Student Loans, Auto Default Clauses: or, Everything Old is New Again

I was recently discussing issues with student loans, and private student loans in particular, with a staffer for one of my Congressmen. The staffer said something along the lines of, but isn’t student loan debt good debt? My response? Student loans, especially private student loans, may be the worst kind of debt – even worse than credit cards. His expression was fun. He did keep his coffee off his tie, though. Points for that.

There are a lot of reasons I’m not just real gung ho on student loans – especially private student loans. One of those reasons has been getting some press this week. Here is a link to a NY Times article on auto default clauses in private student loans. There have been several others recently, but this was the first one I saw.

http://m.washingtonpost.com/business/economy/us-agency-urges-private-lenders-to-ease-automatic-default-rules-on-student-loans/2014/04/21/d06adeee-c97f-11e3-95f7-7ecdde72d2ea_story.html

Most private student loans require a co-signer, usually a parent or grandparent. Many of those loan documents also include language known as an auto default clause. An auto default clause means that the loan is deemed to be in default if a particular event happens – EVEN IF PAYMENTS ON THE LOAN ARE CURRENT. The current press is about auto default clauses that trigger an event of default if the co-signer files for bankruptcy or dies.

To be quite blunt:
Bad news – Dad is dead.
More bad news – your student loans are now being reported in default to the credit reporting agencies, even though you’ve never missed a payment.

There is a good argument that the an auto default triggered by a bankruptcy filing of the co-signer is unenforceable, and I foresee some interesting litigation on that issue. The death of the co-signer, though, is going to be valid unless some lawyer who is far more creative than I am comes up with something I haven’t thought of.

A lot of the NY Times article referenced above has to do with encouragement from the Consumer Financial Protection Bureau for lenders (or, more accurately the loan servicers) to find ways to avoid placing otherwise performing loans into default status. There are a number of problems with that encouragement. First of all, it is just that, encouragement. I am not aware of any authority the CFPB has to require anything. Second, the same problem is showing up here that we had getting loan modifications during the mortgage crisis. Most of these loans have been securitized. The entity that the borrower deals with (Sallie Mae, AES, etc.) isn’t actually the lender. They are the servicer, they just manage the loans on behalf of the ultimate investors, and they do so pursuant to the terms of a contract that limits their ability to modify the loans.

Part of the securitization process is taking a large body of loans, pooling them together and using their income stream to support payments to investors who invest in the large pool. To do that, the individual loans that go into a pool must share certain qualities; and one of the qualities that makes a pool of loans like this more attractive to investors is the presence of co-signers – or, having more than one person responsible for repaying the loans. So, encouragement from the CFBP is nice, but I don’t think I will hold my breath on seeing any real changes here.

Of course, the real victims are the college graduates who are making their loan payments and then find out that the interest rate on a car loan is going to be sky high or they can’t qualify for a mortgage; why? Because their student loans are in default – yea, the ones they are PAYING every month.

I’m sorry, but that sucks.

They took out those loans (for the most part) when they didn’t have a lot of experience with financial products. Their parents (or grandparents) signed. Their school told them to sign. So, they signed. Even if they read the fine print, they very well might not have realized with an automatic event of default means. Their school should have. Their parents (or grandparents) should have, and they might have; but they saw no other (or no better) way to pay for college.

There isn’t much I can do about people dying; but filing bankruptcies for people who might have co-signed student loans is part of my job. I’m currently thinking through some ideas with other attorneys to mitigate the consequences of a bankruptcy filing when the debtor has co-signed private student loans. Keep in touch.

Elaine

 

 

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Filing Fees – and They Say There is No Inflation

There are three things that you have to pay for when you file for bankruptcy. They are: the attorneys fee, the filing fee and the credit counseling fee. The attorneys fee is pretty self-explanatory. The filing fee is paid to the Court at the time that the case is filed. It will probably look like you are paying this to your attorney; because you will pay it by handing your lawyer the money; but your lawyer will then pay the Court when he files your case. The credit counseling fee is ultimately paid to the pre-petition credit counseling company that you use to do your mandatory pre-petition credit counseling course. This you may pay directly, and you may pay it to your lawyer so that your lawyer can pass it on. Regardless, ultimately, you are the one paying for these things.

