Credit Scores (Part 2)

In part two of our blog on credit scores, we will discuss how to rebuild your credit score after completing a bankruptcy.

 
While the filing of bankruptcy places a negative report on your credit, rebuilding your credit rating after completing a bankruptcy is a manageable task.  Once completing a bankruptcy, the debtor’s credit report will not reflect a positive credit history, which makes up the largest influence on the overall credit score.  Also included in credit history, is the public record of filing bankruptcy.
One method of keeping at least some positive credit history after completing a bankruptcy is reaffirming debts during a Chapter 7.  In the typical case, debtors have the option of reaffirming their secured debts, including mortgages, car notes, and debts secured by other property such as furniture or electronics.  After reaffirming those debts, the terms essentially stay in place as if they were not including in the bankruptcy.  The payment history for reaffirmed debts should continue to reflect the payments made prior to, and after, the bankruptcy has been completed.
 
Even if there are reaffirmed debts after a bankruptcy, debtors will need to establish a positive credit history to help rebuild their credit after the completion of their case.  One method of establishing a positive credit history is to open, and use, a credit card after discharge.  While many debtors believe they will be unable to qualify for a credit card after bankruptcy, they will likely get inundated with credit card offers soon after their discharge.  Although there is generally a negative perception to one’s ability to maintain credit with a bankruptcy on their record, many lenders will offer credit to recent bankruptcy filers because their debt has likely been eliminated and they are ineligible for another discharge for eight years.  
 
It is important to note that any credit cards obtained after a recent discharge will likely come with unfavorable terms and high interest rates.  Accordingly, it is generally considered the better practice to open one or two secured credit credits after bankruptcy.  Secured credit cards work like regular credit cards but require a security deposit to open which generally range between $500-$1,500.  The deposit typically becomes the credit limit for the card.  As with unsecured credit cards, each offer varying terms and differing interest rates.  When using the card to establish and build credit, it is important to use the card each month and pay off the entire balance.  Prior to signing up for a secured credit card, you will want to ensure the issuer reports to all three major credit bureaus.  After a period of making regular payments on time, you will eventually qualify for an unsecured credit card at near market terms.
 
After building a positive credit history through the use of credit cards, you can eventually look to purchase a car or even a house.  Federal Housing Administration (“FHA”) loans are available to former debtors after 2 years from a Chapter 7 discharge.  In addition, FHA loans may be obtained during a Chapter 13 after one year of timely plan payments.  These timelines may be adjusted if the borrower provides an explanation of extenuating circumstances which led to the bankruptcy filing along with their application for the FHA loan.
 
When working to reestablish your credit and build a favorable credit score, it is important to continue to monitor your credit report for errors and inconsistencies.  While there are Credit Repair companies willing to assist, these companies are generally perceived as a scam.  Disputes to information on the credit report can be done effectively on a “Do-it-Yourself” basis.  Most disputes can be completed online at through the websites for the three major credit reporting companies.
 
GUIDELINE FOR IMPROVING CREDIT
 
Below is a suggestion for steps to take following bankruptcy to rebuild credit:
 
1) Get a Credit Report and Check Your Score
 
Credit reports can be obtained for free from each agency once per year.  After completing a bankruptcy, it is important to review the credit report to check for any errors.  Make sure debts which were discharged are reflected correctly.  Also ensure that any debts which were reaffirmed continue to show the credit history.  Dispute any inconsistencies with the credit agencies.  
 
2) Open a Bank Account
 
If you do not already have a checking or savings account, open a new account.  Get an account that allows automatic bill pay and set it up to prevent missed or late payments.
 
3) Apply for a Secured Credit Card
 
Although you will receive offers for unsecured credit cards shortly after completing bankruptcy, secured credit cards will likely provide better terms and lower limits which should help prevent falling back into debt.  The credit limit on secured credit cards is generally the deposit required to open the account.
 
4) Pay Off the Balance Every Month
 
Make sure to use the card to make small purchases every month.  Having an open credit card without any usage does not help build credit.  It is also important to pay the balance in full on time each month.  The amount of debt owed makes up a large portion of the credit score.  Because the credit limit is likely to be small when opening secured credit cards, it is best to not leave running balances on the cards from month to month.  Paying off the balance in full also prevents accruing interest.
 
5) Continue to Monitor Your Credit
 
Continue to pull a credit report and monitor for inconsistencies.  Make sure any new accounts are showing their timely payments and continue to dispute any incorrect information.  As previously mentioned, you are entitled to one free credit report per agency per year.  It is best to spread these free reports over the year and obtain a report every 3-4 months from one agency at a time.

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.

Credit Scores (Part 1)

In this series on Credit Scores, I will discuss the various types of credit reports and the factors which influence your credit score.  Credit reports consist of detailed information regarding an individual’s current and past financial obligations.  Credit scores are essentially a numerical grade of the information contained within the credit report.  These scores are used by credit card issuers, auto lenders, mortgage companies, and other lenders to judge the applicants financial responsibility prior to issuing credit. Remember you can obtain your free credit report from each agency one time per year at www.annualcreditreport.com.  Contact the attorneys at Fears Nachawati with any questions. 

 
TYPES OF CREDIT SCORES
  1. FICO Scores - FICO (otherwise known as the Fair Isaac Corporation), created the first credit scores in the 1950s. Since their creation, FICO scores remain the most widely used scoring model by lenders with over an estimated 90 percent of the market share in 2010 of scores sold to firm for use in credit related decisions.  Although there are different FICO scoring models, the scores generally range from 300 to 850.
  1. Credit Reporting Agency Scores - Credit Reporting Agencies (Equifax, Experian and TransUnion) each utilize their own scoring model, which causes scores to vary among the three main agencies.  These scores were originally created to predict performance on credit obligations.  However, today these scores are primarily used as educational scores for consumers.  Each agency uses differing ranges of scores.  For example:
    • Equifax’s Credit Score ranges from 280 to 850.

    • Experian Plus Score ranges from 330-830.

    • TransUnion TransRisk New Account Score ranges from 300-850.

  1. VantageScore - VantageScore is produced by VantageScore LLC, which is a joint venture of the three credit reporting agencies.  It was developed as a competitor to FICO. VantageScore results range on a scale from 501-990.
CALCULATING THE CREDIT SCORE
 
While there are multiple credit scores, as noted above, the credit score of primary concern is the FICO score.  The FICO score is generally based on five categories, each of which are weighted to have a varying impact on the overall score.  These categories, sorted by overall importance, are:
  • -Payment History (35%)
Credit payment history is one of the most important factors in a FICO score.  Lenders, who want to know whether you’ve paid past credit accounts on time, place a heavy reliance on payment history.  While a few late payments may not have a major impact on the credit score, numerous late payments, or a history of routinely late payments, will significantly drop the credit score.  FICO specifically looks at how late the payments were made, how much was owed, how recently the late payments occurred, and how many late payments are on the account.  Typically, late payments are reported as either 30 days late, 60 days late, 90 days late, 120 days late, 150 days late, or a charge off.  It is important to note that when a debt is “charged off,” it does not mean that debt is no longer owed.
 
Account types considered for payment history include credit cards, retail accounts (i.e. department store credit cards), installment loans, finance company accounts, and mortgage loans.  Public records and collection items also fall under the payment history category, which include the filing of bankruptcy.  Paying accounts on time, or a good track record on most of your accounts, will have a positive influence and increase your credit score.
 
  • Amounts Owed (30%)
The second leading influence on credit scores is the amount of debt owed on specific accounts.  Credit scores are affected by the number of accounts you have with balances.  In addition, the proportion of credit limits utilized will affect the credit score as well.  For example, when someone is approaching their credit limit on a card, this may indicated that they are overextended and more likely to make late or missed payments.
  • Length of Credit History (15%)
As the category suggests, the length of time your credit account has been open influences your credit score.  Having numerous recently opened accounts will negatively impact your score.  In addition, the length of time from your last activity on an account may also lower your score.
 
