December 15, 2017

Spouse Filing Bankruptcy Individually: Here’s How You will be Impacted

non-filing sopuseThere are many reasons why a married couple may decide that only one spouse needs to file bankruptcy. The bankruptcy law allows a married person to file an individual bankruptcy but there will be some impact on the non-filing spouse. If you are a non-filing spouse, here are some concerns that you should keep in mind:

1. Your credit score may be negatively impacted. You are most likely to face this problem when you have joint debts with a bankruptcy filing spouse and your spouse does not pay a joint debt on time.

For example, Chapter 13 allows a bankruptcy debtor to restructure payment obligations, which may include reducing the monthly installment, or extending the term of the loan. As a non-filing spouse you will likely be in violation of the contractual terms of your loan, which will appear as a late payment on your credit report.

2 Your joint bank accounts may be at risk. The bankruptcy law does allow a Chapter 7 or Chapter 13 debtor to declare a set amount of cash as exempt (sheltered) property. Depending on the particulars of the case the amount of this exemption can range from zero to around $10,000. [Read more…]

Are Mortgage Modifications in Bankruptcy a Good Idea – Part Two

Earlier this month, I wrote a post on this blog setting out the question of whether Congress should enact legislation empowering bankruptcy judges to modify the terms of mortgages within a Chapter 13 bankruptcy.

Several of my colleagues in the Bankruptcy Law Network have argued that adding this power to the authority of bankruptcy judges will help stem the foreclosure crisis we are seeing in many cities and towns and that so called “voluntary” mortgage modification programs created by mortgage lenders has not and will not work.

Bankruptcy Law Network founding member Cathy Moran, who I respect greatly, has created a special advocacy page on her website that you can use to encourage your elected representatives to support mortgage modification in bankruptcy.  At  the same time Cathy notes that the judicial mortgage modification legislation now circulating in Congress leaves many unanswered questions.

North Carolina bankruptcy attorney Adrian Lapas, writing on the Bankruptcy Law Network blog, makes a compelling case in favor of judicial mortgage modification – click on the link to read Adrian’s post.

What, then, are the arguments against judicial mortgage modification.   A thoughtful and well reasoned argument against modification comes from Andrew Grossman of the Heritage Foundation.   Mr. Grossman argues that judicial mortgage modification will impose uncertainty and financial loss on mortgage lenders, thereby increasing the cost of mortgage loans in the open market.   Credit, therefore, would further tighten, causing additional limits on mortgage availability. [Read more…]

Bankruptcy Implications of a School Board’s Loss of Accreditation

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.

Financial Managment Course Requirement – Filing Deadline

The bankruptcy law requires debtors to attend two educational courses.  The first requirement calls for a "debt management course" and must be completed prior to filing – your certificate of completion is your "ticket in" to the bankruptcy process.

The second course, which is the subject of this post, is the "ticket out."  Known as the "financial management course," this educational requirement involves education about budgeting, interest rates and other financial managment tools that will, hopefully, keep you out of bankrutpcy in the future.

In a Chapter 7 case, you are supposed to complete your financial  management course within 45 days from the 1st date set for your  Section 341 meeting of creditors hearing.  In a Chapter 13 case, you must complete the financial managment course prior to making your last Chapter 13 payment or prior to the closing of your case.

If you do not complete your financial managment course requirment and file your certificate of completion (your attorney will file this for you), you will not be eligible for a discharge.

In my practice I recently represented a Chapter 7 debtor who did not complete her course prior to her case being closed and we had to reopen her case for the sole purpose of filing the financial  management course certificate.  So far, it appears that most bankruptcy judges will permit such reopenings, but be aware that there is a filing fee to do this as well as an attorney’s fee for the time involved.

Most of the vendors who provide pre-filing debt counseling will also provide financial managment courses as well.  The list of vendors that I provide to my clients can be found on my BankruptcyWorksheet web site.

I always advise my clients to get the Financial Management course out of the way.  You are not likely to think about this requirement 4 years into your Chapter 13 and the only notice set out by the clerks’ office is done a couple of months into your case.

The Financial  Managment course can be taken by phone or over the Internet and it will last only a few hours.  I would be interested to hear from anyone who has taken this course to get your observations and thoughts about its value.

