One Time to Always Avoid Filing Bankruptcy

When your finances are ill, bankruptcy is powerful medicine. The federal bankruptcy law discharges many debts and can give you time to pay others. In most cases a bankruptcy debtor will not lose any property; in other cases a debtor may choose to “walk away” from a house or car debt and not owe anything.

Bankruptcy reorganizes both personal and business obligations and provides a fresh financial start. However, there is one situation when a person should avoid bankruptcy:

When you cannot be a completely honest debtor. 

The bankruptcy process relies on the full and honest cooperation from the debtor. More than that, the law requires honesty. Dishonesty during bankruptcy is a federal crime punishable by a fine, or by up to five years in prison, or both.

Section 152 of Title 18 includes nine paragraphs which identify the following activities as criminal:

  • the concealment of property belonging to the estate of a debtor;
  • the making of false oaths or accounts in relation to any bankruptcy case;
  • the making of a false declaration, certificate, verification or statement under penalty of perjury in relation to a bankruptcy case;
  • the making of false claims against the estate of a debtor;
  • the fraudulent receipt of property from a debtor;
  • bribery and extortion in connection with a bankruptcy case;
  • transfer or concealment of property in contemplation of a bankruptcy case;
  • the concealment or destruction of documents relating to the property or affairs of a debtor; or
  • the withholding of documents from the administrators of a bankruptcy case.

Each paragraph in section 152 constitutes a separate criminal act, the violation of which may be indicted and proved separately. All crimes listed in Section 152 require that the act be done “knowingly” and “fraudulently.” Consequently, an inadvertent error is not a crime. “Knowingly” means that the act was voluntary and intentional. The government does not have to show that the defendant knew that he or she was breaking the law. The term “fraudulently” means that the act was done with the intent to deceive, which may be proven by circumstantial evidence.

If you cannot or will not be completely honest during your bankruptcy, you should avoid filing. Dishonesty during bankruptcy will only make matters worse including denial or discharge and criminal charges.

One Time to Always Avoid Filing Bankruptcy

When your finances are ill, bankruptcy is powerful medicine. The federal bankruptcy law discharges many debts and can give you time to pay others. In most cases a bankruptcy debtor will not lose any property; in other cases a debtor may choose to “walk away” from a house or car debt and not owe anything.

Bankruptcy reorganizes both personal and business obligations and provides a fresh financial start. However, there is one situation when a person should avoid bankruptcy:

When you cannot be a completely honest debtor. 

The bankruptcy process relies on the full and honest cooperation from the debtor. More than that, the law requires honesty. Dishonesty during bankruptcy is a federal crime punishable by a fine, or by up to five years in prison, or both.

Section 152 of Title 18 includes nine paragraphs which identify the following activities as criminal:

  • the concealment of property belonging to the estate of a debtor;
  • the making of false oaths or accounts in relation to any bankruptcy case;
  • the making of a false declaration, certificate, verification or statement under penalty of perjury in relation to a bankruptcy case;
  • the making of false claims against the estate of a debtor;
  • the fraudulent receipt of property from a debtor;
  • bribery and extortion in connection with a bankruptcy case;
  • transfer or concealment of property in contemplation of a bankruptcy case;
  • the concealment or destruction of documents relating to the property or affairs of a debtor; or
  • the withholding of documents from the administrators of a bankruptcy case.

Each paragraph in section 152 constitutes a separate criminal act, the violation of which may be indicted and proved separately. All crimes listed in Section 152 require that the act be done “knowingly” and “fraudulently.” Consequently, an inadvertent error is not a crime. “Knowingly” means that the act was voluntary and intentional. The government does not have to show that the defendant knew that he or she was breaking the law. The term “fraudulently” means that the act was done with the intent to deceive, which may be proven by circumstantial evidence.

If you cannot or will not be completely honest during your bankruptcy, you should avoid filing. Dishonesty during bankruptcy will only make matters worse including denial or discharge and criminal charges.

Big Banks Prey on the Poor

 Experience demands that man is the only animal which devours his own kind, for I can apply no milder term to the general prey of the rich on the poor.

