Blogs
I have written several blogs which address the blight of the homeowner in trouble because of the recent economic downturn. I’m talking about people who borrowed an affordable sum after making a down payment to purchase their dream home. Until the recent economic downturn these homeowners made their monthly payments ( in many cases for years). Then layoffs started. In a great number of cases it was impossible to replace lost jobs at their salary range.. Many were forced to accept jobs paying less. By the time life starting getting back to normal, their mortgage payments were way behind. To make matters worse their new salaries don’t stretch enough to make a full mortgage payment.
The federal government had multiple opportunities to act in a way that would have thrown a life line to these good folks and each time either failed to act or threw the life line beyond reach. What were these opportunities?
Congress could have amended the Chapter 13 Bankruptcy Code in such a way as to give a Bankruptcy Judge the bases upon which to fix most of these loans. What was proposed was simply giving ‘Middle America’ the same rights as General Motors has, not expanding the Bankruptcy Code. Congress took away many rights from homeowners a number of years ago and all that was proposed was restoring those; rights and,
Congress then set billions of dollars aside to give folks in this position a way to modify their home loans to make their mortgage payments affordable and at the same time caused very little,( if any pain) to the financial institutions. There can be little question that this vast amount of money thrown at the problem has done little, , to help the consumer. In short a failure. . What is more distressing are the results of a homeowners when unsuccessful in obtaining a loan modification. The abuses in this area has increased the number of foreclosures, in many cases because each those homeowner thought they were about to get their home loans modified. The misconduct on the part of the financial institution usually starts with a temporary fix of lowering the payments and/or interest rate while a modification is being processed. Somehow the modifications are seldom approved and the foreclosure, clock keeps ticking while the loan modification is processing. For some it’s a matter of days from being denied a loan modification and their foreclosure.
Now there may be a glimmer of hope. The Attorney Generals from a number of states have weighed in on the problem of trying to come up with a fix for HAMP (the law that was to fix home owners having a problem). These States Attorney Generals are pushing to amend/change the rules as to what lenders can and cannot do while a modification is being considered especially where there is a temporary fix in place. Briefly it would prevent the abuses that are currently going on.. A word of caution efforts to help the homeowner continues to build a strong opposition in Congress.
It's a little known, but extremely valuable, technique employed by experienced bankruptcy lawyers: Using the "automatic stay" feature of bankruptcy to get a repossessed car back into the hands of its owner.
Our DC-based bankruptcy law firm used it the other day to get a car back for a young man in Northern Virginia who needed his car to get around and commute to his job.
When a car is repossessed, physically it comes under the control of the lender. However, legal title does not pass, and remains with the owner, until a legally-valid auction has been conducted and title then conveyed to the winning bidder, which oftentimes is the lender.
Until that auction takes place, which also must be conducted according to procedures stated in the contract and/or state law (and which usually includes notice of the auction date, time, and location to the owner), legally the car still belongs to the individual.
If a bankruptcy is filed by the owner, the "automatic stay" (a court order requiring debtors to stop enforcement action) comes into existence halting the auction. Our firm's practice is to immediately fax confirmation of the bankruptcy filing to the lender, and then make arrangements for the owner to pick up the car.
To keep the car, the owner must become current on the loan by paying all arrears, late fees and costs of repossession, and also make the regular payment going forward. The owner has to bring the loan current and re-start payments shortly after filing in Chapter 7, or the lender will ask the court for permission to "lift the stay" and proceed once again with the repo. Otherwise, if the owner has the money, or can raise it quickly, he can exercise redemption rights in Chapter 7 and fully pay off the car at its current value in a lump sum payment.
Chapter 13 bankruptcy offers additional options, such as paying the arrears and costs, through a plan of 36 to 60 months. And an even more powerful right exists in Chapter 13 to re-set high interest rates to a little more than prime, and/or pay only what the car is worth through the plan (if the owner has owned the car for more than two and half years, or the vehicle is used in his business) in what's known as a "cram down."
Automobile lenders are getting more aggressive and creative. Recently one of our clients had her car repossessed on a Sunday from a supermarket parking lot when she went out briefly for groceries. Obviously the lender staked out her home waiting for an opportunity.
It can happen, but remember that it's not the end of the story. There are still ways to fix it.
Prior to the enactment and implementation of the federal bankruptcy laws designed to help people keep their homes there were always a few people in trouble and waited too long before seeking bankruptcy legal advice on Chapter 13. These few were faced with the bitter truth that their failure to act promptly resulted in their home being lost to a lender at foreclosure. Fortunately, in the past, this situation only rarely occurred.
Things have changed for the worse. The situation has become complicated in a number of ways: one of the most frequent of which is a couple attempting to modify their mortgage at the same time the foreclosure process is going on. On the one hand they are receiving notices leading to foreclosure at the same time they are being told their request for modification is being processed and will surely be approved. It’s really sad when you are getting mixed signals to not be concerned with the foreclosure process because the modification will fix the problem. In a significant number of cases, within a few short days of the foreclosure sale, they are told their loan modification has not been approved and by the way the loan modification personnel can do nothing to help postpone or intervene saving your home!
This type of news is shocking and sets most people in shock as they try to come to grips with what wasn’t a “fix” but an absolute nightmare facing foreclosure within a few days. By the time most people come to grips with the foregoing situation and scramble to obtain bankruptcy legal advice to save their home from foreclosure, it’s too late!! How this type of situation is allowed to happen almost seems criminal. The sad truth is our government set aside billions of dollars to fix home loans that were in trouble, adopted rules and regulations on how these situations should be handled yet provided no one in charge to make sure the banks and mortgage companies play fair.
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.
Updated daily, this blog will keep you informed on the latest bankruptcy news! 
Learn more about how Bankruptcy works and what you need to know.