Jason Norbury, Bankruptcy Attorney

Exemptions protect some items from creditors

2011-12-14T10:57:00.001-06:00

I have said in this space before, and it has been said many times elsewhere, that someone getting a judgment against you is a bad thing.

When a creditor has a judgment, they gain certain powers over you, powers granted by state and federal law. The two main powers gained are (in many instances) a lien on your real estate and the ability to execute on your personal property.

While these things are generally true, most people only see these powers exercised in two main ways: wage garnishment and bank account execution. The law is not limited to these two items, and it is within the ability of a creditor to execute and sell your furniture and TVs, or even force a foreclosure sale on your house. So why don’t judgment creditors do that?

The answer lies in property exemptions.

Each state and the federal government has crafted statutes that allow a person to protect (exempt) certain amounts of value in certain types of property. The types of property and structure of the protection differs by state, but every legislature and some state constitutions have determined that a person is entitled to a certain minimum amount of property that is theirs above the claims of all creditors. This is your state-granted nest egg, in a way.

Being in the Kansas City area, we have the opportunity to see two very different exemptions schemes in our two local states. Missouri has a more “eastern” exemption scheme, while Kansas’ exemptions have a more “western” tilt. Missouri sets, for most property that regular consumers would own, dollar limits on how much property can be owned of a certain type ($3,000 for automobiles, for example). Kansas tends to protect a broad category of property, regardless of dollar amount (or setting a higher limit). A homestead in Kansas is protected regardless of value (so long as it sits on less than an acre), while Missouri allows a $15,000 exemption in your homestead’s equity. This, in part, explains the existence of Mission Hills.

For most people, and in this current real estate climate, there is little property that has a value over and above the exemption amounts. In order to get some money from executing on a person’s household goods in Missouri, a creditor would have to sell more than $3,000 in furniture and electronics before they could keep any money. Having held numerous garage sales, I can tell you that is a near impossibility for most families. Your old couch just isn’t worth much money.

Your wages and liquid assets, however, have much less robust protection. Both Missouri and Kansas limit the protection of your wages to 75 percent of your net income (90 percent if a Missouri head of household). Kansas offers no protection for most cash in a bank account, and Missouri’s is somewhat limited. Given the limited nature of the exemptions, and the ease of dealing with money over tangible personal property, it becomes clear why creditors concentrate their post-judgment collection efforts on wage garnishments and bank account executions.

So what can you do to best protect your most vulnerable property?

The first and most useless answer is to not allow a judgment be taken against you if possible.

If you are sued on a debt, consult an attorney immediately to determine your rights. If a creditor has taken a judgment and is now attempting to garnish wages or bank accounts, call an attorney to determine what you can do to best protect yourself. You may be able to reduce the garnishment amounts to a livable amount, or in the rare case avoid the impact of the garnishment altogether.

Property exemptions can also help you plan where to put your money.

In most jurisdictions, 401(k) and other retirement accounts are protected from creditor attack. Many life insurance policies are also protected to a large cash value.

In Kansas, home equity is generally protected (though there are limits even there). If you have the ability to save some money, security against future creditors is a factor you should consider when making investment decisions.

With a bit of understanding of the structure of property exemption law, you can take steps to best protect your assets, whether before or after a creditor tries to attack them.

Talk to an experienced legal professional if you have questions about your rights.

Jason Norbury is an attorney in Lee’s Summit who specializes in bankruptcy.

How to Handle the Finances of the Deceased

2011-08-10T09:27:00.000-05:00

As appears in the Lee's Summit Journal

Death is one of those inevitable events. Not just our own, but it is assured that loved ones will die. When people die, their financial problems (and messy estates) don’t go away with them, and eventually most of us will be left to pick up the pieces left by a parent, sibling, spouse or even a child who has gone before us into the great unknown. Navigating the system is challenging in the best of times, and doing so while grieving may be more than any person can be expected to handle alone.

Let me first get the mini-lecture out of the way: Get your estate plan done. Hire competent professionals, explain to them your goals and let them help you find the right documents, investments and plans to meet those goals. Review those plans every few years, and update them if needed. Also, eat healthy, say your prayers and take your vitamins. End Lecture.

Moving on to other people’s decedent estates, they can be divided in two main camps: those with an estate plan, and those without (intestate). If you are “lucky” enough to be left in charge of a well-planned estate, the process is often simply following the instructions of the estate plan. If done right, you can even avoid probate court involvement. Real estate and other property will have to be retitled, any investment accounts will pass according to their terms, and any legitimate creditors of the departed will have to be addressed. Even in this comparatively simple scenario, you may still want professional assistance. After all, you probably have a job and a family of your own, and those needs don’t stop to allow you many hours of free time to administer an estate. Or the estate may be complex enough that you don’t feel you have the expertise to properly run the show. Often the will or trust documents will recommend an attorney or professional to help you do what is required of you as a personal representative, executor or trustee. Don’t be afraid of getting that help.

If someone died and was mean enough to leave you in charge of their estate without a plan (no will, no trust, no nothing), or even an insufficient plan, you are then left with the necessity of engaging the judicial system to pass any unplanned property. The judicial process used to move property of the deceased is typically called the probate process, and is, to put it mildly, very technical and locally driven. Jackson County’s Probate Division has dozens of forms on its website, each uniquely designed to fit the probate process as designed in this county to comply with the state statutes. Property to be transferred by the terms of a will must go through probate, as well as any “intestate” property (not subject to any will). Some property will transfer outside probate by the terms of joint ownership, or through another non-probate transfer law and thus will not require the jurisdiction of the Probate Court. Confused yet?

