Category Archives: consumer law

Exchanging Credit Card Debt for Tax Debt

I really hate to say I told you so — ok, no I don’t. Several months ago I warned that the recent change in regulations requiring the reporting of debt forgiveness to the IRS was going to result in people exchanging freely dischargeable credit card debt for non-dischargeable tax debt. Lots of people called me Chicken Little.

You see, there is an exception to the requirement that forgiveness of debt is taxable as gross income. That exception is for debt discharged in a Bankruptcy or forgiven while the taxpayer is insolvent. However, that exception defines insolvency as having more debts than assets — and it doesn’t say anything about excluding exempt assets.

Early this year the U.S. Tax Court entered a summary opinion finding that the exempt value of the tax payers’ homestead was included in adding up their assets for purposes of the Tax Code’s insolvency test. The Tax Court found that this couple who cut deals with their credit card companies and paid a substantial amount on their debts did not qualify as insolvent, because of their exempt homestead equity.

The couple were clearly insolvent for purposes of the Bankruptcy Code. If they had filed for bankruptcy, they would have discharged the total liability to the credit card companies. Instead, they tried to do the better thing — and exchanged freely dischargeable credit card debt for non-dischargeable tax debt.

This is not a published tax opinion, and I hate to splash this poor couple’s name across the blogosphere, so I am not linking to the opinion. If you have need for it, contact me by email.

Elaine

Arbitration Tide Turning?

Gradually over the last 15 years or more it seems there has been a swelling tidal wave in favor of mandatory arbitration agreeements. I’ve always been suspicious when people with money and power (like large corporations and legislatures) become in favor of keeping aggrieved people out of the court system. Why? Whatever happened to faith in the concept of just as much justice as you can afford?

Recently, however, it appears the tide is turning. In May the Pennslvania Supreme Court heard a case by referral from the Third Circuit on whether arbitration clauses in consumer contracts are unenforceable adhesion contracts. In June, the 8th Circuit refused to compel arbitration when requested by a mortgage company in a Bankruptcy Adversary Proceeding.  Later in June, the Oklahoma Supreme Court went to great lengths to call arbitration clauses in consumer contracts adhesion contracts that are neither freely negotiated nor understood by consumers. Oklahoma has a strong legislative history of favoring arbitration, but the Oklahoma Supreme Court still mentioned, in dicta, that the law was starting to take a more active role in protecting consumers from abuse. (Bilbrey v. Cingular Wireless, L.L.C., 2007 OK 54.)

Now in July, H.R. 3010 (Fairness in Arbitration Act) has been referred to the House Committee on the Judiciary; and S. 1782 has been referred to the Senate Committe on the Judiciary. The House bill has, as far as I can tell, 8 co-sponsers. The Senate bill is sponsored by Sen. Durbin.

Let’s hope that this is the first step in taking back rights that most of us take for granted — until we discover we don’t have them anymore.

Elaine

Minimum Wage — a non-event?

Unless you live in a cave, you have probably heard that the Federal minimum wage increased to $5.85 an hour today.  The part you may not have heard is that 32 States and the District of Columbia already require a higher minimum wage — so, those areas will see no change.

The Department of Labor has a map showing the status of various States’ minimum wage laws.  No surprise, Oklahoma simply follows the Feds.  Here, at least, the minimum wage increased for the first time in almost ten years — and with more to come.  If you haven’t heard the details, today’s change is just the first step of a three-year process.  Next year the minimum wage will increase to $6.55, and then in 2009 it will increase to $7.25.

Elaine

Is Big Brother’s Name Google?

This blog now has a minimum age for readership.

You must be old enough to remember the phrase, “Careful, Big Brother is watching.”  Except now it should be, “Careful, Google is watching.”

I was just reading a Complaint and Request for Injunction that purports to have been filed with the FTC by EPIC (Electronic Privacy Information Center). Now, I read it on a web page. I have not checked with the FTC to make sure it is not an elaborate hoax, but this one would be elaborate.  Disclaimers now done.
According to this complaint Google really is collecting all of the information that passes through its hands. Oh, and its privacy policies may not be what you would want them to be. Ok, so why care now?  Privacy has been outdated for how long?   Well, because Google is trying to merge with the Internet ad power, Doubleclick. Then, Google will be able to use all the information it has been gathering:

  • Email histories from Gmail;
  • Histories of all search querries coupled with IP addresses;
  • Indexes of computer desktops courtesy of Google desktop;
  • All Instant Messages sent through Google Talk;
  • RSS feed usage and histories through Google Reader;
  • Details on your YouTube habit;
  • All payment information obtained through Google checkout;
  • Schedules on Google Calendar;
  • Presumably documents from Google Applications;
  • Your Orkut profile — including hobbies, friends, etc;
  • All searches done with Google toolbar, identified with a special cookie to track web movement;
  • and whatever else Google has planned for us.

