Chapter 12 Bankruptcy

While many people are familiar with chapters, 7, 11, and 13 another chapter that is available is chapter 12.  A chapter 12 is agricultural and is for “family farmers" or "family fishermen." with "regular annual income."   The chapter 12 allows for farmers and fishermen to reorganize their debts in a reorganization plan to pay all or some of their debt.  The chapter 12 plan is an installment plan over three to five years.  Generally, the plan is for three years unless the court approves longer “for cause." If the plan proposes to pay 100% of child support or alimony if any exist, it must be for five years and must include all of the debtor's disposable income.  A case may not exceed 5 years.

 In order to file for chapter 12 the debtor must meet four criteria when they file the case:

  1. The debtor(s) must be engaged in a farming operation or a commercial fishing operation.
  2. The total debts must not exceed $4,031,575 for a farming operation or $1,868,200 for a fishing operation.
  3. If a family farmer, at least 50%, and if family fisherman at least 80%, of the total debts must be related to the farming or fishing operation.
  4. More than 50% of the gross income of the individual or the husband and wife for the preceding tax year must have come from the farming or commercial fishing operation.
 
Chapter 12 is less complicated, and less expensive than chapter 11, but allows for more debt than a chapter 13 because Chapter 13 is designed for wage earners who have smaller debts than those facing farmers. In chapter 12, Congress sought to combine the features of the Bankruptcy Code which can provide a framework for successful family farmer and fisherman reorganizations.
The only a family farmer or fisherman with "regular annual income" may file chapter 12, but the chapter 12 makes allowance farmers and fishermen whose income is seasonal. 
 
If you have any questions about bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.
 

Bankruptcy Filing Fees

When a debtor files for bankruptcy the court charges a filing fee to file the case.  For a chapter 7 case the courts charge a $245 case filing fee, a $75 miscellaneous administrative fee, and a $15 trustee surcharge.  These fees are paid to the clerk when the case is filed. Although with a chapter 7 case a debtor can request to pay the filing fee in installments or have the fee waived. 

If the Debtor is asks the court to pay the fee in installments the number of installments is limited to four, and the final payment must be made no later than 120 days after the case is filed.  For cause shown, the court may extend the deadline, but the last payment then must be paid not later than 180 days after the case is filed.  Failure to pay these fees may result in the case being dismissed. 
 
If the debtor's is unable to pay in installments and the income is less than 150% of the poverty level, the court may waive the filing fee. 
 
For a chapter 13 case the courts charge a $235 case filing fee and a $75 miscellaneous administrative fee.  The debtor may also request to pay these fees in installments or for the fee to be waived, however the Debtor must also make a chapter 13 plan payments so the Debtor must have sufficient income to pay the plan to remain in the case. 
 
If you have any questions about  Bankruptcy or filing fees, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation.

Do I Have to Include My Spouse in My Bankruptcy?

In the event you brought significant debt into your marriage which you incurred before you were married, certain states will consider that your separate debt, including Texas.  If your spouse is not liable for your debt, such as it was incurred before the wedding, or they did not co-sign for the debt, an individual bankruptcy may be an option.  Married debtors are able to file both Chapter 7 and Chapter 13 Bankruptcy individually.  However, your spouse’s income may still influence which Chapter of Bankruptcy you ultimately file.  Keep in mind that all household income, which includes your spouse, is used to determine your eligibility for bankruptcy.  In the event you do file bankruptcy individually, your filing will not affect your spouse’s individual credit rating.  This is a common concern for debtors seeking to file individually.  However, joint debts will still include a bankruptcy indication on your spouse’s credit report.

 
If you have any questions about Chapter 7 or Chapter 13 Bankruptcy, contact the attorneys at Fears Nachawati today. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com for a free consultation. 
 

Divorce and Bankruptcy

According to the American Psychological Association, about 40 to 50 percent of married couples in the United States get divorced.    While getting divorced may not be the easiest process, if you happen to be involved in an active Bankruptcy case, it can add additional step to complete your divorce proceeding.  The good news for those going through a divorce is that you can still complete the process if you or your spouse are involved in a bankruptcy.
 
As part of your divorce proceeding, the Judge will divide the family assets between the spouses.  If you are in a Bankruptcy, this division of assets is prohibited unless approved by the Bankruptcy Court.  After the Bankruptcy is filed, all of your assets become property of the Bankruptcy estate.  The automatic stay, which provides protection from your creditors, prevents distribution or liquidation of the bankruptcy estate without permission from the Court.  In order to proceed with the divorce in State Court, your Bankruptcy Attorney will need to petition the Bankruptcy Court for permission to proceed with the State Court Divorce proceeding.  This is generally accomplished by filing a Motion for Relief From Automatic Stay in the Bankruptcy Court.  Once the Automatic Stay is lifted for the purpose of filing divorce, you will be able to proceed in the State Court.
 
If you are involved in an active Bankruptcy case, you should discuss your situation with your Bankruptcy Attorney to make sure you are properly following the rules of the Bankruptcy 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.
 

Multiple Bankruptcy Filings

 Multiple Bankruptcy Filings

A debtor cannot re-file for bankruptcy for 180 days after their previous case was dismissed if  the  prior case was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court.  Additionally a debtor cannot re-file for bankruptcy for 180 days after their previous case was dismissed voluntarily after a secured creditor obtained an order for relief from stay.  11 U.S.C. §  362.  In other words if a creditor such as the mortgage or car creditor lifted the stay in the previous case, the Debtor is barred from filing a new case for 180s days if they then chose to dismiss the case themselves.  If a case was dismissed for other reason, such as missed plan payments the same restrictions do not usually apply.

 Even if a Debtor is able to file a second bankruptcy, if the bankruptcy is filed in the same year as a previous bankruptcy the automatic stay is only valid for 30 days.  A motion to extend the stay can be filed, that will extend the stay for the duration of the case, but this must be filed early and will usually need to be expedited to avoid the stay lifting.  If there are more the one case with in the last year there is no stay in place, and a motion to impose stay must be filed.  Either of these motions will require that the debtor show by a preponderance of the evidence that the new case is filed in good faith and there is a likelihood of success. 

Prospective Students Get New College Selection Tool

Once upon a time, a college degree ensured a bright future. In fact, an entire previous generation taught their children to work hard, go to college, and stay away from trouble. That seemed to be a recipe for success.

 
Maybe is still is, but it has become harder to find the right ingredients to make that recipe a success – especially when choosing the “right” college and degree program.
 
Forbes estimates that the national student loan debt is $1.2 trillion – with $1 trillion of that federal student loan debt. US News estimates that the average student loan debt for 2013 graduates is $30,000. Many students graduate with six figure debts hanging over their heads as they enter the workforce. Bankruptcy is largely not an option to discharge this debt. Consequently, now, more than ever it is important to make wise decisions regarding college choice and degree program.
 
Fortunately, the US government has stepped in with a tool that provides information on graduation rates, what former students of each school earn, how much debt they leave with, and, perhaps most importantly, what percentage can repay their federal student loans.
 
The College Scorecard, put together by the US Department of Education, allows prospective students to sort and compare information on schools by either state or geographic region. 
 
“Everyone should be able to find clear, reliable, open data on college affordability and value,” President Barack Obama stated. “Many existing college rankings reward schools for spending more money and rejecting more students — at a time when America needs our colleges to focus on affordability and supporting all students who enroll.”
 
Critics of college rankings by media publications complain that the results may be influenced by advertising or other financial sponsorship by the institution. Sometimes this becomes outright comical when small for-profit schools are ranked on the same level as the nation’s best public universities. The College Scorecard seeks to provide objective information that allows the consumer to research and make a sound decision in his or her education.
 
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.
 

Minimum Age to File for Bankruptcy Protection

There are minimum ages that are milestones as you go through life. Typically, age 16 means a driver’s license; age 18 means you can vote; age 21 means you can purchase alcohol; age 35 means you can be elected President of the United States (like your kindergarten teacher predicted for you); and age 65 means you receive Social Security retirement benefits (or age 62, or 66, or 67, or never if the government runs out of money).
 
While the government places age restrictions on many activities, there is no minimum age requirement for an individual to qualify as a debtor in a federal bankruptcy proceeding.
 
This “loophole” was used in 1998 to stop a foreclosure. In that case, 10 year old Shawn Powell filed for Chapter 13 bankruptcy protection in a Maryland bankruptcy court. The facts of the case are actually very sad: Shawn, his brother and his sister were orphaned in 1998 after his father died of liver disease; almost exactly a year after their mother died in a car accident. Shawn and his brother lived in his parent’s home with his uncle, who was not able to keep up the mortgage. Faced with foreclosure, Shawn filed for bankruptcy protection.
 
According to a Washington Post story at that time, the purpose of Shawn’s bankruptcy was to buy time for “the children to collect $100,000 from their father's life insurance policy, which would allow them to pay what they owe and stay in the well-kept home.” Shawn's bankruptcy filing lists his personal property: toys and clothes valued at $200. Shawn’s income, needed for funding a Chapter 13 repayment plan, was disclosed at $327 a month in Social Security survivor benefits.
 
Ultimately, Shawn’s bankruptcy was dismissed in March, 1999 – by Shawn. After filing, Shawn became the subject of media interest. He was interviewed by newspaper and television reporters including Barbara Walters and Montel Williams. Shawn and his family received donations in excess of $34,000. Even the mortgage company found a heart and agreed to stop the foreclosure proceeding while the insurance issue was being resolved.
 
Bankruptcy can be a lifeline, a second chance, and even provide additional time to restructure personal finances. Bankruptcy is protection for everyone, regardless of age.
 
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.

Green Tree Servicing Hit with CFPB Fine, so Rebrands Itself (Naturally)

In April of 2015, Green Tree Servicing agreed to pay a $63 million fine from the Consumer Financial Protection Bureau and the Federal Trade Commission for “mistreating borrowers” after failing to honor modifications for loans transferred from other servicers, demanding payments before providing loss mitigation options, delaying decisions on short sales, and harassing and threatening overdue borrowers. Green Tree agreed to pay $48 million in restitution to victims, and a $15 million civil money penalty to the CFPB’s Civil Penalty Fund for its illegal actions.

 
So what’s a shady mortgage servicing company with a sullied reputation to do?

Change its name, silly.
 
Green Tree’s parent company, Walter Investment Management Corp. (WAC), decided to merge Green Tree with another of Walter Investment’s subsidiaries, Ditech Mortgage Corp, to form a new company, Ditech Financial LLC. According to its corporate website, the new company will operate as ditech, a Walter company.
 
Readers may remember ditech commercials during the housing boom and subsequent bust of the early 2000’s. The company’s ubiquitous commercials were even parodied by Saturday Night Live, which featured a nefarious loan officer, played by actor Ron Michaelson, repeating the catchphrase “Lost another loan to Ditech!”
 
Green Tree’s website announces that the merger will be complete and effective on August 31. “Whether you’re purchasing a new home or looking to refinance your current mortgage, ditech can help you find the right solution for your needs,” the website states. “We look forward to serving you as a ditech customer.”
 
But this leopard may not be able to change its spots.
 
“Green Tree failed consumers who were struggling by prioritizing collecting payments over helping homeowners,” CFPB Director Richard Cordray said last April. “When homeowners in distress had their mortgages transferred to Green Tree, their previous foreclosure relief plans were not maintained. We are holding Green Tree accountable for its unlawful conduct.”
 
Time will tell if the new ditech will be more responsible or law-abiding in its loans or its servicing than its former incarnations.
 
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.

 

Does the Bankruptcy Court Owe You Money?

In a strange case of irony, the Wall Street Journal recently reported that the federal bankruptcy courts around the country are sitting on money that belongs to others. The Wall Street Journal reports that 

 
Each bankruptcy court holds onto unclaimed money for several years before turning it over to the U.S. Treasury. The exact amount of homeless money is unclear. For all of the U.S. Judiciary, the U.S. Treasury held $280.8 million in unclaimed money as of June 30.
 
Apparently, the amount of money in court accounts is large enough to compel some action. Bankruptcy courts around the country are adopting a new financial program initially developed by the U.S. Bankruptcy Court for the Eastern District of Virginia. The Judiciary Financial System is a court financial system which includes an Unclaimed Funds Locator service that a court can make available to the general public for unclaimed funds searches. Through the Unclaimed Funds Locator, creditors can search for leftover money. Currently, 39 of the country’s 94 court websites permit access to the Unclaimed Funds Locator.
 
Usually, “leftover” funds result at the end of the case when a creditor doesn’t cash the bankruptcy court’s check, but can also happen when the court loses contact with the creditor, or the creditor dies and heirs are not aware of the funds. A simple search of the Unclaimed Funds Locator for the Northern District of Texas turned up 24 creditors owed more than $10,000 each, and three owed more than $60,000. Many of these creditors are owed money from cases filed more than 20 years ago.
 
The procedures for collecting these leftover funds varies from court to court. Most bankruptcy courts have local rules for establishing the procedures and practices, and many include an application to the bankruptcy court and service to the US Attorney. For an example of this, see the Application for Payment of Unclaimed Funds for the bankruptcy court for the Northern District of Texas.
 
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.

Donald Trump, 50 Cent, and Chapter 11 Bankruptcy

During the recent Republican debate in Cleveland, Donald Trump stated that he has never filed a personal bankruptcy. However, his companies have filed for Chapter 11 bankruptcy protection four times in 18 years. How is this different from rapper Curtis Jackson, better known as “50 Cent,” who filed personal Chapter 11 bankruptcy earlier this summer?
 
Jackson’s Chapter 11 bankruptcy is a personal reorganization bankruptcy. The Bankruptcy Code allows an individual may file for financial reorganization under either Chapter 11 or Chapter 13. Both Chapter 11 and 13 stop collection activities while the individual formulates a repayment plan. In some cases the bankruptcy court may approve a plan to restructure or change personal debts. For instance, liens on secured property may be stripped off, interest rates changed, repayment times lengthened, and some debts may be paid “pennies on the dollar” or discharged without payment.
 
Most individuals seeking a repayment plan and reorganization of personal finances choose Chapter 13 rather than Chapter 11. Chapter 11 is a more complex bankruptcy process and is used primarily by businesses to reorganize (a company cannot file under Chapter 13). An individual, such as Mr. Jackson, is ineligible to file under Chapter 13 if the person owes more than $383,175 in unsecured debts (such as a personal judgment, credit cards, and medical bills), or more than $1,149,525 in secured debts (such as mortgages and car payments).  Mr. Jackson reportedly owes in excess of $28 million.
 
On the other hand, Donald Trump avoided personal bankruptcy by incorporating his business activities.  His first business bankruptcy, a 1991 case involving the Trump Taj Mahal in Atlantic City, left his business more than $3 billion in debt. Unfortunately, Mr. Trump himself was not completely insulated from this financial collapse. In exchange for a lower interest rate and more time to make loan payments, Mr. Trump gave up half his ownership and equity in the Trump Taj Mahal, and sold off personal assets.
 
During that time, Trump told The Washington Post that he passed a beggar in New York and said to his now ex-wife, model Marla Maples, “You see that man? Right now he’s worth $900 million more than me.”
 
If you are struggling financially, speak with an experienced bankruptcy attorney and discuss your financial strategies. The federal law can be a useful tool to reorganize business or personal liabilities and provide for a more successful future.
 
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.

Should I Have a Bank Account During Bankruptcy?

In general, there is no consequence to having a bank account during a bankruptcy case. However, there are a few “red flags” to observe and avoid:

 
Do you owe the bank money?
If you owe your bank money, it may try to freeze your account and collect the amount you owe. The 1995 US Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 US 16 (1995), holds that a bank can freeze an account and withhold funds so that it has time to make a request for setoff from the bankruptcy court. Once an account is frozen for setoff purposes, the money is likely gone for good.
 
Do you have a joint account?
If you have a joint bank account with a person not filing bankruptcy, the funds in the bank account may be subject to turn-over to a Chapter 7 bankruptcy trustee. Suppose, for instance, that you are a co-signor on your elderly mother’s bank account. Her Social Security check and a small pension are deposited into that account each month. You are required to list the bank account on your bankruptcy schedules and account for the money. The trustee may demand turn-over of half of the joint account, and it is your burden to show (perhaps to a judge) that the money is not yours.  The trouble of having your name on someone else’s account may outweigh any convenience benefit.
 
Do you have an outstanding payday loan?
If you have a post-dated check with a payday loan company, the check may be negotiated after you file bankruptcy. Most courts state that the presentment of the post-dated check does not violate the automatic stay provisions of the Bankruptcy Code. However, the funds collected by the payday loan company may be an avoidable post-petition transfer under Section 549 - meaning that the debtor may get the money back. 
 
All of these red flag situations can be avoided with the advice and guidance of your bankruptcy attorney. Your personal situation will dictate whether the best course of action is to do nothing, open another account and switch all direct deposits, and/or close your existing bank account. 
 
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.

Lien Stripping Your Home

Bankruptcy Code sections are like little boxes. Sometimes, the facts of a bankruptcy case will fit neat and tidy into a box. Other times, judges, trustees, and attorneys disagree whether a case can fit inside a bankruptcy box. 

 
One example of this is lien stripping a home mortgage during a Chapter 13 bankruptcy case. The general rule allows a Chapter 13 debtor to strip-off an entirely unsecured junior mortgage. In other words, if you own a home worth $400,000, and the amount owed on the first mortgage is $400,000 or more, you can strip-off any junior mortgage (like a second mortgage or a HELOC). Because the senior mortgage is more than the equity available in the home, there is no equity to secure any part of the junior mortgage. The bankruptcy court can declare the junior mortgage an unsecured debt and strip-off the lien securing the property. The junior mortgage debt is paid at the same rate, or discharged, along with all other unsecured debts in the case.
 
Simple, right?
 
But what if the facts of your case do not fit neatly into this bankruptcy box? Take, for example, the case of Serge and Lori Boukatch of Arizona. The Boukatches filed Chapter 13 bankruptcy in 2011. The couple listed their home at $187,500 and two liens: a first mortgage to Wells Fargo Bank in the amount of $228,300; and a second lien to MidFirst Bank amounting to $67,484.96. The bankruptcy court subsequently converted the case, and the Boukatches received a Chapter 7 discharge in 2013.
 
In 2014 the Boukatches filed a second Chapter 13. They claimed that the prior Chapter 7 bankruptcy had discharged their personal liability on the MidFirst Bank junior lien and asked the bankruptcy court to strip-off its entirely unsecured lien. The bankruptcy court refused to lien trip in this situation because they were ineligible for a Chapter 13 discharge, but the 9th Circuit Bankruptcy Appellate Panel (“B.A.P.”) allowed the stripping.
 
The B.A.P. discussed three approaches to lien stripping in a Chapter 13 case, ultimately agreeing with the third approach: that nothing in the Bankruptcy Code prevents lien stripping even where discharge is unavailable. “Third approach” courts hold that the mechanism triggering the lien-strip is completion of the plan rather than discharge. Therefore, when a debtor completes his or her plan, the provisions of the plan, including lien stripping, become permanent. The B.A.P. stated that full repayment of the debt secured by the lien is not required because the Bankruptcy Code only requires full repayment of “allowed secured claims.” The panel concluded that “the wholly unsecured status of MidFirst’s claim, rather than Debtors’ eligibility for a discharge, is determinative.”  
 
Bankruptcy is not a one-size-fits-all process. Fortunately, a skilled attorney can find the right-sized box for your bankruptcy issues. If you are experiencing financial difficulties, speak with an experienced bankruptcy attorney and discover how the federal law can help you.
 
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 Federal Government Worries About Your Mortgage

Isn’t it common sense to read an important document before you sign it?

Apparently the Consumer Finance Protection Bureau’s (CFPB) believes that millions of Americans are not reading (or understanding) important lender-required disclosures before they sign mortgage papers. To combat this, the CFPB is implementing new rules intended to eliminate redundancy and overlapping information, and help consumers better understand the loan closing process.
 
The new rules are collectively called “Know Before You Owe,” will merge four documents will be merged into two: the Truth in Lending Disclosure and HUD-1 Settlement Statement are combined into the Closing Disclosure; and the Good Faith Estimate and Truth in Lending disclosures are replaced by a new single Loan Estimate form. The most relevant details of the mortgage loan including the interest rate, the amount of the monthly payments, and a list of all closing costs are clearly spelled out all on one page.
 
The Know Before You Owe rules also require that the Loan Estimate must be delivered to the buyer no later than three business days after receiving the application. If there are changes during that 72-hour period, the closing could be delayed. That is a big change from the current rules that allow presentment of and changes to the HUD-1 Settlement Statement on the same day as the execution of the mortgage loan. Opponents of this rule cite that many closings may be delayed. Proponents say that the rule allows borrowers an opportunity to review and digest loan terms – and to avoid a bad deal.
 
The CFPB’s new rules are scheduled to take effect October 3, 2015. Will Know Before You Owe have a positive effect on the lending process? Will borrowers become more informed and make better choices because of these rules? Or will this cause costly delays, broken deals, and added consumer expense? Only time will tell.
 
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.

Things a Creditor Needs to Know About Bankruptcy

When an individual bankruptcy case is filed, the bankruptcy court sends notice to all creditors listed in the debtor’s petition. Receiving one of these notices generally prompts many questions. Below are a few of the most common questions and answers:

 
Q.Will I get paid?
A.This is the most common and the most important question to a creditor. Unfortunately, it is also the most complex. In very general terms, if the debt is secured by property (such as a house, a car, etc.), the debtor must either pay the debt or return the property. If the debt is unsecured (like a personal loan), disposition of the debt will largely depend on the debtor’s ability to repay the debt.
 
Q.What if I don’t get notified of the bankruptcy case?
A.The Bankruptcy Code excludes an unlisted debt from discharge if the failure to list the debt prevented an opportunity to file a claim or object to the discharge of the debt. However, many courts cite the “no harm, no foul” rule. If the unlisted debt was an honest mistake, there was no reason to exclude the debt on other grounds, and the creditor would not have received any relief from the court (money or other), these courts find that the unlisted debt is included in the discharge.
 
Q.Should I attend the 341 meeting?
A.The 341 meeting of creditors is an opportunity for the bankruptcy trustee and creditors to ask the debtor questions regarding income, expenses, assets, debts, and financial transactions. Most creditors do not attend the 341 meeting. That said, the 341 meeting is a good time to learn more about the case and whether there are available assets or excess income to pay debts.
 
Q.  Do I need a lawyer to represent me?
A.  Obviously, an attorney is always recommended whenever you face an important legal matter. A legal consultation can aid you in determining whether it is a good idea to incur the expense of hiring an attorney. How you proceed as a creditor in the case can vary widely: from doing nothing to actively opposing the debtor’s discharge.
 
Q.  Can I continue my lawsuit for eviction, child support, or personal injury?
A.The general answer is “no.” Actions to collect a debt from the bankrupt individual are immediately prohibited once the bankruptcy case is filed. This prohibition continues until the case is discharged or dismissed, or the bankruptcy court grants permission to continue the suit.
 
Q.  I know the debtor is lying or concealing assets. What should I do?
A. The bankruptcy process relies on the honesty of the participants to function properly. Fraud should be reported to the local U.S. Trustee. You can also send information of fraud via email to: USTP.Bankruptcy.Fraud@usdoj.gov or by mail to:
 
Executive Office for U.S. Trustees
Office of Criminal Enforcement
441 G Street, NW
Suite 6150
Washington, DC 20530
 
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.

When Your School is Under Federal Scrutiny

The U.S. Department of Education is closely monitoring 483 colleges over concerns of financial or federal compliance issues. The Department’s report, released June 1, 2015, includes three public institutions: Northern New Mexico College, Mesalands Community College in Tucumcari, N.M., and Copiah-Lincoln Community College in Mississippi. A complete list of these colleges is here.
 
Colleges on the Department of Education’s list are subject to “Heightened Cash Monitoring” which provides additional oversight over financial or federal compliance issues. Some schools subject to this oversight are restricted from immediate federal financial aid payouts, which always creates cash flow problems for the institution. This situation is often cited as the reason Corinthian Colleges, a for-profit institution with 72,000 students spread over 100 campuses, closed its doors.
 
So what happens if your college shuts down?
 