                       -Thomas Jefferson

Being broke can cost you big bucks. Not only is it difficult for poor people to afford necessities like food and shelter, but basic services can also cost much more when you are low on funds. Take, for example, bank fees. Many employers require direct deposit for employees. Banks are eager to supply debit cards for “convenience,” but debit cards can carry hidden fees. No bank fee is more dangerous to the poor than the overdraft fee.

Recently, the Ninth Circuit Court of Appeals upheld a California federal court decision ordering Wells Fargo to pay $203 million in restitution for misleading practices in connection with overdraft fees. See Gutierrez v. Wells Fargo, 2014 WL 5462407. At the heart of the matter was how Wells Fargo applied its overdraft fees.

From 2005 to 2007, Wells Fargo made $1.4 billion in overdraft fees. Its practice during that time was to post debits at the end of the day starting with the highest dollar amount and ending with the lowest. This ensured that the funds in an individual’s account were depleted faster, which increased the likelihood of overdraft fees.

For instance, suppose you have $20 in the bank at the start of your day. You use your debit card during the day to get a coffee for $1.00, a cheap lunch at Taco Bell for $5.00, and you put $13.00 worth of gas in your car. You were careful to leave $1.00 in your bank account. Only you forgot that Netflix charges you $7.99, and that’s today!

Under a “chronological” policy, the Netflix debit would cause one overdraft. Under Wells Fargo’s policy, the largest charge is debited first. The ledger sheet for our example looks like this:

            Charge                        Amount           Balance

                                                                        $20.00

            Gas                              $13.00             $7.00

            Netflix                        $7.99               -$.99

            Taco Bell                    $5.00               -$5.99

            Coffee                         $1.00               -$6.99

That’s three overdraft charges which can range from $15-$40, depending on the bank’s policy. The appellate court upheld the trial court’s finding that the “decision to post debit-card transactions in high-to-low order was made for the sole purpose of maximizing the number of overdrafts assessed on its customers,” and that Wells Fargo misrepresented the way debit transactions were posted in consumer disclosures.

What the Bankruptcy Trustee Will Not Tell You

While the bankruptcy process expects a debtor to “spill the beans” about his finances, there is no reciprocal obligation to help a debtor reorganize before, during or after bankruptcy. The bankruptcy trustee is ethically (and legally) forbidden from giving legal advice to a debtor. The trustee effectively acts as an advocate on behalf of creditors during bankruptcy. Let’s look at what the bankruptcy trustee cannot or will not divulge to a debtor:

The debtor can keep assets that are of no value to the bankruptcy estate. The Chapter 7 bankruptcy trustee is charged with finding assets that can be taken and sold to pay creditors. However, certain assets have little or no practical value (called de minimis, Latin for “very little value”). For example, a prized Beanie Baby collection that is worth $500 on eBay is of no interest to the trustee. Even if a buyer was ready and able to pay $500 for the collection, the trustee must make an accounting, open a bankruptcy estate, collect assets, send notices, and finally distribute money to creditors. The trustee expects to be compensated for his time, but with only $500 available, there is a good chance that the trustee will consider working at far below his hourly rate not worth the effort.

Legal advice. While the trustee is (usually) a licensed and experienced bankruptcy attorney (or CPA), the trustee is prohibited from giving the debtor legal advice. That is the case even if the debtor is acting pro se and has made a very serious and obvious mistake, and even if the debtor has hired a putz of an attorney who is inexperienced or incompetent.

The trustee’s office is understaffed and overworked. Whether it is the Chapter 13 standing trustee’s office or a Chapter 7 interim trustee, there is more work than hours in the day. Many bankruptcy errors, lies, and omissions are ignored for the sake of expediency. To illustrate, pretend that the debtor’s mother has loaned the debtor $300. The debtor received a tax refund of $300, paid her back, and then immediately filed bankruptcy. This repaid debt is a fraudulent transfer to an insider creditor. The trustee can avoid the transfer and demand the money from the debtor or his mother, but is that likely? Probably not. The costs involved for the trustee are too great and the benefit to creditors is too small. Suppose the debtor failed to account for this transfer in the Statement of Financial Affairs? Will the trustee seek to deny a bankruptcy discharge because of this perjury? Again, probably not. Now consider how the response might change if the amount at issue was $3,000? Or $30,000? Or $300,000?

