Every week I sit across from someone who tells me about how guilty they feel about even considering filing for bankruptcy. They feel guilty because they are unable to repay their debt and they are afraid of what their future will look like. Fortunately, life does go on, even if you file bankruptcy.
Last week, Readers Digest filed for Chapter 11 bankruptcy protection for the second time in less than four years, saying it needs to cut its debt so it can keep restructuring. They filed bankruptcy and guess what? They are still publishing magazines.
Chapter 11 bankruptcy is to companies what a Chapter 13 is to individuals – an opportunity to restructure debt so that debts are prioritized under the U.S. Bankruptcy Code and paid through a court approved plan. By going into Chapter 11, Reader’s Digest will cut its debt load by 80 percent, leaving it with about $100 million in debt, allowing the company to stay in business and pay its employees and freelancers while restructuring its business.
Reader’s Digest emerged from its first Chapter 11 bankruptcy in 2010, and is still one of the world’s most widely read magazines. Still think you won’t survive bankruptcy?
People don’t talk about debt, but they should. I know debt is personal, but with millions of people being unemployed and struggling with foreclosure, debt problems have become common. Facing a mountain of debt and the possibility of bankruptcy may seem like the end of the world, but believe me, it’s not. In fact, bankruptcy really is a chance to get a fresh start and take your life back. I know you feel alone, but chances are someone close to you – a friend, family member or even a co-worker is struggling with their own debt and don’t know where to get help. It may surprise you to discover that some of those people are also considering filing bankruptcy.
Like most people, you’ve worked hard, paid your taxes, and done your level best to pay your bills on time. You may have suffered a job loss, facing foreclosure, or simply can no longer afford to pay your debt, bankruptcy can offer you a solution which will let you start over. I know that the mere thought of bankruptcy makes most people so nervous that they look at it as a last resort. Many people either ignore the extent of their debt problems or try to resolve it by cashing in hard-earned assets like retirement accounts or draining their savings before talking to a bankruptcy lawyer. Unfortunately, these temporary fixes rarely solve a lingering debt problem and I find that many people could have turned their situation around much sooner if they had taken the opportunity to find out what their legal rights are.
Yes, bankruptcy is scary, but so is living in fear of debt. I don’t pretend that it’s not a huge step to take. Bankruptcy is not for everyone, but for most people, it is the only way to get out of debt and start fresh. Once you talk to someone, whether it be a friend who has gone through the process, or a bankruptcy attorney to find out how the process works, you may be surprised to find that the law is on your side.
Many clients tell me they have “overpay” their taxes by using a higher withholding amount throughout the year because they like the idea of getting a larger refund at tax time to help pay household bills, get caught up on bills or utilities, or catch up on their rent or mortgage. However, tax refunds are assets which are considered part of the bankruptcy estate just like your other property and if not properly protected using exemptions, can be taken by the trustee. However, with a bit of pre-bankruptcy planning you may be able to keep most, if not all of your tax refund. Here are some strategies to keep in mind.
Use Your “Wildcard” Exemption
Massachusetts does not provide an exemption specifically for tax refunds, however it has a fairly generous “wildcard” exemption. In bankruptcy, certain kinds of property, up to a specific value is exempted automatically. So, what is the “wildcard” exemption? Well, it allows debtors to exempt property – any type of property – over what the rest of Massachusetts bankruptcy laws allow for. The “wildcard” allowance can be as high as $6,000. This means that if you have $6,000 remaining of your wildcard exemption & you anticipate a tax refund of $4,000, you can use $4,000 of wildcard exemption and keep your tax refund and apply the remaining $2,000 towards some other personal property you wish to keep. But remember, in order to use the wildcard exemption, you must first disclose that you are expecting a tax refund.
Delay Filing Chapter 7 Bankruptcy
The Chapter 7 bankruptcy trustee can only take that nonexempt property which you are entitled to as of the day you file. If you have already received and spent your tax refund, it is no longer an asset that needs to be disclosed in your bankruptcy. Remember, however, that if you decide to delay your bankruptcy filing so that you can spend your tax refund you should be able to show that you spent it on necessities such as food, rent, living expenses or attorneys fees to file bankruptcy. Don’t use it to pay off a credit card or other unsecured debt which you will be able to deal with in bankruptcy. Finally, if you use your refund to buy other personal property which is not a necessity, you will have to disclose them in bankruptcy and risk losing them.
