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Archive for the ‘bankruptcy options’ tag

Using Time to Your Advantage in Chapter 7 and 13

November 20th, 2017 at 8:00 am

Chapter 7’s big advantage is that it’s quick. Chapter 13’s big advantage is that it buys you more time to do what you want or need to do.


A Key Distinction-Treatment of Time

We’re starting a series of blog posts about the practical differences between Chapter 7 and Chapter 13 bankruptcy. Before getting down into the details let’s look at a difference that affects just about everything else—time. These two options deal with time very differently.

Sometimes getting something done quickly is to your advantage. Sometimes getting more time to get something done is to your advantage. Here’s how these play out with Chapter 7 and 13.

Chapter 7—In and Out Fast

If you’re like most people thinking about bankruptcy, you’ve been hurting financially for a long time. Understandably you want to get a fresh financial start fast.

With any kind of bankruptcy you get relief from almost all creditor collection actions the minute you file your case. Then with Chapter 7 “straight bankruptcy” your debts are discharged less than 4 months from the day you file the case. All or most of your creditors can never again attempt to collect on the debts.

So, you get immediate relief, your creditors are put on hold, and then just a few months later you’re done. You have your fresh start.

Chapter 7—One Point in Time

Chapter 7 bases just about everything on that moment in time when your case is filed. It particularly focuses in on your assets as of that moment. Generally your future assets are not relevant, unless they derive from assets owned as of the date of filing. (Rental income from property you own now would be an exception.)  Future income doesn’t count as present assets, unless it was for work done before filing.

Chapter 7—Short-Lived Automatic Stay

One problem with Chapter 7 is it can be TOO quick, when it comes to protecting you from certain creditors. The “automatic stay” is the name of the protection that kicks in the moment you file a bankruptcy case. That protection lasts only as long as the case is open. In a Chapter 7 case that means only 3-4 months, at the most.

Chapter 7 also gives you no enforceable mechanism for making payments on debts that you want or need to pay. For example, if you’re behind on a mortgage and want to catch up you have to bring it current by whatever terms and timetable the mortgage holder demands. There is nothing in Chapter 7 that compels the mortgage holder to give you more time. It’s the same if you’re behind on a vehicle loan, child or spousal support, or recent income taxes. You have little or no protection, and no power to compel these kinds of creditors to be more flexible.

(Chapter 7 does allow for “reaffirming” secured debts like vehicle loans. But “reaffirmation” doesn’t usually help if you’re behind on payments. It just makes you liable as if you hadn’t filed bankruptcy. And it doesn’t apply to other kinds of not-discharged debts like child/spousal support or income taxes.)

Chapter 13—Stretching Out Time in Your Favor

A quick bankruptcy procedure isn’t always in your favor. So getting in and out of bankruptcy quickly isn’t good if you’re left with ongoing special debts.

That’s not a problem if the surviving debt is one you can readily handle. You may have had trouble keeping up with payments on your vehicle loan. But after discharging all or most of your other debts under chapter 7 you may have no trouble making them. Same thing may be true if you still owe a relatively small amount of nondischarged income tax. You may well be able to pay it off conveniently through a negotiated monthly payment agreement.

Problems occur when the debt that would survive a Chapter 7 case is too large to handle on your own. It’s not at all unusual to have more than one such debt. Then you need the substantial additional time that Chapter 13 “adjustment of debts” gives you.

With Chapter 13 you’re not effectively being left on your own to deal with these special debts as under Chapter 7. Instead Chapter 13 can give you up to 5 years of time and protection. You have up to that much time to bring a debt current or to pay it off.

Chapter 13—Flexible Time

Chapter 13 doesn’t just buy you time to deal with those other problems. It buys you flexible time. It does so in three ways.

First, the amount of time it buys flexibly depends mostly on your budget. If your income qualifies you for a 3-year plan, you’re usually allowed to stretch it out longer. If you just need an extra 3 months, or the full 5 years, or anything in between, your personal budget is often the main determinant.

Second, if you have more than one important debt you need to pay, you often have flexibility about that. For example, let’s say you owe back home property taxes and child support, and recent income tax. All of them have to be paid in full before the end of your Chapter 13 case. But the property taxes accrue high interest. The child support you feel morally obligated to catch up fast. The income tax is not accruing interest. Your Chapter 13 payment plan could likely get the property tax and child support caught up before paying anything on the income taxes.

Third, Chapter 13 flexibly keeps your options open. For example, if you’re considering selling your home at some point, your payment plan could schedule that for 3 years into your case. You could keep your plan payments lower until paying a lump sum out of those later home sale proceeds. Or you may be able to leave that potential home sale open-ended, depending on what happens in the meantime.

Conclusion

As you can see, Chapter 7 and 13 each turn time in your favor, depending on what you need. If you don’t have a lot of debt that would not be discharged in a Chapter 7 case, then its quickness can be a big advantage. If you do have debt that would survive, Chapter 13’s length can be a great advantage. It not only buys you time but gives your protection and flexibility for dealing with these special debts.

 

Timing: Writing Off Recent Credit Card Debt

September 25th, 2017 at 7:00 am

Using a credit card shortly before filing bankruptcy doesn’t seem right. The law agrees. Writing off this kind of debt can be a problem. 


