SUBPRIME AUTO LOAN BUBBLE AND BANKRUPTCY?

            Recent articles have focused attention on the sub-prime auto loan industry and its negative effects on consumers and potentially investors. From sub-prime loans being bad investment vehicles due to fraudulent applications which contain misstated income and employment (http://dealbook.nytimes.com/2014/08/04/focusing-on-g-m-unit-u-s-starts-civil-inquiry-of-subprime-car-lending/?_php=true&_type=blogs&_r=0), to articles about the effect of repossessions of such predatory loans on consumers (http://dealbook.nytimes.com/2014/07/19/in-a-subprime-bubble-for-used-cars-unfit-borrowers-pay-sky-high-rates/), the consequences of such loans are beginning to look similar to the sub-prime mortgage crisis.

            While auto loans will never have the financial impact of mortgage loans on the overall economy, it is interesting to look at the explosion of sub-prime auto loans after Bankruptcy Code changes. The first article above noted that sub-prime auto loans had increased 150% since 2009 and the financial crisis. This increase may have been fueled in part by the increased number of sub-prime consumers (credit score below 640) who were created by the financial crisis. However, there may be another factor fueling this explosion of sub-prime lending. Just like sub-prime mortgages being marketed to people prior to the financial crisis, the number of people who end up with a sub-prime auto loan is greater than the number of actual sub-prime consumers. Instead, like with sub-prime mortgages, unscrupulous creditors are being rewarded for securitizing high-yield auto loans to investors. With treasury bills and other safe investments producing historically low yields, high yield investments are being sought out by hedge funds and other big money investors.

            So what does this have to do with the Bankruptcy Code? Interestingly, the increase in sub-prime auto loans also coincides with greater protection for auto lenders in Chapter 13. In 2005, Congress and the auto lenders crafted a provision in the Bankruptcy Code amendments of that year to, essentially, guarantee that almost every car loan balance would be fully protected if the consumer filed for Chapter 13. Prior to that change, the consumer had the ability to value a vehicle within a short period of time after purchase in a Chapter 13 to reflect the true market value of the vehicle. This meant that negative equity, insurance products and other inflated costs associated with sub-prime auto loans could be stripped off of a vehicle after a Chapter 13 filing. A family could then afford the car that was the primary transportation for jobs, medical visits, children’s activities, etc.

            After the 2005 amendments, the valuation period for a purchase money vehicle was increased to 910 days. This time period was not random. That period is the average time that a consumer keeps a car prior to trade in on a newer, more reliable, vehicle. Essentially, after the change the average consumer would no longer be able to value a vehicle in Chapter 13 due to filing with a vehicle less than 910 days old. With that change, the sub-prime lenders and investors were protected from losing any principal on the vast majority of auto loan investments in a Chapter 13 filing. Not coincidentally, a dramatic increase in sub-prime auto lending has come after the 2005 amendments.

            There is on silver lining in the above. Interest rates (which average 13% from the largest sub-prime lenders!!!) on sub-prime auto loans can still be adjusted in Chapter 13, even if the vehicle is within the 910 day window. This change to the interest could still allow for significant savings for a family trying to save their means of getting back and forth from work.

At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 orbkmickler@planlaw.com.

Bryan K. Mickler

REPLACEMENT VALUE FOR SURRENDERING A VEHICLE IN CHAPTER 13?

           A recent case from the 11^th Circuit Court of Appeals in Atlanta may have a major impact on Chapter 13 vehicle surrender cases going forward. On March 27, 2014, the Eleventh Circuit issued a ruling, in In re Brown, 13-13013, 2014 WL 1245266 (11th Cir. 2014) regarding the treatment of any alleged deficiency related to a surrendered vehicle in a Chapter 13 case.

            By way of background, the normal procedure in Chapter 13 has been to surrender a vehicle in a Chapter 13 Plan and then wait for the creditor to liquidate the collateral pursuant to its State law rights. This typically has involved taking the car to an auction, selling the car for well below wholesale value and then a creditor would file a large deficiency claim for the difference between the amount owed on the date of the surrender and the sale amount.

            The Brown case has put an end to the above practice. Based on the language in 11 U.S.C. §506(a)(2), the 11^th Circuit ruled that “replacement value” is to be used for surrendered vehicles, as well as vehicles being retained in the Chapter 13 case. Replacement value has been defined by the Bankruptcy Code to “mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.” 11 U.S.C. § 506(a)(2).

