29 August 2016

Informal Bankruptcy Protections

When a bankruptcy case is filed with the court, an "automatic stay" kicks in which protects you from most debt collection efforts.  The automatic stay is temporary and applies while the bankruptcy case is pending.  In most cases, the automatic stay protections are them replaced by the permanent protections offered by the bankruptcy discharge.

But even before you file your bankruptcy case, just knowing that you intend to file for bankruptcy is often enough to deter most creditors from attempting to collect against you for your debts.  Although technically and legally most are allowed to continue to make collection efforts, most will stop once they can confirm that you have indeed hired an attorney to file for bankruptcy - as a pragmatic matter.

Why would your creditor stop pursuing you for a debt if they are legally entitled to pursue you?

Let's say I'm a collection agent for Acme Collections, LLC.  I've been attempting to collect a $500 debt from you for the past 6 months to no avail.  Seeing no other recourse, I'm thinking about filing a lawsuit against you in small claims court to recover the $500.  Yes, it will cost my company money to file the lawsuit - my company will have to pay court filing fees, pay for an attorney to file the paperwork, and other costs incidental to the lawsuit - but most (if not all) of those costs can be added to the bill I'm trying to collect.  So what may have started out as a $500 debt will become a $1300 debt if my company is successful in obtaining a judgment against you.

But what if you tell me that you've retained an attorney to file for bankruptcy?  I call your attorney and confirm that yes, you did in fact hire that attorney.  The bankruptcy case isn't filed yet, so technically, my company can still file a lawsuit against you.  But should we?

Well, probably not.  My company is already short the $500 you owe it.  If it invests the time and money into filing a lawsuit - even if my company prevails and gets a judgment against you - that judgment can be discharged in the bankruptcy case.  My company's only hope is to rush through the lawsuit, garnish as much of your wages as it can before you file for bankruptcy, and hope that it doesn't have to turn over the money as a recoverable preference.  Not at all likely.

So without even filing for bankruptcy, just the fact that you have hired an attorney to begin the process of filing for bankruptcy is enough to deter my company from filing a lawsuit against you.  In all likelihood, my company will sit back and wait for its notice that the bankruptcy case has been filed.

So what's the lesson to be learned here?  If you're planning to file for bankruptcy and you've hired an attorney - make sure your creditors know it - particularly the ones who haven't yet invested the time or money to file a lawsuit against you.  Don't ignore phone calls.  Make sure that you always refer your creditors to your bankruptcy attorney.

22 August 2016

If I'm bankrupt, how can I afford to hire an attorney for bankruptcy?

Filing for bankruptcy protection without an attorney is a treacherous venture into a legal minefield.  Neither the trustee nor the court can provide you legal advice or counsel, and essentially there is no one involved in the process who can look out for your rights and best interests.

Although most of the bankruptcy forms are relatively self-explanatory, there are any number of places where you could land yourself into trouble by inadvertent omission or error.  Schedule C (your property exemptions) and the Form 122 (the means test) are nearly impossible to do without legal training and access to the resources you need to know the relevant and applicable numbers.  Furthermore, the forms cannot fully convey the myriad of information concerning deadlines, documents, what to look out for (issue spotting), or even ensuring that you've asked yourself all of the questions you need to ask yourself.  There are limits in how much information and strategies you can glean from the forms, and the forms don't provide you access to the bankruptcy statutes nor all of the case law that may be relevant to your case.  There are many tricks and strategies attorneys develop over their entire careers to address all of the various issues that can crop up, and if you choose to file without an attorney, you're denying yourself access to that wealth of information.

But attorneys do not come cheap, particularly to someone who is struggling to pay their bills.  Here are the top three tricks that most people use to pay for their bankruptcy case.

