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Nebraska is the 16th biggest state in the USA, but we rank 43rd in population density.  In fact, Nebraska has more cows than people by a ratio of 3 to 1.

Bankruptcy is a specialized area of laws these days, especially after enactment of the Bankruptcy Reform Act of 2005.  Attorneys in sparsely populated areas of the state generally do not handle bankruptcy cases, so our firm is routinely hired by clients throughout our big state.  (This is actually a wonderful aspect of practicing bankruptcy law since we get to know folks in every square inch of the state and learn about their communities.)

One challenge we face in a state that stretches 430 miles across is getting documents signed and returned in a timely fashion.  This is especially critical in bankruptcy cases since we must provide the court with a precise “snapshot” of a debtor’s financial situation on the day the case is filed.  Bank account balances change daily, average income calculations change monthly, and the list of debts owed changes constantly.

Like an astronomer looking at a distant galaxy through a telescope, we report of a scene that no longer exists.

Preparing bankruptcy petitions is like laying a foundation on moving soil or taking a vivid 35 mm snapshot of a speeding race car when the nearest camera is 3 days away.  It is hard to provide an accurate snapshot when the information is constantly in motion.  Like an astronomer looking at a distant galaxy through a telescope, we report of a scene that no longer exists.

The challenge is to get a list of debts, income and property signed and filed with the court before the information becomes outdated.  Bank account balances can vary by thousands of dollars in a matter of days and debtors may be penalized for providing the court with inaccurate information.  Receiving documents mailed to clients for signature may take up to two weeks.

Many clients do not have ready access to fax machines as that technology seems to be fading away.  To compound the problem, debtors demand their cases to be filed immediately to stop ongoing garnishments and foreclosure.  “Move fast!”, says the client.  “Be accurate!”, says the court.  It’s a tricky balance.

Once solution to this time/distance problem is to obtain electronic signatures.  Companies that offer digital signature services, such as DocuSign, allow attorneys to obtain virtually instantaneous signatures of any document.

Digital signatures are electronic signatures that are encrypted by computer technology, and encryption process protects the document from alteration.  A document that is signed digitally provides an assurance that it was signed by the sender and receiver without alteration.  Parties to a digitally signed document typically receive an executed copy of the document instantly.  A digital signature is similar to a notarized document or a document embossed with a seal to ensure authenticity.

Digital signatures have been authorized in the United States by the Electronic Signature in Global and International Commerce Act of 2000, (ESGICA). 11 U.S.C. 7001.  The Nebraska Digital Signatures Act was enacted in 1998.  In short, these laws give digital signatures the same legal effect as a penned ink signature on paper (sometimes called “wet” signatures).

MAY A DEBTOR DIGIGALLY SIGN A BANKRUPTCY PLEADING?

Federal Rule of Bankruptcy Procedure 9011 governs signatures on bankruptcy documents.  The Nebraska bankruptcy court has a local rule 9011-1 regarding signatures as well:

  1. Petitions, lists, schedules and statements, amendments, pleadings, affidavits, and other documents which must contain original signatures or which require verification under Fed. R. Bankr. P. 1008 or an unsworn declaration as provided in 28 U.S.C. § 1746, shall be filed electronically and may include, in lieu of the actual signature, the signature form described in subsection C.
  2. The attorney of record or the party originating the document shall maintain the original signed document for all bankruptcy cases at least one year after the case is closed. In adversary proceedings, the parties shall maintain the original document until after the case ends and all time periods for appeals have expired. Upon request, the original document must be provided to other parties or the Court for review (Fed. R. Bankr. P. 9011 applies).

May a digital signature qualify as an “original signature” under Nebraska Local Rule 9011-1?  May a bankruptcy petition be digitally signed in Nebraska?

Some bankruptcy courts appear to require “wet-ink” signatures on bankruptcy pleadings, including the Southern District of Indiana, the Northern District of Oklahoma, and the District of Maine.  However, even in in these districts it is not perfectly clear that the courts require “wet-ink” signatures on paper or if the courts are merely speaking to the requirement that bankruptcy attorneys retain originally signed documents, whether in ink or digital format, for a period of years.  Courts seem to use the term “wet” signatures to mean “original signatures” while overlooking the fact that digital signatures may also be used original signatures as well, thus causing confusion.

The Nebraska local rule 9011-1 does not use the term “wet” or “wet-ink” in reference to signatures, nor does Federal Rule 9011.  So, in the absence of local rule explicitly requiring wet ink signatures on paper, it would appear that digital signatures do qualify as original signatures in Nebraska bankruptcy cases since both federal and state law validate digital signatures.  However, a prudent attorney will seek out clarification on this topic from the court before utilizing digital signatures in bankruptcy pleadings.