  • Types of Credit in Use (10%)
Credit scores are effected by total number of open accounts you have and the overall makeup of that mix of credit.  It is not necessary to have each type of credit account considered to establish good credit.  However, it is also important not to open a lot of accounts you do not intend to use.  
  • New Credit (10%)
The number of recently opened accounts will effect the credit score.  Opening multiple credit cards in a short period of time may negatively effect your score.  In addition, running up high balances on recently opened cards will also have a negative impact.  
 
Credit inquires also fall into the New Credit category when determining the credit score.  Checking your credit report will not effect your credit score as long as the report is obtained directly from the credit reporting agency.  Reports from all three may be obtained for free from www.annualcreditreport.com.  Multiple credit inquires from creditors may negatively impact your score.  However, numerous inquires in a short period of time, such as when shopping for a car, are typically treated as a single inquiry and will have little impact on the overall credit score.
 

The Typical Chapter 7 Timeline

 A lot of my clients have not previously filed for bankruptcy.  One of the most common questions is gaining an understanding of the general timeline and process of your typical Chapter 7 Bankruptcy.  In general, Chapter 7 is the quickest bankruptcy to complete.  The typical Chapter 7 case is completed within three to six months of the filing date.  Keep in mind, before you can file a Chapter 7 bankruptcy, you need to complete your pre-filing Credit Counseling Course from a certified credit counseling agency.  You must also qualify for Chapter 7 by passing the Means Test, which will be completed by your attorney and filed as part of your petition and schedules.

 
After your case is filed, the Court will assign a Trustee to your case and schedule the Section 341 Meeting, otherwise known as the Meeting of Creditors.  This meeting generally takes place around 30 days after the case was filed.  It will be held by the Trustee assigned to your case.  All of your creditors are invited to attend the meeting, however, creditors rarely attend.  At the meeting, you will discuss the schedules filed in your case and provide a brief explanation on what caused you to file for bankruptcy.  These meetings typically last 10 minutes.
 
Creditors have 60 days from the completion of the Meeting of Creditors to file an objection to discharge.  Assuming there are no objections, you should receive your Discharge Order roughly 60 days after your Meeting of Creditors.  Once the Discharge is entered by the Court, your case will be closed and your Bankruptcy will be completed.  Please see our series on rebuilding credit after your bankruptcy for further discussion of how bankruptcy affects your credit. 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.
 

Getting Married During My Bankruptcy

For those involved in a Bankruptcy, rest assured that your Bankruptcy case will not prevent you from getting married.  For those involved in a Chapter 13 Bankruptcy however, your upcoming marriage may have an effect on your case.
 
In a Chapter 13 Bankruptcy, you are required to pay your disposable income into your bankruptcy plan in order to pay back your creditors.  The calculation to determine your disposable income includes all household income.  Even if you file an individual case, as opposed to a joint case with your spouse, your spouse’s income is still included as the household income.  For those who get married after their case is filed, their household income may increase if their new spouse is employed.  The Bankruptcy Trustee will want to review their income to see if you can afford a higher return to your creditors.  While your new spouse’s credit will not be affected by your bankruptcy, their income may still come into play.   However, your spouse will have their separate expenses which they were responsible for before the marriage.  
 
If you decide to get married during your bankruptcy, congratulations!  Also, discuss your situation with your bankruptcy attorney who can assist you making any necessary changes to your bankruptcy plan and make sure any changes fit inside your budget. 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.
 

Facebook Friends May Affect Credit Worthiness

Most Facebookers (noun. A person using the social networking website Facebook) know that “friending” someone can enhance or soil a personal reputation. Companies use social media regularly as part of the hiring process. A person’s online reputation may be the difference between getting hired and losing a job opportunity.

Recently it was discovered that Facebook patented technology that could allow lenders to use a borrower's social network to determine whether he or she is a good credit risk.
 
The technology averages the credit ratings of the borrower’s Facebook friends and provides this score to a lender for consideration of the borrower’s credit application. The patent states: “If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.” 
 
This is the ultimate example of “guilt by association” that your mother always warned you about.
 
Facebook has not commented regarding this technology, and it is not clear whether it will ever be used. The federal Equal Credit Opportunity Act strictly regulates what criteria creditors can use when deciding on a loan -- things like income, expenses, debts and credit history determine creditworthiness.
 
For now, it may be prudent to consider the possible implications (and future risks) of friending someone on Facebook. That’s not just good advice -- it could make a huge difference to your future financial success.
 
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.
 

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.

Simple Guide to Rebuilding Your Credit after Bankruptcy: Part Two

Note: This article is a continuation from Part One of the Simple Guide to Rebuilding Your Credit after Bankruptcy.

Six Months after Discharge
  • Apply for an unsecured credit card. An internet search will help in your research to find unsecured cards for individuals with a recent bankruptcy discharge. If you are declined, call the company immediately and request a reconsideration. Charge on this card monthly, but no more than $100 on this card, ever. Pay this card off completely every month as soon as you get the bill.
  • Apply for a gas or retail store card. Gas and retail cards typically don't require applicants to have good credit and, in fact, cater to folks with blemished credit.
One Year after Discharge 
  • When your secured loan at the credit union ends, request an unsecured loan between $1,000 and $2,000. You should also discuss options for an unsecured credit card through the credit union.
  • Obtain new credit bureau reports from http://www.annualcreditreport.com and review these reports for accuracy. It is surprising how often discharged debts can “magically” reappear on an individual’s credit report.
  • A new vehicle purchase should be put off until at least one year after your bankruptcy discharge. A credit score can recover quickly after bankruptcy, and many captive finance companies (e.g. Ford Motor Credit) require both a reasonable credit score and recent history of on-time payments. A new vehicle loan is a major credit purchase, and on-time payments will propel your credit score upwards and demonstrate responsible management of significant credit. 
Two Years after Discharge
  • Obtain new credit bureau reports from http://www.annualcreditreport.com. Review these reports for accuracy. Many bankruptcy debtors are able to obtain an above-average or even excellent credit score within two years after bankruptcy.
  • A home purchase is available to many debtors two years after a bankruptcy discharge. Most government-backed loans require a two year “seasoning” after a bankruptcy discharge. Speaking with your credit union about their loan products is a good first step in the home purchase process.

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.

Simple Guide to Rebuilding Your Credit after Bankruptcy: Part One

This is a simple guide for rebuilding your credit after a bankruptcy discharge. Recovering from the effects of bankruptcy takes time and attention. This guide suggests a basic 24 month timeline for rebuilding credit.

 
T minus One
Before your bankruptcy case is discharged, be sure to review your bankruptcy schedules and consider how your financial situation may have changed. It is very important to understand how your finances will be impacted by bankruptcy court’s discharge order. Some questions to ask are:
1.Which debts are discharged?
2.Are any other debtors impacted by this discharge (such as friends or family)?
3.Which debts are not discharged?
4.Do any liens survive the discharge?
5.Has the bankruptcy court avoided any liens on secured property (or judgment liens)?
6.Have I discharged my personal obligation to pay on a secured debt, but a lien survives?
 
At this point it is critical to have a clear and complete knowledge of who and how much you owe. Any debts that survive the bankruptcy must be paid on-time.
 
