One of the least discussed changes brought about by the October, 2005 changes to the bankruptcy law was a provision that provides for "audits" of random cases.  When a case is audited, it is selected at random by the  United States trustee and the debtor and debtor's attorney are required to submit extensive documentary proof of information set out in the petition.

In January, 2008, these audits were halted because the U.S. Trustee ran out of money for this program.  Now, according to Jill Michaux of the Bankruptcy Law Network blog, debtor audits are back.  You can read Jill's post and the links therein to learn more about this audit program.

What actually happens during an audit?

If you are selected for an audit, the U.S. Trustee sends you a notification that you and your attorney will be contacted by an outside accounting firm.  The firm will send you a notice asking for things like:

• Pay stubs for you and your spouse for the six months prior to the month you filed your bankruptcy petition
• Bank account statements for six months, with explanations for all deposits over $500
• Income tax returns including all schedules and forms for the previous two years
• Divorce documents, including property settlement and child support orders
• Self employment documents
• Proof of school expenses
• Proof of child care expenses
• Proof of food expenses
• Proof of transportation expenses

Once you get this information to the auditor, he will analyze this information and compare it to the information set out in your petition.

In the first eight months of the audit program, 1631 audits were completed.  Of those, 29% of the cases audited were found to have at least one material misstatement.  12% of the audits resulted in a Report of No Audit.  The U.S. Trustee statistics do not tell us how significant any of these misstatements are. (Thanks to Peter Orville of the Bankruptcy Law Network for his series of posts about Audits).

When the program was active, only a few of my cases were selected for audits.  After providing a lot of paper, the audit was concluded with no problem.  On the other hand, these audits required me to spend a lot of unexpected time gathering and reviewing documents.  As such, I have changed my fee contract to provide for an additional fee for any case selected for an audit.  It continues to puzzle me whether members of Congress truly understand that people who are filing bankruptcy most likely don't have a lot of money available for attorney's fees, yet every change to the law increases this burden.

The Money, Matter, and More Musings blog reports that it has found the world's worst credit card. This card provides a credit limit of $300, but after fees and costs, the available credit is $53. The other terms and provisions of this outrageous card are literally breathtaking. You can read the full blog entry by clicking on the link.

You can also view a video that highlights this outrageous card:

Thanks to the Consumerist blog for this story.

The Federal Reserve Bank has issued proposed rules that will place extensive limits on common practices of credit card issuers. In a news release dated May 2, 2008, the Federal Reserve proposes rules whereby:

• Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.
• Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.
• Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.
• Banks would be prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.
• Banks would be required to provide consumers a reasonable amount of time to make payments.

According to the press release from the Federal Reserve: "the proposed rules are intended to establish a new baseline for fairness in how credit card plans operate. Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs."

If approved following public comment, these practices would be deemed "unfair and deceptive" and could subject credit card issuers in violation of the new rules to civil penalties.

Needless to say, credit card issuers will gear up a publicity campaign to challenge or water down these new rules. A spokesman for the American Bankers Association calls the Fed's proposals "an unprecedented regulatory intrusion into marketplace pricing and product offerings."

Anyone may submit a comment on the new rules at the Federal Reserve's web site and I encourage all consumers to write and post statements in support of these new rules. In particular, I strongly support the proposed rule that would disallow credit card issuers from changing the interest rates on existing balances except in very unusual circumstances. In my bankruptcy practice, I regularly see situations where a family is able to sustain payments on balances, but ends up in bankruptcy because a 5% rate gets boosted up to 25% as a result of a late payment or two.

My colleague, attorney Scott Riddle, posted a very interesting observation in his Georgia Bankruptcy blog about the bankruptcy implications of Clayton County, Georgia's school accreditation fiasco.  For those unaware of the situation, the Clayton County School System is about to become only the third school system within the past 20 years in the United States to lose its accreditation.

