Bankruptcy Questions Answered

Co-Signing Your Way To A 1099C

Practicing Consumer Bankruptcy Law is very interesting work. Usually, I get to tell bankruptcy clients good news. Sometimes, I have to deliver bad news about their bankruptcy cases. In a recent case, a young man purchased his first home several years ago, and naturally, the value of the home has dropped significantly. He tried modification and was turned down flat (The mortgage is held by a securitized trust). That wasn't the bad part.

The bad part, as you can tell from the title is that he had his Grandfather co-sign for the loan. So, during the course of the bankruptcy when this young man couldn't get the lender to modify, he asked me: Can I short sale the property, and if so, what will happen to me, and what will happen to my Grandfather? These are both excellent questions.

Here is my advice: Yes, as an option, you can do a short sale. Of course, since you are in a Chapter 13, we will need the Judge's permission, and I will have to file a motion with the Court to allow same, but that is not a problem. I don't believe that the Judge will require any additional items from you other than a signed contract. With regard to the deficiency and you, the answer is simple, your debt will be included in the bankruptcy and you will ultimately receive your discharge, so, no problem.

The problem is: How will a short sale on your primary residence hurt you or hurt your grandfather? As to your grandfather, we have to look at a whole new set of issues. Since this property is not his primary residence, any deficiency that is still owed to the lender will have to be dealt with. This can come in two forms: First, they can pursue him for a deficiency balance. In other words, they can sue him for the remaining balance owed on the promissory note. As I have explained in the past, it's kind of like having two fish on a hook and one gets away. The lender still has one fish to reel in (Grandpa)

When the lender wins the lawsuit, they could go after his non-exempt assets. Alternatively, the lender could just issue him a 1099C cancellation of debt. If the lender takes the second option, your grandfather would have to deal with the IRS. As such, I would advise him to see a CPA for tax advice on how to combat this issue.

All and all, it is not fun to have to explain this to someone who took a risk on purchasing a first home and then sat back and watched his investment disappear as the Southwest Florida real estate market crumbled to the ground.

Now, I just hope the relationship doesn't crumble as well.

I apologize for the depressing blog, but this is something that you need to know and need to prevent in the future. When you take a risk, you want to do it on your own so that you don't jeopardize anyone else's future. It is never worth that risk.

This post was submitted by Carmen Dellutri, Esq., founder of The Dellutri Law Group, P.A. Currently, the firm has offices in Port Charlotte, Fort Myers, Naples and Sarasota. Mr. Dellutri also sits on the Board of American Board of Certification. Mr. Dellutri is also one of the founders of the Bankruptcy Law Network, Debt Law Network, Credit Law Network, and Mortgage Law Network. Mr. Dellutri also writes for the firm's personal injury litigation blog, www.faircreditreportingactblog.com and www.fairdebtcollectionpracticesactblog.com, and the firm's mortgage modification blog.

Posted in Bankruptcy News, Consumer Protection, Sign of the Times, Southwest Florida News | Comments Off

Does a Bankruptcy Really Stop a Foreclosure?

Posted in Real Estate | No Comments »

Chapter 13 Debtors’ Tax Refunds: Spend Or Turn Over To Trustee?

Many taxpayer rely on their tax refunds to pay certain expenses they cannot afford on their normal salary. People who have filed Chapter 13 bankruptcy sometimes ask me what happens to their tax refunds during their bankruptcy. Do they have to hand over their refund to the Chapter 13 trustee, or can they keep their refund as long as they are current on their bankruptcy plan payments?

In most cases, a tax refund is part of the bankruptcy estate and must be surrendered to the trustee who would allocate the refund to the creditors. In our bankruptcy court the Chapter 13 exercises some discretion and may permit a debtor to keep a future refund for "emergencies" or priority expenses. Medical expenses and reasonable home repairs usually are consider valid reasons for keeping a tax refund, for example. The trustee can permit the debtor to apply a tax refund to pay property taxes for his home if they are not paid by the mortgage lender.

