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Why Should I File A Chapter 7 Case and Not Do A Debt Settlement?

Erease you debtMany consumers that are dealing with debt issues ask this question often and many times before ultimately making a decision on what to do.  Some of the problems that lead to the back and worth and questioning what to do is caused by the all the information a consumer will read on the internet.  Like any good sales pitch articles are written to persuade the consumer to what that particular person is selling.  However, there are real considerations in dealing with this question with respect to law and how that law can help someone.  I am going to review the three important reasons that a consumer should file a Chapter 7 case and not do a debt settlement.

1. The amount of debt owed:  There is nothing wrong with a debt settlement for a consumer to consider as long as it is conducted by the debtor or an attorney.  (See our blog about debt settlement companies)  However, the amount of debt owed is the deciding factor on why a consumer should file a Chapter 7 case.  The issue is that if you need to resolve more than one debt the cost to do so could be too expensive to do so.  For example, if you owe nearly $20,000.00 in debt you will need at least $12,000.00 to settle your debt, if you are lucky and it could take years to get settlements resolved. As in comparison to a Chapter 7 case to handle $20,000.00, the fees are generally flat fees and range from $1000.00 to $1500.00 and takes about three months. So, the amount of your debt needs to be considered in deciding whether to file a Chapter 7 or a debt settlement for cost as well as time.

2. Credit Score Desires:  If you are behind on debt, your credit score is already in the gutter no matter what you choose to do.  However, if you want to recover quickly from your poor credit score, you should file a Chapter 7 bankruptcy case.  I know there is a lot of confusion about this fact noted on the internet and in commercials on TV from debt settlement companies.  The truth is that a Chapter 7 case allows all the negative reporting to occur to your credit report unlike settling a debt does.  Even if you settle a debt, the past due payments are still noted on your credit report as well as the settlement for less than is owed is being reported to your credit report.  These negative reports will continue to drive your credit score down.  Now, if you have only one bad debt and ten positive debts, you credit score may survive a major disaster.  If you have several negative debt situations, only the Chapter 7 discharge can clean up your credit quickly.  Yes, you will have a Bankruptcy case noted on your credit but you will also not have any negative reporting of the past debt you discharged on your credit report only increasing your credit score.  And, you can continue to build on your credit report to increase your score each day.  Unlike the debt settlement choice, you will have to battle every day to get your credit score back to a positive.  This is the real truth of this situation.  Debt Settlement agencies have trying to pull the wool over the consumers eyes about this truth.  Do not be fooled.

3. Guarantee Outcome:  If you want guarantee outcome and timeline, you have to consider the time and law for both debt settlements and a Chapter 7 bankruptcy case.  Debt settlement is supposed to be conducted within the Fair Debt Collection Act (See our outline of the act).   However, no one is watching over the debt settlement agencies to ensure that they are following the rules of the act.  Instead, it is only after a consumer was harmed and only if that consumer raises the issue is the debt settlement agency forced to do the right thing.  Additionally, there is no law requiring the debt settlement agency to guarantee settlement of debt or a timeline of when it can be done.  On the other hand, a Chapter 7 bankruptcy is a constitutional right that is regulated by the Department of Justice to ensure that the process is completed within the law and done right.  Also, if the Chapter 7 case is prepared correctly, the process only takes about 3 to 4 four months to complete.  Therefore, if you want a guarantee outcome and solid timeline, you should file a Chapter 7 case.

You have to ask yourself what you really want to do when you are facing the choice of filing either a Chapter 7 case or do a debt settlement.  These three reasons provided above should be considered when making that choice.  I will caution anyone to not believe what you read from tax settlement agencies or debt settlement agencies about how bad bankruptcy is or what it will do to your credit.  The reality is that if you have debt issues your credit is already bad.  The only issue you need to discuss is what is the best course of action on cleaning up my debt and my credit?  The bankruptcy program in the United States was designed to protect and to provide a real solution to consumers without getting taken by false or misleading programs.  It is the only government monitored program that exists in this country.

