Backstreet Boys Settle Bankruptcy Claims

The Backstreet Boys, the best-selling boy band in history, recently settled their claims against their creator, Lou Pearlman, according to news reports. Perlman, also the creator of other successful boy bands such as N’Sync, is currently serving a 25 year prison sentence after pleading guilty to conspiracy, money laundering, and making false statements during a bankruptcy proceeding.

After Pearlman filed bankruptcy in 2007, the Backstreet Boys (A. J. McLean, Howie Dorough, Nick Carter, Kevin Richardson, and Brian Littrell) filed claims that Pearlman and his Trans Continental Records owed them $3.5 million. The bankruptcy trustee challenged those claims and this year a federal bankruptcy judge ordered the band and trustee to work things out. Under an agreed settlement, the Backstreet Boys will receive $99,000 on account of their claims and take possession of the rights to master recordings, including the hit, “”I’ll Never Break Your Heart.”

Last fall, the bankruptcy judge approved Pearlman’s plan to pay creditors, including a provision to pay general unsecured creditors (including the Backstreet Boys) about four cents of each dollar they’re owed. Since that time, payments have been mailed to creditors. The good news for the band is that Backstreet got some of their money back – all right!

What to Tell Creditors during Bankruptcy

Whether you call it a collection attempt or harassment, the fact is that creditors call. They call at home and at work; they call home and cell phones; and they call bosses and family members. Whether a collection call is “legal” depends on many factors. The most powerful protection from a creditor call is from the federal bankruptcy laws, but even that protection depends on the situation. So, what should a person tell a collector during bankruptcy?

Before Filing Bankruptcy

The Bankruptcy Code does not apply to protect an individual from creditor calls until the case is filed. Simply retaining an attorney is not enough. However, other federal laws may protect the individual until the case is filed with the bankruptcy court. For instance, the Telephone Consumer Protection Act restricts certain collection calls to cellular phones. Additionally, under the Fair Debt Collection Practices Act (FDCPA), a third party collector may not continue to call a debtor after an attorney is hired in connection with the debt, including a bankruptcy attorney. The FDCPA does not apply to calls from original creditors. Before a bankruptcy case is filed, any collector should be told, “Don’t talk to me, call my lawyer!”

During the Bankruptcy Case

Once the bankruptcy case is filed, the bankruptcy automatic stay stops all collection calls. The automatic stay is specifically intended to stop creditor harassment and allow the debtor a “breathing spell” to organize personal finances. As a courtesy and to avoid future calls, a bankruptcy debtor should refer all collection calls after filing bankruptcy to his or her attorney’s office. Tell the caller, “I filed bankruptcy, call my lawyer!” Make a record of the call and inform your attorney. If a creditor or third party collector knowingly violates the automatic stay, the bankruptcy court may find that individual or organization in contempt of court, which may include a fine, and an award actual damages and attorney fees. 

After the Bankruptcy Discharge

A debt that is discharged during bankruptcy is no longer legally enforceable against the debtor. The federal Bankruptcy Code prohibits creditors from contacting debtors for the purpose of collecting discharged debts. If contacted, a debtor should tell the caller, “This debt was discharged in bankruptcy. Call my attorney!” Make a record of the call. Bankruptcy courts take creditor harassment after discharge very seriously and may find the collection agency or creditor in contempt of court.  

Hidden Traps When Borrowing Money from Family to Pay for Bankruptcy

Paying for bankruptcy can leave you broke. The typical bankruptcy case involves credit counseling and financial management class fees; court filing fees; and attorney fees. In many cases, paying for bankruptcy is beyond the means for many struggling individuals.

Borrowing money is a common way to fund a bankruptcy case, especially from family members or friends. There is nothing wrong with borrowing money to pay for bankruptcy, but there are some hidden dangers.

