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
Late night comedian John Oliver recently offered his unique and humorous take on the debt buying industry, noting that collection agencies are responsible for more lawsuits than any other type of plaintiff, and that many of these lawsuits claim money damages for zombie debt. Zombie debt is debt that is not legally collectible because the statute of limitations has run.
Debt buyers rely on intimidation and ignorance, and obtain legally legitimate judgments when consumer defendants fail to answer a lawsuit.
Here’s how it works: let’s assume that you visited a hospital or otherwise incurred a debt back in 1995 that you never paid. Under Georgia law generally the statute of limitations on an unsecured debt like a medical bill or a credit card debt would be no longer than 6 years. So, by the end of 2001, your 1995 debt would no longer be legally collectible. This means that if someone sued you in 2010 for the 1995 debt, you could answer the lawsuit by stating “this statute of limitations for collection of this debt ran in 2001 and plaintiff’s claim should be dismissed.”
If you answered a lawsuit using language like this, any Georgia state or magistrate court judge would dismiss the debt buyer’s claim and you would be done. You could also counterclaim the plaintiff for frivolous litigation, but that is a story for a different day.
However, if you fail to answer the 2010 lawsuit, the attorney for the debt buyer would go to court and say, “your Honor, the defendant has failed to answer our complaint and we are requesting a default judgment.” The judge would have no choice but to grant this request. [Read More…]
Financial 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…]
You may recall that back in September, 2015, I reported that federal judge Marvin Shoob had issued a ruling that invalidated on Constitutional grounds bank account levies in Gwinnett County, Georgia. A man named Tony Strickland sued the Gwinnett County clerk of court after his bank account containing workers compensation and Social Security funds was seized by a credit card company that had sued him. Mr. Strickland argued, and Judge Shoob agreed, that the credit card company had an affirmative obligation to notify debtors like Mr. Strickland that certain funds (like workers’ compensation benefits, Social Security benefits, welfare payment and similar benefits) were exempt from garnishment. [Read More…]
This was the issue I faced recently while representing a client whose car was totaled in an accident. My client was in the middle of his Chapter 13 case, having paid into his plan for three years, with two years left to go.
Now, with no car to drive to work, my client was spending $20 per day on a rental car and needed to purchase a replacement. Here’s how we dealt with this problem.
First, my client had to find a replacement vehicle and a lender who would agree to finance a loan despite my client’s status as debtor in an active Chapter 13. Believe it or not, this task was not a problem – my client found a two year old vehicle in the $25,000 range and his dealership was able to arrange financing. [Read More…]
As a practicing consumer bankruptcy attorney in Atlanta, Georgia for over 25 years, I know that out of control credit card debt can force people in to Chapter 7 or Chapter 13 bankruptcy. In many cases credit card debt that was manageable becomes unmanageable because of common mistakes made by individuals in how they handle their credit card debt.
If you can avoid these mistakes you may be able to avoid the stress and financial distress caused by excessive credit card debt.
How Credit Card Debt and Credit Card Interest can Get Out of Control
The first step towards controlling your credit card debt involves your spending. This may seem obvious but many of my bankruptcy clients fail to recognize this reality. If you find yourself carrying a balance (rather than paying off your debt in full at the end of the month) you need o change your usage habits. If you carry a balance you will end up paying unnecessary and expensive credit card interest.
Your credit card is not a substitute for cash – instead your credit cards represent a high interest loan with a 20 days repayment term. Interest on unpaid balances will eat you alive. Most cards obligate you to pay an 18 to 20% annual interest rate on balances carried more than 20 days. To give you some perspective, your interest rate on mortgage debt will end up in the 3 to 4% per year range, and the annual percentage rate on your car note will generally be 5 to 6% per year.
As a rule, if you make only the minimum payment, your balance will stay the same, or actually increase month to month indefinitely. And if you are 1 day late, you will likely get hit with a penalty (often $35 or more) plus your interest rate may be increased to 28% or higher. [Read More…]
If you have never heard the term “debt buyer,” you might be amazed to learn that large companies exist solely for the purpose of buying and selling consumer debt. These companies buy and sell billions of dollars of debt. Some are part of public companies that trade shares of stock on stock exchanges.
In other words, credit card companies, hospitals, personal loan companies, banks and other lenders regularly sell and resell debt – and this may include debt owed by you.
Here’s how it works. Let’s say that you open a Mastercard or Visa account with a local bank. Over the years you may start running a balance – perhaps $2,000 or $3,000. You are able to make the minimum monthly payment but the balance grows slowly. At some point, you find yourself with a problem – you miss one or two monthly payments and your account becomes two or three months past due. The credit card company cancels your account and starts sending you collection letters.
At that point, the credit card company may decide that it would rather sell your delinquent debt for cash before it gets too much older. Depending on how delinquent the debt is, a debt buyer may pay only 4 or 5 cents on the dollar. Your 2 month delinquent debt of $3,000 will be packaged along with other similar debt and sold in bulk to a debt buyer at this discounted rate.
The debt buyer may attempt to collect the debt by dunning you (calling repeatedly) or the buyer may retain a lawyer and sue you. [Read More…]
Every Chapter 7 or Chapter 13 debtor must attend two credit counseling classes. The first, called the pre-bankruptcy credit counseling course, is required before you can file. Your certificate of completion is your ticket in to the bankruptcy process.
Once you have an active case, however, you must attend a second course called a financial management course, obtain a certificate of completion and have your lawyer file that certificate with the clerk of bankruptcy court.
This financial management course offers tips about how to set up a household budget and how to avoid financial mistakes that resulted in your need to file for bankruptcy in the first place.
If your lawyer does not file this financial management course certificate of completion you will not be eligible for a bankruptcy discharge. Instead, your case will be closed without discharge.
Why is a discharge order so important? It represents a formal order from the bankruptcy judge that all debts which can be eliminated or adjusted have been so modified. This order is binding on all state and federal courts and if a creditor attempts to collect on a discharged debt, you can sue that creditor for damages in a contempt proceeding. [Read More…]
A recent study by economists suggests that Chapter 13 debtors whose cases were confirmed and completed through discharge derive significant economic and health benefits from their filings as compared to Chapter 13 debtors whose cases were dismissed.
This report, published on the National Bureau of Economic Research – a professional organization for economists – compared 500,000 bankruptcy records with tax records and foreclosure records.
The study compared Chapter 13 debtors whose cases were approved and completed successfully to discharge to Chapter 13 debtors whose cases were dismissed. Successful Chapter 13 debtors:
- saw annual earnings 25% higher after bankruptcy – compared to their pre-bankruptcy earnings. Dismissed filers saw no increase in earnings
- had a higher employment rate
- had a 30% lower mortality rate compared to filers whose cases were dismissed
- were 19% less likely than dismissed filers to lose a home to foreclosure
The study authors suggest that successful Chapter 13 filers have an increased incentive to work and increased economic stability following receipt of bankruptcy protection. [Read More…]
There 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…]