When credit card debt goes bad, banks sometimes sell it to vulture investors at a steep discount.  The vulture debt buyer then often tries to sue on the account to collect more than they paid.   And their lawsuits are often the final straw forcing folks bankruptcy, where the debt buyer usually wants a share of any repayment too.

Buying bad — “distressed” — debt is a large, highly automated and risky business.  The debt buyers pay very little and get very little information about the account history, the borrowers, and how the balances are calculated.  And consumers are encouraged to take on faith that the balance was calculated properly — and that the debt buyer is really the owner of the account.  Debt buyers would prefer that courts accept their word of honor too.

The Missouri Supreme Court recently disagreed though.  The Court ruled that a debt buyer had to be able to properly prove it owned an account before it could try to sue to collect the debt.  In effect, it ruled that the court is not simply an extension of the collection process — it is an independent arbiter where a case must be proven, not presumed.

That would seem like a simple idea, right?  How can you sue over a loan if you can’t prove you are the one owed any money?  It’s a simple idea at the heart of all court cases.  It’s called “standing,” which comes from the old idea that you have to have a right to “stand” in court to ask for help from a judge.  Standing is so fundamental that federal rules (based on the Constitution) as well as Missouri law say that a party’s standing to be in court is always subject to review by the court and cannot be waived by another party.

In the 2012 Missouri case, the court ruled that a debt buyer had to be able to provide testimony from the original lender how the records of the account and transfer to the final alleged owner were prepared.  In other words, they could rely on business records from other companies — but those companies needed to provide witnesses to testify how those records were created and kept in order to use them in court.  The debt buyer couldn’t simply use its own record-keepers — even if they knew how the bank usually did its work — to “authenticate” another company’s records.

This should not be hard to understand.  I can’t testify from first-hand knowledge how my neighbor balances his checkbook unless I sat there and watched him do it.   I might know he’s an accountant and very careful and, in my opinion, would not lie.  But how do I know how he did the math last week?

It would be surprising if any court let me testify about something like that.  But judges sometimes see complicated business records like credit card account sales deals and assume everything was proper, and forget that they should not assume anything.  In the case of debt buyers who are not original lenders, a “bill of sale” of a huge list of accounts  does not prove standing to be in their courtrooms asking for the time of day.

The problem here is identical to the problem of “robo-signing” and fraudulent or non-existent mortgage foreclosure documents.  The mortgage industry is simply a variety of debt buyer.  Most of the mortgage loans are not owned by  the original lender and proving that they own the loan and have the right — standing — to enforce it is how they got into so much trouble in the last couple years.

All of this begs the question how some courts can allow debt buyers to have claims in a bankruptcy case, or prosecute motions for relief from stay, if they can’t prove ownership of the loans.  Some courts have asserted that the debtor putting this information on their schedules amounts to admission they owe the money.  The state supreme court concluded that standing can’t be granted by a party but is fundamental to invoke the courts’ power.  So it remains to be seen if more bankruptcy courts will take up concerns about standing in the future.

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Why would anyone take out an Internet payday loan?  Bankruptcy lawyers scream this out loud at least once a week.  It tends to frighten the neighbors.

Small, high interest loans are often the last gasp effort folks use to make payments on other debt (like mortgage or car loans) — before they give in and call a bankruptcy lawyer for help.  They’re the proverbial “last straw.”  But they also can make your life a living hell — and cleaning up your finances a nightmare.

“Payday loans” are basically high interest small loans — $3-500 often — where the borrower promises to pay the loan off in a short period of time, often when their next payday comes.  In local offices, it’s usually “secured” by a post-dated check.  Over the Internet, you agree in advance to have the payment plus interest deducted electronically from your bank account.

Post-dated checks are bad enough — bankruptcy law allows them to be cashed even after you file a case.  But giving out your bank account information to a website and authorizing that faceless site to deduct money from your account?  Your mother didn’t raise you right, if that doesn’t worry you.