In short, if you are left to manage a will or an intestate estate, the first call should be to an attorney. Once again, you can call the lawyer who is likely mentioned in the will, or you can consult another attorney you trust. Not only can an experienced attorney help you more easily navigate the minefield of forms and rules that will determine how and where the property will pass, not only will they be able to reduce the stress placed on you during an already difficult and traumatic time, but they can ensure that you, as the personal representative, do not incur any risk or liability that may arise from a misstep or mistake you might make on your own.

Losing a loved one is hard enough for most of us to bear. Trying to carry the extra burden of administering their estate alone is more than should be asked of any of us. By wisely engaging professionals, you can remove that extra burden from your shoulders, and focus on the most important things that remain in your life.

An equal protection primer, courtesy of bankruptcy

2011-07-05T09:39:00.000-05:00

Originally appears in the Lee's Summit Journal

On Feb. 23 United States Attorney General Eric Holder issued a letter stating that the Department of Justice would no longer defend Section 3 of the Defense of Marriage Act, which was a change in position from all previous Attorneys General since the law’s passage in the Clinton Administration.

Section 3 defines marriage as between a man and woman for the purposes of federal law. The next day, a legally married gay couple in California filed a joint bankruptcy petition, asking the court to jointly discharge their debts. The trustee assigned to administer the case filed a motion to dismiss the case, stating that since under DOMA this marriage was not recognized as legitimate (bankruptcy is a federal law), the couple could not file a joint case, they would have to file two separate bankruptcies.

Earlier this week, the bankruptcy court, in an opinion signed by 20 of the 25 judges, declared DOMA unconstitutional in that it violated the equal protection clause of the constitution by denying this legally married couple the same rights as any other legally married couple.

This case is a small and early skirmish in what is sure to be a long and protracted legal argument that will eventually end up at the Supreme Court.

The battle will not be fought over bankruptcy petitions, but one of the fundamental constitutional questions of the last 100 years: The Equal Protection Clause and its application to new groups of people who suffer discrimination.

The Equal Protection Clause is part of the 14th Amendment to the U.S. Constitution and states that “no state shall...deny to any person within its jurisdiction the equal protection of the laws.”

It has been subsequently interpreted to apply to the federal government. It was created and adopted after the Civil War in part to ensure our country’s commitment to the notion that “all men are created equal.” As courts have interpreted the interaction of law with the Equal Protection Clause, a detailed and complicated analytical process has been developed to help determine what laws are unconstitutionally discriminatory.

To begin with, we must look at who is being discriminated against or affected by the law. Laws that classify by race, national origin or infringe on a fundamental right are examined under what is called “strict scrutiny.” Such a law must be “narrowly tailored” to achieve a “compelling” government interest. It is very hard for a law to survive strict scrutiny analysis.

Laws that classify on the basis of gender and illegitimacy get “intermediate scrutiny” and must be “substantially related” to an “important” government interest and actually further that interest.

This puts the burden on the government proposing the law and the intent of the law should not be discriminatory.

Finally, all other classifications get “rational basis” review, which keeps laws constitutional so long as they are “reasonably related” to a “legitimate” government interest. Most, but not all laws analyzed under rational basis are upheld as passing equal protection muster.

Attorney General Holder declared in his letter that it was the opinion of the Department of Justice that sexual orientation (specifically the right to marry) was the kind of characteristic that was similar enough to gender and race (unchangeable, a political minority and having a history of discrimination) to be reviewed under intermediate scrutiny and that according to their analysis it failed that analysis on all fronts.

The Supreme Court so far has failed to explicitly apply the intermediate scrutiny standard to sexual orientation discrimination, but has used some language in its decisions that indicate the trend is in that direction. The current court has not heard or decided a case in which it has applied equal protection analysis to sexual orientation discrimination and the question is open until they actually speak on the subject.

The battleground on this hot-button issue will be argued in the courts around whether sexual orientation deserves rational basis or intermediate (or even strict) scrutiny. That will turn on how the courts view sexual orientation, whether a characteristic like gender or race, or something not worthy of enhanced intervention.

This guide will hopefully make the following a bit easier to understand.

While star-studded, roots of Dodgers’ bankruptcy familiar

2011-07-05T09:33:00.001-05:00

Originally appears in the Lee's Summit Journal

On Monday, the Los Angeles Dodgers Holding Company LLC filed for Chapter 11 Bankruptcy protection in the District of Delaware (I will let the irony of the L.A. Dodgers filing in Delaware wash over you for a moment). With assets listed in excess of $500 million, debts over $1 billion, the famous names at the top of the creditor list (Manny Ramirez, Vin Scully), and the active opposition of Major League Baseball (MLB), it might appear that this bankruptcy has no relevance to the financial struggles of more regular folks. However, the actions that led to the bankruptcy are the same symptoms that lead many of my clients into my office, just written on a much larger financial scale (I don’t handle any billion dollar cases, though I am told the fees are pretty nice).

