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

A recent client asked the following question:

“I am unable to make the payments on my credit card accounts due to my wife’s income dropping, and I am currently working with a debt relief company that negotiates with the credit card companies to reduce the amount I owe.  Unfortunately, I am having a hard time setting aside enough money to escrow for settling even the reduced amounts. I also recently learned that in most cases the IRS will tax me on the amount that is forgiven by the credit card companies, which negates some of the savings I would realize. I would like to know what the advantages of bankruptcy are over the method I am currently pursuing.”

I meet new clients every week with this exact same story.  They come see me when they have been sued despite the fact that they had hired some agency to settle the debts.

The facts are, most debt settlement programs do not work.  Why?  Because to settle debts you need cash in hand.  Almost every debt can be settled for less than what is owed, but you need cash to settle.

As a general rule, you need about one-third of what you owe in cash within 6 months of stopping payments to creditors to effectively settle debts.

Debt settlement companies advise that you stop paying all your credit cards and instead that you start paying them money into an “escrow account” so they can settle the debts.  The programs are really attractive since the settlement payment tends to be much lower than your current credit card minimum payments.   That’s the hook–it seems so much more affordable than your current plan.  The problem is, most of the negotiation plans are doomed from the start because there is not enough money saved in the settlement fund quickly enough to effectively settle the debts.

Here are some examples of debt settlement programs I have seen:

 Monthly  Income  Amount of Debt Monthly Debt Settlement Payment Funds Available in Six Months Percent of Debt Saved in 6 Months
                     2,495             74,178                         1,000                               6,000 8%
                     3,350             51,673                            942                               5,652 11%
                     2,200             17,500                            317                               1,902 11%
                     3,900             46,518                         1,078                               6,468 14%
                     2,900             36,712                            517                               3,104 8%
                     4,240             49,798                            740                               4,440 9%
                     1,200             24,434                            400                               2,400 10%
                     1,540             38,867                            868                               5,208 13%
                     2,800             31,222                            470                               2,820 9%
                     4,600           100,159                         1,539                               9,234 9%
                     4,000             96,313                         1,237                               7,422 8%
                     3,000             22,432                            499                               2,994 13%
                     3,300             84,498                            383                               2,298 3%

Do you see the problem here?  There is only about 10% of the debt balance saved in cash after six months of not paying creditors.  That is not enough to settle the debts.  You need about 33% of the debt balance in cash within six months of stopping payments to creditors in order to be able to effectively settle the debts.  10% is a joke.  The program seems like it is working at first because the agency has settled a few smaller balance accounts, but eventually you get sued and realize the program is not going to work.  The success rate of debt settlement programs is probably less than 10%.  It may be less than 5%, but the industry does not report this statistic so it is hard to estimate.

“The success rate of debt settlement programs is probably less than 10%.”

Tax Consequences of Debt Settlement.

There can be income tax consequences to debt settlement.  The credit card companies may send you IRS Form 1099-C: Cancellation of Debt for the amount you did not pay.  If you receive such a form, you will need to complete IRS form 982 on your tax return.  Here is a video on this topic.

Final Thoughts.

Does debt settlement work?  Yes, it works for some people, but not many in my opinion.  We settle debts for clients every day.  Debt settlement can be a smart way to avoid bankruptcy, but you need cash.  A lot of cash within 6 months.  If you can raise the cash this might be an option.  Instead of hiring an unknown company located in a distant state, contact a licensed attorney in Nebraska with experience in settling debts.

Have you tried debt settlement?  Share your experience here.

Image courtesy of Flickr and 401(k) 2012

ConAgra

ConAgra announced today that it was cutting 1,500 jobs from its Omaha workforce and that it would move the company headquarters to Chicago.  1,200 workers will remain in Omaha for now, but over time those jobs will probably disappear as well.  That giant sucking sound you just heard was about $100 million of payroll leaving the city.  And that is just the impact at ground zero. There will be waves of economic consequences rippling through the Omaha community over the next year.  This is a big loss for Omaha.

I’ve seen many cycles of corporate layoffs over the past twenty years in Nebraska.  There are common themes to these cycles, and now is a good time to share some of the insights we have collected over the years.