It is important that debtors request permission to keep tax refunds before they spend the refund. A Chapter 13 should ask their bankruptcy attorney to submit a request on their behalf as soon as they know the refund amount. Do not spend your refund unless your attorney tells you they have actually received trustee approval. If the trustee denies your request then you must surrender the tax refund to the Chapter 13 trustee.

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Supreme Court: Bankruptcy Law Doesn’t Violate Lawyers’ Rights

A case decided by the Supreme Court this week settles a question of attorneys' free speech rights raised by a Minnesota law firm concerned about restriction in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), according to the Washington Post.

Here are the pertinent details:

• The law states that bankruptcy lawyers are prohibited from advising clients to take on more debt before filing for bankruptcy. In theory, the restriction is meant to prevent advice that would lead to actions that might constitute fraud under U.S. bankruptcy laws.
• The question raised by the Minnesota law firm was one of free speech for lawyers. Apparently, the firm suggested that the aforementioned restriction amounted to an unconstitutional violation of the free speech rights of bankruptcy lawyers.
• The court decided that the law was not, in fact, unconstitutional, and that lawyers can give their clients any advice that does not promote defrauding the bankruptcy court.
  • Filing incomplete or inaccurate information
  • Attempting to pay a "favorite" creditor in full before filing for bankruptcy
  • Failing to disclose assets or expected income
  • Attempting to “give away” assets before filing

The Broader Issue

While the law firm’s concern with free speech may seem piddling here, in the context of bankruptcy cases, it has merit. In some cases, as the WSJ article points out, taking on certain kinds of debt immediately before a bankruptcy filing could benefit both the filer and his or her creditors.

For example, refinancing a troublesome mortgage to better allow a debtor to make payments could benefit all parties. The Supreme Court Justices reportedly acknowledged the truth of this and agreed that taking on more debt can, at times, be the wisest decision for a potential bankruptcy filer.

But, the court noted, the law can be read to mean that bankruptcy lawyers are restricted only from giving their clients advice that would lead to bankruptcy fraud.

What Constitutes Bankruptcy Fraud?

Bankruptcy fraud is a serious matter – in fact, it can lead a court to throw out your case (and thus eliminate your chances at receiving a debt discharge) and earn you fines and jail time. This is one reason why working with a bankruptcy lawyer can be helpful.

Bankruptcy fraud includes:

Posted in Bankruptcy Law, Bankruptcy Lawyers, Filing Bankruptcy, Setting the Record Straight about Bankruptcy, Supreme Court | Comments Off

How To Start A New Bankruptcy Law Practice: Helpful Hints

From time to time I am approached by a younger bankruptcy attorney who says that my bankruptcy blog has helped his new bankruptcy practice. Bankruptcy law is more difficult than when I handled my first case and new bankruptcy attorneys face more complexity and more competition than I did. I have read several articles by other bankruptcy attorneys about how to market a new bankruptcy practice. One I read recently, with good advice, was written by New York bankruptcy attorney Jay Fleischman. Jay has an excellent blog called the Legal Practice Pro which is dedicated to lawyer marketing in general and bankruptcy marketing in particular. If you are an attorney with a new bankruptcy practice you really should subscribe to his blog.

I have my own suggestion to add to the many helpful hints Jay has offered in several of his blog articles. When asked, I always advise younger attorneys to seek a relationship with a bankruptcy paralegal who works, or has worked, in an active bankruptcy practice. An experienced bankruptcy paralegal can help a new attorney with many practical aspects of petition preparation and dealing on a day-to-day basis with the bankruptcy court and bankruptcy trustees. Bankruptcy paralegal cannot help you during their regular work day, but they can (with their employer’s permission) assist new attorneys after work or on weekends.

I think an attorney will find it much easier to communicate with and receive practical bankruptcy guidance from a paralegal than from another bankruptcy attorney. Of course, it will cost you much less to pay for a paralegal’s help. Many bankruptcy paralegals and legal secretaries face economic challenges similar to your own clients, and they would appreciate some additional income.

I have encouraged my own paralegal, who has 10 years experience, to assist other attorneys on her own time. I want to help attorneys getting into the bankruptcy field. I find it much easier to offer my paralegal’s time than to commit my own time to assist other lawyers.

