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November 9, 2007

When Credit Bureaus Report Debts Discharged in Bankruptcy: It Should be a Crime

An article entitled "Prisoners of Debt," by Robert Berner and Brian Grow, published in BusinessWeek, November 12, 2007, reports that the credit reporting bureaus and large creditors systematically violate the most important of all federal bankruptcy court orders; that is, you can't try to collect a debt that has been discharged in bankruptcy.

Debts are eternal. Thanks to the "great computer in the sky," debts don't go away anymore. They may grow old and be barred by statutes of limitation--laws that prevent stale claims from being litigated. They may have been paid up but not taken off the computer. And, they may have even been discharged in a federal bankruptcy proceeding. No matter. According to the BusinessWeek article, old and discharged debts alike are bundled together and sold to collection firms for pennies (or even parts of pennies) on the dollar. These collection firms then cast a wide net to collect these debts, often through economic intimidation or threats of ruining your credit.

Reporting bogus debts is extortion. Who among us hasn't suddenly received a bill in the mail from someone who we paid years ago, alleging that we still owe the debt plus umpteen dollars worth of interest and collection fees and that our credit will be ruined if we don't pay up. Often, bogus debts first come to light when people enter into transactions that require good credit right then and there--such as the purchase of a car or obtain a loan on a house. The bogus debts are paid off in a hurry to facilitate the transaction. Using the common meaning of the word, this is extortion pure and simple.

Credit bureaus willfully refuse to update reports. While this debt-collection-by-ambush can be avoided by incessant checking of one's credit report, many people have better things to do with their time and money, especially when they have no reason to think that anything is wrong. People who thought they got rid of their debts in bankruptcy are even more discombobulated, if that is possible, when bogus debts show up on their credit report. Even when the credit-reporting bureaus are informed about the bankruptcy, they often refuse to update the report to show that the debt has been discharged.

Remedy for victims of discharge violations. The remedy available to victims of federal bankruptcy discharge violators is to reopen the bankruptcy case and sue the violators to collect damages--and even fines if they can prove the errors were knowingly made. Needless to say, the companies defend on the basis that it was simple error. It can take some serious lawyering to overcome this defense.

Victims need a lawyer to recover for discharge violations. The main message I got from the BusinessWeek article was that, surprise surprise, you have to hire a lawyer to secure what rights you thought you had when you received your bankruptcy discharge. Most people who have recently gone through bankruptcy aren't in a position to pay a lawyer--even though attorneys' fees can be recovered if they are successful. In other words, even though you can do your own bankruptcy, you'll still have to pay a lawyer to get what's yours--a fresh start.

Intentional discharge violations should be crimes. If justice prevailed over big bucks, violations of the bankruptcy discharge would be crimes, punishable by truly large fines and even imprisonment of a company's CEO if a policy of reporting discharged debts were shown to exist--as is alleged in the BusinessWeek article. This type of behavior is, after all, garden-variety fraud. But, as we all know, financial theft isn't treated the same way as shoplifting. Wonder why? Anyway, let's not hold our breath on this one.

Procedures to invoke court remedies should be simplified. At the very least, the procedures for bringing the discharge violators into court to account for their debt collection practices can and should be greatly simplified to eliminate the need for a lawyer, at least in most cases. To ease the burden on the self-represented litigant, any reporting of a debt discharged in bankruptcy should be presumed to be willful, placing the burden on the credit reporting bureau to show that they made an innocent mistake. If the burden of proof is shifted in this manner, most credit bureaus will quickly act to correct their mistakes, innocent or not. In any event, a statutory fine of $1000 should be imposed on the bureau, innocent mistake or not.

For more information on this topic, check out a new article in the Nolopedia, "Time-Barred Debts: When Collectors Cannot Sue You For Unpaid Debts", as well Credit Repair, by Attorney Robin Leonard (Nolo), now in its 8th edition.

October 18, 2007

Chapter 7 Bankruptcy Still Affordable Under the New Bankruptcy Law

In 2005, the bankruptcy laws underwent massive changes at the behest of the banks and credit card companies. In advance of the new law's taking effect, the nation's bankruptcy attorneys launched a scare campaign directed at potential filers. The message was, "You better do it now because it will be too late once the legislation kicks in."

Beaucoup bucks flowed to the lawyers. When the new law finally arrived, the public perception was that the bankruptcy safety net was gone forever. Not true. Chapter 7 bankruptcy is alive and well; it's only the attorneys who are suffering because they doubled their fees and nobody can afford them anymore.