A current student at a college that closes has choices under the federal law. A School Closure Loan Discharge is available to a student who meets the following criteria:
  • The school closed while you were enrolled and you could not complete the program of study for which the loan was intended; OR
  • You were attending school within 120 days of the closure date or on an approved leave of absence when the school closed.
The Department also clarifies exceptions to the closed school discharge:
  • Students who withdraw more than 120 days before the closure are ineligible.
  • Students who have completed all the school’s required coursework, even if they haven’t received a diploma or certificate, cannot receive a discharge. They may transfer their credits to another institution and graduate from there.
  • Finally, the discharge isn’t unconditional. Students who complete their coursework at a different institution will be required to repay any amount that was discharged.
In the case of Corinthian and its on-going bankruptcy case, the Department of Education recently agreed to temporarily stop legal action against as many as 40,000 Corinthian borrowers who defaulted on their loans after the school closed. Attorneys for a student committee have complained that Corinthian lured students by exaggerating graduation rates. The Department reports that nearly 7,000 borrowers have applied for some form of relief, however hundreds of thousands of students took out loans to attend a Corinthian school since 2010.
 
If your school is in trouble with the Department of Education, it may be prudent to investigate your rights. The federal law offers protections for borrowers, but these protections are often difficult to navigate. The best advice is to seek the counsel of an experienced bankruptcy attorney.
 
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.

 

Bankruptcy is Only for Low Wage Earners? Think Again!

According to Debt.org, approximately 60 percent of bankruptcy filers have incomes of less than $30,000. For many of these filers, even a small economic hiccup can cause financial ruin, such as reduced hours at work, a lawsuit, or medical expenses.
 
But if you think that personal bankruptcy happens only to lower-income people, consider that many upper-income professionals are seeking bankruptcy protection. This is largely believed to be the continuing fall-out that resulted from the 2008 financial crisis. Among the professions that seem to be overly susceptible to bankruptcy include professional athletes, physicians, and investment professionals.
 
Professional Athletes
A recent study published in the National Bureau of Economic Research reports that nearly one in six NFL players files for bankruptcy protection within a dozen years after leaving the sport. While many professional athletes see spikes in their yearly incomes, these spikes are generally short-lived. An athlete cut from a team is likely to find himself without any income source. Even long-time professional athletes who have made many millions through their sports are not immune to personal bankruptcy filing, like boxing’s Mike Tyson, baseball’s Tony Gwynn, and football’s Warren Sapp.
 
Physicians
Medical doctors were once considered the top of the professional food chain. However, many physicians are filing for Chapter 11 bankruptcy according to CNN Money. According to CNN, “Doctors blame shrinking insurance reimbursements, changing regulations, and the rising costs of malpractice insurance, drugs and other business necessities for making it harder to keep their practices afloat.”
 
Investment Professionals
During the past recession, many individuals watched a falling stock market drain their investment portfolios and retirement incomes. Others cashed out of the stock market and put their money into safer investments. One of the biggest losers during this period were small firm personal investment advisors who lost clients and transactions when investors pulled their money.

If you are experiencing financial difficulty, speak with an experienced bankruptcy attorney and discover how the federal law can help you. A high income does not exclude you from bankruptcy protection, and may be the answer to your financial woes. 

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.

Will ObamaCare Reduce the Number of Personal Bankruptcy Filings?

The Wall Street Journal recently published a very thought-provoking piece in the wake of the U.S. Supreme Court decision over ObamaCare. The article entitled The Future of Personal Bankruptcy in a Post-Obamacare World hypothesizes that a mandatory health care system designed to give people access to affordable health insurance will reduce the number of personal bankruptcy cases.

The article focuses on the research of Northeastern University law professor Daniel Austin, who studied the effects of mandatory health insurance in Massachusetts on personal bankruptcy filings within that state. Professor Austin found that Massachusetts residents who filed bankruptcy in 2013 had $3,041 in medical debt, well below the national average of $8,594 in medical debt.

The conclusion of the article is that mandatory nationwide health insurance will make families more financially stable and keep them out of bankruptcy. President Obama himself has pointed out that 62.1% of consumer bankruptcies are medical bankruptcies, citing a study Sen. Elizabeth Warren (D., Mass.) co-wrote as a Harvard law professor. However, Professor Austin’s study found that only 18% to 25% of personal bankruptcies filed in the U.S. were instigated by medical debt; except in Massachusetts where 3% to 9% of bankruptcy cases were filed because of medical debt.

While this article and the related research are hopeful, there is no magic bullet to avoid bankruptcy. A 2013 study analyzing data from the U.S. Census, Centers for Disease Control, the federal court system, and other health-care system information found that 56 million Americans struggle to pay medical bills – 20% of the population between the ages of 19 and 64. This study concluded that medical insurance is not an answer. The study estimates that nearly 10 million adults with medical coverage will incur medical bills this year that they cannot pay.

Mandatory health insurance has not saved Massachusetts residents from bankruptcy filings. Massachusetts ranked 10th best bankruptcy filing rate in the United States, 11th if the District of Columbia is counted. During 2014, Massachusetts residents filed at a rate of 154 bankruptcy cases per 100,000 people. That is slightly better than New York at 162 cases and well ahead of the national average of 292.

The real conclusion here is that a personal bankruptcy is generally caused by a multitude of factors. It is rare that medical bills alone will cause a bankruptcy filing; just as the absence of medical debt will guard against financial ruin. ObamaCare may save a few individuals from bankruptcy, or prolong filing, or may have no effect at all. 

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.

When a House is Not a Home

Recently, a New Jersey bankruptcy court reminded us that home is where you hang your hat. But what makes a house a home will vary between bankruptcy courts. The case was In re Abraham, 2014 WL 3377370 (Bankr. D.N.J. July 10, 2014), a Chapter 7 case involving a claim under the federal homestead exemption.

 
The facts in this case are a little unusual, but not all that uncommon. The married debtors moved to Tehran, Iran from New Jersey in 2011, after the husband’s business income started to decline. The couple’s adult children continued to occupy the debtor’s New Jersey home, making payments for the mortgage, utilities, and the general maintenance of the property. In 2012, the debtors filed for Chapter 7 bankruptcy protection in New Jersey, and claimed a federal homestead exemption of $43,250. The Chapter 7 bankruptcy trustee objected and argued that the property did not qualify as the debtor’s “residence” under Section 522(d)(1) of the Bankruptcy Code. The debtors maintained that the New Jersey property was their residence. They claimed their intent to return to New Jersey in the future. The husband offered his New Jersey driver’s license as proof of residency during a section 341 meeting of creditors.
 
Section 522(d)(1) specifically provides that under the federal exemption scheme, equity in a residence may be exempted up to $22,975 for a single debtor or $45,950 for joint debtors. However, the Bankruptcy Code does not define the term “residence.” Consequently, courts have determined the meaning of “residence” by applying either a “plain meaning approach” or a “‘residence’ as ‘homestead’ approach.” 
 
A minority of courts us the plain meaning approach. Under this approach, “residence” is applied expansively as a “place where one actually lives.” The plain meaning approach allows for multiple residences, or a place the debtor occupies for a period of time. 
 
The majority of bankruptcy courts use the “’residence’ as homestead’ approach,” which defines “residence” the same way the debtor’s state law defines the term. The bankruptcy court in Abraham chose to apply the majority view, and concluded that the New Jersey property did not functionally serve as the debtors’ residence. The debtors did not occupy the property and the court found that the debtors did not intend to return to the property. Therefore, the debtors could not apply a homestead exemption to their New Jersey property. 
 
If you own property in several states and intend to file bankruptcy, speak with an experienced bankruptcy attorney. How the court in your jurisdiction defines “residence” may mean the difference between keeping and losing property.
 
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.
 

Supreme Court Denies Lien Stripping Case, For Now

One of the main benefits of bankruptcy is the ability of the debtor to restructure his finances, and, in some cases, modify debts by reducing principle or changing terms, like the interest rate or length of the contract. The opportunity to modify an underwater home mortgage is obviously an enormous benefit for someone struggling to pay bills and keep his family home. Unfortunately, Congress made it clear that Chapter 13 debtors may not modify a primary home mortgage (see 11 U.S.C. § 1322(b)(2)), and the U.S. Supreme Court decided that modifying an upside-down home mortgage is not available for Chapter 7 debtors in the case of Dewsnup v. Timm, 502 U.S. 410 (1992). 
 
The Supreme Court of the United States recently reversed two Eleventh Circuit decisions that allowed lien stripping entirely unsecured junior liens in Chapter 7 cases. The Court relied on Dewsnup v. Timm, but several of the justices did not seem especially keen on the outcome.
 
The two Eleventh Circuit cases both concerned Chapter 7 debtors who attempted to “strip off” and discharge unsecured second mortgages using Section 502(d) of the Bankruptcy Code. In each case, the Bankruptcy Court, the District Court and the Eleventh Circuit allowed the debtor to “strip off” the junior mortgage and void the lien.
 
In a unanimous decision by the Supreme Court, Justice Thomas reversed the Eleventh Circuit. First, the Court agreed with the debtors. Thomas examined the plain language of the Bankruptcy Code and found that under Section 506(d), a lien that secures a claim against the debtor that is not an "allowed secured claim" is void:
 
The Code suggests that the Bank’s claims are not secured.  Section 506(a)(1) provides that “[a]n allowed claim of a creditor secured by a lien on property . . . is a secured claim to the extent of the value of such creditor’s interest in . . . such property,” and “an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.” In other words, if the value of a creditor’s interest in the property is zero—as is the case here—his claim cannot be a “secured claim” within the meaning of §506(a). And given that these identical words are later used in the same section of the same Act—§506(d)—one would think this “presents a classic case for application of the normal rule of statutory construction that identical words used indifferent parts of the same act are intended to have the same meaning.” (citation omitted). Under that straightforward reading of the statute, the debtors would be able to void the Bank’s claims.
 
Bank of America v. Caulkett, No. 13-1421, p. 3 (6/1/15).   It seemed like the debtors would have a clear victory, however the Court quickly stomped on the debtors’ throats with a big black boot:
 
Unfortunately for the debtors, this Court has already adopted a construction of the term “secured claim” in §506(d) that forecloses this textual analysis.
 
Id. The Court explained that its prior holding in Dewsnup dictated a different result:
 
Rather than apply the statutory definition of “secured claim” in §506(a), the Court reasoned that the term “secured” in §506(d) contained an ambiguity because the self-interested parties before it disagreed over the term’s meaning. (citation omitted). Relying on policy considerations and its understanding of pre-Code practice, the Court concluded that if a claim “has been ‘allowed’ pursuant to §502 of the Code and is secured by a lien with recourse to the underlying collateral, it does not come within the scope of §506(d).” (citation omitted). It therefore held that the debtor could not strip down the creditors’ lien to the value of the property under §506(d) “because [the creditors’] claim [wa]s secured by a lien and ha[d] been fully allowed pursuant to §502.” (citation omitted).   In other words, Dewsnup defined the term “secured claim” in §506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. Under this definition, §506(d)’s function is reduced to “voiding a lien whenever a claim secured by the lien itself has not been allowed.”
 
Opinion, p. 4. Consequently, relying on Dewsnup the Court found that the unsecured second mortgages could not be avoided because the debts are “allowed secured claims” under Section 502. 
 
However, Justice Thomas included the following interesting footnote to the case:
 
From its inception, Dewsnup v. Timm, 502 U. S. 410 (1992), has been the target of criticism. (citations omitted). Despite this criticism, the debtors have repeatedly insisted that they are not asking us to overrule Dewsnup.
 
Justices Kennedy, Breyer and Sotomayor expressly joined in all of the opinion except for the footnote. This may be an open invitation by the Supreme Court to re-examine Dewsnup and have the case overturned.
 
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.

8th Circuit Forces Married Debtors to Consolidate Bankruptcy Cases

During bankruptcy a debtor must apply legal exemptions to protect property from creditors. The Bankruptcy Code allows the debtor to choose between state and federal exemptions, but also permits states to “opt-out” and force their residents to apply state law exemptions.

 
A married couple filing bankruptcy faces these same exemption law decisions. However, there is nothing in the Bankruptcy Code that forces a married couple to file bankruptcy jointly. In some cases, separate filing is sound strategy. In other cases, filing separately simply invites further litigation.
 
The Eighth Circuit Court of Appeals recently decided an interesting case where a married couple filed separate Chapter 7 bankruptcy cases. The husband claimed protection under the federal law exemptions, and the wife claimed Arkansas exemptions to protect her property. In this case the husband was able to take advantage of greater protections under Section 522(d) to exempt his annuities, while his wife applied an Arkansas homestead exemption to protect her debt-free home.
 
The bankruptcy trustee objected and sought consolidation of the two cases. The trustee argued that the debtors were “stacking” exemptions and should be forced to select one exemption scheme. The debtors responded that they were separated and maintained different households.
 
The Eighth Circuit was asked whether two lower courts had abused discretion by forcing the consolidation of the cases. It turned to the case of In re Reider, 31 F.3d 1102 (11th Cir. 1994), for guidance and asked two questions: “(1) whether there is a substantial identity between the assets, liabilities, and handling of financial affairs between the debtor spouses; and (2) whether harm will result from permitting or denying consolidation.” 
 
For the first prong, the Circuit Court examined the facts of the case: the two debtors lived separately; wife had no mortgage on her home while husband was surrendering his; they owned separate insurance policies, separate interests in businesses, separate annuities, separate IRAs, and individual credit card debt. On the other hand, the couple shared a checking account, several credit cards, and a leased car. They had jointly withdrawn funds from IRAs on two occasions, they had joint state and federal tax obligations, and were jointly liable on a civil judgment. The Circuit Court found no abuse in the decision that there was substantial identity between the debtors.
 
For the second prong, the Court found that the lower courts did not abuse discretion by holding that the benefit to creditors outweighed any prejudice the debtors would suffer by consolidating the cases. The Court said, “Stated differently, the bankruptcy court found that if Marilyn were permitted to exempt her home under Arkansas law and Samuel were permitted to exempt his IRAs and annuities under federal law, their separate estates would have significantly less value than if their cases were substantively consolidated and the Boellners were forced to choose either federal or state exemptions.” For more information on this case, see Boellner v. Dowden, No. 14-2816 (8th Cir. May 12, 2015). 
 
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.

Valuing Collectibles in Bankruptcy

During an individual bankruptcy, all personal property must be identified and valued. Schedule B of the official bankruptcy forms specifically requires information for all “collections or collectibles.” Valuing collectibles during bankruptcy can get tricky, and properly valuing collectibles can mean the difference between keeping and losing the property. Some collections, like Beanie Babies or Precious Moments Figurines, have poor resale value. On the other hand, gun collections have good resale value. 
 
In many cases, the bankruptcy trustee knows little or nothing about the collection or its condition, and will initially rely on the debtor to give a good faith estimate of its worth. The value of the collection should be a “quick sale value,” which is akin to what other similar items in the same condition are selling for in a “quick sale” marketplace like an auction or eBay.
 
In most cases, offering the trustee some evidence of how the collectibles are valued will end the inquiry. For instance, if prices are documented from recent transactions on eBay, or an “expert” provides a statement of fair market value, the investigation into the value of the collection may end. On the other hand, stating that a collection has an “unknown” value only leads to more questions and closer scrutiny.
 
Take, for example, the recent corporate bankruptcy filing by Frederick’s of Hollywood. Included in the assets of this case is a large collection of celebrity under garments worn by stars such as Marilyn Monroe, Robert Redford, and Madonna. The five page list of this collection included in the bankruptcy schedules describes each item, but states that its value is “unknown.”

The Frederick’s case is a Chapter 11 bankruptcy, which is a corporate restructuring, and many of these items may be sold at auction to the highest bidder. In contrast, most personal collections included in a Chapter 7 or Chapter 13 bankruptcy case may be protected from sale at auction due to federal or state legal exemptions. By properly valuing collectibles, an individual debtor may apply these legal exemptions and, in many cases, keep the entire collection. 

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.

 

Bankruptcy Debtors Can Take the Money and Run after Conversion

Chapter 13 cases have a low rate of completion for many reasons. Most statistics show that less than half of all Chapter 13 cases filed receive a Chapter 13 discharge. Some Chapter 13 cases are voluntarily dismissed because the reason for filing has been resolved; other cases are converted because the debtor cannot keep up plan payments.

The United States Supreme Court was recently asked an important question in the case of Harris v. Viegelahn, No. 14-400 (5/18/15): what happens to money the trustee is holding when a Chapter 13 case is converted to Chapter 7? The unanimous opinion of the Court was that the money is returned to the debtor.

Section 348(f) of the Bankruptcy Code states that absent bad faith, when a Chapter 13 case is converted to Chapter 7, “property of the estate” is that property which was originally part of the Chapter 13 estate which remained "in the possession . . . or control" of the debtor. Section 348(e) states that the Chapter 13 trustee’s services are terminated upon conversion.

The Supreme Court interpreted these statutes and found that that money paid to the Chapter 13 trustee after the bankruptcy case was filed, but not distributed as of the date of the conversion to Chapter 7, was not part of the debtor’s new Chapter 7 case. Therefore, the money must be returned to the debtor. The Court further decided that paying money to creditors was a “service” provided by the trustee and therefore something that could not be done after conversion. The Court found that the estate’s creditors had no claim on the funds until they were paid to the creditors.

In deciding that this money should return to the debtor, the Supreme Court rejected the Fifth Circuit’s policy argument that this would result in a “windfall” for the debtor. The Court reasoned that these funds would have belonged to the debtor if he had initially filed under Chapter 7. The Court suggested that creditors avoid situations where the trustee “sits” on debtor funds and “seek to include in a Chapter 13 plan a schedule for regular disbursement of funds the trustee collects.” 

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

Will the Trustee Come to My Home?

Debtors commonly ask, “Will the trustee come to my home?” The quick answer is “No.” Well, that’s the correct answer almost always. Just like every other “certain” rule in bankruptcy, there are exceptions.

Section 704(a) of the Bankruptcy Code directs the bankruptcy trustee to “collect and reduce to money the property of the estate for which such trustee serves.” Sometimes that duty requires the trustee to visit the site of the property. A trustee may do a drive-by on real estate, or may arrange for an appraiser to inspect a vehicle, or may ask to enter a debtor’s home to view a high dollar item, such as a grand piano. The circumstances will dictate when a trustee’s visit is reasonable or likely.

Another time the trustee may decide to do a home visit is when the debtor has demonstrated dishonesty or a lack of candor regarding his property. That occurred in the case of In re Bursztyn, 366 B.R. 353 (Bankr. D. N.J. 2007). The trustee in Bursztyn found discrepancies between the filings in the debtor’s recent dissolution case and her bankruptcy schedules. Specifically, the trustee suspected that the debtor was hiding valuable jewelry and artwork.

After many fruitless requests for information and turnover of property, the Trustee sought a warrant to search the debtor’s home. The bankruptcy court issued the search warrant, and the trustee, with the help of a U.S. Marshall, recovered jewelry and art at the debtor’s home worth approximately $250,000.

The debtor claimed that the trustee’s search violated her Fourth Amendment rights. The bankruptcy court disagreed. It found that while the bankruptcy trustee is bound by the Fourth Amendment, the search of the debtor’s home was not unreasonable. The court pointed to the reduced expectation of privacy in a bankruptcy debtor’s “houses, papers and effects.” While a bankruptcy debtor does not give up all rights to privacy, there is a “strong public interest and policy in full, open and proper administration of a bankruptcy case by a trustee, including a thorough investigation of the debtor’s assets.” The court found that under the circumstances of the case (including a finding that the debtor had not acted “honest nor credible” during the bankruptcy; that there was reason to believe that the debtor was concealing property; that the items were physically small and easily concealed; and that the trustee had made repeated requests for turnover) the search was reasonable and the evidence would not be suppressed.

Courts have both approved and rejected requests for search warrants. For instance, in Spacone v. Burke (In re Truck-A-Way), 300 B.R. 31 (E.D. Cal. 2003), the bankruptcy court refused to issue a search warrant. While recognizing the civil nature of the bankruptcy trustee’s search, the court nonetheless concluded that the only avenue for a trustee to seek a search warrant is through Rule 41 of the Federal Rules of Criminal Procedure. The court held that a bankruptcy trustee has no authority under Rule 41 because a trustee is neither a federal “law enforcement officer” nor “an attorney for the government” as required by that Rule. The court stated, “Clearly the explicit requirements of Rule 41 reflect the exacting mandate of the Fourth Amendment and cannot be circumvented by the statutory structure created by the Bankruptcy Code.” At least one author disagrees with this analysis and points to the Federal All Writs Act and Section 105 of the Bankruptcy Code as providing the authority for a bankruptcy court to issue a search order. See Michael D. Sousa, A Casus Omissus in Preventing Bankruptcy Fraud: Ordering a Search of a Debtor's Home, 73 Ohio St. L.J. 93 (2012).

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.

Families Fight to Keep College Tuition from Bankruptcy Trustees

As reported by the Wall Street Journal, there is a growing trend among bankruptcy trustees to recover college tuition paid by bankruptcy debtors on behalf of their children. Under the U.S. Bankruptcy Code, a trustee can sue to take back money that a bankrupt person spent several years before filing for protection if the trustee finds that the person didn’t get “reasonably equivalent value” for that expense. Since the parent did not receive “value” from the college education (the child did), the payment may be recoverable and distributed fairly between all of the debtor’s creditors. 

 
This provision of the law is not new. Trustees routinely sue to recover money or property “gifted” to another person on the eve of a bankruptcy filing. These transfers are often fraudulent, but are sometimes innocent. The law does not make a distinction when it comes to these types of gifts.
 
Traditionally, bankruptcy trustees have not sought recovery of college tuition payments. This is likely because of fairness concerns and that the amount of money at issue was historically low. However, the trend has increased as college tuition rates have skyrocketed. In 1990 the annual cost at a state college was around $5,000. Today it is over $15,000 per year.  
 
Last February, the University of Bridgeport returned $4,000 in college tuition payments after being sued by the bankruptcy trustee after a student’s parents filed for Chapter 7 bankruptcy. The school said in a court filing it reserved the right to go after the student to recover this money.
New York University was sued in October to turn over $27,152 for a Minnesota couple’s debts. Pace University quickly settled a lawsuit in September, agreeing to pay $23,290.80.
 
If you are contemplating bankruptcy and have paid college tuition in the recent past, speak with an experienced bankruptcy attorney about the possibility of a trustee lawsuit. This trend is not occurring in every jurisdiction or with every trustee. Your attorney can advise you as to the risks in your particular case.
 
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.

Supreme Court Says No Immediate Appeal for Many Bankruptcy Issues

Most bankruptcy cases are comprised of different debt issues between the debtor and several creditors – all who are competing to get at the debtor’s limited resources. During the course of the case, a party may ask for the bankruptcy court to take action to alter the legal status or relationship of one or more parties. For instance, a party may ask the court:

  • To confirm a Chapter 13 plan;
  • To lift the automatic stay to foreclose, repossess, or continue a court action; or
  • To dismiss the debtor’s case.

For years there has been disagreement whether the party has a right to immediately appeal if the bankruptcy court denies such a request.

Recently the U.S. Supreme Court ruled in the case of Bullard v. Blue Hills Bank, No. 14-116 (5/4/15). In that case, Mr. Bullard submitted a Chapter 13 plan for court approval that proposed to modify Blue Hills Bank’s loan on his rental property. Mr. Bullard sought to continue to pay his monthly payment which would be applied to the secured portion of the property only. The unsecured portion would be paid at the same rate as other unsecured debts, with the remaining balance to be discharged at the end of the case. The bank objected, the court denied confirmation of the plan, and Mr. Bullard was given the opportunity to submit another plan.

Mr. Bullard appealed the court’s denial of confirmation. However, denial of confirmation isn’t a final order because Mr. Bullard was able to submit a new plan. In other words, the denial did not change his legal status. Consequently, the First Circuit Court of Appeals said the bankruptcy court denial could not be appealed.

The Supreme Court agreed to hear this case, and in a unanimous opinion authored by Chief Justice John Roberts, the court said, “Only plan confirmation, or case dismissal, alters the status quo and fixes the parties’ rights and obligations; denial of confirmation with leave to amend changes little and can hardly be described as final.”

What this means to a debtor in bankruptcy is plain: there is no right to appeal an order denying relief which does not change the status quo. If the case continues and the party is free to continue litigating the matter, the order is not final. This ruling is especially harsh to a Chapter 13 debtor like Mr. Bullard, who may be faced with a Hobson’s choice of submitting a new, less desirable repayment plan, or allowing the case to be dismissed to have the opportunity to challenge the bankruptcy court’s decision.

As a final note, under current bankruptcy rules a party may seek permission to appeal a non-final order, called an “interlocutory appeal.” This type of permissive appeal may or may not be granted and requires the aggrieved party to persuade the over-worked appeals court to hear the case. Interlocutory appeals must be granted at each stage of the appellate process. In the case of Bullard v. Blue Hills Bank, Mr. Bullard was granted an interlocutory appeal from the Bankruptcy Appellate Panel, but denied appeal at the circuit court level.

