A new report entitled Understanding Evictions in Omaha written by Creighton University professors Pierce Greenberg and and Gary Fischer outline the devastating impact evictions have on the Omaha community.

Evictions cause a loss of “social and community capital.”  High eviction rates are related to increasing crime rates and cause poor educational performance in schools. They cause a severance of supporting relationships that exist in all neighborhoods and can set off a cycle of social destruction that is difficult to break.

Residential stability begets a kind of psychological stability, which allows people to invest in their home and social relationships. It begets school stability, which increases the chances that children will excel and graduate. And it begets community stability, which encourages neighbors to form strong bonds and take care of their block. – Matthew Desmond, author of Evicted

The report describes Omaha’s eviction scene with many statistics and observations:

  • 39,346 eviction lawsuits were filed in 8 years between 2012 to 2019.  That equals 410 evictions per month.
  • 28,226 of those lawsuits resulted in a family being evicted.
  • Omaha has a 3.66% Eviction Rate per 100 rental units per year.
  • Omaha ranks 271st out of 274 U.S. cities on a measure of racial inclusion according to data from the Urban Institute.
  • Evictions predominately occur in older areas of Omaha with higher rates of low income housing and minority populations.
  •  Many eviction “hot spots” represent large apartment complexes or public housing facilities.
  • The interconnected nature of race, income, and evictions helps illustrate how important housing and residential stability is to reducing racial and economic disparities in Omaha.
  • The number of evictions in an elementary school attendance area correlates with student learning outcomes.
  • Only 1 out of 394 defendants were represented by an Omaha attorney.

The connection between high rates of evictions and societal problems in education, crime, jobs, income and family stability is overwhelming.  And, these Creighton professors have some suggestions to combat that problem.

  • Focus on eviction hotspots.  Omaha Housing Authority represents 7% of the eviction lawsuits filed in Omaha. Focus should be given to finding alternative dispute resolutions to reduce eviction rates.
  • Right–of-Counsel-Programs.  New York City initiated a program in 2017 to appoint attorneys to represent low-income tenants in eviction proceedings.  84% of defendants who were provided counsel were able to remain in their residence.

Will filing bankruptcy stop an and eviction in Nebraska?

Filing any type of bankruptcy in Nebraska temporarily stops an eviction.

Chapter 7 bankruptcy cases are short cases completed in roughly 100 days.  There is no payment plan associated with these cases and there is no power to cure a rent default, but the filing of a case will temporarily delay an eviction for probably 30 days.

Chapter 13 cases have more power to address eviction issues.  In addition to imposing a temporary stay of an eviction lawsuit, chapter 13 plans have the power to cure a lease default.

Section 1322(7) of the Bankruptcy Code allows a debtor’s payment plan to assume an unexpired lease and cure a default, however, this right is subject to Section 365 of the Bankruptcy Code, which provides:

  • If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such contract or lease unless, at the time of assumption of such contract or lease, the trustee—
    • Cures, or provides adequate assurance that the trustee will promptly cure, such default  . . .
    • Compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and
    • Provides adequate assurance of future performance under such contract or lease.

So, an Omaha bankruptcy attorney can help tenants to stop an eviction lawsuit IF they have the ability to cure the default promptly and to make future payments on time.  How prompt must the cure payment be? There is no hard rule, but I suspect curing a default over 60 to 90 days is probably considered a prompt payment.

 

COVID-19 is a wrecking ball destroying small Nebraska businesses, but at some point the medical crisis will end and the debt crisis will take off.

So far the damage has been mitigated by programs such as the Paycheck Protection Plan, but business revenues have dropped dramatically and consumer spending is not likely to return any time soon. Emergency funds have been depleted, worker layoffs have been instituted, but fixed expenses for rent and loan payments remain.

At some point a business just needs to start over.  Assuming the core business model is valid and revenues will return when the health crisis ends, how does the owner address the overwhelming debt?

Is it better to file a Chapter 11 and restructure the debt or should one abandon the insolvent entity and incorporate a new debt-free company?

It is my general preference to abandon the old company and to start fresh with a newly incorporated entity. Why? Because resurrecting a debt-ridden company in Chapter 11 is darn expensive and, in most cases, unsuccessful.  So one must question why they want to keep the old entity alive.

Why can’t an owner just incorporate new company? The cost of incorporating a new company is relatively cheap, but filing Chapter 11 is a massive and expensive process fraught with complexity and litigation. Only a very small percentage of companies emerge from Chapter 11 with a discharge of their debt. Most cases fail and are dismissed, leaving the owner worse off than when they started.

So, it is important to evaluate the facts that tend to support or not support filing Chapter 11 instead of just walking away from the old company and starting a new debt-free company to resume business affairs.

Factors favoring restructuring the existing company in a Nebraska Chapter 11 Case:

  • Assets owned by the company.  Some companies own very special assets that cannot be abandoned.  Assets that produce current and future revenue.  For example, if a company owns McDonalds franchise rights, you wouldn’t want to abandon that property right. In cases where a company owns a special property right that is hard to duplicate or transfer, it may be wiser to restructure the existing company than to start up a new company.
  • Leasehold Rights.  When it comes to real estate, it’s all about location, location, location.  A restaurant or store with a long-term lease in a high demand area of town may need to protect that leasehold right in Chapter 11.
  • Accounts Receivables.  Even though new revenue may have dropped in recent months, a company may have substantial receivables that will be paid out over a long period of time.  Receivables owed to the existing company cannot be transferred or collected by a newly incorporated company without fair consideration being paid to the former.  So it might make sense to file Chapter 11 to protect and preserve the cash flow provided by unpaid receivables to finance current operations and employee salaries.
  • Equipment.  A business that has a lot of industrial equipment and machinery may not be able to function or provide new services without that equipment. Unless a new company can acquire replacement equipment quickly, it may be best to file Chapter 11 to protect the equipment that generates revenue.
  • Unfinished Work and New Contracts.  Perhaps a business is in the middle of a large contract and payment depends on completing the project. Perhaps a business has signed several new contracts with work to commence in the near future. Abandoning the old company may not be the best option in these situations.