Last year, the Texas Rangers filed a bankruptcy case, but that one was much different than the Dodgers promises to be. First, the Rangers had already been placed under control of MLB, since its previous owner had defaulted on debts. The Rangers’ bankruptcy was designed to facilitate a quick sale of the team, and even with all the wrangling that followed (such cases are never simple), the entire process took a little over three months. The Dodgers’ filing is designed to prevent such a forced sale by MLB and one of the interesting legal dynamics will be the interaction of MLB’s anti-trust exemption (which gives it tremendous power over the individual teams) and the bankruptcy code’s provisions for self-management and reorganization. The Dodgers’ owner, Frank McCourt, wants the bankruptcy court to force MLB to allow him to sign a TV contract the league had the right to reject, and to accept further financing in violation of MLB rules. The MLB would like to force McCourt to sell the team, and soon, and they have the power to force such a sale if need be (outside a bankruptcy court).

But why are the Dodgers in bankruptcy in the first place? In short (and oversimplified), for two reasons many people are in bankruptcy: Divorce and a failure to adjust lifestyle in the face of changed economic circumstances.

Frank McCourt and his wife Jamie are in the midst of a high-profile divorce, the kind that only seems able to occur in California and on Tabloid Television. Ownership of the team is in dispute in the divorce, which has limited the ability of the Dodgers to field a winning and profitable product. Typically, when a couple divorces, the total living expenses required to support all the family members rise (multiple households), and there isn’t extra income to cover it. For most Americans, who live so close to the edge of their means to start, this means there isn’t enough money left to pay all the creditors, and often one or more of the couple will end up filing a bankruptcy. The McCourts exacerbated this issue by maintaining their lavish lifestyle, including buying two neighboring million dollar homes, in the face of their split, and taking an alleged $100 million out of the Dodgers to use on personal expenses. This “withdrawal” left the Dodgers short on cash for meeting their obligations, and got MLB interested in the financial matters of the team.

While my sympathy for two millionaires fighting for control of a profitable Major League Baseball franchise and refusing to downgrade their lifestyle to just below mind-bogglingly lavish is severely limited (okay, non-existent), the parallels are easy to draw down to those of us who live on planet earth. If you are going through a divorce, it is vital that you examine the financial ramifications of the dissolution. Finances are not a good reason to remain in an unhealthy marriage, but both parties should be able to take a sober look at the realities created by separate households, from extra rent/mortgage payments to added child care costs, insurance and ten other items that if not attended to will invariably lead you to my door. Sometimes, even careful planning won’t avoid a bankruptcy, and a bankruptcy can occasionally make a divorce a bit less painful. But understand that any life change requires with it a life finance adjustment.

What Should I (Not) Do With My Tax Refund?

2011-03-25T10:45:00.003-05:00

As published in the Lee's Summit Journal.

Bankruptcy filings run in cycles during the year. The rate of filing slows down during the dog days of summer (I guess more people are on vacation), pick up after Labor Day, slow down over the holidays (who wants to file bankruptcy on Christmas?) and tend to ebb and flow in relatively predictable ways over the calendar.

The first third of the year is one of our busier times, with people tackling their financial troubles as a New Year’s resolution and also one of the times we have to be most careful with the timing of a bankruptcy filing, because of the pending arrival of tax refunds. While most people aren’t filing bankruptcies this spring (I hope), borrowing some of the advice I give to my clients regarding their disposition can be useful to those without great financial distress, or useful to keep that distress at bay.

When a person files a bankruptcy, all of their property (and property rights, with a few exceptions) that they owned as of the date of filing become part of the bankruptcy estate, which is then used as the basis for getting money to creditors.

Debtors (the people filing the bankruptcy) can exempt, usually under state law, certain amounts of value in certain types of property, thus keeping it and protecting it from being used to generate money for creditors. This is how people can file bankruptcy and keep most of their stuff, with a few wrinkles, of course.

Included in this pile of property rights is the right to receive an income tax refund. The prospect of giving up their tax refund is not something that most people enjoy, so often we will delay a bankruptcy filing to allow a client to use the refund wisely and not surrender it to their case.

How they spend the refund is also important and if a debtor has paid the money to the wrong parties, that transaction can be reversed in the bankruptcy case, adding annoyance and expense to the already humbling bankruptcy experience.

While it is unlikely that you will have your tax refund expenditures reversed, spending your refund unwisely can leave you on the road to bankruptcy, or at least make the ride bumpier than it has to be. Some priority tips:

Start with catching up on any core living expenses, especially your mortgage or car payment. These and your utilities are the foundation of your daily life, so take care of those first if need be.
Apply some of the money to your debt reduction plan. You do have one of these, right? Reducing or eliminating payments on high-interest debt will create money for you year-round, not just once in the spring, providing that you don’t re-grow the debt later.
Plan for your upcoming “spike” expenses. Taking a family vacation this summer? Know you need some new tires soon? Setting the money aside now will keep you from financing the purchase later, once again saving you money all year long.
Save some money for retirement or college. If you are eligible to open a Roth IRA, you can have that money grow tax-free till retirement and perhaps start a good habit along the way. Missouri offers a tax deduction for money contributed to their Education IRA and 529 plans, giving you an incentive to save and a head start on next year’s refund.

These priorities form the basis of almost every financial plan I have ever been exposed to. Cover the basics, develop and execute a debt reduction plan, then save for emergencies, single expenses and retirement/college.

You may have noticed that buying a new flat-screen TV was not on the list above.

While nobody appreciates watching Charlie Sheen melt down on 54 inches of high-definition liquid crystal glory more than I do, I would wait until after I had addressed the above concerns before spoiling myself so thoroughly.

Take care of the other items and there will be time and money for “winning” and tiger blood soon enough.

