BANKRUPTCY REVIEW MAY
MEAN GOOD NEWS...
...and then maybe it won't
By Alan Steven Wolf of The Wolf Firm
(Network News, September/October 1997)
There was great news, which is now merely good news, and then only
maybe. The Bankruptcy Review Commission is about to issue a report to Congress suggesting
vast changes in Bankruptcy Code. Many of the changes initially approved by the Commission
were highly beneficial to first trust deed lenders, however, at the last Commission
hearing held August 12, 1997, the Commission bowed to the demands of consumer groups and
watered down many of its initial recommendations.
The Commission was established by the Bankruptcy Reform Act of 1994,
and is comprised of nine members selected by the President, the Chief Justice and
the bipartisan Congressional leadership. Its mandate is to review the bankruptcy
system and suggest changes. The USFN is very proud to note that John Gose, a member of
Washington State USFN member firm Preston, Gates & Ellis, was one of the nine people
selected to serve on this prestigious Commission.
Since the Commission's formation, members have traveled the country
holding meetings to review and discuss suggested changes to the Code. As part of this
process, the Commission has invited and heard testimony from a variety of industry
experts, including Mark Friedman of USFN Maryland and Washington D.C. member firm Friedman
& MacFayden, and Dean Cooper of Freddie Mac. As a result of its investigation, the
Commission has now recommended approximately 70 changes to the bankruptcy laws and will
present a final report to Congress on October 20, 1997.
Although the changes are merely suggestions for Congressional action,
the Commission's recommendations obviously carry great weight. To ensure that these
helpful amendments to the Code make their way into law, the industry needs to coordinate
its lobbying efforts. In addition, it is not too early for mortgage bankers to start
assessing the effect that these changes, if adopted, would have on their operations. Here
is some of the good and the bad:
I. The Good:
A. Multiple Bankruptcy Filing Abuse
The Commission heard copious testimony regarding the problem of
multiple bankruptcy filing abuse. These abusive schemes range from complex rent skimming
patterns, often marked by the creation of fractionalized interests in property, to the
repeated filing of new bankruptcy cases by individual debtors with no intent to
reorganize. To thwart these schemes and to place bankruptcy into proper perspective, the
Commission has recommended two major changes, (1) limitations on
how often a bankruptcy case can be filed; and (2) express authority for courts to issue
"in rem" orders, or orders that determine the disposition of a particular piece
of real property regardless of future bankruptcy filings.
1. Limitations On How Often A Bankruptcy Case Can Be Filed
The Bankruptcy Code now allows unlimited bankruptcy filings, except in
some circumstances where a debtor is barred from filing for a period of only 180 days. As
a practical matter debtors routinely ignore the 180 day bar, file a petition, and each new
filing provides a new automatic stay.
The Bankruptcy Review Commission's recommendation provides that there
is no automatic stay for the third or later filing by a debtor within six years if the
debtor has been in a bankruptcy case within 180 days prior to the most recent filing.
However, for cause shown, the court may impose a stay where a stay would otherwise not
automatically arise.
In addition, the Commission recommends that there be no automatic stay
upon the filing of a petition by an individual
with respect to property acquired by that individual from a person who was a debtor within
180 days of the new filing. Again, a court can impose a stay in such case after notice and
a hearing,but the stay is not automatic.
These suggestions can be viewed as a broad extension of the 109(g) bar
now found in the Code. The Commission recognized that the 109(g) preclusion is ineffective
because as practical matter debtors routinely file in violation of a section 109(g) bar
(invoking a new automatic stay with each filing) and courts do not have the ability to
determine whether a filing is in violation of section 109(g), i.e., that the
computerization of the Clerk's office does not allow for the effective implementation of
the provision. To solve the later problem, the Commission recommends a national filing
system which would identify bankruptcy filings using social security numbers or other
unique identifying numbers.