1. STOP PAYING YOUR UNSECURED CREDITORS

There are exceptions to every rule, but in virtually every bankruptcy case, you will be advised by your attorney - as a matter of course - to stop making payments on your unsecured debts in anticipation of your bankruptcy filing.  This advice is not given because the attorney wants these funds, but because there are actual legal impacts to a bankruptcy case if you continue to pay your unsecured creditors - referred to as "preference payments".  To say nothing of the fact that you're throwing away money on debts that will ultimately be discharged in your bankruptcy filing.  Now, most people will need to continue paying on some debts - notably secured debts like mortgages and car loans that you intend to keep - and each case is different, so defer to your attorney's advice on this matter.  But in general, you will be advised to stop making payments on your credit card bills, medical bills, payday loans, and more.  Side bonus: it frees up some money to pay for your bankruptcy case.

2. INSTALLMENTS AND TAX REFUNDS

Most attorneys offer some sort of payment plan.  Every attorney is different in setting their own internal policies, and some are more flexible than others.  I consider myself fairly flexible - my clients can make any sort of payment with no minimum requirement and no specific due dates - provided that something is paid once a month.

Taking advantage of payment plans to retain an attorney provides you with limited formal protections under the FDCPA, but also some informal protections against creditors seeking to file lawsuits against you.  In my practice, many of my clients make smaller payments until they receive their tax refunds in the spring and use those to pay off whatever their remaining balance is - usually with plenty leftover to spare - depending on the size of their refund.

3. BORROWING FROM FRIENDS OR FAMILY

Admittedly not an option for everyone.  Even those who have access to this source may be too embarrassed to ask for the help.  But some people go this route, and there's nothing wrong or illegal about it.  However, if you do choose to borrow money from a friend or family member, make sure that you wait to pay them back until after you receive your discharge.  Payments made before your bankruptcy case is filed could be considered an "insider preference", and without getting into a lengthy discussion about that topic - suffice to say - this is not something you want to have to disclose to the trustee.  The statutes are fairly silent about money paid to insiders after a case is filed but before the discharge (the 3-4 months that a Chapter 7 case is typically pending).  To play it safe, I advise waiting until after the discharge, because the statutes expressly permit voluntary repayment of any debt.

25 July 2016

What should my credit report look like after bankruptcy?

So you've filed for bankruptcy, gotten a discharge, and pulled your credit report.  What should it look like?  Should it be blank?  Should all of your creditors be on there with a special notation?  What exactly should you expect to see?

First of all, make sure that your case is completed and you've actually received your discharge.  Many people unfamiliar with the bankruptcy process and procedures aren't clear on when the discharge actually occurs.  You will receive an official notice from a U.S. Bankruptcy Court, and the caption on the document will read "Order of Discharge" or something substantially similar.  Your attorney has also probably sent you a letter around the same time confirming in clear language that you've received your discharge and that he will be closing out your file and concluding representation.  If you're not sure, you can always call your attorney to confirm whether you've received your discharge or not.  If you filed a Chapter 7 Bankruptcy case, the discharge is issued about 2 months after your hearing with the Trustee.

Second, after you've received your discharge, I would wait a few months before pulling your credit report.  Some creditors will notate your account as being discharged right away after your case is filed.  That's an internal procedural practice some creditors have.  Most wait until you actually receive your discharge (just in case you don't get it), because legally, that's when certain debts are - permanently - no longer collectible.

All right, so let's take a simple and common example.  You've filed a Chapter 7 Bankruptcy, you've gotten your discharge, and you've waited a few months to pull your credit report.  In the bankruptcy, you reaffirmed on your mortgage and car loan, and you had a single student loan that you knew wouldn't be discharged in the bankruptcy case.  Everything else you had - credit cards, medical bills, payday loans, etc. - should have been discharged.

First, pull the credit reports.  You are entitled to a free report from all three major credit bureaus (TransUnion, Experian, and Equifax) once every 12 months under the FACT Act.  To access those free reports, go to http://www.annualcreditreport.com/.

What is described below is based on the formats used in July 2016 - these may change over time.

