Money Law Blog

The emerging trend, according to a recent CNN Money article, is that the economy has tanked to the point people can't even afford to file for bankruptcy.

Probably true, based on the experience of this law firm. When the crash hit in 2007, the biggest problem was the wave of toxic mortgages re-setting to interest rates, and consequently payments, that shot to absurd amounts. Home owners couldn't make the payments, so bankruptcy was one way to eliminate the debt and stop the foreclosure long enough to get out of the house and not have to abandon your toothbrush and Fido. This event, in turn, triggered the economic down-turn, the lay-offs and decline in income that bring us to where we are today.

The 2005 "reform" of bankruptcy law has compounded the problem for debtors by requiring more paperwork and thereby increasing costs. Among the most ludicrous requirements is pre-filing debt counseling. Bankruptcy is the last thing debtors want to do. If debt management re-payment plans were a solution, they would be doing them.

The average attorney fee for a Chapter 7 bankruptcy is $1,500 (and that is more or less what bankruptcy lawyers charge in DC, MD and VA.) But, says the article, it is expected that between 200,000 and one million consumers will not be able to afford even that.

Our bankruptcy and tax law firm has recognized this reality. That is why we have set up a new program to make legal representation in bankruptcy more affordable to debtors in DC, MD and VA. The initial cost to start is minimal and the monthly payments within reach. In the meantime, you have legal representation, an advisor, and someone to "run interference" (if I may borrow a sports term) with creditors. Take a look: FINANCED BANKRUPTCY℠.

Call us, and we'll discuss your situation.

Often, debtors come to the bankruptcy lawyer's office after already having made costly mistakes that could easily have been avoided, including:

• Borrowing against a home to pay down credit cards. Now the debtor has turned what, in many cases, was unsecured debt, which could have been wiped out completely, into secured debt that the debtor must pay off or lose the house. Worst yet are predatory loans where the payments are so onerous as to make foreclosure almost a certainty.
• Borrowing against a 401K plan. The debtor takes a loan out against a 401K plan and then finds he can't make the payments. If the debtor defaults, a distribution of the full loan proceeds will be declared for that tax year. The debtor will now have a tax liability (that cannot be discharged) equaling about a third to a half of the loan taken out to pay debt that was probably dischargeable in the first place.
• Moving debt around to take advantage of low-interest credit card offers. If the debtor files bankruptcy within a short time after this transfer, lenders left "holding the bag" often move in court to block the discharge claiming fraud for incurring the debt when the debtor knew he would not be able to pay it back.
• Playing the "ostrich." Unable to face his or her financial problems, the debtor avoids getting help. For persons with back tax debts, the delay permits interest on priority taxes (that you must pay off) to build and also gives the IRS time to file a tax lien, again making what may have been a dischargeable tax debt into secured debt the debtor must now pay off.
• Getting help from the "one trick pony." When shopping for help, pay attention to 1) the range of solutions, and 2) the effectiveness of the solutions the debt professional offers. Ask questions of the following persons you approach for help:

Credit counselors. How much of my debt will be completely wiped out? Will I have to pay income taxes for the debt that is wiped out? (You probably will, especially if the creditor reports "cancellation of debt" income for you to the IRS.) How much will I have to pay in total? How many months will it take to be debt free? How much total principal and how much total interest will I pay? Will my interest rates go up?

Accountants and enrolled agents. For debtors with tax debts, be aware that neither one of them can offer the bankruptcy option unless they have a license to practice law. Usually they will offer only an offer in compromise, which may not be the best option for your case, or an installment agreement which is almost no relief at all. Ask: Would this tax debt be dischargeable in bankruptcy? Are you making a guarantee that my offer will be approved? What amount will be accepted as an approved offer by the IRS? How long will it take? As for an installment agreement, it's just that: Pay over time while interest and penalty charges continue to grow.

