Here is the first post from my 12 Days of Financial Advice.
I'm spending more and more time talking with prospective clients about their student loans. No, I'm not suggesting that they can file bankruptcy and wipe out their student loans. But it's hard to avoid talking about student loans when I see such large balances and they're so widespread.
I'm talking more than ever about strategies to control their student loan payments once folks have gotten out of bankruptcy. Of course, the student loan companies never provide this kind of advice, which is a disservice to young people.
Here are my two tips. If you've got federal student loans, then look into the Income Based Repayment program (known as "IBR"). If eligible, you can put all of your federal student loans into one repayment amount that might better take into account your actual earnings and expenses. Once you're in the IBR program, the downside is that you have to re-submit your income figures every year thereafter. This is because your payment amount can be readjusted for your current income, whatever it is in the future. Nevertheless, it can be a lot better than struggling under a burdensome payment amount. And it's a lot better than defaulting on your loans.
The second tip is to learn about the Public Service Loan Forgiveness Program. Again, it's only for your federal student loans, but if you work for a non-profit organization for more than 30 hours a week, then you can be eligible for this program. If you make all your payments for 10 straight years (120 monthly payments), then the balances of your federal loans are discharged (wiped out), no matter the existing balances.
So there, two programs that can greatly help folks. More tips to follow in the days to come.
You might wonder why someone with virtually no debt and with good credit would contact a bankruptcy attorney. Ah ha, when that person is considering marrying someone who's got credit problems.
Thus, if you're looking to get married to someone who's dodging creditors, how is bankruptcy going to affect you?
There's good news and bad news to my answer. The good news is that you won't wind up owing your future spouse's creditors, but the bad news is that if you're going to live together and share expenses, then it might actually feel like you owe them. (Hint: your spouse's creditors will be calling your house phone from 8 am to 9 pm every day if the accounts have gone into default.)
In the bankruptcy context, how will your future spouse's bankruptcy filing affect your own credit rating. The answer is that it won't affect your credit rating at all. In other words, it won't be considered a "public record" on your credit report.
The interesting part however comes when someone with debt problems is considering marriage. The Bankruptcy Code (since the laws were changed in 2005) requires you to disclose total household income in order to see if you qualify for Chapter 7 relief. This is the Means Test inquiry that I've written about before.
Therefore if your spouse files a bankruptcy case, he or she would have to disclose your income as well (even though you are not the one filing for bankruptcy). At the same time though, your name will not appear anywhere on your spouse's bankruptcy petition or schedules.
So, the bottom line is that your credit rating won't be affected and your name won't be listed on your spouse's bankruptcy paperwork.
If your spouse is required to file a Chapter 13 case, where there's a 3 to 5 year payment plan, then there should be sufficient disclosure to the Court as to the fact that you may have your own credit obligations as well. In other words, you and your spouse will want to propose a reasonable Chapter 13 payment plan that takes into account the fact that you may have car loans, student loans or credit card payments of your own.
If your future spouse has financial problems, then quite often, these are problems that can be resolved with a bankruptcy filing. And often, it's best to fix the problems prior to marriage.
Here's why, and this is the area that some people simply don't understand. I'll give an example. Let's say that John is single and makes $35,000 a year and has $25,000 in credit card debt. If he's considering getting married in one year to Mary, who also makes $35,000 a year, then he should seriously think about filing his bankruptcy case now, rather than later on. Why? Because he's likely eligible now for a Chapter 7 filing (because the current income cutoff for Chapter 7 in Pennsylvania is $47,000 in gross income). If he waits until he gets married, then the income cutoff for a household of two becomes $55,000. After he marries Mary, he's likely only going to be eligible for a Chapter 13 filing.
Whenever you're making changes to your householdn size, remember that there could be consequences in terms of your bankruptcy filing status.
If you have other questions or comments, please let me know.
I subscribe to a lot of blogs relating to personal finance and bankruptcy law. And I've known about the www.Getoutofdebt.org for some time now. This website has a lot of information and advice for people with debt problems.
But I didn't know about their debt calculator, which I just learned about today, and which I find extremely nifty.
