Blogs

4 years 5 months ago

Q:  I keep hearing about debt settlement companies.  Are they a legitimate way to avoid bankruptcy? – John L.
A:  I have not found any evidence that debt settlement programs are a legitimate alternative to bankruptcy.  I find them risky and deceptive and prefer to recommend alternatives which give you legal protection from creditors.  Lately, I can’t turn the TV channel without someone trying to sell me on a debt settlement plan.  As a bankruptcy attorney, I witness first hand the effects of failed debt settlement plans.  The complaints usually start with “Well, I got involved with this company that was supposed to settle my debt…”.  After that, the stories are sadly all the same.  The company never settled the debts and now the person is being sued.
If you are considering a debt settlement company keep these things in mind:
Built to Fail?
According to a 2010 Government Accountability Office report which compiled data from the Federal Trade Commission and 43 state attorneys general, more than 90% of debt settlement plans fail.  This documented fail rate was disputed by some company representatives who claimed a suspiciously high success rate between 83 and 100%. The FTC’s data, however, demonstrated that the high failure rate was in part due to substantial up-front fees required to be paid to begin the plan.
You are still responsible for payments on the debts even though they are in the plan.
Some debt settlement companies will try to convince the consumer that they no longer have to keep paying on the debts included in the plan.  Although you have a relationship with the debt settlement companies, the creditors do not.  By not continuing to pay the monthly payments, your debts will go into default and you may be sued for payment.  Your debt settlement plan does nothing to erase your legal obligation to remain current on your payment obligations.
Don’t be fooled by “official” language.
A number of companies have been sited for misleading the consumer into thinking the programs were sponsored by or implemented by the federal government.  Using advertising slogans such as “National Debt Relief Stimulus Plan” or “New Government Programs”, the companies falsely try to align their company with the government to entice the consumer to join, even though no such relationship with the government exists.  Some states, like Arkansas and Wyoming have gotten so fed up with the abusive practices of debt settlement companies that they have chosen to ban them operating in their states.
But, hey, who knows?  Maybe you will get lucky.
 


4 years 5 months ago

Q:  I keep hearing about debt settlement companies.  Are they a legitimate way to avoid bankruptcy? – John L.
A:  I have not found any evidence that debt settlement programs are a legitimate alternative to bankruptcy.  I find them risky and deceptive and prefer to recommend alternatives which give you legal protection from creditors.  Lately, I can’t turn the TV channel without someone trying to sell me on a debt settlement plan.  As a bankruptcy attorney, I witness first hand the effects of failed debt settlement plans.  The complaints usually start with “Well, I got involved with this company that was supposed to settle my debt…”.  After that, the stories are sadly all the same.  The company never settled the debts and now the person is being sued.
If you are considering a debt settlement company keep these things in mind:
Built to Fail?
According to a 2010 Government Accountability Office report which compiled data from the Federal Trade Commission and 43 state attorneys general, more than 90% of debt settlement plans fail.  This documented fail rate was disputed by some company representatives who claimed a suspiciously high success rate between 83 and 100%. The FTC’s data, however, demonstrated that the high failure rate was in part due to substantial up-front fees required to be paid to begin the plan.
You are still responsible for payments on the debts even though they are in the plan.
Some debt settlement companies will try to convince the consumer that they no longer have to keep paying on the debts included in the plan.  Although you have a relationship with the debt settlement companies, the creditors do not.  By not continuing to pay the monthly payments, your debts will go into default and you may be sued for payment.  Your debt settlement plan does nothing to erase your legal obligation to remain current on your payment obligations.
Don’t be fooled by “official” language.
A number of companies have been sited for misleading the consumer into thinking the programs were sponsored by or implemented by the federal government.  Using advertising slogans such as “National Debt Relief Stimulus Plan” or “New Government Programs”, the companies falsely try to align their company with the government to entice the consumer to join, even though no such relationship with the government exists.  Some states, like Arkansas and Wyoming have gotten so fed up with the abusive practices of debt settlement companies that they have chosen to ban them operating in their states.
But, hey, who knows?  Maybe you will get lucky.
 