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.

 

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."

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. 

Will Filing Bankruptcy Effect my Job?

The stress of filing for bankruptcy is extremely hard on individuals and families. Most individuals going through the bankruptcy process are stressed, tired of creditors calling and just want to get their financial situation in order. The last thing that you want to worry about the effects that bankruptcy has on your job and employment opportunities.  

If you file for a Chapter 7, then most employers will not find out about the case.  While Court documents are typically public information, the only way an employer will generally find out is if you tell them, or if a creditor has began the process to garnish your wages.  Although there is no wage garnishment in Texas for consumer debt, filing for bankruptcy will stop withholding your wages. If you file for a Chapter 13, then there is a possibility that the judge will order your Chapter 13 payments to be deducted from your earned income. In that case, your employer will be notified.

Filing for bankruptcy has no impact on your employment.  According to 11 U.S.C. § 525(b), no private employer may terminate employment, or discriminate, against an employee for filing bankruptcy. You cannot get fired nor will you be refused a position due to filing for bankruptcy. However, it may be wise to speak to your employer about your financial situation. Some people who have a lot of debt or are considering bankruptcy have a lot of weight on their shoulders. Being open and honest with your employer will allow them to create an environment that is comfortable for you to resolve your personal matters. 

Can a Bank Freeze Your Account After Filing Bankruptcy?

Filing bankruptcy does not “stop” or “freeze” your finances. The bankruptcy law recognizes that you have an on-going need to pay for gas, food, the rent, etc. This implies money is available, which can be a problem if the money is in a checking or savings account at a bank where you owe money.

When Your Bank is a Creditor

After you file bankruptcy, if you have a deposit account at a bank where you owe money, the bank has a right of setoff. Simply, the bank may be able to apply money from your checking or savings account to pay a bank-held debt, like an overdraft or a defaulted loan. The 1995 US Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 US 16 (1995) holds that a bank can freeze an account and withhold funds so that it has time to make a request for setoff from the bankruptcy court. Once an account is frozen for setoff purposes, the money is likely gone for good.

If you have a deposit account at a bank where you owe money, it is probably a good idea to switch banks before filing bankruptcy. You should keep the old bank account open, but only maintain a small balance. Remember to change any direct deposit to the new bank account and cancel all monthly direct debits.

When Your Bank is Not a Creditor

When a bankruptcy is filed, the clerk of the court sends a notice to the bank regarding the case. It usually takes a few days for the bank to receive notice, however some larger banks compare the list of recent bankruptcy filings against their accounts. If an account holder has filed bankruptcy, some banks will freeze the account immediately, whether it is owed money or not. Wells Fargo Bank reportedly does this, calling it an “administrative hold.” However, many courts are finding that Wells Fargo’s practice is a violation of the automatic stay, since Wells Fargo does not turn the money over to the bankruptcy trustee nor seek direction from the bankruptcy court. See Mwangi v. Wells Fargo Bank, N.A., 432 B.R. 812 (B.A.P. 9th Cir. 2010); see also In re Weidenbenner, 521 B.R. 74 (Bankr. S.D. N.Y., 2014)(distinguishing Strumpf saying that because Wells Fargo was not a creditor in the debtors’ case, it had no setoff right and could not freeze the debtors’ bank accounts).

Bad Legal Advice Will Not Save Your Bankruptcy Case

When something bad happens in your bankruptcy case, who gets the blame?

You do.

The responsibility for your bankruptcy case is first and foremost squarely on your own shoulders. Your attorney works on your case. It is not your lawyer’s case – it is your case. Sure, when something goes wrong you can complain about your attorney. You may even sue your attorney or cry “foul” to the office of chief disciplinary counsel. Unfortunately, none of that will get you out of trouble.

Just ask Teresa Giudice who is suing her former bankruptcy lawyer for $5 million. The Real Housewives of New Jersey star claims it is the malpractice of her attorney that is responsible for her sentence of 15 months in federal prison for fraud. Giudice’s husband, Joe, was also convicted of federal fraud. But claims of malpractice or a lawsuit against her lawyer will not stop Ms. Giudice or her husband from serving their sentences.

Pointing the finger at your attorney is not usually a defense to a criminal act; in fact, it is often evidence of your own culpability and guilt. Your bankruptcy petition and schedules are signed under threat of perjury. Testimony at a 341 Meeting of Creditors or in court is given under oath and recorded. Signing your name and giving testimony are your own free acts, so be sure that you are stating the full and complete truth.

Consider the case of James Roti. After a creditor obtained a $400,000 judgment against him, Mr. Roti hid his assets and lied to his creditors, to the federal bankruptcy court, and to the bankruptcy trustee. Roti was charged with bankruptcy fraud. At trial Roti testified that his lawyer put him up to it. He argued that he should be acquitted of bankruptcy fraud charges because he was following the advice of counsel, and that his attorney managed the scheme’s details.

The jury rejected Roti’s defense of “not me, him” because it is not a defense at all. In fact, Roti freely admitted committing bankruptcy fraud. Roti was convicted of bankruptcy fraud and of concealing assets from the bankruptcy trustee. He was sentenced to 21 months’ imprisonment.

If you are considering lying, hiding assets, or some other dishonest act during bankruptcy – don’t do it! Once you are discovered you will pay the price and no amount of blaming your attorney will help you. 

Many Americans Walking on the Edge of Financial Ruin

Recently Bankrate.com released a survey suggesting that many American adults are walking the edge of financial disaster. Bankrate surveyed more than 1,000 adults and discovered that 37% had credit card debt that equals or exceeds their emergency savings. 

Credit card debt is old news to most Americans. According to Federal Reserve statistics from December 2014, Americans owe more than $880 billion on credit cards. The average American household (with a credit card balance) owes more than $15,000 to credit cards. 

What this all means is simple: many Americans are living day-to-day hoping that nothing goes wrong. One thing is for certain: unexpected expenses should be expected. A 2014 survey by American Express found that half of all Americans had experienced an unforeseen expense in the past year: 44% reporting an unforeseen health care expense and 46% for car trouble. 

Does this sound like you? 

There are many ways to turn your finances around, including reducing or eliminating monthly expenses; paying off credit cards; contributing to a savings account; or taking extra work or a second job to pay down debts. If your finances are seriously upside down, it is a good idea to obtain a free consultation with a bankruptcy professional before taking extreme actions to correct your finances. Certain provisions of Bankruptcy Code can actually work against the well-intended debtor. For instance:

  • Reducing or eliminating monthly expenses prior to filing bankruptcy may result in an increase of disposable income, which can lead to a greater repayment for unsecured creditors who may be otherwise discharged outright.
  • A debt that is paid off immediately prior to filing bankruptcy may be recouped by a Chapter 7 bankruptcy trustee. This is a common trap, especially when the repayment is to a friend or family member.
  • Contributing to a savings account may lead to non-exempt property that may be taken by a Chapter 7 trustee and distributed to creditors.
  • By temporarily increasing your income to pay down debts, you are also increasing your average income for the six month period prior to filing bankruptcy. This can mean disqualification from filing Chapter 7 or increased monthly payments in a Chapter 13.

 Debt is serious business and major changes in your family finances should be made only after consulting with a seasoned professional. While it is important to “right your ship” and provide for a better financial future for your family, don’t make things worse by acting rashly. Call today for a free consultation with an experienced bankruptcy professional, consider your options, and make the best plan for your family.

Save Money Today

Many families who struggle to make ends meet talk about establishing a family budget and reducing expenses. Some suggest “sacrificing” and “tightening the belt” to save money. While admirable, sometimes it is not necessary to do without in order to save money. Below are three easy ways to immediately save money without changing your lifestyle.

Pay TV

The entertainment world is changing. Last year almost 200,000 Americans cancelled their pay TV subscriptions. More and more people are moving away from pay TV and using internet services such as Hulu, Amazon, and Netflix for cheaper entertainment. The younger a person is, the more likely that person is to watch shows on a wireless device or computer and not subscribe to pay TV. The consequence is that satellite providers, cable companies, and even phone companies are hurting for business.

You can save money today by starting a bidding war for your dollars. Contact Dish TV, DirecTV, your area cable company, and your local phone/internet television providers and tell them that you are willing to subscribe to company with the best deal. Be sure to get the offer in writing (by email or otherwise) and review any contract before signing up.

Cell Phone

The cellular carrier marketplace is crowded. The prize these companies covet is the two-year plan -- the customer that obligates for two years of service. Some companies will even buy out an existing obligation at a competitor, just to earn your business. This all adds up to a powerful bargaining position for you.

If you are a “free agent” without a contract, then you can shop around for the best deal. Be sure to investigate additional hidden discounts such as company or military discounts. If you are not a free agent, research competitor deals that include buying out your contract, then use that information to negotiate better terms with your cellular company’s customer retention department.

Gasoline

Gas prices are lower, that’s good. However, you can still save more money at the pumps by being a watchful consumer. A ten cent difference in price per gallon between filling stations can mean a $1.60 savings for a 16 gallon tank. Fill up once a week and that’s $83.20 a year. “Big deal,” you say? Well, it’s your money.

GasBuddy, a free cell phone app can save you money with each fill up. GasBuddy uses user feedback to track the current prices of local gas stations, making it easy to quickly find the best deal. GasBuddy is especially useful for premium gas, where prices may not be displayed on a road sign and can vary by $.20 or more between stations.

Number of Bankruptcy Cases Drop

The total number of bankruptcy cases filed in the United States fell 14 percent from a year ago, according to a recent press release from Epiq Systems, Inc. Bankruptcy filings in January 2015 totaled 59,037 compared to 68,271 cases filed in January 2104. The number of consumer filings declined 13 percent and commercial filings are down 16 percent. Total commercial Chapter 11 filings, however, are up 33 percent. January 2015’s commercial Chapter 11 filings increased to 518 from January 2014's 391 filings. 

American Bankruptcy Institute Executive Director Samuel J. Gerdano offered this as a reason for the decline, “High costs to file and sustained low interest rates continue to reduce the number of consumers and businesses seeking the fresh financial start of bankruptcy.” According to Gerdano. “The year-over-year filing totals have now declined for 50 consecutive months." 

States with the highest per capita filing rate (total filings per 1,000 population) in January 2015 were:

1. Tennessee (5.25)

2. Alabama (4.61)

3. Georgia (4.57)

4. Illinois (3.89)

5. Mississippi (3.33)

During 2014, the total number of bankruptcy cases filed was 910,090, a decline of almost 12 percent from calendar year 2013. The number of bankruptcy filings have steadily decreased since 2010, when the total number was 1,561,008. One analyst predicts further decreases in the number of bankruptcy filings for 2015, projecting around 800,000 total filings, another 12 percent decline.

Contingent, Unliquidated and Disputed Debts, and Why It Matters

During your bankruptcy you will account for your debts on official bankruptcy forms. The bankruptcy code requires you to list all debts and indicate whether the debt is contingent, unliquidated, or disputed. Below is a quick primer on these types of debts and why you should accurately list the debt.

Contingent debt

A contingent debt is a debt owed to the creditor that depends on some event that hasn’t yet occurred. This includes a debt that may never arise because the event may not occur. Contingent debts are only identified when the contingency that creates the debt is probable and the amount of the liability can be estimated.

Why would you list a debt in your bankruptcy that may or may not arise? Simple, a contingency debt means that certain obligations exist currently that may give rise to a debt in your future. In many cases you can discharge those obligations. For instance, suppose you have co-signed for a car loan for your brother-in-law. Even though you have no liability until your brother-in-law defaults (which may never occur), you may still discharge that potential liability during bankruptcy.

Unliquidated debt

An unliquidated debt means that the exact amount of the debt has not yet been determined. For example, suppose you sue someone for personal injuries. Your attorney agrees to take the case under a contingency fee agreement (1/3 of the recovery, for instance). The debt to your attorney is unliquidated because you don’t know how much, if anything, you’ll win and, consequently, what you will owe your attorney.

Like contingent debts, it is important to list unliquidated debts even though the exact amount is not yet determined. Once the amount is clear and undisputed, the debt is “liquidated.” Liquidated and unliquidated debts are often dischargeable during bankruptcy.

Disputed

A debt is disputed when you and the creditor do not agree about the existence or amount of the debt. For instance, suppose you believe you owe Capital One $1,000 for a credit card debt, and Capital One asserts that you owe $2,000. You would list Capital One as a creditor, list the full amount asserted by Capital One, and identify the debt as “Disputed.”

Listing the debt makes it eligible for inclusion in the bankruptcy discharge. It also alerts the bankruptcy trustee that the creditor may not be entitled to a full distribution of any estate assets. 

How Bankruptcy Affects Your Credit Score

Almost every potential bankruptcy client will ask, “How will filing bankruptcy affect my credit score?” Unfortunately, this important question is often answered flippantly, as in: “If you need to file bankruptcy, isn’t your credit already ruined?” or “What do you need credit for?”

Instead, of brushing aside this question, let’s tackle it head-on and examine what happens to a credit score after bankruptcy.

Bankruptcy’s effect on an individual’s credit report depends on a number of factors. Perhaps the best way to get to the truth of the matter is to view an example posted on myfico.com, the consumer division of Fair Isaac. The FICO score is the credit score that lenders use most often today. In this example, two consumers, Alex and Benecia are compared:

 

Alex has a FICO score of 680 and:

Benecia has a FICO score of 780 and:

Has six credit accounts, including several active credit cards, an active auto loan, a mortgage, and a student loan

Has ten credit accounts, including several active credit cards, an active auto loan, a mortgage and a student loan

An eight-year credit history

A fifteen-year credit history

Moderate utilization on his credit card accounts (his balances are 40-50% of his limits)

Low utilization on her credit card accounts (her balances are 15-25% of her limits)

Two reported delinquencies: a 90-day delinquency two years ago on a credit card account, and an isolated 30-day delinquency on his auto loan a year ago

Never has missed a payment on any credit obligation

Has no accounts in collections and no adverse public records on file

Has no adverse public records on file

 

 

Alex

Benecia

Current FICO score

680

780

Score after one of these is added to credit report:

 

 

Maxing out a credit card

650-670

735-755

A 30-day delinquency

600-620

670-690

Settling a credit card debt

615-635

655-675

Foreclosure

575-595

620-640

Bankruptcy

530-550

540-560

Note that after filing bankruptcy (any chapter) both Alex and Benecia have credit scores in the mid-500s. Consequently, most bankruptcy debtors can expect a credit score in the 500s immediately after filing bankruptcy.

Fortunately, that’s not the end of the story.

Most bankruptcy debtors are able to rebuild relatively quickly. Some analysts project an individual with a 680 credit score can rebuild to a 680 credit score in approximately five years after filing bankruptcy. The truth is that it depends on the individual and the situation, sometimes taking less than two years with active attention to re-establishing credit and paying bills on time.

 

1970's Teen Idol Files for Bankruptcy Protection

Is it hard to file bankruptcy? You bet.

Is it hard to file bankruptcy when you have sold of 30 million records?

Or starred on a hit television show?

Or been a teen heartthrob?

Or been featured in books, magazines, trading cards, and lunch boxes?

Oh, yeah.

David Cassidy, former teen idol and star of the ‘70s TV series “The Partridge Family,” recently filed for Chapter 11 bankruptcy protection. Cassidy, now 64, filed bankruptcy in Florida and reportedly owes hundreds of thousands of dollars to various creditors, including $292,598 to Well Fargo, $21,952 to American Express and $17,150 to Citi. Cassidy experienced numerous legal difficulties in recent years including substance abuse issues, three DUI arrests in less than four years, an on-going divorce, and a lawsuit against Sony Pictures Television, Inc which he was awarded a disappointing $157,964.84. The lawsuit sought millions to compensate Cassidy for use of his image on “Partridge Family" merchandise. This merchandise reportedly generated nearly $500 million for the defendants over the past four decades, but Cassidy claimed he was only paid $5,000.

On February 12, 2015, Cassidy announced his bankruptcy filing on his website, DavidCassidy.com. Cassidy said, “I am going through bankruptcy proceedings at the moment. I wanted to let you know personally. This is necessary for practical reasons to reorganize my life as I go through divorce and to restructure my finances.”

Chapter 11 bankruptcy is often filed by corporations, but is available to individuals seeking to reorganize with high debts or complex finances. Typically, debtors seeking to restructure and not liquidate their assets through Chapter 7 will file Chapter 13 bankruptcy. However, the Bankruptcy Code restricts Chapter 13 debtors to debt limits of $383,175 in total unsecured debts and $1,149,525 in secured debts. An individual who exceeds one of those debt limits is disqualified from filing Chapter 13, but can file under Chapter 11.

Practical Concerns Regarding Wage Garnishment and Bankruptcy

When an individual files a personal bankruptcy case, the bankruptcy automatic is triggered and most collection actions, including garnishments against the debtor, must immediately cease. Further creditor activity generally violates the automatic stay protection – even where the creditor is unaware of the bankruptcy filing!

While the automatic stay casts a long shadow of protection, it is not magical. As a practical matter, a garnishment will continue at least until notice of the bankruptcy filing is received. Therefore, it’s in the debtor’s best interest to send notice to all parties involved in the garnishment to ensure that money is not taken after the bankruptcy case is filed.

Creditor and Collecting Attorney

Faxing notice of the bankruptcy filing to the garnishing creditor and counsel is the first step in stopping a garnishment after a bankruptcy filing.  While the clerk of the bankruptcy court will send out notices, it may be a few days until the creditor and attorney receive them.

Once a creditor is informed of a bankruptcy filing, it is the creditor’s responsibility to ensure that no further collection action takes place while the automatic stay is in effect. Most courts consider “doing nothing” to stop a wage garnishment is effectively a violation of the stay injunction and is penalized by contempt of court. The automatic stay is “intended to stop the snowballing,” and “all who have a part in the garnishment must take such positive action as necessary to give effect to the automatic stay. No action is unacceptable; no action is action to thwart the effectiveness of the automatic stay.” See In re Elder, 12 B.R. 491 (Bkrtcy.M.D.Ga. 1981).

State Court

In some jurisdictions, the debtor can obtain an order from the bankruptcy court quashing a state court wage garnishment order. Most state court judges are aware of the automatic stay’s effect on a wage garnishment order and will rescind the order without bankruptcy court direction. Unfortunately, most employers are not experts on the bankruptcy automatic stay. Failure to revoke or rescind the state court order may lead to confusion at the employer payroll office and delays in stopping a wage garnishment.

Sherriff

Garnishment orders must be enforced. In many areas that means the sheriff’s office is responsible for collecting garnished wages and turning the money over to the court for distribution to a judgment creditor. Consequently, it is always a good idea to send the law enforcement collector notice of the bankruptcy filing.

Employer

Wage garnishment orders direct an employer to withhold money from the debtor’s paycheck for a certain time period. The employer will continue to withhold wages in accordance with the state court order until either the end of the garnishment period or directed otherwise. It is imperative to send notice of the bankruptcy case filing to the debtor’s payroll office and direct it to stop all wage garnishment. As noted above, notice of the bankruptcy filing alone may not be enough to stop the wage garnishment.

Stopping a wage garnishment after a bankruptcy filing is generally a matter of notifying the appropriate parties. While it is ultimately the creditor’s responsibility, leaving the notice procedure to the garnishing creditor is often a risk, and could lead to delays in stopping the garnishment.

Wells Fargo and Chase Accused of Mortgage Kickbacks

Recently the Consumer Financial Protection Bureau (CFPB) and the Maryland Attorney General took action against Wells Fargo and JPMorgan Chase for an illegal marketing-services-kickback scheme they participated in with Genuine Title, a now-defunct title company. According to the CFPB website, Genuine Title gave the banks’ loan officers cash, marketing materials, and consumer information in exchange for business referrals. The CFPB has posted consent orders, filed in federal court, that require $24 million in civil penalties from Wells Fargo, $600,000 in civil penalties from JPMorgan Chase, and $11.1 million in redress to consumers whose loans were involved in this scheme. Two bank employees who were directly part of the scheme will pay a $30,000 penalty.

“Today we took action against two of the nation’s largest banks, Wells Fargo and JPMorgan Chase, for illegal mortgage kickbacks,” said CFPB Director Richard Cordray. “These banks allowed their loan officers to focus on their own illegal financial gain rather than on treating consumers fairly. Our action today to address these practices should serve as a warning for all those in the mortgage market.”

“Homeowners were steered toward this title company, not because they were the best or most affordable, but because they were providing kickbacks to loan officers who referred consumers to them,” said Maryland Attorney General Brian Frosh. “This type of quid pro quo arrangement is illegal, and it’s unfair to other businesses that play by the rules.”

According to the CFPB, Genuine Title offered loan officers services, including purchasing, analyzing, and providing data on consumers and creating letters with the banks’ logos that the company had printed, folded, stuffed into envelopes, and mailed. In return, the banks’ loan officers referred homebuyers to the company for closing services. This scheme was especially profitable for the loan officers, who generally are paid by commission.

This marketing-services-kickback scheme violated the Real Estate Settlement Procedures Act (RESPA), which prohibits giving a “fee, kickback, or thing of value” in exchange for a referral of business related to a real-estate-settlement service.

The CFPB’s investigation identified more than 100 Wells Fargo loan officers in at least 18 branches, largely in Maryland and Virginia, who participated in this scheme. The CFPB also found that at least six loan officers at JPMorgan Chase participated in the marketing-services-kickback scheme with Genuine Title. 

Is Early in the Year a Good Time to File Bankruptcy?

The beginning of the year can be either a good time or a bad time to file bankruptcy. The distinction boils down to tax-related issues, and filing your personal bankruptcy during this time can either be a boon or a bust for your finances. The general rule is: if you owe taxes, file early. If you expect a refund, wait.

Why early in the year is a good time to file bankruptcy

Many Chapter 13 debtors wait until after the first of the year to ensure that the prior year's tax debt is included in the bankruptcy. While recent tax debts are not dischargeable in either a Chapter 7 or Chapter 13 bankruptcy, paying a tax debt through a Chapter 13 plan can stop accruing interest and spread equal payments over three to five years. These payments are made under the supervision of the bankruptcy court and without fear of garnishment or seizure by the IRS.

Why early in the year is a bad time to file bankruptcy

Filing bankruptcy at the beginning of the year can put an anticipated tax refund at risk. When an individual files bankruptcy, all of her assets become property of her bankruptcy estate. This includes any income tax refund that is not yet received. The debtor is able to use legal exemptions to protect this money, but a Chapter 7 trustee can demand turnover of the non-exempt portion of an expected refund. In a Chapter 13 case, the debtor may have to pay an increased plan payment to account for a non-exempt tax refund.

The solution to managing an at-risk tax refund is to avoid filing bankruptcy until after the tax refund is received and spent. Your bankruptcy attorney can discuss strategies for spending a tax refund without fear of reprisal from a bankruptcy trustee.

How Long After Christmas Should You Wait to File Bankruptcy?

Bankruptcy after the holiday season is very attractive for many debtors, and for good reasons. Bankruptcy is a good time to purge debt, especially from credit cards, and get personal finances under control. However, timing your bankruptcy after Christmas can mean the difference between a fresh start and a false start.

The Bankruptcy Code provides that credit card purchases for “luxury goods or services” totaling more than $650.00 (“in the aggregate”) within 90 days prior to filing a bankruptcy case are presumed nondischargeable debts and will survive the bankruptcy discharge. See 11 U.S.C. § 523(a)(2)(C)(i)(I). However, the Bankruptcy Code goes on to state that “luxury goods or services do not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.” See Section 523(a)(2)(C)(ii)(II). That means if a debtor purchases twenty dollars in food from the grocery store, that charge is not be counted toward the aggregate of “luxury goods or services.” By the plain language of the Bankruptcy Code, if a debtor charges over $650 on one credit card for food, gas, and other necessary items, there is no presumption of nondischargeability.

A presumption is just that, the creditor must first file a complaint against the debtor. To get the presumption, all the creditor must show is evidence of credit card charges totaling over $650 in the 90 days before the bankruptcy filing. That said, for many creditors the costs involved in contesting the debtor's discharge may exceed the benefits from having the debt excepted from discharge.

While there are many good defenses to a creditor’s presumption against discharge, the best advice is generally to wait to file bankruptcy until a full ninety days after your last charge. Additionally, pay at least the minimum monthly on your credit card, if you are able. The best time to prepare to file bankruptcy is now, but the best time to file after Christmas may be the last part of March. As always, speak with your bankruptcy attorney about the specifics of your case.