Our last blog post was about writing off—“discharging”—income taxes.  The conditions you have to meet to discharge a tax debt are mostly very clear. These conditions are based on rather straightforward calculations of time. If you don’t meet those time-based conditions the tax does not get discharged; you still owe it.

Credit card debts are completely different. First, they’re almost always discharged. Second, there are some timing rules but those rules don’t necessarily decide whether or not the credit card debt is discharged or not. We’ll explain all this in today’s blog post.

The Point of the Timing Rules

With income tax debts, they’re NOT discharged unless you meet the timing rules. With credit card debts they ARE discharged unless you meet the timing rules.

With income taxes the debt is not discharged unless it’s been long enough since the pertinent tax return was due and since that tax return was actually submitted to the IRS/state. The point of the rules is the give the IRS/state a chunk of time to try to collect the tax.

With credit cards the debt is discharged unless it’s been too short of a time since the credit card charge. The point of the rules is to make it harder to discharge a charge incurred after deciding to file bankruptcy.

A Mere Presumption

As we just said, the timing rules with credit cards merely make it harder to discharge a credit card debt.  If you run afoul of the timing rules with income taxes, you absolutely still owe the tax. With credit cards, if you run afoul of the timing rule there’s only a bigger chance that you would owe it. It just gives the creditor an easier time of making you pay it—a presumption that it can’t be discharged. But that creditor still needs to act or else it loses that advantage. The entire credit card debt could still get discharged.

For example, if you owed $7,500 on a credit card, of which you incurred $1,000 recently, the entire debt would be discharged in bankruptcy if the creditor did not timely object.

 Only a Portion of the Credit Card Debt is at Risk

With income taxes the entire tax is either discharged or it’s not. With credit card debts, most of the debt could be discharged while only the portion that violates the timing rules is not.

In the above example, only the $1,000 incurred recently, in violation of the timing rules, would usually be at risk of not being discharged.

In Rare Circumstances the Entire Credit Card Debt Could Be at Risk

The following may be confusing in light of what we said so far. If a creditor has evidence that you incurred the entire credit card debt without the intent to pay it, the creditor can challenge the discharge of the entire debt. The timing rules do not need to apply (although if they would that may make the creditor’s argument easier).

In the above example, if the creditor somehow had evidence that you didn’t intend to repay any of the $7,500 at the time you incurred the debt, the creditor could object to any of the $7,500 debt being discharged. It doesn’t matter how long ago that $7,500 debt was incurred.

The Timing Rules

So here are the timing rules.

If you buy more than $675 in “luxury goods or services” (essentially, any non-necessity) from any single creditor during the 90-day period before your bankruptcy is filed, that specific debt is presumed not to be discharged. Also, if you make a cash advance of more than $950 from any single creditor during the 70-day period before your bankruptcy is filed, the debt from that cash advance is presumed not to be discharged.  See Section 523(a)(2)(C) of the U.S. Bankruptcy Code.

The Presumption Is Only a Presumption

Just because a purchase/cash advance meets these conditions do not necessarily mean you can’t discharge that part of the debt. You can defeat the presumption with evidence that you did actually intend to pay the debt when you incurred it. You can still win by persuading the court of your honest intent. You and your bankruptcy lawyer can do this through your own testimony. You can also provide evidence of other relevant facts, such as of you making payments after incurring the debt, or the subsequent event(s) in your life that induced you to file bankruptcy (and not pay the debt after all).

Two Examples of Bankruptcy Timing with Medical Debts

September 20th, 2017 at 7:00 am

How to know whether to delay filing bankruptcy when you’re expecting new medical services and their medical debts?  Here are two examples.   


Our last blog post was about the importance of timing your bankruptcy filing to include more of your debts.

One example we used was of a person with unresolved medical issues requiring ongoing medical care. That person could be overwhelmed by medical and other debts already owed. But he or she may wonder whether it would be wise to hold off on filing bankruptcy until the anticipated medical debts were incurred and so could be included.

We’ll now present two examples of this situation, each with different facts. We’ll show how these different facts resulted in these two people getting quite different legal advice.

Jeremy’s Facts

Jeremy is 30 years old, and single. He was in a car accident a year ago, resulting in serious injuries and huge medical bills. He’s not yet medically stable. He was underinsured, so that a big chunk of his medical expenses were covered but a lot were not. Because he’s maxed out his vehicle insurance coverage he’ll be liable for most of his future medical expenses.

Jeremy currently owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. In the next year or so he expects to add on another $30,000 to $40,000 in medical bills.

Jeremy does not have much in assets. His current income is low, as are his immediate prospects. That’s largely because he’s working a limited schedule as a result of his injuries, medical appointments and surgeries. He was in the military and so didn’t finish college until a couple of years ago. His future income prospects are quite good.

Should Jeremy File Bankruptcy Now or Wait?

If Jeremy would file bankruptcy now, it wouldn’t write off (“discharge”) his upcoming $30-40,000 in medical bills. A year from now he’ll be back in the hole that much.

He could then try to negotiate his way to paying reduced amounts. And if his income increases he may end up being able to pay off his debts, eventually. But that is not a satisfactory solution.

His bankruptcy lawyer instead advises that he wait to file a Chapter 7 “straight bankruptcy” until he became medically stable and had incurred most or all of his medical debts.

