Medical Bills and Credit Cards

CNN seems to think that paying medical expenses with credit cards is a new thing.  (Can’t Pay Your Doctor?  Charge It!)  They should have talked to a bankruptcy lawyer.   Anybody who thinks the credit card debt in this country was racked up on soccer shoes and restaurant meals, needs to take another look.  Elderly clients who have never used their credit cards anywhere but the pharmacy are just not that unusual — and haven’t been for years.  Think about the last time you were in a doctor’s office that didn’t display the Visa card sign.  This ain’t news, guys.  It may seem like news, because lobbyists spent so much money trying to influence the characterization of the people who file for bankruptcy prior to Bankruptcy reform passing; but nothing has really changed.

Elaine

Consumer Debt Levels

USA Today has an article on consumer debt levels.   Basically, consumer debt isn’t going anywhere fast.  In 2008 household debt totaled $13.9 trillion.  That was almost double the 2000 levels.  In 2009 –  after the collapse of the credit bubble, banks cutting back lending, tightening of lending standards — you know, after the last year — household debt level is down for the first time in ages.  Well, sort of.  Household debt is now down to $13.8 trillion.  Whoo Hoo!

If this doesn’t scream that we’ve got a problem, then I don’t know what does.  Oh, and all those economists calling for a 2nd half economic recovery?  On the backs of what jobs and what income?  We are a consumer driven economy.  As long as the consumer is busy NOT getting debt paid down and NOT staying employed, I wouldn’t start singing Happy Days are Here Again anytime soon.

So, where to start?  The credit card reform bill going into effect next year is a start.  Anyone who has spent any time at all reading credit card terms figures out pretty quickly that the credit card companies have spent a huge amount of time figuring out ways to make debt almost impossible to pay down.  If you haven’t read about interest rate increases (by sometimes 30% apr or more) just because the card company thinks it can, then maybe you should start by googling double cycle billing; but I wouldn’t recomend trying that before breakfast.

Elaine

Small Business Bankruptcies

USAToday just ran an interesting article on small business bankruptcies.  This article makes several interesting points about the rising numbers of small business failures and the impact that will have on the economy.  What I think the article misses is that you cannot track the failure of really small busineses through the bankruptcy courts — because they don’t go there.

In most cases the owners of the business file.  The Corporation or LLC that is actually the business does not file.  Why?  Simple, unless you are going to attempt a reorganization in a Chapter 11 (which most really small businesses can’t afford), then there is no reason for a Corporation or LLC to file a Bankruptcy.  They aren’t eligible for a discharge in a Chapter 7 filing.

Usually, the better course is to just let the business entity die on the vine.  The owner files and goes on down the road.  The business entity is just essentially abandoned.  The bankruptcy statistics will never be able to track those business failings.  So when you read articles on the bankruptcy rate amongst small businesses, assume that the actual failure rate is far higher.

Elaine

Court Slaps Legal Assistant Directly

The Bankruptcy Court for the E.D. of New York handed down  a very unusual opinion early this month.  If you are interested the case is  Adams v. Giordano, et al. (In re:  Clarke, et al), Adv. No. 08-8133.  As far as I can figure out from the opinion, an attorney hired a contract legal assistant to prepare bankruptcy petitions.  The legal assistant thought that he was doing a first draft of the documents.  The documents, instead, were filed as he prepared them and with his electronic signature on them.  Although, they wound up being filed pro se by the Debtors.  The legal assistant explained some things to the clients, interviewed them, prepared docs, etc.  In other words, he did what most legal assistants do.  He did not provide bankruptcy petition preparer disclosures, or any other disclosures, to the clients before commencing work.

The UST brought an Adversary Proceeding against the attorney, another entity I don’t recognize and the legal assistant.  The UST settled with the other two defendants and proceeded against the legal assistant.  The Court found that the legal assistant violated the mandatory disclosure provisions  of Sections 110 and 528.  In addition, the Court found that the legal assistant had committed the unauthorized practice of law for explaining and summarizing documents for the clients.

There is no mention in the opinion what the settlement terms were for the other defendants, but the legal assistant — who was working for a licensed attorney, albeit on a contract basis, the whole time — was sanctioned more than $5,000.

I can’t help but think that this case would have been decided differently if the legal assistant were a full-time employee working in the lawyer’s office, but this opinion reinforces my decision not to use legal assistants.  Although, I do use some contract attorneys; and I might reconsider if I am properly shielding them from any liability under the every sneaky Bankruptcy Code.  I think the second area to be wary of is making sure that we are not providing our clients with documents that they can file on their own — with or without our consent.

Elaine

Today I Have Hope for Real Bankruptcy Reform

Today, I have hope.

On January 6, 2009 Sen. Dick Durbin intruduced Senate bill 61, known as the Helping Families Save Their Homes in Bankruptcy Act. Identical legislation has been introduced in the House by John Conyers. One of the objectives of this legislation is to give home owners the same ability to modify their home mortgages in Bankruptcy that rental property owners already have.