What brought this subject to mind this week is that the Administrator of the Courts just announced an increase in filing fees. A bankruptcy filing fee is generally divided between the Court for services provided by the Court and its clerk and the Trustee for services provided in administering your case. This increase is all going to the Courts.

The two most common filing fees for consumer debtors both went up $29 apiece, which is a substantial jump. What makes this a bit of a shocker is that fees just went up in November, 2011. Here is how fees have changed over just the last few years.

………………..  3/2006                Pre 11/2011                          2011 – 5/31/2014                      6/1/2014
Ch. 7                   $209                         $299                                         $306                                          $335
Ch. 13                 $194                          $274                                        $281                                           $310

There are all kinds of reasons and explanations for the increases, but the bottom line remains that it is becoming more and more expensive to file for Bankruptcy. I’ve practiced in many areas of law during the last 24 years, and I remain very proud of the Bankruptcy bar’s dedication to keeping attorneys fees as low as possible. When you file a Bankruptcy, you are filing a highly specialized, Federal Court case; and in most cases it will be substantially cheaper than any other significant legal event you have ever been a party to.

Bankruptcy attorneys were the first to really embrace automation. We have gotten very good at efficiently explaining complex legal concepts to our clients. That is not to say that Bankruptcy attorney fees haven’t gone up. The 2005 Bankruptcy Reform Act pretty well doubled the amount of work required to file a Bankruptcy and sent the lawyer’s liability soaring. Needless, to say – fees went up. Although I will say that they haven’t gone up in this office since then.

Elaine

 

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How Long Before They Repo My Car?

I get asked this question a lot, and the answer varies pretty widely depending on the facts. Most commonly, though, I am asked this question by someone who needs to file for Bankruptcy and has made the decision that he cannot afford to keep his car. In other words, the client is going to surrender his interest in the car to the car lender during the bankruptcy.

There are a number of options in a Chapter 7 Bankruptcy for dealing with secured debt (i.e., debt that is secured by a lien on a piece of property, like a car loan or a mortgage). One of them is to surrender the property to the lender. So, the question being asked is really – so, how does that surrender thing work and how long does it take anyway?

Well, that depends.

I’m a lawyer, you were expecting a definite answer?

When the bankruptcy is filed the Debtor files a Statement of Intent that states what he intends to do with his secured debt. So, in this case, the Debtor will indicate that he intends to surrender the vehicle. However, at the instant that the case is filed the Automatic Stay goes into effect, and that stays (or temporarily stops) all collection activity against the debtor or property of the debtor – including the car in this illustration. So, even though the Debtor is indicating his intention to surrender his car to the lender, the lender can’t take it; because taking it would be an effort to collect a debt, and that is prohibited by the Automatic Stay. Are we having fun yet? Thought so.

Now the ball is in the lender’s court. They can either wait until the Bankruptcy is over with and then repossess the vehicle., or they can file a Motion with the Bankruptcy Court asking the Court to lift the automatic stay and abandon any interest that the Bankruptcy estate might have in the vehicle. The creditor can do that as soon as he learns of the Bankruptcy filing or not until later. It isn’t uncommon for creditors to wait until after the First Meeting of Creditors, which is generally about 30 days post-petition, to file their motion. Given these facts, once that motion is filed, it will be granted in about 3 or 4 weeks – kind of depending on how excited the creditor’s lawyer is to get it done. The net effect of this motion being granted is the Bankruptcy Court gives the creditor permission to collect his debt against the property – not the debtor, just the property. The stay remains in effect as to the Debtor, and assuming that no objections to discharge are granted; the stay will be replaced by the discharge injunction at the conclusion of the Bankruptcy. The discharge will prohibit the car lender from EVER trying to collect money from the debtor again. The creditor is welcome to the car, because he has a lien on it; but that is all he gets.

