Bankruptcy Questions Answered

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Protecting Your Best Financial Interests

Part of becoming truly financially responsible and independent involves accepting responsibility for your financial situation. Not only do you have the power to improve your finances, you’re the only person who can (and will) consistently watch out for your rights as a consumer.

This point was driven home once again in this post from CreditBloggers.com, in which the author examines one aspect of banking that people probably don’t realize can cost them serious money.

Understanding Overages

Here's a look at how you could end up losing a couple thousand dollars in a few minutes (without even realizing it):

• You go into your bank to apply for a mortgage loan. A loan officer presents some numbers to you and offers you a loan, which comes with an interest rate that is determined largely by your credit score.
• If you’re lucky, you were offered the lowest interest rate that your credit status qualified you for.
• If you’re unlucky (as many thousands of Americans are), you were offered an interest rate with an "overage"—an interest rate slightly higher than the best rate your credit score allowed.

Why would lenders even offer such loans? Because it can be profitable for them:

• A higher interest rate equals a more profitable loan (because you, the borrower, pay more in interest).
• A more profitable loan is more attractive to investors (because they can collect more money on it).
• The bank gets a higher price for the loan, some of which goes to the loan officer as a reward.

According to the post, issuing loans with overages is fairly common, even at some large, well-established banks, which is why you must act as your own advocate when investigating significant purchases.

Protecting Yourself and Your Money

If you aren’t already monitoring your credit report, consider doing so. At the web site annualcreditreport.com, you can view a free copy of your credit report from each of the Big Three reporting bureaus once per year.

And, if you’re getting ready to apply for a mortgage, you may want to pay to view your actual credit score (visit MyFico.com). To determine what mortgage rate you’re likely to get, do some online research or speak with a financial guru you know before hitting the banks.

Additional Resources

Choosing the Mortgage that’s Right for You (PDF)

Posted in Financial Literacy, Interest Rates, Loans, Mortgage | Comments Off

What Could You Cut in a Pinch?

With unemployment levels still high, many people are looking for ways to trim their household budgets. Dealing with a sudden loss of income can be difficult, especially if you're used to a certain lifestyle. Whether you're dealing with unemployment, recovering from filing bankruptcy or just trying to create a nest egg, where you spend your money can make a big difference.

A recent post from DarwinsFinance.com encourages readers to explore the financial cutbacks they could make if they were laid off. The author crunched numbers and found that his household could save about a thousand dollars per month.

This concept is useful for a couple of reasons. First, it gives you an idea of what kind of emergency fund you ought to have, and second, it opens the door to potential ways to start saving that money more quickly. Here’s a look at some areas where you might be able to save.

• Television: If you currently get a lot of channels, you could drop to a package with fewer frills. If you already have a fairly minimal setup, you could call your company and indicate that you're considering canceling your television service altogether unless they can offer a lower rate.
• Internet and phone: Downshifting to a slower online connection may work if you don't use the Internet much, and there's a good chance you could trim your cell phone package. And remember: negotiating with your provider (or trying to) is always an option.
• Subscriptions: Whether you receive newspapers, magazines or a cheese of the month, chances are your subscription isn't a bare essential. The good news is that if your subscriptions are mostly for reading material, you can likely find much of the content online.
• "Cheap" out food: Cups of coffee, breakfast sandwiches or lunches out may seem inexpensive (especially compared with restaurant dinners), but when purchased regularly, they add up. Packing lunch and brewing coffee are both easy to do—although, if you do lose your job, you'll probably be less likely to be tempted by on-the-go food, since you won't be at work.
• Clubs and activities: If you have children in extracurricular activities or you yourself have an expensive gym membership (or similar), you could always cut them in a pinch.
• Groceries: If you haven't already explored the glorious world of generic food, now is a great time to start. Many store-brand grocery items are actually produced at the same factories as the name brands—and come at a significant discount.
• Clothing: Dry cleaning can eat up serious funds, and so can shopping too often. And if you have difficulty resisting sales (or non-sales), consider avoiding your favorite shopping spots a bit more often.

Additional Resources

Should Households Establish Emergency Funds? (PDF)

The Decline in the U.S. Personal Savings Rate (PDF)

Posted in Budget, Finance, Financial Literacy, Job Loss | Comments Off

IRS May Soon be Out of the Business of Seizing Income Tax Refunds for Benefit of Chapter 13 Trustee

As you probably know, there are two types of consumer bankruptcy cases available to you – a Chapter 7 which wipes out debt, and a Chapter 13 which creates a five year payment plan in which you pay back some or all of your debt with your "disposable income."  When I prepare a Chapter 13 case, we work with you to create a liveable budget.  The money "left over" after you pay for housing, food, transportation, insurance, utilities and other necessities must be sent to the Chapter 13 trustee, who then disburses these funds to your creditors based on a plan of reorganization that we submit to the court.

