With the news full of foreclosure statistics showing huge increases along with stories of self-righteous Members of Congress asserting their heartfelt concern for "struggling homeowners" little attention is paid to the question of whether a homeowner ought to fight to save his home. My friend and colleague, Charleston bankruptcy lawyer Russ DeMott were recently discussing this issue and I invited him to prepare a guest post about this very topic:
Chapter 13 bankruptcy is a tool that can be used to save your home from foreclosure. But the big question sometimes isn’t “can I save my home,” but “should I save it?"
We all know that there’s been an epidemic of foreclosure resulting from the recent economic downturn. Jobs were lost, values plummeted, and foreclosures have been on the rise.
So it’s natural to wonder, “can I file Chapter 13 bankruptcy to save my home from foreclosure?” However, when you meet with a bankruptcy lawyer to explore your options, you need to explore all your options—bankruptcy and otherwise. And that might be not saving your home.
When you’re having financial problems and seek advice, you should take the opportunity to review your entire financial situation. Can you afford your vehicle payments? Can you “tighten the belt” and cut back on some unnecessary expenses? And most significantly, “should you try to save your home?”
In my Charleston, South Carolina bankruptcy practice, I get calls every week from folks facing foreclosure. The potential bankruptcy client’s question is always a “can we?” Can we stop foreclosure? Can we make the lender listen? Can we catch up on these payments we’ve missed? Can we protect our home? Can Chapter 13 bankruptcy help?
But I always focus on the “should we.” Here are some factors to consider when deciding whether you should use Chapter 13 to keep your home:
Can you afford the mortgage payments? Do you have large house payments you can’t really afford, perhaps with more than one mortgage? For example, it may be that you can afford payments of $1800 a month, but your current payments are $2800 per month. Absent a mortgage modification, that’s a tough nut to crack every month.
Is your interest rate scheduled to adjust? It may be that you can afford your payments now but maybe not once your payments adjust.
Do you have equity in your home? (Equity is the value of the property less any liens (like mortgages, outstanding taxes, assessments, and home owner’s dues). Lately, I’ve been getting calls from clients who not only have no equity, but actually have “negative equity.” For example, your house might be worth $250,000 and you owe $350,000. If that’s the case, you might not want to try to save your home from foreclosure. You’d actually have more equity if you rented!
Is this where you want to live for the indefinite future? If not, perhaps you should use your financial problems to reevaluate where you want to live. Perhaps renting in another area would lessen your commute or allow your children to enroll in a better school?
These are just a few factors you should consider. You should weight all the pros and cons of saving your home. You can then have your bankruptcy lawyer help you decide whether filing Chapter 13 bankruptcy to save your home really makes sense.
Jonathan's note: in addition to the very relevant points Russ makes, let me add this: if you decide that saving your house in a Chapter 13 does not make sense, a "fresh start" Chapter 7 could be appropriate. Similarly, you can still file a Chapter 13 to reorganize your other debts while you surrender your home. My point – personal bankruptcy is not a "one size fits all" solution – a good bankruptcy lawyer can offer you several options to consider, many of which you may have never considered.
If there is one lament that I hear from my colleagues, it is this – "I wish my clients would call me earlier, when there is time to evaluate bankruptcy and non-bankruptcy options." Sometimes, when there are only days or hours to go before a foreclosure, an emergency Chapter 13 may be your only choice. Even if bankruptcy is something you really do not want to think about, you would be wise to establish a relationship with a bankruptcy lawyer before you end up facing a crisis.
It turns out that Seattle leads the country in a category other than caffeine consumption. According to a survey cited in the Seattle Post-Intelligencer, among the 20 most populated metropolitan areas in the country, Seattle has the highest average amount of consumer debt.
The survey, conducted by the information services company Experian, found that the average Seattle consumer owes $26,646. This figure is almost $2,000 more than the national average debt per consumer of $24,775.
However, the news is not all bad for residents of the Emerald City. The survey also revealed that Seattle consumers have very few late payments and stay below their credit limits. These signs indicate that Seattle consumers are using their credit wisely and maintaining healthy credit scores, despite their high level of borrowing.
According to the survey, Seattle narrowly edged Dallas, which has an average consumer debt of $26,599. According to the Dallas Morning News, Dallas is tied with Miami for the lowest average credit score among its consumers, and the number of missed loan payments is higher than the national average.
Rounding out the top five American cities with high amounts of consumer debt were Denver, Atlanta, and Phoenix. Perhaps surprisingly, the two largest cities in the country finished near the bottom of the list. New York came in at number 17, while Los Angeles consumers had the lowest average debt of large American cities.
