I saw that Katie Porter over at Credit Slips posted a blog that new, simplified forms for consumer bankruptcy cases are being considered by the Bankruptcy Rules Advisory Committee.  The proposed forms can be accessed here and start at page 189 through page 315.  One item of note is that the forms are being divided into two categories:  a set of forms for “business” cases and a set of forms for “consumer” cases.

I looked through the forms and it seems as if the forms for “consumer” cases are designed to make it simpler for people to file bankruptcy without the assistance of an attorney.  I fully acknowledge that people are entitled to represent themselves in legal proceedings, of which, bankruptcy is one.  However, it bothers me a bit that the forms are billed as “simple”.  Without expressing an opinion on the forms themselves, bankruptcy is not a “simple” legal proceeding.

As a case in point, I met with a client who was elderly and could exempt $60,000 in his $80,000 house.  He also had a mortgage on his home of approximately $11,000, a judgment lien of about $11,000 against the house along with $50,000 in unsecured debt.  He stated that he did not wish to have his house involved in the bankruptcy and that his adult children would pay off the mortgage.  That way, when he came out of bankruptcy, he would have a place to live and not have to worry about creditors again.  Right?

Not exactly.  If the debtor paid off his mortgage, he would then have excess equity in his home.  The chapter 7 trustee would then seek to either sell the debtor’s home or demand the excess equity so that funds could be distributed to unsecured creditors.  Also, the judgment lien would be entitled to payment in full because the liens plus exemptions are less than the value of the property so the judgment lien could not be avoided.  The debtor has just put himself into a mess.

However, a bankruptcy lawyer could have avoided this mess.  The bankruptcy lawyer would tell the debtor not to pay off the mortgage but to file bankruptcy anyway.  This way, the the debtor’s allowed exemption and the liens against the property including the judgment lien exceed the value of the property (the debtor’s interest) so the judgment lien can be avoided in its entirety.  That is, the judgment lien is removed (or avoided) and treated as just another unsecured creditor.  The trustee has no excess equity to go after and the case is treated as a “no-asset” case.  The debtor’s debts are discharged, including the judgment lien, and his only debt remaining would be his mortgage debt.  Then, after the bankruptcy case is over, if the adult children want to pay off the mortgage, they are free to do so.

This example, I’m sure, occurs many times every day across the country.  It is the difference between obtaining the assistance of an experienced practitioner with trying to go it alone merely to save a couple thousand dollars in attorney’s fees (the adage penny wise but pound foolish springs to mind).  Simplified bankruptcy forms do not “simplify” the Bankruptcy Code and there are many, many pitfalls that a consumer may fall into if they try to go it alone.

Even though I applaud the efforts of the Rules Committee to “simplify” the forms (particularly the “consumer”/”business” distinction), simple forms should not be construed by a potential consumer debtor that bankrupcy is an easy process to navigate.  In that respect, an experienced bankruptcy attorney will be your best investment.

 

 

It is a real accomplishment to complete your Chapter 13 case.  In an environment where jobs come and go, unexpected expenses can pop up and more than two-thirds of all Chapter 13 plans fail, anyone who fulfills the terms of his Chapter 13 plan should take pride in this milestone.

Be aware, however, that making trustee payments for five years may not be enough to get your Chapter 13 discharge.  As I previously wrote on this blog, every Chapter 13 debtor must obtain a Financial Management certificate and submit through counsel a certificate of completion for this post-filing educational course.  If you do not submit the certificate, your case will be closed without the issuance of a discharge thereby potentially leaving your exposed to post-bankruptcy collection actions.   If you choose to ask the court to reopen your case so that you can file the financial management certificate you will incur additional time and cost.

A second possible hurdle arises from Bankruptcy Code Section 1328.  This Code Section precludes the judge from issuing a discharge if you do not certify that all domestic support obligations that have come due during the pendency of your case have been paid.   In the Northern District of Georgia, where I practice, every Chapter 13 debtor receives a Section 1328 certificate to complete as their case winds down.