The Language of Bankruptcy

Every profession has its own special language. The use of highly technical terms is a shorthand way to efficiently communicate highly complex ideas between professionals. Unfortunately, bankruptcy language often excludes non-lawyers from the conversation. Many bankruptcy debtors become confused or overwhelmed by the technical bankruptcy terms used by attorneys, the trustee, and the bankruptcy court. Learning a few simple bankruptcy terms can make the process more understandable.

Automatic stay – an injunction issued by the bankruptcy court that stops all collection action against the debtor and is effective immediately and automatically when the bankruptcy case is filed

Bankruptcy estate – the debtor’s legal and equitable interest in property at the time the bankruptcy case is filed. Control over the bankruptcy estate can be vested in the debtor or the bankruptcy trustee

Chapter – chapters of the Bankruptcy Code. Some chapters are general and apply to all cases; other chapters apply only to specific bankruptcy cases

Debtor – the individual or company filing bankruptcy

Discharge – a court permanent injunction prohibiting future collection action of certain debts against the debtor personally

Equity – the value of a debtor's interest in property after subtracting liens

Exemptions – legal protections that shield property from creditor collection. Exemptions are found in state and/or federal laws

Means test – a calculation of the debtor’s income and expenses meant to determine the debtor’s ability to repay unsecured debts. “Failing” the means test means that there is a presumption that the debtor is able to pay unsecured creditors in a Chapter 13 case

No-asset case – a Chapter 7 case without available assets to pay unsecured creditors

Nondischarged debt – a debt that is not absolved during bankruptcy

Petition – papers filed by the debtor that commences the bankruptcy

Plan – the debtor’s proposed plan to repay creditors during a bankruptcy case (does not apply to Chapter 7 cases)

Preference – a debt that was paid prior to the bankruptcy while the debtor was insolvent

Priority debt - the order in which unsecured claims are paid according to the Bankruptcy Code

Proof of claim – a creditor’s claim and verification of a debt

Reaffirmation agreement – an agreement between the debtor and creditor that entitles the debtor to retain property in exchange for continued personal liability to pay a debt (common examples are a car or house loan)

Schedules – the debtor’s detailed description of the property, debts, income and expenses filed with the bankruptcy court

Secured creditor – a creditor holding a lien against property of the debtor’s as security for payment of a debt

341 meeting – a meeting that the debtor must attend with the trustee.  The debtor’s creditors are invited to the 341 meeting and are allowed to ask questions.

Trustee – an individual appointed to oversee the debtor’s bankruptcy case. This is not the bankruptcy judge.

Mastering a few simple terms will aid your understanding during your bankruptcy case. 

Stop Automatic Payments during Bankruptcy

Automatic payments are a convenient way to pay bills. An automatic payment is an automated process that pays bills directly from a banking or brokerage account through an electronic payment system. Typically, an individual will authorize a regular payment that doesn't change from month to month, such as a mortgage or car payment. An individual may stop or delay automated payments at any time.

A direct debit is an agreement that the recipient can take money out of your account to pay your bill. You might authorize a direct debit for an electricity, phone, or credit card bill. Of course, a direct debit could be authorized for most any bill.

When you file for federal bankruptcy protection, the bankruptcy court automatically issues a temporary injunction called the automatic stay. This court order prohibits all of your creditors from taking any action to collect a debt from you. The automatic stay is very broad and applies to most creditors; even the ones that you want to continue paying.

Because of the automatic stay, creditors will routinely stop any direct debit of your bank account and refuse automatic payments. The purpose of this refusal is to remain in compliance with the court order and avoid further entanglement with the debtor’s bankruptcy case. This can be frustrating to the debtor who wants to pay a monthly mortgage payment or car loan bill.

The answer to this problem is simple: mail your payment to the creditor! Remember, the automatic stay prohibits a creditor from collecting on a debt, not accepting a voluntary payment. It is good practice to maintain good records of all payments made to secured creditors during your bankruptcy. Your check may not be cashed for weeks while your lender forwards the payment to another department now handling your loan (e.g. bankruptcy department). By sending your payment via registered mail, you will have a receipt of timely payment, regardless when the check is cashed.

The bankruptcy process provides quick and powerful relief when you have the help of an experienced guide. An experienced bankruptcy attorney knows how the laws and common practices will affect your case, and can lead you to a fresh start without complications.

When a Prosecutor Acts as a Private Debt Collector

In every jurisdiction it is a crime to write a bad check with knowledge of insufficient funds. In other words, if you write a check at Wal-Mart, knowing that there is not enough money in your bank account to cover the check, and Wal-Mart believes that your check is a present payment, then you may have committed a crime. Some prosecutors will give individuals the chance to pay these check, plus fees, and no criminal charges will be filed. After all, most merchants don’t want their customers thrown in jail – they just want the money.

Commonly known as a check diversion program, a letter threatening criminal prosecution is a powerful collection tool. However, this practice is routinely abused. Now, the American Bar Association's Standing Committee on Ethics and Professional Responsibility has issued an opinion on the matter. ABA Formal Ethics Opinion 469 advises criminal prosecutors that it may be unethical to use the prosecutor’s office to scare consumers into paying bounced checks.

The ABA opinion states, “Typically, no lawyer in the prosecutor's office reviews the case file to determine whether a crime has been committed and prosecution is warranted or reviews the letter to ensure it complies with the Rules of Professional Conduct prior to the mailing.” The prosecutor-debt collector arrangements is also “abusive” because it conveys “the impression that the machinery of the criminal justice system has been mobilized” against the consumer, who is led to believe that he or she may face jail time unless the collector gets paid.

In many jurisdictions check diversion letters are routinely sent out by prosecutors without review and, in some cases, without even a reasonable basis that a crime was committed. Hopefully, this ABA opinion will deter this practice and limit the number of these improper and unethical letters.

Best Credit Card to Get After Bankruptcy

Credit cards after bankruptcy are scary. A new credit card may mean playing with the same fire that just burned you. However, credit cards are a great way to build a credit profile and recover quickly after bankruptcy. But which one? And when should you apply? 

Credit Card Basics

Comparing credit cards essentially comes down to the terms of the cardholder agreement (the contract between you and the bank): 

·         The credit line or credit limit is the total amount you may charge on the credit card account.

·         A secured credit card will grant the cardholder a credit line equal to an amount placed on deposit with the bank.  In other words, you deposit $500 into an interest bearing account and the bank gives you a credit card with a $500 limit that is secured by the deposit. Naturally, unsecured credit cards are not secured by anything.

·         The annual percentage rate (APR) is the interest charged on balances. Sometimes the APR changes to a higher rate if you pay late, charge beyond your limit, or take a cash advance. The APR may be fixed or variable. Fixed rate APRs have consistent interest rates. Variable APRs are tied to an index, like the prime lending rate, which changes over time.

·         The interest calculation method should be examined. Interest is usually calculated by averaging the daily account balance and multiplying that figure by the “periodic rate” (APR divided by the number of days in a year).

·         Some credit cards grant the customer a grace period which omits an interest charge if the balance is paid before the grace period expires.

·         Some banks have creative fees to charge cardholders, such as fees for cash advances, balance transfers, paying late, exceeding your credit limit, and annual fees. Other bank have very creative fees, such as application fees, set up charges, dormant card fees, online account management, and even terminating the account.

The Best Post-Bankruptcy Credit Card

In a perfect world this article would point the reader to a credit card with 0 percent APR, gives cash back for purchases, airline points for travel, and has no fees. Since we all live in the real world, here is some practical advice:

1.      There is no perfect time to apply for a credit card after bankruptcy. Many bankruptcy debtors report receiving credit card offers, some even before the case is closed.

2.      Most credit experts recommend charging a small amount on your cards each month, paying regularly, and keeping the card at zero or less than a five dollar balance. Used this way, the effect of a high APR is negated.

3.      Examine the terms of a cardholder agreement closely for fees. If you have questions, or want to compare agreements, the Consumer Financial Protection Bureau maintains a credit card agreement database with agreements from more than 300 card issuers.

When Can I Avoid Pre-Bankruptcy Credit Counseling?

The bankruptcy general rule is that individuals must receive credit counseling from an approved agency within 180 days prior to filing bankruptcy. However, there are exceptions to this general rule. In a few limited circumstances credit counseling is not required. These circumstances are identified by the federal Bankruptcy Code as:

(1)        incapacity where the person is so impaired by reason of mental illness or deficiency that the individual is incapable of making rational decisions;

           (2)      disability where the person is so physically impaired that the individual is unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing session; or

               (3)        active military duty in a military combat.

The Bankruptcy Code also allows individuals to receive credit counseling after a bankruptcy case is filed under the following conditions:

(1)        exigent circumstances exist that merit a waiver;

(2)        the individual requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services during the 5-day period before filing bankruptcy; and

(3)        the request and explanation is satisfactory to the court.

Be advised that a pending foreclosure or lawsuit, procrastination, inability to pay for the counseling, incarceration, oversight, and “I don’t wanna do it” do not excuse the debtor’s failure to complete the pre-bankruptcy credit counseling. Bankruptcy courts are very unforgiving when credit counseling is not completed pre-bankruptcy and reluctant to approve waivers except in the most extreme circumstances.

Only agencies approved by the Department of Justice’s U.S. Trustee Program can issue pre-bankruptcy credit counseling certificates that are accepted by the bankruptcy court.  Each agency is required to provide the service free of charge if you cannot afford to pay the credit counseling fee. Otherwise, the agency will charge a fee of around $50.  The session will last approximately 60 to 90 minutes and includes an evaluation of your personal financial situation, a discussion of alternatives to bankruptcy, and may include a personal budget plan. This counseling session may take place in person, on the phone, or online.

Once your credit counseling session is completed, a certificate is issued which must be filed with your bankruptcy case. Failure to complete the credit counseling or file the certificate will result in the dismissal of your bankruptcy case. Your bankruptcy attorney will recommend trusted credit counseling agencies. Discuss the credit counseling process with your attorney if you have questions. Do not overlook this mandatory credit counseling!

VA Benefits and Bankruptcy

With malice toward none, with charity for all, with firmness in the right as

God gives us to see the right, let us strive on to finish the work we are in,

to bind up the nation’s wounds, to care for him who shall have borne the

battle and for his widow, and his orphan, to do all which may achieve and

cherish a just and lasting peace among ourselves and with all nations.

- Abraham Lincoln, Second Inaugural Address, March 4, 1865

 

Abraham Lincoln is considered the father of the Veteran’s Administration, which arose out of the national desire to care for civil war veterans. From 2000 to 2013, the number of veterans who were receiving disability payments rose by almost 55 percent, from 2.3 million to 3.5 million. Some of these veterans are permanently and totally disabled, and unable to work. Some struggle with debts that they cannot pay with their monthly VA check.

It is important to have an experienced attorney working on your side if you file bankruptcy when in receipt of VA disability compensation benefits. Many debtors (and some attorneys!) believe that VA disability benefits are entirely excluded from the bankruptcy process. This is not true. Whether VA disability benefits are protected during bankruptcy can depend on the circumstances of the case.

Means Testing

VA disability compensation is included in the debtor’s Chapter 7 Means Test calculation. However, many veterans in receipt of VA disability can avoid the Means Test altogether if the individual is (1) a veteran who is entitled to compensation under laws administered by the Secretary for a disability rated at 30 percent or more, or (2) a veteran whose discharge or release from active duty was for a disability incurred or aggravated in line of duty. Additionally, the debts in the veteran’s bankruptcy case must have been “primarily” incurred while on active duty, or while performing a homeland defense activity. “Primarily” is generally interpreted by the bankruptcy courts as greater than 50%.

The Bankruptcy Estate

Even though VA disability compensation is used to determine the veteran’s eligibility to file Chapter 7 bankruptcy, these benefits are not part of the debtor’s bankruptcy estate. In other words, the VA disability compensation is protected from creditor garnishment and is also protected from the trustee during bankruptcy (although there are exceptions including federal offsets and child support debts). Generally, the debtor cannot be forced to use this money to pay creditors during bankruptcy. 

If you are receiving VA benefits and need bankruptcy relief, consult with an experienced attorney who can protect your money and discharge your debts. Your attorney can review your situation and advise you on the right way to avoid trouble during your bankruptcy case.

Supreme Court to Decide Bankruptcy Issue

Imagine that you propose a Chapter 13 repayment plan to repay your creditors, but the bankruptcy court refuses to confirm it.  What can you do?

If you live in the Third, Fourth or Fifth circuits, you may immediately appeal the bankruptcy court’s decision. However, if you live in the First, Second, Sixth, Eighth, Ninth or Tenth circuits, you are stuck with either proposing another plan or having the case dismissed. In these circuits, only after the case is dismissed is the issue a final, appealable order.

Partly as a result of this split of opinion between the circuit appellate courts, the U.S. Supreme Court recently agreed to hear the issue as part of the case of Louis B. Bullard v. Hyde Park Savings Bank et al, a case on appeal from the First Circuit. In that case the debtor proposed a plan to split a home mortgage debt into secured and unsecured portions. Pursuant to the plan he would then pay the secured portion at one rate and the unsecured portion at the same rate as all other unsecured debts in the case. The bankruptcy court rejected the plan. When the debtor appealed, the appellate court found that the bankruptcy court’s rejection of the repayment plan was not a final order because the debtor could simply propose another plan.

This issue has potential far-reaching consequences in Chapter 13 and Chapter 11 business bankruptcy cases. The Supreme Court will likely hear oral arguments in the spring.

Are Student Loans Forever?

We all know some things are forever, for instance:

“A diamond is forever.”

“A marriage is forever.”

“Ignorance can be fixed, but stupid is forever.” 

Many debtors believe that student loans are also forever, but that is not the case. While most bankruptcy debtors do not qualify for reducing or eliminating federal student loans through bankruptcy, there are several government programs that assist borrowers with eliminating student loans. Debtors emerging from bankruptcy with student loans should review their options for repaying these loans, including government-sponsored programs. 

  • The Department of Education's Public Service Loan Forgiveness Program allows workers employed at most government and nonprofit agencies to eliminate their student loans after 120 monthly loan payments. These payments may be made at a reduced rate based on the employee’s income. To qualify, the employee must work at least 30 hours each week for a public service organizations. After ten years the worker can apply for loan forgiveness which will erase any remaining balance on eligible student loans, including Direct Loans and Direct Consolidation Loans.
  • Teachers who first took out Direct Loans or Stafford Loans in October 1998 or later can also take advantage of the Teacher Loan Forgiveness Program. This program allows teachers to eliminate up to $17,500 after five years of service in certain schools or educational service agencies that serve low-income families. To receive the full amount, you have to be a highly qualified secondary-school math or science teacher or special education teacher serving children with disabilities. Teachers in other areas can get up to $5,000.
  • Perkins Loan borrowers are eligible for several forgiveness and cancellation opportunities. Many educators in elementary and secondary schools, firefighters, law-enforcement officials, nurses and active-duty military personnel in hostile-fire areas qualify to have as much as 100% of their Perkins Loan balances canceled under certain conditions. 

Student loans are not forever, but managing your non-dischargeable student loan debt requires careful planning and diligence. If you are emerging from bankruptcy with student loans, review your repayment options with your attorney as part of your plan for future financial success.

Christmas Gifts and Bankruptcy

For many Americans, overspending is a holiday tradition. According to the National Retail Federation, the average American shopper will spend $804.42 to celebrate this holiday season. For some, this spending season will be followed by a visit to a bankruptcy attorney’s office; so many think, why not throw caution to the wind, spend a little more, and enjoy the season?

There are a few precautions to take when preparing for a bankruptcy filing. The first and most important is to not incur a debt that you have no intention to repay. There is a great temptation to max-out personal credit cards and then discharge the debt during bankruptcy – especially when the credit is used to purchase gifts for other people. However, credit card companies review your pre-bankruptcy purchases to discover fraud. You could face an objection to your bankruptcy discharge or even a criminal complaint! Before using available credit, seek the advice of an experienced bankruptcy attorney.

Another way you can create a bankruptcy issue is by making large gifts to friends and family. For instance, you may sign over a car title as a gift to your son as an act of holiday generosity. Unfortunately, the bankruptcy laws penalize this type of pre-bankruptcy transfer, and your son may lose the car to the Chapter 7 bankruptcy trustee. While the circumstances are different in every case, often you can give your son the car after the case is filed without penalty. Again, the safest route is to discuss any gifts with your bankruptcy attorney before making the transfer.

Finally, some individuals will work overtime or take on a part-time job to afford holiday gifts. This extra income is sometimes problematic when calculating a person’s disposable income for bankruptcy purposes. The Bankruptcy Code looks to the past six months of income and projects the debtor’s ability to repay debts in the future. Inflating your six month average income through overtime or a part-time job can push you out of Chapter 7 and into Chapter 13, or may increase your monthly Chapter 13 plan payment. Before taking on extra income, speak with your attorney.

The holidays are not an excuse to act financially irresponsible. If you are hurting and need to file bankruptcy, get the guidance you need from an experienced bankruptcy attorney and ensure that you don’t make matters worse.

Do Bankruptcy Laws Vary from State to State?

Everyone knows that attorneys are masters at avoiding direct answers to simple questions. What is not commonly known is that what may seem like a simple question can actually be many compound questions in disguise. Take, for example, the question, “Do bankruptcy laws vary from state to state?” The simple answer to this question is “no and yes.” Here’s why:

 The “no” part:

The Bankruptcy Code is a uniform law enacted by Congress that applies to all bankruptcies throughout the United States. See Article 1, Section 8, Clause 4 of the U.S. Constitution. Federal bankruptcy courts have exclusive jurisdiction over bankruptcy cases, so state courts have no authority to decide bankruptcy cases. As a result, bankruptcy laws to not vary from state to state.

 The “yes” part:

The federal law allows states to decide what real and personal property is exempt (and therefore legally protected) during a bankruptcy case. In some states you may choose either from a list of federal legal exemptions or state exemptions, and in other states you may only use state exemptions. Consequently, a Chapter 7 bankruptcy debtor in Florida may be able to keep his home and protect its equity, while a Missouri debtor in the same situation may lose the house to the Chapter 7 trustee.

Additionally, how the bankruptcy laws are interpreted and applied can vary from jurisdiction to jurisdiction. For instance, currently Chapter 7 bankruptcy debtors in the Eleventh Circuit (Alabama, Florida, and Georgia) are allowed to strip off and discharge an entirely unsecured junior mortgage (i.e. the first mortgage entirely secures the value of the property meaning the junior mortgage is not secured by any value). No other jurisdiction allows this in Chapter 7 cases. Sometimes the United States Supreme Court is asked to resolve differences between the federal circuits, and, in fact, this issue is currently on appeal to the high court.

As you can see, “simple” questions on the law are often the toughest to answer. The best way to obtain legal advice for your financial situation is to sit down with an experienced bankruptcy attorney. Your attorney can explain how state and federal laws apply and how to use those laws to get the best result in your case.

 

TV Star Teresa Giudice Sues Bankruptcy Lawyer

“Real Housewives of New Jersey” star Teresa Giudice has sued her former bankruptcy attorney, claiming he botched her family’s bankruptcy filing in 2010. Her high–profile bankruptcy resulted in a 15 month prison sentence for Giudice and a 41 month sentence for her husband, Joe, after the couple was convicted of hiding assets during their bankruptcy proceeding.

In a three count lawsuit filed in Manhattan Supreme Court, Guidice makes claims against attorney James Kridel for Negligence-Legal Malpractice, Breach of Contract, and Breach of Fiduciary Duty. Kridel is alleged to have never met with Teresa Giudice before filing the bankruptcy case, and failed to conduct a reasonable investigation into her financial affairs. She claims that Kridel acted negligently in

“(a) representing the Plaintiff throughout the Bankruptcy Case when it was apparent that he lacked the ability to competently represent the Plaintiff;

(b) negligently preparing materially inaccurate amendments to the schedules and statement of financial affairs;

(c) negligently advising Plaintiff throughout the Bankruptcy Case;

(d) negligent representation in connection with the Section 341 Meeting; and

(e) negligent representation in connection with the 2004 Examination.”

Giudice asks for $5 million dollars in damages.

Whether or not Teresa Giudice has any valid claims against her attorney, her allegations are serious. A personal meeting between the client and the attorney is mandatory. One court stated, “This court concludes and finds that an attorney, as a debt relief agency, must provide face to face legal advice to a client, as an assisted person, prior to the filing of the petition and at every critical stage of the bankruptcy proceedings.” In re Santiago, 2011 WL 4056700 (D.P.R. 2011).

Additionally, Bankruptcy Rule 1008, requires that “[a]ll petitions, lists, schedules, statements, and amendments thereto shall be verified . . . .” This means that debtors must sign the petition, Schedules, SOFA and any amendments to those documents as a means of not only authorizing the filing of those documents, but of verifying, under penalty of perjury, that they have reviewed the information contained therein and that it is true and correct to the best of their knowledge, information and belief. See Briggs v. LaBarge (In re Phillips), 317 B.R. 518 (B.A.P. 8th Cir. 2004). Attorneys, correspondingly, have “an affirmative duty to conduct a reasonable inquiry into the facts set forth in a debtor’s schedules [and] statement of financial affairs . . . before filing them.” See Lafayette v. Collins (In re Winthrow), 405 B.R. 505 (B.A.P. 1st Cir. 2009). As a part of this reasonable inquiry, the attorney should sit down in person with his client and carefully review all Schedules, the SOFA, and any other documents to be filed with the court to ensure that all of the representations set forth therein are true and accurate. See In re Nguyen, 447 B.R. 268 (B.A.P. 9th Cir. 2011).

The best practical advice is to insist that you meet with your bankruptcy attorney in person prior to filing a bankruptcy petition. As in the case of Teresa Giudice, the debtor is ultimately responsible for the contents of the bankruptcy petition and schedules and verifies the accuracy of the information under penalty of perjury. Protect yourself by ensuring that your attorney is also following the law and is fully engaged in protecting your legal interests. 

"At-Risk" Property during Bankruptcy

Imagine that you sit down with your bankruptcy attorney for an initial consultation. You have worked hard all of your life and have acquired some personal property and real estate. You are scared and have important questions to ask. You start with the most pressing: “What will the trustee take if I file bankruptcy?” 

The lawyer on the other side of the table leans back and smugly relies, “It depends.”

That weasel-answer is, of course, technically correct, but it doesn’t even begin to answer your question. Let’s take a few minutes and begin to actually start answering your question.

Chapter 13 Trustee

A debtor does not generally lose property to a bankruptcy Chapter 13 trustee. A Chapter 13 bankruptcy is a repayment rather than liquidation bankruptcy. Consequently, the trustee may not seize or compel the sale of the debtor’s property, although in some cases a debtor may choose to voluntarily sell or surrender an asset for liquidation.

Chapter 7 Trustee

Unlike a Chapter 13 bankruptcy case, a Chapter 7 is a liquidation proceeding. The bankruptcy trustee is appointed to sell assets and pay unsecured creditors with the debtor’s property. Every debtor is able to protect certain property using legal exemptions – in many cases the debtor loses nothing. Legal exemptions are simply laws that protect a debtor’s equity in property, such as household furniture, clothing, and limited equity in a house.

A Chapter 7 trustee may compel the sale or turnover of property to reach “non-exempt” equity. The determination of non-exempt equity can be complex, but it always starts with a valuation of the property. Next, secured debts are subtracted. Finally, legal exemptions are applied to protect the unsecured equity. Anything remaining is the non-exempt equity that the Chapter 7 trustee can reach.

To illustrate, suppose you have a car worth $10,000, you owe $2,000 to a secured creditor (e.g. Ford Credit), and you have $3,000 in available legal exemptions. The calculation to determine any non-exempt equity is the fair market value of the car minus the amount you owe minus the legal exemption, or

$10,000 - $2,000 - $3,000 = $5,000 in non-exempt equity

The Chapter 7 bankruptcy trustee can demand turn-over of the car or payment of $5,000. The trustee may take and sell the car, pay the lender, pay you the $3,000 exemption amount, and pay the costs of the sale. The trustee keeps a percentage as his fee and divides the remaining amount among your unsecured creditors.

While it is unusual to disagree over the amount of exemptions, the debtor and trustee often have disagreements regarding the fair market value of property. In some cases the bankruptcy judge is asked to decide the value of an asset.

