Relying on Schwab v. Reilly, 130 S.Ct. 2652 (2010), the Third Circuit has found that the Chapter 7 trustee is entitled to the value of future appreciation in an asset the debtor has exempted under the wildcard exemption to the extent the value exceeds the dollar amount exempted. In re Orton, No. 11-4157 (3rd Cir. July 20, 2012) (affirming the decisions of the bankruptcy and district courts for the Western District of Pennsylvania). [Read more…] about Third Circuit Allows Trustee Retention of Post-Discharge Appreciation
Report on Student Loan Discharge in Bankruptcy
The Consumer Financial Protection Bureau and the Department of Education have released a report on private student loans, found at HERE.
The report finds that the 2005 BAPCPA law restricting bankruptcy protection for student loans coincided with rapid growth in questionable lending practices, compounding the risk to student borrowers. Although the restriction on bankruptcy discharge applies to all student loans, private student loans generally lack the intrinsic flexibility that permits federal student loan debtors to adjust their repayment based on income. The report finds little to no evidence that restricting bankruptcy rights improved either loan prices or access to credit. The report noted that the bankruptcy process itself, with its bad faith considerations, means testing, and attorney accountability, all protect against the use of bankruptcy to unfairly defeat private student loan creditors.
Both the CFPB and the Education Department recommend in the report that Congress revisit the 2005 law restricting bankruptcy protection for private student loans, stating:
“As noted in the report, several bodies were unable to find any systematic abuse of the bankruptcy code in seeking student loan discharges. Additionally, we were unable to find strong evidence that the 2005 changes to the bankruptcy code caused prices to decline or access to credit to increase significantly. If Congress concludes that the 2005 changes did not meet their overall policy goals, it would be prudent to consider modifying the code in light of the impact on young borrowers in challenging labor market conditions.”
Fourth Circuit Bases Household Size on Fractional “Economic Unit”
The Fourth Circuit affirmed the Bankruptcy Court’s calculation of “household size” using a modified “economic unit” analysis in which children sharing residences with ex-spouses were counted in fractional portions. Johnson v. Zimmer (In re Johnson), No. 11-2034 (4th Cir. July 11, 2012). [Read more…] about Fourth Circuit Bases Household Size on Fractional “Economic Unit”
Puerto Rican Law Justifies Reduction of Attorney Fee Penalty
The Bankruptcy Appellate Panel for the First Circuit affirmed the bankruptcy court’s reduction of the mortgage creditor’s attorney fee “penalty” against the debtor, where the penalty, ten percent of the original loan, was provided for in the mortgage document. RNPM, LLC v. Alvarez, No. 11-80 (B.A.P. 1st Cir. June 28, 2012). [Read more…] about Puerto Rican Law Justifies Reduction of Attorney Fee Penalty
Ninth Circuit BAP Permits Appellate Attorney Fee Award for Stay Violation
When a debtor is forced to defend both the ruling that the creditor violated the automatic stay and the award of sanctions for that violation, the debtor may recover her appellate attorney fees under section 362(k). Schwartz-Tallard v. America’s Servicing Co., No. 11-1429 (B.A.P. 9th Cir. June 28, 2012). [Read more…] about Ninth Circuit BAP Permits Appellate Attorney Fee Award for Stay Violation
Social Security Income Amicus Brief
On June 12, 2012, NACBA filed an amicus brief on the issue of whether social security income should be excluded from the calculation of projected disposable income and whether the existence of social security benefits is an appropriate factor to be considered in a good faith analysis under 1325(a)(3). Anderson v. Cranmer, No. 12-4002 (10th Cir.). The brief outlines the explicit statutory protections for Social Security benefits in both the Social Security Act and the Bankruptcy Code and emphasizes the historical protection afforded to retirement benefits in general. From a practical standpoint, the brief discusses the negative ramifications of permitting a trustee to distribute the debtor’s social security income, which would discourage debtors from filing a Chapter 13 plan when they could, alternatively, file under Chapter 7. Finally, NACBA argues that because the Code permits exclusion of social security benefits from the calculation of disposable income, a debtor’s failure to include that income in the plan can never be the basis for a finding that the plan is not proposed in good faith.
