Folks are often afraid to file for bankruptcy as they worry that they will be left without possessions–that the trustee will take all their “stuff” or the kids’ “stuff”.   The ones who really worry will even try to gift away property in order to keep it out of the bankruptcy trustee’s possession.   They will start giving things away without talking to an attorney first.

STOP!!  Each and every state has laws called “exemption laws” that allow debtors (folks in debt) to keep property (certain kinds) up to a certain amount as I explained in an earlier article on this site.  Unfortunately each state is different.  Even the federal bankruptcy law has a set of exemptions for debtors and those laws help the system work, according to Doug Jacobs, California attorney.  Some states laws allow high value for possessions; other states have very low values for possessions.   But in each instance, the trustee is not going to come marching into your home and strip it clean of all furniture, appliances, bicycles, knick-knacks, books, and clothing.    Some debtors worry that the trustee will take their tax refund, as explained by Kevin Gipson of Louisiana.   If a debtor seeks legal advice from an experienced attorney, those worries can be put to rest and some pre-planning can happen.

The worst case scenario, as explained by Pamela  Stewart, a Texas bankruptcy attorney, is to transfer property to try to keep the property away from the trustee by giving it away or by hiding the asset (lying).    Folks are often upset to find that these kind of  transfers can have dire consequences, such as a denial of a bankruptcy discharge or even criminal charges by trying to hide assets.  Hiding assets is just about the worse thing a debtor can do; don’t make your life even more stressful by being dishonest.   Honest debtors find their bankruptcy a much smoother process.

Stay Tuned as the Countdown Continues!  Myth #10 debunked:  An honest debtor does not lose all his property!

photo:  National Archives/Dorothea Lange for the FSA (c. 1930) Depression

Bankruptcy and identity theft?   How can this be an issue if someone is discharging debt?   There are debtors who file for bankruptcy protection due to someone having stolen their identity.  There are bankruptcy debtors  whose identity is stolen and the thief files for bankruptcy.   Then, there are those folks  who worry about their identity being stolen while in bankruptcy due to creditor’s who treat confidential information casually.   When creditors release confidential data in public records, identity theft risk increases dramatically.   What can the average person do to protect themselves, whether in or out of bankruptcy court? 

In the September 2011 issue of Money, Ann Carrns provided excellent steps that could be taken by the average person to protect their identity from being stolen in her article, “Defend Your Data After a Breach.”   Ms. Carrns pointed out that the Privacy Rights Clearinghouse had tracked 313 corporate breaches of data by hackers or by compromising confidential information by the corporation — during the first 8 months of 2011.    While only 4% of Americans have been the victims of identity theft, Ms. Carrns reports that when a breach is involved, that statistic jumps to 17%, or nearly 1 in 5 persons.

Ms. Carrns recommends the following if you are notified of  a breach in your personal confidential data:

1.  Password.  If your password is compromised, change it immediately.  Make each account’s password unique.

2.  E-mail Address:   The main risk is phishing attempts — where an email purportedly from one of your creditors asks for a response which provides confidential information or other data.  If you are suspicious of any email, call the creditor or company instead of responding to the email.

3.  Credit Card number:  Monitor your accounts.  If you are notified of a breach by a credit card company, ask for a new account number and card.

4.  Debit or Bank Information:   If your debit card number is compromised, cancel that card and cancel the PIN.   If the account number is compromised, close the account and open another with a new number.  Ms. Carrns suggests asking for a flag to be put on the account for a verbal password.

5.  Brokerage Account Information:   If account number is exposed, close that account and get another with a new number.

6.  Social Security Number:   Get a fraud alert on your credit report to let lenders know to request additional information if any new account is attempted to be opened.  A regular fraud alert will last for 90 days and can be renewed.  A more rigid alert, a “security freeze” prevents anyone from opening any new account (even you).   The freeze has to be removed in order to open a new account.  There is a fee for a security freeze.

7.  Credit Report Monitoring.  If any of the above breaches happen, you may be offered free credit report monitoring.   There are services that also provide this service for a fee.   At the very least, you should obtain a copy each year of your credit report.   You are entitled to one free copy each year, available at www.annualcreditreport.com.