Non-exempt assets can be found in many sources. However, some assets are less attractive to the trustee because of the difficulties of selling the asset (e.g. a horse). Additionally, the non-exempt equity in an asset may be too little to bother. Here are a few of the easiest non-exempt targets for the trustee:

  • Cash money or bank deposit
  • Commissions earned but not paid
  • Lawsuit settlement or judgment
  • Income tax refund
  • Property transferred fraudulently, especially to a family member
  • High dollar unsecured property, like a house or vehicle

It is important to determine an accurate value of all property and to calculate all legal exemptions before filing bankruptcy. Then you and your attorney can discuss strategies for protecting your property.

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.

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.

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.

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.]

Should You Change Banks When Filing Bankruptcy?

Every night, while the rest of the country sleeps, Wells Fargo Bank cross-checks all newly filed Chapter 7 bankruptcy petitions against its list of account holders. If a Wells Fargo account holder has filed bankruptcy, the bank may place a “temporary administrative pledge” (a “hold”) on the debtor’s account(s). This hold is a certainty if the debtor has a bank account and owes Wells Fargo money. The bank then sends a letter to the Chapter 7 trustee requesting instructions as to how Wells Fargo should dispose of the account funds.

When a debtor files Chapter 7 bankruptcy, all of his assets become property of a bankruptcy estate and are under the control of the bankruptcy trustee. The debtor may claim assets as exempt, such as bank account funds, but the claim is only an interest in the funds (at least according to the Supreme Court decision, Schwab v. Reilly). A party in interest has 30 days after the meeting of creditors to file objections to the debtor’s exemption claim. Only then is the property actually exempt.

So what does all this mean?

It means that Wells Fargo can place a hold on your Wells Fargo bank account and refuse to release your money until 30 days after your 341 meeting has concluded. That could be more than two months after you file! That is the consequence of a recently decided case from the Ninth Circuit Court of Appeals, Mwangi v. Wells Fargo Bank, No. 12-16087 (9th Cir. August 26, 2014).

The Ninth Circuit in Mwangi stated that debtors lacked standing to assert that Wells Fargo violated the automatic stay when it froze their account because: (1) the debtors had no right to possess or control the account funds during the 30 day period for objections to claimed exemptions (the property was under the control of the trustee); and (2) after the objections period ran, property claimed as exempt passed out of the bankruptcy estate. See Section 522(l); see also Smith v. Kennedy (In re Smith), 235 F.3d 472, 478 (9th Cir.2000)(“[i]t is widely accepted that property deemed exempt from a debtor's bankruptcy estate revests in the debtor”).

Based on this ruling, Chapter 7 debtors should examine their banking situation prior to filing bankruptcy, especially when Wells Fargo is involved. Opening up another account at a different bank after filing bankruptcy and changing all direct deposit accounts may help. An experienced bankruptcy attorney can review your case and recommend a strategy to avoid a bank account freeze. 

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.

Social Security Garnished to Pay Student Loans

Student loan default is an epidemic problem among senior citizens. The default rate currently stands at over 12%, more than three percentage points higher than borrowers under 30 years old. According to the U.S. Treasury, more than 156,000 seniors had money taken from their monthly Social Security checks to pay delinquent student loans last year. In contrast, the number of Social Security checks garnished for student loan payments during 2000 was. . . six.

The Trouble with Co-Signing

Many older Americans find themselves deep in student loan debt due to a co-signer obligation. Many are unaware that co-signing a student loan obligation makes the co-signer obligated for 100% of the loan. If the student/borrower is unable or refuses to pay, the lender may seek to collect from the co-signer.

Government-Guaranteed Student Loans

If a defaulted loan is government-backed, the government may collect from government funds owed to the debtor. That could be Social Security, disability checks, income tax refunds, government retirement pensions, or other government money the debtor is entitled to receive. The government may garnish 15% of the entitlement through the Federal Payment Levy Program.

Bankruptcy Can Help

While it is well-known that student loans are difficult to discharge, filing bankruptcy can provide time to repay student loans, or simply provide a breathing spell from collection. During a Chapter 13 case, the bankruptcy automatic stay protection stops garnishment and other collection actions against the debtor and all co-signers -- regardless whether the student loan is paid during the bankruptcy case.

If you are in danger of garnishment from a defaulted student loan, speak with an experienced bankruptcy attorney. Your attorney can review your situation and discuss your options for repayment, forgiveness, or discharge using the federal law.

 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.

Are Your Student Debts Student Loans?

 Baseball pitcher Tom Glavine was recently enshrined into Major League Baseball’s Hall of Fame in Cooperstown, New York. Glavine’s Hall of Fame plaque describes him as a "Durable, dominant and deceptive starting pitcher whose control, change of speeds and placement of pitches translated into 305 wins." Glavine was renown for pitching to the corners of the plate, away from the batter’s strength.

Glavine’s approach is copied by many bankruptcy attorneys when attempting to discharge a student loan. The federal courts have interpreted the “undue hardship” standard for discharging a student loan as an extremely high bar. In most cases, seeking to discharge a student loan on the basis of undue hardship is simply setting the creditor up for a home run.

Instead, many bankruptcy attorneys nibble at the corners of the Bankruptcy Code.

One discharge tactic is to exploit the distinction between student loans described in Bankruptcy Code Section 523(a)(8)(A)(i) and student debts defined in Section 523(a)(8)(A)(ii). A nondischargeable student debt is “an obligation to repay funds received as an educational benefit, scholarship or stipend[.]” The key language here is “repay funds.” Some courts have found that “an obligation to repay funds” can only arise after funds are actually distributed. If no money changes hands, then the debt does not qualify under Section 523(a)(8)’s exception to discharge. See In re Oliver, 499 B.R. 617 (Bankr. S.D. Ind. 2013); In re Christoff, 510 BR 876 (N.C. Cal. 2014).

This approach is useful when a college or university keeps a student “tab” for tuition, fees, and/or education-related expenses. Since no funds are distributed, no obligation to repay is created. Consequently, these debts are not excepted from the bankruptcy discharge.

Nibbling at the corners can mean real victories on the ball field or in the bankruptcy court. If you are obligated for student debts or student loans, speak with an experienced bankruptcy attorney and discuss your options. 

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

What Happens if I Default on My Mortgage after a Bankruptcy Discharge?

 Trouble making your house payments after a bankruptcy discharge can cause a slew of financial complications. Fortunately, lender and government-backed modification programs like the Home Affordable Modification Program (HAMP) provide opportunities to keep your home. If these programs fail, the Bankruptcy Code offers a few solutions. The right approach depends on whether you want to walk away from the debt or pay and keep your home.

Walk Away

If you decide to “walk away” after bankruptcy, the pressing question is whether you are personally on the hook for any of the debt. In other words, did your prior bankruptcy case discharge your personal obligation to pay the mortgage? For many, the answer is “yes,” and you can “walk away” from the home loan without repercussion. Additionally, under some state laws, a foreclosure does not give rise to a deficiency balance on a home loan, regardless whether the personal liability was discharged.

After a Chapter 7 Discharge. A Chapter 7 discharge order from the bankruptcy court discharged you from all debts that arose before the commencement of your case. If you had a pre-bankruptcy mortgage, that mortgage was included in your discharge order, unless it was excepted. The most common way a mortgage debt is excepted from a Chapter 7 bankruptcy discharge is through a reaffirmation agreement. If a reaffirmation agreement between you and the creditor was not filed with the bankruptcy court before your discharge order was entered, your personal obligation was discharged. Home loan reaffirmations are becoming increasingly rare because many attorneys advise against it and some bankruptcy courts will not approve a home loan reaffirmation agreement unless there are substantial changes to the loan that benefit the debtor.

After a Chapter 13 Discharge.

A Chapter 13 bankruptcy discharge also discharges all debts that arose before the commencement of the case, including a home mortgage debt, unless it was excepted from the discharge order. The most common way a home mortgage is excepted is when the mortgage is a long-term debt that is modified or cured during the Chapter 13 case. While some courts contend that all mortgage debts are long-term debts that survive the bankruptcy intact (meaning you are still personally obligated), other courts hold that a mortgage that is not delinquent on the day you filed bankruptcy and is not cured through the Chapter 13 plan is included in your discharge (meaning you are no longer personally obligated).

A Second Bankruptcy

If the personal liability for the mortgage debt was not discharged during your previous bankruptcy case, you may be stuck with a large deficiency balance from the disposition of your home. A second bankruptcy case may be an option. While there is generally no restrictions on a second bankruptcy case filing (there are in few, limited circumstances), the Bankruptcy Code places time limits on the availability of a subsequent discharge:

Original Bankruptcy

New Chapter 7

New Chapter 13*

Chapter 7

8 years

4 years

Chapter 13

6 years

2 years

      *There are special rules for prior Chapter 13 cases

The above time periods are measured from the date the previous case was filed, not from the discharge date. For instance, if you filed Chapter 7 bankruptcy (and received a discharge) on June 1, 2012, then:

1.      on June 1, 2020 you are eligible to file a Chapter 7 bankruptcy case and receive a discharge (the Eight Year Rule); and

2.      on June 1, 2016 you are eligible to file a Chapter 13 bankruptcy and receive a discharge (the Four Year Rule).

Tax Implications

Be warned, a foreclosure sale after discharge may create a tax liability. The most common of these arises from the creditor’s cancelation of the debt, commonly called a “write-off.” If a creditor cancels or forgives a debt over $600, it is required to notify both you and the IRS. The IRS considers this money income and expects you to pay taxes on it. A recent tax debt is not a dischargeable debt.

Keep the Home

As mentioned previously, there is nothing that prohibits a second bankruptcy filing, even when a bankruptcy discharge is not available. By filing a new Chapter 13 bankruptcy, you may use the benefits of Chapter 13 to strip off an unsecured junior mortgage or cure a default over three to five years. Chapter 13 may buy you time to pay an arrearage, modify your loan, or sell your home.

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.

Some Student Loans ARE Dischargeable

 There are many myths surrounding the topic of discharging student loans in bankruptcy. Some say you can’t do it. Others say you can discharge student loans only if you can prove hardship. Still others say you can discharge private student loans, but not federal student loans. Wrong, wrong, and wrong.

All debts are discharged in bankruptcy unless there is an exception. One exception is for student loans, but only certain types of student loans. To qualify for the exception to discharge, the student loan must first meet the requirements of Section 523(a)(8) of the Bankruptcy Code. Non-dischargeable student loans include loans that:

(1)   have been made under a government or nonprofit student loan program, or

(2)   are qualified educational loans for attending an eligible education institution as defined by the Internal Revenue Code.

The loan must also be incurred to pay costs of attendance as defined in Section 472 of the Higher Education Act.

There are two types of student loans: federal and private. Federal student loans nearly always fall under the exception in Section 523(a)(8), but private student loans sometimes do not qualify. For example, some for-profit technical or trade schools do not qualify as an “eligible education institution” because the school is not accredited under Title IV of the Higher Education Act. There may also be defects in the loan, like it was not incurred to pay costs of attendance. If a private student loan does not meet one of the criteria for a non-dischargeable student loan, the debt can be discharged in a Chapter 7 or Chapter 13 bankruptcy case and the exception listed in Section 523(a)(8) does not apply. Section 221(d) of the Internal Revenue Code contains a lengthy list of requirements which must be met before a loan can qualify as a student loan.  If the loan fails to meet these criteria, the debtor may be able to discharge them in bankruptcy.

Student loans may be sold or transferred to several different companies during the repayment term. The debtor may not remember the original lender for a loan taken years earlier. How does a debtor discover whether a student loan is private or federal? Simply go to the National Student Loan Data System (NSLDS) at www.nslds.ed.gov and enter personal information. The debtor will need to recall a PIN number, but this information may be retrieved if not remembered. The NSLDS will display a list of all federal student loans for the debtor. If a loan is not listed on this database, it is a private student loan.

Student loans can be a heavy burden. Fortunately, there are many options for repayment, deferment, reduction, and even discharge for federal student loans. Discuss your student loans with your attorney and review your legal options. In many cases bankruptcy can eliminate other debts that can allow you to afford repayment, or you can temporarily pay a reduced amount during a Chapter 13 bankruptcy. Your bankruptcy attorney is able to help you decide on a reasonable and affordable strategy for dealing with student loan debt.

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.

How Having a Car Loan Can Help in Bankruptcy

 The U.S. Supreme Court in Ransom v. FIA Card Services instructs that above-median debtors can take a vehicle ownership deduction of around $500 on the Means Test when calculating Projected Disposable Income, but only if there is a lien on the vehicle at the time the bankruptcy case is filed.

 

Ransom gives debtors a great incentive to ensure there is at least one vehicle with a lien on it for a single person, and that two vehicles have liens if filing jointly. If there are no financed vehicles, then the debtor cannot claim the approximately $500 per month deduction, which (over a five year plan) has the potential to amount to an extra $30,000 dividend paid out to unsecured creditors. That number is doubled for married couples with no vehicle liens. Instead of paying off one or more car notes during a bankruptcy, that money is used to pay unsecured creditors.

Car Title Loan

Putting aside the question of whether obtaining a title loan (or a small loan from a family member secured by the debtor’s car) just prior to filing for bankruptcy could incur a bad faith objection, let’s ask a more intriguing question: does taking a title loan on a car to create a lien trigger the vehicle ownership deduction in the first place? Several bankruptcy courts have addressed the matter, and found that a title loan is not sufficient to qualify for the vehicle ownership deduction. These courts looked to the language found in the IRS Manual, and concluded that “the intent of the deduction for vehicle ownership expenses is to accommodate the costs of acquiring a vehicle, and not expenses incurred by a debtor using the vehicle as collateral for some other sort of debt, such as a title loan.” In re Carroll, Case No. 12-41350-JDP, slip op., 4 (Bankr. Idaho April 15, 2013); see also In re Alexander, 2012 WL3156760 (Bankr. W.D.Mo. 2012); and In re King, 13-10689-WHD (Bankr. N.D.Ga. 2013).

 

Trade for another Vehicle

While the bankruptcy trend is to disallow an attempt to qualify for the ownership deduction with a title loan, the debtor may consider a vehicle trade to a new, used vehicle with a small amount financed. A Chapter 13 debtor may also consider financing a new vehicle just prior to filing bankruptcy to ensure case success.

 

Make Sure the Loan is “Perfected”

It is important that the debtor’s vehicle is used to secure a loan in order to receive the vehicle ownership deduction. For most states that means executing a promissory note and recording (“perfecting”) the lien with the Department of Motor Vehicles. As a general rule, simply writing on the title or taking possession of the title is not enough.

 

In theory, giving a security interest before bankruptcy can protect otherwise non-exempt property during the bankruptcy case. For example: suppose the debtor “borrowed” money from mom to buy a car. No lien was ever recorded (because good sons always repay their mothers!). On the eve of bankruptcy, the debtor owes mom $8,000 and the car is worth $8,000 (or $5,000 more than his state’s exemption law will allow him to protect). So, the debtor can simply give his mother an $8,000 secured interest in the car, right? Then the Chapter 7 trustee would have to pay mom $8,000 should he liquidate the car. In other words, the car is fully secured, mom’s secured interest survives the bankruptcy (and the debt may be reaffirmed by the good son), and there is no longer an equity issue.

Wrong!

A lien given for an antecedent debt on the eve of bankruptcy is a preferential transfer that the trustee can avoid. The debtor received nothing new when he gave his mother the lien. The trustee can take and sell the property without paying mom (who would be just a general, unsecured creditor after the lien is avoided).

The Bankruptcy Code is chock full of protections to shield income, property, and assets from creditors. Working with an experienced bankruptcy attorney can help you get the most out of the bankruptcy laws. 

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.

Formula Changes May Raise Individual Credit Scores

 In our electronic age, it is tough to avoid negative reporting on your credit report. An honest oversight could mean a missed payment, and one 30 day late payment will drop a 780 credit score as much as a hundred points. The drop is less if you have a lower credit score. Likewise, a disputed collection account can also affect your credit score, even if the matter is ultimately paid or otherwise resolved.

Recently, the Fair Isaac Corp. announced that it will stop calculating FICO credit scores using collection agency debts that have been paid or settled. It will also give less weight to unpaid medical bills that are with a collection agency. This change in the credit score formula is expected to make it easier for tens of millions of Americans to get loans.

The Fair Isaac Corp. made this move after months of discussions with lenders and the Consumer Financial Protection Bureau. The intent is to increase lending opportunities for consumers without creating greater credit risk. A higher credit score generally means lower interest rates for personal loans, credit cards, and major purchases, such as vehicle or real estate.

According to Experian, a major consumer reporting agency, 106.5 million consumers have a collection account on their credit report, and 9.4 million accounts have no balance. Additionally, approximately 64.3 million Americans carry one or more medical collection account on their on their credit report. Consumers are sometimes surprised to discover that their insurance company did not pay a medical bill, and can learn of this failure only after the account has been turned over to collections.

Fair Isaac will offer its new scoring model, named FICO 9, to credit bureaus this fall and to lenders later this year. However, it is up to the credit bureaus and lenders whether to use this new scoring model. It often takes lenders several years to adopt the newest version.

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.

Where Do You Get Your Bankruptcy Advice?

 This just in, lawyers are expensive. Useful legal advice from a licensed attorney costs. No attorney who values his law license is going to give a free, off-the-cuff opinion that may be used against him in a court proceeding (especially a pro se case). Lawyers are also busy (mostly talking on the phone to relatives and friends who want free legal advice). So where do you get a quick and free legal opinion on a bankruptcy issue?

Internet

Google just about any bankruptcy topic and you will get back thousands of hits. The internet is a wealth of information, and misinformation. The Bankruptcy Code, Federal Rules of Bankruptcy Procedure, and loads of bankruptcy case law are all free and searchable on the internet. Unfortunately, relying on internet bankruptcy information is like giving a person with a bullet wound a scalpel, a mirror, and a copy of Gray’s Anatomy. Without training and experience, tools are little use and may make things worse.

There are also many bankruptcy message boards where anyone can ask a legal question and get “good advice” (from a know-it-all non-lawyer or paralegal who has never represented a bankruptcy debtor), or the “right answer” (for the wrong jurisdiction). Even asking a licensed attorney a legal question on the internet has serious limitations; the poster must frame the question properly. The old computer adage rings true on internet legal advice, “garbage in, garbage out.”

Books

Publishing companies have sprung up offering legal advice for lay people. These books contain general advice that may or may not apply in your specific situation. Bankruptcy books are a great overview of the bankruptcy process, but books are no substitute for the experience of a seasoned bankruptcy attorney.

Friends

Your friend, family member, or co-worker who successfully completed a bankruptcy may have practical advice for you, but what worked in that case may not apply to your own. Every case is different and small differences, such as differences in payments, ownership, or income sources, can mean very different results.

Legal Insurance Plan

Legal insurance plans are known by a variety of names, but all plans provide the same promise: the availability of a licensed attorney at a free or reduced charge. These plans are very popular with struggling attorneys and law firms, especially newly licensed attorneys. Many legal plan attorneys follow the rules of the plan and try to provide honest services. Others will pull a “bait and switch” and try to talk the plan holder into spending more than the plan allows.

If you are struggling with debt, seek professional advice from an experienced bankruptcy attorney in your own area. Your attorney can guide you through the process and help you avoid creating problems for your case. The benefits of paying for quality legal advice specifically tailored for your financial situation far outweighs any savings from cheap or free secondary sources.

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.

Why life insurance is a good idea when you are in debt

 Death comes for us all. Life insurance can ease the financial pain and pay the expenses of an unexpected demise, as well as provide for the welfare and support of loved ones. Everyone knows this. What many do not know is how death can affect a family’s debts. Many personal debts are not “carried to the grave” and can survive after death.

General Rule

The general rule is that a personal debt belongs to the individual. For example, a husband’s individual Visa card debt is not also the personal obligation of his spouse. However, the rules change in a community property state. Many debts that are incurred during a marriage by one spouse are the obligations of both husband and wife. That means the wife in our example may get stuck with the Visa bill in a community property state. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (plus Alaska, under certain circumstances).

Joint Debts

Unlike individual debts, many joint debts create multiple liabilities. When a husband and wife are joint account holders of a Visa card, they are both “jointly and severally liable” to pay 100% of the Visa debt. If the husband dies, the wife is stuck with 100% of the Visa bill, not 50% (unless the contract specifies).

These kinds of joint obligations are also found in co-signed or “guaranteed” debts. CNN Money recently ran a heartbreaking story about a young mother who died from liver failure. She left three children in the care of her parents. She also left them with a $200,000 student loan debt they had co-signed. The parents are now obligated to repay the daughter’s student loans, reportedly $2,000 per month.

Probate

When a person dies, whether personal debts are paid depends largely on if a probate estate is opened and the availability of probate assets for creditors. A decedent’s estate is responsible for paying off the individual’s creditors, such as medical bills and loans. If the estate goes through probate, an administrator or executor will account for assets and debts, and determine the order in which creditors and heirs will receive money.

Life Insurance

Many of these after-death debt problems can be solved by purchasing one or more life insurance policies. Life insurance is a “non-probate asset” which means that it passes to a beneficiary(ies) without first going through the probate process, as the name suggests. Life insurance is generally exempt from the taxes of the beneficiary (no inheritance tax). This money can be used to pay debts that may survive death and are passed on to co-debtors, joint debtors, and spouses.

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.

When Can I File Another Bankruptcy Case?

 

 

 

The federal bankruptcy law does not limit the number of times an individual can file for bankruptcy protection. The Bankruptcy Code only restricts how often a debtor may receive a discharge of debts. When an individual is facing overwhelming debt and needs relief from creditors, the bankruptcy laws provide powerful protection. In some cases that protection can be a discharge of debt; in other cases, it means an opportunity to repay what is owed, or just time to negotiate with a creditor.

An individual may file multiple bankruptcies for many reasons; a discharge is not the only benefit of proceeding with a Chapter 7 bankruptcy. When a discharge of debt is needed, the federal law limits time between discharges:

1.      After receiving a discharge in a previous Chapter 7 bankruptcy case, the debtor must wait eight (8) years before he is eligible to receive another Chapter 7 discharge. See 11 U.S.C. § 727(a)(8).

2.      After receiving a discharge in a previous Chapter 7 bankruptcy case, the debtor must wait four (4) years before he is eligible to receive a Chapter 13 discharge. See 11 U.S.C. § 1328(f)(1).

3.      After receiving a discharge in a previous Chapter 13 bankruptcy case, the debtor must wait six (6) years before he is eligible to receive a Chapter 7 discharge. See 11 U.S.C. § 727(a)(9).

4.      After receiving a discharge in a previous Chapter 13 bankruptcy case, the debtor must wait two (2) years before he is eligible to receive a Chapter 13 discharge. See 11 U.S.C. § 1328(f)(2).

These restrictions are not statutes of limitations nor make the debtor ineligible to file for bankruptcy protection. Neither does an intervening bankruptcy toll the waiting period.

The above time periods are measured from the date the previous case was filed, and are not measured from the discharge date. For instance, if a Chapter 7 bankruptcy is filed (and subsequently discharged) on June 1, 2005, then:

1.      on June 1, 2013 the debtor will be eligible to file a Chapter 7 bankruptcy case and receive a discharge (the Eight Year Rule); and

2.      on June 1, 2009 the debtor is eligible to file a Chapter 13 bankruptcy and receive a discharge (the Four Year Rule).

 

A debtor’s ineligibility to receive a discharge does not prevent the debtor from filing a new bankruptcy case. In some cases a discharge is not needed. A debtor can file a Chapter 13 bankruptcy and repay debts without receiving a discharge. In this situation there is no legal limitation between bankruptcy cases. This strategy is especially useful when faced with nondischargeable debts that must be fully paid. The obligation can be paid over time under the supervision and protection of the bankruptcy court. In some rare cases of abuse a bankruptcy court may deny the debtor relief. This can occur when a debtor has shown a history of repeated bankruptcy filings that have been dismissed (called a “serial filer”).

 

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.

Non-dischargeable Student Loans

 A statute of limitation is a law that limits the amount of time that a plaintiff or prosecutor has for filing a legal action. Most crimes have a statute of limitations which varies from state to state. For misdemeanors, like petty theft or public intoxication, the time most states allow to bring charges is one to three years, with a few states allowing up to seven years. Felony crimes generally have longer statute of limitations periods, and certain crimes are considered so heinous and unforgiveable that there are no statute of limitations to allow criminals to escape justice. Examples of crimes with no statute of limitations are: Murder; War Crimes; Kidnapping; Treason;

and Federal Student Loans.

While being unable to pay federal student loan debt is not really a crime, the law certainly makes a borrower feel like a criminal. Like murder, there is no statute of limitations for federal student loans. The debt will follow the borrower to his or her grave, unless it is paid; forgiven or canceled under a qualifying program or certain situations; or discharged in bankruptcy.

