If you’re filing bankruptcy, then chances are you may may have taken out a payday loan recently, according to a “Do Payday Loans Cause Bankruptcy?” by Paige Marta Skiba of Vanderbilt Law School and Jeremy Tobacman from the University of Pennsylvania.

In theory, I have no problem with the concept of payday loans.  It’s nice to know that if you need some fast cash there’s a way to get it.  And  with the credit crunch, payday loans are a place people can still turn to in an emergency.  But note that I said “in theory.”  The reality of payday loans another story–and a sad one at that.

The Cost of Payday Loans is Astronomical

Many payday loans are about 18% for the term.  That doesn’t sound too bad, but consider this: the term is usually two weeks!  Since there are 52 weeks in a year, a simple estimate of the annual percentage ate (“APR”) would be at least 26 x 18%–or 468% (not including any late fees or any compounding of interest)!

Say Fred borrows $300 from Barney at 18%.  Assume further that every two weeks Barney adds a $15 late fee after every missed payment.  Now assume Fred isn’t able to pay Barney back in time, but he comes into $3000 6 months (26 weeks) after taking out the payday loan.  Does Fred have enough to pay his debt?

Here’s how the debt would be calculated:

2 weeks – $300 x 18% = $354 + $15 (late fee) = $369

1 month – $369 x 18% =  $435.42 + $15 = $450.42

3 months – $793.65 x 18% = $936.51 + $15 = $951.51

6 months – $2710.27 x 18% = $3198.12 + $15 = $3213.12

If Barney were a loan shark, Fred would have two broken legs right now. Ouch!

I know math is a harsh mistress, but I think I would give up my law practice and move to Maui if I could realize more than a 1000% return on my investments!

The authors of “Do Payday Loans Cause Bankruptcy?” claim that many payday lenders actually discourage their customers to pay on time.  The effect is a cycle of debt that is hard to escape leaving many with no alternative but to file bankruptcy.

It’s easy for those of us who don’t need to resort to payday loans to say “don’t do it.”  But the reality is that in this economy may folks find themselves between a rock and a hard place.  It’s a matter of getting the payday loan or eviction, or perhaps getting a payday loan or losing a car.

That Payday Loan is Like a Drug

But payday loans are financial heroin.  They result in the borrower being caught in a never-ending cycle of debt.  And having to borrow from a payday lender is a sure sign of financial problems.  If you’re caught in this trap, seek advice from a bankruptcy lawyer in your area who will evaluate your entire financial situation.

Bankruptcy may be the right choice for your situation if you’re caught in the payday loan trap.  After all, bankruptcy is about giving the “honest but unfortunate” debtor a fresh start.

Russell A. DeMott is a Charleston, South Carolina Bankruptcy Lawyer.

In part one, I discussed some recent Bankruptcy Law Network posts on reaffirmation agreements.  For part two, though, we’ll focus soley on the reality of a typical auto loan scenario.

Forget About the Law

“What?” you say.  “This site is all about the law!”  That’s true, but reality is more important.  The reality is that most debtors are upside down with their vehicles.  In car sales talk, that means they owe more than their vehicles are worth.

For example, say you owe $20,000 on your car, and your car is only worth only $16,000.  If your auto lender repossesses your car, it would be sold for around $10,000 at auction resulting in a $10,000 loss for the lender.  Talk about a bear trap!  Why would any auto lender ever repossess your vehicle if you are making timely payments?  The vast majority wouldn’t because if they did, they would guarantee themselves a loss of $10,000 plus more for repossession fees and storage costs.  And remember, they can’t come after you to collect this deficiency balance because you discharged it in your Chapter 7 bankruptcy case.

But if you reaffirm the debt with the lender, you’re still liable for that auto loan.  If you later can’t afford the vehicle, and it’s repossessed or voluntarily turned in, you’ll still be responsible for repaying that $10,000 loss even though you completed your bankruptcy case and got a discharge on all your other debts.  Now hopefully you see why Mark Buckley gets so much heartburn over reaffirmation agreements.  And many lawyers, including me, share his views on this issue.

