Are you eligible for Ch. 7 or Ch. 13 bankruptcy?

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Eligibility for Ch. 7 or Ch. 13 bankruptcy can turn on who is filing the bankruptcy, the type and amount of debt, the amount of income, and the amount of expenses.

Who is filing the bankruptcy:

Only a human being (or a human being and his or her spouse) can file a Chapter 13 case. Neither a partnership nor a corporation can file a Chapter 13 case, but it can file a Chapter 7, whether or not the business owner also files one individually.

The type and amount of debt:

If your debt is primarily consumer debt (a dollar amount of more than 50%), then you have to pass the means test to qualify for a Chapter 7. Under Chapter 7, there is no restriction on the amount of debt you can have in order to qualify. But, Chapter 13 is restricted to cases where the person filing has a maximum of $383,175 in total unsecured debt and $1,149,525 in total secured debt.

Amount of income:

If your income is no more than the median income for your family size and state, then you can easily pass the means test to qualify for a Ch. 7. Chapter 13 requires regular income, which the Bankruptcy Code defines as income that is “sufficiently stable and regular” to enable you to “make payments under a [Chapter 13] plan.” This makes sense because you will be making regular monthly payments for the duration of your Ch. 13 case. A Ch. 13 case will last three years if the income is less than the median income applicable to your family size and state; if the income is at the applicable median income amount or more, the Ch. 13 case will last five years.

The amount of expenses:

In Ch. 7, if your income is not below the median for your state, then you must complete a highly technical test involving some, but not necessarily all, of your expenses to see whether you pass the means test and thus whether you are eligible for a Ch. 7. In Ch. 13, a similar, but often more complicated, calculation largely determines the amount you must pay monthly into your plan to satisfy the requirements of Ch. 13.

Choosing between Ch. 7 and 13 can be simple. But there are at least a dozen major differences among them, differences of which you may not be aware. So when you come in to see me or another attorney, be clear about your goals but also be open-minded about how to reach them. You may well have tools available that you didn’t know about.

For bankruptcy in Northern New Jersey, call: (201) 676-0722 or schedule a consultation at my Setmore page.

Student loan settlement companies to be sued by Illinois AG

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Student-loan settlement companies that allegedly take people’s money and do not provide the promised student-loan debt help will be sued by the Attorney General of Illinois, the New York Times reported.  Illinois will be the first state to take legal action against companies that advertise help for student loan debtors.

Two of these student loan debt assistance companies will be sued – Broadsword Student Advantage and First American Tax Defense – according to the Times reporters, who stated that they read advance copies of the Illinois Attorney General’s lawsuits.  They report that the lawsuit accuses these companies of taking fees about which student-loan debtors were misled and sometimes they faked affiliation with government student loan programs, or they lied about a fake program called the “Obama Forgiveness Program,” which does not exist.

Student-loan debt is a growing problem in this country, with more and more people concerned about their ability to pay off their debt within a reasonable period of time.  Just as debt settlement companies have preyed on people who have large amounts of credit-card debt, student loan settlement companies are now sprouting up all over the place to prey on people who carry large student-loan debt burdens.  They promise a variety of things that they cannot deliver and charge high fees while making false statements to debtors about their student loans.

If you need student loan debt help, it’s better to contact either the Department of Education directly (for Federal student loans) or a local attorney who can help you navigate the system.  For a New Jersey student loan lawyer, call me at (201) 676-0722.

Business debt can allow you to qualify for Ch. 7

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If you owe more business/non-consumer debt than consumer debt, then you avoid not only the “means test” but also some other roadblocks to a successful post-business Chapter 7 bankruptcy case.

What’s the “Means Test” and Why Does It Matter?

