Blog

Time Spent Preparing Your Bankruptcy Budget is Time Well Spent

By Jonathan on November 4, 2006

Requests for documents and records by Chapter 7 trustees at 341 hearings are now a fact of life in the consumer bankruptcy world. No longer will standing Chapter 7 trustees rely on a debtor's best estimates – everything in your petition is fair game for review.

I am now telling my Chapter 7 clients to save their receipts for every purchase they make. Food, out of pocket medical bills, transportation expenses (including gasoline and routine maintenance), utilities, insurance costs and school sports expenses for the kids seem to be the categories that attract the most attention by trustees.

You should assume that some poor soul in your trustee's office will have the task of comparing your receipts to the figures on your filed budget (Schedule J of your petition).

If at all possible, you should start collecting receipts far in advance of filing. If it turns out that your receipts show that you actually spend $200 or $300 less each month than you think, you may find yourself facing dismissal or a conversion to a Chapter 13.

Your need to provide receipts is especially important if your household income exceeds the median and we have to run your budget through the means test. Every means test case is scrutinized by both the Chapter 7 trustee assigned to your case and the United States trustee. As I have reported before in this blog, the United States trustee is looking for a reason to push you out of Chapter 7.

I advise my clients that while I will argue long and loud on their behalf, numbers do not lie. And if I have to spend several hours poring over receipts, meeting the the U.S. Trustee, and arguing a 707 Motion to Dismiss, they can expect to spend a significant sum of money for attorney's fees.

The time to get your attorney detailed information about your spending habits and records of what you actually spend is before you actually file. I realize that this type of planning is not always possible, but if you can prepare in this way, you will save yourself a great deal of aggrevation and probably save yourself money as well.

[tags] chapter 7 budget, Schedule J, standing Chapter 7 trustee, united states trustee for the northern district of georgia, atlanta bankruptcy, bankruptcy georgia [/tags]

Repossession Threat Can Lead to Emergency Need for Bankruptcy Protection

By Jonathan on November 2, 2006

Lost in the on-going debate about how tough bankruptcy ought to be are the voices of those who file for bankruptcy in emergency situations – to stop a vehicle repossession or a wage garnishment. I think that repossession and garnishment are even more of an emergency than a home foreclosure. In Georgia, at least, a homeowner has at least 30 days warning, certified letters announcing the foreclosure and dozens of flyers from real estate investors and bankruptcy lawyers.

Although some people do wait until the last minute to deal with their foreclosure problem, home foreclosure in Georgia should never be a surprise.

Repossession and wage garnishment are much more likely to sneak up on a consumer. In this post, I want to discuss car repossession and answer a few questions that I hear frequently. I'll address wage garnishment and its unique problem later this month.

In Georgia, a secured lender can use "self help" (i.e., repossession) to recover collateral if the purchaser goes into default of the promissory note and security agreement. Secured debt is common – not only is your car considered secured collateral for the installment note you signed, but most furniture, jewelry or appliances you buy on installment is also considered secured debt.

Secured debt differs from unsecured debt like credit cards or medical bills in that the collateral you bought (the car, the furniture, the jewelry) is tied directly to the installment note. If you don't pay, the creditor can demand that you surrender the collateral in full or partial satisfaction of the debt.

Typically, you do not see repossession of furniture or jewelry because the secured creditor cannot get to the collateral without entering your house. These creditors can, however, file a Complaint for Personal Property Foreclosure and obtain a Court Order requiring you to turn over the collateral.

Car or truck repossession can take place without any risk of disturbing the peace. If you are in default of your note, a repo man hired by the lender can show up at your house in the middle of the night, or at the parking lot of your job or whereever he can find your car, and he can grab your car.

Your car is then towed to a storage lot, and the lender will send you a "10 day letter" advising you that you have 10 days to cure the default (usually this means pay off the car) or else the car will be sold at auction after the 10 days elapses.

On more than one occasion, I have received a frantic phone call from a potential client who just found out that a repo man is looking for her car, or perhaps that the repo man is in the driveway right now about to tow that car away.

What exactly can a bankruptcy do?