Also, I always recommend that you seek counsel to discuss on how to deal with any debt issues.

New Projected Disposable Income Rules In Chapter 13 Plans

I recently have received several phone calls from my colleagues asking me, “Can a Trustee move a court to modify an already confirmed Chapter 13 plan claiming new found income of the Debtor?” The answer has always been, “yes,” BUT there were limitations on this process. The modification would be conducted if there was proof that the Debtor has not been completely forthwith about his or her monthly income, which would directly affect the disposable income for the plan. The modification was actually completed as a settlement between the Debtor and the Trustee as a kind of “sorry,” from the Debtor to avoid the greater questions of “why were you not telling the truth in the beginning?”

However, the times have changed and the reasons behind the Trustee’s ability to move for modification of a plan after confirmation have changed too. Prior to passage of the 2005 Amendment to the Bankruptcy Code, “disposable income” was defined as “income which is received by the debtor and which is not reasonably necessary to be expended” for the debtor’s maintenance, support, charitable contributions, and business expenses. 11 U.S.C. §1325(b)(2)(A). Under this definition, a debtor’s income for the term of the plan was determined with prepetition income as of date of filing. The “disposable income” was the amount known at the date of filing and the plan amount was set for the terms of the plan according to the date of filing. So, once the plan was confirmed it was generally set for the term of the plan unless something unusual occurred like the debtor increase income over 10% of the previous income or some inadvertent calculation error occurred with the debtor (well I may have forgotten that I make more than I disclosed).

The 2005 Amendments to the Bankruptcy Code changed the definition of “disposable income” as well as the entire practice of Chapter 13 bankruptcies. Congress changed the definition of “disposable income” by tying it to a new term, “current monthly income,” 11 U.S.C. §1325(b)(2), and adding the definition of “current monthly income” that in relevant part, as noted above, looks at the debtor’s six-month pre-petition income, id. § 101(10A)(A)(i). Finally, Congress added a new clause to §1325(b) that, for above-median debtors, requires the use of the standardized expenses and deductions calculated on Form B22C as the “[a]mounts reasonably necessary to be expended” under §1325(b)(2) (with the exception of charitable contributions under (b)(2)(A)(ii)). See id. §1325(b)(3) The result is that a Chapter 13 plan payment will no longer be determined on disposable income as of the date of filing the Chapter 13 case, but on all income as of the date of filing and any “projected disposable income.”

It is best to review the reasoning of the first court to address the issue of this new definition of income. In re Hardacre, 338 B.R. 718 (Bankr. N.D. Tex. 2006) was the first case to interpret these provisions. In Hardacre, the court expressed concern about the consequences when “current monthly income” derived from Form B22C is used as the sole determinant of the “income” side of the “projected disposable income” calculation. Id. at 722. The court reasoned that a debtor expecting a significant increase in future income would file as quickly as possible, resulting in the commitment of less money to repay unsecured creditors than the debtor would actually be capable of paying during the commitment period. Id. Conversely, the court observed that a debtor who experiences a decrease in income after filing might not be able to confirm a plan because she would be unable to commit the amount of disposable income calculated on Form B22C. Id.

The Hardacre court offered three justifications in support of its conclusion that “`projected disposable income’ must be based upon the debtor’s anticipated income during the term of the plan, not merely an average of her prepetition income.” Id. First, noting the rule of statutory construction that requires a court “to presume that `Congress acts intentionally when it includes particular language in one section of a statute but omits it in another,'” the court reasoned that “Congress must have intended `projected disposable income’ to be different than `disposable income'” when it chose to define only the latter term. Id. at 723 (quoting BFP v. Resolution Trust Corp., 511 U.S. 531, 537 (1994)). Second, the court viewed the phrase “to be received” in §1325(b)(1)(B) as an expression of congressional intent “to refer to the income actually to be received by the debtor during the commitment period, rather than the prepetition average income”; an alternative interpretation, the court said, would render “to be received” superfluous. Id. And third, the court considered §1325(b)(1)’s prefatory language — “as of the effective date of the plan” — to be an indication that “`projected disposable income’ . . . refers to income that a debtor reasonably expects to receive during the term of her plan.” Id.

