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Sacramento Bankruptcy NewsflashAccording to the Eastern District of California that handles all Chapter 7 and Chapter 13 Bankruptcy cases in the Sacramento Metropolitan Area, data shows that filings in the region have fallen consistently over the last few years. As we all have probably noticed, the economy has improved significantly since the Great Recession of 2009. The bankruptcy filing statistics are proof that the economy is now stronger than it has been over the last several years. Sacramento saw a record number of filings in 2010 with a whopping 54,365 cases filed that year. Every year subsequent saw fewer cases filed than the previous year. Last year the Eastern district of California saw only 14,328 new cases filed and includes all Chapter 7, Chapter 13, and Chapter 11 bankruptcies. These numbers even predate filings before the Bankruptcy Laws were modified significantly in 2005 under the Bankruptcy Abuse and Consumer Protection Act (BAPCA).

Although the economy has improved substantially and the unemployment rate has dropped from 9% to less than 5% since 2010, there are still a significant number of people who need to consider taking advantage of the bankruptcy laws in order to confront and resolve the economic turbulence they face. Historically, the number one reason people needed to file for bankruptcy were unexpected medical bills. The recent filings during the height of the Great Recession were due to the mortgage and foreclosure situation many people faced with their homes. Fortunately, many people have already made great use of the bankruptcy code to shield themselves from the banks and to reorganize debts into a much more manageable situation and to stop the foreclosure process in its tracks.

The best use of the Bankruptcy laws are to get your debts discharged that enable a person to start over with a “clean slate” financially. The ultimate discharge of all debt is granted by a federal bankruptcy court that issues a stay to prevent a creditor from any further attempt to collect a debt from the individual. While most debts such as credit cards, medical bills, and other unsecured debts can be extinguished in bankruptcy, other types of debts cannot be discharged: these include child and spousal support, tax debts, and sadly most types of student loans.

As a Sacramento bankruptcy attorney I have previously written about student loans and filing a Chapter 7 or Chapter 13 bankruptcy. The general rule regarding student loans is that they are not dischargeable unless the individual can prove that paying the loans would create “undue hardship.” Undue hardship is a difficult standard to prove as it is indeed a vague concept. I would typically tell my clients that undue hardship exists when a person has zero ability to earn any income. As a result, there is a low chance at discharging student loans for most bankruptcy filers. This situation creates a vicious cycle for many recent graduates who have entered the uncertain job market of the last few years.

A recent case from the United States Ninth Circuit Court of Appeal, Hedlund v. The Educational Resources Institute, reminds us that there are still some situations where a person can get the debts discharged through bankruptcy.

The debtor in this case, Michael Hedlund, obtained student loans on his undergraduate and law school degrees. Mr. Hedlund received a business degree from the University of Oregon and a law degree from Willamette Law School. He failed the bar exam and took a job earning approximately $10.00 an hour. After requesting hardship forbearances and loan consolidations Mr. Hedlund wound up defaulting on the loans. He was not able to implement any successful attempt at a modified repayment plan although he made several payments from various bank accounts when he could. The student loan creditors eventually began to garnish his wages.

Focusing my practice on Chapter 7 and Chapter 13 Bankruptcy in the Sacramento metropolitan area I take notice of headlines that might interest individuals considering filing for bankruptcy in the region.

Most of us are familiar with the controversy surrounding the Maloof’s proposed sale of the Sacramento Kings to a Seattle based investment group.

Well, it seems this melodrama has taken a turn for the more interesting to say the least. According to bankruptcy trustee David Flemmer, bankruptcy law could be what ultimately keeps the Kings in Sacramento. Although the Maloof’s own a controlling stake in the Sacramento Kings, they do not own the entire team. Their relationship with the minority shareholders could wind up killing the entire deal.

As a Sacramento Bankruptcy Attorney I must often explain to my clients that domestic support obligations, such as spousal support and child support, are not dischargeable in Chapter 7 bankruptcy. This concept frustrates many individuals trying to clean up his or her economic profile. I must also remind these individuals to keep in mind that child and spousal support are not the only domestic support obligations to come out of a family court that could survive the bankruptcy. A recent case stemming from the New Hampshire Supreme Court, In re Mason, demonstrates a perfect example of a non-dischargeable domestic support obligation.