 

Factors favoring abandoning the old company and incorporating a new one.

  • You are the company and the company is you.  Customers of a popular hair stylist are likely to follow them no matter where they are located, and such a business has few hard assets or receivables. It makes little sense for such a business to file chapter 11.
  • The company has few receivables. Restaurants and hair stylists and car washes have few receivables.  Future cash flow is not dependent on collecting unpaid accounts but rather is based on new work in the future.
  • The company has few fixed assets.  Consider a drywall installer.  Business assets consist of a few hand and power tools and perhaps a work van. It is not much of a burden to replace those assets, and it makes little sense to pay substantial bank loans even if they are secured to the business equipment.  It is far less complicated and expensive to start a new corporation and to buy replacement equipment.
  • The company needs to downsize and relocate.  Reducing overhead and paring back leasehold square footage to more manageable levels is the order of the day.  Consumer spending is likely to stay at lower levels for years to come. Do you really need all that warehouse space? Is a cheaper venue available? Will employees start working from home? When current leasehold commitments are excessive, abandoning the old company may make greater sense.

 

Personal guarantees and liability of the owner.

Regardless of whether the business files Chapter 11 or simply opts to form a new corporation, the business owner may face a personal debt crisis for company debts due to loan guarantees. Most bank loans and lease agreements require a Personal Guarantee from the owner, so in addition to a restructure of the company’s debt, the individual owner may need to look at bankruptcy options as well.  A bankruptcy filed for the business corporation does not relieve the personal liability of the owner for loan or lease guarantees.

For help, contact a qualified Nebraska Chapter 11 attorney.

 

Image courtesy of Flickr and Haldane Martin

The COVID-19 virus has caused millions of Americans to file unemployment claims, and the federal government has increased state unemployment benefits by $600 per week though July 2020.

May a creditor garnish unemployment benefits in Nebraska?

Nebraska Statute 48-647 states that “benefits received by any individual, so long as they are not mingled with other funds of the recipient, shall be exempt from any remedy for the collection of all debts, except debts incurred for necessaries furnished to such individual or his or her spouse or dependents during the time when such individual was unemployed.”

Two things stand out in this exemption law.

First, if unemployment funds are mixed in an account with other funds, the protection may be lost.  Second, judgments for new necessaries (i.e., medical debts) incurred after unemployment begins may garnish unemployment funds.

MAINTAIN A SEPARATE BANK ACCOUNT FOR UNEMPLOYMENT BENEFITS

The key thing to protecting unemployment benefits in Nebraska is to keep those payments in a separate bank account.  It appears that many Nebraskans now receive benefits on a debit card called a “ReliaCard.”  Since the funds on this account are not mixed with other funds, the account funds are exempt.  But, if your unemployment funds are deposited into your regular checking account that contains other funds or deposits, you may want to open another account to hold the unemployment funds. When unemployment funds are comingled with other funds, the exemption protection is lost.

WHAT SHOULD YOU DO IF A CREDITOR SENDS A GARNISHMENT SUMMONS TO YOUR BANK?

What happens if garnishment summons is sent to the bank holding your unemployment benefits? Since the funds are exempt under Nebraska statute 48-647, is the garnishment automatically denied?

No! Even though an exemption law exists to protect unemployment benefits, you must claim your exemption rights and demand a hearing on the garnishment.  Nebraska’s exemption laws are not self-executing.  They exist, but you must file an application with the court to assert those rights.

STEP #1: REQUESTING A GARNISHMENT HEARING

If your bank receives a garnishment summons, use this form to request a hearing.  Check off on this box: “(1) the funds asked for are exempt from garnishment.”  This form must be filed with the Clerk of the Court.  The address of the court should be on the top of the garnishment summons.  The form must be signed and you should enter the case number on the form.  You can mail this form to the court or bring it directly to the courthouse.

STEP #2: CLAIM YOUR EXEMPTION

At the same time you file the Request for Garnishment Hearing form, you should also file a form to claim your exemption. Requesting the hearing is not enough.  You must also tell the court what law protects the unemployment benefit.  This Claim of Exemptions Form will should be completed, signed and filed with the Clerk of the Court at the same time you request the hearing.  On that form you will need to write in “Unemployment Benefit Exemption, Nebraska Statute 48-647”.

OTHER FUNDS ARE PROTECTED BY THE WILDCARD EXEMPTION

If you have other funds in a bank account being garnished, the Nebraska Wildcard Exemption of 25-1552 protects account funds of up to $5,000.  Regardless of the source of the deposit–wages, gifts, tax refunds, unemployment, etc,–the Wildcard exemption protects a bank account funds up to $5,000.  For most people that exemption law is all they need.

The problem with Nebraska’s exemption scheme is that it is too complicated to apply.  Yes, we have very good exemption laws, but almost nobody understands how to apply them, and Nebraska judges are often confused and surprised that bank account funds can be protected.  They rarely conduct exemption hearings and frequently deny exemption requests when the funds are clearly protected.  When your local judge does not know how exemption laws work you have a problem.

Are unemployment benefits exempt?  Yes, if you apply for a garnishment hearing and assert your exemption rights.

 

Image courtesy of Flickr and Sarah Mirk

 

Presidential candidate Joe Biden recently came out in support of Senator Elizabeth Warren’s bankruptcy reform plan, which is somewhat embarrassing because she is basically proposing to nullify the Bankruptcy Reform Act of 2005 championed by Biden.

Our nation is at the beginning of a COVID-19 Recession that, once again, is dragging the bottom 60% of Americans back into the mud of economic turmoil.  If Biden should win the election it is highly likely that bankruptcy reform legislation lead by Senator Warren is coming our way in the near future.

What exactly is Elizabeth Warren proposing? Details of her plan are lacking, but here is basic list of her plan.

