Archive for the ‘and’ Category
Monday, June 6th, 2011
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.
Posted in Advice, Consumer Protection, General consumer bankruptcy info, Georgia Bankruptcy, a, address, aged, and, applicable, brite, class, class , college, credit cards for college students, dangers of credit cards, delivered, financial advice for high school graduates, graduated, graduates, high, leaving, math environmental, mistakes, ms, named, nicole, said , school, sciences, selected, senior, spectacular, students, teacher, the, wisdom, words, years | Comments Off
Monday, May 30th, 2011
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.
Posted in Attorney, Creditor, Post bankruptcy credit rebuilding, Reaffirmation and negotiation, a, activities, aggressively, agreement, agreement , and, assert, chapter 7 reaffirmation agreements, collection, complete, documents, entering, file, formal, forward, garnishment reaffirmation, including, keep and pay, negotiation in bankruptcy, possession, quickly, reaffirmation, request, sign, signed, the, time, wage | Comments Off
Wednesday, May 25th, 2011
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.
Posted in 1982, 7th, Bankruptcy, Creditor discharge actions, Lawyer, a, administration, and, bihary, called, case, cases, circuit, cited, continue, debt , deceive, disability, discharge of social security disability overpayments, earning, employment, handle, hat, intent, judge, money , mr, my, neavear, overpayment, overpayment , personal, references, rodriquez the, schweiker, security, social, social security overpayment and bankruptcy, the, treated, unsecured, v, waiver, wearing, working | Comments Off
Monday, May 9th, 2011
Most 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:
- you will have the certainty of knowing that you are once again in a contractual relationship with the lender. If you do not reaffirm, you could wake up one day to find that your vehicle has been repossessed or that you are being foreclosed upon.
- secondly, payments on a reaffirmed debt will appear as positive information on your credit reports. This means that your credit score will recover more quickly
Can You Negotiate Better Terms in a Reaffirmation?
Because a reaffirmation agreement is a new contract between you and your lender, you absolutely can negotiate different terms. I have negotiated reduced payments, lower interest rates and reduced balances on furniture, electronics, and vehicles. I have also negotiated lower payments on 2nd and 3rd mortgages.
It has been my experience that some lenders will just not play ball. They would rather incur the expense of recovering, storing and reselling a used item. I think this attitude of "we do not negotiate with debtors" is silly and counterproductive, but some lenders take this position (I suspect that some of these lenders do not have the staff or protocol for handling a negotiated debt).
On the other hand, many lenders will agree to a deal with terms a lot better than the original contract. But you do have to ask, and, of course, if you agree to any terms, you must live up to the deal. Reaffirmation agreements can be canceled by the debtor within 60 days after the agreement is entered, or the case is closed, whichever comes first.
Posted in Debt negotiation, Obligation, Reaffirmation and negotiation, a, agreement, agreements, amount a, and, balances, deal , debt, deficiency, handling, item, layer, lower, negotiated, payments, protocol, rates, reaffirmation, reaffirmation because, reaffirmation of secured debt, reduced, serves, specific, terms , the, ties | Comments Off
Friday, April 15th, 2011
The Associated Press reports that former baseball star Lenny "Nails" Dykstra has been charged with bankruptcy fraud by a California based United States Attorney. Dykstra filed for Chapter 7 bankruptcy in 2009, scheduling $31 million in debts and only $50,000 in assets.
In the complaint, prosecutors allege that Dykstra sold or destroyed over $400,000 worth of property. Among the property that Dykstra allegedly sold – presumably to raise case – were sports memorabilia and furnishings from the home he lost in the bankruptcy.
Obviously most of the Chapter 7 cases filed in the Northern District of Georgia, or in most bankruptcy courts do not involve millions of dollars of debts incurred by a high profile debtor. However, there is an important lesson that all bankruptcy filers can learn from the charges levied against Mr. Dykstra.
When you list assets on your bankruptcy petition, you are swearing that this list is accurate under penalty of perjury. If your trustee discovers that items have been omitted, or worse, that they have been secretly sold, the trustee will refer the case to the U.S. Attorney for prosecution.