Jeremy has limited exposure to harm by his creditors in the meantime. All of his assets are “exempt”—worth little enough to be fully protected from his creditors, even outside bankruptcy. His income is sporadic and low enough that he’d lose little if his wages were garnished. Jeremy hasn’t been sued yet. That may be in part because his creditors don’t see him as a good prospect for forced collection.

So Jeremy does wait, finishes his surgeries and other medical procedures, racking up another $35,000 in medical bills, and then files a Chapter 7 case to discharge all of his debts.

Mary’s Facts

Mary is 65 years old, also single. She had a heart attack two years ago. Like Jeremy she owes $50,000 in medical debts, plus another $60,000 in credit cards and various other unsecured debts. Her heart ailment is a chronic condition which will definitely require medical attention the rest of Mary’s life.

She works full time in the same job she’s had for a decade. Her income is modest but high enough so that if her wages were garnished she would lose a significant amount.

Indeed she just got served with a lawsuit by her largest medical creditor for $10,000. This creditor likely sued knowing that it could likely get paid through wage garnishments.

Should Mary File Bankruptcy Now or Wait?

Because Mary just turned 65 years old she now qualifies for Medicare. She expects to have both Medicare Part A (hospital insurance) and Part B (medical insurance). She understands that these will pay for most of her anticipated medical costs.

So with her future medical expenses largely taken care of, there is no reason for Mary to wait to file bankruptcy. The just-filed lawsuit for $10,000 is good reason not to wait. If she files a Chapter 7 case through her bankruptcy lawyer before her deadline to respond to the lawsuit, she will prevent it from turning into a judgment and then a garnishment.

So Mary does just that. She files the Chapter 7 case, stops the lawsuit in its tracks, and within about 100 days discharges that $10,000 and all the rest of her debts. She gets a fresh financial start heading into her retirement years.

A Moral and Legal Note

Note that incurring a debt, medical or otherwise, when you intend not to pay it is questionable, legally and morally.

The moral question is a personal one. If it’s a matter of your life and death, or even just of your health more broadly, it’s likely defensible to have a surgery or other medical procedure done even if you knew you couldn’t pay for it and intended to discharge the resulting debt in bankruptcy.

The legal question is clearer but still murky. The law does not approve of incurring a debt when you don’t intend to pay it. That can be considered fraud on the creditor. It may turn on the facts of the case. If you’re in the midst of a medical emergency you may not be conscious and able to give your consent for medical services.  Also, most medical creditors don’t raise objections base on issues of fraud in bankruptcy. And when they don’t raise this issue by a quick deadline, they lose the opportunity to do so in the future. So this legal problem usually resolves itself in this practical way.

Talk with your bankruptcy lawyer about these moral and legal issues if you are considering delaying your bankruptcy filing in order to include future debts.

 

The Pursuit of Happiness this 4th of July

July 3rd, 2017 at 7:00 am

This 4th of July follow the Declaration of Independence and claim your right to “Life, Liberty and the pursuit of Happiness.”


Your Life in Mid-2017

If you’re reading this on the Fourth of July weekend there’s a good chance you have some serious financial problems. Your debts may be overwhelming you. You’re worrying about them all the time.

Odds are you’ve probably been trying to improve your situation for a long time, maybe even for years. It’s really adversely affecting your life. It’s dragging down your personal relationships. You’re worried that the anxiety is harming your health, and then you worry about that, too! It’s hard to feel good about yourself with this all never far from your mind. You aren’t often relaxed or happy.

The Declaration of Independence is now 241 years old. It states at the beginning of the Preamble:  

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Isn’t it time to follow this self-evident truth: you’re in a vicious cycle and need to find a way to a better life, financial liberty, and the freedom to pursue your life dreams?  

Happiness to Pursue

You’d like to be able to afford what you need, what are important to you. You’d like to not be anxious about money all the time. You’d like feel hopeful, to have a future worth looking forward to.

You’d like financial freedom.

The First Step

It’s often true that the first step is the hardest. We often figure that solving a problem will be harder than it actually ends up being. Sometimes we’re pleasantly surprised after we take the first step that it’s not as hard as we’d thought. Then afterwards we wish we’d had the nerve to take that first step much earlier. We kick ourselves about how much grief we could have avoided.

So what’s the simple but crucial step here? What do you need to do avoid future unnecessary grief?

Simply find out what your legal options are about your debts.

Move from Fear to Realistic Options

You discover your options by seeing a lawyer who helps people like you solve their consumer and/or business debt problems.

This may be easier than you think. That’s because asking for this kind of help is usually free, at least to get started. Most lawyers who help people with their debts don’t charge for their initial consultation with you.

But Don’t You Just Get What You Pay For—Nothing!?

When you go to the right lawyer you will get valuable information and advice at the free initial consultation. At this meeting you will have the opportunity to tell the lawyer about your situation, your concerns, and your goals. The lawyer will usually outline your most likely legal options, along with their major advantages and disadvantages. This initial meeting is usually extremely valuable.

So why do most lawyers who help consumers and small businesses with debt problems not charge for their initial meeting?

First, let’s admit right from the start that it’s partly a marketing tactic. A lawyer naturally does hope that once you invest the time to meet with him or her you will more likely hire that lawyer if you decide to use a lawyer.

Second, when you’re in financial trouble you likely can’t spare the money to pay for shopping for a lawyer. So most bankruptcy lawyers recognize that they can’t charge for initial consultations. They need to give you a chance to check them out and get advice from them.

