Number 4.  You received a Summons and Complaint for foreclosure.  Now you are being sued by your mortgage company and in danger of losing your property.  You have a short period of time to respond, usually 30days or less in Illinois.

Number 3.  You received a letter from a collection lawyer giving you a deadline to catch up your delinquent mortgage payments and threatening foreclosure.  The next step the bank will take is to sue you.

Number 2.  You receive a notice from your financial institution that your payments are in default.  The next letter you will receive will be from the mortgage company’s lawyer.

Number 1.  You know that you have not paid the mortgage, so why wait,

it is time to call a lawyer and plan a strategy to deal with the problem before it is too late.

The term debt relief agency appears in a legal context for the first time in bankruptcy law in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 [The Act]. The first chapter of this new bankruptcy reform law can be found at Title 11 U.S.C. 101. This is the General Provisions chapter and it contains definitions of words of art used throughout the Act, and includes the term “debt relief agency”.

Debt relief agency office

Section 101(12A) defines the term debt relief agency to be any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer under section 110.  Persons who fail to disclose this status are subject to penalties that could include payment of damages and attorney fees.

In Milavetz vs United States, the Supreme Court of the United States was asked to decide whether bankruptcy lawyers had to comply with the requirement to call themselves a debt relief agency.  The Court ruled in a unanimous 9-0 decision that the debt relief agency provisions of the bankruptcy reform act applied to lawyers.

Although the phrase contains the word agency, the definition clearly refers to any person. You may see and hear media advertisements such as newspaper ads, radio spots, or internet ads where a person refers to oneself as an agency. While that appears to be grammatically incorrect, it is in keeping with the legal definition set forth in the new bankruptcy reform law.

An important note, the same section excludes certain types of persons or organizations from being a debt relief agency. including officers, directors, employees or agents.  Also excluded are certain creditors, non-profit institutions, and some financial institutions.  As are authors, publishers, and distributors of books excluded.  A complete list can be found in the statute.

Credit card and medical debt can often be settled for pennies on the dollar. You do not need to hire a fancy fly by night late night television advertising debt settlement company to settle your debt. Give it a try yourself. You will probably realize a considerable savings.

I have been filing bankruptcy cases for almost 30 years. As a test, I volunteered my legal services pro bono with a young man who owed over $20,000 in credit card debt on 6 accounts. He had some money available, but he did not want to use it all to pay debts. To start, I suggested he invest half of his money in a 6 month certificate of deposit, so it would gain interest and be available in case he needed to use it. Then he began calling his creditors. I coached him on what to say and how much to offer. We started low, usually at 15 per cent of the debt. There were several phone calls to and from creditors as he tested the water to see what would be accepted and what would not. In some cases, we sent seed money, a small payment, a token of good faith to keep the collector interested.  Some times he would go for weeks without hearing from anyone. I kept on him to initiate the call and to stay motivated as he settled one account after the other. As negotiations heated, he texted and emailed me furiously for his next steps.

It took almost eight months, but he was able to settle each account for less than 50%, some for much less. In each case, the collector took considerably less than the amount first demanded, thus proving the point that you should not hire a debt settlement company to do what you can do yourself over the phone.

Cheaper to file bankruptcy

Sometimes it makes more sense to let go of the past and start building a new future.  Chapter 7 bankruptcy can be your solution.

Does this debt arrangement conversation sound familiar?

Client: I want to make arrangements to pay this debt.

Me: Ok, how much can you offer to pay?

Client: Nothing, I don’t have any money?

Is it any wonder the bank will not work with you?  Be realistic, creditors want cold hard cash, not talk, not arrangements.  If you cannot make a payment, your arrangement, while well intentioned, is nothing more than an empty promise.  It is time to check into reality.

Look, if you owe more money today than you did yesterday and you cannot pay your bills on time, you need to realize you are going in the wrong direction with your finances.  You incur debt by spending money you do not have.  If you do not have enough money to pay that debt you have to find another way to deal with it.

Money in, money out.  If your income is insufficient to cover your debts you either need more income or less debt, or both.  Bankruptcy won’t help you make more money but it can discharge some types of debt.  File that Chapter 7 bankruptcy, wipe out that debt, then you can use your money for the things you need, for you and your family and your future.