If you state on your certificate that a domestic support (i.e. child support or alimony) was not paid, then the judge will have to hold a hearing to determine whether your failure to pay is beyond your control or not.  If the judge finds that your failure to pay these domestic support obligations is not excusable, your case will close and you will not get your discharge.

Sometimes it can be tempting to ignore an issue if no one is saying anything and no pressure is being applied.   In the case of child support in Chapter 13 you cannot ignore the obligation even if the custodial parent or child support enforcement is saying and doing nothing.  Otherwise you could end up with a sterling five year payment history in your Chapter 13 but no order of discharge to show for your efforts.

Lately the same refrain keeps cropping up in my practice:  why did you wait so long?  I understand that very few people want to file bankruptcy, and I agree that the decision to file bankruptcy is an important one.  And while it is common to hear that bankruptcy should be a last resort, it is also true that you can wait too long.  So, in honor of Groundhog Day, while we wait to find out when spring will arrive, here are some problems that might crop up if you wait too long to file bankruptcy.

You exhaust your reserves.  This is probably the most common consequence of just hanging on too long, trying to avoid bankruptcy.  You are trying to keep up with mortgage payments or credit card payments after a job loss, illness, divorce, or the like, and you exhaust your savings, tap into your 401k or IRAs, incur taxes and penalties as a result, which makes the whole financial situation still worse.  You use up the resources that would make it easier to make a fresh start, and make it harder to recover financially.  It is easy, and probably natural, to just try to hang on and keep doing what you have always done.  It’s smarter to take an honest look at your situation and ask yourself whether you are going to be able to deal with your debt without some help.

You may lose control of assets that might otherwise be used to help you make a fresh start.  That is often the case when creditors sue you and obtain judgments against you.  A judgment becomes a lien against real property, which can be especially significant if you have investment property, or have inherited property, or, God forbid, you are holding title to family property to “keep it safe.”  The effect of a judgment on property depends on several factors, including where the property is located, whether you are entitled to claim it as exempt, and even what state you are in, but you shouldn’t wait until its a done deal to figure out what the effect will be.  At that point it may be too late.

Other issues can be decided in a law suit that will affect your ability to make a fresh start.  The amount of a debt may be determined to be higher than you anticipate, for example, by the addition of attorney fees and expenses.  Or, the court may enter a finding a fraud against you that will allow a debt to survive bankruptcy.  Other findings may also impact your fresh start as well, and if you are already in financial distress, you may find that it is prohibitively expensive to fight a lawsuit, or worse, several lawsuits.

Don’t wait until the bitter end to consider bankruptcy, and seek out competent legal advice about your bankruptcy options.   You might think that if you go see a bankruptcy lawyer that lawyer is automatically going to recommend bankruptcy, but that is not the case.  Most reputable bankruptcy lawyers are also knowledgeable about alternatives, and will advise you about those options, as well as tell you what may happen if you do nothing.  I regularly advise clients against filing bankruptcy (and sometimes that advice is because there is nothing left to protect).  You have nothing to lose, and quite a bit to gain by talking to someone as soon as you recognize that there is a problem, rather than waiting until you have no options.

 

Bankruptcy is not always a one time event.  Unfortunately, despite the best efforts of many past bankruptcy filers, circumstances may come up where they face financial difficulties again.

Few of us could have predicted the economic difficulties of recent years, nor the high amount of unemployment, or drop in real estate values.

Many people think that if they filed a bankruptcy less than (7 or) 8 years ago, there is no help for them if they get into financial difficulty again.  That is not true.

The old law required 7 years between Chapter 7 discharges, so many people find information saying they didn’t think they can file for seven years.  This is one of the many changes in the bankruptcy laws make in BAPCPA, aka the 2005 New Bankruptcy Law.

Bankruptcy discharge can only be received every so often, but how often you can get a discharge depends on the type of case filed the first time and what you are trying to discharge, or even if you are trying to discharge a debt.

• Not all people file bankruptcy to get out of debt.  Sometimes, they just need help reorganizing the debts into an affordable repayment plan. 

Rachel Foley wrote an article which you can read  ( here )  setting out the time periods and she included a chart showing how long you have to wait to file between the various chapters.