Attorneys who practice only Chapter 7 bankruptcy. This is a bit like going to a doctor who can prescribe only one type of medicine. Your specialist should be able to perform a full diagnosis and then prescribe a range of treatments. Ask: Does the attorney prepare, file and represent debtors in Chapter 13 or Chapter 11? What are the local Chapter 13 trustee's preferences as to the type of plans he or she will accept? How much of his or her practice is devoted to bankruptcy? How long has he or she been practicing this area of the law? For tax problems, does the attorney practice before the IRS? What options does he or she offer?

If you think you may be facing a debt problem, get some advice. The earlier, the better.


Our tax and bankruptcy law firm serves Virginia, Maryland and DC. Call us.

Abraham Lincoln, a lawyer by profession, was exactly on the mark when he said: "A lawyer's advice and time are his stock in trade." That's what we sell -- our time (as well as our knowledge).

Now put that together with another old, but very true, saying: "You get what you pay for." So. . . when you go for cheap, you are bound to get less of that lawyer's time and attention. I have explained how this works before here in a prior blog posting about cheap lawyers and bankruptcy mills.

I state the foregoing (if you will indulge me in a little legalese) as an introduction to the present rant. Excuse me while I spout.

This the second time in a week that I am doing a consultation answering legal questions for former clients of a bankruptcy attorney who bills himself as the "#1 Bankruptcy Filer" in his state. (Although that statement connotes he's the best in quality (an advertising assertion, which, by the way, may run afoul of the state bar association professional ethics rules) actually it just means his office happened to file more cases than anyone that calendar quarter).

It's annoying, to put it mildly, and infuriating, to be more precise. I'm spending my time, doing a free consultation and clarifying issues that should have been explained by the attorney they paid to do the case.

It points up something that you need to take into account when you hire your bankruptcy attorney: Make sure he or she, or knowledgeable staff, is available and competent to answer your questions. This is the intangible that represents the real value when you hire a legal adviser.

Don't be one of those who calls around asking: "How much do you charge?" You'll get a low, low price and nobody there to provide you with a key component of the service: counseling. It's not for nothing that attorneys are also referred to as "counsel."

Don't get short-changed. The attorney and staff, while sometimes not immediately available, should eventually be able to answer your questions -- before you have to go elsewhere.

Call our law firm if we can help you.

Bankruptcy is a very effective tool to deal with financial problems. There are times, however, when it just does NOT make sense. The following facts are from a consultation where I advised AGAINST a filing.

The gentleman had a condominium which had become a financial burden. Like a lot of property purchased shortly before the financial crisis, this one had depreciated significantly. It was a small, 840 square foot condo purchased for about $300,000 in 2006. Upon listing with a realtor, the best offer he could draw $185,000, but the lender would not approve the short sale. He had two mortgages. The payment on the first was about $1,400/month, and the second was about $400/month. The monthly condo fee was $275/month. With rent coming in at $1,500/month, he had to put in $575 a month from his own pocket to carry it. He had recently been pre-approved for a loan to purchase a larger $400,000 for his wife and new baby. He complained he could not afford to keep on paying the condo.

Given his income of $82,000 a year and wife's $51,000 a year, if they declared bankruptcy, they would likely not qualify for a simple Chapter 7 and would have to pay all disposable income into the court for the next five years. Furthermore, the wife had $16,000 in a money market fund, so the minimum contribution over time would have to be a minimum of $11,000. (Since the couple lived in Virginia, that state's $5,000 homestead exemption would apply.)

I advised him that bankruptcy should be only a last resort. Instead, there are other options that should be explored first. The $16,000 cash (and possibly additional funds from a hardship distribution from the $60,000 they had in a 401K) could be dangled in front of the second mortgage lender to try to obtain a lump sum payment in return for a release of the second mortgage. The second mortgage was, for all practical purposes unsecured, so that if the property went to foreclosure, the second would end up with nothing anyway. Some money would be better than none, to this lender.

Once the second mortgage was gone, the net negative income would drop to about $175/month, which could be manageable with some belt-tightening of his household expenses. Furthermore, the net debt against the property would drop to about $232,000 (the amount of the first mortgage). With a present value of $185,500, the property could recover to positive range in a few years.