Here is the Get Out of Debt Calculator. You basically need to type in each credit card balance, along with the name of the creditor and the interest rate on the account.
Once you click "calculate", it will print out a summary for you, and give you choices and descriptions on debt settlement versus debt management (Consumer Credit Counseling) versus debt consolidation versus just making minimum monthly payments.
Okay, that's it for today. Check out that calculator and bookmark it for the future!
It boggles my mind that banks and other creditors can still collect on debts that they have "cancelled" for tax purposes. You might not know about the "cancellation of debts", but you can read here about what the IRS says about it. First, I need to explain what this whole concept in tax law actually is.
Basically, let's say that you default on a loan or credit card account which has a $10,000 balance. The bank can issue a Form 1099-C to you for the amount that it "cancelled". Moreover (and the debt settlement companies never tell you this one), if you "settle" that same account for $4,000, then you may receive a 1099-C for the $6,000 amount that's been forgiven.
So, you'll have to pay income tax on that $6,000 settled debt or the entire $10,000 defaulted debt, whichever was your outcome. Remember that according to the Internal Revenue Code, the IRS will consider that money to be taxable income to you.
Okay, back to me being mindboggled: it absolutely disturbs me to find out that most courts around the country have followed several IRS information letters which state that if a creditor issues a Form 1099-C, the delivery of the Form to the borrower does not constitute a bar to collections activity. Basically, the creditor can still sue the borrower even though they've cancelled the debt for tax purposes.
Finally, a sane Court has realized the unfairness of this concept. Judge Richard Stair, Jr. held in the recent case of In re Reed, in the U.S. Bankruptcy Court of the Eastern District of Tennessee, that when First Tennessee Bank issued a Form 1099-C to the debtor, the issuance of the Form reflected the discharge or cancellation of the debt. Specifically, the Judge stated that the principal amount that was listed on the Form 1099-C was cancelled, but that there may have been other fees, such as interest and collection costs that might be still owed.
One big tax advantage for those who file bankruptcy is the ability to short-circuit the Form 1099-C process. Indeed, those who have claimed either insolvency or bankruptcy are able to seek exemptions from the 1099-C tax liability by attaching Form 982 to their individual tax returns.
And, who knows, maybe other courts around the country will adopt the equitable outcome in the Reed case.
One final and related note: it remains to be seen whether Congress will extend the Mortgage Forgiveness Debt Relief Act which expires at the end of 2013. This law was passed to provide relief for those who had lost their homes in foreclosure, so that those borrowers could exclude from their income any cancelled debts that may have arisen from their foreclosed residences.
Again, beginning in 2014, a bankruptcy filing for someone who is losing their home in foreclosure might turn out to be an even better income tax decision.
I wanted to show a recent Chapter 7 case that I filed. This is a married couple with two young children. They owned a home, and were up-to-date with their mortgage. Unfortunately, they had taken out a home equity loan several years ago in an attempt to pay off credit card debt, but despite their best efforts, they had a lot of debt. Specifically, they were facing $125,000 in credit card and other personal loan debts. These debts are increased considerably due to wife having been unemployed for some time.
Prior to filing their Chapter 7 case in June 2013, their credit scores were 535, 523 and 491 for husband and 535, 518 and 493 for wife. Their Chapter 7 Meeting of Creditors was 42 days after their filing date and the Chapter 7 Trustee signed off on their case after this meeting. All of their assets were fully protected by the bankruptcy exemption laws, so they were easily able to protect their house and personal possessions.
They received their discharge order in early October, exactly 112 days after their case filing date. Thus, their case was then closed in court.
They asked me to check their credit ratings after the bankruptcy filing. So, their new credit scores are 610, 607 and 596 for husband and 639, 609 and 607 for wife.
The reason that their credit scores improved so much was that all of their debt has been archived under a section of their credit report entitled "debts included in bankruptcy". Once a credit account is archived, it can no longer negatively affect the credit rating.
Nevertheless, I have suggested to them that they apply for a small credit card and use it each month for small purchases. If they pay off that account each month, then after 6 to 12 months, their credit ratings should improve considerably, hopefully to 650 or even 700. (note that the goal is to improve your credit rating over 700).
