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.

What is an Adversary Proceeding?

By definition, an Adversary Proceeding is a lawsuit filed within the bankruptcy case. Only three parties can file the complaint that initiates an Adversary Proceeding; these parties include the creditor, the trustee and the debtor. When an Adversary Proceeding is filed, the parties must go in front of the Judge and explain their case.

When a creditor files an Adversary Proceeding, it is usually because the creditor is fearful that their particular debt is being wrongfully discharged in the underlying bankruptcy case.  However, there are certain categories of debts that are declared non-dischargeable. The non-dischargeable debts include certain taxes, past due child support, student loans, damages arising from drunken driving accidents, and, depending on the circumstances, credit cards and personal loans may be non-dischargeable as well. These debts make up the main cause of Adversary Proceedings.  By filing a lawsuit, the creditor is hopeful that they the debt will be declared non-dischargeable and essentially survive the underlying bankruptcy case.

The Bankruptcy Case Trustee, or the United States Trustee, can also file an Adversary Proceeding against the parties to the Bankruptcy case.  For instance, the Trustee may file an Adversary Proceeding against a creditor to collect money if the creditor has received funds or assets from the debtor prior to the Bankruptcy that would be considered a preferential payment.  On the other hand, the trustee may file against a debtor if paperwork was not filled out correctly or on time, if a court date was missed or if schedules were intentionally filled out incorrectly.  Last, the debtor is able to file an Adversary Proceeding.  For example, the debtor can bring suit against a creditor if the creditor has violated the automatic stay or discharge injunction.

The judge will take into account each side of the adversary proceeding and will determine the outcome through a hearing or a trial.  Essentially, an Adversary Proceeding is a separate lawsuit filed within the Bankruptcy Court related to the underlying Bankruptcy Case.

How Bankruptcy Can Help if You are Behind on Your Mortgage Payments

If you happen to fall behind on your mortgage payments, then filing Bankruptcy may provide an option to help you catch up and get current on your mortgage.  Specifically, a Chapter 13 Bankruptcy will help the debtor reorganize their creditors and provide for the mortgage arrears to be paid out over a period of 36 to 60 months.  In addition, the Bankruptcy filing would prevent or delay an upcoming foreclosure if the case is filed prior to the sale date. 

Once a debtor files for bankruptcy, an automatic stay is immediately put into place.  The automatic stay, as provided under Section 362 of the Bankruptcy Code, prohibits creditors from continuing collection activity against the debtor during their bankruptcy case.  After the bankruptcy case is filed, the debtor, who may be at risk of foreclosure, must make payments to their Chapter 13 Trustee according to the terms of their Chapter 13 Plan.  The Chapter 13 plan will provide for the payment of the mortgage arrears, along with other creditors if applicable depending on a case by case situation.  If the debtor fails to make the payments according to the Chapter 13 Plan, then the bankruptcy court dismiss the case, or the creditor may petition the court to allow foreclosure proceedings to resume.

Chapter 13 allows the debtor to reorganize their debts and pay them off through a three to five year repayment plan.  If the debtor continues to pay each month, then filing for a Chapter 13 bankruptcy will provide an efficient way to prevent foreclosure and catch up on missed payments.  The debtor must be able to pay the Chapter 13 Plan payments and their regular mortgage payments each month, depending on the jurisdiction which their Bankruptcy case is filed. 

Filing a Chapter 13 bankruptcy is extremely beneficial if you are behind on your mortgage payments.  Due to the automatic stay, creditors will be unable to continue collection activities. You can focus on reorganizing your debts and create a payment plan that will satisfy all of your creditors. 

Can Creditors Harass You After You File Bankruptcy?

When you file bankruptcy, an automatic stay is put into effect under Section 362 of the Bankruptcy Code.  The automatic stay prevents all collection activity while the bankruptcy case is active without an order of the Court.  The protection provided by the automatic stay prohibits creditors from contacting the debtor, which allows the debtor to have some breathing room during the bankruptcy process.  

