Monthly Archives: March 2014

Don’t Forget Your Lawyer

I know that title looks like I am complaining that most of my clients don’t bother to send me a card at Christmas, but that really isn’t what I am referring to.

What makes me really frustrated is when my Chapter 13 clients, in the middle of a confirmed plan, move and DON’T TELL ME. Sure, from their perspective, everything is done. They are just making their payments until they get to the end. Easy. They can forget all about me, and they do. Then they get to the end of the plan, and I discover that they have also forgotten to do the post-petition, debtor education class. You know, that silly little class that if you don’t take it, you don’t get your discharge – even if you’ve made all your plan payments? Yea, that class.

So, I start frantically trying to get a hold of the clients to remind them. That is when I discover that they’ve moved, and didn’t tell me. Of course, they have also abandoned their old email address, because it was getting too much spam. The address is still live, so nothing bounces, they just don’t check it anymore. So, the email didn’t reach them. They’ve disconnected the house phone, because they only use their cells; and they changed their cell numbers a few years back when they had a stolen phone.

Don’t do that. If you move while your Bankruptcy case is still open, be sure to let your lawyer know. For one thing, if the Court sends you anything, you will want to get it – who knows, it might be important. Your lawyer will do a change of address for you, so that the Court can reach you, the Chapter 13 Trustee can reach you; and this way your lawyer can reach you too.


They Said I Can’t Bankrupt That

I get told this a lot. Someone calls and they have talked to a loan company, a debt collector, or the guy on the next bar stool at a local dive. What I hear is, “They said I can’t bankrupt that.” Well, of course not. Bankrupt is an adjective. To Bankrupt is not a verbal – of any kind. You can be described as bankrupt, but there is no such action as to bankrupt. The moral of this story is, of course, don’t take legal advice from anyone who speaks English this poorly. In fact, don’t take legal advise from non-lawyers – especially when they are trying to get you to pay them for a debt or if you aren’t sure just how many drinks they have already had.

Now, are there debts that cannot be discharged in a Bankruptcy? Sure, and some of them you will kind of know, and there are a few that will probably surprise you.  For instance, most people are pretty comfortable with the idea that you can’t discharge child support in a Bankruptcy.

However, most people probably don’t know that you can’t discharge a debt for willfully or recklessly failing to maintain the capital of a Federally insured financial institution. Don’t worry if you don’t understand what that means, it almost certainly doesn’t apply to you.

I will concede to being a bit silly (or snarky, your call) with that last example, but the fact is that there is a section of the Bankruptcy Code (11 U.S.C. §523) that lists all of the debts you cannot discharge (or get out of) in a Bankruptcy. In the copy of the Code I keep handy, that section is five pages long, and very little of those five pages apply to the vast majority of  people with more debt than they can pay.

In fact, no matter what you have heard about the 2005 Bankruptcy Reform Act there is no general exception from discharge for credit card debt. That’s right. Despite what that debt collector told you, absent certain general restrictions, a Bankruptcy filing will still discharge most, if not all, of your credit card debt – and your medical debt – and pay day loans – and even in many cases old income taxes. Really.

The exceptions to discharge that apply most commonly  are:

  • Child support;
  • Alimony;
  • Property division or other divorce related debt (in a Chapter 7 Bankruptcy);
  • Student loans;
  • Debt incurred by fraud or shortly before a Bankruptcy filing; and
  • Recent taxes (rules are complicated).

Embezzlement? Well, that is a problem. Lying on a loan application or borrowing money with someone else’s identity, forging loan documents, taking the vacation of your lifetime in Paris paid for by Visa with the intention of filing for Bankruptcy before those bills come due?  These are all at least as non-dischargeable as you should think they are.

All silliness aside, here is what you need to remember. Most people who file for bankruptcy can discharge all, or virtually all, of their debt. There is a five-page laundry list of debts that cannot be discharged in a Bankruptcy, and for the most part, none of them are simple; and most of them are not all that common. The odds are very good that no one other than an experienced bankruptcy attorney can discuss any of them with you in any detail. Most people know just enough to be dangerous about Section 523, and that includes a large number of lawyers who don’t practice bankruptcy law on a regular basis.

If you have any questions about whether or not a debt is dischargeable, ask a lawyer who practices in the Bankruptcy Courts regularly. If anyone else tells you that something is not dischargeable, take that advice with a large helping of salt – especially if they think Bankrupt is a verb.



