Bankruptcy is not a “Dirty Word”

I spend a lot of time talking to clients (and prospective clients) about the social stigma of filing bankruptcy.  That is probably the primary reason that people who need the protection bankruptcy offers wait too long to file, or don’t file at all.  Many people struggle with overwhelming debt for far too long, exhausting their resources (and often the resources of family members as well) because of their perception of bankruptcy.

So I was struck by something the Seventh Circuit Court of Appeals said in a recent decision involving NBA great Scottie Pippen.  Pippen had sued several media outlets for defamation because they reported, erroneously, that he had filed bankruptcy.  The three-judge panel found that such a report was not defamation per se.   Defamation per se essentially means someone says  something so bad about you that you don’t have to show that it damaged you–we assume that damage occurred.  (Think of it like the playground taunt that is so bad you don’t get in trouble if you sock the person who said it.)  In the Pippen case, the court said.

A similar taint does not attach to the reputation of people who go bankrupt. Many innocent reasons lead to financial distress. Readers of the defendants’ statements who mistakenly believe that Pippen is insolvent readily could conclude that his advisers bear the blame.

Some people need bankruptcy because of bad financial advice, others because of an illness and resulting bills, or because of the loss of a job, or a divorce, or a combination of those things.  Some people need bankruptcy simply because their income has dropped, or just hasn't kept pace with the cost of living.  Given that there are so many factors that are out of your control, why should the perception that bankruptcy is a dirty word keep you from seeking the protection that you need?

I think of bankruptcy like surgery.  I don’t know anyone who wants to have surgery.  (From that statement you will conclude, correctly, that I don’t know any celebrity plastic surgery addicts.  Thankfully.)  But if you are sick, or in pain, and surgery will correct a problem, or give you a better quality of life, or save your life, how many of us would refuse?  Bankruptcy is financial surgery.  You eliminate the bad stuff, and start over fresh without a financial tumor weighing you down. Without the stress of bill collector calls.  Without trying to decide which bill to pay when your paycheck just won’t stretch anymore. Without worry over foreclosure or repossession.

No, bankruptcy is not a dirty word.

Should I File a Chapter 7 or a Chapter 13 Bankruptcy

While some of my clients know what bankruptcy chapter they should file under, most look to me to advise them whether to file for Chapter 7 or Chapter 13 (or Chapter 11 or Chapter 12, the topics of a later blog). What do I look at in deciding which chapter to recommend?

My “default” setting is Chapter 7. This is the least expensive, fastest and simplest chapter of the Bankruptcy Code. Unless there is a significant reason to file under a different chapter, I will normally recommend that the client file for Chapter 7.

What happens in a Chapter 7? The answer depends on the type of debt. Generally, there are three kinds of debt: priority, secured and general unsecured. Priority debt consists of recent tax debt and domestic support obligations such as alimony and child support. Priority debt is not dischargeable in a Chapter 7. Unless it’s paid in full during the case, you still owe it after you get a discharge. Most secured debt, that is, debt where you pledge something as collateral, such as mortgages and car loans, are changed from “recourse debt” to “non-recourse debt.” What does this legalese mean? It means that if the lender could sue you for a deficiency or shortfall after a foreclosure or repossession if the sale of the collateral doesn’t bring in enough to pay the debt in full, the bankruptcy discharge stops them from going after you. All they can go after is the collateral, and if it doesn’t bring in enough to pay the debt in full, tough. You’re off the hook. This means that you can walk away from the house or car if you want to. If you don’t want to, just keep the payment current and you’ll be fine. Upon the entry of a discharge, most general unsecured debt–credit cards, medical debt, personal loans, old taxes, tax penalties, foreclosure and repossession deficiencies, unpaid rent, unpaid HOA and condo fees, unpaid utility bills, etc. (but not student loans)–are wiped out. You don’t need to pay these debts at all.

A typical Chapter 7 lasts about 4 months from filing to discharge.

Why would you want to file a Chapter 13? Several main reasons:
1. You aren’t eligible for a Chapter 7. You fail the means test, or have too much disposable income to qualify for a Chapter 7. Or you might have filed a Chapter 7 case in which you received a discharge within the last eight years. None of these are problems in a Chapter 13
2. You are behind on your mortgage and need time to catch up. A Chapter 13 gives you up to five years to spread these payments out to bring the mortgage current, without interest.
3. You owe more on the first mortgage on your home than it’s worth, and have a second or third mortgage. A Chapter 13 lets you “strip off,” or wipe out, wholly unsecured second and third mortgages.
4. You’re behind on your tax or domestic support payments and need time to catch up. A Chapter 13 gives you up to five years to spread these payments out to bring them current.
5. You owe a domestic support property distribution and want to discharge it. A Chapter 13 “super discharge” allows you to do this.
In these circumstances, I would normally advise my clients to consider a Chapter 13.
This decision is not always easy or straightforward. It requires a detailed analysis of your assets, debt, income and expenses, and an in-depth knowledge of the Bankruptcy Code. An experienced bankruptcy attorney is the best person to advise you.