4 years 5 months ago

Why Bankruptcy Is a Better Option than Debt SettlementThe National Association of Consumer Bankruptcy Attorneys (NACBA) recently published a consumer alert report entitled “The Debt Settlement Trap: The #1 Threat Facing Deeply Indebted Americans,” which detailed the stories of debt strapped consumers who have fallen prey to the numerous scams peddled by so-called debt settlement companies. You’ve probably heard their claims on TV and on the radio a million times. Debt settlement companies that promise to settle your debts for pennies on the dollar and to get you out of debt without filing bankruptcy. Their commercials usually feature a handful of earnest folks who claim the debt settlement company saved them from the supposed stigma of bankruptcy by negotiating with their credit card companies and bill collectors. Their commercials bombard the air waves with the message that bankruptcy is somehow morally wrong, and the debt settlement companies offer a more honorable alternative than filing personal bankruptcy.
What they don’t tell you about is the debt settlement industry’s abysmal failure rate. According to a 2010 Government Accountability Office report compiling data from the Federal Trade Commission and 43 state attorneys general, less than ten percent of consumers successfully complete debt settlement programs! Nor does the debt settlement industry explain in their commercials that creditors can and frequently do accelerate their collection efforts once a person enrolls in a debt settlement program. That means they step up their campaigns of harassing phone calls, and will eventually sue the consumer because they have been instructed by the debt settlement company to stop making payments directly to their creditors altogether. Yes, the credit card companies can and do sue you in spite of the fact that you’ve enrolled with a debt settlement company. They then obtain judgments that include all the interest, penalties, and now attorneys’ fees that they’ve racked up against you while the debt settlement company was supposedly negotiating with them.
And once a credit card company or other creditor gets a judgment against you, they can then pursue a range of nasty new collection efforts—from garnishing your wages to placing a lien against your home.
The problem I have with debt settlement companies is the fact that their ads are misleading. They’re simply not being straight with people. Not only do they fail to inform debt strapped consumers that their failure rate (of successfully negotiating settlement of all a customer’s debts) is close to 90%, but they likewise fail to explain how their programs work, or the percentage they charge for their lame efforts, or the fact that they often leave their customers in a worse position than they were in before they enrolled in the debt settlement program. That’s because while the debt settlement company is collecting large payments from their customers every month, earmarking a substantial portion of that for themselves—they are mostly for profit companies after all—the consumer’s debt burden is ballooning due to increased interest, late fees and penalties. Additionally, every month that goes by while the consumer is enrolled in the debt settlement program (and not making payments directly to their creditors), their credit score is rapidly destroyed. And if the consumer is like the vast majority of people who enroll in debt settlement, who end up getting sued anyway or who drop out because they can’t afford the exorbitant monthly payments and fees that the debt settlement company is charging them, then he or she ends up far worse off with even bigger credit card balances, no settlement, worse credit, and often a judgment and wage garnishment. Lastly, the debt settlement company commercials fail to inform consumers that if they do actually succeed in settling any debt, then the consumer will be liable to pay taxes to the IRS on that settled debt as though it were income—unless the consumer can prove to the IRS that he or she was insolvent at the time the debt was settled (and retirement savings are included by the IRS in that calculation of “insolvency”). As I’ve written here on this blog before, debts discharged through bankruptcy, on the other hand, are not taxable as income—no matter whether the debtor had any retirement savings at the time the debt was discharged.
So, the next time you hear a talking head on TV urging you to steer clear of bankruptcy and to enroll in a debt settlement program instead, remember this: there is already a legal way to free yourself from debts. One mandated by federal law that provides a range of powerful protections for the debtor—from stopping all collection activities, including lawsuits, to allowing one to actually remove judgment liens from one’s home—and that federal debt relief program is called bankruptcy.
If you can afford to pay some monthly payment toward your debts, but cannot pay them in full, there’s a program for that too. It’s called Chapter 13 bankruptcy. If you simply cannot make monthly payments on your debts and still cover your necessary living expenses, well there is a relief program for that situation too. It’s called Chapter 7 bankruptcy. And either path is a perfectly honorable, legal way to free yourself from debt and get a fresh financial start.
I’m a San Jose bankruptcy attorney. You don’t have to take my word that debt settlement companies generally do more harm than good. Go ahead and read these government and other reports about the abusive, often fraudulent practices of the debt settlement industry. And if you need relief from your debts, do yourself a favor and at least get a free consultation from a knowledgeable bankruptcy attorney before you sign a contract with one of those debt settlement outfits you see on TV.


3 years 11 months ago

Everybody is telling Twinkie jokes this week. Hostess Brands was limping its way through Bankruptcy Reorganization when its bakers heeded the call of their union and went on strike on November 9. As part of the reorganization effort Hostess had proposed wage and pension cuts. The Teamsters Union agreed to the cuts needed to assist […]The post The Twinkies Will Survive appeared first on National Bankruptcy Forum.