As my colleague, David Leibowitz’ article on this site states, redaction is the answer.  If you receive notice that your confidential information has been released in a document filed in the bankruptcy court, consider taking the steps outlined by Ms. Carrns to protect yourself from future identity theft problems.

photo credit:  immagine.com/stockconnection

Your bankruptcy filing can stir deep emotions.  More than a few times, I have received calls from individual (as opposed to corporate) creditors who, after receiving a bankruptcy notice, have called me to express their displeasure that my client is seeking to discharge a debt.  Sometimes these folks will appear at your 341 hearing to protest and sometimes they will write a “poison pen” letter.

Maybe you have borrowed money from friends or relatives, perhaps as a last ditch effort to avoid bankruptcy.  Now, when you file, that $5,000 or $10,000 you owe your friends is now a debt that will likely be discharged in bankruptcy.  Usually a few thousand dollars will not impact the bottom line of a credit card company, but your neighbor will surely feel the pain.  And an individual who is about to see $10,000 disappear forever will not be happy about that prospect.

What options are available to the holder of a $5000 or $10,000 personal loan?  Generally, not many.  Your now former friend can file an objection to discharge of a debt under Section 523 of the Bankruptcy Code, but hiring a lawyer to pursue this type of challenge will cost several thousand dollars without any guarantee of success.   Your friend can show up at your 341 hearing, but a non-attorney creditor will likely get little relief given the crowded dockets and his likely lack of experience in this setting.

What your individual creditor may do is to write a “poison pen” letter to your judge or trustee.  Such a letter may include allegations of alleged improper behavior by you, such as hiding assets or misstating income.

Believe it or not, many judges and trustees take these poison pen letters seriously.   Chief Judge Bihary’s opinion in the Henry case is typical – she construed the creditor’s letter as a motion to extend time to file a dischargeability complaint and directed the debtor to call the Chapter 7 trustee – and even included the trustee’s letter in her Order.   Sensing a judge’s concern, it is likely that a Chapter 7 trustee who receives such a call will initiate an investigation that will cost you legal fees and possibly lead to problems in your case.

How do you minimize the likelihood that a creditor will create problems for you?  Obviously, the best advice would be to avoid borrowing money from individuals in the first place – friends, relatives, co-workers – who are likely to see your bankruptcy filing as a personal insult.

Note that you should always consult with your lawyer before trying to pay these folks back prior to filing – a repayment right before your bankruptcy filing could be an improper preference.

If you have no choice but to include personal loans in your bankruptcy, make sure that everything contained in your bankruptcy filing is not only true, but can be supported by documentation.

Finally, when possible, I recommend to my clients that they contact the individual lender prior to give the lender the courtesy of a personal notice about the filing.  Often, individuals who lose money in a Chapter 7 debtor are looking for an outlet to express their frustration and disappointment.  Obviously you need to consider this on a case by case basis but do not discount the value of common courtesy.

Too often, parents forget to consider their children’s assets when filing bankruptcy.  For example, they may control accounts under the Uniform Transfers to Minors Acts.  They may have custodian accounts. They may serve as trustee under various trusts.  They may have established educational savings accounts under section 529 of the Internal Revenue Code.  

No matter, it’s very important to distinguish between things you own and things you hold for the benefit of your children.

You can’t use your children to shield your own assets from bankruptcy.  You certainly can’t transfer assets from your own name into your children’s name before you file a bankruptcy.  This would be a fraudulent transfer and you could lose your right to a discharge in bankruptcy.  Don’t do that!

But on the other hand, if you’ve been saving money for your kid’s college in a protected educational savings account, you’ll be fine.  If you put money away for your children in a trust before you got into financial problems, you’ll be fine too. If you’ve been saving gifts given by the grandparents for the children in a custodian account, you’ll be fine too.

Be sure to disclose all of this information to your bankruptcy attorney.  You’ll want to disclose every account you have, no matter for what purpose in your bankruptcy petition.  But you’ll also want to be able to explain why the account is in your name and why the account really belongs to or is for the benefit of your children.