After the creditor gets permission to repossess the car, and he will – eventually. Some creditors will have someone out looking for it the next day. Others take longer to get around to it. In my office I point out to my clients that they don’t want to be driving this car if a repo guy might be looking for it. Walking out of the grocery store with ten sacks of groceries including 2 gallons of ice cream and finding no car to put them in is not a situation most of my clients want to find themselves in. So, I will generally arrange for the debtor to deliver the car to the lender. Not everyone does it that way.

The long and the short of this is that even if you want to give the car back it will take just under a month or . . . longer, to do so. On the other hand, if the Debtor wants to keep the car as long as possible, that is a completely different analysis and one that is going to vary widely depending on the specific facts, the creditor involved and even the court in which the case is filed.

Elaine

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Judgments, Judgment Liens and Bankruptcy

Any discussion of judgments and judgment liens is by necessity State specific. These are creatures of State law, and State law varies widely with respect to both judgments and judgment liens. Bankruptcy is governed by Federal law, but the Bankruptcy Code defers to State law frequently, and that is true with respect to how the Bankruptcy Code interacts with judgments and liens. So, always be sure you understand the underlying State law before assuming you understand anything about judgments, judgment liens or how they are affected by a Bankruptcy.

A Judgment is the result of a lawsuit. In a collection case the judgment will specify the amount of money that the Defendant owes to the Plaintiff. A judgment creates a lien when it is recorded in County records and attaches to a piece of property. In Oklahoma judgment liens can only attach to real property (i.e., land). Tax liens (which arise by Statute rather than as the result of a lawsuit) can, and do, attach to anything owned by the Debtor. What a lien does is it gives the lienholder special rights to get paid from the proceeds if and when the property to which the lien is attached is sold.

Some liens can be foreclosed by the lien holder. Some liens cannot be. If the lien can be foreclosed, then the judgment creditor (or lien holder) can effectively force the sale of the property so that its lien can be satisfied from the sales proceeds. If a lien cannot be foreclosed, for instance, a judgment lien attached to the judgment debtor’s homestead; then, the lien holder can only sit back and hope that the debtor chooses to sell the property. At that point, assuming that the lien is still viable, the judgment creditor is entitled to be paid out of the sales proceeds.

A Bankruptcy filing does affects judgments and liens in a number of ways. First of all, if a lawsuit has been filed, but the judgment has not yet been entered; a Bankruptcy filing will stay the lawsuit and prohibit the entry of the judgment. If the judgment has already been taken but not yet recorded, the recording of the judgment will be stayed by the bankruptcy filing.

More generally, by the time the bankruptcy is filed the judgment has already been taken and recorded. At that point if the Debtor owns real estate in the County in which the judgment was recorded, then the judgment has created a lien on the real estate. If the Debtor does not own real estate in the County in which the judgment has been recorded, then no lien has been created. This is a point that countless title attorneys miss.

Once a judgment has been recorded on real estate it can be removed in a Bankruptcy if the real estate it is attached to is exempt, which generally means the debtor’s homestead; and if the lien impairs the homestead exemption. In most cases in Oklahoma a judgment lien will always impair the exemption if it is attached to a homestead. That is certainly not the case in other States, and there are exceptions in Oklahoma, especially if the Debtor used exemptions other than Oklahoma’s State law exemptions when filing the Bankruptcy.

That does not mean, however, that filing a Bankruptcy automatically removes judgment liens from your homestead. First, a motion to avoid the lien must be filed. The motion must be served on the judgment credtior, among others; and that motion must be granted. The vast majority of such motions are granted, and in many cases obtaining good service is the hardest part of the process. Still, if it isn’t done and the order doesn’t issue, then the motion will remain attached to the debtor’s homestead. Oh, and when this Order issues, make sure it is recorded in County records where future title attorneys can find it.