Immediately after Discharge
Congratulations! Rebuilding your credit begins now.
  • Collect all your bankruptcy paperwork, including a complete copy of your bankruptcy petition, schedules, and discharge order, and put these documents in a safe place.
  • Sign up for a three bureau credit monitoring service. You don’t want any surprises popping up on your credit. 
  • Obtain a copy of your credit report from each of the main credit reporting bureaus: Transunion, Experian, and Equifax. One free report from each of these bureaus is available every twelve months from http://www.annualcreditreport.com
  • Review each credit report and identify every debt that was discharged by your bankruptcy case. Each of these debts should be noted as:
    • Zero Balance;
    • Included in Bankruptcy; and
    • Current

It may be necessary to file a dispute with the credit bureau to ensure that the discharged debts are reported accurately. The credit bureaus are obligated to report back to you within thirty days and send a new, updated copy of your credit report.

  • Apply for a secured credit card that will “graduate” to an unsecured card within 12 months. Note that not all secured cards graduate. Secure this card with a minimum deposit of $500. Charge on this card monthly, but no more than $100 on this card, ever. Pay this card off completely every month as soon as you get the bill.
  • Go to your nearest credit union and open a new bank account. You may want to consider direct deposit and automatic bill pay options.
  • Open a one year / $1,000 secured loan at the credit union. The bank will place your $1,000 into an interest bearing account. Make your payment every month on-time. 
More to come in the next post.
 
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.

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."

Problems with Payday Lenders

 

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

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

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

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

How are Debts Handled in Bankruptcy

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

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

Priority Debts

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

Non-Dischargeable Debts

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

Secured Debts

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

Unsecured Debts

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

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

What is an Adversary Proceeding?

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

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

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

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

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

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

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

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

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

Can Creditors Harass You After You File Bankruptcy?

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

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

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

Delay on Foreclosure due to Chapter 13 Bankruptcy

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

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

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).

Filing Tax Return after the Deadline May Lead to Bankruptcy Trap

A troubling trend has now turned into a full-blown minority opinion in the bankruptcy world. Some bankruptcy and appellate courts are reading the Federal Bankruptcy Code to exclude late-filed tax returns from the definition of a “tax return.”

It has long been held that recent income tax debts are not dischargeable in bankruptcy, but older tax debts (that otherwise qualify under the Bankruptcy Code) may be discharged. Some courts, including the First, Fifth, and Tenth Circuit Court of Appeals, now find that changes to the Bankruptcy Code in 2005 exclude certain late-filed returns from discharge. These courts point to a “hanging paragraph” located at the end of Section 523(a) which defines a “return” as a tax filing “that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).” That paragraph specifies that returns filed by the IRS with debtor cooperation under 6020(a) are “returns,” but those filed by the IRS without debtor cooperation under 6020(b) are not.  

Recently the First Circuit in the case of In re Fahey, --- F.3d --- (1st Cir. Feb. 18, 2015), joined other courts in finding that “applicable filing requirements” includes meeting the tax filing deadline. In other words, a late filed return, even by as little as one day past the deadline, is not a “return” and is therefore not a dischargeable debt in either Chapter 7 or Chapter 13.

The First Circuit joins the Fifth Circuit (McCoy v. Mississippi State Tax Comm'n, 666 F.3d 924 (5th Cir. 2012)) and the Tenth Circuit (In re Mallo, 2014 WL 7360130 (10th Cir. Dec. 29, 2014)) in finding that the plain language of the Bankruptcy Code directs this interpretation. Basing its decision on plain language, the Fahey court found that a tax deadline is an “applicable filing requirement,” thereby rendering a return filed outside that time nondischargeable unless filed under 6020(a). The dissent in Fahey points out that permitting only late-filed returns under section 6020(a) absurdly rewards the tax debtor who sits on his hands and awaits IRS invitation to complete the return while punishing the debtor who voluntarily files his own return even one day late.

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.

Statute of Limitations and Foreclosure

Every state has a statute of limitations for filing a foreclosure action. A statute of limitations is a state law that tells the lender that a foreclosure must be filed within a certain time after default on a promissory note. If the foreclosure is not filed by that date, it is not valid and may be stopped or dismissed by a court. A statute of limitations is an “affirmative defense” and must be raised by the homeowner in defense of a foreclosure action. If it is not raised, it is generally considered “waived” and will not be considered in future lawsuits.

The time limit depends on the type of action and the claim that is involved. There are different statutes of limitations for oral contracts, written contracts, personal injury, and fraud. Generally, the statute of limitations for home foreclosures applies to written contracts (i.e. promissory notes). Some states (e.g., New Jersey), have a specific statute of limitations for foreclosure.

Each state has its own statute of limitations, which ranges from three years to 15 years. Most states fall within the three to six year range. The statute of limitations clock for a mortgage foreclosure usually starts when the default occurred, which is generally dated from the last payment.

A foreclosure must be initiated before the expiration of the statute of limitations period. For example, if the expiration of the statute of limitations is March 30, 2015, and the foreclosure is started on March 15, 2015, then the statute of limitations does not apply, even if the foreclosure is not completed before March 30, 2015. However, if the foreclosure action is dismissed or stopped by the lender after March 30, 2015, the time will have expired and the statute of limitations defense is effective against a future foreclosure.

If you have a home that is under threat of foreclosure, consult with an experienced bankruptcy attorney and consider your options.  In some cases, a statute of limitations defense may save your home from foreclosure.

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.

How Long You Must Stay in Chapter 13 Bankruptcy

The chief feature of a Chapter 13 bankruptcy is the repayment plan. A Chapter 13 bankruptcy gives a debtor time to restructure personal finances through monthly payments. How much time is the subject of today’s post.

100% Repayment

In general, a proposed Chapter 13 repayment plan must last between three and five years (36 and 60 months). However, there are exceptions. Some jurisdictions allow debtors to propose a repayment plan that is less than 36 months, if the debtor is paying back 100% of all debts (including nonpriority unsecured claims). 

Three to Five Year Plan

The length of a Chapter 13 repayment plan is often dictated by the debtor’s average income for the six-month period preceding the bankruptcy filing. When the debtor is below his state’s median income for a similar household, the plan can usually be anywhere from 36 to 60 months long. Median income for each state can be found on the U.S. Trustee’s website. A “below median” Chapter 13 debtor has flexibility in adjusting payments during the bankruptcy case.

Five Year Plan

If the debtor has an income that is above his state’s median income for a similar household, the debtor is typically stuck with a 60-month plan. Some courts allow above-median debtors to propose shorter repayment periods if there is no disposable income. By law, a Chapter 13 plan cannot exceed 60 months.

Hardship Discharge

When a change occurs during the bankruptcy case which makes it impossible to complete the debtor’s Chapter 13 repayment plan, the debtor may request a “hardship discharge” and end the case early. To qualify for a hardship discharge, the debtor must show:

  • A financial change that makes the debtor unabile to continue making the scheduled Chapter 13 plan payments;
  • The change in finances must be beyond the debtor’s control;
  • The change must be serious and on-going;
  • Modification of the repayment plan is not practical or feasible; and
  • If a hardship discharge is granted, creditors will receive at least as much as they would have received during a Chapter 7 case.

Hardship discharges are only granted for the most extreme cases. The Bankruptcy Code also limits the scope of the hardship discharge to that of a Chapter 7 discharge, so some debts that would be discharged in a Chapter 13 case may not get discharged if the case ends early. 

As Long as You Need

Finally, many debtors only remain in Chapter 13 for as long as it takes to solve their financial difficulties.  For instance, if the only reason the debtor files Chapter 13 bankruptcy is to stop a foreclosure, once the debtor cures an arrears or modifies loan payments, there may not be a need to remain in bankruptcy. A Chapter 13 debtor is generally able to dismiss the bankruptcy case almost as a matter of right, as long as there is no “bad faith” involved in the dismissal. See Marrama v. Citizens Bank, 127 S.Ct. 1105 (2006).

 

 

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.

