This is the second (and last) installment of things debt collectors won’t tell you or don’t want you to know.  These are taken  from a recent Readers Digest article by Michelle Crouch.

1.  If a debt collector threatens to have you arrested, or calls before 8 a.m. or after 9 p.m., you can report them to your state attorney general’s office (naag.org) or the Federal Trade Commission (ftc.gov).  These are violations of the Fair Debt Collection Practices Act (fdcpa).   I have clients tell me all the time that they have been threatened with jail time by collectors.   ALWAYS take down the name, phone number, time, date, etc. of the call/caller (the name will likely be fake, but take down as much information as possible) and report them.

2.  Don’t ask for a manager–they won’t help you.  You’re better off just calling back and getting a different collector on the phone.

3.   If you ask a collector not to call you at work, they must by law stop.

4.  They’re not interested in your stories about why you’re unable to pay.   All explanations of this nature are summed up by a simple notation on their computer:  “HLS” (hard luck story).  You’re simply wasting your time by going through all of that.

Take Control of Your Situation

All of these items set forth above and in Part 1 exemplify the need to be proactive in dealing not just with your debt problems, but with life in general.    Don’t ever feel powerless.  You always have options.   Know your rights.

As far as debt collection goes,  understand that these are people getting paid to scare you–scare you into paying them.   However, there are federal laws restricting what they can say and how they can say it.   If they cross the line, pin them against the wall.

Talk to a bankruptcy attorney to examine your options.  Read up on the FDCPA and know your rights as far as what a debt collector can and cannot do.  Be proactive.  Learn and examine your settlement options.  Seek settlement if it works best for you.   Take another path if it doesn’t, but always understand the benefits and consequences of any decision.   Use attorneys and other available resources to help you take control of your situation and make those tough but necessary decisions.

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A while back I wrote about the perils of waiting too long to file a bankruptcy case (see http://bklaw.com/bankruptcy-blog/2010/06/waiting-too-long-to-file-bankruptcy/).    One common theme that is becoming ridiculously frequent is people waiting for loan modification approval to save their homes from foreclosure and then contacting a bankruptcy attorney on the eve of foreclosure to try to stop the foreclosure sale.

I cannot emphasize this enough:  This is not a sound strategy.

Prayer and Wishful Thinking Don’t Stop Foreclosures

Folks,  the loan modification process does not automatically stop or postpone a foreclosure sale.   Even where the sale date is postponed, it will be postponed at the discretion of the lender, and your loan modification could be denied today, and the foreclosure sale take place tomorrow.   I JUST received a phone call (it is 10:30 p.m. on a Thursday) from a lady frantic because she just found out her loan modification was denied and the sale is tomorrow at 10:00 a.m.    She has known about the possible foreclosure for a bare minimum of four (4) months. When I asked why she waited until now to look into bankruptcy, she commented that she thought the loan modification would be approved.  Wishful thinking and prayer are nice, but not a sound strategy for saving one’s home.

Don’t Expect to File Bankruptcy Over Night

While it is possible to file an emergency bankruptcy case to stop a foreclosure, it is a HORRIBLE way to go about it that is fraught with problems.  First of all, many bankruptcy attorneys (myself included) will not take an emergency case, for a number of reasons.   Period.   Do you really want to be scrambling around at 10:30 p.m. the night before a foreclosure sale hoping you can find a bankruptcy attorney that can process a case for filing?   Do you even have sufficient funds to retain the attorney?   Second, by doing an emergency case, there is absolutely no way for the attorney to properly assess the risks and potential problems of filing a bankruptcy case.   This means that major problems can develop after the case is filed which not only will cost much more in additional attorneys’ fees to address, but could likely cause your plan to fail and your case to be dismissed (in which case the foreclosure sale will proceed anyway, plus you’ll be out the fees you paid to the attorney).    You will also be immediately behind in submitting to the court all the things required to make the case work, which usually takes several weeks to prepare.

It is simply a bad, bad way to deal with the problem.

Planning:  A Better Way To Stop the Foreclosure

Instead of using the prayer/hoping/wishing method of saving your home, I suggest that the moment you receive a Notice of Default on your home¹ (which in California commences the foreclosure process), you contact a bankruptcy attorney for a consultation.   At that point, there is a minimum of 3-4 months before any foreclosure sale.   The attorney may advise you to go ahead and try a loan modification, but be ready to file a bankruptcy in the event it doesn’t get approved.

