Bankruptcy Questions Answered

Bankruptcy Filings Rise 33 Percent in Third Quarter

The number of bankruptcy filings in the third quarter of 2009 reached their highest point since 2005, and soared 33% above the total from the previous year, according to statistics from the American Bankruptcy Institute.

Consumer and business bankruptcies filed between August and October reached 388,485 compared to 292,291 for Q3 2008. Total filings between January and October, 2009, reached 1,100,035 compared to 841,496 in the same period in 2008, and close to the total 1,117,771 bankruptcies filed in 2008.

October saw the most personal bankruptcy filings since October, 2005, when more than 600,000 consumers filed to meet the deadline before the new bankruptcy law took effect.

"The spike in bankruptcy filings for both consumers and businesses reflect the continuing effects of today's weak economy," said Samuel Gerdano, ABI executive director.

"With unemployment surpassing 10% and credit to businesses remaining tight, consumers and businesses are increasingly turning to the financial relief of bankruptcy."

Bankruptcy filings are expected to exceed 1.4 million in 2009.

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Bankruptcy For Small Businesses

These are hard times especially for small businesses. I frequently hear from small business owners who want to "file bankruptcy for their business." The small business owner usually has personally guaranteed most of his business debts. For some reasons, the troubled small business owner often thinks his first step in a bankruptcy solution is to file bankruptcy for his business. Then, he thinks, he may also file bankruptcy personally for his guaranteed debt and his personal credit cards. This is often the wrong strategy.

I read a good blog post on this subject by Maryland bankruptcy attorney Brett Weiss. People thinking of filing bankruptcy for their small business should read this article.  I agree with what Mr. Weiss has written. In most cases, corporate bankruptcy for a small business is not necessary- its a waste of the client's money.

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Bankruptcy Court Requires Reaffirmation Agreement For Homestead Mortgage

Chapter 7 bankruptcy debtors often own cars subject to a car loan and lien. The new bankruptcy law states that debtors must reaffirm loans on all personal property in order to maintain the property through their Chapter 7 bankruptcy. So, debtors who want to keep automobiles must sign a reaffirmation agreement making them personally liable to pay the loan until paid in full. The Chapter 7 bankruptcy discharge will not discharge the debt and will not protect the debtors if they cannot pay the loan after the bankruptcy is closed.

Real property is different. The new bankruptcy law does not expressly require reaffirmation of debts secured by real property such as mortgage debt. Therefore, I have advised my clients not to reaffirm home mortgages in bankruptcy because they were not so required. I did not think debtors should obligate themselves personally on mortgage debt if not legally required to do so. That way, if after their bankruptcy the debtors could not pay the mortgage and had to walk away from their house the mortgage lender could not sue them personally.

A new ruling by an Orlando bankruptcy judged ends the option to "ride through" a mortgage debt. The judge said that if a debtor wants to keep real property after bankruptcy the debtor has to reaffirm their personal obligation to pay the mortgage debt just like they have to do with their cars and other personal property. The judge cited a ruling by the Eleventh Circuit Court of Appeals that debtors mus act to either surrender or reaffirm a debt if the debtor desires to retain the collateral. The judge said the Eleventh Circuit made no distinction between real property and personal property and that no distinction is merited.

As a consequence of this ruling debtors (at least Orlando Division debtors) must reaffirm personal liability for a mortgage if they want to retain their homestead and other real property after a Chapter 7 bankruptcy. If they are not willing to reaffirm the mortgage they must surrender the house to the lender in which event the bankruptcy discharge would shield them from liability. But, you can’t keep the house without accepting the responsibility and risk for future defaults.

Reaffirming a mortgage debt is not a problem in a good or even normal housing market when housing values increase. In today’s real estate market bankruptcy debtors will have to seriously consider the risks of retaining their homestead and other real property since a future default may subject themselves to substantial legal liability. The case is In re Linderman, 09-BK-02087

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Late Credit Card Payments Dip in Third Quarter

According to an article from the Associated Press, fewer Americans were late on their credit card payments in the third quarter of this year than in the second quarter, signaling that consumers may be getting more responsible at managing their debt.

