Articles Posted in Chapter 13

Scammers are targeting bankruptcy filers throughout the country by posing as attorneys or law office staff and telling them to immediately wire money to pay a debt.

Don’t fall for it. One of the best ways to avoid a scam is to stop the caller and make a direct call to the supposed person or company. For example, if they say it’s your attorney’s office, stop and YOU PLACE THE CALL DIRECTLY TO THE OFFICE. You know you’ll be dealing with the real person or office, instead of a phony. Don’t be hurried by the caller. Situations of this type do not call for immediate action and can wait a day or a weekend if necessary.

Here’s the bulletin issued by the bankruptcy court serving northern Virginia (with information applicable to all jurisdictions):

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF VIRGNIA
CONSUMER ADVISORYALERT
Phone Scammers Target Bankruptcy Filers in Virginia and Other States

A sophisticated phone scam is targeting bankruptcy filers in several states, using personal information from filings and posing as attorneys to coerce intended victims to wire money to the scammers immediately to satisfy a debt.

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It may not be a well-know fact, but the truth is a lot of financially-responsible people are turned down for loans because they have NO history of recent borrowing. None.

This may be because the person saves up and pays for purchases without financing, or because they have not bothered to start building a new credit history by borrowing (and showing on-time payments) after a major financial event such as a bankruptcy or foreclosure.

After a bankruptcy discharge, a debtor needs to make sure that, after his or her case closes, there is a new credit history being reported with either new lines of credit that are opened, or old lines that were maintained and still being used.

Many of these individuals are credit-worthy but the current credit reporting and scoring system is not set up to evaluate this.

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Admitting it was a “bad boy” handling mortgages in bankruptcy, Chase recently entered a settlement with the federal government to compensate more than 25,000 US homeowners. The settlement is subject to court approval.

The United States Trustee Program, a unit of the Department of Justice whose attorneys at the bankruptcy court oversee the integrity of the system, announced on March 3 it had reached an agreement with Chase forcing it to pay homeowners $50 million in cash, mortgage loan credits and loan forgiveness for “robo-signing” and other improper practices before the bankruptcy court. Chase also agreed to change internal operations and submit to the oversight of an independent compliance reviewer.

Chase admitted it submitted more than 50,000 mortgage “payment change notices” that were signed by persons who had no knowledge of the accuracy of the notices they signed:

  • More than 25,000 of the notices were signed by employees or former employees who had nothing to do with reviewing the accuracy of the notices.
  • The rest of the notices were signed by employees of third party vendors who also were not involved in verifying the accuracy.

Chase also admitted it failed to file the notices in a timely fashion, as well as failing to provide timely escrow statements to homeowners in bankruptcy.

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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.

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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.

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By 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.

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.

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.

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.)

The evidence is coming in, and it makes absolutely perfect sense: The federal and state governments are ramping up tax examinations and collections to bring in more money.

Just this morning in our tax and bankruptcy law firm: Five new cases, not including the other tax cases on my desk. I sensed this was coming. It’s a no-brainer for a policy-maker: Why raise taxes and antagonize the citizenry, when you can just enforce more aggressively what’s already on the books?

The difference between what is collected on time and what is legally owed to the government is known as the “tax gap.” IRS has examined the problem and published its a study.

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