Scott points out that if Clayton County loses its accreditation, graduating students will not be eligible for Hope Scholarships (Hope Scholarships are lottery funded scholarships to schools in the Georgia university system and have offered a greatly reduced higher education costs to thousands of Georgia college students).  With a school system in a mess and eligibility for Hope Scholarships withdrawn, residential real estate prices will fall, home buyers with school age children will avoid Clayton County and the county's tax base will fall.  Scott correctly advises:

If you are a homeowner in Clayton County and you find yourself in Bankruptcy, think twice before reaffirming your mortgage debt.  Even if you qualify for a reaffirmation and your home is worth the amount of debt, it might not be the case for long.  You might be signing up for post-petition personal liability for the mortgage on a home that decreases significantly in value in the coming months and years.  You could be locked into staying in Clayton because you cannot sell, selling your home at  discount and paying the difference, or a foreclosure. You will owe the full amount of your mortgage (including interest and fees) after your discharge.  Again, think twice.

While the Clayton County situation is somewhat unique, it does raise an important point about home reaffirmation in general.  It is not always a good idea to reaffirm a home or a car.  You should look forward, not backwards, when filing a bankruptcy.  Too many times I have heard the argument "I can't give up that car because I have invested too much in it."   In my view, that kind of argument is ridiculous.  Bankruptcy should be used to eliminate obligations that you can't afford, not validate bad decisions or purchases that you can no longer afford.

Yes, it would be a pain to file bankruptcy and give up the Clayton County home where you have settled and become comfortable.  However, if you have a chance to extricate yourself from an environment where housing prices will likely be depressed, and a place where hard working middle class families will avoid, you should use the bankruptcy process to better yourself and your future.

Most bankruptcy lawyers will tell you that credit card contributes to most consumer bankruptcy case filings.  Often, overwhelming credit card debt is the primary reason for a filing.  For example, if you have $10,000 or more in credit card debt, and you send in only the minimum payment of 2% of the balance each month, you will need over 50 years to pay off your debt.  You can run your own numbers using an on-line credit card interest calculator.

Many people use credit cards as a means of survival.  Frequently, therefore, I see clients who desperately need to file bankruptcy but have used credit cards recently.  Not surprisingly, recent credit card use prior to bankruptcy is a problem - but just how big of a problem is it?

I recently received this question from a reader of my blog:

Hello, I had a question about chapter 7 bankruptcy. If I incur a lot of debt on my credit cards (like $30,000 worth) four or five months before declaring bankruptcy (for business expenses), could this be considered Bankruptcy Fraud?  In Massachusetts, the lookback period for credit cards is 90 days, but can it be extended further?

Here is my answer:  Bankruptcy Code Section 523 addresses this situation.  Section 523(a)(2) provides that:

consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

To my knowledge there has never been a television drama about bankruptcy lawyers (although there would certainly be a lot of possible story lines!).   So, as a rule, most people do not know what bankruptcy lawyers do all day long. 

Los Angeles bankruptcy lawyer Hale Antico answers this question accurately on his Los Angles Bankruptcy blog.  Hale's experience, like mine, goes something like this:

• Preparing an Objection to Proof of Claim for a Chapter 13 case where the pro se creditor thinks they should be a priority debt compared to a general unsecured non-priority claim. Of course, I needed a Declaration to go along with this for my client, the debtor.
   
• Researching and negotiating a claim for a Chapter 13 bankruptcy where the Los Angeles Chapter 13 Trustee thinks that it might be unfair discrimination between claims in the same class to pay one nondischargeble claim 100% compared to the others.
   
• Responding to a letter from the United States Trustee questioning whether a client should be entitled to a Chapter 7 discharge based on prior income.
   
• Replying to a creditor who is very curious about massive credit card spending the debtor in another Chapter 7 case did prior to filing bankruptcy. There may be an adversary proceeding here on 11 USC 523.
   
• Answering a bunch of questions from existing clients who, after hiring me to let ther house go in foreclosure during the bankruptcy, are now suddenly prey to realtors and real estate agents who want to “help them” with a quick sale and why bankruptcy is better than a short sale.
   