While the decrease isn’t staggering (1.10% of payments compared to 1.17%), the statistic itself is: this is apparently the first time in a decade that late payments have decreased between the second and third quarters.

The Bigger Picture

Here’s a look at how this decrease fits into the larger context of credit card payments and debt in the United States:

• Steady decline: The 6% drop comes after an 11% decline in late payments between the first and second quarters, suggesting that, as a nation, our debt management skills are improving.
• Trend follower: The highest late payment levels occurred in states where the housing bust was biggest (California: 1.33%; Arizona: 1.35%; Florida: 1.47%; and Nevada: 1.98%).
• Outstanding balance: Average amounts due have also declined from earlier quarters and last year: in Q3, the average was $5,612, down from $5,719 in Q2.
• Savings down: The third quarter also saw a slightly lower rate of savings among U.S. consumers, suggesting we’re putting money toward debt rather than in the bank.

So What Does It Mean?

While no definitive explanation can be offered for the drop in late payments, the trend may be affected by a variety of factors, including:

• Unemployment: Both those who have lost their jobs and those who are still working (but are perhaps more aware of the threat of layoffs) tend to cut back on discretionary spending and focus on paying down debt rather than accumulating new “stuff.”
• Tightened credit: Many credit card issuers have pulled way back on their offerings of consumer credit and have gotten stricter about raising interest rates for late and missed payments. This may “scare” consumers into taking their debt more seriously, or into paying down balances to have more wiggle room.
• The holidays: For many of us, a major shopping and/or traveling season is upon us. The dip in late payments could represent a sort of collective preparation for the financial stresses of the season.
• Increased caution: The drop could also point to a more cautious American consumer – one who’s a bit less cavalier about taking on masses of revolving debt.

Additional Resources

Putting Credit Card Debt on Notice (PDF)

How Credit Card Debt Ensnares Consumers (PDF)

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Creditors Leave Annoying Messages On Debtor’s Telephone Answering Machine

Its a question all bankruptcy attorneys are asked by their clients- What can I do to stop these creditors from harassing me? Creditor harassment is not a bankruptcy issue. Everyone knows that after a debtor files for bankruptcy- Chapter 7 or 13- the court issues a Notice of Commencement to all creditors warning them that any further effort to collect a debt violates the automatic stay and subjects an offending creditor to sanctions. There are separate laws protecting all individuals against unfair collections. The main law is the Fair Debt Collection Practices Act.

A particularly annoying collection tactic I have heard from my clients is that of creditors leaving messages on the debtor's voice mail at home or at work. I read an interesting blog post on this topic by Georgia bankruptcy attorney Jonathan Ginsburg. FDCPA Does Not Give Debt Collector the Right to Leave Messages on Your Phone Answering Machine. Mr. Ginsburg discusses a decision by the 11th Circuit Court of Appeals which is the federal appeals court with jurisdiction over Georgia law.This court also controls Florida law so the cases he discusses is applicable to Florida debtors too.

If you believe you are a victim of an FDCPA collection violation you may list the claim on your bankruptcy petition. The trustee may decide to pursue the claim against the offending creditor. If you do not file bankruptcy you can consult with an attorney who works in the area of consumer protection law; some bankruptcy attorneys also litigate consumer protection complaints. Most bankruptcy attorneys do not prosecute FDCPA violations outside of bankruptcy court.

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Creditors Leave Annoying Messages On Debtor’s Telephlne Answering Machine

Its a question all bankruptcy attorneys are asked by their clients- What can I do to stop these creditors from harrassing me? Creditor harrassment is not a bankruptcy issue. Everyone knows that after a debtor files for bankruptcy- Chapter 7 or 13- the court issues a Notice of Commencement to all creditors warning them that any further effort to collect a debt violates the automatic stay and subjects an offending creditor to sanctions. There are separate laws protecting all individuals against unfair collections. The main law is the Fair Debt Collection Practices Act.

A particularly annoying collection tactic I have heard from my clients is that of creditors leaving messages on the debtor's voice mail at home or at work. I read an interesting blog post on this topic by Georgia bankruptcy attorney Jonathan Ginsburg. FDCPA Does Not Give Debt Collector the Right to Leave Messages on Your Phone Answering Machine. Mr. Ginsburg discusses a decision by the 11th Circuit Court of Appeals which is the federal appeals court with jurisdiction over Georgia law.This court also controls Florida law so the cases he discusses is applicable to Florida debtors too.