You might find it helpful to make a list of the items you can live without, and pare them from your budget.  Then you can concentrate on a lifestyle you can afford.  By taking a hard look at your expenses you can determine where your money goes and you can eliminate leakage – money that you spend on impulse or frivolous items.  Shake off the past and live for the future.  Life without debt is a goal you can achieve through Chapter 7 bankruptcy.

The New York Times proclaimed Harvey Miller “The Most Prominent Bankruptcy Attorney in the Nation.”  Mr. Miller may be best known for his representation of Lehman Brothers and General Motors in bankruptcy court.  His firm website lists his advocacy for one side or another in a page-full of bankruptcy cases, a who’s who of corporate insolvency.  He is commonly, affectionately and reverently referred to as the heavy-hitter, the dean of the bankruptcy bar.

I spoke with him at my alma mater, Washington University Law, after a speech he gave about his role in the Lehman and G M cases.

I did not disclose my role as a blogger to Mr. Miller, I was there as a participant in the Continuing Legal Education program, so to be fair I will not quote him directly or mention details from our private conversation.  Instead I will relate my impression, a sort of epiphany, about the corporate debtor’s attorney, that I experienced from his public presentation.

I have seen the bankruptcy lawyer and he is me.  Similarly, your financial problems are no different than General Motors, just smaller in scale.

Astonishingly,

Business does not speak the B word.

Business does what it can to avoid the appearance of financial weakness, even to the point of selling assets at a deep discount to perceived value in the face of adverse market forces that would otherwise eventually downgrade the overall value of the company.  Business also prefers to hedge risk, to fortify positions with collateral or insurance, when possible, in a sort of bet-the-back-side of the deal way to make some money and not lose any money.  Business does what it can to survive the bad deal.  But more importantly,

Business does everything it can to avoid bankruptcy.

When business hits the proverbial wall and cannot find a market solution, the bankruptcy lawyer’s phone rings.  Business calls for advice. How does bankruptcy work? How will it help?  “We want a consultation”, but, and here comes the epiphany part, “but come in through the back door”…”use the servant entrance”…”do not let anyone know you are talking to us”.

What separates the corporate perception of the heavy hitter from the store front bankruptcy attorney, besides a fine pair of shoes and classy threads?  The heavy hitter sneaks in on the executive elevator that only stops at the penthouse, to contain the spread of financial gossip you and I typically hear in the hair salons, sports bars and grocery stores.

While listening to Mr. Miller I kept thinking of those late night television commercials warning how bankruptcy is a 10 year mistake. “Don’t do it.”  “Don’t file”, they encourage, while offering to take what little money you have left.  Corporations feel the same fear of bankruptcy that I see every day in my practice with middle class and low income debtors.

These days most debt is secured debt.  Corporate bankruptcies are fewer in number than in the past few years, and the ones filed these days are well prepared, prepackaged or prearranged, and commonly involve asset purchase agreements where the secured creditors receive some amount of compensation, concessions and terms.  Consumer bankruptcies, though involving smaller debt, are similar in that today’s secured creditors often expect full contract payment, or return of collateral or an indubitable equivalent form of compensation.

The fractured moral lesson foisted on us is bankruptcy is bad, but can be necessary.  So if you must bankrupt your debt, do so carefully and purposefully, in a well-planned bankruptcy case.

Yes, rich people still file bankruptcy.

If General Motors, Lehman and many other big corporations cannot avoid bankruptcy, how can a common person?  Often one cannot, and bankruptcy relief is a necessary good.

If your bankruptcy attorney is a member of the National Association of Consumer Bankruptcy Attorneys [NACBA] chances are that attorney participates in a list service discussion of issues along with other bankruptcy attorneys across the country.  The NACBA list allows member attorneys to share practice tips and discuss emerging trends.

A recent discussion illustrates the need for accurate preparation of the bankruptcy paperwork and shows what could happen if proper procedures are not followed.

A debtor who filed bankruptcy did not disclose ownership of a pending personal injury claim.  After the bankruptcy case concluded the debtor settled the injury claim.  Debtor, the personal injury lawyer who worked the case and several medical providers received payment from the settlement. Later the bankruptcy trustee learned about the settlement and demanded all of that money.