Third, most bankruptcy lawyers who serve debtors are genuinely compassionate folk. Most chose to specialize in this area of law for that reason. So they actually do care about you and want to help you have a happier life.

So it’s only sensible to take advantage of their free offer.

Be Selective

At your initial meeting with a lawyer, you’re “just shopping” but doing so seriously. It’s a big investment of your time, so learn as much as you can.

Of course you have absolutely no obligation to continue working with that lawyer. You are asking for information and advice, and maybe looking for a lawyer to help you.

So during and after the initial meeting ask yourself the following questions:

  • Did the lawyer listen carefully to you and get all the necessary information about you and your finances?
  • Did he or she present your options clearly? Did you have a chance to ask questions about them that were answered in an understandable way?
  • Do any of the options sound practical and worth doing?
  • Was the lawyer considerate towards you, respectful, help you feel comfortable?
  • Was the lawyer knowledgeable but able to communicate in a way that made sense to you?
  • Were you comfortable with him or her? Do you feel like you could trust him or her? Were you and the lawyer a good fit?

Don’t Bankruptcy Lawyers Always Recommend Filing Bankruptcy?

No. That would go against their ethical and legal obligations to you.

Lawyers are strictly required to serve you. It is illegal for them to pressure you into any option at all. Their role is to advise you of your options, and your advantages and disadvantages as to each one. They must provide this advice without considering their financial self-interest.

If they do anything different they can be sued for malpractice for giving bad advice (as lawyers quite regularly are). Or they could lose their law license, and thus their livelihood.

This all true even as to a free initial consultation. When you have a lawyer-client relationship, it doesn’t matter what your financial arrangement is with the lawyer.

Crucially, a lawyer’s job is to lay out the options so that YOU can make an informed decision. The lawyer doesn’t tell you what to do or make you do anything. That’s your choice. Sure, the lawyer’s job is to advise you, and usually to make recommendations based on your circumstances. But it’s not to make decisions for you or to make you do anything.

If the lawyer you meet seems to be putting any uncomfortable pressure on you, find another one who respects your appropriate role as the decision-maker.

Take that First Step

On the 5th of July call a lawyer to set up a consultation meeting. And go to that meeting. You will almost certainly come away from it much, much better informed about your options.

You will very likely be able to get out of your vicious cycle and find a way to a better life. You’ll finally get the freedom to pursue happiness.

 

Avoiding the “Preference” Problem

April 17th, 2017 at 7:00 am

Prevent your trustee from giving you a big headache if you paid a debt to a friend or relative during the year before filing bankruptcy.  

 

In our 3 blog posts last week we explained “preferences” in bankruptcy. In particular, in our last one on Friday we showed how a “preference” claim by your trustee could cause you a significant problem. Doing something seemingly sensible before filing bankruptcy could cause trouble during your bankruptcy case. Today is about how to avoid that trouble.

Avoid the Risk of a “Preference”

A “preference” is a payment you make to one creditor in preference to your other creditors when you’re on the brink of filing bankruptcy. Specifically, it only involves payments made during the 90-day period before that filing. That period expands to the full year before filing if the creditor you pay is a friend, relative, or business associate.

Those 90-day and 1-year look-back periods are fixed, non-extendable. There is a straightforward way to take advantage of this. Just don’t pay anything you owe to a favored creditor during these periods of time. If you owe anything to a friend or relative, don’t pay them anything if there is any possibility that you’ll be filing bankruptcy in the following year. And don’t pay any other favored creditor during the 90-days before filing.

Otherwise you risk that your bankruptcy trustee will require the person you paid before filing to “return” that money to the trustee after you file bankruptcy.

The Realities of Life

There are situations that simply not paying that favored creditor is not that simple.

First, you may feel great pressure to make that payment. You owe some money to a relative who really needs you to pay some or all of it back. He or she trusted you and you feel duty-bound to show that you are trustworthy. Or your friend that you owe really needs the money now. Or you may want to pay in order to avoid including that debt in your bankruptcy case. You may not want to legally write off that debt. You may want to avoid having that friend or relative ever knowing about your anticipated bankruptcy filing. So if you are able to pay, it can be hard not to.

Second, you often don’t know whether and when you are going to file bankruptcy. Most people put it off because they understandably hope that they can avoid it. So being told to not pay a personally important debt in the one-year or 90-day periods before filing can be quite impractical advice.

Maybe sometimes, but not always. Just because you hope not to file bankruptcy, and don’t know when you will if you do, doesn’t mean you don’t know when you’re in financial trouble. If you are, be very cautious about paying a debt to a friend or relative. If you realize that doing so can cause you and the other person a major headache, you may find a better alternative.

Getting Advice

Your bankruptcy lawyer can hugely help in this. You can find out whether it is your best interest to be filing bankruptcy, now or in the near future. You can find out the best solution for dealing with your special creditor.

People understandable avoid seeing a bankruptcy lawyer until they feel that they have to file a bankruptcy case. But that is often not wise, because often the sooner you get advice the better. There are usually ways of meeting your needs that you didn’t realize. As the saying goes, knowledge is power. That’s true about your financial life in general, and in avoiding a possible “preference” as well.