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BANKRUPCY COURTS SHOULD ALLOW AND PREFER DIGITAL SIGNATURES TO WET INK SIGNATURES ON PAPER

There are several reasons why bankruptcy courts should encourage the use of digital signatures:

  • Documents signed digitally cannot be altered.  Each page of the digital document is encrypted and stamped electronically.  If altered, such a document will display an error code to warn that unauthorized changes were made to the document.
  • Every page of the document is verified.  Unlike wet ink signatures on paper, it is not possible to attach altered pages to the signature page.  A wet ink signature on paper may be attached to 60 or more pages of bankruptcy pleadings, and there is no guarantee that the attached paperwork has not been changed.
  • Digitally signed documents are instantly sent to all parties who signed.  If the document is altered each party has evidence of the alteration.
  • Allowing digital signatures encourages attorneys to improve the accuracy of bankruptcy documents since signatures may be obtained instantaneously if errors are discovered.
  • Debtors get immediate full copies of what they signed.  This makes it difficult for them to claim ignorance of what they signed.

In short, allowing digital signatures improves the integrity of court documents. It supplies debtors with full copies of what they signed immediately.  It encourages attorneys to make last minute corrections and improvements to the documents.  Digital signatures essentially provide something similar to a document where every page has been signed and notarized.

Selfishly I confess that digital signatures would be more convenient to use in our practice, but it is clear that they offer a superior level of transparency as well.  The notion that wet ink signatures are more trustworthy is simply not supported by the facts.  Hopefully Nebraska can adopt a local rule confirming the propriety of using digital signatures on bankruptcy pleadings.

Image courtesy of Flickr and Leszek Leszczynski

A few weeks ago I wrote an article to warn plaintiff attorneys to be careful to ensure that their clients who have previously filed bankruptcy to ensure that all claims they have against third parties are reported on the bankruptcy schedules.  (Plaintiff’s Attorneys Beware: Your Client’s Bankruptcy Case is About to Sock You Right Between the Eyes)  Well,  . . .  it just happened to a lady in Minnesota. (See Cover v J.C. Penny Corporation, Civ No 15-515, District of Minnesota).

The significant aspect of this case is that the debtor, April Cover, failed to report a discrimination claim on her bankruptcy schedules but she did verbally tell the bankruptcy trustee about the claim.

Not good enough says the Minnesota court.  Actual verbal notice of a claim is not enough.  Audio recordings of the court meeting between the trustee and the debtor disclose that the discrimination claim was reported to the trustee.  There is no question that the debtor disclosed her claim, but without formally amending the bankruptcy schedules a debtor is legally barred from pursuing recovery in subsequent litigation.

The only locations where Cover disclosed her EEOC claim—the audio file of the creditors’ meeting and communications between the trustee and her counsel— are unavailable to creditors. Hence, despite her later, oral disclosure, Cover failed to adequately amend her Petition, and she also failed to keep the trustee apprised of the status of her EEOC charge, or the existence of this action. In the Court’s view, Cover’s positions are clearly inconsistent.”

Given the court’s opinion, actual written notice to the trustee is also probably insufficient to protect a debtor from judicial estoppel in subsequent litigation.  It is not enough to send the trustee a letter to report claims not originally report or new claims occurring during the bankruptcy.  The Minnesota court declares that only formal amendments to the bankruptcy schedules are sufficient to protect a debtor’s claim.

This issue becomes confusing because the trustee, when informed of the claim, probably determined that the claim was exempt from creditor or trustee claims under Minnesota law.  However, even when a trustee is informed of the claim against a third party and elects not to claim it because of exemption laws, the claim must be formally reported on amended schedules to be preserved.

Plaintiff attorneys need to ask the following questions:

  • Has their client filed bankruptcy in the past?
  • Did the injury occur before, during or after the bankruptcy case?
  • If a claim occurred before or during the bankruptcy were the bankruptcy schedules amended?
  • Did the Chapter 7 trustee release his or her claim against the injury claim?
  • Was the PACER computer system checked to see if the client has filed bankruptcy?
  • Have you obtained a full copy of the bankruptcy schedules?
  • Is it too late to amend the bankruptcy schedules to report a missing claim?
  • Was the notice of the claim sufficiently detailed to put the trustee and creditors on notice?

I encourage Nebraska attorneys to contact this office if they have concerns about their client’s bankruptcy case.

Bomb

The more I think about the disastrous  consequences of two recent 8th Circuit Court of Appeals decisions regarding Judicial Estoppel the more alarmed I become.

This is a time bomb waiting to go off.  The 8th Circuit has ruled that debtors who fail to amend bankruptcy schedules to report claims against third parties that occur after the bankruptcy case was filed will not be able to recover damages in their future litigation.

Following the entry of a bankruptcy discharge, litigation related to unreported post-petition claims shall be subject to Summary Judgment dismissal under the legal theory of Judicial Estoppel.

Judicial estoppel is an equitable doctrine which “prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001).

The 8th Circuit has ruled that a debtor’s failure to report new claims arising after the bankruptcy case was filed is basically a statement that no such claim exists, and if a debtor is saying that no such claim exists in one legal proceeding (i.e., the bankruptcy case) then it is inconsistent to say one exists in a future case.