At this point is it important for the reader to understand some basic bankruptcy principles.  A debtor files bankruptcy by submitting a Petition and Schedules to the court.  The Schedules contain questions designed to identify all  assets and all debts, along with questions about debtor’s financial affairs.  A personal injury claim must be disclosed on Schedule B of Personal Property.  A lawsuit must be disclosed on the Statement of Financial Affairs.  Assets that are not exempt constitute the bankruptcy estate. The trustee is charged with collecting assets of the estate for the benefit of creditors.  A professional person, such as an attorney, seeking payment from an estate asset, such as a personal injury claim, must first be approved and hired by the court.

Case decisions vary from state to state but generally under a theory of judicial estoppel, a failure to disclose an asset results in debtor losing that asset to the bankruptcy estate.  In other words, debtor loses the ability to exempt [exclude] a portion of the asset from the estate; or debtor loses the ability to receive any remainder leftover after all creditors are paid.  Also, professionals are not permitted to receive payment from estate assets without prior approval and employment by the court.  And the debtor could be denied a discharge of any remaining debt.

Because the consequences are severe, a good bankruptcy attorney will personally meet with the new client and compile the answers for each and every question, instead of relying on a paralegal or secretary.  This allows the attorney to explain the question, to clarify confusion, to detect evasive answers and to repeat questions in different ways to insure accuracy.  The attorney, as a skillful interrogator, can cross examine the client to prepare an accurate case.

In addition to answering the question about personal injury claims and the question about lawsuits, debtor is required to sign and certify the accuracy of the Petition and Schedules.  And a few weeks after filing a case each debtor must appear and before a trustee and testify under penalty of perjury.

Trustees typically ask debtor some variation of these questions:

Are you personally familiar with the documents?

Did you meet with your attorney and provide the information for this case?

Did you read the schedules before signing?

Did you include all your assets?

Are the documents true and correct?

Are there any corrections or changes you want to bring to my attention?

Can I rely on these documents as being correct?

And typically debtors answer affirmatively to each of these questions, leaving debtor no room to change the story or to blame anyone else if the trustee finds non-disclosed assets.  But a debtor who hides assets and falsifies information only has oneself to blame.  For this reason, I follow the advice of a wise bankruptcy attorney who taught me to always ask one final interview question:  Now tell me everything you do not want listed on your bankruptcy.  Then include that information on the Petition and Schedules.

     A Chapter 13 bankruptcy debtor may deduct the full IRS Standards vehicle allowance even though the actual payment may be less,  per a decision by Bankruptcy Judge Laura Grandy in the Southern District of Illinois case of In re Scott, 10-32582 (August 8, 2011).

     When the Supreme Court ruled in Ransom v. FIA Card Services, 131 S. Ct. 716, 723-24 (2011) that an over median income debtor could not take an I.R.S. Standards Ownership Cost deduction against Disposable Income, (11 U.S.C. 1325(b)(1)(b)), for a vehicle if the debtor did not have an “applicable” vehicle payment, the Supreme Court refused to indicate whether a debtor could take the full amount of that deduction if the actual vehicle payment was less than the amount of the I.R.S. Standards.  The Supreme Court commented in footnote 8 of Ransom at page 727:

“The parties and the Solicitor General as amicus curiae dispute the proper deduction for a debtor who has expenses that are lower than the amounts listed in the Local Standards.  Ransom argues that a debtor may claim the specified expense amount in full regardless of his out-of- pocket costs.  Brief for Petitioner 24–27.  The Government concurs with this view, provided (as we require) that a debtor has some expense relating to the deduction.  See Brief for United States as Amicus Curiae 19–21.  FIA, relying on the IRS’s practice, contends to the contrary that a debtor may claim only his actual expenditures in this circumstance. Brief for Respondent 12, 45–46 (arguing that the Local Standards function as caps).  We decline to resolve this issue. [emphasis added] Because Ransom incurs no ownership expense at all, the car-ownership allowance is not applicable to him in the first instance. Ransom is therefore not entitled to a deduction under either approach.”