#1 Abolish the Means Test

The 2005 Bankruptcy Reform Act attempted to deny Chapter 7 for higher income debtors by requiring them to submit a statement of their average monthly income earned during the six months prior to filing bankruptcy.  That average monthly income figure was then multiplied by 12 to come up with an annualized income figure.  This calculation is what we call the Means Test.

Debtors with annualized income exceeding the Median Family Income in their state find it much more difficult to file Chapter 7.  Instead, such debtors are forced to repay a portion of their debt in expensive Chapter 13 cases.

Preparing a Means Test is time consuming and expensive. It requires bankruptcy attorneys to acquire six months of paycheck stubs and bank statements from their clients, and that has caused the cost of filing Chapter 7 to double or triple since 2005.

Senator Warren says it is time to scrap this vengeful process, and she is right. The Means Test is a disaster that causes tremendous stress on debtors who are unable to gather paycheck stubs from previous jobs and bank statements from closed accounts. And what is the point of calculating an average monthly income for debtors who have become unemployed? Bravo Senator Warren!   Yes, the Means Test needs to go away.

#2 Eliminate paperwork requirement

Currently, debtors must submit paycheck stubs,  bank statements and tax returns to their bankruptcy attorney. The Warren Plan cancels that requirement, although I suspect Trustees will still demand to review recent paycheck stubs and the most recent tax return filed.

#3 Elimination of Chapter 7 and Chapter 13???

This part of the Warren Plan makes absolutely no sense and is contradictory.  Warren wants to simplify the process and create a “single point of entry.”  Debtors will “choose from a menu of options for addressing their debts.”  A menu of options?

The menu of options available would include a Chapter 7-type option of surrendering all non-exempt property in exchange for having their unpaid debts “discharged,” as well as options that allow people to deal with specific financial problems without involving all of their obligations

Okay, Warren would abolish Chapter 7 and 13 and then we create a menu of options that includes a “Chapter 7-type option.”  Um . . . what the hell does that mean?

My plan does away with means testing and the two chapters for consumer debtors. Instead, it offers a single system available to all consumers.

Senator Warren, are you aware that when a person files a bankruptcy petition they check a box for Chapter 7, 13, 11 or 12?  Um, . . . that’s a “menu of options” right there.  You see, we already have a menu of options in our current system.

And what does it mean to do away with the two chapters for consumer debtors? Would she delete the entire Bankruptcy  Code governing Chapter 7 and Chapter 13? And how does Warren’s Chapter 7-type code vary from the current code?  Why would any sane legislator do that? Such a change would throw the entire United States bankruptcy practice into utter chaos.

The current Bankruptcy Code was enacted in 1978 and it replaced the old Bankruptcy Acts originally enacted in 1801.  The Chapter 7 and 13 consumer bankruptcy law has been in existence for 42 years and thousand upon thousands of court cases have interpreted and applied that code. Is Warren really proposing to do away of 42 years of bankruptcy jurisprudence?

#4 Eliminate credit counseling requirements

The 2005 bankruptcy amendments imposed a requirement that debtors take a credit counseling class approved by the United States Trustee.  Warren’s plan eliminates this requirement, and I fully agree that these courses are entirely worthless.

#5 Debtor attorney duty to certify the accuracy of financial disclosures eliminated, but new Disciplinary Panels to be established. (What’s the difference?)

The 2005 bankruptcy amendments require attorneys to certify that they have performed a “due diligence” investigation into the accuracy of the bankruptcy schedules. Basically, the attorney must “audit” his client and review credit reports, background checks, public records, tax returns and other documents to verify that the bankruptcy schedules are truthful.

Warren says that such requirements caused bankruptcy attorney fees to increase and that this burden should be eliminated. However, she would create Disciplinary Panels to keep dishonest attorneys out of the system.

This proposal is stupid. Despite all the bad changes in the 2005 bankruptcy amendments, requiring attorneys to verify the accuracy of what they file in court is sensible.

The proposal for new Disciplinary Panels is ill advised. Every bankruptcy court already has a system to investigate unethical attorney behavior and the US Trustee’s Office is very active in disciplining attorneys who behave badly. There is no need for yet another overlapping regulatory body to do what is already being done.

#6 Lawyer advertising restrictions lifted

Bankruptcy Code Section 528 requiring attorneys to state that “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code” would be eliminated.  Agreed.

#7 Filing fees waived for lower-income debtors, phased in for higher income debtors.  

Debtors currently pay $335 in court fees to file Chapter 7 and $310 to file Chapter 13.  These fees are used to fund salaries and expenses of the bankruptcy court.  Reducing the amount of fees requested may cause a financial crisis in bankruptcy courts unless other sources of funding are obtained.

#8  Chapter 7 Attorney fees may be paid after the case is filed

Bankruptcy attorneys are not permitted to collect legal fees after the case is filed because, like all other creditors, collection of their debt is automatically stayed by the bankruptcy filing. As a result, chapter 7 attorneys require all their fees and costs (typically $1,300 to $2,000) be paid before a case is filed.

Warren’s plan correctly allows those fees to be paid after the case is filed and that should bring down the filing fees debtors must pay to file a case. It will also have the effect of dramatically increasing the number of chapter 7 cases filed.

#9 Eviction Help to allow debtors to continue to pay rent and cure defaults (Already exists?)

Warren proposes to help debtors stop evictions, but no details are provided.  Current provision in chapter 13 cases already have provisions to repay past due rent, so it is unclear how Warren’s proposal improves upon this.

#10  Chapter 13 Savings Accounts?

My plan allows people in the bankruptcy process who select a repayment plan option to set aside more money to cover the basics for themselves and their children. . . . Allowed parents to spend a reasonable amount of money on toys and books and basic recreation activities for their kids during the bankruptcy process.”

Hmm, this already exists in every Chapter 13 case.  Line 13 of Bankruptcy Schedule J (Monthly Expenses)  provides for “Entertainment, clubs, recreation, newspapers, magazines, and books.”

If Warren is suggesting that debtors be allowed to set aside money in a supervised savings account, say 5% of their income, that would be a welcome and wise change.