One of my favorite questions potential clients ask when they first meet me is “what about debt settlement companies?” I immediately cringe because people want to believe those slick TV and radio ads and let’s face it, no one really wants to file bankruptcy. However, I have yet to find a settlement company who actually has helped make a client’s financial life better, not worse.
We have all seen those ads on TV late at night. Those ads are strategically placed to hit the audience when you are up worrying about how you are going to pay your bills, keep a roof over your head, and feed your kids. The ads claim to be a better alternative to bankruptcy by saying: “get out of debt in less than 6 months!” or “Reduce your debt by up to 50%”.
How Debt Settlement Works
Debt settlement companies promise to reduce your debt by negotiating with your creditors to lower your interest rate or get your creditors to forgive a portion of your debt. The the settlement company will consolidate your debt into a newer, lower monthly payment. You then stop paying your individual creditors and the settlement company will pay them for you. This sounds like a fine idea – everyone gets paid and you move on with your life. Unfortunately, they rarely fully explain to you what will happen to your credit score or how they calculate your monthly payment.
Effect on Credit and Taxes
One of the biggest problems with debt settlement companies is that they encourage customers to default on their debts. Often, creditors will not negotiate with anyone, whether it is the client or a debt-settlement program until the client is delinquent on their payments for approximately three months. Meanwhile, late payments have already been reported to the credit bureaus, your credit score drops and you start receiving harassing collections calls. These late payments will remain on your credit reports for seven years, the same amount of time that a bankruptcy will be on your credit report. What the debt-settlement program doesn’t tell you is that they cannot guarantee they can get your creditors to work with you and even if they do, the delinquent information is not erased from your credit. In fact, often the creditor reports the debt to the credit bureau as having been “charged off”.
The debt-settlement programs also almost never tell you the truth about taxes. Frequently, if a creditor agrees to reduce or settle debts, they will issue you a 1099 tax form. The Internal Revenue Service (IRS) treats forgiven debts as income, which means that the IRS expects you to pay taxes on the forgiven debt.
The Cold Hard Truth
Promises to nuke your debt is often a pipe dream. In fact, only about one in 10 consumers participating in debt-settlement programs actually ends up debt-free in the promised period of time, according to a consumer alert issued recently by the nonprofit National Association of Consumer Bankruptcy Attorneys. Debt-settlement companies prey on vulnerable consumers who usually end up getting sued, stuck with outrageous fees, more deeply in debt, and far worse off in terms of their credit score. The sad truth is that the fees associated with these debt-settlement programs can be as suffocating as the interest you are already paying to your creditor.
My advice: Beware of promises that seem to be too go to be true, try to negotiate with your creditors yourself and, if you’re still thinking about debt settlement, go to www.ftc.gov and search for “Debt Relief Services.” Read the advisory by the consumer bankruptcy association at www.nacba.org and read the fine print.
Is the debt collector calling you violating the Fair Debt Collection Practices Act? Check your time zone!
When Amanda Vinson received a debt collection call at her home on December 7, 2011, her clock read “9:39 p.m.” and she was sure that the debt collector, Credit Control Services, was in violation of the Fair Debt Collection Practice Act (FDCPA). Ms. Vinson acted accordingly and filed suit against Credit Control Services alleging a violation of FDCPA. Under 15 U.S.C. §1692c(a)(1) debt collector may not communicate with a consumer: at any unusual time or place or a time or place known or which should be known to be inconvenient to the consumer. In the absence of knowledge of circumstances to the contrary, a debt collector shall assume that the convenient time for communicating with a consumer is after 8 o’clock antemeridian and before 9 o’clock postmeridian, local time at the consumer’s location. Then, a funny thing happened. While Ms. Vinson lives in Alabama, which is located in the Central time zone (CST), her hometown of Valley, Alabama actually adheres to Eastern Standard Time (EST).
On December 11, 2012, the U.S. Bankruptcy Court in the District of Massachusetts held that under the Uniform Time Act of 1966, the entire state of Alabama is under CST and when interpreting a federal statute (such as the FDCPA), the Uniform Time Act requires courts apply the United States standard time zones. Ms. Vinson was not able to provide the court with any authority that would allow a municipality to deviate from federal time zones for purposes of federal law. Thus, as a matter of law, Vinson received the phone call at 8:39 p.m., and her claim under the FDCPA failed.
Read the entire opinion here.
On December 21, 2012 a new “pay as you earn” program goes into effect for federal student loans. Are you eligible?
