New York Bankruptcy Help

Being Sued In Bankruptcy Court? Choose Your Defenses Early!

Jay Fleischman, Esq. — Wed, 01 Sep 2010 11:00:26 +0000

Let’s say you file for Chapter 7 bankruptcy. One of your creditors comes along and sues, demanding that their debt survive the bankruptcy. Maybe they’ve got a good reason, maybe not. Either way, they file the adversary proceeding in bankruptcy against you.

Your lawyer is served with the adversary proceeding in bankruptcy and gets in touch to plan a strategy for defending the action. You load up on the defenses and your lawyer files the Answer on your behalf.

Then, A Flash Of Realization

A few weeks later your lawyer decides to ask you when you got the adversary proceeding complaint. You tell him or her that you never got it – at least, not that you can recall. You tear through the pile of unopened mail on the table, check out the nooks and crannies of your desk, even turn over your briefcase to find the envelope.

But it’s not there. You never got served. The papers went to your lawyer, but never got to you.

It’s Too Late To Do Anything About It

Jeffrey Ramson filed a Chapter 13 bankruptcy case in Manhattan, which he ultimately converted to a Chapter 7 case. Donald Scott, one of his creditors, filed an adversary proceeding in bankruptcy seeking to deny Mr. Ramson a discharge of debt under 11 U.S.C. § 523(a)(4) (“for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny”). Ramson filed an answer, denying the material allegations of the complaint, and raising a defense that Scott lacked jurisdiction over him. The Answer did not assert that the summons and complaint were improperly served.

His lawyer, Stuart Gelberg, filed the Answer and then later filed a motion to dismiss the complaint. His reason? Suddenly, he realized that the summons and complaint were never served on Mr. Ramson.

Let’s Talk About Service

In order to sue someone, you’ve got to have personal jurisdiction over them. The way you do that in bankruptcy court is to make sure an adversary proceeding summons and complaint is served in accordance with FED. R. BANKR. P. 7004 and FED. R. CIV. P. 4. Yesh Diamonds v. Yashaya (In re Yashaya), 403 B.R. 278, 282 (Bankr. E.D.N.Y. 2009).

According to Rule 7004(b)(9), service may be made “[u]pon the debtor, after a petition has been filed by or served upon the debtor and until the case is dismissed or closed, by mailing a copy of the summons and complaint to the debtor at the address shown in the petition or to such other address as the debtor may designate in a filed writing.” FED. R. BANKR. P. 4007(b)(9). Rule 7004(g) states that “[i]f the debtor is represented by an attorney, whenever service is made upon the debtor under this Rule, service shall also be made upon the debtor’s attorney . . . .” FED. R. BANKR. P. 4007(g). Therefore, in order for there to be proper service over the defendant in an adversary proceeding, plaintiff must serve both the defendant and defendant’s attorney. In re Shapiro, 265 B.R. 373, 376–77 (Bankr. E.D.N.Y. 2001) (citing In re Terzian, 75 B.R. 923 (Bankr. S.D.N.Y. 1987)).

Remember, you don’t need to hire a guy in a trenchcoat to stalk someone outside their office, leaping from the shadows to pounce on them and scream, “You’re served, sucker!” For the most part, you just drop a copy into the mailbox and that’s good enough (there are some things you need to do after that, but let’s leave the technicalities to another day).

So What If Service Is Improper?

You get 120 days to serve the summons and complaint once you file the adversary proceeding in bankruptcy. And if you don’t then the court—on motion or on its own after notice to the plaintiff—must dismiss the action without prejudice against that defendant or order that service be made within a specified time. But if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate period. If the plaintiff does not serve the summons and the complaint on the defendant and defendant’s attorney, the court may dismiss the case without prejudice absent a showing of good cause. In re Rand, 144 B.R. 253, 256 (Bankr. S.D.N.Y 1992).

