Timing is Everything in Bankruptcy

There are many important decisions to make when planning a bankruptcy filing. For example: Chapter 7 or Chapter 13? Joint or separate filing? Reaffirmation, redemption, or surrender? But the most important decision is when to file bankruptcy. The timing of the bankruptcy filing will determine many aspects of the debtor’s case.

 
Tax Refunds
The bankruptcy estate is determined on the date the case is filed. See 11 U.S.C. § 301. All property owned and debts owed on the date the case is filed must be listed in the bankruptcy schedules. A great example of how bankruptcy timing can affect a case is during tax season:
  • If the case is filed before the debtor receives the income tax refund, the refund is property of the bankruptcy estate. 
  • If the case is filed after the refund is received, but before the money is spent, the money is property of the bankruptcy estate. 
  • If the case is filed after the refund is received and after the money is spent, there is nothing left for the bankruptcy estate.

Timing is everything!

910 Vehicles
The Bankruptcy Code places time limitations on the debtor for obtaining certain relief. An example of this is the restriction on vehicle cram down in a Chapter 13 bankruptcy case. Suppose the debtor has a car that is worth $6,000 and $12,000 is owed on it. In a Chapter 13 case the debtor may cram down the car loan to its fair market value. In other words, the debtor pays $6,000 for a $6,000 car. The Bankruptcy Code restricts vehicle cram down to vehicles purchased more than 910 days (2-1/2 years) before the bankruptcy filing date. Waiting a bit to file bankruptcy could save thousands! Timing is everything!
 
Means Test
The timing of the bankruptcy filing can make a difference to the Bankruptcy Means Test. The Means Test requires the debtor to calculate income from all sources from the last full six months. This average income is then analyzed to determine disposable income – money paid to unsecured creditors during the case. Consider the case of a debtor who receives a yearly $12,000 employment bonus in May, then needs to file bankruptcy in November. The “look back” period for calculating income is the last full six months, or October, September, August, July, June, and May. Including May in the calculation artificially inflates the average monthly income by $2,000 per month (not $1,000, as one might reasonably would expect since the amount was a yearly bonus)! If the debtor waits until December 1 to file, May (and the bonus) are not considered by the Means Test. Timing is everything!
 
Residency Timing Issues
The Bankruptcy Code permits each state to decide to either allow its residents to choose between the federal exemptions contained in the Bankruptcy Code and that state’s exemption laws, or to “opt out” of the federal exemption scheme and compel residents to apply state law exemptions only. Consequently, a debtor who has recently relocated to a different state may have an opportunity to decide between the exemption schemes designed by two individual states. Timing is everything!
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.
 

The Anatomy of the U.S. Bankruptcy Court System

Once upon a time, most laymen knew what “going to court” meant. Today, we have a complex web of hierarchical courts and subject matter specific courts, both state and federal. Fortunately, navigating the bankruptcy system is fairly easy to understand. 
 
Most bankruptcy cases never progress past the bankruptcy court. In fact, most bankruptcy debtors never even see the bankruptcy judge. For cases that are difficult or unique, it is important to know the bankruptcy court system.
 
First (Lowest) Court Level
Jurisdiction to hear bankruptcy cases belongs exclusively to the federal courts. Federal district courts have original and exclusive jurisdiction to decide newly filed bankruptcy cases. In almost all of the 94 federal judicial districts, bankruptcy cases are “referred” to the bankruptcy court, a special unit of the district court. As a practical matter, most district courts have a standing order directing all bankruptcy cases to the bankruptcy court.
 
Second Court Level
When a bankruptcy court decision is appealed, the second level of courts is either the federal district court in the same district as the bankruptcy court, or to the Bankruptcy Appellate Panel. Only the First, Sixth, Eighth, Ninth, and Tenth Circuits have convened these panels, which are composed of bankruptcy courts judges from around the Circuit.
 
Third Court Level
The next level of bankruptcy appeals is to the United States Court of Appeals. The Court of Appeals is divided geographically into eleven judicial circuits. Circuit courts of appeals only decide bankruptcy cases filed within their own circuit.
 
Final Court Level
The “court of last resort” is the United States Supreme Court. The Supreme Court has over 10,000 appellate cases brought before it every year. Nine justices have little hope of being able to review each one, and thus have discretion to decide whether to take certain types of cases. Typically, the Supreme Court hears 75-80 cases a year, meaning that less than one percent of all appeals are actually reviewed by the Supreme Court.
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

                                

"Big Three" Credit Reporting Agencies Agree to Reforms

Experian, Equifax, and TransUnion are credit reporting agencies (“CRAs”) that maintain consumer credit information on approximately 200 million consumers. The information in a consumer credit report is compiled by CRAs from submissions by banks, collection agencies, and other creditors. The consumer’s credit report is then sold by the CRA to companies who use the report to assess the consumer’s credit-worthiness.

