Unfair and Deceptive Mortgage Practices in Massachusetts

Chapter 93A of the Massachusetts General Laws prohibits the use of unfair or deceptive practices in trade or commerce. I am going to highlight one way this comes up in the context of foreclosure. Mortgage foreclosure is a two-track system. The first track is managed by the loss mitigation department at the mortgage servicer, and the other is managed by an outside law firm that is hired to handle the nuts and bolts of the foreclosure. The same law firms usually handle all the foreclosures in Massachusetts, like Harmon Law Offices, Korde and Associates, and a few others. As I'll explain, the two different groups, i.e. the loss mitigation people and the lawyers, can give very different messages to the consumer.

The loss mitigation people are employees of the servicer and are charged with communicating with often-frantic consumers about loan modifications, work outs, and forbearances.  These individuals have a tough job, and some do it well and some do it poorly.  However, the bottom line is that you will often hear from these folks that "everything will be fine," "we have your application and are processing it, everything looks good," "we aren't really going to foreclose," or "you have plenty of time to work through this with us."  But all at the same time, another group of people at the mortgage company has hired a law firm to foreclose on your home.  The law firm has no idea what you've been discussing with the mortgage company and has no reason to care: They were hired to do a job and until they are called off, they'll do it.

So what's the problem here?  It's mixed messages.  They are deceptive and can cause harm to a consumer if the loan modification or forbearance doesn't go through and the homeowner has been told not to worry and sits on their hands.  Often a consumer will figure this all out in time, however.  When you get an official court notice that a foreclosure is happening (under the Servicemembers Relief Act) and/or see an ad in the paper advertising your home for sale, it usually starts to seem unreasonable to rely on the phone statements of a mortgage employee.  Often this is when people investigate their bankruptcy options in earnest, but sometimes (but not often) due to the need to come up with money to file, it too late.

Who's to blame? The mortgage servicer mainly is. It is the entity that employs the loss mitigation people and establishes the policies they work under. The mortgage servicer also hires and sets the parameters of the job for the law firm to carry out. If the misrepresentations are bad enough, that is why the mortgage servicer is the most natural party to be sued under 93A if the consumer suffers significant financial damage as a result of the violations.

Liquidating in Chapter 11 versus Chapter 7

So you have a business that needs liquidating?  What's the best way to do it?  There is the classic Chapter 7  route, which after all is the liquidating chapter of bankruptcy, but there is also something known as a "liquidating Chapter 11" bankruptcy. Why would anyone choose to use the reorganization chapter of bankruptcy to wind down a business?  The answer is that sometimes there is more value for everyone when business assets are sold off as part of a going concern rather than at a bankruptcy garage sale by an trustee in Chapter 7.

First the basics: if you do it correctly, Chapter 11 allows the existing business owners to stay in control while the business is marketed for sale. Business owners often like this because they can remain in control and keep existing employees on staff (including themselves).  The advantage to creditors is that the business owners are often the only ones who can really run the business as a going concern.  Chapter 11 is premised on the concept that there is sometimes more value in an operating business than in a sale of its parts.  That's why reorganization exists in the first place.   If this is true in a particular case, that's why selling all the assets of business in a Chapter 11 is permitted: the net proceeds, even after factoring the increased costs of case administration, are greater than a straight liquidation.

The process of selling the assets of a business in Chapter 11 includes many challenges.  Here are some:

• Any blanket lien holder, like a bank with an interest in cash collateral, must be dealt with.  Usually it's necessary to convince such a lender that Chapter 11 route will result in full payment of their claim.
• The business may need cash to operate after filing bankruptcy.  In which case, debtor-in-possession financing must be obtained.  This is sometimes comes from the proposed buyer of the business assets.  However, there obviously timing issues at play when a business is running so low on cash that basic operations are imperiled.
• A buyer must be found and the procedures for counter-bids must be fair.
• The price for the assets must in most cases must pay off all secured debt.  That is because of, among other things, credit bidding, but there is a possible exception for sales via a confirmed Chapter 11 plan.  
• The debtor may have to negotiate a deal with the committee of unsecured creditors to pay them a partial dividend from the sale or the sale may be tied up in litigation in the bankruptcy court.
• The estate must be administratively solvent.

This is just a quick treatment of some of the issues involved in selling a business through a Chapter 11 plan. If a business has real value it makes sense to consider this option. In the right case, everyone can benefit.

