Can you File Bankruptcy with a Durable Power of Attorney in Massachusetts?

There is no reported case here in Massachusetts settling the issue of whether one can file bankruptcy on another’s behalf with a durable power of attorney. However, it is likely that this would be allowed if the debtor was incapacitated and unable to participate in their bankruptcy case due to health or disability.

We tend to be asked about this issue when elderly parents with dementia or Alzheimer’s disease have granted a power of attorney to a son or daughter. The “attorney in fact”–the person granted the power of attorney–wants a discharge of the parent’s debts due to creditor harassment and lawsuits. There is also at times an incentive for children or other heirs to seek a bankruptcy discharge for their parents when they are elderly: if the parent dies with undischarged debt, their creditors will have claims against their probate estate. This might require the sale of a family home to satisfy debts and, in any event, would reduce the amount that children or other heirs would otherwise get under a will or via the laws of intestacy.

So, with this in mind, is a POA-based bankruptcy possible in Massachusetts? As the Vermont Bankruptcy Court put in in 2001:

It appears well-settled that a bankruptcy case may be commenced through an attorney-in-fact under appropriate circumstances. An attorney-in-fact may commence a bankruptcy case so long as the debtor qualifies for relief under 11 U.S.C. § 109, the commencement of the case is within the scope of the specific language contained in the document granting the power of attorney, and such action by the attorney-in-fact does not constitute the practice of law.

In 1999, the New Hampshire Bankruptcy court also allowed a POA bankruptcy and set out some detailed requirements. Essentially, it said that:
1. The petition must be properly executed by the attorney in fact in his representative capacity.
2. A copy of the durable power of attorney must be attached to the petition which serves, among other things, that the attorney (at law, not in fact) for the debtor has made certain inquiries regarding the power of attorney and has no reason to believe that it’s invalid.
3. The “attorney in fact shall appear at the first meeting of creditors and the trustee shall require the attorney in fact to state on the record the reasons necessitating the commencement of the case under a power of attorney.”
4. The petition must be served on the debtor.

There are reasonable safegaurds meant to protect the integrity of the bankruptcy system and ensure that attorney-in-fact-initiated bankruptcies are only filed when necessary. Although, the Massachusetts Bankruptcy Court has not gone on record as allowing POA bankruptcies, it would likely follow the majority of courts, but require a showing of necessity like the New Hampshire court did.

One novel issue here in Massachusetts, however, is that we repealed our durable power of attorney law in 2009 and replaced it with a customized version of the Uniform Probate Code. At least one attorney commentator believes that this invalidates pre-2009 POAs. Consequently, it may be prudent to update your POA, if possible, before filing bankruptcy based on one. If the debtor is already incapacitated, however, this may be impossible. It is my opinion that the Massachusetts Bankruptcy Court would not dismiss a bankruptcy case due to a pre-2009 POA. However, if it did, the appointment of a conservator or guardian–a step certain to increase complexity and expense of a case–would be necessary to proceed with a bankruptcy case on behalf of the debtor.

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Chapter 12 Bankruptcy Protection for Family Fishermen

Chapter 12 of the Bankruptcy Code is a little-known avenue of debt relief and reorganization for family farmers and fishermen.  Like its better-known cousins, Chapter 13 and Chapter 11, Chapter 12 is a court-supervised debt reorganization.  However, in a few important ways Chapter 12 is the most powerful form of bankruptcy.  Simply put, when the bankruptcy laws were amended, farmers and fishermen were favored, and many of the requirements of the other chapters were not made applicable to Chapter 12.  You must qualify, but if you do and need debt relief, Chapter 12 warrants investigation.

Who Qualifies?

For fishing operations owned by private corporations, partnerships or LLCs, the business must be 50-percent owned by one family who actually conducts the fishing operations.  At least 80 percent of the assets of the business must be related to the fishing operation.  The business must have less than $1,757,475 in aggregate debts (excluding debt on one home for an owner), and at least 80 percent of these debts must arise out of the fishing business.

For individuals (i.e. non-corporate owned fishing operations), the requirements are similar.  The same debt limit applies, but there is no asset test.  Instead, at least 50 percent of the individual’s gross income must come from the fishing business in the year preceding the bankruptcy or, alternatively, at least 50 percent of gross income in each of the two years before that.

So why does it matter?  What is so good about Chapter 12?

If you qualify, Chapter 12 allows a family fisherman or fishing operation to reorganize and discharge debts, stop foreclosures, seizures, and lawsuits–just like some other chapters of bankruptcy.  However, there is one special privilege under Chapter 12: the ability to forcibly re-write a home mortgage on an underwater home.  This can provide dramatic relief and cannot be done in any other chapter of bankruptcy, and in this real estate market could have huge advantages for those who qualify.  For example, a fishermen with a home worth $250,000 encumbered by $350,000 in mortgage debt could modify the mortgage balance to $250,000 and repay this on a normal 30-year mortgage term at a market interest rate.

There is also no means test in Chapter 12 or prohibition on seasonal or balloon plan payments.  Although you will need some predictability of income in order to create and fund a feasible reorganization plan, the relaxed requirements of Chapter 12 make a fisherman bankruptcy more flexible and potentially more beneficial and likely to succeed.

The bottom line is that if you are a family fisherman struggling to pay debts or a home mortgage, it makes sense to investigate your options under Chapter 12.

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Chapter 11 Bankruptcy Reorganization in a Nutshell

Unlike in Chapter 7 and Chapter 13 bankruptcy, creditors have a vote on what happens in Chapter 11.  Chapter 11 bankruptcy is sometimes used by individuals who are over the Chapter 13 debt limits, but most of the time businesses file Chapter 11 to reorganize or to sell their assets.  The fact that creditors have a vote in Chapter 11 makes it very different than the other types of bankruptcy.  Here’s how it works.