4 years 5 months ago

The 8th Circuit Bankruptcy Appellate Panel has ruled that a Chapter 13 debtor may not create a special class of unsecured creditors for nonpriority, nondischargeable tax debts at the expense of other unsecured creditors.  In the case of Shawn & Lauren Copeland v. Richard V. Fink, the debtors sought to create a separate class of unsecured creditors for claims of income tax debts that were not considered a priority debt (i.e., the debt became due more than 3 years prior to the filing of the bankruptcy case) but were nevertheless non dischargeable since the tax returns were filed within 2 years of the bankruptcy case.
This situation only occurs when a debtor fails to file their income taxes when due.  Income tax debts are considered "priority" when they become due within 3 years of the bankruptcy filing.  The consequences of being a priority tax debt is that the debt must be paid in full through a chapter 13 plan before anything is paid to general unsecured creditors.  Income tax debts may be discharged in Chapter 7 or Chapter 13 if the debtor files the return and more than 3 years have expired since the return was due or 2 years after a late return is filed, whichever date is later.   But what if the return was due more than 3 years before the bankruptcy was filed and the tax return was filed within two years of the bankruptcy filing?  That is the circumstance of the Copeland case.  The debt is not discharged, but it is also not a priority tax debt.  The debt survives bankruptcy.
Section 1322(b)(1)  of the Bankruptcy Code allows a Chapter 13 plan to “designate a class or classes of unsecured claims, as provided in section 1122 of [the Bankruptcy Code], but [it] may not discriminate unfairly against any class so designated.  A classic example of a separate class of unsecured creditors is where a debtor must make a restitution payment arising out of a criminal sentence.  Since the debtor would wind up in jail if the restitution is not paid, the bankruptcy code permits the debtor to pay those unsecured debts in full before paying other general unsecured claims. 
To determine when a debtor may create a separate class of unsecured debts, the 8th Circuit applies a four-part test:

  1. Does the discrimination have a reasonable basis?
  2. Can the debtor can carry out a plan without the discrimination?
  3. Is the discrimination is proposed in good faith?
  4. Is the degree of discrimination directly related to the basis or rationale for the discrimination?

Unlike the necessity of paying a criminal restitution a child support debt, the court indicated that the failure to file tax returns in a timely manner did not meet the requirements of this test.

Standing alone, the non-dischargeability of a debt is not a proper basis for discrimination against other unsecured non-priority claims. . .
By asking for special treatment of their tax claims, the Debtors ask their other
unsecured non-priority creditors to pay for the Debtors’ failure to file timely tax
returns.

The key practice point with this case is that bankruptcy attorneys should be very careful to determine the precise date that income taxes are assessed prior to filing the Chapter 13 case if the attorney knows the returns were filed late.  This can be accomplished by obtaining an Account Transcript by submitting Form 4506 to the IRS prior to filing the case. 


3 years 9 months ago

Here is a good article about credit scores.Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.