Ways to Prevent Debt

You are not alone if you have managed to create a substantial amount of debt for yourself over the years. Many Americans have trouble managing their money and it can be very easy to find yourself drowning in debt from student loans, over spending or medical bills. However, there are several ways to reorganize your spending habits to prevent debt from growing or becoming uncontrollable. 

The number one plan for managing money is to create a budget. A budget allows you to set limits on your spending. You can set a specific amount for groceries, gas, clothing, entertainment and miscellaneous activities; and you can manage your monthly bills. By creating a budget, you can easily see where all of your money is going and how much you spend on each category. Many smart phones have budget apps or you can create a personalized budget that caters to your needs on an excel spreadsheet. Another way to prevent debt is to use cash. Using cash is an easy way to not overspend and will allow you to keep up with how much you spend. Also, avoid using a credit card. Swiping a credit card is effortless and has the possibility to make you feel as if you have an unlimited amount of money. The credit card bill will come in and you will regret the impulse shopping spree that you went on with your credit card. Always stay on top of your spending and do not spend more money than you make.

Preventing debt for you and your family is not difficult. If you are willing to stick to a budget, use cash and avoid using your credit cards; then you will be able to manage your money and focus on rebuilding your financial freedom. 

A Second Bankruptcy, the Automatic Star, and a Foreclosure

In 2005, Congress, with help (and influence) from creditor lobbyists, chose to add restrictions to the automatic stay and make it harder for a serial filer to get debt relief. Section 362(c)(3)(A) provides that if an individual debtor files a second bankruptcy case within a year of dismissal, the automatic stay terminates “with respect to the debtor on the 30th day after the filing of the later case[.]” The automatic stay may be continued by the bankruptcy court upon a showing of good faith by the debtor.

In English, Section 362(c)(3)(A) means that if you file a second bankruptcy case within a year after the first is dismissed (either by you or by the court), you must ask the bankruptcy court to continue the automatic stay protection or it will expire after thirty days. However, courts across the country disagree as to the effect of this termination.

The vast majority of courts find that when the stay is terminated under Section 362(c)(3)(A), the debtor and his property is fair game, but property of the bankruptcy estate is still protected. This interpretation was recently confirmed by the First Circuit Bankruptcy Appellate Panel in the case of Witkowski v. Knight (In re Witkowski), No. 14-34, __ B.R. __ (B.A.P. 1st Cir. Nov. 13, 2014).

In the Witkowski case, the debtor filed several bankruptcy cases attempting to forestall foreclosure of a residence. When the debtor filed one bankruptcy case within a year of a previous dismissal, and the lender continued a pending foreclosure sale according to state law. The debtor did not seek to extend the automatic stay, but filed a motion seeking sanctions for continuing the foreclosure action in violation of the stay.

The Witkowski court agreed with the debtor and with the majority of courts that the automatic stay was not terminated as to property of the bankruptcy estate, which included the debtor’s residence.

The court then turned to the question of whether the lender’s action constituted a violation of the bankruptcy stay injunction. The court distinguished between taking new action against the debtor and “maintaining the status quo” by continuing a state law foreclosure. The court found that the lender did not take new steps in the foreclosure process after the bankruptcy case was filed and, therefore, did not violate the automatic stay.

While other courts may derive a different result, there are two important rules to learn from Witkowski: (1) most courts agree that the termination of the stay under Section 362(c)(3)(A) does not affect estate property; and (2) there is a growing trend to allow the “maintenance” of foreclosure sales commenced pre-bankruptcy. These are important issues that merit a close watch in the future.

Tax Debt Tolling

Despite common myths, personal taxes are dischargeable in bankruptcy, but only if the following conditions are satisfied:

  • The taxes are income taxes;
  • There is no evidence of fraud or willful evasion;
  • The debt was originally due at least three years before the bankruptcy filing (Three Year Rule);
  • A tax return for the debt was filed at least two years before bankruptcy (Two Year Rule); and
  • The tax debt was assessed by the IRS at least 240 days before the bankruptcy was filed (240 Day Rule).

Unfortunately, the rules surrounding discharging taxes can get confusing, especially when attempting to accurately calculate the time restrictions mentioned above. Confusion often occurs when one of these time period is “tolled.” There are several situations which will temporarily stop the clock on these time periods, including:

A prior bankruptcy case. The filing of a bankruptcy case will toll both the Three Year Rule and the 240 Day Rule.

A request for a due process hearing or an appeal of a collection action taken against a debtor. These actions also toll both the Three Year Rule and the 240 Day Rule.

An offer in compromise. An offer in compromise offers to settle a tax debt for less than the full amount due. The submission of an offer in compromise will toll the 240 Day Rule. If the taxpayer makes an offer in compromise within 240 days of filing for bankruptcy, the 240 day time rule will be suspended for the time during which the offer in compromise is pending, plus an additional 30 days.

Tax litigation. Litigation in Tax Court will toll both the Three Year Rule and the 240 Day Rule.

A request for an extension of time to file a tax return. Filing for an extension will: (a) delay the start of the Three Year Rule to the extended due date; (b) delay the start of the Two Year Rule until the actual filing date; and (c) delay the start of the 240 Day Rule until the tax is actually assessed.

 

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. 

Can I Keep My Anticipated Tax Refund If I File Chapter 13?

Your Chapter 13 bankruptcy is an opportunity to pay creditors over three to five years. Your monthly payments are largely determined by whatever you can afford to pay, but there are other rules. One of these rules directs that you must pay unsecured creditors an amount equal to what they would receive in a Chapter 7 liquidation bankruptcy. This can be a sticking point when it comes to an anticipated tax refund in a Chapter 13 case.

When you file bankruptcy, any income tax refund you are entitled to, but have not yet received, is property of the bankruptcy estate. While you can keep any amount of your tax refund that is protected by legal exemptions, any non-exempt amount must be either paid over the Chapter 13 trustee for distribution to creditors, or your monthly plan payments are increased to account for the non-exempt tax refund. Consequently, proper application of exemptions is very important. In some cases, your tax refund may be entirely protected by legal exemptions, especially when the refund is small.

If you are unable to exempt money from your anticipated tax refund, the traditional advice is to delay filing until your refund is received and spent. The most important part of this strategy is to file your bankruptcy case after the money is gone. Speak with your attorney about the do’s and don’ts of spending a tax refund.

One situation sometimes overlooked by pro se debtors and inexperienced attorneys is the “accrued” tax refund. A debtor’s entitlement to a tax refund accrues during the tax year, even though it may not be owed or payable to the debtor until after the bankruptcy case is filed.  For instance, if the debtor files bankruptcy on October 1, three-fourths of the debtor’s full refund has (arguably) accrued. If the total refund is $4,000, then $3000 is a pre-filing asset. The debtor must account for this $3,000 and either claim it as exempt, or non-exempt (and therefore available for distribution to creditors). A partial year tax return may be beneficial in this type of situation.

Debtors lose anticipated income tax refunds regularly through poor pre-bankruptcy planning and carelessness.  This unfortunate situation can be easily rectified by working closely with a your attorney and your CPA. If you are considering a bankruptcy filing and expect an income tax refund, discuss your situation with an experienced bankruptcy attorney.

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.

Can I Keep My Future Tax Refunds After I File Chapter 13?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 re-emphasized the need for a Chapter 13 debtor to commit all of his or her disposable income to repaying creditors during bankruptcy.  Since that time, Chapter 13 bankruptcy trustees across the country have argued that tax refunds constitute disposable income – income not needed by the debtor to pay reasonable and necessary expenses, such as food, transportation and shelter. Courts have unanimously agreed with the trustees: tax refund money is surplus, and the Chapter 13 debtor must turn over these refunds to the bankruptcy estate.

