Credit Counseling Before Bankruptcy: When Must it Be Done?
By Mark Markus | June 12, 2009
I write this to clarify misconceptions regarding the required credit counseling prerequisite to filing a bankruptcy case.
One of the requirements of the new bankruptcy law that went into effect in October 2005 is that all individual debtors filing a bankruptcy case must complete a credit counseling course by a certified company within six months prior to filing their bankruptcy case.
Recently I have received a number of comments from potential clients telling me that they were informed that they had to complete the credit counseling course, then wait six months before they can file their bankruptcy case. This is completely untrue.
The certificate for a completed credit counseling course is valid for 6 months. If for some reason you obtain a certificate and do not file your bankruptcy case (Chapter 7, Chapter 13 or Chapter 11) within 6 months, then you need to take the course again and obtain another certificate.
The course itself probably takes about an hour or so to complete. Many credit counseling agencies allow this to be done online.
There is another financial management course which Congress requires debtors to take AFTER the bankruptcy case is filed. This is a prerequisite to obtaining a discharge of debts. This financial management course (also called a debt management course) takes a similar amount of time as the credit counseling course to complete and can also be done online in many instances.
Topics: credit counseling | No Comments »
Means Test: 401k loan repayment not an Expense
By Mark Markus | May 29, 2009
Loan repayments to a 401k plan cannot be used as a budget expense on the means test.
The Ninth Circuit Court of Appeals ruled today, in the case of In re Egebjerg, that 401k loans are not a debt as defined in the bankruptcy code and as such, the amount of any loan repayment cannot be considered in calculating a debtor’s budget/ability to repay his/her debts.
The basic rationale is that since a 401k loan is repaying funds to the owner of the 401k, it is not an actual debt, and the funds used to repay it are not a necessary living expense.
There are tax consequences for failure to repay a 401k loan, and these may be able to be argued as an offset, but the loan repayment itself cannot be used to determine eligibility to file a chapter 7 case.
Topics: Los Angeles Bankruptcy Issues, Uncategorized, chapter 7, means test | 1 Comment »
Chrysler Bankruptcy: The Trickle Down Effect
By Mark Markus | May 15, 2009
As everyone knows, Chrysler Motors filed for protection under Chapter 11 of the United States Bankruptcy Code last month. As part of its reorganization plan, the company is closing many dealerships. In fact, according to the Los Angeles Times, Chrysler gave notice of closing 789 of its dealerships across the country. General Motors is taking similar steps to close even more of its dealerships. Thousands of workers will suddenly be unemployed and may need to file bankruptcy themselves. This obviously can have a chilling effect on the economy. This is not just limited to Detroit where manufacturing takes place. This is in your neighborhood.
But, like forest fires are a natural and necessary event (those not started by humans anyway), bankruptcy can offer a fresh start in the same way as reforestation does after a fire. Sometimes we all need to just throw in the proverbial towel and start over, and fortunately, our bankruptcy laws allow us to do that (with certain restrictions, of course).
The employees of Chrysler, General Motors, and those similarly situated should take stock of their financial situation and consult with bankruptcy counsel about their options in the wake of this unfortunate set of circumstances.
Topics: Bankruptcy Law | No Comments »
Attorneys Fees Awarded in Divorce: Are they Dischargeable?
By Mark Markus | April 22, 2009
I was asked today if attorney’s fees awarded in divorce (family law) court to the other spouse’s lawyer can be eliminated (discharged) in a bankruptcy case. The answer is that it depends.
In general domestic support obligations, which are those obligations issued for the maintenance or support of a former spouse or child, including alimony, are not dischargeable in any bankruptcy case. So the key element is determining if the type of debt is for alimony, maintenance or support of a child or spouse. This is not always clear from the divorce decree or other family law order.
Marital equalization obligations, such as those where an award is made against one spouse to offset assets being given to the other, are generally not considered for support or maintenance. Similarly, attorney’s fees awarded to the other spouse’s lawyer is likely not for support or maintenance.