Sometimes, I overhear conversations in bankruptcy court in which a debtor expresses frustration with the bankruptcy process or anger at an ex-wife, a former business partner or even a former employer. I also hear conversations expressing frustration with the rather stingy dollar limits set out in the Georgia exemption statute. I sense that some bankruptcy filers believe that the circumstances that led to their having to file were unfair and out of their control and as such leaving out inherited jewelry that "no one will ever know about" or selling a few items for cash can be rationalized.
While it is probably true that Chapter 7 trustees generally do not have the resources to thoroughly investigate every Chapter 7 debtor, I caution any bankruptcy filer not to take the risk.
First and foremost, an intentional failure to disclose assets is illegal and constitutes a crime under federal law. No asset is worth your freedom or personal integrity.
Second, you have no way of knowing if the United States trustee will select your case for a random review which can also mean much more intrusive scrutiny.
Third, it is possible that a third party – often an ex-wife or ex-business partner – might anonymously write the U.S. Trustee to report intentional errors on your petition.
Fourth, you might fall victim to "Murphy's law" – your trustee or someone from his office might see you walk into a pawn shop or might see your auction on eBay. Believe it or not, these types of coincidences do happen.
Often, issues associated with assets that you cannot protect can be resolved if you do not have to file right away. While the bankruptcy laws can be unforgiving, they will not punish you if you sell assets to raise money for food, shelter and clothing, as long as those sales are disclosed when applicable. This is why I advise anyone who is even remotely considering bankruptcy to speak with a bankruptcy lawyer at the earliest possible date. In my office, I regularly maintain files in "pre-bankruptcy" status for four, six, eight months or longer. Often the delay arises from my client's need to gain lawful benefit from assets that would be seized if the case was filed early.
Posted in Bankruptcy, Chapter 7 issues, Denial of discharge - Section 727, Fraud, Fraudulent Transfers, General consumer bankruptcy info, Lenny Dykstra, a, allegedly, and, attorney , bankruptcy fraud, baseball, based, california, charged, conversations, dykstra, examples of prosecution for bankruptcy fraud, expressing, filed, frustration, furnishings, hear, lenny, memorabilia, nails, sold, sports, star, states, united | Comments Off
Saturday, March 19th, 2011
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.
Posted in 722, Chapter 7 issues, Finance, Lenders, Purchasing, Reaffirmation and negotiation, Redemption, a, and, chapter 7 and personal property, entered, fair, lender, market, paying, reaffirmation vs. redemption, redemptions, redemptions , section, section 722 redemption, the, type, value , vehicle, work, www youtube com watch v 3ebx9zlcsku, youtube | Comments Off
Monday, December 20th, 2010
With the decline in Atlanta area housing values, a seldom used bankruptcy technique has taken on new life. The technique is called "lien stripping" and it arises from Bankruptcy Code Section 506(a) and (d). A lien strip allows a Chapter 13 debtor to use the power of the Bankruptcy Court to transform a secured second mortgage or home equity line of credit into an unsecured debt, thereby eliminating a monthly payment and reducing total debt by tens of thousands of dollars.
Here's how it works: Let's say that you own a home worth $250,000. Perhaps that home was worth $350,000 three or four years ago but its market value has dropped because of the recession. The balance on the first mortgage is $270,000 and the balance on the second mortgage is $45,000.
In this case, a Chapter 13 debtor can ask his bankruptcy judge to "strip away" the second mortgage debt since all of the value in your home is encumbered by your first mortgage. In other words, if you were to sell your house, the first mortgage lender would not be paid in full and the second mortgage lender would get nothing. The second mortgage lender is, therefore, unsecured.
Lien stripping only works when:
- you are a debtor in a Chapter 13 case
- the fair market value of your house is less than the balance due on your first mortgage
The Clerk's Office of the Northern District of Georgia has provided us with sample lien stripping motions, which you can review by clicking on the link.
I suspect that mortgage companies will mount challenges to lien stripping. There has already been a Minnesota case where a local judge there refused to allow lien stripping. One day this issue may be considered by the United States Supreme Court. For now, however, most bankruptcy judges will allow lien stripping and if your second mortgage or HELOC is fully unsecured, you may want to consider it as well.
My friend and colleague, Charleston bankruptcy lawyer Russ DeMott has published a clear explanation of how he approaches the mortgage lien stripping process (in his district, they refer to lien stripping as "mortgage stripping" but the concept is identical. You can read Russ' post by clicking on the link. Russ correctly points out that out of banks and mortgage companies have not cooperated in out of court mortgage modifications and that lien stripping remains perhaps the most reliable tool to modify a mortgage.