• Even if you are not eligible for a ‘full’ discharge, you may still be helped and choose to file bankruptcy to help you with your debt issues.

As a Consumer Bankruptcy Lawyer who regularly meets with individuals about their financial issues, I always treat the initial interview as if I am applying for a job.  Yes, that is correct.  The Client is actually hiring the bankruptcy lawyer, so why should I treat the initial interview as anything else.  After all, they are hopefully going to hire me.

Before ever getting to the initial interview, the client has to make several decisions.  First, how do they find an attorney.  While many people are referred to a bankruptcy lawyer by friends or relatives, some people are not so lucky.  This is where you have to do your homework.  If you read the bankruptcy law network blog regularly, you know how to find one.  But, for those who spend their time doing other – shall we say less important – things, my colleague Jay Fleishman, made it easy.  

So now, you have an appointment set:  What do you do next?  You prepare for the interview right?

You gather as much information as you can.  Hopefully, the bankruptcy lawyer has forwarded you a client intake sheet, a frequently asked questions page and a little bit more information about themselves.  This is for your mutual benefit.  The bankruptcy attorney wants you to look over the information before you come in.  Bankrupty has it’s own lingo, and sometimes bankruptcy attorneys drift off into a different language.  If so, please stop them and say:  Please come back to earth.  At the same time, you should want to know a little about the firm you are interviewing and the subject about which you will be speaking.

If the attorney has not sent anything to you, you may want to do a little homework on your own, but in my opinion, that is strike one.

Remember, you are seeking to get the most out of this time.  You want to be educated, informed and ready to discuss your finances.  So, it is very important that you, the potential client, can help sort out the details.  You want the attorney to be fully informed, so that he or she can give you the best advice possible.

Upon arriving at the Bankrupty Attorney’s office, you again need to have your antenna’s up.  What is your overall opinion of the office, staff, location, etc.  The Attorney works there on a daily basis, and does not usually have the ability to walk in with a unique perspective.  You do, and you should be looking at the details.  If the office is neat, organized and you are warmly greeted, we are off to a good start.

Once the interview takes place, you should not be interrupted.  The only interruption should be if there is an absolute emergency.  This is your time to spend together, it was scheduled and should not be interrupted.

Once the interview is completed, you will need to make a decision.  Is this the bankruptcy attorney for me?  If yes, great?  If not, keep looking, as there are alot of fish in the sea.

I hope this helps.

Bankruptcy is not something that anyone wants to do, but it is often the best course of action for a consumer in debt.   Filing for bankruptcy is often seen as a failure, sign of weakness or immoral.  Understandably, people who file don’t go around telling everyone how much better life is for them now that they filed, but people sure are quick to mention how terrible it is to file.

In an effort to avoid filing bankruptcy, people will often try many different ways to avoid filing including working with a credit counseling company in a debt management program or a settlement program.

The NC Attorney General Roy Cooper announced in a press release that a settlement has been reached against “The Consumer Law Group of Boca Raton, Florida“,  a company described in the press release as a “bogus Florida law firm that falsely claimed it would reduce consumers’ debts…”

“Debt relief scams take advantage of struggling consumers, adding to their burden instead of helping them get out of debt,” Cooper said. “I’m pleased that we’ve been able to win money back for these consumers, money that can hopefully help them pay off bills and get on better financial footing.”

The North Carolina Attorney General’s Office sued this particular debt settlement company after consumers complained about all sorts of problems they had with the company.

The settlement by the Attorney General’s Office is a nice victory for consumers, however it took a a lot of work and a lawsuit to shut this company down.  Sadly, many more of these companies remain in business and more will pop up, playing on the desire of most people to try to honorably settle their debts.

The Attorney General took on one of the really bad companies and won, but the problem is that many of these companies are not acting in the debtor’s best interest and they are still out there.

(To see a news video on this story, go here)

Even if reputable, since none of them can offer legal advice since they aren’t lawyers, when you go to one of these companies, many just explain the program they offer and never give full information on alternatives that may be better for the individual.

And bankruptcy might be the better option – which is not something you want to discover after you have spent hundreds or thousands of dollars trying the alternatives.