But let’s say you’ve got an unusually stubborn auto lender–sometimes that happens, after all.  The lender insists that you reaffirm, or it will repossess the car.  So what!  You are upside down on the car anyway.  Let them have this one back, and go get another one!  The world is awash in used cars.  Yours isn’t the only one.  “But I’ve got bad credit now,” you say.  Again, I say, “so what!”  You’ll get a car loan.  You might need to buy a cheaper car, and you’ll pay higher interest, but you can get a decent car for $5,000 to $10,000.  Drive it for a couple of years and then get something nicer.

This means that in most situations YOU have the power, not the lender.  You need to understand this.  The reality is that you can tell the lender to “Eat Steel!”  Think long and hard before you sign a reaffirmation agreement.  Talk to your attorney about your options before taking this drastic step.

Russell A. DeMott is a Charleston, South Carolina bankruptcy attorney who helps people file Chapter 7 and Chapter 13 bankruptcy.

Reaffirmation agreements are the subject of great debate.  Secured creditors, like auto lenders, want you to sign them if you file Chapter 7 bankruptcy.  Reaffirmation agreements prevent debt from being discharged, and lenders like that.  But because your discharge is the Holy Grail of the bankruptcy process, you need to weigh your options very carefully before signing a reaffirmation agreement.

Recent BLN Posts on Reaffirmation

Recently, we’ve had several posts here on Bankruptcy Law Network about reaffirmation agreements.  My colleague, David Liebowitz, outlined the reaffirmation process in his post, “Why Do I Have to Reaffirm My Car Loan?”  Craig Andresen posted, “Retain and Pay Rejected by Appeals Court,” in which he discussed a recent decision by the 4th Circuit Court of Appeals.  Mark Buckley posted, “Why Would I Ever Sign a Reaffirmation Agreement?”  And Jed Berliner posted, “Do Not Reaffirm in Massachusetts If Current,” which tells debtors in that state that there’s simply no reason to reaffirm any debt.

The Law Interpreting Reaffirmation Agreements is Different from State to State

If you talk to bankruptcy lawyers in different parts of the U.S., you’ll quickly discover reaffirmation agreements are treated very differently throughout the country.  The reaffirmation provisions of our new and greatly flawed Bankruptcy Code are inartfully drafted.  This has lead to a wide variety of interpretations and decisions based largely on the state in which your bankruptcy case is filed.

What Should You Do?  Reaffirm or Not?

All of the recent posts I’ve mentioned above are excellent, and if you are considering reaffirmation, you should take a look at all of them.  Mark Buckley raises some very good points about why you should decline to reaffirm.  As Mark points out, “signing [a reaffirmation agreement] is like putting your foot in a bear trap.”  It undoes the effect of your discharge as to that particular debt.

The law is important, and you should understand it.  But reality is more important.  In “Reaffirmation Agreements: ‘Let Them Eat Steel!’ (Part Two),” I’ll discuss the reality of your relationship with your auto lender.

Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer who helps people file Chapter 7 and Chapter 13 bankruptcy.

In part one, I examined why you should not repay mom prior to filing bankruptcy and discussed preferential transfers, or “preferences.”  In this post I’ll tell you about what options you have if you’ve already paid her back.  After all, much of what bankruptcy lawyers do is to provide solutions to these types of problems if we’re told about the problems in time to do something about them.

But What If I’ve Already Paid Her?