First, by borrowing money, you have created a debt that must be reported during your bankruptcy. Even if you borrowed from a family member with the intention of paying it back, all debts must be reported. The bankruptcy court will send out notices of your bankruptcy filing to all of your creditors, including family members who are owed money, and they are invited to attend your Section 341 meeting (also called the “meeting of creditors”). Not disclosing a creditor or debt may be considered an intentional fraud on the bankruptcy court, which may lead to denial of discharge or even criminal prosecution.

Second, now you may be thinking, “If the money was a gift, then my family member is not involved in my bankruptcy case.” That is true. However, cash gifts are also reported to the bankruptcy court and are included in your bankruptcy means test calculation. The means test is used to determine eligibility for Chapter 7 bankruptcy, and the minimum length of time and required payment for a Chapter 13 case. Loans that are intentionally misrepresented as gifts may also lead to fraud charges.

Third, repayments before filing bankruptcy can create headaches. Consider the following example:

John borrows $2,000 from his mother to pay bankruptcy fees. His attorney notes that he is expecting a large tax refund, so she suggests that John postpone the bankruptcy filing until after he receives and spends his income tax refund. The next week, John receives his normal paycheck and pays his mother in full. Two days later, John gets his tax refund and spends it on regular living expenses. John’s attorney verifies that John properly disposed of his tax refund and files his case (unaware that he paid his mother).

The debt John repaid to his mother is called a “preference payment” and receives special treatment under the federal law. A preference payment generally means that one creditor received payment shortly before the bankruptcy case that other creditors did not. In other words, John preferred to pay his mother and not his other creditors. During the bankruptcy case, the trustee can demand that John’s mother pay over the $2,000 to the bankruptcy estate for fair distribution to all creditors. Preference payments are bad, especially when made to family members. There is a twelve month look-back period for preference payments to “insider creditors,” including family members, friends, and business partners.

Many bankruptcy debtors borrow money from family before filing bankruptcy. In most cases there are no complications, but there are potential traps. The best advice is to fully and completely discuss your financial situation with your attorney before making any transfers of money.  

Lawsuit Mill Responds to Complaint

In July, the Consumer Financial Protection Bureau (CFPB) filed a federal lawsuit against Frederick J. Hanna & Associates, alleging the Georgia law firm filed tens of thousands of debt collection lawsuits against individuals without attorney review or investigation. The CFPB suspected foul play when it was noted that the same name appeared on 130,000 debt collection lawsuits over a two-year period.

The CFPB complains that Frederick J. Hanna & Associates used an automated process to produce debt collection lawsuits without any meaningful involvement of lawyers, which misrepresents itself to consumers in violation of the law. The law firm is also accused of intimidating consumers into paying debts they may not even owe, and producing sworn statements from people who couldn't possibly know the details of the consumer debts. The CFPB points out that when challenged in court, the firm dismissed more than 40,000 lawsuits it had filed in Georgia alone because it couldn't substantiate claims. Since 2009, the law firm has made millions collecting debts for creditors such as Bank of America and Capital One. The CFPB seeks compensation for victims, a civil fine, and an injunction against the firm and its partners.

In response to the federal complaint, Frederick J. Hanna & Associates recently filed a motion to dismiss, claiming that the firm is shielded by a “Practice of Law Exclusion” explicitly included in the federal law. Additionally, the firm points out that there is no standard under federal law requiring “meaningful attorney involvement” when filing a debt collection lawsuit, and that the CFPB has not identified any instance in which the firm filed an affidavit without personal knowledge. Finally, taking a page from consumer attorneys, the firm argues that the federal law is subject to a one-year statute of limitations, so claims against the law firm that date back to 2009 should be barred.

This is an important case in the brief history of the CFPB. Creditor lawsuit mills have been around for many years and prey on the poor and often innocent, wrongfully damaging credit and extorting money from consumers for unenforceable debts. If successful, the CFPB may cause real change in the third party debt collection industry and provide greater protections for individuals from debt collection abuse.

File Bankruptcy and Live Longer?