Firstly, if your car has not yet been grabbed, the filing of a bankruptcy will stop any threat of repossession. A repo after the filing will be void and the lender will be ordered (in most cases) to return your vehicle. The automatic stay created by your bankruptcy filing suspends the right of the secured lender to use Georgia law's self help provisions.

Most lenders will honor a notice of bankruptcy, although some will grab the car anyway and then will hire a lawyer to argue before the bankruptcy judge. In most cases, the judge will order the lender to return the car, and may award damages against the lender and/or the repo man. The judge will not likely order an immediate release of the vehicle if you do not have valid insurance on your car or truck.

If you are two to three months behind and you sense that a repo is on the horizon a bankruptcy filing will stop the immediate threat. However, if you do not maintain insurance on the vehicle or if you do not offer adequate protection to the lender in the form of a viable Chapter 13 plan or a proposal to pay off or refinance (redeem) the vehicle in Chapter 7, the secured lender will force the issue by filing a motion to lift the bankruptcy stay so that State law remedies may be enforced.

Is it appropriate to "hide" a vehicle while you contemplate or otherwise prepare for a bankruptcy filing? This is a tougher question. Hiding a vehicle from a secured creditor is improper and can give rise to civil or even criminal penalties. On the other hand, is it reasonable if you need a couple of days to get your pre-filing certificate, put together the money to file a bankruptcy or otherwise prepare yourself for filing?

The loss of your car, even for just a few days, can yield catastrophic consequences – the loss of a job, trouble getting the kids to school, problems getting medical care, etc. More than a few bankruptcies have and will be filed by debtors trying to stop repossessions. Many of these debtors do not enter the bankruptcy "market" until the last minute and their focus is entirely upon saving their cars and not on "abusing" the bankruptcy system.

[tags] bankruptcy and vehicle repossession, car repo in Georgia, stopping vehicle repossessions [/tags]

Looking for Homeowners Who Have Had Bad Experiences with Mortgages

By Jonathan on November 1, 2006

I received an inquiry from the producer of a Canadian radio program looking for individuals who have had bad experiences with unusual mortgages – such as interest only mortgage loans, sub-prime mortgages, adjustable rate mortgages, etc. If you would be willing to talk about your experience with a radio host, please let me know and I will forward your interest along to the producer.

You can contact me by clicking on the link.

[tags] mortgage problems, adjustable rate mortgages, interest only mortgages [/tags]

Are Debtors Stuck With their Form B22 Means Test Budget?

By Jonathan on October 19, 2006

Here is an issue about Chapter 13 calculations. I don't have the answer so I would appreciate any opinions, especially from any Chapter 13 trustee attorney who reads this blog.

The B22 Means Test looks to the debtor's average income calculated by looking at the debtor's income over the 6 month period preceding the month of filing. The B22 budget is a pro forma budget that uses IRS approved expense figures. We know that Judge Massey and Judge Mullins draw a distinction between the "projected disposable income" of a B22 form and actual disposable income that we see on the Schedule I & J budget. As I read their opinions, the actual budget as shown on Schedules I & J is the appropriate budget from which to evaluate whether a Chapter 13 should be confirmed.

Nevertheless, Chapter 13 trustees routinely file objections to confirmation on the grounds that the B22 showed X in disposable income and X x 60 months = Y which equals Z percentage dividend to unsecured creditors. If the plan as filed does not propose a payment of Z percent to unsecureds, the trustee objects.

In many of my Chapter 13 cases, the B22 does show disposable income, whereas the I & J schedules show none. Why? The allowable expenses per the IRS are incredibly stingy. For example, the IRS budget "allows" a Dekalb County family of 4 a whopping $1,176 for housing and utilities per month. If you assume that utilities are $250, that leaves $926 for a mortgage payment. That translates into roughly a $120,000 house.

Many honest, hardworking debtors live in $200,000 or $250,000 houses with mortgage payments – perhaps both a first and a second mortgage – of $1,800 to $2,000. Under the old law, this level of mortgage payment rarely if ever drew an objection.

