Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

RESPA, Real Estate Settlement Procedures Act, has specific provisions which deal with mortgage servicing and generally found in either 12 U.S.C. § 2605 or § 2609. O. Max Gardner III explains in his article, What Does RESPA Have to do with Consumer Bankruptcy Cases?, that the use of RESPA in a chapter 13 bankruptcy case, “can provide the attorney for the Chapter 13 debtor with some of the very best discovery outside of a contested case or Adversary Proceeding.”

If you don’t know who O. Max Gardner III is, then you’ve been living under a rock. Without bragging too much about the man I have yet to meet and learn from, he goes on to explain the QWR, or Qualified Written Request for information from your loan servicer. Section 2605 is known as the “Servicer Act,” according to Gardner’s article, and is where the authority for the QWR arises. It’s interesting to note that I recently received a response to a QWR from a law firm, representing Aurora Loan Services LLC (“Aurora”). I don’t believe my questions were unreasonable and I certainly did not ask for the “kitchen sink.” However, I was on a fishing expedition and did not make note of any servicing problems because quite frankly I had no idea what I would find.  So, apparently the loan servicers now have a need for counsel to respond to our inquiries.

I do like Max’s questions and I think attorneys who represent consumers in chapter 13 bankruptcy cases should take full advantage of the information he provides so generously. Thanks Max!  I’ll see you soon in Boot Camp!

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Generally, taxes are treated the same as other debts in a chapter 7 bankruptcy case.  Taxes may be treated as secured, unsecured, or non-priority unsecured, or some combination.  IRS Code, found in 26 U.S.C. 6321, states that the government is secured if it has recorded a notice of lien.  Taxes that have been recorded as a  lien are a priority and must be paid in bankruptcy and cannot be discharged.  

A colleague of mine,  John Greifendorf, addressed the question, Can I discharge Federal Income Tax in Bankruptcy?  His article is concise and outlines five conditions for discharging what the debtor owes to the IRS and even sets forth and example to follow. 

The Five Conditions are:

1. The due date for filing the tax return was not less than three years ago
2. The tax return was filed at least two years ago
3. The tax assessment is at least 240 days old
4. The tax return was not fraudulent
5. The tax payor is not guilty of tax evasion

If the debtor meets the qualifications, then the tax liability is not a priority and is discharged in bankruptcy; 11 U.S.C. 523(a)(1).  Unsecured taxes that are deemed a priority, fall outside the scope of the conditions discussed by Mr. Greifendorf and cannot be discharged in bankruptcy.

Timing is a critical component in deciding to file for bankruptcy protection and the advice of a bankruptcy attorney will address this issue.  Best practices include filing all tax returns prior to filing a bankruptcy petition with the court.  Seek the advice of a CPA or tax attorney regarding IRS claims. 

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Somewhere in the American vocabulary, there has got to be a list of the top ten most dreaded words like death, divorce, bankruptcy, we’re moving, your fired, etc. These dreaded words all have one common theme, change. Any significant change can be a traumatic experience and filing for bankruptcy is no exception.

At the heart of deciding to file for bankruptcy, every debtor must face the spiritual, emotional decision, as well as the financial decision to file bankruptcy. Each aspect, spiritual, emotional, and financial, calls for a unique conversation we must have with ourselves.

Religion aside, bankruptcy is and can be a spiritual journey in letting go of the material world as you have come to know it. You are letting go and it feels like you have lost control and you are afraid. I hear this in my client’s voices, “I’m a good person and have always paid my debts . . .” We are all good people. Being able to pay your debts does not a good person make, and the freefall happens anyway.

I have seen it many times. Clients will exhaust all of their resources and drain their savings before filing for bankruptcy because they are paralyzed by the fear and stigma of bankruptcy. They may be following their religious dogma that tells them that somehow bankruptcy is “a sin” and therefore, not an option.

I have another paradigm for bankruptcy. In bankruptcy, you are given an opportunity for a fresh start on your finances to begin again. Like in video games, when you hit the restart button, you get to start over. If you have learned the spiritual lesson of letting go of the material realm, you will view this, not as dread, but rather as an opportunity to live much differently than before.

Start from the point of being legally forgiven for your debt; in bankruptcy terms, it’s the date of discharge. Learn to be a good steward of your money and guide it forward, toward a great retirement program for your self and your family. You have more than enough stuff and no longer have to keep up with the Jones’.

Some of my clients don’t need bankruptcy, but rather come to me because they have run out of options on their own. At this point, I would encourage them to follow some sound financial principles and, as a result, I often prescribe Dave Ramsey’s book, “Total Money Makeover.” His book has seven baby steps that really get to the heart of your emotional relationship with money.

These are breakdown or breakthrough times; it’s your choice. I challenge each of us to have a breakthrough in our relationship to the material world and money. This requires being responsible in handling our money and putting it toward good use. Thank you for allowing me to lead the way.
 

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I just finished reading Battle on the Homefront  by Steven Seidenberg, in the latest issue of ABA Journal. With the rejection of Senate Bill 61 back in April, homeowners are left with trying to work out deals with the same parties that essentially helped create the foreclosure problems. Steven did a great job in outlining the current state of the foreclosure crisis and covers the problems in bankruptcy that homeowners are facing. I agree. We need to do more for homeowners in trouble and Bankruptcy Court can provide the neutral forum.

I’ve been watching the news and wrote my Senator to vote in favor of SB61 to no avail. I hear from clients, “If we could just write down some of our principal, we could afford the payments.” The federal government’s Home Affordable Plan doesn’t appear to be working and the lender’s aren’t moving fast enough to help homeowners in trouble.

In California, our problems are overwhelming because many of us have taken out jumbo loans during the housing boom and subsequently we have seen some of the nation’s greatest home price declines, creating substantial negative equity. The original Obama Plan excluded many California mortgages because the plan does not deal with mortgages that substantially exceed the value of the home. Recent changes to the plan have included homes with substantial negative equity, while the high value homes remain excluded from the program.

Ultimately, we need to show the lenders some value in the modification process. What this means, is that if modifying the mortgage will provide a lesser loss than the foreclosure, the lender is more likely to accept the modification proposal.
 

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