Chapter 13 is a good way to pay what you can towards your debts, but protect you and your assets and keep your creditors away.  Some people pay all their debts off in Chapter 13 payment plans, but others pay a reduced amount.

Chapter 7 helps you get a fresh start fairly quickly, if you aren’t in a position to make payments.  You get to keep some of your property (for many people, they keep everything) and can allow you to get your budget balanced and provide for your family.

I encourage people with debt problems to first see an  experienced bankruptcy lawyer who can discuss all your options, since I feel that an  attorney  can explain how bankruptcy works, explain the myths about filing for bankruptcy, but also explore any non-bankruptcy options.

I often encourage clients who might have some discretionary funds available to pay towards their debts to to see a good credit counselor before making up their mind after seeing me.  That way they know that they have explored all their options and examine other viewpoints, but that their decision is based upon facts and sound advice.

Debt settlement or debt management programs might make sense for people who earn more money than they need to cover their regular and ongoing expenses, or who have a lump sum to pay towards debts that might not pay them in full.

However in considering these options, you would need to be sure that your budget is sound, and that it not only covers your monthly expenses but also includes things that don’t come up every month (like car maintenance, house repairs, medical bills, clothing, etc).

You don’t find yourself in financial trouble a few months or years down the road, after you use all your ‘extra’ funds to pay towards the debt program.    Especially when you should have seen those predictable emergencies coming.  (Also see Liz Pulliam Weston’s Article:  The $0 Emergency Fund)

A reputable credit counselor will not charge fees up front in North Carolina.  

• Charging fees up front for debt reduction, negotiation or debt settlement is not allowed in North Carolina.

The Consumer Law Group tried to get around this law by falsely claiming to be a law firm providing legal services.

You can read a number of past articles on dealings with the Consumer Law Group here  by Steve Rhode website.

 

 

When credit card debt goes bad, banks sometimes sell it to vulture investors at a steep discount.  The vulture debt buyer then often tries to sue on the account to collect more than they paid.   And their lawsuits are often the final straw forcing folks bankruptcy, where the debt buyer usually wants a share of any repayment too.

Buying bad — “distressed” — debt is a large, highly automated and risky business.  The debt buyers pay very little and get very little information about the account history, the borrowers, and how the balances are calculated.  And consumers are encouraged to take on faith that the balance was calculated properly — and that the debt buyer is really the owner of the account.  Debt buyers would prefer that courts accept their word of honor too.

The Missouri Supreme Court recently disagreed though.  The Court ruled that a debt buyer had to be able to properly prove it owned an account before it could try to sue to collect the debt.  In effect, it ruled that the court is not simply an extension of the collection process — it is an independent arbiter where a case must be proven, not presumed.

That would seem like a simple idea, right?  How can you sue over a loan if you can’t prove you are the one owed any money?  It’s a simple idea at the heart of all court cases.  It’s called “standing,” which comes from the old idea that you have to have a right to “stand” in court to ask for help from a judge.  Standing is so fundamental that federal rules (based on the Constitution) as well as Missouri law say that a party’s standing to be in court is always subject to review by the court and cannot be waived by another party.

In the 2012 Missouri case, the court ruled that a debt buyer had to be able to provide testimony from the original lender how the records of the account and transfer to the final alleged owner were prepared.  In other words, they could rely on business records from other companies — but those companies needed to provide witnesses to testify how those records were created and kept in order to use them in court.  The debt buyer couldn’t simply use its own record-keepers — even if they knew how the bank usually did its work — to “authenticate” another company’s records.

This should not be hard to understand.  I can’t testify from first-hand knowledge how my neighbor balances his checkbook unless I sat there and watched him do it.   I might know he’s an accountant and very careful and, in my opinion, would not lie.  But how do I know how he did the math last week?

It would be surprising if any court let me testify about something like that.  But judges sometimes see complicated business records like credit card account sales deals and assume everything was proper, and forget that they should not assume anything.  In the case of debt buyers who are not original lenders, a “bill of sale” of a huge list of accounts  does not prove standing to be in their courtrooms asking for the time of day.

