It costs a lot of money to go broke.  It really does. The cost of filing Chapter 7 in Nebraska is about $1,400 to $1,800 for the typical case, and many can never afford that cost.

To make matters worse, once a bankruptcy petition is filed with the court, attorneys are not allowed to accept further payment. As a consequence, bankruptcy attorneys must charge ALL their fee up front before the case is filed.  And that is a big problem for lower-income debtors.

How can a low income debtors afford bankruptcy fees when they are being garnished? 

And then I had and idea after viewing a self-help bankruptcy service called Upsolve. Would it be possible to offer a drastically discounted fee to review bankruptcy petitions prepared by the debtor? If debtors could input most of their petition online and provide us a draft copy, could we offer an inexpensive service to review their petition?

Chapter 7 can be dangerous and complicated, even for low income cases. Bankruptcy trustees appointed by the court must review every case filed and personally meet with with the debtor. Trustees are paid commissions to uncover unprotected property and transfers.  In other words, your mistakes equal their profits, and that is why it is extremely dangerous to file chapter 7 without an attorney.

And then I did the research.

So I researched if we could offer an inexpensive bankruptcy petition review service, and the court cases I read clearly indicate that attorneys may not offer limited scope services in bankruptcy.

In the case of In re Castorena an Idaho attorney set up a legal clinic that charged clients $250 to prepare a bankruptcy petition with the understanding that the client would file their own case and the attorney would make no appearance at the court hearing.  The Idaho bankruptcy court was not pleased with this limited scope arrangement and took away fees in 19 cases.  The court extensively explained why bankruptcy attorneys could never agree to such a limited representation.

  • Regardless of the propriety of the attempt to limit the scope of representation, the attorney was absolutely obligated to sign the petition under Federal Bankruptcy Rule 9011(a).
  • This Court agrees that there is no excuse for a lawyer, who counsels a debtor regarding a bankruptcy and prepares that debtor’s petition, schedules and related documents, to fail to sign the petition.
  • Attorneys must sign what that cause to be prepared.
  • A competent, ethical attorney is confronted with an extremely difficult, if not insoluble, dilemma when contacted by a client who is inclined to file for bankruptcy, but who, for whatever good reasons, does not want or can not afford “full-service” legal representation in the case. Can the attorney legally and ethically assist a client in prosecuting a bankruptcy case when the lawyer can not in good conscience conclude the would-be debtor is capable of analyzing, confronting and successfully overcoming the legal problems he or she may encounter in bankruptcy court?
  • Is consent by the client to a lawyer’s proposal to restrict services of consequence if the client is not equipped to appreciate the intricacies, and perils, associated with such a decision?

The court in Castorena is not alone in its opinion. Lots of courts have made similar rulings.  (See In re Ruiz, 515 B.R. 362,   “Where a law firm entered into a limited representation agreement with the debtor, failed to sign the petition, failed to formally appear in the bankruptcy case or directly file the petition, and failed to attend the meeting of creditors or provide other necessary services to the debtor, the law firm’s attempt to limit their services was prohibited by Bankr. M.D. Fla. R. 9011-1.“)

Solutions to the low income problem of filing bankruptcy.

So how does a lower income person who is being garnished filed bankruptcy?

File Chapter 13: The most effective solution is to file Chapter 13. Under a chapter 13 case a person must pay back SOME of what is owed, but payments can be as low as $100 per month and Chapter 13 cases can be filed for as little as $75 down.

Also, there are many extra benefits to Chapter 13.

  • Vehicle loans can be “crammed down” to the value of the vehicle and repaid at lower interest rates.
  • New medical bills may be added if the case is converted to chapter 7 later. In fact, if a debtor does not have health insurance or is anticipating lots of new medical bills in the near future, chapter 13 may be the preferred solution.
  • Recover Garnishments of the past 90 Days.  Another benefit of filing chapter 13 now is that it may allow a debtor to recover garnishments taken in the 90 days prior to filing bankruptcy. If one creditor garnished more than $600 within 90 days of filing bankruptcy, a debtor may be able to get that garnishment refunded.

The professional service provided by a paid bankruptcy professional should not be undervalued. A competent and properly compensated (Hmm . . . notice that the words “competent” and “compensated” are similar?) bankruptcy attorney will provide numerous benefits. They pull credit reports. They do background checks. They understand what bankruptcy trustees like to take away. They know how to stop garnishments quickly. They know how to retrieve garnishments of the prior 90 days. They know how to avoid judgment liens. They have experience to avoid the numerous pitfalls that await a pro se debtor. In short, a competent bankruptcy attorney should save a client more than the extra fee they charge many times over.

