Bankruptcy Questions Answered

Words of Wisdom for High School Graduates

Yesterday, my son graduated from high school.   His class selected a math/environmental sciences teacher named Nicole Brite to deliver the faculty address to the senior class.  Ms. Brite delivered a spectacular address which was meaningful, witty and thoughtful (and she received a well deserved standing ovation from both the students and the audience).

In one part of her speech, Ms.  Brite turned to the graduates and said  "now I am going to offer you some words of advice that I wish someone had said to me when I was leaving high school."   One of the points she made I think is applicable to everyone, not just high school students.

"Stay away from credit cards," said Ms. Brite.  "When you get to college, you will see tents set up by the credit card companies.  They will offer you frisbees and t-shirts and free food to entice you to sign up for a credit card.  They'll tell you that a credit card will help you build up your credit and you can use it only for emergencies.   Don't believe it.   You will be tempted to decide that an emergency takes the form of a pizza at 2 in the morning, or putting your entire fraternity's dinner on your card because no one has cash.  Credit cards will mess you up."

I hope that each and every one of the graduates in my son's class heard these words of wisdom and I wish this advice could be included in the "welcome to school" packets given to incoming freshman.

Over the years I see dozens of young adults in their late 20's and early 30's who are still dealing with thousands of dollars of college years credit card debt and the associated damaged credit ratings.   It is so easy to find oneself behind the proverbial eight ball, and digging out from a credit hole is a lot more difficult than avoiding the problem in the first place.

If your son or daughter recently graduated from high school, congratulations on an accomplishment and a milestone.   Let your graduate know that while college isn't exactly the real world, they now have assumed the capacity to get themselves in adult level financial trouble. As uninteresting as household budgeting ten years hence may seem, they most definitely do not want their college aged mistakes to lead them to a bankruptcy lawyer's office in the future.

Housing Prices Hit Eight-Year Low

The latest figures from Standard & Poor’s Case-Schiller Index show that the double-dip in the housing market many economists feared is now a reality. In other words, according to sources, housing market prices have taken another nosedive and home values are now near the same level they were in mid-2002.

How much of a dip is this second downward spike? Reports indicate that:

• The first quarter of 2011 saw a 4.2 percent decline in home prices.
• In the final quarter of 2010, prices dropped 3.6 percent.
• Home prices are currently 5.1 percent lower than they were this time last year and, according to Standard & Poor’s, have reached a new low even for the recession.

If all this sounds like bad news, the kicker is that the cycle of foreclosures and lowered home values seems unlikely to end any time soon.

Gloomy Outlook for the Housing Market

Consider these troublesome figures.

• About 1.9 million homes in the U.S. are currently in some stage of foreclosure, according to RealtyTrac, a company that keeps track of such things.
• Housing prices fall when supply is greater than demand (that is, when there are more homes available than people looking to buy).
• Right now, supply is skyrocketing: empty foreclosure properties are common sights in many states, and apparently nearly two million more are about to follow.
• Unfortunately, demand is also fairly low: many Americans are still skittish about their employment situation and unwilling to take on the burden of a mortgage. Further, many banks have tightened lending standards, making mortgage loans harder to come by even for those interested in buying.
• On top of all this, sources note that as many as 28 percent of U.S. homes are currently underwater, meaning that the owner owes more on the mortgage than the home’s current value. Underwater homeowners may find themselves in foreclosure down the line, whether by strategically defaulting or by being unable to make payments.

Can Chapter 13 Bankruptcy Help?

In the past, Chapter 13 bankruptcy has often been heralded as a way to stave off or prevent foreclosure for some filers. The question of whether Chapter 13 could help some of the millions of Americans who might have mortgage foreclosure in their future is a complex one.

Chapter 13 may work for some people facing foreclosure, but only if those people have sufficient income to make regular payments according to the repayment plan. In other words, if you’re in danger of losing your home because you lost your job, Chapter 13 may not do the trick.

One interesting note, though, is that some sources have reported bankruptcy judges ruling for mortgage cram-downs in Chapter 13 cases, despite laws that prohibit such rulings.

