Filing bankruptcy helps with creditors

There are many ways that filing for bankruptcy protection can help with creditors whether you file under Chapter 7 or Chapter 13 of the Bankrutpcy Code. After you have prepared and filed your bankruptcy paperwork, the court clerk will notify all of your creditors of your bankruptcy filing and inform them that they may no longer contact you. The clerk’s notice will also include information about your meeting of creditors. If your creditors continue to pursue you after receiving notice of your bankruptcy, they are subject to sanctions by the bankruptcy court. Not only does the bankruptcy filing stop the creditors from calling or contacting you, it stops them from suing you or continuing with any pending lawsuit; wage garnishment; or even bank levies are stopped.

When dealing with unsecured creditors and when efforts to pay off high interest rate credit card debt fails, bankruptcy stops any interest from accruing on this type of debt.  This means that under Chapter 13 of the Bankruptcy Code where debtors make a court ordered payment on the debts owed, this repayment plan has zero interest.  This brings financial stability to the household budget with an end in sight for freedom from debt.

Bankruptcy can also protect against paying debts not owed or zombie debts that have lingered long past their expiration dates.  Bankruptcy also helps clean up identity theft more quickly than just about any other method.  I know that identity theft is not the borrower’s fault, but clearing up the bad debt off the credit report and then filing an explanation to the credit bureaus may help that credit score rebound faster than a rebound relationship would last.

My favorite bankruptcy benefit?  All debts discharged in bankruptcy incur NO TAXES. That’s right.  No income taxes will be owed on debts discharged in bankruptcy.  This makes bankruptcy more favorable than debt repayment plans, or debt settlements outside bankruptcy.  As always, I recommend a consultation with your tax professional, and bankruptcy attorney to be sure bankruptcy is right for you.

Attorney Fees in Chapter 7 Bankruptcy May Increase

Here in the Central District of California we have a huge Pro Se Debtor population; which are filers without a lawyer.  Then, there is another group who pay a paralegal or petition preparer no more than $200.00 to assist them in preparing their bankruptcy papers. Others might higher a lawyer to do the same work and pay them to answer questions. Some lawyers may “unbundle” their services to lower their rates in a race to the bottom for some bankruptcy lawyers. Unbundled legal services is like ordering a fast food meal, one item at a time rather than a meal as a bundle. Unfortunately, it’s difficult to know what legal services are needed by consumers, unlike ordering at a fast food restaurant. This creates confusion in advertising. Remember that you get what you pay for and a cheap lawyer provides less services.

This brings me to my point.  Since many lawyers have cut services, many a client are left without a lawyer at their 341a Meeting of Creditors; Motions; and adversary proceedings. What about a U.S. Trustee case audit?  Where is your attorney when something out of the ordinary happens in your Chapter 7 Bankruptcy case? While there is a small chance that additional legal services will be required in your bankruptcy case, our bankruptcy judges are currently reviewing our Limited Scope of Appearance Form pursuant to LBR 2090.

For Bankruptcy Lawyers:  The Limited Scope of Representation Committee has created a survey to solicit comments on changes they are considering to the limited scope of appearance. Please take a moment out of your day to fill out the survey

For consumers, this could mean even more bankruptcy filings without lawyers due to increased attorney fees to represent clients in situations that may never happen during their case.  The many would be paying for the few.  If that happens, our courts could be further bogged down by debtors without lawyers, asking judges and trustees their questions and pressing the patience of the bench.

What is a 341(a) Meeting of Creditors?

Anthony Foxx, Oath of officeAfter your bankruptcy case is filed, your case is assigned to a judge and a trustee.  You’ll soon receive an important notice from the bankruptcy court, giving you a date, time and place of your Meeting of Creditors, but what is it and how do you prepare?

What is a 341(a) meeting of creditors?

The meeting of creditors is a hearing all debtors must attend in any bankruptcy proceeding. It is held outside of the presence of the judge and usually occurs between 20 and 40 days after the filing of the petition. In chapter 7, 12, and 13 cases, the trustee assigned to the case conducts the meeting. In a chapter 11 case, a representative of the United States Trustee’s Office conducts the meeting.

The meeting permits the trustee or the representative of the U.S. Trustee to review the debtor’s petition and schedules with the debtor. The debtor is required to answer questions under penalty of perjury (swearing or affirming to tell the truth) about the debtor’s conduct, property, liabilities, financial condition, and any other matter that may affect the administration of the case or the debtor’s right to discharge. In addition, the trustee or U.S. Trustee’s representative will ask questions to ensure that the debtor understands the bankruptcy process.

