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Debtor Audits to Start Again – What Does This Mean?

By Jonathan on May 11, 2008

One of the least discussed changes brought about by the October, 2005 changes to the bankruptcy law was a provision that provides for “audits” of random cases. When a case is audited, it is selected at random by the United States trustee and the debtor and debtor’s attorney are required to submit extensive documentary proof of information set out in the petition.

In January, 2008, these audits were halted because the U.S. Trustee ran out of money for this program. Now, according to Jill Michaux of the Bankruptcy Law Network blog, debtor audits are back. You can read Jill’s post and the links therein to learn more about this audit program.

What actually happens during an audit?

If you are selected for an audit, the U.S. Trustee sends you a notification that you and your attorney will be contacted by an outside accounting firm. The firm will send you a notice asking for things like:

Pay stubs for you and your spouse for the six months prior to the month you filed your bankruptcy petition
Bank account statements for six months, with explanations for all deposits over $500
Income tax returns including all schedules and forms for the previous two years
Divorce documents, including property settlement and child support orders
Self employment documents
Proof of school expenses
Proof of child care expenses
Proof of food expenses
Proof of transportation expenses

Once you get this information to the auditor, he will analyze this information and compare it to the information set out in your petition.

In the first eight months of the audit program, 1631 audits were completed. Of those, 29% of the cases audited were found to have at least one material misstatement. 12% of the audits resulted in a Report of No Audit. The U.S. Trustee statistics do not tell us how significant any of these misstatements are. (Thanks to Peter Orville of the Bankruptcy Law Network for his series of posts about Audits).

When the program was active, only a few of my cases were selected for audits. After providing a lot of paper, the audit was concluded with no problem. On the other hand, these audits required me to spend a lot of unexpected time gathering and reviewing documents. As such, I have changed my fee contract to provide for an additional fee for any case selected for an audit. It continues to puzzle me whether members of Congress truly understand that people who are filing bankruptcy most likely don’t have a lot of money available for attorney’s fees, yet every change to the law increases this burden.

The World’s Worst Credit Card

By Jonathan on May 5, 2008

The Money, Matter, and More Musings blog reports that it has found the world’s worst credit card. This card provides a credit limit of $300, but after fees and costs, the available credit is $53. The other terms and provisions of this outrageous card are literally breathtaking.

Note: the Money, Matter and More site is now gone but here is an article from Cardrates.com about the 1o worst credit card offers in 2020.

Proposed Federal Reserve Regulations Would Restrict Arbitrary Practices of Credit Card Issuers

By Jonathan on May 3, 2008

The Federal Reserve Bank has issued proposed rules that will place extensive limits on common practices of credit card issuers. In a news release dated May 2, 2008, the Federal Reserve proposes rules whereby:

Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.
Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.
Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.
Banks would be prohibited from imposing interest charges using the “two-cycle” method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.
Banks would be required to provide consumers a reasonable amount of time to make payments.

According to the press release from the Federal Reserve: “the proposed rules are intended to establish a new baseline for fairness in how credit card plans operate. Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”

If approved following public comment, these practices would be deemed “unfair and deceptive” and could subject credit card issuers in violation of the new rules to civil penalties.

Needless to say, credit card issuers will gear up a publicity campaign to challenge or water down these new rules. A spokesman for the American Bankers Association calls the Fed’s proposals “an unprecedented regulatory intrusion into marketplace pricing and product offerings.”

Anyone may submit a comment on the new rules at the Federal Reserve’s web site and I encourage all consumers to write and post statements in support of these new rules. In particular, I strongly support the proposed rule that would disallow credit card issuers from changing the interest rates on existing balances except in very unusual circumstances. In my bankruptcy practice, I regularly see situations where a family is able to sustain payments on balances, but ends up in bankruptcy because a 5% rate gets boosted up to 25% as a result of a late payment or two.

Bankruptcy Implications of a School Board’s Loss of Accreditation

By Jonathan on April 26, 2008

My colleague, attorney Scott Riddle, posted a very interesting observation in his Georgia Bankruptcy blog about the bankruptcy implications of Clayton County, Georgia’s school accreditation fiasco. For those unaware of the situation, the Clayton County School System is about to become only the third school system within the past 20 years in the United States to lose its accreditation.

Scott points out that if Clayton County loses its accreditation, graduating students will not be eligible for Hope Scholarships (Hope Scholarships are lottery funded scholarships to schools in the Georgia university system and have offered a greatly reduced higher education costs to thousands of Georgia college students). With a school system in a mess and eligibility for Hope Scholarships withdrawn, residential real estate prices will fall, home buyers with school age children will avoid Clayton County and the county’s tax base will fall. Scott correctly advises:

If you are a homeowner in Clayton County and you find yourself in Bankruptcy, think twice before reaffirming your mortgage debt. Even if you qualify for a reaffirmation and your home is worth the amount of debt, it might not be the case for long. You might be signing up for post-petition personal liability for the mortgage on a home that decreases significantly in value in the coming months and years. You could be locked into staying in Clayton because you cannot sell, selling your home at discount and paying the difference, or a foreclosure. You will owe the full amount of your mortgage (including interest and fees) after your discharge. Again, think twice.

While the Clayton County situation is somewhat unique, it does raise an important point about home reaffirmation in general. It is not always a good idea to reaffirm a home or a car. You should look forward, not backwards, when filing a bankruptcy. Too many times I have heard the argument "I can’t give up that car because I have invested too much in it." In my view, that kind of argument is ridiculous. Bankruptcy should be used to eliminate obligations that you can’t afford, not validate bad decisions or purchases that you can no longer afford.