Need for new rules to assist low-income debtors.

Generally speaking, rules regulating bankruptcy attorneys should be few and clear.  Right now there is a lot of confusion about limited scope representation in bankruptcy cases. Courts are rightfully concerned about making it too easy for attorneys and others to provide limited services that basically dump complicated cases in the court that a pro se debtor is unable to manage.

Bankruptcy attorneys are rightfully reluctant to file chapter 7 cases for lower fees knowing they can’t and won’t be paid for services after the case is filed.

Unfortunately, that is the system we currently have and it will probably take new rules to help lower income debtors to file attorney-assisted cases for less money down if the court thinks it is wise to open the Pandora’s Box of problems that will necessarily follow.

 

Image courtesy of Flickr and Stephen Samuel

 

I recently returned to work after being a stay at home mom. When I quit working I stopped paying on one large credit card. They took this all the way to judgement and are now trying to garnish my wages with my new employer. I am a mortgage processor and am wondering if I file bankruptcy will it affect my NMLS? My second question is will I even qualify for bankruptcy at this point? The judgement is for about $10,000.  I can’t afford the $400 per paycheck garnishment. I’m going to see if they will take a settlement but if they don’t, bankruptcy is my only other option. I’m just worried I make too much money now to file bankruptcy. Any advice or experiences you’ve had would be great to hear. Just trying to figure out the best way to move forward.

The Nationwide Multistate Licensing System & Registry (NMLS) is the agency that regulates those who originate mortgage loans. Because these individuals handle sensitive financial information and are responsible for ensuring the integrity of our nation’s mortgage lending industry, mortgage originators are subject to many regulations that affect their license.

Generally speaking, the filing of a bankruptcy case does not threaten the license of a mortgage originator, but the filing of a bankruptcy must be reported on license applications and renewals. Some state’s require that a copy of the bankruptcy petition be provided along with an explanation of the circumstances surrounding the filing.

Income Requirements to File Bankruptcy.

There are income limits to qualify for Chapter 7 bankruptcy based on the size of a debtor’s household.  The income limits are adjusted every six months to stay current with the average income in each state, and the median income figures for Nebraska as of January 2020 are as follows:

1 Earner 2 People 3 People 4 People 5 People
$ 48,796 $ 68,061 $ 77,274 $ 93,747 $ 102,747

If your income is below these median income figures, you should qualify for Chapter 7 (unless it is abundantly clear that you have excess income available to repay a significant portion of the debt).  However, if your income is slightly over median income, a person may still qualify for Chapter 7 after taking into account such monthly expenses as mortgage payments, auto loans, health care expenses, etc.  In addition, not all types of income count, such as Social Security or Veterans benefits that are excluded from median income calculations.

Even if your income is too high to qualify for Chapter 7, you always have the right to file for the repayment bankruptcy of Chapter 13.  In Chapter 13 you repay  a portion of what you owe based on your income over a 3 to 5 year period of time, and the unpaid portion is discharged at the end of the case. While you are in Chapter 13 creditors may not garnish paychecks or bank accounts.

Is this enough debt to justify filing bankruptcy?

Given that your income is on the rise and that you question whether you even qualify for bankruptcy, it may be that working out a payment agreement or settlement with your judgment creditor may be the better option.

A good bankruptcy attorney not only helps guide clients through the bankruptcy process, but they actually help clients to avoid filing bankruptcy by working with creditors to set up payment plans and settlements. In fact, bankruptcy attorneys are usually the most effective attorneys to negotiate settlements since they routinely work with creditor attorneys on a daily basis.

 

Image courtesy of Flickr and WOCinTech Chat

“So I’m not great with adult life, I’m 22, I’ve came into work today for my boss to tell me there’s a court order in which they’re garnishing my wages to pay off a debt. The thing is I have no idea as to where this debt has come from. The only time in my life I’ve ever had a letter about a debt is from long ago. Never received any letters about a court order or what not prior to this news. PLEASE HELP THANKS IN ADVANCE!!”