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Debts Arising from Impaired Driving are Not Dischargeable

Recently I met with a client who was looking into filing bankruptcy because of credit card and medical debt.  Among his creditors, however, was an individual, an insurance company and fines due a local county.  When I asked about this, he explained that about a year ago, he was involved in an auto accident that was his fault.  He further explained that the individual sued him and that damages awarded were more than his insurance coverage, and that he also had fines because the accident occurred when he was under the influence.

He was unhappy to learn that Section 523(a)(9) of the Bankruptcy Code specifically excepts from discharge debts arising from the "death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance."

I read this Code section to mean that my client cannot discharge:

• any damage award due to the accident victim
• restitution ordered by the local county court
• fines imposed by the local county court

What about property damage arising from this drunk driving accident.  I read the Code section to limit non-dischargeability to personal injury so I do not think that property damages would be excepted here.

Washington D.C. bankruptcy lawyer Morgan Fisher wrote a post about DUI damages and bankruptcy dischargeability last year.  He notes that an insurance company seeking subrogation damages (recovery of car repair payments from the negligent driver by an insurance company) could argue against dischargeability under other provisions of Section 523.   I believe that Morgan is referring to Bankruptcy Code Section 523(a)(6) which excepts from discharge debts arising from the "willful and malicious injury by the debtor to another entity or to the property of another entity."

Morgan also notes that a local Bankruptcy Judge will look to the state law in the jurisdiction where the criminal prosecution is based to determine culpability.   I suspect this means that if you are convicted of DUI in a state where the applicable blood alcohol limit is .08, but you file bankruptcy in a state where the limit is .10, you would not be able to argue that Section 523(a)(9) does not apply to you.

I would also suggest that any DUI defendant who is contemplating a plea should look carefully at the language of 523(a)(9) – how the plea is structured in state court could have a bearing on whether the debt was dischargeable.  I have not seen this happen, but I would think that a Bankruptcy Judge might have to hold an evidentiary hearing if the state court DUI plea bargain did not conclusively speak to driving under the influence.

Posted in 523(a)(6), 523(a)(9), Bankruptcy, Chapter 7 issues, Creditor discharge actions, DUI and bankruptcy, DWI and bankruptcy, Insurance, Lawyer, a, accident  , alcohol, an, and, applicable, bargain, blood, company, court, d c, damages, driving, drunk, dui, entity, excepted, fines, fisher, here washington, injury, limit, malicious, morgan, non-dischageability, plea, post, recovery, seeking, state, subrogation, subrogation and bankruptcy, the, willful, wrote | Comments Off

LifeLock Fined for Inappropriate Identity Theft Protection Claims

A company that made bold promises about its ability to protect against identity theft has settled with the Federal Trade Commission after the validity of its claims was questioned.

LifeLock is a company that protects customers' identities from theft, and alerts customers about identity theft security breaches, according to the company web site. LifeLock will even help consumers if their identity is stolen, by canceling and replacing stolen cards and verifying information changes.

According to federal regulators, however, LifeLock has made claims about its ability to protect customers from identity theft that it cannot uphold, leading to an agreement for the company to pay $12 million in settlements.

CNNMoney is reporting that the fine will settle charges that LifeLock made deceptive claims about its identity theft protection abilities. $11 million of the fine will go to the FTC, while another $1 million will go to a group of attorneys general from around the country. According to the FTC, this is one of the largest joint settlements between the FTC and the states.

According to the chairman of the FTC, Jon Liebowitz, LifeLock claimed that it could protect consumers against identity theft completely, including all types of identity theft.

The protection it actually provided, said the chairman, left enough holes that you could drive a truck through it.

LifeLock advertises its services in a brash manner, by displaying the social security number of the company's CEO, Todd Davis, on the side of a truck that drives around in public, as well as on national television commercials. This show of confidence is meant to publicize their $10 per month services that they claim will keep users safe from identity theft.

The case that the FTC made against LifeLock was that the company made "deceptive claims" about its protection services. Among these claims were that LifeLock could guarantee protection against identity theft, and that, according to CNNMoney, "it was the first company to prevent identity theft from occurring."

