Bankruptcy Questions Answered

Are Social Security Overpayments Dischargeable in Bankruptcy?

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

Can You Rely on a Verbal Promise that Your Foreclosure Will be Delayed?

Last month, I met several times with a potential Chapter 13 client who was facing a mortgage foreclosure.  Over the course of the past few months he has been juggling his creditors and bills trying to stay afloat and during that time he fell behind to his mortgage company by more than four months, and found himself in the foreclosure process.

This individual earns over $100,000 annually, but, unfortunately he used to earn more than double this amount.  His problem was not the mortgage, but his other bills, including a very high car payment and a mortgage payment arising from a failing real estate investment.

Not surprisingly the foreclosure notice got his attention.  He immediately took action by calling me to discuss Chapter 13 bankruptcy and by contacting his mortgage company to discuss repayment options.   By the Wednesday prior to the pending foreclosure sale scheduled for the following Tuesday, my client had provided me with enough information so that I could prepare a rough draft of a Chapter 13.   In this case, by the way, my client and I entered into an agreement whereby he paid me around $300 to open a file and to start entering information into my petition preparation program.

On the pre-foreclosure Wednesday he called to say that after a lot of discussion he was expecting a decision the next day from his mortgage company but that if he did not hear from them by mid-day on Thursday, we would be proceeding with the Chapter 13.  A few hours later he called back to say that his mortgage company had agreed to postpone the foreclosure until September and that the Chapter 13 was on hold for now.

Let's analyze what my client did right and what he did wrong.

On the positive side, he did the following right:

• he did not panic – he approached the problem as a business problem not as a personal, moral failure
• he began to address the problem early.  His first contact with me was literally the day he received the foreclosure notice.  He correctly guessed that the negotiation process with the lender would take several weeks
• he took a two step approach to the problem – he opened negotiations with his lender, and at the same time he started planning for a Chapter 13
• he retained me early on in the process and paid me a small sum ($300) to start the petition preparation process.  He also obtained his credit counseling certificate shortly after our first meeting.  Contrast that to some of the potential bankruptcy filers who call me on the Friday before foreclosure looking to start the process.
• he convinced his lender to delay the foreclosure by two months – a 2 month delay is preferable to a 1 month delay in that my client now has enough time to try and sell his home

Now, what did he do wrong?

• my main criticism is his failure to get a written confirmation of the suspension of the foreclosure.  What if the lender's representative failed to communicate with the foreclosing attorney?  What if the lender's representative is simply dishonest?  Can a verbal promise by a lender's representative to delay a foreclosure be enforceable?  What would the remedy be?

I am very wary of relying on verbal promises.  In law school, my contracts professor once made the comment that "an oral contract is worth the paper it is written on," and I do not disagree.

I did find a California state appellate case in which an appeals court found that a homeowner who relied to his detriment on a broken promise by a lender to delay a foreclosure had a cause of action for money damages.  However, even in this California case (which would not serve as binding precedent in Georgia) the foreclosure was not reversed and the only issue to be considered by the trial court on appeal was money damages.  Add to this months and months of delay and I wonder if the homeowner in the California case felt that he won anything.  (Thanks to Michael Renne and his San Francisco Bankruptcy Law blog for his post about Garcia v. World Savings.)

When your home is at risk, I would not rely on any verbal promises from your mortgage company.  I would also not rely on an email as the admissability of emails as evidence is questionable.  Instead I would suggest that you ask for a faxed letter from your lender or its attorney on letterhead, with the original mailed to you.  Further, if you enter into an agreement with the lender directly, you should contact the foreclosing attorney's office (with a copy of the foreclosure suspension letter) to confirm that they are aware of the deal as well.

Posted in Alternatives To Bankruptcy, Debt negotiation, Foreclosure, Foreclosure issues, Garcia v. World Savings, Michael Renne, Petition, a, chapter 13 and foreclosure, delay, estate, failing, foreclosure negotiations, garcia, georgia foreclosure, investment not, letter, my, notice, pending, post, pre foreclosure, preparation, program on, promise, promises  , real, representative, sale, savings, scheduled, surprisingly, suspension, the, v, verbal, verbal agreement to stop foreclosure, wednesday, world | Comments Off

Should You Save Your Home from Foreclosure, or Should You Let it Go

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.