Sounds simple, right? Well, maybe not. See, the New York bankruptcy court ruled in Ramson’s case that the failure to raise the defense in the Answer stripped Ramson of the ability to get the complaint dismissed for improper service. Under FED. R. CIV. P. 12(h)(1)(B), a party waives certain defenses, including insufficient process, by “failing to either: (i) make it by motion under this rule; or (ii) include it in a responsive pleading.”

In other words, the court has to dismiss the case for lack of proper service or order that service be made within a specified time – unless the defendant has filed an Answer. In such case, the court can take a hands-off approach to the issue in favor of the defendant (here, Mr. Ramson) bearing the burden.

One More Reason For A Clear Dialog Between The Bankruptcy Lawyer And Client

Your bankruptcy lawyer can’t read your mind. If there are legal pleadings filed in your bankruptcy case he or she may assume that you got a copy. Maybe it’s a good assumption to make, maybe not – either way, sometimes your lawyer may jump to the conclusion because he or she got a copy in the mail. And here, maybe Ramson’s lawyer should have asked the question.

In addition, you’ve got to be an active participant in your own bankruptcy case. If your bankruptcy lawyer calls to tell you that he or she got a motion and you’ve never heard of it before, say something. This is your bankruptcy case, not just a proceeding in which you are a passive bystander.

Take the time to talk with your lawyer. It will serve you well every time.

You can take a peek at Scott v. Ramson here.

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Discharging Child Support Legal Fees In Bankruptcy

Jay Fleischman, Esq. — Mon, 30 Aug 2010 18:34:38 +0000

The Bankruptcy Code severely limits your ability to discharge “domestic support obligations” in bankruptcy. But what if part of the award is for legal fees that your former spouse incurs in getting you to pay for child support or spousal maintenance?

Michael Schenkein filed a Chapter 7 bankruptcy in Manhattan after what appears to be a long battle with his former spouse in numerous domestic support enforcement proceedings regarding his failure to pay the obligations imposed by their divorce settlement agreement. His ex-wife then filed an adversary proceeding in the bankruptcy court seeking to have the debts due to her classified as nondischargeable as domestic support obligations.

Those debts included not only the actual maintenance and child support obligations, but also legal fees to his ex-wife in connection with her state court actions against him. In other words, the New York state court told him to pay her legal fees for chasing him down.

Legal Fees Payable As A Result Of The Divorce And Contempt Actions

The U.S. Bankruptcy Court for the Southern District of New York, in the case of Mordas v. Schenkein, 09-01947 (AJG) (Bankr. S.D.N.Y. 2010) looked solely to the law to hold that not only was Mr. Schenkein on the hook for the maintenance and child support obligations but also his ex-wife’s legal fees. The court did, however, leave the door open for the former Mrs. Schenkein to get even more legal fees from her ex-husband.

To render the decision as to the legal fees, the bankruptcy court looked solely to 11 U.S.C. § 523(a)(5) and (15). § 523(a)(5) provides that debts relating to a “domestic support obligation” are precluded from discharge, while under § 523(a)(15) any debt owed to a spouse or child that is “incurred by the debtor . . . in connection with a separation agreement . . . or other order of the court of record” is non-dischargeable. Here, the legal fees were awarded to Mr. Schenkein’s ex-wife as a result of contempt actions she took because he wasn’t paying the original debt or the arrears due. The state court had made clear that the legal fees awarded were intended to compensate her for the costs incurred as a result of the his failure to meet his support obligations.

Further, there is no question that the amounts due stem from the separation agreement at issue. Even if a portion of the fees were awarded in connection with the equitable division of property, and thus not an exception under § 523(a)(5), this portion of the fees would be non-dischargeable under § 523(a)(15).

Moreover, since BAPCPA, bankruptcy courts in New York have recognized that attorney’s fees awarded in a divorce proceeding are non-dischargeable under § 523(a)(15) regardless of whether or not the fees are considered to be in the nature of support or for some other purpose.