            This holding may effectively end the deficiency for any vehicle surrendered in Chapter 13, as the replacement value of vehicles is generally equal to the outstanding loan amount on vehicles which do not contain “roll over” negative equity financing. It will be interesting to see if the ruling can be pushed to include deficiencies incurred prior to the filing of the Chapter 13 for which no judgment has been entered. Our office intends to object to any pre-petition deficiency which used foreclosure value as a basis for determining the amount of the deficiency based upon the Brown ruling.

            So what does this mean for a Chapter 13 Plan to the average person? If you file 13 and surrender your vehicle, then the chance of the creditor being allowed an unsecured claim has been greatly reduced. This may mean a quicker payoff of the 13 if other unsecured debts are low, it may mean that the monthly payment would be lower or that the term of the plan could be shorter. Those are all good things from a filing perspective.

            At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 orbkmickler@planlaw.com.

Bryan K. Mickler

A GREATER NEED FOR CHAPTER 11 AND 13 BANKRUPTCY DUE TO RISING RENTS?

            A recent article regarding rising rents served as a follow up to a blog that appeared on this site last year. http://www.nytimes.com/2014/04/15/business/more-renters-find-30-affordability-ratio-unattainable.html?hpw&rref=business&_r=0

In that last blog post, the rising home prices in many Florida cities appeared to be the result of investor hedge funds purchasing rental properties for cash. https://www.planlaw.com/is-the-american-dream-dead-in-jacksonville-fl/ That activity was causing a run up in the prices of homes which would typically be middle class living in many cities. The result was a loss of opportunity for home purchases and a greater need to save homes that are currently owned by middle class families.

Now, it appears that rents are rising to a level where they may be unaffordable for many middle class families. As with mortgages, the typical ratio for housing expense in rentals is approximately 30% of a household’s gross income. However, 50% of all renters now spend more than 30% of their gross income on rent. The problem appears to be getting worse as rents continue to rise due to a combination of low vacancy rates and low wage increases.

So what can the average homeowner do to escape the rising rental problem? Try to keep that house and avoid paying high rental rates seems to be the obvious solution. If you currently have a home that is behind and subject to foreclosure – the best solution may be to cure the arrearage on a primary residence with a Chapter 13 Plan or restructure an investment property with a Chapter 11. Chapter 13 can allow for a cure of all arrears over a 60 month period of time or by modifying the mortgage if the homeowner is eligible. Chapter 11 allows investment properties to be valued to the market value of the home even if the mortgages on the property are much greater than the value. Interest rates and maturity dates can also be changed on investment properties.

Saving a primary residence will allow the homeowner to avoid higher rental rates that may areas are experiencing now. If you currently are looking to save an investment property, then rising rental rates could be used to fund a Chapter 11 Plan to save the investment property for future retirement planning or other long term goals. Contact us to discuss your options.

At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler

IS YOUR BANKRUPTCY ATTORNEY REALLY A FULL-TIME BANKRUPTCY ATTORNEY?

            Is your bankruptcy attorney really a specialist in bankruptcy? Or is that attorney just filing a couple of cases to make some extra income, while really putting most effort into another area of law? Our office sees part-time bankruptcy attorneys on a regular basis while attending court. During the bankruptcy filing boom years of 2009-2012, lots of part-time bankruptcy attorneys jumped into filing Chapter 7 or Chapter 13 cases. Some would even try a Chapter 11 if the retainer were large enough. Since that time, 2013 filings were down 8% from 2012 levels and down 35% from the 2010 peak of over 11,000 cases.

So what is the part-time bankruptcy attorney doing now that there are not as many filings? Have they have gone back to foreclosure defense, divorce and other types of law in order to make income? If so,this could mean that the attorney is not staying up to date on the latest case law related to bankruptcy or any changes in the Trustees’ offices that might affect a Chapter 7 or Chapter 13 filing. When this occurs, exemptions are missed, bankruptcy schedules are not filled out properly and issues arise with the bankruptcy trustee. Ultimately, it is the client who is affected by all of the above.

Would you go to a lawnmower shop to have your car repaired? They are both mechanics, but with very different specialties. Before you hire any bankruptcy attorney, check the website of that attorney and ask them questions about what area of law they specialize in practicing. Do they exclusively practice bankruptcy? Are they involved in State Court cases such as divorce, foreclosure defense or litigation that will require large amounts of time at a separate courthouse? All of these issues could potentially impact your bankruptcy filing in a negative way.