If you’ve already repaid mom during the one-year preference period, all isn’t lost.  Here are some possible ways to stop the trustee from pursuing the preference:

• First, if the payments are under $600, the trustee can’t sue mom for the payments, the preference falls within the “small preference” exception.  Also, if the payments are $600 or more, but not that much–say not more than $1,500 or $2,000, the trustee still might decide not to bother with the transfer.  Trustees don’t like administering bankruptcy estates where the asset values don’t justify the cost and effort of administration.
• Second, those payments may be “ordinary course” payments.  In other words, it’s normal in both mom’s financial affairs and yours for her to loan you money, and you’ve paid her back according to your agreed upon terms.  This is called the “ordinary course of business” defense.
• Third, perhaps mom gave “new value” in exchange for the payment.  For example, she made another loan or gave you something else of value in return.
• Fourth, if the preference occurred close to a year prior to the time in which you plan on filing your bankruptcy, you can simply wait out the year.  Sometimes, there’s really no rush to file your bankruptcy case.  If not, just wait to file it.  If more than a year goes by, mom’s in the clear.
• Fifth, undo the transfer by having mom refund the money.  This, however, creates another problem.  You must be able to exempt the money you now have.  (Exemptions are allotments of various types of property you can keep free of the claims of creditors and the bankruptcy trustee.)  If you can exempt the refunded money, you may repay mom after your case is over.

Despite all these strategies for dealing with preferential transfers to mom, it’s far better to simply wait until after your bankruptcy case is over to repay her.  It’ll feel odd, but it’s the way to keep mom from being unnecessarily drawn into your bankruptcy case.

All this illustrates the need to tell your lawyer everything.  You’ve heard about this over and over again here at Bankruptcy Law Network. And for good reason.

Russell A. DeMott is a Charleston, South Carolina bankruptcy Lawyer who helps clients file Chapter 7 and Chapter 13 bankruptcy.

But I Love My Mother!

I know you love your mother. I love mine, too. But if you’re in financial trouble, the best way to show her that you love her is to not pay her back–that is, until after your bankruptcy.

Bankruptcy law can be counter intuitive. You think something’s logical. It makes sense to you.  But here comes the Bankruptcy Code, and the apple cart just got overturned.

Anyone wants to make sure mom gets repaid. That’s understandable. But while you call her mom, the Bankruptcy Code calls her an “insider.”  I don’t know about you, but this reminds me of securities fraud–”insider trading.” This conjures up images of slick guys on Wall Street being led away in handcuffs for illegally profiting from “insider” information.

Relax. We’re not talking about that kind of insider. You don’t have to picture your mom in handcuffs, so banish that thought.

Mom’s an “Insider” under the Bankruptcy Code

What I’m talking about is the Bankruptcy Code’s definition of an insider, which includes a “relative of the debtor.” 11 U.S.C. § 101(31). Because mom’s related to you, she’s specifically covered under this definition.

Mom’s Insider Status Matters with Preferences

Just as the term “insider” is a defined term in the Bankruptcy Code, so too, the Code tells us a “preference” occurs when:

• the debtor transfers something “to or for the benefit of a creditor;”
• for a debt “owed by the debtor before [the] transfer was made;”
• “made while the debtor was insolvent” (that is, the debtor’s debts were greater than his assets);
• made within 90 days of bankruptcy, or, if an insider receives the transfer, within one year of bankruptcy; and
• the transfer “enables [the] creditor to receive more than [the] creditor would have received” (1) in a Chapter 7 case, (2) than “if the transfer had not been made,” and (3) “the creditor received payment of such debt to the extent provided  in the [Bankruptcy Code].”

Huh?  Give it to me in Plain English!

Here’s what the Bankruptcy Code’s all riled up about. Generally speaking, the idea is that creditors of the same type–called “class”–should be treated the same.  Because of this the Bankruptcy Code looks back anywhere from 90 days to one year for preferential transfers or “preferences.” The drafters of the Bankruptcy Code knew that a debtor would rather pay mom than other creditors like VISA, MasterCard, and Discover. Who wouldn’t, after all? There are no late fees with mom. No universal default.  Mom would never arbitrarily change your interest rate. Mom’s on the up and up. Credit card issuers, well, not so much. And, after all, she’s mom.