Best Way For Chapter 7 Bankruptcy Debtor To List His Interest In His Insolvent Business

Many self-employed debtors file bankruptcy because they have personally guaranteed debt of their failing business. Some of these debtors want to discharge their guarantees of business bank loans or credit cards used for the business, and they want to try to resurrect the business after they have been cleared of personal liability. In such cases, the debtor has to value his interest in the business. The debtor must value his stock, membership interest, or other form of ownership in his business. Where the business had assets, but the business also has liabilities in excess of business assets the value of the debtor’s interest is probably zero because he could not sell to an unrelated third party his interest in his insolvent business. The business value is further reduced by the business’ dependence upon the debtor’s personal labor because a new buyer would have to pay someone to replace the debtor’s labor contribution.

There are two ways to list this type of insolvent business in the debtor’s personal Chapter 7 bankruptcy petition. The debtor could value his stock (or other interest) at zero, or he could value the stock at $1 and claim an exemption for the $1 interest as part of the debtor’s personal property exemption. The question is which is the best way to defend against a trustee challenge that the business interest is worth more money and is part of the debtor’s non-exempt bankruptcy estate.

I suggest that it may be better to value the business at a dollar and claim the exemption. The trustee has a limited amount of time, 30 days after conclusion of the creditor meeting, to object to exemptions. The trustee has a longer time, at least 60 days after the meeting, to file an adversary proceeding which asserts greater value to the debtor’s business and requests the debtor’s turnover of the business interest. Better for the debtor to impose a shorter challenge period upon the trustee by claiming a minimal value of an insolvent business and including the business interest in the exempt property list.

How Bankruptcy Saved Detroit

Presidential hopeful Mitt Romney says that the reason America's Big Three automakers have bounced back since the recession is due to bankruptcy, not bailouts.

In an interview Friday with the CBS Early Show, Romney repeated the stance he took in a 2008 op-ed piece in the New York Times at the height of the bailout talks - that filing bankruptcy is a responsible step to take when faced with financial hardship.

"The right process for an enterprise in trouble is not to be given free money from the taxpayers with a bailout, but instead go through a bankruptcy process, reorganize debts, and reduce costs and come out stronger," Romney told CBS's Erica Hill Friday.

Of the three major Detroit automakers, General Motors and Chrysler both filed Chapter 11 bankruptcies in 2009. Both also received bailouts from the U.S. Government, funded by tax payers. Only Ford survived the recession without turning to bankruptcy or receiving a bailout, and instead secured a line of credit to help them bridge the recession's gap in sales.

So how did bankruptcy help Detroit? While bankruptcy can be complex, especially for corporations, it offers a very clear benefit: a reorganization of debts into a more affordable plan. In the case of a Chapter 11, business can also renegotiate contracts, sell off unnecessary assets, receive some debt forgiveness, and reorganize as a new business entity. This is typically favored over Chapter 7 bankruptcy, as it allows the business to stay in operation during and after the bankruptcy.

Bankruptcy allowed GM and Chrysler to shed off the obligations that were keeping them from being truly innovative, and reorganize as a new entity that could focus on a successful future, Romney argues. And while the two automakers did receive bailout funds, having gone through bankruptcy first left them in a better position to capitalize on the investment by taxpayers. Both GM and Chrysler have repaid significant portions of the bailouts.

Romney also takes credit for the situation, saying that his 2008 New York Times piece convinced Obama to hold off on an immediate bailout.

"So I'm very proud of the fact that, in fact, we called it like it was, and that is these companies needed to go through a bankruptcy process, come out through bankruptcy, go back to work, get jobs for the people who had would otherwise have lost jobs if these companies just trailed on down," he told CBS.

"And by the way, we could have saved billions of dollars had we moved to bankruptcy from the very beginning."

Are Inherited IRA’s Exempt In The Middle District Of Florida?

For an individual considering bankruptcy, the question often arises, “[C]an I keep the money I inherited in an IRA from Grandpa Joe when he passed away?” There is no easy answer to this question, as United States Bankruptcy Courts for the Middle District of Florida have shown.