I have successfully "stripped" several junior mortgages. Not surprisingly, the main issue that arises has to do with the fair market value of the home. You may need to pay for an appraisal to convince the judge that the second mortgage is, in fact, fully unsecured.
Posted in Chapter 13, Chapter 13 issues, Lien stripping, Mortgage, and, approaches, bankruptcy mortgage modification, called, in, lien, modifying mortgages bankruptcy, motions, process, refused, remains, sample, stripping, stripping , the, unsecured lien | Comments Off
Tuesday, November 2nd, 2010
My Bankruptcy Law Network colleague Dana Wilkinson, who practices in South Carolina, reports on an unbelieveable scam perpetrated by a collection agency in Pennsylvania. According to a press release issued by the state attorney general, the Unicredit Collection Agency created a bogus "court system" to trick consumers into paying debts.
Unicredit employees dressed like sheriff's deputy's and "served" papers resembling lawsuits on consumers
Unicredit issued fake "court notices" for hearings and depositions
Unicredit built a fake courtroom, complete with a fake judge, where debtors would be intimidated into providing access to bank accounts or surrendering car titles
The Pennsylvania attorney general has shut down Unicredit and has filed suit against the company seeking restitution for harmed consumers.
What can we learn from the Unicredit story? First, you should always be very suspicious of anyone who threatens legal proceedings, implies that you have no right to challenge a debt or suggests that you must resolve a debt issue immediately. Under Georgia law, at least, a lawsuit must be served by a sheriff's deputy (who has identification) or a process server. After service you have 30 days to file a response. No judgment will be issued any faster than 45 days after service – 30 days to file a response and 15 days to open a default by paying court costs and filing fees (which amount to less than $200).
Secondly, sheriff's deputies are not in the business of collecting debts. Their job is to serve papers only. If the person who looks like a deputy starts discussing the merits of the lawsuit against you, a red flag should go up.
Third, recognize that collection agents are not your friends and they are not on your side. Do not believe anything a collection agent tells you. When in doubt, call a bankruptcy lawyer – we will always talk to you over the phone at no charge.
Posted in Attorney, Consumer Protection, a, agency, an, and, bogus, built, car, collection, collection agency scams, collection agency tactics, consumers unicredit, courtroom, created, debts unicredit, depositions unicredit, dressed, employees, fake, general, hearings, issued, learn, paying, pennsylvania, pennsylvania , perpetrated, press, release, reports, scam, story , surrendering, the, titles the, unbelieveable, unicredit | Comments Off
Sunday, September 19th, 2010
If you have been reading your local newspapers, you may be aware that Nathan Deal, the Republican candidate for Governor of Georgia, is facing scrutiny about his personal finances and about the bankruptcy filings of his daughter and son-in-law.
According to the Atlanta Journal-Constitution, Mr. Deal personally guaranteed bank loans totaling over $2 million that was used to build and finance a sporting goods store owned by his daughter and son-in-law called Wilder Outdoors, located on Highway 365 near Gainesville. Unfortunately for the Wilders, the sporting goods business failed, leaving about $2.5 million due. Mr. and Mrs. Wilder filed Chapter 7 bankruptcy in 2009, discharging their obligations on the outstanding bank loans, leaving Mr. Deal exposed as the guarantor.
Mr. Deal and the Wilders were able to refinance the business loan several years ago prior to the closing of the business but now, a $2.5 million debt will come due in February, which would be about a month after he takes office if he wins.
Mr. Deal asserts that his financial quandary is no different from that faced by many parents who offered financial support to the entrepreneurial dreams of their children. He has put his primary residence and other property on the market and no doubt hopes to generate enough cash to satisfy the bank's demands. You can read more about the Wilder bankruptcy issues on my Bankruptcy Law Network post about this situation.
Democrats are pointing to Mr. Deal's financial troubles as proof of his questionable judgment, especially since it turns out that Mr. Deal's son-in-law, Clint Wilder, appears to have been ineligible to file Chapter 7 in July, 2009. Mr. Wilder had filed an individual Chapter 7 case in Atlanta back in December, 2001. Section 727(a)(8) of the Bankruptcy Code provides that a debtor must wait at least eight (8) years from the time a Chapter 7 case is filed before filing a second Chapter 7 – here the time period between the two filings was about 7 1/2 years.