The court’s reasoning is deeply flawed.  There is no provision in the Bankruptcy Code requiring debtors to report new claims that occur after a bankruptcy is filed.  And not reporting such a claim is clearly not the same thing as making an affirmative statement that no such claim exists.  Silence is not a statement. Nevertheless, the 8th Circuit has taken a punitive approach and the failure to report new causes of action will be fatal to recovering a settlement in future legal proceedings.

This is a significant ruling.  There will be tragic consequences.  Uninformed debtors will be denied rightful recoveries and their attorneys are going to be sued.

Imagine the case of a Chapter 13 debtor who is seriously injured in an auto accident 6 months before the end of a 5-year bankruptcy plan.  Assume the bankruptcy attorney never learned of the accident and the debtor never knew of the requirement to report such claims.  Imagine a year or two after the bankruptcy is completed and the debtor’s injury attorney receives a Summary Judgment motion since the bankruptcy schedules were never amended.  This is the type of disaster that now awaits plaintiff attorneys who fail to verify if their client was in a bankruptcy case.

Can you smell the legal malpractice case?  Who gets sued?  The Plaintiff attorney?  Absolutely.  The bankruptcy attorney?  Very likely if they had any knowledge or should have known of the claim.

HOW CAN PLAINTIFF’S ATTORNEYS PEVENT THIS DISASTER?

There is a simple procedure plaintiff’s attorneys can utilize to avoid this nightmare:  Check the PACER computer system to verify if their client has filed bankruptcy, and check the system again before the lawsuit is filed. Update your quality checklist to verify whether a bankruptcy is filed.

My experience is that plaintiff’s attorneys are generally annoyed when a bankruptcy attorney contacts them about the need to report their case to the bankruptcy court.  They are fearful that they may somehow lose control of their case or that the bankruptcy court will interfere with the process.  The opposite is true.  Reporting the claim will preserve the right to proceed with the case and will protect them summary judgment motions.

WHAT BANKRUPTCY ATTORNEYS NEED TO DO TO PREVENT UNREPORTED CLAIMS.

My office is instituting the following procedures to protect our clients from losing recovery for new injuries suffering during the bankruptcy case:

  • We have updated our information disclosure forms to warn clients of the vital need to report new claims against third parties throughout the term of their bankruptcy case.
  • We are contacting all existing clients to warn of this danger.
  • We are sending out regular correspondence to clients to remind them to report new claims.
  • We will conduct an exit interview when cases are about to close to discover unreported claims.

Although there are some debtors who intentionally fail to report new claims because they fear they would have to pay the settlement over to the bankruptcy court, that is not the typical case.  The 8th Circuit’s decision to punish dishonest debtors will unfortunately be imposed on innocent debtors and plaintiff attorneys who are simply unaware of the duty to amend bankruptcy schedules.

Chapter 13 cases fade into the background of life once the payment plan is approved. It’s just another payment in our list of monthly bills.  Contact between debtors and their bankruptcy attorney commonly disappears once the payment plan is approved. Life resumes, and when bad things happen–like car accidents or work injuries–clients contact other attorneys to represent them in those matters. The need to report these new claims to a bankruptcy attorney they have not spoken to in 4 years is not obvious. This is what the 8th Circuit is not understanding. The failure to report new claims is generally not intentional. Why do I have to call my bankruptcy attorney when I get in a car accident? There is no obvious connection between the two events.

The rules have changed.  Beware.

Image courtesy of Flickr and Andrew Kuznetsov

Bird on Fence

In two recent cases the 8th Circuit Court of Appeals has sustained summary judgments against debtors who failed to report claims against third parties that arose after the bankruptcy case was filed.

In the case of Jones v. Bob Evans Farms Inc., the debtor failed to disclose an employment discrimination claim that occurred 3 years after the bankruptcy case was filed.  The bankruptcy case was filed in 2009 and in 2012 the debtor quit his job and filed a discrimination case with the Missouri Equal Opportunity Commission.  The employer filed a motion for Summary Judgment claiming that the debtor was judicially estopped from pursuing his claim because he failed to report the claim in his bankruptcy schedules.

The 8th Circuit court agreed with the employer and declared that a debtor who intentionally hides a post-petition claim by failing to amend the bankruptcy schedules lacks standing to assert such claims in future legal proceedings and is thereby judicially estopped from litigating such claims.

A month later the 8th Circuit issued another opinion on this same topic in the case of Van Horn v. Martin where a debtor filed Chapter 13 bankruptcy in 2007 but failed to amend schedules to report an employment discrimination claim that occurred in 2011.  After the debtor completed the chapter 13 case the employer was awarded a Summary Judgment because the debtor failed to report the new claim, and the 8th Circuit court sustained the summary judgment.

Judicial estoppel is an equitable doctrine which “prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001).