The first problem arises when this isn’t done, the bankruptcy is discharged, and the case closes. This generally happens, because either the Debtor didn’t tell the bankruptcy attorney about the judgment or didn’t pay for the additional work necessary to have the lien avoided. In this case, it is generally possible to reopen the Bankruptcy case to avoid the lien. This is substantially more expensive than doing it when the case is still open. It also gives the judgment creditor an extra argument that the motion to avoid should not be granted. However, these motions are still generally successful. The biggest problem here is that the home owner generally finds out about the judgment lien when trying to close a sale of the house. The time necessary to reopen the case, give notice to all creditors, have a trustee reappointed, file the motion, get proper service o the creditor, and get the order entered frequently means that the buyer has lost interest and moved on.

The other possible problem is that the title company’s title attorney doesn’t understand the effect of a Bankruptcy discharge. Yes, this is really a problem. Here is the most common scenario. A couple files for Bankruptcy. They do NOT own any real estate at the time. There are judgments against them, but they are not liens; because there is no real estate for them to attach to. The Debtors’ bankruptcy attorney correctly does not file motions to avoid the judgment liens, because you cannot avoid a lien that doesn’t exist. The case discharges and closes. Several years later the Debtors decide to buy a house. The title company won’t issue title insurance, because the judgment liens (that don’t exist) weren’t properly avoided in their Bankruptcy. In other words the title company basically tells these people that their bankruptcy lawyer screwed up and now they will never be able to buy a house, because these pre-bankruptcy judgments will attach to any real estate they buy – ever (or until the judgments expire).

I really hate getting these phone calls.

Ok. Here is the skinny. Section 524 of the United States Bankruptcy Code says:

(a) A discharge in a case under this title –

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727, 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;

That is pretty much the last word on this issue. Once a discharge is entered, and the debtor’s liability for the underlying debt is discharged; the judgment is VOID – not voidable, not weakened, not asleep. It is dead. Dead judgments cannot attach to after-acquired property.

Elaine

 

 

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Don’t Forget Your Lawyer

I know that title looks like I am complaining that most of my clients don’t bother to send me a card at Christmas, but that really isn’t what I am referring to.

What makes me really frustrated is when my Chapter 13 clients, in the middle of a confirmed plan, move and DON’T TELL ME. Sure, from their perspective, everything is done. They are just making their payments until they get to the end. Easy. They can forget all about me, and they do. Then they get to the end of the plan, and I discover that they have also forgotten to do the post-petition, debtor education class. You know, that silly little class that if you don’t take it, you don’t get your discharge – even if you’ve made all your plan payments? Yea, that class.

So, I start frantically trying to get a hold of the clients to remind them. That is when I discover that they’ve moved, and didn’t tell me. Of course, they have also abandoned their old email address, because it was getting too much spam. The address is still live, so nothing bounces, they just don’t check it anymore. So, the email didn’t reach them. They’ve disconnected the house phone, because they only use their cells; and they changed their cell numbers a few years back when they had a stolen phone.

Don’t do that. If you move while your Bankruptcy case is still open, be sure to let your lawyer know. For one thing, if the Court sends you anything, you will want to get it – who knows, it might be important. Your lawyer will do a change of address for you, so that the Court can reach you, the Chapter 13 Trustee can reach you; and this way your lawyer can reach you too.

Elaine

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They Said I Can’t Bankrupt That

I get told this a lot. Someone calls and they have talked to a loan company, a debt collector, or the guy on the next bar stool at a local dive. What I hear is, “They said I can’t bankrupt that.” Well, of course not. Bankrupt is an adjective. To Bankrupt is not a verbal – of any kind. You can be described as bankrupt, but there is no such action as to bankrupt. The moral of this story is, of course, don’t take legal advice from anyone who speaks English this poorly. In fact, don’t take legal advise from non-lawyers – especially when they are trying to get you to pay them for a debt or if you aren’t sure just how many drinks they have already had.

