Debt Charge-offs: Do you still owe the money?
By Mark Markus | August 4, 2008
A common misconception people have regards charge-offs on their credit reports. Many people think that if a credit card company or other creditor “charges off” the debt, that it means they no longer owe the money, or they will no longer try to collect on that debt. This is simply not correct.
A charge-off is merely a bookkeeping entry. It has nothing to do with the legal status of the debt. Often, creditors will sell the accounts on which they are owed money to a third party collection company, who then owns all the rights to pursue the debt, just as the original creditor did. What ends up happening is that a debt you thought was long gone, suddenly resurfaces after several years, when the new owner of the debt commences a lawsuit to collect on it.
This can have an impact on your credit report as well, because if that creditor gets a judgment, then the judgment will be on your record for at least another 7 years.
It is important not to assume debts have gone away simply because they are “charged off.” More often than not, you will still have to deal with that debt whether through a bankruptcy or some other alternate means.
Topics: Bankruptcy Law, General Bankruptcy Issues | No Comments »
Non-Filing Spouse’s Income Must Be Included in Bankruptcy
By Mark Markus | July 17, 2008
The fact that a non-filing spouse’s income must be included in the bankruptcy case of the other spouse is one of the most difficult concepts for my clients to grasp. The common scenario is this:
One spouse has certain debts which are only in that spouse’s name and may have even been incurred entirely prior to the marriage. He (or she) wants to file a bankruptcy to deal with those debts without involving their spouse. That is no problem. A bankruptcy case can always be filed by one spouse without the other. However, when determining eligibility for bankruptcy, which includes the ability to repay debts, the other spouse’s income MUST be included in the analysis.
This has always been the case in community property states, such as California. But with the changes in the bankruptcy laws which became effective in October 2005 (see new bankruptcy laws) Congress stated specifically that unless the spouses are legally separated or living apart (and not just for the purpose of evading the bankruptcy laws) or have a valid prenuptial agreement, then the non-filing spouse’s income must be included in the means test analysis (which is one of the several eligibility tests now required). [11 U.S.C. 707(b)(7)(B)].
The reason for this in community property states is that every spouse has a community property interest in the income earned by their spouse (and vice versa).
These requirements have absolutely nothing to do with which spouse owes the debt, whose name is on the debts/accounts, or which spouse is filing the bankruptcy case.
This also does NOT mean that the non-filing spouse will be “affected” by filing the bankruptcy case. It merely means that their income must be factored into the eligibility analysis and may result in a Chapter 13 repayment plan needing to be filed instead of just a straight chapter 7 liquidation case.
Whether or not to include a non-filing spouse’s debts in the bankruptcy of the spouse that files is partially dependent on state law and is the topic for another discussion.
Topics: Bankruptcy Law, means test | No Comments »
Is it OK to put my property in another’s name?
By Mark Markus | July 14, 2008
I get asked a variation of this question at least once a week. Today’s consultation featured a mother who had quitclaimed half an interest in her home to each of her two sons about 2 years ago. She now needs to file a bankruptcy case. The sons are (rightfully) concerned. Why? Because they didn’t pay anything for the property interests they received.
In bankruptcy, this is known as a potentially “fraudulent transfer” which can be recovered by the Trustee. Of course, the Trustee must be able to specifically prove a few things in order to prevail. Among these are: 1. The transfer in question took place within 2 years prior to filing the bankruptcy case (In California, this is four years per separate California law); 2. The debtor making the transfer did not receive “reasonably equivalent value” for the transfer from the transferee AND was insolvent at the time the transfer was made, or became insolvent as a result. (insolvency is a term defined usually with reference to the Internal Revenue Code). Or if the Trustee can prove that the transfer was done with intent to hinder, delay or defraud a creditor, then that is a separate ground on which the Trustee can prevail.
There are obviously more complexities to this and you can read more about fraudulent transfers on my webpage, but this should give a warning bell to all those who are considering doing this.
Even if done innocently or involuntarily, any such transfers can be recovered–both inside and outside of bankruptcy–and the value received by the transferee (person who received the asset) can be ordered by a court to be returned.