Forcing the Mortgage Holder to Take Back a Home through Chapter 13

Using bankruptcy to surrender a home that has become unaffordable is nearly as common as using bankruptcy to stop a foreclosure so that a home can be retained. The question whether to keep a home when filing bankruptcy is usually answered by comparing the amount of the home’s monthly mortgage payments with the income the debtor is able to devote to housing payments. If the payments are no longer affordable, the debtor might choose to surrender the home as part of either a chapter 7 or chapter 13 bankruptcy filing.

However, in practice this is sometimes more difficult than it would seem at first glance. Mortgage companies are often slow to foreclose on homes that are surrendered to the lender in bankruptcy, leaving the home vacant, and still technically under the ownership of the bankruptcy debtor, for months or even years after the bankruptcy was filed.

The slow-to-foreclose mortgage company can create a host of problems for the surrendering-the-home bankruptcy debtor, who could be held liable for post-bankruptcy homeowners association fees, property assessments, other ownership related financial obligations (but not the monthly mortgage payments, the personal obligation for which the debtor was discharged in the bankruptcy), or property owner liability for injuries occurring at the vacant home.

However, a recent ruling from a Hawaii bankruptcy court approved an ingenious solution to the problem of the non-foreclosing lender. This chapter 13 decision, In re Rosa, No. 13-00630 (Bky. Hawaii July 8, 2013), approved over the objections of the chapter 13 trustee a chapter 13 plan which contained a provision designed to solve this problem by conveying the home back to the first mortgage holder.
In the Rosa case, the debtor’s chapter 13 plan stated that title to the real estate “shall vest in City National Bank/OCWEN Loan Service upon confirmation, and the Confirmation Order shall constitute a deed of conveyance of the property when recorded at the Bureau of Conveyances.” The chapter 13 trustee objected, arguing that a “surrender” under the bankruptcy law did not transfer ownership of the surrendered property until the lender actually foreclosed.

The court disagreed with the trustee and pointed out that here, the debtor had gone beyond merely “surrendering” the property in the chapter 13 plan. Rather, the chapter 13 plan plainly stated that confirmation of the plan by the court would transfer ownership to the lender, and that the order confirming the plan would be recorded like any other deed of conveyance. The lender had been served with this plan and it had not objected to the plan in court. The plan was therefore confirmed over the objections of the chapter 13 trustee.

The result of this strategy for this debtor was a prompt solution to the potential foot-dragging behavior by the lender in foreclosing, which otherwise might have led to years of wrangling by the debtor over unpaid future property assessments.

If you feel “stuck” with a house you no longer desire to keep, call us today to discuss your options and whether a Chapter 13 makes sense for you.

www.facebook.com/speckmanlawfirm
www.twitter.com/speckmanlawfirm
www.speckmanlawfirm.com

Over Median? - Get Creative to Fit into Chapter 7

Chapter 7 offers many advantages over Chapter 13:

• faster process – 3 months vs. 5 years
• lower cost
• more complete relief from debts

When I meet with a prospective client, I start my evaluation by by asking “can this person fit into a Chapter 7?”

By contrast, the Bankruptcy Code is designed to push debtors into Chapter 13, where they repay some or all of their debt. This issue – how much, if anything, should a debtor pay back to creditors – underlies most of the conflict (and litigation) that can arise in a bankruptcy case.

As an advocate who works on behalf of debtors, my goal is to help my clients obtain a fresh start – that is, complete their bankruptcy cases as quickly as possible and with as little residual debt as possible.

One hurdle that appears in just about every bankruptcy case is the means test. Designed to bar Chapter 7 relief from debtors who have the means to pay back their debts in Chapter 13 or Chapter 11, the means test uses a clunky, mechanical series of calculations to predict future earnings capacity based on past performance. How ironic that federal securities laws require sellers of investments like stocks and mutual funds to specifically disclaim that past performance is no guarantee of future results.

In any case, an astute bankruptcy lawyer should view the means test as a flexible structure and not a monolith. There are numerous angles to argue that the means test should not apply in a particular case or that the results in a particular case should be ignored. A nice example of good lawyering in this regard was published by my BLN colleague Jay Fleischman in his law firm blog, where he points out that a student loan incurred for a business purpose may make a Chapter 7 case non-consumer in nature and this eliminate the means test requirement entirely.