Credit Card Offers Being Mailed to You at Accelerating Rates

I read in this week’s issue of the Consumer Bankruptcy News (a trade publication for bankruptcy lawyers) that during the 3rd quarter of 2007, credit card companies mailed 1.29 billion (that’s billion with a "B") credit card offers to U.S. households.  This is an increase of 2 million offers a year as compared to the 3rd quarter of 2006.  Approximately 29% of these offers were mailed to households that were already utilizing more than 30% of available credit.

To put this another way, men and women who already have credit card debt and who are most likely carrying balances month to month are still getting pitched on new credit card offers.  This is not an accident.

Credit card companies use sophisticated economic models to calculate expected profit.  They make their money on late fees and high interest rates.  You pay obscene costs if you carry a balance every month and if you make your payments late.

If you are struggling financially, do not allow yourself to be fooled that more credit will help you.  This is especially true if you find yourself paying monthly budget items like electricity, food and gasoline with credit cards.  If you find yourself carrying a balance for more than a month or two, take the cards out of your wallet.

Do not fall prey to balance transfer offers if bankruptcy is even a remote possibility (since a transfer to a new creditor within a few months of filing will be considered "new" debt by the transferee card. 

There can be a time and  place for unsecured debt.  Recognize the manipulation inherent in credit card activities and don’t allow yourself to become a victim.

Do I Have to Give Back the Car I am Financing if I File a Chapter 7?

I have a question about the blog in Nov,2006.  You said that filing bankruptcy can stop car repossion .  But after you file chapter 7 do you get to keep the car and the debt is discharged or you can keep the car only if you promise to make payments on tht vehicle.  Because I have been told the only way you can keep the car when filing chapter 7 is if you promise to make payments and you do not include it in your chapter 7 bankruptcy.  I was told if you owe on the vehicle and place it in your chapter 7 bankruptcy you have to give the car back. Could you give me some insight.
–Fana

Jonathan Ginsberg responds:  Fana, the minute you file a bankruptcy, all creditor action stops because of something called the "automatic stay."   There are a few exceptions to the automatic stay (i.e. multiple filings, child support debt, and a few other limited categories), but as a rule, all creditor action stops the minute you file.

Chapter 7 is primarily designed to get rid of unsecured debts like credit cards and medical bills.  In a Chapter 7, secured debts must be either reaffirmed or the collateral must be surrendered to the secured creditor.

Automobile loans are considered secured debts because the vehicle you purchased serves as security for the loan.  If you want to keep your vehicle in a Chapter 7, you must reaffirm it.  Reaffirmation of a vehicle loan is voluntary on the part of the secured creditor.  Generally, most car lenders will reaffirm if:

you are current with your payments

you have enough income to pay for the reaffirmed debt in your budget

your are able to shelter (exempt) your equity, if any, as part of your Chapter 7 petition

If the creditor refuses to reaffirm your choices are to surrender the vehicle or to convert to Chapter 13 where you can try to force a repayment down the lender’s throat.

If you do nothing – do not reaffirm and do not state any intention, the Bankruptcy Code will presume that your intention was to surrender and after the bankruptcy is over, the secured lender can repossess the vehicle.  Note that in this situation you would have no personal liability for a repossession deficiency – the Chapter 7 discharge serves to wipe out your personal liability.  However, the lien (in rem jurisdiction) that encumbers the vehicle remains and survives the bankruptcy.

So, if you are financing a vehicle and you file Chapter 7, there is a good chance that you can keep your vehicle if you qualify for a reaffirmation.

Weakening of Consumer Bankruptcy Protections Based on Faulty Assumptions

One of the consequences of the new bankruptcy law (BAPCPA law) has to do with erosion of protections offered by bankruptcy in various situations.  For example, the automatic stay provisions, which previously offered a comprehensive, no-questions-asked protection from any creditor action, no longer provides absolute protection in all circumstances.  Under BAPCPA, the automatic stay terminates in 30 days (unless you go to Court to renew it) in certain repeat filing situations and it does not exist at all in the third case filed within a year.

While the policy considerations that underlie this erosion of the automatic stay may be valid, my concerns are (1) when you create complicated exceptions to core concepts, the system loses predictability and public confidence and (2) the stage is set to undermine the entire bankruptcy system with exceptions that swallow the rules, i.e. the “slippery slope” argument.