What Michael Vick means to you and your finances

2010-12-08T09:04:00.000-06:00

As published in the Lee's Summit Journal.

Given his recent run of success on the football field, there has been renewed discussion of Michael Vick, his prior actions, the value of second chances, redemption and What It All Means.

This article isn’t about any of those things. Instead, this is about one of the few things Mr. Vick and most of us have in common: money and debt (I am assuming very few of you reading this article have careers in professional sports, millions in assets, or federal felony convictions.)

Michael Vick is in the last year of his playing contract, but is only one year or so into a five year Chapter 11 Bankruptcy Reorganization Plan.

A Chapter 11 has the effect of grouping together creditors and treating them all in a similar manner, allowing for the debtor in the case to continue making income or doing business without lawsuits, garnishments or other collection activity. It is the type of bankruptcy that larger businesses use (think GM, Chrysler, pick an airline), as well as individuals with many assets and large debts (Mike Tyson, Vick). This plan requires him to pay some of his income into a “Liquidating Trust” that then pays out money to his creditors. In structure it is fundamentally similar to a Chapter 13 Bankruptcy, for which most consumer debtors (people like you and me) would be eligible.

In a Chapter 13 Bankruptcy, a person (or couple) makes payments to a Chapter 13 Trustee, and the money is then paid out to their creditors according to the terms of the bankruptcy plan. If the debtor’s income changes, whether an increase or decrease, the terms of repayment may also have to change – if you make more, you pay more to your creditors; if you make less, you pay less (within certain limits).

I was curious what provisions Mr. Vick’s plan made for his future contracts, and how, if at all, it would change based on what he made. It turns out his plan is well thought out on this front (those millions in legal fees haven’t gone to waste), and provides for an increasing percentage of income to be paid to creditors as his income increases (much like how your taxes are calculated), maxing out at 40 percent of all income over $10 million per year is to be paid until the end of 2014, or 100 percent of claims are paid.

There are some provisions to ensure extra income is paid if he hasn’t met 80 percent of the claims by 2014. Since Chapter 11 cases essentially end when the plan is confirmed by the court and not when payments are completed, it must include some provision to account for changes in income. By contrast, Chapter 13 cases don’t end until the last payment is made, and are thus reviewable by the court in the event of a change in circumstance.

In both cases, there is provision in place to adjust how creditors are treated in the event the financial situation changes for the individual. When dealing with your creditors (hopefully outside the confines of a bankruptcy), you need a plan that does the same.

First, you should have a plan in place to reduce or eliminate your consumer debts (credit cards, medical bills and the like), making sure the plan categorizes and prioritizes the debts (there are many methods, like Dave Ramsey’s or Suze Orman’s.) Second, you need to be willing to reexamine the plan when your situation changes, perhaps after your annual pay review, or in the event of a child being born or going to college, making changes to account for your current economic reality. Finally, and most importantly, you need to have the will to stick to the plan, even when it ceases to be fun.

It took a felony conviction, complete public disgrace, and a Chapter 11 bankruptcy to get Michael Vick on sound financial footing with a plan for recovery.

If you start with a plan to manage and eliminate debt, you can hopefully avoid a similar financial fate. Feel free to skip the felony and disgrace parts as well.

Who Really Holds My Mortgage?

2010-11-19T11:14:00.000-06:00

Reprinted from the Lee's Summit Journal.

The news has been filled recently with tales of fraudulently foreclosed homes and the stories only get worse and more regular every week.

Even if you are completely current on your home mortgage payment, the events behind these wrongful foreclosures can affect you and your rights.

The problem stems primarily from two sources: mortgage backed securities and mortgage electronic registration systems. Mortgage backed securities are, essentially, a group of mortgages that are wrapped up together, turned into a trust or other “asset,” and then divided into shares which are sold on the open market.

These securities are then transferred repeatedly, as securities are meant to be. Since the original notes and mortgages were sold away from the primary lender, cash was freed up to make more home loans, which is good for consumers.

This led, of course, to such lowered standards for lending and inflated prices for houses that we had the recent real estate market crash of which we have yet to find the bottom, which is bad for everybody. So mortgage backed securities were the pumps that inflated the real estate bubble, especially in the absence of any useful regulation.

With all those mortgages packaged, sold and split into shares, some new problems were created, the first of which was figuring out who would take care of the mortgage.

Traditionally, if a mortgage was sold from one lender to another party, the transfer had to be recorded with the local recorder of deeds, like here in Jackson County. That way, anybody who was interested in the property could easily find out who to contact when it came time to buy or otherwise give required notice. Once the mortgage was packed in an MBS, however, the party to whom you sent payments was not necessarily the party who held the note or mortgage. This creates not only a problem for the homeowner, but also for the lenders. Enter MERS.

MERS is, well, an electronic registration system for mortgages. Upon creation of a mortgage, or deed of trust as used in Missouri, a notice to MERS was inserted in the note and mortgage and a registration number was assigned to the instruments. Then as the mortgage was transferred repeatedly, the changes were recorded in a central database. When it came time to foreclose or release a lien, MERS could be accessed to find the appropriate holder of the note and mortgage. It is estimated that some 60 percent of current mortgages are in the MERS system and the concept is pretty slick.

The problem is that MERS, as executed, doesn’t really comply with most states’ laws on recording of real estate transfers. It often splits the holder of the note (the promise to pay) and the mortgage (the lien on real estate), which can render the mortgage unenforceable (under some states laws).