Student Loan Stupidity

In 2005 Congress made a few changes to the bankruptcy code.   Some of those changes got a lot of attention.  Others did not.  One of the stealthier changes extended the same protections against discharge in Bankruptcy to private student loans that Federally insured student loans had had for years.  It is probably not a coincidence that the availability of private student loans skyrocketed shortly thereafter, and I don’t think anyone can say that this was really unexpected.

The unexpected part was that Congress had just created a scenario where those newly protected private student loans were going to be getting repaid at the expense of Federally insured student loans. 

Go ahead.  Read it again.  Yes, Congress really did pass a law that encouraged people to repay their private student loans instead of making payments on their federally insured student loans; and you used to wonder why we have a budget deficit.

Here is why.  If you legitimately do not make enough money to repay your student loans, you can put your federally insured student loans into some form of alternative payment system that is income based or income contingent.  In those cases, your payment can be as low as $0.  In many cases the payment will not keep up with the accruing interest, so even though the debtor is making payments, the principal balance is not declining.  Those loans are not getting paid, even if the debtor is keeping up with the accruing interest.  After a long enough number of years, the remaining balance on those loans will be forgiven.  That is an unfairly brief summary, but it covers the high points.

You can’t do that with your private student loans.  They don’t participate in the income based or income contingent repayment programs, and if the debtor doesn’t make the payments, they will proceed with the appropriate legal steps to begin garnishing the debtor’s  wages.  Well, if you can’t afford your loan payments, you really can’t afford to have your wages garnished.  So, the net result of all of this is that people with more student loan debt than they can pay wind up paying their private student loans (at least sometimes) and NOT paying their federally insured student loans.  There are days when I think that I want to know just who thought that was such a great idea.  Then, there is the rest of the time.

There are bills currently pending in Congress to change this.  They are Senate Bill 114 and House Resolution 532.  Last time I checked neither piece of legislation had so much as poked its nose out of committee.  In other words, the private student loan lobbyists are doing their jobs better than the rest of us.  So, if you have a mind to write your Congressmen and request intelligent, sensible governance; this wouldn’t be a bad issue to include.


Bankruptcy, Tax Returns and Identity Theft

Looking at the title to this post, I must say that those are not words I ever expected to be putting in one sentence — but then this morning happened.  Let me begin at the beginning.  Early this morning I got an email from a friend of mine with a link to this article:

Evidently, some time ago Experian (one of the three major credit reporting services) bought a company called Court Ventures.  Now, from what I gleaned from Google, Court Ventures is a company that collects public record information on people.  I assume from the name that they tend to focus on court house type records.  Whether or not they are collecting Bankruptcy court records, I don’t know.  Regardless, many bankruptcy cases wind up being referenced in State Court files.  The most common reason for that is when a bankruptcy is filed and there is a pending state court case (a foreclosure, a collection case, anything like that), a Notice is filed in the state court case that the case has been stayed by the Bankruptcy filing.  This notice is sometimes called a Suggestion of Bankruptcy.  This notice includes the bankruptcy case name, case number, and the bankruptcy court in which the bankruptcy is filed.  So, if Court Ventures is collecting courthouse based public records, they are collecting bankruptcy filing notices — albeit indirectly.

Court Ventures then had a contract with another data collection company, US Info Search.  From them a Vietnamese man, who was in the ID theft business,  bought access to both US Info Search data and Court Ventures data — kind of the warehouse shopping model for Identity theft.  Ultimately, this Vietnamese man was able to sell to his customers access to names, Social Security numbers, dates of birth, addresses, former addresses, phone numbers and email addresses — among other things.

The article goes into considerably more detail, and it is quite interesting and well worth reading.  Still, you might be wondering what this has to do with tax returns and bankruptcy clients.  An increasingly common form of ID theft is to file a fraudulent tax return for the victim of the ID theft in an attempt to steal the victim’s tax refund.

Shortly after reading this article this morning I received an email from a Chapter 13 client of mine letting me know that she didn’t have her tax return ready quite yet.  You see, she was working with the IRS to unravel it, but evidently someone had filed a tax return for her in an attempt to abscond with her refund.

