My colleague, attorney Chip Parker from Jacksonville, has written a timely post in the BankruptcyLawNetwork blog about how to save your income tax refund if you are thinking about filing for bankruptcy. Chip suggests that you file your tax returns sooner rather than later, then spend your refund on ordinary and necessary expenses. You would have to reveal receipt of the income tax refund on your bankruptcy schedules, but you would have the benefit of the money and the odds are very small that your bankruptcy trustee would challenge your use of this money.
Chip’s advice falls into the general category of "pre-bankruptcy planning." Under the current bankruptcy law, pre-bankruptcy planning has become increasingly important. Now, more than ever before, the bankruptcy laws empower trustees and creditors to try to squeeze whatever they can from debtors. All the paperwork your file will be scrutinized. "Good faith" and "best efforts" have been replaced by demands for documents, proof of income and expenses, and tax returns.
In some cases, the means test will show "disposable income" when in real life, there is nothing there. In this unfriendly environment, you, as the debtor, need to look for every opportunity to protect and preserve your assets and cash flow. Do not assume that the bankruptcy system will give you any breaks.
I know I sound like a broken record, but START EARLY. Don’t wait until the lawsuits are filed or the repo man in circling before talking to a lawyer. If I could send one message out to people in even mild financial distress, it would be to find a bankruptcy attorney long before you are facing any sort of emergency. In January alone, I met with over ten potential debtors who could file now, but who will have a much better result if they wait for two or three months. Sometimes, the goal is to create a paper trail of payments to creditors to show good faith, and sometimes the goal is to water down the effect of a one-time bonus for median income purposes.
There are enough pressures on bankruptcy debtors under the new law. Find a lawyer who will act aggressively on your behalf and fight back!
Technorati Tags: income tax refund and bankruptcy, Chip Parker, Bankruptcy Law Network, pre-bankruptcy planning
Filed under General consumer bankruptcy info, Protected property issues by 
A Chapter 13 client contacted me this morning with a somewhat unusual situation. She called because she has been in her Chapter 13 case for almost exactly three years and she wanted to pay off her case and get out of bankruptcy.
I looked at the claims file and at her account on the trustee’ s web site and calculated that she would need between $5,000 and $10,000 as of her three year anniversary to pay off her case (the usability of the trustee’s web site merits a post of its own, but my best guess in this case was between $5k and $10k).
I asked where the money would come from and she advised me that her mortgage company would lend it to her based on a fairly significant increase in the value of her property during the three years since she had filed. I should also point out that at the time we filed, there did not appear to be any equity at all and our confirmed Chapter 13 plan called for a 2 pennies on the dollar divided to unsecured creditors.
The question I had – if I contacted the trustee for a payoff at 36 months, how would the trustee treat the increased value in the property? Would the trustee simply accept the cash and issue a discharge that paid unsecured creditors 2%? Or would the trustee take the position that the increased equity belongs to the estate and ask that some or all of the cash proceeds from a refinance be paid to the trustee?
For my analysis, click More on Does Chapter 13 Debtor Get to Keep Sale Proceeds if Fair Market Value of Home Goes Up During Chapter 13?
Filed under Chapter 13 issues, Georgia Bankruptcy by
I often get questions about creditor collection practices. Can I be sued for an old debt? Did the bill collector do something illegal? What is the significance of a "charge off?"
California lawyer Jonathan Stein has gathered many of these questions together and has answered them quickly and eloquently. Here is a link to the FDCPA section of his new blog – the California Debt blog.
Technorati Tags: FDCPA, collection practices, Jonathan Stein, old debt and lawsuits
Filed under General consumer bankruptcy info by
My colleague, California bankruptcy lawyer Cathy Moran, has written an interesting blog post about debt settlement companies. I regularly meet with clients who pay debt settlement services fairly hefty fees to "negotiate" debt settlements.
Often, the debt settlement company can do little to actually resolve the debt, especially if the debtor has limited cash resources. Cathy brings up a point that I had not previously considered – some of these debt settlement companies market their services as an "alternative" to bankruptcy and may prey on the natural aversion many hard-working consumers have to the entire idea of bankruptcy.
Most of the clients I see make statements like "I never in a million years thought I’d be talking to a bankruptcy lawyer." No doubt the sales training in the debt settlement industry encourages the sales operators to emphasize that their solution is not bankruptcy.
Unfortunately, as Cathy points out, when a debt settlement plan does not work, the debtor is not only out a large fee, but he may have multiple judgments, pending garnishments and other problems that would never have happened if the debtor had been steered to bankruptcy in the first place.
Because of its power, bankruptcy can address advanced debt problems like judgments, foreclosures and garnishment, but make no mistake – cases that require multiple motions to avoid lien, complaints for turnover or other litigation will be most costly, time consuming and stressful.
Forums like Cathy’s blog (and a new multi-lawyer bankruptcy blog where both Cathy and I participate) are designed to remove the mystery from the bankruptcy process and allow debtors to make informed decisions. One of the themes you will see over and over on this blog has to do with timing – begin your research into bankruptcy and non-bankruptcy alternatives before your situation becomes an emergency.