 

It seems so wrong, but the first indication of owing a debt may be when a paycheck or bank account is garnished. Isn’t a person supposed to receive a copy of the lawsuit and have an opportunity to object before garnishments commence?

It may seem strange, but there are several reason you may not be aware that a judgment was issued against you:

  1. YOU MOVED:  It is common for creditors to deliver a copy of the court summons to your former address. They frequently are not aware that you moved and so they use the last address they have on file. And, since many folks are not home when the Sheriff attempts to deliver a copy of the lawsuit, creditors us a process called Alternate Service to have a copy of the lawsuit taped to your door and mailed via First Class mail.  But if you don’t live there anymore, you may never know that you were served.
  2. THE ROOMMATE FORGOT TO TELL YOU:  The Sheriff may serve the lawsuit on any member of your household of suitable age. There is no strict definition of what a suitable age is, but the papers may be served on any person who resides in the home and who seems responsible.  So if your clueless roommate or child accepted the papers and just forgot to tell you and threw the papers behind the sofa, you may not have know that you got sued.
  3. SERVICE BY PUBLICATION:  When creditors cannot get the papers personally served by Sheriff delivery or Certified Mail, they may ask the court to allow them to serve notice by publishing a notice in the local newspaper.  Unless you read the newspaper–and who reads a newspaper these days–you would have been unaware of the lawsuit.

I once had a client whose 10-year-old daughter was given the court summons by the Sheriff.  As you can expect, the kid totally forgot to tell his mom and she was shocked to discover a judgment lien was placed against her home.  Is a ten year old mature enough to accept service of summons? Apparently so in the eyes of one sheriff.

VACATING A DEFAULT JUDGMENT:

So what does a person do when they first learn of a judgment when a garnishment is received? The answer is to file a motion to vacate the judgment.  For more information on that procedure, refer to this article on How to Vacate a Default Judgment.

 

Image courtesy of Flickr and Paul Boudreau

 

 

 

 

My parents passed away a year ago. I was estranged from them. My sister was the sole beneficiary of the estate and I was told I was getting nothing. I had my meeting with the bankruptcy trustee today and the trustee asked if I was expecting any inheritance in the next 6 months. I said no. I got home and my sister said she sold our parent’s house. She wrote me a check for a share of the proceeds. I was not in any way shape or form expecting this money. What should I do??

The starting point to understand this question is found in Bankruptcy Code section 541(a)(5)(A):

The bankruptcy estate is comprised of all the following property, wherever located and by whomever held of any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date . . .by bequest, devise, or inheritance.

In short, any inheritance a debtor becomes entitled to within 6 months after a case is filed is considered property owned on the date the case was filed. In other words, if a person dies within 6 months after a case is filed and leaves the debtor an inheritance, that must be reported.

In this case, the debtor’s parents died one year before the bankruptcy was filed and she did not expect any inheritance, so it is doubtful she reported any inheritance to the bankruptcy court when the case was filed.

What is not clear from this question is why her sister wrote her a check from the sale of the home. Did she write a check because the debtor was entitled to the money or did the sister just feel it was the right thing to do and made a gift of her inheritance to the debtor?

If the debtor was entitled to the money because of her parent’s Will or Living Trust, then the inheritance must be reported to the bankruptcy court.

On the other hand, if the sister was just being generous, the debtor’s duty to report the money will vary on whether this is a Chapter 7 or Chapter 13 case.

If the sister merely made a gift and this is a Chapter 7 case, there is probably no duty to report the gift. However, if this is a Chapter 13 case, in addition to the duty of reporting inheritance a person becomes entitled to within 180 days after the case is filed, a debtor also has a duty to report income received during the case, and a sizable gift from a sister is probably income that should be reported.

As a practical matter, it is best to report all sizable money receipts to the bankruptcy trustee while the case is open, regardless if a duty to report that receipt exists.  I once had a client who won a $500,000 lottery about 30 days after his Chapter 7 case was completed.  Was it inheritance? No. Was there a duty to report the winning? Probably not.  Still, we reported the winning and the trustee replied that the debtor should enjoy the money.  We all felt better since now we knew for certain that money was not owed to the bankruptcy court and my client could fully enjoy his winnings.

Bankruptcy Estate Includes Inheritance but not Payable on Death Benefits.

The 180-rule about inheritance only applies to property received by bequest, devise or inheritance.  Those three legal terms deal with gifts from a Will or Living Trust. But what about Payable on Death (POD) accounts?  If a debtor receives money as the beneficiary of a POD account within 180 days after filing bankruptcy, must that be turned over to the bankruptcy trustee?