At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler

1099 FORMS AND FILING FOR BANKRUPTCY

With 2013 behind us, many people are starting to think about filing taxes for the 2013 tax year. In connection with tax season, our office has noticed a great increase in the number of 1099 forms arriving from mortgage lenders. These forms can have no tax effect or can dramatically alter a tax obligation for an individual or family. First, you need to understand the 2 main types of 1099 forms. There is a 1099-A and a 1099-C as explained below.

If you borrow money from a lender to purchase property, the lender may require the loan to be secured by the purchased property. If the property is sold in a foreclosure or you abandon the property, you may be required to treat the transfer or the abandonment as a sale of the property. If the lender forecloses on the property or has reason to know that you abandoned, or permanently discarded from use, the secured property, the lender should send you a Form 1099-A, Acquisition or Abandonment of Secured Property. The filing of a bankruptcy and surrender of the property after a Chapter 7 or Chapter 13 filing will often trigger a 1099-A filing.

The 1099-C is strictly income related. When you borrow money, you are not required to include the loan proceeds in gross income because you have an obligation to repay the lender later. If that obligation is subsequently canceled, you may be required to include the amount of the canceled debt in gross income. A commercial lender canceling a debt will issue a Form 1099-C  Cancellation of Debt, to report the cancellation. Often we see this with mortgages and credit cards after the filing of a Chapter 7 or Chapter 13 case.

On Form 1099-A, the lender reports the amount of the debt owed (principal only) and the fair market value of the secured property. You, the debtor, use these values to determine a gain or loss on the disposition of the property. On Form 1099-C, the lender reports the amount of the canceled debt. If the lender’s acquisition of an interest in the secured property (or the debtor’s abandonment of the property) and the cancellation of the debt occur in the same calendar year, the lender may issue a Form 1099-C only.

Either form can have a large impact on tax obligations. If you receive a 1099-C, the IRS will include the amount reported as imputed income and you are obligated to pay tax on the amount of the income. On the 1099-A, you may have a paper gain that would be a taxable event and cause an increase in taxes owed.

So what is the solution? Filing a Form 982 with the IRS will generally relieve you of the tax obligation. The Form 982 is used by people who have filed for bankruptcy and allows the income reported to the IRS to be a non-taxable event in most instances. It can also be used if you are insolvent (assets worth less than liabilities) and have imputed income reported to you.

If you are interested in filing a Chapter 7 or Chapter 13 to deal with IRS or other issues, please contact our office for a free consultation.

At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler

WELLS FARGO BANK AND THE FREEZE ON BANKRUPTCY ACCOUNTS

            I’ve been meaning to write about this issue for some time, but it gets pushed to the side to deal with more current issues usually. However, just when I think that Wells Fargo has ceased to be a problem in Bankruptcy, the “administrative hold” on accounts will pop back up and cause real problems for individuals or companies attempting to reorganize through Chapter 13 or Chapter 11.

            The administrative hold is Wells Fargo’s way of throwing a wrench into the ability of individuals or companies to reorganize even if the individual or company does not owe any money to Wells Fargo. Wells will scan the bankruptcy filings each night for the entire United States. If it gets a hit for an individual (even if the other account holder did not file) or a company, it will freeze the entire account for some undetermined period of time. Fortunately, the bank limits the freeze to accounts that contain more than $5,000.00 on the date of the filing.

             Wells claims that it is preserving the assets of the bankruptcy estate for the benefit of the Trustee (See 11 U.S.C. § 542(b) requiring turnover of property to Trustee). While some sense can be made of that reasoning in a Chapter 7, the reorganization purpose of Chapter 13 and Chapter 11 do not support the reasoning of Wells. Short of Court Order, Wells will not release the funds in the account despite the fact that the Chapter 13 debtor needs the funds to commence payments. In a Chapter 11 case, the bank will only release the funds to a DIP account at Wells Fargo or require the individual or company to go to a branch and pick up a check issued to the entity as DIP. This is despite the fact that the Chapter 11 Debtor is really the Trustee and Wells has no duty to preserve the funds for a third party trustee.

         Unfortunately, the administrative hold is here to stay. The Courts (outside of the 9^th Circuit in a Chapter 7 case) have not found that such an activity is a violation of the automatic stay despite the damage that has been caused to companies by the action of freezing a corporate account needed for day to day operations. We recently encountered this when a towing company was forced to delay responding to stranded motorists after filing Chapter 11 since Wells had frozen its operating account. This company was in Chapter 11 and owed no money to Wells. It took over 24 hours to move the funds to a Wells Fargo bankruptcy account and allow access to the funds.