• Personally reviewed a bankruptcy petition (you know, the simple bankruptcy forms) with a client before we both signed it and I file bankruptcy for him.
   
• Preparing for court on Tuesday where I’m helping three clients get their cases “confirmed” at their Confirmation Hearings at the bankruptcy court (do we have the mortgage declarations? the plan payments? did we satisfy the Chapter 13 trustee’s requests for business expenses and short form?).

I can add to this list:

• responding to email from a self employed client who is currently in Chapter 13, and who wants a dramatic reduction in monthly plan payments
   
• responding to email from Chapter 13 client who now wants to convert to Chapter 7
   
• calling Chapter 7 client whose 341 hearing is later this week to remind him to bring his ID's
   
• responding to potential client emails
   
• replying to a blog or web site visitor who wants clarification of a point
   
• answering email questions from blog readers

I recently appeared before one of the bankruptcy judges in the northern district of Georgia to request a somewhat higher than normal fee for a Chapter 13.  I found it somewhat cathartic to be able to explain to the judge that even "simple" Chapter 13 cases take up huge amounts of time because of the endless document requests and correspondence with the client, creditors and the trustee.

Revolution Money, a new PayPal-like money transfer service, has a very cool promotion. This company is for real.  It was started by Steve Case,
founder of AOL.  I’ve already transferred my money to my checking account so I think that it is legitimate.

They are paying you $25 just to sign up.  No strings (well, you must be 18 and in the U.S. and you must have a bank account)  I get $10 for the referral, so we both profit (thank you!)

They just extended their promotion to May 15.  So if you haven’t already done so, you now have plenty of time to claim your money.

Revolution Money link

On a fairly regular basis, I get calls from potential bankruptcy clients who don't really have enough debt to justify the time and expense of bankruptcy.  For example, if your only debt is a delinquent $7,500 credit card bill, it hardly makes sense to spend $1,500 to $2,000 for a Chapter 7 case.  Similarly, it makes no sense to spend $3,500 to $4,000 for a Chapter 13, especially if you would end up paying back 100% of the debt anyway.

What, then, are your alternatives?

Debt negotiation is one alternative.  Someone once told me that "everything is negotiable" and that is especially true when it comes to credit card lenders.  My experience, however, has been that you will find it difficult to convince a credit card lender to negotiate if you are current with your account.   When you get to three or four months delinquent, you may find that the credit card lender will talk to you seriously about a reduced lump sum payoff or some type of payment plan.  The problem with this, of course, is that your credit score will take a major hit and you will have to deal with those harassing phone calls.

Another problem - who is going to do the negotiation?  You can certainly try to negotiate your own account, but this can be difficult as you are the subject of the negotiation and you are emotionally involved therein.  There are vendors out there who say that they will do debt negotiation, but I think you need to be careful there too.  I have met with several clients over the years who have tried this route, all with very mixed results.  Several of these companies have been sued by the attorneys general in several states. 

Consumer Credit Counseling is not really a negotiation service - they are funded by the credit card companies and my sense is that their goal is primarily to take some of the heat off while you enter into a payment plan that pretty much pays back everyone 100%.

Recently I have noted that several law firms (none in Georgia, to my knowledge) have added debt negotiation to their menu of services.  For example, the Michigan law firm of Thav, Gross, Steinway and Bennett has a separate law firm called StopCreditorCalls.com and has posted several compelling videos on YouTube discussing their negotiation services. 

An Alabama consumer law firm, The Watts Law Group and M. Stan Herring, publishes a very informative blog about consumer protection.  Recently, Attorneys Watts and Herring have written a series of blog posts about the Fair Debt Collection Practices Act and have identified common types of violations.  In the case of FDCPA violations, it may be that a negotiation over a relatively small credit card debt may turn into an FDCPA claim - it would not surprise me if a settlement of an FDCPA claim involved a reduction in the outstanding balance or favorable terms for the debtor.