Delay the Bankruptcy Filing

If you’ve already made a preferential payment, it may be worth waiting before filing bankruptcy. As mentioned above, those 90-day or 1-year look-back periods before filing your bankruptcy case are fixed. If you paid your grandmother $1,000 360 days ago when you got your tax refund, it’s usually easy enough to wait a week before filing so that payment is not within the year before filing. Then it’s not a “preference” and won’t be a problem.

If it isn’t already obvious, it’s crucial to be honest and thorough with your lawyer about any such payments you made. It’s easy to not think of debts to friends or relatives are real debts, them as real creditors. You may have paid in something other than money. Frankly, it may seem sensible to just pretend it didn’t happen.

But if you’re up-front with your lawyer there are usually solutions much better than not telling the truth. For example, most payments to creditors, including favored creditors, do NOT qualify as a preference. There are a number of elements that must be met for a payment to be legally a “preference.” See our blog post of a week ago for more about that. You may be worried about something not worth worrying about. There are many parts to your financial life and a good lawyer will help you find the best way to meet your goals.

You want to avoid creating a “preference.” Get legal advice so that you can do so and not worry about this.

 

Discovering the Facts in a Dischargeability Proceeding: an Example

March 31st, 2017 at 7:00 am

Here’s how the debtor and creditor get at the facts in an adversary proceeding about whether a debt gets discharged. 

 

We’re going through a series of blog posts showing by example how a creditor’s formal objection to discharge goes in bankruptcy court.

Here are the facts, briefly. Five years ago Marshall got a $35,000 loan from his aunt, Heather. But he wasn’t completely upfront with her at the time, neglecting to list in his loan application a $7,500 debt to another aunt. So now, after Marshall filed bankruptcy, Heather filed a formal complaint accusing him of fraud for this lying by omission. Specifically, she alleged that his omission about the other loan was “materially false,” Heather “reasonably relied” on that omission in making the loan, and Marshall made the omission “with intent to deceive” her. (There are other elements of fraud but these are the ones that are at issue in this example.)

Marshall filed an answer by denying that this omission was “materially false.” That’s because he thought that Heather would have made the $35,000 loan even if she had known about the $7,500 balance on the earlier loan. He also denied that Heather had “reasonably relied” on his omission because he didn’t think that she had relied on the application at all. Finally, Marshall denied that he’d excluded the prior $7,500 “with intent to deceive” Heather. He hadn’t thought she’d care one way or the other.

He felt he hadn’t set out to cheat her at all. Since he hadn’t, he understood the law gave him the right to legally write off the now-$21,000 debt in bankruptcy.

Burden of Proof

Debts like Marshall’s get discharged unless the creditor finds legally valid grounds for the bankruptcy court to deny discharge. The burden is on the creditor to find facts supporting those grounds.

Here in our example Heather has to bring evidence establishing ALL of the following:

  • Marshall’s omission was “materially false.” That is, the omission not only made his application false. It was so false that Heather would not have made the loan had Marshall included the $7,500 debt.
  • Heather had “reasonably relied” on the omission in making the loan. That is, Heather had at the time not only relied on the lack of a $7,500 loan. She had relied on that omission reasonably. Under all the circumstances it made sense for her to rely on the accuracy of Marshall’s application.
  • Marshall acted with “intent to deceive” Heather. He had not included any reference in the loan application to the $7,500 he owed to the other aunt because he purposely wanted to fool Heather into giving him the loan.

“Discovery” Methods

“Discovery” is the formal procedure for discovering the relevant facts in a lawsuit. In our context it’s the way that Marshall and Heather get at the facts relevant to their discharge dispute.

The facts are “discovered” mostly through these four methods:

“Discovery” in Our Example

The lawyers for Marshall and Heather wanted to try to keep litigation costs down for their clients. So they agreed to avoid depositions if they could get the facts they needed without them. Depositions can be time-consuming and expensive.

So both parties prepared and delivered Interrogatories.

Heather’s Interrogatories to Marshall

Here are some of the most important interrogatories that Heather presented to Marshall, along with his sworn answers:

1. Were you aware of the $7,500 balance you owed your other aunt at the time you completed Heather’s loan application?

Yes.

2. If you were aware of this other loan balance, why did you not include it in the application?

I did not include it because I really didn’t think Heather would care one way or the other. I’d made payments on that personal loan perfectly, bringing it down from $20,000 to the $7,500 balance at the time. I figured that with this payment history that existing loan was more of a positive than a negative to Heather. It showed my creditworthiness on family loans. However, I’d heard that Heather was in an unpleasant dispute with the other aunt. Heather had a reputation for being unpredictable. So I was afraid of giving her any excuse to not give me the $35,000 business loan. I was pretty desperate to get it from her.

3. Did you intend to deceive Heather into making the loan by omitting the $7,500 debt you still owed to your other aunt?

No. First, I really didn’t think that Heather was basing her decision on the loan on financial and risk considerations. Based on my conversations with her, she seemed to be motivated mostly by family considerations. She was pretty well off, didn’t have kids of her own, and was excited about my business venture. She expressed a desire to help, out of affection and family connection. She acted like the application was a formality and wouldn’t be a major basis for her decision.

Second, I thought Heather may well already know about that other debt. I had borrowed the $20,000 years earlier from the other aunt to get a 2-year community college degree. I knew these two aunts were not very close, but that earlier loan wasn’t any big secret. I figured there was a good chance that Heather already knew about it.

I wasn’t trying to fool her into thinking I was debt-free so that she would make the loan.