#11 Union Dues.  Allow union members to continue paying their union dues during the bankruptcy process.

Senator, please note that Line 5(g) of Bankruptcy Schedule I already allows for payment of union dues.

#12 Student Loan Discharge

My bankruptcy reform plan ends the absurd special treatment of student loans in bankruptcy and makes them dischargeable just like other consumer debts.

Is Warren proposing the immediate discharge of all student loan debts? Would graduating students be immediately eligible to discharge their entire student loan debt burden? No waiting period?

Doesn’t it seem a bit unfair for recent college graduates to discharge taxpayer subsidized student loans when their income is likely to rise in the near future? Other consumer debts are not subsidized by taxpayers. Isn’t that the key difference?

Something tells me that voters do not view limited discharge options on taxpayer guaranteed loans as an absurd special treatment. A waiting period to discharging student loans is fair and appropriate, and allowing their discharge after 20 years is probably acceptable to most legislators and voters.

#13: Uniform Federal Homestead Exemption

My plan creates a uniform federal homestead exemption. The exemption would be set at half of the Federal Housing Finance Agency’s conforming loan limit for the bankruptcy filer’s county of residence . . . . For most communities, it would be $255,200 in 2020″

Wow! Nebraska’s current homestead exemption only protects $60,000 of home equity. One of the most common reasons a client will not file chapter 7 is that they have more than $60,000 of equity, so they file chapter 13 instead to protect their home.

The 2005 bankruptcy amendments attempted to curtail homestead exemption planning by preventing debtors who move to states with more generous homestead exemptions from claiming those exemptions. (Rather, debtors had to claim the exemption in the state they moved from less than two years ago.)

Warren’s plan blasts opens the doors to homestead exemption planning. Her plan encourages debtors to sink money into their homesteads on the eve of filing bankruptcy.

There is a lot to be said for creating standard bankruptcy exemptions that apply to all cases nationwide. We actually have that system now, but current law allows states to opt out of the federal exemption system.  By standardizing exemption laws the the bankruptcy process becomes more uniform and that in turn encourages lawyers and software developers to create cost cutting mega firms that cross state lines.  Essentially, Warren appears to advocate the “Turbo-Taxing” of the bankruptcy process by making the process streamlined and uniform.

#14 Mortgage Loan Modifications

My plans also permits people to modify their mortgages in bankruptcy -something that is generally prohibited by law . . . As part of the menu of options available to a bankruptcy filer, it offers a special streamlined pre-packaged mortgage bankruptcy procedure that will allow struggling homeowners to get a statutorily defined mortgage modification

What does this pre-packaged procedure involve? Will it allow for a cramdown of the loan balance to the present value of a home?  Will it allow debtors to re-write mortgage loans to cure defaults outside of chapter 13 plan? Will a debtor be allowed to cramdown the interest rate to current levels?

Will homeowners receive a windfall by modifying loans to cramdown mortgage balances and interest rates during periods of declining home values, and then keep all the new equity acquired when property values rise again in good times?

Banks will vigorously oppose this reform, and that will cause a potential log-jamming of reform legislation thus  risking no reform is passed at all.

Modification Limits?  How many times may a homeowner force the bank to modify the loan?

#15 Zombie Mortgages

Warren proposes to force banks to complete a foreclosure if the debtor surrenders the home.  How is this constitutionally valid? By what right may Congress force a bank to take an affirmative act to acquire property they do not want?

Perhaps it would be better to allow debtors to exercise existing bankruptcy powers to conduct an auction of unwanted property via a motion to sell free and clear of liens.

#16 Auto Loans: Repeal 910 Day Rule

The plan repeals the 2005 amendment that prohibits the cramdown of auto loans acquired within 910 days of filing bankruptcy to the value of the vehicle.  Will this change be limited to chapter 13 cases?  May a debtor cramdown a loan to the asset value in chapter 7?

#17 Local Government Fines

Warren proposes to allow the discharge of local government fines, except for fines related to death, personal injury or other egregious behavior.

What about landlord code violations? Speeding tickets?

#18 Civil Rights Debts

No discharge for violations of civil rights such as, for example, police brutality. However, these debts are already not dischargeable under Bankruptcy Code 523 for intentional bad acts.

#19 Improved Data Collection

Warren would invites bankruptcy filers to provide statistical information on racial identification, gender, and age.  Why not make this mandatory? What if they “identify” as a Martian? Perhaps we should just go with whatever their state driver’s license says?

#20 Lump-sum Personal Property Exemption

Warren’s plan provides for a standard federal personal property exemption that is adjusted by the number of dependents in the household. A single federal personal property exemption would greatly simplify the process and give rise to more national bankruptcy law firms since state exemption law complexity would be eliminated.

Does this preempt all state exemption laws? What about exemptions for personal injuries and other rights to compensation that are difficult to measure? Will all of these numerous state exemption laws be replaced by a single dollar federal exemption?

#21 Millionaire’s Loophole Closed

Warren would eliminate protect for self-settled trusts. She also seems to say that Spendthrift trusts would become property of bankruptcy estate.  Um, . . how?  State law governs what is property of the estate, and state laws say property in spendthrift trusts are not property of the debtor.

#22 Exemptions forfeited if debtors lie on bankruptcy schedules.

#23 Fraudulent transfer law strengthened.

Property transfers by deadbeat parents to trusts to avoid paid support would be reversed. The statute of limitations to reverse fraudulent transfers would be extended.  And, Warren would make it a federal crime to engage in or aid and abet or receive an actual fraudulent transfer.

Transferring property while insolvent becomes a crime? To receive a transfer becomes a crime? This is very dark.

#24 Disallow Bankruptcy Claims of Creditors that Violate Consumer Laws

Creditors would be barred from filing claims for expired debts. The FDCPA law would be amended to ban collection on expired debts.

 

 

An email from a new client:

Hi Sam! Thank you for your time yesterday. A few quick questions for you.

    • After my case is filed, and everything goes through, how long does it take for my credit to repair/refresh?
    • What are most of your clients seeing?
    • Can I expect to have an industry average credit score within 3 years?

