6 years 4 weeks ago

 I read a blog today, as well as the written opinion of the Court, concerning what is called a "fee-only Chapter 13 plan". While I agree with the ruling of the Court I completely disagree with the blog and was shocked that a lawyer would take such an action as a matter of course. A summary of the facts are:
 A potential client approached a bankruptcy lawyer about filing a Chapter 7 which the client clearly qualified for however, the client did not have the funds to pay the Chapter 7 fee. It is not clear whether the potential client had any money or simply did not have enough money to pay the lawyer in full. It is also not clear what the legal fees were qoted for the Chapter 7 bankruptcy. Finally it is not clear what other facts, if any, existed that would have made the filing reasonable, which is why the case was reversed.
I'll make the assumption that the Chapter 7 fee was between $800 to $1,500 plus filing fees. Inasmuch as the client did not have the funds the lawyer suggested that the client file a Chapter 13 bankruptcy. The fee for a Chapter 13 case was $2,900 plus filing fees. The legal fees would be deferred and paid in installments by the Chapter 13 Trustee. The Chapter 13 payment would be roughly $100 a month for 36 months.  A chapter 7 bankruptcy is over in approximately four (4) months while this Chapter 13 case will take three (3) years. The result was the lawyer got paid, the Chapter 13 Trustee received his commission and there was nothing paid to creditors. The Bankruptcy Court and the Federal District Court threw the case out as having been filed in bad faith and the case was appealed to the Federal Circuit Court. The Circuit Court reversed the lower Court's ruling that the bankruptcy court could not, out of hand, dismiss the case without first examining the facts. The bottom line to the ruling is that the Bankruptcy Court must review the facts before concluding whether or not a case was filed in bad faith. I want to make clear this case did not occur in Texas where I practice.
 Very few lawyers want to extend credit to a client filing Chapter 7 because the legal fees still owed on the Chapter 7 filing date are discharged and any payment made by the client to the attorney post-filing is strictly voluntary. I believe that I am one of the few lawyers that will allow a client to make payments, get the case started, but not file the case until the case has been paid in full. In almost all cases allowing a client to make weekly or monthly payments usually, but not always, fixes the above problem. Barring some type of situation that required a case to be filed immediately there is no reason for the above fact pattern to take place. If the client could make $100 a month payments to the Chapter 13 Trustee, the client could have made those payments to the lawyer. The result would have been accomplished in for a lot less money and in a lot less time.
 What the Appeals Court said, in my opinion, was that merely filing a Chapter 13 case so a lawyer can get paid is not going to fly unless there exists facts of a compelling nature that would have required the attorney to advise his client to file a chapter 13. For example, if the client’s wages were being garnished by a creditor holding a significant claim might well justify the filing of a Chapter 13 immediately. Therefore, the Bankruptcy Court was required to look at the facts before concluding a case was filed in bad faith, rather than summarily dismissing a case. From my point of view the ruling is standard text book law and there is nothing remarkable in this ruling. The case certainly does not stand for the principal that a fee only chapter 13 case is acceptable.  In fact the course was very clear when it said fee only plans should only be used in exceptional circumstances, noting that they may be "vulnerable to abuse by attorneys seeking to advance their own interests without due regard for the interests their clients".
 On a more personal note, I have a hard time justifying this practice except in very limited circumstances. In fact I never have attempted to accomplish such a thing. Not everything about the practice of law is about money. On numerous occasions I have cut my fees when I concluded that it was appropriate.

