Debtors are not the only parties who have the power to enlist help from the bankruptcy courts. Under the right circumstances, creditors can file an Involuntary Petition and force the debtor to address issues of insolvency and the dissipation of assets. The following are the main threshold requirements to initiate an involuntary bankruptcy case:

1. If the debtor has more than eleven creditors, three creditors can join together to file an involuntary bankruptcy petition. These creditors are known as the “petitioning creditors.” If the debtor has eleven or fewer creditors, only one creditor is required. In practice, between normal utility, cell phone, credit card, employee, mortgage and other claims most debtors will have more than eleven creditors.
2. The debtor is generally not paying its debts as they become due, unless such debts are the subject of a bona fide dispute as to liability or amount. A bankruptcy court will examine the debtor’s overall financial health. If the debtor simply cannot keep up with its bills the court will be much more likely to approve an involuntary bankruptcy than if the petitioning creditors are disgruntled claimholders with whom the debtor is in litigation. .
3. The three creditors must have noncontingent debts. These debts must not be personal guaranties or other claims that will not mature until some other event occurs to trigger liability.
4. The debts of the petitioning creditors must not be subject to a bona fide dispute. Creditors cannot use the involuntary bankruptcy procedure as a litigation tactic.
5. The aggregate amount of the unsecured claims of the petitioning creditors must be more than $14,425. Involuntary bankruptcy is a remedy for unsecured creditors, not secured creditors who may foreclose on or seize collateral to obtain repayment of their claims.

Creditors most commonly use the involuntary bankruptcy procedure when the debtor has transferred, or is likely to transfer, assets that will diminish the creditors’ likelihood of being paid. For example, if the Debtor has made substantial transfers to insiders without adequate consideration, a bankruptcy trustee may recover those transfers for up to four years, depending upon the law of the applicable state. Similarly, if a debtor has repaid creditors substantial sums within the prior 90 days, a trustee can recover those payments as preferences.

On the other hand, sometimes creditors have concerns that a debtor will transfer significant assets, or even the debtor’s entire business operation. If a creditor obtains this kind of information the creditor may seek similarly situated creditors and commence an involuntary bankruptcy case by filing a petition with the bankruptcy court.

Filing an involuntary petition is similar to filing a federal court complaint. The debtor has thirty days after service to contest the validity of the filing. As shown from the list above, debtors may have many grounds to resist the bankruptcy filing. However, if the creditors prevail at a trial on their petition, the court will enter an order for relief and appoint a Chapter 7 trustee to begin the process of administering the debtor’s assets. At that point, the debtor has the right to convert its case to Chapter 11 (or 13, if the debtor is an individual) in order to reorganize its affairs.

The filing of an involuntary petition is often a double edged sword for creditors. On the one hand, the filing creates an automatic stay that prevents creditors from taking any steps to collect on their claims. Thus no foreclosure, lawsuit or asset seizure may occur after filing an involuntary case.

On the other hand, until the bankruptcy court enters the order for relief the debtor’s activities are not restricted. Thus the debtor can continue to buy and sell assets and even transfer assets without consideration. However, if the court views these activities as severely prejudicial to creditors’ rights, or even if the petitioning creditors can establish that the debtor has committed fraud or other abusive acts, the court has the power to appoint an interim trustee even without entering an order for relief. Under those circumstances, the debtor will lose control of its assets.

It is not surprising that the filing of an involuntary bankruptcy may have disastrous effects on the debtor’s business. The adverse publicity of a bankruptcy case, along with the cost of contesting an involuntary petition, may cause significant damage to the debtor. In light of these potentially dire results, the bankruptcy code provides significant remedies for debtors who ultimately prevail against an involuntary petition. If the petition is dismissed debtors may obtain costs or a reasonable attorneys’ fee. If the court rules that the involuntary petition was filed in bad faith, the court may award the debtor any damages caused by the filing or punitive damages.

Under the right circumstances, when the debtor’s actions are causing creditors to lose significant value to repay their claims, the filing of an involuntary bankruptcy may result in a significant recovery and prevent years of costly and futile litigation. However, the prospect that a debtor may receive an award of its attorneys’ fees even against petitioning creditors who act in good faith should cause creditors to carefully analyze all the elements and likely defenses before filing that simple two page involuntary petition.