If you take out a loan from a store down the street, you know how to find them.  Do you know how to find the lender you take out an Internet loan from?  Sure, in some cases the website is just another outlet for a business that has actual street addresses and phone numbers. You can see them on the website and you can find their business registered in their respective states.  That is a lender trying to play by the rules.

But often the Internet lender has no physical location mentioned anywhere on the website — and their website ownership and registration is masked behind privacy services too.   It turns out quite a few of these are offshore, outside the United States often theoretically existing in places like Malta or Caribbean island countries, which offer drop box address services so it becomes almost impossible to locate a person or business.  They are corporate phantoms that infest the Web, obeying only the laws of the most convenient forum, if even those.

And you would like to take a loan out from them?  And give them access to your bank account?   It’s like giving your bank account a financial virus.

When you file bankruptcy, it’s even harder to deal with them.  I spend a lot of time trying to find anything like a valid address for these companies to send written notices.  Or FAX them.  Or, sometimes, to even e-mail them information to stop collecting debts.  Of course, if I do track them down and give them notice and they ignore it, what can I do?  Sue them?  That’s hard without anyone I can actually serve papers to — and even harder to collect from them when I win.

It means, effectively, they obey bankruptcy law only if they feel like it.

Most states regulate — more or less — small lenders like these.  They often have very liberal rules allowing them to get away with lending terms that make a loan shark blush.  But at least they’re here and we can find them.

Borrowing from “some guy” who registered a business last month on the Island of Lost Dreams, and built a payday loan webpage — and wants to keep his name, address and phone number out of this?  And giving him all of your most personal financial information?  How crazy does that sound?

It’s a business that should not even exist if people did not go a little crazy when they’re desperate for money.  That it is thriving and there are (at least) thousands of these websites tells you a lot about economic desperation these days.

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Getting compensated for injuries is personal.  It’s meant to replace a loss to you as a person.  Missouri exemption law recognizes that.  Yet the recent evolution of those exemptions in bankruptcy (here, here, and here) has set up an unusual conflict between state and federal law.

Until the Benn decision discussed previously, Missouri cases were uniform in saying that Missouri law protected an unliquidated personal injury claim from creditors — and from bankruptcy trustees.

In the modern era, the cases trace back to Judge Barry Schermer’s In re Mitchell decision in 1987.  Mitchell reasoned that the state never allowed trafficking in the injury claims of individuals under its common law.  And by implication, the “opt out” law (noted in part I of this series) incorporated the common law of Missouri into the arsenal of bankruptcy exemptions.

But in the Mahony case, Judge Arthur Federman found this long history was not sufficient to withstand the implications of the 8th Circuit’s Benn.  He reasoned that Benn commanded that a separate legislative act — a statute — was required for the state to provide a protection of any asset in bankruptcy.  So the common law — being created by the decision of a judge — was not enough to qualify.

Mahony is remarkable since most personal injury claims are common law (e.g. auto accidents are based on negligence) “created” by judges.  So while Missouri judges can create a cause of action, under Mahony the protection of that personal compensation from creditors afforded by those judges throughout our history turns out to be irrelevant, if you file bankruptcy.

Ironically of course  Western legal tradition holds that decisions of judges carry the force of law — unless the legislature itself acts to abrogate or reverse the decisions of the judges.  And this is true for Missouri as well.

One can search in vain through the Bankruptcy Code to find the authority for federal courts to dictate to state lawmakers what is a “law.”   Section 522 allows states to “opt out” of federal exemptions and enact their own but it does not tell the states how to do so.  Such requirements appear to be grafted into the Code.  Not by Congress but by federal… common law.

Despite all the fallout, common law exemptions or “magic words” of enactment were not at the heart of the Benn decision.  These elements appear more speculative than decisive — as witnessed by Benn‘s dictum apparently striking down of the state wildcard exemptions — including the idea that the legislature “might” have intended to create two different exemption schemes for debtors in or outside bankruptcy proceedings.  As lawyers say, it’s more dicta than holding.

