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.

Filing Chapter 13 after a Chapter 13 Discharge

Chapter 13 cases last 3 to 5 years. A lot can happen in that time. In some cases, a debtor may need additional bankruptcy relief. This article will address some of the rules of filing a second Chapter 13 case after receiving a Chapter 13 discharge.

Eligibility for Chapter 13 discharge

The law restricts the availability of a Chapter 13 discharge if the debtor received a Chapter 13 discharge in a previous case. Section 1328 of the Bankruptcy Code states that a court may not grant a Chapter 13 discharge to a debtor who has received a Chapter 13 discharge in a case filed under chapter 13 of this title during the 2-year period preceding the date of such order.

The time period described in Section 1328 is measured between filing dates, not discharge dates. To illustrate, suppose a debtor files her first Chapter 13 case on January 3, 2013, and she receives a Chapter 13 discharge. She is eligible to file a second Chapter 13 case and receive a discharge on January 3, 2015.

It does not matter under what chapter the original case was filed. For instance, if a case was filed as a Chapter 7 on January 3, 2013, converted to Chapter 13, and discharged, the debtor is still eligible to receive a second discharge on January 3, 2015 (2 years after the filing date). This is because the original case commencement date did not change, even though the debtor converted to another bankruptcy chapter.

Note that Chapter 13 cases generally last between three and five years, meaning that a debtor could hypothetically receive a Chapter 13 discharge, then immediately file a second Chapter 13 case that is also eligible for discharge.

Eligibility to be a Chapter 13 debtor

The time limit contained in Section 1328 is not a statute of limitations and does not disqualify the individual from filing Chapter 13 bankruptcy. There is no general limit to the number of times or frequency an individual may file Chapter 13 bankruptcy. That said, a debtor is ineligible to be a bankruptcy debtor for 180 days after the Chapter 13 case closes if it was dismissed:

  • by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or
  • after the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay.

See 11 U.S.C. § 109(g).

Applicability of the Automatic Stay

The Bankruptcy Code also limits the reach of the automatic stay in a case filed after a Chapter 13 discharge. The automatic stay is effective for only 30 days if you had a bankruptcy case pending within 365 days of the case filing. See 11 U.S.C. §§ 362(c)(3) and (4). The bankruptcy court may extend the automatic stay if your case is filed “in good faith” and you are not abusing the bankruptcy system. Even if the automatic stay is terminated, most courts find that the property of the bankruptcy estate is still protected from creditors. That may include your house or your vehicles. Additionally, garnishments of post-bankruptcy wages are generally protected in a Chapter 13 case. 

Filing Chapter 7 after a Chapter 7 Discharge

Bankruptcy is meant to provide debt relief to honest, but unfortunate individuals. For some, bad luck seems to hang around a while. For others, bad luck seems to have moved in permanently. Unfortunate individuals with continuing or reoccurring debts may find relief through the federal bankruptcy laws which can provide a third, or even fourth opportunity to start fresh.

Eligibility for Chapter 7 discharge

There are a few wrinkles in the law for repeat Chapter 7 filers. First, the federal law limits the availability of a Chapter 7 discharge if an individual has received a Chapter 7 discharge in a previous case. Specifically, Section 727 of the Bankruptcy Code states that a court may not grant a Chapter 7 discharge if:

the debtor has been granted a [Chapter 7 discharge] in a case commenced within 8 years before the date of the filing of the petition.

This section confuses many debtors and some bankruptcy attorneys. The time period is measured between filing dates, not discharge dates. To illustrate, suppose a debtor files her first Chapter 7 case on January 3, 2010, and she receives a Chapter 7 discharge. She is eligible to file a second Chapter 7 case and receive a discharge on January 3, 2018.

It does not matter under what chapter the original case was filed. For instance, if a case was filed as a Chapter 13 on January 3, 2010, converted to Chapter 7, and discharged, the debtor is still eligible to receive a second discharge on January 3, 2018 (8 years after the filing date). This is because the original case commencement date did not change, even though the debtor converted to another bankruptcy chapter.

Eligibility to be a Chapter 7 debtor

The time limit contained in Section 727 is not a statute of limitations and does not disqualify the individual from filing Chapter 7 bankruptcy. There is no general limit to the number of times or frequency an individual may file Chapter 7 bankruptcy. That said, a debtor is ineligible to be a bankruptcy debtor for 180 days after the Chapter 7 case closes if it was dismissed:

  • by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or
  • after the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay.

See 11 U.S.C. § 109(g).

Applicability of the Automatic Stay

The Bankruptcy Code also limits the reach of the automatic stay in a case filed after a Chapter 7 discharge. The automatic stay is effective for only 30 days if you had a bankruptcy case pending within 365 days of the case filing. See 11 U.S.C. §§ 362(c)(3) and (4). The bankruptcy court may extend the automatic stay if your case is filed “in good faith” and you are not abusing the bankruptcy system. Even if the automatic stay is terminated, most courts find that the property of the bankruptcy estate is still protected from creditors. That may include your house or your vehicles. It would not protect you from garnishments of post-bankruptcy wages in a Chapter 7 case.

If lady luck seems to have lost your address, you may need to schedule another consultation with your bankruptcy attorney. A second Chapter 7 case may provide the means for another chance at a fresh start. 

