There are two major categories of debts incurred during or after a divorce, and it is important to determine the nature of these debts in order to determine whether the bankruptcy court can provide any relief. The first type is a domestic support obligation such as a child support or alimony. As you may expect, neither the ongoing support payments nor past due payments can be discharged in bankruptcy, and the automatic stay from a bankruptcy filing does not stop the collection activities on these obligations.
The second type of debt incurred during or after divorce is one owed to a spouse, former spouse, or child under a separation agreement or divorce decree. A common example here might be a provision requiring the debtor to pay a credit card of the ex-spouse. These debts are non-dischargeable in most cases (except perhaps Chapter 13), although filing a bankruptcy petition will temporarily stop the collections on these debts. In the process of reviewing bankruptcy options, it is important to review divorce papers to figure out what the obligations are to an ex-spouse.
If someone is required to pay the attorney's fees to an ex-spouse's lawyer, this type of debt is a little tricky to categorize. It is often considered a support obligation because these awards are usually made to assist the other spouse in a divorce case just as an alimony award would. However, there are bankruptcy court decisions that have found some of these awards to go into other categories of debt, sometimes even allowing them to be discharged.
The problem for me as a bankruptcy lawyer is that I cannot provide quick and easy relief through bankruptcy court for these obligations. However, relief may be available from the court that issued the divorce decree (or other order creating the obligation) because there are rules that allow for the modification of a support order or a divorce decree. These rules are outside the scope of this blog, but they should not be overlooked in the process of managing a debt problem, and I can help my clients assess these debts since I also practice as a divorce lawyer.
Friday, October 28, 2011
Monday, August 15, 2011
Bankruptcy filings continue to fall in Athens area
Bankruptcy trends provide useful information but fuel much speculation. Does a drop in bankruptcy filings indicate the economy has improved or that most people who needed to file have already done so? Does it mean that people are finding better income to pay their debts or that they are just able to borrow more now that the credit freeze has thawed out?
Bankruptcy statistics in the U.S. Bankruptcy Court for the Middle District of Georgia (which includes Athens) show the number of filings continuing to drop since their recent peak in 2009. This trend cannot be easily observed on a daily basis since individual debtor attorneys like myself observe the short-term trends that follow seasons and even monthly payment cycles. However, comparing the first two quarters of this year still show a drop in comparison to the first two quarters of the previous two years.
Professor Bob Lawless of the University of Illinois explained on the Credit Slips blog that there is a relationship between total consumer debt and bankruptcy filings. ("Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)".) Bankruptcies go up when the amount of consumer credit goes down and thus limits the options of borrowers. He also explained that bankruptcy is a lagging indicator and not a leading indicator. On an anecdotal level, I have indeed seen that some of my clients were pressured to investigate bankruptcy options when their credit card or home equity limits were dropped, and they often try to pursue various options for months or years before considering bankruptcy.
This June article from Reuters, "US consumer credit climbs in April for 7th month," observed that borrowing has increased but noted warnings that this increase is due to "tough economic times" rather than "an economic rebound." So the recent drop in bankruptcy filings does not really show an improvement in the economy, just an increase in the amount of credit available. (A rosier view is painted by Professor Ronald Mann of Columbia University on Fox Business.) Of course, there are many particular trends on a finer level of detail that affect bankruptcy filings overall, such as foreclosures, employment, income, and even changes in the rules that govern credit and bankruptcy.
All this means about bankruptcy statistics is that they are symptoms of economic changes but not a direct indicator of the health of the economy, at least on the shorter scale of comparing year to year. Over a period of years, however, they do seem to indicate the economic stress of the time period as long as they are considered in the context of the regulations and market trends of that period. (For instance, filings were pushed down in 2005 by new bankruptcy laws and pushed up in 2009 by the housing market crash.)
Bankruptcy statistics in the U.S. Bankruptcy Court for the Middle District of Georgia (which includes Athens) show the number of filings continuing to drop since their recent peak in 2009. This trend cannot be easily observed on a daily basis since individual debtor attorneys like myself observe the short-term trends that follow seasons and even monthly payment cycles. However, comparing the first two quarters of this year still show a drop in comparison to the first two quarters of the previous two years.