Legal Fees In Connection With Filing The Non-Dischargeability Action

None of this is stunning to the bankruptcy lawyer who bothers to read the Code and decisions issued by the New York bankruptcy courts. What does bug me, however, is the fact that the judge specifically left open the door to the debtor’s ex-wife going back into state court and tacking on even more legal fees in connection with her lawsuit filed in bankruptcy court.

Judge Gonzalez notes that any legal fees ordered in connection with the bankruptcy lawsuit would be post-petition debts not subject to the bankruptcy discharge. That’s true enough, but he goes the next step and dismisses out of hand the question of whether Schenkein should be ordered to pay such amounts at all.

As a general rule, attorney’s fees should not be awarded to the prevailing party in an adversarial proceeding. See In re Sokolowski, 205 F. 3d 532, 533 (2d Cir. 2000). In a case involving “issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party.” Id. Here, Gonzalez states that “the issues at hand were primarily, if not entirely, related to federal law. Therefore, this Court does not grant the Plaintiff’s request for attorney’s fees.”

He then says:

However, this Court does recognize that this action was initiated in order to maintain enforceability of the numerous state court rulings ordering the Defendant to pay all debts owed to the Plaintiff. As a result, there may be grounds for a New York court to award the Plaintiff attorney’s fees under DRL sections 237(c) and 238, if the Plaintiff decides to bring such an action in that court.

The upshot is that we’ve got a debtor in Chapter 7 bankruptcy facing debts that can’t be discharged. And now he’s going to be looking at the potential of more fees after his bankruptcy is discharged. Not only fees due to his ex-wife, but also to his own lawyer for defending him in state court when she sues.

How To Limit Your Post-Bankruptcy Exposure In Domestic Support Obligation Disputes

First off, let’s be clear on one thing – I do not have any particular insight as to how Mr. Schenkein’s lawyer handled his case. I don’t know what went on behind the scenes, or if there were any negotiations. But it seems to me that his bankruptcy lawyer should have known about how this was all going to play out. And with that in mind, it seems logical to do something lawyers don’t like to do – get on the phone.

Getting on the phone and calling the ex-spouse’s lawyer would be a great way to avoid all the legal turmoil in the first place. Be upfront about it, and acknowledge that the debt isn’t going anywhere in bankruptcy. Sign an agreement if need be acknowledging it, and move on.

What happens in such a case? Does the debtor lose? Not at all. The debtor merely comes to the table with the realization that the bankruptcy isn’t going to discharge the domestic support obligations. In doing so, he saves himself the possible post-bankruptcy action in state court which will likely result in nothing more than more legal fees out of his pocket.

You may download the Mordas v Schenkein decision here.

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Filing Chapter 7 Bankruptcy With Inherited Property

Jay Fleischman, Esq. — Wed, 21 Jul 2010 13:00:16 +0000

You’re thinking about filing Chapter 7 bankruptcy, but you’ve got property (either real estate or personal property) that you inherited. You’re concerned that you will lose it if you file for bankruptcy.

Fair enough. Simply put, the New York bankruptcy exemptions will apply to determine whether you will lose it. If the value falls within the statutory limits then you’re home-free; if not, then filing Chapter 7 bankruptcy will result in the loss of the property.

A few myths need to be dispelled about inherited property.

It doesn’t matter if you bought the property or inherited it. It doesn’t matter if it was a gift or came to you through purchase. Once it’s yours, it’s yours.
The item is considered to be yours even if you didn’t have title officially transferred to you.
Filing Chapter 7 bankruptcy may impact the rights of any co-owners of inherited property. If there is a co-owner and you are required to surrender to the trustee, they will lose ownership as well (of course, the trustee will be required to pay them a share of the sale proceeds – so all is not lost).
It doesn’t matter if you give back the inherited property before you file your case. In fact, it could be considered fraud to do so.

The good news is that there may be options for you. If the value is so high that you would be forced to surrender it in Chapter 7, you may want to look into Chapter 13. This will let you keep the inherited property but you will be required to pay back a portion of your debts over a 3-5 year period. You will need to figure out whether you qualify for Chapter 13 but, assuming you do, it may be a good option to consider.