Night of the Living Debts!

You may think that your bankruptcy case will discharge all pre-bankruptcy financial obligations and stop all future debt collection cold. You may think that these debts are dead and buried, never to rise again. That’s the power of the federal bankruptcy law, right?

Or is it?

The truth is that there are several types of debts that survive a bankruptcy case, like debts excepted from discharge by law (e.g. taxes or student loans); or debts excepted from discharge by the bankruptcy court (e.g. credit card charges for a spending spree on the eve of bankruptcy). However, there is one type of debt that is rarely discussed, the “Zombie Debt.”

Zombie Debts in bankruptcy are those debts that are dead and buried (discharged), but somehow manage to come back to haunt you. Essentially, they are pre-discharge obligations that cause new, unexpected debts after the bankruptcy case. Here are a few common examples of Zombie Debts:

Real Property Zombie Debts

Many debtors have been shocked by real property zombie debts after a bankruptcy discharge. It is well-known that the discharge prevents the mortgage company from ever collecting from you. What is not well-understood is that the bankruptcy court does not transfer ownership of the property back to the bank. You still own the real property, and are obligated to pay any non-mortgage obligations that arise after the bankruptcy discharge and before the property is transferred. Some Zombie Debts that you may encounter are HOA fees, insurance, and upkeep costs.

Bank Zombie Debts

You may have discharged your bank account, but you are still obligated for any charges for bounced checks after the bankruptcy case is filed. Even if the check itself is discharged, such as a payday loan check, the check may still be presented for payment and cause a fee. Likewise, a forgotten automatic bill pay connected with a closed account can cause a bank charge. Post-bankruptcy debts are not included in the bankruptcy case.

Uninsured Property Zombie Debt

Attorneys commonly caution debtors to maintain insurance on property that will be surrendered back to a creditor. The common situation is an automobile in a Chapter 7 case. The debtor continues to drive the car until the creditor seeks to repossess it. Oftentimes a creditor will wait to repossess until after the bankruptcy discharges and the automatic stay is lifted. But what if the car is meanwhile damaged in an accident?

If there is not enough insurance to cover the damage to the vehicle, the debtor may have created a Zombie Debt. The debtor has an obligation to safeguard and protect the creditor’s property. This includes maintaining insurance. Damage to property (such as to an automobile or to real estate) that is not covered by insurance may be a post-bankruptcy liability that is enforceable against the debtor.

Bankruptcy is No Laughing Matter!

Being broke is no laughing matter. . . but maintaining perspective and keeping a positive outlook on life is vitally important when going through a stressful time. With that in mind, take a look at some of the best bankruptcy and debt jokes, and take a minute to relax and laugh.

 

One day, the Pastor sees Matthew walking slowly out of Church. Matthew is dejected, disheveled and looks terrible.

"Matthew," asked the Pastor, "what's the matter?"

"Well, Pastor, my business is shot, I'm losing my house and my wife says she is going to leave me and take the kids if I don't straighten things out. I just don't know what to do."

"Matthew, find the answer in the Bible," the Pastor replied. And Matthew left.

 Four months later, the Pastor sees Matthew coming out of Church, only this time, he's wearing an Armani suit and lighting a big cigar.

"Matthew, you look great! Did you follow my advice?"

"I did. I went home that day and decided to open the Bible and to follow the advice I saw. So I opened the Bible and the first phrase I saw said: Matthew Chapter 11."

 

A husband and wife are looking at a new bedroom suite in a furniture store.

Husband says to the salesman, “We really like it, but I don't think we can afford it.”

The salesman says, “You just make a small down payment... then you don't make another payment for six months.”

Wife wheels around with her hands on her hips and says, “Who told you about us?!”

 

October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.

 – Mark Twain

 

Matt Moody applied to a debt-collecting agency for a job, even though he had no experience.

He was very energetic, so the manager gave him a tough account with the promise that if he collected, he’d get the job.

Two hours later, Matt returned – with the full amount!

“Amazing!” said the manager. “How on earth did you manage that?”

“Easy,” replied Matt, “I told him that if he didn't pay up, I'd tell all his other creditors he'd paid us.”

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.