        The takeaway from this story is that Wells will continue to freeze accounts with no reason in the future. If you are considering filing any type of bankruptcy, be sure to understand the consequences of having a Wells Fargo account. Also, be sure that your attorney can warn you of such a consequence before you file so that you are not left without funds to meet your daily living expenses.

            At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler

EFFECT OF BANKRUPTCY ON JOB SEARCH

            Bankruptcy and foreclosure have long been recognized as severe drags on a person’s credit report score. A typical foreclosure filing against an individual can drag that individual’s credit score down by 250 points for 7 years. A bankruptcy filing will have the same immediate impact. However, in the case of the bankruptcy the score will begin to rise almost immediately upon discharge of the Chapter 7 or over the course of a Chapter 13 repayment Plan based upon timely payments to the secured creditors.

            Our office uses a software program to predict the result of any bankruptcy filing on an individual’s credit score. While not exact, it does provide a good insight into what effect the filing will have on long term credit.

            But what if an individual is applying for a job. Does it matter if the individual has filed for bankruptcy or has damaged credit? As the law is written now, the Fair Credit Reporting Act allows employers to access credit reports of potential job seekers to determine credit worthiness. It is estimated that 50% of employers access the credit reports of potential employees prior to hire.

              The ability of employers to deny job seekers the opportunity for employment based upon credit has had a dramatic effect on a large number of families as a result of the recent financial crisis. Millions of Americans have suffered credit damage as a result of foreclosure, job loss, divorce and other non-merit based reasons. As a result of a general economic slowdown, an individual’s experience, education and work ethic have ceased to be determining factors in whether that individual may qualify for a particular job when employers base employment decisions on credit reporting.

         Recently, however, there may be some encouraging news on this pressing issue. Legislation was recently introduced in the United States Senate to amend the Fair Credit Reporting Act to prohibit potential employers from accessing a potential employee’s credit reports or inquiring about credit status in connection with an application for employment. Sen. Elizabeth Warren recently introduced the “Equal Opportunity for All Act” in order to prohibit employers from making employment decisions based upon negative credit report items. Errors on credit reports, studies showing no correlation between credit and work ethic and past economic problems for the entire economy make this legislation important to even out the competition for jobs according to Senator Warren. See http://www.warren.senate.gov/?p=press_release&id=305

       If you have bankruptcy credit impact questions, our office will be happy to assist you and answer any questions related to the effect of filing a bankruptcy on credit and other aspects of your life.

     At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler

BANKRUPTCY PREDICTIONS FOR 2014 . . . AND BEYOND

            With 2013 behind us, it is time to look ahead to what 2014 will bring to the Bankruptcy World. First, a look at 2013. Filings in the Jacksonville Division continued the decline that started in 2010. 2013 filings were down 8% from 2012 levels and down 35% from the 2010 peak of over 11,000 cases.

            What is causing the decline? The average person will say that unemployment has dropped significantly since 2010 and that has helped lower filings. However, bankruptcy filing rates have historically never been tied to unemployment, health care expenditures or any number of reasons that typically are blamed for increased filing rates. Instead, bankruptcy filing rates have risen and fallen almost perfectly in line with the availability of credit. See chart at: http://www.creditslips.org/creditslips/2011/08/one-more-time-with-feeling.html

               So based on the availability of credit, what can we expect for 2014? The good news for everyone except bankruptcy practitioners is that it looks like 2014 will be more of the same declines, just maybe not as steep. Short term credit appears to be increasing which has the effect of pushing down bankruptcy filing rates since people will borrow to put off filing bankruptcy. Greater amounts of long term credit and household debt will inevitably cause the bankruptcy filing rates to increase.

               This is why the 2010 to present drop in filings is easily explainable. After the collapse of the financial markets in 2008, there was no credit available for 2-3 years for the average person. Lack of home equity, tighter credit card standards and almost no unsecured lines of credit created a cash basis for most households. Coupled with high household debt levels, this caused a dramatic upswing in filings from 2008-2010. That has slowly starting to change since 2010 with the increase in available credit brought about by the growth in the economy and housing values. The decline in bankruptcy filings will inevitably reverse itself as long term credit/household debt level increases over the next 12-24 months.

               As in 2008, long term increases in household debt levels coupled with a sharp pullback in the availability of credit due to actual or perceived economic weakness will result in an increase in bankruptcy filings. Most likely, that scenario will not play out for the next year or two as the economy continues to improve. It will be interesting to see how the coming 2014 mortgage standards (tougher underwriting) will impact the availability of mortgage credit and the bankruptcy filing rate. Stay tuned for more on that in a later post.

