Bankruptcy Court Denies Discharge for Damages to Property from “Foreclosure Rage”

“Foreclosure rage” describes the situation when an angry homeowner, faced with a foreclosure, destroys the house or strips it of anything valuable. While not all involve complete demolition of the house, it’s common for an owner to take valuable fixtures out of a house or, worse, cause intentional damage.

A Bankruptcy Court has recently provided a remedy to a lender whose collateral was intentionally damaged: the lender was awarded a non-dischargeable debt for the amount of the damages. (See In re Zahniser, 09-B-71797, 2010 WL 5140779 (Bankr. N.D. Ill. Dec. 13, 2010)).

Under 11 U .S.C. 523(a)(6), a Bankruptcy Court can deny a discharge for debt resulting from “willful or malicious injury by the debtor to another entity or to the property of another entity.” Here, the lender argued that the damage to the house fell within this section, and the Court agreed, awarding damages for the cost of restoring the house and attorney fees.

This is a fair result, and I suspect other jurisdictions will follow this Court’s lead. It will be interesting to see how far Courts will protect lenders in this situation? What if the debtor simply removes the appliances from the house?

In this case,  the Court tried to give the Debtor the benefit of the doubt, wondering if the Debtor believed that the large appliances were his to take (and not the bank’s collateral). But, the Court refused to overlook holes in walls and the removal of other items that were inextricably affixed to the house (tiles, light fixtures, cabinets, and the fireplace).

As with most arguments, it comes down to the facts of each situation. But, given the frequency that borrowers are gutting their homes before leaving, this decision is an interesting argument for lenders, if not an antidote for foreclosure rage.

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Sometimes the Postman Brings Bad News: The Notice of Chapter 7 Bankruptcy Case

If you’re doing your job as a creditor, some of your defendants will file bankruptcy.  More than likely, the way you’ll find out is when the Clerk mails you a “Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines.”

This is the first mailing in a bankruptcy case, and a copy goes to all of the creditors and parties listed in the debtor’s bankruptcy Schedules.

In addition to putting the creditor on notice of the filing (and the imposition of the automatic stay), this Notice contains important information about the case, including:

  • What chapter the debtor filed (i.e. Chapter 7)
  • The name and address of the debtor’s attorney and the Trustee
  • The bankruptcy case number
  • The address of the Bankruptcy Court Clerk (and where/how to file pleadings)
  • The date, time, and location of the Meeting of Creditors
  • Deadlines to file Proofs of Claim (if any)
  • Deadlines to object to discharge or dischargeability of your debt

All of this information is relevant as you decide what your next step is. Over the next few weeks, I’ll revisit the various events and deadlines mentioned in the Notice in more detail.

For now, I’ll point to the bottom of the Notice, where there’s a line that shows how optimistic the bankruptcy system is about the recovery of assets:

“Please Do Not File A Proof of Claim Unless You Receive a Notice To Do So”

You see, you have to file a Claim in order to share in the distribution of the money that the Trustee recovers. So, basically, that’s the Clerk’s way of nicely saying, “Don’t Hold Your Breath.”

Be Careful When Dealing with Debt Relief Services

If you’ve watched much late night TV, you’ve probably seen the commercials for debt relief services promising the path out of debt through settlement with creditors. These companies ask consumers to pay them their money, then they’ll attempt reach out to the creditors and, they say, settle all debts for a fraction of what is owed.

In these tough times, consumers are looking for any help they can get, but many commentators say that debt relief agencies are a rip-off. Many cite the fact that the services pay themselves first, and, only after they have paid themselves, do they try to settle the debts.

As a creditor’s attorney, I’ve worked with these agencies on a number of occasions. On one hand, it’s efficient to deal with a business-savvy party on the other end of a debt repayment transaction. On the other, I know how the system works, and I know that, for any dollar they are offering to my creditor client, they have already kept as much in their own pocket.

Long story short, be wary when dealing with one of these companies, on either side of the table.

When Collecting on Judgments in Tennessee, Wage Garnishments Might Not be the Best First Step

The goal in judgment collections is to get as much money as possible, as quickly as possible.

The reason behind the “as much as possible” part is easy: clients want full recovery of the amounts owed.

The reasons behind the “as quickly as possible” are numerous. Maybe you’re competing with other creditors for the same pot of money. Maybe your debtor is getting ready to leave town (or spend all his money). Maybe you think a bankruptcy is on the horizon.

As a result, when deciding what collection tool to use first, always consider which tool gets you the most money the fastest. Judgment liens that immediately attach to any and all properties are a great start. Bank levies that seize all the money in a bank account aren’t bad.

When in a hurry, however, wage garnishments aren’t always your best bet. Here’s why: under Tennessee exemptions law, a wage garnishment is only effective against about 25% of a debtor’s wages (Tenn. Code Ann. 26-2-106). Plus, wage garnishments are applied in the order they are filed, meaning you can get stuck behind other creditors. Finally, a wage garnishment might be the last straw that pushes someone into Bankruptcy…meaning you probably get paid nothing.

Don’t get me wrong–knowing your debtor is working and earning regular income is a great sign of collections to come. But, in the grand scheme, getting just 25% of the earnings spread out over 6 months might not be your best first move.

To Solve Foreclosure Issues, Some Courts May Require Attorneys to be the First Line of Defense

This article in the New York Times suggests that courts may no longer allow lawyers to blame paperwork issues and inaccuracies on their clients. Now, some New York state court judges are requiring lawyers representing lenders to vouch for the accuracy of the client’s representations.

This is a judicial reaction to the frequent reports mortgage lenders relying on incorrect, incomplete, and unverified documents to take action against borrowers. This is an attempt to place some responsibility on the creditor’s attorney to vet the accuracy of his or her client’s documents, instead of leaving it all up to the court system.

As you’d expect, the article quotes foreclosure attorneys who dislike this practice, especially in the face of potential fines in the event the documents are erroneous.

The Rules of Professional Conduct already require an attorney to do a due diligence review of any client’s claims, and this practice could restore some level of faith in the foreclosure process. As it stands now, most borrowers believe that the “robo-signing” issues are indicative of the entire industry, not just a few sloppy lenders.

Any system that introduces only a few basic safe-guards into the process should be welcomed by counsel for foreclosure lenders.

Bankruptcies Fall in 2010, but Expect Record Numbers in 2011

Welcome back after a long holiday break. Of course, it’s always great to have your blog go stagnant at the same time the blog gets featured in a great Nashville Business Journal article, “Standing out on the Web: Tips to help your clients find your business online.”

The big news in the new year is that Bankruptcy filings are down nationwide, particularly in Tennessee and the south. In the article, one attorney says the decrease is an indication that the economy has turned the corner (or that everybody who was going to file bankruptcy has already filed).

I’m not so sure.  Throughout 2010, we learned that banks were reluctant to foreclose, either as a result of issues with their paperwork, being adverse to taking properties into REO, or being hopeful that the mortgage modification programs would help.

As we ended 2010, we learned that none of those factors were a long-term issue that would prevent foreclosure. I expect foreclosures to crank back up in the next few months. Plus, as more second and other junior lienholders come to the realization that their collateral lacks value, 2011 will bring more lawsuits on the underlying debt.

The rise in foreclosures, coupled with more deficiency lawsuits on unpaid debt, will likely make 2011 another strong year in Bankruptcy Filings.