Although the Wilders' case was closed in December, 2009, the United States trustee has the right to reopen this case and petition the judge to revoke the discharge. From what I am hearing, this is what is happening now.
Candidate Deal correctly points out that issues relating to his son-in-law's bankruptcy are not his doings and should not be attributed to him. On the other hand, the Deal campaign has to be concerned about the prospect of a candidate who could very well be insolvent the month after he takes office and who could face the prospect of filing a voluntary petition or having an involuntary bankruptcy file against him shortly after he takes office. You may recall that former State school superintendent Kathy Cox chose not to run for re-election after she and her husband filed Chapter 7 following her husband's failed business deals.
I think that the main lesson to glean from this situation has to do with the inherent problems associated with co-signing a loan for anybody, especially when the money put at risk is more than you can afford to lose.
What do you think? Will Mr. Deal's looming financial problems cost him your vote? Or do his financial problems give him insight into the economic plight of struggling Georgians?
Posted in 2, 2009 , Business, Chapter 7 issues, Finance, Georgia Bankruptcy, Involuntary Bankruptcy, Loans, Nathan Deal, Revocation of Discharge-Section 727, a, and, bank, build, called, chose, correctly, cox, daughter, deal, failed, goods, guaranteed, guarantor mr, happening, hearing, ineligible to file Chapter 7, july, kathy, mr, now candidate, outdoors, owned, personally, points, recall, revocation of Chapter 7 discharge, school, son in law, sporting, state, store, superintendent, the, totaling, wilder, wilders | Comments Off
Tuesday, September 14th, 2010
There are dozens of lawyers out there who offer to prepare and file bankruptcy cases. Some work in high volume "bankruptcy mill" firms that compete on price while others compete on experience, knowledge and service. Usually the cost differential is a few hundred dollars, but when you are considering bankruptcy, every dollar counts – so why would you want a lawyer like me as opposed to a firm that would offer to represent you for a lower price?
I could offer a glib answer like "if you needed brain surgery, would you look for the cheapest surgeon on the one with the most experience and industry recognition" but that does not really answer the question. Perhaps it would be helpful if you could look over my shoulder as I analyze a real life situation that came before me recently.
Earlier this month an email arrived from a couple who wanted information about bankruptcy. The wife wrote that she was a stay at home mom raising 2 children and that her husband lost his job about a year ago, and recently started back to work at a lower paying job. Their current household income is just under $50,000. They own a house that is now worth less than what they paid for it – the house is worth about $200,000 – the first mortgage is $210,000 and the second mortgage is $35,000. They own one older car outright and are financing a mini-van. They have also incurred around $25,000 of credit card debt – most of which was used trying to keep the mortgage current.
Earlier this year they fell behind on both the first and second mortgage. The first mortgage lender started foreclosure proceedings, but suspended foreclosure and offered to consider my potential clients for a mortgage modification. They have been making modified payments for several months but when they called the lender to ask if they had been approved for a permanent modification, the account rep told them that their modification paperwork had not been approved but that their application had been sent to another department for a reconsideration. News of this decision had not been provided to my prospective clients – the only reason they found out was from their call. No one from the mysterious reconsideration division was available and their multiple calls have not been returned for over 2 weeks.
They decided to contact me because they are getting the sense that the mortgage company is unlikely to approve their modification and they want to be prepared for a possible foreclosure. What are their options?
Here is what I advised them through my conversation with the wife:
First, I asked what was their desire regarding the house – was keeping the house a priority? The wife responded that they would like to keep their house but they were not sure they could afford it given the husband's reduced salary.
I explained that Chapter 13 is the type of bankruptcy that can stop a foreclosure but that Chapter 13 would not allow us to change the amount of the monthly payments, nor would it change the total balance due on the mortgage. Chapter 13 would allow them to "cure" their arrearage by paying that arrearage (the past due payments) over a five year period of time, along with other debts that would also be included in the Chapter 13 payment plan. However, if they were not able to afford the regular monthly payments Chapter 13 probably did not make much sense.
