November 24, 2017

What is the Secret to Making Your Chapter 13 Plan Work?

 

After 25+ years representing hardworking but financially struggling men and women in the Atlanta area, I can report to you that the #1 secret to surviving Chapter 13 is living below your means. This can mean you have to make some difficult choices.

Chapter 13 Trustees are Increasingly Demanding

When you enter Chapter 13, you need to eliminate the “wants” in your life in exchange for the “needs.” I advise my clients that if you find yourself meeting with a bankruptcy lawyer, everything needs to be on the table. And this includes your cars, home, furniture, jewelry and just about any other type of property you are financing. You will also find that your Chapter 13 trustee likely has a much more restrictive view of what constitutes a true “need:”

  • if you find yourself paying more than $300 per month for a car or truck, you need to consider giving that vehicle back to the creditor and buying a car for cash or financing a vehicle and keeping the payment below $300 per month
  • if you are financing vehicles, furniture or jewelry for your children or other relatives, you should be prepared to surrender that property and let your relative work out a deal on his/her own
  • if your budget includes out of pocket payments for your children’s college expenses, expect push back from the trustee. The trustee’s position will generally be that your child needs to use loans and grants to finance his/her own higher education and that your child may need to seek a less expensive education. Trustees generally do not agree with including someone else’s education costs in your budget
  • if your budget includes private elementary or high school for a child, you will need to produce evidence that your child has special educational needs that make public school insufficient
  • do not plan on keeping time shares or other non-essentials when you file Chapter 13

[Read more…]

Relief From Your 72 Month Car Loan

cram downFinancial experts bemoan the “crisis” in student loan debt (over $1.2 trillion as of 2015) and the rising rates of credit card debt ($733 billion as of 2015) but no one seems to be talking about yet another debt bubble – the huge rise of auto loan debt.

In 2012, total auto loan debt in the United States passed $1 trillion. Currently, the average household owes over $27,000 to vehicle lenders. More problematic, many of these loans extend well beyond 3 or 4 years. According to Edmunds.com, as of 2014, over 60% of auto loans were for terms over 60 months, with nearly 20% of these loans using 72 to 84 month terms.

60 months, of course, equals 5 years. 72 months equals 6 years, and 84 months equals 7 years.

Why a Long Term Vehicle Loan Means Trouble

You may ask “why should I be concerned about signing a 60 or 72 month car loan if I can afford the payment?” The answer, in a word, is “depreciation.”

Cars and trucks are depreciating assets. This means that they go down in value with each day and each mile of wear and tear. When you sign off on a 5 year or longer loan, you won’t be break even on your loan for at least 3 years. All your payments through at least year 3 (and most likely longer) will be applied to interest only. And my experience has been that folks who pursue long term vehicle loans often have less than perfect credit such that their interest rates are 7%, 8% or even higher.

This means that if your vehicle breaks down, or if you want to replace your car or truck 3 or 4 years into the loan, you will have to come out of pocket to satisfy the loan. If your vehicle is totaled in a wreck before the break even point, you will have to come out of pocket to pay off the loan because insurance companies pay property damage settlement based on “low retail” value.

If the dealership offers to “roll your existing payment” into a new loan, you’ll end up paying even more, because the new loan will include the leftover finance costs from the original loan plus the unfavorable terms from the new loan.

In essence, a 5 year or longer car loan equals a long term rental, except that you bear all the risk of loss. In case I am not being clear, a 5 year or longer loan is a toxic loan, and almost never a good idea. Even 4 year loans are less than ideal. [Read more…]

What is “Lien Stripping” and Can I Use it to Reduce my Mortgage Payments

mortgage lien stripWith the decline in Atlanta area housing values, a seldom used bankruptcy technique has taken on new life.  The technique is called “lien stripping” and it arises from Bankruptcy Code Section 506(a) and (d).  A lien strip allows a Chapter 13 debtor to use the power of the Bankruptcy Court to transform a secured second mortgage or home equity line of credit into an unsecured debt, thereby eliminating a monthly payment and reducing total debt by tens of thousands of dollars.