There are a few ways to combat this loss during a Chapter 13 bankruptcy.  The most obvious way is to not create a tax refund in the first place. This means careful vigilance of your tax situation. Instead of Uncle Sam holding onto your money throughout the year, make sure that you only give the tax man what is owed – and no more.

Another way to avoid an income tax loss is to include language in the bankruptcy plan that excludes income tax refunds. This exclusion must be supported by evidence of the need to pay a reasonable and necessary expense. For instance, you may propose to pay annual property taxes with income tax refunds. These types of proposals have a low success rate and will almost always draw an objection from the trustee or a creditor.  Furthermore, the bankruptcy court may be reluctant to allow this proposal due to the unpredictable nature of using a tax refund as income (the refund may be what you expect, it may be more, it may be less, or it may not come at all).

Finally, many Chapter 13 debtors attempt to modify their plans to excuse a particular refund, or part of a refund. Some courts and trustees will allow a debtor to keep money from an income tax refund when the debtor shows that the money is needed to pay reasonable and necessary expenses.  For instance, if the debtor suffers an unexpected expense, such as an unexpected medical bill, funeral expenses, or a car repair, the debtor may be able to keep tax money to cover the expense.  The bankruptcy court will not allow the debtor to keep tax money to pay for food, utilities, a car payment, or other expenses that should be paid by the debtor’s regular income.

Income tax refunds (and underpayment of taxes) during Chapter 13 bankruptcy always cause headaches, so the best advice is to pay attention to your income. A regular visit to a seasoned CPA will avoid tax issues and keep more money in your pocket. 

Can I Keep My Anticipated Tax Refund if I File Chapter 7?

A Chapter 7 bankruptcy is an erase-your debts-start-fresh bankruptcy. It is meant to give an individual a chance to begin anew on a financial path without the burden of overwhelming debts dragging him or her down. On the other hand, Chapter 7 bankruptcy is not intended as a way to legally hide from debts the person can afford to pay.

That tension that felt most keenly when dealing with an individual’s income tax refund during Chapter 7 bankruptcy. On the one hand, the debtor is excited about his Chapter 7 “fresh start” and is eager to use his after-bankruptcy tax refund to help him along with his new financial future. On the other hand, his creditors are eyeing his income tax refund as a pre-bankruptcy asset that should be used to repay his debts.

Both creditors and debtors have a claim on the debtor’s anticipated income tax refund. The debtor is entitled to the refund, even though it is not yet received. Consequently, the debtor’s interest in receiving this refund must be included in the debtor’s bankruptcy estate. Because it is property of the estate, the debtor is able to use legal exemptions to protect all or a part of the tax refund.  The remaining non-exempt portion must be paid over to the bankruptcy trustee for distribution to creditors.  Often debtors are able to exempt enough of an expected income tax refund that it will make the remaining sum de minimis, or so little that it is not worth the trustee’s time or effort to take and distribute the funds.

The debtor must turn over non-exempt tax money even if the refund is not received until after the debtor receives a discharge. The only timing that matters is whether the debtor had a legal interest in the income tax refund at the time he filed the case. When the refund is actually received by the debtor is of no consequence. In many cases a trustee will leave a debtor’s case open until the debtor has both filed and received his income tax refund. This may mean remaining in bankruptcy for many months longer than expected.

The best way to avoid income tax refund problems during bankruptcy is to file the case after the tax refund is both received and spent. Your attorney can direct you on how to spend your tax money and avoid further bankruptcy complications.

Another way to protect non-exempt money from an income tax refund is to apply the non-exempt portion of the expected income tax refund to next year's taxes. The IRS will keep the tax overpayment and use it for taxes owed in the future. The Tenth Circuit case of Weinman v. Graves, 609 F.3d 1153 (10th Cir. 2010) holds that the bankruptcy trustee cannot force the IRS to turnover a tax refund that is held to pay future taxes. The election to apply the refund to a future tax liability is irrevocable under section 6513(d) of the Internal Revenue Code. Consequently, the debtor’s interest in the refund when he files bankruptcy is limited to what is left after the IRS applies the money to next year's tax liability.

If you are considering filing bankruptcy and expect a large income tax refund, speak with an experienced bankruptcy attorney. Your attorney can discuss your options and help you choose the right course of action for the maximum financial benefit using the federal bankruptcy laws.

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.

A Dangerous Trap for Chapter 13 Debtors

A Chapter 13 bankruptcy debtor may sigh in relief once the bankruptcy case is filed. The weeks of collecting documents, dodging creditors, and examining finances is over and the bankruptcy automatic stay has provided a much needed “breathing spell” from collection activities. For the immediate future, the Chapter 13 debtor has only one job to do: pay the trustee. Paying the trustee may seem simple and mundane, but some debtors quickly realize that there are no simple tasks in bankruptcy.

The Bankruptcy Code directs the debtor to pay the trustee the amount proposed in the repayment plan not later than 30 days after the bankruptcy case is filed. Section 1326(a)(1) of the Bankruptcy Code states:

Unless the court orders otherwise, the debtor shall commence making payments not later than 30 days after the date of the filing of the plan or the order for relief, whichever is earlier, in the amount—

(A) proposed by the plan to the trustee;

Many debtors elect to have their plan payment withheld from their wages and sent directly to the Chapter 13 trustee. Some courts require that wage earning debtors must execute a wage withholding. Unfortunately, for some debtors it may take several pay cycles to start the wage withholding. In the meantime, some may spend their paychecks unaware that a deficit is accruing in their bankruptcy case. When the plan payments are not delivered to the trustee as required, the trustee will ask the bankruptcy court to dismiss the debtor’s case for “failure to commence” the bankruptcy case.

There is no exception in Section 1326 for wage withholding orders. Bankruptcy courts ordinarily put the responsibility for paying plan payments squarely on the shoulders of the debtor and ignore pleas of “not my fault.” If your employer cannot deliver payment to the trustee on time, you must make arrangements to pay the first payment yourself. The best solution to this potential trap is to work closely with your payroll department to ensure that the trustee is paid.

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.

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. 

Supreme Court to Hear Chapter 7 Lien Stripping Case

On November 17, 2014, the U.S. Supreme Court recently agreed to hear two cases that could have a major impact on debtors across the country. The cases are Bank of America v. David B. Caulkett and Bank of America v. Edelmiro Toledo-Cardona, two Chapter 7 cases on appeal from the Eleventh Circuit Court of Appeals (Alabama, Georgia, and Florida). In each case, the appellate court allowed the bankruptcy debtor to strip off an entirely unsecured junior mortgage held by Bank of America. While lien stripping second and third unsecured mortgages is common across the country in Chapter 13 cases, only the Eleventh Circuit has allowed Chapter 7 debtors to rid themselves of junior liens on their underwater homes.

Bank of America argues that the Eleventh Circuit holding is contrary to the Supreme Court case of Dewsnup v. Timm, which found that “liens pass through bankruptcy unaffected.” However, most courts limit the holding of Dewsnup in Chapter 13 cases to liens secured by equity. The question boils down to whether the Bankruptcy Code prevents a Chapter 7 debtor from stripping off a secured lien that is not secured by any equity in the property. Once the mortgage lien is extinguished and the debt is discharged, the lender has no recourse against the debtor or the property.

If the high court agrees with the Eleventh Circuit, that ruling may pave the way for debtors across the country to extinguish junior mortgages in Chapter 7 without payment. Supreme Court decisions are binding on all federal courts. 

The First Step to Credit Recovery after Bankruptcy

Bankruptcy offers debtors a fresh financial start. Unfortunately, many debtors avoid rebuilding their credit profiles after bankruptcy. These debtors believe that credit is dangerous and should be avoided.