The situation would not be entirely cost-free, but the trade-off -- in this case -- to a bankruptcy filing, in my opinion, was worth it.

It's the policy of this office to be absolutely honest, even when we lose business. We win by knowing we do the right thing for our clients or prospects.

Nevertheless, in the end, it's the client's decision, and we respect that. Call our law firm, if you want to discuss your situation.

Practicing bankruptcy law in the greater Washington, DC area, we often get this question from nervous government employees and defense contractors: "If I file bankruptcy, will I lose my security clearance?"

The answer is: It's not the bankruptcy itself that is the problem. It's the underlying circumstances leading to the bankruptcy that is the determining factor.

Think about it. If you got a very serious illness and racked up a million dollars in medical bills you could not pay, and needed bankruptcy relief to stop the collection calls, lawsuits and garnishments, does the bankruptcy -- in any way -- reflect upon you personally as a security risk? Was the illness your fault? Is it evidence of a personality defect that would make it more likely you would breach security? I think you know the answer.

Where the circumstances leading to the bankruptcy were financial irresponsibility, then that's another matter. But then, the late charges, delinquencies, high credit balances, judgments, tax liens, etc. would already exist on your credit report. If anything, the bankruptcy would actually show you acting responsibility by exercising your legal right to "wipe the slate clean" and get the "fresh start" the law allows.

The US Air Force Academy's website discusses this issue and provides some interesting guidance: (The highlighted text is mine.)

The status of your security clearance can be affected, but it is not automatic. The outcome depends on the circumstances that led up to the bankruptcy and a number of other factors, such as your job performance and relationship with your chain of command. The security section will weigh whether the bankruptcy was caused primarily by an unexpected event, such as medical bills following a serious accident, or by financial irresponsibility. The security section may also consider the recommendations and comments of your chain of command and co-workers. This is an issue that can be argued both ways, so as a practical matter your security clearance probably should not be a significant factor in making your decision about whether to file bankruptcy. The amount of your unpaid debts, by itself, may jeopardize your clearance, even if you don't file bankruptcy. In that sense, not filing for bankruptcy may make you more of a security risk due to the size of your outstanding debts. By the same token, using a government-approved means of dealing with your debts may actually be viewed as an indication of financial responsibility. Eliminating your debts through bankruptcy may make you less of a security risk. There is no hard and fast answer here, with one exception: it never hurts to have a good reputation with your co-workers and your chain of command.

Call us and make an appointment. We'll analyze your situation, and discuss all options to address your problem in person.

Sometimes it is worthwhile to put up a fight when you're being sued on a credit card or mortgage loan deficiency. The truth is, many times, the lender does not have the evidence available to prove the case, or does not have the means to get the proof admitted into evidence -- a crucial step to win a judgment for the debt against the borrower.

J.P. Morgan Chase & Co. tacitly admitted this recently when it voluntarily dismissed more than a thousand of its credit card lawsuits across the country. The company won't admit WHY it took this step which was reported in last week's Wall Street Journal.

It has been coming to light in the courts, however, that, just like the "robo-signers" that surfaced with the foreclosure mess, credit card lawsuit affidavits of the debt allegedly owed have been signed by employees who are not personally-familiar with the company records and have not verified the debt.

Rather than risk public disclosure and embarrassment, speculation is that the company decided to withdraw the cases until the documentation could be fixed.

For the poor soul facing a lawsuit, it is important to know that the collection "model" used by the credit card companies is based largely on the fact that very few debtors respond to the suit. In fact, about 94% of suits end up in "default judgments" because there is no response by the defendant.

To defend, you may have to have some knowledge of the law. This attorney frequently sees unrepresented debtors showing up in court and responding in this typical fashion to the judge's query as to whether they owe the debt: "I cannot afford to pay." By responding this way, the debtor has implicitly admitted the debt is owed, hence, the judge will issue judgment, and not being able to pay is not a valid legal defense to establishing the liability.

The debtor will have to, in good faith, contest the liability and ask for trial. Some understanding of the rules of evidence and "discovery" are helpful to know what proof the lender will have bring forward, how the debtor can ask for it, and what the lender's attorney will need to establish to get it admitted into the record.