Another, even better method in many cases, is to go ahead and file a Chapter 13 (or Chapter 11) case and then seek a loan modification during the bankruptcy.   If it works out, you may be able to dismiss the case, or simply continue it for a much lower monthly payment and get a discharge of debts.

The bottom line is that you shouldn’t risk losing your home by wishing on a star.

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¹ Foreclosure procedures differ from state to state, so contact an attorney in your area regarding the procedures and timing.

Image Courtesy of  TheAlieness Gisela Giardino

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I received a 1099 from a Creditor After My Bankruptcy Case was Completed:  Is this Taxable Income?

A very important question I’m often asked this time of year by my clients is what effect does their bankruptcy have, if any, on their income taxes.    The exact question is whether or not debts discharged (forgiven) in a bankruptcy case must be included as income on federal or state income tax returns.

This often arises when a client receives a Form 1099 statement from a creditor after their discharge in bankruptcy has been granted.    Creditors send 1099 statements when they are required to, but this does not necessarily mean that the amount on the 1099 form must be included in the taxpayer’s gross income for that year.

Debts Discharged in Bankruptcy are NOT Included in the Taxpayer’s Income

In general, outside of bankruptcy, if a creditor forgives a debt that is owed by you, then that may need to be included in income.   However,  there is an exception to this rule pursuant to Internal Revenue Code section 108 which provides that  debts “forgiven” (i.e. discharged) in a bankruptcy case do NOT need to be included as income for forgiveness of debt.

However, even though the discharged debts are not part of a debtor’s gross income, the amount discharged can be required to reduce any tax attributes that the debtor/taxpayer may have, such as net operating losses, capital loss carryforwards, basis reductions and others.  It is important to discuss these issues with your accountant–preferably before filing bankruptcy, but certainly after.

FILE IRS FORM 982

The correct way to ensure that you do not have to pay taxes on any debt “forgiven” in bankruptcy, and properly allocate any tax attributes, is to file IRS Form 982 for the tax year in which you received your bankruptcy discharge.  See IRS Publication 4681 for detailed information explaining all the above.   Many people and even accountants are unaware of this form and the importance of filing it.   Be proactive and mention it to your accountant before filing your returns (or, file it as an amendment to your return).

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The key for this lies in a common misconception people have about what bankruptcy does.    Bankruptcy discharges the  party filing bankruptcy from the legal obligation of paying on a given debt;  it does not eliminate the debt itself.  The debt still exists  and the party who is owed the debt cannot pursue recovery of that debt from a party discharged in bankruptcy.

The entire reason for having a co-signer on a loan or credit card application, for example,  is so that if the primary obligor defaults on the debt (such as by filing bankruptcy), they can recover against the co-signer.

If filing bankruptcy could discharge the debts of people other than the party filing the bankruptcy, we could all benefit by having one person in the United States file a bankruptcy case, and we’d all be discharged from our debts.   That obviously doesn’t make any sense (fun though it may be to imagine).

Whether a debt is dischargeable or not depends on the type of debt it is, and how it was incurred.  For example, debts incurred through fraud are not dischargeable.  Neither are certain tax debts, domestic support obligations, or student loans. For more information on which debts are not dischargeable,  see http://www.bklaw.com/discharge.html

A Judgment is Not a Lien But a Lien Can Be Created From a Judgment

It is important to understand that a judgment and a lien are not the same thing.    A lien is a right to get paid from a specific asset/property.  A judgment, however,  is merely a court order that allows a creditor to pursue collection actions against someone (including creating a lien against assets).    Depending on the laws of the state involved,  such collection actions can include getting a lien against property, or wage garnishment, or seizures of bank accounts, etc.    But as far as discharge in bankruptcy goes, a debt on a judgment is no different than any other debt that doesn’t yet have a judgment–they are dischargeable in bankruptcy unless they meet one of the exceptions set forth in 11 U.S.C. 523, as described above.

Liens Remain Against Property After Bankruptcy Unless Removed

A “judgment lien” is simply a lien that results from recording a judgment, as described above (as opposed to a lien created voluntarily, such as a mortgage).   This lien will remain against whatever property it is “attached” to on the date the bankruptcy case is filed after the bankruptcy discharge has been entered, unless it is specifically avoided (removed) in the bankruptcy case.