The only possible justification for a Chapter 13 would arise from the possibility that they could use Chapter 13 to "strip" the second mortgage and make that unsecured. Under Chapter 13 law, a second mortgage that is wholly unsecured, meaning that the balance due the first mortgage exceeds the fair market value of the home. If the second mortgage is wholly unsecured, we can file a motion to strip the lien, thereby making the second mortgage debt an unsecured claim in the Chapter 13. If our Chapter 13 plan called for paying unsecured debt at 5 cents on the dollar, then Chapter 13 might be something to consider.
In this case, the wife advised me that the monthly payment due the first lender was more than what they could afford, plus she did not seem enthusiastic about signing on for a five year payment plan, so we decided to remove Chapter 13 from consideration.
We then proceeded to discuss Chapter 7.
I pointed out that Chapter 7 would allow the couple to discharge their credit card debt as well as any potential liability arising from the surrender of their home. I felt that the real danger came from the second mortgage lender as it has been my experience that first lenders rarely pursue deficiency claims because of the Georgia law that requires them to go to court to certify the deficiency before a judge within 30 days of the foreclosure. Second mortgage holders, by contrast, need only file suit on the promissory note associated with their loans. I see far more deficiency balance claims from second mortgage lenders than from first mortgage lenders.
I also noted that since the foreclosure process could take several months, one strategy here would be to remain in the house and pay nothing – nothing to either mortgage lender and nothing to the credit card lenders. This strategy would allow my prospective clients to reduce their budget outflow dramatically for several months while they built up a small cash reserve, and then file bankruptcy in four to six months when creditors were starting to take action. I noted that this strategy was based on economics, and that they would have to be comfortable with the moral implications of this course of action. I also noted that this "wait until the last minute" strategy would cause significant damage to their credit in addition to the bankruptcy. By contrast, filing a Chapter 7 when there were few or no 120 day late references would make recovery from bankruptcy a little easier. Credit reports document payment histories and while a bankruptcy discharge will put the balances at zero, it does not delete the negative payment histories.
On the other hand, I advised the wife that if she and her husband waited to file and the husband secured a better, higher paying job, their household income might leave them with disposable income in their budget, or it might cause their household income to exceed the median income for a family of four, thereby making Chapter 7 much more difficult or impossible. It has been my experience that when household income exceeds the median (in Georgia the current median income for a family of 4 is $68,258) by $10,000 or more, it can be very difficult to qualify for Chapter 7 under the means test. Thus, if the husband was actively looking for employment and his target income was $80,000 or more, waiting to file Chapter 7 might not be the best idea.
The wife then asked me about the credit report issue – how long would it take for she and her husband to rebuild their credit. I responded by saying that it my experience, a Chapter 7 debtor can expect his credit score to remain depressed for eight months to a year following the Chapter 7 discharge. However, Chapter 7 has the positive effect of eliminating all debt and thereby causing an improvement to the debt to income ratio. Further, individuals can only file Chapter 7 once every eight years – so from a lender's perspective a recently discharged debtor has no debt and cannot file bankruptcy for at least 8 years.
I assured the wife that I made it my practice to follow up with my clients who had received a discharge to review their credit reports three to five months after discharge. I have found that at least half of the time, there are errors on the credit reports that artificially depress post bankruptcy credit scores and sometimes, the errors are actionable, meaning that we can collect damages from creditors for Fair Debt Collection Practices Act violations. In a few cases I have been able to collect enough in damages to cover the attorney's fees and filing fees associated with the original bankruptcy filing!
I ended by conversation with the wife by thanking her for contacting me. I then followed up our conversation with a brief email summarizing what we had spoken about and providing her with the "get started" link to one of my web sites.
I hope you can see that even a "simple" fact pattern can give rise to a variety of options and pratical considerations. Consumer bankruptcy is not a "one size fits all" practice and I am able to raise all of the points that I did because I have seen a lot of different issues over the past 23 years. If you have any questions about what have written here or if you want to discuss your personal situation, I encourage you to contact attorney Susan Blum or me by phone at 770-393-4985 or send us an email.
Posted in Chapter 13, Chapter 7, Credit, Current, Foreclosure, General consumer bankruptcy info, Georgia Bankruptcy, Lenders, Mortgage, a, and, because , choosing a bankruptcy lawyer, claims, deficiency, document, easier , exceeds, georgia, histories, house, household, in, income, keeping, lender, median, payment, priority , proceedings, pursue, rarely, reports, responded, started, the, wife | Comments Off