Marshall’s Interrogatories to Heather

Here are some of the most important interrogatories that Marshall presented to Heather, along with her sworn answers:

1. Were you aware that Marshall had taken out a loan from his other aunt at the time you agreed to lend him the $35,000 for his new business?

No. I’d heard vaguely about it a few years before that. But it was not in my mind at the time I was considering whether to make the $35,000 loan. I did not know whether he’d paid it off, was making payments at the time, or any such details.

2. If you had been made aware of the $7,500 debt by Marshall including it on his application, would you have made the $35,000 loan to him?

I don’t know. Hard to tell now, more than five years later. It would have made it less likely, for sure. I WAS a little nervous about making the loan anyway. That could have pushed me to change my mind.

3. Did you review the application after Marshall had completed it?

I had my lawyer prepare the application form and I asked her to review it when he’d completed it. But no, I didn’t read it myself. I remember vaguely talking with my lawyer about it, but nothing specifically.

4. On what did you base your decision to make the loan to Marshall?

On whether he was worthy of getting the money. He’d always been a good guy. I don’t have any kids myself. I’d always liked him. He was always a hard worker, an honest young man. He had gotten some bad breaks earlier and I wanted to help. His business plan sounded sensible. He was family.

But now he needs to pay me back. Just because he can write off his other debts doesn’t mean he should write off this one. I was loyal to him. He should return the loyalty by paying back this debt to me.

Next, the Trial

With these facts on the table, this adversary proceeding is ready for trial. We’ll finish with that in our next blog post on Monday.

 

Independence from Debt

July 4th, 2016 at 7:00 am

This 4th of July make your move towards financial freedom.  Get informed. You’ll feel tons better once you know your options.

 

We take this break from our ongoing series of blog posts on secured debts this 4th of July to talk about freedom from debt. 

Your Life Today

If you’re reading this most likely you’ve got some rather serious financial problems. Most likely your debts are overwhelming you, worrying you all the time.

You’ve probably been trying to improve your situation for a long time, likely for years. It’s really affected your life. It hasn’t helped your personal relationships. The anxiety is impacting your health.  It’s hard to feel good about yourself, to be happy or relaxed.

It’s difficult to take care of your basic daily needs, and of those who depend on you. It’s frustrating to think about the long-term responsibilities that you aren’t getting ahead on, like saving for retirement.

What You Need

Financial peace. Financial freedom.

You’d like to be able to afford what’s important to you. You’d like to not be worrying all the time. You’d like to have reasons to be hopeful; you’d like to have a future worth looking forward to.

Take the First Step

You’ve heard the expression that the first step is always the hardest. There’s something about human nature, especially when we’re feeling down, that makes us assume that resolving a problem will be harder than it actually ends up being. We are often pleasantly surprised that once we take the first step the process is not as hard as we had feared. Then afterwards we wish we would have had the nerve to take that first step much earlier and avoid unnecessary grief in the meantime.

So take that first simple but crucial step: find out your legal options about your debts.

From Fear to Practical Options

You find out your options by seeing a lawyer who focuses on helping people like you solve their consumer and/or business debt problems.

This may be easier than you think because asking for this kind of help is usually free, at least to get started. Most lawyers who help people deal with their debts don’t charge for their initial meeting with you.

At this meeting you will have the opportunity to tell the lawyer about your situation, your concerns, and your goals. The lawyer will usually outline your most likely legal options, along with their major advantages and disadvantages.

But Do You Really Get Something for Nothing at that Initial Consultation?

Most lawyers who help consumers and small businesses with debt problems don’t charge for their initial meeting for various reasons.

And sure, it’s partly a marketing tactic. Lawyers hope that once you take the trouble to meet with them you will like them and will more likely hire them if they decide to retain a lawyer.

There’s also the reality that when you are in financial trouble you likely can’t spare the money on shopping for a lawyer. So fortunately most lawyers don’t charge for that chance for you to check them out and get advice from them.

It’s worth mentioning that most of these lawyers actually do care about you and genuinely want to help you. That’s because who get into the field of helping people deal with their debts they get satisfaction from improving their clients’ lives.

So take advantage of their free offer.

Be Picky and Find a Good Match

Just because you have an initial consultation with a lawyer, you have absolutely no obligation to continue working with that lawyer. You are seeking information and advice, and maybe looking for an attorney to help you. After the initial meeting ask yourself the following questions.

Did the lawyer listen carefully to you to get enough information about you and your finances? Did he or she present your options clearly, and answer your questions about them in an understandable way? Do any of the options presented meet your goals?

Was the lawyer considerate, treating you like a human being? Were your concerns heard and addressed directly? Was the lawyer knowledgeable but not overbearingly so? Were you comfortable with him or her? Did you feel he or she was worthy of your trust? Were you and the lawyer a good fit?

But Won’t Lawyers Always Recommend Filing a Bankruptcy Case?

No. That would be contrary to their ethical and legal obligation to you.

Lawyers are strictly required to represent YOU, not to pressure you into any preconceived direction. They must advise you of your options, and the advantages and disadvantages to you, without any regard for their financial self-interest. They can be sued for malpractice for giving bad advice, or could lose their law license. That applies even to free initial consultation meetings.