A judgment lien¹ is not automatic.   First, the creditor must obtain a judgment from the court.  Then, to create a lien, it must be perfected under applicable non-bankruptcy law (usually the state or county in which the asset is located).  For real estate, this usually involves obtaining a certified abstract of the judgment from the court that issued it, and recording it with the county recorder’s office wherever the property is located that the creditor wants the lien to attach.

Sometimes Judgment Liens Can Be Removed in Bankruptcy

So, can one get rid of  (avoid) a judgment lien in a bankruptcy case?  If certain requirements are met, yes.  The bankruptcy code section that states this is 11 U.S.C. 522(f), which allows a lien to be removed to the extent that it impairs an exemption to which the debtor would have been entitled in the absence of the lien. This is basically a mathematical calculation, and depends of course on the value of the asset, the amount of any senior liens, and the amount of the available exemptions (usually governed by the laws of the State where the bankruptcy case is filed, but not always), as well as when the lien attached to the property.  To see more on exemptions, visit http://www.bklaw.com/exemptions.html.

The bottom line is that if you have a creditor who has obtained a judgment lien against you, be sure to tell your bankruptcy attorney so he/she can assess whether or not it can be removable in your case.    This can also be done after your bankruptcy case is over, but there are limits and it requires additional legal fees to reopen your bankruptcy case.

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 ¹ A judgment lien is an involuntary lien.  This is distinguished from a voluntary, or consensual lien such as a mortgage or a security interest granted to purchase a vehicle.  The lien avoidance procedure referenced above only deals with involuntary judicial liens.

There is always significant misinformation floating around regarding the bankruptcy laws and what they can or cannot accomplish (see for example the new bankruptcy laws enacted in 2005 as an example where people still think that one cannot file Chapter 7 on credit card debts–a complete falsehood propagated by the media).   But the “new” bankruptcy laws are only 3-4 years old.   Debtor’s prisons were abolished 176 years ago.  I doubt any of my clients were born prior to then, and yet there is still a perception in our society that this law exists.

Prior to 1833 debtors were allowed out of prison if they gave up all of their assets.   Presently, creditors can undertake collection activities allowed under applicable state law, such as garnishing wages, seizing bank accounts, placing liens against real estate and other property, etc.   One can file a Chapter 7 or 13 bankruptcy case and get rid of most debts (i.e. discharge the debts) in return for giving up any NON-exempt assets they have (in Chapter 7) or paying out the equivalent value of said assets over time (in a Chapter 13).  Every state has exemptions which protect the value in various assets, so one is always allowed to retain some (and frequently ALL) of the their assets when filing for bankruptcy relief.

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.

I write this post to clarify the definitions of a “bankruptcy attorney” and a “debt relief agency” (“DRA”) because, at least according to one recent client, there is a substantial amount of confusion over these terms.

A bankruptcy attorney is an attorney (or lawyer), licensed to practice in the courts of whatever jurisdiction he is practicing, who handles bankruptcy related cases. (click here for an explanation of the differences–if any–between an attorney and lawyer)

A debt relief agency is a made-up designation that our Congress created as part of the 2005 Bankruptcy Reform Act and is defined in 11 U.S.C. 101(12A). It includes “any person who provides any bankruptcy assistance to an ‘assisted person’ in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer…”. Without getting too detailed about who an assisted person is and other nuances, this basically includes a very wide variety of “people”, including credit counselors, unlicensed petition preparers, and it can be argued that it can extend to accountants or anyone else who provides any assistance in connection to the filing or possible filing of a bankruptcy case or even giving financial advice. It may be even broader than that.

Subject ultimately to rulings by the appellate courts in this country, all bankruptcy attorneys are debt relief agencies (although this is being appealed in many different circuits at this time). However, as you can see above, not all debt relief agencies are bankruptcy attorneys.

It has been argued that one of the reasons Congress added this definition was to cause the precise confusion experienced by my client. It was implemented to add additional disclosure and paperwork requirements, to add costs to the bankruptcy process and to cause confusion between who is licensed to practice bankruptcy and who is not, and (it has been argued) it was designed to take business away from licensed attorneys as a result of this confusion.

In any event, in order to represent you in a bankruptcy case (or any other legal proceeding, for that matter) an attorney must be licensed to practice law in whatever state your case is in. Whether or not he/she is also a “debt relief agency” depends on the rulings of the courts in that jurisdiction. Perhaps more importantly, it is virtually meaningless.

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