     In Scott, Judge Grandy was asked to confirm a Plan that deducted the full I.R.S. Standards vehicle allowance on Form B22C over the objection of the chapter 13 trustee.  The trustee suggested the Judge should limit the amount of the deduction to the actual amount of the vehicle loan payment amortized over a 60 month period.  A ruling in favor of the trustee would have required debtors to increase the amount of money paid to unsecured creditors during the life of the Plan.  Because this decision would affect the calculation of Disposable Income for all over median income debtors with unconfirmed plans in that Bankruptcy District, the practical effect of such a requirement would have caused several active cases to fail in which debtors were already paying as much as they could afford.

     Judge Grandy refused to disallow “standard expense deductions for anything that could be considered a debt payment”, an interpretation proffered by the trustee of 11 U.S.C. 707(b)(2)(A)(ii)(I)’s “notwithstanding sentence”.  “Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts”.  Instead, Judge Grandy focused on the B22C form.  Judge Grandy noted the history of the form as being created by the Judicial Conference of the United States – the principal policy making body concerning the administration of the United States Courts comprised of the Chief Justice of the United States, the chief judge of each judicial circuit, the Chief Judge of the Court of International Trade, and a district judge from each regional judicial circuit, with a number of committees and members appointed by the Chief Justice to advise on a wide range of subjects, including rules of practice and procedure and deriving its authority from federal statute 28 U.S.C. 331 [Pretty much her words, not mine].  Judge Grandy also noted the Official Forms prescribed by the Judicial Conference “shall be construed to be consistent with [the Rules of Bankruptcy Procedure] and the Code.”  Fed. R. Bankr. P. 9009.”  [Again, better said by her than me].

     Form B22C directs debtor to list the applicable I.R.S. Standards vehicle ownership expense on line 28a.  From that amount the debtor is directed to deduct the actual amount of the vehicle loan payment on 28b.  The resulting amount on 28c is subtracted from the amount of money a debtor is presumed to be able to pay to unsecured creditors.  The amount subtracted at line 28b is added back at line 47, in effect giving debtor a full deduction of the I.R.S. Standards no matter the amount of the vehicle loan payment, provided there is a loan payment.  [Per Ransom, a debtor is not permitted to claim the I.R.S. Standards if debtor does not have a vehicle loan payment.]

     Because the Official Form permitted a debtor to deduct the full allowance, and based on the history and authority behind the form, Judge Grandy accepted the form as an advisory opinion on how to calculate Disposable Income.

Bankruptcy debtors should not reaffirm a mortgage.  Reaffirmation of debt in bankruptcy prevents the debt from being discharged, a process explained in greater detail by Kevin Gipson in Chapter 7 Bankruptcy and the Reaffirmation Agreement.  Yet, lawyers continue to debate whether to reaffirm a mortgage, without compelling argument on the affirmative side, even though state laws protect a homeowner, who continues to make voluntary mortgage payments without reaffirming the mortgage, from foreclosure, so long as payments are current or brought current within a reasonable time.

So why should one reaffirm?  Distinguished Missouri bankruptcy attorney Wendell Sherk once said “[T]he only reason to sign them is in order to get continued reporting of good payment status on the credit reports”.   In practice, mortgage companies dangle the prospect of reporting future good payment history to credit bureaus as a way for bankruptcy debtors to improve the credit score or qualify for future loans.  If that is the only reason to sign, then that is actually a compelling reason not to sign.

The unsaid corollary of that offer is that same mortgage company will report all information, good and bad, to the credit bureaus.  And that information, both the good and the bad, can damage a credit score or derail a loan application.

The more accurate part of the reporting argument is that the borrower should not want mortgage payments reported to the lender, because:

1.  The debt to income ratio is minimized by not reaffirming the mortgage;
2.  The likelihood a borrower actually makes mortgage payments on time is small;
3.  The borrower can make the payment late, miss a payment here or there, catch up payment, pay whatever late fees accrue, all without risking a negative tradeline on the credit report.

A credit score is one factor lenders use in evaluating loan applications. While the exact formulas various lenders use are not publicly known, a major factor in the loan application process involves the total amount of unpaid debt in relation to a person’s income.  Low debt and high income is better than not.  After bankruptcy the mortgage debt is discharged unless the debt is reaffirmed.  By not reaffirming, a person effectively lowers the total amount of outstanding debt, thus lowering the ratio of debt to income.