The 8th Circuit applied a three-prong test to determine when judicial estoppel applies.

  1. A party’s later position must be clearly inconsistent with its prior position.  By not amending bankruptcy schedules to report a new claim the 8th Circuit declares that no such claim must exist, and that is a position deemed to be clearly inconsistent with the later litigation.
  2. Whether the party succeeded in persuading the first court to accept its position. Receiving a discharge in a chapter 13 case where new new claims are not disclosed is considered to cause the first court to accept the position that no claim truly exists.
  3. Whether the party seeking to assert an inconsistent position would derive an unfair advantage if not estopped.  Failure to disclose new claims arising during a chapter 13 gives the debtor an unfair advantage in that creditors may have benefited from increased payments derived from settlement of those claims.

The concept of Judicial Estoppel is widely understood by attorneys to require the disclosure of claims that exist prior to the filing of bankruptcy in both chapter 7 and chapter 13 proceedings, but many were surprised that the doctrine was extended to new claims arising after the bankruptcy was filed.

Attorneys for the debtors pointed out that the “bankruptcy estate” is not compromised of post-petition claims.  They claimed that there is no legal duty under the Bankruptcy Code to disclose post-petition claims.  However, the 8th Circuit responded that judicial estoppel may apply “regardless of whether he had independent legal duty to amend schedules.”

As a practical matter, these rulings will have a profound impact on debtors and their attorneys. First, many debtors are simply not aware of the requirement to report new claims to their bankruptcy attorneys.  Debtors are inundated with information at the beginning of a case and it is unreasonable to expect them to remember such fine legal details during a five year case. Also, once a chapter 13 payment plan is approved the case really just fades into the background of their life.  Payments are made the the court monthly, often through a payroll deduction, but there really is no ongoing contact with the court or their attorneys in many cases.

The 8th Circuit takes a drastic and dark view of debtors who fail to amend schedules to report new claims, but this omission is more common and innocent than the court understands.  I frequently learn of new claims that arise from clients who have no idea that such claims should be reported. Usually we learn of these claims when a debtor defaults on plan payments and responds that they were off work due to a car accident or job injury.

Very commonly I discover debtors who are in the middle of new lawsuits for worker compensation claims or auto accidents, and their personal injury attorney has no clue of the need to report the claim to the bankruptcy court. Contrary to the 8th Circuit’s concern over dishonest debtors who hide claims with the intent of misleading the bankruptcy court of their ability to pay debts, most debtors and their injury attorneys are completely clueless of the need to amend bankruptcy schedules to report new claims.  These rulings will cause a lot of unexpected grief when debtors realize they have lost their right to recover just compensation for injuries.

Bankruptcy attorneys will need to communicate with Chapter 13 debtors on an ongoing basis to ensure that new claims are reported.  I can envision scores of malpractice lawsuits being filed against attorneys who fail to report new claims. This is going to be a mess.

Image courtesy of Flickr and The U.S. National Archives

Choices

What is the most effective solution to a serious debt problem?  Without a doubt, Chapter 7 remains the single most effective way to eliminate debt.  What is the success rate of chapter 7 cases?

In reviewing 172 cases filed by our firm since January 1, 2014, clients received a discharge in all but three cases.  Of those 3 cases where no discharge was entered, two of them converted to chapter 13 since their income was declared to be too high to be eligible for chapter 7 relief and they will receive a discharge when they complete their payment plan.  The remaining case was voluntarily dismissed after the client incurred significant unplanned medical bills during her case. After her case was dismissed she filed a new case and received a discharge.

To summarize, 100% of the clients who filed chapter 7 obtained bankruptcy protection, and 99% of the cases received a chapter 7 discharge.

There simply is no more effective way out of debt.  Chapter 7 relief is immediate.  The moment a case is filed a federal protection order comes into place that immediately stops garnishments, collection calls, lawsuits, and all other forms of collection.  On average, cases were discharged in 102 days.

Success Rate of Chapter 13:

A Chapter 13 case is a payment plan completed over 3 to 5 years.  A review of the first 210 cases filed in 2006 indicates that 58% of those cases were discharged. When you factor in that 19 cases were converted to chapter 7, the discharge rate increases to 67%. That is actually an amazing statistic considering that a dramatic overhaul of the bankruptcy law took effect in October 2005 and attorneys were working with an entirely new law.

The success rate of Nebraska chapter 13 cases  is significantly higher than the national success rate of 36% reported by law professor Katherine Porter in her article, The Pretend Solution: An Empirical Study of Bankruptcy Outcomes.  Much of that success is attributable to our Chapter 13 Trustee, Kathleen Laughlin, and the Nebraska bankruptcy court for making the process work.

The success rate of chapter 13 does not include those cases converted to chapter 7. So the real success rate may be higher depending how we define “success” in bankruptcy. Also omitted is a list of those cases dismissed the first time around but that were eventually refiled with a successful result.