There are certain types of identity theft that LifeLock claimed it could protect against, and the FTC argued that these fraud alerts did not actually protect against one of the most common types of identity theft: the misuse of existing accounts.

There was also the charge that LifeLock claimed, falsely, to be able to prevent changes to customers' address listings that weren't authorized, and that it constantly monitored customer credit report activity.

The FTC also said that LifeLock made untrue statements about data security, claiming that sensitive data was only accessed on a "need-to-know" basis. According to the FTC, however, LifeLock collected social security numbers and credit card numbers on a routine basis.

Davis, the CEO of LifeLock, said of the settlement that he was pleased with it, and that it would help to establish the advertising standards for the identity theft protection industry. He went on to say that the activities in the FTC charges were from several years ago, and that LifeLock agreed to settle the case as a way to put the issues behind them.

We agreed to settle this matter, he said, in order to quickly put this behind us so we can get back to doing what we do best—helping to protect our members from identity theft.

Posted in FTC, Financial Literacy, Identity Theft, lifelock | Comments Off

Chapter 13 Debtor Can May Make Some Payments Directly To Secured Creditors

The general rule in Chapter 13 bankruptcy is that the debtor makes one monthly payment to the Chapter 13 trustee who then distributes monthly payments to the debtor’s creditors- the trustee is the collection agent for all creditors. Some debtors ask whether they can pay one or more of their creditors directly each month; its called making payments "outside the plan."

Why would a debtor want to make payments outside the plan. Possibly, to minimize the costs of Chapter 13 bankruptcy. The bankruptcy trustee charges a fee to administer a Chapter 13 payment plan. The fee ranging from 6% to 10% is assessed against all plan payments collected and administered. Debtor payments outside the plan directly to creditors are not subject to the trustee fee.

Our bankruptcy court will permit payments to secured creditors outside the plan if the debtor has arranged for automatic payments to the creditor from the debtor’s employer or his bank account. The automatic payments system must have been in place before the debtor filed his Chapter 13 petition.

Posted in Chapter 13 | Comments Off

Posted in Personal Finance | No Comments »

FTC: Identity Theft Top Complaint in 2009; Potential Data Breach

The Federal Trade Commission recently issued its annual report on consumer complaints filed in the last 12 months (summary available here, for the complete report, see below).

Identity theft was by far the largest complaint category, concerning 21 percent of all complaints filed. The top fifteen list looks like this:

• Identity theft (21 percent)
• Third party and creditor debt collection (nine percent)
• Internet services (six percent)
• Shop-at-home and catalog sales (six percent)
• Foreign money offers and counterfeit check scams (five percent)
• Internet auctions (four percent)
• Credit cards (three percent)
• Prizes, sweepstakes and lotteries (three percent)
• Advance-fee loans and credit protection/repair (three percent)
• Banks and Lenders (two percent)
• Credit bureaus, information furnishers and report users (two percent)
• Television and electronic media (two percent)
• Health care (two percent)
• Business opportunities, employment agencies and work-at-home plans (two percent)
• Computer equipment and software (two percent)

The FTC reports that identity theft complaints also constituted the largest single group of consumer worries last year, but have dropped as an overall percentage of the whole. In addition to the release of 2009’s data, the FTC has posted an animated video detailing how and when to file a complaint (available here).

A Potential Data Breach You Should Know About

In another recent news release, the FTC noted that it has warned almost 100 companies that information they store on peer-to-peer websites (used for everything from playing video games to sharing text, audio and video files to conducting online phone calls) may be vulnerable to data breaches.

Specifically, if peer-to-peer (P2P) software is improperly configured, any sensitive data may be accessible to anyone on the network. This presents a huge security risk, and could lead to identity theft or other costly and frustrating scams.

What this could mean for you is that, if you have given your personal information to one of the companies in question, your information could be at risk.

While no companies have necessarily broken the FTC’s regulations regarding storage of sensitive information, some may be at risk for significant future data breaches.

Additional Resources

FTC 2009 Full Report on Consumer Complaints.

Posted in FTC, Identity Theft, data breach | Comments Off