Now, are there debts that cannot be discharged in a Bankruptcy? Sure, and some of them you will kind of know, and there are a few that will probably surprise you.  For instance, most people are pretty comfortable with the idea that you can’t discharge child support in a Bankruptcy.

However, most people probably don’t know that you can’t discharge a debt for willfully or recklessly failing to maintain the capital of a Federally insured financial institution. Don’t worry if you don’t understand what that means, it almost certainly doesn’t apply to you.

I will concede to being a bit silly (or snarky, your call) with that last example, but the fact is that there is a section of the Bankruptcy Code (11 U.S.C. §523) that lists all of the debts you cannot discharge (or get out of) in a Bankruptcy. In the copy of the Code I keep handy, that section is five pages long, and very little of those five pages apply to the vast majority of  people with more debt than they can pay.

In fact, no matter what you have heard about the 2005 Bankruptcy Reform Act there is no general exception from discharge for credit card debt. That’s right. Despite what that debt collector told you, absent certain general restrictions, a Bankruptcy filing will still discharge most, if not all, of your credit card debt – and your medical debt – and pay day loans – and even in many cases old income taxes. Really.

The exceptions to discharge that apply most commonly  are:

  • Child support;
  • Alimony;
  • Property division or other divorce related debt (in a Chapter 7 Bankruptcy);
  • Student loans;
  • Debt incurred by fraud or shortly before a Bankruptcy filing; and
  • Recent taxes (rules are complicated).

Embezzlement? Well, that is a problem. Lying on a loan application or borrowing money with someone else’s identity, forging loan documents, taking the vacation of your lifetime in Paris paid for by Visa with the intention of filing for Bankruptcy before those bills come due?  These are all at least as non-dischargeable as you should think they are.

All silliness aside, here is what you need to remember. Most people who file for bankruptcy can discharge all, or virtually all, of their debt. There is a five-page laundry list of debts that cannot be discharged in a Bankruptcy, and for the most part, none of them are simple; and most of them are not all that common. The odds are very good that no one other than an experienced bankruptcy attorney can discuss any of them with you in any detail. Most people know just enough to be dangerous about Section 523, and that includes a large number of lawyers who don’t practice bankruptcy law on a regular basis.

If you have any questions about whether or not a debt is dischargeable, ask a lawyer who practices in the Bankruptcy Courts regularly. If anyone else tells you that something is not dischargeable, take that advice with a large helping of salt – especially if they think Bankrupt is a verb.

Elaine

 

Categories: Bankruptcy, Consumer Credit, Divorce, Student loans, Taxes | Tags: , , , , , , , | Leave a comment

Student Loan Stupidity

In 2005 Congress made a few changes to the bankruptcy code.   Some of those changes got a lot of attention.  Others did not.  One of the stealthier changes extended the same protections against discharge in Bankruptcy to private student loans that Federally insured student loans had had for years.  It is probably not a coincidence that the availability of private student loans skyrocketed shortly thereafter, and I don’t think anyone can say that this was really unexpected.

The unexpected part was that Congress had just created a scenario where those newly protected private student loans were going to be getting repaid at the expense of Federally insured student loans. 

Go ahead.  Read it again.  Yes, Congress really did pass a law that encouraged people to repay their private student loans instead of making payments on their federally insured student loans; and you used to wonder why we have a budget deficit.

Here is why.  If you legitimately do not make enough money to repay your student loans, you can put your federally insured student loans into some form of alternative payment system that is income based or income contingent.  In those cases, your payment can be as low as $0.  In many cases the payment will not keep up with the accruing interest, so even though the debtor is making payments, the principal balance is not declining.  Those loans are not getting paid, even if the debtor is keeping up with the accruing interest.  After a long enough number of years, the remaining balance on those loans will be forgiven.  That is an unfairly brief summary, but it covers the high points.