This case study is a fairly typical example of how bankruptcy can improve your credit, despite what you might hear about the "myths" of bankruptcy. Here is another blog post on rebuilding credit after bankruptcy from the past about this same subject.
Let me know if you have questions or comments.
Happy 8th Birthday to the Bankruptcy Abuse and Consumer Protection Act, also known as BAPCPA (pronounced "BAP-SEA-P-A", if you're interested). Enacted by Congress in 2005, it became effective on October 17, 2005, so virtually every bankruptcy lawyer in Pittsburgh, and for that matter, in America, was working day and night on the week prior to the law change.
So, why is the 8th birthday important? Because if you filed a Chapter 7 just before that date, you're only just now able to file a new Chapter 7 if you've incurred new debts. One of the important changes that BAPCPA brought was that it lengthened the periods between bankruptcy filings.
Here are some other changes that we thought were big back in 2005:
1) Pre Filing Counseling; this is the requirement that every person filing a case had to complete an hour-long Pre Bankruptcy Counseling session with a non-profit Consumer Credit organization. Yes, it's raised the cost of filing. Most of these sessions cost between $25 and $50, and there's a mandatory requirement. My take: I occasionally hear clients tell me that the counseling provides helpful budgeting tips, but ultimately, the requirement is not such a big deal, but it has raised the cost of filing.
2) Financial Management Course; this is the mandatory two-hour financial education course that all people must take prior to their cases being approved for discharge. A lot of my clients contend that it's a waste of time. I wish it would be eliminated, but ultimately, it's not been as much of a big deal as we thought.
3) Means Testing. This is the biggest change in BAPCPA. In all consumer cases (not business cases), we now must focus on the "household income" received during the immediately-preceding six month period. This is to determine the "Current Monthly Income". Never mind that you may have lost your job last week; it's still a test that must be examined. The means test was the instrument by which Congress (and the credit card industry) hoped to keep higher-income folks from filing bankruptcy at all, or at least from filing Chapter 7 cases. Yes, this is still a big deal, but not as much as it was back around 2006 and 2007 when we (and the Courts) were still figuring out the law. The means test provisions were poorly-drafted, but fortunately Bankruptcy Court Judges and Trustees have for the most part used common sense.
4) Higher Filing Fees and Legal Fees. Prior to October 2005, the filing fee for bankruptcy was $210. After BAPCPA, it was raised to $295 and now it's $306 for a Chapter 7 and $281 for a Chapter 13. Attorneys fees too have increased due to all the increased work associated with a typical case. For many people, the higher fees have had an impact.
5) Domestic Support Obligation Verification. BAPCPA requires the Trustees to inquire as to whether a bankruptcy filer is obligated to pay child or spousal support or any "domestic support obligation". Moreover, the Trustee has to inform the recipient of the support about the bankruptcy case filing. The thought was that if the Court uncovered assets, then the support recipient could file a claim and get paid. In the past 8 years, I've never seen this theory actually work in practice. My opinion: a waste of time and not a big deal.
6) Changes with Discharges. BAPCPA made it significantly more difficult to discharge (wipe out) student loan debts as well as a variety of other debts, including condominium fees. It also eliminated the Chapter 13 "super-discharge" of certain taxes debts. All of this is indeed a big deal and has affected people.
7) Debt Relief Agencies. BAPCPA clearly was aimed at annoying bankruptcy attorneys, particularly those who represent debtors. We now have to provide the preposterous statement that we are "debt relief agencies who help people file for bankruptcy." Nope, not a big deal. Oh, I am so glad that Congress spends its time worrying about big issues in life.
8) Bankruptcy Attorney Duties. BAPCPA worried us at first about the new obligations that it imposed upon Debtor's Counsel to verify assets and disclose to prospective clients their duties to list assets and to properly value them, among other things. I'd have to say that attorneys have adjusted fairly well to these requirements. I believe that the best provision in the law was to require all attorneys to provide a written fee agreement to prospective bankruptcy clients. Ultimately though, all these new duties haven't been all that imposing.
