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In the previous Blog I discussed Reaffirmation, which is one of the ways for a debtor in Chapter 7 bankruptcy to keep property secured by a lien such as an automobile. There are alternatives to reaffirmation. There are two ways to eliminate a debt secured by property, one of which is to give the property back to the creditor and the other allows you to keep the property by redeeming it as allowed by the bankruptcy laws.
The kinds of property that can be redeemed is limited to consumer goods which are used primarily for household purposes, such as furniture, a refrigerator, washing machine, dryer, personal computers, televisions and automobiles. The advantage only works to the debtor's advantage if the creditor is underwater (upside down) with its debt. When the collateral is worth less than the debt you only have to pay the creditor what the property is worth rather than the entire debt. An example would be if you owe a computer company $2,000 on a PC that is only worth $500, you would only have to pay the company $500. The only disadvantage is that you have to pay the creditor in cash. Having to pay cash is often a challenge for many individuals just emerging from bankruptcy. In the right situation redeeming consumer goods can work a lot better than a reaffirmation agreement.
To redeem property requires a court order. Your lawyer files the appropriate documents with the Bankruptcy Court, a hearing is set at which time the court places a value on the property. You pay the creditor cash for the value of the property determined by the court and the creditor releases its lien. You now own the consumer good free and clear of debt.
A reaffirmation agreement is a contract that is used in a Chapter 7 Bankruptcy case that must be approved by the Bankruptcy Judge, in most cases without a court hearing. In general, the purpose of this agreement is to agree to repay what is owed to a creditor, in almost all cases the debt is secured by something that the debtor bought and wishes to keep. A good example would be an automobile. If the Debtor wishes to keep the car and still owes money on the car, he/she must agree to continue to pay for the car.
A reaffirmation agreement is sent to the Debtor's lawyer by the Creditor, who then obtains the client's signature and then must certify that the reaffirmation agreement is in the debtor's best interest and does not present an undue hardship, as set forth in the bankruptcy code. The document is then filed with the Court and approved by the Judge without a hearing. However, as with all things in life, there are exceptions that would trigger a hearing before the Bankruptcy Judge, at which time the client, through his/her attorney would have to justify the reaffirmation agreement.
One example, is that the debtor's budget filed as part of the paperwork that started the bankruptcy case does not demonstrate that the debtor would have the money to pay for the car the debtor wants to retain. In this case, the debtor would have to find a way show the Judge that the payments could be made without creating undue hardship.
Another example, would be the debtor wishes to reaffirm an unsecured debt and the debtor's lawyer is unable to certify the reaffirming the debt is in the debtor's best interest. In this case the Judge is going to want to know what makes this particular unsecured claim different from the other unsecured claims, that he should allow the debt to be reaffirmed. Justifying this type of reaffirmation usually requires demonstrating to the Judge that there is something unique about either the debt or the relationship between the debtor and the creditor. An example of a reaffirmation agreement that I presented to the court was a situation in which the debtor had a career in the military and served his country honorable for a long time and had retired in El Paso to be close to a large military base as well as a military hospital. He had always shopped on post and had always had a military credit card allowing him to make credit purchases on post. His argument was simple -- He had always shopped on post and always had a military credit card and that the use of this credit card was not a contributing factor to his bankruptcy. In short, he wanted to continue to do what he had been doing for over thirty years. When I finished arguing the debtor's position the judge did not hesitate in making a ruling. He stated: "I come from a military family and I understand the special relationship that exists between this person and this particular creditor. I further understand that not to allow this debt to be reaffirmed would be a life changing event for this retired person. The Reaffirmation Agreement was approved by the Court.
The "Means Test" became law as part of the Bankruptcy Consumer Protection Act Of 2005. The test is mandated by the bankruptcy code including a long, vague and confusing explanation of exactly how to set up the test, which was left to the Office of the United States Trustee. The backbone of the test is derived from the Internal Revenue Code. The test has gone through more than a few changes as people in charge attempted to make the test fit the statute and has been subject to a number of court rulings both by the Bankruptcy Courts and the Courts of Appeal. Two (2) changes that have recently taken place are:
The Court of Appeals for the Fifth Circuit, the Appellate Court that Texas is subject to has recently ruled on whether or not a debtor is entitled to an "Ownership Expense" deduction when the vehicle is paid for. The Court ruled that a debtor is entitled to an ownership expense deduction regardless of whether or not there is a debt against the vehicle.
Is a debtor entitled to an additional deduction with a vehicle that has high mileage? Obviously a car that has low mileage costs less to operate than a vehicle with high mileage. The Office of the United States Trustee has determined that a debtor is entitled to an extra deduction for vehicles that have over 200,000 miles on them. Exactly how much of a deduction is unclear at this point and is apparently determined on a case by case basis.