The same logic applies when you  are holding assets for the benefit of your aging parents.  What’s theirs is theirs.  Be sure that you don’t muddy the waters and leave your parents’ assets vulnerable to a bankruptcy trustee in the event that you have to file a bankruptcy case.

Full disclosure to your attorney is always the right approach.

InsideARM, a accounts receivable management blog reported today that during the past week, a consumer was awardeda $1.26 Million verdict in a Fair Debt Collection Practices Act (FDCPA) lawsuit  in New Mexico.  The consumer, a “Lucinda Yazzie”, had brought the lawsuit after the debt collector had attempted twice to garnish wages for a debt that the consumer had disputed with the debt collector.

Lucinda Yazzie told the debt collector, Farnell & Sandlin, a law firm, that she had never had a Target credit card for which they were collecting.   Instead of stopping collection, the debt collector obtained a judgment, then attempted to garnish Yazzie’s wages.   The wage garnishment was stopped the first time, but then two years later, a second garnishment was served on Yazzie’s employer.   That order stayed in effect and a hearing on the order was pending when Yazzie filed the FDCPA case against the debt collector and against Target as well with Robert Treinen, of Albuquerque, New Mexico as her attorney.

During the litigation, it was discovered that Target had supplied the correct account information, social security number and identifying information on a different Lucinda Yazzie to Farnell & Sandlin.  However, later in the process, an employee had changed the social security number to that of the Lucinda Yazzie who was eventually garnished.

The jury found that $161,000 in actual damages was appropriate and then awarded $1.1 million in punitive damages.

The Fair Debt Collection Practices Act was implemented to protect consumers from unfair, deceptive and illegal acts of debt collectors and damages may be awarded in those cases.   Consumers have recently received $311,00o from a Montana jury, according to my colleague Carmen Dellutri of Florida’s blog article.    A debt collector is anyone who collects the debts for another, even a law firm can be a debt collector.   If your rights have been violated, see an experienced consumer attorney for guidance about whether the FDCPA can be of assistance to you.

photo:  istockphoto.com

So, you’re in a Chapter 7 bankruptcy and you want to know whether you should reaffirm your car loan.  A reaffirmation agreement basically takes a secured loan, like a car loan, outside the effect of your bankruptcy discharge.  As to that one debt, it’s like you never filed bankruptcy.  You filed Chapter 7 bankruptcy in order to eliminate all the phone calls and threats and creditor harassment, and make a fresh start.  Then you have to decide whether to sign a reaffirmation agreement, which puts you right back on the hook for that debt.  Should you, or shouldn’t you?

Almost everyone wants to keep their car.  In South Carolina, where public transportation is virtually non-existent, it is an unfortunate reality that most people need a car to get or keep a job.  Currently, in order to be absolutely sure of keeping your car after a Chapter 7 bankruptcy, you have to do three things:  make the payments, keep it insured, and sign a reaffirmation agreement. But that should not end the inquiry.  You (and your attorney) should both be looking at whether signing a reaffirmation agreement is in your best interests.  We know you want to keep your car.  But a reaffirmation agreement can have serious consequences, and can seriously interfere with the fresh start that you filed bankruptcy to obtain. So, here are some key factors you should consider.

1.  First, look at the value of your car and how much you owe on it.  If you owe more than the car is worth, reaffirming is a risk.  My clients always tell me that they can and will make the payments.  Maybe so, but what if the car is in an accident and is a total loss?  What if the insurance pays off on the value of the car, leaving you owing the difference?  Then you may have to make payments on a different car, but be stuck owing thousands of dollars on the wrecked car.  You are right back in financial trouble, and you take another hit to your credit rating.  You can check to see of you can buy GAP insurance to cover that difference.  If so, you eliminate some of the risk.  If you can’t buy the insurance, that may be a pretty good indication that you are taking too much risk.

2.  The current state of the law gives the lender the option of repossessing your car if you don’t reaffirm, even if you are making payments.  But they don’t have to repossess.  Many lenders will let you keep the car as long as you continue to make payments on time, and keep the car insured.  In many cases, they are better off doing that, and they recognize that fact.  There are some who will stand on their rights, and who may decide to take the car even if your payments are current. Your attorney can help you evaluate the risk, depending on your lender.  Your attorney can also advise you concerning other issues that may make repossession unlikely.  For example, in some states, if you have a co-borrower who has not filed bankruptcy, there may be no default as to that person, and so no right to repossess.