Forgiveness or cancelation programs are very narrow and the guidelines are strict. Consider the Teacher Loan Forgiveness program. If all of your federal student loans were obtained after October 1, 1998, and you teach full-time for five consecutive years at a low-income elementary or secondary school, you may have up to $17,500 of your subsidized or unsubsidized loans forgiven. Since the average college student graduating in 2014 has more than $33,000 in student loan debt (according to Forbes), and the average first year teacher salary for many states is just over $30,000 (according to the National Education Association), this “benefit” seems hardly beneficial.

If the debtor is unable to pay, and does not qualify for forgiveness or cancelation under a federal program, that leaves bankruptcy. Prior to 1976, an honest, but unfortunate debtor could file a Chapter 7 bankruptcy and discharge unaffordable federal student loans. Since that time Congress has raised the bar for discharging student loan debt to a very difficult height. Today, the standard is whether repayment of the student loan “would impose an undue hardship on the debtor and the debtor’s dependents.” See 11 U.S.C. § 523(a)(8).

Debtors who are truly unable to pay anything towards federal student loan debt, and will not be able to pay anything in the future (due to age or infirmity), often qualify for student loan discharge. Other cases of hardship discharge are fact-specific and can depend on the political leanings of the bankruptcy judge.

If you are buried in federal student loans that you cannot pay, speak with an experienced bankruptcy attorney and discuss your options. In some cases bankruptcy can reduce or eliminate federal student loans, or help you restructure your finances to make the debt more affordable.

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 and email to fears@fnlawfirm.com.

What's in a Name?

 A bankruptcy case is part lawsuit, part financial accounting. Before filing bankruptcy, the debtor must make a good faith effort to account for and disclose all of his creditors and debts; monthly income and expenses; and describe and value all assets. In addition, the federal law requires the debtor to disclose financial transactions, such as a sold automobile, cashed out stock, or transferred real estate prior to filing bankruptcy. The debtor and his attorney may spend many hours probing the debtor’s finances, including investigating bank accounts; tax returns; mortgage documents; titles and deeds; and retirement accounts.

Considering all the meticulous preparation before filing bankruptcy, it’s remarkable when a debtor (and his attorney) files a case under a false name. Let me explain. Suppose your name is Sally. Your parents, teachers, friends, spouse, co-workers, pastor. . . everyone knows you by Sally. Your credit cards, debit card, and library card all say Sally.

The only problem is, your birth certificate name is Sarah.

The government knows you as Sarah, not Sally. Your driver’s license and your social security card identify you as Sarah, so “Sarah” is the name you must use on the bankruptcy petition. That is also the name you must use when completing the pre-bankruptcy credit counseling course and the post-bankruptcy financial management class.

“But wait,” you say, “everyone other than the government knows me as Sally.” The bankruptcy petition form gives a debtor an opportunity to list nicknames, trade names, names used in doing business, former married name(s), and maiden name immediately after the debtor’s legal name:

All Other Names used by the Debtor in the last 8 years

(include married, maiden, and trade names):

Alias information is indexed into the bankruptcy system and is searchable for creditors. All notices sent by the bankruptcy court contains alias information provided by the debtor.

Other common pseudonym situations that may cause trouble include:

  • Using “Sr.” to identify the father of a “Jr.” when the father has not legally changed his name with the government.
  • Using a married name when the spouse has not legally changed his or her name.
  • Using a maiden name after divorce without legally changing the name with the government (even if the change is authorized or ordered by the divorce court).

Bankruptcy Rule 1005

Rule 1005 of the Federal Rules of Bankruptcy Procedure requires a debtor to include the “name, employer identification number [if any], last four digits of the social-security number, any other individual-taxpayer identification number, and all other names used” within eight years before filing the petition. This information helps creditors to (1) correctly identify the debtor when they receive notices and orders from the court, (2) comply with the automatic stay, (3) file a proof of claim, and (4) exercise other rights given to them by the Bankruptcy Code. A failure to list correct identifying information on a petition fails “to notify creditor about the relevance of the bankruptcy proceeding to some of its claims.” See Ellet v. Stanislaus, 506 F.3d 774 (9th Cir.2007).

Consequences

It is important to make sure that all creditors know about the bankruptcy proceeding and are allowed to exercise their rights in the case. A debt owed to a creditor who is not given proper notice of the bankruptcy may not be discharged and the liability may continue despite the completion of the bankruptcy case. See 11 U.S.C. § 523(a)(3). While an error on the debtor’s petition is correctable by filing an amendment, the error may cause delay in the case. In one case out of the Ninth Circuit, the time for filing creditor objections was extended when the debtors’ name was misspelled on the petition. See In re Diepholz, 2012 WL 4747238 (9th Cir. B.A.P.).

It is essential to provide the proper legal name and all other names used by the debtor when filing a bankruptcy case. Notice to creditors is an essential part of the bankruptcy process; without it, the debtor’s fresh start may stall at the starting line. 

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.

BANKRUPTCY TRICK: Filing Stale Claim May Violate FDCPA

The Eleventh Circuit recently held that a third party debt collector is liable for violating the Fair Debt Collection Practices Act (FDCPA) when it files a proof of claim in a bankruptcy case that is barred by a state statute of limitations. This decision marks the first time that a circuit court has extended the protections of the FDCPA to bankruptcy proofs of claim.

In the case of Crawford v. LVNV Funding, LLC, et al. (In re Crawford), Case No. 13-12389, Opinion (11th Cir. July 10, 2014), the Eleventh Circuit Court of Appeals applied a “least-sophisticated consumer” standard and found that filing a time-barred claim was deceptive, misleading, unconscionable and unfair under FDCPA Sections 1692e and 1692f. Relying on the Seventh Circuit Case of Phillips v. Asset Acceptance, LLC, 736 F.3d 1076 (7th Cir. 2013), the court in Crawford stated that

the FDCPA outlaws ‘stale suits to collect consumer debts’ as unfair because (1) ‘few unsophisticated consumers would be aware that a statute of limitations could be used to defend against lawsuits based on stale debts’ and would therefore ‘unwittingly acquiesce to such lawsuits’;

(2) ‘the passage of time…dulls the consumer’s memory of the circumstances and validity of the debt’; and (3) the delay in suing after the limitations period ‘heightens the probability that [the debtor] will no longer have personal records’ about the debt.

The Eleventh Circuit rejected LVNV’s argument that filing a proof of claim is not a “collection activity,” and held that filing of a proof of claim fell well within the broad prohibitions of Sections 1692e and 1692f as it was a “means” by which to collect a debt.

A violation of the FDCPA includes a statutory fine and an award of attorney fees. Section 1692k of the FDCPA provides that a debt collector may be liable to a person in an amount equal to actual damages; statutory damages of up to $1,000; and the costs of the action, including reasonable attorney’s fees.

It is worth noting that the Eleventh Circuit acknowledged that circuit courts in the Second, Third, Seventh and Ninth Circuits all hold that the Bankruptcy Code preempts the FDCPA in the context of a proof of claim. However, LVNV did not claim that the Bankruptcy Code preempts the FDCPA, so it is unknown whether the case would have been decided differently had this issue been raised.

This case highlights the need for a debtor and his attorney to diligently review all proof of claims that are filed in the bankruptcy case. In Crawford, the debtor filed bankruptcy in 2008 and LVNV filed a timely claim. Only in 2012 did the debtor raise objections that LVNV’s claim was beyond the state statute of limitations - long after LVNV had received distributions during the bankruptcy case.

A statute of limitations defense may be asserted in a bankruptcy case, especially in a Chapter 11 or 13 repayment case. See In re Hess, 404 B.R. 747 (Bankr. S.D.N.Y., 2009). Debts that are outside the statute of limitations may be discovered by the bankruptcy trustee and objected to under Section 1302(b)(3). If not challenged by the trustee, the debtor should motion the bankruptcy court to disallow the debt as time-barred under Section 502(b)(1). Disallowed debts are not paid during the bankruptcy case which may lower the monthly payment to creditors, or could reduce the Chapter 13 debtor’s time in bankruptcy.

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.

BANKRUPTCY TRICK: Lien Strip a Previously Discharge Mortgage

 While the Bankruptcy Code prohibits modification of a secured home mortgage, most courts permit an underwater debtor to “lien strip” an entirely unsecured junior mortgage. For instance, suppose Roger “Raj” Thomas owes $100,000 on a first mortgage and $20,000 on a second, but Raj’s home in Watts is only worth $90,000. In most jurisdictions Raj may “strip” the second mortgage lien, which converts its debt into an unsecured obligation. At the end of the Chapter 13 case, the lien is stripped off Raj’s house and whatever is not paid during the case is discharged.

Lien stripping in conjunction with a Chapter 13 discharge is common. What is uncommon is lien stripping when the debtor is ineligible for a discharge. This situation arises in a case colloquially known as a “Chapter 20,” or a Chapter 7 with discharge followed by a Chapter 13 filing (Chapter 7 plus Chapter 13 equals Chapter 20). Bankruptcy courts are split on whether to allow a debtor to lien strip property in a Chapter 13 case when he is ineligible for discharge due to a prior Chapter 7 discharge; however, a growing number of Circuit Courts are allowing the process. See Wells Fargo Bank N.A. v. Scantling (In re Scantling), ___ F.3d ___,  2014 WL 2750349 (11th Cir. June 18, 2014); Branigan v. Davis (In re Davis), 716 F.3d 331 (4th Cir. 2013); Fisette v. Keller (In re Fisette), 455 B.R. 177 (B.A.P. 8th Cir. 2011).

Recently, the Sixth Circuit Bankruptcy Appellate Panel joined these Circuit Courts in the case of In re Cain, No. 13-8045 (6th Cir. BAP, July 14, 2014). The debtor, Cain, filed Chapter 7 bankruptcy in 2008 and received a discharge, including a discharge of her personal obligation a second home mortgage. The second mortgage was completely underwater, so, Cain filed a Chapter 13 bankruptcy case a few months after her Chapter 7 discharge. Cain was ineligible to receive a discharge in the Chapter 13 case since it was filed within four years of the Chapter 7 case. See 11 U.S.C. § 1328(f)(1). Nevertheless, she proposed to lien strip the home upon completion of her Chapter 13 case, which paid an outstanding auto loan, delinquent tax obligations, and cured a default on her first mortgage. The plan was confirmed, but in 2013, the bankruptcy court denied Cain’s motion to avoid the lien on the second mortgage at the end of her case. The Sixth Circuit Bankruptcy Appellate Panel reversed the bankruptcy court and held that “nothing in the Code prevents a Chapter 20 debtor from stripping a wholly unsecured junior lien on the debtor’s principal residence.”

Chapter 20 is a valuable strategy when the debtor can initially qualify for Chapter 7 bankruptcy (based on a low income or business debt exception) and has one or more unsecured junior liens. By eliminating all dischargeable unsecured debts in the Chapter 7 case, the debtor is not bound by the anti-discrimination rules in Chapter 13. In other words, the debtor may pay student loans or other non-dischargeable, non-priority unsecured debts, and not worry about discriminating against other unsecured creditors (who were discharged in the Chapter 7 case). Through Chapter 20, the debtor has an opportunity to receive many of the benefits found in Chapter 7 and Chapter 13.

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.

Assumption of a Lease vs. Reaffirmation

A reaffirmation agreement continues the personal liability of a debtor in secured property after the bankruptcy discharge. A reaffirmation agreement must be approved by the bankruptcy court before it is effective. Essentially, if the debtor purchases a vehicle with financing, and wants to keep it after bankruptcy, he will be asked to execute a reaffirmation agreement by the lender. According to 11 U.S.C. § 521(a)(6), if the debtor fails to reaffirm or redeem the vehicle within 45 days after the first 341 Meeting of Creditors, the automatic stay is terminated and the lender may repossess the vehicle - even if the debtor is current on the payments!  See In re Dumont, 581 F. 3d 1104 (9th Cir. 2009).

Assuming or rejecting leases (and executory contracts) in bankruptcy is detailed in Section 365. This Section and area of the law has been described as “psychedelic.” See In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687 (Bankr. S.D.N.Y. 1992) (quoting Westbrook, A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227, 228 (1989)). The part relevant to personal property is found in Section 365(p):

If a lease of personal property is rejected or not timely assumed . . . the leased property is no longer property of the estate and the stay under section 362 (a) is automatically terminated. . . . If the debtor in a case under chapter 7 is an individual, the debtor may notify the creditor in writing that the debtor desires to assume the lease. Upon being so notified, the creditor may, at its option, notify the debtor that it is willing to have the lease assumed by the debtor and may condition such assumption on cure of any outstanding default on terms set by the contract. . . .

When read together with the relevant part of § 365(d):

In a case under chapter 7 of this title, if the [debtor inheriting the trustee’s power to assume the lease pursuant to § 365(p)] does not assume or reject an executory contract or unexpired lease of . . . . personal property of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.

Section 365 requires the debtor to assume a lease in personal property, rather than to reaffirm the lease.

All courts agree that the bankruptcy court plays no part in the assumption or rejection of a debtor’s personal property lease, but there is confusion over whether assumption of a lease continues any personal liability after discharge. Collier explains it this way:

If the debtor then assumes the lease, the liability under the lease will be assumed by the debtor and not the estate. However, because there is no reaffirmation of the lease debt, it is not entirely clear what this means. Personal liability on the lease will ordinarily be discharged if the chapter 7 discharge is entered, presumably even if the lease is assumed.

See 1-15 Collier Consumer Bankruptcy Practice Guide ¶ 15.04[8].

Courts are split in the interpretation of Section 365 in regard to personal liability. The majority of courts find that assumption of a lease is not the same as reaffirmation, and, therefore, the debtor’s personal obligation under the lease is extinguished by the discharge. See, e.g., In re Eader, 426 B.R. 164 (Bankr.D.Md. 2010); and In re Creighton, 427 B.R. 24 (Bankr.D.Mass. 2007). These courts point to the necessity of a reaffirmation agreement under Section 524(c) and Federal Rule of Bankruptcy Procedure 4008 to continue the debtor’s personal obligation, and that the bankruptcy discharges “personal liability of the debtor, whether or not discharge of such debt is waived." See 11 U.S.C. § 524(a)(2).

A minority of courts find that assumption of a lease binds the debtor to the original lease terms and the discharge has no effect on the debtor's assumed obligation. The court in In Re Mortensen, 444 B.R. 225 (Bankr. E.D.N.Y. 2011), found:

Once a lease is assumed, it is assumed cum onere and the Debtor is bound to accept the obligations and the benefits. See NLRB v. Bildisco and Bildisco, 465 U.S. 513, 531-32, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984); and In re Shangra-La, Inc., 167 F.3d 843, 849 (4th Cir.1999) (citation omitted). In exchange for the right to retain the lessor's property for her use, the Debtor cannot assert that the Debtor has been discharged of her obligations under the Lease the discharge injunction simply does not apply.

Most courts will find that assuming a lease creates a kind of non-recourse situation. The debtor is entitled to keep and use the leased property, but has no personal liability for default. Lenders, especially auto finance companies, have different perspectives on leased vehicles in bankruptcy. Some lenders require short lease assumption documents, while others compel the debtor to file a reaffirmation of the lease obligation with the bankruptcy 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.

Where are Bankruptcy Rules Found?

Bankruptcy law is complex and confusing to bankruptcy outsiders (and often to bankruptcy in-siders). To gain a general understanding of the process, the Administrative Office of the U.S. Courts publishes a basic overview of the federal bankruptcy process entitled Bankruptcy Basics. This guide is available on the US Courts website: http://www.U.S.C.ourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics.aspx

Article I, Section 8, of the United States Constitution authorizes Congress to enact federal bankruptcy laws, which are codified in Title 11 of the United States Code. This section of federal law is commonly called the Bankruptcy Code and is divided into nine chapters. Chapters 1, 3, and 5 apply to all cases. An individual bankruptcy case is filed under either Chapter 7, 11, or 13. A complete copy of the Bankruptcy Code is maintained on-line at: http://www.law.cornell.edu/U.S.C.ode/text/11

The dollar amounts found in the Bankruptcy Code change from time to time. Changes are published in the Federal Register: https://www.federalregister.gov

The federal bankruptcy process is governed by the Federal Rules of Bankruptcy Procedure, which may be read on-line at: http://www.law.cornell.edu/rules/frbp

Approved agencies for consumer credit counseling and the financial management course are found on the United States Trustee’s website, along with information required for completing the bankruptcy Means Test: http://www.justice.gov/ust/

Finally, take a look at the bankruptcy court’s “local rules,” which supplement the bankruptcy procedures. Every court has a copy of its local rules posted on its website.

Bankruptcy rules are only one aspect of understanding the bankruptcy process. The court interpret these laws and rules, including the bankruptcy court, district court, bankruptcy appellate panels, circuit courts and the United States Supreme Court. Phew! That’s a lot of reading! Fortunately, an experienced bankruptcy attorney has spent years reading these laws and cases, and is able to help you navigate the bankruptcy system.

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

 

Bankruptcy Discharge Order

At the conclusion of nearly all consumer bankruptcy cases the court will issue a permanent injunction prohibiting creditors from collecting on pre-bankruptcy debts. This permanent injunction known as the “bankruptcy discharge” replaces the “automatic stay,” a temporary injunction. Specifically, the discharge order prohibits discharged creditors from taking any kind of collection action against the debtor personally. The discharge injunction generally forbids a discharged creditor from sending bills, making collection phone calls, or filing a lawsuit to collect on a debt. This protection is final and permanent. Violation of the discharge injunction has serious consequences, and may result in a federal contempt of court charge.

A discharged debt is not erased. See In Re Mahoney, 368 B.R. 579 (Bankr. W.D. Tex. 2007)(“Bankruptcy does not erase debt; the discharge is only an injunction against attempts to collect the debt as a personal liability of the debtor. See 11 U.S.C. § 524(a)” see also In re Vogt, 257 B.R. 65, 70 (Bankr. D. Colo. 2000)). The debt still exists, but payment cannot be collected from the debtor because of the bankruptcy court's injunction. However, a creditor may still have opportunities to collect.

Although a debtor is no longer personally liable for a discharged debt, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made unenforceable) during the bankruptcy case will remain after the debt is discharged. This is because enforcing the lien is an action against the property, not against the person. In this way the bankruptcy laws balance the interests of the debtor and the creditor. For instance, the bankruptcy discharge may prohibit an auto lender from garnishing a discharged debtor’s wages to satisfy an unpaid and defaulted loan, but the law allows the lender to repossess the vehicle. Bankruptcy attorneys are fond describing it this way: “secured property must be paid for or returned.”

The bankruptcy discharge does not protect non-filing co-debtors. The discharge injunction only applies to the debtor. A creditor may still enforce its collection rights against a co-debtor. Typically co-debtors are "jointly and severally liable," which means that the non-discharged co-debtor is likely on the hook for 100% of the debt.

What happens when a creditor contacts the debtor after discharge?  The answer depends on the situation and first involves answering three questions: (1) “Was the debt discharged in bankruptcy?” (2) “Is the collection directed at the discharged debtor?” and (3) “Was the creditor notified of the bankruptcy case or discharge?”

As stated previously, a discharged debt is no longer legally enforceable against the debtor. Some debts are not discharged, so it is important to understand which debts are included in the discharge and which are not. For instance, taxes, student loans, and family support obligations may not be subject to the discharge.  In other cases a debt may be excepted from discharge by the court. 

The discharge only protects the debtor from collection efforts. It does not protect a co-debtor who did not file bankruptcy, and, as a general rule, it does not protect property that is subject to a lien. For instance, a discharged creditor may not garnish the debtor’s wages to collect on a discharged debt, but may repossess collateral when a lien survives the bankruptcy discharge. Therefore, it is important to understand how property is affected by the bankruptcy discharge and whether a creditor can seize, repossess, or foreclose on the property after a bankruptcy.

As a practical matter, if a collector does not know about the bankruptcy discharge, the bankruptcy court is not likely to impose sanctions against it. Often a collection attempt can be resolved by informing the collector of the discharge and either providing a copy of the discharge or referring the collector to the debtor attorney. Buying and selling debt is big business, and debts often get passed from collector to collector – even uncollectable debts like those discharged in bankruptcy!

The bankruptcy discharge injunction applies to the original creditor, collection agencies, attorneys, and any other subsequent collector. A creditor may be liable for selling a discharged debt when the subsequent purchaser attempted collection action. See Laboy v. FirstBank P.R. (In re Laboy), 2010 Bankr. Lexis 345 (Bankr. D.P.R. 2010) (concluding that the original creditor had knowledge of the bankruptcy discharge and selling the debt some 15 years later to a debt collector violated the discharge injunction. Creditors “are obligated to maintain procedures to ensure that they do not violate [the discharge injunction], and may be held liable for damages and attorney’s fees if they do not”).

 

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

To Reaffirm or Not To Reaffirm. . .

Congress recognizes that in the real world, sometimes a reaffirmation agreement is not filed. When that happens, the discharge injunction prohibits contact with the debtor concerning the debt. However, in a fit of practical wisdom, Congress enacted Section 524(j) which allows a creditor holding a mortgage on the debtor’s principal residence to accept payments in the ordinary course of business from the debtor without violating the bankruptcy court’s discharge injunction. A debtor may continue to pay his home mortgage and the debtor may accept payments even when the debtor’s personal obligation was discharged by the bankruptcy case.

 

Many bankruptcy attorneys refuse to allow their clients to execute reaffirmation agreements on real estate. Some plainly state that it is malpractice to reaffirm a mortgage. The issue of the non-recourse mortgage is undecided and replete with potential perils for the debtor. Should a Circuit Court determine that a Chapter 7 debtor must reaffirm a mortgage, then the property may no longer be protected by the bankruptcy and the creditor may assert its state law rights and accelerate the mortgage debt and foreclose on the property even though the debtor is current on the loan. A similar situation with an auto loan was discussed in the Ninth Circuit Court of Appeals case Dumont v. Ford Motor Credit Company (In re Dumont), 581 F. 3d 1104 (9th Cir. 2009).

A more practical (and perhaps a more important) question to ask before deciding to reject a mortgage reaffirmation agreement is, “If I don’t reaffirm my mortgage loan, will I be able to modify my loan in the future?” This question is best answered by looking at two current government backed housing programs: HAMP and HARP. Under the Home Affordable Modification Program (H.A.M.P.), a mortgage may be modified (modification) even though the debt was not reaffirmed. See U.S. Dep’t of the Treasury, Making Home Affordable Program: Handbook for Servicers of Non-GSE Mortgages v4.3 (2013). Under the Home Affordable Refinance Program (H.A.R.P.) the debtor is not eligible for refinancing. The reason is that the modification only changes the terms of the loan and does not expand upon or create a new personal obligation. However, refinancing clearly creates a new financial obligation for the debtor, and violates the bankruptcy court’s discharge injunction. Some lenders refuse to modify a home mortgage if the debtor did not execute a reaffirmation agreement and is no longer personally liable for the debt. 

If you are considering filing bankruptcy please call the experienced attorneys at Fears | Nachawati Law Firm to set up consultation. Call 1.866.705.7584 or send an email to fears@fnlawfirm.com 

Stop an Eviction with Bankruptcy

 Generally, when a bankruptcy petition is filed, collection actions are automatically stayed. The purpose of this stay is to give the debtor some breathing room and time to sort out financial difficulties. If the debtor is behind on rent payments, the bankruptcy automatic stays the commencement or continuation of an eviction action.  The automatic stay prohibits the landlord from any attempt to collect rents that accrued prior to the bankruptcy filing date. The landlord may not write or call the debtor in an effort to collect these rents, and may not start or continue a lawsuit to evict.

The bankruptcy automatic stay will not relieve the debtor from his obligation to pay rent after the bankruptcy filing date. If the debtor/tenant falls behind on rent payments after the bankruptcy is filed, the landlord may evict regardless of the bankruptcy, but cannot seek payment of rents that were due before the bankruptcy case was filed. If the debtor in bankruptcy is not behind on rents at the time the bankruptcy case is filed, the landlord is not a creditor and will not receive notice of the bankruptcy filing. However, the debtor must account for any rent deposit on his bankruptcy schedules.

In some circumstances a landlord may complain to the bankruptcy court that the tenant is endangering the property or using controlled substances illegally on the property. See 11 U.S.C. § 362(b)(23). The landlord must file a certification to the bankruptcy court and the tenant has 15 days to respond. The court must hold a hearing within 10 days. If the landlord is successful in this complaint, the court will lift the automatic stay and allow the eviction process to continue.

