By Michael V. BaumerLaw Office of Michael BaumerAustin, TX This is a very long post describing some recent case law with respect to home equity litigation in Texas. These events are significant to a consumer bankruptcy practice, but if the subject is of no interest, you may want to skip it.The Texas Supreme Court issued two opinions on May 20, 2016 regarding issues related to the home equity loan forfeiture provisions of the Texas Constitution. These opinions make significant changes to Texas case law regarding applicability and enforcement of those provisions. The first case was Garofolo v. Ocwen Loan Servicing, L.L.C., 497 S.W.3d 474 (Tex.2016) and the second is Wood v. HSBC Bank USA, N.A., 2016 WL 2993923 (Tex.2016). It is important that the cases are read in sequential order as Woodrelies on Garofoloin reaching its conclusion. (All references to the Texas Constitution herein are to Article XVI, section 50(a)(6) and its subsections unless otherwise noted.)I found these cases to be confusing (as did my sister who edits my posts) so I write to provide my understanding/interpretation of what they mean. To help you understand where we are going let me summarize at the beginning. Garofoloholds that there is no constitutionalviolation if a lender violates 50(a)(6) by not curing a violation if none of the cures enumerated in 50(a)(6)(Q)(x) will actually cure the violation. The court goes on to state (in dicta)  that a borrower may have a breach of contract claim if the lender fails to cure after notice from the borrower and suffered actual damages. More significantly, Woodholds that if an equity lien does not include all of the terms and conditions required by 50(a)(6), it is not a valid lien under 50(c), and since it is not a valid lien, limitations does not start to run until the lender fails to cure after notice. (The statute of limitations ruling is the big news out of these two cases.) Woodalso confirms Garofolo’s statements that a borrower may assert a claim for forfeiture as a breach of contract claim if the claim is asserted under 50(c) as opposed to 50(a).Garofolo  Answers Question:   What Happens If I Don't Get My Cancelled Note Back?In Garofolo, the Fifth Circuit certified two questions to the Texas Supreme Court because they involved interpretation of the Texas Constitution. Those two questions were:Does a lender or holder violate Article XVI, Section 50(a)(6)(Q)(vii) of the Texas Constitution, becoming liable for forfeiture of principal and interest, when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder fails to return the cancelled note and release of lien upon full payment of the note within 60 days after the borrower  informs the lender or holder of the failure to comply? If the answer to Question 1 is “no,” then, in the absence of actual damages, does  a lender or holder become liable for forfeiture of principal and interest under a breach of contract theory when the loan agreement incorporates the protections of Section 50(a)(6)(Q)(vii), but the lender or holder, although filing a release of lien in the deed records, fails to return the cancelled note and release upon full payment of the note within 60 days after the borrower informs the lender or holder of the failure to comply?Section 50(a)(6)(Q)(vii) states that a home equity loan is made on the condition that: (vii) within a reasonable time after termination and full payment of the extension of credit, the lender cancel and return the promissory note to the owner of the homestead and give the owner, in recordable form, a release of the lien securing the extension of credit or a copy of an endorsement and assignment of the lien to a lender that is refinancing the extension of credit; To avoid the suspense, the Court answered both questions “no.” Garofolostarts with one atypical fact – the equity loan in question had been paid in full and the lender filed a release of lien in the real property records before litigation ensued. Ocwen, however, failed to send the borrower the cancelled promissory note and a release in recordable form within a reasonable time after full payment of the loan as required by 50(a)(6)(Q)(vii) and by the deed of trust andthe lender failed to cure within 60 day after notice from the borrower as provided in 50(a)(6)(Q)(x).  The GarofoloCourt held that a breach of the terms of the extension of credit under the terms of the loan documents – in this case, failure to timely return the note and send a release after demand – did not give rise to a constitutional claim for forfeiture. “Our constitution lays out the terms and conditions a home-equity loan must include if the lender wishes to foreclose on a homestead following borrower default.” In other words, an equity lending violation is a shield not a sword, although how the sword is wielded is not made completely clear by Garofolo(or Wood). The court states that “we do not suggest Garofolo is not without recourse. Her remedy simply lies elsewhere– for instance, in a traditional breach-of-contract claim, in which a borrower seeks specific performance or other remedies contingent on a showing of actual harm.” [Emphasis added.]With respect to the breach of contract