New Attorney With The Firm

I am very proud and excited to announce that I have hired a new associate. His name is Fredrick Nix and he had been practicing bankruptcy law in Hagerstown, Maryland before joining this firm. He is a 1997 graduate of Catholic University School of Law and is a member of the Maryland Bar Association Consumer Bankruptcy Section.

Turnover of Post-Petition Garnishment Starts When Case Is Filed.

Once a debtor files for bankruptcy, all wages garnishments must cease. In the recent case of In re Williams, a case from the Bankruptcy Court in Kansas reported on May 15, 2012, the creditor had an obligation to refund post-petition wages even though it did not originally get notice of the bankruptcy filing.

In this case the debtor filed bankruptcy on June 23, 2011, but did not list the creditor who had been garnishing his wages before he filed. On October 5, 2011, he finally notified the creditor of his bankruptcy filing and the next day the wage garnishment stopped. The creditor refused to return the wages garnished for the period between June 23, 2011 and October 5, 2011, claiming that it only needed to stop the garnishment once it leaned of the bankruptcy case. The debtor then filed a turnover motion with the bankruptcy court seeking the return of his wages for this period of time.

The Bankruptcy Court granted the debtor’s motion. The Court said that “absence of notice to the creditor that the bankruptcy has been filed is not a defense to the obligation to obligation to turnover. Notice to creditors is not an element of the imposition of the stay. The stay arises automatically upon the filing of the petition for relief, not upon notice to creditors of the filing. A creditor who has initiated collection efforts without knowledge of a bankruptcy petition has an affirmative duty to restore the status quo without the debtor having to seek relief from the Bankruptcy Court. Lack of proper notice protects a creditor from the imposition of a penalty, but not from the turnover obligation."

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

District Court of Maryland Dismisses Thousands of Debt Collection Cases

A recent news article caught my attention and I thought I would share it with those following this blog.

ANNAPOLIS, Md. – July 11, 2012) On July 10, Chief Judge Ben C. Clyburn of the District Court of Maryland dismissed 3,564 debt collection cases against Maryland residents. Judge Clyburn’s order comes after a settlement agreement with the debt collection agencies LVNV and Resurgent Capital Services.

As part of the agreement reached with the Maryland State Collection Agency Licensing Board, LVNV and Resurgent will pay $1 million to the state and agreed to the dismissal of cases pending in Maryland District Court. Also, $3.8 million in credit will be applied to the accounts of 6,246 consumers whose cases have been adjudicated or settled. The settlement came after claims that LVNV and Resurgent violated state and federal laws about licensure and submitting false or misleading claims or affidavits in court.

LVNV is part of a new industry – “debt buying,” – that has clogged the dockets of small claims courts in Maryland and throughout the country, particularly during the current recession. Debt buyers specialize in buying debts that have been abandoned by the original creditors, usually credit card companies, for a tiny fraction of the amount owed. Debts may be sold to other debt buyers several times, and the documentation to prove the debt is owed sometimes is little more than the person’s name, last known address and Social Security number.

“In this current recessionary economy, the District Court has been seeing an increasing number of debt collection cases,” Judge Clyburn said. “We have been responding to many issues related to debt-buying and we now have new rules in place that help make the process more transparent, give the judge more information, and level the playing field for consumers.”

The 3,564 cases dismissed yesterday were dismissed before judgment and “without prejudice,” which means a case is eligible to be re-filed in the future.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Interesting Case on Bad Faith and a Meth Lab

An interesting case was recently reported in the Consumer Bankruptcy News. In First Tennessee Bank, N.A. v. Hansen, 2012 WL 1156409 (Bankr. E.D. Tenn. 4/6/12), the bank alleged that the debtors’ case was filed in bad faith because they knew about a meth lab in their basement and should not be allowed to get the damages caused by the lab to be discharged. The debtors had rented out their basement to their grandson’s father. The father had a drug problem, which he claimed was over. The debtors required that he take drug tests and after 10 months of the tests coming back negative, they allowed him to rent their basement. In 2010 the debtors’ business declined and they thought about selling their house, but after obtaining an appraisal in August of 2010 they realized there was no equity in the house and proposed a plan that called for the surrender of the house back to the lender. They then moved out of the house, but allowed their grandson and his father to remain in the house.