9) Automatic Stay Changes. There were a host of changes made to the automatic stay of the Bankruptcy Code. In short, it took attorneys a while to figure out, for example, how to "extend the stay" in the event that we had a client who wished to file a new Chapter 13 case in the same year that his previous case was dismissed. This was a big deal for a while, but it's no longer that worrisome.
10) Better Protection for Retirement Funds. My favorite new provision from BAPCPA pertains to the ability to protect (exempt) retirement account funds in bankruptcy cases. Prior to 2005, we were required to investigate exactly what type of retirement account that someone owned. After 2005, the federal exemptions were extended to virtually all retirement funds, and as a result, it's become much easier to protect those retirement assets. Yes, a very big deal.
So, 8 years in. This isn't a full list of the BAPCPA changes. Get back to me about questions and comments.
This is a common question. The answer is no, your spouse is not required to file jointly with you. Of course, each case is different and should be examined on its own merits.
For example, if you are considering bankruptcy and the debts are all in your name, then your spouse shouldn't file jointly with you. There would be no point to that, after all. Again, this is Pennsylvania law, and I presume that if you reside in a community-property state, the laws are completely different.
In fact, many times, particularly in a Chapter 13 case, I might not want both spouses to file. This is because if the family needs to get a new car during the 3 to 5 year Chapter 13 case, then the non-filing spouse can simply go out to a dealership and get a replacement car rather easily.
So, let's take a typical case. Let's say that Wife wants to file and most of the unsecured debts are in her name. How will Husband be affected? First, the Wife's bankruptcy filing will not impair Husband's credit rating. In other words, if Husband later pulls a credit report, it won't be reported that Husband filed a bankruptcy case.
However, if Wife wishes to file, then we'll need to know Husband's income. Remember that the Bankruptcy Code requires a disclosure of all household income. So, I would need to review Husband's paystubs to determine Wife's eligibility for bankruptcy (this is the Means Test review).
But, Husband's assets (those that he owns just in his name) will not be required to be disclosed in Wife's bankruptcy paperwork. Any jointly-held assets will obviously need to be disclosed.
What about jointly-held debts? At the end of Wife's case, her dischargeable debts will be eliminated (for example, credit cards, personal loans and medical bills). If Husband is a co-signer, then he will still owe on those debts. This is something to be planned ahead of time.
Again, this article pertains to Pennsylvania residents, and you shouldn't draw any conclusions for non-Pennsylvania individuals, where the laws are undoubtedly different.
If you're not sure about the liability, then a credit report can be very handy. A credit report will show, for example, whether a credit card account is an individual account, or jointly-held, or whether it's simply an authorized user status. In our example, let's say that Husband was able to use Wife's credit card account, it'll state on his credit report that he was an authorized user on her account. Therefore, if Wife files a bankruptcy case, then her liability for the account will be discharged (wiped out) and Husband won't be responsible for payments because he was merely an authorized user, and not a cosigner.
The bottom line is that each case is unique, and with proper planning, and a good examination of the couple's debts and assets, a joint bankruptcy filing might be the best outcome, but certainly not in every case.
If you have questions or comments, please respond!
Last week, I wrote about the bi-monthly cattle call of Pittsburgh bankruptcy lawyers in Judge Bohm's courtroom for "Reaffirmation Day". One commenter from my blog post last week mentioned that I hadn't talked about vehicle redemption as an alternative to reaffirmation.
Simply put, redemption in a Chapter 7 case is a legal strategy to reduce the overall balance on your current car loan to the fair market value of your car. You have the legal right of redemption pursuant to Section 722 of the Bankruptcy Code.
Here's an example: let's say that you're upside-down on your car loan. You owe $19,000 on your loan, but your car only has a fair market value of $12,000. Then you seek financing while in a Chapter 7. Yes, believe it or not, there are lenders out there. The most widely-known is called 722Redemption Lending. They can be found at www.722redemption.com. You might even contact your credit union, if you belong to one.
If your motion is approved by the Court, then the new lender through 722Redemption would pay $12,000 to your old lender, and you wouldn't owe the remaining $7,000 to the old lender. You would now have a new loan through 722Redemption, albeit with a relatively high interest rate, usually around 22% to 25%.