The post Creditor’s Rights: Capture a Debtor’s Value by Forcing an Involuntary Bankruptcy appeared first on Baltimore Bankruptcy Lawyer.

In many lawsuits, the real challenge begins after the plaintiff becomes a judgment creditor by winning the judgment. Collecting from the defendant can feel daunting, even impossible. Sometimes defendants have transferred their assets, hid their assets or have no assets.

Courts universally permit a judgment creditor to ask questions of the debtor in a deposition in aid of enforcement. This deposition allows creditors the chance to uncover assets and other collection possibilities. An industrious judgment creditor can’t stop the debtor from lying under oath, but they can ask the right questions. Here are proven methods for getting the best from your post-judgment deposition:

• Make Sure The Debtor Has Been Personally Served With The Order Compelling The Deposition. Personal service is the first step towards obtaining a contempt ruling and ultimately a bench warrant for the debtor’s arrest if they don’t show up for the deposition. Courts will want to feel sure that the debtor has been served before signing that warrant. Use the sheriff or a process server you trust.
• Don’t Skimp On The Document Request. The judgment creditor is going to need bank statements, tax returns, canceled checks, general ledgers, mortgage payoff statements and a host of other documents to truly piece together a judgment debtor’s financial condition. In most states, transfers may be set aside for up to 4 years if done without adequate consideration, so the document request should extend back at least that far. Creditors should expect that judgment debtors will not bring all the documents to the deposition, so they should have a clear record of what they’ve requested to obtain a follow up order from the Court.
• Hold The Deposition In The Courthouse, Not A Conference Room. It’s tempting to depose a debtor in your office, where you have all your documents, your computer and your photocopier, but don’t. If the debtor doesn’t bring all the documents you need or refuses to answer your questions, you won’t be able to force the issue from your suite. When the debtor is sitting before (or at least within easy reach of) a judge or a master the creditor has the power of the court to compel the answer to a question or production of a document. There are also stories of how judges have forced debtors to give up valuable assets from their persons right then and there. This legendary seizure is likely more myth than fact, but it can never happen in your conference room.
• Use Bankruptcy Schedules As A Template For Your Questions. Bankruptcy schedules are set up to help creditors and bankruptcy trustees obtain a comprehensive overview of a debtor’s financial condition. Bring a clear set to the deposition and walk the judgment debtor through them, line by line. The forms can be downloaded from this website. ONE NOTE: the schedules only ask for transfers made within the last year. Make sure to ask about transfers for the last 3 or 4 years, depending upon your jurisdiction.
• Don’t Forget To Leave Without A Court Order Compelling Production Of Missing Items. Again, most debtors will not bring all of the requested documents to the deposition. Keep track of the items not produced and have the judge issue an order compelling the production before you leave the courthouse. Many judges will sign an order even if some of the terms are handwritten. For this purpose, the substance counts much more than the look of the document.
• Have A Court Reporter Present, Or Record The Deposition. You want to make sure you have a good record of your questions and the debtor’s answers if you need to file any follow up motions or other discovery. But don’t be surprised when the court refuses to allow you to record the proceedings on your smartphone: make arrangements with the clerk of the court ahead of time, and get the permission in writing.

Sometimes, the debtor honestly has no assets and has made no transfers from which the judgment may be paid. But the creditor shouldn’t make it any easier on the debtor by not taking all the right steps and asking all the right questions.

The post Creditor’s Rights: 6 Tips to get the Information You Need in a Deposition In Aid Of Enforcement appeared first on Baltimore Bankruptcy Lawyer.

When deposit account holders write a check or make a withdrawal, they may believe that they are accessing their own money, but that is not precisely true, for important reasons. What is actually happening is that the account holder is making demand upon the bank to pay over sums up to the amount on deposit. Viewed in this light, the bank balance really represents a debt owed by the bank to the account holder. Banks hold plenty of cash, but if every deposit holder were to withdraw all their funds at the same time the banks may not have enough to satisfy all these demands. Recognizing that banks can’t maintain such 100% liquidity, the law has developed this debtor/creditor approach to deposit accounts.

This approach becomes vitally important when viewed under the doctrine of setoff (also called offset). Setoff happens when two people or entities owe each other debts. Instead of requiring one side to pay the other and then collect the money back, either of the debtor/creditors can simply say “you don’t have to pay me all you owe; I’m setting off what I owe against your debt to me.” The other party usually can’t protest when the right of setoff is being exercised if the right is built into the transaction or under the law.