6 years 4 weeks ago

Often, debtors come to the bankruptcy lawyer's office after already having made costly mistakes that could easily have been avoided, including:

  • Borrowing against a home to pay down credit cards. Now the debtor has turned what, in many cases, was unsecured debt, which could have been wiped out completely, into secured debt that the debtor must pay off or lose the house. Worst yet are predatory loans where the payments are so onerous as to make foreclosure almost a certainty.
  • Borrowing against a 401K plan. The debtor takes a loan out against a 401K plan and then finds he can't make the payments. If the debtor defaults, a distribution of the full loan proceeds will be declared for that tax year. The debtor will now have a tax liability (that cannot be discharged) equaling about a third to a half of the loan taken out to pay debt that was probably dischargeable in the first place.
  • Moving debt around to take advantage of low-interest credit card offers. If the debtor files bankruptcy within a short time after this transfer, lenders left "holding the bag" often move in court to block the discharge claiming fraud for incurring the debt when the debtor knew he would not be able to pay it back.
  • Playing the "ostrich." Unable to face his or her financial problems, the debtor avoids getting help. For persons with back tax debts, the delay permits interest on priority taxes (that you must pay off) to build and also gives the IRS time to file a tax lien, again making what may have been a dischargeable tax debt into secured debt the debtor must now pay off.
  • Getting help from the "one trick pony." When shopping for help, pay attention to 1) the range of solutions, and 2) the effectiveness of the solutions the debt professional offers. Ask questions of the following persons you approach for help:
  • Credit counselors. How much of my debt will be completely wiped out? Will I have to pay income taxes for the debt that is wiped out? (You probably will, especially if the creditor reports "cancellation of debt" income for you to the IRS.) How much will I have to pay in total? How many months will it take to be debt free? How much total principal and how much total interest will I pay? Will my interest rates go up?
  • Accountants and enrolled agents. For debtors with tax debts, be aware that neither one of them can offer the bankruptcy option unless they have a license to practice law. Usually they will offer only an offer in compromise, which may not be the best option for your case, or an installment agreement which is almost no relief at all. Ask: Would this tax debt be dischargeable in bankruptcy? Are you making a guarantee that my offer will be approved? What amount will be accepted as an approved offer by the IRS? How long will it take? As for an installment agreement, it's just that: Pay over time while interest and penalty charges continue to grow.
  • Attorneys who practice only Chapter 7 bankruptcy. This is a bit like going to a doctor who can prescribe only one type of medicine. Your specialist should be able to perform a full diagnosis and then prescribe a range of treatments. Ask: Does the attorney prepare, file and represent debtors in Chapter 13 or Chapter 11? What are the local Chapter 13 trustee's preferences as to the type of plans he or she will accept? How much of his or her practice is devoted to bankruptcy? How long has he or she been practicing this area of the law? For tax problems, does the attorney practice before the IRS? What options does he or she offer?
  • If you think you may be facing a debt problem, get some advice. The earlier, the better.

    Our tax and bankruptcy law firm serves Virginia, Maryland and DC. Call us.

6 years 4 weeks ago

describe the imageWithout question just the thought of having to file bankruptcy, Chapter 7, Chapter 13 or a Chapter 11 is very stressful.  It is an emotional roller coaster ride before you actually make a decision.  When anyone is facing the unknown, coupled with the hearsay gossip about bankruptcy that is almost invariably wrong, it is no small wonder that your stress mounts. During financial hardship the pressure grows from the demands of creditors in the form of harassing phone calls, demand letters, pending lawsuits as well as the strain to keep a roof over your head, the utilities on and enough food on the table to feed your family.
 Financial hardship can also increase the strain on a marriage, partnership or with your significant other.   This type of situation can and often does lead to divorce, separation or the end of the relationship.  There are several things a person needs to both consider and understand when faced with these foregoing challenges.  First and foremost what is more important – protecting your family or worrying about how you are going to get your creditors paid.  Secondly, bankruptcy does not cause divorce, the blame and shame of financial pressure does.  Bankruptcy can remove financial strain that causes the emotional day to day turmoil on you and your family.  In order to understand your options clearly it's important to seek the advice of a competent consumer bankruptcy lawyer.    

6 years 4 weeks ago

Abraham Lincoln, a lawyer by profession, was exactly on the mark when he said: "A lawyer's advice and time are his stock in trade." That's what we sell -- our time (as well as our knowledge).

Now put that together with another old, but very true, saying: "You get what you pay for." So. . . when you go for cheap, you are bound to get less of that lawyer's time and attention. I have explained how this works before here in a prior blog posting about cheap lawyers and bankruptcy mills.