Recently the Missouri state court of appeals was given the opportunity to express its opinion on the subject.  In Russell v. Healthmont of Missouri, a debtor asked the state court to declare his right to exempt a PI claim when he filed bankruptcy.  The court reiterated some of the cases finding we have always protected such claims and then confronted the Benn and Mahony decisions.  It pointed out, “Of course, federal cases interpreting Missouri law are not binding on this court interpreting our own statute.” (internal quotes omitted) The Russell panel went on to hold:

Under Missouri law, an unliquidated, personal injury claim can, if the proper procedures are followed and conditions satisfied, be exempted from his bankruptcy estate pursuant to Sec. 513.427 [the opt out law].  the trial court erred in relying upon federal cases interpreting a Missouri statute in a manner contrary to that of established Missouri case law…(slip opinion p. 6)

So eventually it will have to come to this.  It seems clear that state courts, interpreting their own law, do not believe a specific legislative act, much less any “magic words,” are needed to create an exemption for Missourians in bankruptcy.  And they seem to believe that “common law” is still “the law of the state of Missouri” and can qualify as an exemption.

But state judges do not rule in federal court buildings.  So will federal courts graft onto Sec. 522 a narrow linguistic and enactment standard that has not heretofore been found in it, particularly when it restricts the ability of states to craft their own exemption rules for their bankruptcy debtors?  Or will they find a more balanced approach that sustains the core (reasonable) holding of Benn while restoring the authority of Missouri courts to define what Missouri law is?  Time will tell.

Photo credit: Stig Nygaard

In the on-going saga of Missouri bankruptcy exemptions, some apparently-settled debtor protections have recently been destabilized.  And this caused an apparent split among bankruptcy judges on at least some of these protections.

Recently, this on-going evolution visited the daily wages of consumers.  Missouri has a law which protects a large portion of an individual’s income from her own services from collection by creditors, often called the “wage” exemption.  It is similar to a federal law which sets the outside maximum a creditor can garnish from personal income.

In years past, the U.S. Supreme Court has held that the federal law is not intended as an exemption in a bankruptcy case.  And some states have followed this as to their own “wage” protection laws.

But as we know, states can  make their own laws about exemptions to be used in bankruptcy.  And Missouri has opted to go the other way.

Beginning 22 years ago in bankruptcy court with In re Sanders, 69 B.R. 569 (Bankr.E.D.Mo.  1989), Missouri courts began recognizing this statute as a protection for earnings still owed to a debtor.  The Court of Appeals accepted this principle in In re Wallerstedt, 930 F.2d 630 (8th Cir. 1991) and In re Parsons, 280 F.3d 1185 (8th Cir 2002)  — while rejecting it in application in those cases.  These courts consistently held or applied it as a bankruptcy exemption. There does not appear to have ever been a contrary state court decision.

The rule itself provides that an amount owed to a person as compensation for her own labor or “personal services” are protected up to 75% or up to 90% if the person is the financial head of a family.

In 2009, in In re Garst, Judge Venters in Kansas City examined the statute and concluded that the wage exemption would apply to funds on deposit in a bank account, if they could be traced to personal earnings.  This was because the statute used the term “paid or payable” which is identical to Social Security protections – and generally interpreted to mean that the protection follows the money.

But in 2010, Judge Surratt-States in Eastern Missouri declined to follow the Garst logic, she concluded that the wage protection statute was not an exemption at all, in light of  Benn.  In Parsons (unrelated to the prior circuit case) the court disregarded the pre-Benn decisions applying the  wage statute as an exemption in bankruptcy because Benn entitles the individual to only those statutory enactments which explicitly state they are intended as exemptions.

In effect, Parsons puts every Missouri exemption — even if applied as an exemption for many years and supported by prior case law — to a challenge now.   It concludes there is a federally-mandated definition of “exemption” for bankruptcy purposes.  The origin of this federal mandate appears to be federal common law, not the Bankruptcy Code itself.

The potential here is that many long-accepted Missouri exemptions would seem to be “in play”  in light of the Nathan Smith and Parsons application of Benn.