The problem here is identical to the problem of “robo-signing” and fraudulent or non-existent mortgage foreclosure documents.  The mortgage industry is simply a variety of debt buyer.  Most of the mortgage loans are not owned by  the original lender and proving that they own the loan and have the right — standing — to enforce it is how they got into so much trouble in the last couple years.

All of this begs the question how some courts can allow debt buyers to have claims in a bankruptcy case, or prosecute motions for relief from stay, if they can’t prove ownership of the loans.  Some courts have asserted that the debtor putting this information on their schedules amounts to admission they owe the money.  The state supreme court concluded that standing can’t be granted by a party but is fundamental to invoke the courts’ power.  So it remains to be seen if more bankruptcy courts will take up concerns about standing in the future.

Photo Credit:  The National Archives

The 2005 amendments to the Bankruptcy Code modified the landscape for a key defense to bankruptcy preference actions. Preference actions are when a trustee or debtor in possession sue a creditor for the return of payments made in the 90 days before a bankruptcy. The concept is that creditors that receive more than similarly situated creditors by extracting unusual pre-bankruptcy payments from the struggling debtor should have to give the money back so that it can be shared equally with their peers. This creates a disincentive to employ coercive collection techniques when a debtor is teetering on the edge of bankruptcy. However, there is a defense to a preference case that allows the recipient of the money to keep it if the transfer was “ordinary”. There are several other defenses to preference actions (some of which I discuss here), but I will be highlighting the ordinary course of business defense, and more specifically, the “ordinary business terms” prong of that defense.

Section 547(c)(2) is where the general defense is found. It says:

(c) The Trustee may not avoid under this section a transfer –
(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.

The “ordinary course of business” prong (subsection A) is known as the subjective test because it concerns the history of dealing between specific the debtor and creditor. The “ordinary business terms” prong (subsection B) is known as the objective test because it concerns what is normal in the industry in which the debtor and creditor do business.

Prior to 2005, a preference defendant had the burden of proving both prongs of the defense, but now either one will suffice. This means that a preference defendant can win by proving that a suspect payment was normal for the industry even if it was not normal in the course of dealing with the debtor. However, much of the case law on the topic is from pre-2005 bankruptcy cases. During that time, when it was necessary to prove both prongs, the objective component was often treated like an afterthought. Now that “ordinary business terms” is its own defense, the question is how will the courts interpret it–and much is still uncertain because many preference cases coming to decision now are still in base cases filed before 2005. However, it is clear that in order to carry its burden on the “ordinary business terms” prong of the defense, a defendant will have to retain a trade expert to prepare a report and testify on the standard payment timing and behavior within the industry group during the preference period. Courts will have wide discretion to assess dueling expert testimony, define what constitutes the relevant industry group, and define the range of what should be considered “ordinary” within that group. There are some obvious challenges in presenting this defense, like obtaining often proprietary trade information within an industry group. Moreover, there is always wide discretion in defining a sample group, and thus much to fight over: Whether the group of businesses in the relevant industry group is defined broadly or narrowly will dictate much, and is within the discretion of the court.
An added factor to consider is the preference defendant’s right to demand a jury trial and transfer to the District Court. It has this right when it has not filed a proof of claim in the underlying bankruptcy case (the U.S. Supreme Court’s 2011 decision, Stern v. Marshall, does not change this).

Buy a home after bankruptcy?  Seems like a stretch for all but those who win the lottery once the discharge is issued.  But play your cards right and you could be worrying about scheduling a closing date sooner than you ever thought possible.

After filing bankruptcy, you’re debt free.  No more calls, no more lawsuits.  Suddenly, the world feels a bit brighter and filled with possibilities.  You start looking around your rental and thinking you might want to buy a home.

In order to buy a home after filing bankruptcy, you’re going to need to worry about two things.  They are:

1. Your level of savings; and
2. Your credit score.

Your Savings Account (The Downpayment)

In order to buy a home, you must have a downpayment.  Though the land of $0 down mortgages was wonderful for a time, it’s gone now.  And if there’s a broker willing to do the deal for you, run the other way.  When you don’t have a downpayment, you run the risk of going upside down on your mortgage the first time the Federal Reserve Bank chairman catches the sniffles.  Definitely bad idea.

