Sonoma County Bankruptcy Lawyer Blog

SANTA ROSA (Sonoma County), CA -- The big news in landlord-tenant law is that President Obama has extended the Protecting Tenants at Foreclosure Act through 2014, This law gives tenants renting from landlords who are later foreclosed on 90 days (if they have a month to month lease) or the remainder of the lease (if there's a current written lease.)

The problem with the law has been that it talks about leases entered into before "foreclosure.' Well, in California (and probably many other states) there is no specific event called foreclosure. There are two events: there's the notice of default and the actual sale. Banks have argued that "foreclosure" begins at the notice of default, which I personally think is ridiculous, since, although it's required for foreclosure, it's a totally curable notice of a problem.

The new law now makes clear that "foreclosure" means foreclosure (sale), not notice.

Continue reading "Obama extends, clarifies protection for tenants in foreclosed homes" »

How high? Check this out.

Michael R. Mastro, the Seattle real-estate tycoon, filed for Chapter 7 of the U.S. Bankruptcy Code last summer reporting liabilities of $570 million. He then proceeded to take vacations in Italy, Paris, New York and Palm Springs, Calif., as well as ski trips to Switzerland and Jackson Hole, Wyo.

He has enjoyed $2,900 dinners at the plush Seattle restaurant Canlis and continues to roll around in his Rolls-Royce and Bentley, which cost him $8,000 a month. He also still lives in his $15 million waterfront home in Medina.

Yikes.

If you're reading this blog but you're not yet ready to sign up for a consultation, feel free to post a question in the form to the right. I'll do my best to provide a basic understanding of the law. Obviously, I won't give specific legal counsel without having a solid understanding of your situation (that would require a face-to-face meeting in my Santa Rosa, CA offices -- or a phone meeting), but I encourage you to shoot me a question of comment here, and I'll try to provide some help.

Look forward to hearing from you.

Usually when I meet with people in my Sonoma County offices in Santa Rosa, one of the first questions they have is, how bad will filing for Chapter 7 bankruptcy be for my credit? Will I be able to rent again? Will I be able to buy a car?

Of course a bankruptcy stays on your credit report for 10 years, so it ain't great. But if you're sitting in a bankruptcy attorney's office -- the odds of you having stellar credit are pretty bad. In point of fact, you probably have a wave of late payments, nonpayments, credit cards sent to collections, perhaps a foreclosure ... you get the idea.

Putting yourself in a creditor's seat, would you rather work with someone who clearly can't pay their bills, or someone who declared bankruptcy and 6 months later is paying all their bills on time?

This article on the National Bankruptcy Forum points out that a key factor is your debt-to-income ratio.

If you have tens of thousands of debt, that ratio is going to look pretty bad. If you have declared bankruptcy, you have virtually no debt, so your debt-to-income looks great. Once you get a little new credit in place and make regular payments, you're on the way to a clean bill of health.

Santa Rosa, CA -- Back in 2005, Congress passed -- at the behest of credit card companies -- a dramatic overhaul of the bankruptcy laws, under the supposed need to stop debtor "fraud." In fact, the law was intended to protect the monied interests by making it harder to file bankruptcy.

The San Francisco Chronicle took a look at the effect of the law 5 years later. It's clear that the law had an immediate freezing effect on bankruptcy filings, but today in light of the Great Recession, filings have steadily and markedly marched upward.

This either proves, as Scott Talbott, with the Financial Services Roundtable, claims: "The fact that the numbers are up means people still have access to the bankruptcy courts."

Or that there are many people who can't afford bankruptcy who desperately need it.

The Government Accountability Office, the nonpartisan watchdog agency of Congress, told lawmakers in June 2008 that the 2005 law boosted Chapter 7 expenses from about $914 to $1,477, including legal, filing and counseling fees.

What's not clear from this data is how many of these increased filings are Chapter 13s instead of Chapter 7 bankruptcies, which provide a full discharge.

2009 was a record year for bankruptcies, with a record high of 2,264 cases in Sonoma County alone. According to a Santa Rosa Press Democrat report from April, Chapter 13s are a growing part of bankruptcy here, as people look to save their homes.