In a recent interview with Lisa Scherzer on, Henry Somer, President of the National Association of Consumer Bankruptcy Attorneys, said that bankruptcy was no longer an available remedy for most people due to doubled attorneys fees and increased complexity. While it's true that bankruptcy attorneys have priced themselves out of the market, the supposed reason for doing that--added complexity--is horsepuckey. It's just as easy to get rid of debt such as credit card and medical bills under the new law as the old. And, most bankruptcies still are procedurally very straightforward. Somer, however, clearly believes you need an attorney to file bankruptcy, and if you can't afford one, oh well.

Apparently Somer hasn't heard of self-representation or non-lawyer assistance with bankruptcy forms--both of which are perfectly legal. Or maybe he has, but takes the prototypical lawyer position that doing your own bankruptcy is like doing your own brain surgery. Jeez, self-help law has been around for 35 years at least, but you would never know it from the Somer interview. There is help out there for folks who need bankruptcy but can't afford a lawyer.

A bankruptcy petition preparer (a non-lawyer) can prepare your petition for you for about $150. It's true that non-lawyers can't provide legal advice--or alert you to a problem with your petition --but there's nothing to stop bankruptcy lawyers from giving the public a break and providing the necessary legal information while letting the non-lawyers fill in the forms. For example, people doing their own bankruptcies can get all the legal help they need from me for a flat rate of $100. In this manner, self-represented filers can proceed in an informed manner with the help of an attorney and a forms expert (bankruptcy petition preparer)--and pay less than 25% of what they would pay an attorney for full representation.

Future blogs will cover such bankruptcy related issues as:

  • best practices for people doing their own bankruptcies

  • why the new bankruptcy laws don't work

  • how bankruptcy can be used to stave off foreclosures

  • why Chapter 13 is only for people who think they'll go to heaven if they repay their debt, and

  • turf wars over non-lawyer bankruptcy form preparation services.

For more information about Chapter 7 bankruptcy and your options, take a look at How to File for Chapter 7 Bankruptcy, by Attorneys Stephen R. Elias, Albin Renauer, and Robin Leonard (Nolo).

October 15, 2007

How Bankruptcy Can Be Used to Deal With Foreclosure

The media is full of stories about the skyrocketing rates of foreclosure. Often, people believe they can save their home and they scramble to find the best possible way to prevent their home from being taken away. Not uncommonly, however, the handwriting is on the wall--the home will be lost--and the homeowner's chief concern is how to move on without causing further harm to his or her economic status. In either situation -- keep the home or move out -- bankruptcy can be an incredibly useful tool in dealing with foreclosure.

What is foreclosure? In California and most other states, a foreclosure starts when you fall behind on your payments for several months. Your lender sends you a Notice of Default giving you a period of time to cure the default--typically three months. If you haven't caught up by the end of the default period, you are notified that the property will be sold at public auction--on a date scheduled roughly 20 to 30 days later. If you still haven't adequately dealt with the problem by that date, the property is sold and you can't get it back unless your state laws provide a redemption period--one last grace period for you to recover the house by paying off the loan being foreclosed on.

Some people facing foreclosure manage to work out a settlement with their lender under which the payments they've missed get tacked on to the end of the loan period. Others get their lenders to agree to a short sale--that is, you sell the property for whatever you can get for it and the lender writes off the difference between what you owe and the sale proceeds. Unfortunately, the short sale--and a foreclosure sale if it comes to that--can make you liable for taxes on the debt written off by the lender. In other words, the IRS may consider the debt you don't have to pay the lender as income subject to taxation.

Bankruptcy may provide some relief. At the point you are faced with the forced sale of your property, you will undoubtedly start thinking about bankruptcy if you haven't before. Bankruptcy may help you keep your home or, if that's not in the cards, at least get you out from under your mortgage free of tax liability for debt write offs. By delaying the foreclosure process, it can also help you save some money to deal with the aftermath of your bankruptcy.

When you file bankruptcy, the foreclosure process comes to a halt (called the "automatic stay") and remains that way until your bankruptcy case comes to an end or the lender obtains court permission to proceed (called "lifting the stay").

There are two types of bankruptcy--Chapter 7 and Chapter 13.

Chapter 7 bankruptcy. Chapter 7 is the most popular type for getting rid of debts. However, a Chapter 7 bankruptcy typically lasts for only four months--after which the foreclosure can resume. And if the court grants the lender permission to continue the foreclosure while your bankruptcy case is pending, you have even less time. In short, Chapter 7 won't prevent an ultimate foreclosure--although for the time the process is delayed you can live in your home for free and amass a savings that can help you find a new dwelling. In addition to getting rid of unsecured debt, such as credit card and medical debts, Chapter 7 bankruptcy will also get rid of your mortgage debt and exempt you from tax liability for the loss incurred by the lender in the foreclosure sale.