In a nut shell, the court reasoned that a Chapter 13 plan should be based upon income that is received throughout the Chapter 13 plan term. So, the days of locking into an amount and confirming a plan are long gone. A Debtor will now have to present the potential for all anticipated income that will be received through the bankruptcy case. Therefore, bankruptcy counsel filing a Chapter 13 case must advise their clients that is it possible for a Trustee if he/she finds out about increase of income or an award for damages in litigation, that a modified plan request can be raised by the Trustee. To answer my colleague inquiries, the answer is “yes” a Trustee can move to modify an already confirmed plan.

How To Deal With Forward-Looking Approach Projected Disposable Income Rule And Personal Injury Awards In Chapter 13 Plans

Personal injury formThe 2005 Bankruptcy Code Amendments really shook up Chapter 13 cases and changed the way attorneys need to deal with personal injury awards.  The new definition of “projected disposal income” verses “disposable income” has put a new twist with personal injury awards.  The days of confirming a plan and the personal injury award being swept under the rug and forgotten as time passed is no longer the norm in Chapter 13 cases.  It is almost tragic to see attorneys trying to deal with personal injury cases today in bankruptcy cases, trying to apply the old “disposable income” rules.  When this happens, it is almost certain that the personal injury award that could be and should be protected is not and the debtor must turn over part of the award to the Trustee.

Why does this happen?  If an attorney applies the old law of “disposable income,” a personal injury award is often listed as “unknown” on Schedule B of a Debtor’s schedules.  The truth is that the amount of the award is really “unknown.”  It used to be common practice that if you did not know how much an award was going to be, an attorney would list it as “unknown.”  The reasoning behind this practice was that you would not want to misrepresent an amount of the award unless you actually knew the amount.  It was understood that neither an attorney nor a debtor could actually ascertain the amount of the award until it was granted by a court or settlement was agreed upon.  An attorney would disclose it and wait until an amount was agreed or granted by a court to disclose the actual amount.  Generally, an award or settlement would occur years into the Chapter 13 case and often was not even considered as part of the plan payments.

However, Chapter 13 cases no longer use only “disposable income” to determine the funding of a plan.  Instead, a Chapter 13 plan is determined using “projected disposable income.”   See 11 U.S.C. §1325(b)(2).   Projected disposable income does include personal injury awards, whether granted by court order or settlement.  Therefore, if an attorney applies the old way of thinking of listing the award as “unknown,” and does not take an exemption, the debtor can and will have to include the award into paying his/her creditors.  The award is seen as an addition to the already paid plan amount and not a way to pay off the plan earlier.

So how should an attorney deal with a personal injury award in this new “projected disposable income” world?  An attorney must disclose the potential of an award for the debtor and then fully exempt as much as possible pursuant to the exemptions allow in that jurisdiction.  For example, if the jurisdiction allows federal exemptions, an attorney should take 11 U.S.C. §522(d)(11)(D), which authorizes the exemption of $20,200 of proceeds for a personal injury claim, excluding pain and suffering or actual out-of-pocket losses.  The attorney must take the full amount of this exemption even if the debtor does not know the actual monetary amount of the award.  Therefore, if the award is $16,000.00, the full amount will be exempted even if the award occurs three years after the filing date.

There are other exemptions an attorney should take in this example, such as 11 U.S.C. §522(d)(10)(C), which allows an exemption of the debtor’s right to receive a disability, illness, or unemployment benefit, with no limit on the dollar amount.

Section 522(d)(11)(B) allows an exemption for payments on account of wrongful death, to the extent needed for the support of the debtor or the debtor’s family.  Section 522(d)(11)(E) allows an exemption for payments on account of loss of future earnings, to the extent needed for the support of the debtor or the debtor’s family.  There is no reason this section should not apply to no-fault wage loss claims or personal injury awards arising from automobile accidents. Finally, the $11,200 “wild card” exemption of 11 U.S.C. §522(d)(5) can always be applied to any portion of the debtor’s award.