Debts incurred as part of or in connection with a divorce decree or separation which are not for the alimony, support or maintenance of the spouse or children may be dischargeable in a Chapter 13 bankruptcy case, but not in any other chapter.
Thus, the key is determining whether the debt in question is for the support or maintenance of the spouse or child, and which chapter of bankruptcy is involved.
Topics: chapter 13, divorce and child support issues | No Comments »
New Bankruptcy Mortgage Modification Dropped
By Mark Markus | April 9, 2009
The following is just in from the American Bankruptcy Institute:
MORTGAGE MODIFICATION, EXECUTIVE COMPENSATION LIKELY TO BE DROPPED FROM SENATE AGENDA
Senate Democratic leaders appear likely to drop several high-profile legislative issues from their agenda, including efforts to tax bonuses paid to corporate executives and giving bankruptcy judges the ability reduce mortgage payments on the primary mortgages of chapter 13 debtors, according to a CongressDaily report today. Senate aides said that the legislative agenda this year might increasingly focus on revamping financial regulations — which could reach the Senate floor in late summer — and on health care reform. The chamber will reconvene April 20 by taking up a fraud-enforcement bill that authorizes increasing Justice Department funding and authority to crack down on mortgage fraud and other crimes related to federal assistance programs. Those efforts come as more high-profile legislation sits on the back burner in the face of opposition from Republicans and moderate Democrats. Senate Majority Leader Harry Reid (D-Nev.) and Senate Finance Chairman Max Baucus (D-Mont.) have said that they have not dropped efforts to craft a bill slapping heavy taxes on bonuses for firms such as American International Group that received bailout money, but Democrats have no immediate plans to move an AIG bill in the face of White House concerns and strong opposition from the banking industry. Also faltering is mortgage cramdown legislation that lobbyists and some senators say lacks the votes to pass. Reid has said previously that he is prepared to drop the cramdown language provision from a broader housing bill if the votes are not there.
Topics: Uncategorized, chapter 13, real estate issues | No Comments »
Bank Accounts Frozen After Filing Bankruptcy
By Mark Markus | March 11, 2009
Within the past couple of years, a couple of banks have started freezing the funds in the deposit accounts of debtors when they file a Chapter 7 bankruptcy case. To my knowledge, the only two banks that are doing this are Wells Fargo Bank and Union Bank. They do this regardless of whether they are owed money by the debtors.
This has resulted in a great deal of confusion among clients, as well as unsuspecting bankruptcy attorneys who fail to advise their clients of this possibility.
Why can these banks freeze the funds in their accounts? Well, it’s a rather complicated legal analysis, but here is the basic explanation:
When a Chapter 7 bankruptcy case is filed, EVERYTHING the debtor owns or has an interest in becomes property of the Chapter 7 Trustee. That includes everything from your house to your underwear to money in your bank accounts. The Trustee has a duty to liquidate any assets that are not protected by an exemption. (to see which State’s exemption laws would apply in a given case, go to http://www.bklaw.com/exemptions.html) .
What Wells Fargo and Union Bank are supposedly doing is protecting (acting as a custodian for) the money that is in their bank accounts on the day the bankruptcy case is filed for the benefit of the Trustee until the Trustee decides to either take the money and pay it out to the creditors (if it’s not exempt) or, more likely, “abandon” (return) the funds back to the debtor. This only applies to the exact funds in the account on the date the bankruptcy case is filed. It does not apply to funds deposited subsequently, but obviously this can be a major inconvenience if there’s a large amount in the bank account that gets frozen. It can take anywhere from several days to several weeks to get the Trustee to authorize the banks to “unfreeze” the accounts, and sometimes it even requires a motion to be filed with the court to have the Judge order it. If the funds are exempt, they will eventually be released, but those banks will freeze the funds.
An unrelated but similar problem can result if you owe money to the banks in which you have your money deposited. In this circumstance, the banks can actually TAKE the funds in your accounts to satisfy the debts to them if you are delinquent on the payments. This usually occurs before a bankruptcy case is filed, so it’s not really a bankruptcy issue, but I always advise my clients to switch bank accounts to an institution that they do not owe money to (and other than Wells Fargo or Union Bank, for the reasons stated above).
