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New Credit Card Protections Trigger Higher Fees by Card Issuers

August 10, 2010 By Jonathan

As you may know, last year Congress passed a law called the Credit Card Accountability Responsibility and Disclosure Act of 2009.  This law, nicknamed the CARD Act of 2009, was designed to regulate a variety of unpopular credit card tactics, such as interest rate increases without notice, inactivity fees and unfair interest calculations.

According to credit card industry analysts, the CARD Act of 2009 will eliminate over $390 million in fees for credit card issuers.  Not surprisingly, the credit card companies do not intend to walk away from this fee income.  For every fee and penalty eliminated by the CARD Act, credit card issuers are finding replacements.   For example the annual fee for many cards has been increased, sometimes dramatically.  Card issuers are also sending corporate card applications (called "professional cards") to consumers.  Corporate cards are not included in the CARD Act.

The Wall Street Journal recently ran a story explaining how the credit card companies intends to recoup their lost fee income.   The bottom line: the CARD Act of 2009 will eliminate some consumer-unfriendly tactics used by the credit card companies, but it will trigger an equal number of new consumer-unfriendly tactics.  Caveat Emptor.

Filed Under: Avoiding Bankruptcy, News Tagged With: , , , , ,

Can You be Sued for Non-payment of your Mortgage if You Do Not Reaffirm?

August 3, 2010 By Jonathan

I recently received an email from a blog reader asking about his obligations to his mortgage company when he does not reaffirm:

I have read your blog and you are very through so I write you with hopes that you might answer this question for me. I file Chapter 7  in 08, and did not reaffirm my loan. I am still living in the house and did make some payments. However, i have not for the last 8 months. It is my understanding that I must sign a document to reaffirm and that continuing payment in itself is not a reaffirmation…or?  Well it gets a little more complicated.  My house is valued at $410,000 and the bank has offered me a deal that is going to be hard to refuse. They have agreed to let me do a short re-fi in the amount of 180k.  If I agree to that is that in itself a reaffirmation?

Here is my response: in most cases, when you take out a mortgage loan, you are signing two different types of agreements.  The first type is a promissory note whereby you personally agree to make the payments.  The second type of obligation creates a property lien, meaning that you, as the owner of the property, pledges that property as collateral for the loan.

When you file a Chapter 7 and receive your discharge, your personal obligations are extinguished.  However, a Chapter 7 discharge does not eliminate the mortgage company's lien against your property.  If you "reaffirm" your mortgage, you are actually reaffirming the promissory note and your personal obligations to pay.

For years, many bankruptcy attorneys advised their clients to avoid signing reaffirmation agreements for mortgages, car loans or any other secured debt.  The reasoning – even without a personal "guarantee" lenders are protected by the property lien.  If the lender is willing to accept payments (the so-called "stay and pay" option), the now discharged debtor keeps his property, keeps making payment, but does not have personal liability on the note.

If the debtor misses payments, the lender would still have the right to foreclose or repossess based on the property lien.  The debtor would not have personal liability for any foreclosure or repossession deficiency because his personal liability was extinguished in the bankruptcy.

There is a downside to this "stay and pay" strategy.  First, the debtor does not get any credit report benefit for making payments.  Because the debtor's personal obligations have been extinguished, the lender no longer reports either a positive or a negative payment history.   A positive payment history from a mortgage company can be a good way to restore credit after bankruptcy, and if you do not reaffirm, you will not get this benefit.

Second, there is the "uncertainty factor" if you do not reaffirm.  Most mortgage or vehicle finance installment notes contain a default provision that includes bankruptcy as a default trigger.  In theory, at least, once your bankruptcy is closed (and the automatic stay of bankruptcy terminated), your lender could declare your loan in default and take action under State law to recover the collateral.  In my experience, lenders would much rather have monthly payments than your collateral but this risk does exist.

Finally, many of my readers have asked me if there is such a thing as "constructive reaffirmation" meaning that by making payments, are you in effect re-obligating yourself?  Are you creating a contractual obligation by your actions?

