Monday, June 2, 2014

Bankruptcy vs. Debt Settlement

I am often asked about debt settlement and whether it is a better option than filing bankruptcy.  Before we go any further, it may be useful to talk about what bankruptcy is and what a debt settlement is.

Bankruptcy is a legal proceeding where a petition is filed with a bankruptcy court.  After certain proceedings through either a chapter 7 or chapter 13 filing (typical for most consumer debtors), debts are often discharged meaning that you are no legally obligated to pay those debts.  Your case is monitored by a bankruptcy judge and the court’s orders can be enforced through various means.  Your creditors are prohibited from contacting you and the process is generaly well organized.

A debt settlement is a voluntary arrangement between you and a creditor where the creditor will accept less than full payment usually in a lump sum payment or in a limited number of payments.  If an agreement is reached, the creditor will cancel or forgive some portion of your debt while you pay other portion.  One thing to remember about debt settlement is that it is a voluntary agreement.  The creditor does not have to accept your settlement offer.  The process may take many months, is often stressful for the borrower as collection call and letters will continued to be received, and there is little organization in the process. 

One other point about debt settlement is that if a debt is settled, the creditor will most likely issue a Form 1099 for the balance of the debt forgiven or cancelled.  This will be reported to the IRS as income to you and it could affect your tax liability.  But see Form 982 and instructions. 

There is also a significant difference in the professional fees associated with the two approaches. With bankruptcy, legal fees and court costs are generally agreed upon and know up front.  For a Chapter 7, one may expect to spend int eh neighborhood of $2,000 plus filing fees.  A Chapter 13 will be a bit more, but generally less than $4,000.  By contrast, the fees for debt settlement are generally set on a percentage basis, which 15% being the industrial norm.  Because of this, bankruptcy cases are generally far less expensive than debt settlement. 

Let’s use an example case for comparison of the two approaches. Let’s assume a consumer has accumulated $90,000 in unsecured debt, including credit card debt, medical bills, etc.  Assume further that the consumer’s assets are all “exempt” (state and federal law allow consumers to “exempt” certain types and amounts of assets in a bankruptcy so that the debtor may retain those assets.  For most people in bankruptcy, all of their assets will be “exempt”)

In a bankruptcy, the consumer would pay attorney fees of between $2,000 and $4,000 plus about $300 in court costs.  At the end of the case, the debts are gone and there are no tax consequences.  The consumer most likely never had to go to court and the collection calls stopped immediately.  A Chapter 7 case is often over in as little as 4 months.  When the case is complete, the consumer’s credit will usually begin to improve.

If the consumer elected to settle her debt, the consumer will likely pay about 40% of what is owed.  In this example, that would equate to $36,000.00.  In addition, the consumer will be taxed on the $54,000 charged off, thereby resulting in significant tax liability.  Next, the professional fees will run from $8,000 to more than $10,000, depending on how the relationship was structured.  During the process, which may take many months to over a year to complete, the consumer’s credit is being dragged through the mud.  When the debts are all settled and “off the book”, the consumer will be sad to learn that the damage to the credit from the process will be long lasting and often worse than a bankruptcy, which has a clear ending point. 

So, in the end, the bankruptcy costs around $2,300 (Chapter 7) while the debt settlement cost over $44,000, plus the added tax liability.  So, which option makes the most sense?  Of course, each person’s situation is different and, believe it or not, there are time in which debt settlement makes sense.  This is your financial future.  Do risk it on a catchy radio add or late night television spot advising against filing bankruptcy.  The right advise will lead to the right solutions.  Please feel free to call us to go over your options so that you may selected a course which would be most beneficial and cost-effective.

Monday, December 9, 2013

Running on Empty: “What If I Can’t Make My Chapter 13 Payments?”

Chapter 13 bankruptcy is about payments. After all, it’s a “payment plan bankruptcy.”  But what if you just can’t make the payments?