Topics: chapter 7 | No Comments »
Debt Consolidation or Bankruptcy: Which is Better?
By Mark Markus | February 4, 2009
One of the most frequent questions bankruptcy attorneys are asked by potential clients is whether they should file bankruptcy, or use a debt consolidation company to make payments towards their debts. For those lucky debtors who qualify for Chapter 7 (which requires no repayment of debts but allows in most cases for discharge of all dischargeable debts), the decision is markedly easier to make.
But what about those who have the ability to make some monthly payments to their creditors and don’t qualify for chapter 7? Their primary bankruptcy option in many cases is Chapter 13, which allows for, usually, a partial repayment of the debt. Armed with this choice, most people decide that debt consolidation, rather than filing a Chapter 13 bankruptcy case, is their optimal solution. However, this is almost never true.
In Chapter 13, the amount you have to repay to your creditors will almost always be less than (or, at worst, equal) to what you will have to repay outside of bankruptcy. This is true even if you are required to repay 100% of your debts in a Chapter 13 case. Depending on various factors–primarily your income and expense– you can get a discharge of your debts in a Chapter 13 case repaying anywhere from 0% to 100% of your unsecured debts for 36-60 months.
Why is it better to repay 100% in a Chapter 13 rather than doing debt consolidation? Because you do not have to pay for interest accrual on unsecured debts in a Chapter 13. Even under the best consolidation deal outside of bankruptcy there is going to be interest paid. Also, in Chapter 13 your repayment plan will be for a maximum of 60 months (and in many cases can be as little as 36 months). This can result in significantly less paid out over time than one would have to pay in a debt consolidation arrangement.
So if you are in a position where you may have too many assets or income to qualify for a Chapter 7 case, but are having trouble managing your monthly payments on your credit cards or other unsecured debts, you should consult with a bankruptcy attorney about the possibility of filing a Chapter 13 case. You very well may be able to pay off all your unsecured debts with affordable monthly payments in less than 5 years!
Topics: chapter 13, debt consolidation, means test | No Comments »
SB 61: Eliminate Mortgage Liens in Chapter 13
By Mark Markus | January 30, 2009
On January 6, 2009, Senator Dick Durbin (D, IL) introduced Senate Bill 61 called the “Helping Families Save Their Homes in Bankruptcy Act of 2009.” The bill has several provisions, which can be analyzed by following the above link, but the main purpose of the bill is to allow homeowners in a Chapter 13 bankruptcy case to reduce the amount of liens (mortgages) against their home down to the value of the home and modify the payments. This is known as lien stripping in bankruptcy.
For example, if your home is worth $400,000 and you owe $350,000 to the First Mortgage and $100,000 to the second, you would theoretically be able to reduce the lien of the second mortgage down to $50,000, and then reamortize (modify) the payments based on that amount. (The remaining $50,000 that was taken off would be treated as an unsecured claim and paid whatever percentage the other unsecured creditors were to receive in the case).
This is a potentially significant development and one can reasonably expect President Obama to sign this law if it passes both houses of Congress. Check back often for the progress on this new legislation.
Topics: chapter 13, foreclosures and short sales, lien stripping | No Comments »
Success Rate in Filing Bankruptcy
By Mark Markus | December 14, 2008
Recently a potential client asked me a question that, as a bankruptcy attorney, left me shaking my head. That question is: “What is your success rate in handling cases for your clients?”
The answer to this question depends on how one defines “success.” Does success mean that the client gets everything on his/her “wish list” despite negative facts to the contrary? Or does it mean a favorable outcome given the client’s fact situation? Often, one who asks a question like this has unrealistic expectations and wants a miracle. For example, is it a “success” in a murder case where the D.A’s office has nearly indisputable evidence of the crime and is likely to be able to show guilt beyond a reasonable doubt, and the defendant’s attorney bargains the jail time down from life to 10 years? Or is only acquittal considered a success? While bankruptcy doesn’t deal in the same terms as a criminal matter, this analogy is illustrative.