So the bankruptcy trustee will examine any debts repaid during the preference period. If the trustee believes a preference occurred and there are no defenses, the trustee can sue the person or entity who received the payments. Yes, this means mom!

Because of these rules, you should show mom the love she deserves by holding off on those payments. You can always pay her back after your bankruptcy case is over.

In “Show Mom How Much You Love Her by NOT Paying Her Back! (Part Two),” I’ll address what to do if you’ve already paid mom during the one-year preference period.

Russell A. DeMott is a Charleston, South Carolina bankruptcy attorney who helps clients file Chapter 7 and Chapter 13 bankruptcy.

In parts one and two, I discussed how (1) the definition of student loans is extremely broad, and (2) the history of how student loans have been come increasingly difficult to discharge.  In this post, I’ll address the predominant legal standard used by almost all bankruptcy courts to determine whether a debtor’s circumstances create an “undue hardship.”

The Brunner Test

In Brunner v. New York Higher Educ. Services, 831 F.2d 395 (2d Cir. 1987), the Second Circuit Court of Appeals held that undue hardship exists if:

(1)   The debtor can’t maintain, based on current income and expenses, a “minimal” standard of living if he repaid the student loans;

(2)   Other circumstances exist indicating that the debtor’s financial condition is likely to persist for a large portion of the student loan repayment period; and

(3)   The debtor has made a good faith effort to repay the student loans.

Actual decisions applying the Brunner test are varied, but at least one Circuit Court of Appeals has specifically held that a debtor need not be at poverty level to demonstrate that he was entitled to a discharge.  In re Hornsby, 144 F.3d 433 (6^th Cir. 1998).

When reviewing these cases, it’s clear that the outcome of each case is dependent on (1) the views of the particular judge assigned to your case—any judge has his biases or leanings, and (2) the unique facts of each case.  Individual circumstances, especially disabilities or misfortunes, weigh heavily in the court’s consideration.  Whether or not you qualify for a student loan discharge is highly dependent on what bankruptcy judge has been assigned to your case, as well where you live. Different circuit courts of appeal cover different states, and they have all decided student loan cases and added their own interpretation of the various factors involved in these cases.  So, for example, your case might come out differently if you live in Maryland instead of California.  You should seek experienced local bankruptcy counsel for assistance in deciding whether to ask for your student loans to be discharged.

You must file an adversary proceeding to ask for your student loans to be discharged

To request a discharge of student loans, you must bring an “adversary proceeding.” An adversary proceeding is a separate lawsuit in your underlying bankruptcy case.  You sue the student loan creditor just like you would in any other lawsuit.  The adversary proceeding may be brought at any time, even after your bankruptcy case is closed.

In “The Worst Kind of Debt You Can Have: Student Loans (Part Four)” I’ll address some other strategies for dealing with student loans.

Russell A. DeMott is a Charleston, South Carolina Bankruptcy Lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy.

Using good judgment and following instructions are essential to making your bankruptcy case a success.  Sometimes when I hear about some self-destructive things clients do, I can’t help but remember a line from “Tommy Boy,” one of my favorite movies.  You may recall that “Tommy Boy,” played by actor Chris Farley—God rest his troubled soul—was prone to accidents.  When he’d have one, he’d exclaim, “Now, that’s gonna leave a mark!”

It’s the same with your bankruptcy case.  Sometimes bad choices will really leave a mark on your case.  Here are a few examples of things you can do to really mess up your case.  (And these things have really happened!)

