February 26, 2020

Co-Signed Loans: An Old Problem that is Making a Comeback

avoid co-signing a debtWhen I first began working in the consumer bankruptcy field, co-signed loans were a common problem that I saw often.  Then credit standards loosened and I rarely saw clients who were co-signers or who had co-signed loans.

Now the personally guaranteed co-signed loan is making a comeback.   I can state without reservation that in both a personal and a business context, agreeing to co-sign a loan for someone with poor credit is never a good idea.

In the current market, standards for consumer credit are tight and securing credit approval can be a challenging feat for someone with mediocre or poor credit.   Because of the tightening credit market and increased regulation by the federal government on lenders, people who may have been approved in years past are now needing others to co-sign in order to take out a loan. [Read more…]

Bank Won’t Talk to You Now that You have Filed Bankruptcy – Here’s a Solution

no customer service after bankruptcyMortgage companies and banks often put you on a “no communication” list after you file bankruptcy.  Your on-line access log-in may stop working, you will no longer receive loan statements, and when you call customer service you may be told that because you are in bankruptcy, the lender cannot talk to you anymore.

Lenders are not giving you the silent treatment because they are angry at you for filing bankruptcy, nor are they trying to be rude.  They are not talking to you because the automatic stay protection of the Bankruptcy Code says that once you file, it is a violation of the stay to make any effort to collect a debt.

Arguably, a loan statement could be construed as attempting to collect a debt and customer service reps not knowledgeable about bankruptcy may say something inproper.  Basically your bank or mortgage company does not want to find itself facing a claim for damages arising from violating the stay so many of these companies simply cut off all communication.

The problem for you, of course, is that you may have a need to speak with a representative.  Perhaps you need to confirm receipt of a mortgage payment that was paid directly after filing.  You may need to make an electronic payment directly from your checking account.  You may need a copy of your payment history.

How do you get past the wall of silence? [Read more…]

Will Recent Use of Credit Cards for Necessities Like Food and Clothing Prevent me from Filing Bankruptcy?

expensive litigationThere is no perfect time to file for bankruptcy.  Ideally, you should wait to file at a point when you have not touched your credit cards for several months and your credit card charges over the past year have not taken a big jump.  Further there is less chance that you will face any objection if you have made at least the minimum payment over the past 6 months or longer.

Section 523 of the Bankruptcy Code sets out a number of situations in which credit card debt will not be discharged.  Section 523(a)(2)( c) makes non-dischargeable consumer debt totaling more than $500 for luxury goods and services owed to any one creditor that are incurred within 90 days of filing, or cash advances totaling $750 or more owed to any one creditor made within 70 days of filing.

Section 523(a)(2) makes non-dischargeable debt owed to a creditor that was incurred by false pretenses or by fraud.

Basically, then, Section 523 gives credit card lenders at least two arguments to challenge a debtor:

  1. recent credit card use (within 3 months) for anything but necessities like food, clothing and shelter
  2. any credit card use in the recent past (in my experience this can be up to a year prior to filing) if a debtor makes charges where there is no reasonable expectation of repayment.    [Read more…]

Reaffirmation Requires Written and Signed Contract Between You and Your Creditor

reaffirmation agreement in chapter 7I have written before about the pros and cons of entering into a reaffirmation agreement with one or more of your secured creditors.  On the plus side, reaffirming a secured debt gives you a degree of certainty – you are once again in a contractual relationship with your creditor.  You know how much you are supposed to pay each month and you know the payoff balance, interest rate and terms of the agreement.

Further, you may be able to negotiate a more favorable deal when you reaffirm.  Other than cars, secured creditors are often not set up to liquidate used merchandise and since you already have possession of the property (collateral), many lenders are happy to negotiate more favorable terms with you so they can avoid the hassle of recovering and disposing of property.   This negotiation option is less true with motor vehicles, because there is an active used car market, but the negotiation option can work well when you are dealing with furniture or electronics. [Read more…]

Reaffirmation of Debt Need Not be Under Same Terms as Original Loan

negotiation with credtorsMost people know that Chapter 7 allows you to wipe out unsecured debt – credit card bills, medical debt and other signature loans.  But what about secured debt – loans you are still paying to finance your home, your car, perhaps some jewelry or furniture?

This past March, I discussed redemption of property in Chapter 7.   Redemption of property is a viable option but it is far less common than “reaffirmation” of debt.

Why Do You Need to Reaffirm?

Secured loans actually contain two different kinds of obligations.   On one hand, you obligate yourself personally to pay a particular debt.  This is typically in the form of a promissory note.  The second layer of obligation ties the specific item of property to the loan.  This is called a security agreement.

When you file a Chapter 7 and a discharge is issued by the judge, your personal liability on your secured debt is extinguished.  This is why payments on a non-reaffirmed car loan or home loan will not be reflected on your credit reports.  You have no personal obligation to pay.  However, a Chapter 7 discharge does not extinguish the lender’s security interest against property.  This is why a vehicle lender can repossess or a mortgage company may foreclose to recover property.   In such a situation you would not have any personal liability for any deficiency amount.

A reaffirmation serves two main purposes: [Read more…]

What is a Redemption of Property in Chapter 7

If you are purchasing a vehicle and you file Chapter 7, your options are (1) surrender the vehicle, (2) reaffirm the existing loan, or (3) redeem the vehicle by paying the lender fair market value.  Redemption, which is described at Section 722 of the Bankruptcy Code used to be an uncommon choice.  More recently, however, several lenders have entered the market to finance Section 722 redemptions.  In this video, I discuss how redemptions work and how to know if a Motion for Redemption under Section 722 is a good idea.

[mc src=”http://www.youtube.com/watch?v=3ebX9zlCskU” type=”youtube”]Redemption of Collateral in Chapter 7[/mc]

Can You be Sued for Non-payment of your Mortgage if You Do Not Reaffirm?