Mrs. Mason filed for bankruptcy in 2010 after having received a divorce from the state of New Hampshire in 2007. The parties’ divorce decree held that both parties would be liable to pay one half of their 2006 tax burden. However, Mrs. Mason listed Mr. Mason as a co-debtor on their tax lien and a creditor in her Chapter 7 petition and attempted to discharge her half of the parties’ 2006 income tax bill. Ms. Mason received her automatic discharge in the Chapter 7. Each party later attempted to assert relief from the 2006 taxes under the “innocent spouse” doctrine. The IRS granted Mrs. Mason’s request and denied the request of Mr. Mason. Mr. Mason moved to hold Ms. Mason in contempt of the family court for not paying her share of the tax bill and for an order directing her to pay one half of the tax bill. The circuit court denied Mr. Mason’s request. They found that since the IRS had granted her petition for relief under the “innocent spouse” doctrine, that it changed the nature of the taxes from a debt to the IRS to a personal debt to Mr. Martin and since Mr. Mason failed to fight the discharge in bankruptcy court that he would lose. They also denied his request for attorney’s fees.

On appeal, the New Hampshire Supreme Court reversed the lower court and held that the modifications of the bankruptcy code in 2005 mean that the domestic support obligations are not discharged automatically. The question turned on whether the taxes were automatically non-dischargeable because they were a part of the divorce decree, such as child support, or whether Mr. Martin would have to fight the discharge in the bankruptcy court. In their decision, the New Hampshire Supreme Court compared the modified bankruptcy code with the older version. They found that the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA “) removed the previous ability to pay tests that the law previously required regarding the dischargeability of a debt. This courts interpretation of the law found the BAPCPA directs that any debts falling within particular categories are automatically non-dischargeable. Specifically, they held that a debt created by a divorce decree is one of the automatically non-dischargeable debts. Since the 2007 divorce decree required Mrs. Mason to pay one half of the 2006 tax bill the court found that her debt was automatically non-dischargeable and she lost.

Sacramento Mayor Kevin Johnson released his endorsement for local attorney Matthew D. Roy for the Sacramento City Charter Commission.

The Charter Commission will be charged with reviewing the Sacramento City Charter and determining if revisions are needed. If revisions are proposed by the Commission, such revisions will be in the form of a ballot question(s) that will be presented to the voters at a future primary or general municipal election. The Commission will serve a term of two (2) years and then disband. It is anticipated that the Commission will meet two (2) times per month, or on whatever schedule is deemed appropriate by the Commission to ensure that decisions are made in time for placement of questions on a future primary or general election ballot. This is an unpaid position.

Attorney Matthew D. Roy has decided to run for a local position within the City of Sacramento in the upcoming November election. Matthew Roy started the Law Offices of Matthew D. Roy in 2010 that resolves personal and financial problems for Sacramento area residents.

Mr. Roy is a graduate of California State University Sacramento and the McGeorge school of law. As a volunteer attorney with W.E.A.V.E he has helped numerous victims of domestic violence obtain restraining orders against their abusers. Additionally, he regularly facilitates workshops at the William R. Ridgeway Family Relations Courthouse on behalf of the Family Law Facilitator’s Office to conduct their domestic violence prevention series.

Mr. Roy supports growth in Sacramento. He believes the City Charter should be updated since it was first established in 1920. “We are not a small town anymore,” says Roy. “We need to allow this city to evolve and grow with the modern times.” “By updating the Charter we will allow our city officials to meet the present needs of the city and prepare for the future.”

Sacramento area residents considering a Chapter 7 or Chapter 13 bankruptcy should be interested to learn about the recent United States Ninth Circuit Court of Appeals case: In re Brenda Marie Jones, which affects how a second bankruptcy filing affects a persons tax debts. The Ninth Circuit Court of Appeals governs all appeals made from Sacramento area federal courts, including bankruptcy matters.

Federal and State income taxes can typically be discharged if they were due more than three years ago. However, the three-year standard can be extended if the debt could not have been collected. This means that when an automatic stay is issued in a previous bankruptcy, the debt cannot be collected, which therefore extends the time period to which a debtor must wait before he or she can discharge that tax debt.