I think that the answer to this depends on State law but I would suspect that a mortgage or vehicle lender would have a hard time making this argument.  In many States (such as in Georgia) a financial obligation related to real estate must be written and they must have specific terms.  As a matter of general contract law, a contract usually will not be enforceable if its terms are not specified.   I would argue therefore that a debtor's actions of simply making payments and the lenders actions of accepting such payments should not be enough to create personal liability on the part of the debtor.  I would be interested to know if any of the attorneys who read this blog have a different opinion or if anyone is aware of any case law that says otherwise.

At a minimum, if a lender tries to make the argument that you have somehow re-obligated yourself personally by your act of making payments, I would insist that the lender provide you with case law or other support for its position, and you should consult with a lawyer before agreeing to any payment or taking any action (like signing a new, valid contract) that could create personal liability.

My reader states that his lender has proposed a refinance for $180,000.   He did not say, but I presume that his prior (discharged) mortgage was much higher than this and that his current payments under the "stay and pay" are based on this higher balance.  If he enters into a mortgage contract for $180,000, that contract will function like any other mortgage – and include both personal liability under a promissory note as well as a property lien.   It is not a reaffirmation because the bankruptcy is over – instead, the proposed $180,000 loan deal is equivalent to a new mortgage.  This proposed deal could result in lower payments plus positive credit history, but it will also create personal liability that currently does not exist.  I would certainly advise my reader to discuss his options with an attorney so that he will fully understand the implications of his decision.

Filed Under: Avoiding Bankruptcy, News Tagged With: , , , , ,

Can You Rely on a Verbal Promise that Your Foreclosure Will be Delayed?

July 18, 2010 By Jonathan

Notice of ForeclosureLast month, I met several times with a potential Chapter 13 client who was facing a mortgage foreclosure.  Over the course of the past few months he has been juggling his creditors and bills trying to stay afloat and during that time he fell behind to his mortgage company by more than four months, and found himself in the foreclosure process.

This individual earns over $100,000 annually, but, unfortunately he used to earn more than double this amount.  His problem was not the mortgage, but his other bills, including a very high car payment and a mortgage payment arising from a failing real estate investment.

Not surprisingly the foreclosure notice got his attention.  He immediately took action by calling me to discuss Chapter 13 bankruptcy and by contacting his mortgage company to discuss repayment options.   By the Wednesday prior to the pending foreclosure sale scheduled for the following Tuesday, my client had provided me with enough information so that I could prepare a rough draft of a Chapter 13.   In this case, by the way, my client and I entered into an agreement whereby he paid me around $300 to open a file and to start entering information into my petition preparation program.

On the pre-foreclosure Wednesday he called to say that after a lot of discussion he was expecting a decision the next day from his mortgage company but that if he did not hear from them by mid-day on Thursday, we would be proceeding with the Chapter 13.  A few hours later he called back to say that his mortgage company had agreed to postpone the foreclosure until September and that the Chapter 13 was on hold for now.

Let's analyze what my client did right and what he did wrong.

On the positive side, he did the following right:

  • he did not panic – he approached the problem as a business problem not as a personal, moral failure
  • he began to address the problem early.  His first contact with me was literally the day he received the foreclosure notice.  He correctly guessed that the negotiation process with the lender would take several weeks
  • he took a two step approach to the problem – he opened negotiations with his lender, and at the same time he started planning for a Chapter 13
  • he retained me early on in the process and paid me a small sum ($300) to start the petition preparation process.  He also obtained his credit counseling certificate shortly after our first meeting.  Contrast that to some of the potential bankruptcy filers who call me on the Friday before foreclosure looking to start the process.
  • he convinced his lender to delay the foreclosure by two months – a 2 month delay is preferable to a 1 month delay in that my client now has enough time to try and sell his home

Now, what did he do wrong?

  • my main criticism is his failure to get a written confirmation of the suspension of the foreclosure.  What if the lender's representative failed to communicate with the foreclosing attorney?  What if the lender's representative is simply dishonest?  Can a verbal promise by a lender's representative to delay a foreclosure be enforceable?  What would the remedy be?

I am very wary of relying on verbal promises.  In law school, my contracts professor once made the comment that "an oral contract is worth the paper it is written on," and I do not disagree.