The point is that attorneys who have a client with personal injury awards must exempt all potential claims, even if they are years out before resolution, under the new “project disposable income” rules.   The real reason behind the new way of looking at income was to ensure that creditors would get a piece of personal injury awards if granted in the future.  The thought is:  why should a debtor get a wind fall?  The answer is that a debtor can still get a wind fall but only if their attorney properly protects that award.

Attorneys must be forward-looking and protect a debtor’s assets, as well as income, from an award.

The Potential End of the Mortgage Debt Relief Act of 2007 Is Upon Us: This Means Debtors Will Be Paying Taxes They Use To Be Required To Do.

The economic crunch has forced our country to change the very core economic principles that have been around for decades.  It depends who you talk to as to whether these changes are good for the country and should remain.  One key change was who has the tax burden when dealing with houses that go to foreclosure and a surplus of debt is owed.  Traditionally, the Debtor of the home would have to pay taxes on the debt owed.  However, a shift occurred to the creditor in this liability with the Mortgage Debt Relief Act of 2007.

I am writing about this issue because this Act of 2007 is only temporary and many Debtors may not realize that is about to expire on December 31, 2012.  Many of my colleagues think that this Act cannot possibility not be renewed.  When I speak with bank executives, they complain that if this Act is renewed, it will continue to harm banks and restrict their ability to provide new loans to new consumers that technically are good investments for the bank. Additionally, they complain that the Act renewed will continue to stall the economic growth of the economy.  The answer to the questions appears to raise even more questions.  Nevertheless, the impact on either it is renewed or not renewed will be felt the greatest by the Debtors.

The recent years has seen a real change in not only our economy but attitude in general about credit and debt.  In the late 1990s, I never would of heard a Debtor making the statement of who cares about my mortgage payments.  Or, “let them come get the house, it’s the mortgage company’s fault for giving me such a loan.”  Debtor’s perceptive on how they got into this situation and how they deal with these circumstances are much different today.  Debtors use to understand it was their responsibility to pay the mortgage on time.  Debtors also would not blame the mortgage company for over estimating their ability to make payments.  Debtors would never have entered into a mortgage payment that they simply would not be able to afford.

Unfortunately, with these new Debtor attitudes, it only harms the Debtors and not the intended creditors that they are direct at.  President Bush and Obama’s administrations took several steps to try and slow the painful reality that Debtors were facing with choices that they made.  The Act of 2007 was one to these steps.  It is a nice attempt to help Debtors out but someone ultimately will have to pay for these poor choices made by both Debtors and Creditors.  Creditors are to blame also no doubt for they gave out loans based upon what became clear that the information not totally legitimate that was being provided by brokers.  However, the Debtors are responsible for bad choices ultimately for they said they could pay.

So why I am talking about blame or responsibility with the Act of 2007 and why am I appearing is beating up Debtors when I am a consumer advocate?  The attitude of “it wasn’t me,” only hurts consumers/Debtors in the future.  It might be a quick fix but it allows consumers/Debtors to avoid the truth of the situation.  The truth is that with all of these Debtor friendly programs and the attitude, the future is grim for both consumers/Debtors in hope of recovery financially.  Like I said, someone has to pay for the forgiveness of the Act of 2007.  The banks are going be less likely to issue out loans.  So, our country will be right back to where it was pre-real estate boom.  Only a small portion of people will be home owners and the rest will be destine to rent.  This is eliminating the buying power of all consumers/Debtors and minimizes the American Dream.

The moral of this blog is that we must think about the consequences of our “it wasn’t me,” attitude.  If consumers do take responsibility the impact could have been not so bad.  I guess the election in November 2012 will determine whether this deadline is extended.  Most important is that consumers/Debtors need to think about acting now and clean up their credit and not take the chance of whether this law is passed or not.  If the Act is not renewed, Debtors could end up taking responsibility for the debt as is was prior to 2007.