If the landlord has obtained a judgment for possession and order of eviction before the bankruptcy case is filed, the legal process is more complex. See 11 U.S.C. §§ 362(b)(22) and 362(l). The debtor must deposit one month of rent with the bankruptcy court immediately upon filing the bankruptcy petition along with a certification stating that the landlord’s judgment permits the debtor to stay in the premises upon satisfaction of the entire judgment amount. This filing stays the eviction process for thirty days. If the debtor wishes to remain longer, the amount stated in the judgment for possession must be paid within the thirty day period.

If you're interested in filing for bankruptcy contact the experienced attorney's at Fears | Nachawati  for a free consultation. Call our office at 1-866-705-7584 or send an email to fears@fnlawfirm.com.

Married Couple, Single Debtor

While it is common for a husband and wife to file a joint bankruptcy, in some cases it is beneficial for only one spouse to file. When one spouse files for bankruptcy protection, the other (non-filing) spouse is not automatically joined into the case. The husband and wife are treated separately and individually, although there are some consequences to the non-filing spouse, both positive and negative.

The primary benefit of a single spouse bankruptcy filing is to protect some or all of the property in an asset from turnover to the trustee. In general, bankruptcy law looks to the applicable state law to decide property rights. See Butner v. United States, 440 U.S. 48, 55 (1979). Under state law, each individual person has their own assets, whether owned individually, or in some form of joint or common ownership with another person. The bankruptcy estate has no greater interest in an asset than the debtor has. See 11 U.S.C. § 541(d); In re McCafferty, 96 F.3d 192 (6th Cir. 1996). Consequently, the married debtor filing alone must determine what property is his, hers, and ours.

A single spouse bankruptcy filing should be considered when one spouse has high debt, but the non-filing spouse holds property as sole, non-joint property. Property in which the debtor has no ownership interest is generally not property of the debtor’s bankruptcy estate and is beyond the reach of the bankruptcy court. For example, husband owns a $1,000,000 home in his name only. Wife is sued and owes $1,000,000 in her name only. Whatever the creditor receives will come from the wife’s assets and not the husband, or his $1,000,000 home.

Additionally, where the state law allows, the debtor may be able to halve equity in an asset or protect it altogether. For instance, suppose that husband owes $50,000 in credit card debt in his name only, he and his wife jointly own a home with $50,000 in equity, and they live in a state where the husband can claim a $25,000 homestead exemption. If the husband files an individual bankruptcy and the wife does not, the most the husband’s creditors can reach is the non-exempt equity in the home. In this case he can protect his entire one-half interest with his $25,000 homestead exemption and his creditors get nothing.

While the general rule in bankruptcy is that the bankruptcy only affects the debtor’s liability and the debtor’s property, the rules get a bit more complex when dealing with a community property state. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. When one spouse files bankruptcy in a community property state, all of the community property acquired during the marriage comes into the bankruptcy estate.  All of the claims enforceable against the community property are allowable in a debtor’s spouse’s separately filed bankruptcy case. However, after a debtor’s discharge, the non-filing spouse remains liable for a debts that the debtor incurred, but because of the bankruptcy discharge, the non-filer’s debts can be collected only from separate property. That is because the creditors had an opportunity during the bankruptcy case to collect from the community property.

 

Filing bankruptcy is not simply filling out forms. Careful planning is required ensure bankruptcy success and to avoid creating a financial disaster.

For more information please contact Fears | Nachawati by sending an email to fears@fnlawfirm.com or call our office at 1.866.705.7584. 

Top 4 Questions to Ask Your Attorney

Getting the relief you need through the federal bankruptcy laws starts long before you file your case. A successful bankruptcy begins with having an experienced attorney evaluate your financial situation. The evaluation process is a two way street: the client is expected to provide the attorney with all necessary financial documents to review, and answer questions; and the attorney is expected to provide answers and legal guidance during the bankruptcy process.

There are six important questions that every client should ask his or her bankruptcy attorney:

Question One: What chapter should I use?

There are two common bankruptcy chapters for individuals: Chapter 7 (liquidation) and Chapter 13 (repayment). Each chapter has its advantages and disadvantages and your attorney can fully explain the differences and benefits. You should only choose a bankruptcy chapter after exploring your legal options with your attorney, listening to his or her advice, and weighing your options.

Question Two: Will I lose any property?

This is perhaps the most common question asked by clients, but is also an extremely important one. An individual may lose property during a bankruptcy case for many reasons. In one case a person may voluntarily surrender an underwater house or car back to the lender and discharge the debt. In another case there may be non-exempt equity that puts the property at risk of turn-over to the Chapter 7 trustee. Property should never be lost unexpectedly during bankruptcy if there is a proper case evaluation and a frank discussion of the risks between the attorney and client.

Question Three: What debts will survive the bankruptcy case?

Bankruptcy does not discharge every debt. Some debts are excepted from discharge by law, such as child support and recent taxes. Other debts are nondischargeable unless certain conditions exist, such as student loans. Still other debts are not discharged if a creditor objects and the bankruptcy court excluded the debt from the discharge order, such as charges made on credit cards just before the bankruptcy filing. An experienced attorney can identify debts that may survive the bankruptcy discharge.

Question Four: Will the trustee or a creditor file an objection in my case?

No one can predict the future, but your bankruptcy attorney can tell you how likely it will be that a creditor or the bankruptcy trustee will file an objection in your case. Objections are filed for a multitude of reasons, but nearly always manifest themselves before filing bankruptcy when a proper case evaluation is conducted.

Don’t be afraid to ask your attorney questions! Your attorney is there to represent your interests and guide you through the bankruptcy process. Maintaining an open line of communication between attorney and client is critical to success during bankruptcy.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

 

Inherited IRA Not Protected in Bankruptcy

The Supreme Court recently decided a bankruptcy issue that has caused confusion in the lower courts. The issue is whether an inherited IRA receives the same protection in bankruptcy as other retirement assets. Ordinarily, an IRA is classified as a “qualified” retirement fund and receives protection from creditors and the bankruptcy trustee. In the case of Clark v. Rameker, the debtor, Clark, filed for Chapter 7 bankruptcy protection and listed a $300,000 IRA that he had inherited from his mother. Previously, the Seventh Circuit Court of Appeals disagreed with the Fifth Circuit and other lower courts over whether the debtor is entitled to qualified retirement fund protection when the asset is inherited.

In a 9-0 opinion, the Supreme Court held that funds in an individual retirement account inherited from someone other than the bankrupt debtor’s spouse are not “retirement funds” within the meaning of Section 522(b)(3)(C) of the United States Bankruptcy Code, and are available to pay creditors of the debtor-heir. The Court opined:

For if an individual is allowed to exempt an inherited IRA from her bankruptcy estate, nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete. Allowing that kind of exemption would convert the Bankruptcy Code's purposes of preserving debtors’ ability to meet their basic needs and ensuring that they have a “fresh start,” Rousey, 544 U. S., at 325, into a “free pass,” Schwab, 560 U. S., at 791. We decline to read the retirement funds provision in that manner.

This ruling is unfortunate for bankruptcy debtors seeking a fresh start, but the result can still be avoided with proper estate and bankruptcy planning. For instance, the Bankruptcy Code provides that a trust that expressly is limited by an enforceable transfer restriction (called a spendthrift provision) is not property of the debtor’s bankruptcy estate. See 11 U.S.C. § 541(c)(2). The typical spendthrift trust gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. This prevents the beneficiary from wastefully spending the trust assets, and also puts the trust corpus beyond the reach of creditors. Since the funds in the trust are not actually under the control of the beneficiary, the trust is also protected during bankruptcy.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Supreme Court Elaborates on Bankruptcy Jurisdiction

Recently the United States Supreme Court clarified the powers of the bankruptcy court to rule on many issues that arise during a bankruptcy case. The case, Executive Benefits Insurance Agency v. Peter H. Arkison, concerned the bankruptcy court’s authority to decide non-bankruptcy issues that impact or relate to the bankruptcy case.

Many citizens are not aware that while bankruptcy court judges have jurisdiction over bankruptcy issues, they are not “Article III” judges described in the U.S Constitution like other federal judges, are not confirmed by the Senate, and do not serve a life term. Instead, bankruptcy judges are appointed by federal appeals court judges and serve 14-year terms. Consequently, in 2011 the Supreme Court ruled in the Anna Nicole Smith inheritance case (Stern v. Marshall) that bankruptcy courts do not have the constitutional authority to issue final rulings on certain legal claims, unlike Article III federal district court judges.

In a unanimous opinion delivered by Judge Clarence Thomas, the court said that, while the Constitution does not permit a bankruptcy court to enter final judgment on a bankruptcy-related claim, the relevant statute nevertheless permits a bankruptcy court to issue proposed findings of fact and conclusions of law to be reviewed by a district court. The Supremes did not comment on whether a bankruptcy judge may issue a final judgment in a case where the parties consent to litigation in the bankruptcy court. Several courts of appeal have allowed the bankruptcy court this jurisdiction after consent, but the question has not been finally resolved.

Navigating through the bankruptcy process requires a skilled and experienced guide. If you are experiencing serious financial difficulties, consult with a bankruptcy attorney to learn how the federal bankruptcy laws can help provide you with a fresh financial start.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Bankruptcy Filing Rate Continues to Decline

Law Professor Robert Lawless of the University of Illinois has posted a short article on CreditSlips.com regarding the declining bankruptcy filing rates for the first part of 2014. Lawless sites data collected by Epiq Systems, a provider of technology products and services for the legal profession, that shows that the “decline is part of a longer-term trend[.]”

The annual bankruptcy filing rate is now 3.08 bankruptcies per 1,000 persons, the lowest rate since 1990 (ignoring 2005 when bankruptcy rates spiked, then plunged due to changes in the bankruptcy laws). The bankruptcy filing rate has declined for forty-three straight months. Lawless projects that bankruptcy filings will reach just over 900,000 for 2014, down from 2010 when over 1.5 million cases were filed.

Professor Lawless postulates that this downward trend is due to the “availability of bankruptcy alternatives and very little to do with overall economic conditions.” Government programs like HAMP and looser lending restrictions may allow individuals to restructure their personal finances without filing bankruptcy.

Bankruptcy remains a viable tool for reorganizing finances in a permanent and long-term way. Through bankruptcy, an individual may eliminate unsecured debts, like a credit card or medical bill, and modify or “walk away” from secured debts, like a house or car loan. If your finances are sick, the fresh start offered by the federal bankruptcy law may be the right medicine. Get a free consultation today and learn how bankruptcy can help you and your family.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

 

Beware Circling Vultures

Seeking professional guidance when faced with a serious financial issue is smart. The only problem is: who to trust? Many so-called “financial experts” may be very skilled in one area of finance, but know little or nothing of other areas. Worse, some nefarious individuals are just after what little money they can squeeze out of you and care nothing about making your situation better.

Take, for example, the investigation into a nation-wide mortgage modification scam. Recently, the Orange County California district attorney unsealed an indictment related to a $13.5-million loan-modification scheme that officials called the largest crime of its type ever prosecuted in the United States. The conspiracy reportedly involved at least 3,500 victims using mailers, a misleading website and telemarketers over a span of more than two years. The conspirators operated a company with a continually changing name, including the apparent laws firms “Prudent Law,” and “Remedy Center Law” which trained employees to falsely tell customers that they qualified for loan modifications and assure them that a lawyer from the company could represent them. Once lured in, the victims were charged an average of $4,000 of illegal up-front loan-modification fees and promised services the company couldn't offer.

Included in the group behind the scam is Pamela Gressier, a California licensed attorney, who remains a fugitive from justice. Gressier faces multiple felony counts of conspiracy, grand theft, money laundering and filing a false or fraudulent tax return. If convicted on all counts, she could get a maximum of over 48 years in prison.

If you are in need of mortgage modification, make sure that you do your due diligence before hiring a “debt relief” company. One mortgage relief process that can provide actual relief is found in the United States Bankruptcy Code. Bankruptcy can stop foreclosure and provide you time to negotiate a home loan modification, short sale, or even to “walk away” without owing a dime. In some cases bankruptcy can force the bank to accept low interest payments for a deficiency over three to five years, or strip off an unsecured second or third mortgage. Consult an experienced bankruptcy attorney for more information on your rights under the federal law.

 

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

When the Investigator is Investigated

Suspected criminal bankruptcy fraud is investigated by the Federal Bureau of Investigation and prosecuted by the United States Attorney. Employees of the FBI and USA are people, and subject to the same failings and bad judgments that can plague any other person.

For example, in 2011 former FBI Special Agent Darin Lee McAllister, of Brentwood, Tennesse, was sentenced to 48 months in prison after a jury convicted him of 15 counts of wire fraud (18 U.S.C. § 1343) and three counts of bankruptcy fraud (18 U.S.C. § 151(3)). In addition to his prison sentence, McAllister was ordered to pay $675,142.83, in restitution to the victims of his fraud and a special assessment of $1800.00. Upon his release from prison, McAllister will also serve a term of three years’ supervised release.

McAllister was indicted in 2010 by a federal grand jury. He had devised a scheme to defraud SunTrust Mortgage Co., Inc., in connection with the purchase of rental properties totaling $1.25 million in 2006. In addition, he devised a scheme to defraud the SunTrust Bank in connection with a $100,000 line of credit and making three false statements in connection with his subsequent bankruptcy petition in July 2009.

When you are in bad financial shape, you need good legal advice to keep you out of trouble. You also must discuss your financial situation completely and honestly with your attorney. There are many legal options to avoid criminal charges, but your attorney can only help you when he or she has all of the information.

 

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

When You Can't Win the Game, Change the Rules

The game of consumer finance is full OF rules. First, there are contracts between individuals and institutions that permeate our lives. Credit card companies, banks, mortgage lenders, finance companies, payday loan companies, and auto lenders all require a consumer contract. Second, there are state and federal rules (laws) that affect you when you are unable to pay per the contract terms. You can be called into court and the law requires you to defend your actions – being broke is not an excuse for not paying a consumer debt. Finally, if you lose the court action, other rules allow a creditor to garnish your wages, seize your bank account, and/or take your property to pay a debt.

Make no mistake: the rules of consumer finance are written to protect the lender’s interest, not yours. What can you do when you find yourself broke, in breach of consumer loan contracts, and facing repossession, foreclosure, garnishment, or asset seizure?

Change the game.

Quit defending yourself and your property using their rules. Instead go on the offensive using the federal bankruptcy laws. The Bankruptcy Code is written to protect consumer debtors and provide an opportunity to play by a new set of rules. Through bankruptcy the debtor gains the upper hand:

  • The bankruptcy automatic stay stops collection actions cold. A creditor may not continue a repossession, foreclosure, lawsuit, garnishment, or even harassing phone calls without the permission of a federal bankruptcy court judge.
  • The bankruptcy laws can discharge unsecured loans (e.g. a personal not secured by collateral).
  • In certain situations, a bankruptcy debtor can keep secured property (e.g. a car) and “re-write” the terms the loan and force a creditor to accept lower payments over a longer period of time, reduce interest, or reduce the amount owed.

Literally, bankruptcy is a “game-changer” that takes the legal power out of the hands of the creditor and puts you in control. Changing the rules in your favor by using the federal bankruptcy laws can help you win the game. Debts that are discharged and contracts that are altered during bankruptcy stay that way forever. Take control over your creditors and your debt situation today using the federal bankruptcy laws.

 

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

I surrendered my property in my Bankruptcy, Now What?

 

When you file for bankruptcy, you have the option of surrendering your secured property which you no longer wish to keep.  For instance, if you have a rental house which you can no longer afford, you can surrender it through your bankruptcy and discharge your personal liability for the remaining debt.  However, surrendering the property does not automatically mean that it is no longer yours.  When you elect to surrender something through bankruptcy, you basically give up your interest.  It also allows the secured creditor to retake possession of the property without seeking permission of the court. 

In the above example, it is important to remember that even though you may have surrendered your interest in the house, the mortgage company would still need to go through the formal foreclosure process in order to take proper ownership of the property.  The foreclosure would have to take place even if your case has been discharged and closed.  While pre-petition debt associated with the property, meaning debt from before the bankruptcy was filed, is likely to be discharged, you are still liable for any post-petition debt.  If you were required to pay Home Owner Association fees, they will continue to accumulate after the bankruptcy even if the property was surrendered.  Furthermore, you will be liable for all the post-petition HOA fees, property taxes and other related debts until the bank formally forecloses on the property.

Contact a bankruptcy attorney for more questions on the consequences of surrendering your property through your case. 

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Federal Income Taxes Statute of Limitations Tolled during Bankruptcy

Tax debts commonly survive a bankruptcy case. The general rule is that a tax debt must be at least three years old before it can qualify for discharge in bankruptcy. Additionally, the tax debt must have been “assessed” 240 days before the bankruptcy filing. “Assessment” is a tax term that means the IRS has determined the tax obligation. Filing a return is only a “self-assessment” and gives consent to the IRS to assess the taxpayer’s tax obligation. Sometimes nailing down the assessment date is difficult, so it is recommended to seek this information directly from the IRS.

When a tax debt is not discharged in bankruptcy, the IRS has ten years to collect a delinquent income tax debt from the date it was “assessed.” See 26 U.S. Code § 6502. However, filing a bankruptcy case tolls this ten year period for the time the bankruptcy is pending plus 6 months. See 26 U.S. Code § 6503(h). This is important to know for any remaining tax that is not discharged by the bankruptcy case.

For instance, suppose the following scenario:

            May 1, 2014:               2013 tax debt assessed by IRS

July 1, 2014:                Debtor files Chapter 7 bankruptcy

November 1, 2014:      Bankruptcy case closes, tax debt is not discharged.

Since the debtor filed bankruptcy, the time the IRS has to collect on the debt is ten years, plus the time in bankruptcy (four months), plus an additional six months. That extends the statute of limitations deadline, what the IRS calls the Collection Statute Expiration Date (CSED), from May 1, 2024 to March 1, 2025.

The IRS is required by law to provide information on the CSED, and taxpayers may contact the IRS at 800-829-1040 to ask about the expiration date. However, be warned that the IRS has recently publically acknowledged that its CSED calculations have been flawed. During a recent audit of 75 tax cases with calculated CSEDs, 39 percent of these cases contained errors. Just another reason to not trust the IRS.

Some debt issues linger after a bankruptcy filing. If you have debts that were not discharged during your bankruptcy case, discuss your situation with an experienced attorney to learn of your legal options.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Will My Job Find Out That I Have Filed for Bankruptcy?

Bankruptcy can be a very embarrassing and private matter that many people do not want anyone to find out about, especially their employers.  When you file for bankruptcy there is no requirement that your employer be informed. The court does not automatically send notice to your employer and the debtor is not required to tell them.

There are ways a debtor’s employer may find out about a bankruptcy. One way is by doing periodic credit checks. Now most employers only do credit checks when they are hiring new employees, but when anyone checks a debtors credit they will see any bankruptcy filings within the last ten years.

The other way an employer may find out about a bankruptcy filing is through a wage directive or pay order in a chapter 13 case.  Some jurisdictions require that a pay order be filed in the case to insure that the plan payment is paid each month. The wage order is mailed the debtor’s pay roll and then the plan payment is garnished from each paycheck. If the jurisdiction requires that a pay order be filed the Debtor’s attorney will need to request that the court wave the pay order. This can be done either with a motion or by agreement with the Trustee.

If your employer does find out that you filed bankruptcy there are laws that protect debtors from discrimination for filing bankruptcy. Private employers may not fire you or punish you because you filed for bankruptcy, however, a future employer can take your bankruptcy filing into consideration when choosing to hire you.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Supreme Court to Decide Case Involving Inherited IRA

The Supreme Court is preparing to hear arguments in Clark v. Rameker a seventh circuit case involving whether an inherited IRA would be exempt under the federal bankruptcy exemptions. 

For more information on the Seventh Circuit see our previous article: Are Inherited IRAs Exempt in Bankruptcy

Specifically the statue in question is 11 U.S.C. § 522, which exempts "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation,” under several provisions of the IRS code.

The Debtor is arguing that the funds should be exempt because the funds were set-aside for retirement into the identified account and remains in that account. Further the Debtor points to years of congressional history showing there intention for retirement funds to be exempt.

The Trustee on the other hand is arguing that the funds were not set aside by the Debtor and the Debtor could remove the funds without any additional tax liability.

Both sides have strong arguments and legal scholars are not clear which side the court is likely to come down.

 For further reading: Argument preview: Scope of protections for retirement funds in bankruptcy squarely at issue.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com . 

Recent Bankruptcy Fraud Cases

Bankruptcy provides a fresh financial start for the honest, but unfortunate debtor. Unfortunately, some individuals try to use the bankruptcy laws to get more than just a fresh start - they want a head start. Bankruptcy fraud is a federal crime punishable by a fine, or by up to five years in prison, or both. Take a look at some of these recent cases of debtors caught up in bankruptcy fraud schemes:

Wesley Pace of Natachitoches, Louisiana, was sentenced on April 2, 2014 to 15 months in prison and three years of supervised release. He was also ordered to complete 300 hours of community service within the supervised release time period. Pace filed for bankruptcy in March of 2008, but did not declare his ownership of mineral rights to a parcel of land in Natchitoches Parish. One month later, Pace sold the mineral rights for $95,000 without informing the bankruptcy trustee of the sale or providing the money to the bankruptcy trustee as required by the Bankruptcy Act.

Sacramento, California couple Derian Eidson and Steven Zinnel were convicted of bankruptcy fraud and money laundering. Eidson, a suspended member of the California bar, was sentenced on in April, 2014 to 121 months of imprisonment and a fine of $200,000, following conviction at trial on two counts of money laundering and bankruptcy fraud. Eidson and her lover, Sacramento businessman Steven Zinnel, conspired to conceal millions of dollars to avoid paying funds to Zinnel’s ex-spouse and child. Zinnel filed bankruptcy and lied about assets, while hiding money in shell corporations, Eidson’s attorney-client trust account, and her personal bank account. Zinnel was previously sentenced to 17 years in prison for 15 counts of bankruptcy fraud and money laundering.

Michael Wayne Harding of Keswick, Virginia pled guilty on April 16, 2014 to one count each of bankruptcy fraud and wire fraud after waving his right to an indictment. Harding was sole employee and president of a company that secured mortgages based on improvements made on the properties. He provided false invoices to make it look like the improvements were made to get mortgages secured. During bankruptcy, Harding filed false monthly reports and forged signatures on real estate documents. He will complete 30 months in federal prison for his bankruptcy and wire fraud crimes, and was ordered to pay over $2 million in restitution.

Former West Virginia doctor Dr. Allen Saoud was sentenced on March 25, 2014 to eight years in prison and ordered to pay $2.5 million in fines. Saoud was previously convicted on health care fraud charges, identity theft, concealment of material facts in a health care matter, one count of obstructing the IRS, bankruptcy fraud, and making a false statement to the IRS. In 2005, Saoud, a former doctor of osteopathic medicine specializing in dermatology, settled federal charges of submitting false claims to Medicare and Medicaid. He agreed to pay $310,000, and to voluntarily be excluded from all federal health care programs for 10 years. Saoud violated that agreement and submitted false documents during bankruptcy, which led to his federal conviction.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Beware the Wolf in a Sheep's $2,000 Suit

Most of us can recognize a scam, especially when it comes in the form of an offer to repair your credit. Advertisements by credit repair firms found in the local pennysaver (you know, the free ads found at your local laundry mat) promise to magically erase the negative marks from your credit reports. Like dad always advised, “If it seems too good to be true, it probably is.”

But what if the credit repair firm is a “not-for-profit” or even a lawyer? To help consumers tell the unscrupulous wolves from the sheep offering good and lawful services at a fair price, Congress enacted laws to regulate the credit repair industry. The rules are codified in the Credit Repair Organizations Act, or “CROA.” According to CROA, any company that provides services marketed as credit improvement and is paid for those services is a credit repair organization. That includes attorneys who offer credit repair assistance. See Rannis v. Recchia, 380 Fed.Appx. 646 (9th Cir. 2010). Not-for-profit organizations are exempt from the CROA, but many credit repair organizations that claim not-for-profit status are actually offering for-profit services and must adhere to the CROA.

Pursuant to the CROA, credit repair organizations may not charge a fee in advance for services, must provide certain disclosures to their customers, allow their customers to cancel at any time, and not make any guarantees regarding their results. The Federal Trade Commission is tasked with enforcement of the CROA. You can also file an action against the credit repair organization for actual damages, punitive damages, costs, and attorneys' fees for violations of the CROA.