A moratori…what?
A motion for moratorium of payments is a motion you can file to suspend your plan payments for a period of time.
Practice from bankruptcy district to bankruptcy district is very different.  Here in the Southern District of California, it can be challenge to get a moratorium, but not impossible. We are often able to obtain orders suspending payments for up to three months – although it is wise to use only one or two months if you need it, because you never know when you’ll need another order.  There is usually more flexibility if the plan is otherwise scheduled to complete in less than five years since a bankruptcy may not extend beyond its fifth anniversary.

Tell your lawyer if you’ll have problems making your plan payments
Going on maternity leave? Getting laid off for a few weeks? Having surgery? These are all income interrupters. If you’ll be experiencing an income interrupter, let us know well ahead of time so that we can timely prepare and file your motion with the (hopefully) legitimate reasons you have to suspend your payments.
Your creditors and the bankruptcy trustee have the right to object to the motion, but usually (let’s say almost always) the only person you need to “sell” your cause to is the trustee.

But my trustee’s a real jerk!
My official position is that there are no Chapter 13 trustees who are real jerks. None. Unofficially, let’s say you really do have a jerk for a trustee. Keep in mind that even if the trustee objects, you have the right to be heard by the judge. And the likelihood of your bankruptcy judge and your bankruptcy trustee being a jerk is pretty slim, statistically speaking.  If you really do have some legitimate reason to suspend your payments–through no fault of your own–the judge will grant your motion.

Don’t keep your attorney in the dark
With any problems in any type of bankruptcy, let us know immediately so that we can take necessary steps to keep your case on track. 

Chapter 13 cases are designed to help everyone – even you!  So, keep us informed of changes in your circumstances and lives so that we can continue to protect your interests.  

Friday, November 22, 2013

How to file bankruptcy – What are Executory Contracts and Unexpired Leases in bankruptcy?

List your executory contracts and unexpired leases on your bankruptcy petition and declare your intention either to accept or to reject those contracts. Contracts that are not timely assumed are rejected and the parties are released from further performance under those contracts.

An executory contract is an agreement that has not been completed. A contract is an agreement between two or more parties to perform certain specified actions. Once the parties complete all contractual obligations the contract becomes fully executed and the parties to that contract have no further obligation to act under that contract. An example of an executory contract is an agreement to sell property in which the buyer and seller agree to perform certain actions including inspecting the property, making certain repairs, obtaining financing, transferring title, delivering possession and making payment. Until all contractual requirements are met, the contract remains open to be executed.

An unexpired lease is a form of contract for the use of certain specified real or personal property that has a specified length of time remaining on the length of the contract. An example of an unexpired lease is a rental agreement for the use of a car or a house where the owner agrees to provide the property to the lessee for a set number of months or years and the lessee agrees to make payments for using that property. For bankruptcy purposes, a timeshare falls into this category.

Bankruptcy code section 11 U.S.C. 365 requires that assumption of an executory contract or unexpired lease in a chapter 7 liquidation case within 60 days of filing the case; and in all other chapters of bankruptcy before confirmation of a plan. The court may extend the time to assume such agreements for cause. In the case of non-residential real estate agreements, the time to act is extended to 120 days or longer by court order.

If you have any questions regarding your open contracts or leases, call us today for a free consultation.

Speckman Law Firm
Attorney David L. Speckman

Friday, November 15, 2013

Should You Use A Debt Settlement Company? Be Aware! Be Very Aware!

I was recently in court and saw two different consumer debtors attempting to navigate a collections action, in pro per.  They had been sued by a credit card company after they had sought help from a debt settlement company.  The debtors had been sued even after having been assured by the debt settlement company that it would assist the debtors somewhat with the creditors.  Of course, the only thing the debt settlement company provided by way of assistance was some worthless “cut and paste” pleadings that made no sense and actually violate the prohibition on practicing law without a license.  Needless to say, the debtors found themselves in court having to explain things before the judge by themselves.