Topics: Bankruptcy Law, transfers | No Comments »
How much debt do you need to go bankrupt?
By Mark Markus | July 8, 2008
A question I have been repeatedly asked over the years from my potential bankruptcy clients is: How much debt do they need before they can declare bankruptcy? I have found that this question has different intent and meaning to different people. For example, some people think that there actually is a minimum amount of debt required before one is eligible to file a bankruptcy case. That question is very easy to answer: Some amount more than zero.
I think the real question most intend to ask is whether filing bankruptcy is prudent given the amount, and type, of debts they have. This can only be answered after a comprehensive analysis of a client’s complete financial situation.
For example, certain bankruptcies–such as a Chapter 13– can be filed when the only debt one has is secured debt, such as a mortgage, in order to allow time to catch up on payments.
For a Chapter 7 liquidation case, I have filed cases for debtors who have had as little as $5,000 of total unsecured debt to those with over $5,000,000. In the case of the young man who had $5,000 of debt, which is admittedly an unusual amount on which to file a bankruptcy case, the situation was such that it was in his best overall interest–after analyzing his entire situation–to file a bankruptcy case. He was relatively uneducated, had a part-time minimum wage job, and no credit to speak of (the debt was a judgment from a traffic accident). Filing bankruptcy enabled him to get rid of the debt, which he was going to have a very difficult time paying off, and it also enable him to clear off his credit record, obtain a fresh start, and commence rebuilding (or actually in his case, BUILDING) his credit. Several years later, he has several credit cards (on which he is current with payments), a wife, a house, a dog and enough income to survive.
I use that story–unusual though it may be–to point out that sometimes bankruptcy really is the best solution, regardless of how much debt there is. Now obviously if the man in that story had income of $75,000 a year, it would have been a ludicrous decision to file bankruptcy, but it is important to seek the advice of a qualified bankruptcy attorney and see if it is in your best interest to take advantage of the bankruptcy laws which are here to provide assistance in such situations.
Topics: General Bankruptcy Issues, chapter 11, chapter 13, chapter 7, debts in bankruptcy | No Comments »
It Costs Money to Go Broke
By Mark Markus | July 7, 2008
A bankruptcy client of mine recently made a statement that I obviously already knew, but had never heard it phrased quite the way he said it. The husband and wife’s situation had been deteriorating for a long time. They had amassed a large debt, which they previously had sufficient income to pay, but one of them lost their job, and the other had to take a pay cut, and the problems started mounting. They used all their savings, sold assets, borrowed from their retirement and survived as long as possible before seeking a bankruptcy consultation. By the time they got to me, they had exhausted all their resources.
After a lengthy consultation with them about their financial situation, analyzing their assets and debts and determining that bankruptcy would likely be their best option, I gave them a fee quote for my services (which was actually for a lower amount than normal for a case of their complexity). The husband said out loud–to nobody in particular–”Guess it costs money to go broke.” He said it with a slight smile, but I felt his pain.
The truth, however, was that they were already broke. What cost money was filing bankruptcy to get rid of their debts (or in other cases, to reorganize them). But the client raised an important point. Other than the moral kudos they get for paying their creditors as long as possible by depleting all their resources and assets, they simply waited far too long before seeking advice on their situation. All States have exemption laws which enable debtors, inside and outside of bankruptcy, to protect certain assets, including–at times–cash in bank accounts, etc. It rarely makes sense to deplete your assets below the applicable exemption amounts. (see more on California exemptions. You are going to need those assets! Not just because you may need to hire an attorney, but also to assist you in living as you try to rebuild after a bankruptcy case.
One recurring theme I see over and over again is clients that wait too long to seek advice. Whether it be out of guilt, fear, hope that circumstances will change, or whatever….it is important to analyze your options before your options have disappeared.
Topics: Bankruptcy Fees, Bankruptcy Law | No Comments »
Discharging consolidated debts in bankruptcy
By Mark Markus | July 6, 2008
Another frequent question I get from potential clients is whether debts that they are making payments on as part of a “debt consolidation” program are dischargeable in a bankruptcy case. In fact, I’ve had numerous people think that those aren’t even debts anymore, once they are in a repayment program, or that magically the 15 debts they consolidated are now just one debt. Let me provide some simple, concise answers or explanations to these questions/comments.