Fraudulent Transfers and Closing a Business

I previously wrote about closing down a small business in Massachusetts. One of the point I alluded to, I am going to expand on a bit here. What happens to the assets of the business when the small business folds? There is a temptation for the business owners to just keep the assets for their personal benefit after closing the doors and leaving business debts unpaid. This is what is called a fraudulent transfer, and a business creditor can make you personally pay the value of these assets over to them if you just keep them in this manner. The reason for this is the Massachusetts Fraudulent Transfer Act. The big picture is that the law does not permit giving away the assets of a business that can't pay its debts: the business creditors are entitled to get the value of those assets before anyone else does. It usually makes sense to administer and distribute assets to creditors in a fair and transparent manner, such as via a business bankruptcy. However, not all transfers of assets to business owners are problematic.

In Massachusetts, generally, an insolvent business can transfer assets to a business owner if the owner pays a fair price in cash to the business. Any such transfer and accompanying valuation must be well documented and supported, and the "payment" to the business must not simply be debt forgiveness by the business owner. It is also important to document transactions of this type because if the insolvent company ends up in bankruptcy, the trustee can sue the owner to recover the value of the assets if they are sold for less than reasonably equivalent value.

Winding Down a Business in Massachusetts

There are many reasons why you might want to close a business. It may just be the time in your life to move on. However, if there's no way to sell your business and there's not enough money to pay the debts off, what do you do? This "insolvency" can create challenges in winding down a business in a way that allows you to move on.

Here are a few key questions to consider:

1. Have you personally guaranteed business debts?

This is a key consideration. Any debts you, your spouse, or partners guaranteed will have to paid by the guarantor(s) should the business close without satisfying these debts. Business credit cards are typically personally guaranteed by the owners. The same with most bank debt. Trade credit (vendor debt) usually is not personally guaranteed, but sometimes it is. Personal guarantees are common and can end in the bankruptcies of individual business owners if these debts cannot be paid. I call these business-personal bankruptcies and have written a bit more about them here.

2. If there are no personal guarantees or the personally guaranteed debts have or will be paid, does the business have valuable assets?

Some examples of assets include inventories, equipment, cash, and accounts receivable. If the business has assets, it can't just close its doors and leave debts unpaid. Where would the assets go? The business owner can't just keep them. In theory at least, these assets must be distributed equitably to creditors before the business owner can just take a dividend. So, if the business is operating in the red and there is not enough money to pay all the debts, who should get what? Lien holders should receive their collateral or its value. Taxes and employees should be paid in full. (It is important not to leave employee wages unpaid in Massachusetts). But after the secured and priority creditors receive their share, who should be paid what if there is money or assets left over? The answer to this depends on the goals of the business owner and the extent of the assets, but it may at this point make sense to file bankruptcy for the business so that the assets can be distributed fairly to creditors by a trustee. Whether to do this or not depends on a few factors, like the exposure of the business owners to suit by the trustee (like if they have unpaid debts to the business), but it sometimes is the best way to clear the assets in a transparent fashion so that creditors get their satisfaction and stop pursuing the business and its owners for the unpaid debts. Once this bankruptcy process is finished, the business can be formally dissolved with the Secretary of the Commonwealth and the matter can be put to bed. The cost of bankruptcy usually comes from the business assets.

3. What if there are no business assets?

If the business has not assets, you still need to make sure you deal with personally-guaranteed debt and any priority debts, like taxes and wages. Once you do this, an old legal maxim comes into play: you can't get blood from a stone. Creditors will try, however, and many an asset-less business winds up in bankruptcy just to satisfy the creditors that there are indeed no assets to be found. However, this is not always necessary. Blood can truly not come from stones and so, although annoying and time-consuming, dunning efforts by angry business creditors will come to naught if the business has nothing. In this case, letting the business die a natural death (non-payment of debts and administrative dissolution by the Secretary of the Commonwealth) should be considered.

It's probably obvious, but it makes a lot of sense to retain an attorney to guide you through the process of winding down a business in Massachusetts. There are several strategic options to consider that will affect the speed of the process and the overall cost to the business owners.

Massachusetts Personal Injury Bankruptcy Exemption

Here in Massachusetts, we can choose between the federal and state bankruptcy exemptions. Exemptions are laws that allow you to keep property you have when you file bankruptcy. A personal injury lawsuit is "property" that you will lose to a Chapter 7 bankruptcy trustee if it is not exempt. So, when are personal injury suits--for car accidents, slip and falls, etc.--exempt?