Debts (claims and interests, technically) are divided into classes in Chapter 11.  There can be many controversies about which debts are lumped together for reasons we will see, but in a very simple scenario, let’s say, the business in bankruptcy has a secured bank loan and several unsecured vendor debts.  The secured debt will occupy Class 1 and the vendor debt will make up Class 2.  The voting totals emerging from each class is what will matter.

In a standard reorganization scenario, the business debtor’s lawyer will draft a lengthy document telling the story of the business, how it ended up in bankruptcy, what it’s financial picture is like, what the business intends to do in its bankruptcy plan, and what the alternatives to the plan’s approval is.  That document is called a disclosure statement.  The court must ensure that the disclosure statement provides adequate information.  This is largely a discretionary standard, but it is defined quite intelligently as enough information so that a hypothetical investor in a class of claims being treated under the plan would be able to make an informed judgment about whether to invest in a claim of that class.  Anyway, the court will approve this document after one or more amendments and it will then be transmitted to all creditors along with a copy of the plan and a ballot.  The voting will begin.

Whether a class of claims accepts the plan or not is based on whether more than half of the creditors in the class holding at least 2/3 of the dollar amount of the class who actually cast a vote do so in favor of the plan.  In general, all classes of claims who are “impaired” (basically have their normal rights outside of bankruptcy modified) have a right to vote on the plan and must accept the plan.  However, and this is a big however, there is an alternative route to getting a plan confirmed, and that is called “cramdown.”  A cramdown plan is possible when not all impaired classes accept the plan (but at least one must) as long as the plan is held to be fair and equitable.  The phrase “fair and equitable” is a whole subject matter in itself, and I will plan to get to that in another post.  However, if the plan is accepted by all classes of creditors or the cramdown requirements are met, and the plan otherwise complies law and stands a decent chance of working out (is “feasible”), the court will confirm the plan.  In a classic reorganization scenario, once that happens the business (a “debtor in possession”) is reorganized and tie up loose ends and emerge from bankruptcy.  The business will still be bound to carry out what it promised in its plan (i.e. make certain payments to pre-bankruptcy creditors), but otherwise it will be free to operate unimpeded and unsupervised with a new capital structure and a discharge of pre-bankruptcy debts.

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Should I Reaffirm my Mortgage in Bankruptcy?

It may work differently in other states, but here in Massachusetts people do not tend to reaffirm mortgages in Chapter 7 bankruptcy.  First of all, reaffirmation only exists in Chapter 7.  It does not exist in Chapter 13 or 11.  Reaffirmation is a voluntary procedure that can happen within a Chapter 7 case in which a debtor re-assumes legal liability on a debt that would be discharged in the normal course.  They are not very common, but when they do happen, they are usually done with mortgages.

Wait, I’m keeping my house and paying on the mortgage, did I reaffirm?  Probably not.  90 plus percent of bankruptcy debtors in Massachusetts who want to keep their homes just “keep and pay.”  That means they keep their house and pay on their mortgage.  The twist with reaffirmation is that it revives your discharged personal liability on the mortgage while this is wiped out in the keep and pay option.  Liability on a secured debt comes in two forms: the lien and the personal liability.  A bankruptcy discharge removes the personal liability, even on a mortgage, but the mortgage lien remains.  That prevents people from getting free houses by virtue of their bankruptcy discharge.  If a mortgage liability is reaffirmed, both the lien and the personal liability stay in place, and not just the lien.

So why isn’t reaffirmation more popular?  First, it’s a separate process that costs more in legal fees.  Second, it keeps you on the hook for the debt. So, if you ever stop paying and the property gets foreclosed you may be subject to a deficiency judgment.  There are simply not too many benefits from reaffirming.  If there is one, it’s that you get the convenience of the mortgage servicer handling the debt normally, i.e. sending you statement, allowing online access to the account, etc.  When a mortgage is not reaffirmed, this may not happen.  However, you can also get these benefits by refinancing the mortgage a few years after your bankruptcy case.

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Can a Second Mortgage Foreclose on my Home?

In theory, the answer is, yes. A junior mortgage, such as a HELOC or other second or third mortgage, can foreclose in Massachusetts.  There are additional procedures for the foreclosure of junior (second, third, etc.) mortgages that are different than those for first mortgage holders. However, in this economy, many junior mortgages are partially or wholly under water.  This makes foreclosure impractical.

There is always a senior mortgage with superior rights and first dibs on the money from a foreclosure sale.  Tax and condo fee creditors may even exist with rights that trump a junior mortgagee.  Consequently, unless there is obvious equity above and beyond all outstanding liens and the expected costs of the foreclosure process, a junior mortgagee is extremely unlikely to press a foreclosure.  We often see people with second mortgages that are in severe default with no attempts on the part of the junior mortgagee to foreclose.  However, unless the junior mortgage is wholly unsecured because it is completely out of the money and can be stripped in a Chapter 13, that mortgage lien will stay with the property and so will have to be paid off with interest upon a normal sale.  That could happen with real estate prices rising again in the future leaving homeowners with more opportunities to sell or refinance property.

Note: I mention this all the time, but it warrants repeating….Wholly unsecured junior mortgage liens can be stripped off and eliminated in a Chapter 13 bankruptcy.  This is dramatic relief and is only possible now given the recent drop in home prices.  As prices appreciate again, the opportunity will no longer be available.

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