1. Yes, debts that have been consolidated or are in a repayment program are dischargeable in bankruptcy, assuming that there are no independent grounds for objecting to the discharge. (see more on dischargeable debts)
2. When you enter into a debt consolidation program, you still owe the debts until they are paid in full (which presumably includes the fees to the consolidation agency). Thus, if you file a bankruptcy case, you must list any and all such debts. (See our recent related blog on picking and choosing which debts to include in bankruptcy.
3. Just because you have consolidated your multiple debts down into one payment does NOT mean that you don’t owe each of the individual creditors, unless they were paid off by a single consolidation loan that was taken out. What this usually means is that you are paying a company to make the payments to each of the creditors, while you make one single payment to the consolidation company, but you still owe each of the creditors until they are paid off.
Topics: Bankruptcy Law, General Bankruptcy Issues, chapter 11, chapter 13, chapter 7, debts in bankruptcy | No Comments »
Can You Only Bankrupt Certain Debts and Keep Others?
By Mark Markus | July 2, 2008
Whether you can discharge (bankrupt) specific debts and keep others is a question that over the years I get asked repeatedly. Actually, strangely enough, clients don’t ask it as a question. They state it as if it were completely possible. “I want to get rid of my large debts and keep the small ones”. After nearly twenty years of listening to this, I believe a lot of it stems from some very basic confusion of bankruptcy discharges and the general requirements and obligations of being a debtor in bankruptcy.
First: There are numerous requirements to filing a bankruptcy case. One of them is that you must LIST ALL of your debts and ALL of your assets in your bankruptcy schedules.
Second: When you receive a discharge, you are discharged from any and all debts that are made dischargeable by the Bankruptcy Code (unless a creditor or other party successfully objects to the discharge).
Third: You can voluntarily repay any debt you want after the bankruptcy case is completed (in a Chapter 7 case, this is about 4 months after the case is filed, in Chapter 13, it’s 36-60+ months). See more on how the process works for each bankruptcy chapter.
Fourth: In a Chapter 7 case, you may, with the consent of the creditor and approval by the bankruptcy court, enter into a reaffirmation agreement. What this does is take the debt out of the bankruptcy and obligate you to the terms of the agreement (whatever they may be) despite the discharge you ultimately receive in the bankruptcy case. Reaffirmation agreements must be signed, executed, and filed with the court prior to the entry of discharge in your case.
The critical question to ask when trying to determine (or ask your attorney) whether you can discharge certain debts is: WHY do you want to do that (whatever “that” is)? In my experience, most debtors perceive that if they keep certain creditors off the bankruptcy, that they will magically be able to continue to have credit with them. Nothing could be further from the truth. In fact, with respect to credit card debt in particular, you have a much better chance of negotiating for a reaffirmation agreement with them (if that is your goal) to keep some credit on the card after your discharge is granted. Personally, I advise my clients strongly against doing that (because getting a new credit card after bankruptcy is about as difficult as finding mud after a rainstorm).
There is much more to say on this topic, such as how secured debts are handled in bankruptcy. If you have questions, you should schedule a consult with a bankruptcy attorney.
Topics: General Bankruptcy Issues, chapter 11, chapter 13, chapter 7, debts in bankruptcy, reaffirmation agreements | 1 Comment »
The Warning Signs of Bankruptcy
By Mark Markus | July 2, 2008
Since the vast majority of people who seek to file bankruptcy wait too long before obtaining legal advice, it is important to know what some of the warning signs are that should prompt one to at least have a consultation with a qualified bankruptcy attorney.
The following are some guidelines set forth by the Association of Independent Consumer Credit Counseling Agencies (AICCCA). If you find yourself fitting into more than one of these categories and you have more debt than you can afford to pay off within a short period of time (let’s say 6-12 months), then you should consider seeking advice on possibly filing a bankruptcy case:
• Living paycheck to paycheck — This is very dangerous since any slight reduction in income, or sudden increase in expenses, such as from a job loss, unexpected medical bills, can push you over the edge. Credit card payments are missed, the interest rates skyrocket and everything can fall apart very quickly.