You can’t do that with your private student loans.  They don’t participate in the income based or income contingent repayment programs, and if the debtor doesn’t make the payments, they will proceed with the appropriate legal steps to begin garnishing the debtor’s  wages.  Well, if you can’t afford your loan payments, you really can’t afford to have your wages garnished.  So, the net result of all of this is that people with more student loan debt than they can pay wind up paying their private student loans (at least sometimes) and NOT paying their federally insured student loans.  There are days when I think that I want to know just who thought that was such a great idea.  Then, there is the rest of the time.

There are bills currently pending in Congress to change this.  They are Senate Bill 114 and House Resolution 532.  Last time I checked neither piece of legislation had so much as poked its nose out of committee.  In other words, the private student loan lobbyists are doing their jobs better than the rest of us.  So, if you have a mind to write your Congressmen and request intelligent, sensible governance; this wouldn’t be a bad issue to include.

Elaine

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Bankruptcy, Tax Returns and Identity Theft

Looking at the title to this post, I must say that those are not words I ever expected to be putting in one sentence — but then this morning happened.  Let me begin at the beginning.  Early this morning I got an email from a friend of mine with a link to this article:

http://krebsonsecurity.com/2014/03/experian-lapse-allowed-id-theft-service-to-access-200-million-consumer-records/

Evidently, some time ago Experian (one of the three major credit reporting services) bought a company called Court Ventures.  Now, from what I gleaned from Google, Court Ventures is a company that collects public record information on people.  I assume from the name that they tend to focus on court house type records.  Whether or not they are collecting Bankruptcy court records, I don’t know.  Regardless, many bankruptcy cases wind up being referenced in State Court files.  The most common reason for that is when a bankruptcy is filed and there is a pending state court case (a foreclosure, a collection case, anything like that), a Notice is filed in the state court case that the case has been stayed by the Bankruptcy filing.  This notice is sometimes called a Suggestion of Bankruptcy.  This notice includes the bankruptcy case name, case number, and the bankruptcy court in which the bankruptcy is filed.  So, if Court Ventures is collecting courthouse based public records, they are collecting bankruptcy filing notices — albeit indirectly.

Court Ventures then had a contract with another data collection company, US Info Search.  From them a Vietnamese man, who was in the ID theft business,  bought access to both US Info Search data and Court Ventures data — kind of the warehouse shopping model for Identity theft.  Ultimately, this Vietnamese man was able to sell to his customers access to names, Social Security numbers, dates of birth, addresses, former addresses, phone numbers and email addresses — among other things.

The article goes into considerably more detail, and it is quite interesting and well worth reading.  Still, you might be wondering what this has to do with tax returns and bankruptcy clients.  An increasingly common form of ID theft is to file a fraudulent tax return for the victim of the ID theft in an attempt to steal the victim’s tax refund.

Shortly after reading this article this morning I received an email from a Chapter 13 client of mine letting me know that she didn’t have her tax return ready quite yet.  You see, she was working with the IRS to unravel it, but evidently someone had filed a tax return for her in an attempt to abscond with her refund.

That got me thinking.  I wonder how many bankruptcy clients assume (rightly or wrongly) that their Trustee is entitled to their tax refunds, so when the refund doesn’t appear; they don’t go looking for it?  I have had a number of clients over the years receive correspondence from the IRS that they don’t understand (and that may or may not make sense to me), but they don’t follow up on it.  They don’t call the IRS and get them to explain something to them or ask what something means or why it happened.  They just assume.

So, don’t do that.  Nobody in Vietnam deserves your refund more than you do.

Elaine

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US Trustee Audits — They’re BACK!