If you believe you are a victim of an FDCPA collection violation you may list the claim on your bankruptcy petition. The trustee may decide to pursue the claim aginst the offending creditor. If you do not file bankruptcy you can consult with an attorney who works in the area of consumer protection law; some bankruptcy attorneys also litigate consumer protection complaints. Most bankruptcy attorneys do not prosecute FDCPA violations outside of bankruptcy court.

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Two Frequent Issues Discussed In Recent S. Florida Bankruptcy Court Opinion

This week I read a decision from a south Florida bankruptcy court which dealt with a few issues I frequently see in my own bankruptcy practice. Many of my clients have borrowed money from their 401k to help pay their bills before bankruptcy.. The tell me they have to make a minimum amount of loan repayments each month to avoid having to declare the loan balance as a withdrawal subject to income tax. The clients state that their loan repayments are "required" and ask is the minimum monthly loan repayment is deductible as an expense in their means test.

The 401 k payments are not allowable bankruptcy expenses. This bankruptcy judge pointed out that most courts which have previously considered this issue have disallowed 401 k loan repayments as means test expenses. The court followed the majority of opinion and ruled that this debtor’s monthly loan repayments to his own 401 k plan is not permissible as an involuntary expense deduction for means test purposes.

The means test permits debtor to deduct on their means test the money they pay each month for transportation. The law provides for a standard transportation expense. The debtor deducts either the standard expense or proven actual expenses. What happens if a debtor owns a car free and clear? Should debtors with no car payments get the same deductions as other debtors with monthly car debt. This court reported that on this issue there is a heavily litigated split among different appellate courts and bankruptcy courts. Our appellate circuit, the 11^th Circuit, has not ruled on this issue. After reviewing arguments on either side of the issue this bankruptcy court held that the debtor with a car owned outright may deduct the applicable standard monthly allowance for vehicle ownership cost. The case is In re Michael Koch Case No. 08-29122 from the Souther District of Florida.

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True Bargains: What Makes a ‘Good Deal’

While looking for low prices is an important part of financial responsibility, it’s only one component: getting the value you need is the other half. For example, buying the cheapest brand of conditioner may seem frugal, but if you have to use twice as much as any other brand, it may end up costing just as much.

Value Vs. Price

The "value" of an item is subjective, while price is relatively fixed. Two people may see the same item as having different values even when the price is the same.

• Value: How much an item is worth to a buyer/seller (usually determined by how much you need or want an item).
• Price: How many dollars an item costs. Dollars are sort of a generic value unit we’ve all agreed upon.

In many cases, value and price line up pretty well, and merchants will try to keep the two in line. Value really shoots up when a seller is asking for less than you’re willing to pay.

Maximizing Value

So how can you make sure you spend your dollars to maximize their value? Here are some tips.

• Buy second-hand: Thrift stores, flea markets and garage sales are all excellent places to find good values because they’re filled with items that haven’t declined in intrinsic worth but whose owners grew tired of them. Gently used items are often steeply discounted and still perfectly functional (but avoid super-cheap items that are simply junk).
• Spread the word: Let your friends and family members know what you’re looking for – someone may be trying to “get rid of” exactly what you need. When you’re in a store, tell the sales associate what you’re looking for. Ask for advice and find out if any discounts might be available.
• Shop ahead & behind: If you know you’ll need a new pair of sneakers once a year, keep your eyes peeled at all times for bargains – many staples won’t “go bad” from sitting around a while. Take advantage of end-of-season sales to stock up for the next year (think Halloween decorations on November 1st).
• Use the Internet: Craigslist, eBay, Freecycling, Amazon and other websites often offer significant discounts from retail prices. But if you don’t want to buy online or don’t like to pay for shipping, you can still use the Internet to get an idea of what various vendors charge for the item in question (and use that knowledge to bargain).

If you start thinking in terms of value, you'll be able to save money while getting your true dollar's worth—particularly important if you're struggling with debt or rebuilding your finances after bankruptcy.