Technorati Tags: debt settlement companies, Cathy Moran, bankruptcy blogs, debt negotiation
Filed under Consumer protection, General consumer bankruptcy info by
I loan a family member a large sum of money a year ago. Now this family member is filing for bankruptcy and has ask for my name and address and the amount borrowed from me. According to the family member the courts can list this as a debt owed and I would be included in this repayment plan. Is this true? I did not think personal debt owed to family and friends could be file under bankruptcy.
– Alice
Jonathan Ginsberg responds: Alice, when someone files bankruptcy, he must list and include all debts, including debts owed to family members. There is no exception for family members.
In fact, if your relative had paid you back within a year of filing, there is a good chance that the bankruptcy trustee would demand that you return the money as a "preference."
If your relative is filing a "repayment plan," it means that he is in a Chapter 13 bankruptcy. Assuming that the loan you made was a "handshake" loan, then your claim would be unsecured. In Chapter 13 case, unsecured debts are paid after priority (taxes, child support) debts and after secured (cars, houses, furniture) debts. You may not get a check from the Chapter 13 trustee for two or three years. You also may not get paid at 100% as many Chapter 13 cases call for less than 100% payouts to unsecured creditors.
When you get the bankruptcy notice, you will see a Proof of Claim form included in the letter. If you want to get paid something, even if you won’t see any money for a few years, you need to fill out this proof of claim and send it to the Clerk of Bankruptcy Court.
Finally, be aware that the automatic stay of bankruptcy prohibits you from trying to collect your money outside the bankruptcy process. You do not, however, have to send this relative Christmas cards or invite him over for dinner!
Technorati Tags: debt owed to family or friends in bankruptcy, proof of claim, unsecured claims in Chapter 13
Filed under Chapter 13 issues, General consumer bankruptcy info, Preferences by
I ran across an interesting post called "How the Red Flags of Debt Can Save You" on a blog called the DebtFree blog. I think what is interesting here is that the author recognizes that most spending arises from emotional buying decisions – i.e. a new car when the current vehicle works fine or a desire for a new plasma TV right before the Super Bowl.
In the 20 years I have been in bankruptcy law practice, friends and colleagues often ask me what factors drive my clients into bankruptcy. Although personal finance crises – like unexpected medical expenses, a job loss or a divorce lead people into bankruptcy, almost always there is an underlying problem.
Although most of the people I see are honest, hardworking and sincere people, very few have ever sat down to actually write out a budget. Less than 5% of my clients use a personal finance program like Quicken or Microsoft Money to track where their money goes. When we actually sit down to prepare a budget as required by the bankruptcy schedules, my clients are shocked to discover that they have routinely been spending more than their household income.
Expenses that you should watch carefully include the following, many of which can be trimmed or eliminated in a time of budget crunch:
- car insurance
- tires, oil changes and routine maintenance done by a dealer
- medical expenses not reimbursed by insurance
- cable TV
- monthly cell phone expenses
- recreation/entertainment
- dry cleaner
- cigarettes
- lottery tickets
Do not forget to include in your monthly budget expenses that arise once or twice a year. Once you have a budget, you will know what you need on a monthly basis and you can start thinking about a debt reduction plan. Another interesting blog to check out is the No Credit Needed Network blog, which is an on-line community where members track their debt reduction plans and goals anonymously but publicly using a neat charting application. Another blog I like is called, appropriately enough StopBuyingCrap.com – where you can vote about whether various purchases are frivolous or appropriate (i.e. was that widescreen monitor a wise purchase??
Maybe you will find that bankruptcy does make sense – or maybe, a part time job for 8 or 9 months might be enough to get you out of significant debt. The point here – you cannot know if you do not have a handle on your numbers.
Technorati Tags: red flags + debt, creating a budget, bankruptcy, debt reduction plan
Filed under General consumer bankruptcy info by
My colleague, Boston bankruptcy attorney Nick Ortiz, has written a helpful post on his Massachusetts Bankruptcy and Consumer Protection blog summarizing your right to refuse to speak with a debt collector under the Fair Debt Collection Practices Act.
If you have ever been the target of aggressive collection efforts, you know that bill collectors use applied psychology to intimidate the debtor. If you did not yet know this, bill collectors follow a script that was developed by psychologists to trigger certain emotional responses in you. For example the word “promise” is much more emotionally charged than words like “debt,” “outstanding balance” or “financial obligation.”
Debt collection scripts are also designed to suggest that your failure to pay a debt will result in a form of “punishment,” which could lead a stressed out debtor that he could end up in jail (despite the fact that there have never been debtor’s prisons in the United States not been federal debtor’s prisons in the United States since 1833 or state debtor’s prisons shortly thereafter).
In my bankruptcy practice, I encourage my clients to make thoughtful, informed decisions about whether to file a Chapter 7 or Chapter 13. Recognizing the tactics used by bill collectors can help a debtor avoid emotional decisions, or, worse, bad decisions. I cannot tell you how many times I have met with clients who partially or totally cashed out a 401(k) to pay a credit card or other unsecured debt. In Georgia, 401(k) accounts are 100% sheltered from creditors, so any encroachment one of these protected accounts is usually a bad idea.