The result of the foregoing is that the bar has been lowered to some extent as to whether or not a debtor can be eligible to file a Chapter 7 bankruptcy rather than a Chapter 13 bankruptcy.
Required by law, the first request that a trustee for a Chapter 7 or a Chapter 13 bankruptcy makes of a debtor is to see his driver's license and social security card in order to establish the identity of the debtor. The trustee is fulfilling his obligation to identify the debtor by seeing an original driver's license, because it has a picture of the debtor and then matches the social security number against the name on the card and then compares the same against the bankruptcy paperwork. There are, of course, other forms of identification that will work just as well such as a military identification card. What will not work is a copy of any of the items mentioned, they must be originals.
If a debtor does not have these items with him/her, at least in El Paso TX, is that, in a Chapter 13 bankruptcy case, the meeting is continued to a later date, which means you have to take another day off of work and in the case of the Chapter 7 bankruptcy you must bring the originals by the Trustee's office within several days after your 341 Meeting, not as bad as having the meeting continued, but still inconvenient. This may seem petty, still copies vs. originals will delay your bankruptcy moving forward.
Oh my God, today I spoke with a woman who was considering bankruptcy as a way to get out from under her credit card debt. She like most people would rather pay off her debts than file for bankruptcy especially when you can wrap your arms around your debt total. I applaud your ethics and values. Sometimes, based on how much you owe in credit card debt it could take years and years and years to pay off especially due to mounting interest rates. Some of these debt relief storefronts are no better in helping you than the exorbitant interest rates charged by the credit card companies. Getting back to this woman I spoke to today, her debts today were approximately $6,000. The company she was (at least I hope it's in the past now) considering working with was going to charge her on top of her monthly payment towards her credit card debt - a service charge of $300 per month during the lifetime of the payment schedule. She was told that it would take approximately 24 months. What is wrong with this picture? A $6,000 debt without additional interest charges would cost this woman more than $13,000. People do the math!! I know how it feels to have bills you can't pay and to have creditors breathing down your neck. I know how badly that can make you feel and so you think anyone that will work with you is a blessing. NOT................ Read, read, read the fine print........... You're not buying a car ............. you're paying off debts. DO THE MATH.
If you choose to handle your credit card debt through a debt relief agency seek out a non- profit agency. Or consider filing bankruptcy, Chapter 7 where you erase entirely your credit card debt as well as all unsecured debts if you qualify.
In an average bankruptcy case, regardless of the chapter (7,13) filed, student loans are not dischargeable. In the Western District of Texas, payments on student loans may not be included in a Chapter 13 Plan unless such plan proposes to pay the unsecured creditors 100% of their claims. Instead, student loans are deferred until after the Chapter 13 plan has been completed. All the while interest is accruing on these loans.
There are possibilities that present opportunities to discharge student loans, as set forth below:
1. The opportunity to discharge a student loan is to determine whether or not the loan made is actually a student loan. The provisions of the bankruptcy code dealing with student loans are very specific, although very broad as to what constitutes a student loan that is non-dischargeable. Therefore, each loan must be examined to determine whether or not the loan is of a type that falls within the definition of the statute. If it does not, then the loan is dischargeable like any other unsecured claim.
2. The opportunity to discharge a student loan is set forth in the statute and reads in part "unless accepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for..." The burden of proof a debtor must overcome is very high but not impossible. What constitutes "undue hardship" is in fact driven and therefore is dependent on the facts in each case.
3. A potential opportunity that is presented is more complex and deals with the situation where a loan was made but the educational institution failed to furnish that which was promised at the time the loan was made. An example of this type of situation is where an educational institution failed before the institution furnished or completed the course(s) and the student was unable to transfer all or any portion of the credits that would have been received to a second institution. Whether or not this type of situation would allow the loans to be discharged would in all probability depend on the relationship between the financial institution making the loan and the educational facility.
All of the above is complicated by a case decided by the Supreme Court commonly referred to as "Seminole". The case limits the Bankruptcy Court's jurisdiction to decide certain issues if they only involve States rights. Therefore, if the student loan referred to is made by a state institution and does not involve any federal institutions, the court may not have the power to hear and determine any of the above.