One other common exemption has also been stuck down by some judges under the same theories described in this series — but this has also provoked the beginnings of a re-examination as well, as we shall see in the next installment.

In the previous installment, we discussed the 8th Circuit’s Benn decision which began a sea change in Missouri bankruptcy exemptions.

To see how Benn‘s unusual opinion created  uncertainty in Missouri bankruptcies, one need look no further than our state teacher pension plans.  Prior to 2010, almost no one seriously imagined a state employee’s pension plan would be unprotected in bankruptcy.  Well-established pensions are like battleships, with layer after layer of armor protecting them from creditors typically.  And no single attack can get through.

In Missouri the pension plan law itself provides protection:

Neither the funds belonging to the retirement system nor any benefit accrued or accruing to any person…shall be subject to execution, garnishment, attachment or any other process whatsoever, nor shall they be assignable….  (169.090 RSMo.)

Yet Bankruptcy Judge Arthur Federman of the Western District of Missouri applied Benn and found Missouri’s laws wanting.  He reasoned Benn‘s reading of the Bankruptcy Code command that the state’s lawmakers use precise language — “magic words” in lawyer parlance — in order for a law to be an exemption in bankruptcy cases.

Benn said:

“Exemption” is a term of art in bankruptcy, and we agree with the dissenting judge of the BAP that “[w]hile exemption may mean different things in different contexts, in the context of Sec. 522, it refers to laws enacted by the legislative branch which explicitly identify property [that] judgment-debtors can keep away from creditors for reasons of public policy. (Benn at 814)

It is interesting to note however that the Bankruptcy Code itself does not actually define the word “exemption” but only defines how (and from what sources of law) a debtor may “exempt” property from the estate.

Judge Federman’s In re Nathan Smith opinion argues that the legislature enacted specific exemption laws for other pension plans but the teacher pension at issue did not use the magic word “exempt.”  And further the judge could find no legislative history to indicate the Missouri General Assembly intended to protect the pensions in bankruptcy cases.  (The lack of evidence is not surprising as the Missouri legislature does not maintain legislative history, though.)

Before any Missouri teacher panics, even Judge Federman acknowledges in a final footnote that there are other means than the statute at issue to preserve the pension in bankruptcy.  But he did expand on the dictum in the Benn decision and conclude that Missouri in fact does have a separate system of protections for consumers, inside or outside of bankruptcy, because the 8th Circuit “was quite clear that, in order to create an exemption in bankruptcy, the Missouri legislature must use that word [exemption].”

So prior to Benn, the laws of exemptions had generally been interpreted expansively to benefit the debtor because bankruptcy is considered a remedial process to help debtors obtain a fresh start. Indeed, prior to Benn, this same statute had been upheld as a bankruptcy exemption in In re Olson, 108 B.R. 232 (Bankr.W.D.Mo. 1989).  Indeed, the ruling seems to presuppose that the pension plan was even property of the estate, which seems unlikely under the Supreme Court’s 1992 Patterson v. Shumate decision.

Yet after Benn, the law of exemption became a narrowly-defined process.  In the next installment, we’ll discuss other issues created and then how things may recover in the future.

Sometimes a  strategy causes more harm than good.  Many long-accepted Missouri bankruptcy exemptions have become uncertain or been lost due to one such case.  This is the story of how one strategy blew up to create dangerous  uncertainty for consumers.

Bankruptcy exemptions dictate what stuff is protected from a bankruptcy trustee.  As allowed by federal law, Missouri has “opted out” and require debtors to use only its bankruptcy exemptions when they file.

In most places, the “opt out” is a simple law.  And Missouri’s “opt out” simply says a debtor can protect “any property that is exempt from attachment and execution under the law of the state of Missouri…”

This language seems simple and caused no trouble for over 25 years when it came to Missouri bankruptcy exemptions.  But some felt that “exempt from attachment and execution” meant any property that could not be attacked via the exact technical process of “attachment and execution.”