Success Rate of Consumer Credit Counseling Debt Management Plans:

Measuring the success rate of Debt Management Plans (DMP) is difficult since, unlike bankruptcy court records, there is no public data to review.  However, a poll conducted by the National Foundation for Credit Counseling indicated that only 21% of the repayment plans were completed. To be fair, the poll indicated that another 21% withdrew from the repayment program to manage the payments on their own but there is no data as to whether they were successful. The chief stumbling block to the program is that the payments were not affordable.

Success Rate of Debt Settlement:

This is the darkest area of the debt management industry and there is no hard data available to show how many plans have been completed.  It is generally believed that the success rate of these programs is less than 10%.

Need help sorting out debt repayment options?  Click here for help.

Image courtesy of Flickr and Dan Moyle.

Ten

Ten years ago this month the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became effective. The act was designed to make filing bankruptcy more difficult by requiring filers to provide more information to court trustees that supervise the process and by installing a mathematical formula to keep higher income debtors out of chapter 7.

Is the reform act at success? Hardly. Despite the fact that some changes in the law had the effect of supplying the court with more income information and imposed limits on repeat filers, the vast majority of changes were unnecessary and are detrimental to the process.

The Good Reforms:

  1. Limits on Repeat Filers.  The drafters of the reform act felt that some people file too often, especially on the eve a foreclosure sale. BAPCPA limited how often a person could file bankruptcy. Chapter 7 cases may only be filed once every 8 years and those individuals who have been debtors in several cases within the preceding year do not automatically get protection without seeking court review of their case.
  2. Forum Shopping.  Some states have generous exemption laws that protect a debtor’s property, while other states are more frugal. BAPCPA curtailed this process by requiring debtors to use the exemption laws of the state a they lived in the majority of the two years prior to filing bankruptcy.
  3. Homestead Exemption Limits.  Prior to BAPCPA, wealthier debtors moved to states with unlimited homestead exemptions (such as Texas and Florida) and protected their money by purchasing expensive mansions. BAPCPA put a cap on homestead exemptions.  Sorry kids, no moving to a beach house when daddy’s business goes down.
  4. More Income Documents Provided to Trustees.  Debtors must supply the bankruptcy trustee with their last two tax returns and 2 months of paycheck stubs.
  5. Bankruptcy Attorneys Responsible for Accuracy of Case.  The reform act holds bankruptcy attorneys to a higher standard and requires that they perform a due diligence investigation of the information reported instead of just taking the debtor’s word for its accuracy. Good attorneys always did this, but it is fair to say that the reform act has put a healthy amount of fear in the hearts of bankruptcy attorneys.  Many attorneys, including this one, now obtain background reports to ensure that all property and property transfers are reported.

The Bad Aspects of the Reforms:

  1. Cost of Bankruptcy Skyrockets.  The cost of filing bankruptcy immediately doubled when BAPCPA was enacted, and for good reason.  Attorneys must gather substantially more information to prepare the case, they must prepare six-month income calculations and investigate the debtor’s financial condition much like an auditor.
  2. Means Test.  To keep higher income debtors out of Chapter 7 and to establish a nationwide standard of how much debt had to be repaid in Chapter 13, BAPCPA created a mathematical formula based on a debtor’s last six months of income. In practice, however, the Means Test has been a disaster to administer.  The central defect of the test is that most debtors do not have consistent income in the six months prior to filing bankruptcy. It is common that debtors have lost a good paying job just shortly before filing bankruptcy, so the six-month average does a poor job to forecasting what the debt they can really repay.  Conversely, some debtors were unemployed for a substantial time prior to bankruptcy but obtained a higher paying job just before filing. Past income is often a poor predictor of what future payments should be, but the Means Test is built on this faulty foundation. In addition, some types of income are not counted as income on the means test, such as Social Security income, so the test is often passed by debtors who really should fail.  Lastly, the means test favors secured debt so higher income debtors with big homes and fancy cars commonly pass the test while debtors who denied themselves such luxuries find they fail the means test.  Because of its complexity and poor drafting, bankruptcy courts struggle to establish a uniform method to apply the test.  The Means Test has failed its basic purpose and should be abolished.  Those who claim the means test has reduced the number of bankruptcies being filed are dead wrong.  Bankruptcy filings are down because the general rate of participation in the workforce is down.
  3. Mandatory Credit Counseling.  The drafters of the reform act require debtors to take a credit counseling class prior to filing bankruptcy and another course before the case is completed.  The idea here is that if people would just spend a little time getting the facts about budgeting and money management, perhaps fewer folks would file bankruptcy. This sounds nice, but as practiced this credit counseling is generally worthless.  Most of the courses are completed online and debtors just click through a series of mundane questions.  No real counseling is occurring.  Tragically, less sophisticated debtors without access to the internet are unable to get the credit counseling completed and, consequently, their homes are being lost to foreclosure and their paychecks are garnished. Thousands of debtors have lost their homes to foreclosure because bankruptcy attorneys are unwilling to meet with debtors whose homes are scheduled for sale until they complete the credit counseling class prior to meeting them.  Requiring a family who faces the humiliation of filing bankruptcy to learn about money management is just pouring salt in an open wound.  A single mom earning $9 per hour doesn’t need a credit counseling class–she needs housing, education, health insurance, child care and a higher paying job.
  4. Private Student Loan Discharge.  Prior to BAPCPA, a debtor could discharge a private student loan but not federally guaranteed loans.  The reform act now protects private student loans from discharge, and as a result there has been an explosion of debtors saddled with unmanageable student loan debt.  Private student loans are the single worst debt in America.  College financial aid departments steer students to these dangerous loans without any real discussion of the burden this will place on graduates and their families. Students are often unaware of the significant differences in repayment terms between federally guaranteed loans which offer income-based repayment plans and private loans which do not.  BAPCPA has created a monster student loan debt nightmare for millions of America’s young families and for the parents who foolishly co-signed these loans.
  5. Extended Duration of Chapter 13 Plans.  Prior to BAPCPA a chapter 13 case could be completed in 3 years.  Debtors with above-median incomes are now required to remain in chapter 13 for 5 years so that, in theory, they can repay more of their debt.  In reality, this change has decreased the success rate of chapter 13 payment plans and it also causes higher income debtors to load up on secured debts–especially car loans–prior to filing their case.  Debtors tied up in 5 year cases are not buying homes, cars, furniture, etc., and the economy as a whole takes a hit by taking these consumers out of the market.  Five year payment plans are too long.