I did find a California state appellate case in which an appeals court found that a homeowner who relied to his detriment on a broken promise by a lender to delay a foreclosure had a cause of action for money damages.  However, even in this California case (which would not serve as binding precedent in Georgia) the foreclosure was not reversed and the only issue to be considered by the trial court on appeal was money damages.  Add to this months and months of delay and I wonder if the homeowner in the California case felt that he won anything.  (Thanks to Michael Renne and his San Francisco Bankruptcy Law blog for his post about Garcia v. World Savings.)

When your home is at risk, I would not rely on any verbal promises from your mortgage company.  I would also not rely on an email as the admissability of emails as evidence is questionable.  Instead I would suggest that you ask for a faxed letter from your lender or its attorney on letterhead, with the original mailed to you.  Further, if you enter into an agreement with the lender directly, you should contact the foreclosing attorney's office (with a copy of the foreclosure suspension letter) to confirm that they are aware of the deal as well.

Filed Under: Avoiding Bankruptcy, Foreclosure, News Tagged With: , , , , ,

Ruling by Supreme Court Impacts Bankruptcy Exemptions in Georgia

July 14, 2010 By Jonathan

The United States Supreme Court rarely accepts cases that affect consumer bankruptcy debtors.  Recently, however, the Court considered an issue that potentially impacts all debtors – the treatment of exemptions.

The term "exemptions" refers to property you own that is protected from the reach of the trustee or creditors.   For example, every state provides for exemptions that include your clothes, a certain amount of household goods, a certain amount of equity your car, and a certain amount of equity in your home.   Georgia has fairly stingy exemptions – you can read the Georgia exemption law by clicking on the link.

When property is declared as exempt, it does not count for purposes of counting up your assets.   If you own property that exceeds the exemption available to you, that property could be seized and sold by a Chapter 7 trustee or it could force you to pay back a higher percentage of your unsecured debt in a Chapter 13.  Exemption planning and exemption calculation are important functions for consumer bankruptcy lawyers.

The Supreme Court decision in Schwab v. Reilly requires debtors and their attorneys to be more exact when identifying exemptions, and applies to cases filed in Georgia and everywhere else in the United States.   The article that follows is a guest post written for this blog by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline.  The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy lawyers who provide debt relief and bankruptcy counsel to consumers in Utah.

On June 17, in Schwab v. Reilly, the U.S. Supreme Court issued a decision that limits the extent to which individuals filing under Chapter 7 can exempt their property from the bankruptcy estate.  The case arose out of the interplay between two important rules.  One imposes dollar-value limits on the extent to which a debtor can exempt certain types of property.  The other requires interested parties to object to a debtor's claimed exemptions within 30 days after the conclusion of the creditors' meeting, or else lose the ability to retain any of that property for the bankruptcy estate.

The question in Schwab was, what happens when a debtor both reports an asset with an estimated market value and claims an exemption for the asset equal to the market value, the trustee does not object because the claimed exemption falls within the applicable-dollar value limit, and it later becomes apparent that the asset's true market value exceeds the claimed value and the applicable dollar-value limit?  According to some lower courts, the trustee's failure to object entitled the debtor to an exemption equal to the entire market value, regardless of whether that value exceeded the limit imposed by the rules.  In Schwab, however, the Supreme Court rejected that approach.  According to the Court, the trustee need not have objected to the exemption to preserve the estate's ability to recover value in the asset beyond the value the debtor declared exempt.  The rationale for this conclusion was that the trustee had no basis for objecting in the first place–on its face, the exemption appeared to comply with the limit imposed by the rules, and there was no way of knowing beforehand that the asset would appreciate in value beyond the limit.

The Court's analysis was somewhat complex, but an example helps to illustrate the effect of the ruling.  Imagine that an individual files for Chapter 7 protection and reports an asset–in this example, office equipment–to which he assigns an estimated market value of $5,000, that he claims a $5,000 exemption for the equipment, and that the applicable dollar-value limit on office equipment exemptions is also $5,000.  Given the dollar-value limit, the trustee concludes that the claimed exemption is appropriate and therefore does not object.  The thirty-day objection period then passes, and a third-party appraises the equipment and assigns a market value of $8,000.  Under the prior approach of some lower courts, the trustee's failure to object would have entitled the debtor to an $8,000 exemption for the equipment.  But Schwab invalidates that approach and establishes that the debtor will be entitled to an office equipment exemption of $5,000, even though the true value of the equipment exceeds that amount by $3,000.  The $3,000 remainder goes to the bankruptcy estate, to be distributed among the creditors.