As always, if you are dealing with a home that has not gone to foreclosure sale but is likely to do so in the next couple of months, you should seek an attorney for advice on how to deal with the potential deficiency judgment that you might now owe.

Condo Association Fees—Why do I Still Owe Them After Filing a Chapter 7 Case?

HOA feesI recently have had an increase in phone calls with the opening line of “Why do I still owe condo fees after I filed a Chapter 7 case and was discharge?”  Prior to the amendment of the Bankruptcy Code in 2005, there would never be a question like this proposed to our office.  For pursuant to 11 U.S.C. §523(a)(16), provided that condo fees generally would be dischargeable without issue unless they fell within a few common sense exceptions.  Condo fees would be owed “only if such fee or assessment is payable for a period during which…the debtor physically occupied a dwelling unit in the condominium or cooperative project; or…the debtor rented the dwelling unit to a tenant and received payments from the tenant for such period, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case….”

Therefore, if a Debtor files a Chapter 7 case and gave up the condo completely, the fees were not owed.  Only the exception noted above would raise liability and they are pretty simple to figure out.  If a Debtor stayed in the condo and intended to keep the condo then common sense says that they are liable to continue to make payments on the condo.  Or if a Debtor rented the place out to someone and was making money on the condo even if the Debtor has decided to surrender the property, the Debtor would be liable to pay the condo fees.  Again, it makes sense that the Debtor would be required to pay the condo fees.

All of this makes complete sense to even the common person not educated in how to read law or code.  You want to stay or you make some money on the property, the Debtor should pay the condo fees.  If a Debtor fully surrendered the property, then the Debtor was not responsible for the post-petition condo fees.

What does not make any sense is the amendment made to 11 U.S.C. §523 in the 2005 Amendments to the Bankruptcy code.  Both sections do allow for the discharge of all pre-petition owed condo fees.  However, for any post-petition condo fees, the Debtor is still liable on condo fees.  It does not matter if you are renting the condo or living in the condo or just giving up the condo.  You are a Debtor still in possession or you surrender the condo and it has not gone to foreclosure sale yet, you are liable.

As long as the condo is in the name of the Debtor, all post-petition condo fees are due and owing.  This is not a problem if the Debtor desires to keep the condo post-petition.  It is a real problem when the Debtor cannot afford the condo in the first place and seeks bankruptcy relief to deal with these types of expenses.  It almost takes the purpose out of the bankruptcy filing for Debtors who do not have the ability to make payments on the condo.  Additionally, this situation negative impact on the Debtor is enhanced by the fact that mortgage companies are taking additional time to complete the foreclosure sale.   Think about it, if the mortgage company takes its sweet time to complete than the more a Debtor will be liable on post-petition condo fees.  With the foregoing stated, it should be pointed out that last year a very limited ruling  by the Bankruptcy Court in Tennesee, Pigg v BAC Home Loans, 453 B.R. 728 (2011) where the court ordered the sale of a condo that Bank of America wouldn’t complete foreclosure on, to pay HOA fees–telling the bank that HOA fees get paid first, then the mortgage, since BAC was dragging its feet, and debtor was being held liable on the post-petition fees.

This amendment to the Bankruptcy Code could have a major impact on Debtors.  Unless, the Debtor’s bankruptcy attorney is well verse with the amendments and the impact of those changes, a Debtor could very well be blindsided by condo fees due and owing years after the discharge of their case.  It would a very cruel result for the Debtor.

Therefore, if you are a Debtor or considering filing a bankruptcy case and own a condo you should be sure to review your situation thoroughly with an attorney that knows how this new amendment works.

Changing a Chapter 13 Bankruptcy Case to Chapter 7 Bankruptcy

Along with making the decision to pursue bankruptcy, debtors must also decide what chapter of bankruptcy is right for their current financial situation. When examining the severity of your debt and financial stress, you may decide that Chapter 13 bankruptcy is a better choice compared to Chapter 7 bankruptcy.

