December 10, 2014

Five Holiday Deal "Gotcha's"

Here are common holiday "deals" that look good on the surface -- but are financial time bombs waiting to go off. Thanks to USAA financial services for bringing them to my attention. I share them with you:

1) "90-days same as cash." Don't pay it in time and you could be hit with accumulated finance charges and double-digit interest rates. Now it's no longer such a good deal.

2) "5 years interest free." Don't believe it. They cannot stay in business if they don't put interest somewhere in the charge to pay for their own loans. The charge is probably hidden in the price. Or maybe enough borrowers fail to meet the terms and get hit with suspended accumulated interest to make the business practice a money-maker.

3) "Skip a payment." There's no free lunch (if I may coin a phrase). The interest may be folded into principal increasing the cost of your financing. They are not doing you favors.

4) "20% discount for opening a store credit card." Credit scores also take into account the amount of credit lines you have, as well as the frequency and recency of credit applications. You may be dinging your credit to save a few dollars. By the way, for many companies, the real money is in the financing, NOT the goods they selling. I remember the harangue I got from a dealer once for buying a car with cash and another time from a Dell salesman when I bought a set of office computers. That was instructive. (Undoubtedly the sales persons got bonuses for financed purchases.)

I would add a fifth "no no":

5) "Interest-free balance transfers." Read the fine print and understand the transaction. Many such offers say that you can transfer interest free for a period to time but charge you a one-time transfer fee. For example, a transfer that is "interest-free" for 9 months with a one-time transfer fee of 6% is effectively 8% per annum interest. Watch out.

October 23, 2014

How to Pay for Your Bankruptcy Case

One of the most frequent questions I get is: "How am I going to pay the attorney's fees and costs for a bankruptcy?"

Yes, we know you're seemingly strapped, but you actually have more resources than you realize.

Here are some:

1) Stop paying on the debt you are going to discharge anyway. In bankruptcy, almost all debts are dischargeable (wiped out). (There are a few, such as governmental fines, recent taxes, etc., but your bankruptcy attorney will identify them and discuss them with you.) The majority, such as credit cards, unsecured lines of credit, judgments, will be gone. Stop paying immediately and save up that money to finance your case. These are professional lenders, they understand.

And, by the way, once you hire an lawyer, you can stop the collector calls by simply telling them you have hired a bankruptcy attorney to prepare a case. Give them the name of your attorney, because they will call to confirm, and the calls will stop.

Professional lenders know they will be violating a court order by calling once you have filed, and since they don't know when you will file, as a matter of company policy, they usually stop the calls altogether. Whew.

2) Get a "loan" from your secured lenders. If you have a mortgage on a house you want to keep, you may actually be doing the mortgage lender a favor by skipping a couple payments to pay for your case. If your goal is to save your home, you will probably be filing a Chapter 13 bankruptcy to catch up on your back payments -- "cure the default" -- and make your regular payments going forward.

Believe me, the bank does NOT really want to take your home. They are not in the real estate business. They are in the lending business. They want you to pay the mortgage and pay the arrears -- that's where they make money. If you skip a couple payments to get the money to set up a payment plan to pay them in Chapter 13, as well as freeing up more money by wiping out your other "junk" debt, such as credit cards, as a business matter, they won't mind. You're going to pay back the missed payments in the plan anyway.

3) Get help from friends and family. Now is the time to reach out. Everybody has somebody who will help. Think. Oftentimes, it's somebody from your community, such as church or social group, with whom you have an affinity that will be there for you. You may be surprised.

And here's the benefit to them: Once you're debt-free, you'll have even more resources to be able to pay them back. And no. Please, don't tell me you have no friends and/or no family. If that's the case, you may need a Dale Carnegie course. (Remember him? The author of "How to Win Friends and Influence People." Google it.)

4) Take a "hardship loan" from your retirement plan. If you have a retirement plan at work, call the administrator and see if you can apply for a hardship loan from the plan. Most plans have this feature. Make sure it's a loan, do NOT take a withdrawal. If you take money out of retirement plan (as opposed to a loan you pay back), you will have to pay taxes on it as well as 10% penalty. I see too many people turn a debt problem into a tax problem (which is way more expensive and onerous) when they take out withdrawals from the retirement plan to pay debts. It's a no-no.

5) Use your tax refund. Like accountants, January through April can busy months for bankruptcy lawyers. Many people use their tax refund to pay the costs of a bankruptcy filing. It may work for you, too.

6) Go hi-tech: Crowd-fund your case. The Wall Street Journal today ran an article on the innovative use of "crowd-funding" to raise money for a variety of personal projects and causes, including:


  • A 26-year-old woman trying to raise $3,000 on GoFundMe.com to go to circus school to be an acrobat.

  • A group of young women using Tilt.com to raise money from participants for a bachelorette party.

  • A 55-year-old woman who got laid off from her job, needed a break and got her friends to chip in $5,000 for a trip to Italy.