These companies are typically a scam.  Indeed, across the county, these outfits have been investigated and sued by various governmental agencies and prosecutors, including for engaging in the unauthorized practice of law.  Other entities have had similar experience with one debt settlement firm in particular.  But, the fact that people still sign up for these “services” raises the question why do people believe the junk they are selling?

I think the real reason is twofold.  First, people generally want to pay their debts and they reason that payment of some of the debt is better than none at all.  The second reason is fear of bankruptcy.  People are afraid of losing property and of the damage to their credit.  While these are legitimate concerns, it does not explain why folks do not seek out a competent professional to advise on financial issues yet they fall hook, line and sinker for some fast-talking snake oil salesman over the telephone.

If you are facing financial issues, seek out a competent bankruptcy attorney in your area.  Just because you seek advice, it does not commit you to filing bankruptcy.  But, because we are experienced in all aspects of the debt collection process and alternatives including bankruptcy, we can offer you meaningful solutions to your financial problems.

Call Speckman Law Firm and Set Up your FREE Consultation

Wednesday, November 13, 2013

Are You Too Far Behind on Your Mortgage for Chapter 13? Chapter 11 May Help!

 Mortgage lenders have been delaying foreclosures for people all over the country. Ask any bankruptcy attorney–they've seen cases where people haven’t made a mortgage payment for two, three, or even four years, and the mortgage company hasn't even started the foreclosure process. Loan modifications can stretch on, court proceedings are scheduled and canceled, an unsuccessful Chapter 13, can all delay things. As a result, the mortgage arrearages–the amount you’re behind on your mortgage–can add up to a lot of money.

When you go to most consumer bankruptcy attorneys to file for a Chapter 13 repayment plan, you’re told that the plan payments will be too high for you to afford, since the full amount of the arrearage must be paid over a maximum of five years. If the arrears are $60,000, for example, this would require at least a $1,000 per month payment on top of resuming the regular monthly payment. Most people just can’t afford it.
This may result in many people thinking that they have no alternative other than losing their home. But there may be another alternative: an individual Chapter 11.
Most people don’t even know that individuals can file for Chapter 11; they think that it’s just for businesses. This is not true. In a Chapter 11 case, there is no five-year limit on the repayment term for mortgage arrearages. In some Chapter 11 cases, it is possible to obtain repayment terms of up to 30 years, without interest. In the example above, instead of a $1,000 per month payment, my client is looking at a monthly payment of $166.67. This is far more doable for most people.
Of course, Chapter 11 is not for everyone.  These cases tend to be far more complex and expensive than a Chapter 13, and there are not many consumer bankruptcy attorneys who know how to steer you through an individual Chapter 11.  However, we do.  Indeed, we have successfully managed several individual Chapter 11 cases.  Give us a call today to discuss your situation and learn whether a Chapter 11 bankruptcy may be the correct answer. 

Friday, November 1, 2013

Fourth Circuit Holds Inheritances Are Estate Property In Chapter 13 Cases

Recently, the Fourth Circuit Court of Appeals issued an opinion in Carroll v Logan.  This will have an impact for future chapter 13 cases in this circuit.

In Carroll, the debtors filed a chapter 13 case in 2009.  The Carrolls’ plan provided for a payment to unsecured creditors of approximately 3.8%, that is, each unsecured creditor who filed a claim would receive approximately 4% of what they claimed was owed.

A little over three years after the debtors’ filed bankruptcy, Mr. Carroll notified the court that he would receive $100,000.00 from an inheritance.  Upon such notice, the chapter 13 trustee moved to modify their plan to provide for the $100,000.00 to be paid through the plan toward unsecured creditors.  The debtors’ objected to the trustee’s motion.