I state the foregoing (if you will indulge me in a little legalese) as an introduction to the present rant. Excuse me while I spout.

This the second time in a week that I am doing a consultation answering legal questions for former clients of a bankruptcy attorney who bills himself as the "#1 Bankruptcy Filer" in his state. (Although that statement connotes he's the best in quality (an advertising assertion, which, by the way, may run afoul of the state bar association professional ethics rules) actually it just means his office happened to file more cases than anyone that calendar quarter).

It's annoying, to put it mildly, and infuriating, to be more precise. I'm spending my time, doing a free consultation and clarifying issues that should have been explained by the attorney they paid to do the case.

It points up something that you need to take into account when you hire your bankruptcy attorney: Make sure he or she, or knowledgeable staff, is available and competent to answer your questions. This is the intangible that represents the real value when you hire a legal adviser.

Don't be one of those who calls around asking: "How much do you charge?" You'll get a low, low price and nobody there to provide you with a key component of the service: counseling. It's not for nothing that attorneys are also referred to as "counsel."

Don't get short-changed. The attorney and staff, while sometimes not immediately available, should eventually be able to answer your questions -- before you have to go elsewhere.

Call our law firm if we can help you.

6 years 4 weeks ago

Now, I certainly don’t blame you for wanting to get rid of these offers. It is amazing how many we get each week. I used to think that I was something special to get so many credit card companies wanted me to enroll. I’ve learned the error of my thinking the hard way and I definitely should have removed the temptation long time ago.
But, fortunately, it’s actually pretty easy to stop receiving these offers. You have two choices. You can opt out of receiving them for five years or you can opt out of receiving them permanently.
To opt out for five years call 1- 888-5–opt-out or visit
To opt-out permanently, you have to go online to and you will have to mail back a signed permanent opt out election form. They actually make it harder to get rid of them permanently.
When you call or visit the website, you have to provide information such as home telephone number, name, social security number, and date of birth. If you don’t want to call or go online, you can also send letters electing to opt-out permanently to the major consumer reporting companies, Experian, TransUnion, Equifax, Innovis Consumer Assistance in Pittsburgh.
Also, don’t forget that the government has set up a national do not call registry as a way to reduce telemarketing calls to your house. Go to to or call 888-382-1222.

6 years 4 weeks ago

On an issue of first impression before the Sixth Circuit, the Court held that post-petition income that becomes available after a debtor completes repayment of a 401(k) loan is projected disposable income that must be turned over to the Trustee for distribution to unsecured creditors pursuant to Section 1325(b)(1)(B) and may not be used to fund voluntary 401(k) plans.
In this case, both debtors (on consolidated appeal) were making payments to a 401(k) loan, which would be paid off during the life of the Chapter 13 plan.  Neither debtor was making contributions to their 401(k) retirement accounts at the time the petitions were filed.  The debtors proposed to use the income (available after full repayment of the 401(k) loan) to start making contributions to their 401(k) retirement accounts.  The Trustee objected on the issue of whether the debtors must include the income resulting from the payoff of the 401(k) loans to their respective plans considering neither debtor was making 401(k) contributions at the time the petitions were filed. Read More ›
Tags: 6th Circuit Court of Appeals, Chapter 13

6 years 4 weeks ago

Bankruptcy is a very effective tool to deal with financial problems. There are times, however, when it just does NOT make sense. The following facts are from a consultation where I advised AGAINST a filing.

The gentleman had a condominium which had become a financial burden. Like a lot of property purchased shortly before the financial crisis, this one had depreciated significantly. It was a small, 840 square foot condo purchased for about $300,000 in 2006. Upon listing with a realtor, the best offer he could draw $185,000, but the lender would not approve the short sale. He had two mortgages. The payment on the first was about $1,400/month, and the second was about $400/month. The monthly condo fee was $275/month. With rent coming in at $1,500/month, he had to put in $575 a month from his own pocket to carry it. He had recently been pre-approved for a loan to purchase a larger $400,000 for his wife and new baby. He complained he could not afford to keep on paying the condo.