3.  You should also carefully evaluate your budget, and the available funds to pay the car payments.  In a nutshell, if your budget is tight, you probably shouldn’t reaffirm.  The tighter your budget, the more likely that you will be forced to miss a payment at some point, and that you will lose some of the benefit of going through bankruptcy if you default on a debt that has been reaffirmed.  Consider the overall picture here, too.  How long are you going to be making the car payments?  Are you going to have the car paid off soon, or are you going to have to pay for another four or five years?  Is there some other change in your budget that will make it more difficult (or easier) to make the car payments?  If you have already filed bankruptcy, and you are still struggling to make ends meet, you may want to take that as a sign.

4.  Can you negotiate a better deal from your lender?  Some lenders are willing to listen to a proposal that makes a reaffirmation more favorable to you, either by reducing principal, reducing the interest rate, or capitalizing arrears.   If your concern is that you owe more than the car is worth, ask the lender to reduce principal.  If you are concerned that the payments are too high, ask for a lower interest rate.  Not all lenders will meet you in the middle like this, but there is no harm in asking, and you might get a deal that will make you (and your attorney) a whole lot more comfortable.

5.  Consider your lender, and your relationship with them.  One of the big differences in dealing with reaffirmation agreements depends on whether your lender is a credit union or not.  If the lender is a credit union, you get less protection from the court (and your attorney) and should therefore be more cautious about signing a reaffirmation agreement.  If your account was sold to a new lender after bankruptcy, you may also want to factor that unknown into your thinking.

6.  While you are considering a request to reaffirm a car loan, be brutally practical and honest with yourself.  As noted above, most people who live outside major metropolitan areas in this country need “a” car.  That doesn’t necessarily mean you need the particular car you are driving.  Do you have a friend or family member who would let you borrow (or buy) a car that is underused?  Do you have a source of cash (a tax refund, or a retirement account) that could be used to buy basic transportation for cash?  Remember, practicality and honesty are key here.  I have heard all kinds of explanations over the years for keeping cars (and trucks and motorcycles and motor homes) that basically boil down to “I don’t want to give it up.”  I know you don’t want to–I want you to consider whether you need to.  I recently had a client explain to me that he had to keep a new truck because he had to have a reliable vehicle to get to work.  Okay, I get that.  But then it turned out that his wife, who doesn’t work, also had a new car.  And his teenage son also had a vehicle.  It seemed to me that alternative transportation was available, and that he was confused between “want” and “need.”  Given the serious consequences that go along with reaffirming on a car, I think it’s important to eliminate that confusion.

Other considerations may also impact your decision, including whether your attorney is willing to sign off on your reaffirmation agreement, and whether you will have to attend a hearing and justify your decision to the judge, and whether the judge will approve your reaffirmation agreement or not (which may not be a bad thing).  Stay tuned to Bankruptcy Law Network for more on those issues coming soon.

Image credit:  Paphia/iStock

Two years ago, the New Mexico Attorney General’s Office proposed regulations that would help control debt collector abuses (as reported by Bankruptcy Law Network here) by requiring debt collectors to inform people that the debt they were trying to collect was too old to try to collect in a court proceeding.  The final rule went into effect on December 15, 2010 but applicability was delayed for 90 days, until approximately March 15, 2011 — it is now fully in effect in New Mexico.

Here’s part of the Attorney General’s statement:

The Rule, “Collection of Time-Barred Debt,” requires all debt collectors doing business in New Mexico to make a good faith determination of whether a debt is “time-barred” (beyond the judicial enforcement period established by the applicable statute of limitation). If the debt is time-barred, the debt collector must so inform the debtor in both written and telephonic communications. The Rule also requires the debt collector to tell debtors that they would “revive” the debt (start a new enforcement period running) by making a partial payment on the obligation in any amount, or by signing a written admission or new promise to pay.