Posted in Budget, Financial Literacy, after bankruptcy, saving money, spending money | Comments Off

How much do it cost to file bankruptcy ?

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After you file bankruptcy when can you rent another apartment or home?

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What happen to shareholders when a company file Chapter 11 Bankruptcy? ?

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One in Four Mortgages Underwater

Nearly one in four home mortgages are burdening borrowers with negative equity, an article by the Wall Street Journal reports.

Underwater mortgages find homeowners with declining home values to the point that they owe more on their mortgages than the home is worth.

The situation has hit new homeowners in the past few years, especially those who were paying interest-only mortgages as their home values declined.

However, this is no longer the case, as a whopping 23% of all home mortgages—10.7 million households— are underwater, according to real estate information company First American CoreLogic.

5.3 million of those homes are tied to mortgages worth least 20% more than the home's value.

The hardest hit states include Florida, Arizona and Nevada, where 65% of mortgages have negative equity—nearly three times the national average.

Negative equity can become a financial disaster for homeowners, especially if it means turning down a promotion or job transfer because they cannot sell their home.

The underwater crisis is intimately tied to foreclosures (a category also led by Nevada), as rising foreclosure rates can cause neighboring homes to lose value, and as some homeowners choose to simply stop paying on underwater mortgages, known as strategic default.

An estimated 588,000 borrowers defaulted on mortgages last year even though they could afford to pay, double the amount from 2007.

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Can you file bankruptcy on your home before foreclosure?

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What Happens To LLC Membership Interest In Chapter 7 Bankruptcy?

I received an email from a bankruptcy attorney with an interesting question about debtors’ interests in limited liability companies. The debtor and his non-filing spouse started a new business using a limited liability company. The debtor and his spouse do not have any joint debt. Here’s the question:

LLC membership interest provide asset protection outside of bankruptcy court. Most new small businesses are formed as limited liability companies rather than S-corporations to take advantage of the asset protection features as well as certain cost efficiencies. A creditor cannot levy upon a LLC membership interest. Florida statutes limit the creditor’s collection remedies to a lien on LLC distributions, if any. When a debtor files bankruptcy, however, the LLC provides much less protection. The bankruptcy trustee is not limited to a charging lien, and the trustee may seize as part of the bankruptcy estate a debtor’s LLC interest which is not otherwise exempt. (There may be some bankruptcy protection when the LLC is an executory contract). What will happen to the LLC interest owned by this debtor?

Nothing. The debtor will list his LLC interest at its current fair market value. The value of the debtor’s membership interest is not what he hopes the LLC will be worth in the future after years of his own hard work and a little luck, but the amount its worth today to an arms length buyer. Although the question does not reveal the nature of the LLC business I assume that without the debtor and his spouse investing their sweat equity the value of the LLC today is 0. The trustee is very unlikely to pursue an LLC interest with no present value to anyone but the debtor.

In addition, the debtor’s LLC interest may be exempt. The question as asked stated that the married couple owns the LLC together. I will assume that the two spouses own 100% of the LLC interest jointly. Florida law provides that all property, including intangible personal property such as an LLC interest, owned jointly by husband and wife is tenants by entireties property. T by E property is exempt in bankruptcy filed by one spouse where the two spouses have no joint unsecured debt. Because this debtor and his spouse have no joint debt the debtor’s interest in the jointly owned LLC interest is exempt as tenants by entireties. If each of these spouses owed a separate 50% of the membership interest the entireties exemption would not apply.

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I filed bankruptcy and it was recently discharged; do I need to file the 1099c form when I file my taxes?

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Can Trustee Indirectly Attack Homestead Protection By Amending A Trust Agreement

I saw an interesting post by south Florida banrkuptcy attorney Jordan Bublick. I refer many people living in sourth Florida to Mr. Bublick for bankruptcy. The post,  Homestead Held in Revocable Trust, discusses a court decision involing a Chapter 7 debtor who owned his primary residence in a living trust. Many courts in Florida previously held that a home owned by the debtor's living trust qualifies for homestead exemption in bankruptcy. Mr. Bublick reports that thisj judge implied that a Chapter 7 trustee can take over the debtor's rights to amend his living trust and by amending the trust agreement possibly strip homestead protection.

