November 24, 2017

When Bankruptcy Makes More Sense than Struggling to Pay Off Debt

I want to challenge the conventional wisdom that filing bankruptcy should be considered a last resort. Does that sound self serving coming from a bankruptcy lawyer? Maybe. But consider this table:

Balance monthly payment time to payoff interest rate total interest total payoff
$10,000 $300 44 months 15% $3,043 $13,043
$50,000 $1,500 44 months 15% $15,217 $65,217

 

As you can see, under the best of circumstances, it will take you 4 ½ years and $13,043 to pay off that $10,000 credit card debt, assuming that: you are no longer using your credit card for future purchases you have not been late, thereby keeping your interest rate from jumping to a penalty rate you make only the minimum payment of $300 per month Under this best case scenario, $50,000 of credit card debt will require $1,500 per month and you will end up paying interest charges totaling $15,217 for payoff of $65,217.

What happens if you miss a payment? In addition to the late fees, your interest rate rises from 15% to a penalty rate, which is typically 29%. With a 29% interest rate, and a $300 per month minimum payment, your interest charge on that $10,000 balance will total $10,959 (totaling $20,959) and almost 6 years to pay off the debt.  A $50,000 balance, payable at $1,500 per month, will produce interest charges of $54,793 for a total of $104,793 over that 70 month period.

Balance monthly payment time to payoff interest rate total interest total payoff
$10,000 $300 70 months 29% $10,959 $20,959
$50,000 $1,500 70 months 29% $54,793 $104,793

 

You can run your own numbers at: http://www.cardhub.com/credit-card-calculator/

[Read more…]

Senior Citizens and Bankruptcy: Special Considerations

fixed income bankruptcyOver the past few months, Susan Blum and I have been meeting with an increasing number of senior citizens and others on fixed incomes who are considering bankruptcy because of significant credit card debt.

It is not at all unusual for us to see seniors with over $100,000 in unsecured debt that has accumulated over years – sometimes 10 years or longer.  When fixed income investments and/or Social Security no longer throw off enough monthly income to pay the minimum payments, bankruptcy becomes a legitimate option.

Seniors, in particular, are often conflicted about filing bankruptcy because they came of age in an era when bankruptcy still had a social stigma and it was unthinkable not to pay one’s debts.  As a result, I sometimes see cases where a client has paid two or three times the balance due by making minimum payments but the outstanding balance has not really budged.  When I point this out, the stigma issue often disappears. [Read more…]

Don’t Forget that You have Payment Obligations in Chapter 13

Chapter 13 can transform an upside down budget into one where your income equals your outflow, and it can reduce your total debt, sometimes by thousands of dollars.

Chapter 13 only works, however, if you pay what you are required to pay by your Chapter 13 plan.  Specifically, for cases filed in the Northern District of Georgia, you will have to pay your mortgage(s) directly and you will need to pay your Chapter 13 trustee your plan payment until the payroll deduction kicks in.

You cannot and must not be passive about your payment obligations – if you are not current with your post-filing mortgage payments and your initial trustee payments, your case may be dismissed.  In this brief audio podcast, I discuss what you need to keep in mind about your direct payment obligations in your Chapter 13 case.

Payday Loans Banned in Georgia? Not So Fast….

high interest short term loans allowed in GeorgiaIn 2004 the Georgia legislature passed legislation that was designed to outlaw “payday lending” – the practice of finance companies making high interest short term loans of a few hundred or a few thousand dollars.  According to the Georgia Department of Banking and Finance, a payday loan involves the practice of using a post-dated check or electronic checking account access to repay the loan.

Payday loans can have an effective interest rate of 300% and bad check and delinquency charges can quickly turn a $300 loan into a $1000 debt.

When payday loans were legal, most of the loan transactions were made by small, storefront lenders usually located in run down areas of town.

Lenders caught making payday loans (as defined by the statute) face possible felony racketeering charges and large fines.  Thus, if you search for “payday loans” in the Internet, most of the sites that come up will note that Georgia does not allow these types of loans anymore.