Chapter 13 bankruptcy. Chapter 13 bankruptcy is a different animal altogether. You can actually defeat the foreclosure by proposing a plan to pay off mortgage arrears over time. For example, assume you are $10,000 behind on your mortgage. You file a Chapter 13 bankruptcy and propose a plan under which you will make current paymnts on your mortgage and additionally pay off the $10,000 arrears at a rate of $277 per month over three years, thereby keeping your home and avoiding the foreclosure sale.

While Chapter 13 bankruptcy may seem like an ideal solution, you may not be able to propose or afford a plan that the court will approve. This is because certain debts such as child support and back taxes must be paid in full during the life of the plan, and you must have enough steady income to meet your daily expenses as well as the arrears and other debts you are required to pay off under your plan.

Since a repayment plan under Chapter 13 plan isn't always practical, and since Chapter 7 will only provide a temporary delay from the foreclosure sale, how should you proceed? If you come to terms with the fact that you'll have to move--a bitter result to be sure but sometimes unavoidable--you can at least view bankruptcy as the best way to get out from under your mortgage debt and tax liability as well as a way to save some money that will help you weather the psychological and economic shocks that lie ahead.

To read further, check out my latest article in the Nolopedia, Nolo's free encyclopedia of legal information.

October 14, 2007

How to Amass a Nest Egg During Bankruptcy

The combination of a downturn in the real estate market and aggressive lending policies has caused millions of homeowners to find themselves in one of these situations:

  • You are current on your mortgage payments but your ARM is about to go up and you won't be able to afford payments in the future. You try to renegotiate the ARM but with no luck.

  • You have a little equity in your home that you would like to pull out, but you can't get a refinance loan and you are having great difficulty in making your payments.

  • You can no longer make your mortgage payments and you are "upside down" on your home--you owe more than the property can be sold for.

The bad news is, in all of these situations you are facing foreclosure. The good news is you may be able to use bankruptcy to delay foreclosure and remain in your home for a year or more without paying one cent on your mortgage. If you are able to save all or a portion of the mortgage payments that come due during this period, you can emerge from bankruptcy with a tidy sum that will help you start over financially. Let's see how this works.

Assume you can no longer afford your mortgage payments or you are upside down on your house. You've accepted the fact that you'll need to find another place to live--but you hope to put if off as long as possible. In California and many other states, you can typically fall three months behind before a statutory foreclosure process begins by your being served with a Notice of Default--which states that your home will be sold after three months if you don't get current or otherwise deal with the problem in that time. This means you can go a total of six months without paying your mortgage before you are faced with the prospect of an involuntary sale of your home (that's three months before the Notice of Default is mailed to you and another three months before the foreclosure sale itself is scheduled). This six months' delay will allow you to save up some money from not paying your mortgage--money that will allow you to rent new quarters.

To buy more time, if, just before the foreclosure sale you file a Chapter 7 bankruptcy, the sale will be stalled while your case is open--roughly three to four months--unless the lender files a request with the court seeking permission to proceed with the sale. Either way, it's safe to assume a Chapter 7 bankruptcy will get you an additional three months delay before you have to leave your house. Another chance to add to the nest egg that will prove useful in adjusting to your new fresh start.

A way to buy even more time is to initially propose a feasible Chapter 13 plan (which requires a steady income that exceeds your expenses by the amount necessary to meet the Chapter 13 repayment requirements) and then convert your case to a Chapter 7 bankruptcy. This will probably delay the foreclosure for at least six months.

And here's the kicker. Even after your home is finally sold at foreclosure, it may just sit there for several more months--with you in it--before the new owner finally gets around to getting you out. If you really want to stay to the bitter end, know that the new owner will have to first serve you with a 30-day "notice to quit" before going to court to obtain an eviction order, and the court eviction process typically takes a couple of months before you absolutely have to move.

But it's not a good idea to have a judicial eviction action on record when you'll be seeking to rent a dwelling--so to be conservative, figure filing for bankruptcy will give you an additional three months of free housing after the foreclosure sale. All together, through a combination of your state's foreclosure laws and federal bankruptcy law, you can live in your home "rent free" for about a year and save up a financial cushion so you won't get into this position again.

To take full advantage of the bankruptcy laws in the manner described here, you will likely need the services of a bankruptcy lawyer. While you can normally file bankruptcy without a lawyer, and you always have the right to do so, a good knowledge of the bankruptcy laws is called for if the primary reason you are filing is to amass a nest egg in the manner I suggest. For example, whether you can keep all of the money you save before you file for Chapter 7 bankruptcy will depend on your state's property protection laws (exemptions). A lawyer is likely to charge a lot for orchestrating this type of strategy--typically between $2,000 and $4,000. However, because you are paying nothing for your shelter for up to a year, it may be worth your while, and you'll probably gain more time in your home than if you do it yourself.

To find out more about attempting to save for retirement while simultaneously trying to get out of debt, try reading Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Attorney Robin Leonard (Nolo).