In the Brenda Marie Jones case, a California woman filing for a Chapter 7 bankruptcy owed a debt, more than three years old, to the California Franchise Tax Board (CFTB). Ms. Jones attempted to discharge that debt in her new bankruptcy but the CFTB argued that because Jones had previously filed for bankruptcy, they were prevented from collecting the tax debt and it was therefore improper for her to discharge the debt in the recently filed case.

Sacramento bankruptcy lawyers who file Chapter 7 and Chapter 13 bankruptcies on behalf of individuals will be glad to know that the Center for Responsible Lending has published a study that shows that it makes more sense for lenders to modify a distressed homeowner’s loan than to immediately foreclose on the individual’s property. The Center released a study on March 22 that researched whether investors who held a defaulting loan could retrieve more money through foreclosure or modification. The study used the net present value test (NPV), which is used by the federal loan modification program in addition to numerous private programs. The answer turned out to be (under most circumstances), whether the loan was securitized or not, that it made more sense to modify because the lender received more money in the long run.

The authors explained that when considering whether to modify a loan, a prudent investor must balance the cost of foreclosing with the costs of reducing a borrower’s monthly payment. The NPV test is a ready tool to calculate this ratio and the authors using the instrument were able to evaluate over 1,500 test cases. The authors were also able to include different circumstances such as original size of the loan, different property values, and well as the size of the reduction in monthly payments. According to the study then, if the end result of the test shows a lower re-default rate than the actual re-default rate, the value of modifying the loan is higher than what could be gotten through foreclosure. Therefore, under these conditions the lender should grant a loan modification rather than initiate foreclosure proceedings. The Center’s study calculated that most real-world circumstances should lead to a loan workout.

According to the study, a loan modification that discounts the loan by 10% would be profitable more than 86% of the time under existing self-cure numbers. Thus, the Center has concluded that NPV tests should begin to inspire a lender’s willingness to implement the loan modification process into its business model.

Recent data proves what practitioners in the Sacramento metropolitan area have already noted with regard to the loan Modifications being sought by individuals or corporations filing for Chapter 7 bankruptcy. On February 3, 2011 the Federal Reserve bank of Chicago released a study that shows that bank -held mortgage loans are one fourth to one third percent more likely to be modified than a similar securitized mortgage. The study also shows that individuals who receive the loan modification are almost 10 percent less likely to default on the new loan generated by the bank. Similarly, the Center for Public Integrity notes that homeowners are more likely to get their loan renegotiated if a bank owns their mortgage by a margin of 26% – 36%.

The practice of securitization consists of investment banks or brokers who bundle individual loans into a pool whereby investors are then able to buy a stake in the pool of loans with the lenders continuing to collect the monthly payments. This “securitization” is completely legal, but is widely blamed for contributing to the housing crash since it allowed institutional lenders to make high risk loans and then pass the risk of default onto the investors who purchased the bundled loan pools.

Borrowers have no say as to whether the loan on their residence has become securitized in this fashion. Unfortunately, these borrowers must deal with the consequences of their loan having been securitized if they seek a modification later. The increased chances of receiving a loan modification existing in a bank held loan appear to remain firm regardless of the borrower’s credit rating. The reasons for this may be due to coordination problems among investors, legal constraints, as well as a lack of servicers’ financial incentives (such that the servicers control the “loans” but do not have an ownership stake since it has been passed along to investors).

Sacramento residents who have recently considered or filed Chapter 7 or Chapter 13 bankruptcy should beware the stiff penalties associated with Bankruptcy fraud. A report from the Des Moines Register shows just how serious the federal government takes people who are abusing the bankruptcy code.

A Federal Judge sentenced Gerald Schurer to more than four years in prison after he and his wife were convicted for their part in a scam to take advantage of the revised bankruptcy code. Schurer’s wife received a two year sentence for her role in the plot.

Prosecutors claim the Schuerers made false sales of assets to “insiders” with the understanding that the friends or relatives would return the personal property to the Schuerers after they had received their discharge in bankruptcy. The Schuerers disposed of jewelry, stock, vehicles, and a boat in this manner before they filed their petition in order to avoid those items becoming a part of their bankruptcy estate. In all, the total value of hidden assets totaled approximately $380,000.

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