Here’s how it works: Let’s say that you own a home worth $250,000.   Perhaps that home was worth $350,000 three or four years ago but its market value has dropped because of the recession.  The balance on the first mortgage is $270,000 and the balance on the second mortgage is $45,000.

In this case, a Chapter 13 debtor can ask his bankruptcy judge to “strip away” the second mortgage debt since all of the value in your home is encumbered by your first mortgage.  In other words, if you were to sell your house, the first mortgage lender would not be paid in full and the second mortgage lender would get nothing.  The second mortgage lender is, therefore, unsecured. [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…]

BAPCPA at 4 Years – Has It Solved Anything?

paperworkI have been representing debtors in bankruptcy cases filed in the Northern District of Georgia for over 20 years. Until the law changed in 2005, filing bankruptcy was a fairly straightforward process – often I would meet with a client, decide whether to file and select Chapter 7 or Chapter 13, collect information about creditors, develop a budget, then file that day.

Attorney’s fees and filing fees in those days were relatively low and relatively hassle free. Most Chapter 7 cases processed through to discharge, and Chapter 13 cases worked as long as the debtor remained employed and committed to making his case work.

Fast forward to October, 2005 – the time that the BAPCPA amendment to the Bankruptcy Code went into effect. The system became significantly more complicated. Clients were expected to gather page after page of documents, lawyers were charged with performing extensive budget calculations (the median income and means test).

Fees went up because both the attorney’s liability and the amount of work required increased greatly. And what is the end result? Many people with limited income and no hope of paying it back are filing Chapter 7. Others who would have fit into Chapter 7 sometimes do not qualify immediately and end up having to delay their filing for a few months. Folks with some capacity to pay end up in Chapter 13, but trustees are more demanding and Chapter 13 plans that would have worked under the old law do not always work now. [Read more…]

Does the Name on the Car Title Matter?

As a bankruptcy lawyer, I have to deal with the consequence of what I call “real world” activities.    In the non-bankruptcy world people make decisions that will save money and make life easier.  For example, blog reader Lou writes me with a question about car titles:

I might need to file chapter 13 in the future.  I filed a Chapter 7 in 2003 and now have a lot of credit card debt.  I have a house but I do not want to keep it. When the house goes into foreclosure the only property I will have in my name is 3 cars valued from $6000 to $8000 each.  I only own one of them.  The other two belong to my parents.  I got loans in my name for the cars because I got the best rates, but when they were paid off I never signed the titles over to my parents.  In a ch. 13 will all the cars be considered mine, or is there a way to prove that they belong to my parents?  My name is the only name on the titles.

It appears to me that Lou and his parents made a common sense decision at a time when bankruptcy was not a consideration.  Lou most likely qualified for better rates because he was working so he made a decision to help out his parents by applying for car loans in his name.   His parents have made all the payments so as far as they and Lou are concerned the cars belong to the parents.

Unfortunately this is not how the bankruptcy court will look at things.   [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…]

You are Responsible for Your Chapter 13 Trustee Payments

I have probably written about this subject before, but I am going to raise it again because it creates so many unnecessary problems and it arises month after month and year after year.

If you are a Chapter 13 debtor, you and you alone are responsible for making your trustee payments.


Pre-confirmation

In the Northern District of Georgia, all Chapter 13 cases must be funded by payroll deduction. An employer deduction order (“EDO”) should be filed in your case at the time your case is filed. Until the money starts coming out of your check, however, do not assume that your employer knows what to do or knows how to do it right. Further, you should assume that your employer may need 1 to 3 payroll cycles to implement the payroll deduction. Until the money starts coming out, you have to make the payments directly.

I cannot tell you how many confirmation hearings have been held up because a Chapter 13 debtor was one or two bi-weekly payments behind. In fact, I advise my clients to send in the first one or two bi-weekly or semi-monthly payments under the assumption that the employer will not withhold accurately the first time.