A quick perusal of the sites showed a variety of causes seeking funds for help for medical bills or funeral costs.

Who knows? It could be the wave of the future.

There are other ways to get the money to pay for a bankruptcy filing, depending on your particular situation. Sit down with an experienced bankruptcy lawyer and discuss it. We're creative. Give our office a call.

July 25, 2014

When Qualifying for a Loan: It's Not Your Credit Score that Matters -- It's How Much Debt You're Carrying

Probably the most frequent question I get from prospective clients is: "Will bankruptcy hurt my credit score?"

It's a fair question, but I usually find it a little amusing. It's a bit like the man who's drowning worrying about how he's dressed.

For most people, by the time they see a bankruptcy attorney the financial problem is extreme -- the garnishment has begun, the foreclosure is imminent, the summons has arrived setting a court date, or the collector calls are now coming every hour. And, of course, at this stage, the person's credit score is in the tank. It cannot get worse.

By clearing away debt, I explain, they will improve themselves to get a loan.

A recent survey of credit-risk managers at lenders by credit-score giant FICO, reported in the Washington Post, confirms what I have been saying all along: When it comes to qualifying for a loan, it's the amount of debt you are carrying, not your credit score that matters most.

"Researchers asked a representative sample of them what single factor makes them most hesitant to fund a loan request -- in other words, what's most likely to prompt them to say no.


Tops on the list? Surprise, it's not your credit scores. And it's not how much you've got for a down payment or what you have in the bank. It's your DTI -- your debt-to-income ratio. Nearly 60 percent of risk managers in the FICO study rated excessive DTIs as their No. 1 concern factor. . . "

Again, I repeat, for 60% of bankers it's the amount of debt the credit applicant is carrying that is the disqualifier, not the credit score!

"Debt-to-income ratios for home loans are the most direct indication about whether you are going to be able to afford to repay the money you want to borrow," says the article.

Basically, bankers look at two ratios to determine whether they will qualify an applicant for a home loan.

The first ratio looks at the ratio of the monthly payment for the loan you seek to your gross monthly income. Generally, lenders do not like to see a ratio for this of greater than 28%. Basically, they don't want you to buy a bigger house than you can afford.

The second ratio, the so-called "back end" ratio, is a ratio of your monthly recurring debt payments against your monthly gross income. The recurring debt payment total includes the proposed housing payment as well as your credit cards, car, student loans and payments on other debts. For most lenders, this ratio cannot exceed 43%. This is why amount of debt you are carrying can be such a deal-killer when applying for a loan.

For a lender, who cares about a bankruptcy in the past, it's the applicants current debt load, as well as income that matters.

If you have financial problems and are looking for guidance, contact us for a consultation. We'll ready to help.

June 17, 2014

It's Still Not Easy, But IRS May Be Moving Toward Granting More Back Tax Relief

There may be some good news for taxpayers with problems since IRS loosened up the rules for relief in 2012, according to recently-released reports by the agency.

The IRS changes for granting tax relief recognize the downturn in the economy.

From 2012 to 2013 the number of so-called "offers in compromise" (proposed agreements by taxpayers to IRS to discount back taxes) increased from 64,000 to 74,000. And, more importantly, the number of offers accepted jumped from 24,000 to 31,000 -- a 29% increase.

Likewise, the IRS seems to be moderating its forced collection efforts. IRS levies on bank accounts and paychecks dropped from 2,961,162 to 1,855,095 -- a 37% decrease. And the number of seizures dropped from 733,000 to 547,000, which amounts to 25% fewer seizures of property.

Says Morgan King, a California attorney and tax relief expert: "Clearly, the new policies are making it feasible for more honest but delinquent taxpayers to wipe the slate clean, become compliant with the tax laws, and get a fresh start."

"Most delinquent taxpayers," says King, "do not deliberately fail to pay their taxes when due. In most cases there is a small business failure, a serious illness, drugs, divorce, and similar causes. Once they get behind, they tend to go into avoidance until penalties and interest skyrocket the debt. At that point, they need a lawyer."

Still, says Kings, taxpayers need to beware of the tax relief scammers who advertise heavily, but deliver little: King notes that the percentage of accepted offers would be higher if only professionally drafted, competent offers are counted. "The acceptable rate is lower than it should be because so many ʻoffer mills,ʼ like the ones advertising on T.V., are slap-dashed together and sent to the IRS so poorly prepared that they are basically dead-on-arrival."

The new IRS changes generally focused on the financial analysis used to determine which taxpayers qualify for an OIC ("offers in compromise"). The changes enable some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.

The IRS looks at the taxpayer's income and assets to make a determination of the taxpayer's "reasonable collection potential." OICs are subject to acceptance on legal requirements.

When the IRS calculates a taxpayer's "reasonable collection potential," it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted.

For more details, contact our office. We specialize in resolving tax and debt matters.