If you want to learn more about the psychology of influence, I can recommend the work of noted psychologist Robert Cialdini. I saw Dr. Cialdini speak a few years ago at a tax problem seminar and his work is truly groundbreaking. His book, entitled “Influence: Science & Practice” is available at Amazon and I recommend it highly no matter what you do for a living. You can read more about Dr. Cialdini at his InsideInfluence.com web site.
Filed under Consumer protection, General consumer bankruptcy info by
I’ve filed a chapter 13 due to divorce (no previous credit issues) and am paying rightly on my repayment plan having several years to go. I’m trying to learn ways to re-establish my credit and raise my credit score so that when done I’ll be in a strong position. Long before filing my 13, I’d bought a car and am making on-time payments. I think that will help, but since I can’t use new credit until the payment plan is over, do you have other suggestions or references (other than keep paying on time) that I can use or do? I’d be interested in books, websites, blogs, councilors, anything…
Regarding my creditors, I believe my accounts are still open. What should be done regarding those accounts and what the creditors are or are not telling the credit reporting agencies? Can I and should I close the old accounts? Also, I’ve not taken a recent look at my credit report so I don’t know what each debtor is showing? I’d appreciate your comments. There isn’t a good source for information and advice on these subjects and attorney’s are charging over $200 per hour for half baked advice that usually take the most cautious approach, even when not necessary.
–Rangeman
Jonathan Ginsberg responds: Since you are still in your Chapter 13, you can’t really do too much in terms of new credit, but you can take several steps to improve what you currently have.
1. pull your credit reports from all three credit bureaus. All open accounts should show that they are being paid thru your Chapter 13. If you have any showing a charge off or an unpaid delinquency, you should challenge these erroneous entries pursuant to the Fair Credit Reporting Act. Write letters (return receipt requested) to the particular credit bureau and request that the erroneous reporting be corrected. Debts in Chapter 13 are in payment status and should be reflected accordingly.
2. Most credit gurus advise against closing old accounts. Credit reports are basically historical records and any good credit you have, even if it is old, will help you.
3. As far as references, the best credit related information that I see regularly is at Clark Howard’s web site, Ilyce Glink’s web site and Dave Ramsey’s web site.
4. Once you are out of your Chapter 13, you should wait about two months, then request copies of all 3 credit bureau reports. All of the accounts paid in the Chapter 13 (such as credit cards and other non-pay direct accounts) should show zero balances. Frequently, I see credit reports post bankruptcy showing outstanding balances. Once you receive your Chapter 13 discharge, these balances should be zero.
Technorati Tags: restore credit after bankruptcy, Clark Howard, credit reports, challenge inaccurate credit report
I recently received an email from a very concerned Chapter 7 client who I represented in 2006. My client had suffered a fairly drastic reduction in his income and as part of his Chapter 7, he surrendered his home, which has a fair market value of approximately $650,000. There were no objections in this case, and my client received his discharge as a matter of course.
Around the first of February, 2007, my client received a 1099 from the mortgage company showing that $599,000 of debt was forgiven. I checked with my colleague, CPA Scott Rittenberg, who advised me that in a non-bankruptcy context, a homeowner who sells or loses a home to foreclosure could be liable for taxes on the difference between his basis in the home (in this case around $500,000) and the forgiveness ($599,000). Would my client be looking at an income event in the amount of $99,000?
Scott did note that if my client had been in his home for two years or longer there was a $250,000 exclusion that applied, but absent a two year stay, there could be a tax problem. Scott advised me to look further to research the rules about how a bankruptcy might change things.
I did a quick search on the BankruptcyLawNetwork blog and I found this post that answered by question about the tax treatment of a forgiveness of debt in bankruptcy by my colleague, attorney Cathy Moran of Mt. View, California. Cathy publishes a very comprehensive and informative California bankruptcy law web site that speaks to many consumer bankruptcy issues.
Cathy advises that if you get a 1099, you should file a Form 982 to advise the IRS that the debt forgiveness occurred in bankruptcy and has no tax consequences.
2008 Update: you can read another informative post about the tax treatment of debt forgiveness in a bankruptcy on Taxgirl’s blog in a post entitled “Foreclosures, Debt Forgiveness and Mortgage Losses Explained.” Click on the link to read this post.
Needless to say, my client is much relieved by the answer to his question. Tax consequences arising from a deed in lieu of foreclosure in a non-bankruptcy setting could have significant and unintended consequences. If you have option of executing a deed in lieu vs. a bankruptcy, keep the tax issues in mind.
Filed under General consumer bankruptcy info, Tax issues by
News reports on the Internet and in traditional media suggest that foreclosure rates are rising nationally, especially among sub-prime borrowers. At the same time, bankruptcy filings remain suppressed. The slide in bankruptcy filings has been attributed to widespread misinformation about the availability of bankruptcy under the BAPCPA law, or perhaps tighter restrictions on filing under BAPCPA .More on Non-Bankruptcy Foreclosure Workouts – Does It Make Sense for You?
Filed under Foreclosure issues, General consumer bankruptcy info by