Avoidance can be one of the many useful things in the bankruptcy alphabet. Many people know avoidance as a lien strip. Section 522(f)(1) of the U.S. Bankruptcy Code permits a debtor to avoid judicial liens on any property claimed as exempt, and nonpossessory, nonpurchase-money security interests in household goods and certain other property claimed as exempt.
Section 522(f)(1)(A) gives the debtor the right to avoid any judicial lien that impairs an exemption, except a lien securing a domestic support obligation. The term “judicial lien” is broadly defined under the bankruptcy code, but it generally includes levies, judgement liens, and liens obtained in judicial proceedings. A debtor may avoid judicial liens attached to any type of property: homes, vehicles, household goods, and any other property that may be claimed as exempt.
Section 522(f)(1)(B) allows a debtor to avoid nonpossessory, nonpurchase-money security interests (financed appliances, jewelry, etc.) in household furnishings, household goods, wearing apparel, appliances, animals, crops, or musical instruments that are used primarily by the debtor or their dependents.
A debtor may “strip off” or remove a lien on their property if the lien interferes or “impairs” an exemption by filing a motion explaining how the lien impairs (or reduces) the equity in your property.
For example, let’s say that Visa was awarded a judgment against you in the amount of $30,000 and the value of your interest in your property without liens is $20,000. The lien exceeds your interest by $10,000. Therefore, the lien impairs your exemption and is void.
Motions to avoid liens may be filed in both chapter 7 and chapter 13 cases. If a lien is avoided in a chapter 13 case, the claim can be treated as an unsecured claim under the debtor’s plan. If you do not have equity in your property, your attorney should still file a motion to avoid lien because if none is filed, your liens will survive your bankruptcy
Too Big to Fail and Too Big to be Accountable: Banks Continue to Usurp the Law with a Mortgage Settlement
On February 9, 2012, five of the nation’s largest banks struck a settlement with federal officials and 49 state attorney’s general (Oklahoma excluded). Under the agreement, Wells Fargo, JP Morgan Chase, Citi, Ally (formerly GMAC), and Bank of America will pay $25 billion to be spared further state or federal lawsuits regarding abusive and negligent foreclosure practices. Included in those practices is the robo-signing issue, where mortgage companies signed false affidavits in order to speed up the foreclosure process. The agreement does not cover the mortgages backed by quasi-government agencies Fannie Mae and Freddie Mac, which accounts for more than 50% of the nation’s current loans.
Who Gets Help?
Massachusetts’ estimated share of the settlement is $318 million, including: approximately $14 million in cash to Massachusetts borrowers; $257 million in mortgage relief, such as term modifications and refinancing; and about $46 million to the state for assisting homeowners.
Currently, 1 in 4 homeowners nationwide are underwater and approximately 4 million families have already been foreclosed on. Under the agreement, most of the settlement money will go to reduce balances for approximately one million families who owe more on their homes than they are worth and are delinquent on their payments. Some who are current but underwater could be allowed to refinance at a lower value. The smallest amount of the settlement will go to those families already foreclosed on. Because robo-signing or other false documents may have been behind their foreclosures, some 750,000 families who lost their homes between 2008 and 2011 could qualify for settlement payments of $1,500-$2,000, a token amount which would barely cover a month’s rent in most areas.
While the settlement covers some illegal acts by the banks in foreclosing on families throughout the nation, the deal does not completely spare the banks from litigation. Massachusetts Attorney General Martha Coakley, who has been one of the more outspoken attorneys general during the negotiations, reserved the state’s claims related to Mortgage Electronic Registration Systems, Inc. (MERS), and “Ibanez” claims. However, despite the fact that the nation’s five largest banks made $46 billion in profits last year, they will only have to pay a combined $5 billion in cash.
The bottom line is that the banks have paid off the nation’s attorneys general to drop their lawsuits, leaving families across America grappling with the foreclosure mess the banks created. In the end, the banks win, again. By agreeing to what amounts to a legislative program, the banks have escaped the judicial process and any real opportunity to provide redress and prevent violations in the future.
In the meantime, something is better than nothing. Borrowers are being advised to contact their mortgage servicer to obtain more information about specific loan modification programs and whether they qualify under the terms of the settlement.