It's fairly simple: There is no Massachusetts exemption for injury awards in bankruptcy, but since we have the right to choose exemptions under federal law, we have the following:

Effective April, 2010, the federal personal injury bankruptcy exemption is $21,625 for "personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or an individual of whom the debtor is a dependent."

There are various complications when it comes to exempting personal property awards in bankruptcy, mainly involving liens. Seek out experienced bankruptcy counsel if you wish to attempt to exempt an injury suit.

Payment Plans in Chapter 13 Bankruptcy

I previously wrote about payment plans in Chapter 7 Bankruptcy, and now I'm going to explain a bit about Chapter 13 payment plans. Chapter 13 payment plans are the same as Chapter 7 payment plans with one important difference. A bankruptcy attorney can accept payment from you after a Chapter 13 case is filed if the money comes from your Court-ordered Chapter 13 payment.

Here's a key point: Total Chapter 13 bankruptcy fees are generally $4,000 ($3,500 plus $500) here in Massachusetts because of a Court rule (you can read the Court rule here--this link will open a large PDF document on the Court website and the rule is on pages 83 and 84). Virtually all bankruptcy lawyers in Massachusetts charge this amount for a standard Chapter 13 case because of the rule. However, the key is this: the amount you pay out of your pocket varies. Lawyers who do a lot of Chapter 13 will sometimes only take part of the $4,000 upfront and let the rest be paid via your plan. This is good for you because the remainder that your lawyer collects normally just reduces the money that your creditors get without requiring that you pay more. We will sometimes charge people as little as $1,750 before a case is filed (which itself can be paid via a payment plan in the Chapter 7 style) and take the rest via their Court payment.

Contact us if you'd like to discuss your bankruptcy options in Massachusetts.

Another question you might have: How is my Chapter 13 payment determined?

Payment Plans in Chapter 7 Bankruptcy

Some bankruptcy attorneys hide the ball when it comes to the true cost of bankruptcy. We do not and you can get some real numbers about bankruptcy fees in Massachusetts on our website. However, I wanted to write here about payment plans. My experience is that more than half of consumers these days do not have sufficient funds to pay for bankruptcy upfront and need a payment plan. We work with people in this situation every day and offer payment plans that are clear and honest manner--but they work differently in the different chapters of bankruptcy.

Chapter 7 Bankruptcy Payment Plans
The key with payment plans for Chapter 7 cases are that all fees and costs must be paid before the case is filed. At first glance, this may disappoint you, but for 99-plus percent of people it's not a problem. There are a couple of factors to keep in mind.

• First, this is the only legal way to offer a Chapter 7 payment plan. If an attorney extends a payment plan into the period after a Chapter 7 is filed, he or she is breaking the law. This is because unpaid, pre-filing fees cannot be collected after a Chapter 7 case is filed due to the automatic stay. Any bankruptcy lawyer who would consider offering an illegal payment plan is either ignorant about basic bankruptcy law or is playing fast and loose with the rules. You do not want this. In general, the Court will not excuse you from the law just because you were following the advice of an unethical lawyer.
• Second--and this is key--the payment plan period usually overlaps with the pre-filing process. In other words, you and your lawyer need time to prepare your case for a successful filing. This work is done along side the payment plan. Once the payments are made and the work is completed, the case is filed. One extra thing we provide is a service to handle creditor phone calls while you are in the pre-filing process. This makes the payment plan process comfortable by giving you some breathing room. Ask about this if you decide to call us.

For my next installment in this two-part series, I will explain how payment plan work in Chapter 13 bankruptcy. You can read more about us and Massachusetts bankruptcy in general here.

Charged Off, Zombie Debts and Bankruptcy

Someone recently wrote me and asked whether he had to pay a debt that was charged off years ago and sold to a debt collector. Of course, the answer is it depends, but this is what it depends on. The key points:

1. The tough news is that after a debt is charged off, you still owe it. Charging off a debt is an accounting practice meant to give a fair picture of the value of a business (by taking bad debt off its books). Charging off an account does not affect the legal obligation to pay it, and the business must account for money they earn once they sell the debt to a debt buyer to collect the defaulted debt. Often there will be a gap between when the debt is charged off and when a debt buyer emerges to contact you for payment. This is where the "zombie debt" term comes in, i.e. you think the debt is dead, but then it resurrects and attacks you.