The Bankruptcy Itself

All three reports have a section on Public Records, and this is where a notation about your bankruptcy case will reside for up to 10 years after your case is filed.  On the Experian report, it won't be labeled as Public Records, but it will show up near the top of the report.

Reaffirmed / Non-Dischargeable Debts

These should appear exactly as they had before you filed for bankruptcy, plus whatever payments have been made since the last time you pulled your report.  So any reaffirmed mortgages or car loans that you've continued to make payments on, any student loans or other non-dischargeable debts that were not affected by your bankruptcy case - these will all continue to show up as they had in the past.

Old Accounts Settled / Closed Prior to Bankruptcy

In the reports we examined, accounts that had been satisfied, paid in full, transferred to another creditor, or closed - all continued to appear on the credit report.

Debts Discharged in Bankruptcy

In none of the credit reports did any of the debts discharged in bankruptcy show up in any way, shape, or form on the credit reports - save for one, which was never the debtor's account in the first place and erroneously reported; although that creditor was listed on the debtor's bankruptcy schedules for good measure.

11 July 2016

7 Year Myth

Quite often, clients believe that a bankruptcy case will only remain on their credit report for 7 years and/or that 7 years is the period of time someone must wait before filing another bankruptcy case.

  • A bankruptcy remains on your credit report for up to 10 years.
  • Someone who files for Chapter 7 bankruptcy and receives a discharge must wait 8 years before filing for another Chapter 7 bankruptcy.

The source of confusion for the first one appears to be linked to a general 7 year rule about how long old debt can be reported on your credit report.  Generally speaking, if you file for bankruptcy, most if not all of the debts that were discharged in your bankruptcy should no longer show up on your credit report at all after 7 years, even though the bankruptcy case itself will linger and continue to be reported for another 3 years.

Your credit score, however, may rehabilitate much faster.  Depending on your financial circumstances, what - if any - debts survive your bankruptcy (either because you reaffirmed on them, or because they couldn't be discharged), and how well you manage your credit after bankruptcy - many people find that their credit score has rebounded somewhat within about 12 months.

As for the 8 year refiling prohibition, please remember that 8 years assumes that both the first and second cases were Chapter 7 cases, and that the debtor received a discharge in the first bankruptcy case.  If there was no discharge in the first case (it was only filed, but dismissed without a discharge), then these time limits do not apply.  Other limits may apply, depending on how soon after the first case is dismissed you attempt to file the second case.

If either the first, second, or both cases are a Chapter 13, then that time period can be shortened from 8 years to 6, 4, or 2 years.  Also, you can be eligible to file a Chapter 13 case even if you're not eligible to receive discharge.  And these questions get a lot more complicated if either the first case is converted from one chapter to another (which I cover extensively here).

04 July 2016

Unfiled Claims in Chapter 13

No creditor who doesn't file a proof of claim will be paid by a Chapter 13 Trustee.

Let me repeat that...

No creditor who doesn't file a proof of claim will be paid by a Chapter 13 Trustee.

What does that mean?

Let's say John Doe has 4 credit cards, one with Wells Fargo, one with Chase, one with Bank of America, and one with HSBC.  Let's also say that each one has a balance owed of $5,000 - or a grand total of $20,000.

Let's further pretend that John files a Chapter 13 Bankruptcy which proposes to pay 10% to each of his unsecured creditors.  If Wells Fargo, Chase, BoA, and HSBC all file claims, then each will get 10% of their claims, or about $500 each and a total of $2,000.

But what happens if BoA doesn't file a claim?  Then there are only $15,000 in claims.  John still pays the $2,000 that his disposable income was calculated out to.  But now the 3 creditors who did file claims (Wells Fargo, Chase, and HSBC) all share that $2,000 - $667 each.  That means that each creditor gets paid 13% of their claims - except BoA who gets paid $0 because they didn't file a claim.

What if BoA is the only creditor who files a claim?  Well, then John is still paying the $2,000 of disposable income, but now BoA is getting paid 40% of their $5,000 claim, while each of the other 3 creditors gets paid $0.