Bankruptcy law says that if your income is more than a certain amount, you have to pass a means test to be able to go through a Chapter 7 case successfully. One way to avoid this means test is by having less income than the permitted median family income for the state in which you live. But the median family income amounts are relatively low. If your income is above the applicable median amount, you have to go through the entire means test at the risk of being forced into a 3-to-5-year Chapter 13 payment plan instead of a three-month Chapter 7 liquidation.

Debtors with More Non-Consumer Debts than Consumer Debts

You can skip the means test altogether if your debts are not primarily consumer debts. This way you could be eligible for a Chapter 7 case even if your income is above the median level. Indeed, you avoid other kinds of “presumptions of abuse” as well, not just the formulaic means test, but also the broader “totality of circumstances” challenges. Congress decided that if most of your debts are from a failed business venture, you should be allowed a fresh start through Chapter 7, regardless of your current income and expenses.

What is a “Consumer Debt”?

The Bankruptcy Code defines a “consumer debt” as one “incurred by an individual primarily for a personal, family, or household purpose.”

The focus is on the reason why you incurred the debt. If you made a credit purchase or took out the loan for your business, then it may not be a “consumer debt.” That is a factual question that must be decided separately for each one of your debts.

“Primarily Consumer Debts”?

The Bankruptcy Code does not make this crystal clear, but generally, if the total amount of consumer debt is less than the total amount of non-consumer debts, your debts are not primarily consumer debts. And then you do not have to mess with the means test.

Seemingly Consumer Debts May Not Be

Small business owners often finance the start-up and operation of their businesses with what would otherwise appear to be consumer credit—credit cards, home equity lines of credit and such. These may qualify as non-consumer debts in calculating whether you have primarily consumer debts. Your use of various forms of personal credit to fund your business is something to discuss with your attorney.

Unexpectedly High Business Debts Can Help

Sometimes business owners end up with business debts larger than they thought they would have when their business closed. For example, if you had to break a commercial lease when you closed your business, the unpaid lease payments you owe could be huge. Or your business closure may have left you with other unexpected debts, such as obligations to business partners or litigation resulting in damages owed. The good side of larger-than-expected business debts is that they may allow you to skip the means test and other grounds for dismissal or conversion to Chapter 13, allowing you to discharge your debts through Chapter 7.

For bankruptcy in Northern New Jersey, call: (201) 676-0722.

What happens to general unsecured debt in Chapter 7?

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Examples of general unsecured debts include credit card debt and medical debt.  If you are thinking about filing for bankruptcy, you should know how these general unsecured debts are handled.

Secured debt usually is tied to your most important possessions, such as your home or your car. So it’s understandable that being able to keep these types of collateral will drive your bankruptcy decisions.  Likewise, your “priority” debts tend to involve your most aggressive creditors and often can’t be discharged in bankruptcy, so these also grab our attention. But it’s more likely that you owe more in general unsecured debt than in secured and priority debts combined.

What happens to general unsecured debt in a Chapter 7? It depends on 2 things: 1) “dischargeability,” and 2) asset distribution.

Dischargeability

Dischargeability refers to whether you are able to get a discharge of that debt in bankruptcy. The dischargeability of most general unsecured debt is not challenged. In the rare case that your discharge of general unsecured debt is challenged, you may have to pay back some or all of that particular debt. But this would depend on whether the creditor is able to show that the debt fits within some narrow grounds for non-dischargeability, such as fraud, misrepresentation, or other similar bad behavior on your part.

Asset Distribution

If everything you own is exempt, or protected, then your Chapter 7 trustee will not take any of it from you – this is called a “no asset” case. But if you have an “asset case,” where the trustee takes some of your assets for distribution to your creditors, your general unsecured creditors will not necessarily receive any of those assets. The trustee must first pay off any priority debts and must pay the trustee’s own fees and that of any other professionals who were hired. Only if any funds remain will the unsecured creditors get to share in the leftovers.