I find the reduction in bankruptcy protection that applies to repeat filers especially troublesome.  There seems to be an underlying assumption that a debtor who seeks bankruptcy protection  – usually under Chapter 13 – more than once within a year is acting with less than honorable purposes.  In my experience, at least half of the second filers I see have to file a second case because they did not fully understand the process and their obligations thereunder the first time around.

In most jurisdictions, one or two high volume consumer bankruptcy firms account for a majority of the Chapter 7 and Chapter 13 filings.  These high volume firms are a product of the Bankruptcy Courts’ paternalistic attitude towards debtors and consumer bankruptcy counsel.  In most jurisdictions, the Judges set out “no look fee” provisions for Chapter 13 that essentially set the market rate for legal fees in that jurisdiction.  Although the standing court orders that set out these provisions are careful to state that the judges are not setting a fee, the practical effect is, in fact, to set a fee for services.

Because it is hardly practical for a small firm to spend three or four hours of non-billable time to present a fee application, most consumer bankruptcy attorneys accept the no look fee as a flat fee for services.  In the northern district of Georgia, for example, the no-look fee for Chapter 13 is around $4,500.  If a Chapter 13 lasts five years, that amounts to $500 per year to prepare, file and manage a case. Until just a few years ago, that no look fee was $1,500 for five years’ worth of work (that amounted to $300 for five years’ worth of work).

By contrast, in Chapter 11 cases, where the financial stakes may be in the millions of dollars, bankruptcy attorneys may bill at $500 or $600 per hour without any significant judicial interference.

Is it any wonder, therefore, that high volume consumer bankruptcy firms spend so little time with their clients to walk them through the filing and case management process.  Actually face to face attorney time in a high volume firm may amount to 30 minutes or less.  Further, because the business model dictates that costs must be kept down, the high volume firms have no choice but to rely on inexperienced, young lawyers who stay for a year or two then move on.

In simple consumer cases, a paralegal driven model may be fine and I personally have no issue with operating a law firm according to a profitable business model, especially when that model is driven by judicial control of attorney compensation.  In more complex cases, however, it may take a second or third filing for the debtor to find a lawyer who is equipped to deal with that debtor’s complicated problem.

The automatic stay issue discussed above is but one of the many erosions and exceptions to full relief now contained in the Code.  A 2005 article in the ABA Journal entitled “Debts that Will Follow You to the Grave” by Marc S. Stern and Larry B. Feinstein offers an excellent summary of other exceptions to bankruptcy relief.

The prevalence of high volume, limited service bankruptcy mill firms in every large jurisdiction is clearly the product of judicial control of bankruptcy fee payments in Chapter 13 cases.  Yet BAPCPA incorporates a simplistic formula to punish repeat filers, even those who have to seek repeat protection because they ended up in the wrong attorney’s office for their particular case.

Means Test Musings

Over the past few weeks, I have received objections in two Chapter 7 cases from the U.S. Trustee having to do with the median income/means test Form 22A.

Under the new law, debtors must fit within these tests in order to qualify for Chapter 7. The first part of the test is called the “median income” test. Under this (simple) test, if your household income is below the average income for a similarly sized family in your State, then you qualify for Chapter 7. The average income figures are built into my bankruptcy preparation program, but if you want to see these figures, you can look at them on the U.S. Trustee’s web site.

If your income exceeds the average, you can still qualify for Chapter 7 if you pass the “means test.” This is where we compare your monthly income (generated from an averaging of your gross income over the past 6 months) to a pro-forma budget using IRS derived budget numbers.

If your real life expense numbers are higher than the means test numbers, you are most likely out of luck. The means test does contain a small window where a Bankruptcy Judge can find that a particular expense is “reasonable.” The problem, of course, is that the U.S. Trustee is taking a very conservative approach and most debtors do not have the money to pay for research and litigation.

Two issues have come up recently – be aware of these if you are a lawyer or a debtor planning to file:

1. Reasonableness of supporting a college aged child – the U.S. Trustee will object if you include food, housing and transportation expenses for a college aged child. According to the trustee, these expenses are not necessary.

2. Vehicle leases – the U.S. Trustee contends that leased vehicles are not secured debts therefore the lease cost may not be an allowable expense in the pro forma budget. It seems to me that both leases and purchases are “ownership costs” such that it would be absurd to disallow lease payments, but it appears that is exactly what the trustee is doing.

I have a meeting scheduled for later this week to discuss these issues with an attorney in the trustee’s office – perhaps I will get some clarification.

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