When a debtor files Chapter 7 the Chapter 7 trustee takes over all of the debtor's legal rights and powers. Most living trust agreement reserve to the debtor the right to take property out of trust and the right to amend the trust agreement. A court could find that the debtor's right to amend the trust is not protected by homestead exemptions even if the result of the amendment is to diminish the debtor's homestead rights. In my own opinion, I think this argument would fail because courts very liberally construe homestead protection for the benefit of a debtor's family dependents. In any event, Mr. Bublick makes an interesting point.

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Why wouldn’t GM want to file chapter 11 and reorganize?

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Christmas Shopping and January Bankruptcy

As we approach the Christmas holiday season, I want to remind my readers of two things.  First and foremost, I want to wish all of my clients and blog readers a happy and healthy holiday season.   Financial struggles will come and go but if you have your family and your health, not a whole lot of other things matter.

Secondly, I would respectfully suggest that it is never too late to begin the process of tackling your financial issues.   Over the years I have met with many potential clients in January and February who bring me credit card bills containing charges incurred for presents in November and December.  They are ready to make a fresh start and want to file.

On more than one occasion I heard the explanation "well, I knew that I was going to have to file bankruptcy at some point – but I wanted my family to enjoy a nice Christmas first."

From my perspective as a bankruptcy lawyer, this attitude will get you in trouble.  Common sense should tell you that you cannot run up your credit cards buying gifts, then wipe out that debt a month or two later by filing bankruptcy.

Not surprisingly the Bankruptcy Code addresses the issue of "credit card binge" debt as well.

Section 523(a)(2) excepts from discharge debt that was obtained if an individual made material and false representations about his financial condition (i.e. , lies on the credit application).

Section 523(a)(2)(C) provides that:

1. consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services (luxury goods defined as goods or services reasonably not necessary for the support or maintenance of the debtor or a dependent of the debtor) incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and
2. cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable;

Section 523(a)(2)(a) excepts from discharge money, property or services incurred by false pretenses, a false representation, or actual fraud (i.e. incurring debt that you knew or should have known that you would not be able to repay)

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Obama Administration Creates Task Force to Fight Financial Fraud

The White House announced in a press release on November 17th that President Obama has made an executive order to create a Financial Fraud Enforcement Task Force. Part of the reason for the executive order, it seems, is the number and complicated nature of various financial fraud cases related to the current economic crisis.

Sources indicate that the goals of the force are to prevent abuses in the financial sector that could lead to economic turmoil in the future as well as to bring to justice those responsible for the current state of affairs. This task force will reportedly replace the Corporate Fraud Task Force implemented by the Bush administration after the scandal at the Enron Corporation.

The following groups will fall under the wing of the task force:

• Mortgage lenders & modifiers: Groups responsible for initiating and altering the terms of home loans, much maligned for their role in the current crisis, will be under the task force’s watchful eye.
• Securities law: This is the branch of law that regulates money, stocks and bonds.
• Stimulus spending: Government funds intended to perk up the economy, too, will be overseen by this group.
• Government bailout of the financial sector: This especially controversial bailout has been identified specifically as a target for the task force.

Too Much Fraud?

In recent years, growth and innovation in the financial sector (including such innovations as subprime mortgages) have proven to be more than the Securities and Exchange Commission (which is responsible for regulating stocks, bonds and the like) can handle.

And reports indicate that, despite concerns about national security, officials in the FBI and Department of Justice have been shifting resources away from terrorism cases and to financial fraud cases.

The hope, apparently, is that this group will form a more specialized unit, able to deal exclusively with cases of financial fraud.

The Next 30 Days

The Task Force will reportedly hold its initial meeting within the next month. Headed by Justice Department officials, it’s supposed to include help from the Department of Treasury, Department of Housing and Urban Development and the Securities and Exchange Commission, among others.

Geithner: Beyond Prosecution

Treasury Secretary Timothy Geithner has been quoted as asserting that prosecuting fraud cases after the fact is not workable; he apparently sees the Task Force as a comprehensive reform for financial oversight.

Posted in Financial Literacy, Legal Info, Obama, financial fraud | Comments Off

Bankruptcy Can Save Your Home From Foreclosure

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