Given his income of $82,000 a year and wife's $51,000 a year, if they declared bankruptcy, they would likely not qualify for a simple Chapter 7 and would have to pay all disposable income into the court for the next five years. Furthermore, the wife had $16,000 in a money market fund, so the minimum contribution over time would have to be a minimum of $11,000. (Since the couple lived in Virginia, that state's $5,000 homestead exemption would apply.)

I advised him that bankruptcy should be only a last resort. Instead, there are other options that should be explored first. The $16,000 cash (and possibly additional funds from a hardship distribution from the $60,000 they had in a 401K) could be dangled in front of the second mortgage lender to try to obtain a lump sum payment in return for a release of the second mortgage. The second mortgage was, for all practical purposes unsecured, so that if the property went to foreclosure, the second would end up with nothing anyway. Some money would be better than none, to this lender.

Once the second mortgage was gone, the net negative income would drop to about $175/month, which could be manageable with some belt-tightening of his household expenses. Furthermore, the net debt against the property would drop to about $232,000 (the amount of the first mortgage). With a present value of $185,500, the property could recover to positive range in a few years.

The situation would not be entirely cost-free, but the trade-off -- in this case -- to a bankruptcy filing, in my opinion, was worth it.

It's the policy of this office to be absolutely honest, even when we lose business. We win by knowing we do the right thing for our clients or prospects.

Nevertheless, in the end, it's the client's decision, and we respect that. Call our law firm, if you want to discuss your situation.

6 years 4 weeks ago

There has been little success with the money allocated by Congress, through HAMP, to help fix the mortgage crisis. Very few people having trouble with their mortgages have received any relief of any kind.  No reduction in interest rates, no reduction in the mortgage amount etc. etc. etc.  Now there's been an investigation launched to examine why the two giant government created entities seem to be unresponsive and has adopted new rules that make it even harder to obtain help.  According to everything I've read the general consensus is that fixing a mortgage for a consumer hurts the profit margin of Fannie and Freddie. foreclosure, bankruptcy, chapter 13, chapter 11, loan modification,
What makes the problem worse is that a Bankruptcy Judge has no authority to do anything with a mortgage on your principal residence in a Chapter 13 or a personal Chapter 11, except to allow for a cure of the past due amount plus the attending fees leading up to the attempt to foreclose.  If one has a mortgage on an apartment complex, office building, manufacturing plant, vacation home or any other type of real estate a Bankruptcy Judge in a Chapter 11 can change the interest, redo the amortization period and if the property is underwater (worth less than the debt) reduce the amount of the mortgage to equal the value of the property.  For the life of me I cannot see any difference between a mortgage on a home and a mortgage on any other piece of real estate. Why should an apartment owner have more clout than a homeowner? 
I am beginning to wonder if there is a complete disconnect between the federal government and the average consumer that is having trouble with their mortgage.  There are multiple ways to fix this problem  -- most of which seem to be always below the radar.  On the other hand those 'fixes' that have been proposed and passed into law have a slim chance of granting the relief they were designed to give. 