In conducting the survey, Experian took samples of consumer credit reports from each of the 20 metropolitan areas. The numbers include items such as credit cards and car loans, but do not take into account mortgage debt, which is often excluded from consumer debt surveys.
Lessons for Consumers
Late payments are the single biggest factor in lowering credit scores. Dallas consumers’ rate of late payments was nearly 20 percent higher than the national average. This explains the city’s low credit ranking, and shows that making credit payments on time is crucial to maintaining a health credit score.
A high level of debt is not an insurmountable obstacle. Seattle consumers owe the most money, but also tend to make their payments on time. By using credit responsibly, Seattle consumers have been able to maintain decent credit scores despite their high levels of spending.
Living in a large city may be expensive, but doesn’t have to result in high amounts of debt or even bankruptcy. The presence of New York and Los Angeles at the bottom of the list suggest that it is possible to have high living expenses but maintain healthy credit.
Additional Resources
Click here to see the entire list of average consumer debt in the largest American cities.
If you’ve recently found yourself buried under a pile of debt, you’ve probably spent some time researching ways to dig yourself out. Most likely, filing for personal bankruptcy did not sound like the most appealing choice. However, like visiting the dentist or and eating spinach, filing for bankruptcy can actually be quite good for your health, financially.
Like most tools that aid in personal finance recovery, the more you learn about bankruptcy, the more comfortable you may feel wielding it as a debt-reducing tool.
The following are some important things to know about personal bankruptcy:
What Will the Neighbors Say?
While many people think bankruptcy carries some stigma, the fact is that more than 1.5 million Americans filed for bankruptcy last year. And these people stretched across all social strata—from doctors and corporate executives to plumbers and house cleaners.
In addition, according to the Orlando Sentinel, a recent Harvard University study revealed that most bankruptcy filers wound up in court as a result of job loss, divorce, or medical issues. So, if one of these problems led to your financial malaise, know that you are not alone.
Where Do I Start?
First, figure out if you can stay out of bankruptcy by reducing your household expenses, or adjusting the payment plans on the debts you owe. If such tactics dramatically reduce your debts, you may be able to navigate the road to financial recovery yourself.
However, if these strategies prove ineffective, consider filing for personal bankruptcy. See if it makes more sense to file for Chapter 7 or Chapter 13 bankruptcy. Each of these options comes with its own advantages. For example, Chapter 7 bankruptcy can help discharge your debts more quickly, while Chapter 13 may allow you to keep more of your assets.
Of course, both options are pretty complex, especially after the legislative overhaul of bankruptcy law in 2005. It is possible to file for bankruptcy yourself, but seeking legal advice from an experienced bankruptcy attorney is often worth the investment.
Caveat Debtor
Reportedly, some companies promising immediate debt relief peddle misleading, or outright wrong, information. Be wary of promises to drastically reduce your debt or painlessly repair your credit, especially if these promises come attached with large up-front fees.
Also, beware of pressure tactics from your creditors. One tall tale occasionally given by debt collectors is that the 2005 reforms banned bankruptcy altogether. This couldn’t be further from the truth. Personal bankruptcy is alive and well, and over a million Americans use bankruptcy every year to reduce their debt load.
Student loans provide people chances for their education, dreams and future career opportunities. But what happens when it’s time face the hefty debt waiting after graduation?
Who is to blame if the recent grad gets overwhelmed with debt and can't afford to pay their loans back?
A recent New York Times article profiled one indebted grad and tried to address all the parties involved.
For students like Courtney Munna, blame is no longer her concern. Now she regrets taking out $100,000 in student loans to attend N.Y.U. and wishes she made better financial decisions regarding the loans.
Since graduation in 2005, Munna has deferred her loans as a short term solution to scrape by and pay the rest of her bills.
But the question still remains, who’s to blame for students like Munna getting in over their heads.
The article said that both the students and their families have personal responsibilities to know their finances and take out loans they can afford to pay back.
The article also placed some responsibility on the universities since they have access to student’s finances after they fill out the financial aid forms, and are in a familiar situation helping students find aid. Students, on the other hand, are often overly trusting of universities to look out for their best interest.
The Times suggests that these schools should advise prospective students they cannot afford their school, an idea that Vice President of Enrollment at N.Y.U. Randall Deike said “would be completely inappropriate.” Besides discrimination issues, it’s not the schools decision to make whether or not a student can afford their school.