The classic setoff relationship is when a depositor owes money to their bank, under a mortgage, credit card or line of credit. When that happens, if the depositor is in default under the debt, under the right of setoff the bank can seize any money in the bank account and apply the funds taken to reduce the debt. This right of setoff will usually happen without any warning or notice to the account holder.

It doesn’t take much imagination to see that when the bank exercises its setoff rights the result is usually great inconvenience or hardship to the account holder. If there’s a default the depositor is usually insolvent or facing other financial distress. Losing access to cash on deposit may mean that other bills or necessary expenses can’t be paid. Even though these results may seem severe, the bank is completely within its rights to exercise this setoff. This is why clients seeking financial advice must be mindful to inform their advisors that they are holding money in banks who are their creditors. It is also why banks will exercise their setoff rights promptly if they believe their customers may be getting ready to prefer other creditors with the cash on deposit.

Debtors cannot seek protection from their banks by filing for bankruptcy. The Bankruptcy Code specifically preserves setoff rights and the US Supreme Court has ruled unanimously that applying an administrative freeze to prepare for setoff does not violate the automatic stay in bankruptcy. As a result, immediately upon learning of the bankruptcy filing by an account holder, a bank may administratively freeze a bank account. Under the debtor/creditor approach to bank accounts, this means that the bank will refuse to honor an account holder’s demand for payment of a check or withdrawal of funds. This refusal to pay on a debt is not by itself considered a setoff. That won’t happen until the bank files a motion for relief from the automatic stay and the bankruptcy court grants that motion. Once that happens, the bank will make a book entry by (1) reducing the amount considered on deposit and (2) applying that amount to reduce the debt owed to the bank. At that time, the funds are forever removed from the reach of the account holder.

Insolvent debtors need to understand the perils of leaving money on deposit with their creditor banks. They should expect that a bank can and will exercise their setoff rights and deprive them access to their cash, usually at a time they can least afford it.

On the other hand, banks and credit unions should anticipate that their debtor customers will seek legal advice that will result in depletion of their bank accounts to defeat their setoff rights. The best way to protect these rights is to closely monitor customers’ payment patterns to better understand whether a pattern of late payments is developing. If so, an early exercise of setoff rights may preserve a collection opportunity that may soon be lost forever.

The post Bankruptcy And The Frozen Bank Account appeared first on Baltimore Bankruptcy Lawyer.

Anyone in business will tell you that bumps come up in the road. Temporary dips in sales, problems collecting accounts receivable, even adding expense to manage a potentially profitable new line of business may all contribute to creating a cash flow crisis. Similarly, an individual may be faced with job loss, an unexpected medical condition or separation/divorce creating an income interruption in the home. Sometimes debtors can address these issues by making arrangements directly with creditors and therefore avoid the more drastic remedy of a bankruptcy case. One such typical arrangement is a forbearance agreement.

What is a forbearance agreement?

Forbearance agreements generally come up when you have a loan with a bank or other creditor, you’ve defaulted on the loan, and the creditor has either begun (or threatened to begin) enforcement action against you or your business. At that point, you may ask the creditor to stop the foreclosure sale, or in a business case, to stop suing you or liquidating its collateral. As part of this arrangement you may need to:

• Begin (or resume) making payments to the creditor
• Offer the bank additional collateral to help secure the creditor’s position
• Agree to liquidate certain assets in order to pay down principal on the loan
• Agree to shorten the original maturity date of the loan

Each of these concessions will help the creditor reduce its risk of loss in the credit situation. In exchange for doing these kind of things, the creditor will agree to not move forward with, or forbear from, conducting its foreclosure sale, obtaining its judgment or otherwise exercising its “rights and remedies.”

What are additional terms to a forbearance agreement?

Creditors usually have some additional terms that they’re going to require as part of that forbearance. They’re usually going to require:

• A release, so if you have claims against the creditor you’re going to let those go
• Waiver of a jury trial, so that if you want to ever sue the creditor in connection with that forbearance agreement you’re only going to be able to have the trial before a judge
• Acknowledgment of the amount that is due on the loan, so that you’re not going to be able to come back and challenge the outstanding principal, interest and other charges that may have accrued
• Waiver of any defenses or counterclaims. This way later, especially if you’re involved in a commercial situation, you won’t be able to contend that the creditor, especially if it’s a bank, interfered with your ability to develop a piece of property, or to move forward in a certain way in your business.