For individuals contemplating Chapter 7 bankruptcy, the lesson of Schwab is twofold:  First, even if you accurately report an asset's value and claim a valid exemption equal to that value, you cannot later capture any serendipitous increase in value beyond the limits imposed by the rules.  Second, if for some reason it is important to you to exempt the full market value of an asset or the asset itself, rather than a particular monetized interest in the asset, Schwab suggests that it might be appropriate to claim an exemption for "full fair market value (FMV)" or "100% of FMV."  Thus, going back to the example above, the debtor might try to claim an exemption of "100% of FMV" for his office equipment, rather than $5,000.  A court could reject this claim if it later became apparent that fair market value exceeds the $5,000 limit.  But Schwab also suggests that phrasing an exemption claim in this manner effectively places other parties on notice that the debtor seeks to exempt the entirety of the asset's value. If a debtor provides this notice and others nevertheless fail to object, the debtor may be able to keep a subsequent increase in market value beyond the otherwise applicable dollar limit.

Filed Under: Avoiding Bankruptcy, Court, News Tagged With: , , , , ,

Examples of Bankruptcy Fraud

July 9, 2010 By Jonathan

bankruptcy fraudLast October, I wrote a post on this blog about bankruptcy fraud, and pointed out that everything included in a bankruptcy filing is subject to scrutiny by the office of the United States Trustee, which is an arm of the United States Department of Justice.  In other words, false statements on a bankruptcy petition could land a debtor in hot water – dismissal of the bankruptcy case, fines and even prison.

Because the bankruptcy process can seem informal, it can be easy to forget that a Chapter 7 or Chapter 13 filing is made up of documents filed in a federal district court and subject to investigation by the F.B.I.

Attorney Gini Nelson, a New Mexico bankruptcy lawyer, recently published a post about bankruptcy fraud in the Bankruptcy Law Network blog.  Gini's post includes a link to the IRS.gov site containing examples of bankruptcy fraud investigations.   I found the IRS.gov link especially interesting in that one can get a sense of the type of fraud that bankruptcy debtors have attempted and the level of fraudulent activity that generated prosecution.  Given the highly interconnected and electronic public record access that is available to bankruptcy trustees as well as government investigators I can't believe any of these folks believed that they would not be caught.

Filed Under: Avoiding Bankruptcy, News Tagged With: , , , , ,

Supreme Court Issues Important Ruling About Chapter 13

July 4, 2010 By Jonathan

Supreme Court of the United StatesOn June 7, 2010, the United States Supreme Court released its decision in the case of Hamilton, Chapter 13 Trustee v. Lanning.   The Supreme Court rarely hears argument in consumer bankruptcy cases so the Lanning decision is big news to consumer bankruptcy lawyers.

The issue in Lanning is one that has troubled bankruptcy lawyers since 2005, when the "means test" was added to the Bankruptcy Code.   The means test functions as a test – do you have the "means" or disposable income to fund a Chapter 13 repayment plan?  If the means test shows that you do not have sufficient disposable income to make a Chapter 13 work, then you qualify for Chapter 7.

As one of the assistant United States trustees once told me – the purpose of the means test is to disqualify as many people as possible from Chapter 7, and to force them into Chapter 13.

In practice, the means test does not work very well in predicting who can make a Chapter 13 work.  One of the biggest complaints has to do with the mechanical nature of means testing.   To run a means test, I have to gather pay stubs from the past 6 months.  I then create a monthly average, which represents available income.  Next I prepare a means test budget, but I do not use actual expense amounts.  Instead, the means test tells me how much my clients are allowed to spend for food, medicine, utilities, etc.  And where do these budget numbers come from?  Means test numbers are based on IRS budgets used in delinquent tax repayment plans.  In other words, the means test budget allocations are not especially generous.

This explanation of the means test is somewhat oversimplified, but you get the main idea – every bankruptcy debtor's income and expense numbers have to be run through the means test, and not surprisingly this somewhat mechanical test produces some absurd results.

The classic example of absurd results occurs when a debtor has received a Christmas bonus or a one time payment.  That bonus/one time payment has to be included in the monthly income numbers even if it is not guaranteed or likely to happen again.  In other situations a debtor may have earned a comfortable income but has now lost his job – under a strict reading of the means test, he earns too much money to file Chapter 7.  And he can't afford to file a Chapter 13 because he now has no income.