Specifically, income tax refunds not yet received because a creditor cannot “attach” a tax refund in Missouri — even though some creditors could get at them in other ways.

The reading, if it prevailed, would benefit consumers when determining their bankruptcy exemptions.  But the strategy would allow attorneys to file cases in Missouri without any concern about large tax refunds coming in soon.  That in turn would streamline bankruptcy practice and avoid a major exemption issue we all deal with each Winter and Spring.

It would also take a regular source of assets away, frustrating bankruptcy trustees and creditors alike.

Ultimately the question reached the federal Eighth Circuit Court of Appeals in In re Benn in 2007.  The circuit concluded that the bankruptcy exemptions could not be used to protect tax refunds under the “opt out” law, Sec. 513.427 RSMo.

In essence, the circuit reasoned that the words “from attachment and execution” should not be read separately from the word “exemption.”  Reading it as a whole, it implied that the “opt out” law requires a separate Missouri law that would protect the property.  Essentially, “exempt” was crucial while “attachment and execution” was not.

This was actually the prevailing wisdom concerning bankruptcy exemptions.  Unfortunately, the Benn court went on to reach additional conclusions — which seems to be dicta — that played havoc in consumer Missouri bankruptcy cases ever since.  It is not clear the implications of the additional Benn comments were intended, though.  For example, Benn says

[The opt out law] does not create an exemption for tax refunds, and no other Missouri statute or non-bankruptcy federal exemption statute permits a debtor to exempt tax refunds from the bankruptcy estate.

Missouri does provide “wildcards” (e.g. 513.430.1(3) RSMo.) which are bankruptcy exemptions for any property the consumer chooses and has always been allowed for refunds.  Yet a literal reading of this Benn dictum means the Missouri wildcards have been struck down (at least as used for refunds).

It’s clear Benn did not really intend to disallow exemption wildcards.  And no bankruptcy court has so ruled as yet.  But a strict obedience to every phrase in Benn would result in no exemption for any tax refund in the future.  And some courts have gone some way down this road in following other Benn dicta, as we will see in the next installment.

Image credit:  Thomas Hawk

The U.S. economy needs a stimulus.  Many American households would be better served by filing bankruptcy to free-up some income to support their family, rather than waiting for Congress or the banks to help move us forward.

It doesn’t sound right, does it?  You file bankruptcy to help the economy?

But right now, President Obama is pursuing a continuation of a payroll tax cut which works out to approx. 2% from the average person’s paycheck.  That’s roughly $1,000 a year of extra income left in the median household’s paycheck.  Nothing to sneeze at of course.  And in middle and lower income families, that money will be spent to help keep everyone afloat — stimulating the economy!

But I can do better than the President for quite a few of those families.   The median family currently spends twice that much in consumer, non-mortgage debt service.   So the median household’s bankruptcy filing, all other things being equal, has a decent chance of freeing up even more money each day and each year than the payroll tax holiday will. Instead of spending several more years living on the edge while you try to payoff the credit cards and payday loans, just get rid of them.

To the extent that debt is discharged through bankruptcy instead of being repaid, there is a loss caused, primarily to the largest banks in this country.  However, in theory, these banks are in much better shape than they were 3 years ago.  In fact, a problem we have right now is that the banks have money but either will not lend it out or can’t find viable borrowers.

So instead of continuing to recapitalize the already-well-capitalized banks, who won’t or can’t re-lend that money to consumers or businesses, consumers could cut out the middle man.  Take the extra couple hundred a month currently being spent to pay off credit cards and, instead, fix the car.  Fix up the leaky roof.  Buy the kids new clothes.  Do it with cash, not on credit.  And, yes, save for a rainy day too (maybe the bank will find some borrowers for the money!).

Obviously this prescription is not for everyone.  Your mileage may vary.  But it’s important that folks not simply consider consumer bankruptcy in the context of individual cases but also of its place in society.  Individuals are still too highly leveraged.  They are trying to pay down debt.  And especially by giving up houses they can’t afford, some are making dramatic changes in their leverage.