To summarize, in most Chapter 7 cases your general unsecured debts will be discharged, preventing those creditors from ever being able to pursue you for them. Also, these creditors will receive nothing from you, so long as all your assets are exempt. Relatively rarely, a creditor may challenge the discharge of its debt. And if you have an asset case, the trustee may pay a part or—very rarely—all of the “general unsecured debts,” but only if the priority debts and trustee fees do not exhaust all the funds being distributed.

 

Options with Your Vehicle Loan under Chapter 7

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Your car loan may be your most important debt. Chapter 7 gives you the control you need to handle it.

When you think about secured debts—those tied to collateral like a vehicle—it helps to look at these kinds of debts as two deals in one. You made a commitment to repay the car loan and then you agreed to back up that commitment by giving the creditor certain rights to your collateral.

The first deal—to repay the money—can almost always be discharged (erased) in bankruptcy. But the second deal—the rights in the collateral that the creditor has, known as a “lien” on the vehicle title—is not affected by your bankruptcy. So, you can wipe out the debt, but the creditor stays on the title and can get your vehicle if you stop paying. Your options in Chapter 7, and the creditor’s options, are tied to these two realities.

Keep or Surrender?

As long as you file your Chapter 7 case before your vehicle gets repossessed, the ball is in your court regarding whether to keep or surrender it.

Surrender the Vehicle

In most situations, if you want to surrender the vehicle, then a Chapter 7 bankruptcy is the time to do it. That’s because in the vast majority of vehicle loans, you would still owe part of the debt after the surrender— the “deficiency balance”—often a shockingly large amount. The reason for the large deficiency balance is because you usually owe more than the vehicle is worth, but also because the contract lets the creditor charge you for its repossession and resale costs. Surrendering your vehicle during your Chapter 7 case allows you to discharge that whole debt and not owe your lender any of those costs.

There is a theoretical possibility that the vehicle loan creditor could challenge your discharge of the “deficiency balance,” based on fraud or misrepresentation when you entered into the loan. These are rare, especially with vehicle loans.

Keep It

Whether you are current on the loan payments does not matter if you are surrendering the vehicle. But if you want to keep it, whether you are current and if not, how far behind you are, makes a big difference.

Keep the Vehicle When Current

As you can guess, it’s best if you are current on your car payments. Then you would just keep making the payments on time and you might sign a “reaffirmation agreement” to exclude the vehicle loan from the discharge of debts at the end of your Chapter 7 case. But whether you would sign such an agreement depends heavily on the advice of your bankruptcy attorney, an issue you should discuss thoroughly with them.

Some vehicle loan creditors insist on a reaffirmation agreement, at the full balance of the loan—it’s a take-it-or-leave-it proposition. In that case, if you want to keep the car or truck, you need to “reaffirm” the original debt, even if by this time the debt is larger than the value of the vehicle. But reaffirmation can be dangerous because if you don’t keep up the payments, you could still end up with a repossession and a hefty debt owed—AFTER having passed up the opportunity to discharge the debt during your bankruptcy case. So be sure to understand this clearly before reaffirming, especially if the balance is already more than the vehicle is worth.

Some creditors are willing to allow you to reaffirm for less than the full balance, so that the creditor avoids taking an even bigger loss if you surrender the vehicle. Talk to your attorney whether this is a possibility in your situation.

Keep the Vehicle When Not Current

If you are not current on the vehicle loan at the time your Chapter 7 case is filed, most of the time you will have to get current quickly to be able to keep the vehicle—usually within a month or two. That’s in part because for a “reaffirmation agreement” to be enforceable, it must be filed at the bankruptcy court before the discharge order is entered. Since that happens usually about three months after the case is filed, the creditor needs to decide quickly whether you will be able to catch up on the payments and reaffirm the debt.

Some vehicle creditors may be more flexible, such as by giving you more time to cure the arrearage. Your attorney will be able to discuss this issue with your creditor, if it arises.

Capital One making it easier for debtors to open bank accounts

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Capital One bank soon will be making it easier for those with bad credit to open checking and savings accounts, under the terms of a settlement with New York Attorney General Eric Schneiderman.