Consumer bankruptcy attorneys have long known that filing bankruptcy can relieve personal stress. Clients burdened with overwhelming debt are able to “start fresh” after bankruptcy without the stress of debt collectors chasing them. Now there is evidence that filing bankruptcy may actually lead to a longer and more prosperous life.

Recently, a paper published by the National Bureau of Economic Research (NBER) examined 500,000 bankruptcy filings in the United States to measure the effect of bankruptcy laws on consumers. The authors, economists Will Dobbie and Jae Song, found that filing Chapter 13 “increases annual earnings by $5,562, decreases five-year mortality by 1.2 percentage points, and decreases five-year foreclosure rates by 19.1 percentage points.” The authors postulate that filing bankruptcy can also eliminate the disincentive to work after a paycheck garnishment. Once a paycheck is garnished, some individuals may stop working because the benefits of receiving a reduced paycheck are outweighed by the costs of working. Bankruptcy can stop a paycheck garnishment cold, and in some cases return garnished money to the worker.

The study theorizes that bankruptcy can help people live longer due to decreased daily stress in their lives. Chapter 7 bankruptcy can quickly eliminate unpayable debts, usually within 4 or 5 months. Chapter 13 bankruptcy can help protect a car from repossession and a home from foreclosure while the individual reorganizes personal debts over three to five years.

While the many financial advantages of bankruptcy are well-documented, the NBER study highlights some benefits of bankruptcy that may be overlooked. Now the bankruptcy debtor can not only look forward to a fresh financial start after bankruptcy, but also a wealthier and longer life.

HAMP Denial May Mean Lawsuit

Under the Home Affordable Modification Program (“HAMP”), an underwater homeowner may request that a lender modify his or her home mortgage. Typically, a request is made after the homeowner has missed payments and needs the modification to eliminate negative equity, reduce monthly payments (and interest in some cases), and bring the mortgage current. If the homeowner meets certain eligibility requirements, the lender will offer a trial period plan that requires the homeowner to make three modified payments. After the trial period plan payments are made on time, the homeowner is supposed to receive a permanent loan modification agreement.

Unfortunately, lenders do not interpret the HAMP rules the same as the rest of the world. Many lenders and mortgage servicers are denying home loan modification after the trial plan period is successfully completed by the homeowner. The lenders categorically state that even though homeowners are enticed into paying the trial period plan payments, there is no contractual obligation to permanently modify loans. They point out that even if a lender promises to modify a loan (in writing), the lender never signs a contract and is not legally obligated. Lenders have also argued that HAMP laws do not provide a homeowner with a private right to sue the lender for failure to provide a loan modification. Consequently, even if a lender did something wrong, the homeowner cannot do anything about it.

Some courts are now allowing lawsuits against lenders and/or servicers for breach of contract when homeowners are denied loan modifications after successfully completing trial plan periods. In the recent case of Topchain v JPMorgan Chase, No. 13-2128 (8th Cir. 2014), the Eighth Circuit Court of Appeals held that a homeowner has a private right to sue a mortgage lender when it fails to properly process a modification.  Other courts have likewise ruled that homeowners can sue under HAMP when lenders refuse loan modifications for eligible borrowers. See Wigod v Wells Fargo Bank, N.A. 673 F.3d 547 (7th Cir. 2012); Corvello v. Wells Fargo Bank, N.A., 728 F.3d 878 (9th Cir. 2013); Young v. Wells Fargo Bank N.A., 717 F.3d 224 (1st Cir 2013).

Naturally, lawsuits are expensive and time-consuming. In many cases Chapter 13 bankruptcy is a cost-effective alternative when a homeowner is unfairly denied a loan modification. A bankruptcy debtor may litigate a HAMP lawsuit in federal court while under the protection of the bankruptcy laws prohibiting foreclosure. Chapter 13 bankruptcy may also allow the debtor to “catch-up” missed payments or “strip-off” wholly unsecured junior mortgages.