The meeting is referred to as a meeting of creditors because creditors are notified that they may attend and ask the debtor questions pertaining to assets or any other matter pertinent to the administration of the case. It is also referred to as a 341 meeting because it is mandated by Section 341 of the Bankruptcy Code. Creditors are not required to attend these meetings and do not waive any rights if they do not attend. The meeting usually lasts only about ten to fifteen minutes and may be continued if the trustee or U.S. Trustee’s representative is not satisfied with the information presented.

If the debtor fails to appear and provide the information requested, the trustee or U.S. Trustee’s representative may request that the case be dismissed, or may seek other relief against the debtor for failure to cooperate. If the case involves spouses filing jointly, both spouses must appear at the meeting of creditors.

How to prepare for your 341(a) meeting of creditors

  1. WHAT TO BRING:  Valid government issued Identification; Social Security Card; and last filed tax returns.
  2. BE ON TIME. Better yet, arrive early.  In the back of the room, on the wall there is usually a calendar posted where you can find your name.  This information will tell you how many people will be heard before you.
  3. Next, grab a GREEN SHEET (pamphlet) in your preferred language and READ IT.
  4. If you don’t have an attorney, you may be required to fill out an additional form.  Look for it on one of the tables.
  5. Have a seat and wait for further instructions from your Trustee.

Remember that the trustee’s job in Chapter 7 is to look for assets (what you own) that they can take to pay your creditors.  This hearing is your sworn testimony that what you said in your bankruptcy papers is true, correct and accurate because those papers were signed under penalty of perjury. If you have a lawyer and have questions about this important part of the process, you should direct them to your lawyer.  Attorney fees should include representation at your hearing.

The Secret Trick To Getting Out of Debt

Are you caught up in a vicious debt cycle that feels like it will never end?  Have you considered payday loans or already have one? Are you overwhelmed by all the so-called “help” on the internet about getting out of debt? The real secret to getting and staying out of debt requires a permanent change to how you make and spend money.  I know it’s not what you wanted to hear, but a shift in perspectives about money is all it takes to succeed and anyone can do it.

In fact, I’ve written a book, 5 Steps to Freedom From Debt, that simplifies all the options people have for getting out of debt.  Whether it’s Dave Ramsey’s approach using the Debt Snowball, or filing for Bankruptcy protection; we all have feelings and emotions that affect our financial decisions. When most people think about bankruptcy, they feel shame and embarrassment. In order to avoid shame and embarrassment and still get out of debt, requires repaying ALL the debt at the contracted interest rates for each account.  Let’s look at this from a numbers perspective:

  • $30,000.00 in unsecured debt at 18% interest with $500.00/mo. payments will take 13 years to pay off; paying a total amount of $78,000.00!
  • $30,000.00 can be FULLY paid in FIVE (5) years under a court ordered repayment plan in Chapter 13 Bankruptcy with a $500.00/mo. payments at 0% interest.
  • That same $30,000.00 can be discharged in Chapter 7 Bankruptcy with NO Payments. (Bankruptcy costs and Attorney fees vary)

Let’s just focus on the difference between repaying all the debt using the “snowball” method and a bankruptcy repayment plan.  The real difference here is the Eight (8) years of payments of $500.00/mo., which totals $48,000.00!  So, the secret trick of facing shame and embarrassment will save both time and money.

Imagine if you took the $48,000.00 savings and invested it in a mutual fund that earned 6% interest.  After Eight (8) years, that amount would grow to be $63,744.82! The person that filed bankruptcy and fully repaid their debt in Five (5) years, who then took the $500.00 monthly payment, invested in a mutual fund that earned a 6% interest over the next eight years, not only paid off all their debt, but also made $15,744.82.  Who does that?  Those that take a different perspective to eliminating their debts; that’s who!

Does Having a Disability Erase Student Loans?

This was a great question asked of Liz Weston (@lizweston) recently. Her answer is here. I like the fact that her answer encompasses several Human brain function represented by red and blue gearsoptions for the reader, but let’s look at the costs of some of these choices.