 
This system of data collection commonly results in errors in a consumer’s credit report. A 2012 study by the Federal Trade Commission found that 26% of study participants identified at least one potentially material error in their credit reports, and that only 13% of study participants experienced a change for the better in their credit score as a result of modification to their credit report after a dispute to a credit reporting agency. These findings suggest that millions of consumers have material errors on their credit reports.
 
New York State Attorney General Eric Schneiderman recently announced a settlement with Experian, Equifax, and TransUnion after a three year investigation that may substantially change CRA processes. Many of these changes will be instituted nationwide. Provisions of the settlement include: 
 
1.Improving the credit dispute process by employing specially trained employees to review all supporting documentation submitted by consumers for all disputes involving mixed files, fraud or identity theft. Additionally, when a creditor verifies a disputed credit item through the automated dispute resolution system, the CRA will not automatically reject the consumer’s dispute. Instead, a CRA employee with discretion to resolve the dispute must review the consumer’s supporting documentation;
2.Establishing a six month waiting period before reporting medical debts on a credit report. Many delinquent medical debts are caused by delayed insurance payments or other disputes;
3.Promoting the federally mandated entitlement to one free consumer credit report from each CRA via AnnualCreditReport.com. The CRAs must include a prominently-labeled hyperlink to the AnnualCreditReport.com directly on the CRAs’ homepages or by a drop-down menu visible on the homepages;
4.Providing a second free credit report to consumers who experience a change in their credit report as a result of initiating a dispute; and
5.Removing medical debts from a credit report after the debt is paid by insurance.
 
The agreement allows these changes to be phased in over three years, but most of them will occur over the next six to 18 months.
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.

File Bankruptcy and Buy a New Car!

It may sound funny, but a new car purchase and a bankruptcy filing often go hand-in-hand. Bankruptcy reorganizes personal finances, and sometimes purchasing a new car is part of that reorganization. 

 
Chapter 7
In some Chapter 7 cases it may be advantageous for an individual to purchase a new car before filing bankruptcy. If the individual has a good enough credit score, it may make sense to purchase a new car since credit rates and terms may change after the bankruptcy is filed. 
 
In other cases it makes sense to purchase a new vehicle after a Chapter 7 bankruptcy filing. Individuals with very bad credit and outstanding debts may find that they are unable to finance a vehicle before filing bankruptcy. However, after the bankruptcy is filed, financing may be available. Why?
  • •The individual has resolved the outstanding debts;
  • •The individual’s debt –to-income ratio is usually low;
  • •The Chapter 7 debtor can only receive one Chapter 7 discharge every 8 years;
Some lenders will approve a new car loan immediately after the debtor files bankruptcy with the assistance of an attorney; others require that the debtor first attend the 341 meeting; and still others require that the debtor receive a discharge before approving a loan.
 
Chapter 13
Like a Chapter 7 debtor, an individual contemplating Chapter 13 bankruptcy may find that purchasing a new car before filing bankruptcy is in his or her best interest. A unique feature of Chapter 13 is the ability to “cram-down” many vehicle loans. In 2005, Congress (at the behest of big banks) stopped debtors from cramming-down vehicle loans to value unless the loan is older than 910 days (approximately two and a half years). However, many bankruptcy courts will allow a Chapter 13 debtor to cram-down the interest rate, and sometimes any negative equity from a trade-in that was rolled into the loan.
 
What this means is that if you purchase a new car before Chapter 13 bankruptcy, you may be able to use the bankruptcy laws to reduce the interest rate, the term (and pay up to five years), and in some cases strip off negative equity. Since success in Chapter 13 depends on predictable finances, controlling auto expenses and repairs in critical. As a side note, a new car purchase may also be attractive in situations where there is excess disposable income. The individual may be faced with an option of paying on a new car or paying unsecured creditors (like credit cards or medical bills).
 
A debtor may also purchase a new car during after filing Chapter 13 bankruptcy. A Chapter 13 bankruptcy is a three to five year repayment plan under the supervision of the federal bankruptcy court. Consequently, the debtor must have the approval of the bankruptcy court before incurring a new car debt. Obtaining Court approval can be difficult to navigate and always depends on the debtor’s financial situation.
 