Credit comes back in phases. Right now his credit is in the gutter and the score has nowhere to go but up. In fact, most debtors have a higher credit score one year after filing bankruptcy than on the day they filed.

That’s right, filing bankruptcy may cause your credit score to go up.  Hold on, I thought bankruptcy ruined credit? Why would filing bankruptcy be good for your credit?

FICO Score

When we refer to credit scores, we are generally referring to your FICO Score created by the Fair Isaac Corporation.  A score below 580 is considered poor and a score above 670 is considered good.

Initial credit score hit followed by positive reporting

In truth, filing bankruptcy usually causes a credit score to drop initially.  And the higher the score is on the day a case is filed, the harder the hit.

But, most people file bankruptcy after they have already maxed out and defaulted on credit card accounts. They file bankruptcy after receiving a court judgment. The credit score is already down so the hit they take is not significant.

Once the initial credit score hit takes place the negative reporting stops. It’s like putting a bandage on an open wound. The blood stops flowing and the credit wound begins to heal. Now the foundation for positive credit reporting is in place.

Ironically, filing bankruptcy may make it easier to get a loan

Many find it easier to get loans after bankruptcy than before. In fact, some bankers send me clients to clean up the bad credit issues so they can actually extend a new loan.

That may seem strange, but think about this for a minute.  If you were a banker, would you prefer to extend credit to a person on the verge of filing bankruptcy or to a person who just walked out of Chapter 7, who is debt free and who cannot file another Chapter 7 for eight years? Who is the better risk?

A credit score is supposed to tell a banker the likelihood that a person will repay a debt, and a person with no debt is a better risk than a person who is deeply in debt.

Debt-to-Income ratio

Thirty percent of a credit score is based on the Debt-to-Income Ratio.  If you owe $5,000 of debt on a $100,000 annual salary, your debt-to-income ratio is 5%, which is very low.  But if you owe $10,000 on an annual income of $20,000, then the ratio is 50%, which is very high.

Bankers focus heavily on debt-to-income ratio when reviewing loan applications.

The number one thing you can do to increase your credit score is to pay down debt. That is why bankruptcy actually improves the credit score–because the debt-to-income ratio immediately improves.

Payment History

Some rebuild credit quickly after bankruptcy as they continue to pay existing car or home loans, and those payments get scored positively. Others stop using all credit after bankruptcy and just use cash, which is fine, but the result is that nobody is scoring their use of credit, so the score stays low.

If you want to build credit after bankruptcy you must use credit. Some clients obtain secured credit cards to rebuild their credit score.  Paying off auto loans after bankruptcy helps. Paying down student loans helps. Paying down any debt after bankruptcy helps.

Paying credit card bills early in the billing cycle helps the score. Not only do they score if you pay a debt on time, but when you pay the debt.

Bankers prefer customers who pay loans the day the bill arrives in the mailbox over customers who pay 2 seconds before the bill is late. Those who pay after a due date incur late fees and that is a sign of a risky loan to a banker.

Studies show that early payers tend to default less and late payers tend to default more. So, pay bills early in the bill cycle and watch the credit score go up.

Focus on the Cash Score, not the Credit Score

Credit scores really only matter if you need to borrow money, like buying a home. Otherwise, instead of focusing on the credit score, focus on the cash score. How much did you save this month? Do you have 3 months of expenses saved in cash? Have you made saving cash systematic?

Unfortunately, our credit scoring models do not account for cash savings, but those who store cash reserves are prepared for unexpected events and default less.

Buying a home after bankruptcy

As a general rule, you must wait two years after filing Chapter 7 to qualify for a FHA home loan.

Those debtors in the middle of a Chapter 13 case must wait at least one year and be able to prove that they have made all bankruptcy payments on time. In addition, a debtor must obtain court approval to incur a mortgage debt during a Chapter 13 case.

Car loans after filing bankruptcy

It used to be that a debtor had to wait for the Chapter 7 discharge to obtain a car loan. That has all changed in recent years. Now, some are getting car loans a day after the case is filed. It appears that the auto lending industry has finally figured out that those entering Chapter 7 are better credit risk since they emerge debt free and cannot file another Chapter 7 for eight years.

Conclusion

Filing bankruptcy does not block access to credit. In many cases it actually increases the ability to borrow. Some waiting periods apply to obtain certain types of credit, but generally a person files for bankruptcy to start building good credit, not to destroy it.

Filing bankruptcy can accelerate the process of building better credit.

 

Image courtesy of Flickr and eflon

Included in the 2 trillion dollar Coronavirus Aid, Relief, and Economic Security (“CARES”) Act is a provision that allows homeowners with government guaranteed loans (Fannie Mae and Freddie Mac) to request up to 12 months of mortgage payment forbearance.

Under the CARES Act  a homeowner may ask for 6 months of loan payment forbearance that is renewable for another 6 months. In other words, a qualified homeowner can go an entire year without making a single mortgage payment.

What exactly is a mortgage payment forbearance?

Well, it simply means that a payment does not have to be made presently, but eventually the skipped payment must be repaid.

How are skipped payments to be paid?

There are basically three options here:

  1. Reinstatement: Make a one-time payment for the amount due.
  2. Repayment Plan: Pay extra each month on the amount due.
  3. Loan Modification: Rewrite the mortgage loan to pay the amount due over the remaining term of the loan.

Other remedies.

In addition to allowing for a payment forbearance, FHA and Freddie Mac loans will also receive the following benefits:

  • Waiving assessments of penalties and late fees,
  • Halting all foreclosure sales and evictions of borrowers living in Freddie Mac-owned homes until at least May 17, 2020,
  • Suspending reporting to credit bureaus of delinquency related to forbearance,
  • Offering loan modification options that lower payments or keep payments the same after the forbearance period.

Not sure if you have a Fannie Mae or Freddie Mac Loan?

Us the Fannie Mae lookup tool and Freddie Mac lookup tools to see if you have a government guaranteed loan.