It is a “black box” and it is not clear to the consumer that they are sending their payments to the right party. Records are not kept well, if at all and if the loan servicer (the company collecting the checks) determines that you are in default, your house could be foreclosed on by a party who isn’t legally tied to the house. Add a heaping of fraudulent intent and you have today’s mortgage morass.

Compounding this is Missouri law. In Missouri, the vast majority of liens are in the form of a deed of trust, instead of a mortgage. The main difference is the method of foreclosing.

Instead of filing a suit for foreclosure, under a deed of trust, once default has been declared and an opportunity for curing the default has run, the trustee has only to publicize a notice of foreclosure for 20 days before holding the sale. This sharply limits the consumer’s ability to fight the foreclosure if it is wrongful, whether because the loan is current or the trustee is the wrong party to do the foreclosure. The homeowner has to start a legal action, which is expensive and puts the burden of proof on them, not the mortgage company.

If you find yourself on the wrong end of a foreclosure action and you believe it is not legitimate, you need to contact an attorney immediately. You don’t have much time and you must act to protect your rights.

What do You Really Want From Your Lawyer?

2010-07-21T10:13:00.003-05:00

As posted in the Lee's Summit Journal.

“So what should I do?” “Should I leave that to my niece or my church?” “What would be better, a Chapter 7 or a Chapter 13?”

These are some of the most difficult and uncomfortable questions an attorney gets asked on a regular basis, as well as among the questions an attorney is least qualified to answer. We don’t like those questions because we don’t know the answer (lawyers hate not knowing the answer). We don’t know what you should do, nor should we. The only person that can answer those questions is you.

To understand why, it is critical to understand who the “boss” is in an attorney-client relationship – you, the client.

Attorneys are experts. We have a specialized field of knowledge. We know the ins and outs of courtrooms, negotiations and legal documents. Attorneys are not, however, inside your brain and heart and soul. We don’t know you like you do. We can be there to help you make the right decision for yourself, but only you can make that decision. The core questions, the hard choices, the most fundamental decisions at the basis of any legal representation? Those must be made by the client and only the client.

Attorneys are able to, when acting at their best, distill out your options for action and the potential consequences of those actions. Understanding this and using it to your advantage will give you not only the maximum number of options and the clearest view of the road ahead, but will also save you time and money, getting you the most legal bang for your buck. Your attorney cannot do it alone, however. Helping your attorney requires you to be prepared:

n Know what you want to achieve. Having a clear and realistic sense of your goals in any matter will help your attorney in devising your best path. If I know what you want to gain, I can advise you on the best or worst path to gain it. Conversely, if your goals are unrealistic given the situation, I have a duty to tell you that as well.

n Be honest with yourself, and your lawyer. If you really want to make sure you stick it to the company that injured you or you absolutely want to make sure to protect your house in a bankruptcy, you need to tell me that so that I can work with that goal in mind, or at the very least let you know what the costs of reaching that goal may be.

Some questions I will ask you will touch on deeply held beliefs about life and death. Answering those questions honestly is imperative if you expect a to sign living will that respects your wishes and beliefs. n If the lawyer gives you “homework,” thoroughly complete it and turn it in on time. Having a complete set of answers and documents to work from will shorten the time it takes to move your matter to completion, which will not only save you money but time and aggravation as well.

While we are best suited to help you with the informed part of your informed decisions, this does not mean attorneys are without opinions, or are unwilling to share them - all too often we are eager to share what we think.

But my job is to be an objective and zealous representative of your interests and my view of your interests will color my opinions. If I know your interests and priorities, then I can give you a much better and more tailored opinion, with balance from an outside set of eyes.

This approach will help you in your dealings with all sorts of professionals, not just attorneys. Your relationships with tax professionals, financial advisors, doctors and architects, to name a few, will be enhanced if you understand that you are the core and key decision maker, the boss in the relationship.

Know who you are and what you really want. Follow that advice and you will be more likely to be the happy client of an attorney.

What does the Texas Rangers filing bankruptcy mean to me?

2010-05-25T09:40:00.003-05:00

Yesterday, the Texas Rangers Baseball Club filed for Chapter 11 bankruptcy protection. This was a "prepackaged" bankruptcy filing, designed to ease the sale of the club to its new prospective owners, led by Hall of Famer (and current Rangers Club President) Nolan Ryan, for $575 million.

As my website makes clear, my practice is almost solely devoted to bankruptcy representation for consumers and small businesses. The odds of Jason Norbury being counsel for a $525 million Chapter 11 case are so small as to be zero. So why would I use up valuable blog space talking about a case that bears no resemblance to what I do, or what you, the reader would likely encounter?

One, I am a baseball fan and I find the intersection of work and play entertaining. But secondly, to discuss the concept of "prepackaged" bankruptcies. You may recall that GM filed such a case in the last couple of years. The idea behind the prepackaging is that you get enough creditors to sign off on what you are doing (the bankruptcy plan) that it will get approved by the court in as short a time as possible.

In many respects, this is not all that different from what a Chapter 13 bankruptcy does for consumers. Most of the time, we file a Chapter 13 case knowing what the available rules are, and how they require the treatment of your creditors. This avoids messy and expensive litigation and hearings, and streamlines the process to allow regular folk to keep their home out of foreclosure, cure tax delinquencies, and make a "fair" payment to their unsecured creditors.