The Northern District of Iowa bankruptcy court answered that question a few years ago in the negative.  A POD account beneficiary has not received a bequest, devise or inheritance.

Image courtesy of Flickr and Beta-J

photo by CafeCredit

Here is the question posed in today’s Reddit debt column.

 

“So, as the title says. In total, between a few credit cards and a personal loan through Lending Club I owe about $25,000 in debt. Never missed a single payment in my life, never even been late with one. But my credit has gone way down simply due to the utilization ratio. Somewhere around 90% of my cards are maxed out and it’s dropped me down to a score of just a bit under 600. Simulations on Credit Karma say that If I can get it back under 30% I’d go up to somewhere between 720 and 780 though. So it’s really just my utilization causing me problems. And the insane interest rates on the cards are obviously making them super hard to pay off.

So I was shopping around for another personal loan like I got with Lending Club before but none of them want to help me anymore with my lower score.

Instead I keep getting companies trying to bait & switch me with these flashy “Debt Consolidation” plans.

So I just talked to one for a while (from Simple Path) and she explained all the benefits and advantages and how I’d be “debt free” from the start. Made it sound pretty enticing actually. Until she started telling me about how I’ll have to “ignore the harassment from my current creditors…”

She said I have to stop paying my cards and pay them instead and then eventually they pay off my creditors at a lower rate and at that point, then everyone’s happy again?

Like, is this a scam I’m being roped into? I want my credit to go back up, not get oddly manipulated by a random company that sent me a flyer…

Can someone give me some advice please? She’s calling me back tomorrow but do I have any better options without killing my payment streak?

I’ve seriously considered just walking into a bank and explaining my situation and trying to get a loan the old fashioned way but I don’t know if they will for someone with less than a 600 score. Even considered trying to get a car loan for something like a Porsche so I can pay off my cards and get something cheaper instead.

Or should I just stay on my grind and try to do this myself?

Sounds like a kinda nice deal considering she says the utilization rate is 50% impact compared to the payment history only being 10%. Like, if they actually get me out of debt and lower that utilization for me then my score could shoot up back to 700 like the personal loan did last year but at the same time I don’t want a bunch of missed payments on my history for life.

I just have to do something fast cause I can’t save any money for emergencies with these payments and have no space on the cards left to pay if it happens. That 25% interest rate is stressing me out to the max.

What’s my best option here to get out of debt and stay out forever? Gonna cut up most of the cards when they get paid off. Can’t wait.”

How do you get out of a $25,000 credit card debt?  

I’m going to assume that income is not the problem here as much as an out of control spending problem. In fact, if you read between the lines, this writer is more concerned about the decline of his credit score–i.e., about his ability to borrow more money–than he is about being $25,000 in debt.

Option 1: Credit Card Consolidation Loan:

This option may be valid if you have a really high credit score and can benefit from a loan that consolidates several high interest rate accounts into a single lower interest rate loan spread out over a longer period of time.  If a person can refinance $25,000 of credit cards with a minimum monthly payment of $800 to a lower interest rate loan requiring $500 per month, that is often a smart move.  But this borrower states that his credit score has dropped to below 600 and it is doubtful that an affordable consolidation loan is available.

Option 2: Debt Settlement Company.

The borrower was rightly concerned about the flashy claims of a debt settlement company. These programs almost never work. The idea that you can simply stop paying on credit cards and settle the accounts for pennies on the dollars is just a lie. Most credit card companies will start legal proceedings once an account has become more than 6 months delinquent, so unless you have saved up a minimum of one-third of the credit card debt within 6 months of stopping payments, the settlement program is doomed to failure. However, at first the program seems like it is working, especially when these flashy companies settle small balance accounts in the first few months. But in time you realize the program will fail as you begin to be sued and garnished for the unpaid accounts.  Debt settlement is a real debt solution, but only if you have cash on hand to settle the account.  Starting from zero savings to settle $25,000 of debt is just not realistic.

Option 3: Debt Management Plan.

This is the most realistic option for this debtor.  Under a reputable debt management plan (DMP) sponsored by a National Foundation for Credit Counseling member, such as GreenPath (formerly known as Consumer Credit Counseling Services of Nebraska), credit card debts are consolidated into a monthly payment plan that reduces interest rates to about 8%.  Since the debtor’s current credit score is less than 600 he is unlikely to find a loan offering such a low interest rate and this is his best option to get out of debt.