February 12, 2014

Beware: Tax Preparer Mistakes Costs Consumers Big-Time

It happens almost every week. Somebody comes into our office with a serious tax problem -- caused by a shoddy tax preparer, either through incompetence, negligence or sometimes downright fraud.

It boggles my mind that there is no regulation of tax preparers. I thought I was the only one who had noticed this problem. But no.

The National Consumer Law Center, a consumer watch-dog group, has recently issued a very good report on this. Following is from the press release announcing the report:

(BOSTON) One of the most surprising aspects about paying taxes in the United States isn't about marginal rates, deductions, or loopholes - it's the lack of regulation for most tax preparers.

Each year, tens of millions of consumers rely upon paid tax preparers to help them file accurate and compliant tax returns, yet the majority of these preparers are not subject to any minimum educational, training,competency, or other standards.

A new report from the National Consumer Law Center (NCLC) documents how a lack of regulation has allowed incompetence and abuses by tax preparers to flourish.

"All 50 states regulate hairdressers, but only three regulate tax preparers," stated Chi Chi Wu, staff attorney at the National Consumer Law Center (NCLC) and author of the report. "Yet an inaccurate tax return can cause a lot more harm than a bad haircut."

The report, "Riddled Returns: How Errors and Fraud by Paid Tax Preparers Put Consumers at Risk and What States Can Do" analyzes years of mystery shopper testing by government agencies, consumer groups, and advocacy organizations, all of which found disturbingly high levels of incompetency and outright fraud, such as:

• Intentional omission of income;

• Falsifying information to make the taxpayer eligible for various credits and deductions, such as charitable deductions, job-related or business expenses, and the Earned Income Tax Credit (EITC); and

• Inability to accurately handle education-related items, such as grants and tuition credits;

This incompetence and fraud could expose consumers to the risk of audit by the Internal Revenue Service, or even criminal sanctions.

Also documented is the severe lack of transparency in tax preparation fees. Taxpayers, especially lower income recipients of the EITC, sometimes end up paying $300, $500 or more in fees. Yet these and other taxpayers often cannot get information beforehand on how much tax preparation will cost them because many tax preparers claim they cannot give a quote or give inaccurate lowball estimates.

"Tax preparation is one of the few businesses in this country where consumers can't get an accurate price quote before buying the service," stated David Rothstein, a contributor to the report and director of Resource Development & Public Affairs at NHS of Greater Cleveland. "The lack of transparency and disclosure is stunning. How can there be a competitive market if consumers can't comparison shop due to lack of price information?"

Government enforcement actions also provide evidence of widespread abuses by paid tax preparers. The latest example is a decision issued just this month by a federal judge shutting down the nation's fourth largest tax preparation chain, Instant Tax Service, and permanently banning its owner from the business of tax preparation due to "an astonishing array of repeated fraudulent and deceptive conduct."

The report also makes the case that the problem is not limited to a few instances, but is endemic and widespread. "Law enforcement action alone is not enough to address the abuses," stated Wu. "Going after a few bad actors would ignore how lack of regulation permits fraud to flourish."

The NCLC report calls on states to regulate tax preparers to address preparer abuse and incompetency. The IRS attempted to address the problem in 2011 with regulations requiring tax preparers to register with the IRS and pass a competency exam. Yet, a federal court struck down these common-sense requirements as exceeding the IRS's statutory authority.

Recommendations

To better protect consumers, state legislatures should require paid tax preparers to:

• Obtain a registration unless they fit into one of exceptions for the limited number of tax preparers already regulated, such as certified public accountants, enrolled agents, and lawyers.

• Pass a basic competency exam.

• Have 60 hours of initial education and 15 hours per year of continuing education.

• Provide a standardized disclosure of their fees.

Along with the report, NCLC is releasing a Model Individual Tax Preparer Act with specific language that states can use to implement these recommendations. It is based on the existing state laws of the three states that do regulate tax preparers (Maryland, Oregon and California), as well as the IRS regulations.

Go to NCLC's website for a free copy of the report and additional information.

And if you're facing a tax problem, give our law firm a call. We'll be happy to help.

January 25, 2014

Getting Sued? Here's One Very Easy Way to Defend.


A layperson is often at a disadvantage when defending against a debt collection suit filed by an attorney. The debtor as a defendant does not know the "rules of the game" and sometimes takes the advice or direction of court staff (who by the way should not be giving legal advice but often do.)

Talking to clients who have appeared to defend in small claim collection suits in this area (Northern Virginia, suburban Maryland and DC), I am surprised that many will meekly follow court staff instructions to come back to court on another date -- when the collector's attorney fails to show up or is late! This failing is a perfect opportunity to have the case thrown out!

You have a right to ask the court to proceed on the case. Tell the clerk that you are present and ready for the case to be called. When the case is called, proceed to the podium and ask the court to have the case "dismissed with prejudice." That very important qualifier -- "with prejudice" -- means that you are asking the court to dismiss forever.