In cases where the means test does apply, it is important to look for every possible may be possible to end up with the result that you are eligible to file Chapter 7 if you wish. If you are an above-median debtor the first draft of your means test may yield the result that you cannot file Chapter 7 but you and your attorney must dig deeper.  Contact us today to discuss several tactics that may help you qualify for Chapter 7, even when the means test suggests that you may not be eligible.



Experience Debt Relief Through Bankruptcy (not against it)

 Answer this question: Should you file bankruptcy?

Yes, if you owe more now than you did last month. This test is easy and the answer is simple to understand. It is your best way to tell whether your finances are headed in the right direction or whether you are digging deeper into debt. If you ignore this one piece of expert advice you will undoubtedly follow the false promise of what appear to be quick easy painless debt collection schemes, schemes that are stacked against you.

Do not ignore these warning signs.

As one struggles with bills one typically faces a series of common phases – ill-advised attempts to fix the problem. You pay as much as you can on your bills, and when that is not enough you move into phase one. First, one uses savings, until none is left, leaving nothing for emergencies. You are taught early in life to save for a rainy day. Your savings account is your safety net. It is there to protect you and keep you out of financial trouble. Using up your emergency fund is your first warning sign that financial danger lies ahead.

Next, one borrows money, usually in one or more of the following four ways.
            1.        By credit cards, until the account limits max out and the bank declines to issue further credit;
            2.        By long term debt consolidation, based on one’s ability to get a loan;
            3.        By short term high interest payday type loans;
            4.        By begging money from family and friends.
When you find yourself in a hole, stop digging. Borrowing money to get of debt is the same as digging the hole deeper. If you cannot pay your bills today, you will not be able to pay more debt tomorrow. When no one will loan you more money, you have used up all your credit, and you have spent all the money you do not have. When you have no more credit to spend, stop digging. This is the second warning sign that you need real help.
Finally you realize your ways do not work and you start to ask for advice. The one word you keep hearing is bankruptcy. That is a word you have been conditioned to avoid, because banks tell you it is bad. The same people that stopped loaning you money do not want you to file bankruptcy. Why, because they tell you they will not give you loans in the future. But they already stopped giving you loans and you cannot pay the debt you already have. It is time to get a fresh start, a do-over. It is time to take back control of your life. In reality, contacting a bankruptcy lawyer is the first step to achieving debt relief, but for many people it is often the last resort. The third warning sign is thinking you can solve this problem yourself.

See an expert.

You tried it your way. Now is the time to listen to the expert. A bankruptcy lawyer brings years of experience and thousands of cases to your problems. A lawyer will listen to your problems and present you with options to get out of debt. The lawyer can offer debt consolidation or debt settlement and can explain whether those options are suitable to your situation.

Follow advice.

Bankruptcy lawyers are trained to find solutions. An experienced bankruptcy attorney can predict whether your case:
-Probably will succeed;
-Might have a chance at success; or
-Is a loser.
It is time to follow advice. Keep an open mind and let the lawyer work for you. Accept the advice, take the recommendations. Do not insist on another scheme that “is a loser”. You ignored all the warning signs leading to falling in debt. Now is the time to let the experienced bankruptcy lawyer help you out of debt.

Still not convinced?

Walk into the lawyer’s office. Proudly announce that you do not want to file bankruptcy. Shout that you have excellent credit. Scream that you want to pay your bills. Then, … Remember the test: Do you owe more money today than you did yesterday? Remember how you drained your savings accounts. Remember how you borrowed every penny that you could borrow.
Remember how everything you tried did not work. Now, let the experienced bankruptcy lawyer bring you to your goal of real debt relief.

www.speckmanlawfirm.com
www.facebook.com/speckmanlawfirm
www.twitter.com/speckmanlawfirm
www.lawyers.com/davidspeckman



“Chapter 20″ Lien Stripping Allowed by Fourth Circuit Appeals Court

The U.S. Court of Appeals, Fourth Circuit, has become the first U.S. Court of Appeals to approve “chapter 20″ lien stripping.  Although virtually all U.S. bankruptcy courts allow the “stripping” (vacating and eliminating) of completely unsecured junior mortgages on homestead real estate, the Fourth Circuit is the first circuit-level appeals court to approve lien stripping in a chapter 13 which follows closely on the heels of a chapter 7 bankruptcy filing.  In re Davis (Branigan v. Davis), No. 12-1184 (4th Cir. May 10, 2013).

“Chapter 20″ is a colloquial term for a chapter 13 bankruptcy filed within four years of a chapter 7 case.

A junior mortgage is the second, third, or any other mortgage which is junior to the first mortgage upon homestead real estate.  Although junior mortgages cannot be stripped or otherwise modified in a chapter 7 bankruptcy (although the Eleventh Circuit has allowed this practice in an unpublished opinion), junior mortgages can indeed be stripped off in a chapter 13 bankruptcy, if the junior mortgage is entirely unsecured.