claim, however, the Court held that she did not have a claim for forfeiture under a breach of contract theory as it was undisputed that she had suffered no actual damages as a result of the breach. (Although the holder did not send her a release in recordable form, the holder did file an actual release in the real property records so there was no cloud on her title.) The court noted that the 2003 amendments to 50(a)(6) included a change to the forfeiture provision “whereas forfeiture under the original version was arguably triggered whenever a lender ‘fails to comply with [its]obligations,’ the current version does not implicate forfeiture until a lender ‘fails to correct the failure to comply… by’ performance of a corrective measure.”Section 50(a)(6)(Q)(x) was amended in 2003 to set out the methods by which a lender or holder may correct the failure to comply. The amended statute provides:Except as provided by Subparagraph (xi) of this paragraph, the lender or any holder of the note for the extension of credit shall forfeit all principal and interest of the extension of credit if the lender or holder fails to comply with the lender’s or holder’s obligations under the extension of credit and fails to correct the failure to comply not later than the 60th day after the date the lender or holder is notified by the borrower of the lender’s failure to comply by:paying the owner an amount equal to any overcharge paid by the owner under or related to the extension of credit if the owner has paid an amount that exceeds an amount stated in the applicable Paragraph (E), (G), or (O) of this subdivision;[Paragraph (E) is the 3% cap on closing costs which is one of the more common violations. Paragraph (G) is the prohibition against pre-payment penalties. Paragraph (O) limits the interest rate to a “rate permitted by statute.”]sending the owner a written acknowledgement that the lien is valid only in the amount that the extension of credit does not exceed the percentage  described by Paragraph  (B) of this subdivision, if applicable, or is not secured by property described under Paragraph (H) or (I) of this subdivision, if applicable;[Paragraph (B) is the 80% loan-to-value limitation. Paragraph (H) prohibits taking “any additional real or personal property other than the homestead” as collateral for the loan. Paragraph (I) prohibits taking an equity lien on ag exempt property.]sending the owner a written notice modifying any other amount, percentage, term, or other provision prohibited by this section to a permitted amount, percentage, term, or other provision and adjusting the account of the borrower to ensure that the borrower is not required to pay more than an amount permitted by this section and is not subject to any other term or provision prohibited by this section;[This cure does not refer to any specific provision or prohibition.]delivering the required documents to the borrower if the lender fails to comply with Subparagraph (v) of this paragraph or obtaining the appropriate signatures if the lender fails to comply with Subparagraph (ix) of this paragraph;[Subparagraph (v) is the provision that requires the lender to provide the borrower with copies of all documents signed by the borrower related to the extension of credit which were signed at closing. Subparagraph (ix) is the provision which requires the acknowledgment of value to be signed by the borrower and the lender.]sending the owner a written acknowledgement, if the failure to comply is prohibited by Paragraph (K) of this subdivision, that the accrual of interest and all of the owner’s obligations under the extension of credit are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead; or[This one presents a problem. Paragraph (K) provides that a borrower may only have one equity loan at a time. The cure provision is that the lender must send the borrower a written acknowledgement that accrual of interest and all of the borrower’s obligations under the extension of credit (including making payments) are abated while any prior lien prohibited under Paragraph (K) remains secured by the homestead. But, assuming that the first lien equity loan is otherwise valid, then the first lien is not prohibited by Paragraph (K). The cure provision as drafted would seem to provide only a cure for a third lien equity loan. In short, the cure does not appear to match the violation.]if the failure to comply cannot be cured under Subparagraphs (x)(a)-(e) of this paragraph, curing the failure to comply by a refund or credit to the owner of $1,000 and offering the owner the right to refinance the extension of credit with the lender or holder for the remaining term of the loan at no cost to the owner on the same terms, including interest, as the original extension of credit with any modifications necessary to comply with this section or on terms on which the owner and the lender or holder otherwise agree that comply with this section.In this case, the violation – failing to return the cancelled note and sending a release in recordable form - does not fall within the scope of subparagraphs (a) through (e) so it must fall, if anywhere, within the scope of the “catchall” provisions