Lawsuit threat before discharge...

Filed Chapter 7: 06/09/09
341 Meeting: 07/16/09
Last day to object: 09/14/09

We took out a windows loan (~$10,000) for our house with First Mutual Bank in April of 2006. They filed a breach of contract lawsuit against us on this loan but never got a default judgment due to the fact that we filed for Chapter 7. Our 341 was smooth with no issues at all. No activity on pacer at all since our 341.

But our attorney called today saying that First Mutual was considering suing us in bankruptcy court because they believe that we overstated our income on the loan application by $1,700 per month. They get the figure by comparing what we stated in 2006 and what we made in 2007 (Tax Returns part of bankruptcy filing). They are pretty much just basing this off my wife’s income as a teacher saying that it should be a steady income and why does it show less in 2007.

I can remember filling out this application out on our back porch... we pretty much just guessed at our income as the guy was pressuring us to fill it out that day. There was no intent to defraud or whatever they are claiming. We put down $66,000 as my wife’s income on the application. Going back to check our tax returns she made:

2005: $58,500 (overstated by $7,500)
2006: $54,000 (overstated by $12,000)
2007: $45,500 (overstated by $20,500)

We took the loan out in early 2006 so her income was running around that $58,000 at the time... so it doesn't seem like we were all that far off with our guess. Our daughter was born in late 2006 and she ended up taking a few months of unpaid leave which drove down her income in late 2006/2007.

So the lawyers for First Mutual are saying they are giving us a chance to show them why our income in 2007 is lower than what we said it was in 2006. They are asking for copies of our 2005 and 2006 tax returns. Our attorney says this is outside of the scope of our retainer for the bankruptcy so it would cost us to have them deal with it.

Not really sure what we should do here. You guys have any advice on this. Does their threat of a lawsuit due to overstated income hold water or are they trying to push for some kind of settlement or what?

Thanks in advance!

I'm not 100% positive, but I think that if you fought this they would have to not only prove that you purposely misrepresented the income, but that it resulted in them giving you a loan you wouldn't have qualified for otherwise. In other words, if you had stated your income as $58k, would they have approved you for the loan?

We also made 3 years of payments on this loan. There is no way our intent was to misrepresent or defraud.

I wish we could have anticipated what was going to happen with the housing market... but we didn't and here we are. :(

They can sue you only in an Adversary Procedure. However, they have to prove intent. They are stating fraud, but you made no fraud within your bk at all so the bk laws were not broken. Your explanation as stated would satisfy any Jury. I doubt they wish to go to court over this, but you could cause them some problems by asking for a full accountability of your debt. Unless they subpoena you, don't give them a thing. Play it out as it may just go away. An AP only determines one creditor, and should not interfere with the normal bk process. P.S. I have experience with APs. 'Hub

Maybe I'm misinformed, but I thought during the automatic stay, creditors were not allowed to contact you in any fashion let alone demand copies of your tax returns or explain anything. It sounds like they are on a fishing trip.

Maybe I'm misinformed, but I thought during the automatic stay, creditors were not allowed to contact you in any fashion let alone demand copies of your tax returns or explain anything. It sounds like they are on a fishing trip.

I believe the OP stated they went through his lawyer. That is proper to do. 'Hub

and the bk code allows creditors to request your tax returns prior to the 341. i guess they must have done that.

and the bk code allows creditors to request your tax returns prior to the 341. i guess they must have done that.

I know they can definitely request it but is it only prior to your 341?

There was recently a case in CA where the court threw out the Income argument because they said the creditor failed to use due diligence to verify the details. The couple had over stated their income by a good $100k.

Considering you have paid the loans for so long, I highly doubt they can use the intended to deceive or defraud argument.

We provided our 2007 and 2008 tax info as part of the bankruptcy. We are 14 days from discharge and this is the first contact we've had from any of our creditors.

Our attorney has asked me to draft a letter to forward to them regarding the situation. The First Mutual attorney says they wanted to contact us first to see if we can explain why there was such a big drop from what was put on our loan app in 2006 compared to what shows in the 2007 tax return which was part of our bankruptcy papers.

I knew things were just going way to smooth. :(

I think they are bluffing. It is not as if you took the loan out and then refused to pay them. It's not as if they asked you to verify your income and you provided them with falsified documents.

I wonder if music12 is right about not being able to request them post 341. How did they get your 2007 and 2008 returns anyway? They would have had to ask your lawyer for them.