The answer, as it so often is under the law, is “it depends.” The May 2011 issue of the American Bankruptcy Institute Journal featured an article on Inherited IRAs titled Inherited IRAs: Exemption Issues under the Code.

The Harsh Reality of Car Title Loans

Legislators and consumer advocates have taken stands in recent years against payday loans, largely considered one of the most nefarious financial traps available to low-income consumers. But more recently, some worried analysts have taken up the torch of another type of absurdly high-cost loan: car title loans.

According to a recent post at CreditSlips, this type of loan can wreak serious financial havoc on consumers who can least afford to lose money. Here’s a look at some of the troubling numbers.

How Title Loans Work

Car title loans work like this:

• A borrower enters the lender’s storefront in need of cash.
• The lender originates a secured loan with the borrower’s vehicle as collateral. (According to sources, lenders will typically offer dollar amounts of no more than 40 percent of a vehicle’s value.)
• Interest rates on car title loans can reportedly top 300 percent, meaning that most borrowers end up paying far more than their car’s value in interest payments over the repayment period.
• If a borrower cannot afford to make payments, the lender has the legal right to repossess the vehicle used to secure the loan.
• Some lenders, it seems, also sell used cars (no doubt those repossessed from customers unable to pay).

The Hidden Dangers of Car Title Loans

As most people can see, the risk of losing your car to a car title lender is pretty high, especially given the astronomical interest rates charged and the typically limited financial means of most title loan borrowers.

But, according to a recent study, the actual cost to title loan borrowers seems to be higher than expected. Sources note that:

• At some auto title lenders, the repossession rate stands at 13.1 percent of loans - that means 1 in 8 people who go in for a loan end up getting their vehicle repossessed by the lender.
• The typical auto title borrowers will take out between 3 and five loans from a given title lender. This means that most borrowers apparently return more than once to take on high-interest, high-risk loans.

Know Your Options

While car title loans may seem like the only way out of a tight financial spot, it’s important to understand the high risks associated with them. If you’re struggling with serious debt (or know someone who is), consider seeking the help of a bankruptcy lawyer or credit counselor for guidance.

Bankruptcy Filings Dropped in April

Recently released numbers on personal bankruptcy filings show that April’s numbers were down from both March 2011 and April 2010, more or less following the trends that experts have predicted for the remainder of this year. Here’s a closer look at the specifics, and what this means for you.

Breakdown of April Bankruptcy Figures

• The 21 business days in April saw 130,000 total bankruptcy filings, which comes to 6,177 filings per business day.
• The number of filings shows a decline of 2.9 percent from March, and 7.1 percent from April 2010.
• So far this year, filings have decreased each month at a rate somewhere between 5.6 percent and 8.2 percent compared to 2010 numbers.
• In the past 12 months, 4.9 in 1,000 people have filed bankruptcy petitions. The number in 2004 (before the new bankruptcy law was passed) was 5.5 per thousand.

According to these statistics, April 2011 bankruptcy numbers suggest a decline in bankruptcy filings both compared to recent months and to last year. Bankruptcy filing rates, though not as popularly cited as unemployment numbers, can be used to offer at least a partial picture of economic recovery.

Projected Bankruptcy Filings for 2011

Based on the numbers for April and 2011 so far, predictions for total bankruptcy filings this year include the following:

• 1.475 million bankruptcy filings if Americans continue filing at the daily average rate (5,876) for the first four months of 2011 combined;
• 1.525 million bankruptcy filings if we continue at April’s daily average rate (6,177); or
• 1.499 million bankruptcy filings if the last eight months of the year make up the same proportion of filings as they did in the last two years.

How does that compare with the recent past? In 2010, the country had 1.56 million total filings; in 2009, the total was 1.474 million; and in 2008, 1.118 million. If filings stay on track, then, it looks like 2010 might have been the peak year for bankruptcy filings and 2011 will be the beginning of a decline.

There is no guarantee, however, that bankruptcies will steadily decrease. After all, the housing market is still glutted with foreclosure properties and home prices don’t seem to be rising. As a new wave of foreclosures begins to affect homeowners, combined with sluggish growth in the jobs sector, the need for bankruptcy protection could climb or remain constant for a few years to come.