Redemption is an option that I simply don't get the opportunity to pursue very often. I hadn't done a redemption motion in a couple of years, but ironically today, I started to prepare the paperwork on two separate redemption motions. Hmm, I thought that was strange.
Both motions are being prepared for clients who are simply behind on their car payments for various reasons, but who wish to retain their cars. Surprisingly, neither client is upside-down on their car loan. It's simply that neither lender will work with either client on payment terms. Yes, car lenders can sometimes be unforgiving when it comes to negotiating repayments.
In one case, I am recommending that the car be redeemed for a one-time payment of $500. The current car loan is approximately $3,500. If the lender fights it and wants more than $500, then my client simply wants to walk away from the car, but he would absolutely want the lender to retrieve the car. If this happens, then the $3,500 car loan will be discharged in bankruptcy and my client won't owe a dime.
Ah yes, perhaps a subject for another day and another blog post, but what happens if you have an older-model car and the lender refuses to repossess? Hint: you're going to be in a bind, because you can't take that car to a junk yard without a car title.
If you have questions or comments, please let me know!
There's a new scene up in the Bankruptcy Court in Pittsburgh recently. Judge Carlota Bohm is the judge assigned to the vast majority of Chapter 7 cases. She took the bench as a new judge about a year ago. Before she took the bench, judges rarely scheduled hearings when you wanted to sign a reaffirmation agreement. Now, we've got hearings, albeit brief ones, and a lot of folks aren't sure why.
First, a reminder about just what a reaffirmation agreement is. Whenever you have a secured debt for a car or mortgage loan, you must choose on your Statement of Intentions what you want to do with the loan. In other words, are you going to surrender that car, or are you going to keep it. And if you're going to keep it, are you going to reaffirm the loan in Court or are you going to "retain and pay"?
Specifically, a "reaffirmation" of a debt is when you formally waive the discharge as to that debt. In other words, you state to the Court that you will be on the hook for that debt, no matter what happens in the future.
Most people react sharply, and tell me that of course, they want to keep their cars, and of course they need their car to get to work, etc., and that they absolutely want to reaffirm it. I respond that it's more complicated than that.
The 2 Cons
1) Deficiency Judgments. Lenders and banks absolutely want you to reaffirm your loans when you file bankruptcy. Why? Because if you default on your car loan 6 months or a year after your case is over, then they can repossess your car, and then sue you for the balance on the loan. Remember that cars depreciate quite a bit, and the car on which you owe $20,000 will be sold at a dealers-only auction for $6,000 or $7,000. Then the bank will sue you for the remaining $13,000 or $14,000. Ouch. But you don't reaffirm, then they can't sue you for this balance. If you do reaffirm, then yes,you're on the hook!
2) Gap Insurance. Let's say that you reaffirm your loan, and someone hits your car. Let's say that your car is totalled. Your car insurer will pay the fair market value of your car. Your insurer isn't going to necessarily pay off your car loan (unless you have gap insurance). If you don't have gap insurance, you might wind up with a totalled car, AND a balance owed on your loan. Ouch again.
The 3 Pros
1) Credit Rebuilding. If you decide to reaffirm, then IF you make your future payments on time, then those payments will help to rebuild your credit rating. Note that this could be a hindrance if you wind up paying the same loan late! But if you do not reaffirm the loan at all, then your payments will not show up on your credit report at all; it will appear instead that the loan has been wiped out (discharged).
2) Invoices and Statements. If you do not reaffirm your loan, then your lender will not send out monthly loan statements. Yes, if you retain the car or house, then you still owe the money and need to make a payment, but you'll need to photocopy an old statement to make sure you know the account number and payment address.
3) Website access. This is similar to number 2. If you do not reaffirm your loan, then you won't be able to make payments electronically on your lender's website. Yes, you can still make a payment via your bank's website, or you can mail in a payment. This isn't a huge deal, but it can be annoying. Clearly, the banks are trying their utmost to get folks to reaffirm their loans.
