Plan Your Holiday Spending for a More Merry Christmas

Once the holidays are over, many of us will be facing a larger than ever pile of debt, with a decreasing ability to manage it. This looming financial stress can make even the happiest of holidays tense and anxious. How can we manage this stress? Here are some tips:

• Draft a budget, and stick to it. Retailers are masters at making you want something they are selling, no matter the cost. And while the newest and most high-end flat-screen TV would be nice, if you have $500 to spend on gifts, you must spend $500 or less. Going over budget will seriously impact your ability to repay your debts down the road.
• Plan your debt repayment strategy now. $1,000 in credit card charges will raise your minimum payments by only $40 or so, but at that minimum payment you will still be paying on almost the entire $1,000 next Christmas. So put yourself on a plan to repay those charges in full as soon as you can, and no later than by next holiday season. If you can’t pay it back by then, you should probably reconsider your budget, setting it at a level you can afford to repay more quickly.
• Use only cash. It may be difficult, but the best strategy is to not incur debt at all. If that means a holiday season of less plenty, your bank account will thank you all next year.
• Don’t use more debt to pay debt. If you have reached the stage where you use balance transfers to manage your payments, or living on your credit cards while your income goes to pay those cards down, it is time to speak to a professional for help. An attorney can help you explore a number of options, and set you on the path best for you.
• Start saving for next year January 1. If you set aside money for gifts during the year, it is easier to stick to a budget on those purchases, and you get the benefit of making interest, not paying it.

With a firm and realistic plan in hand, you can take the money stress out of the holiday season. That leaves you free to enjoy the greatest of gifts – time with your family and friends.

A Primer on the Bankruptcy Means Test, and a Reminder

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), all people who filed bankruptcy with primarily consumer debts (mortgage, car, credit cards, medical bills, etc.) are now required to fill out what is called the "Means Test." The means test is another method the bankruptcy system can use to determine if a person can qualify for a Chapter 7 Discharge, as well as determine how much money, if any, a debtor must pay to their unsecured creditors in a Chapter 13 bankruptcy.*

*Under previous and current law, a straight calculation of income minus reasonable and necessary expenses is used for this purpose. It's almost as if congress didn't trust reality.

As a first measure, the Means Test uses the average total household income for the prior 6 complete months (if a case is filed in November, the months used are May-October), and compares that to the median income for the same-sized family in their state of residence (these numbers are compiled by the Census Bureau). If the income is below the median, the Means Test is over, and no "presumption of abuse" is created.*

*The bankruptcy code uses "abuse" as its legal term for whether to allow a Chapter 7 Bankruptcy or not.

If the income is ABOVE the median income, more work remains to be done. The actual Means Test is then applied, which consists of deductions taken against the average income already calculated. Some expenses are directly drawn from the IRS, and some are reflective of the debtor's actual expenses. At the end of all this, a net income is generated (it can be negative or positive). If the "Disposable Monthly Income" (DMI) is above a certain threshold, the debtor is assigned a "presumption of abuse" for purposes of filing a Chapter 7 bankruptcy. In a Chapter 13, the DMI is multiplied by 60 to determine an amount needed to pay unsecured creditors in the case.

Once the presumption of abuse arises, there are two main options: 1) rebut the presumption and continue with the chapter 7, and 2) decide against the chapter 7 filing. Some attorneys do not, as part of their practice, handle cases in which the presumption of abuse arises (some don't even handle over-median chapter 7 cases). I am not among those, but unless there are specific facts and circumstances that would change how the court looks at the case, rebutting the presumption is difficult, and will likely cost you more for the trouble. If a chapter 7 doesn't work for you because of income concerns, a chapter 13 is usually a workable option.

This calculation is of particular concern right now because there are new median income figures effective November 1, 2009, and in many places the median income has dropped. You may have a 21 day window in which to qualify for the previous median income figures, so if you are considering a bankruptcy, contact an attorney now to see if this can make a difference for you.

The 'Stigma' of Bankruptcy

Nobody wants to file bankruptcy. I have seen several thousand bankruptcy cases in my years of practice, and not one was happy to be in my office. For most, it was a humbling or humiliating experience.