“Under the state’s Unfair Practices Act, the fact that a debt is so old that a person can not be sued to collect on it is considered material,” says Attorney General King. “If it is material, New Mexico law requires that it be disclosed to the debtor. This Rule is intended to ensure that debt collectors provide important information to consumers so that they can make informed decisions when they are confronted with a demand to pay an old unenforceable debt.”

See also this earlier BLN post by Michael  Doan about federal and state rights to sue based on time-barred debts.

Gini Nelson is a Santa Fe, New Mexico bankruptcy lawyer who helps people file (or avoid) chapter 7 bankruptcy.

I discuss financial problems with people everyday.  I usually ask people to give me a little history–how did they get to the point of needing to discuss bankruptcy?  Some of the answers wouldn’t surprise you–job loss, medical bills, divorce.  But it might surprise you how frequently I hear a story that involves financial help to adult children, that ultimately leads to bankruptcy.

Parents struggle with saying “no” to their children almost from day one.  How long do you let your baby cry in her crib before you pick her up?  How long do you linger at the preschool door when your toddler is crying “don’t leave, Mommy.”  From toys to treats to clothes and shoes, we go on trying to strike the right balance, between giving enough and spoiling them rotten. It isn’t easy.  In my own household, every time I say “no,” it is an invitation to a negotiation, and my daughter is a really tough negotiator.  Seriously, union bosses should be so persistent.  And it only gets harder as they get older, and the decisions are about cars and college, student loans and first homes.

So how do you know how much financial help to grown children is too much? That depends on many factors, including how much retirement savings you have, and whether you are considering a gift (or a loan you know won’t actually be paid back), a loan, financing for your child, or co-signing a loan.  Whatever the circumstances, though, you should approach that decision the same way you would (or should) approach taking out a loan, or refinancing your mortgage.  What is your child’s history with credit?  Are you helping a child stretch her wings for the first time, or rescuing a child who has gotten in trouble with credit before?  Are you seeing signs of change, of responsibility undertaken, or are you just reflexively running to the rescue of a child who is in perpetual need of rescue?

I once represented a woman whose house was in foreclosure.  A Chapter 13 case can usually help with that, but this woman was in her 80s, and I was concerned about the feasibility of a five-year payment plan for someone in her situation.   It turned out that she was supporting several grown children who lived with her, and was trying to save the home so they would have a place to live.  But the mortgage on the house was far in excess of the property value.  So I asked her what did she think would happen to the house when she was no longer around to make the payments.  From her reaction, it was apparent that the question had never occurred to her before.

Sometimes the kindest thing we can do for our children is to say “no.”  And while most parents have the instinctive need to help, to try to fix things, the greatest gift we give our children is to teach them to fix it themselves.  Offer a hand up, but not a handout; give them enough help to set them straight, but not so much that they fail to launch.  I know, it’s a hard balance to strike.  Sometimes you miss the mark, miscalculate, and need a bankruptcy to set yourself straight.  It happens. Sometimes it’s the kids who need to file bankruptcy, make a fresh start, and leave you with the ability to help in a real crisis, without exhausting your resources to cover everyday expenses.

Debt colllectors use the  threat of being sued  because it terrifies most people. Debt collectors know that, and use it.  Yet most of the things consumers fear are myths.

Among the myths I encounter among my clients:

• I can be sued and not know it.

• The creditor can come to my house and take my stuff.

• I’ll have to explain my situation to a judge  in open court.

• I may go to jail if I stop paying.

These fears are exploited by the  debt collection industry because they  galvanize people: the targets  either pay on a less important debt out of fear, or they  break down and consider bankruptcy.  As a bankruptcy lawyer, I’m torn.

On the one hand, I’m glad to see people and help them analyze how they can extract themselves from debt (they’ve usually waited far too long and should have thrown in the financial towel long ago); on the other hand, service of a summons and complaint is not an emergency .  There is plenty of time to make a plan and execute it before the suing creditor gets a judgment.

So, let’s walk through the steps in a collection law suit and see how it works.  My timelines are drawn from California law, and the details may differ elsewhere, but not substantially.

