Tag Archives: credit cards

Should You Apply for a Forbearance?

Lots of creditors are offering forbearance deals right now.   The thing to remember about a forbearance is that it doesn’t erase the debt — and that can be either a useful tool or an anchor around your future neck.

The first thing I will tell you about any forbearance agreement is to read it — all of it.  Ask questions, especially about the pay back and especially about interest rates and fees.  What will it ultimately cost you?  Then consider what it is that you are forbearing and what are your other options.

Credit cards are offering forbearance plans, and they can be really nice tools.  Ask all the questions, and then ask yourself one more.  What is the likelihood that I will be filing for bankruptcy before I get this account paid in full?  Remember, forbearance agreements are intended to be repaid, but if it is an unsecured debt and you wind up filing for bankruptcy anyway, the balance owed at the time that you file for bankruptcy is not likely to be repaid regardless.  So, doing a forbearance deal with credit card companies can be a useful tool, especially if it frees up cash for you to stay current on your home, your car or your utilities.

I will caution you that borrowing money with the intention of filing for bankruptcy and not repaying it is called bankruptcy fraud, and it is seriously illegal.  So, don’t enter into any agreement with the intention of not following through.  Understand, however, that intentions and future realities can differ for many very real reasons — including the simple fact that we are living in very uncertain times.

Many utilities are offering forbearance options as well.  Do what you have to do to keep the lights and the water on, but do stay informed about the policies and regulations governing shutting off service.  Knowing that can help you negotiate a better deal.  Also, if you wind up filing for Bankruptcy, the utility companies have some special rights.  They can require a new deposit in order to continue providing service after the case is filed.  Of course, you will have to pay for all service as the bills come due after you file as well.

Mortgage forbearance offers are different.  They frequently simply defer a few months payments with the expectation that they will all be repaid in a lump sum at the end of the forbearance period.  Sorry, but that is neither likely nor helpful.  A second option can be to apply for some type of permanent loan modification at the end of the forbearance period.  That would be more helpful (depending on the terms of the modification), but it can be difficult to predict at the beginning of the forbearance period what the likelihood is of getting a favorable modification some months in the future.

Counting on a future modification can wind up with a mortgage account falling further and further behind with not just missed payments but also a host of fees assessed by the mortgage company.

A mortgage forbearance may also add the missed payments to the end of the mortgage term.  Consider carefully how the accrual of interest will effect this.  I am frequently surprised by the number of people who don’t do the math to figure out just how much that forbearance will cost them.  It may still be the right decision, but once your future straightens out a bit, it may be very wise to start making small payments every month towards getting those payments paid sooner.

Another thing to consider is that a Chapter 13 bankruptcy is one of the best tools for getting current on a mortgage.  So, if you take a forbearance agreement hoping that you will get a loan modification or an extended time to get the payments current — and that doesn’t work out.  A Chapter 13 filing can give you up to five years to cure a mortgage arrearage.  A Chapter 13 filing can also deal with credit cards that have forbearance balances and give you limited abilities to get utility services back in good standing.

Always remember, no matter how bad things look, it is always worthwhile to know your options, and that includes knowing what a bankruptcy will or won’t do for you.

Elaine

 

 

 

What If the Tax Refund Doesn’t Catch You Up?

Like most businesses, mine has patterns. One of those patterns is that someone will call me about this time of year and we will talk for a bit about a possible bankruptcy filing. Then, I won’t hear anything back from them for several months. What happens is that shortly after talking to me, the caller discovers that he is going to be getting a substantial tax refund – enough to get caught up. Of course, in some cases they are right; and I never hear back from them; and that is a good thing.

Then, there are the people who are calling back in May or June. They got a $3,000 or $4,000 tax refund. They threw it all at the problem bills. Those payments paid a ton of interest. A few months later, they realized that they are still in trouble. Their tax refund bought them a little bit of time and not much more. So much of it went to interest that it didn’t really reduce their principal balances much. They still can’t pay the debt. They still can’t save for retirement. They still can’t help their kids save for college. They still need dental work they can’t afford. They still have cars that desperately need new tires. Oh, and they have $0 saved to pay for a bankruptcy filing.

If you think you will, “get caught up” with your tax refund; do a lot of math first. How much of your payments will actually reduce the principal. What interest rates are you paying and how long will it take that rate to increase your balances more than your refund reduced them? How long will it be before you can start doing the things you need to do – like plan for retirement, college costs, oh, and just how long will those tires last, anyway?

I don’t actually mean to be this depressing, and if your tax refund will get you out of trouble; more power to you. If all it will do is buy you some time, then maybe it is time to take a deep breath and consider where your real responsibilities lie – Visa, Master Card or your family’s future? Personally, I like to think that Visa and Master Card are big enough to take care of themselves.

Ok, so you still really want to pay this. Great. Pay it. But wouldn’t paying it without interest be a better solution than what you are currently fighting? There is a way to do that. It isn’t fun, it isn’t quick and easy; oh, and it isn’t cheap. It is called a Chapter 13 Bankruptcy. Yes, it is a bankruptcy; but it is a bankruptcy that lets you take five years to pay as much of your unsecured debt as you can – with NO interest.

Do the math, and do it before you throw yet another tax refund at 28% interest charges.

Elaine

What do You Do When You Can’t Pay Your Bills

Most of the people who call me have always paid their bills. They have never been in the kind of position that leads them to call a Bankruptcy lawyer before, and they are scared and don’t know what to do.