USDA Rural Housing Development Loans.

A similar loan deferment program is also being sponsored by the USDA home loans.

Contact Your Mortgage Company:

Bank of America
Phone: 1-800-669-6607

Cenlar FSB
Phone: 1-800-223-6527

Chase
Phone: 1-800-848-9380

Freedom Mortgage
Phone: 855-690-5900

Lakeview Loan Servicing, LLC
Phone: 1-855-294-8564

LoanCare, LLC
Phone:800-410-1091

Mr. Cooper a/k/a Nationstar
Phone: 1-855-375-4001

NewRez
Phone:1-866-317-2347

PennyMac
Phone: 1-800-777-4001

PHH Mortgage Services

Phone: 888-820-6474

Wells Fargo
Phone: 1-800-357-6675

 

Image courtesy of Flickr and sergio santos

 

The unfolding of the COVID-19 virus episode has been the weirdest experience in my lifetime. I remember the courthouse bombing by Timothy McVeigh in Oklahoma City and commercial jets hitting the Twin Towers on 9/11, but those were one day events.

The corona virus is different because it continues from day to day and all of us are potential victims. You see young people dying on breathing machines and you realize your family is not safe.

At first the virus seemed like just a bad version of the flu and I dismissed it, but as I kept reading news reports I realized this was different and it was heading our way.  Then it became apparent that all my staff would soon be working from home.

Our attorneys have always been able to work from home, but not the paralegals. I scrambled to purchase computers and then raced to my tech vendor set them up. Thankfully we got the job done just before daycare services closed so all our staff can work from home.

On March 19th our Chapter 13 Trustee, Kathleen Laughlin, held a Zoom conference with 32 attorneys across the state, and she explained that her court hearings would continue on Zoom.  Last week the Chapter 7 trustees declared that their hearings would be conducted by telephone.  So, the good news is that court hearings will go during this period of social distancing.

Four years ago I started a one-man campaign to allow clients to sign bankruptcy petitions using digital signatures.  This blog was instrumental in getting that message across, and two years ago our brave judge, Thomas Saladino, agreed that it was time to allow debtors to sign their bankruptcy petitions digitally.

Nebraska is the first and only state to implement a permanent rule allowing digital signatures. In a state that spans 450 miles across, that rule change has allowed us to serve clients in all 93 Nebraska counties.

Now that attorneys nationwide cannot personally meet with clients to sign petitions, 43 bankruptcy courts recently issued temporary orders allowing for digital signatures and more are expected to allow it soon.  This blog lead the way.

I participated in four bankruptcy hearings by Zoom last week, and I now interview new clients via Zoom right in their living room. Then I conducted a case signing using Zoom and shared my screen with the client who could see me typing in his responses and he could view the same documents I viewed on my screen. He said it was amazing, and it really was.

In many ways, the COVID-19 crisis has forced us to become better communicators and to utilize technology that was at our fingertips all along. Sometimes it takes a crisis to move forward. I doubt we will ever go back to the old ways again.

So, our firm is open. We are answering every call and responding to every email. Sometimes I work in my office apart from other employees, and sometimes I work in my home office. But wherever I or my staff works, we are all working full time every day and we can service new and existing clients thanks to our technology investments.

It’s going to be a wild year. Today we are scared. Tomorrow we start to pick up the pieces of our businesses and protect what remains from the claims of creditors. Whatever comes, our firm stands ready to serve.

Below is a letter written by a 64-year old bankruptcy attorney to the United States Trustee, the agency that oversees bankruptcy cases.

Clifford J. White III, Director
Executive Office for U.S. Trustees

Re: Covid-19 and consumer bankruptcy practice

Dear Director White:

On behalf of our NACBA membership and our entire NACBA Board of Directors, I am writing to you to suggest immediate (and hopefully temporary) remedial actions regarding the administration of Ch. 7 and Ch. 13 bankruptcy cases. These suggestions are meant to help stabilize our joint goal to maintain the integrity of the bankruptcy system while we all struggle for equilibrium in these trying times.

All pending 341(a) meeting of creditors in consumer chapter 7, 13 and 11 cases be automatically adjourned for some period of time (such as at least 4 weeks), OR

that debtors and their counsel be permitted to appear telephonically, in place (given quarantine or social distancing, as applicable), by joint conference call or other electronic means, AND

that ‘wet’ signatures (allow for /s/ signatures) be eliminated for those forms and in those jurisdictions where ‘wet’ signatures are required.

We know that you are aware of the heightened risk of serious illness and death for those aged 60 and over if this Covid-19 virus is contracted. While we cannot know exactly the proportions of our Attorneys, Clients nor Trustees who belong to that demographic, speaking for myself as a 64 year old, the risks to us all, at the present time, are clearly too great to ignore. I am sure you will agree that these suggestions, while representing a change from normal case administration, are warranted.

Your prompt response and action along these lines is appreciated.

On behalf of NACBA,

John C. Colwell
President, Board of Directors
National Association of Consumer Bankruptcy Attorneys

Nebraska is leading the way on this issue.  For two years I nagged the court in this blog and in bankruptcy seminars to allow digital signatures of bankruptcy petition, and our court finally agreed that the evidence supported this practice starting in February 2018.  For the past two years the Nebraska bankruptcy court has allowed debtors to sign their case electronically with digital signatures and the program has been a stunning success.  Debtors may review and sign documents through digital signature vendors like DocuSign and receive an immediate copy of what they signed.

In this strange and stressful Covid-19 virus episode, our clients are able to send and sign all required documents to us electronically. Most if not all of the work can be completed over the telephone and email.

Nebraska is the only bankruptcy court allowing digital signatures. And now the rest of the nation is in a panic to allow what our wise court accepted over two years ago.

The next step is to allow debtors to testify at the required trustee meeting over the telephone or via a video conference, such as Skype.  Our Nebraska trustee has already begun testing that service this past year.