Interestingly, most states still do allow payday loans and I even found a report issued by the Federal Reserve Branch of New York which concludes that payday loans, while expensive, serve a need and should not be characterized as “predatory.” [Read more…]

Beware of “Emergency” or “2 Page” Bankruptcy Filings

avoid emergency bankruptcy petitionsA typical Chapter 7 or Chapter 13 petition requires you to submit well over 50 pages of documentation, including:

  • your schedules – which includes a detailed budget, a list of all creditors including addresses and account numbers, a detailed list of assets with estimated valuations, detailed information about sales, transfers, losses and recent payments to creditors, information about your and your spouse’s income over the past 3 years
  • your plan (in a Chapter 13)
  • a credit counseling certificate
  • pay advices documenting income for the past 6 weeks

In my experience, even the most organized bankruptcy filers will need around a week to 10 days to put all this information together.  For those less organized, it can take longer.

What happens, then, if you need bankruptcy protection immediately – perhaps to stop a pending repossession, wage garnishment or foreclosure?  In such an instance, the Bankruptcy Code does allow you to file an “emergency” petition consisting of only the first two pages of your petition + the credit counseling certificate.

You then have 15 days to complete the remainder of the paperwork and get it filed. [Read more…]

Words of Wisdom for High School Graduates

avoid credit cardsYesterday, my son graduated from high school.   His class selected a math/environmental sciences teacher named Nicole Brite to deliver the faculty address to the senior class.  Ms. Brite delivered a spectacular address which was meaningful, witty and thoughtful (and she received a well deserved standing ovation from both the students and the audience).

In one part of her speech, Ms.  Brite turned to the graduates and said  “now I am going to offer you some words of advice that I wish someone had said to me when I was leaving high school.”   One of the points she made I think is applicable to everyone, not just high school students. [Read more…]

Are You Liable for Ongoing Homeowner’s Association Dues if You Surrender Your House in a Bankruptcy?

HOA lawsuitEarlier this month on my Atlanta-bankruptcy web site blog I discussed an interesting case involving mortgage loan deficiency claims that was issued by the Georgia Court of Appeals and Georgia Supreme Court.  In the River Farm vs. Suntrust case, the Georgia courts ruled that a mortgage lender could sue a defaulted borrower on the promissory note and thereby bypass the deficiency confirmation process associated with a foreclosure.  This ruling is important because property values in Georgia have been trending downward and more and more often I am seeing cases where the balance due on a mortgage exceeds the fair market value of my client’s home.

This court case should be of concern to you if you intend to walk away from your home because you are delinquent or if your are so “underwater” with your mortgage that it does not make sense to fight to keep a home that may never be worth what is owed on it.   If you do walk away (without filing bankruptcy), your lender may sue you on the mortgage loan contract instead of foreclosing.  The lender would refrain from foreclosing to avoid a legal requirement associated with foreclosure that would require the lender to appear before a judge to argue that the foreclosure sale price was reasonable.

In my article, I pointed out that this change in the law might encourage more people to file bankruptcies since a bankruptcy can discharge any deficiency claim.

However, there is another potential problem area that could arise if your lender holds off on foreclosing.  This problem area relates to homeowners’ association (HOA) dues.

Under Georgia law, homeowners’ associations enjoy special protections.  Unpaid dues can automatically can become liens that encumber your property.   As HOA lawyers read the law, if you file a bankruptcy and surrender your home, your delinquent HOA dues as of the date of filing will be discharged.  However, ongoing dues that accrue after the filing remain your obligation until title passes.  In other words, if your HOA dues are $100 per month and you file Chapter 7 bankruptcy on February 28, your dues begin accruing again on March 1.  If your lender does not foreclose until November, you would, in theory, be responsible for 8 months of dues, or $800, after your filing, even though you have stated  your intention to surrender your house in bankruptcy. [Read more…]

The Problem with 401(k) Loans and Consumer Bankruptcy

Most of the clients who I represent in Chapter 7 or Chapter 13 cases view bankruptcy as their absolute last resort.  Usually, by the time they get to me, these clients have exhausted every other alternative – they have borrowed money from relatives and friends, sold possessions on eBay and cashed out or borrowed against retirement plans.