Here is what ConAgra employees need to consider right now, especially those who already carry a hefty debt load:

  1. Retirement Accounts.  Do not touch that retirement account.  It’s temping to tap into retirement savings when you are between jobs.  Bad idea.  You think it is a temporary situation and that you will replenish the funds when the new job arrives.  Retirement withdrawals come with tax consequences and an extra 10% tax penalty for those who are under age 59 & 1/2.  I’ve seen countless people over the years who have burned through hundreds of thousands of savings trying to maintain the mortgage, auto and credit card payments only to wind up in bankruptcy when the account ran dry. Remember this, retirement accounts are protected from creditor claims.  Retirement accounts are protected in bankruptcy and outside of bankruptcy.  Keep the money in the retirement account.
  2. Downsize Now.  Some ConAgra workers will find comparable jobs quickly, but most won’t.  Fortune 500 jobs don’t come around every day.  Take a close look at your monthly housing and auto expenses and ask yourself this question:  If your income drops by 50% can you still keep the home and car?  Start living the new normal today. Consider selling the home and trading in for a cheaper car now.
  3. Be Prepared to Earn Less.  You’ve got years of experience.  You wrote the book on how things get done.  You are not going to compromise and accept a demeaning job working with people half your age for half of what you were earning before.  Think again.  If you are a middle aged worker you will face a lot of age discrimination in seeking a new job.  Younger managers feel threatened and uncomfortable with hiring older, smarter, more-experienced employees.  Waiting for the right job to come along is a mistake.  The longer you go without being employed the worse it looks. Employers shy away from hiring people with long gaps in their employment  history. Be willing to take a lower paying job now to maintain a continuous employment history. You can always upgrade jobs later.
  4. Be Willing to Move.  Omaha now has 4 Fortune 500 companies left, and one of them, Union Pacific Railroad, has been eliminating jobs recently as well. Chances are you will need to be willing to move to another state to find a similar job.
  5. Stay Fit.  With layoffs come depression. The tendency is to hole up and watch movies, eat donuts, etc.  Start moving.  Set specific goals and consider getting a trainer to reach them.  You are used to structure in your daily life.  That is a good habit to maintain.
  6. Network.  This should be obvious.  Take every opportunity to communicate with the people in your life.  Press the flesh.  Do lunch, chat with Facebook friends, update the LinkedIn profile.
  7. Volunteer.  It is important to stay working.  Helping others always leads to better things and it offers a chance to network.  You have vital skills that will benefit others and it keeps you mentally alert and fills in gaps in the resume.
  8. Add up the Debts.  Now is the time to make an inventory of every debt you owe.  How bad is it?
  9. Consult with a Debt Professional.  I can’t tell you how many people I meet that I could have steered away from bankruptcy had they only talked with me sooner.  If a debt problem already existed before the layoff it is time to meet with a professional in debt management.  Maybe it is time to clear the debts in bankruptcy while your income is low.  Perhaps you did not qualify for bankruptcy because of your high-paying job at ConAgra, but now you have options.  Maybe debt settlement is a better option if a large severance package is coming your way.  You have options.  Talk with a professional about what option is best.

Well, congratulations to Chicago for taking our beloved ConAgra away from Omaha.  Hey Governor Ricketts, since your family owns the Chicago Cubs, can you move them to Omaha? Just a thought.

What is your advice to ConAgra employees?  Let’s hear it.

Image courtesy of Flickr and Ali Eminov.

Going out of Business

I still remember being in the bankruptcy meeting room waiting for my client’s turn to see the Chapter 7 Trustee.  What I saw was a classic mistake made by young and inexperienced bankruptcy attorneys.

Trustee:  So how long have you owned the painting supply business?

Debtor: About 8 years.

Trustee: I see that you rent the store space and that you value the business equipment at $5,000, is that right?

Debtor: Yes, that’s correct.

Trustee: Are you owed accounts receivables?  Do customers owe you money today?

Debtor:   Yes.

Trustee: How much do they owe?  What is the total?

Debtor: About $15,000.

Trustee: And your inventory of paint, how much is that worth?

Debtor: About $10,000 to $15,000.

Trustee: Okay, and my understanding is that you are a sole proprietor.  You are not incorporated.  Is that correct?

Debtor:  Yes, that is correct.

Trustee:  Okay, well I’m going to claim your inventory and accounts.  I want you to stop operating the store now and deliver the keys to my office.

And just like that, the business was over.

The tragic thing is, neither the bankruptcy attorney nor the client thought this would happen.   They thought the business was safe because the business owed way more in debts than it had in assets.  In truth, the business did owe a lot of debt for rent, supplies, utilities, taxes, etc, but none of that mattered.