If you are like the 1.37 million people who filed for consumer bankruptcy in 2011, you understand how stressful it can be to live with debt. After choosing to pursue Chapter 13 bankruptcy to repay creditors over a three to five year period, you may find that your financial situation is more serious than you once thought. When this happens you may decide to convert your Chapter 13 case to Chapter 7 so you can discharge your debts and more quickly get rid of a large amount of your debt.

As filing for Chapter 13 bankruptcy makes a person commit to a repayment plan that could last anywhere from 36 to 60 months, it requires a debtor to make their payments on time and in full. A number of things can happen during these months, from divorce to job loss that may jeopardize your finances and ability to continue making payments putting your bankruptcy filing in jeopardy.

When this happens, you may want to think about transferring your case to Chapter 7 bankruptcy. With the help of a bankruptcy lawyer, a debtor can convert his case at any time from Chapter 7 to Chapter 13 as long as he or she fulfills the following requirements:

  • Have not filed for Chapter 7 bankruptcy at all in the past eight years
  • Meet with your creditors to explain your case
  • Pass the means test to determine eligibility
  • Go through credit counseling
  • Complete and submit all necessary paperwork for Chapter 7 exemptions
  • Ensure that you will not loose any property in a Chapter 7 case that you must retain

Chapter 13 bankruptcy is an excellent option for debtors who are not in as serious financial trouble as others; therefore, it is much easier for them to make these monthly payments over this lengthy period. And, while Chapter 7 bankruptcy is more damaging to your credit score and puts you at risk of losing some assets, it allows for a debtor to more quickly get rid of large amounts of debt.

The foregoing was a guest post.

How long will you pay in a Chapter 13 Bankruptcy?

As I have discussed in the past there are two main categories of consumer bankruptcy cases filed.  One is a Chapter 7 case, which typically lasts for about 3 – 4 months and generally does not require the Debtor to pay back any of their debt.  The other type is a Chapter 13 bankruptcy that is a reorganization of consumer overall financial circumstances and debt payments.  In this type of bankruptcy, the Debtor proposes a plan to pay back his or her creditors over a period of 3 – 5 years based upon the Debtor’s ability to fund a plan.

One of the most common questions I field from clients who will be filing a Chapter 13 case is how long will they be paying?  In general the answer depends upon how much money they have made over the past 6 months.  If a Debtor’s income based upon their family size is more then the median income in the state, then they must propose a plan for 60 months.  However, if their income is less then the median income, a plan can be proposed for 3 years.

The median income analysis although a good place to start is not the end all and be all of determining the duration of the plan.  For example, in Massachusetts the current median income for a family of 2 is $66,200.  If a Debtor and his spouse earn $60,000 a year that does not necessarily mean his plan will be for only 3 years.  There are a number of other considerations, such as whether the couple has any assets that are not exempt in a Chapter 7 case and could be liquidated, such as too much equity in an investment property or a car.

Typically, liquidation in a Chapter 13 case does not occur.  Instead of the Trustee taking your asset or selling it and paying off your creditors with the proceeds of the sale, the Chapter 13 plan payment to unsecured creditors must equal what ever the creditor would receive in a Chapter 7.   In many states this is called the liquidation analysis.  In other situations, if you have a large amount of secured debt in arrears such as mortgage payments or priority debt, your plan must propose to pay those back 100%.  If a Debtor’s disposable income does not allow the arrears to be cured in 3 years, the petitioner can extend their plan to a maximum of 5 years.

To summarize the timing analysis, if your income is too high you must pay for 5 years, or pay 100% of the debt in a shorter time period.  If your income is below the median income, there are many considerations that must be addressed and it is certainly in anyone’s interest who is contemplating a Chapter 13 case to consult with an experienced bankruptcy attorney in your area before you do anything.  The money you spend on them may save you thousands of dollars over the duration of your plan.