However, 60% to 75% of debt management plans fail, unusually because the debtor cannot afford the monthly payment. Credit counselors, who are trying to make a buck themselves, tend to enroll too many clients into payment plans they cannot afford.  What most debtors lack is an emergency savings account, and without such savings these payment plans tend to crash and burn.  So, enrollment into a DMP should be limited to those who can afford the payment and who have emergency savings that they continue to build each month.  As a general rule, do not enter a DMP until you have $1,000 in savings.

Option 4: Stop paying credit cards until they agree to lower the interest rate.

This option is not used enough. There is really nothing a credit counseling agency does that you cannot do yourself if you have the courage to stop paying the credit cards until the bank agrees to lower the interest rate. Banks will not lower rates or offer special payment plans until the account is in default. So, sometimes skipping a payment or two will “wake up” the bank and force them to take your debt problem seriously. Obviously, such radical action will cause your credit score to drop dramatically, but you can demand that you will not resume payments until their negative reporting is removed and the account is shown to be in good standing. I’ve seen banks completely drop all interest charges and rewrite accounts to fixed payment debts once the borrower got tough and refused to pay until a satisfactory payment agreement was reached.

Option 5: Consider bankruptcy options.

This particular debtor seems to have income that would allow him to repay his debt, but sometimes that picture is unclear.  What makes him able to repay the debt? Is he paying his student loans or is he deferring them? The practice of deferring student loan payments until credit cards are paid is very unwise since credit card debts may be discharged in bankruptcy but student loans generally cannot be discharged. Is the debtor saving for retirement in his 401(k) plan? A lot folks say they can afford to pay their debts, but really this is only true because they are not saving for retirement or they have no health insurance or they are deferring student loan payments.  If that is the case, perhaps bankruptcy may be the wiser choice since a bankruptcy budget does allow for retirement savings, health insurance premiums and student loan payments.

Image courtesy of Flickr and CreditCafe.com

 

In today’s mailbag . . .

“70k in student loans–feeling lost

When I graduated high school, I felt invincible. I was a smart kid, so I thought I’d definitely find a good career someday. I had lots of dreams of becoming a roboticist, doctor, dentist, or anything challenging that I could feel proud of.

Flash forward to 2020, I’m 25 years old. I have a Bachelor’s degree in math from a small, unknown school, and I’m working as a behavior technician–bringing in about $1200/mo. My loan repayment is $650/mo and once I turn 26, I’ll have to get health insurance (approx. $450).

I feel so screwed.

Yes, I know I can set my loans to a longer-term plan to have smaller monthly payments. But even with that, I still need money for a new car. I have no savings. No retirement.

I’m smart, and I have big dreams, but I feel so crushed right now.

I’m about to apply to grad school in clinical psychology. Hopefully I can get into an affordable program. Wish me luck. I hope I don’t drown in this debt.”

 

Dear Feeling Lost:

You got used by the Industrial Educational Complex.  Yep, you wanted that college experience, and damned if you didn’t get one.  70k to get a generic degree in mathematics?  I’m pretty sure math today is still the same basic subject it was 100 years ago.  It’s a classic, and your knowledge could have been obtained for free just by reading library books and buying a few notepads.  But you got scammed into believing that if you went to that magical kingdom of a small college that you would come away as this shinning knight the world would embrace.  Yep, you got used. Welcome to life.

Okay, you have work to do, but it’s not that bad.  You’re 25.  (Dang, I’d pay you 70k cash if I could be 25 again, even with 70k of debt.) You are obviously a smart dude since math is no walk in the park. Your income is on the way up, and you now see the benefit of getting an advanced degree. But obviously you should be leery of taking on more student loan debt and I would advise that you try to pay for school without taking on additional debt.  You could have got your math degree cheaply at a community college and I see  no reason why your next degree should be expensive.  Honestly, in 25 years only a handful of clients every asked me where I got my degree.  It’s your personality and knowledge that matters, not where you got the diploma. Any accredited school will do.

 

OPTION #1: Refinance the Student Loan over 20 Years.

