Category Archives: Consumer Credit

Bankruptcy and Secured Debt — the Car Edition

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I can’t count the number of times I have answered the phone, and the first words out of the caller’s mouth (before Hello, my name is. . . , etc.) are, “If I file for Bankruptcy can I keep my car?”

If everyone who filed for Bankruptcy automatically lost their cars, don’t you think you’d have heard about it by now?   Do you really think car dealers would ignore advertising to  this large a market?  So, when was the last time you saw an ad for a car lot that went like this.

So, you need to file for Bankruptcy.  You’re going to lose your car, of course; but we all know you can’t live in Oklahoma without a car!  So, you just come on down and pick out a replacement.  We will hold it until your Bankruptcy is safely filed.  Don’t you worry, we’ve got ways to get you into that car as soon as you lose your old one. After all, you don’t want to be one of those thousands of bankruptcy filers out hitch hiking to work!

Doesn’t sound too familiar to me either, but it was kind of fun to write.

The fact is that when it comes to secured debt in a Chapter 7 Bankruptcy you generally have four options:

  • Reaffirm;
  • Retain;
  • Surrender; or
  • Redeem.

A reaffirmation agreement recreates the debt post-petition.  That sentence is fraught with meaning.  First of all, it is an AGREEMENT.  That means that you must agree to it, but the Creditor must agree to it as well.  So, if the creditor is sick of you, you cannot force them to let you sign a reaffirmation agreement.  Also, the agreement terms may well require that you be current on your payments as of the time of the Bankruptcy filing.

Second, the reaffirmation recreates the debt post-petition.  That means it is effectively after the bankruptcy.  If you subsequently default, the creditor will have all of the rights that they would have had if you had never filed.  This means you lose the benefit of the Bankruptcy discharge with respect to the reaffirmed debt.

Retain and pay is an option that varies dramatically by jurisdiction.  The 2005 Bankruptcy Reform Act tried to do away with this option, but like many parts of the Act, it wasn’t quite as well drafted as it could have been.  The long and the short of it is that depending on a number of factors including:  where you live, the terms of your loan, the relevant State law and even the identity of your lender; you may be able to simply keep making your payments.

Surrender is pretty self-explanatory.  If you don’t want the car or can’t afford to keep the car, you can give it back to the lender and discharge any remaining obligation for the loan.  Wash your hands of it, be done, over.

Finally, there is redemption.  Redemption is really kind of cool and deserves its own post — which it is going to get.  However, in a nutshell the right to redeem property is the right to pay the lesser of the value of the property or the amount owed in a lump sum to the lender and get a lien release.  So, owe $2,500 on a laptop now worth $300?  Pay the $300 and keep the laptop.  Owe $36,000 on a pickup worth $13,000?  (Why, no, I did not just make up those numbers.)  If you can find a way to pay the $13,000 in a lump sum, you can keep the truck and be done with the $36,000 loan.

As usual, the devil is in the details; and that is nowhere as true as it is with the concept of redemption.  So, check back for a post on how to make it happen — or not.

Elaine

 

Bankruptcy, the Fiscal Cliff and Tax Refunds

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Evidently, we have a deal on the fiscal cliff — well, sort of.  We have a deal for two months, and then all bets are off.  So, I’m not completely sure that what I have read so far accurately describes the contents of this deal (so double-check my facts before relying on them, please); but even better, anything that does (or doesn’t) change today might in 60 days or so.  I’m sorry, but Congress needs to grow up.

What does this have to do with Bankruptcy and Tax Refunds?  Well, first of all, it appears that the tax exemption for forgiveness of debt income on a principal residence has been extended for a year — or at least until March.  So, if your primary reason for filing for bankruptcy was to avoid tax consequences from a foreclosure or short sale; now, you may not need to.  The emphasis there is on MAY.  Do pay the relatively trivial amount of money to check this with a qualified tax expert — which I am not, and this tax exemption is deceptively complicated.

Now, for the bad news, your pay check will get smaller.  Tax withholding rates are going up 2%.  Most people who file for Bankruptcy have been living pay check to pay check  for many months.  A 2% withholding hit can make all the difference in the world between keeping the heat on and not.  Of course, the problem is that filing for bankruptcy isn’t cheap; and if you are living close to the edge, you probably don’t have the cash laid by for attorneys fees and filing fees.  So, before you spend your 2012 tax refund getting current on bills (like credit cards) and then realizing that you’ve blown your refund and still owe more than you can pay; consider whether you will be better served using that money to pay for a bankruptcy filing.

Every year people call me in late April or May who got back several thousand dollars in March or early April.  They spent that getting current on a bunch of debt and then realize a month later, that their balances aren’t going down and their income isn’t going up.  If your tax refund is enough to get you out of trouble, enough that you won’t need to file, enough that you will then be in a position to take care of yourself and your kids instead of Chase and Discover; then, by all means, use it to pay the bills — but do the math first.  Then, take a look at your retirement accounts and your kids’ college funds.  J.P. Morgan Chase made record profits in the 3rd quarter of 2012.  Did you?