The first thing that I tell them is to just breathe. Calm down. Stop the racing mind. Just breathe.
Now, prioritize. Pay the utilities, the car payments, the house or rent, the groceries first. Second, if at all possible keep a small cash reserve. Did you hear me say pay the credit cards? Sure, if you can, you should always pay your bills; but if you can do that, you aren’t reading this. If you are reading this you have lost a job or your income has dropped dramatically, you’ve had major health problems, or even worse, your child has had major health problems. Even good insurance won’t necessarily insulate you from major financial ramifications.

Seriously, I have had people on the phone hyper-ventilating at the thought of not paying their credit cards. I ask them what they think will happen, and they can’t tell me; but it is clearly TERRIFYING. We’re talking asteroid slamming into the Earth, wiping out all life kind of terrifying – which may explain what happened to the dinosaurs. They missed a payment on their Master Card. Ok, so, I’m teasing a bit.

Here is what is likely to happen if you stop paying your credit cards. First of all, they are going to start calling – a lot. This is why God invented caller ID. Then, they are going to shut down your charging privileges – probably not a bad thing. About the same time, they will start reporting you delinquent to the credit reporting agencies. Sometime thereafter, you will get a letter that they are referring your file to a LAWYER for further action. The word lawyer is in all caps, because the only reason for this letter is to be scary. They can send your file to anyone they want to for “further action” or whatever other scary (and generally vague) terms they want to use, and they don’t have to send you a letter telling you they are doing it. When that file lands in the lawyer’s office, his office will also send you a letter telling you that they have it. Notice, that no lawsuit has been filed yet? It is easier and cheaper to try and scare you with letters than it is to sue you. That doesn’t mean you won’t be sued, you probably will be – eventually; but in the meantime you still have a bit more time to try to find your feet.

You will know you have been sued when you are served. The actual rules for service of process are complicated, but if you wind up with a copy of something called a Summons and a Petition or Complaint – odds are pretty good that you have been sued. How do you know that is what these things are? Well, they have the name of the court at the top, then the names of the parties beneath that on the left, with a case number on the right, then a bunch of paragraphs explaining who you are, who is suing you, and why you are supposed to owe them money. Letters start, “Dear so and so”. Court pleadings don’t.

Once you have been sued, you will be given a certain amount of time in which to file an Answer or otherwise appear and dispute the case. If you don’t do that, then a default judgment can be taken against you. Once a judgment has been taken against you, then (at least in Oklahoma) the creditor can attempt to garnish your wages, levy on bank accounts or otherwise force you to pay them money – and it will hurt. A wage garnishment can take up to 25% of your gross wages – not take home – gross. Of course, you will still pay taxes on the pre-garnishment amount,, so your net will be substantially reduced. Most people can’t afford that.

Everyone in financial trouble is different. Some people will decide to contact a lawyer earlier in this process than others. One thing that is almost universally common is that most people who have accounts in collection want to pay them. They frequently put off calling a lawyer hoping that they will be able to pay them. Where this becomes tragic is when they wait too long hoping against hope that something will save them from drowning. Then, their employer is served with a wage garnishment; and they have no money to pay attorneys fees or filing fees. They don’t have the paperwork started to get a bankruptcy filed; and they can’t afford to pay really basic living expenses if they are having their wages garnished. At that point these people are starting to be out of options. So, once you are sued, it is probably time to call a lawyer if you haven’t already and get things started. The collection process takes long enough and filing a lawsuit increases the collection costs enough that if you haven’t found a way to get the account paid by then; you probably aren’t going to.

Once a lawsuit is filed, time is no longer on your side.

Elaine

Christmas Bills, a New Year and Bankruptcy

There are a number of reasons why Bankruptcy filings surge after the first of the year. The New Year brings introspection and the desire to finally find a way out of the hole you have been trying to climb out of for years. Christmas bills can be the last straw. Then, of course, there is the impending tax refund, which can be a helpful way to pay for the bankruptcy filing.

There are a few things to consider, though.

First, let’s talk about Christmas bills. The general rule is that you want to wait at least 70 days and preferably 90 days after you have last used your credit cards before filing a bankruptcy. There are exceptions to this, but those are sufficiently fact specific, that you will want to talk to a lawyer about your particular facts. What you should remember is, if you haven’t already stopped using your cards – do it now, before you call the lawyer. Then, go ahead and schedule the appointment. You will want some time to get things ready to file anyway, but have a good idea what your card usage has looked like during the last 30 – 60 days so you can discuss it with your lawyer in detail.

There are actually a couple of issues with tax refunds. First of all, you will be happier if you have your tax return for the completed year prepared before you file your Bankruptcy. In some cases, you will have to have it, but you will always want to have it in hand. One reason for that is that if you have not received your tax refund before you file your bankruptcy, your Trustee may be entitled to the refund. The solution to that, of course, is to have already received it and done something constructive with it before the case is filed. I will caution you that you will want to discuss exactly what you do with that refund with your lawyer before you do it – not after. Of course, I think that one of the best things to do with that refund is to pay your attorney for filing the bankruptcy – but I might be prejudiced.

Finally, there is that decision to start a new year finally freeing yourself from the unending cycle of debt that you have been mired in. Finally, it is time to put yourself back in a place where you can take care of yourself, your family, put something aside for retirement – yes, it is time! Not so fast. Is it time? Are you through getting into trouble? If you have lost a job, do you have a stable pay check coming in? With health insurance? If you’ve had health problems, are they behind you? If so, then, yes. It is time. Time for a New Year and a new start.

Elaine

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.

Elaine

 

Bankruptcy, the Fiscal Cliff and Tax Refunds

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

Debt Settlement Regulation

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

Divorce Debt and bankruptcy — everybody loses but the lawyer

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