Most student loans are payable over 10 years. The name of the game is to keep the payment affordable. So, your best option is probably to consolidate all your loans into a Direct Loan issued by the Department of Education payable over 20 years.  As your career advances and your income increases you can always pay more each month, but for now the goal is to keep the loan affordable and reduce principal each month.

OPTION #2: Income-Based Plan (IBR).

If you have federal loans, a popular option is to apply for an Income-Based Payment plan.  In these programs all you to repay what you can afford over a 10 to 20 year period of time. At the end of the payment plan the unpaid balance is forgiven.  The benefit of this program is that the monthly payment is based on your income and household size, and if your income is really low the payment can be zero.  But, the danger of this program is that if you are not paying enough to cover monthly interest accruals, the balance of the debt actually goes up over time (what they call “negative amortization.”)  Also, the vast majority of folks who enter these programs never complete them and they default at some point and wind up owing more than when they started.  I’ve actually never met a person who completed this program, and the Department of Education has recently been involved in a scandal of not discharging loans for those who completed the 10-year Public Service program.  So, I’m not a big fan of this program and in your situation I would advise against it.

College Career Counselors make Used Car Salesmen look honest.

It took a few decades, but eventually trial lawyers took down the tobacco industry for their lies about the harm of smoking. But what about colleges and universities, can they be held liable for mispresenting the income a graduate will likely earn to be able to repay student loan debts?

With only minor exceptions, colleges and universities have not been held liable for misrepresenting the economic value of their degrees.  How long with this last? Courts have been slow to impose liability, but these schools are loading up young and naïve kids with debts they can never repay.

There is no underwriting in student loans (i.e., there is no standard analysis of whether the borrower can repay the loan.)  There is no risk analysis at all. No federal guideline exists to protect students from loans that they will be unlikely to repay. Why is that? Our federal banking regulations go to great length to protect borrowers from unwise mortgage loans (a loan backed up by collateral), but virtually no regulations to protect 18-year-old kids from unsecured loans that often greatly exceed the cost of buying a home! How does that make sense?

The educational industrial complex is ruining young lives and is lying to students and parents about the value of their product and danger of incurring large debts.

 

Image courtesy of Flickr and Yutaka Tsutano.

Payday loans have infiltrated every neighborhood and income level.  And what starts out as an emergency loan to cover a temporary cash shortage can turn into a cycle of obtaining new payday loans to pay off older loans.  And so it begins, a process of going from one payday lender to another.  An entire day can consist of making the rounds from one lender to another just to get by another week.

Nobody intends on becoming caught in the high interest rate trap of payday loans, it just happens over time.  It’s a temporary thing to pay bills and fix the car until that cash comes in from a tax refund or the next paycheck.  Everyone knows that payday loans charge in excess of 400% interest and that they are bad deals, but it’s just temporary until the cash comes in.  No one intends on getting caught in the trap of not being able to repay the loans, it just happens.

And when it is clear that you cannot honor that loan, what do you do? Well, you find another payday lender.  And that solves the problem for another week.  But when that check comes due, you seek yet another, and then another, and still one more.

At some point you realize you are trapped in an interest rate cycle that will not stop, but what do you do? How do you get out of the trap?

A recent client came to me with $8,000 of payday loans with interest rates averaging 400%. It would cost $32,000 a year to just to pay accruing interest without reducing any principal.  He hit the wall and just could not continue the cycle.  He had no other debt–just payday loans that got out of hand. So what were his options?

1: STOP PAYING THE DEBT.

The truth is, payday lenders fully expect their customers to stop paying at some point.  And until they stop paying they will pressure and threaten their customers.  Threats of lawsuits and judgments and garnishments and even criminal prosecution for writing bad checks.  That’s how they make money.  By the time the customer quits paying they have fully paid every dollar borrowed many times over.

Payday lenders are fully prepared to work out reasonable payment terms with their customers, but not until the customer stops paying and makes it perfectly clear they will no longer be a victim.

2: BRACE FOR THE PHONE CALLS AND LIES.

When you stop paying the payday loan, you will get calls.  At first the calls are “did you forget to pay us?” and then later  they become “you are going to jail for writing a hot check!” and “the Sheriff is coming to your work to serve papers and arrest you!”

This is why it was so hard to stop paying, because you believed their lies and worried that you would go to jail.