All of these choices, by the way, create unintended consequences – if you are reaching that point of desperation where you are thinking about selling things, cashing out retirement plans, etc., I would rather that you call me  before taking any action because of the risk that you might unknowingly lose some of the benefit from your bankruptcy filing, or possibly disqualify yourself altogether.

Retirement plan loans such as 401(k) loans create a variety of issues and are almost always a bad idea in a bankruptcy context.   Presumably you borrow against your 401(k) because you need cash now, you expect to repay that loan in the near term, you want to preserve your 401(k) account for the future, and because you do not want the tax consequences associated with cashing out your 401(k).

Bankruptcy trustees, however, look at 401(k) loans in a different light.   They see any allocation to repay a 401(k) loan (and sometimes any ongoing contribution to a 401(k) plan) as an unnecessary reduction of disposable income that would otherwise be available to pay creditors.    401(k) loan payments cannot be counted as allowable deductions in your means test calculations.   And both Chapter 7 and Chapter 13 trustees and/or creditors will often object if you include a 401(k) loan repayment allocation in your Schedule I and J budget in either a Chapter 7 or Chapter 13. [Read more…]

Will Bankruptcy Issues Affect Georgia Governor’s Race?

Nathan Deal under scrutiny for financial woesIf you have been reading your local newspapers, you may be aware that Nathan Deal, the Republican candidate for Governor of Georgia, is facing scrutiny about his personal finances and about the bankruptcy filings of his daughter and son-in-law.

According to the Atlanta Journal-Constitution, Mr. Deal personally guaranteed bank loans totaling over $2 million that was used to build and finance a sporting goods store owned by his daughter and son-in-law called Wilder Outdoors, located on Highway 365 near Gainesville.   Unfortunately for the Wilders, the sporting goods business failed, leaving about $2.5 million due.  Mr. and Mrs. Wilder filed Chapter 7 bankruptcy in 2009, discharging their obligations on the outstanding bank loans, leaving Mr. Deal exposed as the guarantor.

Mr. Deal and the Wilders were able to refinance the business loan several years ago prior to the closing of the business but now, a $2.5 million debt will come due in February, which would be about a month after he takes office if he wins. [Read more…]

Inside the Mind of a Bankruptcy Lawyer – Should I File and if so, Why Should I Choose Your Firm?

There are dozens of lawyers out there who offer to prepare and file bankruptcy cases.  Some work in high volume “bankruptcy mill” firms that compete on price while others compete on experience, knowledge and service.  Usually the cost differential is a few hundred dollars, but when you are considering bankruptcy, every dollar counts – so why would you want a lawyer like me as opposed to a firm that would offer to represent you for a lower price?

I could offer a glib answer like “if you needed brain surgery, would you look for the cheapest surgeon on the one with the most experience and industry recognition” but that does not really answer the question.  Perhaps it would be helpful if you could look over my shoulder as I analyze a real life situation that came before me recently.

Earlier this month an email arrived from a couple who wanted information about bankruptcy.  The wife wrote that she was a stay at home mom raising 2 children and that her husband lost his job about a year ago, and recently started back to work at a lower paying job.  Their current household income is just under $50,000.  They own a house that is now worth less than what they paid for it – the house is worth about $200,000 – the first mortgage is $210,000 and the second mortgage is $35,000.  They own one older car outright and are financing a mini-van.  They have also incurred around $25,000 of credit card debt – most of which was used trying to keep the mortgage current.

Earlier this year they fell behind on both the first and second mortgage.  The first mortgage lender started foreclosure proceedings, but suspended foreclosure and offered to consider my potential clients for a mortgage modification.  They have been making modified payments for several months but when they called the lender to ask if they had been approved for a permanent modification, the account rep told them that their modification paperwork had not been approved but that their application had been sent to another department for a reconsideration.  News of this decision had not been provided to my prospective clients – the only reason they found out was from their call.  No one from the mysterious reconsideration division was available and their multiple calls have not been returned for over 2 weeks.

They decided to contact me because they are getting the sense that the mortgage company is unlikely to approve their modification and they want to be prepared for a possible foreclosure.  What are their options? [Read more…]

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