Bankruptcy Filings and the “New” Law

If nothing else, these latest bankruptcy numbers suggest (once again) that the Bankruptcy Abuse Prevention and Consumer Protection Act passed in 2005 had little real effect on bankruptcy filing totals.

Those truly in need of the financial relief and protection bankruptcy offers are still largely able to get that help from the bankruptcy court, despite the tightened restrictions the law introduced.

Reaffirmation Requires Written and Signed Contract Between You and Your Creditor

I 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.

Reaffirmation can also help you rebuild your credit because you are re-assuming personal liability for payments, and regular, timely payments usually will be reported as positive information to the credit bureaus.

On the other hand, when you reaffirm, you are re-obligating yourself personally to pay an installment note.  If you should default, you are fair game for all collection activities including wage garnishment.

Reaffirmation Must be in Writing, Signed by You and the Creditor and Approved by the Bankruptcy Judge

At least once or twice a month, I get an email from a frustrated individual who has received his bankruptcy discharge, and has continued to make monthly payments, but sees no mention at all about these payments on his credit report.

It is not enough that you checked the "reaffirm" box on your bankruptcy Statement of Intention.  You and your creditor have to complete a formal reaffirmation agreement.  These agreements usually consist of about 10 pages of legal speak and your attorney has to document that your budget can handle the reaffirmed payment.  Your attorney also has to sign the reaffirmation agreement and assert in writing that he thinks that reaffirmation is in your best interest.

Usually, reaffirmation agreements are prepared by the creditor or creditor's attorney.   Sometimes lenders simply will not cooperate – they may not have any objection to accepting your payment and leaving you alone regarding possession, but they may forward a reaffirmation agreement to you.

I have also seen situations where lenders fail to file the signed reaffirmation documents on time and the reaffirmation agreement does not get court approval even though the debtor and his attorney did everything they were supposed to do.

If you and your attorney confer and decide that reaffirming a particular secured debt makes sense for you and that you can afford the reaffirmed payment, you should encourage your lawyer to quickly and aggressively request a reaffirmation agreement from your creditor.  Once your case is discharged and closed, it is difficult and expensive to try to re-open a closed case solely for the purpose of reaffirming a debt.

 

Bankruptcy Court Says Debtor Can Claim Wildcard Exemption Where Debtor Intends To Retain Upside Down House

Since the Florida Supreme Court liberalized the application of  the $4,000 wildcard exemption in February, 2011. The Supreme Court said that the wildcard exemption can be stacked upon the Constitutional exemptions for personal property and automobiles for any debtor who does not claim the homestead exemption in bankruptcy and where the homestead exemption does not otherwise impede the trustees administration of the bankruptcy estate. Some bankruptcy trustees have suggested that debtors are ineligible for the wildcard exemptions when they indirectly get the benefit of a homestead exemption even though they do not expressly claim the homestead exemption on their bankruptcy schedules. The trustees are trying to chip away pieces of the wildcard exemption in order to increase the value of property subject to the trustee’s administration and trustee commission.

A recent bankruptcy court decision addressed two such trustee arguments seeking to disallow the debtors wildcard exemption. The court first considered the situation when a debtor owned an upside down homestead. The debtor intends to retain the home and reaffirm the mortgage. Because the house has no equity, the debtor did not claim any amount of homestead exemption. The court considered whether a debtor receives the benefits of a homestead exemption, and therefore is ineligible for the wildcard exemption, when the trustee is unlikely to administer the upside down house and the debtor intends to retain the house.

The court held that a debtor does not receive the benefit of a constitutional homestead exemption that he does not claim as exempt in bankruptcy even if the trustee is likely to abandon the property because it has no value. The court also held that a debtor does not receive the benefit of a homestead exemption if he declares his intent to retain the upside down homestead. Actual surrender of the homestead to a mortgage lender is not required to claim the wildcard exemption. The case is: 3:10-6845

Are Social Security Overpayments Dischargeable in Bankruptcy?