The plaintiff can ask the court to re-instate the case later, but, for most judges, he will have to have a very good excuse, for example unavoidable illness that came on suddenly, and he will need to ask for that reinstatement very soon after the dismissal, in most cases, within 30 days.

Remember: It's the plaintiff's case. He brought it. Not you. You're present and ready to go forward. If he's not there, the law is very willing to treat him harshly.

It's a simple technique, and a very valuable one, to get rid of a lawsuit.

If you need more advice, call our law firm. We're ready to help.

July 3, 2013

How Do You Know If You Could Be Sued by Your Mortgage Lender on a "Deficiency" After Foreclosure (or Short Sale)


A blog post here last month discussed the growing wave of lawsuits by lenders for the balance of mortgage loans left over from foreclosures (and in some cases short sales), known legally as lawsuits for the recovery of "deficiencies."

As discussed, in most foreclosures the lender bids only a part of his loan to win the collateral (the house) at the auction. In most jurisdictions, including Virginia, Maryland and the District of Columbia, the balance will still be owing and the lender has a right to sue the signer of the mortgage for that balance, and many are beginning to do just that.

So you had a foreclosure on your house a few years ago. How do you know if there is still a balance owing and whether you may be facing a lawsuit? The bad news is, unless the value of the house was more than the loan, you are probably owing something, since lenders will only bid a part of the loan, especially if the house is devalued, and that is the case for houses bought during the peak of the market, around 2007, before the crash.

One way to check is to look at your credit report. See if the lender (or its successor) is on the report and whether it is reporting a balance. (Note that this is not foolproof. We have seen instances where no debt was reported, but there was a balance owing.) You can get a free credit report once a year at www.AnnualCreditReport.com.

You can also get clues from the way the lender reported the foreclosure to IRS in the year following the foreclosure. If you got a Form 1099-A, box #4 labeled "fair market value of the property" is generally the amount the lender bid to win the auction. If that amount is less than the amount in box #2 "balance of principal outstanding," you probably have a deficiency.

If you got a Form 1099-C, and here is possible good news, the lender cancelled the debt, for tax reporting purposes. And some courts have held that reporting by the lender to IRS as proof the lender forgave the debt.

If you're facing this problem, or worry that you may be facing it, call us and we'll discuss your options.

June 21, 2013

Lost Your House in Foreclosure? Watch Out, the Lawsuit May Be Coming!


It's just another kick in the teeth. After losing homes in foreclosure a few years ago, borrowers may be getting another big surprise soon as mortgage lenders are now gearing up to file lawsuits against homeowners for the balance of the mortgage.

A Washington Post article this past weekend highlighted the rise in so-called mortgage "deficiency" court actions.

Many homeowners who were foreclosed upon don't know it, but most still owe money to the mortgage lender.

A foreclosure on a home works like this:


  1. The mortgage lender declares a "default" (breach of the contract) after payments are missed and "accelerate the mortgage" so that the WHOLE mortgage now becomes due and payable. (This is why a mortgage payment is often returned to the homeowner after several missed payments - the whole loan is due. One payment will not pay it off. The lender sends it back to avoid a legal defense from the homeowner that by accepting the payment the lender was reinstituting the loan.)

  2. The foreclosure auction is advertised in the newspaper for a specific date and time. In "non-judicial foreclosure" states -- which is the case for DC, Maryland and Virginia -- there is no actual court involvement in the process. (In Maryland, a foreclosure case is "docketed" in the county court, but there is no actual suit where the lender has to prove his right to foreclose.)

  3. At the auction, investors can, and sometimes bid, but usually it's the mortgage lender itself that bids a part - but only a part -- of its loan. For example, on a house with a $400,000 loan outstanding, and worth only $300,000, the lender may bid only $250,000 of its loan to win the auction. The balance of the loan - $150,000 in this example - is what is known in legal terminology as the "deficiency." The lender can re-sell the house at a profit, but that is solely the lender's to keep.

Most of the states in the US, including MD, VA and DC permit the mortgage lender to sue the borrower to get a judgment from a court for that deficiency.

And once the lender has a judgment, it can proceed to forcibly enforce that judgment through a variety of means it chooses including seizing the borrower's bank accounts, placing a lien on the borrower's property and/or requiring an employer to deduct from the borrower's paycheck and send it to the judgment creditor (known as garnishment). In this area, the judgment creditor is permitted to take up to 25% of the debtor's take-home pay.

It's a worrisome state of affairs, for borrowers who thought they were out of the woods after the foreclosure and after years of no communication from the bank.

During the past few years second mortgage lenders had been pretty aggressive and could almost be counted on to pursue borrowers after a foreclosure (since in most foreclosures it's conducted by the first mortgage holder and leaves the second mortgage holder with nothing).