One of the things lobbyists convinced Congress absolutely had to be added to the Bankruptcy system in 2005 were Debtor audits.  Well, this concept has come and gone a few times since then, generally due to budget fluctuations.  However, it is being reported that the US Trustee has found more money; and random audits are once again a fact of life.

Now, before you get too excited, I have not seen figures for the frequency of audits at this point.  One in every 250 cases being selected is pretty much the historical standard, but I have no idea how much funding the US Trustee has available at this point in time.

The purpose of the audits is to find “material” misstatements in the Debtors’ petition and schedules.  Now, you would think that material would mean material for purposes of the Bankruptcy process and to people who understand how the system works.  No, material at this point seems to mean material to the independent CPA’s from large CPA firms that the U.S. Trustee’s office contracts with to do these audits.  These guys aren’t accustomed to preferential transfers and median income calculations.  These are the same people who audit corporate financial statements.  (If you aren’t rolling your eyes by now, you haven’t been reading my blog long enough.)

Anyway, if your case is selected for an audit, you will have to begin by producing certain documents to the auditors.  The last list of documents I have seen for an audit is from 2008, but I don’t think it has changed much.  Here it is:

  • Payment advices or other evidence of payment from an employer for the six full calendar months preceding the date of the bankruptcy petition, plus those received in the calendar month in which the bankruptcy was filed, from the debtor(s), or from an individual debtor and the individual debtor’s non-filing spouse unless the debtor has checked Box 2.b on Form B22A (Chapter 7 cases only).
  • Federal income tax returns, including all schedules and all W-2, 1099, and K-1 forms, for the two most recent taxable periods prior to the date of the bankruptcy petition.  If either of the returns has not been filed, provide copies of the two most recently filed federal income tax returns.  (If joint case and debtors filed separate returns, provide both returns.)
  • Account statements for the six months preceding the date of the bankruptcy petition for all depository and investment accounts in which the debtor(s) had an interest in any of the six months, including statements (even if received post petition) that reflect activity in the month in which the petition was filed; along with sufficient documentation to explain the source of every deposit or credit over $500.  (Include information for checking, savings, money market, mutual fund, and brokerage accounts.  Examples of documentation for deposit transactions include check registers and annotations on or attached to the account statements.)  Audit firms may request that you provide additional documentation to sufficiently explain the source or purpose of an account statement entry or entries.
  • If the debtor(s) is divorced, (a) the divorce decree, (b) any orders regarding property settlements entered within the last three years, and (c) any alimony or child support orders currently in effect and amendments thereto.
  • If the debtor(s) is self-employed, then for each business owned by debtor or from which debtor derives self-employment income, (a) business tax returns for the two most recent taxable periods prior to the date of the bankruptcy petition, (b) most recent accounts receivable ledger and aging schedule/report, (c) most recent balance sheet prior to the date of bankruptcy petition, (d) income statement for the most recent period ended prior to the date of the bankruptcy petition, (e) quarterly sales tax return for the most recent period ended prior to the date of the bankruptcy  petition, if any, (f) account statements for business depository account(s) for the six months preceding the date of the bankruptcy petition, and the month in which the petition was filed, along with sufficient documentation to explain the source of every deposit or credit, and the purpose of every check, withdrawal, or debit, and (g) most recent business asset listing and depreciation schedule, if any.

My favorite requirement is that last one.  Accounts receivable ledgers, balance sheets, income statements, depreciation schedules — from a self-employed debtor?  Who are they kidding?  Anyone who has that sophisticated an accounting system isn’t self-employed.  They may operate a wholly owned professional corporation, but they aren’t self-employed.  Your self-employed debtors are lawncare people, electricians, oil field contractors, remodeling contractors, plumbers, oh and the next-door neighbor’s cousin who cleans your house. All of whom are, of course, famous for their detailed, double-entry accounting systems.

Yet another example of the 2005 Bankruptcy reform act and its ongoing quest for an abuse in need of a remedy.