The pre-confirmation period in a Chapter 13 functions as a kind of probation period for your Chapter 13. If we drafted an “aggressive” plan, there is a good chance that we may have to amend the plan and increase the payment to the trustee. If this happens, your attorney will file an amended EDO. But guess what. Some payroll office employees don’t recognize that the amended EDO is different than what they received 4 weeks previously. When you plan is amended to increase the payment you need to verify that the correct amount is being withheld.

Post-confirmation

Five years is a long time. And during that five years you may experience an interruption in your employment causing an interruption in your pay and therefore an interruption in payment received by the trustee. Do not ignore this interruption and hope that no one will notice. The trustee uses a computer program to track payments. If you fall behind, the lapse will eventually trigger a trustee Motion to Dismiss. If that Motion to Dismiss occurs in year three, leaving you, for example 22 months left in your plan, any delinquency needs to be cured in that 22 months. This may require a substantial increase in your monthly payment or a large lump sum.

Are Mortgage Modifications in Bankruptcy a Good Idea – Part One

There has been a lot of chatter on bankruptcy blogs and bankruptcy lawyer forums about the possibility that Congress will amend the bankruptcy laws to give judges the power to modify mortgages.   To offer some perspective, bankruptcy judges have long had the power to modify vehicle loan contracts and other secured debt claims but never mortgage debt.

When I first started practicing bankruptcy law some 20 years ago, I was introduced to the term “cram down” which is a kind of bankruptcy lawyer slang for the process of forcibly changing the terms of a contract against a creditor’s interests.  In a typical car loan cram down, you might enter into bankruptcy with four years remaining on a five year note, a monthly payment of $530 per month, an interest rate of 12% and a total outstanding balance of $28,000.   After cram down the interest rate might be 6% and the outstanding balance may be $18,000 (which represents that approximate value of the vehicle) and the monthly payment to the creditor within a Chapter 13 plan might be $250 per month.

As you can see from this example, the purpose of a cram down is to bring a debtor’s obligation more in line with the value of the collateral and prevailing interest rates.  I suspect that Congress allowed cram downs on car loans because it saw a problem in the market place whereby consumers with poor credit were ending up with unreliable used cars at unreasonable terms in the secondary market.

Debtor’s attorneys also included cram down provisions in Chapter 13 plans to modify the terms of other secured loans, such as furniture and jewelry.  However, home loans were specifically excluded from cram down.

In 2005, with the enactment of the BAPCPA changes to the bankruptcy laws, Congress added restrictions to the power of judges to cram down vehicle purchase loans.   In other words the era of freewheeling bankruptcy cram downs was over.   Under the amended law, vehicles purchased less than 910 days prior to the filing of a bankruptcy case were not subject to cram downs.

These new restrictions on the authority of a judge to forcibly modify the contractual terms between a debtor and his car finance company were the result of extensive lobbying on the part of the automobile industry who argued that market forces, not bankruptcy judges ought to set the terms of vehicle purchase financing.

There has been no organized effort to change the rules regarding vehicle cram downs.   Instead, Congress has turned its attention to mortgage loans.   Perhaps this is not surprising since the federal government, through its mortgage guarantees, now owns or controls a fairly significant chunk of mortgages owed by Americans.

Legislation is now circulating in Congress that would allow a bankruptcy judge to change the terms of a mortgage, which would involve such things as:

  • reducing the outstanding balance to line up with the current market value
  • modify the terms (monthly payments)
  • change the interest rates

The sense among bankruptcy lawyers is that if this legislation makes it into law, Chapter 13 bankruptcy will become a viable and attractive option to middle class families who might never have considered bankruptcy relief.   Mortgage debt is often a family’s largest obligation and an opportunity to “re-write” one’s mortgage at more favorable terms while at the same time reducing credit card debt and canceling unfavorable leases and service contracts may very will put the bankruptcy option on the table.

Is it a good idea to enable mortgage loan cram downs?   If you have a mortgage and have been contemplating bankruptcy should you wait?  We’ll explore those questions next….

What do Bankruptcy Lawyers Do All Day Anyway

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.

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