But, until recently, the first mortgage holders had NOT been pursuing borrowers. Most of us lawyers who specialize in debt and foreclosure issues assumed they would NEVER sue for deficiencies. It may not turn out that way. In Maryland, according to the article, in 2006 there were deficiency lawsuits involving 19 homes that resulted in a total of $432,115 in judgments. Last year, in 2012, there were similar lawsuit involving 120 properties demanding $13.6 million.

So, how do you know if you owe? And what steps can you take to protect yourself? We'll discuss that in the next blog post here.

But if you're in a hurry, call our law office for an appointment. We specialize in legal representation of individuals and small business with financial distress issues in DC, Virginia and Maryland.

April 12, 2013

Warning: A "Charge Off" On Your Credit Report Does NOT Mean You Don't Owe It


It happened again this week. The client comes into the consultation smiling broadly. He just needs help with a loan modification, he argues. He doesn't have any other debts. "Look," he says, pointing at his credit report, "it's been charged off!"

Sorry, that's not what it means. A "charge off" is an accounting entry by the lender declaring that the debt is uncollectible, a determination that helps the lender deduct it as a loss against his taxes.

The "charged-off" account is still a live debt of the borrower until such time as the statute of limitations runs out and that can vary from three to seven years and depends also on the type of debt. In this area -- Maryland, Virginia and the District of Columbia -- you will need to check the law in the jurisdiction in which you reside.

So, remember, you are still "on the hook." In fact, many of these debts are sold to debt investors at a large discount, such as Portfolio Recovery Services, Midland Funding, Portfolio Recovery, or LVNV Funding who make it a business to recover on this stuff via lawsuits and other means.

Also, it may be more harmful on your credit report as a "charge off" than actually eliminating all legal liability and having it read "discharged in bankruptcy."

One of the factors a mortgage lender takes into account when deciding on whether to grant a borrower a loan modification is that borrower's "back end" ratio. Too much other, non-home-related debt, such as charged-off, but still live debt, can nix the modication.

So don't rest easy just yet. Consult an attorney knowledgeable about debt issues, and see what the options are to deal with this.

April 8, 2013

Fixing Businesses Through Chapter 11 Bankruptcy Boosts the Economy, Says New Study


Despite the image and stigma associated with bankruptcy, financial reorganization of failing businesses (and nonprofit organizations) through Chapter 11 bankruptcy is actually helping the economy by giving companies a chance to find new financing, reject onerous contracts, renegotiate leases, and expedite the sale of assets.

Harvard Business School recently published an article reviewing comments made by Stuart C. Gilson, a Harvard business professor and advocate of Chapter 11 bankruptcies in his new book, "Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups." Gilson believes that the first step is getting the public to realize that Chapter 11 is not about "dying companies," but about "reviving" them.

During the financial crisis of 2008, debt restructuring and Chapter 11 played a heroic role in reviving the US economy. Not only does it speed up a company's reorganization process, but it focuses in on what is necessary to "rehabilitate" the company rather than focusing solely on paying back creditors and stakeholders. (US bankruptcy laws differ from other countries in that they strive to restore the companies facing bankruptcy in order to make them viable and competitive rather than simply liquidating them.)

Restoring Chapter 11's Image

Chapter 11 was often seen as slow and expensive, however, it is emerging and evolving in a way that allows "managers and financiers to work with companies facing bankruptcies and deal with them effectively and appropriately."

For example, one of the ways Chapter 11 is evolving is through the use of the "prepackaged bankruptcy." A "prepackaged bankruptcy" combines the traditional notions of a Chapter 11 bankruptcy while incorporating "out-of-court" restructuring. Companies are able to negotiate restructuring plans with creditors to give them assurance that once they file the actual bankruptcy, the creditors all will be on the same page.

Allowing for prepackaged bankruptcies gives companies the flexibility and assurance from creditors that they will "vote for the restructure plan once the firm officially enters into chapter 11." By choosing this path, it allows companies a chance to "avoid the steep costs associated with spending [time] in bankruptcy court."

Another emerging frequent use of Chapter 11 is for a bankrupt company to sell its assets in a competitive auction that is supervised by the courts under Section 363 of the Bankruptcy Code. Companies who utilize this option can expedite the sell-off of their assets free and clear.

In addition to expedited asset sell off, Chapter 11 gives companies other options for generating income. During Chapter 11, the company pays no interest on any "pre-bankruptcy debts," they can "reject unprofitable leases" and "new lenders are given priority in the capital structure" using what is known as "debtor in possession financing" by new lenders gain super priority and stand ahead of pre-existing creditors. This priority encourages banks and other lenders to lend to companies in Chapter 11 rather than discourage it.

Should My Company Seek Advice From a Bankruptcy Attorney?

Chapter 11 is changing and becoming an integral part in saving US companies and the economy. If you feel your company or organization could benefit from filing for Chapter 11 it is advisable to speak with an attorney, and in particular an attorney familiar with bankruptcy practice in Maryland, Virginia and Washington, DC. An attorney will evaluate your company's situation and determine whether you would benefit from reorganizing. Additionally, an attorney will aid you throughout the process as well as assist you through the restructuring process to meet your goals.