4 years 5 months ago

student loans and SSA disabilityIn an about face from former policy the U.S. Department of Education has released new regulations, effective on July 1, 2013, which state that a student loan borrower’s repayment obligations may be discharged if that borrower has been found totally and permanently disabled by the Social Security Administration.   In an absorbing 61 page restatement of Sections 674, 682 and 685 of Title 34 of the Code of Federal Regulations, the U.S. Department of Education has announced its new, streamlined procedures. This new policy changes the procedure used by a student loan borrower can petition the Department of Education for loan forgiveness based on the borrower’s total and permanent disability. Under current procedure borrowers with student loans issued under the Perkins loan program, the FFEL loan program or the Ford Federal Direct Loan program could apply for forgiveness on the grounds of disability but the forgiveness rules did not recognize a Social Security Disability Award as proof of total and permanent disability. In an effort to streamline the total and permanent disability process, the Department of Education will now use a common disability forgiveness procedure for all of its student loan programs rather than a different procedure for each. More importantly, a disabled borrower can now include a copy of his Notice of Award from Social Security as proof of disability. Under current rules, the Department of Education would make its own, independent decision about a borrower’s medical or mental health disability. Under today's procedures, a student loan borrower found disabled by Social Security would essentially have to pursue a second finding of disability from the Department of Education. This process would entail tracking down the appropriate application from the relevant loan program, filling out the form, obtaining and submitting medical evidence. If an applicant in this process wanted to secure legal help, he could do so but would have to pay an attorney out-of-pocket as there was obviously no lump sum payment to support a contingency fee payment like there is a Social Security disability claim. As a practical matter, many permanently disabled student loan borrowers became subject to seizure of disability benefits by the Department of Education, mainly because they did not know about or were unable to complete the application for disability discharge of those obligaitons. The Department of Education’s new procedures will require some changes in Social Security’s disability determination procedure. Student loan forgiveness under these new regulations only applies if Social Security determines that an approved claimant shall be subject to a continuing disability review every five to seven years, as opposed to subject to review every three years.  SSD claimants approved under a three year continuing review status are not considered totally and permanently disabled by the Department of Education, where as SSD claimants on a 5 to 7 year review schedule are deemed more severely disabled. Currently, however, Social Security does not routinely include in its Notice of Award whether a claimant shall be subject to a 3 year review or a 5 year review. A 3 year review case is one where medical improvement is likely and the claimant has a good chance at improving sufficiently to return to work. A 5 year review case is one where medical improvement is not likely. Presumably SSA awards will now include this information in its awards. Further, Social Security has not met its goals in conducting continuing disability reviews. In my practice I receive only 2 or 3 calls yearly about continuing disability reviews from existing clients or prospective clients – I expect that SSA will be putting a great deal more focus on continuing reviews in the next few years. Finally, the Department of Education has not yet released its new “streamlined” disability discharge applications. These new student loan discharge regulations do not go into effect until July 1, 2013 so the new discharge applications will most likely be released in the spring of 2013. The Department of Education’s new regulations changing its procedures to incorporate Social Security findings of total and permanent disability in student loan disability applications represents a reasonable accommodation to the government’s otherwise hard-line approach to student loan debt forgiveness.  It will be interesting to see if bankruptcy judges will begin to consider Social Security disability awards in Section 523(a)(8) student loan hardship discharge litigation.The post Social Security Disability Payees Now Eligible for Discharge of Student Loans appeared first on theBKBlog.


4 years 5 months ago

In a recent Opinion, Judge Opperman from the Eastern District of Michigan Bankruptcy Court held that a Chapter 13 debtor cannot exclude voluntary post-petition retirement contributions from disposable income.  This Opinion is significant for debtors, trustees, and creditors as it systematically changes the way the Eastern District of Michigan will treat post-petition voluntary retirement contributions in a Chapter 13. Read More ›
Tags: Chapter 13, Eastern District of Michigan


4 years 5 months ago

Scale of Justice.jpgReading the opinion just issued by the Bankruptcy Appellate Panel for the 8th Circuit in the case of Shaffer vs. Iowa Student Loan Liquidity Corporation, I am wondering if we are now witnessing a greater willingness of the bankruptcy courts to discharge student loans. 
Susan Shaffer is a single woman in her 30s with no dependants. She apparently suffers from mental health issues including eating disorders, depression, anxiety and self-harm (cutting).  She acquired $204,525 of student loans while obtaining a degree in psychology in 2002 and attending chiropractic school before dropping out in 2008.  She worked for a time as a revenue specialist before leaving that job after suffering bouts of depression.  After filing bankruptcy she found employment in the radiation oncology department at the University of Iowa.
Student loans are not dischargeable in bankruptcy unless they would impose an undue hardship on the debtor or the debtor’s family. (Bankruptcy Code Section 523(a)(8)).  The debtor must file an Adversary Proceeding against the student loan provider in the bankruptcy case and has the burden of proving the hardship by a preponderance of the evidence. 
Bankruptcy courts in the 8th Circuit apply a Totality of the Circumstances Test and look at several factors in considering whether the debt imposes an undue burden.  These factors include:

  • The debtor’s past, present and reasonably reliable future financial resources.
  • A calculation of the reasonable living expenses of the debtor and his or her dependants.
  • The age of the debtor.
  • The mental and physical health of the debtor.
  • Whether the debtor has participated in an Income Contingent Repayment Program (ICRP).
  • Whether the debtor has retirement accounts or equity in a home or other assets.