Under the Total and Permanent Disability discharge of student loans (A federal program), a borrower MUST be totally and permanently disabled.  I do not wish this for anyone and it’s a hard line to tow.  I’ve had clients in limbo and on appeal for these decisions for years. So, in addition to being totally and permanently disabled, this program ONLY applies to federal student loans.  There is no relief afforded to private student loans.  For more information on this and other federal programs, go here.

Income-Sensitive Repayment: Again, this is ONLY available to federal student loans.  See the link above.  If the borrower has both federal and private loans, they’ll need to consider the following options.

File a Civil Law Suit:  Another option is to sue the lenders and the school to void the student loan contracts on the premise that the borrower was unable to enter into such an agreement due to the mental disability.  While the lawsuit may have a high likelihood of success with proper medical experts, the cost of litigation can mean tens of thousands of dollars for this option.  Although, the prevailing party, the party that wins, may be entitled to reimbursement of attorney fees and costs.  The downside is, the borrower may still end up in bankruptcy if they do not succeed. Unfortunately, most don’t have the money up front to pay an attorney.

Bankruptcy Option:  When the cost is a consideration to resolve any financial problem, bankruptcy becomes a more viable solution.  First, bankruptcy will tackle all debts at once; thus killing many birds with one stone.  File one bankruptcy case and it stops ALL collections. Second, in bankruptcy, the debtor can file suit against the lenders on more than one legal ground.  This means that the debtor can sue to discharge their student loans on a Undue Hardship Standard, and plead in the alternative on a state court cause of action for their inability to contract.  Again, two birds with one stone. Sometimes the cost of bankruptcy far outweighs other options because it’s actual cheaper, better and faster to get to the goal.

A Look Back At 2014: California Homeowners Edition

As the year comes to a close, I get a little nostalgic and look back at articles I’ve written through the year.  This year, California homeowners faced the expiration of the Mortgage Debt Relief Act, which may still linger in Congressional uncertainty. Home values have stalled, leaving many with persistent negative equity, while many struggle to keep up with their adjustable mortgage payments after they have “adjusted.”

Here’s a look back at articles for California’s homeowners:

I hope that next year brings you joy and equity. I wish for financial stability and increased home values for all. May you find peace and comfort.  I hope these articles help guide your difficult financial decisions and help you toward financial freedom from debt. Most of all, I wish you the Happiest of Holiday Seasons.

Should I Pay A Bogus Bill To Save My Credit Rating?

You Can Have an Excellent Credit ScoreI definitely have heated opinions every Sunday when I read Liz Weston’s (@lizweston) “Money Talk” articles.  She’s a journalist who has published books on money, so she’s an expert right? Well, she definitely tries to help, while avoiding the unauthorized practice of law because she is not a lawyer.  Recently, a reader asked whether they should pay a bill they don’t owe to save their excellent credit rating.  You know what I think?  I think your blood pressure is the most important number to protect, not your credit score, but I digress.

Ms. Weston’s response, here,  to this reader seems decent, “pay the bill, then sue in small claims court.”  This will save the credit score, but it certainly does not exhaust the consumer’s full potential legal remedies.  I’ll pick up where Weston leaves this poor consumer.  My Answer:  After you’ve written to everyone and their brother, contact a consumer protection attorney who sues debt collectors under the Fair Debt Collections Practices Act for attempting to collect on such bogus debts.  This is a federal law so it applies throughout the U.S.  Sue the university, and the third party debt collector.  If the debt shows up on your credit report in error, you also get the protections of the Fair Credit Reporting Act, which would force the credit bureaus to remove the derrogatory trade line; sue the credit bureaus too.

Bottom line is don’t take bogus debt lying down.  Fight back with a consumer protection attorney.  Each violation under these federal laws will cost the creditors a statutory fine of $1,000.00, plus attorney fees and costs, which only grows if they blatantly fail to act after you’ve tried to get them to correct their error.  And the moral of the story is that no good deed goes unpunished.  The story behind this problem started with volunteerism.

Questions can be sent to my office at 5011 Argosy Avenue, Suite 3, Huntington Beach, CA 92649, or by E-mail to:

Zillow Says You Still Owe More Than Your Home Is Worth

Negative equity, a term that means that the amount owed on all mortgages is more than the market value; also known as “underwater.” Home equity is the difference the current resale value of the home and the total mortgage debt owed. According to Zillow, 9.7 million Americans still have a problem with negative equity and are holding on to underwater homes. The Forbes article looked at the Zillow data and noted that the most troubled homes are valued at less than $100k, in the lower tier of values. This is despite the recent equity boom since the foreclosure crash of 2008.