These are valuable rights that borrowers generally lose when they agree to a forbearance agreement.

Should you enter into a forbearance agreement?

Forbearance agreements are very valuable the vast majority of the time for businesses and for individuals, because they give you a chance to get back on your feet without filing for bankruptcy. These are usually arrangements that work best when all that’s needed is a temporary fix for a temporary problem.

Sometimes a forbearance is joined to a loan modification agreement when there is a permanent change to the terms of a loan. This may occur if the creditor is willing to maintain the relationship on a longer term basis. The creditor will usually only see value in changing the loan terms if it believes that repayment is more likely in a modification than in a lawsuit or a liquidation of its collateral.

How do you get the creditor to agree to a forbearance agreement?

Many clients want to know what the creditor is willing to take in a default situation. However, creditors don’t like to negotiate against themselves. More importantly, a creditor doesn’t know what the client can afford to pay. That’s why negotiations for a forbearance agreement will usually begin by the debtor making a proposal, frequently written. That proposal will generally be accompanied by financial information regarding the debtor, its income and operations.

When negotiating a forbearance agreement debtors need to furnish the creditor with accurate financial information and the proposal needs to be something a debtor can reasonably satisfy. It’s vital to resist the urge to make promises you won’t be able to keep. Every creditor wants to recover as much of their debt as possible, but nobody wants to put in the time, effort and money to negotiate and draft a forbearance agreement that will put the parties right back where they started.

The post Forbearance Agreements Can Prevent Bankruptcy appeared first on Baltimore Bankruptcy Lawyer.

Today’s politics and news reports tend to paint the economic recession in a mostly one-sided way, and the story is that creditors have debtors in an iron-fisted grip. If one were to subscribe to this popular viewpoint—as most people do—it would be seem as though creditors hold the power in the creditor/borrower relationship.

Reality, however, can be very different. The creditor surprisingly has little to no leverage over the borrower. In fact, the borrower most often aggregates power to himself, deciding when (and if) debts will be repaid, and in what amount.

Creditors and financial institutions become worried that they lose all rights to their claims against a debtor when the debtor declares bankruptcy or seeks to discharge the debt. This is not the case, however, as creditors retain many rights in these situations. These rights include sharing in any distribution from the bankruptcy, and being heard by the court when it comes to the debtor’s bankruptcy plan. Many times debtors fail to accurately and completely list their assets and income, and in those situations their very discharge becomes at risk.

Maryland creditors’ rights lawyer Ron Drescher, of Baltimore and Wilmington’s Drescher & Associates, has penned a guide for creditors entitled Maintain the Pressure & Get Paid. In this free download, Mr. Drescher shows creditors how to reclaim their power and motivate their borrowers to make payments.

Many lawyers operate with a black and white, all-or-nothing perspective on Maryland creditors’ rights cases. Ron Drescher finds unique approaches to the best methods to incentivize debtors, as well as focusing on identifying the priorities of the financial institution. Are timely payments more important than receiving the full amount? Is a settlement preferable to a long legal battle? Many creditors don’t truly assess their situation, and spend more money than necessary over the long run trying to “win” a case.

If you are a creditor that is looking to take control of a difficult situation, look no further than this guide. With over twenty-five years of experience helping parties on both sides of the lender/borrower equation, Ron Drescher’s reputation as a creative problem-solver has earned his clients successful solutions and settlements to seemingly impossible cases.

If you are a creditor with difficult debtors in Pennsylvania, Maryland, Virginia, or Delaware, call Drescher & Associates today at 410.484.9000 to learn more about your options.

The post Free Guide: Information on Maryland Creditors’ Rights Cases appeared first on Baltimore Bankruptcy Lawyer.

Certain states impose a heightened burden on debt collectors in order to regulate the collection of delinquent debt. In Maryland, investors in bad debt need to obtain a license to collect this debt; failure to do so may lead to violations of both federal and state consumer protection laws.