Know this: it is not a crime to default on a payday loan. A post-dated check written to a payday lender is not the same thing as a check written to a grocery store.  When you buy groceries with a check you are representing to the store that there are funds in the account now, but when you give a post-dated check to a lender you are saying there are no funds in the account to honor the check today.  There is no representation that the check is good today, therefore there is no crime if the check bounces.  The post-dated check is a loan, not a representation of funds on hand.  That is the key difference. But payday lenders will lie to you and say you committed a crime when the check bounces so you panic and pay them. Ignore their empty threats.

3: DEMAND A REPAYMENT AGREEMENT.

When payday lenders call tell them you cannot honor the old agreement and that you want a new deal. You cannot and will not pay another dime unless you receive a written payment agreement that you can afford.

This step requires that you figure out what you can honestly pay each payday to pay off the debt. And you must figure out this answer not just for one debt, but for all the payday loans.  What is the total you can pay towards all the payday loans each payday?  How many paydays will it take to pay back the principal owed on each loan? Whatever that answer is, offer that and make no further payments until they agree.

4: EXPECT TO BE SUED.

More likely than not, you will be sued when you default on the payday loan.  Don’t look on that as a bad outcome. Why not? There are two good things about being sued. First, you can now deal with the lender’s attorney and offer to pay back the debt at a level you can afford. Those attorneys are often paid in commission and they generally favor any solution that results in a repayment of the debt.  Second, even if the payday lender obtains a judgment, the interest rate on a Nebraska judgment is usually less than 10%.  You will find it much easier to repay a judgment at 10% interest than to pay the original loan at 400%.

5: OFFER A CASH SETTLEMENT.

When you stop paying payday lenders the door to a cash settlement opens up. If you are able to tap into a source of cash (time for a garage sale?), offer the lender 50 cents on the dollar if they will send you a settlement letter.  NEVER pay a settlement until you receive a signed settlement letter.  At first the lender may balk and threaten to garnish wages.  Just smile and tell them to get in line with the other dozen creditors who called this morning.  Stand firm.  No settlement letter, no payment.  There is no need to raise your voice or to convince them of anything.  If they refuse just hang up and wait for their next call.  Eventually they will either sue or settle, and you shouldn’t care which option they choose since you win either way.  Act like you don’t care and they will take you seriously.

6.  SPEAK TO A DEBT MANAGEMENT PROFESSIONAL.

The way you look at a financial problem and the way I review them is completely different. You are trying solve the immediate chronic pain you are facing, but I’m taking a much wider and longer perspective.  If you owe one $500 payday loan, that is small problem that goes away, even if you are freaking out about it now.  I want to know the larger problem. It’s not just about today’s problem but a question of your trajectory.  My office is a supply house of financial band aids along with an intensive care unit. When you are hurting you lose perspective, and what we do is to measure the severity of the problem and recommend the correct course of action.

Payday loans are usually the tip of the financial iceberg that reveals a much deeper problem. Payday loans are usually obtained when other sources of credit have run out, so we need to look at ALL of the debt, not just the payday loans.

Payday lenders may spook you, but not us. In fact, we tend to spook them since we discharge their debts in bankruptcy and know how to defend against their collection lawsuits.

Okay, it’s your turn.  Let’s light up this article with good comments. When you ask questions on this blog it not only helps you but it helps other readers.  I love questions. Fire away.

 

Image courtesy of Flickr and Jason Comely.

 

 

 

 

It has never been more dangerous for business owners to file Chapter 7 bankruptcy in Nebraska.

New rules now require that business owners prepare special valuation reports to provide more information about the assets of their business.  Chapter 7 Trustees have the power to sell unprotected assets, and they are demanding special reports showing the annual revenue of the business and the value of the business inventory, equipment, real estate and accounts receivable.

Companies with significant revenue and assets will be put under the microscope, even if the net value of those companies is negative.

In short, the trustees want to know the scope and size of the business. How many employees and contractors are employed? What is the the gross monthly revenue? Are there any liens on the company assets? If the company liquidated all its property, how much cash would exist?

These new business reports will help the trustees to identify possible targets. Companies with significant revenue and assets will be put under the microscope, even if the net value of those companies is negative.

REPORTING THE VALUE OF A BUSINESS INTEREST ON BANKRUPTCY SCHEDULES:

What is the value of a business? In most cases, the value a debtor’s business is based on a balance sheet approach. If the debts of a company exceed the assets, the company is normally valued at zero. Conversely, if the assets exceed the liabilities the company is valued at the net difference. In most cases a debtor’s business corporation has debts greatly exceeding company assets and the ownership interest is zero. The general feeling is that a company with a negative net worth is protected in Chapter 7, but that concept may not always be true.