            At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler

INHERITED IRA’S TARGETED BY CHAPTER 7 TRUSTEES AND POSSIBLY A GREATER NEED FOR CHAPTER 13

            With the coming wave of Baby Boomer inheritance issues, one situation has suddenly taken on new urgency. Most people who are near retirement age or have already retired were gradually shifted from traditional pension plans into an IRA or 401(k) plan in the past. IRAs and 401(k) funds are two of the most common exemptions that are claimed in Chapter 7 or Chapter 13 cases. This means that the IRAs and 401(k) plans cannot be liquidated in a Chapter 7 filing or counted as liquidation in a Chapter 13 case. The accounts simply pass through the filing of a bankruptcy and will remain available for later income upon retirement.

            Recently, however, a new issue has become a target for Chapter 7 Trustees. What if a Chapter 7 debtor had inherited an exempt IRA and then rolled the funds into an exempt IRA in their own name within the allowed period after inheritance? This is precisely the issue confronting the Supreme Court now. The case is Clark et ux. V. Rameker et al., U.S. Supreme Court, No. 13-299.

            In the Clark case, the Wife inherited a $300,000.00 IRA from her later mother. She immediately rolled that amount into an exempt IRA in her own name. When their pizza business failed, the Clarks filed for Chapter 7 to discharge approximately $700,000.00 in business guarantee and personal debts. They claimed the IRA as exempt in the Chapter 7 filing.

            Prior to that date, the 5^th and 8^th Circuits had ruled such inherited funds to be exempt. Undeterred, the Chapter 7 Trustee filed an exemption to the IRA in the Clark’s Chapter 7 case. Eventually, the 7^th Circuit ended up with the case and ruled that the IRA was not exempt since the funds were inherited and not for the savings or retirement of the Clarks.

            The Supreme Court will most likely rule on the issue in June of 2014. Our office is closely monitoring the case and progress of the current exemption in inherited IRAs. Don’t be surprised if inherited 401(k)s are the next target as they are essentially the same as an IRA for exemption purposes.

            At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler

RETURN OF THE FLORIDA ROCKET DOCKET IN FORECLOSURE AND A GREATER NEED FOR CHAPTER 13

            Six months ago, House Bill 87 became the new foreclosure law in Florida. This marked the return of the so called “Rocket Docket” to foreclosure in Florida Courts. It is interesting see the effect of this bill after 180 days of application by the Florida Courts, in particular Jacksonville Foreclosure Courts.

            While pre-foreclosure activity is down over 23% from the year prior, auctions are up almost 7% from the year prior and bank owned property is up over 23% from the year prior (63% from the prior month!!!) (Source: Realtytrac December 2013). These figures make it clear that the new law is doing what was intended – speeding up foreclosures and pushing people out of their homes. These figure are despite the great number of foreclosure defense promises made by both legal and non-legal associations.

            The typical client that we are seeing now is three or more years behind on their home and has been in foreclosure defense almost the entire time. While they may have bought some time, no progress has been made on what the client really wants, which is to save the home and set up a payment that is affordable.

          One point to make about foreclosure defense – our office does not handle foreclosure defense cases. Why? Based on our experience and the steady flow of disappointed clients, it simply does not work. The clients end up farther behind on a mortgage that really needed to be modified instead of just put on hold. Interest continues to accrue, late charges are assessed each month and attorney’s fees are continually tacked on to the account. Worse, most clients are paying hundreds of dollars in foreclosure defense fees each month to allow this to happen. Eventually, the mortgage company will get its paperwork straightened out and the trial court will set a sale date. This is when the foreclosure defense firm turns into a bankruptcy firm and tells the client to file for Chapter 13.

          Why would anyone go through that type of activity if they really wanted to save their home? Chapter 13 bankruptcy filings allow a court ordered mediation program which sets the mortgage payment at 31% of a family’s gross income. As long as that amount can cover a reduced principal, interest, taxes and insurance amount, the mortgage company is generally obligated to offer a HAMP or some other modification program.

          Our office will offer you an honest assessment of your options to save your home and the chances of a modification based on the amount of your current income and mortgage debt. While the program is not a way to force a mortgage company to modify the loan, the program has been very successful at saving homes over the last 18 months in the Jacksonville area. Let us see if you qualify.

            At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.