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In the last few months, OneMain has been contacting me about reaffirmation negotiation on car loans. That took me by surprise. With the exception of Ford Credit, I’ve been strongly opposed to reaffirming cars.  Usually you can keep the car without reaffirming. and then give it back when your credit improves. I explain more about […]
The post After Bankruptcy, OneMain Offers Car Reaffirmation Negotiation by Robert Weed appeared first on Robert Weed - .

At first glance it appeared that the debtor had a “slam dunk” case to receive a hardship discharge of her $140,000 student loan debt.
The debtor is a 36-year-old single mother of two disabled children, ages 11 and 12. She received no child support since her ex-husband voluntarily terminated his parental rights. She could not afford her own apartment and lived with her parents. She earned a $36,000 annual salary and did not expect any wage increases.
Obtaining a hardship discharge seemed like a no-brainer–this debtor was stuck in the mud and her student loans imposed a real and long-term financial hardship.
But the Nebraska bankruptcy court denied her application for a hardship discharge, and a closer look at the facts indicates why. (See In re Wells, Case #18-08339)
Public Service Loan Forgiveness Program.
Although the debtor had enrolled her loans into a 25-year income-based repayment program, she did not apply for the 10-year Public Service Loan Forgiveness Program even though she worked for an eligible nonprofit employer.
In fact, during the case the government attorneys offered to delay the trial to allow the debtor to apply for this program, but she declined to make an application.
Why should a bankruptcy court discharge federal student loans when a debtor can eliminate the debt in 10 years with no tax consequences through the Public Service Loan Forgiveness Program? The debtor failed to answer that question to the court’s satisfaction.
Lack of Evidence of Future Income and Living Expenses.
The court was also annoyed by a general lack of evidence presented at trial.
The debtor’s children were disabled and it appears that they might be eligible for Social Security benefits, but no evidence was supplied by the debtor as to whether an application would be made to obtain this income.
The debtor claimed her children’s needs could not be satisfied by attending the local public school and she was therefore incurring the expense of private school tuition, but no medical evidence was provided to support this position.
The debtor failed to provide any evidence indicating that higher paying jobs were not available.  No evidence of denied job applications were presented or that the debtor had maxed out her earnings capacity.
The debtor had a pending personal injury claim but no evidence was presented as to when the claim might be settled or the amount she might receive.
No medical evidence was supplied to show the necessity of certain medical expenses she incurred for her children.
In short, the debtor failed to provide evidence to support her expenses or future income potential.
Actual Expenses did not match Scheduled Expenses.
A review of the debtor’s bank statements revealed that her actual expenses differed significantly from the expenses she listed on her bankruptcy schedules. Specifically, her entertainment and recreational expenses appeared to be much higher than she reported.
Debtors seeking a hardship discharge of their student loans should expect a thorough examination of their spending activity as revealed by a close examination of their bank statements.  The bank statements and bankruptcy schedules must tell the same story.
Conclusion.
Although bankruptcy courts have become increasingly skeptical of the eligibility for various income-based repayment programs as a bar to student loan hardship discharge applications, eligibility for the Public Service Loan Forgiveness Program is almost a certain bar to a hardship discharge.
The Public Service Loan Forgiveness Program is relatively short (10 years) and unlike other income-based programs, if successfully completed it does not result in any income tax liability.  An eligible debtor who fails to apply for this program will almost never receive a hardship discharge.
 
Image courtesy of Flickr and GotCredit.
 
 
 

Old Debt Can Die, But If You Pay Even a One Cent the Debt Comes Back to Life “Zombie Debt”
LAWS THAT PROTECT THE BORROWER – UNTIL THEY DON’T. DEBT COLLECTORS TRICK CONSUMERS INTO BRINGING DEAD DEBTS BACK TO LIFE.
There are legal protections for the consumer if a creditor does not take steps to collect a debt in a certain period of time – referred to as the statute of limitations (in Arizona, depending on the type of debt, ranges from 2 to 6 years).  Even though there is a debt, once it is beyond the statute of limitations the borrower cannot be sued.  But, debt collectors found a back door – they bully the borrower into paying “just a little” (somewhat like a whiny child).  The moment the borrower pays this “little bit” the statute of limitations starts all over.  The debt collectors are not required to notify the borrower about their rights.
The Consumer Financial Protection Bureau proposed a national standard for how debt collectors must explain to borrowers that they cannot be sued on an expired debt “zombie debt”.

Five Sample Letters to send debt collectors:
Wondering how to respond to a debt collector? Our sample letters can help if you:

• Need more information
• Do not owe the debt
• Want the debt collector to stop contacting you while you dispute the debt
• Want the debt collector to only contact you through a lawyer
• Want to specify how the debt collector can contact you

* These letters are not legal advice. You’ll also want to keep copies of any letters you send.

CONSUMER FINANCIAL PROTECTION BUREAU PROPOSAL WOULD ALLOW DEBT COLLECTORS TO CALL 7-TIMES A WEEK AND UNLIMITED EMAILING OR TEXTING (PUSHED BY THE TRUMP ADMINISTRATION)
An example of the Trump Administration working against the consumer: wants to allow debt collectors to call 7 times a week and text, email as much as they want, according to the Washington Post.