Since the B22 Means Test in this example only recognizes the first $926 of our hypothetical $2,000 mortgage, the means test tells us that $1,074 is left over. At the same time, our debtors may have to stretch to find $200 or $250 in their Schedule I & J real life budget.

Nevertheless, the Chapter 13 trustees are using the $1,074 to determine what percentage the debtors need to be paying back to their unsecured creditors.

What is the basis of this objection? Does the Bankruptcy Code require a Chapter 13 debtor to pay a dividend to unsecureds equal to the B22 projected disposable income? If so, what the applicable Code section?

I have always taken the position that the B22 Means Test is a qualification – it tells you if you can file a Chapter 7 without a presumption of abuse, or a 36 month Chapter 13 or a 60 month Chapter 13. Beyond that, I don't see how any of the B22 numbers mean anything.

Is not Chapter 13 still controlled by the Kitchens criteria, where for years no one said "boo" abot a $2,000 mortgage obligation for a family of 4.

Thoughts? Comments?

[tags] means test, Schedule I & J, bankruptcy disposable income, projected disposable income [/tags]

Do Bill Collectors Intentionally Mislead Consumers About Bankruptcy Options?

By Jonathan on October 18, 2006

My colleague, bankruptcy attorney Kevin Chern, discusses a lesser known consequence of the new bankruptcy law in his Bankruptcy Lawyers Blog. It seems that some of the more aggressive bill collectors are (wrongly) advising consumers that bankruptcy protection is not available, illegal or otherwise not an option. This intentional misrepresntation about bankruptcy may be part of the reason that bankruptcy filings are down during the 12 months following the effective date of the new law.

In his October 16, 2006 post entitled “Bankruptcy Attorney Responds to Media Mischaracterization” Kevin reprints a thoughtful letter to the editor penned by South Carolina consumer bankruptcy lawyer Sheryl Schelin. In her letter, Sheryl correctly notes that the new bankruptcy law does nothing to address the root causes of financial distress among consumers.

Although I think that Sheryl may be overstating the issue a little (she relates bankruptcy filing rates to “the underlying oppression of the working poor in America”), I agree completely that overreaching tactics by bill collectors can drive honest, hardworking families into bankruptcy. I can think of several instances where I attempted to negotiate a non-bankruptcy payment plan for a client who came to me with a one debt problem. Inevitably, the judgment creditor or car lender absolutely refused to consider a payment plan and forced us to use the bankruptcy option.

Perhaps Congress should consider adding teeth to the Fair Debt Collection Practices Act. Right now, most of the provisions of this Act only apply to bill collectors, and not to the in-house collection efforts of the actual creditors. More importantly, the Act limits damage recovery to $1,000 plus reasonable attorney’s fees. As you might imagine, this limited opportunity for damages discourages consumers from filing lawsuits in federal court.

In my practice, I have not personally heard many stories of outright lies regarding the new bankruptcy law by bill collectors. Perhaps I am not speaking to affected consumers because they believe the misstatements. If you have experienced this type of misrepresentation yourself or from your clients, please add a comment to this post.

Does Section 541 Give Us Added “Exemptions?”

By Jonathan on October 15, 2006

Section 541 of the Code is worth a second look for debtors and their attorneys who are struggling with the question of how to shelter cash.

Section 541 identifies property that is considered "Property of the Estate" and therefore subject to the powers of the trustee and claims of creditors.

Section 541(b)(5) provides that property of the estate does not include "funds placed in an education individual retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986) not later than 365 days before the date of the filing of the [bankruptcy] petition…." There is a $5,000 cap on any such transfer unless the money was transferred more than 720 days prior to filing, in which case there apparently is no limit.

As a practical matter, this means that if you see bankruptcy as a possible option, but not one that is likely to happen within the next year, you can shelter funds by putting them in an education IRA for the benefit of a child, stepchild or grandchild.

Section 541(b)(6) similarly exempts from the bankruptcy estate funds used to purchase tuition credits under a qualified State tuition program

[tags] Education IRA, IRC section 530(b)(1), qualified State tuition program, bankruptcy exemptions, pre-bankruptcy planning [/tags]