of subparagraph (f). The Court held, however, that under the circumstances the catchall cure would not actually provide a cure. The lender could offer to pay or credit $1,000 but could not refinance the extension of credit as there was no longer any debt to refinance. Garofoloconcluded “…if a lender fails to meet its obligations under the loan, forfeiture is an available remedy only if one of the six corrective measures can actually correct the underlying problem andthe lender nonetheless fails to timely perform the relevant corrective measure.” [Emphasis added.]The final paragraph of the opinion states:The terms and conditions required to be included in a foreclosure-eligible home-equity loan are not substantive constitutionalrights, nor does a constitutionalforfeiture remedy exist to enforce them. The constitution guarantees freedom from forced sale of a homestead to satisfy the debt on a home-equity loan that does not include the required terms and provision – nothing more. Ocwen therefore did not violate the constitutionthrough its post-origination failure to deliver a release of lien to Garofolo. A borrower may seek forfeiture through a breach-of-contractclaim when the constitutional forfeiture provision is incorporated into the terms of a home-equity loan, but forfeiture is available only if one of the six specific constitutional corrective measures would actually correct the lender’s failure to comply with its obligations under the terms of the loan, and the lender nonetheless fails to perform the corrective measure following proper notice from the borrower. If performance of none of the corrective measures would actually correct the underlying deficiency, forfeiture is unavailable to remedy a lender’s failure to comply with the loan obligation at issue. Accordingly, we answer “no” to both certified questions. [Emphasis added.] [Unfortunately, Garofolo does not make clear the distinction between 50(a) and 50(c). More on this infra.]Baumer Responds My response to the Court’s summary:First sentence: The terms and conditions applicable to home equity loans contained in 50(a)(6) are not “required” to be “included” in the equity loan documents (although most of them typically are included).Second sentence: A borrower is protected from forced sale of a homestead if the loan “does not include the required terms and conditions – nothing more.”” The opinion suggests that defects in an equity loan are only a defense to foreclosure and not the basis for an affirmative claim against the lender, but… (Look at the fourth sentence).Fourth sentence: Notwithstanding the holding that there is no constitutional violation or remedy, the court also stated that a borrower may seek forfeiture under a breach of contract theorybut:only if one of the corrective measures contained in 50(a)(6)(Q)(x)(a)-(f) would actually cure the violation;and the lender fails to perform the applicable corrective action following notice from the borrower;and the borrower sustained actual damages as a result of the uncured violation.Fifth sentence: If none of the corrective measures enumerated in the 50(a)(6)(Q)(x)(a)-(f) would actually correct the violation, forfeiture is not an available remedy.The missing sentence: The Court states elsewhere that the borrower must be able to prove actual damages in order to invoke forfeiture under a breach of contract theory. Under the facts of the case, the borrower in Garofolosustained no actual damages and has no remedy.Because of the atypical fact in this case that the loan was paid in full prior to the instigation of litigation, the holding should be limited in its application. (Although I am primarily a debtor’s attorney, I have to agree with the result in Garofolo. The violation was highly technical and the borrower suffered no damages, actual or otherwise. A borrower shouldn’t get a “free house” under those circumstances.)    Wood Holds No Statute of Limitations for Curing Constitutionally Non-Compliant Home Equity Loans Wood is the follow up to Garofolo. Wood states:The primary issue in this case is whether a statute of limitations applies to an action to quiet title where a lien securing a home-equity loan does not comply with constitutional parameters. The parties also dispute whether petitioners are entitled to a declaration that respondents have forfeited all principal and interest on the underlying loan. We conclude that liens securing constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to any statute of limitations. We further hold that in light of this Court’s decision today in Garofolo [citation omitted], petitioners have not brought a cognizable claim for forfeiture. [Emphasis added.]The determination that there is no applicable statute of limitations is a major change from prior case law which generally held that limitations accrues at closing if the violation was apparent at the time of closing. See, In re Priester, 708 F.3d 667 (5th Cir.2013);  Schanzle v. JPMC Specialty Mortgage LLC, 2011 WL 832170 (Tex.App – Austin 2011); Santiago v. Novastar Mortgage, Inc., 443 S.W.3d 462 (Tex.App. – Dallas 2014); Estate of Hardesty, 449 S.W.3d 895 (Tex.App. – Texarkana 2014). [Judge Gargotta took