So while the term "prepackaged" may drag up images of collusion and smoke-filled back room deals, it usually is merely designed to expedite the transition of the company into its new form, and keep the wheels of the business turning. The rules of a Chapter 13 do much the same for most people.

And finally, this document should make you feel better about yourself, because you don't have to pay Alex Rodriguez $26 million to hit home runs for the Yankees.

My Small Business is in Trouble. Do I Need a Chapter 11?

2010-04-15T15:40:00.002-05:00

This economy has been very rough on many people, but especially harsh on the small business owner. Small businesses don’t have access to the same tools available to larger businesses (access to credit, sale of stock or other security) to weather a stormy economy. Additionally, a small business may be reliant on one core line of business (construction of a certain type of building for which demand dries up) than a larger, more diverse business entity. So what can a small business owner do when the debts are deeper than the money to pay them? Unfortunately, the answers are somewhat limited and can be disappointing.

File a Chapter 11 Bankruptcy. This is the classic business bankruptcy, of which you have undoubtedly seen many examples in the news (pick an airline, the Phoenix Coyotes hockey club, GM and Chrysler to name a few). In this scenario, the business uses the bankruptcy court to help effect a reorganization of the debts of a company, often eliminating a large portion of amounts owed to vendors, and restructuring secured loans (mortgages on land, e.g.) to make for a more affordable debt load. Indeed, the last few years have seen a significant increase in the number of small business Chapter 11 filings. However, a Chapter 11 remains out of reach for most small businesses for a number of reasons:

Cost of filing. Attorneys for a Chapter 11 are very expensive, often with fees in excess of $50,000. Many small businesses simply cannot afford that kind of outlay for legal representation.
One large creditor. If most of the debt of a business is owed to one creditor, that creditor essentially has the power to scuttle any plan they don’t agree with.
The business is no longer viable. It is often hard to admit, but sometimes the business has simply run its course, and needs to end, not restructure.
Difficulty in obtaining ongoing financing. The credit squeeze has not only affected existing loans, but sharply limited the availability of new financing, especially for distressed businesses.

Informally restructure debts. In the instance of significant debt owed to one or a few creditors, it may be possible, if the creditor is willing, to restructure the debts sufficiently to allow for continued operation. This may require forming a new business entity to continue operations, or some additional personal risk for the owners of the small business. Absolutely consult with legal counsel before attempting this option.

Dissolve the business. Each state has a procedure for the orderly ending of business operations and paying creditors. Following these procedures will keep the officers, directors and shareholders of a business insulated from liability for the debts of the company (barring any personal guaranties or fraud). This has been done for many years, and is the method by which most businesses end. Your business attorney can help lead you through the needed steps.

File a business Chapter 7. Most of the time, it is neither necessary nor desirable to use a Chapter 7 to end a business. The state dissolution procedure is the preferred method. But there are circumstances when it is best to turn the liquidation of business assets to an independent third party (the Bankruptcy Trustee). If there are disputes over what property is secured by a given lender, and in what order they will be entitled to receive sale proceeds, then a Chapter 7 may be beneficial. But most businesses should not be in a Chapter 7, for they have no assets to distribute to unsecured creditors.

Generally I find that when a business owner refers to a “business bankruptcy,” they are referring to taking care of the personal obligations of the business, not the business obligations proper. In this case, they may be suited for a personal bankruptcy, but one that is primarily business-related debt. The distinction is fine, but important.

Remember, entrepreneurialism and the failure of businesses is the American economic way. Bankruptcy and dissolution are the methods that back stop our system, ensuring that the next great business idea can be developed without ruining the lives of the people behind the businesses.

Don't Be Like Lenny; or How to Behave During Your Bankruptcy

2010-04-08T14:29:00.002-05:00

This post is inspired by the ongoing bankruptcy of Lenny Dykstra. Mr. Dykstra was at one time a very famous baseball player, and at a later time an apparently successful businessman with a line of car washes. As has been the case with many businesses (and former athletes), the success was built on poor fundamentals, and when the economy went south, so went Mr. Dykstra's business and financial situations.

"Nails'" story really isn't all that different from many of the people I see in my office everyday, save that he was playing with bigger numbers when it all came crashing down. The real estate and construction markets are nearly vaporized, and lots of hard-working people and families have been affected adversely.

What separates Dykstra's case from others in a more important sense is his behavior during the case. Mr. Dykstra has repeatedly sold property without court approval, ruined property (letting his dogs mess all over a house that was to be sold), and otherwise worked to the opposite ends than the bankruptcy court desires. As such, the judge has taken over his case, and Mr. Dykstra has been reduced to making half-baked claims about his superior will being critical to the success of his case. Needless to say, his case is not going well.

Every one of my clients come to me from a different place. The events that led to their arrival in my office are as varied as they come: job loss, medical expenses, divorce, failed business, stupid in college. But all of them have a desire to re-grasp control of their financial selves, and bankruptcy is a tool they can use to help regain that control.

But you have to want it, and you have to admit you need the bankruptcy code as an ally to get you there. Being too proud and declaring that you don't need help while standing in front of the bankruptcy judge is not a successful combination. The "fault" behind your filing may not be your own, but humility in the face of the situation is a must.

Some of my clients attempt to beat themselves up for failing; I try to stop them. A chapter 7 case is not a time for recriminations, it is an opportunity to move forward again. To be successful, you do need to closely and critically examine the "whys," but not dwell on them.