What is odd about the Shaffer decision is that this debtor was relatively young, well educated, had no dependants, and despite her problems with depression, she had no significant physical disability.  In addition, the debtor did not participate in any type of income contingent repayment program, and she had only been out of school for a short period of time before filing bankruptcy.  Wasn’t it a bit premature for the court to declare that the debtor would never be able to repay any of the debt when she still has about 30 to 40 more working years ahead of her?
Mental Illness.jpg
Contract the Shaffer case with the opinion issued in the Erik and Kathryn Nielsen case issue by the 8th Circuit BAP court in July of 2012.  In that case a couple with four young children were denied a discharge of $48,361of student loan debt despite an annual income of $30,000.  The Nielsen’s received $316 of monthly Food Stamps and about $8,000 of taxes refunds.  Erik Nielson suffered from a variety of work injuries including two broken wrists and was unable to work outside in cold weather or to handle large ladders in his job as a service technician.  The appeals court dwelled on the fact that the debtors had not applied for the income contingent repayment program and Kathryn Nielsen was not employed outside the home despite having a masters degree.  The court noted that under an ICRP the debtors would have to make no payment on the student loans until their income increased to over $55,000 per year. 
Which set of debtors had the greater hardship?  The married debtors earning $30,000 per year with four young children or the single debtor with similar income and no kids and no physical limitations but who suffers from depression?  It is hard to reconcile this difference.
Last year the 8th Circuit discharged $300,000 of student loans for a married couple in their mid 40s with five minor children, two of whom were diagnosed with autism.  In re Walker, 650 F.3d 1227 (2011).  Mrs. Walker had attended medical school but never passed the state licensing exam and later went on to obtain a degree in school psychology.  Mr. Walker was employed as a police officer earning about $60,000 per year.  Despite their eligibility for an ICRP payment of $593.98 per month and despite obtaining a $40,000 Chevrolet Suburban SUV loan costing $850 per month and obtaining a $48,000 second mortgage to install a screened deck costing $373.52 per month just shortly before filing bankruptcy, the 8th Circuit discharged the student loan debt.  The court stated that the “apparent contradictions in this case are troubling” but finally concluded that the reality of the situation is that special needs of the two autistic children would endure for many years to come and therefore discharged the debt.  
The single greatest obstacle to discharging student loan debts is the availability of income contingent repayment plans.  In the absence of physical or mental health issues in the debtor’s family, the courts tend to deny applications to discharge student loan debts when debtors have failed to exercise their ICRP options.  However, when physical and mental disabilities are present, I sense that the courts are more willing to weigh those factors into consideration as the Walker and Shaffer opinions demonstrate.
 


3 years 9 months ago

Guest Post by Ashley Bertoldo, student at Brigham Young University

The automotive industry crises that emerged at the end of the 2000’s was a result of numerous unforeseen occurrences as well as poor strategic decisions on the part of company executives. Due to the relatively high profit margins on SUV and trucks as opposed to mid-size and compact cars, the executives of several car-manufacturing companies decided to double down on their larger vehicles. Profits were expected to soar as a growing number of factories began producing these larger vehicles. Unfortunately for these companies, the price of oil increased in the mid-2000s, which prompted consumers to opt for smaller vehicles. These companies had already begun to experience financial losses before the downturn of 2008. Due to problems in the financial industry, raw materials for vehicle production increased in price and the number of sales decreased. The auto companies then found that they were in debt, meaning they owed more money than they actually had. The companies were on the verge of collapse.

Policy-makers agreed that the hundreds of thousands of jobs that were on the line were worth saving. Several different ideas emerged regarding what should be done in order to save jobs and allow these companies to continue operating. Mitt Romney stated that the companies should be put through a managed bankruptcy. In a managed bankruptcy, the company would have been able to continue ownership of the majority of its property while eliminating most of its debts in exchange for new ones. The opinion was that private investors would be able to invest in the company and pay off old debts in exchange for a future promise of repayment or small ownership in the company. If necessary, the federal government would have guaranteed the loans to the auto companies. The downside to this approach was that during this time, very few investors and firms were willing to risk any money or give any credit whatsoever. Doubts persist as to whether or not enough money would have been raised. The other alternative was a bailout, in which the US government would have loaned or given money to the automakers and let them continue business as usual. The problem with this approach is the fact that more money would have been lent to a company, which had shown its inability to be profitable, thus prolonging the inevitable decline.

The eventual outcome was a hybrid of the two. The companies were forced to undergo a period of restructuring, in which the company was reorganized and the government lent them money to pay off their immediate debts. The companies emerged more efficient, but it would be at the expense of the federal government until the automakers were able to pay off their new debts, which did eventually happen.Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.


Pages