March 16, 2013

Bankruptcy Court -- An Alternative Way to Dispute Taxes

Bankruptcy is designed as a way for an insolvent debtor, one who cannot pay his or her creditors, to get a fresh start. Depending on the type of bankruptcy involved--Chapter 7, Chapter 11, or Chapter 13 for example--among the main functions of a bankruptcy court are to liquidate assets, discharge certain debts, or confirm a payment plan for non-dischargeable debts.

It can also serve as a way to dispute taxes, as illustrated in a recent Virginia bankruptcy court decision . In Harris v. Commonwealth, the debtor and his wife filed for Chapter 7 bankruptcy.

In Chapter 7, also known as a liquidation bankruptcy, a trustee takes control of the "nonexempt" assets of the debtor's and reduces them to cash from which creditors will be paid. (Note that before the case is filed you and your attorney will know if there are any nonexempt assets, and can plan accordingly.) While certain unsecured debts are discharged under Chapter 7, certain types of debt, like child support and income taxes less than three years old, are not dischargeable.

Like almost all Chapter 7 cases, this case was determined to be a "no-asset case," where there were no assets available for liquidation or to pay creditors. All of the dischargeable debts that the debtor had were discharged and the only reason for the Chapter 7 action was to contest an income tax assessment. The assessment was for nearly $613,000, and was disputed by the debtor.

Tax courts have broad discretion to determine tax liabilities assessed before or after the debtor filed for bankruptcy. However, in "no asset" cases, where there are no assets to distribute, courts have usually abstained from deciding disputed tax matters. In these cases, the only avenue for debtors who have been assessed an incorrect amount of taxes is to pay the full amount of the taxes and subsequently sue for a refund in state court.

The Commonwealth argued that the bankruptcy courts should abstain from deciding the amount of tax a debtor owes in no asset cases since the decision will not affect the debtor-creditor relationship. However, the debtor argued that he would be severely prejudiced since he would be forced to pay well over half a million dollars BEFORE he could litigate the incorrect assessment in state court. Due to the enormity of the debt, the debtor argued that he would be unable to litigate and therefore would be denied the fresh start guaranteed by Chapter 7.

The debtor further argued that while he would be extremely prejudiced by having to pay the tax first and litigate in state court later, the Commonwealth would suffer no prejudice either way because, in the end, the Commonwealth will only get the correct amount of tax due. The debtor argued that all that his case required was a substantiation of the amount of gross revenue he received and then calculate the correct tax due, which would not be a complex matter and not take up too much of the bankruptcy court's time. This outcome would be the same in either bankruptcy or state court, but the procedure in state court would severely prejudice the debtor. In the end, the court agreed with the debtor and allowed the case to move forward in bankruptcy court.

What is interesting about this case is that it illustrates the possibility for other debtors in similar situations to litigate their tax matters in bankruptcy court. This can prove very beneficial to many people who are already considering bankruptcy and also want to clear up a tax matter but have not been able to get the government's attention to resolve it. It also may eliminate the requirement of having to pay a mistaken tax assessment and sue for a refund later. Since most people are filing for bankruptcy precisely because they cannot pay their bills, being able to litigate tax matters before actually having to pay an incorrect amount of tax may make a huge difference in getting the "fresh start" promised by bankruptcy.

December 1, 2012

Location, Location, Location: Pick And Choose Where You File Your Bankruptcy Case, It May Affect the Outcome

A significant consideration in filing your bankruptcy case is "venue" -- that's legalese for the physical location of the court in which you file.

It's a powerful feature of bankruptcy -- especially for business bankruptcy cases under Chapter 11 - that you may be able to pick the court, and that, in turn, can have a bearing on the legal outcome.

A federal statute, 28 U.S.C. 1408(1), specifies where a bankruptcy case may be filed and applies to all types of bankruptcy, from Chapter 7 through Chapter 13. The statute provides options for filing your bankruptcy case.

The law says a debtor may choose to file in the federal court district in which his domicile, residence, principal place of business, or principal assets in the United States have been located for the past six months (or where they have been located for the longest part of those six months, if they have been located in several places during that time.)

This can work to the benefit of businesses in bankruptcy because they are often incorporated in one place but work principally and have assets located in several places. Venue is generally considered to be permissive, that is, proper wherever the case is filed, unless someone objects.

Thus, a debtor should ensure that the place for venue is the most favorable to his case. With venue selection, certain factors must be considered, including:

  • Consistency in Decisions. Predictable rulings by judges on a given set of facts, and other key players, such as the Office of the US Trustee in that court, is one of the most important factors in deciding where to file. Consistency will allow the debtor to make a reasonable prediction of the outcome of ruling in his case. Judges are humans, too, and have their own inclinations, so it's good to know that from the outset. And particularly with a relatively new bankruptcy law that has is only seven years old and is still being interpreted, there can be variance in published rulings from court to court, and even from judge to judge in the same court as we see here in our area covering Washington, DC, Northern Virginia (Alexandria Division of the Eastern District of Virginia) and suburban Maryland (Greenbelt Division of the District of Maryland).