Do you need to make changes after you file? I would bet the answer is yes. You could become an expert coupon clipper, change your eating habits from restaurant to kitchen, find a more fuel-efficient car, or even stop smoking to spend less. Obviously your relationship with credit will need to change - perhaps a program like Dave Ramsey will work for you.

But a bankruptcy filing is a moment in time, that you can use to greater good, or waste by crowing about yourself like Lenny Dykstra. Use the opportunity wisely.

(And it is never a good idea to make the judge mad at you. Never.)

The Importance of Planning Exemptions

2010-03-30T10:36:00.003-05:00

When most of your clients are typical consumers needing to file bankruptcy, exemption planning isn't something you have to do very often. Most people don't own extravagant property, and certainly aren't part of the mythical set of folk who run out and buy a bunch of stuff in anticipation of bankruptcy. So even the modest exemptions provided by Missouri's Legislature are sufficient to protect the core stuff that people need from day to day. However, some situations do arise from time to time that require a more nuanced look at a person's property and how to exempt it before filing a bankruptcy.

Now, by "exemption planning," I mean taking the available property exemptions and applying them judiciously to my client's available property, thereby maximizing what they can keep after filing a Chapter 7, or minimizing what must be paid to unsecured creditors in a Chapter 13. I do not mean the large-scale transfer of assets to an exempt form on the eve of filing a case - that way lies litigation (as a judge once said "when a pig becomes a hog he gets slaughtered"). You can, in some circumstance (and depending on state law), transfer some assets from a non-exempt form into an exempt form, but care must be taken not to run afoul of the law and open yourself to expensive and risky adversary proceedings in the bankruptcy.

This process really calls for the skills and knowledge of an experienced attorney. Missouri alone has over 40 statutes that purport to exempt property. This doesn't mention the various federal exemption statutes that still apply, nor the mountains of case law devoted to interpreting the statutes. I don't pretend to know all of that, I merely know how to access the information, read it and form an opinion from which you can make a decision (all that bit cost me was three years of school, huge student loan debt, and 10 years of practice). It just isn't reasonable to expect a layperson to know how all that pieces together, and where the pitfalls lay.

Sometimes, a client cannot escape the fact that he or she will have to relinquish some property to the bankruptcy; it can be a tax refund, a car, artwork, season tickets to the local sporting franchise, or a piece of real property (even your home, in some instances). That is the trade-off for filing a Chapter 7 - you give up some property rights in exchange for protection from creditors and a discharge of debt. I have cases where a $1,500 tax refund was surrendered, but $150,000 of debt was discharged. My client complained, but if you could get your credit cards to settle for 1% of what you owed them, you would jump on that in a second.

Losing property in a bankruptcy isn't a failure. Losing property unexpectedly in a bankruptcy is. With proper planning, you can know what is coming, prepare for the eventuality, and even minimize the impact of property loss.

I Know Students Loans Don't Discharge, So I Don't Have to List Them, Right?

2010-03-24T09:19:00.004-05:00

Um, not so much. Section 521 of the bankruptcy code requires a debtor to list all of their debts in their bankruptcy schedules. It doesn't matter what you intend to do with the debt, or if the debt wouldn't discharge anyway. The debt must be listed, so notice can be given to the creditor.

Okay, so you have to list the student loan in your bankruptcy schedules, and you know they will (with a few rare exceptions) survive your bankruptcy and be there at the end of your case. What can you do with them? The answer, as always in bankruptcy law, is it depends on what you are filing.

If you file a Chapter 7, there isn't much to do in the case of the student loans. The case will likely be over in a few months, and you will go back to doing what you were doing before the case started.

You aren't currently up-to-date on your student loan payments? Well, consider these options:

Change your repayment option. The student loan programs have several ways to approach repaying your loans, including extended repayment periods up to 30 years, graduated repayment plans, income contingent repayment, or income based repayment. Contact your federal student loan program for more details.
Consider a deferment. If you are going back to school, for instance, you may be eligible for a payment deferment. The requirement to make payments is temporarily stopped, but interest will likely still accrue on your loans.
Forbearance. If you have a financial hardship (and a bankruptcy client may very well have one), you may be eligible for reduced or eliminated payments, but once again, some interest (on non-subsidized loans) may still accrue.
Consolidation. If you have loans with several agencies, or simply several loans, you may be eligible for consolidation, which will give you only one payment per month, and may gain you a break on the interest rate. Not all loans are eligible to be consolidated, however, and you should carefully examine the terms of any proposed new loan.

If you file a Chapter 13, there are several options to consider. In some districts (including one of mine), there are explicit options in a Chapter 13 plan to allow a debtor to continue to pay the monthly payment and to help catch up on arrears on the loan. Sometimes, however, the requirements of the plan are such that it isn't possible to make both the plan payment and the loan payment each month. In that case, you may be able to simply treat the student loan like any other unsecured creditor (like a credit card), with the understanding that it will be there, with interest, at the end of the Chapter 13.

As always, talk to a qualified, licensed attorney before deciding on what is right for you. A student loan isn't going away, and you need to plan for it before you file a bankruptcy, so you can have it under control along with the remainder of your finances.

What will happen to my tax refund in bankrutpcy?

2010-02-02T13:53:00.003-06:00

It's that time of year; W-2's are being mailed out, and people the nation over are rushing to their favored tax preparer (self, Internet, or brick-and-mortar) to have their taxes done in hopes of getting their tax refund and using the (interest-free loaned) money to catch up on bills, get that needed repair done to a car or house, or fund the family vacation.