Because I handle both personal bankruptcy cases and Social Security disability cases, I frequently get questions about the interrelationship between these two areas of law.   A question I get at least once a month has to do with whether a Social Security disability overpayment is dischargeable in bankruptcy.

The short answer to this is "yes," a Social Security overpayment is treated like any other unsecured debt.    There are exceptions to the dischargeability of a particular debt under Section 523 of the Bankruptcy Code and exceptions to the discharge as a whole under Section 727 of the Code.

Specifically, this means, however, that fraudulent behavior can result in a finding that this Social Security debt is not dischargeable.

Overpayment issues typically arise in disability cases when a claimant continues to accept and receive disability payments even after returning to work.  The question then becomes – "did the debtor/claimant knowingly and with intent to deceive the Social Security Administration continue to accept disability payments even when not entitled to do so?"

A 2009 case decided by Judge Joyce Bihary, chief judge of the Bankruptcy Court for the Northern District of Georgia offers helpful insight into how a bankruptcy judge will analyze this issue.

In the Rodriquez vs. United States of America case, debtor Diego Rodriquez collected over $70,000 of disability benefits after returning to work.   Mr.  Rodriquez filed Chapter 7, then asked the Bankruptcy Court to rule on his request for waiver of overpayment.  Judge Bihary found that the Bankruptcy Court did not have jurisdiction over this issue and denied Mr. Rodriquez' motion about the waiver issue, but she took the unusual step of addressing some of the substantive issues arising from the overpayment problem.

In what is known as "dicta," the judge explained that under her understanding of the law, "an overpayment debt of Social Security benefits is dischargeable"  and will be treated like any other unsecured debt.   The judge cited a 1982 7th Circuit case called Neavear v. Schweiker as support for her conclusion.  Since Social Security did not file a timely objection to discharge, the overpayment debt owed by Mr. Rodriquez is dischargeable.

What is interesting to me about this decision are the judge's discussion of the facts.  Apparently, on several occasions, Mr. Rodriquez attempted to advise Social Security about his return to work, but all of these disclosures were ignored by SSA.  Further, the judge noted that Social Security had put Mr. Rodriquez in limbo by failing to respond to his request for administrative review.

The judge devotes almost a page of her decision to suggestions about how SSA might appropriately satisfy its statutory obligations to Mr. Rodriquez.   Reading between the lines, it seems apparent to me that the judge found Mr. Rodriquez' testimony credible about his efforts to report his employment income to Social Security, but she did not believe Social Security's assertions (apparently gleaned from documentation and perhaps testimony) that it had not received notice of employment from Mr. Rodriquez.

The judge references Social Security's ineptitude regarding file management.  Mr. Rodriquez' deliquentcy grew so large because "SSA lost debtor's file for a period of five years."

In my mind, the obvious question in an overpayment case is this – how can a debtor not be guilty of fraudulent behavior if he accepts Social Security payments while at the same time he is working and earning money.  Wearing my Social Security disability lawyer hat I can tell you that Social Security's rules about trial work periods, its Ticket to Work program and its extended period of disability and work that does not reach the level of "substantial activity" is by no means intuitive and even a sophisticated claimant would not necessarily know when he might be allowed to keep his disability check as well as his paycheck.

The judge in the Rodriquez case did not reach this issue (because Social Security did not raise it) but I get the sense that the judge felt that in this case at least, the debtor tried to play by the rules but received little cooperation from Social Security and that Social Security's "unclean hands" might very well be held against the agency in a dischargeability inquiry.

So, what can we learn from the Rodriquez case?  I think that if you are attempting to discharge an overpayment you will need to show that you tried to engage Social Security to resolve the issue prior to filing bankruptcy.   If you were confused by Social Security's rules it would not be a bad idea to explain your areas of confusion in your correspondence with Social Security.   Finally I would make sure that you and your lawyer identify specific addresses where notice of your bankruptcy filing ought to go.  Social Security is such a bloated bureaucracy that they will most likely not file an objection in time – there is no need to give them added life by not offering notice at the correct address.