In October of 2010, the debtor husband went back to the house and went to the basement storage area to get packing tape and discovered two bottles and a tube and confronted the father. The father admitted he was making speed and apologized for violating the debtors’ trust and destroyed all the lab equipment. However, it turned out that after destroying all the lab equipment he then bought new equipment and resumed his illegal activities. The police were called to the house by child protective services to make sure the grandson had enough food in the house. When opening the cabinets the police discovered jars containing a white liquid and found the meth lab. The father was arrested and the house was condemned. The bank subsequently paid more than $45,000 to repair the damage done to the house and also spent more than $35,000 in legal fees. The bank asked the court to dismiss the case as having been filed in bad faith. The bank alleged that the debtors knew of the meth lab and were using the Chapter 13 filing to get rid of a worthless house and the debt associated with it. However, the court found that the debtors were not aware of the meth lab and only decided to surrender the house after an appraisal came back which indicated they had no equity in the house. Accordingly, the court denied the bank’s motion.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

New Rules for Mortgage Lenders In Chapter 13 Bankruptcy Cases

This past December 2011, Congress enacted a new Federal Bankruptcy Rule, Rule 3002.1. This new rule governs how mortgage payments are to be treated. Specifically, when a debtor’s Chapter 13 plan provides to cure pre-petition arrears owed to the debtor’s mortgage company and the Trustee has paid those arrears in full, the Trustee must file a report with the court and send a copy of the report to the mortgage lender which indicates that the pre-petition arrears have been paid in full and that the debtor is current on his mortgage payments. If the mortgage company’s records indicate that the pre-petition arrears have not been paid in full or that the debtor is not current, it has 21 days from the date of the Trustee’s notice to file a response. If no response is filed by the mortgage lender, then the debtor will be considered current on his or her mortgage payments. This means that the mortgage lender is later precluded from claiming any payments are due from the debtor as of the date of the Trustee’s notice. This new law was enacted to prevent mortgage companies from claiming additional monies due from debtors after their Chapter 13 cases are discharged and closed.

If the lender files a timely opposition to the Trustee’s notice, the debtor has 31 days after the opposition is filed to file a response challenging the lender’s opposition. The court will then schedule a hearing and make a determination on the issue. If the lender does not file a timely opposition, it is precluded from presenting evidence at a subsequent hearing on the issue of the debtor’s payments.

The new rule also requires lenders to notify the court and the debtor if during the chapter 13 case it changes the amount of the debtor’s mortgage payment due to escrow changes or the loan was an adjustable rate loan or for any other reason. This notice must be filed with the court at least 21 days before the new payment amount is due. I had once case recently where the mortgage lender filed a notice in May 2012 of a payment change that took effect March 1, 2012. This was clearly not timely, and therefore, my client would not be responsible for the increase in payment during the months of March and April.

Finally, the new rule also requires that the mortgage lender file a notice with the court, with copies sent to the debtor and the debtor’s attorney, of any fee, cost or expense incurred by it during the Chapter 13 case which it considers the debtor’s liability. This notice must be filed within 180 of the date the lender incurred this fee, cost or expense. For example, if the lender wants to charge the debtor’s account for preparing and filing a proof of claim, it must notify the court of that expense within 180 days of the filing of the claim, or it will not be able to charge the debtor’s account for that expense.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Reaffirmation of Vehicle Loans in Chapter 7 Cases

On July 15, 2011 the highest Court in Maryland clarified the issue of whether a lender who has granted a loan for the purchase of a vehicle under a vehicle retail installment contract may repossess a vehicle solely because the borrower filed bankruptcy. In most cases, the answer is “yes.”

In the matter of Ford Motor Credit Company, LLC v. Roberson, 420 Md. 649 (Md. 2011), the debtor, Patricia Roberson, filed a previous Chapter 7 bankruptcy case. While that case was pending she did not execute a reaffirmation agreement to reinstate her car loan with Ford. After she received her discharge, Ford repossessed her car. Ms. Roberson was current on her car payments at the time of repossession, and the vehicle was properly titled and insured. Ford argued that it had the right to repossess the vehicle under the “Ipso Facto” clause of her finance agreement. The Ipso Facto clause stated that the filing of bankruptcy, in and of itself, was a breach of the finance agreement. Ford argued that the purpose of the Ipso Facto clause is to prevent “insecurity” that is caused by the filing of Chapter 7 bankruptcy. This “insecurity” exists because a bankruptcy discharge removes Ford’s ability to sue a borrower if he or she defaults on the car loan after bankruptcy. The way to cure this “insecurity” would have been for Ms. Roberson to have executed a reaffirmation agreement during pendency the Chapter 7 case because it would reinstate Ms. Roberson’s personal liability for the loan (subject to Court approval). Ms. Roberson argued that since she was current on her payments and was otherwise in compliance with the loan agreement, there was no basis for Ford to deem the loan to be in default.