2. The (possible) good news is that the gap is sometimes too long, and the debt too old, to make it collectible in court. Just because a debt is sold to a zombie debt buyer, it doesn't mean that the statute of limitations is revived if it already has lapsed. Generally, the statute if limitations in Massachusetts for debt collection is six years from the date of the original default. If you make any partial payments later, this will usually re-start the clock, but if you don't the six-year rule usually applies.

3. If the debt is still good once it's in the hands of a debt buyer, you must pay it, settle it, or file bankruptcy. We specialize in affordably accomplishing the last two options for Massachusetts consumers and small to medium-sized businesses. Give us a call or send us an email if you would like our help with your debt problem.

Threats During Car Repossession

I have written about the special Massachusetts rule against trespass during vehicle repossession, but I wanted to say something about threats. When there is a confrontation during a repossession attempt two things are almost always true: (1) there's a trespass and (2) the repo agent makes threats. I see the threats as fitting in two categories: (1) threats against financial interests and (2) threats of violence against persons or property. Although the first type of threat can sometimes be actionable in a court of law, it is the second type of threat that almost always constitutes a breach of peace and creates the entitlement to the sometimes-sizable breach of peace damages.

*Note: If your car has been repossessed in Massachusetts, we might be able to help. However, due to high call volume after I posted information here about Massachusetts car repossession, we must first receive the completed form found here. We will review your matter confidentially and free of charge.

Massachusetts Repossession and High Interest Car Loans

As I have written elsewhere on this blog, the minimum damages under the Massachusetts Commercial Code for a breach of peace during a car repossession are the finance charge for the loan plus 10 percent of the amount of the total loan. When repo agent comes onto your property without your permission and demands and takes your car over your strong objections, you likely have a breach of peace. We get emails all of the time from people with this situation. Often these people are just looking for information and some assurance that the law has been broken. I really do not know why. This knowledge means nothing by itself. Laws do not enforce themselves.

If you've been subject to a car repossession involving a breach of peace, here's the smart thing to do: submit this form to tell us your story. However, the point of the form is to see if you have a good case, and if you do, to bring a lawsuit for wrongful repossession. There are two key points to keep in mind about this:

1. If you do not sue, you will likely be pursued for a car repossession deficiency debt. If the balance of your loan is more than $2,000 when the repossession occurs, you are liable for any deficiency debt.

2. If you do sue, you can likely wipe out the deficiency debt. Moreover, if there is a breach of peace you can recover the minimum damages (noted above). For a high interest car loan, this sum can be substantial. For example, we now have a case involving a $30,000 car loan at a 14 percent interest rate. The car was repossessed. If we are able to show that a breach of peace occurred, the consumer will be entitled to almost $18,000. There are most likely thousands of consumers who unwittingly are entitled to substantial damages based on a wrongful car repossession in Massachusetts.

Bottom line: If you have a case, pursue it diligently. It can mean the difference between you paying money and getting paid money.

Notes:

* We do not charge you fees. If we agree to take your case, we get paid from the proceeds of settlement or judgment.

* Just coming onto your property without your permission to take the car when you are behind on the loan is usually not enough. To be a good case, normally there must be a confrontation of some sort on your property.

The Dave Ramsey Mistake

Recently I received a call from a woman in her 70s seeking information about bankruptcy. This woman, a widow, had tried just about everything to deal with her debts: credit counselors, direct negotiations with creditors, and drawing down her savings to keep up with payments. With that savings quickly approaching zero, she finally reached out to a attorney to explore bankruptcy.

I've always had a soft spot for older people with debt problems. They often take it very hard, perhaps because they come from a generation where debt problems and bankruptcy were more stigmatized. So, we spoke about her options. Given her low income and meager assets, she qualified easily for Chapter 7, which would result in a discharge of about $40,000 in consumer and medical debt. However, our conversation wasn't just about money. She told of me of her great emotional reluctance to file bankruptcy. Only one inescapable fact made her consider it at all, that she would soon have nothing left and be unable to even eat without some serious debt relief. Then she mentioned that she listened to the Dave Ramsey radio show.

I don't really listen to Dave Ramsey, but I've seen him on TV a few of times, and I am familiar with his message. Mr. Ramsey is well known as a fierce anti-bankruptcy crusader despite famously filing bankruptcy himself several years ago and discharging about $4,000,000 in debt. Despite this small mercy that allowed him to move on with his life, he now counsels people to avoid bankruptcy at all costs and does everything he can to re-stigmatize the process.