The Supreme Court has injected some common sense into this situation.  In the Lemming case, which was filed in Topeka, Kansas, the debtor's 6 month average was skewed by a one time payment arising from a buyout from her former employer.  The debtor filed a Chapter 13 plan that called for a payment that the debtor could afford based on her actual, current income.  The trustee objected on the grounds that the means test dictated a higher number (that the debtor clearly could not afford based on his actual income).

The Topeka bankruptcy judge agreed with the debtor and approved a plan that Ms. Lemming could afford.  The trustee appealed and lost in the 10th Circuit Court of Appeals.  The trustee appealed again and the Supreme Court granted certiorari.

The Supreme Court affirmed the decision of the 10th Circuit Court of Appeals and held that bankruptcy judges need not apply a "mechanical approach" to means testing in Chapter 13 cases.  Instead, judges should "take into account other known or virtually known certain information about the debtor's future income or expenses."  Rather than looking backwards, judges can take a forward looking approach and consider the realities of a debtor's income.   This forward looking approach should be considered in cases with unusual facts and the Lemming decision should not be construed as an invalidation of the means testing formula.

Despite the Supreme Court's warning that a "forward looking" approach should only be used in limited situations, I suspect that bankruptcy judges will use "Lemming arguments" mitigate some of the harsh results of Chapter 13 in general.   Bankruptcy judges recognize that Chapter 13 cases often do not work because means testing and aggressive trustee arguments force debtors to agree to plans that commit debtors to pay every last dime to the trustee.  Unfortunately, family emergencies and unexpected things happen over the course of a five year bankruptcy plan and many plans will fail – not because the debtor did anything wrong, but because there is no "give" in the plan.

I predict that judges will use the rationale of Lemming to reduce some of the harsh results of the means test and help debtors improve their chances at success in Chapter 13.

If you want to read the Lemming decision, click on the link.  I also found a nice summary of Lemming in attorney Jordan Bublick's fine South Florida bankruptcy blog.

Filed Under: Avoiding Bankruptcy, Court, News Tagged With: , , , , ,

Does Your Landlord have any Obligations to Mitigate Damages if You Breach Your Lease?

June 30, 2010 By Jonathan

Not surprisingly, I get calls from small business owners who are contemplating personal bankruptcy when their businesses fail.  There are many issues that arise in these types of cases but I would like to focus on one problem that, more than any other, can force the business owner into bankruptcy.

Generally when the owner of a small business leases retail space, the landlord will demand a personal guarantee.  This means, of course, that in the event of a default, the business (which may be a corporation or LLC) faces liability and the business owner personally faces liability.

Given this reality, every small business owner should seek counsel to discussion asset protection options before starting his business, but that is a topic for another day.

If the business fails you might be surprised to learn that the landlord does not necessarily have to take any steps to "mitigate damages" by releasing the retail space.  Instead, the landlord can demand payment for the full value of the lease from the business owner personally.  If the business owner has a house with $100,000 of equity, that equity is therefore at risk, and given that Georgia's bankruptcy exemption statute is stingy ($10,000 for an individual or $20,000 for a married couple filing jointly), bankruptcy may not offer much protection.

I ran across two helpful resources that go into more detail about the landlord's obligations or lack thereof.  The first is a blog post from Atlanta lawyer David Pardue in his Georgia Real Estate Litigation blog.  In his post, David discusses a recent Georgia Court of Appeals case called Sirdah v. North Springs Assocs., LLLP, which was decided by the Court of Appeals in June, 2010.  In the Sirdah case, the Court restated its previous holding that a landlord is under no duty to mitigate damages unless (1) the landlord accepts the tenant's surrender, or (2) the tenant successfully terminates the lease.  In the Sirdah case, the tenant returned his keys to the landlord and argued that by accepting the keys, the landlord accepted the tenant's surrender.  The Court said that accepting the keys did not constitute an acceptance of the surrender.

Another helpful resource is a more extensive article written by attorney Stephanie Everett of the Bloom Law Firm in Atlanta.  In this paper, Stephanie examines the various scenarios that could arise when a tenant breaches a lease and the resulting consequences.  Although Stephanie's article is written for the benefit of landlords, tenants will find the information very helpful as well.