That got me thinking.  I wonder how many bankruptcy clients assume (rightly or wrongly) that their Trustee is entitled to their tax refunds, so when the refund doesn’t appear; they don’t go looking for it?  I have had a number of clients over the years receive correspondence from the IRS that they don’t understand (and that may or may not make sense to me), but they don’t follow up on it.  They don’t call the IRS and get them to explain something to them or ask what something means or why it happened.  They just assume.

So, don’t do that.  Nobody in Vietnam deserves your refund more than you do.


US Trustee Audits — They’re BACK!

One of the things lobbyists convinced Congress absolutely had to be added to the Bankruptcy system in 2005 were Debtor audits.  Well, this concept has come and gone a few times since then, generally due to budget fluctuations.  However, it is being reported that the US Trustee has found more money; and random audits are once again a fact of life.

Now, before you get too excited, I have not seen figures for the frequency of audits at this point.  One in every 250 cases being selected is pretty much the historical standard, but I have no idea how much funding the US Trustee has available at this point in time.

The purpose of the audits is to find “material” misstatements in the Debtors’ petition and schedules.  Now, you would think that material would mean material for purposes of the Bankruptcy process and to people who understand how the system works.  No, material at this point seems to mean material to the independent CPA’s from large CPA firms that the U.S. Trustee’s office contracts with to do these audits.  These guys aren’t accustomed to preferential transfers and median income calculations.  These are the same people who audit corporate financial statements.  (If you aren’t rolling your eyes by now, you haven’t been reading my blog long enough.)

Anyway, if your case is selected for an audit, you will have to begin by producing certain documents to the auditors.  The last list of documents I have seen for an audit is from 2008, but I don’t think it has changed much.  Here it is:

  • Payment advices or other evidence of payment from an employer for the six full calendar months preceding the date of the bankruptcy petition, plus those received in the calendar month in which the bankruptcy was filed, from the debtor(s), or from an individual debtor and the individual debtor’s non-filing spouse unless the debtor has checked Box 2.b on Form B22A (Chapter 7 cases only).
  • Federal income tax returns, including all schedules and all W-2, 1099, and K-1 forms, for the two most recent taxable periods prior to the date of the bankruptcy petition.  If either of the returns has not been filed, provide copies of the two most recently filed federal income tax returns.  (If joint case and debtors filed separate returns, provide both returns.)
  • Account statements for the six months preceding the date of the bankruptcy petition for all depository and investment accounts in which the debtor(s) had an interest in any of the six months, including statements (even if received post petition) that reflect activity in the month in which the petition was filed; along with sufficient documentation to explain the source of every deposit or credit over $500.  (Include information for checking, savings, money market, mutual fund, and brokerage accounts.  Examples of documentation for deposit transactions include check registers and annotations on or attached to the account statements.)  Audit firms may request that you provide additional documentation to sufficiently explain the source or purpose of an account statement entry or entries.
  • If the debtor(s) is divorced, (a) the divorce decree, (b) any orders regarding property settlements entered within the last three years, and (c) any alimony or child support orders currently in effect and amendments thereto.
  • If the debtor(s) is self-employed, then for each business owned by debtor or from which debtor derives self-employment income, (a) business tax returns for the two most recent taxable periods prior to the date of the bankruptcy petition, (b) most recent accounts receivable ledger and aging schedule/report, (c) most recent balance sheet prior to the date of bankruptcy petition, (d) income statement for the most recent period ended prior to the date of the bankruptcy petition, (e) quarterly sales tax return for the most recent period ended prior to the date of the bankruptcy  petition, if any, (f) account statements for business depository account(s) for the six months preceding the date of the bankruptcy petition, and the month in which the petition was filed, along with sufficient documentation to explain the source of every deposit or credit, and the purpose of every check, withdrawal, or debit, and (g) most recent business asset listing and depreciation schedule, if any.

My favorite requirement is that last one.  Accounts receivable ledgers, balance sheets, income statements, depreciation schedules — from a self-employed debtor?  Who are they kidding?  Anyone who has that sophisticated an accounting system isn’t self-employed.  They may operate a wholly owned professional corporation, but they aren’t self-employed.  Your self-employed debtors are lawncare people, electricians, oil field contractors, remodeling contractors, plumbers, oh and the next-door neighbor’s cousin who cleans your house. All of whom are, of course, famous for their detailed, double-entry accounting systems.

Yet another example of the 2005 Bankruptcy reform act and its ongoing quest for an abuse in need of a remedy.