In short - John Doe pays the exact same amount - $2,000 - no matter which creditors file claims or how many creditors file claims.  But if certain creditors don't bother to file claims - they don't get paid, and the creditors that did file claims get paid a bigger share.

What if we keep the facts exactly the same, but instead of $2,000, John's disposable income shakes out to $7,000 over the life of his Chapter 13 case?  $7,000 is 35% of $20,000, so if all creditors file claims, they'll get 35%, or $1,750 each.

But now let's say again that only BoA files a claim.  Their total claim is $5,000, which is less than the $7,000 in disposable income that John has to pay his unsecured creditors.  BoA gets paid their claim in full - at 100%.  Since there are no other claims to pay, his Chapter 13 Plan ends early, and he gets to keep the extra $2,000.  The other 3 creditors are shit out of luck.

Now, all of this is overly simplistic because we're assuming nothing but unsecured and dischargeable creditors.  Let's stop talking about hypothetical numbers and start discussing the issues that affect the analysis.

  1. In the above examples, we're assuming that John Doe is eligible for a discharge.  If he is, then whatever is not paid to these 4 creditors (whether they files a claim or not) is wiped out upon receipt of the discharge.  These 4 creditors cannot pursue John for the unpaid balances after his bankruptcy is over.
  2. What if John isn't eligible for a discharge?  Maybe he filed a prior bankruptcy case too recently.  Maybe he failed to complete his financial management course.  Maybe he fell behind on child support after his bankruptcy case was filed.  Or maybe he failed to make his plan payments and his case got dismissed.  Without a discharge, creditors can then pursue John for any unpaid balances owed after his bankruptcy is over - whether they filed a claim or not.
  3. If a debt is non-dischargeable (like a student loan) and they don't file a claim, the debt is still non-dischargeable, which means the full balance and interest will be due when John exits bankruptcy.  Since student loans share the same dividend of funds as other unsecured creditors, it is in John's interest to make sure his student loan creditors file claims so that they can at least get paid down a bit - and to reduce the amount of money his other dischargeable creditors can get their hands on.
  4. Remember the example where BoA got paid in full, John still had $2k in disposable income, but since the other 3 creditors didn't file claims, they got paid $0?  Why don't those creditors file claims then?  Because all creditors are under a deadline to file their claims.  Once that deadline has passed, they can't file a claim - no matter what else may have changed about the debtor's bankruptcy case.  If the creditor was not duly notified of the bankruptcy in time to file a claim, then their claim is likely going to be non-dischargeable.  But if they were duly notified and chose not to file claims on-time, it's their loss.

27 June 2016

Does paying in my tax refunds shorten my Chapter 13 case? And who gets that money?

All right, so many (but not all) people who file Chapter 13 Bankruptcy are required to turn over a portion of their tax refunds.  Tax refund policy varies from district to district.  In the Eastern District of Wisconsin, below median debtors are required to turn in one half of their net tax refunds each year that they are in bankruptcy (typically 3-5 years).

Why does tax refund money ever come in to a bankruptcy case?  Under Chapter 13, all "disposable income" (a term that elicits its own discussion for another time)  is required to be turned over to the bankruptcy estate for the benefit of creditors.  Tax refunds represent surplus disposable income that was withheld from someone's wages (or other form of income) in excess of what should have been withheld.  Meaning, if the debtor had less money deducted from his paycheck (resulting in no tax refund), there would be more money on the paycheck to pay creditors.

Why not the full tax refund?  To provide an incentive for the tax payer to prepare his/her taxes in such a way as to take advantage of any eligible deductions and credits so as to maximize their tax refund.  The Trustee isn't able to file or even amend your tax returns for you.  If the Trustee were to take the full tax refund, then there would be no incentive on your part to attempt to get any tax refund at all.  By only taking half, every extra dollar you manage to secure in tax refund money means 50 cents for you and 50 cents for the Trustee.