6 years 4 weeks ago

I recently started to do some financial video lessons for Everyday, I realize how poorly we are all educated about handling our money. To think that two-thirds of our economy is built on consumer spending yet we don’t teach anything about personal finance in school or about the value of saving. Come to think of it, maybe this is why we are not taught how to handle are money…
I hope to do my little part in broadening financial education through these financial education videos. Don’t worry, they are short and to the point- plus, I’m sure they will get better the more I do.  A transcript of the video follows or you can watch the video here.
More and more people are are retiring with mortgages on their homes. So don’t feel bad if you still have mortgage. Don’t feel like you’re being the curve. It’s not necessarily a bad thing but the most important thing to think about is whether can you afford to have that mortgage when you retire. You have to make sure you can budget properly with the mortgage in mind is that’s going to be a fixed cost until the end of the term. So one possibility would be to pay off your mortgage with the savings that you have which is sometimes thrown out there as an option for people who have a mortgage going into retirement.
I do not recommend this. I think it’s more important that you have your savings available to you then you can use that money in other ways and keep your mortgage. I would instead like to propose a couple other options on what you might be able to do if your mortgage might be a little too much and does not fit into your budget of what you need for retirement. I mean the first option I recommend would be to move out of your house to smaller house. That way you are going to save that expense. I know the family home is important and it has a great sentimental value but if you can you would really benefit yourself greatly if you move to a smaller house, cut down on the mortgage payment or hopefully have no mortgage at all with this move to the smaller house.
Second, what you could think about is a 30 year mortgage, entering into a new one. Interest rates are at historic lows. You could capitalize on that. It puts the payment down at a lower rate and then there might be some left over when you die but it most likely won’t be a huge amount and it will benefit you with a lower payment throughout your retirement.
Third, perhaps you can work it out with your children so that they can pick up a percentage of your mortgage. You could deed the house to them, enter into a new mortgage with them or outright sell the house. There are various strategies you could pursue along that line that could keep the house within the family and I recommend inter-family transfers as a way to get around reverse mortgages which I do not recommend. The fees and expenses in a reverse mortgage eat up the equity in your house so quickly that do not consider reverse mortgages as an option. I’m Ted Connolly and that’s how to retire with a mortgage that’s not paid for.


6 years 4 weeks ago

business bankruptcy, business bankruptcy alternatives, business ch 13, business ch 11Chapter 13 can be used to save a small business provided  the business is a proprietorship (not incorporated and not a partnership) and provided the debt limitations of a Chapter 13 are met.   A Business Chapter 13 works best if most of the debts are unsecured and those debts that are secured can be repaid within a 5 year period.  Restructuring loans on equipment and vehicles can also be accomplished provided the ownership time periods are met.  
A Chapter 13 has some limitations which may not make a business chapter 13 your best choice:   

  • A Chapter 13 plan must be filed immediately with the first payment due 30 days from the filing date.  In many cases a business, large or small, needs some time to reorganize internally, such as cutting operating expenses, before addressing creditors and begin paying their creditors back.   
  •  A Chapter 13 plan cannot exceed 60 months.  In many cases this limitation prevents a small business from addressing certain issues that need to be addressed  to make the Business Chapter 13 successful.   
  • If a business owner also owns the building and real estate from which the business operates and the loan against the building needs to be adjusted because the interest rate is too high; the value of the building is worth less than the debt or the amortization period is too long, a Business Chapter 13 will not work because any such debt that is restructured in this manner must be paid in full in 5 years or 60 months. 
  •  The equipment or vehicles have not been owned long enough to allow the debt to be modified sufficiently under Chapter 13. 

 There is an alternative to a Business Chapter 13 - a Small Business Chapter 11   There are now numerous  features that cut the cost of a Small Business Chapter 11:

  • There is now a form Chapter 11 Plan and a form Chapter 11 Disclosure Statement.  This helps reduce the cost of a Small Business Chapter 11.  
  •  Monthly operating reports for a small business have been made simpler than the standard monthly operating report. 
  • One of the problems for an individual filing a small business chapter 11 is that a discharge is not granted until after the last payment is made.  This fact added a significant additional burden because the quarterly reports and quarterly fees had to be paid while the case was open.
  •  Under limited circumstances to allow a discharge to be entered immediately as part of the Order Confirming the Plan.   The fees and  expenses for a Small Business Chapter 11 is now a reasonable alternative to a Business Chapter 13.

It's important as a business owner to weigh the benefits and costs of a Business Chapter 13 versus the benefits and costs of a Small Business Chapter 11.   As with any important decision be sure to get a second opinion.  Many bankruptcy lawyers are  consumer - only chapter 7’s and chapter 13’s or a business bankruptcy chapter 11 practice.  A Small Business Chapter 11 requires the finesse of both.