Except in rare circumstances, it really doesn't matter to the court how you got to the point of filing bankruptcy. The laws are pretty mechanical, and if you fit the statutory requirements, you can file bankruptcy and receive a discharge of debts. That doesn't stop my clients from trying to explain to me the reasons they got where they are. People seem to subscribe to the notion that filing bankruptcy makes you a bad person, and nobody wants to be thought of as a bad person.

Bankruptcy used to carry such a social stigma. In today's culture, however, the "bad actor" stigma has largely faded from use. Your filing is very unlikely to be published in the local paper. There is no sign placed on your lawn that declares you a bankrupt. Given the large number of filings, it is highly likely you know someone who has filed a bankruptcy. If you don't know who it is, this proves my point: the stigma has largely been removed.

I look at my clients a different way. All my clients are people who have lost control of their financial situation. This may be the result of job loss, injury or health crisis, divorce, a gambling problem, an adjustable rate mortgage gone wild, or just youthful stupidity. The other thing that binds my clients is that all are trying to take back control of their finances. Sometimes the mountain of debt becomes paralyzing, leaving you unable to act to save yourself. Calling an attorney or credit counselor is a first step toward recovery, and it takes strength to make that call and admission of a problem you can no longer fix alone.

In a down economy like ours, it is easy to look at someone's financial troubles and think "There but for the grace of God go I." In truth, most of us are one car accident or bad diagnosis away from those who are filing bankruptcy today. Luckily, I think our society is beginning to understand that, and treat those unfortunate debtors accordingly.

Photo from flickr by Nick Farnhill used under Creative Commons license

Help! My home value has fallen and it can't get up!

Falling home prices and the terrible employment market have combined to create one of the worst housing markets in recent history. People who need to sell their homes can't, and those whose income has dropped often find themselves in a now-unaffordable house with no way to get out.

What can you do?

You have several options:

1. You can simply walk away from the house. Sometimes, just handing over the keys works best. You do put yourself at risk of a deficiency on the mortgage, but often those are not pursued. The downside is, other than you lose your home, is the foreclosure on your credit history.
2. You can try working with your lender to modify the terms of the loan. Some lenders are willing and able to do this, and when available, it is often the quickest way to get your home affordable again. However, since so many mortgages are sold and packaged on the secondary sale market (the cause of all this mess), speaking to the actual loan holder is difficult if not impossible, and your loan servicer is very limited in what they have permission to offer.
3. You can get a short sale on the home. If you need to leave the house, or simply cannot sell it for its loan value, your lender may agree to a sale price that does not fully repay their loan. This avoids foreclosure and bankruptcy, but may either carry debt on you to the future, or have significant tax implications. Read the fine print carefully before agreeing to a short sale.
4. You can try the Obama Loan Modification Program. This program is designed to help both you and your lender get the monthly mortgage payment down to about 31% of your gross income. It does this by lowering interest rates, extending repayment periods, and can even reduce your principal in part. However, not all lenders are participating, and it is a government program, so naturally it entails lots of detailed paperwork.

There is one tool that has intentionally been excluded from this toolbox: Bankruptcy. Mortgages on primary residences are basically unchangeable in bankruptcy proceedings. There has been renewed discussion of "mortgage cramdown" in Congress, but since the mortgage industry has a powerful (rich) lobby, I wouldn't get my hopes up of having any help from the Bankruptcy Courts.

That is a shame, for bankruptcy courts are just the place for such a tool. When a person files bankruptcy, they are attempting to get their fiscal lives back on track, but they cannot as of now help their mortgage. It does nothing to stem the tide of foreclosures, which is the primary step needed to begin the climb out of our current recession. Indeed, I have seen many people forced to lose their homes due to rising interest rates on adjustable mortgages, or falling home values due to the recession. With no help on the horizon, the situation may take even longer to reverse itself.

Feel free to contact your senators, and encourage them to allow for bankruptcy cramdown.

Night of the Living Debt

Many people have been afflicted by the recurrence of old debts through third party collections. It may be for a debt you paid long ago, or a debt that simply reappears after years of being out of circulation. This type of debt is called "zombie debt," and suits about this are becoming more common as debt collectors get more desperate to get money from an unsuspecting public.