And why only below median debtors?  This is a matter of practical convention.  Below median debtors never reach part 2 of the Means Test which - among other things - requires that actual tax liability be estimated and calculated, rather than what is withheld from tax withholdings (as described on Schedule I, which all debtors must complete).  Since the Means Test ignores tax withholdings and focuses on actual liability, it is assumed (incorrectly, I might add) that the only way the debtor can afford to make plan payments as required under the Means Test is to adjust their withholdings in such a way that they do not receive a tax refund.

This is hardly ever true, and as I said - different districts have different approaches to tax refunds.

Who gets the money?  Well, technically, tax refund money is earmarked for unsecured creditors.  Since tax refund money isn't reliable (we never know how much a debtor will receive in tax refunds during the pendency of a Chapter 13 Plan, or even if a debtor will receive any refunds), tax refund money cannot be relied upon to pay mandatory creditors holding secured or priority claims.

Most debtors, however, pay less than the full balance owed to their unsecured creditors.  How much they do pay is based primarily on income.  So tax refund money - if there is any - is a windfall for the unsecured creditors.

HOWEVER, the Trustee is required to pay secured and priority claims first, which means that most people who are in Chapter 13 bankruptcy - their first few tax refunds will actually go toward paying secured and priority creditors off a little faster than they would have been paid if depending only on regular monthly plan payments.  As a result, unsecured creditors will start getting paid a few months sooner than originally scheduled.  Those extra few months of payments eventually make up for the tax refund money which was earmarked for the unsecured creditors, but was physically turned over to the secured and priority creditors.

Which then answers the final question - does paying in tax refund money shorten the term of the Plan?  And the answer is usually "no".  The amount paid to creditors is not fixed at the time your bankruptcy case is filed.  There is a preliminary amount which consists of all secured and priority creditors that have to be paid in full, plus some percentage toward your unsecured creditors.  Tax refund money merely inflates the amount of money going toward unsecured creditors.

Barring some other circumstance (or a plan amendment), your Chapter 13 Plan will continue for the full 3 or 5 years that you originally scheduled it for, and would only be shortened if your unsecured creditors would be paid in full.

06 June 2016

News Items

Just a couple of news items that came across my desk that I thought I would share.  The first is a New York Times article about new laws enacted in Hawaii that criminalize poverty and homelessness.  In Hawaii's defense, the measures included the dispatching of social workers to help the homeless into shelters.  Additionally, vagrancy laws are hardly anything new.  But there has been a resurgence in these laws in recent years.

The second piece is a Washington Post op-ed about President Obama's overtime word rules.  The piece lamented the end of so-called prestige jobs, where unpaid overtime is common.  I found it very interesting that the writer blamed Obama and thought paying people for the time they spend working was a bad thing, rather than blame a growing number of corporations who are all-too-happy to rely on a workforce increasingly composed of robots, computers, interns, and volunteers.  People are having a harder time finding jobs that pay a living wage while companies - in an effort to boost profits for their shareholders, are looking for ways to pay even fewer employees.

I don't know if this is a phenomenon that's been going on for a lot longer than I've been paying attention to it, or if we're witnessing the beginning of a new recession.  But I'm becoming increasingly convinced that in the absence of a universal basic income, we're soon going to be looking back on the 1930s as the "good ol' days".

31 May 2016

Credit Reports

Due to a change in credit reporting providers and my dissatisfaction with their service and fees, effective immediately, my office will no longer charge clients for credit reports (previously incorporated into the DRS Fee).  We will instead rely on the free credit reports from all 3 bureaus (Experian, Equifax, and TransUnion) via http://www.annualcreditreport.com/.

23 May 2016

Bankruptcy Terms

Last week, I was speaking to a client who was in Chapter 13, had fallen on some hard times, and was considering a conversion to Chapter 7.  In attempting to explain the various effects of the conversion (and her other options), a lot of confusion rapidly ensued because she was swapping out words interchangeably which had VERY different meanings.  Had I not stopped to make sure that she was using the correct terms, the confusion would only have compounded.  And earlier that day, another client was denied information that he needed from one of his creditors because he made a common mistake about the status of his case.