It's not foolproof, but sometimes worthwhile, particularly when the debtor cannot simply declare bankruptcy, maybe because he has property which cannot be protected and which he would lose, or other personal reasons.

This law office specializing in financial matters in DC, VA and MD has successfully defended creditor lawsuits and settled others. One current case involves a suit for $185,000 for a second mortgage that was left over from a foreclosure on the client's home. Today, we got a letter from the lender who has brought his settlement offer down to $30,000 -- not a bad discount.

It doesn't hurt to investigate all the options. Don't be in the 94% who just let the lender get a judgment against them without a fight.

It's a little known, but extremely valuable, technique employed by experienced bankruptcy lawyers: Using the "automatic stay" feature of bankruptcy to get a repossessed car back into the hands of its owner.

Our DC-based bankruptcy law firm used it the other day to get a car back for a young man in Northern Virginia who needed his car to get around and commute to his job.

When a car is repossessed, physically it comes under the control of the lender. However, legal title does not pass, and remains with the owner, until a legally-valid auction has been conducted and title then conveyed to the winning bidder, which oftentimes is the lender.

Until that auction takes place, which also must be conducted according to procedures stated in the contract and/or state law (and which usually includes notice of the auction date, time, and location to the owner), legally the car still belongs to the individual.

If a bankruptcy is filed by the owner, the "automatic stay" (a court order requiring debtors to stop enforcement action) comes into existence halting the auction. Our firm's practice is to immediately fax confirmation of the bankruptcy filing to the lender, and then make arrangements for the owner to pick up the car.

To keep the car, the owner must become current on the loan by paying all arrears, late fees and costs of repossession, and also make the regular payment going forward. The owner has to bring the loan current and re-start payments shortly after filing in Chapter 7, or the lender will ask the court for permission to "lift the stay" and proceed once again with the repo. Otherwise, if the owner has the money, or can raise it quickly, he can exercise redemption rights in Chapter 7 and fully pay off the car at its current value in a lump sum payment.

Chapter 13 bankruptcy offers additional options, such as paying the arrears and costs, through a plan of 36 to 60 months. And an even more powerful right exists in Chapter 13 to re-set high interest rates to a little more than prime, and/or pay only what the car is worth through the plan (if the owner has owned the car for more than two and half years, or the vehicle is used in his business) in what's known as a "cram down."

Automobile lenders are getting more aggressive and creative. Recently one of our clients had her car repossessed on a Sunday from a supermarket parking lot when she went out briefly for groceries. Obviously the lender staked out her home waiting for an opportunity.

It can happen, but remember that it's not the end of the story. There are still ways to fix it.

Here are the facts:

1. All bankruptcy attorneys filing in a specific court charge within a few hundred dollars of each other. This goes for the bankruptcy courts in DC, suburban Maryland and northern Virginia. The reason: Bankruptcy fees are disclosed in all cases and they are easily available for viewing on-line by attorneys e-filing in that court. Any attorney wanting to see what the other guy or gal is charging? Go to the court's website, a few clicks and voila, you know! Everybody charges within that range.
2. Lawyers are not stupid. (OK, no jokes!) They have to run a business and earn a profit to make a living. The guys or gals who charge low-ball prices and tout inexpensive bankruptcy make up for the lower margins by running more cases through the office in less time. It's what's known as a "mill." Expect less attention and time answering your questions and concerns. You get what you pay for. We get way too many calls from disappointed customers who got no service from such firms.
3. You cannot be overcharged. The US Trustee's Office (UST), which is the US Justice Department's watch-dog guarding the bankruptcy system from abuse, closely monitors attorney fees. (This is especially true for the US Bankruptcy Court, District of Maryland, Greenbelt Division, the court serving residents of suburban Maryland, outside Washington, DC.) The UST attorneys, and the judges, know the "going rates" for a bankruptcy. Too high, and the UST will file a motion asking the judge to order the attorney to "disgorge" -- return excess attorney fees back to the client.
4. For Chapter 13 bankruptcy cases in Northern Virginia and suburban Maryland, the court has a set preferred fee schedule. In bankruptcy, attorney's fees must be approved by the court. To save time and reduce effort by everyone, the local bankruptcy courts (except DC) have set pre-approved fees for cases, based on the range of services to be delivered. As of this writing (November, 2010), for a routine Chapter 13 case (with no special issues) an attorney will be allowed $3,000 (not including costs) in the US Bankruptcy Court, Eastern District of Virginia, Alexandria Division. In the US Bankruptcy Court, District of Maryland, Greenbelt Division, the court allows $2,000 for services that are limited to plan confirmation only (with additional services at an hourly rate), $3,500 for services including all matters in the case (with unexpected, extraordinary services, and services occurring 90 days after confirmation, at an hourly rate) and $4,500 for services including all matters (with no additional fees ever, except for unexpected, extraordinary services). Since most cases will involve additional work beyond plan confirmation, the $3,500 flat fee is the most cost-effective for clients and the one usually charged by attorneys.
5. The cost of a bankruptcy is tiny compared to the benefits. Run the numbers. If it costs $1,500 (the average for a typical Chapter 7) to get rid of $30,000 in credit cards, what is the net benefit? Answer: $28,500! Know any investments where you can invest $1,500 and get back a return of $28,500 in only four months? If you do, then you shouldn't be here reading this. You should be out running a hedge fund. A few dollars more or less is insignificant compared to a benefit ten times your cost -- assuming you have chosen an attorney for the experience and qualifications to get you results.
6. "I can't afford it." When the garnishments begin and a creditor seizes your bank account or a significant part of your paycheck, you cannot NOT afford the protection and relief from debt that bankruptcy affords. So how do you finance the fees and cost? A few options:
   • Save it up. Stop paying on debts you will discharge anyway, such as unsecured debt or loans on property you are planning on giving back to the lender. Continuing to pay is a waste of money and also a possible "preference" in bankruptcy in which the creditor can be forced to pay the money back to the case administrator to be divved up among all creditors fairly. Also, don't be accused of "bad faith" if you pay one creditor and don't pay another before the filing. If you don't have the means, just stop paying them all.
   • The "friends and family" financing plan. Bankruptcy removes the legal obligation, but it's not against the law to voluntarily pay if you want. Many clients get loans or gifts from persons they know to pay for the service. Post-discharge they have more excess income to make voluntary re-pay.
   • Borrow from, or partially liquidate, an "exempt" asset to generate funds. In bankruptcy, some assets are protected and remain property of the debtor. Retirement plans, for example, are generally exempt. If necessary, you may be able to borrow from it or take a hardship withdrawal, depending on the plan's rules. Plan with your attorney.

   
   Shopping for a low-price bankruptcy is not a smart way to pick a bankruptcy law professional. Cost is only one factor, and a factor of very low relative importance, at that. Instead look for an attorney you trust, with whom you have a good working relationship, who answers your questions, and who has the legal experience and qualifications to get the results you need.

   If you need time to raise the fee, see, our new FINANCED BANKRUPTCY℠ program for basic consumer cases. If you qualify, you will have attorney representation -- and peace of mind -- starting with a minimal down payment.
   

The new credit card law that went into effect on Monday, February 22, 2010 is one of the few good things to come out of the economic mess. In particular, I like the disclosures in the new statements. So many times clients come to office and they are fooling themselves. I ask about credit card debt, and they answer: "No problem. I'm paying on it." The minimum I ask? And they say yes. The new statements tell them the truth. Here's an example from a client's most recent statement:

- New balance: $6,798.80
- Minimum payment due: $136.00
- Amount of time necessary to pay this balance paying only the minimum: 17 years (!)

That's the shocker. Chapter 7 bankruptcy will clear this debt in 4 months. Do the math. Which is quicker way to increase your net worth?

This firm pushes no one into bankruptcy. But when all you can afford is the minimum payment, 17 years is a long time to be a financial slave. Now, for once, the credit card lenders are telling you the truth!