Elaine

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When a Collector Threatens You With Jail

There are two scenarios that I have seen where purported debt collectors have threatened people with jail.  One of them is an out and out scam.  The other is just illegal.  The scam is the most common so let’s start there.

  • Collector calls and tells you that if you don’t pay a certain bill immediately, the Sheriff is going to come to your house and arrest you.  You have to pay this today.  You are going to be arrested tomorrow.  The only way you can pay this is by electronic funds transfer from your checking account over the phone RIGHT NOW.  You cannot mail in a check — even a certified check sent next day delivery.  Nope.  It must be over the phone, straight from your checking account RIGHT NOW.

When was the last time a legitimate debt collector wouldn’t take a cashier’s check by mail?  They are so interested in keeping you out of jail that they would rather not get their money?  Really?  Does this sound like any legitimate debt collector you have ever spoken with?  Any debt collector who won’t give you a mailing address and who won’t take a cashier’s check is not really a debt collector.  A colleague of mine traced one of these calls.  It was a voice over IP call, and somehow he was able to track the IP address of the originating computer.  It was in Pakistan.

The second scenario is just an overly aggressive collector who gets carried away.  My favorite example of this is the debt collector who told a woman that if she didn’t pay her credit card account, he was going to call DHS and have them take her children away, because she was obviously an unfit Mother.  That is what is known as a violation of the Fair Debt Collection Act.  It also violates a number of State laws.  That debt collector was sued by a friend of mine for that call, and the case settled for a not insubstantial amount of money.

These scenarios work, because the collector gets the debtor scared enough to stop thinking rationally.  Consider carefully, how many children would we have in foster care in this Country if not paying your credit cards made you an unfit parent?  Not only am I not sure I can count that high, but how many news stories about this would it take before the tax payers told our legislatures to find better ways to spend our tax dollars?  Have you ever seen a television news story about this?  If it happened, don’t you think you would?  What better television than a poor, weeping, hysterical woman who has lost her children because the ex didn’t pay child support, and she has been too ill to work?  Do you really think the local news stations have too much class to air this?

Now, here is where this whole issue gets sticky.  It is easy to say that you can’t go to jail for debt in this Country, and technically that is true.  You can, however, go to jail for violating a court order; and if that order is to pay a debt — most commonly child support, and you don’t do it, well, you can go to jail for willfully disobeying the Court’s order.  The standards for that are going to vary from State to State, but even though technically this is punishment for disobeying the Court, it is effectively imprisoning someone for not paying a debt.  It is very effective at getting recalcitrant parents to pay their child support, by the way.

Another variant on this is that if you are ordered to appear for a Hearing on Assets by a creditor who has a judgment against you, and you don’t appear; well, a bench warrant can issue for your arrest.  Again, the warrant is for disobeying an order of the court to appear and provide information; but it can be an effective collection tool nonetheless.

One thing to notice about both of these scenarios, they involve judgments, court orders and lawyers.  They don’t involve telephone calls, and before you can violate a court order, you have to have been given notice of that order.  That means you have to have been a party to a lawsuit.  Ask the guy who is calling you, threatening to put you in jail, for the case number of the lawsuit.  Odds are he will tell you that he didn’t have to sue you.  Those laws don’t apply to him.  Well, maybe they don’t — in Pakistan.

I will say, though, that these calls are only effective if the person receiving the call has problems with debt.  So, if this happens to you.  Don’t get so scared that you lose your grasp on reality.  After all, you don’t know ANYONE who has gone to jail for not paying a credit card.  Ask for a mailing address.  Real debt collectors will always take a cashier’s check by mail.  They really just want their money.  Ask what order you have violated, in what court case and ask for the case number.  Then hang up.

Oh, and after you hang up — call a lawyer.  If you are getting calls like that, and they are elevating your heart rate so much as one beat per minute; it is time to call for help.

Elaine

Categories: Consumer Credit, consumer law, Divorce | Tags: , , , , , , , | 1 Comment

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