At issue were two provisions of the Bankruptcy Code:  Section 541 and Section 1306.  Section 541 defines what property interests come into the bankruptcy estate upon filing for bankruptcy protection.  In particular, Section 541(a)(5) states that any property that the debtor acquires or is entitled to within 180 days after filing bankruptcy by bequest, devise or inheritance becomes property of the bankruptcy estate.  A reason for this provision is so that if a debtor knows that a family member is going to pass on soon and the debtor has lots of debts, the debtor won’t file bankruptcy immediately before the family member passes to discharge his debts and then have the full inheritance.  If a debtor inherits property within 180 days after filing, the trustee can get those assets to pay creditors.

In the Carrolls’ case, they had filed for bankruptcy in 2009 and did not become entitled to inherit anything until well after the 180 days since filing had passed.  As such, the debtors’ argued, they should not have to submit their inheritance to the chapter 13 trustee.

The trustee countered and the Fourth Circuit agreed that Section 1306 allows the trustee to reach the inheritance.  Section 1306 states that property of the bankruptcy estate includes, in addition to the property specified in Section 541 (see above), all property that the debtor acquires after commencement of the case but before the case is closed, dismissed, or converted to a case under a different chapter.  As such, under Section 1306, even though the debtor did not acquire the property within 180 days after his bankruptcy filing as set forth under Section 541, Section 1306 states that the after acquired property does come into the bankruptcy estate until the case is closed, dismissed or converted.  Therefore, the debtors would be required to pay the $100,000.00 inheritance into the plan (less their exemptions, if any).

This can create another factor to carefully consider before choosing a chapter 7 case or a chapter 13 case.  If you do not stand to inherit much from family members, it may not be much of a factor.  If you do stand to inherit something, a chapter 13 case can go on for up to five years and any inheritance acquired could go to paying your creditors.  At the same time, if you do not qualify for a chapter 7 case because you “flunk” the means test or if you must file a chapter 13 to cure mortgage arrears or other reasons, there may not be any other bankruptcy options.

A skilled bankruptcy professional such as those on this website can help you navigate the world of bankruptcy.  If you are facing financial issues, contact one of us today.

Wednesday, October 30, 2013

What is a Chapter 12 bankruptcy and do I qualify?

          Chapter 12 of the Bankruptcy Code is designed to protect family farmers and fisherman.  Southern California has plenty of both.  Still, this is a very uncommon form of bankruptcy.

          An individual or married couple who farm can file Chapter 12, but so can a farm corporation, LLC or partnership. There are some requirements to file a successful Chapter 12. You must have regular annual income, your debts cannot exceed $4,031,575 (adjusted yearly), and over 50% of your debts must have been related to the farming operation. In addition, if you are an individual or couple, over 50% of your gross income must come from farming operations.

          Farm Bankruptcy was first added to the Bankruptcy Code in 1986. In the 1980’s, there were many bank failures, and credit all but dried up for farmers. The result was a farm crisis. Chapter 12 Farm Bankruptcy was supposed to be a temporary emergency response, but was periodically extended. In 2005 when Congress passed a major overhaul of the Bankruptcy Code, making it harder and more expensive for consumers to file for bankruptcy, they actually strengthened Chapter 12 and made it permanent.

          The most powerful tool found in a Chapter 12 is the ability to re-do, or modify any secured debt. This includes mortgages and loans on livestock, crops and equipment. All aspects of the loans can be modified into what is effectively a new loan. The interest rate can be lowered. The principal balance can be decreased down to the value of the collateral. The term of the loan can be increased. Any arrears will disappear into the new modified loan.

          This ability to modify ANY secured loan in Chapter 12 is one of the major advantages of Chapter 12 over Chapter 13. Others include: There is no required “means test” in a Chapter 12; you do not have to get a Court Order extending the automatic stay beyond 30 days if you were in a previous Chapter 12; The eligibility limits are greater than in a Chapter 13.

          Family farmers in America are a dying breed. The continued access farmers have to Chapter 12 bankruptcy has allowed many farms to get through tough economic times and continue their family farm business and way of life.

          If you feel you may qualify for this powerful and effective bankruptcy, call us for a free consultation.  The call just might “save the farm”.