NEW CONCEPTS IN BUSINESS VALUATION:

Assume a debtor owns a small business corporation with $50,000 of assets and $100,000 of liabilities.  Traditional thinking is that the company ownership is safe in Chapter 7 since the company has a negative net worth.

But net value concepts may be lacking. Nebraska law only protects up to a maximum of $5,000 of stock ownership.  You would think that stock in a company with a negative net worth is therefore protected, but that is not how stock is valued.  The price of stock ownership is based on what an investor is willing to pay for its ownership, not necessarily what the net value of a company is. In fact, many companies listed on the New York Stock Exchange sell for prices greatly exceeding the stock’s net value per share price.

Value to Competitors:

Assume the above company is based in a smaller community with only one other significant business competitor.  How much would the competitor be willing to pay to own the debtor’s stock? More than the $5,000 protected exemption limit?  Chances are a competitor would be willing to buy the company’s stock to take over ownership of its main competitor and its customer list.  Clearly the company stock is worth more to that investor than just the mere net asset value.

Value to Liquidators:

Assume the $50,000 of business assets above are free of liens.  The company is still insolvent since total debts exceed total assets, but the assets can be sold to generate cash since no lien is present.  What would an investor pay to own stock in a company that could be liquidated for $50,000 in cash? Yes, that cash would have to be applied to the $100,000 of company debt, but administrative expenses–wages of corporate officers in particular–are paid before general creditors.  So the new owner could pay a generous executive salary greatly exceeding the stock purchase price to handle the task of closing down the company. In addition, perhaps the new owner could negotiate with creditors to pay them, say, 25 cents on the dollar for their debt, thus generating a positive $25,000 net asset value for the company.

Value of Company Name, Customer Lists, Customer Contracts & Phone Numbers:

Although a company may have a negative net asset value, there is an independent value to the company’s name, customer list, customer contracts and telephone numbers. Any company that has been existence for a long period of time develops a reputation in the community and probably has a long customer list. The company may have value beyond the auction value of its assets.

Piercing the Corporate Veil in Reverse:

The legal concept of a corporation is that it has a separate legal identity from its owner. But creditors may disregard the corporate form and pursue its owner for a debt if the formalities of operating as a company are not followed. Were corporate tax returns filed and paid? Did the company conduct annual stockholder and board of director meetings to elect new officers? Does the company use a separate taxpayer identification number? Are company assets and funds comingled with the debtor’s personal funds? In short, was the company really operated as a company? If not, there are cases in Nebraska courts where the company fiction is disregarded and creditors were able to reach the assets of the company.

The takeaway here is that Chapter 7 Trustees are looking intently for companies with hidden value and net asset value is not the only measure of a company’s worth. Debtors who own a substantial business may be well advised to consider the safer options of Chapter 13 or Chapter 11 bankruptcy to protect their business operations in Nebraska.

Image courtesy of Flickr and Kevin Dooley.

In finance, and in life generally, there are steps and elevators.

Steps and elevators take us to where we want to go.

When it comes to money, eventually we want to wind up in a nice place. A paid home. A retirement fund. An opportunity to slow down and enjoy the fruits of our work. An opportunity to help others financially.

Money elevators are rare. You receive an inheritance, or win the lottery, or marry that rich person. Few people get to ride money elevators.

Most of us climb the steps. And the financial steps of our lives are called paychecks.

We normally are paid twice a month, or about 25 times a year.

Each decade has 250 paychecks.  250 steps.

Today you are here.  Tomorrow you want to wind up there.  How many steps are left?

This is why it is critical to know what “there” is in great detail. Because if you don’t know how much “there” costs, then you don’t know how much of today’s paycheck must be set aside for that goal.

When you know the price of the home you want paid in 20 years–in 500 steps–then you are informed about what you must do today.

Knowing where you want to be in the future informs you of what you must to do today.

But when you do not know where you want to wind up–when your goal is not specific–you wander. You try this and taste that. You go in circles.

Identify where you want to wind up being. Measure the paycheck steps left in your life. Make every step count.

The more steps you have left, the smaller each step is.

Paychecks are steps towards your future. Make every step count.

 

Image courtesy of Flickr and ~jar[]