All this to help it target Doubleclick marketing campaigns. If the special cookie in the Google toolbar gave you pause, the Doubleclick merger should get your attention. Doubleclick tracks your web progress as part of their marking business.

Anyone who thinks they can’t be identified by this kind of information missed the media storm when AOL mistakenly released some search data last summer. The AOL data did not include the kind of Personally Identifiable Information (PII) that Google stores, and people were still being identified by their search history. Now add in your IP address, email usage, billing histories and who knows what else — Google knows you.

Excuse me, I have to go delete my Google Toolbar.

Elaine

Consumer Credit Protections for the Military

Congress has recently passed, as part of a much larger military bill, certain limitations on consumer credit extended to servicemembers and their dependents. This will ultimately be codified in Title 10 U.S. Code. In the meantime, I have attached a copy of just Section 670 of Public Law 109-364. Section 670 of Public Law 109-364

This statute is incredibly expansive. The cap on interest rates at 36% got all the press, and that doesn’t sound all that great — unless you have actually looked at a TILA disclosure that puts the interest rate, right there in black and white, at 1000%. There is way more to this Statute.

First of all, it doesn’t just apply to servicemembers, but also to their dependents. Second, it prohibits arbitration clauses, rollover/renewal based financing, and the use of post-dated checks, payments by electronic debit or the use of car titles as security for non-purchase money loans. This Act goes into effect October 1, 2007.

The Act also empowers those experts in consumer credit, the Department of Defense, to promulgate regulations to carry out this section. Those regulations are to establish the disclosures necessary, methods for calculating interest, allowable fees, definitions of creditor and consumer credit, and other things the Secretary of Defense deems necessary.

The Department has issued a draft of its proposed regulations which are now available for comment. DoD Proposed Regulation (actual proposed regulations begin at page 48 of the attachment.)

These regulations go a long way towards addressing the credit industry’s concerns about this Act. For instance, DoD limits the expansive definition of “consumer credit” in the statute to a very restrictive, payday loan description. The regulations require that the loan be:

  • Payday loans. Closed-end credit with a term of 91 days or less in which the amount financed does not exceed $2,000 and the covered borrower:
    • Receives funds from and incurs interest and/or is charged a fee by a credtor, and contemporaneously provides a check or other payment instrument to the creditor who agrees with the covered borrower not to deposit or present the check or payment instrument for more than one day, or;
    • Receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously authorizes the creditor to initiat a debit or debits to the covered borrower’s deposit account (by electronic fund transfer or remotely created check) after one or more days. This provision does not apply to any right of a depository institution under statute or common law to offset indebtedness against funds on deposit in the event of the covered borrower’s delinquency or default. . . .

This just doesn’t strike me as being that hard to wire around. Second, it expressly doesn’t provide protection for other types of incredibly usorious situations. Now, granted no one else is statutorily protected from some of the other kinds of loan products I have seen, but Congress has made the determination that the military and their dependents need special protection. I don’t think this is doing it.

One of the big concerns of the credit industry. is how to determine who is and is not a covered borrower? The introduction to the regs seems to indicate that the service member should be pretty easy to identify, because the lender will surely want proof of employment before making the loan. Have these people ever been inside a payday loan shop? I didn’t think so. Oh, and both the Statute and the Regulations define “dependent” as:

  • The member’s spouse, the member’s child defined in 38 USC 101(4), or an individual for whom the member provided more than one-half fo the individual’s support for 180 days immediately preceding an extension of consumer credit covered by this part.

So, a college student going to school in a State with no military bases could be covered. An elderly parent of a service member could be covered. The proposed regulations include a form that is to be offered to all applicants where the applicant must tell the loan shop whether or not they are a covered borrower, but the Statute does not provide a safe harbor for a creditor who relies on a statement from the borrower, and the penalty is voiding of the contract (or punishment for  a midemeanor for a knowing violation).