Underwater homes where the debt owed exceeds the value cannot be sold on the regular market; cannot be refinanced to reduce interest rates; and have no cash value to the homeowners trying to wait and see when their equity may come back.  Especially troubling are those whose negative equity exceeds 25% or more of the value.  This begs the question:  How long would you continue to pay on a home that may never fully recover from the negative equity? 

12% of California homeowners still don’t have any equity in their homes.  I believe that as some of those toxic mortgages begin to adjust from the teaser “interest only” terms to full repayment, we will see these owners forced into a short sale, or loan modification, if they qualify. However, with every dark cloud there is a silver lining. Bankruptcy may strip off a junior mortgage for negative equity homes. Bankruptcy may also eliminate potential income tax consequences of a short sale, if the Mortgage Debt Relief Act is not continued.

Taking Stock of the Student Loan Crisis

Numbers of the Mind

I’m using real numbers as taken from the U.S. National Debt Clock as of Tuesday, November 4, 2014. You can watch the numbers move at a dizzying pace, here. It frustrates me when journalists and others in the media use inaccurate numbers to describe their perspective on how the U.S. economy is “improving.”  After staring at the debt clock for a few minutes and reading my take on the numbers, you decide where your economy is headed and why student loan debt remains a crisis situation.

  1. Student loan debt is now greater than $1.3 Trillion
  2. Median household income in 2014 dropped by $200 per year as compared to the year 2000 to $28,544.00
  3. Total personal debt increased 99% since 2000, nearly double the amount of personal debt in 14 years
  4. Federal spending has increased 98% since 2000
  5. Real unemployment is 5.9% nationwide and 7.4% in California. Actual number of unemployed: 18,161,224
  6. Nearly 50% of the U.S. population receives some form of government assistance!

Reuters declared that the student loan crisis is over according to this article by blogger John Haskell (@John_e_Haskell) from Maine.  His article details the evidence that supports that eventually no one will have the ability to repay this enormous student loan debt. Even as jobs begin to return to the U.S., incomes will remain competitive with China, which means that American workers will make less than in the past. It’s really simple math; when income drops, so must spending.  Look at the numbers one more time and notice that federal spending has nearly doubled, and so has personal debt, while average household incomes have dropped.  These numbers spell B-A-N-K-R-U-P-T-C-Y! If it’s good enough for General Motors to file more than once, then it’s good enough for every American whose debt has increased because their income dropped!

They Went Broke and Lived Happily Ever After

Freedom - happy free couple in car

I’ve been wondering recently about how my clients are doing long after their bankruptcy case ends and the debt is gone.  Then, I happened upon Bryan Fears’  (@fearsnachawati) article, File Bankruptcy and Live Longer and read a few positively surprising results that began to answer my questions about life after bankruptcy. Unfortunately, the article did not have a link to the source and study, but have no fear, I got that for you. The research article entitled, Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection, found here, although a very technical and dry title, has some fabulous results for those who have filed bankruptcy.

The study focused on Chapter 13 Bankruptcy cases, which are a court approved repayment program for consumer debtors.  500,000 bankruptcy filings were studied and matched to administrative tax and foreclosure data to estimate the impact of Chapter 13 bankruptcy protection on subsequent outcomes.

“The Bankruptcy Act is…of public as well as private interest, in that it gives the honest bu unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.” -U.S. Supreme Court, Local Loan Co. v. Hunt, 292 U.S. 234 (1934)

Bankruptcy’s surprising effects on consumers:

  1. Increased earnings
  2. Incentive to work/Stay employed
  3. Live longer
  4. Lower stress
  5. Stop home foreclosure
  6. Stop wage garnishment & Bank levies
  7. Increased financial stability

In contrast, the study explains that if a case is Dismissed, the consumer experiences large and persistent drops in earning after filing bankruptcy. So, what does all this mean to someone looking to get out of debt?  It means that a court approved debt repayment program under Chapter 13 of the Bankruptcy Code provides control and financial stability (and a 0% interest on unsecured debts in repayment) by fixing the monthly repayment amount based on an affordable budget. One of bankruptcy’s best protections is to stop collections efforts, foreclosure, and wage garnishment.  Besides, who doesn’t want to increase their income, reduce stress and live longer?