the dismissal of junior liens, regardless of the value of the home and the surrounding circumstances. Also unusual, the opinion barely reached seven pages, and took a straightforward, objective approach to the problem by asking: What does precedent say?  

In 1992, the Court considered a similar case involving a partially-underwater residential home mortgage meandering its way through the bankruptcy process. In that case, the plaintiffs urged the Bankruptcy Court, and eventually the Supreme Court, to reduce the value of the outstanding lien to that of the fair market value of the home. That way, when the collateral was sold, the bank holding the original mortgage would be paid off in full and any remaining liens would be discharged. However, the Court didn’t buy that argument in 1992, and it didn’t opt to buy it today. 

Instead, the Court held that junior liens must remain in place, even if the value of the home is nowhere near enough to conceivably pay the debt. 

If you are considering personal bankruptcy, contact Mobile, Alabama’s premier bankruptcy law firm, Padgett & Robertson today at (251)342-0264. 

Friday, June 26, 2015

Conversion From Chapter 13 to Chapter 7: Who keeps the funds?

I recently decided to convert my consumer bankruptcy case from a Chapter 13 payment plan to a Chapter 7 liquidation. What happens to the unused funds held by the trustee? 

For consumers facing insolvency, there are two options in bankruptcy. The first, known as a Chapter 13 proceeding, allows debtors to enter into a repayment plan with the help of a trustee to oversee the process. In theory, this plan will help protect debtors’ credit, keep most of their secured assets, and experience the satisfaction of debt payoff. The other option, known as a Chapter 7 proceeding, allows debtors facing serious, insurmountable debt the opportunity to break free from the confines of financial pressure and avoid repayment all together through discharge. 

In some cases, debtors start out on the Chapter 13 path, only to quickly realize that a Chapter 7 bankruptcy proceeding is a better option for their situation. However, if a repayment plan has already been set up, the trustee assigned to the case may have a substantial amount of funds held in trust for the repayment of debts. In this case, courts have been unsure whether these funds should be refunded directly to the debtors or reapplied to the Chapter 7 proceedings as an asset. In a recent case known as Harris v. Viegelahn, the U.S. Supreme Court responded to this inquiry, thereby finally putting the issue to rest. 

Court’s Holding in Harris v. Viegelahn

The situation at hand in Harris involved a mere $5,000.00 that was languishing in the trustee’s escrow account after the debtors had opted to convert their case from a Chapter 13 to a Chapter 7 proceeding. At the time, Circuit Courts were split over how the surplus should be distributed. The Fifth Circuit, for example, held that the money should be refunded back to the debtor under the Bankruptcy Code provision that states a Chapter 7 debtor gets to keep all post-filing income. Other courts concluded that the money should go directly to creditors under the Chapter 13 rules requiring post-filing income to funnel to creditors. 

After pointing out the complete lack of clarity on the issue in the language of the Code itself, the Court unanimously decided that the debtor should benefit from the surplus funds in this scenario, and the $5,000.00 at issue in this case should be refunded back to the bankruptcy petitioners. In sum, the Court reasoned that the Chapter 13 rules ceased to apply immediately upon the moment the case is converted to Chapter 7. Since the trust funds do not become an issue until this point, the Chapter 7 rule allowing post-filing income to refund to the debtor should apply – and the trustee must return the money immediately. 

If you are considering Chapter 7 or Chapter 13 bankruptcy, please do not hesitate to contact Padgett & Robertson in Mobile and Baldwin County, Alabama today by calling (251)342-0264. 

Wednesday, June 10, 2015

Jefferson County Files an Appeal in its Bankruptcy Claim

What is going on with Jefferson County’s Bankruptcy?

When Jefferson County filed for protection under Chapter 9 of the Bankruptcy Code in 2011, they hardly expected the legal challenges would continue as long as they have.  The county owned sewer system that contributed greatly to the county’s financial trouble is the subject of a lawsuit from several customers attempting to block Jefferson County’s exit from bankruptcy.  The county’s bankruptcy plan includes rate hikes for sewer customers each year for the next forty years.

The customers claim that, because the reason for the bankruptcy was the corruption of public officials who have been tried and convicted, the sewer customers should not be required to bear the brunt of the cost.  Instead, they argue that the county’s debt should be reduced by $300 million to eliminate the need for rate increases. 
The county feels that the issue is irrelevant because they have already sold the warrants to refinance the debt in question.  The federal District Court Judge disagreed with them, indicating that the customers can still petition the rate increases.  The judge did not rule on whether the rate increases would be permitted, only that the lawsuit could go forward.  Jefferson County appealed this decision.

Jefferson County will be required to file their briefs by June 1, 2015.  The sewer customers will have an opportunity to file their response.  The 11th Circuit Court of Appeals will likely hear arguments by the end of 2015.

Not every bankruptcy case is as complex as the one involving Jefferson County.  Some can be even more complicated. Before getting started, it is important to hire an attorney you know you can trust to explain any potential complications.  The Mobile and Baldwin County bankruptcy lawyers at Padgett & Robertson have the knowledge and experience to best protect you and your assets in a bankruptcy action.  Call (251) 342-0264 today to schedule an appointment.