Professor Bob Lawless of the University of Illinois explained on the Credit Slips blog that there is a relationship between total consumer debt and bankruptcy filings. ("Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)".) Bankruptcies go up when the amount of consumer credit goes down and thus limits the options of borrowers. He also explained that bankruptcy is a lagging indicator and not a leading indicator. On an anecdotal level, I have indeed seen that some of my clients were pressured to investigate bankruptcy options when their credit card or home equity limits were dropped, and they often try to pursue various options for months or years before considering bankruptcy.
This June article from Reuters, "US consumer credit climbs in April for 7th month," observed that borrowing has increased but noted warnings that this increase is due to "tough economic times" rather than "an economic rebound." So the recent drop in bankruptcy filings does not really show an improvement in the economy, just an increase in the amount of credit available. (A rosier view is painted by Professor Ronald Mann of Columbia University on Fox Business.) Of course, there are many particular trends on a finer level of detail that affect bankruptcy filings overall, such as foreclosures, employment, income, and even changes in the rules that govern credit and bankruptcy.
All this means about bankruptcy statistics is that they are symptoms of economic changes but not a direct indicator of the health of the economy, at least on the shorter scale of comparing year to year. Over a period of years, however, they do seem to indicate the economic stress of the time period as long as they are considered in the context of the regulations and market trends of that period. (For instance, filings were pushed down in 2005 by new bankruptcy laws and pushed up in 2009 by the housing market crash.)
Monday, August 1, 2011
Debts which are dischargeable and nondischargeable
Most people who file for bankruptcy do so to get a discharge of their debts so they can start over financially. Debts fall into different categories under federal law which may or not be dischargeable. In the cases I prepare, many debts are either clearly dischargeable or clearly not dischargeable, though some debts fall into gray areas.
The discharge order in a bankruptcy case does not specify which debts are being discharged. A dischargeable debt that was not challenged (e.g., a credit card balance) is presumed to be discharged, and a nondischargeable debt (e.g., a student loan) is presumed to remain collectible. A debt from any category can be challenged for dischargeability by the creditor for special reasons, sometimes after the bankruptcy case is closed. A debtor can also start a proceeding to determine the dischargeability of a debt in order to settle conflicts that may arise after the bankruptcy case.
The common types of debts that are discharged are:
A major exception to dischargeability is based on some kind of fraud. A creditor can challenge the dischargeability of a debt if it was incurred by false pretenses, a false representation, actual fraud, or a false written statement with certain conditions. It could also be challenged if it was incurred by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. The first problem for the creditor making the challenge is deciding what type of fraud was involved and how the circumstances fit into all the necessary legal elements. The second problem is actually proving that all these elements (which may come from state law as well as federal law) are met.
When I prepare bankruptcy cases for my clients, we do an extensive analysis to determine whether the debts are dischargeable and whether they may be challenged. When a debt may be challenged, we try to determine the risk of getting an actual challenge and the risk of my client losing the challenge. I do not rush my clients into filing a bankruptcy petition because I prefer that we are fully prepared and willing to accept whatever risks are necessary before filing. The risk of having the dischargeability of a debt challenged is important to assess.
The discharge order in a bankruptcy case does not specify which debts are being discharged. A dischargeable debt that was not challenged (e.g., a credit card balance) is presumed to be discharged, and a nondischargeable debt (e.g., a student loan) is presumed to remain collectible. A debt from any category can be challenged for dischargeability by the creditor for special reasons, sometimes after the bankruptcy case is closed. A debtor can also start a proceeding to determine the dischargeability of a debt in order to settle conflicts that may arise after the bankruptcy case.