But what if you have filed, or are considering filing, a bankruptcy?

Let's start with a few basic ideas. First, your right to receive an income tax refund is generally considered an asset of your bankruptcy estate, and is thus available to be taken by a Chapter 7 Trustee. In a Chapter 13 case, the courts consider a tax refund income, and thus it may need to be paid into your Chapter 13 plan, either in whole or in part.

DISCLAIMER: The preceding and following are general statements, and cannot be universally applied in all districts. I can only vouch for the Western District of Missouri and the District of Kansas (Kansas City Division), and I wouldn't even make blanket statements about those either. In other words, your mileage may vary.

So, Chicken Little, is the sky falling? Not necessarily. You may lose only some of the refund, or even get to keep it in whole. Let's begin with those who have already filed. In an existing Chapter 7 case (at least as it's done around here), how much of your refund the Trustee gets to take depends on when your case was filed, and what exemptions you may be able to apply to it. If your case was filed last year (2009 in this case), the percentage of the refund subject to the bankruptcy estate is the same percentage of 2009 that has passed. Thus a case filed 75% of the way through the year can claim 75% of the tax refund. If your case was filed this year before you received the refund, 100% is part of the estate. On top of that, if your state allows the use of a "wildcard" exemption, it can be applied to a tax refund, thus further reducing the amount that has to be turned over.

In an existing Chapter 13 case, I am afraid you will have to consult the local rule and practice. In my districts the rules have changed (evolved) over the years, and hopefully your attorney will know what is up. You may be allowed to keep a portion of the refund, or ask the court for permission to use it in specific ways. According to this, however, Chapter 13 Trustees wont be able to intercept your refund (insert much legal track-covering here, since I don't and you likely don't live in Michigan).

For those who haven't yet filed, my advice is fairly simple: Delay filing until you have received and spent the refund. How you spend the refund is somewhat limited, however. A couple of do's and dont's:

Don't repay debts owed to family, or pay more than $600 to an unsecured creditor;
Do use them on reasonable and necessary living expenses;
Do track how you spend it, with receipts if possible;
Don't "hide" it by shoving it into an IRA, another person's name, or a coffee can in the backyard; and
Do consult with a licensed, experienced local bankruptcy attorney before spending the refund.

If you can't wait, then use this perspective: That refund is the payoff for all of your debts; that is a $2,000 tax refund pays off $35,000 in credit cards. Not such a bad deal, eh?

One more note - if you have a relatively steady income, you can plan your withholdings to approximately cover your expected tax liability. That way, you get the money each pay period, which I think most of us could use these days.

How does bankrutpcy affect my mortgage?

2010-01-18T16:22:00.002-06:00

In the past two years, the value of residential real estate has dropped by an average of 30% or more nationwide. This leaves millions of homeowners with a house they owe more against than it is worth; they are "upside down" in the house. While the federal government has instituted some programs to help homeowners stay in their home and get their payments to what they can afford, sometimes it isn't enough to keep the house affordable. Can a bankruptcy help?

In general, unfortunately, a bankruptcy cannot help you change the terms of your first mortgage. The mortgage industry has a very powerful lobby, and has repeatedly defeated attempts to allow a bankruptcy to alter the terms of a mortgage. Every year, a congressperson proposes a bill that allows modifications in bankruptcy, and every year, it fails to make it out of the House of Representatives, let alone through the Senate.

All is not lost, however. Filing a bankruptcy can help you with your mortgage in several ways, and under certain circumstances:

You can walk away from the home. Simply put, you can surrender the house to the mortgage company and leave it with no risk of a deficiency liability. This can be done in any chapter of bankruptcy. As a practical matter, it can be done outside of bankruptcy, and most mortgage companies will take the house and not pursue a deficiency. However, if you have a second mortgage, it may pursue a deficiency since it likely will get no money from a foreclosure sale. A bankruptcy will allow a free surrender no matter how many mortgages are on the house.
If you have a second mortgage, a Chapter 13 bankruptcy may be able to get rid of it. If your home is worth less than what is owed on the first mortgage, it is possible to "strip the lien" of the second mortgage, turning it from a mortgage to a glorified credit card. This avenue requires some extra work by your attorney, and may necessitate a commercial appraisal of your home.
The anti-modification provisions of the bankruptcy code do not apply to a mortgage that secures both the home and some other property. If your home loan is also secured by your car, personal items or another piece of real property, the lien can be "stripped" to the extent it is protected by home value. In this case, you can reduce the size of a second mortgage, and treat the rest like a credit card.

None of the above options is sufficient to keep most homeowners in their home if their mortgage is simply too expensive. For most people, walking away is really the only choice available to them. In my opinion, this is much worse than if a court is allowed to lower a mortgage's principal value to the market value of the house. Allowing that would keep more homes occupied, help adjust the real estate market, and in the end get mortgage companies more money. Until, however, the mortgage industry loosens its iron grip on Congress, that idea will remain the hope of attorneys like me.

Plan Your Holiday Spending for a More Merry Christmas

2009-12-01T11:25:00.004-06:00

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

2009-11-03T08:45:00.002-06:00

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

2009-08-18T14:15:00.003-05:00

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!

2009-07-23T15:29:00.002-05:00

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:

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.
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.
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.
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

2009-07-15T13:41:00.003-05:00

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

2009-07-13T16:42:00.002-05:00

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.