There are some things here I really like. For one, the acknowledgement from Congress that maybe mandatory arbitration clauses and consumer contracts aren’t a good combination. Also, the inclusion of all fees and costs in the interest rate calculation. I am waiting, though, to see how the industry will react and what litigation, if any, results from this Act.

Elaine

More on 1099C’s

It has been a really full week with way too much life interrupting my legal work.  So, this is going to be short.

I was just checking the stats on this blog, and noticed a search query that led someone here.  It was, “1099 c and still paying the debt”.  I would love to know who that was, I would be very interested in the supporting facts.

Sure, insolvency is a defense — if you raise it.  If you don’t and an assessment becomes final, then what?  What if the 1099 issues, and the debtor is still paying on the debt?  What then?  Somebody came here looking for the answer, unfortunately, whoever it was didn’t find it.

Elaine

Secured Loans — Pay now, pay more later

Twice in the last two weeks I have talked to people who had a significant piece of collateral reposessed, and after applying the proceeds the lender tried to tell them that they now owed more than they had originally borrowed.

These are not reverse amortization or interest only loans. These are aggressive repo. and attorney fees plus a healthy spice of late fees, penalties and interest charges.

The borrower now has limited options:

  • Pay more in a deficiency than the original principal balance;
  • Hire a lawyer, and probably an accountant as well, to challenge the lender’s collection and accounting procedures; or
  • File for bankruptcy.

So, why should borrowers give collateral for a loan if they are going to wind up in more trouble in the event of default than if they hadn’t? Why not pay a slightly higher interest rate (and both of these people could have gotten the loans as unsecured loans at the time they were made), buy the collateral, own it free and clear, claim it as exempt if it is a vehicle; and then if there is a default — keep the collateral and owe LESS money, because of fewer opportunities to assess repo. and collection charges?

When did we change the rules so that you have to be a sucker to do a secured loan?

Elaine

Questions

There are days I have more questions than answers.

If a lender makes a mortgage loan disguised in the form of a line of credit to a 69-year-old woman who can barely make the payments as long as she is working but won’t be able to as soon as she stops, is that predatory?

If someone moves to another State for a few months and then moves back, can they use the Federal exemptions and hide a tax refund under the Federal wildcard?

If a debtor doesn’t raise a Truth in Lending claim in a collection case and allows a default judgment to enter before filing a Chapter 7 Bankruptcy, does that estop the Trustee from pursuing the claim on behalf of the Estate?

If someone qualifies for free credit counseling but has assets, what are the chances of getting the Bankruptcy filing fee waived?

How on Earth are we going to deal with non-priority, non-dischargeable taxes in Chapter 13’s?

How many of the homeowners currently defaulting on sub-prime mortgage loans would have defaulted if they had gotten a higher quality loan product?

How many of the homeowners losing their houses in foreclosure have been offered meaningful loss mitigation as required by FHA regulations or pooling and servicing agreements?

How many FHA mortgages are sent to foreclosure when they are less than 90 days past due in violation of Regulations? (I know of one.)

How many depository institutions have gotten away with offsetting a bank balance against a credit card debt in violation of Federal Statute? (I know of one.)

So, how was your Tuesday?

Elaine

Hospital Billing and Consumer Protection Acts

I have to be missing something. I know that, I’m just hoping somebody will tell me what it is so I don’t have to figure it out the hard way.

A friend was telling me about a hospital billing issue. The long and the short of it is that she was billed a 1,000% markup for some things that she could have supplied herself at cost. This product was sold to her in addition to itemized services. This happened several times over a period of three months. She didn’t find out about it after the first bill, because it went to the wrong address. By the time she got the address straightened out, the bill was huge.

Anyway, charging a 1,000% markup (yep, that is not a typo) strikes me as unscrupulous and seriously injurious to the consumer — the mark of an unfair trade practice as defined by the Oklahoma Consumer Protection Act. The Act applies to “consumer transactions” which are defined as the advertising, offering for sale or purchase, sale, purchase, or distribution of any services or any property . . . for purposes that are personal, household or business oriented.

Health care strikes me as a pretty personal purpose, and medical goods and services are services or property; so, has anybody challenged a hospital billing practice using a consumer protection (or other UDAP) statute?

Elaine