an early lead on the limitations issue in In re Ortegon, 398 B.R. 431 (Bankr.W.D.Tex.2008), a case I lost. Somebody has to try the cases where we don’t know what the answer is.] The borrower did not have to be aware that the extension of credit violated 50(a)(6), as long as it was not concealed. For instance, if the closing costs exceeded the 3% cap on closing costs and that could be determined by doing the math on the HUD-1, the fact that the borrower was not aware of the 3% cap or how it was calculated does not delay limitations from running.Wood explains the holding in Garofolo, including the scope of that opinion.Our opinion today in Garofolo clarifies the extent of the protections outlined in section 50(a), including a borrower’s access to the forfeiture remedy. Specifically, we hold in Garofolo that section 50(a) does not create substantive rights beyond a defense to foreclosure of a home-equity loan securing a constitutionally noncompliant loan, observing that the terms and conditions in section 50(a)“are not constitutional rights and obligations unto themselves.” We also clarify that “the forfeiture remedy [is not] a constitutional remedy unto itself. Rather it is just one of the terms and conditions a home-equity loan must include to be foreclosure-eligible. We explain that borrowers may access the forfeiture remedy through a breach-of-contract action based on the inclusion of those terms in their loan documents, as the Constitution requires to make the home-equity loan foreclosure-eligible. In Garofolo we interpret only section 50(a), which sets the terms home-equity loans must include to foreclosure-eligible. Section 50(c), on the other hand, expressly addresses the validity of any homestead lien, broadly declaring the lien invalid if the underlying loan does not comply with section 50. [Internal citations omitted.] [Emphasis added.]Section 50(a) provides, in relevant part: “The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except: [a list which includes subparagraph (6) which describes home equity loans.] [Emphasis added.]Section 50(c) provides, in contrast: “No mortgage, trust deed, or other lien on the homestead shall ever be valid unless it secures a debt described by this section…” [Emphasis added.]Although Garofolo is less than crystal clear that its holding is based on 50(a) as opposed to 50(a)(6), Wood makes clear that the distinction is between 50(a) and 50(c).Although Garofolo and Wood may seem to say that a borrower may not bring a declaratory relief action regarding an alleged home equity defect, the actual holding is that a borrower may not bring a declaratory relief action based upon alleged constitutional violations. Both opinions make it clear that a borrower may bring an action for breach of contract if the loan is noncompliant andthe lender/holder fails to cure after notice. This is significant as a claim for breach of contract gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 38.001 and a claim for declaratory relief gives rise to a request for attorney’s fees under Tex. Civ. Prac. & Rem. Code Sec. 37.009. (I say “request” as both statutes are discretionary – the court “may” award attorney’s fees.)  The Take Aways What it the message for practitioners? If a potential client comes to you and you identify a home equity violation, you should draft a notice of violation letter for the client’s signature which identifies the violation with sufficient specificity for the lender to identify the violation, i.e., if the violation is charging more than 3% for closing costs, say that. You do not have to identify the specific statutory sub-paragraph. Do not take any further action during the 60 day cure period. Assuming the lender does not cure, you have a couple of options. Have the borrower default, wait until the lender files an application for foreclosure, then sue the lender for declaratory relief and breach of contract. (And injunctive relief if necessary to stop a foreclosure.) Alternatively, don’t wait for the lender to take action and file a preemptive declaratory relief/breach of contract action. In your pleading, make certain that forfeiture of principal and interest is requested under 50(c), not 50(a). The declaratory relief is that the loan is invalid under 50(c). The breach of contract claim is that the lender failed to cure the violation pursuant to 50(a)(6)(Q)(x)(a)-(e) after notice pursuant to 50(a)(6)(Q)(x).This is way beyond the scope of this post, but home equity violations may give rise to other claims and causes of action. For instance, there may be claims for DTPA violations. Texas case law holds that a loan is not a “good’ or “service” and will not serve as the basis for a DTPA violation. If, however, the home equity violation is charging closing costs in excess of the 3% cap, one or more of those costs may be a good or service – an appraisal, a survey, a tax certificate….... - which might bring the claim under the DTPA. There may also be RESPA violations, FDCPA violations, FCRPA violation,… (I have seen all of these. This is not meant to be an exhaustive list.) I mention the DTPA in particular as it may give rise to treble damages. (And attorneys fees.)