Retain and Pay
My take on reaffirmation agreements is that I don't encourage clients to reaffirm on car loans, but I don't worry as much about mortgage loans being reaffirmed. Why? Please remember that I write this as a Pennsylvania bankruptcy attorney, and folks in other States have different laws and practices. But because cars depreciate like crazy, I don't ever want a client to default on a car loan and wind up facing a big deficiency judgment. Car lenders are particularly aggressive when they need to repossess a car and then collect on a deficiency. If you reaffirm, and then later default, I guarantee that they will seek a deficiency!
In Pennsylvania, mortgage companies rarely seek deficiencies on residential mortgage loans after a sheriff's sale. This is a common practice in other States, but for now in Pennsylvania, we virtually never see banks do this on residential mortgages. Be careful though--this could change. There's no Pennsylvania law that says that they can't.
So, for cars, are you allowed to "retain and pay"? An Allegheny County Judge ruled in a 2007 case that you indeed could. The case involved a person who had filed a bankruptcy, and who did not reaffirm his car loan. The car was repossessed soon after the bankruptcy case was over. The loan was completely current, and the only reason for the repossession was because of the failure to reaffirm. The Judge ruled that the repossession was not legal, because the loan account was still current.
Lastly, if you choose not to reaffirm on your car loan, then you can simply surrender your car after the bankruptcy case is over, and then enter into a new car loan with a different lender. Yes, you will be able to rebuild your credit, and fairly soon after the Chapter 7 is over, you may very well qualify for a new and better loan.
Judge Bohm and the Court's Position on Reaffirming Loans
If you decide to reaffirm a mortgage or car loan, the Judge wants to know that you understand what you are choosing to do. The Judge does however deny a high percentage of reaffirmation requests. Why? Because she states that you don't have to reaffirm a loan in order to keep the house or car in question.
One big difference however is if your bank offers you a lower interest rate or lower payment through the reaffirmation agreement. The Court will be much more likely to approve a reaffirmation agreement when the new loan terms are better.
And it never hurts to ask your mortgage company or bank to do just that. Some of them will never do it, but your lawyer should ask anyway.
If you have any comments, please let me know!
Back in 2010, I wrote about how long mortgage foreclosure takes in Pennsylvania.
Again, here are the basics. In Pennsylvania, we have a judicial foreclosure system, which means that foreclosure cases must be filed in Court. Still, there are specific steps to follow:
1) Notice of Intention to Foreclose, which is a letter sent to the homeowner by the mortgage company after a payment default of usually 3 months;
2) Act 91 Notice, a required notice sent to the homeowner indicating that they have a right to contact the PA Housing Finance Agency for assistance;
3) After a month wait, the mortgage company can then file a Complaint for Mortgage Foreclosure in Common Pleas Court;
This update is specifically for Allegheny County residents and it relates to Step 3. In Allegheny County for the past few years, there has been a Mortgage Mediation Program in Common Pleas Court. This program was designed to assist homeowners who were seeking a mortgage modification. Those homeowners in the program received an automatic stay on the foreclosure proceedings.
Many homeowners however discovered that they could easily delay the process even further by requesting postponements from the Judges.
It appears that the judges currently assigned to the Allegheny County program are attempting to speed up this process. Ultimately, this is good news for the program and for homeowners alike.
Remember that more than 50% of the homeowners who apply for mortgage modifications will be denied a modification. Don't forget the fact that your mortgage company really doesn't want to grant you a reduction in interest or a deferral of arrears or a principal writeoff. I've written about this before, but you're dealing with a mortgage servicer who likely was not the original lender you received your mortgage from.
The bottom line is that the country's best court-supervised mortgage modification programs offer close oversight from judges along with quick turn-around times.
Moreover, if you really want to save your home, do you want to stay in a foreclosure mediation program for 18 months, only to receive the news that you've been denied? Instead of being $6,000 behind on your mortgage, now you're $18,000 or $24,000 behind. Ultimately, that's going to make it quite a bit more difficult to successfully pay for a Chapter 13 payment plan to cure your mortgage arrears.
Personally, I have been glad that this program exists to help homeowners, but disappointed at times to receive calls from homeowners who were so far behind on their payments. It simply makes filing a Chapter 13 case that much more difficult.
Let me know if you have any other questions.