The Maryland law allows for very few exceptions. There is no carveout for debts that are actually bought (and therefore not being collected by a paying client); the Maryland licensing act specifically includes investors of delinquent debt, even when being collected for their own benefit. As long as a debt is in default when purchased, that investor cannot collect that debt without first obtaining a Maryland license. The Consumer Protection Commissioner can impose hefty fines on investors who do not jump through this critical hoop.

Although there is no direct right by consumers to enforce the licensing act, courts have made life particularly difficult for unlicensed investors who run afoul of the licensing requirement. Under the federal consumer protection act, any violation can be actionable, including a violation of state collection regulations. Under the Maryland consumer protection statute, a violation of the licensing act can lead to a lawsuit if the violation is done “knowingly”. Courts have ruled that since the collector is presumed to know that it needs to be licensed (ignorance is no defense), any unlicensed collection efforts are done “knowingly” and therefore borrowers almost automatically overcome that otherwise difficult burden of proof.

What damages are available to borrowers is not fully settled under the law. Many courts rule that borrowers cannot recover the amount they repaid on the debt, because that amount is actually due and owing (the distinction is a fine one: the debt is valid, but until the owner of the debt is licensed, it cannot be collected). However, because the consumer protection statutes focus on misrepresentations (i.e., a collector who is unlicensed misrepresents that it has the ability to collect a debt when in fact it does not), borrowers who sue under these regulations can collect damages for emotional distress, even without proving that they suffered an accompanying physical injurty (a requirement in negligence cases).

The failure to become licensed as a debt collector in states like Maryland can lead to expensive and time consuming litigation that can completely defeat any profit built into even the best debt purchase, and should be a significant item on the due diligence checklist of any investor interested in purchasing delinquent debts.

The post Buyers of Distressed Maryland Debt Need to be Licensed as Collectors appeared first on Baltimore Bankruptcy Lawyer.

Sheriffs typically develop rigid procedures for allowing creditors to sell their collateral. This process can take months or years to navigate through. In many states and counties, the sheriff holds sales only every other month, usually requiring up to 120 days’ notice before the sale will be scheduled. In some counties, the sheriff won’t even hold a sale in December in deference to a holiday spirit.

Under the right circumstances, lenders can take the judicial process into their own hands by conducting sales in federal court. This procedure is genrally only available under the federal diversity rules, where the lender and the property owner reside in different states and the amount in controversy exceeds $75,000. When these stars align, the lender can file its foreclosure action in the United States District Court in the district where the property resides.

The advantages can be significant. The U.S. Marshal conducts very few foreclosure sales, so its staff is not likely to be overwhelmed by the backlog of pending sales. As a result, the lender can schedule (or adjourn) a sale with much greater flexibility than in the state proceeding. For example, a lender who suspends a sale in September may have to wait until the November sale date to have its sale in jurisdictions that schedule sheriff sales every other month. However, in federal court if the lender so prefers the Marshal can set the date only far enough in advance to allow the mandatory four weeks’ advertising to be completed. This flexibilty can make a huge diffference for the parties.

In some situations though filing federal foreclosure cases may be more trouble than they’re worth. This can happen in states where mediation is mandatory (or heavily encouraged) if the property to be sold is owner occupied residential property. Most such states have detailed and complex pre-sale procedures to ensure that a homeowner is not ousted from their residence without the chance to obtain a loan modification or other loss mitigation opportunity to keep the family in their abode. State courts are much more familiar with these procedures than federal courts, so in such circumstances choosing the federal option may actually slow the process down.

For many cases, however, choosing the federal option can offer a tremendous savings of time and money to complete the foreclosure process.

The post Federal Foreclosures Offer Flexibility At A Price appeared first on Baltimore Bankruptcy Lawyer.

TO: ALL ATTORNIES, NEWSPAPERS

The Sussex County Sheriff’s Office would like to inform the public, attorneys and newspapers that we will NOT be holding a Sheriff’s Sale in the month of December due to the fact that our office would like to issue compassion in these hard economic times.
If you have any questions, please contact us at the above number.

Thank you.

Delaware is a judicial foreclosure state, meaning that the lender must file a lawsuit and obtain a money judgment before earning the right to foreclose on a house. After obtaining the judgment the lender takes steps to arrange for the Sheriff to conduct a public auction at the Sheriff’s office. In Sussex County Delaware, the Sheriff conducts foreclosure sales on the third Tuesday of each month. By that schedule, the date for the December 2012 sale would have been December 18, 2012, one week before Christmas.