Friday, May 29, 2015

Alabama Among Leaders of Bankruptcy Filings Per Capita

How many people are filing bankruptcy this year?

A recent study shows that Alabama has the second highest total of bankruptcy filings per resident so far this year, after Tennessee.  0.524% of Alabama residents declared bankruptcy in April.  This was a slight increase from 0.514% of Alabamans in March when it was also second to Tennessee.  Only 0.274% of Americans declared bankruptcy in April of 2015.  After Tennessee and Alabama, the states in which bankruptcy petitions were most common were Georgia, Illinois, Utah, and Indiana.

Bankruptcy filings across the nation have dropped significantly since 2010, when they were at their highest.  In April of 2010, there were 146,373 bankruptcy petitions filed.  In 2011, that number dropped to 129,898, and then to 109,022 in 2012, 100,779 in 2013, 88,163 in 2014, and 77,884 this year, just over half as many that were filed five years ago.  There was also a significant decline in the number petitions filed this month than there were last month, 81,622.   

So far this year, 283,587 Americans have declared bankruptcy, an average of 3,417 filings every day.  If you are one of the thousands of Americans who needs help managing debt and you are considering a bankruptcy, you should speak to a lawyer.  The experienced Alabama bankruptcy attorneys at Padgett & Robertson will assist you in determining the best course of action for your financial future.  Call (251) 342-0264 today to schedule an appointment.


Friday, May 22, 2015

Bankruptcy Petitioner Attempts to Block $13.08 Million Auction

Can a bank foreclose on a property when the mortgage documents were forged?

Danny Ray Butler is fighting a thirteen million dollar battle from a federal prison.  Butler filed for an emergency injunction to prevent the sale of 4 parcels of real estate.  He says that the mortgage on four parcels of real estate was forged and that he never signed mortgage papers.  The parcels include the home of Butler’s developmentally disabled brother, a 60-acre pecan orchard, a portion of the Fosters Water Treatment Plant and approximately five acres of undeveloped property.  

A handwriting expert testified in court that he had examined the documents in question and that Danny Ray Butler did not sign the mortgage papers.  An attorney for Alabama One, the credit union holding the mortgage, said, “Not only did he sign the document he now challenges, but he signed numerous other documents acknowledging the earlier mortgage and agreement. To try and take the position now that he did not sign them is as ridiculous as it is offensive for someone serving a prison sentence for fraud. The allegations his bankruptcy estate made yesterday are a recent concoction that he has never even hinted at before, including in his earlier sworn testimony in this case.”

Butler’s fiancé does not believe that he is completely innocent, but adds, “Anyone who knows Danny knows he didn’t come up with all this on his own. There are still people who haven’t yet paid the piper and I am more than happy to help them do that."  Meanwhile, there is reason to believe that the Federal Judge hearing the case may be forced to recuse herself as, prior to her becoming a judge, she was employed by a large law firm of which Alabama One was a client.

Not every bankruptcy case is as complex and involved as Danny Ray Butler’s.  And yet, some can be even more complicated.  Before getting started, it is important to hire an attorney you know you can trust.  The Mobile and Baldwin County, Alabama bankruptcy lawyers at Padgett & Robertson have the knowledge and experience to best protect you and your assets in a bankruptcy action.  Call (251) 342-0264 today to schedule an appointment.


Thursday, May 21, 2015

Article 9 Repo Sales Gaining Popularity

What are alternatives to Chapter 11 Bankruptcy?

Recently creditors’ seeking to dispose of the assets of a delinquent borrower through Article 9 of the Uniform Commercial Code instead of in Bankruptcy court has become a popular procedure.  To repossess encumbered assets and sell them under the UCC, a creditor only has to perform a lien search, notice the interested parties, and conduct the sale.  The process can take as little as thirty days, unlike sales through the bankruptcy code, which require court approval, include additional legal fees, and take at least sixty days to complete.  This method of collection is comparable to a foreclosure sale, although Article 9 of the UCC is not applicable to real estate.  A creditor whose loan is connected to specific collateral, such as a car loan, may repossess that property, provide notice to other parties, and sell it without court approval, if that loan is delinquent.  There are different means for repossession, but almost all of them involve less legal fees than a Chapter 11 Bankruptcy.

Often times, debtors will opt to use Article 9 of the UCC instead of filing bankruptcy, because it saves them time and money as well.  Scott Kay, Inc., a jewelry manufacturer chose to do it earlier this year.  In March of 2015, an Alabama furniture manufacturer that defaulted on its debts had its equipment seized and sold by the creditor.  The equipment went to a different manufacturing plant in the same town, which is now thriving.  In another individual case, the assets of a defunct company were purchase by a coalition of former employees who used the equipment purchased to restart the company and keep their jobs.  

There are many ways in which an Article 9 sale can be beneficial to a Bankruptcy action, but each case is different and only an attorney can help determine what the best course of action is for each individual case.  The experienced Mobile and Baldwin County, Alabama bankruptcy attorneys at Padgett & Robertson will assist you in determining the best course of action for your financial future.  Call (251) 342-0264 today to schedule an appointment.


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