Previously, Capital One would use a credit reporting agency called Chexsystems to screen out bank account applicants who had bad credit.  Now Capital One has agreed to no longer screen out applicants with bad credit, but it will still screen out those who committed fraud in the past.  The settlement is part of the NY Attorney General’s ongoing investigation into banks’ use of credit reporting agencies.

Schneiderman’s concern is that people with bad credit who don’t have bank accounts are forced to rely instead on high-cost financial products, such as check-cashing stores.  My last post on this blog was a review of a film about (in part) people who cannot get bank accounts and what they have to do to get around that problem.

Capital One will roll out the changes nationwide toward the end of 2014.

Film Review of Spent: Looking For Change

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A recent documentary available on YouTube highlights the high cost of being poor.  Spent: Looking For Change, a film sponsored by American Express, explores the financial lives of people who lack access to banks or who have bad credit or no credit.  Here is a basic summary of the important topics covered:

According to the film, approximately 70 million Americans lack access to the traditional financial system.

Why don’t these people have access to banks or to credit?  For a variety of reasons – medical problems resulted in lost income, bad financial decisions were made, etc.  Then bank accounts were overdrawn and eventually closed.  Once debts have gone unpaid, credit gets ruined and it’s hard to fix, even where there is currently a good income and all monthly bills are being paid.  Where a person has large student loans relative to their income, their credit is weakened.  Or those who have never had a credit card or taken out a loan are invisible to the credit reporting agencies and have no available credit.

When people lack access to the traditional financial system, they often turn to check cashing businesses, payday loans, and title loans in order to make ends meet.  These types of financial products cost more in fees and interest than traditional products.  The film tells us that Americans spend about $89 billion a year on fees and interest.

When people don’t have a bank account or a debit card, they must physically go around and pay monthly bills, which costs a lot in terms of gas and time.  Even prepaid debit cards that are funded with cash carry large costs in fees charged for buying and using the card.

People turn to payday loans, which are designed to be paid back on the next paycheck; and title loans, which are loans that use your car for collateral.  If you don’t pay the loan, they take your car.  Many will pay the fee over time instead of paying the original loan off because they can’t afford it.  The original loan is never paid off.

My take on the film is that it is a good overview of how financial products that are designed to take advantage of poor people actually set them farther and farther back.  It’s worth watching because it’s an unbiased presentation of a lot of information in only about 40 minutes.

 

Inherited IRAs not exempt, U.S. Supreme Court says

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The U.S. Supreme Court recently made an important decision regarding Individual Retirement Accounts (IRAs) that have been inherited by someone who then files for bankruptcy.

At issue was an IRA account that the bankruptcy filer had inherited and that contained $300,000.  Bankruptcy law allows those filing for bankruptcy to keep IRA accounts, so long as those accounts qualify as “IRAs” under tax law – this is the case in New Jersey.

However, when the owner of an IRA account passes away and someone else inherits that IRA, that account loses the characteristics that make it an “IRA” under tax law and the account becomes more like an ordinary pool of money.  Because of these lost characteristics upon inheritance of the IRA, the U.S. Supreme Court decided that bankruptcy filers cannot keep all of the money in a very large inherited IRA account, such as the $300,000 involved in this case.

Remember, this decision does not affect bankruptcy filers’ own personal IRA accounts, which generally remain exempt.  It’s a good idea to talk to a bankruptcy attorney about your retirement accounts before filing for bankruptcy to ensure that they are protected through your case.  I offer a free consultation for people in New Jersey who are considering bankruptcy.  Call me at (201) 676-0722.

 

Photo by www.aag.com.

Links – Stuff worth reading from the week of 5/11/2014

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At the very beginning of this week, the Wall Street Journal had an interesting article on how banks that are located mainly in Wal-Mart stores collect a lot of fees from their customers, who tend to have bad credit histories.