Flagstar Bank Penalized for Mortgage Servicing Violations

The Consumer Financial Protection Bureau (CFPB) announced that it has reached a consent agreement with Flagstar Bank to settle accusations that the bank delayed or prevented thousands of homeowners from obtaining mortgage relief and avoid foreclosure. The agreement calls for Flagstar to pay $27.5 million to the roughly 6,500 consumers whose loans were serviced by the bank. The bank will also pay a $10 million fine to the agency. Flagstar is one of the nation’s largest mortgage servicers.

What makes this penalty unique is that the CFPB halted Flagstar’s mortgage servicing operation until it can show that it is in compliance with federal laws.

The consent agreement outlined many of Flagstar’s wrongful acts, including assigning only 25 full-time employees and a third-party vendor in India to review nearly 13,000 active loss mitigation applications. During 2011, it took Flagstar up to nine months to review a single application. When consumers called Flagstar for information, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. In many cases loan modification applicants were wrongfully denied, often without explanation.

Pursuant to the consent order with the CFPB, Flagstar is prohibited from acquiring any servicing rights for defaulted loans. If a loan it services goes into default, Flagstar must transfer the servicing of that loan to another mortgage servicer. These prohibitions continue until Flagstar has demonstrated compliance with the consent order's operational reform provisions.

The CFPB, like the rest of the country, has figured out that mortgage servicers benefit from non-compliance with the law, and that it is more profitable to simply pay fines without change. Halting Flagstar’s operations changes the character of the penalty and may ultimately provide incentive for the industry to reform itself. 

When State Law Conflicts with Federal Law, Bankruptcy Debtors May Lose

The United States is a nation of laws, many, many laws. We have city laws, county laws, state laws, and federal laws. The enforcement of each law is constrained by a jurisdiction. Federal laws typically apply everywhere within the United States; state laws only within the state borders. So, what happens when a state allows certain conduct within its borders that is illegal under federal law? And, more important as a practical matter, is a person or company entitled to the benefits of the federal bankruptcy laws when engaged in a permitted state activity that is a federal crime?

This uncommon situation has been addressed in several recent bankruptcy cases involving medical marijuana operations. Currently, 23 states have legalized medical marijuana, six have decriminalized marijuana use, and the states of Colorado and Washington have legalized recreational cannabis use. This despites the federal law that makes marijuana use illegal for any reason, even with a medical prescription. The Supreme Court held in the 2005 case of Gonzales v. Raich that Congress has the right to outlaw medicinal cannabis, thus subjecting all patients to federal prosecution even in states where the treatment is legalized.

This tension between state permission and federal prohibition makes the “legality” of marijuana very murky in many states. Regarding enforcement of the federal drug laws concerning marijuana, President Obama has said, "We're going to see what happens in the experiments in Colorado and Washington. . . The Department of Justice ... has said that we are going to continue to enforce federal laws. But in those states, we recognize that ... the federal government doesn't have the resources to police whether somebody is smoking a joint on a corner." In other words, the feds will not actively enforce in states that allow marijuana production, sale, and use - for the time being.

However, this “blind eye” approach does not extend to other federal processes. Five bankruptcy court rulings from Colorado, California, and Oregon have turned away debtors who seek to restructure financial obligations connected with a marijuana business, whether the debtors are warehouse landlords, dispensary owners, or caregivers. Most recently, a federal judge dismissed the bankruptcy case of a Colorado marijuana business owner, stating that while he is in compliance with state law, he is breeching the federal Controlled Substances Act. The debtor, a marijuana distributor and producer, sought Chapter 7 bankruptcy protection and listed $556,000 in unsecured debt. He also identified roughly 25 marijuana plants, each valued at $250, which could have been liquidated to pay creditors, but the trustee could not take control of the plants without breaking federal law. The bankruptcy judge stated that that the case could not be converted to a Chapter 13, because the bankruptcy plan would be financed “from profits of an ongoing criminal activity under federal law.” The judge added, "Violations of federal law create significant impediments to the debtors' ability to seek relief from their debts under federal bankruptcy laws in a federal bankruptcy court."