3 Options Regarding Financed Cars When a person files for chapter 7 bankruptcy relief and they have a financed vehicle, the debtor has three options with regard to that secured debt. The debtor can reaffirm the debt on the vehicle, redeem the debt on the vehicle or surrender the vehicle in full satisfaction of the+ Read More The post Auto Lender Moved Too Fast To Repossess In An Open Chapter 7 Bankruptcy Case appeared first on David M. Siegel.

This is the bankruptcy case study for Ms. W., who resides in Chicago, Illinois. She is here to discuss filing for Chapter 7 bankruptcy. She recently lost her job. Her previous income was insufficient to cover her expenses after she became divorced. Let’s examine the facts of her case: She currently resides in Chicago and+ Read More The post Bankruptcy Case Study appeared first on David M. Siegel.

By Ed Adamczyk Feb. 17 (UPI) -- Total U.S. household debt climbed to a near-record $12.58 trillion by the end of 2016, a Federal Reserve Bank of New York report says. February's 33-page "Quarterly Report of Household Debt and Credit" shows that every category of debt measured -- including mortgages, credit cards, student loans and auto loans -- saw an increase.The total increase of $460 billion in 2016 was the largest in a decade. Mortgage balances, now at $8.48 trillion, made up 67 percent of the household debt. At the current rate of growth, household debt is expected to break the 2008 record high, of $12.68 trillion, sometime in 2017. The year was marked by the start of a recession. The report indicates mortgages still make up the bulk of household debt, but student loans are now 10 percent of the total, auto loans are 9 percent of the total and credit card debt is 6 percent. Dollar amounts rose in each category in 2016's fourth quarter. The rising debt indicates that banks are extending more credit to households. A major difference between the 2008 and 2016 debt levels, the report said, is that fewer delinquencies were reported at the end of 2016. In last year's fourth quarter, 4.8 percent of debts were regarded as delinquent or late in payment, compared to 8.5 percent of total household debt in 2008's third quarter.There were also 200,000 fewer consumer bankruptcies reported in 2016's fourth quarter, a four percent decline, compared to the fourth quarter of 2015.Copyright © 2017 United Press International, Inc. All Rights Reserved. 

After Bankruptcy Mistakes: Navy Fed does the Right Thing; Wells Fargo Makes More Excuses. Everybody makes mistakes. Banks do, too. When you file bankruptcy, the banks you owe money to don’t always do what they are supposed to do. This is a true story of Navy Fed admitting their mistake and fixing it. Wells Fargo […]The post Navy Fed does the Right Thing; Wells Fargo Makes More Excuses by Robert Weed appeared first on Robert Weed.

After Bankruptcy Mistakes: Navy Fed does the Right Thing; Wells Fargo Makes More Excuses. Everybody makes mistakes. Banks do, too. When you file bankruptcy, the banks you owe money to don’t always do what they are supposed to do. This is a true story of Navy Fed admitting their mistake and fixing it. Wells Fargo […] The post Navy Fed does the Right Thing; Wells Fargo Makes More Excuses by Robert Weed appeared first on Robert Weed.

Fear Of Failure To List Creditors There is a fear that many chapter 7 debtors have with regard to failing to properly list creditors. The bankruptcy code provides that creditors be given due process with regard to the bankruptcy filing. This means that creditors must be given notice of the bankruptcy so that they have+ Read More The post Chapter 7 Debtor Brings Motion To Reopen In Aurora appeared first on David M. Siegel.