When you are a sole proprietor there is no such thing as a business being separate from you. You are the business.  The business assets are your assets.  In your mind you think of the business as a separate creature, but it is not.  The “business” is nothing more than a collection of assets and debts that is combined with your personal property and debts.  There is no distinction.

Now consider how this case would have turned out had the business owner incorporated the business prior to bankruptcy.  Instead of owing a painting supply business the debtor would have owned stock in a company that operated a painting supply business.  The corporation would have owned the business property and the corporation would have owed the various debts.  Since the debts of the company would have exceeded the value of the business assets, the stock of the company would have been worthless.  The business would have been safe from the Chapter 7 Trustee since the company’s stock would have had a negative net worth.  The trustee could not “cherry pick” the business assets.

There is a key difference between owning a business individually and owning stock of a company that operates a business.

SHOULD YOU INCORPORATE YOUR BUSINESS PRIOR TO FILING BANKRUPTCY?

Some businesses are so simple that there is no need to incorporate.  A home daycare may not have very many assets to protect (but watch out for receivables).  Some businesses are simple personal service businesses, so incorporation may not be necessary.  But if the business owns significant assets or if substantial inventories or receivables exist, it is probably best to incorporate the business prior to bankruptcy.

Transferring assets to a new company on the eve of bankruptcy can be a dangerous activity. Chapter 7 trustees have special powers to undue property transfers, so incorporating a business is not a simple solution.  It is best to hire a very seasoned corporate attorney to set up the new business.  You may want to delay the bankruptcy filing until the current inventory and receivables are gone and new inventory and receivables are built up in the new corporation.  You need to be counseled by an attorney who is familiar with the bankruptcy law of Fraudulent Conveyances and Insider Preferences.

If you own a business that supports your family and need to file bankruptcy, slow down.  Make sure you don’t lose your business in the bankruptcy process.  Consider the safer Chapter 13 alternative if you sense too much risk in the quick but dangerous Chapter 7 case.

Image courtesy of Flickr and Marius Watz.

 

We represent lots of small business owners in Nebraska bankruptcy cases.  Starting a new business is an expensive learning experience.  There is an old saying that it takes seven years to grow a business. If you can survive seven years with doing things wrong–seven years of correcting your assumptions of how the business should advertise, hire, manage, purchase, spend money–then the light switches on and the business starts to succeed.

So you now reach a point where you have “figured out” the business, but the company is saddled with so much debt that it can’t move forward. You have reduced payroll, slashed wasted advertising, learned how to properly bid jobs, and focused on the core elements of running a successful business, but the old debt keep sucking all the cash flow and it needs to go away. Bankruptcy appears to be the best option, but are you ready to file?

WHO FILES THE BANKRUPTCY: THE OWNER OR THE COMPANY?

  • Personal Guaranty.  In most cases, it is the business owner that files the bankruptcy and not the company.  Why?  The usual answer is that you have signed a Personal Guaranty of the business debt.  Almost every bank loan to the company requires a personal guarantee, so even if the company were to file bankruptcy the bank would have the right to sue the owner for the debt.
  • Company Debts signed Personally.  A common mistake made when signing for company debts is the failure to properly notify the other party that you are signing on behalf of the company and not signing for the debt personally.  For example, if you sign a contract for Joe’s Plumbing but just sign the contract as “Joe Smith” the debt is probably a personal debt.  To take the advantage of the Limited Liability benefit of being incorporated, you must clearly put the other party on notice that you are signing in a corporate capacity and not in a personal capacity.  The contract should be signed as:  Joe’s Plumbing, INC. by Joe Smith, President.   See the difference?  The first signature was vague as to who was signing for the debt, but the second example is not vague.  It clearly states that you are signing as a corporate officer of an identified corporate entity, not personally.  Most business owners do not take the time to sign company contracts correctly, so they become personally liable for the debt.
  • Corporations do not receive bankruptcy discharges.  Corporations do not receive a discharge of debt in Chapter 7 cases.  The purpose of Chapter 7 for corporations is to have a court-appointed trustee liquidate the company’s property in an organized fashion.  So, if you are closing a company and want to sell off the assets to pay back the debts but certain aggressive creditors are seizing the assets and will sell them for far less than they are worth, chapter 7 may make sense.  But if you intend on still operating the business filing chapter 7 is about the worst decision you can make. The debts survive the corporate bankruptcy and while the case is pending you cannot operate the business without the bankruptcy trustee’s permission.
  • Preference Payments & Fraudulent Conveyances.   A chapter 7 trustee has the power to undue transfers made to an “insider” within a year of filing bankruptcy.  Owners of the company are considered to be insiders.  So, the Trustee will scrutinize any payment made to the owner within a year of bankruptcy and may demand that you repay the money to the company.   Also, the trustee has the power to undue any transfer of company assets made within four years of the bankruptcy if the company did not get equivalent value in the trade.  For example, if you transferred a company vehicle into your personal name in the past four years to keep it out of the reach of creditors, the bankruptcy trustee may be able to make you return the vehicle or pay back its value.

