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Alternatives to Bankruptcy if Your Debt is Less than $20,000

By Jonathan on April 14, 2008

On a fairly regular basis, I get calls from potential bankruptcy clients who don’t really have enough debt to justify the time and expense of bankruptcy. For example, if your only debt is a delinquent $7,500 credit card bill, it hardly makes sense to spend $1,500 to $2,000 for a Chapter 7 case. Similarly, it makes no sense to spend $3,500 to $4,000 for a Chapter 13, especially if you would end up paying back 100% of the debt anyway.

What, then, are your alternatives?

Debt negotiation is one alternative. Someone once told me that "everything is negotiable" and that is especially true when it comes to credit card lenders. My experience, however, has been that you will find it difficult to convince a credit card lender to negotiate if you are current with your account. When you get to three or four months delinquent, you may find that the credit card lender will talk to you seriously about a reduced lump sum payoff or some type of payment plan. The problem with this, of course, is that your credit score will take a major hit and you will have to deal with those harassing phone calls.

Another problem – who is going to do the negotiation? You can certainly try to negotiate your own account, but this can be difficult as you are the subject of the negotiation and you are emotionally involved therein. There are vendors out there who say that they will do debt negotiation, but I think you need to be careful there too. I have met with several clients over the years who have tried this route, all with very mixed results. Several of these companies have been sued by the attorneys general in several states.

Consumer Credit Counseling is not really a negotiation service – they are funded by the credit card companies and my sense is that their goal is primarily to take some of the heat off while you enter into a payment plan that pretty much pays back everyone 100%.

Recently I have noted that several law firms (none in Georgia, to my knowledge) have added debt negotiation to their menu of services. For example, the Michigan law firm of Thav, Gross, Steinway and Bennett has a separate law firm called StopCreditorCalls.com and has posted several compelling videos on YouTube discussing their negotiation services.

An Alabama consumer law firm, The Watts Law Group and M. Stan Herring, publishes a very informative blog about consumer protection. Recently, Attorneys Watts and Herring have written a series of blog posts about the Fair Debt Collection Practices Act and have identified common types of violations. In the case of FDCPA violations, it may be that a negotiation over a relatively small credit card debt may turn into an FDCPA claim – it would not surprise me if a settlement of an FDCPA claim involved a reduction in the outstanding balance or favorable terms for the debtor.

So, if you have a relatively small amount of debt (less than $20,000 of unsecured debt) I think it is wise to strongly consider non-bankruptcy alternatives as a more cost effective solution.

However, I am still looking for specific solutions. If you were able to work out a resolution of your credit card debt outside of bankruptcy, or if you are a lawyer who can speak about non-bankruptcy alternatives, I’d love to hear from you.

Foreclosure Practices in North Georgia Come Under Scrutiny

By Jonathan on April 2, 2008

The New York Times published an investigative report on March 30, 2007 entitled Foreclosure Machine Thrives on Woes. The article addresses what has become a growing problem in bankruptcy cases:

out of control fees and costs added to mortgage loan balances
failure of mortgage companies to properly account for payments
refusal or failure of mortgage companies and their counsel to resolve disputes amicably

The Times tells the story of a Georgia couple – the Atchleys – who filed Chapter 13 and paid their mortgage but found themselves on the receiving end of multiple motions for relief asserting that mortgage payments had been made. In addition to the stress and cost of dealing with these inaccurate motions (which would be withdrawn at the last minute), the Atchley’s discovered that their payoff balance was being adjusted higher and higher with questionably fees and costs. The Atchleys eventually sold their house but now the United States Trustee has sued Countrywide claiming that its pattern of conduct was an abuse of the bankruptcy system.

The Atchleys decided to sell their home, and contend that they lost over $20,000 in equity. I have seen similar cases in my own practice. One case in particular comes to mind. My client filed bankruptcy to stop a property tax sale, and subsequently fell behind in her ongoing mortgage payments. She then decided to sell her condo (there was significant equity), the closing attorney gave her a payoff figure that seemed extremely high. I looked at the payment ledger and I saw overcharges and double billing. One item showed a charge of $650 as attorney’s fees arising from a Motion for Relief. However the Order on the Motion for Relief provided for only $550 in attorney’s fees and my client had already paid that fee directly when she cured her post petition arrearage. There was also a $2,500 “analysis charge” that no one could explain.

While Chapter 13 remains the only option to stop a foreclosure, you should realize that there is a good likelihood that if you file, your payoff balance will go up and that you may have limited recourse to challenge these charges.

Thanks to my colleagues at Clark and Washington for bringing the New York Times article to my attention.

File Your Bankruptcy by the End of the Month or Start the Process Over

By Jonathan on March 31, 2008

If you read this blog and other consumer bankruptcy blogs like Scott Riddle’s Georgia Bankruptcy blog or the Bankruptcy Law Network blog, you know that preparing for filing a case involves a great deal of effort on your part to collect information and documents. Are there any steps that you as the potential bankruptcy debtor can take to speed up the process and to keep costs down.

My Bankruptcy Law Network colleague, Michael Doan, has posted a very useful article about the timing of filing. Specifically, Michael points out that if you start the bankruptcy information gathering process towards the end of a month, and the process rolls over to the next month, then a lot of the work has to be redone. For example, the six month medican income test look back would involve a new six month period, your credit counseling certificate validity date may run out and the required tax return might change. I encourage you to take a look at Michael’s well thought out post entitled “File by the End of the Month or Start Over.”

I think that in a big picture sense, what Michael is saying is that you need to communicate regularly and accurately with your lawyer. If you meet with your lawyer on the 20th of the month and promise to have all necessary documentation by the 27th, but you end up rescheduling your appointment to the 5th of the following month, don’t be surprised if you have to pay a higher fee to account for all the new calculations.