Auto loans are often a large part of an individual’s finances. The individual’s automobile situation should be discussed and all options reviewed before filing bankruptcy. In many cases a purchasing a new car is a sound financial management.
 
If you are considering filing for bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up a free consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com.
 

New Study Finds 1 in 6 NFL Players File Bankruptcy

To the chagrin of baseball fans, football has long been America’s Game. A recent Harris poll revealed that the National Football League, or NFL, is the favorite sport for 32% of sports fans, while baseball only garners “favorite” status among half as many Americans (16%).
 
Pro football is also the most lucrative sport with annual revenues estimated at $9.5 billion, and the average value of an NFL team currently valued at $1.43 billion, according to Forbes Magazine. Naturally, the players are compensated well, but the pay is not as good as you would think. Forbes reports that the average NFL player’s salary is “only” $1.9 million a year. Compare that to the average NBA (basketball) player salary at $5.15 million, MLB (baseball) player salary at $3.2 million, or NHL (hockey) player salary at $2.4 million. 
 
The playing careers for professional athletes are also skewed against the pro football player. According to RAM Financial Group, a large financial services group that caters to professional athletes, the average span for a professional athlete is: 
  • NFL:  3.5 years 
  • NBA: 4.8 years 
  • NHL:  5.5 years  
  • MLB: 5.6 years 
 
These numbers can be a recipe for disaster for the young professional football player. A new study published in the National Bureau of Economic Research reports that nearly one in six NFL players file for bankruptcy protection within a dozen years after leaving the sport.
 
Researchers collected data on roughly 2,000 players drafted by NFL teams between 1996 and 2003, then looked at earnings data and bankruptcy court records. Career earnings data were available for roughly 900 players.
 
“Players with median-length careers earn about $3.2 million in a few years. If they are forward-looking and patient, they should save a large fraction of their income to provide for when they retire from the NFL,” Kyle Carlson, Joshua Kim, Annamaria Lusardi and Colin F. Camerer wrote in a working paper released last month.
 
Instead, 15.7% of NFL players file for bankruptcy within 12 years of retiring from the league, with little difference based on career length or earnings. “Having played for a long time and having been a successful and well-paid player does not provide much protection against the risk of going bankrupt,” they wrote.
 
Few players file for bankruptcy while playing in the NFL. But filings gradually increase in the two years after retirement, “likely due to a combination of players rapidly drawing down limited savings and having leveraged investments.” The bankruptcy rate increases over time.

Car Title Loan Trap

Car title loans can be a problematic debt trap.  If you need money fast, then using your as collateral may be an option. If you take out a title loan, the lender will take your title and place a lien on your car in exchange for a short-term loan.  If you stop making payments on the loan, then the lender has the right to repossess your vehicle.

There are many disadvantages to this type of loan. First, the borrower does not have to meet any qualifications in order to receive a car title loan. All the borrower needs is a source of income and a vehicle in to receive a loan. Unlike many other financing options, the approval process for a car title loan is nonexistent and the borrower does not have to qualify for the loan. This procedure can be dangerous for borrowers who are already in a large amount of debt. The lenders do not base their approval process on your credit score, so acquiring a car title loan could produce more debt for the borrower. Second, the interest rates on car title loans have been known to exceed 100 percent. Short-term loans are expected to be repaid quickly. If the borrower is unable to make payments to the lender, then late fees and interest rates skyrocket causing the borrower to pay back more than they originally acquired. Third, the borrower is at risk of losing their vehicle. If the borrower is unable to make payments, then the lender has the right to sell the vehicle that was originally used as collateral.

If you decided that a car title loan is the best option for your current situation, then be sure to make your payments on time to avoid late fees and high interest rates. It is extremely important to read the fine print when signing up for a car title loan. By reading the fine print, you are better able to completely understand the terms and conditions so you are not caught off guard by hidden fees. 

What Records Will the Bankruptcy Trustee Require?

The bankruptcy system is built on trust. It really isn’t designed that way, at least not intentionally, but this trust system has developed from necessity. The volume of bankruptcy cases necessitates that bankruptcy trustees accept most debtor statements without verification, and rely on the examination of a few records for the rest. Many of these records are mandated by the Bankruptcy Code or Federal Rules of Bankruptcy Procedure. Other records are required by the local rules of the bankruptcy court. Finally, the bankruptcy trustee may request other debtor records.