Yes, it would be a pain to file bankruptcy and give up the Clayton County home where you have settled and become comfortable. However, if you have a chance to extricate yourself from an environment where housing prices will likely be depressed, and a place where hard working middle class families will avoid, you should use the bankruptcy process to better yourself and your future.

Recent Credit Card Use and Filing for Bankruptcy – What Are Some Guidelines?

By Jonathan on April 24, 2008

Most bankruptcy lawyers will tell you that credit card contributes to most consumer bankruptcy case filings. Often, overwhelming credit card debt is the primary reason for a filing. For example, if you have $10,000 or more in credit card debt, and you send in only the minimum payment of 2% of the balance each month, you will need over 50 years to pay off your debt. You can run your own numbers using an on-line credit card interest calculator.

Many people use credit cards as a means of survival. Frequently, therefore, I see clients who desperately need to file bankruptcy but have used credit cards recently. Not surprisingly, recent credit card use prior to bankruptcy is a problem – but just how big of a problem is it?

I recently received this question from a reader of my blog:

Hello, I had a question about chapter 7 bankruptcy. If I incur a lot of debt on my credit cards (like $30,000 worth) four or five months before declaring bankruptcy (for business expenses), could this be considered Bankruptcy Fraud? In Massachusetts, the lookback period for credit cards is 90 days, but can it be extended further?

Here is my answer: Bankruptcy Code Section 523 addresses this situation. Section 523(a)(2) provides that:

consumer debts owed to a single creditor and aggregating more than $500 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

cash advances aggregating more than $750 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable;

The Code also provides that the term “luxury goods or services” does not include goods or services reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor.

However, Code Section 523(a)(2) also includes another test to determine the dischargeability of credit card debt. The following debts are non-dischargeable:

money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;

(B) use of a statement in writing—

(i) that is materially false;

(ii) respecting the debtor’s or an insider’s financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive;

So, what the Code provides is that non-essential credit card debts to any one creditor totaling $500 or more and incurred within 90 days prior to filing are presumed non-dischargeable. And credit card debts of any amount, incurred at any time prior to filing may be deemed non-dischargeable if the creditor can prove that the debt was incurred under false pretenses (i.e., that the consumer used the card when he knew or should have known that he would be unable to pay back the debt).

The 90 day/$500 debt to any one creditor is a fairly easy argument for the credit card companies – those are hard to defend. The false pretenses/false representation issue is more difficult for a credit card company to win because they have to prove what you knew or should have known.

Remember, however, that if the credit card lender files an objection, you have to pay a lawyer to respond and defend it – which can get expensive.

My practice, therefore, is to hold off on filing for as long as I can following my client’s last use of credit cards. I also encourage my clients to make at least the minimum payment for several months while we are waiting to demonstrate good faith.

If you find yourself using credit cards to pay household expenses, that should be a signal to you that you have a debt problem and need to speak with a bankruptcy lawyer. If you find yourself in a bankruptcy lawyer’s office, you should think very carefully about using credit cards thereafter.

What do Bankruptcy Lawyers Do All Day Anyway

By Jonathan on April 21, 2008

To my knowledge there has never been a television drama about bankruptcy lawyers (although there would certainly be a lot of possible story lines!). So, as a rule, most people do not know what bankruptcy lawyers do all day long.

Los Angeles bankruptcy lawyer Hale Antico answers this question accurately on his website. Hale’s experience, like mine, goes something like this:

Preparing an Objection to Proof of Claim for a Chapter 13 case where the pro se creditor thinks they should be a priority debt compared to a general unsecured non-priority claim. Of course, I needed a Declaration to go along with this for my client, the debtor.
Researching and negotiating a claim for a Chapter 13 bankruptcy where the Los Angeles Chapter 13 Trustee thinks that it might be unfair discrimination between claims in the same class to pay one nondischargeble claim 100% compared to the others.
Responding to a letter from the United States Trustee questioning whether a client should be entitled to a Chapter 7 discharge based on prior income.
Replying to a creditor who is very curious about massive credit card spending the debtor in another Chapter 7 case did prior to filing bankruptcy. There may be an adversary proceeding here on 11 USC 523.
Answering a bunch of questions from existing clients who, after hiring me to let ther house go in foreclosure during the bankruptcy, are now suddenly prey to realtors and real estate agents who want to “help them” with a quick sale and why bankruptcy is better than a short sale.
Personally reviewed a bankruptcy petition (you know, the simple bankruptcy forms) with a client before we both signed it and I file bankruptcy for him.
Preparing for court on Tuesday where I’m helping three clients get their cases “confirmed” at their Confirmation Hearings at the bankruptcy court (do we have the mortgage declarations? the plan payments? did we satisfy the Chapter 13 trustee’s requests for business expenses and short form?).

I can add to this list:

responding to email from a self employed client who is currently in Chapter 13, and who wants a dramatic reduction in monthly plan payments
responding to email from Chapter 13 client who now wants to convert to Chapter 7
calling Chapter 7 client whose 341 hearing is later this week to remind him to bring his ID’s
responding to potential client emails
replying to a blog or web site visitor who wants clarification of a point
answering email questions from blog readers

I recently appeared before one of the bankruptcy judges in the northern district of Georgia to request a somewhat higher than normal fee for a Chapter 13. I found it somewhat cathartic to be able to explain to the judge that even “simple” Chapter 13 cases take up huge amounts of time because of the endless document requests and correspondence with the client, creditors and the trustee.