So, if you have a relatively small amount of debt (less than $20,000 of unsecured debt) I think it is wise to strongly consider non-bankruptcy alternatives as a more cost effective solution.

However, I am still looking for specific solutions.  If you were able to work out a resolution of your credit card debt outside of bankruptcy, or if you are a lawyer who can speak about non-bankruptcy alternatives, I'd love to hear from you.

The New York Times published an investigative report on March 30, 2007 entitled Foreclosure Machine Thrives on Woes.  The article addresses what has become a growing problem in bankruptcy cases:

• out of control fees and costs added to mortgage loan balances
• failure of mortgage companies to properly account for payments
• refusal or failure of mortgage companies and their counsel to resolve disputes amicably

The Times tells the story of a Georgia couple - the Atchleys - who filed Chapter 13 and paid their mortgage but found themselves on the receiving end of multiple motions for relief asserting that mortgage payments had been made.  In addition to the stress and cost of dealing with these inaccurate motions (which would be withdrawn at the last minute), the Atchley's discovered that their payoff balance was being adjusted higher and higher with questionably fees and costs.  The Atchleys eventually sold their house but now the United States Trustee has sued Countrywide claiming that its pattern of conduct was an abuse of the bankruptcy system.

The Atchleys decided to sell their home, and contend that they lost over $20,000 in equity.  I have seen similar cases in my own practice.   One case in particular comes to mind.  My client filed bankruptcy to stop a property tax sale, and subsequently fell behind in her ongoing mortgage payments.  She then decided to sell her condo (there was significant equity), the closing attorney gave her a payoff figure that seemed extremely high.  I looked at the payment ledger and I saw overcharges and double billing.  One item showed a charge of $650 as attorney's fees arising from a Motion for Relief.  However the Order on the Motion for Relief provided for only $550 in attorney's fees and my client had already paid that fee directly when she cured her post petition arrearage.  There was also a $2,500 "analysis charge" that no one could explain.

While Chapter 13 remains the only option to stop a foreclosure, you should realize that there is a good likelihood that if you file, your payoff balance will go up and that you may have limited recourse to challenge these charges.

Thanks to my colleagues at Clark and Washington for bringing the New York Times article to my attention.

If you read this blog and other consumer bankruptcy blogs like Scott Riddle's Georgia Bankruptcy blog or the Bankruptcy Law Network blog, you know that preparing for filing a case involves a great deal of effort on your part to collect information and documents.  Are there any steps that you as the potential bankruptcy debtor can take to speed up the process and to keep costs down.

My Bankruptcy Law Network colleague, Michael Doan, has posted a very useful article about the timing of filing.  Specifically, Michael points out that if you start the bankruptcy information gathering process towards the end of a month, and the process rolls over to the next month, then a lot of the work has to be redone.  For example, the six month medican income test look back would involve a new six month period, your credit counseling certificate validity date may run out and the required tax return might change.  I encourage you to take a look at Michael's well thought out post entitled "File by the End of the Month or Start Over."

I think that in a big picture sense, what Michael is saying is that you need to communicate regularly and accurately with your lawyer.  If you meet with your lawyer on the 20th of the month and promise to have all necessary documentation by the 27th, but you end up rescheduling your appointment to the 5th of the following month, don't be surprised if you have to pay a higher fee to account for all the new calculations.

In my practice, I do not start the time consuming process of analyzing pay stubs and figuring out the median income and/or means test until I have pretty much all of the required documentation.  This means that I can't give my client bottom line numbers unless and until my client provides me with pay stubs and tax returns.  I can still give a "big picture" analysis based on my experience, but the actual number crunching has to wait.   This is a major shift from pre-BAPCPA practice where I could run numbers almost immediately.

Some of my colleagues are more willing to tolerate the risk of not getting documentation in time and they end up running their calculations two or three times.  If you are a lawyer and this is how you have set up your practice, I would advise you to keep your notes so at least your'll have a head start on the calculations.