Image courtesy of Flickr and Woodleywonderworks.

Zombie

We call these Zombie homes.  This is the home you move out of when you can no longer afford the payment or the home is in terrible disrepair.  These homes typically have no equity–they are worth far less than what is owed on the mortgage–and it may not seem possible to sell the home. Real estate agents balk at listing the home for sale until repairs are made, and the homeowner may not be in a position to afford the expense.  So, the home sits vacant, sometimes for years.

The problem with vacant homes is that you still own them.  You are responsible for cutting the lawn and shoveling the snow. Home association dues continue to accrue even after filing bankruptcy. Home insurance should be maintained in case someone is injured on the property. In some neighborhoods thieves will cut out the plumbing, air conditioners and fixtures. Vandals may break windows or spray paint graffiti on the exterior. The city inspector may impose fines for failure to maintain the home and they may even issue criminal citations if the problems go uncorrected. Owning a vacant home is a serious burden.

Homeowners are often shocked when banks do not immediately begin foreclosure after they stop making mortgage payments.  There are many reasons a bank may delay foreclosure.  Sometimes they have lost the mortgage documents and they cannot legally start the process. Sometimes they are swamped with foreclosures and can only process so many at a time.  In some cases they don’t want to foreclose because the home is condemned or damaged and is considered a liability to own.  I’ve seen homes that have sat vacant for nearly a decade.

A new option to deal with this problem is to use a Chapter 13 Plan to transfer ownership of the property to the bank. That is exactly what one homeowner did in the Minnesota bankruptcy court recently. (See In Re Stewart, 2015 Bankr. LEXIS 2948; 536 B.R. 273.)   The Chapter 13 Plan contained the following language:

Upon confirmation of this Chapter 13 plan, the Property shall vest in OneWest Bank, and the Confirmation Order shall constitute a deed of conveyance of the Property when recorded at the Registry of Deeds . . . . All secured claims secured by the Property will be paid by the surrender of the collateral real property and foreclosure of the security interest.”

Over an objection filed by the Trustee, the Minnesota court approved the plan and allowed the debtor to quitclaim the home to the bank.

Other cases support this new trend in bankruptcy courts as well.  The bankruptcy court for the Eastern District of New York has recently ruled that debtors have the right to surrender and convey a home to the bank over the bank’s objection.  In Re Zair, 235 B.R. 15 (2015).

The Zair case is significant and the court does an excellent job of explaining the Catch-22 situation debtors find themselves in when a bank refuses to foreclose:

If Debtors were not able to divest themselves of ownership of the Property, they would be left in limbo while HSBC decides whether and when to proceed on its foreclosure action, thus incurring the continued liabilities associated with the property ownership, such as accruing property taxes.”

Other courts have ruled that the bank must agree to the surrender. (See In re Rosa, 495 B.R. 522.)  It seems like the better reading of the Code allows a home to be conveyed over the bank’s objection.

If you have a home that you wish to surrender and efforts to sell the home appear futile, consider using a Chapter 13 Plan to transfer ownership of the home to the bank.

Image courtesy of Flickr and Nicholas A. Tonelli

Medical Bills

Medical debts account for nearly 62% of all bankruptcy cases filed according to a Harvard study.  The actual number may be even higher since medical debts turn into credit card debts and mortgage debts as people try to pay off debt collectors.  Although some medical debts are incurred when a person is temporarily uninsured, many are a result of ongoing  medical conditions that continue throughout the bankruptcy case.