Our office is fully ready to protect clients from the spread of the Covid-19 virus with the following service:

  1. Telephone or video consultations.
  2. Digital signatures of all bankruptcy documents.
  3. Documents may be emailed or sent via a ShareFile system.
  4. Payments are accepted online on our website, www.SamTurcoLaw.net
  5. We have video conferencing services ready to facilitate handling court hearings over the internet.
  6. All our staff is able to work from home.
  7. We handle cases in all 93 Nebraska counties.

As a result of continuously modernizing our firm, we are 100% ready for this Covid-19 virus.  Imagine that, a little state like Nebraska is the clear leader in solving this national problem, and I am in daily contact with attorneys nationwide who are looking to copy what we implemented two years ago. So much thanks is owed to Judge Thomas Saladino who had the guts to try something new that will soon benefit debtors and attorneys nationally.

 

 

At first glance it appeared that the debtor had a “slam dunk” case to receive a hardship discharge of her $140,000 student loan debt.

The debtor is a 36-year-old single mother of two disabled children, ages 11 and 12. She received no child support since her ex-husband voluntarily terminated his parental rights. She could not afford her own apartment and lived with her parents. She earned a $36,000 annual salary and did not expect any wage increases.

Obtaining a hardship discharge seemed like a no-brainer–this debtor was stuck in the mud and her student loans imposed a real and long-term financial hardship.

But the Nebraska bankruptcy court denied her application for a hardship discharge, and a closer look at the facts indicates why. (See In re Wells, Case #18-08339)

Public Service Loan Forgiveness Program.

Although the debtor had enrolled her loans into a 25-year income-based repayment program, she did not apply for the 10-year Public Service Loan Forgiveness Program even though she worked for an eligible nonprofit employer.

In fact, during the case the government attorneys offered to delay the trial to allow the debtor to apply for this program, but she declined to make an application.

Why should a bankruptcy court discharge federal student loans when a debtor can eliminate the debt in 10 years with no tax consequences through the Public Service Loan Forgiveness Program? The debtor failed to answer that question to the court’s satisfaction.

Lack of Evidence of Future Income and Living Expenses.

The court was also annoyed by a general lack of evidence presented at trial.

The debtor’s children were disabled and it appears that they might be eligible for Social Security benefits, but no evidence was supplied by the debtor as to whether an application would be made to obtain this income.

The debtor claimed her children’s needs could not be satisfied by attending the local public school and she was therefore incurring the expense of private school tuition, but no medical evidence was provided to support this position.

The debtor failed to provide any evidence indicating that higher paying jobs were not available.  No evidence of denied job applications were presented or that the debtor had maxed out her earnings capacity.

The debtor had a pending personal injury claim but no evidence was presented as to when the claim might be settled or the amount she might receive.

No medical evidence was supplied to show the necessity of certain medical expenses she incurred for her children.

In short, the debtor failed to provide evidence to support her expenses or future income potential.

Actual Expenses did not match Scheduled Expenses.

A review of the debtor’s bank statements revealed that her actual expenses differed significantly from the expenses she listed on her bankruptcy schedules. Specifically, her entertainment and recreational expenses appeared to be much higher than she reported.

Debtors seeking a hardship discharge of their student loans should expect a thorough examination of their spending activity as revealed by a close examination of their bank statements.  The bank statements and bankruptcy schedules must tell the same story.

Conclusion.

Although bankruptcy courts have become increasingly skeptical of the eligibility for various income-based repayment programs as a bar to student loan hardship discharge applications, eligibility for the Public Service Loan Forgiveness Program is almost a certain bar to a hardship discharge.

The Public Service Loan Forgiveness Program is relatively short (10 years) and unlike other income-based programs, if successfully completed it does not result in any income tax liability.  An eligible debtor who fails to apply for this program will almost never receive a hardship discharge.

 

Image courtesy of Flickr and GotCredit.

 

 

 

 

Lower-income debtors simply cannot afford the high cost of filing chapter 7, and that is a real problem when garnishments strike.

The cost of filing Chapter 7 in Nebraska ranges from $1,300 to $1,800 and ALL of those fees must be paid in full to file a case. How can low-income debtors stop garnishments if they cannot afford the fee?

Many debtors have no choice but to file a chapter 13 case which can be filed for as little as $75 down.  But attorney fees in Chapter 13 cases are currently set by court rules at $4,000 payable in monthly installments over 3 to 5 years. Chapter 13 cases are cheap to file but cost 3 to 4 times more in the long run.

And whereas chapter 7 cases have a 95% success rate, chapter 13 discharge rates are less than 50% nationally.

Lower-income families face a tough choice, but a bankruptcy court in Kentucky recently issued an opinion that may provide a roadmap to making the chapter 7 process more affordable.

Kentucky’s Bifurcation Opinion.

In the case of Chanda S. Carr, the Kentucky court reviewed a bifurcated fee arrangement in which the debtor was charged $300 down to file an incomplete chapter 7 petition consisting of nothing more than her name and a list of her creditors.

After the case was filed, the debtor signed a new fee agreement to pay $1,185 payable in 12 monthly installments of $98.75 for the remainder of the legal work.

On it’s own motion, the court reviewed this fee arrangement in great detail. The court noted several important factors in approving this Dual Contract scheme.

Disclosures.

It was very apparent that the debtor’s attorney made a full disclosure of all payment options.

First, the debtor was offered the option of filing a normal chapter 7 case for $1,135, but all of that fee had to be paid in full before the case could be filed.

Then, the debtor was offered a bifurcated fee arrangement of $300 down and then 12 payments of $98.75, for a total of $1,485.  This bifurcated arrangement would ultimately cost the debtor an extra $350 since it is more costly to prepare cases in this manner and payment to the attorney is stretched out over a year.

The combination of an inability to pay for a lower upfront fee combined with an imminent garnishment was a key factor in the court’s analysis. In other words, the debtor made an informed choice.

What is important to observe here is that the debtor was first offered a standard contract–pay a lower fee upfront to file a standard chapter 7 case. The debtor was not steered to the dual contract scheme, but rather chose that option when it was apparent that she could not afford to prepay all the fees up front and garnishments were pending.