The Trump administration has been the war-path trying to limit the powers of the Consumer Financial Protection Bureau (CFPB) because it was looking out for you and me, not the big banks, payday lenders, unscrupulous car dealers and others that prey on the consumer (you).  May 7, 2019 – issued a Notice of Proposed Rule-making to “modernize” the Fair Debt Collection Practices Act (FDCPA) (which has been law since 1977).  The 1977 law did not address digital communications.
Debt collectors monitor your Facebook and other social media accounts
The report discloses that debt collectors monitor Facebook and LinkedIn accounts to find former employers and family members and contact these people, with the hope to put pressure on the borrower to pay, when many times it is not a valid debt (wrong borrower, debt paid in full or identity theft).

MUSINGS FROM DIANE:
Many people, my Dad included, feel that if you don’t pay your bills, you deserve to be called every hour, on the hour, demanding payment.  In his mind, and many others like him, it is okay for debt collectors to call your office, neighbors, family and friends.  I remind him of the days when our family could not afford allowances or Christmas presents because his largest client had filed for bankruptcy (Dad was a mechanical engineer and operating out of our front room at that time).  Things were tight, but he does not remember that six decades later when he is financially stable.  Instead, he falsely assumes that everyone has a financially stable life and the reason someone does not pay their bills is because, they don’t want to.
Be Kind to Each Other
Our prospective of the world changes with each life change.  The loss of a loved one (perhaps the primary income producer) causes an extreme upheaval in your file.  A diagnosis of cancer – not only emotionally challenging, but also financially disastrous.Your life may be great today, but tomorrow it may fall apart.  Before you say something unkind – put yourself in their shoes.

How Can I Help You?
The post Debt Collectors Trick You into Bringing Old Debts Back to Life appeared first on Diane L. Drain - Phoenix Arizona Bankruptcy & Foreclosure Attorney.

 

Lower-income debtors simply cannot afford the high cost of filing chapter 7, and that is a real problem when garnishments strike.
The cost of filing Chapter 7 in Nebraska ranges from $1,300 to $1,800 and ALL of those fees must be paid in full to file a case. How can low-income debtors stop garnishments if they cannot afford the fee?
Many debtors have no choice but to file a chapter 13 case which can be filed for as little as $75 down.  But attorney fees in Chapter 13 cases are currently set by court rules at $4,000 payable in monthly installments over 3 to 5 years. Chapter 13 cases are cheap to file but cost 3 to 4 times more in the long run.
And whereas chapter 7 cases have a 95% success rate, chapter 13 discharge rates are less than 50% nationally.
Lower-income families face a tough choice, but a bankruptcy court in Kentucky recently issued an opinion that may provide a roadmap to making the chapter 7 process more affordable.
Kentucky’s Bifurcation Opinion.
In the case of Chanda S. Carr, the Kentucky court reviewed a bifurcated fee arrangement in which the debtor was charged $300 down to file an incomplete chapter 7 petition consisting of nothing more than her name and a list of her creditors.
After the case was filed, the debtor signed a new fee agreement to pay $1,185 payable in 12 monthly installments of $98.75 for the remainder of the legal work.
On it’s own motion, the court reviewed this fee arrangement in great detail. The court noted several important factors in approving this Dual Contract scheme.
Disclosures.
It was very apparent that the debtor’s attorney made a full disclosure of all payment options.
First, the debtor was offered the option of filing a normal chapter 7 case for $1,135, but all of that fee had to be paid in full before the case could be filed.
Then, the debtor was offered a bifurcated fee arrangement of $300 down and then 12 payments of $98.75, for a total of $1,485.  This bifurcated arrangement would ultimately cost the debtor an extra $350 since it is more costly to prepare cases in this manner and payment to the attorney is stretched out over a year.

The combination of an inability to pay for a lower upfront fee combined with an imminent garnishment was a key factor in the court’s analysis. In other words, the debtor made an informed choice.