In my practice, I do not start the time consuming process of analyzing pay stubs and figuring out the median income and/or means test until I have pretty much all of the required documentation. This means that I can’t give my client bottom line numbers unless and until my client provides me with pay stubs and tax returns. I can still give a “big picture” analysis based on my experience, but the actual number crunching has to wait. This is a major shift from pre-BAPCPA practice where I could run numbers almost immediately.

Some of my colleagues are more willing to tolerate the risk of not getting documentation in time and they end up running their calculations two or three times. If you are a lawyer and this is how you have set up your practice, I would advise you to keep your notes so at least your’ll have a head start on the calculations.

Pre-Bankruptcy Balance Transfer – the Debtor Wins…This Time

By Jonathan on March 29, 2008

My Bankruptcy Law Network colleague, Wendell Sherk, recently posted a very helpful case study about a case called In re Brumbaugh in Ohio involving credit card use prior to bankruptcy. Although Wendell’s case study looks to 6th Circuit law (whereas cases filed in Georgia would look to 11th Circuit precedent), I think that the reasoning used by the judge in the Brumbaugh case can give you some insight as to how bankruptcy judges deal with real life situations.

In the Brumbaugh case, a debtor transferred an $18,000 balance from a high interest credit card to a new Chase credit card. The debtor also used the Chase card for several small retail purchases including a few purchases made after she spoke to a bankruptcy lawyer.

After the debtor filed for bankruptcy, Chase filed a lawsuit in bankruptcy court (called a Complaint to Determine Dischargeability of a Debt) to argue that the entire $18,000 balance should be deemed “non-dischargeable” by the bankruptcy judge. In other words, Chase wanted its claim to survive the bankruptcy and not be discharged.

Despite a fact pattern that looked pretty bleak for Mrs. Brumbaugh, the bankruptcy judge ruled against Chase. While recognizing that this was a close call, the judge ruled in favor of the debtor because of the following:

most of the $18,000 balance was in the nature of a balance transfer, not new charges – under the bankruptcy law, balance transfers are not treated like new purchases
the debtor made the transfer in response to a Chase offer that gave her 0% interest
the transfer was made by the debtor who was going through a divorce and the debtor saw the lowered interest rate as necessary to get her financial house in order
the debtor and her spouse were trying to sell their house and planned to use the proceeds to pay down this debt. The house did not sell, but the judge believed that the debtor had a reasonable plan
the debtor made payments to chase after the transfer – debtors who plan to defraud a creditor rarely make payments.

Obviously, not every judge would rule the same way as the judge did in the Brumbaugh case. And Mrs. Brumbaugh had to pay a lawyer to defend her in this litigation. My feeling is that if Mrs. Brumbaugh had been even slightly less credible and sympathetic, she would have lost.

Wendell closes his post by repeating a warning that I have been giving for years – if bankruptcy is an option, even a remote option, be very careful about making any significant financial moves until you have spoken to a lawyer. For information about bankruptcy in St. Louis, take a look at Wendell’s web site.

CNN and Fortune Magazine Explain The Many Repurcussions of the Sub-Prime Meltdown

By Jonathan on March 29, 2008

A lot has been written about the housing and mortgage finance crisis in the United States. You may be wondering how and why you would be affected by the failure of a mortgage company that issued high interest loans to borrowers who were not credit worthy. Although it may not be obvious, a rising delinquency rate among sub-prime borrowers can and has impacted:

housing prices (the value of homes in most places in the country has gone down)
interest rates
inflation
the stock market
our trade imbalance with other countries
the decline of the dollar
oil prices
the stability of the stock market and commodities markets
employment
foreclosures

CNN and Fortune Magazine have produced a television program called "Busted – Mortgage Meltdown" that explores all of the implications of our mortgage crisis. I suspect that the show will end up on-line but for now, you can visit the multi-media online companion to the show.

Thanks to Paula Wethington from the blog Monroe on a Budget for writing about the CNN/Fortune program on her blog.

My Chapter 13 Was Dismissed Two Weeks Ago – Can I Refile a Chapter 13?

By Jonathan on March 25, 2008

A visitor to one of my web sites wrote me to ask about refiling his Chapter 13. After being in a Chapter 13 for almost 2 years, this gentlemen lost his job and fell behind with his Chapter 13 payments. His mortgage company filed a Motion for Relief because he had falled behind on his mortgage payments (this motion was granted) and the trustee filed a motion to dismiss based on the delinquency in trustee payments. This motion to dismiss was also granted and the case was dismissed.

Now, some 6 weeks later, the mortgage company has started foreclosure proceedings and my visitor wants to know if he can refile the Chapter 13 to stop the foreclosure.

Here are my thoughts: under the BAPCPA changes to the bankruptcy law, a debtor can refile his Chapter 13 case. However, if case #2 is filed within 12 months that case #1 was pending, then the automatic stay is not absolute. Instead, the automatic stay does go into effect, but it terminates in 30 days unless the debtor files a motion with the court and convinces the judge to extend the stay.

Thus, my site visitor can refile his case, but he and his lawyer need to immediately file a Motion to Extend the Stay. Some judges will extend the stay for pretty much any reason, while others will want to see a significant change in the debtor’s circumstances.

If the judge does not extend the stay, then it would come to an end in 30 days and the mortgage company would be free to re-start foreclosure proceedings.

Note that there are different rules for a 3rd case filed within any 12 months when prior cases were pending, or if the debtor had voluntarily dismissed his prior case – subjects for a different blog post. In the meantime, my colleague Rachel Lynn Foley does tackle some of these issues in a helpful post published on the Bankruptcy Law Network blog.