The common types of debts that are discharged are:
- Credit cards
- Personal loans
- Medical bills
- Liability on repossessed cars and foreclosed houses
- Student loans
- Taxes (but not all of them)
- Child support or alimony
A major exception to dischargeability is based on some kind of fraud. A creditor can challenge the dischargeability of a debt if it was incurred by false pretenses, a false representation, actual fraud, or a false written statement with certain conditions. It could also be challenged if it was incurred by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. The first problem for the creditor making the challenge is deciding what type of fraud was involved and how the circumstances fit into all the necessary legal elements. The second problem is actually proving that all these elements (which may come from state law as well as federal law) are met.
When I prepare bankruptcy cases for my clients, we do an extensive analysis to determine whether the debts are dischargeable and whether they may be challenged. When a debt may be challenged, we try to determine the risk of getting an actual challenge and the risk of my client losing the challenge. I do not rush my clients into filing a bankruptcy petition because I prefer that we are fully prepared and willing to accept whatever risks are necessary before filing. The risk of having the dischargeability of a debt challenged is important to assess.
Tuesday, July 26, 2011
Repayment of a variable debt load
My clients consider their overall debt load when deciding whether to file a bankruptcy petition. If they think that it may be feasible to pay off their debts but they are uncertain about how long it may take, I remind them that the general policy of bankruptcy is to consider whether debts can be paid off in three to five years. A debtor should feel justified in filing for relief if she cannot calculate when her debts might get paid off or if she calculates it will take longer than three to five years.
It can be tricky to determine how much debt actually has to be paid off since some balances change over time. For instance, a credit card balance could go up if interest rates change or late fees are added. However, sometimes these balances can be reduced through a process of negotiation aimed at setting up a payment plan. A debtor may find that she could reduce the amount of debt through such a process, and then it may be easier to determine when it can be paid off. When someone needs to explore such options, I recommend the services my friend Dewayne Hamilton, a certified housing and credit counselor. His website is the Hamilton Financial Bridge, and it is more helpful to discuss debt repayment options with him than taking a risk with an unknown service provider.
It can be tricky to determine how much debt actually has to be paid off since some balances change over time. For instance, a credit card balance could go up if interest rates change or late fees are added. However, sometimes these balances can be reduced through a process of negotiation aimed at setting up a payment plan. A debtor may find that she could reduce the amount of debt through such a process, and then it may be easier to determine when it can be paid off. When someone needs to explore such options, I recommend the services my friend Dewayne Hamilton, a certified housing and credit counselor. His website is the Hamilton Financial Bridge, and it is more helpful to discuss debt repayment options with him than taking a risk with an unknown service provider.
Friday, May 27, 2011
Stop foreclosure with Chapter 13
Foreclosures are really easy for mortgage lenders in Georgia. When you finance a home here, you sign a security deed to the lender plus a waiver of rights. These documents allow the lender to advertise your house for sale for four weeks and then auction it off on the courthouse steps, without ever going inside the courthouse. The homeowner has the burden of taking the lender to court to prove problems with the lender's accounting or procedures, but usually missing three payments is enough under most mortgage terms to allow the lender to foreclose.
Fortunately, Chapter 13 of the Bankruptcy Code provides a powerful tool: Debtors can cure the default on a loan through a payment plan. Chapter 13 filings are high in Georgia precisely because foreclosure is so easy, but Chapter 13 allows people to keep their homes and catch up on the missed payments.
However, the Chapter 13 option really only helps in certain situations. The common scenario is a homeowner who loses her job, misses mortgage payments, but then finds new employment. She has the same level of income restored, but it is still not high enough to help her make a lump sum payment or even follow through on a six-month repayment plan the lender might offer. Chapter 13 is useful because she would have three to five years to catch up on the missed payments.
In this economy, though, many people who change jobs are finding that their income has dropped for the long term. A Chapter 13 payment plan includes payments for the regular mortgage payments, payments toward the arrears on the mortgage, and fees for the attorney plus the trustee who handles the payments. Many homeowners cannot afford this, and they may not be able to afford their regular house payment either. In this situation, mortgage modifications through the federal government's Home Affordable Modification Program (HAMP) may be the only way to keep a home and lower payments.