Key reason: Homeowners can strip the second mortgages on their underwater homes, while entering a payment plan to cure arrears on the first mortgage, while staying current on the first. As a result, many homeowners are able to modify their loans on the first.

The story features a typical Chapter 13 story, Robert and Jennifer Campbell, who were able to strip their second mortgage in a 13 and drive their credit card debt to minimal amounts under their plan. Campbell,a photographer, couldn't do a Chapter 7 because he would lose his 1969 Helio Courier airplane -- the kind of personal property for which there is no exemption.

A Chapter 13 allows Campbell to keep his property, strip the second and save the house -- maybe. The article points out that just the $500,000 first mortgage is plenty to keep Campbell up at night

All consumer debtors contemplating Chapter 7 (full discharge) bankruptcy have to tackle the Means Test. Back in the distant days before 2005, this wasn't the case - you could file Chapter 7 regardless of income. These days, some fairly complex calculations are involved to figure out if you have disposable income that could be used to pay creditors.

(Of course, if your debt is more than 51 percent business debt, for instance if you are defaulting on mortgages on homes you ran for rental income, you're exempt from the Means Test.)

As this Nolo.com article points out, the first issue is whether your income is above the median for Sonoma County, California, for your household. If not, you're golden. Even if it is above the median, we then look at "allowed monthly expenses" for your family size in Sonoma County.

If you don't pass the means test, you are limited to Chapter 13 -- which is essentially a court-monitored repayment plan. But all is not lost, if you are close to qualifying, some judicious choices about expenses or waiting to file can help make it work. There are no sure things, but working with you attorney can make the difference between qualifying for a Chapter 7 and a 13.

Fannie Mae says it will crack down on homeowners who "walk away" from the mortgages on their underwater homes. Borrowers who have the means to pay on their loans but engage in "strategic defaults," won't be able to get another mortgage for seven years, according to news reports.

In states that allow deficiency judgments - California does not - Fannie Mae will sue walkaways, the mortgage guarantor said.

In Sonoma County, property values have fallen so hard in the real estate crash that one third of all homes are underwater, the Press Democrat reported this winter. That's some 34,000 borrowers looking at an average of $70,000 in "negative equity."

If Fannie Mae is going to be suing walkaways, it would seem they're just going to be driving up the number of bankruptcies. Until banks are ready to seriously modify loans to reflect market reality, people will still walk away from underwater loans. Renting for seven years is still going to look better than funding a permanently underwater home.

There's a fascinating article on Avvo's Naked Law site, titled 8 Reasons College Tuition is the Next Bubble to Burst.

It's of particular interest to me not only because I have a son about to enter 11th grade but also because the article implicates the 2005 "reform" of bankruptcy law in the Tuition Bubble.

Here's the theory in a nutshell: Private colleges have been riding the same debt bubble that real estate and derivatives were riding - spiking profits based on consumers getting easy credit. And since student loans are nondischargable in bankruptcy, the lenders take no risks that students will default. In other words, we have a system that encourages private schools to hike tuition rates, since students can always get those giant loans, and encourages banks to lend the money, since they know they will not be left holding the BK bag.

Continue reading "Is college tuition a bubble that's about to burst?" »

Economists are predicting a steady but slow - very slow - economic recovery for Sonoma County, the Press Democrat reports. The good news: Job growth, corporate profits and housing affordability are up in Sonoma County.

Continue reading "Sonoma County economic recovery? A slow but steady race" »

Sonoma County debtors with substantial income may be able to skip the means test if more than half their debit is "business debt."

The bankruptcy means test - created in 2005 - is meant to identify debtors who have enough nonexempt assets to pay their creditors. If you fail the means test, you may be forced into Chapter 13 or even blocked entirely from bankruptcy protection.

But do you even have to take the means test?

I recently handled a Chapter 7 bankruptcy for a Sonoma County couple who owned half a dozen homes, mostly in the South, in addition to their primary residence. While they may have been able to pass the means test in any case - since their income had plummeted - we didn't have to worry about it.

Since they were operating the homes as rental properties, all of the mortgages were considered business debt. If more than 51 percent of debt is business debt, as opposed to consumer debt, you don't have to take the means test!