It is amazing to see how much medical debt can be acquired even when a person has insurance.  Some deductibles are high and it seems like most consumers do not know how to respond when the claim is denied. Many treatments are not fully covered and medical supplies for diabetes and other conditions are just not covered very well under most policies.

This problem is especially heightened when new medical debts are incurred during a bankruptcy case.  Generally speaking, bankruptcy cases only cover those debts you owe on the day the case is filed.   Although Chapter 7 cases are completed in about 100 days, a Chapter 13 case can last up to five years and it is common for debtors to incur substantial new medical debts during the case.

What can you do when new medical debts are incurred during a bankruptcy case?

  1. Convert the case to another bankruptcy chapter.   Chapter 13 cases can be converted to Chapter 7 in most cases.  Some special rules apply, but if you were eligible to file chapter 7 on the day the chapter 13 case was filed you probably can convert the case to chapter 7 now and add all the new medical debts.
  2. Dismiss & Refile.  I have seen cases where a client suffered significant medical debt a few weeks after filing a case.  You do have the right to dismiss the current case and start over.
  3. Negotiate the Debt.  While you are in the middle of a bankruptcy case a creditor cannot garnish wages or bank accounts.  Some chapter 13 cases last for up to five years.  Since creditors prefer not to wait, request a discount on the amount owed in exchange for a payment now.

Converting a case from chapter 13 to chapter 7 can create problems if car and loans have not been paid in full or if the chapter 13 plan deeply discounted the interest rate of the car loan.  It is common for chapter 13 plans to reduce interest rates from 18% down to 5.25%.  (Secured auto debts in chapter 13 cases only pay the Prime Rate plus 2%).  So, when a case converts to chapter 7 the benefits of the chapter 13 plan vanish and the auto lender may demand the loan be made current at the original contract rate.  Be careful in assuming that the car is safe when you convert the case.  Sometimes it is wise to call the auto lender before converting the case to see what the new payment will be or if a large cure payment must be made.

When chronic medical problems exist and health insurance coverage is spotty, it is generally wise to file chapter 13 to take advantage of the ongoing protection from medical creditors.  If major surgeries are planned in the near future, perhaps it is best to start the bankruptcy as a chapter 13 case with the idea of converting to chapter 7 later just in case some of the medical bills are not covered by insurance.

Image courtesy of Flickr and Chuck Olson.

Hospital

“I want to file medical bankruptcy.”  I get that phone call a lot.  The situation is that many people are current on their house, car and credit card payments, but they were hit by a wave of medical bills and just want to file bankruptcy on those debts.  Can a person just file bankruptcy on medical debts?  Is there such a thing as medical bankruptcy?

Technically, there is no such thing in the law as medical bankruptcy, and there is no way to file bankruptcy by only listing medical debts.  When you file bankruptcy all debts are listed.  In fact, when somebody files bankruptcy they sign a sworn statement that says, under penalties of perjury, that they have listed ALL their debts.

When someone says they filed medical bankruptcy what they mean is that they filed not because of irresponsible spending but because of something beyond their ability to control–their health.  You hear the term medical bankruptcy a lot for good reason.

NerdWallet estimates for 2013:

  • 56M Americans under age 65 will have trouble paying medical bills
    – Over 35M American adults (ages 19-64) will be contacted by collections agencies for unpaid medical bills
    – Nearly 17M American adults (ages 19-64) will receive a lower credit rating on account of their high medical bills
    – Over 15M American adults (ages 19-64) will use up all their savings to pay medical bills
    – Over 11M American adults (ages 19-64) will take on credit card debt to pay off their hospital bills
    – Nearly 10M American adults (ages 19-64) will be unable to pay for basic necessities like rent, food, and heat due to their medical bills
  • Over 16M children live in households struggling with medical bills
  • Despite having year-round insurance coverage, 10M insured Americans ages 19-64 will face bills they are unable to pay
  • 1.7M Americans live in households that will declare bankruptcy due to their inability to pay their medical bills
    – Three states will account for over one-quarter of those living in medical-related bankruptcy: California (248,002), Illinois (113,524), and Florida (99,780)
  • To save costs, over 25M adults (ages 19-64) will not take their prescription drugs as indicated, including skipping doses, taking less medicine than prescribed or delaying a refill

“Medical Bankruptcy” is really Chapter 7 or Chapter 13 Bankruptcy.

When someone says they filed medical bankruptcy they really mean to say they filed Chapter 7 or Chapter 13 bankruptcy.  All debts must be listed, even the ones you want to keep, such as auto and mortgage debts.  However, this is not really a big problem you can sign Reaffirmation Agreement in Chapter 7 cases to keep and revive the debts you want to keep.  A Reaffirmation Agreement basically pulls a debt out of the bankruptcy case so that you can keep the car, home, etc, and continue the benefit of getting positive credit reporting.

Ongoing Medical Bills: The benefit of Chapter 13 cases.