Elaine

How to Get Ahead in Bankruptcy

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One of my favorite tools in the Bankruptcy Code is the right of redemption.  Redemption, or to redeem property, is the ability to pay the lesser of the value of the property at the time the Bankruptcy is filed or the amount owed on it.   So, when you paid $2,500 for a computer two years ago that is now worth $400 but you still owe over $2,000 for it; redemption can be a great deal.   I’ve redeemed Palm Pilots ($50), dining room furniture, televisions, cars, mobile homes, travel trailers, all kinds of stuff in Bankruptcy.

Now, obviously there must be a lien on the property or you don’t need to redeem it, you just file the Bankruptcy.  If there isn’t a lien on property, then any debt owed is basic unsecured debt; and a bankruptcy filing eliminates that automatically anyway.  However, a bankruptcy discharge does not normally affect liens attached to property.

Redemption works best with property that isn’t worth very much.  Funding can be a real problem, because you have to pay off the original lender in a lump sum.  So, those used Palm Pilots in the ’90’s were easy.  Clients paid hundreds for them, racked up huge interest charges; and they could all come up with $50 to never make a payment on the Palm Pilot again.

Bigger ticket items present a different set of problems.  So, if you have a mobile home that you paid $70,000 for (I didn’t say my clients were all terribly bright), it flooded recently and has earthquake and hail damage — hey, its been a rough year weather wise; it might be worth considering what it is actually worth NOW in the condition it is in and whether you can come up with a source of funding to pay that amount off.   I’ve got a mobile home working now.  Granted, the amount owed is down to about $28,000 (in large part due to a seriously spotty payment history).  However, the mobile home is worth less than $12,000 — and the client has managed to come up with the $12,000 from a relative.

So, we file the motion, hire an appraiser and get ready to argue value in front of a Judge.

Cars are a little easier, because there are a couple of lenders who will finance the redemption of vehicles.  Their interest rates are astronomical, but it can still make a huge difference in the total amount being paid for a vehicle.  I think my record on a vehicle was a Chevy pickup worth $12,000 and with a payoff balance of more than $35,000.  My clients redeemed it with redemption financing at 28% interest.  Their payment went down and their payoff term went down.  GMAC was not happy.  Oh, well.  You can’t please all the people all the time, and GMAC  just never seemed to make it onto my list for the day.

Speaking of redemptions, I’ve got a motion to file.

Elaine

Mortgage Overcharges and Consumer Protection

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Recently, Bank of America agreed to a staggering settlement for mortgage fees improperly charged by Countrywide prior to the BOA takeover.  Henry Sommer, one of the Country’s leading Bankruptcy lawyers, scholars and consumer activists has posted some thoughts about that settlement on Credit Slips.  It is well worth reading.

Elaine

Student Loan Tips

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I get frequent calls from people who are way over their heads with student loan debt.  It used to be that anything over $50,000 got my attention.  Boy was that the good, old days.  Now, it is going to have to be six figures before I blink.

Anyway, a blog I read pointed me to a nice discussion of the student loan collection manual published by the U.S. Department of Education.  If you are dealing with a private collector for a student loan, you will want to read this post.

Elaine

Debt Settlement Regulation

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There is a movement afoot to increase the regulations governing debt settlement companies.  These are the companies who advertise that they can negotiate substantially reduced deals with your credit card companies.  If you have seen a banner ad that says something like, “Reduce your credit card debt by 40-50%”, odds are you have encountered a debt settlement company.

USAToday.com ran an article today on this very topic.  They interviewed a couple of people who had used debt settlement companies, one got bad results, one got good results.  Over the years I have seen a lot of clients who have used one of these companies before coming to see me.  I have them bring me there contracts.  Some of them are downright appalling.

There are two problems with the debt settlement business model.  In order to do it well you have to really work your files and you have to be very, very good.  There may be a way to do it well representing people in other States, but I don’t see how.  To do it well, in my opinion, you need to be prepared to aggressively defend collection litigation as it gets filed.  (If you are considering a debt settlement company, read the contract completely but pay particular attention to what they do with the money you send them and what they will, or more likely won’t, do if you get sued during the process.)

I have heard of a good debt settlement company in Texas.  They only take clients in their area, and I heard a presentation about them some years ago; but I no longer remember their name.  Even a good debt settlement company can’t get you out of the second problem.

If you “settle” debt by convincing a creditor to accept less than it is owed, the amount that you don’t pay will get reported to the IRS as forgiveness of debt income.  I have written about that before.  This means that unless you meet certain tests and deal effectively with the IRS, you could wind up having to pay taxes on the amount of debt that was forgiven.  Oops.

Debt settlement companies know how to say what desperate people want to hear.  Just remember the old rules.  Read everything.  Don’t sign anything you haven’t read or that you don’t understand.  When in doubt call the Better Business Bureau, and always know where the money goes and who gets it.