2. In Rem Orders
To add even greater weight to its fight against multiple bankruptcy
filing abuse, the Commission suggests expressly empowering courts to issue "in
rem" orders barring the application of a future automatic stay to identified property
of the estate for a period of up to six years when a party could show that the debtor had
transferred such real property, or fractional shares of property, to avoid creditor
foreclosure or eviction. Of course, the recommendation also allows a subsequent owner of
the property to petition the bankruptcy court for the imposition of a stay to protect
innocent parties who were not a part of the scheme.
B. Cramdowns
The Commission recommends that there be no cramdowns on first mortgages
nor refinanced first mortgages. Current law allows a cramdown on a first mortgage if the
property is not the principalresidence of the debtor when the case is filed. Under the
recommendation, whether or not the property the principal residence of the debtor, a first
mortgage or a refinance of a first mortgage cannot be crammed down.
C. Credit Reporting
The Commission recommends that the Fair Credit Reporting Act be amended
so that debtors that complete Chapter 13 plans and Debtors that complete voluntary debtor
education programs are provided a special favorable entry on their credit report. This
should encourage people to complete Chapter 13 plans and to seek credit education.
II. Bad
A. Cramdown of Junior Liens
Junior liens are subject to cramdown whether or not the property is the
principal residence of the debtor at the time of filing; however, they can not be
reduce to less than the secured amount at the time of loan origination.
B. False Claims
The Commission recommends that creditors who file and fail to correct
materially false claims in bankruptcy can be ordered to pay the costs and the debtors'
attorneys' fees involved in correcting the claim. Furthermore, it is recommended that if a
creditor knowingly files a false claim, the court could impose appropriate additional
sanctions.
C. Violation of Discharge Injunction
The Commission recommends assessing costs, attorneys' fees and treble
damages to any creditor who violates the discharge injunction.
D. Reaffirmation Agreements
The Commission reviewed great abuse in the use of reaffirmation
agreements and concluded that reaffirmation agreements should be permitted
only upon court approval and only as to the allowed amount of the secured claim.
Essentially this precludes recovery of any deficiency as of the reaffirmation date;
only that portion which is fully secured as of that date is still held as personal
liability, and then only after court order allowing this liability.
For further information please contact:
Alan Steven Wolf
The Wolf Firm
A Law Corporation
18 Corporate Plaza Drive
Newport Beach, CA.
Tel: (949) 720-9200.
Fax: (949) 720-9250
The Wolf Firm, A Law Corporation,
is an "AV" rated law firm which concentrates on providing superior legal
services to the mortgage banking industry. The firm's national clientele includes
many of the largest mortgage bankers in the country, as well as a variety of savings
banks, commercial banks, commercial finance companies, credit unions, and the Resolution
Trust Corporation. With a staff of approximately forty individuals, including attorneys,
certified paralegals, legal secretaries, administrators, clerical personnel, and a full
time computer systems analyst, the firm represents its clients on a wide range of matters
including all aspects of both residential and commercial/multifamily mortgage loan
origination and servicing, securitization, regulatory compliance, bankruptcy, and
litigation related to the foregoing in both federal and state courts throughout
California. For more routine matters, such as residential bankruptcies, evictions and
receiverships, The Wolf Firm has developed extremely cost-effective and efficient
programs using specially trained paralegals and computer technology to assist its
attorneys in handling these matters at rates that are the most competitive in the State of
California and, through its membership in the USFN, the Firm is able to arrange similar
services in virtually every state in the nation.
This article is intended as a general discussion and should not be construed or used
as legal advice or a legal opinion. Should you seek legal advice, you should consult with
your own attorney.
Copyright- All rights reserved
Go to listing of articles
The Wolf Firm
A Professional Law Corporation
18 Corporate Plaza Drive
Newport Beach, California 92660
(949) 720-9200 Phone
(949) 720-9250 Fax
E-Mail us at Alan_Wolf@wolffirm.com
| Home | What's New | Firm Profile | Firm Resume | Firm
Publications |
| Library | Bookstore
| Missing Assignment Database | Mortgage
Banking Training |
| Employment | Guestbook | Industry News
| Industry Calendar | Search
|
| Forms | Photo
Albums | Miscellaneous | Disclaimer | Contact
us! |
Last Revised On
© 1996-2001 The Wolf Firm. All rights reserved.