  • "Debtor-Friendliness." Some judges and courts are consistently more "debtor friendly" than others. This is something regular practitioners in the courts will know from experience.

  • Responsiveness of the Court. Poor responsiveness can affect the timing of so-called "first-day hearings" -- hearings early in Chapter 11 cases where the debtor company ask the court for permission to, for example, access cash to make payroll for employees, key vendors, etc. Slow decision-making by the court in first-day hearing procedures can also signal a general lack of court responsiveness, as well.
  • These are just a few of the considerations that may well affect the outcome of a debtor's case. Debtors should be mindful of the various options for venue and the burdens and benefits they carry with them when deciding where to file their bankruptcy case.

    Work with experienced bankruptcy counsel. For more than fifteen years, our law firm who has successfully handled cases in the various bankruptcy courts in this area of Northern Virginia, Maryland, and the District of Columbia. Call for a complimentary initial consultation.

    November 28, 2012

    A Bankruptcy Lawyer The Banks Fear: Elizabeth Warren Speaks Up to Defend Consumers Abused by Shady Mortgages

    I had to smile when I read the news that the banks were now lobbying to keep former Harvard bankruptcy professor and Senator-elect Elizabeth Warren from getting appointed to the Senate banking committee.

    Lobbying is not cheap. It runs into the millions of dollars for a campaign. And, like most good businesspersons, I am sure the banks did some cost-benefit analysis in making this decision.

    This action by the financial industry must mean they see a big threat to profits. And consequently, since bank profits and consumer losses are a zero-sum game, it also means her appointment to the committee could mean a big financial win for consumers. Granted, one person alone will not do it all, but the banks perceive she could have a significant effect on the outcome.

    For consumers, let's hope the banks are not as successful with this campaign as they were in sinking her appointment to head the Consumer Financial Protection Bureau (CFPB), a sort of consumer safety protection agency she dreamt up. Among the CFPB's primary goals is to prevent the reappearance of the bad mortgages that blew up in the mid-2000s and harmed so many average people and the nation's economy as a whole. It was passed as part of the Dodd-Frank financial reform act.

    We'll see.

    Closer to home, and down at the grass-roots, our law firm focuses on helping consumers and small businesses in Washington, DC, Northern Virginia, and suburban Maryland with financial problems. Call us, if you want to discuss your situation. We're not quite as feared as Elizabeth Warren right now, but we're working on it.

    August 8, 2012

    Jose Canseco: You're Beautiful, Man! Your Tirade Is a Testimonial!

    Baseball.jpgBy now, many have heard the news that well-known former baseball player Jose Canseco recently filed for bankruptcy, mainly to deal with back taxes. What many have not seen, however, is the screed he published on the website, Vice.Com, and titled: "Jose Can Say So - I'm Broke and It's the Government's Fault."

    Undoubtedly he intended it as a tirade against the government. But interestingly it also serves very well as a testimonial to the dangers of tax debt I have written about in the website of our DC-based tax and bankruptcy law firm. Some excerpts from his harangue and my comments:

    " . . . [I]t's my duty to warn you: It can happen to anyone.

    When you owe the government--whether it be state or federal--they are relentless when it comes to getting their money back. They institute incredible penalties and interest that almost makes it seem like they want to enslave you."

    I have compared owing taxes to having a financial cancer - particularly because the debt grows at an alarming rate -- on the order of about 25% a year, due to penalties added on top of interest. Every month somebody comes to my office complaining that they had been in a payment plan with IRS (known as an "installment agreement") and "it has not gone down!" The reason is, invariably, that the small monthly payment they are making is not nearly enough to pay the interest and penalties that are accruing, let alone the tax (which is the principal, in this case).

    Canseco does a good job in describing what it feels like when a person is literally drowning in tax debt:

    "Recovering from something like that is very difficult. It's like swimming in the ocean. Once you get out past 100 yards, it looks like 200 yards and the farther you swim the harder it is to get back to shore; you're just swimming around forever and you can never reach the other side. The vastness just keeps expanding and expanding and expanding, by which I mean penalties and interest. Obviously, I've got issues from the past, but it just becomes so overwhelming that you're not even swimming anymore. You're just underwater, sipping air--sipping life even--through a little straw that's sticking through the surface. It's the most frustrating, unnatural thing I've ever had to go through--constantly being suffocated, choked out, and wondering if I could survive until the next day to make more payments on whatever I could."

    Pretty good image huh? And he's not bad on describing the consequences either:

    "For the last five or six or seven years I've just been trying to, well... live. I've been evicted from homes, lived in friends' converted garages, and bounced from house to house. Putting money into my account became a terrifying activity because there was a good chance the government would immediately confiscate it."