Posted in 2800, Bankruptcy, Chapter 13 issues, Foreclosure, Foreclosure issues, Lawyer, Mortgage, Russ Demott, a, absent, bankruptcy and foreclosure, charleston, client’s, consent to foreclosure, contest foreclosure, deed in lieu of foreclosure, demott, equity, facing, folks, foreclosure  , home when, home  , home ” in, huge, increases, modification, month  , my, oppose foreclosure sale, potential, question, russ, save, saving, showing, statistics, the, you’d, you’re | Comments Off

Forgotten Lawsuit Creates Big Problems for Prior Chapter 7 Client

Earlier this month I received a call from a Chapter 7 client that I had represented several years ago.  He is attempting to refinance his house and has discovered that a judgment creditor has a lien for several thousand dollars.  The creditor was listed on the case, but neither he no I knew that there was any judgment.

I directed him to visit the county courthouse and pull the file for this case.  He did and he reports that the return of service shows that his wife was served by a sheriff's deputy.  His wife has no recollection of being served.  We did list the creditor on the bankruptcy petition but because we did not know that there was a judgment, we did not file a motion to avoid the judgment lien.  What can he do?

There are a number of lessons you can learn from this man's experience.  First, you should always obtain copies of credit reports from all 3 credit bureaus prior to filing bankruptcy.   In Georgia, you can get a free credit report from each of the 3 main credit bureaus twice a year.  Online, you can go to annualcreditreport.com and download your reports.  Because credit reports obviously contain sensitive information the annualcreditreport.com system will ask several questions to identify yourself.  These are usually multiple choice questions – for example, the system may say "your credit report shows that you previously lived on one of the following streets: (a) Oak Street (b) Thompson Street (c) Ivers Road (d) none of the above.

If you are unable to answer these questions, the system will instruct you to mail away for your credit reports – here is a link to a page on my website with the credit report request letters.

Credit reports are helpful because they will usually show pending lawsuits as well as the names, address, account numbers and debt amounts for most of your creditors.  Obviously I can't require all bankruptcy clients to bring me credit reports but it sure helps avoid "forgotten" creditors or judgments.

As far as what we can do, there are a couple of options.  First I want to make sure that service of process was correct.  If you are served with a lawsuit in Georgia, the sheriff's deputy (or private process server) has to complete a document called a "return of service" that states when a party was served and by whom.  Section 9-11-4 of the Official Code of Georgia provides that service on an individual must be made on the defendant himself, or "by leaving copies thereof at the defendant´s dwelling house or usual place of abode with some person of suitable age and discretion then residing therein."

In this case, if the sheriff's deputy served my client's wife, then service is most likely valid.

However, I sometimes see situations where the return of service is unclear as to who was served or even situations where the return of service is blank.  In these cases, a defendant can "collaterally attack" the judgment on the grounds that service was not made and he did not know about the lawsuit.

If it turns out that service is valid, my client will have little choice but to negotiate a settlement of the real estate debt.  Interestingly the Chapter 7 discharge would eliminate any personal liability he might have for this debt, but the liability remains as to his real estate.

My experience has also been that judgment creditors will become more amenable to negotiation the longer a real estate lien remains unpaid.  Here, my client could forego a refinance (or threaten to to forego a refi) and use the argument that the judgment creditor might have to wait for years to get paid as leverage to negotiate a reduced payoff.

Posted in Chapter 7, Chapter 7 issues, Credit, Negotiation, Post bankruptcy credit rebuilding, a, amenable, avoid, bankruptcy and judgments, client, deputy, estate, forego, judgment, lawsuit, letters credit, lien, lien  , longer, my, or, post-bankruptcy, private, process, real, refinance, remains, report, reports, request, served, server, the, threaten, unlisted judgment creditors, unpaid  , wife | Comments Off