As the law in this area could change, you should not rely on these resources in the absence of counsel.  If you are a small business owner and you are coming to the realization that your business may not survive, you would be wise to consult with a lawyer to discuss your options both in business and in terms of bankruptcy.  I have seen far too many business owners who simply left and discovered after the fact that their bankruptcy options were limited, or too painful.

Filed Under: Avoiding Bankruptcy, News Tagged With: , , , , ,

The Only Thing Certain is Change

June 19, 2010 By Jonathan

No one starts his or her adult life expecting to file for bankruptcy.  Yet every week, I meet with men and women in their 30's, 40's, 50's, 60's and older who have become insolvent and need relief under the United States Bankruptcy Code.   I often hear the lament "I never in a million years thought I'd be sitting in a bankruptcy lawyer's office."  I usually respond by reassuring my clients that bankruptcy is a legitimate and legal financial tool that can offer hardworking families a kind of "do over" when unexpected circumstances finances to go south.

If this sounds familiar to you and you are struggling with the idea of finding anything positive from your bankruptcy experience, I would encourage you to take a few minutes to think about how and why you ended up in a bankruptcy lawyer's office.  I would also encourage you to consider what you can do differently in the future to make your bankruptcy a one time event.

I also think it is important to recognize that you are by no means alone in facing unsettled financial times.  You may have seen lists containing the names of famous historical figures who filed bankruptcy (like Walt Disney, Larry King, even Wolfgang Mozart).   Now think about the tremendous change that we are all experiencing now.  I recently ran across a blog called 24/7 Wall Street that issues a yearly list of companies or brands it expects to disappear in the next year.  This year's list includes:

  • Readers Digest magazine
  • Blockbuster Video Stores
  • T-Mobile cell phone carrier
  • Merrill Lynch stockbrokers
  • Radio Shack
  • Zales Jewelers
  • Kia Motors

Now, I fully expect some of these brands to survive, but I am also certain that one or more may go away. 

Other well known brands that 24/7 says are in trouble include:

  • Newsweek
  • Eastman Kodak
  • Motorola
  • Palm (smartphones)
  • E*Trade (discount stock brokers)

I am sure that you have heard of many of these companies, and if you think back, most of these businesses were thriving, dominant concerns run by experienced executives from the finest business schools.

The point here is that anyone, and I mean anyone, can get into financial trouble quickly.  Just the other week, for example, I met with two men about bankruptcy, each of whom formerly earned over $1 million annually.

Bankruptcy is certainly not a good thing to experience but in our economic system, a bad decision or two and an unexpected change in the business environment (think about those shrimpers in Louisiana) and there you will be – sitting in a bankruptcy lawyer's office.

Filed Under: Avoiding Bankruptcy, News Tagged With: , , , , ,

Should You Save Your Home from Foreclosure, or Should You Let it Go

June 13, 2010 By Jonathan

With the news full of foreclosure statistics showing huge increases along with stories of self-righteous Members of Congress asserting their heartfelt concern for "struggling homeowners" little attention is paid to the question of whether a homeowner ought to fight to save his home.  My friend and colleague, Charleston bankruptcy lawyer Russ DeMott were recently discussing this issue and I invited him to prepare a guest post about this very topic:

Chapter 13 bankruptcy is a tool that can be used to save your home from foreclosure.  But the big question sometimes isn’t “can I save my home,” but “should I save it?"

We all know that there’s been an epidemic of foreclosure resulting from the recent economic downturn.  Jobs were lost, values plummeted, and foreclosures have been on the rise.

So it’s natural to wonder, “can I file Chapter 13 bankruptcy to save my home from foreclosure?”  However, when you meet with a bankruptcy lawyer to explore your options, you need to explore all your options—bankruptcy and otherwise.  And that might be not saving your home.

When you’re having financial problems and seek advice, you should take the opportunity to review your entire financial situation.  Can you afford your vehicle payments? Can you “tighten the belt” and cut back on some unnecessary expenses?  And most significantly, “should you try to save your home?”