    That's true. That's what happens. The tax debtor starts having to live an underground existence. It's pretty much living in the Third World with no bank account, no ATM, no credit, no nothing.

    "Things got to the point where even my daughter Josie--her last name is Canseco--was drained one time. I think she said that they returned it, but anything relating to the Canseco last name became a nightmare. Let me tell you from first-hand experience, the IRS are a bunch of thirsty piranhas. They bled me dry."

    True again. Even though the tax liability is legally only that of the debtor's, this type of problem will have an impact on your relationships, in a bad way. I'm sure his daughter is not happy with him, looking up to Daddy, and ready to blow him a lot of kisses. Think about what it will do to your marriage when your partner's account is also wiped out, even if only temporarily, or you can't contribute to the mortgage because your wages and bank account have been seized. It does not win friends.

    "The issue is very simple: If you've got friends and family, the more money you make the more you spend on them. So let's say you spend half your money on them and the rest on yourself and the cost of living. It may so happen that during all of that you forget to pay your taxes. And then all of a sudden penalties and interest start to add up, and you're in a pool of quicksand from which you cannot escape."

    Here, unfortunately, Canseco goes off into a justification and excuse for his actions. I won't comment on the merits of his arguments. You can read them for yourself. But saying that he "forgot" to pay taxes is an excuse right up there with "my puppy chewed up my homework" from grade school days. He may be able to handle a fastball, but he'll never get this past a judge.

    A case like his will present some significant legal issues. According to news reports, the back taxes, which make up the bulk of his total debt, are more than $500,000. The key question is how much of that is non-dischargeable tax debt? I trust his bankruptcy attorney made a detailed analysis before filing and discussed the issues thoroughly with him, like we do in our bankruptcy and tax law firm for our clients in DC, Virginia and Maryland.

    If it's not dischargeable, Chapter 7 bankruptcy, which is what he filed, will not help him much. The tax debt will still be there when he finishes. Reorganization bankruptcy could give him the right to pay it back interest-free over time, but given his total debt of $1.69 million, he probably would have to file an individual Chapter 11. Chapter 11 for individuals in DC, Virginia and Maryland is always an option to consider and provides powerful relief, but is complicated, expensive, and at this point in time, changing as judge-made case law defines the new bankruptcy law that went into effect in 2005. Consult only an experienced bankruptcy lawyer.

    Finally, given who he is, and the potential revenue streams he has available to him as a celebrity from intellectual property (endorsements, copyrights, etc.) that he could generate, I easily see a lot of objections from his creditors, the US Trustee, the US Attorney, and the Chapter trustee if he tries to walk away from this debt without a financial contribution of some sort.

    Unlike a bankruptcy for the average person, this one should be a whole new ballgame.

    Good luck, slugger.

    For the rest of you, if you have questions, give our tax and bankruptcy firm a call.

    June 19, 2012

    Suntrust Mortgage Discrimination Settlement Is Second Biggest To Date

    Richmond, VA-based Suntrust Mortgage will pay out $21 million to more than 20,000 African-American and Hispanic home loan borrowers to settle a federal government suit charging discriminatory mortgage pricing from 2005 to 2009. The lawsuit charged Suntrust with violating the Fair Housing Act and Equal Credit Opportunity Act.

    This settlement comes on the heels of a settlement last December by Countrywide Financial Corp. and subsidiaries for $335 million for similar loans made between 2004 and 2008. Currently under investigation by the Department of Justice is Wells Fargo & Co.

    "At the core (of the suit) is a simple story: If you are African-American or Latino, you likely paid more for a SunTrust loan than equally or similarly qualified white borrowers," Thomas E. Perez, assistant U.S. attorney general for the civil rights division, told the Richmond Times-Dispatch in a May 31, 2011conference call. "You paid what amounted to a racial surtax," ranging from hundreds to thousands of dollars per borrower," he told the newspaper.

    The problem arose because of the way loan officers and mortgage brokers were incentivized, according to the lawsuit. The discriminatory charges (probably "yield spread premiums") boosted the commission for the loan agent when he or she could obtain an inflated price for a loan. Furthermore, the bank gave the loan officers and brokers free reign to do so by giving them broad discretion on prices beyond what should have been charged based on the customer's credit profile alone.

    The investigation took two and half years and involved the review of more than 850,000 residential loans. Under the terms of the settlement, Suntrust will hire an independent administrator to contact the victims. Mailings are expected to begin at the end of this year. Suntrust admitted no wrong-doing.

    The payout will average about $1,000 per person. However, in the opinion of this author, that will not nearly compensate the actual loss to many of the victims. Our law office has seen many who had homes with equity, refinanced during the height of the market, and then ended up losing both the equity and the home upon the collapse of the economy.

    It's a sad state of affairs.