But a consumer-driven economy ultimately needs the consumers to come back — and not driven by overspending on credit.  So starting over fresh and using current income to meet current needs could be a jump-start for more than just the individual debtor.

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As outlined in earlier segments of this series, bankruptcy law primarily comes from federal and state laws.   But critical parts also are based on rules written by the court system itself.

The laws that Congress enact are typically broad definitions of rights and responsibilities.  Congress will often leave the specific procedures of how the broad law is actually executed day-to-day to the courts to define.   In turn, the court system has created a detailed set of standard Rules which apply to all bankruptcy cases.

Some of these procedures can be very critical to the people involved.  For example, Congress decreed that some of your property can be protected — exempted — from creditors in a bankruptcy case.  By doing so, that property can be taken out of the reach of creditors.   But how you do that in the case — for example how you “claim” an exemption — is not carefully described in the law.  Generally, neither is the time frame for anyone to object to it.  So the federal court system has prescribed rules for how to claim an exemption, as well as when and how to object.  Failing to follow these rules can mean either side loses their rights under the law itself.

In other words, the national rules of bankruptcy procedure  can have the effect of making or breaking your rights.  The court system doesn’t work in a vacuum here.  It is empowered by Congress to enact these rules, through committees, subcommittees, and more committees.  (Lawyers naturally form committees the way fish form schools, after all.)   The public can make recommendations for rules (I recently submitted a minor suggestion on-line, for example).  Proposed rules are made public for comments (and often revised as a result).  They are ultimately approved by the Supreme Court and become final rules — if Congress does not act to reject them.

Ironically, it can take longer to modify the Rules than to change the entire Bankruptcy Code.  So, as happened in 2005, Congress can pass a law that becomes effective immediately or at some later date — and all the existing Rules are suddenly out-of-date.  It can take several years for the court system to catch-up.  In such cases judges hold that the law itself — as passed by Congress — will always “control” over a conflicting procedural rule set up by the courts.  After all, Congress is elected and the courts are not.

So although you can know generally the way bankruptcy works from the federal and state laws that make up its structure, the rules written by the courts are what hold it together on a day-to-day basis.  In other words, the laws are the bricks; the rules are the mortar.  You have to have all the parts for the house to stay standing.

When you file Chapter 7 bankruptcy, one option you have is to reaffirm your mortgage.  Do you have to reaffirm in order to refinance later?  Of course not, but your lender may try to tell you otherwise.

Other articles here discuss the actual process of reaffirming a debt.  And the pros and cons of doing so.  But as the mortgage market begins to unfreeze (slightly) these days, we are again hearing an old lie from mortgage servicers and mortgage salesmen (er, “mortgage bankers”):  You have to reaffirm your mortgage or you can’t refinance it.

This is completely untrue.  Reaffirming a debt makes you personally liable for the debt.  It puts you at risk for a deficiency claim, if you don’t pay the debt.  But if you did not reaffirm, the mortgage did not disappear, it is still a lien on your house.  It is still owed and must be paid unless you are willing to risk losing the property.  The mortgage company — the servicer — virtually always wants you to make these payments.  And they often don’t care about the reaffirmation and will not waste their time (and your money) asking for it during the bankruptcy case.

So why do they later on claim you can’t refinance since you didn’t reaffirm?  There are different explanations I’ve been given, some simple, some bizarre, some bizarrely stupid.  The problem is compounded by a new generation of loan salesmen (er, loan officers) who have little experience with this process.

A common problem is that your new loan officer can’t “see” the mortgage on your credit report.  So you can’t refinance what doesn’t exist, right?  This is from the school of “credit reports are written by God” logic.  Mortgage brokers at times appear to believe with fatal absoluteness in credit reports as holy writ and have a tendency towards nervous breakdowns if the data on a report is misleading or incomplete.  That’s a bad habit, if you’re a mortgage seller.