What is important to observe here is that the debtor was first offered a standard contract–pay a lower fee upfront to file a standard chapter 7 case. The debtor was not steered to the dual contract scheme, but rather chose that option when it was apparent that she could not afford to prepay all the fees up front and garnishments were pending.
The combination of an inability to pay for a lower upfront fee combined with an imminent garnishment was a key factor in the court’s analysis. In other words, the debtor made an informed choice.  She chose the lesser of of two evils–to pay a little more in the long run in order to avoid losing even more from a garnishment.  All the alternatives were laid on the table. She made a reasoned choice. That is a key factor.
Pre-petition Fees Not Shifted to Post-Petition Payments.
The United States Trustees Office–the supervisor of bankruptcy cases–is highly suspicious that attorneys using the Dual Contract method are really preparing most of the case prior to filing and then attempting to collect their fees after the case is filed.  In other words, the US Trustee believes this scheme is a fraud.
In fact, US Trustee investigations of attorneys using bifurcated contracts have revealed that some attorneys have clients sign both contracts at the same meeting and that most of the petition was prepared before the case was filed.
In the Carr case the Kentucky court determined that attorney and the debtor had a post-petition meeting to sign the second contract. The court found that the attorney really did prepare the bulk of the petition and perform the majority of the legal work after the case was filed. The court underscored the importance of this factor.
The Debtor’s Case Must Be Simple.
Bifurcation agreements are not appropriate for complex cases.  Why? Because complex cases require more pre-petition analysis to determine if a debtor’s income is too high to qualify for chapter 7 and even more analysis to determine if the debtor’s property is protected by exemption laws.
Cases involving higher-income debtors who own substantial property require most of the legal work be completed before the case is filed.  Thus, it is a fraud to use bifurcated contracts in those cases since no competent attorney would file a risky case without a full analysis of the debtor’s income, expenses, property and property transfers. A bifurcated fee arrangement in complex cases would be a lie.
But cases involving lower-income debtors with little property are inherently simple and require little pre-petition analysis. Determining if a debtor is above or below Median Income is simple.  For example, the annual median income for a single person in Nebraska is $48,796.  A debtor earning $12 per hour clearly earns less than that amount.  A debtor who rents an apartment with only basic household goods and who owns a used vehicle does not present a complex asset case requiring careful exemption planning.
Lower-income debtors with few assets facing imminent garnishments are the ideal candidates for bifurcated fee agreements since the bulk of the legal work can be prepared post-petition.  The Kentucky court agreed with this reality.
Bifurcated Legal Fees Must Be Reasonable and Should Not Utilize Factoring Arrangements.
The common link between cases where attorneys have been disciplined for the use of bifurcated fee agreements is the presence of factoring arrangements.
Almost all the attorneys sanctioned in bifurcated fee arrangements were using an accounts receivable factoring arrangement offered by BK Billing or Fresh  Start Funding.
The factoring finance companies present attorneys with a slick marketing package complete with fee agreements, disclosure statements and a pricing scheme that basically doubles the cost of the chapter 7 case.   Attorneys that would normally charge $1,500 to file a chapter 7 case are encouraged to bump the price of the case to $2,400.  After the dual contracts are signed by the client, the attorney sells off his post-petition contact to the finance company and receives an immediate payment of $1,500.  The financing company collects future payments from the debtor at typically high interest rates.
Factoring the legal fee contract is attractive to attorneys. Instead of waiting for debtors to slowly pay in their normal fee, they can now streamline the process and get paid now by advertising “No Money Down” chapter 7 services. And believe me, you can file a lot of chapter 7 cases if you can really charge no money down.  There is no shortage of people who need to file bankruptcy, but there is a real shortage of debtors who can afford the $1,500 fee to go broke.
Factoring arrangements should be avoided since they escalate the price of bankruptcy services to unreasonable levels.
But the attorney in the Carr case did not utilize a factoring arrangement. Nor did the attorney charge high interest rates. The extra cost he charged the client for the bifurcated fee arrangement was only $350, and that amount seems reasonable given the extra work bifurcated contracts require and the delay and risk associated with collecting payment.
Birfurcated contracts that charge only slightly higher fees than standard contracts for lower-income debtors with relatively simple cases are likely to be respected by the US Trustee and the courts.
Is the Bifurcated Contract Affordable?
The debtor in the Carr opinion was only required to pay 12 monthly payments of $98.75 post-petition.  Her monthly budget indicated that she could afford that payment. The amount of that payment was reasonable.  The Kentucky court found this payment agreement to be feasible and modest.
Courts that have sanctioned attorneys have found the payment demanded by factoring finance companies to be excessive and predatory. In those cases the debtor’s income and expense schedules would often show negative monthly income but the factoring contract would require payments of $200 per month or more.
If it is clear that a debtor cannot afford to a pay post-petition legal fee installment it is advisable not to enter into a bifurcated fee arrangement.
Conclusion.
The time has come for bankruptcy courts to craft Safe Harbor rules on the use of bifurcated fee arrangements. If we are really serious about addressing the very real problem of low-income debtors being denied access to our justice system, then we need to come up with a compensation system that encourages attorneys to assist those debtors now.
Just making statements like “we really need to change the bankruptcy law” is not enough. We have to work with the tools we have in our hands now instead of waiting for a legislative change that may never come.  Bifurcation is a tool we currently have that can immediately help lower-income debtors facing wage garnishments.
The cost of delaying the establishment of safe harbor bifurcation rules is significant. When low-income debtors cannot afford to pay for bankruptcy fees their wages become garnished, they fall behind on rent, they suffer evictions, their financial distress ignites family distress, and their children pay a dear price.
Attorneys feel threatened by the US Trustee’s office. The attorney in the Carr case faced a significant investigation by the US Trustee and faced potential sanctions and disgorgement of fees. Without safe harbor rules attorneys are reluctant to take a chance of being sanctioned or having their fees disgorged.
Congress is not going to fix this problem anytime soon. Nonprofit organizations lack the resources to handle the volume of cases.
The bankruptcy community of attorneys, trustees and judges must lay the framework to help the working poor access our justice system with the tools we already possess.
 
Image courtesy of Flickr Carl Wycoff.