Their business is to enlist students, not turn them away. Deike agreed that prospective students should not take on too much debt, but he said that’s their decision.
There are other reasons universities do not want to tell students to search for a cheaper education. They said it might reflect poorly on their school and suggest that their education might not provide opportunities after graduation.
The lenders themselves have continued to take the blame for loaning too much money with too lax of standards. In Munna’s case she was approved for $40,000 in loans by Citibank, even after she was already deep in debt.
As of now, Munna makes $22 an hour and barely makes the bills. She knows she’s responsible for taking out to much money in loans. But said she doesn’t “want to spend the rest of her life slaving away to pay for an education…[she] would happily give back.”
Student loans typically take decades to repay, even if the student is fortunate to find a well-paying job after graduating. Many students see a series of forbearance and deferrals while they wait to land the right job, as interest and fees pile onto their original loans.
And there is typically no way to eliminate student loans other than to pay them in full. Currently, student loans are one of the rare types of debt that cannot be discharged in bankruptcy.
Bankruptcy is a word at which all businesses shudder. The aim of most businesses is to be successful, aka make money, and needing to file for bankruptcy means that they have failed to achieve this over-arching goal. Most businesses have extremely high start up costs; in order to make any money, they need investors so that they can hit the ground running. These investors take a certain amount of risk but if they believe in your business plan, then they will be more than happy to loan you the money with the hopes of making large returns on their investment farther down the road.
A business relies on many different factors; even if you have the best plan the universe has ever seen, there is no guarantee that is will work. You need to have great people working for you, a patient attitude, perseverance, and a little luck. You cannot control the market and if there is a sudden recession, you need to be able to adapt and make sure that your services or products are still in demand. If all these factors fall into place, you will, in a perfect world, be successful. If they do not, however, and you do not know how to recover financially, you might need to consider filing bankruptcy.
US bankruptcy should be the absolute last resort for your business, however. You need to consider some alternatives to bankruptcy before you decide that is your last option. Liquidation, composition agreements, and a turn-around specialist are all options that are available to you. Your creditors are most likely not pleased that you fear you cannot pay them the money you borrowed from them. Therefore, you need to find a way to pay them back in full so that they do not sue you.
Look closely at your other options and discuss them with your business partners. If you simply do not have the capital or the means to earn the money you need, filing for Chapter 11 bankruptcy might be your only option. The bankruptcy court then takes control over your business and your assets and your creditors have to deal with the court directly in order to get back their money. Explore the other options first because it is very difficult to get out from under a bankruptcy filing!
Last month, my friend and colleague, Charleston bankruptcy attorney Russ Demott published an interesting article on his web site entitled "Fired for Filing Bankrutcy? No way!" This article was written by Elyria, Ohio bankruptcy lawyer Bill Balena, who notes that the Bankruptcy Code specifically forbids "employee discrimination" based on a bankruptcy filing if:
You are, or have gone through a bankruptcy proceeding
You are insolvent either before filing a bankruptcy or while your petition is pending;
You have not paid a dischargeable debt
Let's take a closer look at what the Code actually says. Pay particular attention to the different language that applies to government employers vs. private employers.
[with limited exceptions] a governmental unit may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against, deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a bankrupt or a debtor under the Bankruptcy Act, or another person with whom such bankrupt or debtor has been associated, solely because such bankrupt or debtor is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.
As to private employers:
No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt—
(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.
As you can see, the restrictions on discrimination are not identical.
Specifically the limitation on governmental action against insolvent or bankrupt employees or job applicants includes the following prohibitions:
deny employment to
terminate the employment of
discriminate with respect to employment against
By contrast the limitations on private employers against insolvent or bankruptcy employees includes the following prohibitions:
terminate the employment of
discriminate with respect to employment against
Now I have not litigated this issue – but I think that a private employer could make a strong argument that the Bankruptcy Code does not forbid denying employment to an insolvent or bankruptcy individual who is applying for a job.
Further, as Mr. Balena points out, if you are applying for a job as an "at will" employee, a prospective employer does not have to explain why he is not hiring you – it can be for any reason. I can't imagine that too many employers would specifically put into writing that you are not being hired because of your credit issues.
In my view, within the context of private employment, Section 525 protections have much more relevance to an employee who already has a job as opposed to a job applicant. Further, I think that Section 525 is somewhat of a toothless tiger in that few employers would specifically identify a bankruptcy as the sole reason for termination (note the language "solely because").