Responsible use of credit is an important part of personal finance. A good credit score is necessary to purchase a house or car, or qualify for a bank loan or credit card. Aside from credit applications, credit scores are also used by employers during the hiring process, by car rentals, and by landlords. In other words, your credit score is important.

The first step to rebuilding your credit after bankruptcy is to examine your credit reports for errors. Many debtors believe that the bankruptcy court reports information to the credit bureaus. It does not. It is your responsibility to ensure that the information in your credit report is accurate.

There are three major players in the credit reporting world: Trans Union, Experian, and Equifax. The federal law mandates that each credit reporting agency must issue a free credit report to a person once a year upon request. To facilitate this directive, Trans Union, Experian, and Equifax have created a consumer website: https://www.annualcreditreport.com. At this site you can obtain an entirely free credit report without a credit card or on-going financial obligation. A copy of your credit bureau credit score is also available for a nominal fee.

Discharged debts should be listed on your report as “included in bankruptcy” with a balance of “zero.” There should be no collection activity listed on your credit report after the filing date of your bankruptcy case. For instance, the addition of a third party collector after the date you filed bankruptcy violates the bankruptcy automatic stay injunction and should be removed from your credit report. Likewise, overdue payments after the filing date are considered collection actions and should be removed.

Cleaning up your credit report is the first step to credit recovery after your bankruptcy case. In many cases, you can improve his credit score to an average score within a year or two after bankruptcy. However, any stumble along the way will only magnify the bankruptcy filing and keep your credit score low. For this reason it is important to monitor your credit report for errors or any changes at least twice a year.

"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.

Bibles are Often Exempt in Bankruptcy

When an individual files for Chapter 7 bankruptcy protection, the federal law requires an accounting of all property and assets. In most Chapter 7 cases, the bankruptcy debtor is allowed to keep all of this property through the application of legal exemptions. Common legal exemptions will protect equity in a car or house; clothing; household items; and some jewelry, including a wedding set.

Another common bankruptcy protection pertains to exempting a family bible from creditor collection. In the recent Illinois bankruptcy case of Robinson v. Hagan, a Chapter 7 bankruptcy trustee sought to take and sell a rare Mormon bible to pay the debtor’s creditors.

The debtor, Anna Robinson, worked at a local library and she saved a rare First Edition Mormon Bible from destruction. Robinson is a member of The Church of Jesus Christ of Latter-Day Saints, so the bible has great significance to her. Ultimately, the library gave her the bible and proof of ownership.

The bible was published in 1830 and is valued at over $10,000. Robinson keeps it sealed in a Ziploc bag due to its fragile condition. While she does not use the bible regularly, she has removed it from the Ziploc bag to show it to her family and fellow church members.

When Robinson filed for bankruptcy protection, her attorney listed the bible as “old Mormon bible,” and stated that “debtor has been told that there is a 100% exemption for bibles but valuable bibles may or may not be covered under such exemption.” The Chapter 7 bankruptcy trustee took this as an invitation to challenge the debtor’s exemption and claimed that Illinois exemption did not apply to a “valuable bible.”

The bankruptcy court agreed with the trustee, but the District Court for the Southern District of Illinois reversed. The District Court noted that the word “necessary” in the statute modified only the first listed item (“wearing apparel”) and not other items claimed exempt (“bible, school books, and family pictures”). Consequently, there was no need to examine whether the bible was “necessary” or to consider its value (although the Court did ask an interesting rhetorical question: What is a necessary bible?). The state legislature intended bibles to be exempt, no matter the monetary value.

There are several lessons to be learned from this case. The most important lesson is to not poke a Chapter 7 trustee with a stick. Another valuable lesson is to discuss the value of your property and the applicable legal exemptions with your attorney prior to filing your case. Your attorney is aware of cases interpreting legal exemptions and can help you identify property that may be at-risk.

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.

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.

Rental History Useful for Rebuilding Credit

The average American’s FICO credit score hit an all-time high this past April, nosing in at 692. FICO scores range from 300 to 850. Although judgment of credit scores is often in the eye of the beholder, anything between 700 and 749 is considered a good score, with the best scores ranging 750 and higher.

Debtors emerging from bankruptcy are often far below the national average credit score, so rebuilding and improving is a high priority for many. Fortunately, Experian and TransUnion, two of the country’s largest credit reporting bureaus, are now allowing landlords to report rental payment histories for tenants. According to an article in the Washington Post, “nearly 20 percent of renters saw an increase in their score of 10 points or more after just one month” once rental payments were included in the consumer’s credit profile. An extra 10 points on a credit score can mean the difference between a “poor” credit score and an “average” credit score, which translates to a better interest rate and a lower monthly loan payment.

There are two ways for a landlord to submit rental payments to a credit bureau (a tenant may not self-report). The first is when a landlord agrees to receive payment through a third party service, such as RentTrack. Tenants are able to pay rent through RentTrack via credit card or echeck directly from a bank account. There is a small processing fee for these services.

The second way to report rent payments is when a landlord provides a history of rental payments to the credit bureau, such as through TransUnion’s Resident Credit program.

Another option for consumers to include rental payments in a credit analysis is to use an alternative credit data company such as ECredable. These credit bureaus will verify a tenant’s rental payment history and include this data in a credit report and score, which can be used during a loan application. Under federal credit regulations, the mortgage company is required to consider this information during its loan approval process.

Your bankruptcy discharge will provide a fresh start, but it is up to you to rebuild your credit score. This takes time and attention. Your bankruptcy attorney can help you analyze your situation and make recommendations for improving your score after bankruptcy.

Filing Chapter 13 after a Chapter 13 Discharge

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

Eligibility for Chapter 13 discharge

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

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

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

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

Eligibility to be a Chapter 13 debtor

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

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

See 11 U.S.C. § 109(g).

Applicability of the Automatic Stay

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

Filing Chapter 7 after a Chapter 7 Discharge

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

Eligibility for Chapter 7 discharge

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

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

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

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

Eligibility to be a Chapter 7 debtor

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

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

See 11 U.S.C. § 109(g).

Applicability of the Automatic Stay

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

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

Beware "Too Good to Be True" Legal Advertising

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

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

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

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

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

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

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

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

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

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

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

Hard Truths about Bankruptcy

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

It promptly gets him fired.

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

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

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

Bankruptcy wrecks your credit

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

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

Bankruptcy does not discharge all debts.

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

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

Bankruptcy can affect your employment

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

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

Bankruptcy Affects Future Housing

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

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

Buying a Vehicle before Filing Bankruptcy

 While having reliable transportation is important for most American families, it can be critical for a debtor in Chapter 13 bankruptcy. The average Chapter 13 case lasts three to five years, and during that time the debtor is prohibited from incurring additional debt without court approval. While it is possible to get court approval for a different vehicle during the bankruptcy case, it is not an easy process when factoring in a conservative bankruptcy court judge, the objection from the bankruptcy trustee, and the scarcity of lenders and auto dealers who will work with a debtor in bankruptcy. Consequently, a debtor who purchases a vehicle during bankruptcy often overpays for a vehicle he or she doesn’t want.