The Court of Appeals of Maryland decided the matter in favor of Ford. In doing so, the Court looked to three statutes that govern lending and borrowing in the State of Maryland. These statutes are commonly referred to as “CLEC”, “OPEC”, and “RISA”. There was no dispute that the finance agreement at issue was governed by CLEC. The Court also looked at an older case called Biggus v. Ford Motor Credit Co., 328 Md. 188, 613 A.2d 986 (Md. 1991). In Biggus the Court of Appeals acknowledged that CLEC was a newer statute that RISA. The Court determined that there were certain situations that were not covered by CLEC, and wherever there were gaps in the CLEC rules, the rules under RISA would fill in the blanks. After the Biggus case was decided, the Maryland Legislature grew concerned that this “gap filling” would cause a flood of new lawsuits in order to determine when RISA rules would apply to contracts that were otherwise governed by CLEC. The Legislature thought this uncertainty would cause lenders to believe that they needed set money aside to cover legal fees and costs associated with this unknown litigation. As a result, it was feared that many lending costs would spike and lenders would simply stop writing auto loans in Maryland. Therefore, new provisions, including the one containing the Ipso Facto clause at issue were enacted.

The Court then compared language in CLEC (and OPEC) with the language in RISA, regarding what a lender is prohibited to do in the face of “uncertainty.” The Court noted that RISA prohibits both acceleration of all payments due under the loan and repossession of the vehicle, while CLEC only prohibits acceleration of the payments due under the loan. The Court determined that the Legislature must have intentionally excluded repossession from the prohibitions under CLEC and, as a result, it was permitted.

Boiled down to its essence, the Roberson decision stands for a proposition that most car loans must be reaffirmed in Chapter 7 cases in order to nullify the lender’s right to repossess the vehicle at any time, regardless of whether payments have been made and the owner is otherwise in compliance with the loan terms. This does not mean all reaffirmation agreements should be signed. Consultation with a bankruptcy lawyer is key in determining whether it is in your best interest to sign a reaffirmation agreement.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.

Be Careful of What Funds Are in The Bank on The Day the Debtor Files Bankruptcy

In Maryland, the Chapter 7 Trustees are now asking to see exactly what funds were in the debtor’s bank account on the day he or she filed the Chapter 7 case. If the amount in the account is more than is listed on the debtor’s schedules and therefore not fully exempt, the trustee may ask the debtor to turn over the non-disclosed and non-exempt portion of the funds in the account. When indicating the amount in the bank account, a debtor may have deducted the amount in checks that he or she wrote prior to filing from the balance in the account. However, if those checks did not clear pre-petition, the money was still in the account on the date of filing and unless disclosed and exempted, may have to be turned over to the trustee. A debtor may be surprised to find out that they cannot deduct checks outstanding on the date of filing from the balance on the account, especially since by the time they meet with the trustee, the checks would have cleared and the funds are no longer in the account.

Section 541 of the Bankruptcy Code broadly defines property of the estate to include all legal or equitable interests of the debtor in property as of the date of the filing of the case. This will usually include all money in a debtor’s bank account. The Supreme Court has ruled in the case of Barnhill v. Johnson, 503 U.S. 393 (1992) the funds in a debtor’s bank account remain the debtor’s until the checks actually clear the bank, even though the debtor may have written checks that were outstanding as of the date the case was filed.

My suggestion is for the debtor to go online on the date the case is being filed and let the attorney know exactly how much is in the account on that date. Hopefully, it is not more than the debtor will be entitled to exempt. If it is, then the debtor may want to wait to file until all the checks that have been sent out clear the account, or withdraw the funds in the account and use the cash to pay bills that would be considered necessary expenses for the debtor or his or her dependents.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.