All debtors are required to submit a copy of the last filed tax return and pay advices for the past 60 days to the bankruptcy trustee. In addition, most trustees will request some or all of the following documents, but all of these documents should be delivered to the debtor’s attorney for analysis prior to the case filing:

  1. Last six months of pay check stubs for all jobs, and profit/loss statements for any business. All income information from the past six full months is needed in order to complete the bankruptcy Means Test. For a W-2 employee, this information can be obtained from the debtor’s employer or human resources office. The debtor is also obligated to send copies of all pay advices received within the last six months to the bankruptcy trustee.
  2. Last two years of income tax returns. The Statement of Financial Affairs requires income information for earnings during the past two years. The bankruptcy trustee may also request this information.
  3. Real estate deeds and mortgage paperwork. Some bankruptcy trustees require copies of real estate deeds. It is always a good idea for the debtor’s attorney to have copies of real estate records so that ownership interests in property can be properly ascertained. This is not a good time to “forget” about a timeshare in Florida, or that the debtor’s name is on the deed to his mother’s house. 
  4. Vehicle titles along with lease or purchase agreements. Similar to real estate deeds, the bankruptcy trustee may require production of vehicle titles and purchase agreements (also called promissory notes). In many cases a perfected security interest can help the debtor keep a vehicle, or lower Chapter 13 plan payments, so it is in the debtor’s best interest to ensure that this paperwork gets to his attorney for review.
  5. All loan paperwork. This includes personal loans to banks, finance companies or payday lenders; personal guarantees; and co-signor agreements (which may include agreements guaranteeing a child’s student loan or apartment lease).
  6. All unexpired contracts. The debtor may have the opportunity to accept or reject a contract, like for a cell phone or satellite television.
  7. Appraisal paperwork for real estate or personal property. Appraisals aid in developing a strategy to protect the debtor’s property.
  8. Any tax bill showing assessed value. Property assessments are useful when discussing real estate values with the trustee.
  9. Any child support or maintenance (alimony) court order. Most domestic support orders are not dischargeable, but some are. The prudent debtor will discuss the situation with his attorney.
  10. Most recent credit reports. Credit reports contains useful information like creditor addresses, the date obligations were incurred, and collection agency contact information. The federal law entitles consumers to receive a free, no-obligation, no credit card required credit report once each year from each credit reporting agency.
  11. Information regarding debts, including bills and collection letters. Credit reports are a great start, but the most practical way to obtain creditor information is to save periodic bills received by mail.
  12. Documents that impact income, assets, debts, or expenses.  Examples of this are a foreclosure notice, or a notice of an upcoming bonus or commission.
  13. Investment records. Some investments are exemptible, other are not. All investments, including retirement accounts, should be reviewed prior to filing.
  14. Life insurance policy with a cash surrender value. Term life insurance policies generally have no value. Other life insurance policies may be exemptible assets.
  15. Last six months of bank statements. Every bankruptcy trustee will ask for bank statements. The debtor’s attorney must review bank statements to uncover suspicious transactions before filing the case.
  16. Proof of insurance on all property secured by a lien. Creditors (and sometimes the trustee) will request proof of insurance to ensure that a secured asset is being protected and safeguarded by the debtor.
  17. Documents pertaining to legal claims or pending lawsuits, including lawsuits filed by the debtor. The debtor’s attorney needs lawsuit information to determine whether the debtor/plaintiff will be able to maintain a lawsuit during bankruptcy or keep any money judgment. The debtor’s attorney also requires lawsuit information when the debtor is a defendant to notify the federal or state court to stop the case once the bankruptcy case is filed.

New Credit Score for Those without Credit

The traditional wisdom is that having any credit score is better than not having a score at all. Lacking a credit score makes it very difficult for a lender to calculate the risk of extending credit to a particular consumer. Consequently, a person with fair or even poor credit may be extended credit after evaluating all circumstances, while a person who pays her bills on-time and pays cash, but has no credit score, may be denied outright.

Some individuals fail to re-establish their credit history after bankruptcy. This is an obvious mistake when you compare a person with no credit history after bankruptcy with a person who has a year of rebuilding. When the individual with no credit is evaluated for a mortgage, a car loan, or even a new job, the last activity on his or her credit report is the bankruptcy discharge. The person who has rebuild his or her credit with have demonstrated responsible use of credit and on-time payments during the past 12 months.

Is this fair? Some banks are now saying, "No."

Responding to bank requests, the Fair Isaacs Corp., producers of the popular "FICO" credit score, recently announced that it is developing a credit score for the estimated 53 million people who do not use credit cards, auto loans, house payments, etc. The new score will use alternative data including payment history on utility bills, cable bills and cell phone bills as well as other information in the public record such as the number of addresses the person has had in the recent past (an indicator of stability).