Elaine

Mortgage Servicing — Thou Shall’t Not Lie, Cheat or Steal

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USA Today is reporting that Bank of America, as the purchaser of Countrywide, is paying $108 Million in penalty to the Federal Trade Commission (to be distributed amongst the effected parties).  The FTC discovered that Countrywide was charging excessive fees to home owners who were facing foreclosure.  These fees were for things like property inspections and landscaping (I assume that means mowing).  What Countrywide was doing was creating wholly owned subsidiaries to arrange for the services and then bill the accounts at an inflated price.

At the very bottom the article also mentions that Countrywide has been known to misrepresent the nature, and amounts due on loans, it looks like they may have discovered some false Bankruptcy claims and concealed fees.  This should be shocking.  It isn’t.  I sued Countrywide for its bankruptcy related accounting practices a few years ago.  What is more disturbing is that these practices, or variants on them, are widespread throughout the industry.

We don’t let debtors lie, cheat or steal in Bankruptcy.  It is high time we stopped letting creditors do it.

Elaine

Divorce Debt and bankruptcy — everybody loses but the lawyer

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I’ve been getting a lot of calls lately from both prospective clients and other lawyers with questions about how divorce related debt is handled in a Bankruptcy.

Support debt — child support, alimony, anything that is intended in the actual nature of support, regardless of what it is called, is yours for life.  No Bankruptcy court can help you.

Non-support debt, i.e., the credit cards, the medical bills, your own divorce attorneys fees, possibly (but not necessarily) your ex-spouse’s divorce attorneys fees, anything other than support that you are ordered to pay in a divorce decree — this is different.  If you file a Chapter 7 Bankruptcy, you are stuck with this.  If you file a Chapter 13 — not so fast.

Typical scenario, prospective client calls following a nasty divorce.  Decree orders this person to pay tons of credit card debt, and he owes his lawyer a fortune.  (For purposes of this scenario it makes no difference to me how much the other spouse was ordered to pay, how much the other spouse makes, how much the other spouse has or has not suffered.  For one thing the other spouse is not my client.  For another thing, I’m just not that impressed by tales of other people’s poor judgment in things like choosing spouses.)

Here is what I tell the prospective client.  You can file a Chapter 13 Bankruptcy.  You will pay me several thousands in attorneys fees.  You will pay the Trustee a not inconsiderable amount to administer your case.  You will pay your mortgage, car, any recent taxes and any support debt that you owe over a period of five years.  You will pay some additional amount, probably a small amount and almost certainly a lot less than all, of the rest of your debt — what you were ordered to pay in the divorce decree and whatever else you’ve got lying around.  I can’t predict how much of that you will have to pay, but it is generally a lot less than all.  Oh, and it will be paid without interest.  At the end of the five years, you will get a discharge.  Your ex-spouse will not.  Any creditors to whom your ex-spouse is also liable will then be able to try to collect money from the ex-spouse.  Not only can they try to get the remainder of the principle balance, but the interest you didn’t have to pay during your Bankruptcy.

In other words, you two fought for years over this debt.  You paid attorneys thousands of dollars.  You are going to pay me thousands more — and you will both still get the bill.

Now, wouldn’t it just have been better to have both filed for Bankruptcy before the Decree?  Not had all that debt to argue about and then agreed to pay the money it would have taken to fund a Chapter 13 plan and added it to your kids’ college funds?

Elaine

Medical Bills and Credit Cards

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CNN seems to think that paying medical expenses with credit cards is a new thing.  (Can’t Pay Your Doctor?  Charge It!)  They should have talked to a bankruptcy lawyer.   Anybody who thinks the credit card debt in this country was racked up on soccer shoes and restaurant meals, needs to take another look.  Elderly clients who have never used their credit cards anywhere but the pharmacy are just not that unusual — and haven’t been for years.  Think about the last time you were in a doctor’s office that didn’t display the Visa card sign.  This ain’t news, guys.  It may seem like news, because lobbyists spent so much money trying to influence the characterization of the people who file for bankruptcy prior to Bankruptcy reform passing; but nothing has really changed.

Elaine

Consumer Debt Levels

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USA Today has an article on consumer debt levels.   Basically, consumer debt isn’t going anywhere fast.  In 2008 household debt totaled $13.9 trillion.  That was almost double the 2000 levels.  In 2009 —  after the collapse of the credit bubble, banks cutting back lending, tightening of lending standards — you know, after the last year — household debt level is down for the first time in ages.  Well, sort of.  Household debt is now down to $13.8 trillion.  Whoo Hoo!

If this doesn’t scream that we’ve got a problem, then I don’t know what does.  Oh, and all those economists calling for a 2nd half economic recovery?  On the backs of what jobs and what income?  We are a consumer driven economy.  As long as the consumer is busy NOT getting debt paid down and NOT staying employed, I wouldn’t start singing Happy Days are Here Again anytime soon.

So, where to start?  The credit card reform bill going into effect next year is a start.  Anyone who has spent any time at all reading credit card terms figures out pretty quickly that the credit card companies have spent a huge amount of time figuring out ways to make debt almost impossible to pay down.  If you haven’t read about interest rate increases (by sometimes 30% apr or more) just because the card company thinks it can, then maybe you should start by googling double cycle billing; but I wouldn’t recomend trying that before breakfast.

Elaine