Mass. AG’s dedicated mortgage settlement phone line – 617-963-2170
1. Do NOT Transfer Money or Assets.
Sometimes people worry that they will have to give up all their personal belongings and they transfer assets to someone to hold for them before they file a Chapter 7 or Chapter 13bankruptcy petition. While it is true that all of your property becomes property of the bankruptcy estate when you file bankruptcy, there are steps you can sometimes take prior to filing to improve your ability to retain your property. A good bankruptcy lawyer will use the federal or State exemptions to help you keep your personal property. However, to give valuable property to a spouse, family member or friend before bankruptcy could be considered a fraudulent transfer by the trustee. Such conduct may result in a denial of a discharge, avoidance of the transfer, or in serious cases, criminal prosecution.
2. Do NOT Borrow From Your 401k, IRA, or Retirement Plan.
A frequent mistake my clients make is to borrow or withdraw from their retirement accounts to pay off credit card debt. This is mistake for three reasons. First, it is much easier to deal with credit card debt in bankruptcy than it is to repay a 401k loan because credit card debt is considered unsecured debt and is generally dischargeable in bankruptcy. A 401k loan must be repaid. Second, retirement funds are generally protected in bankruptcy. Section 522(d)(12) permits the debtor to exempt retirement funds to the extent they are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue code. However, once funds are distributed or withdrawn from any qualified trust account, they may lose their protection. Finally, the purpose of your 401k, IRA, or retirement plan is to fund your retirement. By withdrawing from your retirement account now, you will not only face steep taxes and penalties, but you will impoverish yourself in retirement by robbing your retirement account to pay off credit cards.
3. Do NOT Borrow Against Your Home to Pay Unsecured Debt.
Do not take unsecured debt (credit cards, personal loans, and medical bills) which is dischargeable in bankruptcy and turn it into a mortgage. It is far easier to deal with unsecured debt in bankruptcy than it is to pay off a mortgage or risk losing your home.
4. Do NOT Pay Off Family or Friends First.
One of the things many people do when they get into financial trouble and start considering bankruptcy as an option is to pay off debt owed to people they know first. Under the Bankruptcy Code, all creditors must be treated equally. This means that whether you owe your Aunt $500 or owe $500 to Visa, the law treats them equally. If you pay off a loan owed a friend or family member between ninety (90) days and one (1) year before you file bankruptcy, the trustee could go to your friend or family member and demand they return the money that you paid them before you filed bankruptcy. A safer choice is to talk to your lawyer before making any payments to creditors.
5. Do NOT Wait to Seek Legal Advice.
It can be difficult to admit that you need help. However, I frequently see people who have ignored their finances for so long that the worst has happened – they have lost their home or have let the stress of their debt destroy their marriage. It can be scary to talk to a lawyer about your finances, but a lawyer can help you plan ahead and strategize to preserve your assets. Bankruptcy is not easy, but it does not have to be the end of the world. It is much easier to move on with your life without the fear of debt collectors and creditors hounding your every step.
With the unemployment rate slowly improving, a big concern among individuals is student loan debt. Many students borrow money from the government or private loan companies such as Sallie Mae with the expectation that they will be able to repay the loans when they graduate from college. However, the harsh reality is that post-secondary graduation rates are abysmal and often those who do graduate enter a depressed job market. Frequently, graduates are either unable to find work or are underemployed, making it difficult to keep up with their loan payments. These days education does not guarantee a job, but the government does not care and they can legally garnish your paycheck to collect on a defaulted loan.
The law allows the government to garnish up to 15% of your disposable income without the permission of the court or an official judgment. “Disposable income” is whatever is left of your paycheck after all deductions which are required by law (such as taxes) are withheld. The government cannot take more than the equivalent of 30 times the current federal minimum wage, which is $7.25 an hour. This means that 30 x $7.25/hour is $217.50 a week, which the government may take to repay your loans.
Unfortunately, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, made education loans almost impossible to discharge in personal bankruptcy. Thus, unless you can prove “undue hardship” the debt will remain intact after bankruptcy. However, there are strategies for dealing with student loan garnishment and many people seek the protection of Chapter 13 bankruptcy. Your bankruptcy lawyer will customize a plan to repay your debts over a three to five-year period. By filing a Chapter 13 bankruptcy all collection efforts must stop and by including your student loan payments you may be able to reduce the amount of your monthly payments and make a sizable dent in your loan balance. In the meantime, your bankruptcy lawyer will work hard to consolidate all of your education loans into one loan payment so that you will be on better footing when you emerge from bankruptcy.