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I had to smile when I read the news that the banks were now lobbying to keep former Harvard bankruptcy professor and Senator-elect Elizabeth Warren from getting appointed to the Senate banking committee.

Lobbying is not cheap. It runs into the millions of dollars for a campaign. And, like most good businesspersons, I am sure the banks did some cost-benefit analysis in making this decision.

This action by the financial industry must mean they see a big threat to profits. And consequently, since bank profits and consumer losses are a zero-sum game, it also means her appointment to the committee could mean a big financial win for consumers. Granted, one person alone will not do it all, but the banks perceive she could have a significant effect on the outcome.

For consumers, let's hope the banks are not as successful with this campaign as they were in sinking her appointment to head the Consumer Financial Protection Bureau (CFPB), a sort of consumer safety protection agency she dreamt up. Among the CFPB's primary goals is to prevent the reappearance of the bad mortgages that blew up in the mid-2000s and harmed so many average people and the nation's economy as a whole. It was passed as part of the Dodd-Frank financial reform act.

We'll see.

Closer to home, and down at the grass-roots, our law firm focuses on helping consumers and small businesses in Washington, DC, Northern Virginia, and suburban Maryland with financial problems. Call us, if you want to discuss your situation. We're not quite as feared as Elizabeth Warren right now, but we're working on it.

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.
 

The 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.

• http://www.gao.gov/new.items/d10593t.pdf
• http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00192.pdf
• http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00216.pdf
• http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00161.pdf
• http://www.responsiblelending.org/other-consumer-loans/debt-settlement/

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.