• No savings cushion –This is a subset of the above. It’s important to have a cushion for unexpected expenses. In fact, you have to expect the unexpected. When was the last time you had an entire year with no unexpected expenses?
• More than 20% non-mortgage debt to income ratio — For those spending more than 20 percent of net income to satisfy non-mortgage debt, a drastic change in spending behaviors is needed.
• Making only minimum payments on credit cards — If you pay only the minimum amount due you are making virtually no principal reduction payments and, thus, no progress towards paying off the debt. All you’re doing is keeping your head barely above water and all it takes is a little wave to push you under.
• Not adequately insured — Some studies suggest that 50 percent of bankruptcies involve medical debt. Without adequate insurance, the high cost of medical, home or car expenses can ruin personal finances
For other types of bankruptcy, such as those precipitated by mortgage defaults, where you need time to catch up on the payments to prevent foreclosure, it is equally or more important to see a bankruptcy attorney sooner, rather than later, to allow sufficient time to prepare to file either a Chapter 13 or Chapter 11 case for you to save your home.
Topics: General Bankruptcy Issues, chapter 11, chapter 13, chapter 7 | No Comments »
The Difference Between an Attorney and a Lawyer
By Mark Markus | June 29, 2008
This isn’t specifically a bankruptcy-related posting, but something I’ve always found curious.
Interesting thought: Is there a difference between a lawyer and an attorney? According to wisegeek.com: “Generally speaking, an attorney, or attorney-at-law, is a person who is a member of the legal profession. An attorney is qualified and licensed to represent a client in court. By most definitions, an attorney may act on the client’s behalf and plead or defend a case in legal proceedings. The English word attorney has French origins, where it meant a person acting for another as an agent or deputy.
A lawyer, by definition, is someone who is trained in the field of law and provides advice and aid on legal matters. Because a lawyer also conducts suits in court proceedings and represents clients in various legal instances, the term has expanded to overlap the definition of attorney. In the U.S., attorney and lawyer are normally considered synonyms. The term lawyer has Middle English roots.”
I hope that clarifies this monumental issue for my bankruptcy blog readers 
Topics: Miscellaneous (not necessarily bankruptcy) Thoughts | No Comments »
How Much Will This Chapter 13 Cost You?
By Mark Markus | June 28, 2008
I often get asked this important question by concerned potential clients. It is very difficult, if not impossible, to answer how much the attorneys fees for any bankruptcy will be before having a consultation and getting all the relevant information. It’s even more difficult to do in a Chapter 13 bankruptcy case.
Why?
Let’s say that the base bankruptcy attorney’s fee is $4,000 for a regular, non-business debtor Chapter 13 case, plus the $274 filing fee and necessary credit counseling courses. In most cases, that is NOT how much you have to pay to your attorney before filing your case. Why not? Because part of the attorneys fees can be taken from your monthly plan payments that you will have to make anyway in your Chapter 13 case. How much can be taken through your plan payments? That depends on 1. What your monthly plan payment is, which is determined by the complex means test analysis; 2. Whether by making the additional payments for attorneys fees, it would render you unable to pay certain necessary debts which need to be paid 100% in your plan (such as taxes, or mortgage arrears, etc.).
For example, if the means test is showing that your monthly plan payment is $200 per month for 36 months, and you are filing the bankruptcy case in order to repay $7,200 of past due amounts on your mortgage (arrears), then you do not have any more income available to pay your attorneys fees through your plan. If you added another $3,000 of attorneys fees, it would raise your monthly payment by approximately $100 per month. (Plus, most attorneys aren’t going to wait that many months to be paid their fees).
This was just a quick example, but I think it illustrates why it is necessary to have a complete consultation with an attorney before they can give you an accurate fee quote and let you know how much you’ll have to pay up front to file a Chapter 13 case for you.
Topics: Bankruptcy Fees, chapter 13 | No Comments »