What happens if you need to file a Chapter 13, you have not yet filed your tax return for last year, but you know that a refund will be coming your way.  The simple answer is that unless you are paying back your creditors at 100%, your Chapter 13 will demand that you turn over your tax refund check, and will use that money to pay your creditors.  If you know that a refund is headed your way, make sure to tell your lawyer before you file – there are some steps you can take to preserve some or all of your tax refund money.

Your Chapter 13 trustee will also want future refunds paid to the trustee.  This situation is easier to handle – you will want to adjust your payroll withholdings so that you do not have any refund coming.  As far as the Chapter 13 trustee is concerned, your tax refund is kind of like a savings account that artificially reduces your net pay amount.

All of the Chapter 13 trustees in the Northern District of Georgia require debtors who are paying less than 100% to creditors to include in their Chapter 13 plans a provision that authorizes the IRS to intercept any refund payable during the years that your plan is in effect and send this money to the Chapter 13 trustee.  And until now, the IRS has cooperated with the Chapter 13 trustees in redirecting refund money.

In January, 2010, however, a federal district court in Michigan has rules that the Chapter 13 trustee does not have the power to compel the IRS to serve as its collection agent.  In the case of United States v. Carroll, a judge in the Eastern District of Michigan ruled that there is no legal basis for the IRS to withhold money and deliver it to the trustee because Congress has not waived the IRS' "sovereign immunity" that would otherwise leave the IRS vulnerable to contempt actions and other enforcement actions by the trustee (in other words, if the IRS failed to withhold a debtor's refund, the trustee would not have the right to sue the IRS for damages or for remedial action).  The Michigan judge issued an order forbidding the bankruptcy courts there from confirming any Chapter 13 plan that has the income tax refund seizure language.

I would not be surprised if bankruptcy courts elsewhere in the nation begin to follow the path set by the Michigan judge.  We'll know soon enough, but I suspect that the trustees in the Northern District may discontinue their demand for an income tax provision involving the IRS in Chapter 13 plans.

I do not expect, however that Chapter 13 trustees here or elsewhere in the country will permit Chapter 13 debtors from keeping large tax refunds.  I suspect that trustees will still demand provisions that obligate debtors to tender their tax refunds but they will expect the debtors to send in the money, rather than having it withheld by the IRS.  I will continue to advise my clients to minimize their refunds to avoid the problem entirely.

Needless to say, losing this automatic tax refund payment mechanism will make enforcement of tax refund plan provisions much more difficult.  It will be interesting to what if anything Chapter 13 trustees do to address this potential administrative nightmare.

Posted in 2010, Bankruptcy, Chapter 13 issues, Chapter 13 plan calculations, Irs, Tax issues, a, an, automatic, chapter 13 plan, chapter 13 trustee, court, courts, district, enforcement, federal, forbidding, income, intercept, issued, january, judge, keeping, language i, large, losing, mechanism, michigan, money in, order, payable, payment, plan, provisions, redirecting, refund, refunds  , seizure, tax, tax refunds in chapter 13, the,   | Comments Off

Is going bankrupt the best way to clear my debts?

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My First Nomination For The Bankruptcy Debtor’s Honor Roll

Creditors, their attorneys, and some bankruptcy trustees have a negative opinion about bankruptcy debtors. I’ve read comments in the media by laymen that refer to bankruptcy debtors as either dishonest or immoral for avoiding debts they are legally and morally obligated to pay. The stereotype does not apply to the debtor who consulted with me today.

This man had already filed Chapter 7 bankruptcy pro-se (without an attorney). He had no non-exempt assets at the time he filed. There were no issues in his case. The bankruptcy court issued a discharge on schedule. The trustee closed his case four months after it was filed. Done and gone in four months. Then, the story got interesting.

He explained to me that about a month after his case was closed, but within six months of his filing date, his mother died unexpectedly and left him a large inheritance. Its enough money to pay all his unsecured debts discharged in bankruptcy. Inheritances within six months after a Chapter 7 bankruptcy filing are part of the bankruptcy estate. However, none of his creditors nor the trustee knows about his windfall. He asked me if he should let the Trustee know about the inheritance.  His legal question for me was whether he is obligated to initiate a motion to reopen his bankruptcy case so that he can amend his schedules and turn over his inheritance.

I was really interested to hear his reaction. I think that most of my clients (and maybe many readers) would keep all the money and their mouths shut. The chances of this guy getting caught are really small. What would you do?

The man said that he is going to contact the trustee and disclose the inheritance because it’s the right thing to do and he wants to do whatever he is legally obligated to do. I think he means it. He seemed sincere and he really did not consider hiding the inheritance even though he said he felt he probably could get away with it.

It was nice to hear a client insist on doing the morally (and legally) correct thing. I deal with many people who try to stretch the limits of bankruptcy to get away with things without regard to morality. It shows that there are truly honest bankruptcy debtors who really would pay back all their creditors if they had the money. The bankruptcy court should have a debtor honor roll for people like this.

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How Can I Get Out of an Apartment Lease When I File Bankruptcy?