The combination of an inability to pay for a lower upfront fee combined with an imminent garnishment was a key factor in the court’s analysis. In other words, the debtor made an informed choice.  She chose the lesser of of two evils–to pay a little more in the long run in order to avoid losing even more from a garnishment.  All the alternatives were laid on the table. She made a reasoned choice. That is a key factor.

Pre-petition Fees Not Shifted to Post-Petition Payments.

The United States Trustees Office–the supervisor of bankruptcy cases–is highly suspicious that attorneys using the Dual Contract method are really preparing most of the case prior to filing and then attempting to collect their fees after the case is filed.  In other words, the US Trustee believes this scheme is a fraud.

In fact, US Trustee investigations of attorneys using bifurcated contracts have revealed that some attorneys have clients sign both contracts at the same meeting and that most of the petition was prepared before the case was filed.

In the Carr case the Kentucky court determined that attorney and the debtor had a post-petition meeting to sign the second contract. The court found that the attorney really did prepare the bulk of the petition and perform the majority of the legal work after the case was filed. The court underscored the importance of this factor.

The Debtor’s Case Must Be Simple.

Bifurcation agreements are not appropriate for complex cases.  Why? Because complex cases require more pre-petition analysis to determine if a debtor’s income is too high to qualify for chapter 7 and even more analysis to determine if the debtor’s property is protected by exemption laws.

Cases involving higher-income debtors who own substantial property require most of the legal work be completed before the case is filed.  Thus, it is a fraud to use bifurcated contracts in those cases since no competent attorney would file a risky case without a full analysis of the debtor’s income, expenses, property and property transfers. A bifurcated fee arrangement in complex cases would be a lie.

But cases involving lower-income debtors with little property are inherently simple and require little pre-petition analysis. Determining if a debtor is above or below Median Income is simple.  For example, the annual median income for a single person in Nebraska is $48,796.  A debtor earning $12 per hour clearly earns less than that amount.  A debtor who rents an apartment with only basic household goods and who owns a used vehicle does not present a complex asset case requiring careful exemption planning.

Lower-income debtors with few assets facing imminent garnishments are the ideal candidates for bifurcated fee agreements since the bulk of the legal work can be prepared post-petition.  The Kentucky court agreed with this reality.

Bifurcated Legal Fees Must Be Reasonable and Should Not Utilize Factoring Arrangements.

The common link between cases where attorneys have been disciplined for the use of bifurcated fee agreements is the presence of factoring arrangements.

Almost all the attorneys sanctioned in bifurcated fee arrangements were using an accounts receivable factoring arrangement offered by BK Billing or Fresh  Start Funding.

The factoring finance companies present attorneys with a slick marketing package complete with fee agreements, disclosure statements and a pricing scheme that basically doubles the cost of the chapter 7 case.   Attorneys that would normally charge $1,500 to file a chapter 7 case are encouraged to bump the price of the case to $2,400.  After the dual contracts are signed by the client, the attorney sells off his post-petition contact to the finance company and receives an immediate payment of $1,500.  The financing company collects future payments from the debtor at typically high interest rates.

Factoring the legal fee contract is attractive to attorneys. Instead of waiting for debtors to slowly pay in their normal fee, they can now streamline the process and get paid now by advertising “No Money Down” chapter 7 services. And believe me, you can file a lot of chapter 7 cases if you can really charge no money down.  There is no shortage of people who need to file bankruptcy, but there is a real shortage of debtors who can afford the $1,500 fee to go broke.

Factoring arrangements should be avoided since they escalate the price of bankruptcy services to unreasonable levels.

But the attorney in the Carr case did not utilize a factoring arrangement. Nor did the attorney charge high interest rates. The extra cost he charged the client for the bifurcated fee arrangement was only $350, and that amount seems reasonable given the extra work bifurcated contracts require and the delay and risk associated with collecting payment.

Birfurcated contracts that charge only slightly higher fees than standard contracts for lower-income debtors with relatively simple cases are likely to be respected by the US Trustee and the courts.

Is the Bifurcated Contract Affordable?

The debtor in the Carr opinion was only required to pay 12 monthly payments of $98.75 post-petition.  Her monthly budget indicated that she could afford that payment. The amount of that payment was reasonable.  The Kentucky court found this payment agreement to be feasible and modest.

Courts that have sanctioned attorneys have found the payment demanded by factoring finance companies to be excessive and predatory. In those cases the debtor’s income and expense schedules would often show negative monthly income but the factoring contract would require payments of $200 per month or more.

If it is clear that a debtor cannot afford to a pay post-petition legal fee installment it is advisable not to enter into a bifurcated fee arrangement.

Conclusion.

The time has come for bankruptcy courts to craft Safe Harbor rules on the use of bifurcated fee arrangements. If we are really serious about addressing the very real problem of low-income debtors being denied access to our justice system, then we need to come up with a compensation system that encourages attorneys to assist those debtors now.

Just making statements like “we really need to change the bankruptcy law” is not enough. We have to work with the tools we have in our hands now instead of waiting for a legislative change that may never come.  Bifurcation is a tool we currently have that can immediately help lower-income debtors facing wage garnishments.

The cost of delaying the establishment of safe harbor bifurcation rules is significant. When low-income debtors cannot afford to pay for bankruptcy fees their wages become garnished, they fall behind on rent, they suffer evictions, their financial distress ignites family distress, and their children pay a dear price.

Attorneys feel threatened by the US Trustee’s office. The attorney in the Carr case faced a significant investigation by the US Trustee and faced potential sanctions and disgorgement of fees. Without safe harbor rules attorneys are reluctant to take a chance of being sanctioned or having their fees disgorged.

Congress is not going to fix this problem anytime soon. Nonprofit organizations lack the resources to handle the volume of cases.

The bankruptcy community of attorneys, trustees and judges must lay the framework to help the working poor access our justice system with the tools we already possess.

 

Image courtesy of Flickr Carl Wycoff.