Failure to pay on time is a huge factor and perhaps the number one cause in lowering a credit score.   Consumers who live paycheck to paycheck or on fixed income often face financial setbacks that make it hard and sometimes impossible to pay all bills when due.   The more information that gets reported, the greater chance that information will contain a negative report.

The homeowner has an unofficial flexible due date, limited not by a specific date on the calendar, but by the logistics of how long it takes a lender to react to a payment default.  If a payment is late the borrower can catch up the payment before the lender can foreclose.  While state laws vary as to the specific length of time a borrower is permitted to cure a delinquency, and late fees will probably be added, the informed homeowner can float a payment within this time frame to suit one’s ability to pay.  By not reaffirming a mortgage, late mortgage payments are not reported to the credit bureau and do not lower a credit score.

Wouldn’t it be a better world if all creditors did not report payment history?

An individual same-sex married person who files bankruptcy faces a choice whether to include spousal income for purposes of determining how much unsecured creditors could receive from the bankruptcy case.  This choice is not available to the heterosexual married debtor due to an intended consequence of Congressional legislation that requires the heterosexual married debtor include such income.

Moreover, the decision is independent of whether same-sex married couples can file joint bankruptcy, as is occurring in more courts today.  And, this analysis does not consider community property states, though perhaps it should if Congress persists with its definition of marriage.  Caution, this is opinion and the laws of your state may vary.

Logic
From Alice’s Adventures in Wonderland by Lewis Carroll:
[Alice] “Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.
Background
Income over certain limits can prevent a bankruptcy debtor from obtaining a chapter 7 discharge of debt and can extend a 3-year chapter 13 case into a 5-year case, thereby increasing the amount paid to unsecured creditors and the trustee.
Bankruptcy Form B22, both B22A in chapter 7 and B22C in chapter 13, requires a married debtor to include spousal income to determine how much debtor must pay unsecured creditors.  Depending on various factors, the amount of spousal income added to the calculation can be reduced on account of some spousal expenses, though not all expenses qualify.
The Defense of Marriage Act [DOMA] is a federal law, found at Title 1 U.S.C. 7, which defines marriage as being only between spouses of the opposite sex.

Discombobulating
Attorney General Eric Holder wrote a letter informing Speaker of the House John Boehner that the President of the United States believed DOMA could not withstand a constitutional test against discrimination against gays.  “[T]he legislative record underlying DOMA’s passage contains discussion and debate that undermines any defense under heightened scrutiny.  The record contains numerous expressions reflecting moral disapproval of gays and lesbians and their intimate and family relationships – precisely the kind of stereotype-based thinking and animus the Equal Protection Clause is designed to guard against.”
Is DOMA dead or isn’t it?  It is too soon to tell.  Here is more from the Holder Letter, “Notwithstanding this determination, the President has informed me that Section 3 will continue to be enforced by the Executive Branch.   To that end, the President has instructed Executive agencies to continue to comply with Section 3 of DOMA, consistent with the Executive’s obligation to take care that the laws be faithfully executed, unless and until Congress repeals Section 3 or the judicial branch renders a definitive verdict against the law’s constitutionality.”

Conundrum
Despite recent bankruptcy court cases criticizing DOMA and permitting same-sex married couples to file joint bankruptcy cases that have been ordinarily reserved only to heterosexual married couples; DOMA has not been ruled unconstitutional.  It remains the law of the land, at least for now.
The Department of Justice will continue to enforce DOMA until and unless Congress or the Court system says otherwise.
Same-sex marriage or civil union exists under various state laws.
In bankruptcy, state law and federal law are in conflict on the issue of marriage.