When I received the letter I was impressed that the Sheriff felt involved enough in the community to cancel December foreclosures. From a broader perspective, I began to wonder whether most people feel that creditors should grant their debtors a brief respite during the holidays, especially if the debts arise from hardship.

Do you think creditors should adjust their practices before the holidays? If you do please share this post on Twitter, Facebook or Google+, and have a happy holiday!

The post Sussex County Sheriff Suspends Foreclosures For Christmas appeared first on Baltimore Bankruptcy Lawyer.

• Paul Barnes: President of Shea Homes San Diego: No. Oh, boy, some of the finest and brightest have been at it again. Not only are they late for the wedding, but junior was born and is off to college … This one is right up there with the recently approved Abandoned Property Ordinance whereby you have to notify the police department that you plan to abandon your property. You couldn’t dream this stuff up.

• Murtaza Baxamusa: Directs planning and development for the Family Housing Corporation:  Vacant and abandoned homes depressed property values in neighborhoods through the “broken glass” effect and fiscally impacted the municipal tax base. Displacement also exerted an economic, health and human toll on at-risk families. However, the foreclosure hurricane has passed us, with defaults falling to their lowest level since the turbulence of the Great Recession.

• Kurt Branstetter: Loan officer and mortgage manager at W.J. Bradley Mortgage: No. A registry for distressed properties would have been a great idea … in 2008. However, establishing such a registry today is a day late and many taxpayers dollars short. Any potential benefit derived from this registry today is more than offset by establishing another government bureaucracy. While the tsunami of foreclosures has waned, a government bureaucracy will never go away.

• Alan Nevin: Economist and a principal at London Group Realty Advisers: San Diego is not the first city to have an ordinance of this type. It is, of course, locking the barn after the horse is gone. Fortunately, our foreclosures have diminished substantially and should return to normalcy by next year.

These experts believe that San Diego is three or four years too late in acting on the problem, but is that fair, or even accurate? As recently as August, 2012, experts were predicting another wave of foreclosures  because the moratorium resulting from the robo-signing scandal is ending. How many people were so ahead of the curve in 2008-2009 to understand the depth of the real estate crisis in our country? What do you think, did we all have blinders on at the end of the last decade, or is hindsight 20/20? Please tell me your thoughts in the comments.

The post The Foreclosure Crisis: Is It Too Late For Politicians To Make A Difference? appeared first on Baltimore Bankruptcy Lawyer.

Guernsey is giving regulators pushback by embracing a different philosophy: retain, repair and rent foreclosed homes. Bank president Robert Patrella concluded a few years ago that there was a better way to deal with bank owned properties. “Most all of them were trashed,” Patrella said. “They were in the worst possible condition. It didn’t make sense to try to sell a house worth half what was owed on the mortgage.” Instead of dumping the houses, Guernsey invested between $10,000 and $50,000 per home, became property managers and collected rent until a buyer could be found. For example, one house needed a new roof, exterior trim, a garage floor and doors, drywall in some rooms, paint throughout, carpet, appliances, a kitchen counter and sink, and a new driveway. Also, basement walls were badly buckling, requiring the bank to trench around the home and shore up the walls.

Most banks would have sold this house “as is” instead of investing about $45,000 repairing the home. Guernsey expects to recover its investment and much more in addition to booking rental income on the home.

Guernsey’s approach to foreclosures is at the forefront of lenders’ innovative approaches to the national foreclosure crisis, but the bank is not alone. The Museum of Modern Art also responded to the crisis by sponsoring a study amongst several teams of architects, landscape engineers and urban visionaries to explore a revision of suburbia in Foreclosed: Rehousing the American Dream. These efforts are in stark contrast to the infamy of the five major loan servicers  who were sued by the states’ attorneys’ general and are slowly, if at all, implementing the $25 billion settlement that concluded the litigation.  Bank of America, Wells Fargo, Citi, Chase and GMAC could go a long way towards repairing their reputations and the national housing industry by taking a lesson from small Guernsey Bank and allowing innovation to creep into their cookie-cutter approach to foreclosing on American families.

The post Foreclosure Innovation for Landlord Bank appeared first on Baltimore Bankruptcy Lawyer.