The goal of most (if not all) bankruptcy cases is to obtain a discharge of some or all of your debt, either without paying anything on it, such as in a Chapter 7 case, or by repaying a portion of it, such as in a Chapter 13 or Chapter 11 case. However, in any bankruptcy case there are many things that can occur to limit or even eliminate the discharge of some or all of ones debts. For example, creditors can object to the discharge of debts that were incurred through fraud, misrepresentation. Most tax debts are not dischargeable. Student Loan debts are usually not dischargeable. As the attorney, if the client’s facts show fraud, I can do my best to limit or minimize the chances of a creditor objecting, but I can’t change the facts, nor can I dictate which Judge will get the case or how the judge will rule.
Another thing that can happen is that the US Trustee’s Office can file a Motion to Dismiss a case for any number of reasons, the most common being if they can show the filing is an “abuse” of the bankruptcy system. This is usually shown if the debtor is showing an ability to repay their debts, either due to their current budget, or the means test analysis. Now, a good attorney will usually not file a Chapter 7 case that is showing a “presumption of abuse” on the means test, but there is enough vague language and uncertain law in this area, that sometimes it makes good sense to try. Does that mean that if the US Trustee objects and the the debtor decides to convert their case to a Chapter 13 repayment plan that it wasn’t a success? No, it means that a Chapter 13 was the most favorable outcome given that particular fact scenario.
The bottom line is, if you want to know a bankruptcy attorney’s “success rate”, you need to be prepared to define “success” as it relates to that case. It is likely best to define it as “the most favorable outcome given the facts of a particular case.” No attorney can guarantee ANY outcome (favorable or otherwise). In fact, it’s legally prohibited for an attorney to do so. That is because there are many variables in any legal case beyond the attorney’s control, not the least of which is….the Judge.
Topics: Bankruptcy Law, General Bankruptcy Issues | No Comments »
Get things in writing and get receipts
By Mark Markus | November 26, 2008
If there’s one thing lawyers in general repeatedly see from their clients–in any field of law–it’s the lack of proof or evidence necessary to properly represent them or assist in solving their problems. This is as true for a contracts attorney whose client insists is the victim of a breach of an oral contract with someone, but has nothing in writing showing the terms of the contract, giving rise to the old adage “an oral contract isn’t worth the paper it’s printed on.”
In bankruptcy, the common errors I see in this regard include the following: paying rent with cash (often to family or friends), not having a written rental agreement, paying childcare expenses (baby sitter) with cash (and usually not paying the required “nanny taxes“), making charitable contributions without getting receipts, selling assets without keeping records of the transactions, giving or receiving loans without a promissory note, etc.
Many times I have clients tell me that they are paying rent to their parents for allowing them to live there, but there is no rental agreement. It could look to the bankruptcy court and creditors as though the debtor in question is merely gifting money to relatives to keep it out of the reach of creditors which is a big “no-no” (known as a “fraudulent transfer“).
Failure to have these items can result in all kinds of problems in your bankruptcy case, from as minor as having the expenses disallowed in your budget (thereby making it look like you have more disposable income than you really do) to having your entire discharge denied for failure to keep adequate books and records from which your financial situation can be be determined (11 U.S.C. 727(a)(3)).
It is very important to have and maintain records of your financial transactions. If necessary, these can sometimes be created after the fact to properly memorialize the intent of the parties, but it’s obviously better (and more persuasive evidence) if they are done at the time the events take place.
Loans are particularly important. Many times clients receive assistance from family members prior to filing a bankruptcy case. Most assume they are going to repay it when they can, but since it’s family, there is nothing in writing. Big mistake. If it is not a loan, then the money received is income–at least as far as current monthly income is calculated for the means test. This can result in a debtor who is otherwise eligible to file a Chapter 7 case, having to file a Chapter 13 or Chapter 11 repayment plan case.
So, the rule is: Always get things in writing and get receipts for payments you make. It can save you lots of problems inside and outside of bankruptcy.
Topics: Bankruptcy Law, General Bankruptcy Issues, chapter 13, chapter 7 | No Comments »