  A Judge in North Carolina sanctioned a debtor's attorney under Rule 9011 regarding the signing and filing of a reaffirmation agreement with Ally Financial.  In re Griffin, No. 16-11017, 2017 WL 56049 (Bankr. M.D.N.C. Jan. 4, 2017).  The Court noted a number of issues.    First, was that the debtor's schedules I & J showed negative monthly income of $337.20 whereas the Debtor's Statement in S Upport of the Reaffirmation Agreement indicated expenses exactly equal to the income, with no itemization of how this mathematical result was reached.  Rather, the only explanation proffered on the cover sheet was that he would have less driving to save gas, less eating out and less shopping. The Court noted this explanation of a $337.20 reduction was inadequate given a total initial transportation expense of $139 and total food expense of $200.  The Court also complained how the reduction works out to exactly the amount of income stated.  At the hearing on the matter the Debtor testified that he reduced his television and cable bill by $47 and reduced his phone bill by $53.  Further he indicated he would be paying off two loans against his 401k in February and March 2017 saving an additional $58/month.   However, the Court appeared to expect an exact computation of the savings to reach the $337.20 reduction in expenses, which was not provided.  The Court further complained that counsel's certification on the reaffirmation averred that 1) the agreement represented a fully informed and voluntary agreement by the Debtor; 2) the agreement does not impose an undue hardship on the debtor, and 3) that he has fully advised the Debtor of the legal consequences of the agreement and any default under the agreement.  The undue hardship box was not checked.  At the hearing the Debtor testified that he had not met nor spoken with the counsel that signed the reaffirmation at any time.  The Court also found issue with the fact that the reaffirmation was made according to the original terms of the agreement with the parties, and that there was no evidence of any negotiation that occurred between Ally and Debtor's counsel.    A local rule required that any attorney that represents a debtor in a bankruptcy shall remain the responsible attorney of record for all purposes including the representation of the debtor in all matters until the case is closed or the attorney is relief from representation upon motion and court order.  This specifically includes representation in connection with reaffirmation agreements, however does not require counsel to sign the agreement if counsel cannot do so within the constraints of his judgment, the Federal Rules of Bankruptcy Procedure, and the rules of professional conduct.    The duties of counsel in connection with reaffirmations were stated by the Court to not simply advise clients of their rights and allow them to make a business decision, but rather for counsel to exercise independent judgment as to whether the agreement imposes an undue hardship on the debtor.  If so, counsel is duty bound to decline to sign the declaration attached to the agreement.  Citing In re Vargas, 257 B.R. 157, 166 (Bankr. D. N.J. 2001).  Counsel must also independently verify the creditors' current security interests, and to confirm that the liens are unavoidable.  Next counsel must apprise and advise the debtor of other options available instead of reaffirmation.  Presumably redemption through redemption funding agencies as well as surrender and replacement.  The attorney testified at the hearing that all reaffirmations are signed out of the Raleigh office of the firm (the filing having been made in the Greensboro division).  No evidence was presented that either counsel that signed the agreement, nor the attorney that filed the case has personal knowledge of the statements certified to the court.   Under Rule 9011 personal knowledge is required for any affidavit such as the reaffirmation certification.    As a consequence of this failure the Court set an order to show cause hearing for counsel to show cause why the firm and the attorney should not be sanctioned for 1) violating Rule 9011; 2) failing to have in place a procedure to ensure that declarations filed with the court are true and accurate; 3) failing to review facts in a declaration filed with the court; iv) filing a declaration with inaccurate facts; and/or v) signing a declaration to be filed with the court without personal knowledge of its content; and why the declaration in support of the reaffirmation agreement should not be stricken, and why given the finding by the court that the declaration imposes and undue hardship and that it is not in his best interest, why it should not disapprove the agreement.  The Court did rule that the debtor complied with §524(c) and 521(a)(2) thus that the automatic stay remains in effect the vehicle remains property of the estate, and any ipso facto clause in the security agreement or other document remains ineffectual so long as the debtor remains current in his payment and does not rescind the agreement.  The fact that the counsel who signed the agreement never met with the debtor, and never discussed the budget or options is what got the Court's attention.  I have not found that Ally or any of the creditors are generally willing to negotiate terms of a reaffirmation (though given the legislative history requiring negotiation this might be used as a basis to challenge creditor's insistence on reaffirmations).  It also seems somewhat problematic to insist on detailed proof of any changes of expenses to show the affordability of a reaffirmation, though it may be good practice.    It is important for counsel to make an independent analysis of the viability of the Debtor's on-going financial situation in determining whether to sign a reaffirmation.  If schedules I and J do not show money available for a reaffirmation, counsel should have a ready explanation of why the reaffirmation is not an undue hardship and be prepared to explain this to the court, and failing that should refuse to sign the declaration and, if the client insists, let the Court rule on whether the reaffirmation agreement is approved.  Counsel would need to attend such hearing and explain their reasoning for declining to sign the agreement.Michael Barhnett.  www.tampabankruptcy.com

The Automatic Stay Once your chapter 13 bankruptcy case is filed, there are a series of processes and events that take place. Each of these events are required and mandated by the United States Bankruptcy Code and assist in the smooth process of chapter 13 for all parties involved. The first thing that happens is+ Read More The post What Happens Once My Chapter 13 Bankruptcy Is Filed? appeared first on David M. Siegel.