Furthermore, a lawyer’s job is to lay out the options so that YOU can make an informed decision. The attorney doesn’t tell you what to do; that’s your choice. Yes, his or her job is to advise you, and usually to make recommendations, strongly or otherwise. But not to make decisions for you or to make you do anything. If the lawyer you meet seems to be putting any uncomfortable pressure on you, find another one who respects your appropriate role as the decision-maker.

Take that First Step

Call to set up a consultation meeting with a lawyer who focuses on debt matters. Meet with him or her. You will almost certainly come away from that initial meeting much, much better informed about your options. You will very likely feel much better about being able to find the freedom from debts that you need.

 

Chapter 13 Benefits Directly Related to Real Estate Other than Your Home

June 17th, 2016 at 7:00 am

Chapter 13 can be an effective way to keep or unload business and investment real estate.

 

Our last blog was about selling real estate that is not your home within a Chapter 13 “adjustment of debts” case. We showed how this would give you more control over the timing and other important circumstances of the sale than if you just surrendered the real estate through a Chapter 7 “straight bankruptcy.”

But Chapter 13 may provide other benefits to consider.

Some of those benefits are related to the real estate itself. We’ll cover those today and in our next blog post.

Benefits under Chapter 13 Related to the Real Estate
—Control over Keeping or Selling

When you file a Chapter 7 case you hand over total discretion about that decision to the bankruptcy trustee. He or she chooses whether to take possession and control over the property, whether to sell it, and all the circumstances of that sale. The guiding principle for the trustee’s decision is whether your creditors will benefit, with essentially no consideration for your interests.  

Under Chapter 13 you have at least some say about what to do with the real estate. For example, if you believe that with some “sweat equity”—repairs done through your efforts plus a modest amount of money—you could increase the equity in the property and thereby pay more than you would otherwise to your most important creditors, you’d have to opportunity to make your case about this.

You do have to justify what you propose to do with the real estate, and so your discretion is definitely limited. For example, if want to keep your real estate but it has no equity, requires monthly payments on a mortgage, and produces no financial benefit, you’re going to have a tough time justifying keeping that real estate. Keeping the real estate has to be part of a sensible financial plan.

—Surrendering Undesirable Property

This loss of decision-making includes your likely inability to get rid of real estate that you want to be rid of. It’s not unusual to have real estate that is a significant burden to you. For example, you may very much want to get out from under a rental home where the last tenants manufactured “meth,” with the result that the clean-up costs are prohibitively expensive. Your mortgage holder is not foreclosing, so you file a Chapter 7 case thinking that the bankruptcy trustee gets the property out of your hands. Not necessarily.

The Chapter 7 case may well discharge (legally write off) your mortgage debt, along with all or most of your other debts. But the Chapter 7 trustee would very likely choose to “abandon” the real estate back to you on the grounds that it is “burdensome” or “of inconsequential value and benefit” to your creditors. See Section 554(a) of the Bankruptcy Code.

So you’d still be saddled with the real estate after your Chapter 7 would be over, probably continuing to incur new debts for property taxes, potentially for homeowner association dues and assessments, city fines, and such.

Under Chapter 13 you may be able to be more proactive with such property. You may be in a stronger negotiating posture with the mortgage lender to induce it to accept its losses and foreclose on the property. The bankruptcy court may help with this since that one creditor is potentially harming your ability to pay the other creditors. At the very least you would have the power to convert the Chapter 13 case into a Chapter 7 one once the foreclosure occurred, allowing you to discharge the debts on the property that accrued in the meantime.

 

(Our next blog post in a couple days will have more about how Chapter 13 can help you temporarily or permanently retain and build your equity in business and investment real estate, and your income from it.)

 

The Business Debt Exemption from the Chapter 7 “Means Test”

March 16th, 2016 at 7:00 am

If your debts are not “primarily consumer debts” then you may be able to qualify for Chapter 7 bankruptcy much more easily.

 

Last week we had a blog post about an adjustment in the “means test” that is used for qualifying for Chapter 7 “straight bankruptcy. We mentioned that you’re exempt from needing to take and pass the “means test” under two circumstances:

  • if your debts are primarily business debts instead of consumer debts
  • if you fall into one of several military service categories

We’ll cover the first of these exemptions today, and the second one in our next blog post.

The Purpose of the Means Test

The “means test” is intended to not allow you to go through a Chapter 7 case if you have the “means” to pay a meaningful amount of money back to your creditors. If your income is more than the “median income” for your family size in your state, you are required to go through a complicated formula to see if you do have sufficient “means.” If you are considered to have the “means,” you are required to file a Chapter 13 case instead, paying all you can afford to your creditors for 3 to 5 years.

The “means test” was instituted as a major ingredient of the last major amendment of the federal Bankruptcy Code in 2005. That amendment was in large part motivated by Congress’ impression that consumers could discharge (legally write-off) their debts through Chapter 7 too easily. Some debtors were considered to be abusing the bankruptcy system, abuses that Congress believed needed to be reined in. In fact the amendment was called in part the Bankruptcy Abuse Prevention…  Act.

Under the Bankruptcy Code prior to this Act the bankruptcy court was given a fair amount of discretion in allowing a debtor to pick between the available Chapters—the forms of relief. The law instructed the court that “[t]here shall be a presumption in favor of granting the relief requested by the debtor.” The 2005 amendment deleted this sentence and, among many other ways of toughening the law, added the “means test.”