They are grasping at straws at this point...geesh...
I think they will have a hard time proving anything, they (the creditor) is just now checking/verifying your income?!?

Hang in there, my best to you~

How did they get your 2007 and 2008 returns anyway? They would have had to ask your lawyer for them.

Our 2007 and 2008 tax numbers were part of the original bankruptcy petition. So anyone with pacer access can get that info.

They should not be. They are usually only sent to the trustee directly. The creditor would have to request them from your lawyer.

Edit: ah the numbers, I see. Did you guys file a joint petition?

In all of my research, I have never seen one AP filed due to income.

The only people to be charged, yes charged, for misstating income was a middle eastern couple. However they lived off their credit cards and amassed $180K in cc debt. They also grossly exaggerated their income, like 4 to 8 times their actual income, even while receiving food stamps.

Ya I just paged though petition and I found my wifes income numbers for 2007-current under the statement of financial affairs. There are no tax documents. They are just using her 2007 income numbers compared to the 2006 financial application.

Yes, joint petition.

When your wife filled out the application, does she remember if it asked for household income or her income alone?

Not that it really matters since applications are usually quite ambiguous yet they claim it's up to you to verify the information.

I have a copy of the application... it says "Applicants Gross Income". Nothing about household income.

We provided our 2007 and 2008 tax info as part of the bankruptcy. We are 14 days from discharge and this is the first contact we've had from any of our creditors.

Our attorney has asked me to draft a letter to forward to them regarding the situation. Yes, and in that letter, sound as if you are mortified by false accusations of fraud as well as the fact that you paid them faithfully until hard times fell upon you, and state that they had accurate information to your knowledge at the time of the loans paperwork. The First Mutual attorney says they wanted to contact us first to see if we can explain why there was such a big drop from what was put on our loan app in 2006 compared to what shows in the 2007 tax return which was part of our bankruptcy papers. Never respond to them as not only may it be recorded, but if a second party is on the line, you then have a witness against you. Always go through your attorney.

I knew things were just going way to smooth. And, they still are. You will get your discharge and I doubt they will AP you. :(


This company is blowing smoke. How much did you say the debt was, and is it secured? 'Hub

Thanks for the feedback and encouragement guys... it helps calm the nerves :)

The balance due on this loan is ~$9,800.

Thanks for the feedback and encouragement guys... it helps calm the nerves :)

The balance due on this loan is ~$9,800.

Was the loan secured? What did you purchase with the loan and what did you pay back in three years? The opening balance and current balance and interest rate? I'm looking for other loopholes. 'Hub

Here are the details:

Opening Balance: $10,723
Current Balance: ~$9,800.
Interest Rate: 11.99%
Loan Type: Unsecured
Loan Use: New windows for our house (which we are waiting to have forclose)
Payments: 144 monthly payments of $140.77

Personally, I think they are bluffing you. There has to be a range of breaches for them to win an AP. You have already made $5K worth of payments, so it's almost impossible for them to prove malicious intent.

If anything you should be suing them considering those loan conditions. 144 months. That means you would pay back double the loan.

Personally, I think they are bluffing you. There has to be a range of breaches for them to win an AP. You have already made $5K worth of payments, so it's almost impossible for them to prove malicious intent.

If anything you should be suing them considering those loan conditions. 144 months. That means you would pay back double the loan.

Well thats the upside to this whole bankruptcy process for us... we are done making stupid financial decisions. We are in control of our future, not the banks and credit card companies.

Well thats the upside to this whole bankruptcy process for us... we are done making stupid financial decisions. We are in control of our future, not the banks and credit card companies.

I am in a similar boat. After returning from overseas, I applied for credit and under the household income field, I stated our anticipated combined income. I had a job but my wife did not. Unfortunately my wife did not end up finding work, so now it looks like I deliberately tried to defraud them. As it looks like I overstated my income by $50K.

I think they are bluffing. My question also would be, why didn't they verify income. Where is their responsibility to confirm income as stated?

the tax returns should not be on pacer! if they are, your lawyer seriously screwed you.

the tax returns should not be on pacer! if they are, your lawyer seriously screwed you.

Nope my mistake... the only thing on pacer is my wifes 2007-current salary which is under the Statement of Financial Affairs.

you can always offer them the windows back!

you can always offer them the windows back!

They can have the whole damn house! We are in one of the harder hit areas in the Central Valley of CA. We owe $356,000 on a house worth ~$110,000. We will be the 3rd forclosure on our block in the last few months.

They have to prove fraudulent intent. Your payments contradict their assertion. Ignore them and if they file an AP you will win.