It’s a thorny issue, to be sure. That’s exactly why you need to have a firm idea of the value of the inherited property before you meet with a lawyer to discuss your situation. Doing so will allow the attorney to assess your situation and help you decide whether filing Chapter 7 bankruptcy will spell trouble for any property you own.

Photo credit: crazysanman.history (via Flickr)

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Which Chapter of Bankruptcy To Choose When A Car Is Involved

Jay Fleischman, Esq. — Tue, 20 Jul 2010 19:31:43 +0000

Filing for bankruptcy in New York often involves a car. Though many New York City residents use the subway or the bus to get back and forth, people with children or who work outside of the main transportation areas (for some reason, most of Queens falls into this category) frequently have a car.

And when it comes down to a decision about filing for bankruptcy, that car becomes an issue.

Luckily, there are some options when you’re trying to protect your automobile and get out of debt at the same time.

The first thing you want to think about is Chapter 7. If the value of your equity in the car falls within the Chapter 7 exemption guidelines then you’ll be able to keep the automobile, wipe out the unsecured debt and move on from there.

A word of caution, though. If you’ve got a car loan and file for Chapter 7 bankruptcy, you’re going to have an extra layer of complexity in the form of reaffirmation. Your lender may force you to sign a reaffirmation agreement in order to keep the car after discharge, and this creates a host of potential issues. Be sure to chat with your bankruptcy lawyer before making a decision.

If your equity is too great to protect in a Chapter 7, you may want to look at Chapter 13. This is going to give you the opportunity to pay back a portion of your debts over a 3-5 year period. And before you go telling me that you’re not looking to pay back the debts if you’re going to be filing for bankruptcy, consider this – Chapter 13 will let you keep the car as well as everything else you own.

So looking at it through that lens, repaying a portion of the debts off over time in exchange for keeping the vehicle isn’t that bad of an idea.

If you’re looking at filing for bankruptcy, there’s one solution that is absolutely wrong for you – and that’s selling or transferring the car. When you transfer property of any kind, you’re going to need to report that to the bankruptcy trustee. If the transfer was made within a certain period of time it will be suspicious and may land you in a heap of trouble. You can go through that scenario with your lawyer, but trust me – you don’t want to.

Photo credit: U-g-g-B-o-y-(-Photograph-World-Sense-) (via Flickr).

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The Bankruptcy Solution to the Second Mortgage Problem

Jay Fleischman, Esq. — Thu, 15 Jul 2010 15:51:24 +0000

[See post to watch Flash video]

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Understanding The Reason For The New York Foreclosure Problem

Jay Fleischman, Esq. — Fri, 11 Jun 2010 19:43:59 +0000

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How The New York Times Sold Homeowners Down The River

Jay Fleischman, Esq. — Tue, 01 Jun 2010 14:01:32 +0000

This past weekend the New York Times did a story titled Owners Stop Paying Mortgages, And Stop Fretting. As a bankruptcy lawyer heavily involved in the world of consumer debt and foreclosure issues, I was stunned and disgusted by the entire piece.

Anyone who’s been awake at all over the past few years knows that the real estate market is in tatters. We’ve got millions of homeowners who bought homes, saw their values erode significantly, and are now screwed, money-wise. But that doesn’t give them license to go to the Hard Rock Hotel and go boating.

I’m calling that just plain absurd. And who wouldn’t?

When you think of someone in foreclosure the picture in your mind is someone who can’t pay the mortgage and is struggling like hell to get by. You don’t picture someone wearing their skipper hat and an ascot, sailing blissfully along the coastline and admiring the view.

If you’re behind on the mortgage and can’t make payments anymore, you go to the lender and try to work out something. Sure, modifications and forbearances are tough to come by – but you try like hell to make it work.

Failing that, you look to get the rest of your debt under control so you can concentrate on the house payments. You try to sell it, maybe do a short sale if you can. And if you want to keep the house and can swing it, you look into Chapter 13 bankruptcy to make the payments manageable.