The answer for many debtors preparing to enter Chapter 13 bankruptcy is to finance a new vehicle before filing bankruptcy. There are several good reasons to do this, including:

  • A newer vehicle is less likely to fail than an older vehicle, and a new vehicle has a “bumper to bumper” warranty that will last three to five years (or more). That means that the bankruptcy case will not fail because of an expensive vehicle repair, or the need to purchase a new vehicle.
  • Many debtors can benefit from a new vehicle purchase on the bankruptcy Means Test. The Means Test calculates disposable income that is available to pay unsecured creditors (like medical bills and credit cards). For some debtors, the purchase of a new vehicle will qualify the debtor for Chapter 7 bankruptcy. For others, money that is spend on secured creditors (like a car payment), will reduce the amount available for unsecured creditors. For most debtors, the issue is simply this: would the debtor rather spend money buying a new car, or repaying credit cards during the bankruptcy case?
  • The Bankruptcy Code generally allows a vehicle to be crammed down to value, unless it is purchased within 910 days of the bankruptcy filing. See Section 1325(a), hanging paragraph. While cram down is not available to modify the principle amount owed on a “910 vehicle,” most courts allow the interest rate to be modified. The U.S. Supreme Court has stated that the proper interest rate to use in a cram down case is about 2% over the prime interest rate (called the Till rate, after the case). See Till v. SCS Credit Corp., 541 U.S. 465 (2004). As an example, if a Chapter 13 debtor obtained a vehicle loan at 19% interest, the loan interest rate could be crammed down to a more reasonable interest rate. This rate may be discovered by contacting the local Chapter 13 trustee’s office, or it is often posted on the standing trustee’s website.

For many debtors, purchasing a new vehicle prior to bankruptcy is simply planning for bankruptcy success. The U.S. Supreme Court, in Milavetz, Gallop & Milavetz, P.A. v. U.S., 559 U.S. 229 (2010), specifically approved the idea of incurring a debt just prior to a bankruptcy filing, so long as the debtor intends to pay the debt in full and doesn’t incur the debt with a “bankruptcy motive.”

If the impetus in financing a new car prior to bankruptcy is a “bankruptcy motive,” the court will find that the debtor has not acted in good faith and the he (and his attorney) will be answering questions regarding abuse of the bankruptcy system. In order to stay on the “right side of the law,” a vehicle purchase on the eve of a Chapter 13 bankruptcy filing should be necessary, “sensible” (one judge quipped that he would not allow a debtor to keep a car nicer than his own), affordable, reliable, and meet the needs of the debtor’s family. Think of it this way: a $20,000 Ford Focus is fine, a $30,000 Toyota Camry maybe ok if it is within the debtor’s budget and means, and a $70,000 Lexus is not. See a common sense discussion of purchasing a new car on the eve of bankruptcy in the case of In re Wolf, No. 13-13174-BFK (Bankr. E.D.Va, October 3, 2013).

When purchasing a vehicle before bankruptcy, be mindful that the vehicle title must be recorded within 30 days in order to create a valid and enforceable lien on the vehicle (called “perfecting the lien”). See 11 U.S.C. § 547(c)(3)(B). If the debtor files bankruptcy and the lender records its lien after the 30 day period, the bankruptcy trustee may be able to set aside the lender’s lien as an avoidable preference and declare the vehicle free and clear. The trustee can then take and sell the vehicle. Section 547 offers the debtor a “safe harbor,” but only if the lien is recorded within 30 days of purchase, regardless of what the state law provides. See Fidelity Financial Services, Inc. v. Fink, 522 U.S. 211 (1998). To make matters worse, Section 522(g) prevents a debtor from claiming exemptions in voluntarily transferred property that the trustee recovers for the estate. See Russell v. Kuhnel (In re Kuhnel), 495 F.3d 1177 (10th Cir. 2007). The debtor may lose both the vehicle and any vehicle exemption in equity. This is certainly a grave penalty for the debtor, especially since the debtor did nothing wrong.

The solution to this trap is simple: before filing, ensure that the lender or lienholder has recorded its interest with the state Department of Motor Vehicles timely. Having a copy of the recorded lien for the bankruptcy trustee will help clarify the matter.

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 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.

Domestic Support Contempt Actions during Chapter 13 Bankruptcy

 Once a bankruptcy case is filed, the bankruptcy automatic stay stops creditor collection action and provides the debtor some temporary breathing room in order to restructure personal finances. There are limits to this protection, however. One of the most common exceptions during a Chapter 13 bankruptcy case concerns collection and enforcement of domestic support obligations (DSO), such as child support and alimony. 

 
The Bankruptcy Code allows two ways to enforce and collect a DSO after the debtor has filed bankruptcy:
•Section 362(b)(2)(B) allows “the collection of a domestic support obligation from property that is not property of the estate.” 
•Section 362(b)(2)(C) allows actions “with respect to the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation under a judicial or administrative order or a statute.”
 
When a DSO is enforced through a state court contempt action, the bankruptcy court first considers whether the DSO is collected or enforced from property of the bankruptcy estate. The debtor’s property is part of his bankruptcy estate, such as bank accounts, vehicles, and real estate. Wages and other income streams are also property of a Chapter 13 debtor’s bankruptcy estate. Consequently, when a state court holds a Chapter 13 debtor in contempt, the exception at issue is usually Section 362(b)(2)(C), which permits enforcement or collection from property of the bankruptcy estate.
 
When a state court seeks to hold a debtor in contempt for non-payment of a DSO, the critical question is whether the DSO involves a judicial or administrative wage garnishment. Appellate courts have found that enforcement through state court contempt violates the bankruptcy automatic stay if the debtor is compelled to pay a DSO during bankruptcy where there is no garnishment or other wage withholding order. See In re DeSouza, 2013 WL 2991034 (1st Cir. B.A.P. 2013); Lawinda v. Seyffer (In re Lewinda), 2011 Bankr. LEXIS 4299 (B.A.P. 9th Cir. Aug. 1, 2011). Note that some lower courts have permitted enforcement of a DSO through contempt on bankruptcy estate property without a wage withholding order, so long as there is a court or administrative order establishing the obligation. See In re Powers, 2010 Bankr. LEXIS 825 (Bankr. S.D. Ind. Mar. 12, 2010); In re Friedberg, 2009 Bankr. LEXIS 1542 (Bankr. D. Conn. May 8, 2009)).
 
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.

Can I End My Chapter 13 Bankruptcy Early?

 One of the chief benefits of bankruptcy is the ability to restructure your finances under court supervision and protection. A confirmed Chapter 13 plan means that pre-bankruptcy creditors cannot sue or harass you as long as you stick with your plan. The problem is that Chapter 13 bankruptcy lasts a minimum of 36 or 60 months, depending on your income. What if you don’t want to wait that long and want out early?

You have four options for terminating a Chapter 13 case early, receiving the benefits of a bankruptcy discharge, and walking away:

Convert Your Case: You may be able to convert your Chapter 13 case to one under Chapter 7, receive a discharge, and end your case early. This is especially useful if you have paid a secure arrearage during the bankruptcy case or otherwise cured a default. For instance, suppose you are an under-median debtor behind on your mortgage and forced into Chapter 13 because your mortgage lender refused to accept payments. If you are able to obtain a home loan modification during the repayment period, you may decide to convert your case to Chapter 7 and include the post-petition canceled mortgage debt in the bankruptcy discharge along with all other dischargeable debts. You can convert the case at any time, as long as you otherwise qualify.

 

Pay 100%

The growing trend among appellate courts interprets the bankruptcy “applicable commitment period” as a minimum time a debtor must remain in bankruptcy. In other words, you must remain in Chapter 13 bankruptcy a minimum of 36 or 60 months. The only exception to this minimum period is if you repay all of your unsecured claims in full as provided in Section 1325(b)(4)(B) of the Bankruptcy Code.  

 

Hardship Discharge

A Chapter 13 hardship discharge may be granted by the bankruptcy court if you are unable to complete your repayment plan, and will end the case before the plan termination date. To obtain a hardship discharge you must first show an inability to continue making the scheduled Chapter 13 plan payments and that modification is not practical. Hardship discharge is available when something serious has happened that reduced your income or ability to (re)pay creditors. The change must be beyond your control, and creditors must receive at least as much as they would have received during a Chapter 7 case. The Bankruptcy Code limits the scope of the hardship discharge to that of a Chapter 7 discharge, so some debts that are dischargeable in a Chapter 13 case are not discharged if the case ends early for hardship.