If they decide to push me into an AP do I really need the lawyer or can I represent myself? Just curious.

If they decide to push me into an AP do I really need the lawyer or can I represent myself? Just curious.


I had almost the exact same thing happen to me, about 33 days after my hearing. The creditor sent letter to my attorney, saying they were going to file an AP. Lawyer asked for more money to fight it. I sent lawyer letter to forward to the creditor, saying we did nothing wrong and if they felt the need, to file the AP. Creditor sent a settlement offer to the lawyer, who forwarded to me. I wrote "NO" in bright red letters and sent it back to them. We are now past 60 days and never heard another word.

Found it
-------
MAY 31, 2008

Are Borrowers Free to Lie?
Lender Held Responsible for Vetting Data on Home Loan

In a ruling that backs borrowers even when they have lied on loan applications, a federal bankruptcy judge held that borrowers who inflated their income to get a loan don't have to pay back a bank because the lender should have noticed a "red flag" about the deceit.

The case, which the Oakland, Calif., judge called "a poster child for some of the practices that have led to the current crisis in our housing market," places responsibility on the lender for vetting information in loan applications.

Inaccuracies in loan documents have emerged as a factor behind the current wave of foreclosure and bankruptcy actions. Mortgage experts say some applications were riddled with inflated credit and income scores that allowed borrowers to qualify for loans that should have been out of their reach.

The Oakland case highlights a debate that has emerged over whether responsibility for homeowners' woes should fall to lenders or borrowers. In the May 23 ruling following a trial, U.S. Bankruptcy Judge Leslie J. Tchaikovsky said that Cleveland-based National City Bank couldn't recover debt from a Pinole, Calif., couple who emerged from bankruptcy because the lender, which had funded the couple's home-equity line of credit, ignored a "red flag" in their loan application.

The borrowers "made a material false representation concerning their financial condition ... with knowledge of its falsity and the intent to deceive the bank," the court found. But the bank's reliance on those figures wasn't reasonable, the judge wrote. National City declined to comment.

One of the borrowers, Cecelia Hill, said in an interview: "I take full blame for living a lifestyle that we couldn't afford." Her family last year gave up the home, she says, which they had purchased some 20 years ago. They found themselves unable to make payments after having taken out additional debt, from National City, against the property. The lender that held the primary mortgage bought the home in a foreclosure sale.

"Under no circumstances did we intend to defraud anyone," she said. "And we signed a paper authorizing [National City] to call our employers and access our bank accounts, and they never did."

Mrs. Hill and her husband, Norman Hill, both 54 years old, work as a delivery driver and an employee for an auto-parts distributor, respectively. They signed two loan applications in 2006 incorrectly stating they earned about a combined $146,000 and, six months later, about $191,000 annually.

They claimed that their independent broker and the bank put the income figures into the applications without their knowledge and that they didn't read them before signing.

The judge, who said she didn't find the borrowers' argument to be credible, said even if they hadn't read the loan application, by signing it "they effectively made the representation" to the bank.

But the judge said that the income figures "would alert the reasonably prudent lender of the possibility that the information was inaccurate" and that the bank didn't follow its own guidelines, which required that it "evaluate the reasonableness of the stated income based on job type, tenure, and geographical location among other things."

Philip Stone, a Worcester, Mass., consumer-bankruptcy lawyer, said the nature of the case was unusual. Lenders typically don't try to collect debt from borrowers whose collateral has been sold. Still, he said "the ruling is significant because the judge is saying the lender has a responsibility to carry out an investigation of borrowers' financial condition." The couple represented themselves in defending the case, Mrs. Hill noted, saying she couldn't afford a lawyer.

By AMIR EFRATI
http://online.wsj.com/article_email/SB121219711917034619-lMyQjAxMDI4MTMyMTEzOTE3Wj.html#

I remember reading that case on here a couple of weeks ago. That doesn't mean that anyone who lies on an application is off the hook. This couple got by on a loop hole because the underwriter messed up by either not following the guidelines required for that specific loan, or at least not documenting the process for determining if the stated income seemed reasonable.

There are some types of loans where it's standard practice (either within a company or industry) not to verify income, and in those cases the bank is not obligated to do so.

Regardless, I think in the case of the original poster here there isn't much to worry about. The creditor is probably bluffing and hoping for a settlement. I would tell them to repo the windows since you're letting the house foreclose. ;-) Seriously though, I think if you respond with a letter explaining it the way you did here, they will drop it.