The Purpose of the Business Debt Exemption from the Means Test

Most of the changes in the 2005 amendment were intended to affect individual consumers, not businesses and business owners. The “means test” in particular was not intended for present and former business owners. Apparently Congress did not want to discourage risk-taking among entrepreneurs, and left the door open wide for Chapter 7s by them.

The mechanism that Congress used to divide between consumers who had to take and pass the “means test” and business owners who did not is a 3-word phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”

Not “Primarily Consumer Debts”

If the total amount of all your consumer debts is less than the total amount of all your non-consumer (business) debts, your debts are not “primarily consumer debts.” If so, you can avoid the “means test.”

Section 101(8) of the Bankruptcy Code defines a “consumer debt” at as one “incurred by an individual primarily for a personal, family, or household purpose.”

But as you add up your consumer and non-consumer debts, realize that you may have more business debt than you think for two sets of reasons.

First, for purposes of this distinction in the law, debts that you might normally consider consumer debts may actually not be. For example, debts used to finance your business, even if otherwise straightforward consumer credit—credit cards, home equity lines of credit, and such—may qualify as non-consumer debt based on your business purpose of that credit.

Second, keep in mind that some of your business debts may be larger than you think. For example, If you surrendered a leased business premises or business equipment you would likely be liable not just for the missed lease payments owed at filing of the bankruptcy but also potentially for the string of future contractual payments, depreciation, and such.

These are all the more reason to confer with an attorney before assuming that you have “primarily consumer debt” and are stuck with needing to take and pass the means test. This makes sense given what is at stake if you don’t pass the means test–being required to pay on your debts for the next 3 to 5 years under Chapter 13 instead of discharging them in just a few months under Chapter 7. 

 

Chapter 7 and Chapter 13–Unsecured Debts

November 4th, 2015 at 8:00 am

Which of the two consumer bankruptcy options is better for you if you have lots of unsecured debts depends on the kind of unsecured debts.  

 

Unsecured Debts

Debts that are unsecured are those which are not secured by anything you own. The creditor has no “security interest” in anything, no right to repossess anything if you don’t pay the debt.

In general it’s easier to deal with unsecured debt than secured ones in bankruptcy.

Unsecured Debts Turning into Secured Ones

Unsecured debts can turn into secured ones if you don’t pay them. A credit card holder or medical provider can sue you for the balance owed, get a judgment against you, and usually can record that judgment as a lien against your home and other possessions. If you don’t pay your federal income taxes the IRS can record a tax lien against your real estate and personal property without suing you.

Under some circumstances bankruptcy can turn an unsecured debt that had been turned into a secured one by the creditor back into an unsecured one. But not always. For example, an older income tax debt that could have been completely “discharged”—written off without paying anything—may have to be paid in full once a tax lien was recorded on it. So in general it’s better to file a bankruptcy case before creditors can turn unsecured debts into secured ones.

Secured Debts Turning into Unsecured Ones

When a secured creditor repossesses or forecloses on something you own, and sells it and credits the sale proceeds against your balance, if there’s still a remaining debt it is now unsecured.

“Priority” and “General Unsecured” Debts

There are two broad kinds of unsecured debts.

“Priority” debts are those that the law treats as special because of different “policy” reasons for treating that particular kind of debt more favorably. For example, unpaid child support and income taxes are “priority” debts. Congress has determined that bankruptcy should not be able to discharge child support or hinder its collection because of the high value Congress places on the payment of child support. And income taxes are considered a social obligation that we should not be able to avoid easily. And yet income taxes can be discharged if they are old enough and meet some other conditions.

“General unsecured” debts are simply unsecured debts that do not fit into any of the “priority” debt categories. “General unsecured” debts include most unsecured ones, such as medical and credit card debts, retail accounts, personal loans, many payday and internet loans, unpaid utilities and other bills, claims against you arising out of vehicle accidents other injuries, and out of contractual and business disputes, overdrawn checking accounts, bounced checks, the remaining debt after a vehicle repossession or real estate foreclosure, many kinds of debts from operating a business, and on and on.

Chapter 7 vs. Chapter 13

Speaking very broadly, if all your unsecured debts are “general unsecured” and are not “priority” ones, you’d lean towards filing a Chapter 7 “straight bankruptcy” case.

That’s because it usually discharges (writes off) those debts quickly, in a matter of 3 or 4 months, and almost always without you needing to pay anything on those debts.

In contrast, in a Chapter 13 “adjustment of debts” case you would usually have to pay some portion of your “general unsecured” debts (although in some situations you may not pay anything). Also, the discharge of the remaining unpaid portion would not happen until the end of the 3-to-5-year payment plan. And maybe most important, if you do not successfully complete the Chapter 13 case—which have a much lower percent completion rate than Chapter 7 cases—that remaining portion of the “general unsecured” debts would not be discharged at all and you’d continue owing them.

On the other hand, again speaking very broadly, if you have a “priority” debt or more than one of them, and especially if that debt or those debts are large, you may lean towards filing a Chapter 13 case. That’s because it has better tools for dealing with “priority” debts than Chapter 7.

In the next few blog posts we’ll look at the various kinds of “priority” debts to see how each is handled under Chapter 7 and Chapter 13. In particular we’ll look at circumstances in which each kind of “priority” debt can be appropriately handled in a Chapter 7 case vs. when that kind of “priority” debt needs the extra help of Chapter 13.

 

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