The debt is called zombie debt because it keeps coming back to life, being sold from one debt buyer to another over and over again. These will often lead to the debt buyer filing a lawsuit to get a judgment against you, so they can begin wage garnishments and other painful collection actions. Often, you can't even tell what the original debt was, let alone if you actually owe it.

I have spoken to many clients over the years who felt powerless to fight this kind of debt. They can't prove they don't owe it, so they feel like the burden is too large and they don't even appear at the hearing to fight the debt. Unless you are about to file a bankruptcy, this may be a mistake for this third party collection.

First, remember that the burden is on the creditor to prove you owe the debt, not the other way around. Often the basis for the debt is only noted by one line in a computer database; other times it is so removed from the original source there is no link between it and you. Maybe the debt is too old to be enforceable.

You may have rights under either state or federal law that allow you to not only prevail on such a suit, but offer claims against the collector for damages and even attorney's fees. That last bit makes these cases rather attractive to an attorney and more affordable for you to get quality representation.

Most attorneys who practice in this area will offer a free initial consultation about your case. They can provide perspective on the matter at hand, and may help you realize you have power you didn't know about to stop malicious collection efforts like these.

You can call 816-272-5544 and I will be happy to help if I can.

Photo Scott Beale\Laughing Squid under Creative Commons License.

A somewhat misleading article in the LA Times

The Sunday LA Times Real Estate section printed an article on bankrutpcy today, demonstrating the way that a Chapter 13 can help prevent a foreclosure. All in all, it is a good article, and does get across the point that a Chapter 13 can help prevent a foreclosure, and can be a good tool in states with a "non-judicial" foreclosure process (Missouri is this kind, Kansas requires judicial intervention to foreclose). In Missouri, after the notice of right to cure, you have as little as 50 days to either file bankruptcy or otherwise satisfy the mortgage lender before a sale. After the sale, there is almost nothing to do to save the house.

The article is not without flaws. We begin with the following statement:

But whether to file for bankruptcy can no longer be a spur-of-the-moment decision. Under a change in the law that went into effect in October 2005, before you can file you are required to go through credit counseling from a nonprofit agency approved by the Justice Department's U.S. Trustee Program.

Bankruptcy has never been a spur-of-the-moment decision. The filing of a case may be a last-minute affair, but any attorney worth their bar license requires an in-depth interview before recommending a bankruptcy, and certainly requires significant records and documentation before a filing can be completed (save for true emergencies, but that is a different matter). And I doubt seriously that any of my Chapter 13 clients have come in to file on a whim. This is the kind of hackneyed portrayal of consumer debtors that allowed the deeply flawed 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (which neither prevents abuse nor protects consumers) to pass in the first place. The author apparently could not find either a debtor or debtor's attorney to contribute to the article, so he went with the poor stereotype.

Stepping momentarily from my soapbox, the author oversimplifies the qualifications for a Chapter 7 bankruptcy, stating "If you earn less than the median income for your state, you can file under Chapter 7...." This is not entirely true. One could, in theory, still have sufficient excess income with a below-median income to disqualify them from a Chapter 7. Additionally, many over-median debtors still qualify for Chapter 7, if the "means test" shows they have little or no disposable monthly income. A debtor with a large mortgage payment will often qualify for a Chapter 7 despite being above-median.

The above matter speaks to one of the great myths of the 2005 act: That you can no longer qualify for Chapter 7 Bankruptcy. Many debtors in my office have asked just that question, and it is disappointing for the newspaper to help perpetuate that myth.

The final problem with this article falls a bit lower, when the Times author claims that if a Chapter 13 fails, everything is liquidated. That is far from the truth - a Chapter 13 that fails is most often dismissed, which does not require the liquidation of any property (though often leads to a foreclosure). Liquidation only happens after a debtor converts a Chapter 13 to a Chapter 7, assuming they qualify as a Chapter 7 debtor.

The article seems to attempt to reach the conclusion that filing a Chapter 13 is the worst thing you can do, even to the greater detriment of your credit than a foreclosure. This is simply oversimplistic. Before you reach the stage of imminent foreclosure, call a bankruptcy attorney. They are ethically required to give you the options as they apply to you. Additionally, the credit counseling process ensures you get a second opinion before choosing bankruptcy. Sometimes bankruptcy is the best choice for you, sometimes not. But if you shut options out before you start, you may do more harm than good.