 

Modify Your Plan

Some bankruptcy courts may allow an above-median debtor at the time of the case filing to modify the bankruptcy case after confirmation to reduce the time of repayment when the debtor’s income drops below the state median income level. These courts hold that the “disposable income” test, as set forth in section 1325(b) of the Bankruptcy Code does not apply to modified plans under Section 1329. A modified plan must still continue for a minimum of 36 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.

BANKRUPTCY TRAP: Divorce after Bankruptcy

As one court put it, “Neither knaves nor fools should be representing debtors who need legal assistance.” Bankruptcy law is not for the inexperienced, imprudent, or unprepared. Take, for example, a very common situation: divorce after bankruptcy.

It is an unfortunate reality that some debtors divorce after Chapter 7 bankruptcy. In fact, some clients show up for an initial attorney consultation already determined to file divorce “right after the bankruptcy.” For the most part, eliminating financial obligations and obtaining a financial fresh start is a good first step, and alleviating the financial pressures can sometimes even save a marriage.

There are traps along the way for debtors who are intent on divorce after bankruptcy. The most significant is found in Section 541(a)(5) of the Bankruptcy Code which states that property acquired by the debtor within 180 days as a result of a marital property settlement agreement or divorce decree becomes property of the debtor’s bankruptcy estate. Under this statute, a bankruptcy debtor who receives property during a dissolution case will lose it unless the property is already protected with available exemptions.

Cases where a debtor has lost property under this section include a home owned by a husband and wife. The family court awarded the wife full interest in the marital home which was protected during bankruptcy by a tenants by the entireties exemption. Upon divorce within 180 days of the bankruptcy filing, the tenants by the entireties protection was extinguished and the bankruptcy trustee was able to take and sell the home to pay creditors. See In re Cordova, 73 F.3d 38 (4th Cir. 1996).

Other courts have broadly construed Section 541(b)(5) and found that property acquired ''as a result of a property settlement agreement ... or of an interlocutory or final divorce decree'' includes alimony and spousal support received within six months after the bankruptcy is filed. If these payments cannot be exempted, which is the case in some states, the result is that all payments due in the six months after the bankruptcy filing must be turned over to the trustee. Some courts, including the Court of Appeals for the Tenth Circuit in Peters v. Wise (In re Wise), 346 F.3d 1239 (10th Cir. 2003), and the Bankruptcy Appellate Panel for the Eighth Circuit in In re Jeter, 257 B.R. 907 (B.A.P. 8th Cir. 2001), have held that section 541(a)(5)(B) does not apply to alimony, maintenance or support payments.

Avoiding these traps is fairly simple. First, a debtor who expects to receive property in a dissolution proceeding should avoid commencing a bankruptcy case, unless it is clear that all property that may be awarded in an after bankruptcy dissolution is protected by exemptions. Second, the debtor may delay the award of property beyond the 180 day claw back period. While these tips appear simple and direct, competent legal assistance from an experienced bankruptcy attorney is needed to ensure that the debtor’s actions cannot be construed as efforts to conceal property and otherwise run afoul of the bankruptcy process.

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'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 TIP: Fight Back Against Mortgage Servicers

Mortgage servicer PHH Mortgage Corporation is in the news again, this time on the losing end of a $16 million jury verdict. Like many others in Yuba County, California, homeowner Phillip Linza ran into some financial trouble after purchasing his home in 2006. Linza filed bankruptcy in 2009, then worked with PHH for a home loan modification. According to Linza’s attorney, PHH agreed to a loan modification that reduced Linza’s monthly payments from $2,100 to $1,543, which would take effect in January 2011.

Inexplicably, PHH changed the terms. PHH first told Linza his new payment was $2,350 per month, then demanded an extra $7,056. When Linza complained and threatened litigation, he was told, "We're a multi-billion dollar company. Stand in line because we've got a busload of attorneys that are on retainers."

This is not the first time PHH has been in the news. In January, 2014, the Consumer Financial Protection Bureau initiated an administrative proceeding, alleging PHH harmed consumers through a mortgage insurance kickback scheme that started as early as 1995. The CFPB is seeking a civil fine, a permanent injunction to prevent future violations, and victim restitution.

In December, 2013, the New Jersey Attorney General announced a $6.25 million settlement with PHH to resolve allegations that the company misled financially struggling homeowners who sought loan modifications or other help to avoid mortgage delinquency or foreclosure.

In 2011, PHH was hit with a $20 million jury verdict from a Georgia federal court for improperly reporting U.S. Army sergeant David Brash to credit agencies as "seriously delinquent" despite the fact that all his mortgage payments had been automatically deducted from his paycheck. When he tried to resolve the matter, his letters to PHH went unanswered (violating federal law) and his calls were routed to overseas customer services staff who couldn't answer his questions.

When a mortgage servicer will not play fair, there are few options. Litigation is costly and time-consuming, and also carries some risk since not every consumer lawsuit is successful. For many consumers, the power found in the federal bankruptcy laws is a more certain and permanent option. Most jurisdictions allow a bankruptcy debtor to strip away an unsecured junior lien against a home in a Chapter 13 case. A mortgage arrears may be repaid over three to five years under court supervision, and without threat of an unannounced foreclosure.

A Chapter 7 debtor may discharge a personal obligation on a home loan while retaining the right to modify post-discharge under HAMP. That means that the lender has no recourse against the homeowner for nonpayment, and the property is eligible for loan modification.

If you are experiencing the pains of dealing with an incompetent or dishonest servicing company, consider all of your options, including options found in the federal bankruptcy laws. Bankruptcy is not always the best option, but it is often the most powerful option.

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.

Payments held by Chapter 13 trustee

When a debtor’s Chapter 13 bankruptcy case is terminated early, the first question asked is, “What happens to my money that the trustee is holding?” The answer depends on whether the Chapter 13 plan was confirmed prior to a dismissal, or whether the case is converted to a Chapter 7.

Unconfirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was not confirmed prior to dismissal, money held by the trustee is returned to the debtor. After the dismissal of the Chapter 13 case, the trustee makes an accounting, and pays trustee's fees, attorney fees and/or adequate protection payments to creditors. Any remaining money is generally returned to the debtor. See In re Stamm, 222 F.3d 216 (5th Cir. 2000)(holding that when a Chapter 13 case is converted to Chapter 7 before confirmation of a plan, wages paid by the debtor to the trustee under the proposed plan do not become part of the Chapter 7 estate and must be returned to the debtor).

Confirmed Chapter 13 Case

If the debtor’s Chapter 13 Plan was confirmed prior to the dismissal of the case, there is a split of opinion on where the money goes. The Third Circuit Court of Appeals directs the trustee to return undistributed money to the debtor. See In re Michael, 699 F.3d 305 (3rd Cir. 2012). Conversely, the Fifth Circuit Court of Appeals states the right of creditors to money paid to the trustee under direction of a confirmed plan is superior to the debtor’s. See Viegelahn v. Harris (In re Harris), No. 13-50374 (5th Cir. July 7, 2014). In the Fifth Circuit, the trustee may pay creditors after he case is converted. These funds are generally not property of the Chapter 7 bankruptcy estate (see below).  

Dismissed Case

If the debtor’s Chapter 13 Plan is dismissed by the bankruptcy court after the case was confirmed, any money held by the Chapter 13 trustee is returned to the debtor. See 11 U.S.C. § 349(b)(3)(dismissal generally revests the property of the estate in the debtor); see also In re Nash, 765 F.2d 1410 (9th Cir. 1985) (holding that any undistributed earnings paid to a Chapter 13 trustee pursuant to a confirmed plan must be returned to the debtor upon dismissal of the Chapter 13 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 and email to fears@fnlawfirm.com.

Cram Down a House