I recently received an email from a blog reader asking about his obligations to his mortgage company when he does not reaffirm:

I have read your blog and you are very through so I write you with hopes that you might answer this question for me. I file Chapter 7  in 08, and did not reaffirm my loan. I am still living in the house and did make some payments. However, i have not for the last 8 months. It is my understanding that I must sign a document to reaffirm and that continuing payment in itself is not a reaffirmation…or?  Well it gets a little more complicated.  My house is valued at $410,000 and the bank has offered me a deal that is going to be hard to refuse. They have agreed to let me do a short re-fi in the amount of 180k.  If I agree to that is that in itself a reaffirmation?

Here is my response: in most cases, when you take out a mortgage loan, you are signing two different types of agreements.  The first type is a promissory note whereby you personally agree to make the payments.  The second type of obligation creates a property lien, meaning that you, as the owner of the property, pledges that property as collateral for the loan.

When you file a Chapter 7 and receive your discharge, your personal obligations are extinguished.  However, a Chapter 7 discharge does not eliminate the mortgage company’s lien against your property.  If you “reaffirm” your mortgage, you are actually reaffirming the promissory note and your personal obligations to pay.

For years, many bankruptcy attorneys advised their clients to avoid signing reaffirmation agreements for mortgages, car loans or any other secured debt.  The reasoning – even without a personal “guarantee” lenders are protected by the property lien.  If the lender is willing to accept payments (the so-called “stay and pay” option), the now discharged debtor keeps his property, keeps making payment, but does not have personal liability on the note. [Read more…]

If I Do Not Reaffirm My Mortgage in Chapter 7, Do I Automatically Lose Title to my House?

I have been getting a lot of questions recently about reaffirmation and about the consequences of not reaffirming a mortgage loan.  I have previously written about the consequences of not reaffirming a mortgage debt.   The 2005 BAPCPA changes to the Bankruptcy Code attempts to force debtors to choose between reaffirmation or surrender of their collateral.  The trend I am sensing both here in the Northern District of Georgia and elsewhere around the country suggests that bankruptcy judges are not particularly inclined to force this issue.  In cases where the debtor cannot or will not sign a reaffirmation there seems to be a judicial acceptance of the old “stay and pay” process.

In those cases where a debtor does not reaffirm, there seems to be some confusion as to how this decision affects the debtor’s rights.  I received the following question from Heather, who asks the following:

I claimed Chapter 7 bankruptcy back in 2004.  Sadly enough I just now looked closely at a credit report.  My mortgage wich I had maintained through the bankruptcy and have done so for the past 5.5 years said it was discharged on the bankruptcy.  Which rose many questions!  I called the mortgage holder and they said I never reaffirmed my mortgage.  I don’t know if I did or didn’t my original mortgage was with one company who sold it to another in 2006.  I no longer live in this house, it is an income property, which I also have on the market. Am I going to run into trouble selling this? And my mortgage is directly withdrawn out of my account each month if “technically” it was discharged are they able to continue to take that money every month?  I have sunk a lot of time and money into this property if it “technically” isn’t mine.  What would I lose by stopping payment on it.  I’ve already suffered the credit report deduction for 5.5 years and have managed to get my score to fair standard even with that on there.  what more can it do to me and where should I go from here.  Thanks

Here is my response: Not reaffirming a mortgage obligation means that you are not personally liable on the promissory note associated with the security agreement.   The property remains encumbered by the mortgage obligation and you continue to maintain and grow your equity interest in the property.  Your title interest does not change. [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.

Retiree With $25,000 of Credit Card Debt Contemplates Bankruptcy

Thank you for your informative web site.  I have 2 questions I am filing for SS as I am 63 my bill are current however I was laid off last year and my health is failing. If I file would I be able to keep my car?   I owe 16K on it as low milage (17K) my son will be giving me the payments.  Also I have been renting this small house for the past 5 years I have never been late with the rent do I have to notify the landlord if I plan to stay here? I own nothing but have 25K credit card debt all these bill are current but I have run out of savings

Jonathan Ginsberg responds:  Christina, thanks for your questions and the kind words about my Atlanta bankruptcy web site.  With regard to your car, in a Chapter 7, you can reaffirm your car note if (1) you are current on the note and the lender agrees to a reaffirmation and (2) you have less than $3,500 of equity in the vehicle.

Reaffirmation is a voluntary process most frequently used in the case of secured debt in which you keep your property and reassume full legal responsibility for the note.  If you are current and you have a source of funding for the payment, you should have no trouble reaffirming.

The $3,500 figure comes from Georgia’s exemption statute.  Under Georgia law (which applies to your bankruptcy case), you can shelter or "exempt" up to $3,500 of equity in your vehicle.  If you have more than $3,500 of equity, you would need to settle up with your Chapter 7 trustee and pay him the non-exempt portion of your equity – which he would use to pay creditors of your bankruptcy estate.

WIth regard to the lease, technically a rental contract is known as an "executory contract."  This means that its terms have not yet been fulfilled (the terms being your monthly lease obligations).  Until the October, 2005 changes to the law, most lawyers did not include current lease contracts in bankruptcy petitions.  Under the new law, however, an executory contract that is not "assumed" is deemed rejected.  So, it probably makes sense to include the lease contract on Schedule G of your petition and to assume the contract.   The potential problem with including the lease contract in your petition is the notice that will be given to the landlord.  Some large apartment complexes may be reluctant to give you a new lease if you have filed bankruptcy – this is rarely a problem with smaller ownership groups.

I would also note that if your only source of income is Social Security, and you have no assets, then you are basically judgment proof.  If you own only $25,000 and you are judgment proof, I wonder if filing Chapter 7 is really a good idea.


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