An example of an entirely secured junior mortgage would be where the home’s value is $200,000 and the first mortgage has a balance of $250,000; if the home is also subject to a second mortgage in the amount of $50,000 the second mortgage is not secured by any actual value of the real estate.  To think of this example in another way, if a foreclosure sale were to occur on this underwater home, the first mortgage would receive only $200,000 (the home’s value) and the second mortgage would get absolutely nothing.  This is what the bankruptcy code means when it categorizes a junior mortgage as entirely unsecured.

“Chapter 20 junior mortgage lien stripping” means stripping an entirely unsecured junior home mortgage in a chapter 13 bankruptcy case which is filed within four years after a chapter 7 filing by the same debtor.  The question whether this is permissible arises because the debtor is not eligible for a discharge of debts in a chapter 13 filed within four years of a chapter 7 discharge.

Many are surprised that someone can file chapter 13 bankruptcy within four years of filing chapter 7 — isn’t there a mandatory eight year waiting period between bankruptcy filings?  The answer is no.  A debtor can file chapter 13 at any time, it’s just that a chapter 13 debtor cannot receive a discharge, in the new chapter 13 case, if the case is filed within four years of a previous chapter 7 case.

Mortgage banks have raised the argument that even if junior mortgage lien stripping is allowed in chapter 13 bankruptcy cases, it should not be allowed in a no-discharge chapter 20 case.  If the debtor cannot receive a discharge of debts, the argument goes, then how can the chapter 13 filing strip off a junior mortgage?
In In re Davis, the appeals court noted that lower courts have been split on the question of chapter 20 lien stripping, although one Bankruptcy Appellate Panel had approved this practice in In re Fisette, 455 B.R. 177 (8th Cir. BAP 2011).

Call Speckman Law Firm at 619-696-5151

www.speckmanlawfirm.com

www.facebook.com/speckmanlawfirm

www.twitter.com/speckmanlawfirm

Who gets Lower Rates? Wall Street Banks or Student Loans?

Wall Street Banks Get Lower Rates Than Student Loans AND Can Bankrupt Their Loans From The Government

…Fair?

 

Bankruptcy remains a source of financial relief for most borrowers.  Most debts are discharged in bankruptcy and folks receive a “fresh start”. However, there is one huge exception that is not discharged automatically in any bankruptcy - student loans.

 

Both government and private loans are not discharged in bankruptcy. Student loans are dischargeable in bankruptcy cases only if the student can prove that the loans cannot be repaid without undue hardship, now or at any time in the future.   Providing undue currently hardship would seem to be easy — after all, bankruptcy means broke, right?   The difficult part is proving that the hardship will continue indefinitely into the future.  Absent a permanent disability, this standard is seldom met. So, the practical consequence is that student loans are largely considered “non-dischargable.”

There may be some relief in the future – at least with private student loans. 

A meaningful push to revamp the current loan is being made by Elizabth Warren, a former Democratic Senator from Massechusetts. 

There, Elizabeth Warren served as the interim potential head of the Consumer Financial Protection Bureau, but her permanent appointment was blocked by partisan politics. Undeterred, Elizabeth Warren ran for Senate shortly thereafter. Warren now serves on the Senate Banking Committee, where she has introduced her first piece of legislation:  “The Bank on Students Loan Fairness Act.” Ms. Warren proposes a radical change:   to give individuals the same interest rate that the big Wall Street banks obtain, an interest rate of about .75% on loans they obtain from the government. The interest rate for Stafford (government backed) student loans is currently set at 3.4% and is set to double to 6.8 percent in July.

As Warren explains, this student loan problem is a quiet but growing problem.  She explains that taxpayers are investing in the big banks and that taxpayers should invest in our students.    America should not be “drowning our students in debt while we give a great deal to the banks.”  She points out that economists have stated that defaulted student debt poises a problem and barrier to the recovery of our economy.    She concluded with a call to action and a reminder that students have only their voices, not lobbyists, to ask Congress for equal treatment.

Why should our government make it so easy for Wall Street to skip out on debt while requiring students, our future, to jump hurdles and hire attorneys to obtain financial relief?

Ms. Warren, a former Harvard law professor, understands the financial pressure faced by most Americans as she came from a working-class background, becoming a waitress at age 13 (after beginning as a babysitter at age 9).  Ms. Warren has authored 9 books, including two best sellers.  Let’s hope her efforts produce some meaning change.

If you are struggling with student loan debt, call us today to schedule a free consultation with attorney David L. Speckman.

www.speckmanlawfirm.com

www.facebook.com/speckmanlawfirm

www.twitter.com/speckmanlawfirm

www.lawyers.com

619-696-5151

1350 Columbia Street, Suite 1350

San Diego, CA 92101