As a practical matter, I cannot recall the last time I observed or even heard of a bankruptcy debtor facing termination or a refusal to hire because of a bankruptcy filing. The sheer numbers of bankruptcy filings in the Northern District of Georgia, for example, are such that almost every company of any size has had one or more employees go through the bankruptcy process. Still, I counsel my clients that Section 525 offers very little in the way of real protection and that there is some risk, even if it is small, that their bankruptcy filing could have a negative impact on employment.
The recession has affected us all, but who's been hit the hardest?
Last year there were nearly 1.5 million bankruptcy filings--learn about the people behind those numbers. Check out our latest You Tube video and please share it with your friends.
The healthcare bill is now signed into law; but what does it mean for you?
We sifted through the press and propaganda to uncover how the new healthcare bill may affect you.
How the Healthcare Bill Will Affect…
The Uninsured
$5 billion immediately goes to provide temporary coverage to the uninsured living with preexisting conditions. This measure is intended to bridge the divide until all the healthcare changes go into effect in 2014.
By 2014, more people will qualify for Medicaid coverage, such as people who are low-income and have no children.
By 2014, small businesses, the self-employed and the uninsured will be able to join together to buy less-expensive policies.
By 2014, Americans who don’t qualify under a hardship plan must have healthcare insurance or face fines. Those who qualify under the hardship plan will be low-income individuals and families of four making less than $88,000.*
By 2014, the uninsured will face fines of $95 (or 1% of the uninsured’s income). By 2015, the fines increase to $325 or (or 2% of their income). By 2016, the fines increase to $695 (or 2.5% of their income).*
The Insured
If you buy a policy, insurance companies can’t limit your lifetime coverage anymore. This means your insurance money shouldn’t “run out” if you’re diagnosed with a serious illness.
Insurance companies can no longer deny your child coverage because of a preexisting condition.
By 2014, the same preexisting condition protections will arrive for adults.
Adult children can now stay on family insurance plans until they’re 26 years old.
By 2011, prescription drug costs are expected to drop by 50% as manufacturers drastically discount brand-name drugs. By 2020, it’ll drop by 75%.
Those on Medicare Part D will soon receive $250 for prescription help.
By 2014, families will receive tax breaks to help cover healthcare premiums. The amount will depend on household income.
Six months from now, insurers must provide some specific preventive healthcare (such as immunizations) for infants, children and teens with no cost to the insured.
* Based upon House changes to the bill, which must still be approved by the Senate.
Quick Healthcare Facts
The Bill Aims to Cover 32 Million People.
That’s the combined populations of Alabama, Colorado, Illinois, New Mexico and Wisconsin, according to the Census Bureau.
Healthcare Spending = 16% of the U.S. Total GDP.
That’s $8,000 per person ($2.5 trillion), according to the Organisation for Economic Co-Operation and Development.
Medical Bills Are a Main Reason Behind Most Bankruptcy Filings
A 2009 Harvard study published in the American Journal of Medicine found that 60% of filers cited heath problems/medical bills as the main reason they filed bankruptcy.
Check Out These Illustrations of Medical Bankruptcy:
In order to get enough votes to pass this bill last night, the House had to make certain changes to the bill and create a reconciliation bill. The Senate still has to vote on this reconciliation bill, so there may be some bill tweaking.
Stay tuned to Total Bankruptcy for more healthcare and medical bankruptcy news.
What Do You Think: Is the Healthcare Bill a Good Deal for Americans?
Tired of politicians and reporters telling you what’s best for you? Post a comment and share your thoughts.
Sources:
Organisation for Economic Co-Operation and Development
The U.S. Census Bureau, U.S. Population Projections
TheWhiteHouse.Gov: Health Reform by the Numbers.
Harvard Study: The American Journal of Medicine, August 2009 issue
BBC News: Obama Healthcare Reforms May Pay Off for Drug Firms, March 22, 2010
Reuters U.S. Edition: Factbox: Winners, losers in House Healthcare Bill, March 22, 2010
Associated Press: House Sends Health Care Overhaul Bill to Obama, March 22, 2010
CNN Health: How the Health Care Bill Could Affect You, March 22, 2010
The Christian Science Monitor: Health Care Reform Bill 101: What Does it Mean for Kids and Families? March 22, 2010.
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.
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.
With the news full of foreclosure statistics showing huge increases along with stories of self-righteous Members of Congress asserting their heartfelt concern for "struggling homeowners" little attention is paid to the question of whether a homeowner ought to fight to save his home. My friend and colleague, Charleston bankruptcy lawyer Russ DeMott were recently discussing this issue and I invited him to prepare a guest post about this very topic:
