When Does a Claim Accrue against Chapter 7 Debtors?

I have a pending auto accident case in which the issue of when a claim accrues against a Chapter 7 debtor has come up.  In my case, the debtor was involved in an automobile accident approximately one year prior to her filing a Chapter 7 bankruptcy petition.  Attorneys for the plaintiff placed the debtor's insurance company on notice of the plaintiff's claim, but did not place the debtor on notice.  The plaintiff's attorneys filed suit two months after the debtor filed her Chapter 7 petition.  About thirty days after plaintiff filed her complaint, the bankruptcy court entered an order of discharge and closed the the debtor's case.

A motion to dismiss the plaintiff's lawsuit is now pending.  The argument in favor of dismissal is that the automatic stay renders the complaint filed by the plaintiff void.  Thus, the argument follows that since the complaint is void because it was filed in violation of the automatic stay, the suit must be dismissed.

This is certainly a frustration for the plaintiff.  Had she known about the bankruptcy, she could have filed a motion for relief from the automatic stay and agreed not to pursue any recovery from the debtor beyond available insurance coverage.

One lesson learned from this case is that plaintiff's counsel should do a quick search on PACER (the federal case reporting system) to determine if defendants have filed for bankruptcy protection.  A lesson for debtors is that they should be sure to include any potential claims against them in their bankruptcy filing.

Stay tuned to learn the outcome of this interesting legal question.

www.debt-relief-law.com

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(502) 245-9100

Student Loans and Bankruptcy

Student loan debt is the most pressing problem in the realm of consumer law.  There is currently $1.48 trillion in outstanding student loan debt, and 44.2 million Americans have at least some outstanding student loan debt.  The current student loan delinquency rate is 11.2%, and the median student loan payment for borrowers between the ages of 20 and 30 is $203 per month.

Generally speaking, student loans, whether federal or private, are not dischargeable in bankruptcy.  If you can show undue hardship, meaning that repaying the loans would result in your inability to maintain a minimal lifestyle, you may be able to discharge part or all of your student loans.  However, courts are extremely reluctant to find undue hardship.

Using Chapter 13 to Address Your Student Loans

Chapter 13 of the bankruptcy code is a means that is available to address student loan debt.  Chapter 13 is a repayment plan that is usually 36 to 60 months in length.  Your payments will be based on disposable income left after your reasonable monthly living expenses.  For example, if you have $300 disposable income after your reasonable monthly living expenses, your Chapter 13 plan payments will be $300 per month.  The money goes to the Chapter 13 Trustee, who distributes the money to your creditors, including your student loan creditors.

Chapter 13 Approaches to Student Loan Debt

Chapter 13 allows the creation of different classes of unsecured creditors, which includes student loans, credit card debt, health care debt, etc.  You can treat student loans in one of three ways in a Chapter 13.  

First, you can treat student loan debt the same as all other unsecured creditors.  This means that student loan creditors will receive the same payment percentage as all other unsecured creditors.  

Second, you can create a special class for the student loans and pay a higher percentage to the student loan creditors than to the other unsecured creditors.  

Third, you can create a special class for the student loan creditors and pay zero percent to them while paying the remaining unsecured creditors.

The approach taken will vary depending on your individual circumstances.

Cautions Regarding Chapter 13 and Student Loan Debt

Some cautions are in order.  First, your student loan debt will not be discharged via the Chapter 13 plan.  Any unpaid portions on the student loans will remain, and interest will continue to accrue.  But, all collection actions have to stop during the repayment period.  Your other unsecured debt will be discharged if you successfully complete your repayment plan.

While not a discharge or long-term solution, Chapter 13 may be the best means to address your student loans if you are unable to pay them.  Of course, once you complete your repayment plan, you should have more disposable income.  But, if you still are unable to pay, you could always immediately file another Chapter 13 petition.

If you are struggling with student loan debt, contact a skilled bankruptcy lawyer to discuss your options.

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Considering a Debt Settlement Company? Here are Some Tips

If you are considering hiring a debt settlement company, you should consider the decision carefully.  I have considerable experience working with debt settlement companies in my debtor defense practice.  I must say that my view of these for profit debt settlement companies is not particularly positive.  Sadly, many of my clients have paid thousands of dollars to a debt settlement company only to have a lawsuit filed by a creditor who is not receiving payments filed against them.  And, in most cases, we have no defense to raise against the lawsuit.  The only alternative at this point for many clients is to file a Chapter 13 bankruptcy if they own property or a Chapter 7 if they don't.  I once had a client who owned real estate with a value of approximately $150,000 who had two judgments against him for approximately $25,000 while working with a debt settlement company.  Even though he was on Social Security disability, he had to file a Chapter 13 bankruptcy to protect his real estate, which could have been seized and sold to satisfy the judgments.  Below are some thoughts that may help you in deciding whether to hire a debt settlement company.

Some of your creditors may also refuse to work with the debt settlement company you choose. In many cases, the debt settlement company will be unable to settle all of your debts.

Debt settlement companies often claim they can negotiate with your creditors to reduce the amount you owe. However, before working with a debt settlement company, you should remember: Debt settlement companies often charge expensive fees. Debt settlement companies typically encourage you to stop paying your credit card bills. If you stop paying your bills, you will incur late fees, penalty interest and other charges, and creditors will likely step up their collection efforts against you. Unless the debt settlement company settles all or most of your debts, the built up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles. Using debt settlement services can have a negative impact on your credit score and your ability to get credit in the future.

You could owe taxes on debt that is forgiven. If a portion of your debt is forgiven by the creditor, it could be counted as taxable income on your federal income taxes. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax.

You could end up further in debt than when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and to collect the funds required for a settlement. This can have a negative effect on your credit score and may result in the creditor or debt collector filing a lawsuit while you are collecting settlement funds.  I see this happen frequently in my practice. And if you stop making payments on a credit card, late fees and interest will be added to the debt each month. If you exceed your credit limit, additional fees and charges may apply. This can cause your original debt to increase. 

Don't do business with a debt settlement company if it: (1) Charges any fees before it settles your debts; (2) Touts a "new government program" to bail out personal credit card debt; (3) Guarantees it can make your debt go away; (4) Tells you to stop communicating with your creditors; (5) Tells you it can stop debt collection calls and lawsuits; or (6) Guarantees that your unsecured debts can be paid off.

If you do business with a for-profit debt relief company, the company may tell you to put money in a dedicated bank account, which will be managed by a third party. You may be charged fees for using this account.

Consider as an alternative to a debt settlement company consulting with a non-profit, consumer credit counseling service. These organizations will attempt to work with you and your creditors to develop a debt management plan that you can afford, and that can help get you out of debt. They usually will also help you develop a budget and provide other financial counseling.

Also, you may want to consider consulting a bankruptcy attorney, who may be able to provide you with your options under the law. Some bankruptcy attorneys  will speak to you initially free of charge (we don't charge for an initial consultation).

In conclusion, if you are considering hiring a debt settlement company, think the decision through and consider your options before signing up.

www.debt-relief-law.com

(502) 245-9100

Stop Foreclosure

     Early in this decade home foreclosure was a raging epidemic.  With the improving economy, the foreclosure epidemic went away… or did it?  In 2016 one in 2505 mortgages in Kentucky was in foreclosure, and one in 1036 mortgages in Indiana was in foreclosure.  On March 4, 2017 Zillow listed 5037 foreclosed Kentucky homes and 9685 foreclosed Indiana homes for sale.   In the first quarter of 2016 70% of loans in foreclosure were originated prior to 2009 even though these loans accounted for only 30% of outstanding loans. 
      As of February 2017, the first mortgage default rate nationwide was 0.72% (7.2 loans per 1000), and the second mortgage default rate nationwide was 0.48% (4.8 loans per 1000).  The trend for both first and second mortgage defaults increased from fall 2016 according to the S&P/Experian indices.
     While there may be a lower percentage of defaults compared to the height of the recession, the statistics above clearly show that many residents of Kentucky and Indiana are facing the prospect of losing their homes.  The sad fact is that many of these folks will lose their home unnecessarily.
     When people fall behind on their mortgage payments, either first or second mortgage, they suffer a feeling of helplessness.  Since they did not have sufficient income to meet their obligations, they often feel that there is no way to ever catch up.  However, the Bankruptcy Code provides a potential source of relief for those who are facing a possible foreclosure.
     Chapter 13 of the Bankruptcy Code allows persons who are behind on their mortgage to place the amount they are behind in a plan to repay their debts over a period of 36 to 60 months.  And, if they have a second mortgage but no equity in their home, the second mortgage can be “stripped off” and treated as any other debt.
     Regular mortgage payments are made outside the Chapter 13 plan.  If the person fails to make the required payments, the mortgage holder may ask the court to allow it to move forward with foreclosure.
     Suppose a person has a $200,000 first mortgage, but the home is only worth $275,000.  Suppose also this person has a second mortgage of $50,000.  Since there is no equity in the home to secure the second mortgage, it can be stripped off and treated as any other unsecured debt.  These debt are paid back at less than 100%, sometimes much less, and when the Chapter 13 plan is completed and the court enters the discharge order, the second mortgage is erased.  But, if the person fails to complete the plan payments and the case is dismissed, the second mortgage is not stripped off.

     Stripping off the second mortgage only works when there is no equity in the home to secure the second mortgage.  For example, if a home has a first mortgage of $200,000 and a value of $300,000 with a second mortgage of $75,000, then there is $100,000 to secure the second mortgage.  But, if the first and second mortgages exceed $300,000, the second mortgage can still be stripped off.
     A person facing foreclosure needs to consider whether she can afford to keep the home.  If it it is a tight financial situation, then perhaps Chapter 13 is not the best choice.  An experienced bankruptcy attorney can certainly provide guidance in this regard.

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Supreme Court to Decide if Filing Proof of Claim in Bankruptcy Violates FDCPA

The Consumer Financial Protection Bureau has filed an amicus brief in the U.S. Supreme Court in support of the respondent/consumer in Midland Funding, LLC v. Aleida Johnson, a decision of the Eleventh Circuit that held Midland’s filing of an accurate proof of claim in the consumer’s bankruptcy case on a time-barred debt violated the FDCPA.

In its brief, the CFPB argues that the Supreme Court should reject Midland’s arguments that the filing of a proof of claim that is accurate (i.e. provides correct information about an unpaid debt) but is for a debt that is time-barred does not violate the FDCPA, and even if the filing does violate the FDCPA, the Bankruptcy Code (Code) would preclude such application of the FDCPA.  According to the CFPB, nothing in the Code allows a creditor to legitimately file a proof of claim that it knows is subject to disallowance under the Code because it is time-barred.  The CFPB also argues that because a debt collector implicitly represents that it has a good faith basis to believe its claim is enforceable in bankruptcy when it files a proof of claim, the filing is misleading and unfair in violation of the FDCPA when the collector knows the claim is time-barred and therefore unenforceable in bankruptcy.

With respect to Midland’s preclusion argument, the CFPB argues that Code does not preclude an FDCPA action based on the filing of a proof of claim for a time-barred debt.  According to the CFPB, treating Midland’s alleged conduct as an FDCPA violation would not penalize Midland for conduct the Code authorizes and would not otherwise create any conflict between the FDCPA and the Code.

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Chapter 7 Bankruptcy Caution

Beware if you have taken a Chapter 7 bankruptcy and did not reaffirm your mortgage and/or second mortgage.  We have found that may times, lenders fail to report that the mortgage account has been closed. In fact, I have just such a case where the bank has failed to change the reporting of the mortgage even though it did change the reporting of the second mortgage of my client who had taken a Chapter 7 and did not reaffirm the debt on the house.

The lesson here is to check your credit report after taking a Chapter 7 to ensure that those lines on your report are accurate.  This is critical to your rebuilding your credit after bankruptcy.

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Student Loan Debt and Bankruptcy

A huge amount of the debt Americans carry is from student loans.  That debt today totals a staggering $1.2 trillion!  Often people find that paying back their student loan debt is an impediment to their being able to provide minimal necessities for themselves and their dependents.  Bankruptcy may be an option, but only in limited circumstances.

In order to have student loans discharged in bankruptcy, the debtor must show that it would be an undue hardship to be required to pay them.  Courts will apply various tests to determine if an undue hardship exists.  Regardless of the test applied, most courts are hesitant to discharge student loans, but if the debtor has very low income or incurred student loans from a for-profit school, the odds are better that a discharge will be granted.

One of the tests courts apply is the Brunner test.  In order to discharge student loans under the Brunner test, the debtor must meet 3 criteria:

1. Poverty.  Based upon current income and expenses, the debtor cannot provide a minimum standard of living for himself and his dependents.
2. Persistence.  The debtor's current financial circumstances will likely continue into the future for a significant portion of the student loan repayment period.
3. Good Faith.  The debtor has made a good faith effort to repay his student loans.

Again, if and only if the debtor meets all 3 criteria will the court consider a discharge under this test.

Some courts use a totality of the circumstances test to determine if student loans may be discharged.  In this test the court will look at all relevant factors to determine if an undue hardship exists.

Courts vary on this issue of whether a debtor may discharge only a portion of his student loan debt.  Many view this proposition as an all or nothing situation, i.e., the debtor will be able to discharge all of his student loan debt, or he will be able to discharge none of it.

There is a formal procedure that must be followed in order to discharge student loan debt called a Complaint to Determine Dischargeability.  The burden of proof is on the debtor to show undue hardship.

A good bankruptcy attorney will be able to help with the ins and outs of working through which tests, etc., apply in a particular jurisdiction.

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