Creditor hires a lawyer Except in small claims court, a corporation must be represented by a lawyer.  So the decision to sue a delinquent card holder comes at a cost to the creditor.  They must either pay for legal counsel or give up a percentage to a collection firm working on a contingency.

Complaint drafted, filed with court and summons issued The complaint sets out briefly the facts and the law that the plaintiff, the party filing the suit, asserts entitle it to a judgment for money.  The summons is issued by the court and is the court’s written direction to the defendant that “yes, this suit is real, and there are legal consequences if you take no action”.

Summons & complaint served on defendant Our concept of due process requires that a person get notice and an opportunity to defend before the state puts its law enforcement mechanisms behind the claims of the party suing.  The rules for how service is accomplished vary, and in my experience, it is this aspect of the system that seems to be breaking down:  process servers, those people licensed to serve summons seem to be willing to attest to serving the named defendant without having done so.

Defendant gets a set time to answer The time when a written answer is due is set out in the summons.  In California, the summons says the answer is due 30 days from service of the complaint.  Served with the summons is a notice of a case management conference.  Too many people don’t read the documents word for word, spot the date for the conference and assume they don’t have to act before then.  WRONG!  If no timely answer is filed, the plaintiff can ask for a judgement long before the date set for the hearing.

Absent an answer, creditor asks for judgment The system is set up so that judges are entitled to conclude that you do not dispute the creditor’s right to a judgment if you don’t file an answer.  Your ability to pay the debt is not at issue at this point: the issue for decision is whether the law entitles the creditor to a judgment.  In California, the statute of limitations is a defense to an otherwise valid debt, but the creditor gets the judgment if no answer asserting the statute is filed.

Judgment is entered The judgment is the court’s determination that the creditor is in deed owed the money it claims and that the creditor can use the law and the mechanics of the government to levy and garnish to collect that judgment.  Judgments can be set aside if a court finds that there was no legally effective service or for other excuses.  The longer a judgment remains of record, the harder it is to get the default vacated.

A perfectly efficient creditor, who acted the very day that the next action in the sequence is permissible, needs 60-90 days from the filing of the complaint, to get a judgment, and longer to get a writ issued to enforce the judgment.  And collection lawyers are not perfectly efficient.

So, the point of this exercise is to hammer home the fact that a collection suit takes time and you will see it coming.  Rules surround the process.  We do not put people in jail for not paying.  (You might be jailed for failing to show up pursuant to a court order issued to collect the judgment, but jail is not the consequence of not paying, it’s the consequence of ignoring a judge’s order.)

Faced with a complaint, meet with a bankruptcy lawyer and explore the big picture in your financial situation.  Figure out where this lawsuit fits in the overall scheme of things.  Don’t let unfounded fear stop you.

Image courtesy of Wonderlane.

A Chapter 13 bankruptcy will normally take a minimum of 3 years and may have to continue for 5 years depending upon the income of the debtor.

Because of the length of time involved in a Chapter 13, there is always the very real possibility that the debtor may have unanticipated major expenses during the life of the bankruptcy.

It may be necessary to purchase a big ticket item such as a car or make repairs to a house.

Under these circumstances can a debtor incur new debt?

Generally speaking, incurring debt during a 13 is prohibited.  For instance you cannot use any credit cards that you may have at the time of the filing (assuming that there are any creditors that have not already cancelled the cards) , nor can you go out and get credit cards.

However,under certain circumstances you can obtain credit for a specific need, but it will be necessary to obtain permission from the court.

A motion needs to be filed with the court requesting permission to incur debt and the court will determine whether or not a loan can be obtained.

However, before considering getting into new debt, your attorney may have other solutions that can help in paying unexpected bills.

One option would be to request a suspension of plan payments for a fixed period of time.

If you are not in a full 60 month plan it may be possible to suspend the payments and extend the plan without having to increase your plan payments.

If the plan is already a 60 month plan, then it is likely that an increase in plan payments will need to occur.  Under those circumstances, it will be necessary to show the court that there are going to be additional funds available to fund the new amount.

You will want to explore all of your options with an experienced bankruptcy attorney before making any decisions.