• You run up your credit cards prior to filing your bankruptcy and don’t tell your lawyer.
• You transfer property to your son “to avoid probate” and don’t tell your bankruptcy lawyer despite the fact that HE ASKED YOU ABOUT TRANSFERS BEFORE YOU FILED YOUR CASE.
• You decide not to make your ongoing mortgage payments in your Chapter 13 case because, after all, you had to give out Christmas gifts.
• You fail to file your tax returns.
• You fill out only a small part of the client questionnaire your bankruptcy lawyer gives you because you “didn’t understand it.”   (This can also result in higher attorneys fees because this tells your lawyer you can’t follow instructions.)
• You delay getting your case filed—month after month after month—because you can’t provide your bankruptcy lawyer with the basic information he needs to file your case.
• Because of your delay, your credit counseling certificate lapses.  It’s only good for 180 days.  It was a waste taking it in the first place, and now you’ll waste your time and money a second time–and it’ll cost you another $50.
• You don’t complete your debtor education course, despite being repeatedly reminded by your bankruptcy lawyer about it since before your case was filed.  Your case is closed without a discharge.
• You spend a post-petition bonus in your Chapter 13 for breast implants because you think it would “help your career.”
• You keep money in the bank account when you owe the bank money and your bankruptcy lawyer told you several times not to keep money in that bank account.  The bank, predictably, freezes your account (called “setoff”) just like your lawyer said the bank would.
• You decide not to read the list your bankruptcy lawyer gives you with all the things you should not do when you file bankruptcy.
• You lie on your bankruptcy schedules about how much money you have.  You hide $13,000 and have not told your bankruptcy lawyer about it.  You then, just after you file your case, put the $13,000 in your bank account—of all places!—so that when the trustee asks for bank statements, she sees the money you lied about.  You then lose your discharge and now wonder if you’ll be indicted for perjury.
• You file a Chapter 13 without disclosing real estate you own.  (That is, you lie on your schedules and commit perjury.)  You then sell the property and net $60,000.  You then call trustee’s office and ask for a payoff amount on your Chapter 13 plan and tell the trustee why you’re asking (“because I just sold some property you don’t know about for $60,000.”)
• You don’t list your personal injury case on your schedules until after the case settles and after you spent the money on things like “cosmetic dentistry” and “cosmetic surgery for girlfriend.”
• You don’t provide your bankruptcy lawyer with information he needs to file your case when your foreclosure sale is coming up—tomorrow!
• You suddenly remember things the trustee asks about at your bankruptcy hearing when YOUR ATTORNEY ALREADY ASKED YOU THESE QUESTIONS!

You may think I’m being insensitive to those with financial problems.  Not true.  I am a bankruptcy lawyer because I enjoy helping people with financial problems.  I really believe that financial problems can happen to anyone.  I don’t look down on those who have to file bankruptcy.  I don’t judge them.  I like my clients, and any bankruptcy lawyer I’ve met feels the same way.   But, as Tommy Boy would say, “Holy Schnikees!”  We want to help our clients.  Help us help you! Don’t needlessly make your case more difficult than it already is.

Russell A. DeMott is a Charleston, South Carolina Bankruptcy Lawyer who helps people file Chapter 7 and Chapter 13 Bankruptcy.

If you don’t know who Harvard Law School Professor Elizabeth Warren is, you should. She’s a plain-speaking champion of the American consumer and a noted authority on bankruptcy law.

Jon Stewart recently hosted her as a guest on “The Daily Show.”  In addition to being funny, this interview is highly informative. Once you know something about the history of financial regulation, you understand why we are, as one commentator said, the “United States of Amnesia.” We have a financial crisis, impose regulation so we won’t have it again, forget about the financial crisis, deregulate, and have another crisis.  I hope you enjoy the video clip.  To watch it, just click on “Elizabeth Warren.”  And after you watch it, if you have the urge to kiss Professor Warren, well, get in line.

Russell A. DeMott is a Charleston Bankruptcy Lawyer who helps people file Chapter 7 and Chapter 13 bankruptcy.

Tax refunds are property of your bankruptcy estate.  There are two times of the year this can be especially problematic.

During Tax Season

During tax refund season–the first four months or so of the year–you may be entitled to a tax refund.  If you are getting a refund, you want to be able to keep it.  This is called “exempting” the property.  That is, you want to be able to claim the refund as property you may keep.  Most exemption statutes—either the federal exemptions or your state’s—are fair and allow a certain amount of your refund to be kept.  However, using your exemptions on your tax refund may limit your ability to use the exemptions to protect other property, such as bank accounts, equity in vehicles, and jewelry, just to name a few.