What you don’t do is take it as a “get out of jail free” card, giving you the chance to spend your money on luxuries. That may or may not be called bad faith in a court of law, but it’s just not the way your parents raised you.

The New York Times article, however, seems to gleefully recount how Alex Pemberton and Susan Reboyras, two Florida homeowners profiled in the piece, are living the Life of Riley in the face of their foreclosure mess. It makes them, and all defaulting homeowners, look like dishonest people who pull one over on the banks.

If I loan you money and you can’t pay me back, that’s one thing. But if I loan you money and you decide to go on a spending spree with the funds and flip me the bird, that’s just not cool. I’d have a right to be angry – really, really angry, in fact.

The real shame of this piece is that it’s not reflective of what people do when they fall behind on the mortgage. Most people fight like hell to catch up, to get out from under the debt, and to do what is by all accounts the honorable thing. They want to hold up their end of the bargain, and fail only because most lenders don’t have the same objectives.

There’s a disconnect in the real world – consumers want to make it right, and lenders just don’t give a crap. Because consumers are real people, and lenders are monolithic corporations with bureaucracies and levels between the font lines and the decision makers.

That’s the reality, but the New York Times went for the sensational. Boo, hiss.

And in the end, someone is going to stand up at a Congressional hearing and hold up this article as proof that American homeowners are dishonest and are the ones who have wrecked the housing market in spite of the best efforts of the lenders. We’ll see the same game play out that we watched in the run-up to the 2005 changes to the U.S. Bankruptcy Code, when creditors claimed that consumer debtors were dishonest and cheating scoundrels.

People who paid their credit card bills stood up and decried the lack of honesty, the sheer gall of others who dared to shrug their shoulders and walk away. They were enraged because those who were paying (the thought went) we subsidizing those who were not.

Of course, that wasn’t true. Still isn’t. But the press sold the American consumer down the river. And in this story, they did it again.

Bookmark this post, folks – this is not the last time you’re going to hear about this story.

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Bankruptcy Retainer Agreements – Why You Need One

Jay Fleischman, Esq. — Fri, 28 May 2010 14:52:52 +0000

Hiring a bankruptcy lawyer is no small task. You’re putting your trust and faith in a professional who is going to help you end your bill problems. And as emotional a time as it may be, you also need to remember that this is a business arrangement. Exchange money for services that are worth the money you spend.

To keep things simple, retainer agreements are absolutely, positively a must when you hire a bankruptcy attorney. Retainer agreements have got to be in writing, signed by both of you, so that you eliminate all chances of confusion later on. This is too big of a deal to do on a handshake, but more to the point you have to to know exactly who is going to do what during the course of your relationship. That’s right, I called it a relationship. Any time you are going to be working closely with someone for an extended period of time, that’s relationship.

Lots of clients come to me for help with filing a Chapter 7 or Chapter 13 after meeting with – and in some cases, hiring – another attorney. A large number of these people paid money to their former lawyers for … well, something. They’re not real clear on exactly what the lawyer was going to do, when they were going to do it, and how much money it was going to cost. They’ve got a vague idea, but not much beyond that.

If your bankruptcy lawyer does not “do” written retainer agreements, you should run away.

If you require a law degree to understand your lawyer’s retainer agreement, you should run away.

These are deal-breakers for you. No two ways about it.

Bankruptcy retainer agreements usually provide for at least the following:

How much it will cost to file for bankruptcy using the lawyer’s services;
What the legal fee covers, and what it doesn’t;
How much it will cost if the lawyer has to do something not covered by the legal fee;
When your case will be filed with the court;
Whether your lawyer will be using another attorney for your court appearances; and
What you have to do in order to get the case handled properly.

When making a decision to file bankruptcy with a lawyer, always read the retainer agreement when you sign it. Doing so will save you a lot of headache later on.

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Short Sale After Bankruptcy? Don’t Waste Your Time!