I want to make it clear that I have nothing against "Debt Relief Agencies". Under the right circumstances they perform a service that avoids bankruptcy for many people. Some of these companies are honest, charge reasonable fees and have a staff that is well trained. A good example is the YWCA here in El Paso, Texas. Over the past six months it appears that the number of companies that offer debt relief by making deals with your creditors has increased substantially. You see their ads on TV, hear their ads on the radio and read their ads in the newspaper. Unfortunately many of these companies charge large up-front fees and provide no meaningful service to their customers. The bankruptcy judge has expressed deep concern over these companies and has said that there has been at least one indictment and conviction in San Antonio, Texas. He has asked the bankruptcy bar (lawyers) and the Office of the United States Trustee to gather as much information as possible with the idea in mind of turning the information over to the Department of Justice for prosecution. However, as with most things in life, you must protect yourself. Before hiring a debt relief company ask for references and check them out carefully. Beware of any company that wants large up-front fees (read the fine print) before they will do anything on your behalf. Most importantly, remember if it sounds too good to be true - it usual is.
Lots of people seeking help from a bankruptcy lawyer to file a Chapte 7 (eliminate unsecured creditors) or a chapter 13, have one or more payday loans. Payday loans are difficult to deal with for both the client and the bankruptcy lawyer. The companies that offer these loans seem to know every trick in the book to continue receiving payments, as well as avoiding having their addresses known so they cannot be notified of a bankruptcy filing. The only way to prevent such a lender from collecting on their loan is to close the bank account upon which the lender collects its funds. Merely having a zeo balance does not seem to work, inasmuch as many people have accounts that have overdraft protection or at the least, will incur a charge for every returned check. Closing their bank accounts presents a few challenges to many clients for reasons such as automatic withdrawals for monthly payments and/or direct deposits of checks. If you are going to stop these folks from collecting, you must promptly close your account and open a new account at a different bank.
Have you ever wondered why doctors and lawyers ‘practice' their profession? I have. Today you have to be lucky to find a doctor that focuses on ‘healing' and an attorney that focuses on ‘selfless problem solving'. It has been my experience that the word ‘practice' gives professionals the freedom to make choices that may not best serve our needs. It's important to sift through the rhetoric and do your homework.
I 'm Sidney Diamond wife and I can often be his worst critic. He leaves his clothes everywhere, almost never closes a cabinet door and is constantly misplacing his keys. He's also brilliant and has more integrity than anyone I know.
Case in Point: I sat in on a free initial consultation with a potential client this week. The gentleman was devastated about his state of affairs and at his wits end. He started his business over 10 years ago, incorporated his business and now due to the economy his industry came to a screeching halt. I was impressed by how prepared he was for this meeting. He wanted to know if he should consider filing a business Chapter 7 or a Small Business Chapter 13. He had corporation papers, his lease, credit card statements, tax information; he knew the answers to all the questions asked and had all the documents that Sidney asked for. He had several years left on his lease (which he did not personally guarantee), credit card debt and bank loans (which he did not guarantee). Basically his business was in debt for almost $100,000 and the business had no assets to protect.
Sidney recommended closing the business and walking away. Bankruptcy was not recommended in his situation. It was amazing to see the relief on his face. His reality is still scary, he worries how he'll continue to feed his family, pay his mortgage and find employment. Lucky for him he found sound legal advice.
There are always people ready to take advantage of other people in desperate situations and the current home foreclosure situation is no different. A whole cottage industry has sprung up made up of predators prepared to charge large fees for helping someone avoid foreclosure through a loan modification.
The vast majority of these people simply take a person's money and perform no service whatsoever. I am sure that there must be a few people who actually attempt to do what they have been hired to accomplish and I am sure that on occasion a loan actually gets modified.
The truth is there is no reason to pay anyone for this type of help. There are non-profit companies all across the country that has qualified people ready to lend a hand for no charge of any kind. In short, there are no fees or other charges for obtaining their help.
The U.S. Department of Housing and Urban Development ("HUD") offers a variety of services and assistance in avoiding foreclosure through a variety of resources, both new and old. Trying to understand these programs by going directly to HUD is difficult and confusing. This agency actually understands the problem and has come up with a solution that really works. On one of their web pages the following statement is made by HUD:
"Foreclosure prevention counseling services are provided free of charge by nonprofit housing counseling agencies working in partnership with the Federal Government. These agencies are funded, in part, by HUD and NeighborWorks® America. There is no need to pay a private company for these services...."
Finding a reliable free agency is now easy; just go to http://www.hud.gov/offices/hsg/sfh/hcc/fc/. Find the pull down menu on the page which allows you to pick your state. That selection then takes you to a web page that allows you to narrow your search by city; with several other choices such as your preferred language.
I am located in El Paso, Texas. I went through the search instructions and came up with four (4) agencies. Much to my delight I was familiar with all four. I have referred clients to each. I can vouch for each agency having highly trained, qualified and very courteous people to address a full range of problems. While they do not always succeed, one can rest assured that they have made a maximum effort to help.
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