Each bankruptcy case implicates both federal and state laws. If you are contemplating restructuring your debts through bankruptcy, speak with an experienced attorney to discuss your situation.

Bankruptcy Dishonesty Means No Discharge. . . and Worse

Overwhelming debt causes a great deal of stress. You may lose sleep, become angry, or get scared. Fortunately, the federal bankruptcy laws can restructure your debts, provide a fresh start and alleviate your stress.

However, it is critical that you play by the rules.

A man in Tama County, Iowa, recently discovered the importance of honesty and fair dealing during the bankruptcy process. According to the Waterloo Cedar Falls Courier, Jay Freese was convicted of bankruptcy fraud and sentenced to 18 months in federal prison. He was also ordered to pay a $5,000 fine, a $100 civil penalty, and will be on supervised release for three years following prison.

According to court records, Freese ran into debt problems with his hog operation. He obtained an operating loan from Lincoln Savings Bank and put up equipment including a Bobcat, Kubota tractor and ATVs as collateral. He later traded the ATVs for a corn-burning stove valued at $10,700, then filed for Chapter 7 bankruptcy protection. Freese did not list the ATVs or the stove in his bankruptcy filing, even though he still owed Lincoln Savings $354,000.

The bank cried foul after it discovered that Freese had not listed the collateral securing its loan. When questioned, Freese said that he sold the Bobcat and the tractor. Investigators subsequently discovered that there was no sale. They also discovered that he had given his sister $5,700 in cash and she wrote a check in that amount so it would look like payment for the equipment.

A search of Freese’s property by FBI agents found the equipment, along with five firearms, a boat, a snowmobile, a collection of farm toys and $22,102 in cash, none of which was disclosed in the bankruptcy. After being discovered, he pled guilty to bankruptcy fraud charges. Additionally, the bankruptcy court denied discharge of all of Freese’s debts.

Bankruptcy is powerful medicine, but it is only available for debtors who are honest about their income, expenses, assets, and debts. Dishonesty during bankruptcy can mean loss of bankruptcy protection as well as criminal charges.

Rental History Useful for Rebuilding Credit

The average American’s FICO credit score hit an all-time high this past April, nosing in at 692. FICO scores range from 300 to 850. Although judgment of credit scores is often in the eye of the beholder, anything between 700 and 749 is considered a good score, with the best scores ranging 750 and higher.

Debtors emerging from bankruptcy are often far below the national average credit score, so rebuilding and improving is a high priority for many. Fortunately, Experian and TransUnion, two of the country’s largest credit reporting bureaus, are now allowing landlords to report rental payment histories for tenants. According to an article in the Washington Post, “nearly 20 percent of renters saw an increase in their score of 10 points or more after just one month” once rental payments were included in the consumer’s credit profile. An extra 10 points on a credit score can mean the difference between a “poor” credit score and an “average” credit score, which translates to a better interest rate and a lower monthly loan payment.

There are two ways for a landlord to submit rental payments to a credit bureau (a tenant may not self-report). The first is when a landlord agrees to receive payment through a third party service, such as RentTrack. Tenants are able to pay rent through RentTrack via credit card or echeck directly from a bank account. There is a small processing fee for these services.

The second way to report rent payments is when a landlord provides a history of rental payments to the credit bureau, such as through TransUnion’s Resident Credit program.

Another option for consumers to include rental payments in a credit analysis is to use an alternative credit data company such as ECredable. These credit bureaus will verify a tenant’s rental payment history and include this data in a credit report and score, which can be used during a loan application. Under federal credit regulations, the mortgage company is required to consider this information during its loan approval process.

Your bankruptcy discharge will provide a fresh start, but it is up to you to rebuild your credit score. This takes time and attention. Your bankruptcy attorney can help you analyze your situation and make recommendations for improving your score after bankruptcy.