Jay Fleischman, Esq. — Thu, 27 May 2010 21:25:15 +0000

You filed for bankruptcy and now are contemplating a short sale. Maybe you got a phone call or a letter from some “workout consultant” who “specializes” in these sorts of things. Perhaps a real estate broker called to let you know someone wanted to buy your house but it would need to go through a short sale in order to make the deal happen.

Before you agree to a short sale after bankruptcy, let’s take a step back and inject a little bit of reality into the situation.

Listen closely because I’m only going to say this one time.

A short sale after bankruptcy makes no sense whatsoever. Period.

Look, you went through bankruptcy already. You got your discharge. You’re no longer personally liable for the balance due on the mortgage. If the house goes into foreclosure after bankruptcy the bank can’t come after you for the deficiency.

There’s no further negative credit stigma because your debt has been discharged already.

What do you need to do in order to get a short sale done after bankruptcy?

You’re going to need to enter into a contract of sale for the property (I’m betting that real estate broker has one ready for you to sign, surprise surprise). Then you need to get it over to the right people at the bank (good luck with that). They’ve got to review it, get appraisals of the property, and make you jump through a bunch of hoops.

If you’re working with a workout consultant, you’re probably going to have to spend some money to get the deal done, too.

So you’re going out of pocket and out of time. And you get nothing out of it.

The only people who win when you do a short sale after bankruptcy are the real estate broker (who makes a commission on sale of the property), the workout consultant, and the buyer (who gets the property at a lower price than would be possible without a short sale).

Notice the person missing from this scenario? Yup, it’s you. No benefit whatsoever. Of course, this presupposes that you don’t want your friend or relative to get a sweet deal on a house – but that’s another ball of wax and doesn’t involve these players.

So what happens if there’s a foreclosure after bankruptcy?

Eventually you’ll have to move out. And until the bank takes title to the property you’ll want to keep current on the taxes and insurance. But aside from that, pretty much nothing.

Why would you possibly consider a short sale after bankruptcy? What’s the point? I know I said it before (and told you I wouldn’t repeat myself), but here it goes – there is no point. Short sales after bankruptcy are a waste of your time and your energy.

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New York Bankruptcy Laws – Where To Find Them

Jay Fleischman, Esq. — Tue, 25 May 2010 14:50:57 +0000

New York bankruptcy laws are often thought to be just like the ones in other states – in fact, you probably think they’re found in the U.S. Bankruptcy Code. If only it were so easy.

In fact, the New York bankruptcy laws are scattered around the federal and state statutes. It’s one of the reasons why lawyers who practice bankruptcy law in other states often call a local bankruptcy lawyer when they have a question that relates back here.

It makes sense to think you should look first to the federal laws, and you’re right. The framework of the bankruptcy system is based in the federal scheme. But that’s pretty much where it ends.

For example, here are 2 places where the New York bankruptcy laws come from state, rather, than federal statutes:

Fraudulent Conveyances: The determination of whether a transfer of property is fraudulent comes from the Article 10 of the Debtor and Creditor Law, not the federal bankruptcy laws.

New York Bankruptcy Exemptions: What you get to keep in Chapter 7 or Chapter 13 comes not from federal law, but from a host of New York laws. In particular, NY Civil Practice Law and Rules Sections 5205 and 5206 govern our bankruptcy exemptions for personal property and real estate. Article 10 of the Debtor and Creditor Law also governs the exemption of personal property.

These two aspects of the bankruptcy law are very important when you’re dealing with a New York issue because the outcomes in bankruptcy can be radically different here than elsewhere.

For example, let’s say you own a home in Illinois yet you live here. You move to Illinois and try to file a case. Assuming that Illinois exemptions apply (they don’t unless you live there for a certain period of time) you may end up getting to keep certain property that you would have to give up if you lived here (such as your home) – or vice versa.

Some people have moved to another state merely to take advantage of more liberal exemption and fraudulent conveyance rules, and there’s nothing wrong with that it done properly. But don’t make the mistake of doing something like that without consulting with lawyers on both sides of the border or you may be in for a rude awakening when it comes time to file your case.

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