Consumer Bankruptcy

I have trained more than 350 attorneys at my bankruptcy boot camps, and to my surprise less than 10 percent know what I mean when I refer to a “QWR.” This is shocking in that a reasonable QWR can provide the attorney for the chapter 13 debtor with some of the very best discovery outside of a contested case or adversary proceeding. The QWR can be used to find out how the servicer for the securitized trust is applying the debtor’s money and the disbursements by the chapter 13 trustee. It can also be used to identify all of the “ancillary fees” and “collateral charges” that mortgage servicers are so fond of unilaterally adding to the debtor’s mortgage account.

The U.S. Supreme Court just ruled 9-0 in United Student Aid Funds Inc. v. Espinosa, 559 U.S. ____ (2010), which held that the bankruptcy court’s order confirming the debtor’s plan is not voidable under Federal Rule of Civil Procedure 60(b) when no jurisdictional and/or due process violations have occurred. The Court noted that United’s remedy should have been to timely appeal the confirmation order, which it did not do. The Court further noted that while it is the duty of the bankruptcy court to make a finding of undue hardship, the lack of that finding amounted to legal error, and therefore, the confirmation order is binding.

The Pooling and Servicing Agreement (PSA) is the document that actually creates a residential mortgage-backed securitized trust and establishes the obligations and authority of the master servicer and the primary servicer. The PSA also establishes mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. It is this unbroken chain of assignments and negotiations that creates what I have called the “alphabet problem.”

Due to the recent downturn in the real estate market, chapter 13 debtors are fabricating new tools to surrender their real estate. While surrendering a secured asset is not a novel concept in the Bankruptcy Code,[1] one new “tool” being utilized is attempting to surrender real property with excess mortgage debt in full satisfaction of the mortgage. Unfortunately for debtors, this tool is as effective as using a plastic hammer on a railroad spike.

Section 704(a) of the Bankruptcy Code enumerates the essential duties of a bankruptcy trustee in a chapter 7 case, requiring that the trustee “collect and reduce to money the property of the estate for which such trustee serves.” The courts have occasionally been asked to interpret whether this provision gives a governmental dimension to the functions of the trustee, and as a result, whether constitutional restrictions apply to the trustee. In conflicting opinions, courts have answered in the affirmative and negative. In In re Bursztyn,366 B.R. 353 (Bankr. D. N.J. 2007) the U.S. District Court for the District of New Jersey recently held that for the purposes of searching the debtor’s property, a trustee was an agent of the government, but that the search and seizure of the debtor’s property was not unreasonable under the Fourth Amendment of the U.S. Constitution. 366 B.R. 353 (Bankr. D.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) added a new provision regarding personal property leases, §365(p), which provides:

In In re Lane,( George Lane, et. Al v. Western Interstate Bancorp), 280 F.3d 663 (6th Cir. 2002), the Sixth Circuit Court of Appeals, following the direction of the U.S. Supreme Court’s decision in Nobleman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106 (1993), held that §1322(b)(2), or what is commonly known as the anti-modification clause, did not protect an unsecured mortgage-holder from modification of its lien through the chapter 13 plan process.

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a bankruptcy court’s decision to dismiss a chapter 7 case pursuant to §707(b)(3) in In re Egebjerg.[1] The bankruptcy court concluded that the debtor’s loan from his §401(k) plan was a secured loan, repayment of which can be expensed pursuant to §707(b)(2)(A)(iii). Nevertheless, the court found that the debtor could pay a significant portion of his debts after the loan was repaid, finding the case abusive under §707(b)(3).

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