Honest credit repair is not difficult. All three of the major credit reporting bureaus (Experian, Equifax, and Trans Union) provide simple and clear instructions on how to dispute inaccurate information on your credit report. A copy of your report is available from each of these bureaus simply by visiting a website: annualcreditreport.com. In other words, a credit repair organization cannot do anything more than you can do for yourself.

Not all credit repair organizations act honestly or within the spirit of the federal rules. Some engage in “guerilla tactics” and dispute every negative item on a credit report, whether accurate or not. The credit bureau is then obligated to either verify the accuracy of the information within 30 days, or remove it from the individual’s record. The problem is that after you have paid the credit repair organization for its magical services, the information may reappear on your report after it is verified (or, in some cases, inaccurate information may show up again). The credit repair company gets your money and you only get temporary relief.

Before you hire a credit repair company that you found while waiting for your whites to tumble dry, have your situation reviewed by a licensed bankruptcy or consumer credit attorney. Your attorney can use the federal laws to improve your credit, reorganize your finances, or help you attain a fresh financial start.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com

Avoid the Bankruptcy Means Test

The great Chinese military general Sun Tzu once wrote, “The best victory is to win without actually fighting.” In bankruptcy, the best way to beat the means test is to avoid it altogether. Taking the Means Test only complicates your bankruptcy case, and may disqualify you from Chapter 7, force you into a five year Chapter 13, or make you pay more money each month to unsecured creditors. There are three situations when an individual is excepted from taking the bankruptcy Means Test:

Disabled Veteran

Some disabled veterans may qualify to avoid the Means Test. First, the individual must be (1) a veteran who is entitled to compensation under laws administered by the Secretary for a disability rated at 30 percent or more, or (2) a veteran whose discharge or release from active duty was for a disability incurred or aggravated in line of duty.

Second, the debts in your bankruptcy case must have been “primarily” incurred while on active duty, or while performing a homeland defense activity. “Primarily” is generally interpreted by the bankruptcy courts as greater than 50%.

Primarily Non-Consumer Debts

The Bankruptcy Code excepts business debtors from the Means Test. If your business-related debts comprise more than 50% of your total debt, then you are excused from the Means Test requirement. Courts differ on the definition of “non-consumer” debts. Debts incurred with a profit motive, like a bank loan to buy a commercial oven for your upstart catering business, are clearly non-consumer debts. However, some courts have stated that personal tax debts and student loans are non-consumer debts as well.

Active Duty Military, Reservists and National Guard

Active duty military members also get a pass on the Means Test. In order to qualify, the individual must have been on active duty for at least 90 days, or performed a homeland defense activity for a period of at least 90 days. The Means Test exclusion lasts for the duration the individual is on active duty or performing a homeland defense activity, and for 540 days thereafter. Once the 540 day exclusion period ends, if the time has not passed for objections to the Means Test qualification in your bankruptcy case, you will have to take and pass the Means Test.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Debts that are discharged in Chapter 13, but not in Chapter 7

Some debts are discharged at the end of Chapter 13 case which cannot be discharged in a Chapter 7 bankruptcy. Chapter 13 is a payment plan bankruptcy, and creditors are repaid over three to five years. That’s a long time for a debtor to remain in bankruptcy, so Congress has placed a few “carrots” to entice individuals to file Chapter 13 and attempt to repay whatever he or she is able.

A list of nondischargeable debt is found in Section 523 of the Bankruptcy Code. All of the debts listed in that section are not dischargeable in a Chapter 7 or Chapter 11 individual case. Some attorneys less familiar with the Bankruptcy Code believe that debts excepted by Section 523 are also excepted in Chapter 13 cases. Well, some are, but Chapter 13 has its own section that identifies nondischargeable debts: Section 1328. This specific section applies only to Chapter 13 cases and supersedes the general provisions in Section 523 that apply to all cases. Bankruptcy attorneys refer to these differences as part of Chapter 13’s “Super Discharge.”

Debts that are not dischargeable in Chapter 7, but can be discharged in Chapter 13 bankruptcy include:

  • willful and malicious injury by the debtor to another entity or to the property of another entity [11 USC § 523(a)(6)]
  • civil fines and penalties [11 USC § 523(a)(7)]
  • debts that couldn’t be discharged in a previous bankruptcy [11 USC § 523(a)(10)]
  • debts incurred to pay a nondischargeable tax debt [11 USC § 523(a)(14) and (14a)]
  • marital debts created in a divorce or settlement agreement [11 USC § 523(a)(15)]
  • condominium, cooperative, and home­owners’ association fees incurred after the bankruptcy filing date [11 USC § 523(a)(16)], and
  • debts for loans from a retirement plan [11 USC § 523(a)(18)].

The Bankruptcy Code contains general rules on discharging debts, but applying these rules to the specifics of an individual’s bankruptcy case can mean the difference between a fresh start and a false start. You need an experienced attorney on your side to apply the rules and ensure that you obtain the full benefits of the bankruptcy laws.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Keeping Your Homestead Exemption in Bankruptcy

When a court interprets a statute to apply the law to a set of facts, it first looks at the “plain meaning” of the statute. The United States Supreme Court discussed the plain meaning rule in Caminetti v. United States, 242 U.S. 470 (1917), reasoning “[i]t is elementary that the meaning of a statute must, in the first instance, be sought in the language in which the act is framed, and if that is plain... the sole function of the courts is to enforce it according to its terms.”

The plain meaning rule often plays an important part in exemption issues during bankruptcy. The bankruptcy court will examine the statute and apply it to the facts of the case. How the court interprets both the statute and the facts of the case can mean the difference between protecting and losing property during a bankruptcy case.

For instance, James and Glory Demeter had maintained their principal residence at a home in Riverview, Michigan, since 1972. In fact, they occupied the home when they filed Chapter 7 bankruptcy in 2012. But they also owned a second home in Cheboygan purchased in 1996. The Demeters lived in Riverview half the year and Cheboygan half the year, and they planned to ultimately live in Cheboygan full time. Consequently, the Cheboygan property was never rented out, never winterized, and was used on winter holidays including Christmas and New Year.

A Michigan bankruptcy court allowed the Demeters to apply their homestead exemption under Section 522(d)(1) of the Bankruptcy Code to protect the Cheboygan property. The court pointed out that this section is not limited to the debtor’s primary or principal residence (whatever those terms mean, since they are not defined by the Bankruptcy Code). The court said that a bankruptcy debtor can apply the homestead exemption to any property that the debtor uses as a residence, even if his principal residence is elsewhere. See In re Demeter, 478 B.R. 281 (Bankr. E.D. Mich. 2012).

Likewise, in the case of Condit v. McKeithan, Case No. 11-41305 (5th Cir. 2012), a debtor was allowed to claim a homestead exemption on property she owned in Texas, but had not resided in for nine years! The debtor had lived with her daughter in Louisiana due to a medical condition, but never abandoned the property in question and consistently stated her intention to return when her health would permit. The debtor maintained the property, paid the taxes and insurance, and kept utilities. She even had an active land-line telephone at the property. However, the debtor used her daughter’s address for mail and on her driver’s license.

Once a property has acquired the status of a homestead, this status typically continues until an abandonment occurs, which depends largely upon the intent of the debtor/claimant and upon the facts of the case (and how the court interprets the homestead statute). The 5th Circuit Court of Appeals stated in Condit v. McKeithan that abandonment of a homestead requires both cessation of use of the property as the debtor’s homestead coupled with an intent to permanently abandon the property as a homestead. The appellate court said that the evidence did not indicate any intent to permanently abandon the homestead.

Placing property on the market with an intent to sell may also put the debtor’s homestead exemption at risk. By evidencing no intent to remain in the home, the debtor may abandon his homestead exemption under certain state laws. See Carpenter v. Brown, 13-CV-61183-KMM (SD Fla. 2013)(signing contract for sale before bankruptcy abandons homestead exemption, even though debtor still lived in property). In some cases the debtor’s intent to reinvest proceeds from the sale of a home into another homestead (within a reasonable time) may be sufficient to protect the homestead exemption. See Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 201 (Fla. 1962).

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com

Credit Unions Can Help After Bankruptcy

Rebuilding your credit after bankruptcy is not automatic. Raising your score and proving your credit-worthiness takes vigilance and persistence. If you never re-establish your credit, then the last (and eventually, only) entry on your credit report will be your bankruptcy filing. To raise your score, you must show responsible use of credit.

There are many credit roads to take after bankruptcy. Many individuals report receiving credit card offers in the mail a few weeks after filing bankruptcy. Most of these offers contain high interest rates and fees, but are effective to re-establish a revolving credit history. Installment loans and revolving credit are two types of credit that will quickly raise a credit score.

Perhaps the safest and least costly way to rebuild your credit is by taking advantage of credit building programs at your local credit union. Unlike banks, which are publically owned and concerned with turning profits for shareholders (generally through large-scale lending), credit unions are owned by members and are not-for-profit institutions. Consequently, most credit unions offer aggressive and helpful products to assist members with credit problems.

Credit Builder Loan

A Credit Builder Loan is an old trick that bankruptcy debtors have used for years. It is a simple signature loan secured by a cash deposit. For instance, you give the credit union $500, and it loans you $500. You make a monthly payment at a low interest rate, and the credit union reports your payments to the credit bureaus. At the end of the loan, the deposit is returned to you, plus interest.

Secured Credit Card

Many credit unions also offer secured credit cards to their members. A secured credit card works in much the same way as a Credit Builder Loan: you make a small cash deposit with the credit union, say $500, and the credit union extends you a credit line on a Master Card or Visa. When you make a small purchase on the card and pay the monthly payment, the credit union reports the responsible credit usage and payments to the credit bureaus. Once the account is finally closed, the deposit is returned to the member. In many cases the secured card is converted into an unsecured card after the member proves his or her credit worthiness.

Rebuilding a credit profile after bankruptcy and raising your credit score is not difficult, it just takes some savvy and some effort. Your bankruptcy attorney can provide you with helpful credit rebuilding tips and suggestions that are tailored to your individual case.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Discuss Your "Clever" Bankruptcy Ideas with Your Attorney

The bankruptcy debtor is always in the best position to know his or her financial condition. Because the debtor thinks, worries, and sometimes obsesses over unpaid debt, occasionally a light bulb goes off that appears to fix a financial problem. The remaining question is whether the bankruptcy law will permit the debtor’s clever idea, or will acting on this idea make matters worse.

In theory, giving a security interest before bankruptcy can protect otherwise non-exempt property during the bankruptcy case. For example: suppose the debtor “borrowed” money from mom to buy a car. No lien was ever recorded (because good sons always repay their mothers!). On the eve of bankruptcy, the debtor owes mom $8,000 and the car is worth $8,000 (or $5,000 more than his state’s exemption law will allow him to protect). So, the debtor can simply give his mother an $8,000 secured interest in the car, right? Then the Chapter 7 trustee would have to pay mom $8,000 should he liquidate the car. In other words, the car is fully secured, mom’s secured interest survives the bankruptcy (and the debt may be reaffirmed by the good son), and there is no longer an equity issue. A light bulb moment if there ever was one!

Unfortunately, this type of secured interest given on the eve of bankruptcy is a preferential transfer that the trustee can avoid. The trustee can sell the property without paying mom (who would be just a general, unsecured creditor after the lien is avoided). If you give a security interest to friends or relatives, you must wait to file bankruptcy (three months or a year for friends, one year for relatives) or the trustee can sue them to cancel the security interest.

When you are in financial trouble and considering bankruptcy, speak with your attorney before acting on a “bright idea.” There is no prohibition against pre-bankruptcy planning to ensure that you protect your property and discharge your debts. In fact, it is expected and even encouraged by the courts. However, moving assets around and securing property without legal advice before bankruptcy can result in trouble during the case,

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

Supreme Court Denies Certiorari in Chapter 7 Lien Stripping Case

I didn’t say the things I said.

Quote attributed to baseball great Yogi Berra

One of the main benefits of bankruptcy is the ability of the debtor to restructure his finances, and, in some cases, modify debts by reducing principle or changing terms, like the interest rate or length of the contract. The opportunity to modify an underwater home mortgage is obviously an enormous benefit for someone struggling to pay bills and keep his family home. Unfortunately, Congress made it clear that Chapter 13 debtors may not modify a primary home mortgage (see 11 U.S.C. § 1322(b)(2)), and the U.S. Supreme Court decided that modifying an upside-down home mortgage is not available for Chapter 7 debtors. See Dewsnup v. Timm, 502 U.S. 410 (1992).

But bankruptcy courts around the country have allowed Chapter 13 debtors to “lien strip” junior home mortgages, but only when the junior mortgage is entirely unsecured. For example:

            Home value:                $300,000.00

            First Mortgage: $300,001.00

            Home Equity:              -$1.00

Since there is no remaining equity in the home after paying the first mortgage, any junior mortgage is unsecured. Most courts agree that any junior lien in our example home may be stripped away, and the remaining unsecured debt either paid in full, partially paid, or entirely discharged at the end of a Chapter 13 case.

Unlike in Chapter 13 cases, this lien stripping opportunity has not been extended to Chapter 7 debtors. For years bankruptcy courts have applied Dewsnup and held that a Chapter 7 debtor may not strip off a wholly unsecured junior lien. See Palomar v. First American Bank (In re Palomar), No. 12-3492 (7th Cir. July 11, 2013); Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortg. Serv., 344 F.3d 555 (6th Cir. 2003); Wachovia Mortg. v. Smoot, 478 B.R. 555 (E.D.N.Y. 2012). Things changed for some Chapter 7 debtors in 2012 when a unanimous panel of the Eleventh Circuit Court of Appeals found Dewsnup to be irrelevant when applied to a junior mortgage that is entirely unsecured. In re McNeal, Appeal No. 11-11352, 2012 WL 1649853 (11th Cir. May 11, 2012).

Since there is a split in the Circuit Courts, and the matter is of tremendous importance to many debtors, it would seem that the issue of lien stripping an unsecured junior home mortgage in Chapter 7 would be ripe for restatement by the Supreme Court. Sadly, the High Court recently denied certiorari in such a case and refused to hear the issue. The case of Bank of America v. Sinkfield, No. 13-700, asked whether a wholly unsecured lien may be stripped off in a Chapter 7 case. In that case the Eleventh Circuit courts allowed the debtor to strip off the lien, so by refusing to hear the case, the debtor, Sinkfield, scored a decisive victory. However, this issue remains hotly contested in many areas, and the Court’s refusal to hear the matter has left many debtors in limbo wondering how to interpret the Supreme Court’s silence.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com . 

The Bankruptcy Discharge

You know the old saying, “You can’t see the forest for the trees?” Well, this saying can apply in the bankruptcy world also. Sometimes debtor attorneys get so caught up in examining the trees (like fraudulent transfers or presumption of abuse cases) that they lose sight of the “big picture.” For most debtors, the main benefit of bankruptcy is the promise of a “fresh start” - and that means a bankruptcy discharge.

But what is a bankruptcy discharge?

The usual answer is something like, “A discharge in bankruptcy is a permanent court injunction prohibiting creditors from attempting to collect on any debt that was discharged.” But that answer sounds a little circular and confusing, so let’s take a brief look at some of the main benefits of the bankruptcy discharge using plain English:

 

No Longer Legally Enforceable

A debt that is discharged during the bankruptcy case is no longer an obligation that can be legally enforced against the debtor. The debt is still there, it’s not erased or “wiped out,” but the bankruptcy judge has ordered that the creditor is forever barred from taking any action to collect it from you, personally. No longer owing the money and the creditor not being able to collect is hair splitting in most cases – it generally has the same effect.

 

Creditor Harassment Stops

The discharge injunction means that ALL collection action on a discharged debt must stop. Forever. It means that the creditor is not permitted to contact you by mail, phone, or otherwise, to file or continue a lawsuit, to attach your wages or other property, or to take any other action to collect a discharged debt from you. This applies to any individual or entity trying to collect the debt, such as collection agencies and collection attorneys. A creditor or third party collector who violates this discharge injunction may be found in contempt of the bankruptcy court’s injunction, and ordered to pay damages and attorney fees.

Negative Credit Reporting Stops

An often overlooked consequence of the discharge injunction is that creditors are prohibited from reporting negative information on your credit report. When the bankruptcy case is filed, the automatic stay temporarily stops negative reporting on your credit report (which is seen as an attempt to collect a debt through indirect pressure), later the discharge injunction makes this stay permanent. A discharged debt should be reported as “discharged in bankruptcy” with a “zero balance.” There should be no further derogatory remarks of any kind after the bankruptcy case is filed, which also includes any collection agency transfer. In effect, filing bankruptcy “freezes” the discharged debts on your credit report which will help you rebuild after bankruptcy.

As the United States Supreme Court said in case of Local Loan Co. V. Hunt (292 U.S. 234, 1934), the bankruptcy discharge provides “a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.” The bankruptcy discharge is a powerful tool that can help a financially burdened individual gain a fresh start. Speak with an experienced bankruptcy attorney today to discover how a bankruptcy discharge can help you.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

What Happens at the End of a Chapter 13 Bankruptcy?

After completing a Chapter 13 repayment period that lasts a minimum of three years and a maximum of five, most debtors receive a discharge from the bankruptcy court. Section 1328 of the Bankruptcy Code sets out the discharge eligibility of a Chapter 13 debtor. This section states that a Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 repayment plan so long as the debtor:

1.  certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid

2.  has not received a discharge in a prior case filed within a certain time frame (two years for prior Chapter 13 cases and four years for prior Chapter 7, 11 and 12 cases); and

3.  has completed an approved course in financial management.

 

The discharge injunction stops creditors from seeking payment from the debtor for all debts provided for by the plan or disallowed under Section 502, with limited exceptions. Discharged creditors may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in Section 1328. Debts not discharged in Chapter 13 include certain long term obligations (such as a home mortgage), Domestic Support debts such as alimony or child support, some taxes, most student loans, debts arising from death or personal injury caused by driving while intoxicated, and debts for restitution or a criminal fine. To the extent that they are not fully paid under the Chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded.

Certain debts are discharged unless a creditor timely files and prevails in an action to have such debts declared non-dischargeable, including:

                         1.    debts for money or property obtained by false pretenses,

                         2.    debts for fraud or defalcation while acting in a fiduciary capacity, and

                         3.    debts for restitution or damages awarded in a civil case for willful or malicious    

                                actions by the debtor that cause personal injury or death to a person.

The discharge in a Chapter 13 case is somewhat broader than in a Chapter 7 case. Debts dischargeable in a Chapter 13, but not in Chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com .

 

Criminal Bankruptcy Fraud

Bankruptcy fraud is a federal crime punishable by a fine, or by up to five years in prison, or both. The federal law defines actions constituting criminal bankruptcy fraud in Sections 151 through 158 of Title 18 of the United States Code. These laws apply to any proceeding, arrangement or plan under the Bankruptcy Code. The purpose of creating and classifying these crimes relating to bankruptcy fraud is to preserve honest administration in bankruptcy proceedings and to ensure the distribution to creditors of as large a portion of the debtor’s estate as possible.

Ultimately, bankruptcy fraud is an act of dishonesty in connection with a bankruptcy case. Examples of bankruptcy fraud include:

·      filing bankruptcy documents for a fraudulent purpose;

·      making a false or fraudulent representations in connection with a bankruptcy case for a fraudulent purpose;

·      knowingly and fraudulently concealing property of the bankruptcy estate; and

·      knowingly and fraudulently concealing, destroying, mutilating, falsifying, or making a false records relating to the property or financial affairs of the debtor.

Bankruptcy crimes are prosecuted by the United States Attorney, typically after the case has been referred by the U.S. Trustee, an interim bankruptcy trustee, or by a bankruptcy court judge. In some cases a “tip” may be received from an outside source that may lead to prosecution. Bankruptcy fraud may also result in criminal prosecution in state courts for violations of state law.

Report of Violations of Bankruptcy Fraud

Section 3057(a) of Title 18, United States Code, requires a judge, receiver or trustee to report to the U.S. Attorney whenever there is reason to believe that criminal bankruptcy fraud has occurred. Bankruptcy fraud may also be reported by any individual by emailing the following information to USTP.Bankruptcy.Fraud@usdoj.gov:  

·         Name and address of the person or business you are reporting.

·         The name of the bankruptcy case, case number, and the location of where the case was filed.

·         Any identifying information regarding the individual or the business.

·         A brief description of the alleged fraud, including how the fraud was discovered and all supporting documentation.

·       Identify the type of asset that was concealed and its estimated dollar value, or the amount of any unreported income, undervalued asset, or other omitted asset or claim.

·       Your name, address, telephone number, and email address (you are not required to identify yourself, though it is often helpful to do so if questions arise).

Upon receipt of this report, the U.S. Attorney determines whether an investigation should be commenced. Agents from the Federal Bureau of Investigation (FBI) generally investigate cases of bankruptcy fraud, but other agencies such as state prosecutors and police or the Internal Revenue Service may also become involved. The U.S. Attorney has final say on whether an investigation from criminal bankruptcy fraud is commenced.

If you are considering filing for bankruptcy please contact the experienced attorneys at Fears | Nachawati for a free consultation. Call us at 1-866-705-7584 or send an email to fears@fnlawfirm.com

Bankruptcy Filing Fees Increase June 1, 2014

The cost of going broke is going up. The Judicial Conference of the United States has approved several bankruptcy related fee increases at its March 2014 session. These fee increases will take effect starting June 1, 2014, and include the basic filing fee for initiating a case in the bankruptcy courts.

For filing a petition under Chapter 7, 12, or 13, the filing fee will increase by $29:

  • The Chapter 7 filing fee will be $335, up from $306.
  • The Chapter 12 filing fee will be $275, up from $246.
  • The Chapter 13 filing fee will be $310, up from $281.

The fees for filing a petition under Chapter 9, 11, or 15 increase by a whopping $504:

  • The filing fee for case filed under Chapter 9, 11 or 15 will be $1,717, up from $1,213.

Additionally, the fees for certain motions will increase on June 1:

  • A motion to divide a joint case under Chapter 7, 12, or 13 is filed is increasing to $75. A motion to divide a joint case under Chapter 11 is increasing to $550.
  • The fee for filing an adversary complaint in bankruptcy will increase to $350, except if the trustee or debtor-in-possession files the complaint.

It remains to be seen whether these higher fees have a “chilling effect” on the number of bankruptcy cases filed in the future. Higher filing fees can only make it harder for financially strapped individuals to obtain the relief they need.

If you are struggling with debts you cannot pay, speak with an experienced attorney at Fears | Nachawati and discover your options through the federal bankruptcy laws. In some cases filing fees may be paid over time or waived altogether by the bankruptcy court. Contact us at 1.866.705.7584 or send an email to fears@fnlawfirm.com.

What if I left something out of my bankruptcy case?

When you file for bankruptcy you are required to list all of your assets, your debts, and your income. All the statements and schedules filed in your bankruptcy case are signed under penalty of perjury. Therefore it very important to make sure you tell your attorney about everything that you own. Even if you don’t believe it is something that you would normally list or disclose.

From time to time errors are made and things are left off. If you forgot to list an asset or a debt contact your attorney immediately and they can amend your schedules to add the missed item. Typically missed items are life insurance policies—especially those that carry cash value—child support payments owed to the person filing, and cars titled to the filer but driven by someone else.

The reason it is so important to give your attorney this information up front is that all assets must be exempted or they may cause major changes in your case. A non-exempt asset in a chapter 7 can be sold and can cause a plan payment to increase in a chapter 13. While the exemptions can be amended if it something that was not originally anticipated, it may not be something that can be exempt.

If you forgot to list one of your debts, these can also be added. Most courts charge a filing fee to add or remove creditors after the case was filed. Also, notice needs to be sent to the creditor. A judge or trustee will not usually have an issue with adding creditors but may deny the amendment if the addition would have an adverse effect on the creditor; in other words, it may be denied if the creditor was not missed in harmless error.

If your bankruptcy case has already ended it may not be possible to reopen it to add the missing information. However, it is very important that you contact your attorney especially if an asset was left off. The bankruptcy code also imposes strict fines on people who knowingly try to deceive the court by failing to list assets. This is known as a bankruptcy crime. To avoid committing this crime, be sure to contact your attorney if you discover anything missing from your petition and they can discuss the issue with you further.

For more information about bankruptcy, check out our website at www.fnlawfirm.com. To set up a free consultation call our office at 1.866.705.7584 or send an email to fears@fnlawfirm.com.