I have blogged before about the fact that if you own rental property and file for bankruptcy, you can modify the terms of the mortgages secured by those properties. Under the right circumstances you can change the principal balance, reduce the interest rate, change the monthly payment amount, even modify the right to assess and collect certain fees. If you live in the house securing the mortgage, as a general rule; you can’t change anything. You can cure an arrearage if you were behind on the mortgage at the time that you filed, but it must be done in accordance with the terms of the note and mortgage.

One of the results of the Durbin/Conyers legislation will be to level the playing field. I am a member of an organization, the National Association of Consumer Bankruptcy Attorneys, that is fighting for this right for our clients in Washington. We need your help. Contact your Senators and Representatives now.

To my mind there are three important points in favor of this legislation.

First, in a Country that is supposed to encourage home ownership it strikes me as wrong that landlords get better treatment in the Bankruptcy Courts than homeowners.

Second, one of the problems behind the credit crisis gripping the world economy and devestating retirement accounts and any hopes of a balanced Federal budget, is that no one really knows where mortgage losses (and other consumer debt losses) are going to stop. Modifying the mortgages will accelerate the pain, but it will help determine its full extent.

Finally, the bank lobby is telling Congress that this bill will increase the cost of mortgage loans for borrowers. In fact, they are saying essentially the same things that the Credit Card lobby (more bankers) were saying about Bankruptcy reform in 2004. According to the credit card lobbyists passing Bankruptcy reform was going to reduce the costs of credit for the average American to the tune of $400 a piece per year. Well, I don’t know about you — but I haven’t gotten my check yet.

Maybe, it is time we address the root of the financial problem instead of simply throwing more money at the banks whose rush to invest in securitized loan products that paid too much, carried too little risk and nobody really understood in the first place created the biggest mess in our lifetimes.

Elaine

Getting Paid by the U.S. Trustee

I love reading opinions where the winning attorney had way more in the guts category than I do.  Dennis Feld, a fellow NACBA member from New Mexico, has just gotten a written opinion out of the Bankruptcy Court in New Mexico to the extent that a withdrawal of a 707(b) motion by the U.S. Trustee qualifies the debtor as a prevailing party under the Equal Access to Justice Act.

Ok, so in English?

The Equal Access to Justice Act allows an award of attorneys fees against the U.S. Government if four conditions are met:

1. First, the petitioner must be the prevailing party;
2. The government’s position in the litigation must not have been substantially justified (which means a reasonable basis in both fact and law);
3. A motion requsting an assessment of fees must be timely filed; and
4. No special circumstances exist that would make the award unjust

See, In re: Mendez, No. 7-07-11092 Bankr. N.M. decision date September 26, 2008.

The Mendez court found that the Trustee’s withdrawal of its 707(b) motion to dismiss qualified the debtors as a prevailing party. The opinion does not address the remaining three factors. However, I expect to see more litigation on this issue in the near future.

Oh, and as much fun as it is to spend Capital One’s money — and it is, trust me. It must be even more fun to cash that Treasury check.

Elaine

Discharge Violations

Countrywide has just been spanked to the tune of $55,000 for a discharge violation involving a mortgage.  Debtor’s counsel is providing the details here. The basic facts are that Debtor filed a Chapter 7, did not reaffirm the mortgage, received discharge, surrendered the property and then got harassed (pretty endlessly from the looks of things) by Countrywide trying to collect on the debt.

Countrywide’s collection actions included phone calls, billing statements, and reporting the balance as still owed on the Debtor’s credit report.  Debtor’s counsel claims that Countrywide received no less than 16 notices of Bankruptcy and demands to stop the improper conduct.

The debtor claimed damages in the form of emotional distress, credit problems resulting in higher interest rates and a lower credit score, and some kind of problem with an adoption.

Clearly, this is not your run of the mill discharge violation.  Countrywide was not only persistent but when your counsel tells debtor’s counsel on the phone to “take it to court” you are really asking for trouble.

It has been my experience that Judge’s hate discharge violation cases.  They want to be sure that it isn’t just a stupid mistake and that Debtor’s counsel has fired a warning shot before filing the Adversary Proceeding.  Even so, they appear to be reluctant to award serious damages.

When I was a young lawyer representing creditors, I was taught to be terrified of violating the automatic stay or the discharge violation.  That doesn’t seem to be the case anymore, and frankly, a lot of the problem comes from Courts who don’t have a whole lot of respect for their own orders.  That needs to change, and in my office it is going to.

Elaine

Honesty Really is the Best Policy

Federal prosecutors have arrested four people in West Virginia for attempted bankruptcy fraud.  (According to story reported by WSAZ.com.)  Pretty straight forward stuff really.  They were all caught attempting to hide assets.  The examples listed in the story were concealing income from the sale of real estate in 2003, concealment of a workers compensation claim and collecting disability benefits while concealing employment income by using a false Social Security Number.