Beware "Too Good to Be True" Legal Advertising

Bankruptcy attorneys make many promises. Many of these promises are true, some are half true, and a few are not true at all. Today’s article will investigate whether a certain bankruptcy advertising promise is true, kind of true, or a lie. Specifically, the promise by an attorney to “start” a bankruptcy case for $100 (or $149, or $199, or $249, or $299). This sort of promise is common on Craigslist and weekly advertisement pages found at the laundromat. Is it true?

What does “start” mean? Let’s start our investigation with a key word in the promise: “start.” The law is very clear about when a bankruptcy case “starts.” Section 301 of the Bankruptcy Code clearly states:

       (a)   A voluntary case under a chapter of this title is commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.

Consequently, a bankruptcy case is started (commenced) only when a petition is filed with the bankruptcy court. To find out if an attorney can start a bankruptcy case for only $100, let’s turn to the economics of the case:

Credit Counseling. An individual must complete a credit counseling class with an approved agency before he or she is eligible to be a debtor in bankruptcy. The typical cost for this class is around $50. A truly indigent person may qualify for a fee waiver. Waivers are reserved for the most desperate of situations, and when the attorney is working pro bono. Accepting $100 from the client will likely disqualify the person from a fee waiver.

Filing Fee. The court fee for filing a bankruptcy case is $306 (Chapter 7) or $281 (Chapter 13). Filing fees may be made in installments, not to exceed four payments within 120 days after the petition is filed. Conceivably, a debtor could apply to pay the court filing fee in installments and not pay anything (or $50) at the time of filing.

The debtor may also apply for a waiver of the filing fee, but the court will only approve a fee waiver if the debtor’s attorney is not paid for his or her work during the case.

Attorney Fees. Bankruptcy attorneys do not generally work for free. Accepting payments after filing for pre-bankruptcy Chapter 7 work violates the bankruptcy automatic stay and creates an ethical conflict because the attorney is a creditor. Debtors do not have to pay attorneys that make “under the table” deals to accept post-filing payments in Chapter 7 cases. Attorney fees are often paid in installments during a Chapter 13 case, although most attorneys require some money up front for pre-filing work.

Is the promise true or not? Probably not. This advertisement could be true if the attorney will file a fee installment agreement and accept attorney fees in payments during a Chapter 13 case. It could also be true in a Chapter 7 case if the attorney is representing the client for $50, pro bono, or agrees to accept a small post-petition fee and discloses the agreement to the bankruptcy court.

The truth is that the promise to “start” a bankruptcy case for $100 is often simply an offer to put that money into the attorney’s bank account and commence some kind of pre-bankruptcy work. This advertising is usually a bait-and-switch ploy, misleading at best, and unethical.

You may want to ask yourself: if an attorney advertises for clients using half-truths or outright lies, do you really want this attorney representing you in an important legal matter? 

Hard Truths about Bankruptcy

 In the movie Jerry Maguire, Jerry’s crisis of conscience leads him to write a company memo/mission statement for his sports agency. The title of the memo is “Things We Think And Do Not Say.”

It promptly gets him fired.

Every profession spins its services and has its “dirty little secrets.” Bankruptcy is no different. The benefits of filing are well-known. They include:

  • Stopping lawsuits, creditor harassment, and other debt collection activities
  • Protecting real and personal property
  • Eliminating or reducing unaffordable debts

But filing bankruptcy cannot guarantee happiness, or future prosperity, and, sometimes, debtors don’t even receive the fresh start that attorneys promise in the yellow pages. There are positive and negative aspects to filing bankruptcy, and there are risks. Knowing the negative consequences of filing bankruptcy can help you make an informed choice.  Let’s look at a few hard truths about bankruptcy:

Bankruptcy wrecks your credit

Fair, Isaac and Company (FICO) reports that an individual with a 680 credit score will lose between 130 and 150 points by filing bankruptcy. A bankruptcy filing is a public record that can stay on a credit report for up to ten years from the date the case is filed. Each debt discharged during a bankruptcy case will be reported as “included in bankruptcy” and will remain on a credit report for up to seven years.

[Positive aspect: some credit scores actually increase after filing bankruptcy. Bankruptcy stops the continuation of negative reporting and helps you recover quickly from burdensome debt.]

Bankruptcy does not discharge all debts.

Filing bankruptcy does not mean that you can “walk away” from all of your financial obligations. Some debts are excluded from the bankruptcy discharge as a matter of law. Secured debts, such as a car or house payment, must (generally) be paid for or the property must be surrendered. Certain debts are deemed non-dischargeable, such as child support payments and some taxes. Other debts are not dischargeable because of bad acts, such as charging up credit cards on a spending spree on the eve of bankruptcy.

[Positive aspect: most debts are dischargeable and will never again trouble you.]

Bankruptcy can affect your employment

Bankruptcy can cause the loss of a security clearance, which can mean loss of a position and ultimately termination of employment. There is no prohibition for private employers who may freely discriminate against a person with a bankruptcy, which sometimes happens during the hiring phase.

[Positive aspect: federal law prohibits employers from firing employees for filing bankruptcy. Bankruptcy stops collection calls and clears up debts that may negatively impact employment.]

Bankruptcy Affects Future Housing

Federally guaranteed home loans are generally not attainable for several years after a bankruptcy. Mortgage brokers call this post-bankruptcy period “seasoning,” and the average waiting period is two to four years. Additionally, there is no legal prohibition against a landlord discriminating against an individual with a bankruptcy on his or her credit report. Some bankruptcy debtors are either rejected during the apartment application process or forced to pay a larger security deposit to guarantee future rental payments.

[Positive aspect: many individuals are able to qualify for home loans two years after filing bankruptcy.]