From the Washington Post, there is an article on the debt buying industry and the sloppy mistakes they make when trying to collect on old credit card debt when they take people to court.  The Consumer Financial Protection Bureau (CFPB), a relatively new government agency, has taken an interest in oversight of the debt-buying industry and it may try to set standards for debt buyers to meet when they take people to court.  As the article points out, it’s a good idea to get an attorney when a debt collector is hounding you or trying to drag you into court, so that you have a fighting chance. The article is here.

Pennsylvania Congressman Matt Cartwright introduces interesting legislation to amend the Fair Debt Collections Practices Act (FDCPA):  The FDCPA protects consumers against some of the abuses of the debt-collection industry. But last year, the U.S. Supreme Court said that a consumer may have to pay the costs of the debt collector, where the consumer does not win. So Rep. Cartwright proposed legislation that would change the FDCPA to require that debt collectors can only be awarded costs where the consumer brought its lawsuit in bad faith or in order to harass. The press release is here.

On May 13, 2014, the FDIC announced that it settled its case against Sallie Mae, accusing the student-loan giant of unfair and deceptive practices and violations of the Servicemembers Civil Relief Act (SCRA).  Sallie Mae agreed to a consent order and to pay civil penalties of $6.6 mil. Sallie Mae’s violations include: Inadequate disclosure to student loan borrowers; distributing student loan payments across loans in such as way as to maximize late fees; misrepresenting and inadequately disclosing how borrowers could avoid late fees; and misrepresentations and inadequate disclosures to service members regarding their rights under the SCRA.  Sallie Mae is supposed to make “clear and conspicuous” disclosures about how to avoid late fees and to treat service members properly under the SCRA.  Here’s the press release.

This week, Adam Levitin has an essay in American Banker about forcing consumers into mandatory arbitration whenever a consumer wants to sue for a violation of consumer rights. Levitin argues that a consumer’s rights are not adequately preserved when the consumer is forced out of the court system and into arbitration.

See the essay here.

This Week’s Links

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Student Loan Interest Rates to Rise With Treasury 10-Year Note

 – The Congressional Budget Office predicts that interest rates on new Stafford and PLUS Federal student loans will rise for the 2014-2015 school year because Congress tied the rates to the yield on the Treasury 10-year note.

Democrats Plan Push to Refinance Student Loans 

 – Roll Call’s blog says that Sen. Elizabeth Warren of Massachusetts will introduce a bill on refinancing student loans as part of the Democrats’ election-year, middle-class agenda.

 – More on Sen. Warren’s bill here: http://www.masslive.com/politics/index.ssf/2014/05/sen_elizabeth_warren_introduci.html

 – And a good analysis of Sen. Warren’s proposal on Josh Cohen’s blog: http://thestudentloanlawyer.com/705/bank-on-students-emergency-loan-refinancing-act-in-plain-english/

Bankruptcy filing fee increases effective June 1, 2014:  

– The Chapter 7 filing fee will increase to $335 and the Ch. 13 filing fee will increase to $310.  Perhaps the court system is losing revenue due to the precipitous decline in bankruptcy filings over the past few years.

The NY AG is getting two debt buyers to vacate $16 mil. in bad debt-collection judgments

 – The NY AG has settled with debt buyers Portfolio Recovery Associates and Sherman Financial Group (including Sherman’s affiliate, Resurgent) to pay penalties and stop collection activities on certain judgments that they obtained even though the debts were time-barred in the state where the cause of action arose, whether that state was NY or another state with a different statute of limitations.  Kudos to the AG of New York.  May New Jersey learn from your actions.

Map of average student loan debt burden

 – The Washington Post’s blog has an interesting map showing where the average student loan debt is largest.  New Jersey is among the states with the highest levels of student loan debt.

And in celebrity bankruptcy news, Mekhi Phifer has filed for bankruptcy.