In my Charleston, South Carolina bankruptcy practice, I get calls every week from folks facing foreclosure.  The potential bankruptcy client’s question is always a “can we?”  Can we stop foreclosure?  Can we make the lender listen?  Can we catch up on these payments we’ve missed?  Can we protect our home? Can Chapter 13 bankruptcy help?

But I always focus on the “should we.”  Here are some factors to consider when deciding whether you should use Chapter 13 to keep your home:

  • Can you afford the mortgage payments?  Do you have large house payments you can’t really afford, perhaps with more than one mortgage?  For example, it may be that you can afford payments of $1800 a month, but your current payments are $2800 per month.  Absent a mortgage modification, that’s a tough nut to crack every month.
  • Is your interest rate scheduled to adjust?  It may be that you can afford your payments now but maybe not once your payments adjust.
  • Do you have equity in your home?  (Equity is the value of the property less any liens (like mortgages, outstanding taxes, assessments, and home owner’s dues).  Lately, I’ve been getting calls from clients who not only have no equity, but actually have “negative equity.”  For example, your house might be worth $250,000 and you owe $350,000.  If that’s the case, you might not want to try to save your home from foreclosure.  You’d actually have more equity if you rented!
  • Is this where you want to live for the indefinite future?  If not, perhaps you should use your financial problems to reevaluate where you want to live.  Perhaps renting in another area would lessen your commute or allow your children to enroll in a better school?

These are just a few factors you should consider.  You should weight all the pros and cons of saving your home. You can then have your bankruptcy lawyer help you decide whether filing Chapter 13 bankruptcy to save your home really makes sense.

Jonathan's note: in addition to the very relevant points Russ makes, let me add this:  if you decide that saving your house in a Chapter 13 does not make sense, a "fresh start" Chapter 7 could be appropriate.  Similarly, you can still file a Chapter 13 to reorganize  your other debts while you surrender your home.   My point – personal bankruptcy is not a "one size fits all" solution – a good bankruptcy lawyer can offer you several options to consider, many of which you may have never considered.

If there is one lament that I hear from my colleagues, it is this – "I wish my clients would call me earlier, when there is time to evaluate bankruptcy and non-bankruptcy options."  Sometimes, when there are only days or hours to go before a foreclosure, an emergency Chapter 13 may be your only choice.   Even if bankruptcy is something you really do not want to think about, you would be wise to establish a relationship with a bankruptcy lawyer before you end up facing a crisis.

Filed Under: Avoiding Bankruptcy, Foreclosure, News Tagged With: , , , , ,

Failure to Disclose Assets Lands Chapter 7 Debtor in Prison

June 6, 2010 By Jonathan

Because the bankruptcy system operates efficiently and quickly and it serves hundreds of people every day, I sense that many bankruptcy debtors forget that everything they submit to the bankruptcy court is done so under penalty of perjury. I recently ran across an article from a Texas newspaper about a Chapter 7 debtor who ended up in federal prison, convicted of bankruptcy fraud, because he failed to disclose an $84,000 insurance payment, proceeds from the sale of a vehicle and several bank accounts.  This particular debtor used Chapter 7 to discharge over $1 million in liabilities.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor's case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a "poison pen" letter to the trustee will allegations about improper activities by a bankruptcy debtor.

Second, be aware that Chapter 7 trustees and the U.S. trustee like to pursue fraud cases periodically to send a message to debtors and debtors' lawyers that the trustees are paying attention.   Bankruptcy lawyers may be tempted to say "don't worry about it," to avoid extra expense and complication but playing fast and loose with disclosure rules can create major problems for both debtors and their lawyers.

Occasionally I meet with a client who may say something like "between you and me, no one knows this but…."    This type of statement is the last thing that any bankruptcy lawyer wants to hear.  From my perspective that client is really saying "I am thinking about committing a federal crime and I want you to help me."  My license to practice law is not worth the fee for any one case and I have and will continue to decline representation for any client who wants to use my office to file inaccurate schedules.

Nobody likes to surrender assets, especially in a bankruptcy case that may have come about because of factors beyond one's control (such as a layoff, unfair treatment by a lender, a lawsuit judgment that you did not know about).   In most bankruptcy cases you will not lose in assets.   However, losing a few hundred or thousands of dollars is a far better fate than federal prison.

Filed Under: Avoiding Bankruptcy, News Tagged With: , , , , ,
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