IS IT TIME TO INCORPORATE AGAIN?

If the company has become saturated with debt it may be time to organize a new corporation so that new revenue and property may be held by a new company.  If you don’t have one, now is the time to establish a relationship with a smart corporate attorney to create a new entity and to get counsel on how to keep the new company free of the problems of the old toxic company.  This is not the time to skimp on legal fees or to use an online incorporation service.  You need good counsel.  You need a business coach.  You need someone who has seen every mistake a business can make and who can help you avoid those pitfalls.  Hire the best corporation attorney you can find.  It is the best money you will ever spend.

BE CAREFUL WHEN TRANSFERRING ASSETS FROM THE OLD COMPANY TO THE NEW COMPANY.

If you transfer title to all the old company’s assets to the new company rashly, creditors may argue that the old company’s debts should attach to the new company.  This is why it is critical to hire an experienced corporate attorney.  The dudes at Legal Zoom will not be there when problems arise and the new company is under attack.  You are not going to figure out this issue by yourself–there are too many rules.  Hire the experienced counsel.

Image courtesy of Flickr and reynermedia.

An article I wrote on Zombie homes a while back generated a lot of response.  A lot of folks across this country were struggling with the same problem.  They moved out of a home they no longer could afford and quit making the mortgage payment. Many of these folks had filed a bankruptcy case and assumed the bank would conduct a foreclosure sale of the home quickly.

Unfortunately, many banks delayed the foreclosure and the homeowner got stuck owning a home and the burdens that go along with ownership: cutting the grass, shoveling the sidewalks, complying with local building codes, and paying for home insurance.  Vacant homes became vandalized.  Since the homes were worth far less than what was owed on the mortgage loans, it became extremely difficult to sell the homes unless the banks would agree to a Short Sale.

Why to banks refuse to foreclose?  Sometimes they have lost the mortgage documents and they cannot legally start the process. The home may be in terrible disrepair and they do not want to take ownership.  Some banks are swamped with defaulted mortgage loans and they only handle so many foreclosures at a time.

There are some basic strategies to deal with Zombie homes:

  1. Move back into the home.  Until the home is sold you own it with the right to occupy. Live in the home until a a foreclosure sale is actually scheduled.
  2. Rent the home.  Again, you own the home and have the right to rent it.
  3. Sell the Home.  Some real estate agents specialize in Short Sales.  They are skilled with negotiating with the banks to accept less than what is owed on the mortgage.
  4. Quitclaim the home to the bank.  This is a questionable strategy since there is some doubt about whether a person can “force” a home on the bank.
  5. Donate the home.  You might not want to live in the home any longer, but maybe you can find someone who needs temporary housing and who is unconcerned about the eventual foreclosure.  You can quitclaim the home to them and they can assume the burden of ownership.
  6. Sell to an investor.  I have met real estate investors who will take ownership of a home subject to the mortgage loans.  Why?  Because they will rent the home until the foreclosure sale occurs.

A new strategy is to transfer ownership of the home to the bank through a Chapter 13 Plan.  (A chapter 13 is a 3 to 5 year repayment plan where a person pays back some of their debt based on their income and other factors.)

In the New York bankruptcy court, Raymond and Christine Zair’s Chapter 13 Plan provided for the surrender of their home “in full satisfaction of the secured portion of the first mortgage owed,” and that title to the property would be vested in the bank.  The Plan stated that “the confirmation order shall constitute a deed of conveyance of the property when recorded with the county clerk’s land records.”   The bank objected to the plan but the court approved it.  The case is now on appeal.

Can you file a chapter 13 plan in Nebraska to force the bank to take back the home?  There is no case deciding this issue in Nebraska yet, but it may be a valid option worth trying.   This option is only available in Chapter 13 cases.

Image courtesy of Flickr and Mike Eaves.

Mail Box

The Nebraska Court of Appeals has issued an important decision that clarifies the right to set aside default judgments, regardless of how old the judgment is, when the defendant had no actual service of the lawsuit papers. Well, the issue is now clear, except when it is not clear, which is to say I’m confused again.