This new scoring system may have unexpected consequences, including the potential for more sources of negative information for consumers with "traditional" credit scores. The product "is largely a response to banks’ desire to boost lending volumes by increasing loan originations to borrowers who otherwise wouldn’t qualify, many of whom tend to be charged more for loans."

Problems with Payday Lenders

 

One of the most common causes of bankruptcy includes the accumulation of payday loans. Payday loans are extremely easy to obtain, most borrowers are unable to pay the lenders back in full, which creates an unlimited debt trap.   One major issue which causes payday loans to become difficult to repay is the extremely high interest rate built into the loan. This never-ending process can put many people in an immeasurable amount of debt.

It is commonly known that all you need to obtain a payday loan is a checking account and a job or source of income. This creates an environment for borrowers to easily take out loans if they are in a difficult financial situation. Many times, debtors are able to obtain multiple payday loans in the same month as it is a highly unregulated industry.

The majority of borrowers are unable to pay their loan back by the due date and tend to take out more than they can afford to pay back. This allows lenders to increase the interest amount and charge the borrower more for not paying their loan back on time, in addition to the inclusion of late fees and penalties. However, if a borrower is unable to pay their loan back in full by the due date, then the lender will extend the loan with a large fee attached. The borrower continues to create a financial hole and a boundless debt trap.

The Consumer Financial Protection Bureau is in the process of passing a proposal that would make it difficult for payday lenders to take advantage of borrowers through outrageous fees. The process will take a long time, but the outcome may be highly beneficial to consumers who are drawn to small-dollar loans.  

How are Debts Handled in Bankruptcy

Individuals who have been through the bankruptcy process are often happy to talk about their experiences. Usually this is not a bad thing, but sometimes it can lead to misinformation and unrealistic expectations. How your friend’s debts were treated in her case may be very different from how similar debts are treated in your case. For instance, a bankruptcy court may find that a $5,000 credit card debt must be paid in full in one case, partially paid in another, and not paid at all in a third.

A debt that is included in a bankruptcy case can take several different paths and be altered in several different ways. What “legally” happens to the debt depends on the type of debt and the laws that apply to it; the intent of the debtor; and the order of the bankruptcy court. In certain situations it even matters how and when the debt was created! Let’s take a look at common types of debts in bankruptcy cases and how they are often treated.

Priority Debts

The Bankruptcy Code instructs the bankruptcy trustee to pay creditors in accordance with a priority hierarchy. For example, recent tax debts are paid ahead of credit cards; owed child support obligations are paid ahead of medical bills.  Priority debts have little impact in most Chapter 7 cases, where there is no money to pay creditors from the bankruptcy estate. However, priority debts play a large part in Chapter 7 cases when assets are distributed or in Chapter 13 repayment cases. In Chapter 13 cases, some priority debts must be repaid in full before the bankruptcy court will grant a discharge. Note that priority debts may be discharged at the end of a bankruptcy case unless they are also non-dischargeable debts.

Non-Dischargeable Debts

Non-dischargeable debts are either excluded from a bankruptcy discharge by law, by a court, or by agreement between the debtor and creditor. The Bankruptcy Code identifies several kinds of debts that are not discharged during a Chapter 7 case, a Chapter 13 case, or in either case. When a debt is excepted or excluded from the bankruptcy discharge, it survives the bankruptcy case either in whole or in part.

Secured Debts

Secured debts, like car payments and house loans, are secured by collateral. Treatment of a secured debt during a bankruptcy case is complex. A secured debt may be discharged in whole and the collateral surrendered (called “surrender”); discharged and the property retained (called a “lien stripping”); or discharged in part (called a “cram-down”). In a Chapter 7 case a debtor has the choice of “reaffirming” the debt with the creditor at the same or changed terms. A reaffirmed debt survives a bankruptcy discharge.

Unsecured Debts

Unsecured debts commonly include medical bills, credit cards, unsecured personal loans, debts to family members, and old tax debts. Unsecured debts in a Chapter 7 no-asset case are discharged, unless excepted as a non-dischargeable debt. Unsecured debts in a Chapter 13 case are either discharged at the end of the case, paid in full, or paid at a “pennies-on-the-dollar” rate with the remaining amount discharged.

Your debts and financial situation will dictate how your debts are treated in bankruptcy. Don’t rely on general rules found on the internet or advice about how your friend’s debts were treated in her bankruptcy, call an experienced attorney and have your own case fully and professionally evaluated.