So let's clarify a few things...

RETAINED, FILED, CONVERTED, DISCHARGED, and DISMISSED are all very different events.

RETAINING an attorney means that you have hired an attorney to work on your behalf.  Retaining an attorney is not the same as filing for bankruptcy.  Different attorneys have different procedures, but generally at the point of retainer, all you have done is to sign a retainer agreement with the attorney - a contract for work and services to eventually file a bankruptcy case.

FILING a bankruptcy case is the act of filing a voluntary petition, schedules, and statements with the bankruptcy court which initiates a series of protections under the bankruptcy code.

CONVERTING a bankruptcy case means changing the type of relief - corresponding to a chapter of the bankruptcy code - that you are seeking.  Conversion does not create a new filing date, it does not create a nor does it change the filing date of the original bankruptcy case.

DISCHARGED is what happens to debts at the successful conclusion of a bankruptcy case.  Debts do not get dismissed.

DISMISSED - in bankruptcy (other types of legal actions have a different meaning for dismissed) - means that a case was or is about to be closed without the benefit of a discharge.

So, in the case of this particular client, she was wondering what would happen with medical bills that she incurred after her bankruptcy case was filed.  The answer was as follows:

If she continued under Chapter 13 and received her DISCHARGE, any debts she incurred after her bankruptcy case was FILED would survive the bankruptcy.

If her Chapter 13 case were DISMISSED, then she would not receive a DISCHARGE, in which case both her pre-filing debts and her post-filing debts would survive the bankruptcy.

If her case were CONVERTED, then the debts incurred after her case was FILED but before her case was CONVERTED would be DISCHARGED, and any debts incurred after her case was CONVERTED would survive the bankruptcy.

My client kept switching up the terms "filing" and "converting", and "dismissed" and "discharged" - and if she continued to interchange those words as if they meant the same thing when they have very distinct legal meanings - you can imagine how this would lead to severe confusion later on.

16 May 2016

What Bills Do I Pay, and When?

What to Pay (& When)



PAY
DO NOT PAY
BEFORE YOUR BANKRUPTCY CASE IS FILED
·         any secured debts you intend to reaffirm (e.g. mortgages, vehicle loans, and other secured loans)
·         ongoing child support obligations
·         payments on any leases you intend to assume
·         ordinary living expenses (groceries, fuel, insurance, utilities, etc.)
·         any unsecured debts (credit cards, personal loans, payday loans, past-due medical bills, past-due utility bills, civil judgments, repo deficiencies, etc.)
WHILE YOUR BANKRUPTCY CASE IS PENDING
·         secured debts you will reaffirm
·         ongoing child support obligations
·         payments on assumed leases
·         ordinary living expenses
·         any unsecured debts
AFTER YOUR BANKRUPTCY CASE IS CONCLUDED
·         reaffirmed secured debts
·         payments on leases
·         ordinary living expenses
·         student loans
·         non-dischargeable debts (taxes, child support, etc.)




PAY
DO NOT PAY
BEFORE YOUR BANKRUPTCY CASE IS FILED
·         mortgage payments
·         vehicle & other secured loans
·         ongoing child support obligations
·         payments on leases
·         ordinary living expenses
·         any unsecured debts
WHILE YOUR BANKRUPTCY CASE IS PENDING
·         Chapter 13 Plan Payments
·         ongoing child support obligations
·         payments on leases
·         ordinary living expenses
·         mortgage (if plan has no conduit provision)
·         any unsecured debts
·         vehicle & other secured loans
·         mortgage (if plan has conduit provision)
AFTER YOUR BANKRUPTCY CASE IS CONCLUDED
·         mortgages
·         payments on leases
·         ordinary living expenses
·         student loans