I meet many clients who suffer from ongoing medical problems. Even if they file Chapter 7 today to wipe out the medical bills, in six months they are right back where the started with new medical debts.  They may lack health insurance or the insurance they have contains loopholes that don’t cover certain medical treatments.  Such individuals may benefit from the extended protection of Chapter 13.  Chapter 13 cases can be open from 3 to 5 years and may eventually be converted to Chapter 7 to add new medical bills that accrued during the bankruptcy.  While a person is in Chapter 13 creditors may not garnish paychecks or bank accounts.  In some ways, Chapter 13 is something of a drastic form of health insurance.

Image courtesy of  Flickr and Scott Kless.

Help

A recent client asked this great question:

Is there such a thing as getting help to avoid bankruptcy? My wife and I have a small business.  We are struggling to keep it going.  We’re down over 50% this year, we’ve cut some expenses, and customer payments are dragging.  While we are not unique, and I am sure you have heard it before, but we would like to avoid drowning. Please let us know if you would be available/interested in a consult.

The short answer is YES!  We help people avoid bankruptcy every day.  Filing bankruptcy is something you do when nothing else works.  It is the last option.  The process of deciding to file bankruptcy is really a process of elimination–when no other option solves the entire debt problem you then focus on bankruptcy.  Partial solutions are no help.  Settling one debt or one lawsuit is nice, but if it does not solve the whole problem it is just throwing money away.  The benefit of bankruptcy is that it is a complete solution.

So how do we help clients avoid bankruptcy?

DEBT PAYMENT PLANS.

How much does it cost per month to get out of debt?  You must answer that question before you consider bankruptcy. This is a two-step process:

STEP ONE: List the debts.  Making a list of your debts is about as much fun as getting on a scale after going out for dinner.  There comes a time when you stop opening the mail and lose track of how much you owe.  It’s depressing so you avoid it.  If you really want to avoid bankruptcy you need to write down a list of who you.  Follow these steps to prepare a list.

  • Open the mail.  Stop throwing away collection letters.  Go through the pile of envelopes pushed to the corner.  Sort the debts, put them in separate files, use color-coded three ring binders, etc.  Do whatever it takes, but organize what you have.
  • Get a credit report.  Go to www.AnnualCreditReport.com for a free copy of your credit report.
  • Search for lawsuits and judgments online in Nebraska.  Here is an article to help search the public records online.
  • Some debts do not appear on credit reports.  Just write the Name and Address of your creditors and estimate the amount you owe each.
  • Call creditors to figure out the balance owed.
  • Locate student loans using the National Student Loan Data System.
  • Write the interest rate charged by each creditor next to the balance owed.
  • Divide the list into Secured creditors (mortgage auto, furniture loans) and Unsecured creditors (everybody else).

STEP TWO:

  • Add up the list.  How much do you owe in total?
  • Divide the total by 36.  Can you afford that payment?  For example, if you owe $18,000 of debt, can you afford to pay $500 per month?  This is a rough estimate of what you need to pay each month to become debt free.  Call it the “Rule of 36”.
  • Consider a debt management company such as GreenPath to set up a debt payment plan.  I prefer counselors belonging to the National Foundation for Credit Counseling.

DEBT SETTLEMENT.

Most of the people in debt settlement programs should not be in them.  Most of the debt settlement plans I review have virtually no chance of succeeding.  Why?  You need money on hand to settle debts.  If you cannot raise enough settlement funds quickly enough the creditors will file lawsuits and begin garnishments before you can settle all the debts.  As a general rule, you need about one-third of what you owe in cash within 6 months of stopping payments to creditors to have any chance of settling all the debts.  Creditors will typically settle debts for about 40% of what is owed, but they want the settlement in cash now.  If you are able to raise cash quickly debt settlement might be an option.  We help clients settle credit cards and other debts every day, but only if we see a reasonable chance of all accounts being settled.

LAWSUIT DEFENSE.

Can the creditor prove you owe the debt?  Has the Statute of of Limitations expired?  Can the creditor provide a copy of the credit card agreement?  Are you being sued for a medical debt that your health insurance should have covered?  Over 90% of creditor lawsuits result in Default Judgments.  We can show you how to respond to lawsuits and to demand an accurate accounting of the debt.

BUSINESS REORGANIZATION.

Sometimes a small business is so overcome by debt that it must reorganize.  Some small business corporations are so saturated with debt that it must start over.  It is possible to form a new corporation and start with a clean slate.  There are special rules to follow to prevent the old corporation from contaminating the new company, but this is a valid strategy to reorganize without filing bankruptcy.  Personal guarantees of business debts must be considered as well.

The bottom line is, there are many ways out of debt.  You need to consult with an attorney that carefully goes through each option.  That is what we do.  We can help you avoid filing bankruptcy if you visit with us before the situation gets out of hand.

 

 

 

 

 

 

Image courtesy of Flickr and David J. Dalley.