Continue reading "Can Sonoma County debtors skip the Means Test?" »

ABC News reports that BP itself may suffer a "top kill" as a result of the horrendous environmental disaster created by the explosion of the oil rig.

BP might have thought itself safe because a Louisiana law limited liability to under a billion dollars, but Obama extracted a promise - in writing - from BP CEO Tony Heyward to pay the whole bill for the cleanup. That's an amount beyond even BP's ability to pay.

Thus, BP's share price keeps getting dragged down and the BK rumors are swirling like the gooey stuff on the ocean waves. What's all this have to do with consumer bankruptcies? Just that whether you're an individual or a megacorp, one's fortunes can turn quickly - whether it's a real estate investment that goes south (in the case of many an individual these days) or one project that suffers a "perfect storm" of negligence, malfeasance and bad luck.

Continue reading "BP bankruptcy rumors swirling over oil slick" »

I'm about to file suit against a low-income housing complex in Healdsburg, CA on behalf of a tenant who was locked out by the property manager. Granted she was behind in her rent and the landlord had initiated unlawful detainer proceedings, but the law forbids self-help and my client was locked out while she was still in legal possession.

California law -- like most states -- imposes statutory penalties and attorneys fees for illegal landlord self-help, which is why, OwnerSecrets.com has an article detailing some of the troubles landlords have gotten themselves into.

The article points to a few cases from around the country. These examples have relatively low amounts, but the point is well-taken:

[In South Carolina], Hanna Abdulla engaged in self help eviction by changing the locks and removing William Spano's personal property from the premise to the sidewalk. Hanna Abdulla claimed that she thought the tenant had abandoned the premises. The court was not persuaded by her claim and awarded Spano $1,800 for the 3 months of rent expense he incurred to live elsewhere. The court further awarded $1,200 in punitive damages and attorneys fees.

[In Ohio] the landlord changed the locks just before the end of the month upon learning that the tenants had shut off the utilities and removed most of their belongings. The trial court awarded the tenants only $96.77 in actual damages (they had paid rent through the end of the month but were deprived of the use of the apartment, and this was the prorated amount). But the trial court further awarded $1,000.00 in punitive damages and $1,462.00 in attorneys fees.

Nolo.com's Bankruptcy Foreclosure Blog reminds us that California increased its homestead exemption by $25,000.

The California homestead exemption increased by $25,000 as of January 1, 2010. The current amounts are $75,000 for individuals, $100,000 for couples, and $175,000 for seniors (over 65), disabled or over 55 with limited income, effective January 1, 2010, thanks to legislation signed by Governor Schwartzeneger in late last year.

Of course the increases matter little to most debtors in California these days, what with many homes worth less the mortgages. On the other hand, the new law (AB 1046), will help people facing judgments outside of bankruptcy.

One of the things you have to declare in Chapter 7 is any current executory (not fully performed) leases - either as the landlord or the tenant - as well as your other contracts. If these are month-to-month leases, there's no problem. The tenant could move out with 30 days notice. But it's a different story when you've signed tenants, especially commercial tenants, to fixed-term leases.

I know of a case in the Santa Rosa, Calif. Bankruptcy Court where the debtors had signed two commercial tenants to above-market-rate leases with a commitment to three years, total. In that case, the trustee claimed the leases as property of BK estate. Total value of the leases was over $100,000 but the matter will likely settle for substantially less than that.

Often, the trustee won't want residential leases -- they come with liability! But commercial leases are far less risky. Here's a good summary of the issue from the University of Minnesota:

The trustee may assume or reject executory contracts and leases of the debtor. An executory contract is an agreement under which the obligations of both parties to the contract are unperformed. Common examples of such contracts in a farm setting include equipment leases and real property leases. Certain farm program contracts, such as Conservation Reserve Program contracts, are also executory contracts.

If the trustee elects to assume an executory contract, he must either cure any defaults in the contract or provide the other party to the contract with adequate assurances that he will cure the defaults. In a Chapter 7 case, the trustee has 60 days from the filing of the bankruptcy petition to make a determination as to whether such contracts or leases should be assumed. A contract for deed in which the debtor is the buyer has been determined by the courts not to constitute an executory contract under the Bankruptcy Code. Therefore, the trustee need not determine whether to assume such contracts or cure all defaults under such contracts immediately.