Mortgage modifications are tricky, too. Lenders are overloaded with requests and cannot meet the demand for modifications. When the paperwork finally goes through, homeowners find themselves in a six-month trial period in which they still have not been granted a final modification decision. If they are denied a permanent modification, they are back in default at the end of the period and may face an immediate foreclosure process again.
For these reasons, I do not get very excited about offering my clients the Chapter 13 option to stop a foreclosure. Between falling wages in the new economy and overpriced homes that should not have been purchased to start with, it is difficult for homeowners to find relief from foreclosure. But for these scenarios where a client has had a temporary interruption in income and simply cannot come up with enough money fast enough to stop a foreclosure, Chapter 13 makes good sense.
Fortunately, Chapter 13 of the Bankruptcy Code provides a powerful tool: Debtors can cure the default on a loan through a payment plan. Chapter 13 filings are high in Georgia precisely because foreclosure is so easy, but Chapter 13 allows people to keep their homes and catch up on the missed payments.
However, the Chapter 13 option really only helps in certain situations. The common scenario is a homeowner who loses her job, misses mortgage payments, but then finds new employment. She has the same level of income restored, but it is still not high enough to help her make a lump sum payment or even follow through on a six-month repayment plan the lender might offer. Chapter 13 is useful because she would have three to five years to catch up on the missed payments.
In this economy, though, many people who change jobs are finding that their income has dropped for the long term. A Chapter 13 payment plan includes payments for the regular mortgage payments, payments toward the arrears on the mortgage, and fees for the attorney plus the trustee who handles the payments. Many homeowners cannot afford this, and they may not be able to afford their regular house payment either. In this situation, mortgage modifications through the federal government's Home Affordable Modification Program (HAMP) may be the only way to keep a home and lower payments.
Mortgage modifications are tricky, too. Lenders are overloaded with requests and cannot meet the demand for modifications. When the paperwork finally goes through, homeowners find themselves in a six-month trial period in which they still have not been granted a final modification decision. If they are denied a permanent modification, they are back in default at the end of the period and may face an immediate foreclosure process again.
For these reasons, I do not get very excited about offering my clients the Chapter 13 option to stop a foreclosure. Between falling wages in the new economy and overpriced homes that should not have been purchased to start with, it is difficult for homeowners to find relief from foreclosure. But for these scenarios where a client has had a temporary interruption in income and simply cannot come up with enough money fast enough to stop a foreclosure, Chapter 13 makes good sense.
Monday, May 2, 2011
Bankruptcy videos
The Administrative Office of the U.S. Courts has a website with videos giving consumers an introduction to bankruptcy: "Bankruptcy Basics."
Thursday, April 21, 2011
Chapter 7 legal fees are due up front
Why can't you pay your bankruptcy attorney in installments? For Chapter 13 cases, the attorney's fee usually is paid as part of the payment plan, but Chapter 7 is a different animal. Some clients find it frustrating that I cannot set up a payment plan or just take half now and half later. Let's explore why.
Conflict of interest: A bankruptcy petition deals with your debts, and your attorney is representing your interests as against those of creditors. Once your attorney becomes a creditor, there is a conflict of interest. Bankruptcy judges frown upon attorneys who get themselves in this situation.
Automatic stay: Filing a bankruptcy petition creates a special legal status. This filing automatically acts as a court order against collections efforts by creditors, including actions against property of the debtor. Violating any court order is contempt of court (punishable by fines and imprisonment) and the Bankruptcy Code specifically provides that violators can be penalized. If I were to call my clients and mention that they owe me money after filing the bankruptcy petition, I would be in contempt of court. If I deposited a postdated check from a client, this would be collecting on a debt and still likely to be considered a prohibited action.
Unauthorized post-petition transfers: When a debtor's assets are not exempt in a bankruptcy case, she is not allowed to transfer those assets to creditors or anyone else. If I deposit a client's check after she file a bankruptcy petition, a question about this transfer of assets could arise. Of course, in many cases the debtor can write checks to transfer money that is earned after the bankruptcy filing, but I do not want to open a dispute with a bankruptcy trustee and then have the judge find out I was collecting on a client's debt post petition.