Spend the first year or so after filing bankruptcy focusing on your savings account.  Sock away every spare dollar, and then some.  Cut your cable or satellite television, consider ditching the landline phone in favor of the cell, and turn off your lights when you leave the room to save on electricity.

Clip coupons.  Lots of them.

If you can, grow something useful in the garden rather than pretty flowers that can’t feed you.

If you want to buy a home, you need money.  Lots of it.  Save every dollar you can.

Your Credit Score

Going through bankruptcy will hit your credit score to the tune of about 150 points. Doesn’t sound like a lot, but when you remember your credit score tops out at 850 and seldom goes below 400 unless you’ve somehow lost your pulse, it’s pretty big.

You’re going to want to get to work on repairing the damage, and fast.

First thing to remember is that you must continue to pay your debts on time. If you’ve got student loans or a car loan, make those payments without fail. The student lender will report that positive payment stream, though the car lender may not unless you reaffirmed the debt. No reaffirmation? No problem – just keep copies of the cancelled checks and ask the finance company for a payment history before you go to the mortgage broker.

Next is that different mortgage companies may look to different credit reporting agencies – each of which may list different obligations. Some may list your utility payments, others may have the rent bill to the landlord. Keep on top of it all after filing bankruptcy to maximize the chances you can buy that dream home. You also want to check your credit reports after bankruptcy to make sure they reflect your debt-free world.

Finally, consider a single credit card after bankruptcy. Use it every month, then pay it off over a 2-month period to ensure that the payments show up on your credit report. That’s going to raise your score as well.

You can buy a home after filing bankruptcy, but the upshot is that you need to take some time to build yourself back up. Don’t rush it – Rome wasn’t built in a day. With hard work, however, you’ll get there just fine.

Jay S. Fleischman is a bankruptcy lawyer who helps people fight back against debt collection harassment.

One of the concerns about filing for bankruptcy is that those folks will never be able to obtain credit again after filing for bankruptcy protection and assistance.     Most times, nothing could be further from the truth as bankruptcy may actually improve folks’ credit score, according to my clients’ experiences (and as explained by Smart Money on their website).  Every debt collection note on a credit report, every late payment, every negative notation affects a debtor’s credit score.   Bankruptcy?  It doesn’t add to the negative credit score; it replaces a number of negatives with ONE negative notation of “discharged in bankruptcy” with the account showing a “zero” balance.   That act usually improves a debtor’s credit score.   As my colleague Doug Jacobs stated in his article on this site, debtors should list all of their debts to insure that a financial fresh start is obtained.  There are a number of other ways to improve your credit score.

Post-bankruptcy, acting carefully in making financial decisions improves a debtor’s credit rating according to Liz Weston of MSN Money.   Jennifer Weston mentions eight credit repair tips in her blog:

1.  after your bankruptcy is discharged, check your credit report for errors

2. check  your report again

3.  make a budget and stick to it

4.  be careful when applying for new credit

5.  use the automatic payment function on credit so that  you won’t (ever) forget to make a payment

6.  if you have student loans, make SURE you make those payments on time (this will help rebuild your credit)

7.   apply for a secured credit card (where you deposit money against future charges)

8.  when you do obtain new credit (and you will), do NOT max out the cards.   Credit rating is affected by amount of credit available ratio to credit used.

Using the above tips, a diligent debtor will find that even a mortgage is obtainable quickly after filing for bankruptcy, according to Craig Andresen, my Minnesota colleague.   Folks who educate themselves about the ways to protect themselves and who act wisely will find that their credit score improves rapidly.

Most folks are entitled to receive one free credit report each year.  Those reports can be obtained through www.annualcreditreport.com or by going to each of the three credit reporting agencies:

Experian

Equifax

Transunion

In addition, there are three check/bank account reporting agencies:

Telecheck

Chex Systems

Early Warning Services

Debtors who have had returned checks or overdrawn checking accounts and who find themselves turned down for a new account should obtain a copy (also free) of their report from those agencies as well.

 

Image credit:  Andres Ruedas under Creative Commons license/Flickr