Important: If you are getting a refund, do your best to determine the amount of the refund, both state and federal.  If this causes problems with your exemptions, you may simply decide to wait to file until after you have received the refund and spent it.  For example, you may have mortgage payments due, clothing needs, school expenses, medical expenses, car repairs, or other necessary expenses.  Using the refund for these purposes is allowable.  If you have any doubt about whether a particular expenditure is appropriate, be sure to discuss this with your bankruptcy attorney.

During the Last Quarter of the Previous Year

Refunds can also cause problems during the last quarter of the year (October through December).  If, for example, you have been having large amounts withheld from your paycheck, the refund attributable to the part of the year prior to your bankruptcy filing is an asset of the estate.   For example, if you file bankruptcy on November 15 and have too much withheld in taxes (say an additional $2000 more than you’d owe up to that point), the overpayment—$2,000 in our example—is an asset of the estate.  To avoid this second type of tax refund problem, you need to adjust your tax withholding to a significantly lower amount.  Find out how much you must have withheld to eliminate any refund.

This also makes sense from a financial planning standpoint.  I have never heard a financial planner suggest you should overpay withholding and allow the government to use your money interest-free for a year.

Important: Make sure you are not having excessive amounts withheld from your paychecks.  Seek assistance from a tax professional to determine the appropriate amount you should have withheld to minimize your tax refunds.

Russell A. DeMott is a Charleston, South Carolina Bankruptcy Lawyer who helps people file Chapter 7 and Chapter 13 bankruptcy.

Cash and bank accounts (checking, savings, CDs) are property of your bankruptcy estate.  You must provide your bankruptcy attorney with exact bank balances as of the date of your bankruptcy filing for all bank accounts.  You can obtain this information over the Internet by logging into your account or by calling the bank.  Knowing these balances is vitally important to being able to keep all the property to which you are entitled.

When you calculate your balances, you should be aware that although you may have written checks against this account, until those checks clear, they do not reduce the balance in your account.  The actual balance in your account is the balance that you must list on your bankruptcy schedules.  For example, if your check register shows $37 in your account because you have written several checks the day before you filed, then $37 is not the balance of your account.  The balance of your account will include all funds as of the day of your filing, regardless of whether checks are outstanding.  Put simply, your balance is what your bank says it is.

In some cases bank balances are not very important.  However, as a general rule, it is a good idea to have your bank balances as low as possible.  You can do this by paying all of your normal monthly bills (utility bills, car payments, mortgage payments, and any other normal monthly expenses such as groceries).  You are allowed to keep a certain amount of property.  The property you are allowed to keep is provided for in the exemption statute applicable to your case.  (That may be the Bankruptcy Code or your state’s statute, depending where you live.)  The higher your bank balances, the fewer exemptions you will have left for other property such as tax refunds and vehicles.  Note that I said you should pay normal monthly bills.  This does not mean you should pay your mortgage ahead six months or pay your mom back for that money she loaned you.  If in doubt about what you should pay, you should contact your bankruptcy attorney.

Important: Simply withdrawing the cash does not help the situation.  Withdrawing cash just means that we must list money that was in your bank account as “cash” on your schedules.  The money needs to be spent on legitimate, normal living expenses as discussed above.  Furthermore, lying on your bankruptcy schedules is a big “no no.”  Lying to the court can lead to a denial of your discharge and, more importantly, it’s a felony.  Losing your discharge and going to prison would be a bad outcome to your bankruptcy case.

Think of your property exemptions as a valuable commodity.  Exemptions are important and deserve your full attention.  Carefully planning on how you will use your exemptions is important in almost any bankruptcy case.

Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer representing debtors in Chapter 7 and Chapter 13 bankruptcy.