Ethics: As you can tell, most attorneys and judges do not consider payment plans or taking postdated checks from clients in Chapter 7 cases to be proper or ethical. Again, it is frustrating for a debtor, especially after a garnishment has started and it is that much harder to save up the money for a bankruptcy case. Unfortunately, there are bankruptcy attorneys who routinely take postdated checks from clients to make it easier for them to pay for the case, and sometimes these attorneys get in trouble for doing so. If you are tempted to hire one of these attorneys because this arrangement is easier, can you really trust her to look out for your best interests when she is willing to push ethical boundaries to be competitive and look out for her own financial interests?
Practical issues: After I explain these issues to prospective clients, some still ask if they can make a down payment to get started and pay the rest at the time of filing. While it might be nice to hook them in to my office rather than another attorney's, there is no advantage whatsoever. I am going to charge at the time of our full consultation, and then I might have your petition ready for filing in only a couple of days anyway. Paying an installment does not get your case filed any quicker and only makes me play banker.
It is inconvenient to have to pay up front for bankruptcy relief under Chapter 7, but it is a unique financial process. Unfortunately, Chapter 7 does not have provisions for attorney's fees, and I have heard a judge observe that perhaps that was a mistake made by Congress. But these are the rules we have to play by, and I hope that if you are looking for bankruptcy help you will not hire an attorney who is comfortable bending or breaking the rules.
Conflict of interest: A bankruptcy petition deals with your debts, and your attorney is representing your interests as against those of creditors. Once your attorney becomes a creditor, there is a conflict of interest. Bankruptcy judges frown upon attorneys who get themselves in this situation.
Automatic stay: Filing a bankruptcy petition creates a special legal status. This filing automatically acts as a court order against collections efforts by creditors, including actions against property of the debtor. Violating any court order is contempt of court (punishable by fines and imprisonment) and the Bankruptcy Code specifically provides that violators can be penalized. If I were to call my clients and mention that they owe me money after filing the bankruptcy petition, I would be in contempt of court. If I deposited a postdated check from a client, this would be collecting on a debt and still likely to be considered a prohibited action.
Unauthorized post-petition transfers: When a debtor's assets are not exempt in a bankruptcy case, she is not allowed to transfer those assets to creditors or anyone else. If I deposit a client's check after she file a bankruptcy petition, a question about this transfer of assets could arise. Of course, in many cases the debtor can write checks to transfer money that is earned after the bankruptcy filing, but I do not want to open a dispute with a bankruptcy trustee and then have the judge find out I was collecting on a client's debt post petition.
Ethics: As you can tell, most attorneys and judges do not consider payment plans or taking postdated checks from clients in Chapter 7 cases to be proper or ethical. Again, it is frustrating for a debtor, especially after a garnishment has started and it is that much harder to save up the money for a bankruptcy case. Unfortunately, there are bankruptcy attorneys who routinely take postdated checks from clients to make it easier for them to pay for the case, and sometimes these attorneys get in trouble for doing so. If you are tempted to hire one of these attorneys because this arrangement is easier, can you really trust her to look out for your best interests when she is willing to push ethical boundaries to be competitive and look out for her own financial interests?
Practical issues: After I explain these issues to prospective clients, some still ask if they can make a down payment to get started and pay the rest at the time of filing. While it might be nice to hook them in to my office rather than another attorney's, there is no advantage whatsoever. I am going to charge at the time of our full consultation, and then I might have your petition ready for filing in only a couple of days anyway. Paying an installment does not get your case filed any quicker and only makes me play banker.
It is inconvenient to have to pay up front for bankruptcy relief under Chapter 7, but it is a unique financial process. Unfortunately, Chapter 7 does not have provisions for attorney's fees, and I have heard a judge observe that perhaps that was a mistake made by Congress. But these are the rules we have to play by, and I hope that if you are looking for bankruptcy help you will not hire an attorney who is comfortable bending or breaking the rules.
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