Fourth Circuit Finds Absolute Priority Rule Applicable to Individual Debtors
The Fourth Circuit Court of Appeals has dealt a blow to debtors on the issue of whether the absolute priority rule applies in individual chapter 11 cases. In re Maharaj, No. 11-1747 (4th Cir. June 14, 2012). The decision turned on the court’s finding that the reference in Section 1129(b)(2)(B)(ii) to “property included in the estate under Section 1115,” and the words “in addition to” as found in Section 1115 were amenable to differing interpretations. Having found the meaning ambiguous, the court went on to base its decision on its view of congressional intent. [Read more…] about Fourth Circuit Finds Absolute Priority Rule Applicable to Individual Debtors
Heritage Pacific’s Debt Collection Practices Garner More Attention
Heritage Pacific Financial, a debt buyer of foreclosed second mortgages, first popped up on my radar screen nearly two years ago. At that time, Heritage was filing multi-defendent complaints in state and federal courts against California home loan borrowers–mostly Latino–claiming that the borrowers fraudulently misstated their monthly income on their loan applications. I suspect that they were trying to get people to settle with them and save filing fees, but at least most federal district court judges recognized that suing multiple defendants on multiple contracts in the same complaint is not proper under Rule 20 of the Federal Rules of Civil Procedure. (See Order here). As a result, those cases didn’t go very far in court. With the multi-defendant model out the door, Heritage turned its attention to bringing non-dischargeability actions against bankruptcy debtors. Court documents show debtors, many chapter 7 pro se debtors, entering into settlement agreements to pay Heritage thousands of dollars over several years. Sadly, in many of these cases, the underlying debt is uncollectable based on state anti-deficiency laws. Heritage cannot show that it has been assigned the original lender’s fraud claim, or Heritage is unable to demonstrate that the borrower made any false statements or that the original lender relied on any false statement.
Several cases are now pending against Heritage in state courts alleging violations of California’s anti-deficiency laws, the Fair Debt Collection Practices Act, the Rosenthal Act (the state’s version of FDCPA) and the state’s unlawful business practices law.
Earlier this week, Rick Jurgens of the Center for Investigative Reporting, wrote a story that focuses on some of the borrowers that have been targeted by Heritage. ABC affiliate, KGO-TV, in conjunction with CIR, also put together a video news story on Heritage.
NCBRC is looking into Heritage’s practice of bringing frivolous non-dischargeability actions in bankruptcy courts throughout California. The United States Trustee should also consider a thorough investigation of Heritage and its bankruptcy practices.
Post-Petition Tax Liability Not Incurred by Chapter 12 Estate
The Supreme Court found that debtors could not have their income tax liability resulting from the post-petition sale of their farm treated as a non-priority, dischargeable debt in their chapter 12 bankruptcy case. Hall v. United States, No. 10-875, 182 L. Ed. 2d 840, ___ U.S. ___ (May 14, 2012). The debtor relied on Section 1222(a)(2)(A), which permits certain tax liabilities, which would otherwise be priority debts under section 1222(a)(2), to be treated as non-priority, unsecured debts, if they are “incurred by the estate,” under section 503(b). Justice Sotomayor, joined by Justices Roberts, Thomas, Alito, and Scalia, found that post-petition income tax liability adheres to the debtors rather than the estate, and the debtors, therefore, could not avail themselves of the benefit of section 1222(a)(2)(A).
While this case forecloses a potential avenue of relief for the Chapter 12 debtor, it is likely to have little effect in the realm of Chapter 13 bankruptcy. In Chapter 13 taxes incurred post-petition are not incurred by the estate. 11 TX2 Collier on Bankruptcy ¶ TX2.03[2][a][ii] (16th ed.). However, under Section 1305, the taxing authority in Chapter 13 may file a proof of claim for post-petition tax liability if it so chooses. [Read more…] about Post-Petition Tax Liability Not Incurred by Chapter 12 Estate
RESPA Prohibition Against Fee-Splitting not Applicable to Undivided Unearned Fee
The Supreme Court declined to interpret RESPA’s prohibition against fee-splitting as applying to the situation in which fees were charged for services that were not provided but where the fees were not divided between two or more parties. Freeman v. Quicken Loans, No.10-1042, __U.S.___ (May 24, 2012). [Read more…] about RESPA Prohibition Against Fee-Splitting not Applicable to Undivided Unearned Fee