Occasionally, the problem is related to reaffirmation but not a legal issue.  If you do not reaffirm, the payment history after bankruptcy may not appear on your credit report.  That can make it more difficult to prove you are a good credit risk.  It can make rebuilding your FICO score harder — unless you make a lot of late payments of course.  But it is possible to get copies of your payment history from the mortgage company and a decent broker can use those to try to convince their loan underwriters to reconsider a lower FICO score problem.  This can be an issue but there are other ways to rebuild credit without reaffirming large debts like a mortgage.

Sometimes the problem is muleheadedness at the mortgage servicer’s office.  It’s easier to refuse to provide a payoff to a new lender than to provide it.  And, lo and behold!, these good customers did not reaffirm in their bankruptcy last year.  There’s an excuse — tell the broker to go away, there’s no “debt” because there was no reaffirmation.  (Remember customer service reps are sometimes docked for spending too much time on the phone with you — so finding a way not to do the job is a survival skill.)

And at times the mortgage servicer is misunderstanding the law.  They think they cannot provide billing or account information because someone will treat that as a demand for payment of the discharged debt.  And accepting the payoff by refinancing is the same problem.  Of course this is not true.  And they ought to realize it is untrue because the borrower has probably been making payments for awhile and they have been accepted.  And bills have been sent to them.  All without trouble.  But saying no is often easier than saying yes.

It is also possible that some servicers simply do not want to have good performing accounts paid off.  If your loan is paying them more in interest and fees than they could make re-lending the money to another borrower, a lender may not really want you to refinance early.  If you are inclined to believe mortgage companies think about their investors and their own long-term financial interests with some care and planning, this would make sense.

On the other hand, very little in the last decade of American mortgage lending should make one really believe the industry does much long-term planning.  We can all hope that will change of course.  I’d like to look like Tom Cruise too.  But, as Dirty Harry once said, “A man’s got to know his limitations.”

Bankruptcy is about providing relief to folks who can’t really afford their debts anymore.  But we often hear from folks who have heard that Chapter 13 can’t help because they won’t have any money left over to live on.  Like many rumors, this one is usually not true.

Bankruptcy is one of the most common things in America today — that no one talks about.  More than a million households file every year.  And everyone keeps it a secret.  So when friends open up to each other about their case, it’s often to complain.  For example that their Chapter 13 payments are too high.  From then on, everyone “knows” that wage earner payment plans are too high.

Why would the payments be too high?  After all, Chapter 13 is meant to allow for payments you can afford based on your current income.  Yet sometimes the payment has to be more than your budget says you can afford — but that is often because of choices our clients make, not the law.

For example, Congress has not allowed us to modify most mortgages.  So if your monthly mortgage payment is too high for your current income, then no matter what else we can do with the payment plan, we can’t really fix the real problem — your house is too expensive for you now.  That’s a horrible reality a lot of people in Chapter 13 are dealing with but the only real solution is something they have chosen to not use — giving up the too-costly home.

Sometimes the problem relates to the kind of debt someone owes.  The law will generally require your plan to repay in full certain kinds of debt — priority claims.  In every day terms, that is taxes and back child support (or alimony).   Then it becomes a math problem — how much is owed divided by the amount of time the law allows the plan to go (max: five-years).  If that by itself is more than you can reasonably devote to the monthly payment, Chapter 13 might not be a great solution to your situation.  It might be the only useful one but this situation is far from routine.

Occasionally the problem is a failure to communicate.  Our office has plenty of clients who are paying back more than the absolute minimum in Chapter 13 because they can afford to.  Or that’s what we understood.  Every so often, a client will finally break down and tell me they’ve been getting by on unemployment for months — and I could have changed their payments to help out all along.   Plans can sometimes be changed after the court has approved them, if the facts of life change for you.

So if you’re in Chapter 13 or thinking about it and you think the payments are too high, talk to your bankruptcy lawyer.  Don’t assume there’s nothing that works for you.

The important point is this:  Everyone’s life is different.  So are their debts.  Chapter 13 usually is not a straight jacket.  It’s a tool and it can be very good at many things — if you use it right.

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