Behind the scaremongering, Mr. Ramsey's makes two basic wrong points. His first avenue of attack is that bankruptcy damages credit. Bankruptcy does damage credit for several years. However, the simply truth is that people considering bankruptcy already have or shortly will have severely damaged credit. Not paying debts on time severely damaged credit. When this is inevitable, very little additional damage is done by filing bankruptcy. In fact, bankruptcy can even clean up the cluster bomb of multiple debt defaults by replacing the credit balances on a report with zeros. In any event, a Google search of "credit after bankruptcy" will quickly illuminate the well-trod path to rebuilding credit after bankruptcy--something that is not an option while you're still mired in debt.

The second avenue of attack is more insidious. Mr. Ramsey lays it on thick about the psychological cost of bankruptcy, comparing it to the death of a loved one and having the nerve to suggest that it might be one of the worst experiences of your life. This is just insane. I've been practicing bankruptcy law since 2002 and I can say without any reservation that the reverse is true. People are so relieved after getting a debt discharge after struggling with it for so long. Permission to move on with your life is freeing and cathartic. By way of an example, check out this message board I found tonight discussing Dave Ramsey and people's real experiences with bankruptcy. You can also read my site to read about people's experiences with us and the bankruptcy process.

The truth is that Mr. Ramsey did what many rational and intelligent people do when faced with an insurmountable debt problem: He sought refuge in the legal system created to help him. Counseling people to do otherwise is irresponsible. I usually don't mind anti-bankruptcy posturing, but when it affects someone in their 70s, it does bother me. I say live what life you have left for yourself and your family, and not for the credit card companies. The credit card companies--the beneficiaries of Mr. Ramsey's rhetoric--can take care of themselves and have had plenty of influence on the bankruptcy laws on the books today. One should pay their debts if they can, but if someone simply cannot pay and qualifies for bankruptcy, they are doing themselves and their family a great disservice by not taking the help that the law provides.

U.S. Supreme Court Decides Ransom

The U.S. Supreme Court just decided an important bankruptcy controversy. The question was whether you could take an "ownership" deduction for a paid-off car on the bankruptcy means test. The answer is now, no.

The case is Ransom v. MBNA et al (link opens .pdf version of opinion).

This decision means a slightly higher Chapter 13 payment for some consumers and more consumers having to file Chapter 13 instead of Chapter 7. However, like most things, it will not affect the bottom line for the overwhelming majority of people who need bankruptcy relief. That bottom line is this: If you cannot afford to pay dischargeable debts (like credit cards), you will not have to if you file bankruptcy. If you can afford to pay some, you will have to in an orderly Chapter 13 partial repayment plan.

Massachusetts Governor Signs Exemption Bill

Days ago, Massachusetts Governor Deval Patrick signed the personal property exemption modernization bill into law. I previously wrote about the bill here and provided a list of the updated exemptions that will apply outside of bankruptcy and within many bankruptcy cases.

The Globe's coverage of the signing can be viewed here.

This is a solid victory for consumer advocates and Massachusetts consumers.

Massachusetts on Verge of Modernizing Exemptions

Massachusetts has some antiquated exemptions ($700 for a car!). These exemptions allow people to keep certain property when they are in debt. The Massachusetts legislature this week passed a long-awaited update. The bill now awaits the governor's signature. These changes will affect many people but, off the top of my head, two groups will most immediately benefit:

(1) People who have home equity and other property (such as paid-off cars) who need to file for bankruptcy.

(2) And people who own a car, are subject to debt judgments, and do not want their car to be seized by creditors.

Congrats to NACA and NCLC! They worked hard to lobby for these changes.

The full list of the new Massachusetts exemptions in the bill are here:

Property	Current	New
Money for utilities	$75	$500
Furniture	$3000	$15,000
Books	$200	$500
Tools	$500	$5000
Stock in trade	$500	$5000
Provisions for family	$300	$600
Fishing equipment	$500	$1500
Sewing machine	$200	$300
One computer & one TV	none	no stated dollar limit
Rent money	$200	$2500
Cash or savings (execution)	$125	$2500 on any day
Wages (execution)	$125	greater of 85% of gross wages or 50 times min. wage per week
Automobile	$700	$7500 wholesale, $15000 for disabled or elderly
Personal property	none	$1000 to $6000
Jewelry	none	$ 2500
Wages (trustee process)	$125	greater of 85% of gross wages or 50 times min. wage per week
Bank account (trustee process)	$125	$2500