February 2, 2017As a result of Uber’s and Lyft’s technological disruption of the transportation services market, the value of New York City taxi medallions has significantly decreased. In 2014 taxi medallions were being sold for approximately $1.3 million dollars,  Current Taxi & Limousine Commission sales reports from December 2016 and data from taxi medallion brokers indicate that the current value of taxi medallions is approximately $400,000-$600,000.  And according to a recent piece in Bloomberg News, over 80 percent of Capital One Financial Corp.’s loans for taxi medallions are at risk of default.Many entrepreneurial immigrants and other individuals pursuing the American Dream and financial security purchased taxi medallions by borrowing money from banks or finance companies. Many of these loans were at an 80% loan to value ratio, and as a result of the decline in taxi medallion value, the debt securing the taxi medallions exceeds the value of the taxi medallions, giving the medallions a negative value. To use a term from real estate financing, these taxi medallions are “underwater.” Banks and the taxi medallion financing companies require that the borrower sign a Promissory Note, a Security Agreement and a UCC–1 financing statement so that the banks or the financing companies would be a secured creditor. Additionally, the borrower would be personally liable to repay the loan to the bank or financing company, and in some instances the medallion owner may have pledged other assets that they own as collateral for the loan, such as their house.As a result of the decrease in value of taxi medallions, many medallion owners owe substantially more to the bank or financing company than the medallion is worth: a typical example would be an individual who owns a medallion subject to a loan of $1,000,000 and the medallion presently has a fair market value of $500,000 -$600,000, resulting in a deficiency or shortfall of $400,000-$500,000, which the medallion owner would have to repay to the bank or finance company if the medallion were sold. Most medallion owners don’t have sufficient assets to cover this deficiency, creating a financial catastrophe for the medallion owner.There are over 13,000 New York City taxi medallions.  The New York City Taxi & Limousine Commission sales reports indicate that six medallions were sold in December 2016. Two were estate sales (meaning that the medallion owner died and their estates sold the medallion) and four were foreclosures (meaning that the medallion owner could not repay the loan and the bank or financing company foreclosed pursuant to New York State Uniform Commercial Code law to obtain possession of the financed taxi medallion). If we assume that in an average year 5% of taxi medallions are sold or transferred, that would mean that there should be about 700 medallion sales a year or 58 per month.  But if December 2016 was a representative month, medallion sales have nearly ground to a halt!Why so few taxi medallion sales? One answer to this question may be that with the new technology of Uber and Lyft, few individuals see a viable financial future as a taxi medallion owner and driver. Another potential factor is that medallion owners may be hoping that the market will correct itself in the future and their medallions may increase in value over time, hopefully equal to or greater than the amount of the loan associated with the medallion. As we all know, “hope springs eternal” and this strategy may be the equivalent of “kicking the can down the street” – delaying or pushing off a problem that will not go away.The purpose of this article is to present medallion owners with strategies to deal with the reduced or diminished value of the taxi medallion that they own under New York State Debtor and Creditor Law and the federal Bankruptcy Code. There are five possible strategies:1.     The medallion owner can continue to make loan payments and hope that the value of the medallion increases over time and the increased value will allow for a sale of the medallion in the future, which will generate enough money to pay off the medallion loan. As discussed above, as a result of Uber, Lyft and other transportation service technologies, it is doubtful that the value of taxi medallions will ever return to its previous high valuations.The medallion owner can stop making loan payments and surrender the medallion to the bank or finance company or allow the bank or finance company to foreclose or repossess the medallion under New York State law. There are several problems with this strategy.  First, the bank or finance company will commence an action against the medallion owner to collect their debt. Second, after the foreclosure or repossession, the bank or finance company is allowed to seek a deficiency judgment (the difference between the amount due on the medallion loan and the value of the medallion at auction or its value at the time of repossession including legal fees and court costs) against the medallion owner. Under New York State law a judgment is enforceable for 20 years (statute of limitations) and the bank or finance company will be able to: (a) garnish the medallion owner’s wages; (b) place a lien and levy on any financial accounts owned by the medallion owner; and (c) docket the judgment against any real estate owned by the medallion owner. Third, the bank or finance company will report “relief of indebtedness income” to the Internal Revenue Service pursuant to section 108 of the Internal Revenue Code, and practically speaking the amount of the deficiency judgment (calculated above) would be deemed to be income to the medallion owner (unless an exclusion pursuant to this provision can be found).  