Creditors will receive a notice from the Court that the debtor has filed for bankruptcy.  However, some creditors ignore the bankruptcy case and continue to call or pursue collection activities.  If this occurs, the creditor is in violation of the automatic stay.  If a creditor initially violates the automatic stay, then it is likely out of error.  Generally, the debtor informs the creditor of the open bankruptcy case, which will stop all further calls.  If a creditor continues to call after they have received the notice of bankruptcy filing and after the debtor has informed them of the bankruptcy case, then the debtor should notify their attorney or the bankruptcy court. The bankruptcy court has the power to sanction creditors for violating of the automatic stay, which could result in fines or monetary damages against the creditor.  

Under Section 362 of the Bankruptcy Code, the creditor is absolutely prohibited from harassing the debtor after a bankruptcy case has been filed.  The automatic stay was put in place upon filing, and creditors who violate the automatic stay could face sever ramifications.

Should I Take Money Out of My 401K to Pay Off Debts?

Your retirement fund, also known as 401K, is something that you work your entire life for. The last thing you want is for bankruptcy to swipe all of your retirement savings out from underneath you. Luckily, under state and federal law, your 401K plan is considered “exempt” or a protected asset in bankruptcy. No creditor can legally touch any funds in your 401K.

However, under no circumstances should you ever take money out of your 401K to pay off debts or use as cash to cover everyday expenses. Money that you pull out of your 401K is not protected if you file for bankruptcy and it will eventually have to be paid back into your retirement plan or it will be taxed. Therefore, your bankruptcy trustee will treat the money that you loaned from your 401K as a debt obligation.

In addition, money withdrawn from your 401k or other retirement account will count as additional income for income tax purposes as well as income to determine your eligibility for filing bankruptcy.  If you withdraw from your 401k within six months from filing bankruptcy, the withdrawal will be used in the calculation for means tests purposes.  Prior to touching your retirement, consult with your attorney or account to make sure you understand the potential ramifications.   

Be very careful if you are considering taking any money out of 401K. Not only may hinder your bankruptcy case, but it can also affect your taxes. If you take funds out of your 401K then you will be taxed on the amount at a higher rate, and if you take a loan from your 401K, then you will be charged interest that is going back into your retirement account (so you are essentially paying yourself back). If you need to retrieve access into your 401K balance early, then you are probably in a jeopardizing financial situation and will most likely not have the means to reimburse your 401K at a later date. 

Delay on Foreclosure due to Chapter 13 Bankruptcy

Foreclosure on homes often happens when lenders want to retrieve the remaining balance of a loan from the homeowner who has stopped making payments. Normally, the lenders will not begin the legal process until the homeowner skipped out on 3 or 4 months worth of payments.  Keep in mind, the foreclosure process varies in each state.  In Texas, foreclosures only take place on the first Tuesday of the month.  In addition, the creditor must provide certain notices informing you of the sale prior to any foreclosure date.  Although there are loss mitigation options available through some lenders, Chapter 13 Bankruptcy also provides an option to delay or prevent foreclosure while providing an avenue for you to catch up on the mortgage arrears.

Chapter 13 is often called “Reorganization Bankruptcy” because it allows you to reorganize your debts and prepare a payment plan. If your home is being foreclosed, then you can file for Chapter 13 and extend your repayment length.  Typical Chapter 13 cases range from 36 to 60 months and arrange monthly payments to your priority, secured, and in certain situations, unsecured creditors.  For many, Chapter 13 provides a beneficial option for people to catch up on the arrears by including the arrears in the Plan and spreading the amount out over five years.  While in Chapter 13, all payments must be made on time, including the regular on-going mortgage payments if they are not part of the Bankruptcy Plan. When the debtor completes all plan payments, the arrears on the mortgage will be cured and the debtor will exit the bankruptcy current on their mortgage.