What is it with people?  It isn’t just these four.  One of the most important parts of my job is keeping clients from lying about  stuff — generally stupid stuff.

Now, I don’t know much about West Virginia exemptions; but in Oklahoma the proceeds from the 2003 land sale could almost certainly have been protected given a little bit of time.  The workers compensation award is just exempt in Oklahoma — regardless of value.  Well, until it was concealed.  Once you try to conceal an otherwise exempt asset, it loses its exempt nature.  Yep, disclose it and keep it; conceal it, and lose it.  Oh, and that whole fake Social Security Number thing; is there anyway you could not get caught?

Thou shalt not lie, cheat or steal and file for bankruptcy.  Oh, and if you do — I ain’t sharing your jail cell.

So, what exactly is the point of this?  These arrests were part of a crackdown by a joint team of US Trustees and US Attorneys.  This particular effort was focused on 23 counties in West Virginia.  If it happens there, it will happen here.  Of course, it doesn’t hurt that the W.D. of Oklahoma has traditionally had one of the toughest U.S. Trustees offices when it comes to bankruptcy fraud; and our Trustees are really good at finding things debtors decide to try and hide.

So, repeat after me.  Thou shalt not lie, cheat or steal and file for bankruptcy.  If you have any questions, ask your Mother to finish teaching you the concept of honesty.

Elaine

Interest Rates and Bankruptcy Reform

Anyone else remember the arguments being made by the credit card industry that abusive bankruptcy filings were forcing up interst costs?  Bankruptcies under the old law were supposed to be costing everyone of us $400 a year in excess interest charges.  We had to pass the Bankruptcy reform bill to stop that.

So.  You got your $400 in savings yet?  Neither have I.

In fact, credit card interest rates are SOARING.  USAToday is reporting that more and more people who have never missed a payment are having their interest rates hiked to 27, 28% or more.  Why?  Well, one credit card company allegedly admitted to a customer that it was because they could.  Doesn’t that make you feel all warm and fuzzy.

A more complicated reason is that it all has to do with securitization.  You know, that whole structured finance mess that is causing so much grief in the world’s financial markets.  You know, that stuff that is all about sub-prime mortgages?  Yea, well, its about credit cards too.  Oh, and car loans; but that is another post.

You see, credit card companies use credit card accounts, with their resulting cash flow, to securitize bonds.  Just like gets done with mortgages.  Another thing that is just like with mortgages is that any increases in fees or interest may not be required to be passed on the investors.  The servicing lender may be able to pocket that.  Banks deny that this has anything to do with it, of course.  After all, this might create a conflict of interest between the servicer and the ultimate investor — especially since bankruptcy filings are heading back up.

Let’s see.  Bankruptcy reform was passed to stop losses to lenders from people who filed for bankruptcy.  So, lenders securitize debt in such a way that it makes sense for them to up interest rates which the borrowers now can’t afford to pay forcing more people into bankruptcy.

Something tells me I won’t be seeing that $400 in interest savings this year either

Elaine

Can You Still Stiff the Trustee and Get Your Taxes Paid Too?

This is the last post on In re: Graves — unless, I think of something else.

The Graves opinion mentioned something in passing that I had almost forgotten about. Gee, does that mean that I am starting to forget things that other people never knew? Really? Cool! Anyway, the Graves court mentioned in passing that the Debtors did not elect a short tax year pursuant to 26 U.S.C. Section 1398(d)(2).

I’ve done this once. It was way cool. Even Special Procedures was impressed. Ok, here is the scoop. Debtor was going to file an asset Chapter 7. It was just going to happen. On the other hand, Debtor was going to owe taxes for the current tax year — if he filed now. His withholding might catch him up by the end of the year, but as of right now he was going to owe taxes. So, I had him elect a short tax year. Basically, for the year that he filed for Bankruptcy he filed two tax returns. The first covered the year up to the day before his bankruptcy petition was filed. The second covered the petition date through the end of the year. The tax liability and payments made by the Debtor were allocated between the two returns as if they were separate years.

So, the Debtor filed a Chapter 7 with assets for the Trustee to administer. The Debtor also declared a short tax year that bifurcated his pre-petition tax liability from his post-petition tax liability (and his post-petition withholding). The Debtor then could present to the Trustee a pre-petition (and in those days priority) tax claim to pay with the asset available for administration. By the way, there is an IRS publication explaining how this works, and it only works in Chapters 7 and 13. The publication used to be IRS Publication 908. I’m not sure if that is current.

Unfortunately, I can’t come up with a use for this in a post-BAPCPA world. Anyone have any ideas how to make use of this with the current state of Section 507?

Elaine