Fourth, the judgment will be reported to credit reporting agencies, the medallion owner’s credit report score will decrease and the medallion owner will be unable to obtain a loan from another bank or finance company while the judgment is outstanding.The medallion owner can stop making loan payments to the bank or finance company and attempt an “out-of-court workout” with the bank or finance company. Under this scenario, the medallion owner would hire an attorney to negotiate a consensual return of the medallion to the bank or the finance company and any other consideration or money negotiated between the parties. The benefits of this approach are as follows: First, this arrangement is consensual and there will be no litigation between the medallion owner or the bank and finance company.  Second, a judgment will not be entered against the medallion owner. Third, the amount of relief of indebtedness income that would be reported to the Internal Revenue Service pursuant to section 108 of the Internal Revenue Code would be minimized. Under this scenario, the bank or the finance company would ask for an Affidavit of Net Worth (a statement of assets and liabilities made under oath) from the medallion owner to determine what assets the medallion owner could use pay the deficiency to the bank or the finance company if the value of the medallion is substantially less than the value of the outstanding balance of the loan.The medallion owner can file a chapter 7 personal bankruptcy. Chapter 7 personal bankruptcy is known as a “Liquidation and Fresh Start”. The medallion owner would hire a bankruptcy attorney, provide financial information to the attorney, who would then prepare a bankruptcy petition for the medallion owner and file the bankruptcy petition with the bankruptcy court. The medallion owner would go to court for a meeting of creditors with the bankruptcy attorney and then obtain a Discharge from the bankruptcy court, discharging or eliminating the loan or monies due to the bank or financing company. Under this scenario, the chapter 7 bankruptcy trustee could attempt to sell the taxi medallion or it would be surrendered to the bank or the financing company. The good news for the medallion owner is that if a debtor files under chapter 7, there is no relief of indebtedness income to the medallion owner. Additionally, with guidance from an experienced attorney, the medallion owner will be able to repair their credit in approximately a year to 18 months. However, if the medallion owner owns other valuable property or assets (such as a house, co-op, condominium or vacation property), the bankruptcy trustee has the right to sell or liquidate those assets to repay creditors. With respect to the family house, co-op or condominium unit, the medallion owner would be able to claim a homestead exemption (in the New York metropolitan area) of $165,550 for himself or herself and $165,550 for their spouse (if they are married and both parties reside in the house, co-op or condominium). Additionally, the chapter 7 bankruptcy filing would negatively impact the debtor’s credit report score. A medallion owner should consult with an experienced bankruptcy attorney before going down the path of a chapter 7 personal bankruptcy filing.Finally, the medallion owner can file a chapter 13 personal bankruptcy. Chapter 13 bankruptcy is a form of personal bankruptcy for individuals who own valuable property that they want to keep at the conclusion of the bankruptcy case, and requires that the debtor to make three to five years of payments out of their disposable income (future income minus necessary living expenses) to the bankruptcy trustee, who then makes distributions to the creditors in the case. The chapter 13 bankruptcy filing could be used by a medallion owner who wants to keep the medallion and continue to make payments to the bank or financing company, or it could be used to return the medallion to the bank or financing company and allow the debtor/medallion owner to keep the other assets or property that they own, provided that they make all of the payments scheduled in their chapter 13 plan. A chapter 13 bankruptcy filing is more favorable for credit reporting purposes then chapter 7 bankruptcy.As you can see, there are many strategies under New York State law and federal bankruptcy law that can be utilized by a medallion owner who owns a medallion that’s underwater. Just as there is no such thing as “a one sized shoe that fits all,” each potential strategy discussed above must be reviewed and evaluated by an experienced bankruptcy and workout attorney who has reviewed the medallion owner’s financial situation and understands the medallion owner’s desired outcome. At Shenwick & Associates, we have represented medallion owners and other debtors, and are extremely experienced at doing workouts and bankruptcy filings for both individuals and companies. Those interested in setting up a meeting with Jim Shenwick can call him at (212) 541-6224 or email him at jshenwick at gmail dot com.© 2017 James Shenwick.  All rights reserved.