The Choice
A married person filing an individual bankruptcy must complete Form B22, the form that calculates how much money, if any, must be paid to unsecured creditors.  A heterosexual married debtor filling out Form B22 has to include income received by a spouse on that form.
By definition, marriage under federal law is limited to heterosexual couples, according to DOMA.  Consequently, a person who is same-sex married under state law and who files bankruptcy should not be compelled to include spousal income on B22, because DOMA does not recognize that person as being married.  And as Attorney General Holder indicated in his letter to Congress, the government will continue to enforce the Defense of Marriage Act.
Even though that person is married under state law, DOMA protects the gay or lesbian married debtor from having to include spousal income for distribution to creditors in bankruptcy because federal law, according to DOMA, does not recognize that person as being married.  To rule otherwise, a court would have to overrule DOMA.
In practice, a same-sex married debtor could voluntarily choose to include spousal income when determining whether that income should be used to pay creditors.  In that case any challenge would have to come from an unlikely source – a creditor, the trustee or the court.  It would be highly unusual that any one of the three would try to prevent a debtor from paying more money to creditors than required, regardless of the definition of marriage.

If you’re filing for bankruptcy, do you still have to pay back creditors?  Depending on how your local court looks at it, that old car may save you $200 a month.

When you file for bankruptcy, you’ve got to pay unsecured creditors an amount equal to the projected disposable income available to you during a three to five year period.  The amount varies on a case by case basis, and can be as little as $0 up to 100 per cent of the total unsecured debt.

Before we dive deeper, let’s recap the idea of projected disposable income.  As my colleague, Binghamton bankruptcy lawyer Peter Orville said in a previous article here on Bankruptcy Law Network:

The result of the means test is called your “projected disposable income”.  If it is less than $166.66 per month, you have overcome the presumption of abuse, and should be able to file a Chapter 7.  If you cannot overcome the presumption of abuse, you may be limited to a Chapter 13 with a payment plan over a 5 year period.

To get through the means test, your lawyer’s going to compare your income and your expenses.  Depending on your income level, that comparison takes different forms.

If your income during the 6 months immediately prior to filing for bankruptcy is below the state median income for a household of your size then we look at actual income and subtract reasonable expenses to determine the amount of disposable income available to pay creditors.

If, on the other hand, your income during the 6 months immediately prior to filing for bankruptcy is above the state median income for a household of your size then we look at your income and subtract expense standards used by the Internal Revenue Service to determine ability to pay delinquent taxes (not that you owe any taxes, it’s just the standards the U.S. Bankruptcy Court uses for these sorts of calculations).  Specifically, National Standards and Local Standards tables show allowed deductions and IRS collection guidelines explain how to apply the standards, though courts are unwilling to rely on the guidelines to interpret bankruptcy law.  These standard deductions could be more or less favorable than actual expenses incurred by a debtor.

One of the expense categories had to do with automobiles.  Car expenses are divided into two categories, one for ownership expenses associated with the vehicle, and one for operating expenses for the vehicle.  If you owned or leased a car you got a standard expense associated with operating it, and a second one for ownership.

The Supreme Court decided a recent case that cleared up our ability to deduct certain car-related expenses in our calculation of projected disposable income.  In Ransom vs FIA Card Services N.A. the Court decided a debtor has to have a loan or lease payment to be able to also deduct an ownership expense under those IRS standards.

But what Ransom clarified, it also left murky.

The ownership segment was designed to cover the cost of a lease or car finance payment, but even if you didn’t owe money on the car you could still take an additional $200 for car expenses if the vehicle was either more than six years old or had at least 75,000 miles.

This special expense didn’t appear on the books, but the IRS allowed it as a way to account for the fact that people who were driving around older cars probably had some extra expenses associated with keeping it road-worthy.

But now even that extra $200 expense isn’t uniformly accepted.

The Central District Bankruptcy Court of Illinois case of In re VanDyke rejected the supplemental $200 old car expense on the basis that the expense is not specifically part of the National or Local Standards as required by the Ransom decision.

But the U.S. Bankruptcy Court Montana disagreed in the case of In re Baker, holding the deduction as valid.  Noteworthy in the Illinois case is that the vehicle was inoperable, though the bankruptcy judge pointed out an allowance could be appropriate if debtor intended to repair the vehicle to running condition during the course of the bankruptcy case.

So will you be able to deduct that extra $200 for your old car?  It depends on where you live – and it may be a fight your bankruptcy lawyer will need to take on for you.

Image credit: Bogdan Suditu/Flickr