My office colleague, Susan Blum is in the process of filing a Chapter 7 bankruptcy for a young woman.   Our client  currently lives in a rented apartment, and her lease runs through July of this year.    Our client would like to find a cheaper place to live, however, she is concerned that she may not be eligible to sign a new lease after filing for bankruptcy.  Our client asked for our advice about what to do.

First, we advised out client that her bankruptcy filing would not prevent her from finding a new apartment later this year and signing a lease.  However, the the months immediately following a bankruptcy are a time when a debtor's credit is most damaged – it is very possible that our client would have a difficult time finding a landlord who would lease her an apartment right after the bankruptcy.

A better option in cases like this would be for our client to to sign a new lease prior to filing bankruptcy and reject the current lease in the bankruptcy filing.

Under the bankruptcy law a lease is considered an "executory contract," meaning that our client still has on-going obligations to perform under the contract.  In this case, our client has the contractual obligation to pay her lease.  Other examples of executory contracts are vehicle leases, health club memberships and cell phone contracts.

The bankruptcy law allows a debtor to "reject" or "assume" an executory contract.  If the contract is assumed, the debtor remains obligated under the terms of the contract.  If the contract is rejected, the debtor's obligations terminated.

In our client's case if she rejects her old apartment lease, the law deems the lease contract as breached as of the day before the bankruptcy filing. The landlord is entitled to repossess the apartment in accordance with state law. Any damages that the landlord might suffer are treated as pre-petition general unsecured claims. Per the Bankruptcy Code, the rejection damages that the landlord is entitled to are limited to either 15 percent of the balance of the rent that is left in the lease or the rent due for one year from the filing date or the date the apartment was surrendered, whichever is earlier.   Fortunately the debtor can include any outstanding rent in her petition and wipe out the debt along with other unsecured debt.

Susan's client took our advice and has already signed a new lease on an apartment and she will be rejecting her current lease in the Chapter 7, including all future rent and penalties incurred for not fulfilling the lease’s terms.

Posted in Apartment, Bankruptcy, Current, Executory Contracts, Law, a, an, and, apartment leases, canceling leases, cell, club, contract, contracts the, deems, filing, health, lease, lease  , memberships, phone, reject, rejecting, rejects, signing, susan blum, the, year | Comments Off

The Right Time to File Bankruptcy?

A refreshing article published recently in the Kalamazoo (Mich.) News underscores the role bankruptcy plays in helping filers overcome debt and draws attention to the oft-neglected question of when is the best time to file.

The article points out that too many people try to avoid filing bankruptcy at all costs and wait until they are financially desperate to file. Unfortunately, this is not always a good plan, as it may mean that filers use up retirement accounts (which are often exempt from creditors in bankruptcy court) and set themselves back for their post-bankruptcy life.

The article provides a helpful list of warning signs that filing for bankruptcy may be a good option sooner rather than later:

• Borrowing money to pay debts: Whether you're using one credit card to pay another, relying on payday loans or hitting up family and friends for cash, this is a bad sign.
• Dipping into retirement funds to pay debts: Again, your qualified retirement savings will likely be safe in bankruptcy court and heavily taxed if you take it out early. And once you spend that money, it's gone.
• Falling short of minimum payments: If you cannot make even a minimum credit card payment each month, bankruptcy may be a good option.
• Selling your goods to pay debt: If this is a one-time thing and you're shedding appliances you can do without, you may be fine. But if you're consistently scouring the house for stuff to trade for cash, you may be in trouble.
• Getting contacted by bill collectors: Phone calls and mailings from your creditors, especially when they start to add up, can be halted by bankruptcy's automatic stay.
• Having your wages garnished: If creditors are going straight to your employer to collect on debt, take it as a warning sign.
• Dealing with increased tension or stress: Money can be tough on your home life. Whether you're having trouble sleeping, fighting more or just generally stressed out, you may need a serious solution for your debt.

A New Beginning

It's important to understand that filing for bankruptcy does not mean admitting defeat or failure. Rather, it is a proactive and difficult decision you must make to save your financial future. Filing for bankruptcy can:

• Help you save your retirement fund so that you’re not destitute or a burden on taxpayers in your golden years.
• Give you a chance to start over financially and the knowledge you need to make better decisions in the future.
• Stop stressful contact from creditors.

Of course everyone's financial situation is different, and this post is not meant as advice for any one situation. If your finances are at their breaking point, considering contacting a local bankruptcy attorney for an evaluation.

Posted in Filing Bankruptcy, Setting the Record Straight about Bankruptcy, automatic stay, retirement accounts, when to file bankruptcy | Comments Off

Double Standards in Bankruptcy

I was really bothered by something that I heard on the news last night, and this morning I couldn't help but voice my opinion on Bankruptcy Law Network. I know that I shouldn't listen to the news before bed, but I heard the talking head make a comment about why people file for bankruptcy and why businesses file. The joker said that when a business files for bankruptcy, it is done for one reason, and that is because it is in the best interests of the business. When an individual files for bankruptcy protection, it is because they have made bad decisions. Nothing could be further from the truth in my opinion.

So, I wrote a blog this morning titled: Bankruptcy Double Standard ? : Businesses and Individuals

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