In Capital One Bank vs. Lehmann, the defendant, Nelseena J. Lehman was sued in  November of 2009 for $2,942.37 for an unpaid credit card account.  The court summons was sent by Certified Mail and was signed by her estranged husband who did not inform her of the lawsuit.   Since Lehmann did not respond to the lawsuit, a motion for default judgment was awarded in February 2010.

Lehmann claims that she had no actual notice of the lawsuit since she moved to Oklahoma in September of 2009 and did not return to Nebraska until June of 2011.  Upon receiving a garnishment notice she motioned the court to set aside the default judgment in June 2014. That motion was denied and Lehmann filed her appeal.

The first half of the court ruling gives great assurance that default judgments obtained without notice to the defendant may be set aside at any time.  “A judgment entered without personal jurisdiction is void.”  The court cites the case of Ehlers vs. Grove, 147 Neb. 704 (1946) to underscore the basic rule that “every court possesses the inherent power to vacate void judgment, either during the term at which it was rendered or after its expiration.”  The Ehlers case states declared that “. . . Nor is it necessary that a meritorious defense be shown on the part of the defendant . . .” The fact that no service was obtained is enough to set aside a default judgment at any time for any reason or no reason at all.

The second half of the opinion was not so great.

The Court of Appeals focused on Nebraska’s service of summons law, Neb. Rev. Stat. §25-505.01 which provides that “Certified mail service which shall be made by (i) within ten days of issuance, sending the summons to the defendant by certified mail with a return receipt requested showing to whom and where delivered and the date of delivery, and (ii) filing with the court proof of service with the signed receipt attached.”

Citing a prior case, the court declared that “due process requires notice to be reasonably calculated to apprise interested parties of the pendency of the action and to afford them the opportunity to present their objections.”  Doe v. Board of Regents, 280 Neb. 492, 508 (2010).

The court noted that here was no record of Lehmann notifying the bank that she moved to Oklahoma or that she forwarded her mail.  “It is unclear how Lehmann’s temporary marital or living status affects Capital Ones’ reasonable reliance on, presumably, an address provided to them by Lehmann for the purpose of her maintaining an account.”  Unlike the Ehlers case where there was no service of summon at all, in this case due process was not violated because notice was reasonably calculated to apprise Lehmann of the lawsuit.  So, the court ruled that Lehmann was properly served and her appeal was dismissed.

The court’s conclusion is difficult to comprehend.  Why does it matter that Lehmann failed to provide a new address?  Has it been determined that it was, in fact, her account?  Was that fact admitted in the motion?  Would it have made a difference if Lehmann was a battered spouse requiring an immediate exit from the family home?  Would that make her failure to change the address more reasonable?  If her estranged husband admitted that he purposely hid the lawsuit to get back at her would that have made a difference?  If the certified mail receipt was signed by a subsequent tenant of the home instead of the estranged husband, would that make a difference? Of course it would.  The court seems to be saying that it is Lehmann’s fault for not getting notice. The court talks about whether notice was reasonably calculated to apprise the interested parties, but then it goes on to attack Lehmann’s conduct as not being reasonable.

Is it the the plaintiff’s conduct that must be reasonable in serving notice or is it the defendant’s behavior that must be reasonable to be available for notice?  Isn’t every notice sent by a creditor to the last know address of the customer reasonably calculated to provide notice?

The undisputed fact in this case is that the defendant never received notice until her paycheck was being garnished.  That should have made a difference.

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

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.

“Insurance is the business of collecting premiums.”

Jorge was explaining to me why he needed to file bankruptcy.  Lots of medical debts, about $50,000 in total.  Most of it came from a heart attack he suffered a year ago.  The odd thing was, he had health insurance through his employer but his claim was denied because he was treated at a Norfolk, Nebraska hospital that was out of his insurer network.  But how could an emergency visit for a heart attack not be covered?

The truth was, his policy did cover the emergency visit.  Under the Prudent Layperson Standard of the Affordable Care Act/ObamaCare, all health insurance policies must cover medical emergencies.  A “medical emergency” is defined as “a condition with acute symptoms of sufficient severity (including severe pain) that a person who possesses an average knowledge of health and medicine could reasonably expect the absence of immediate medical attention to result in—(i) placing the health of the individual (or an unborn child) in serious jeopardy, (ii) serious impairment of bodily functions, or (iii) serious dysfunction of any bodily organ or part.”  Jorge’s claim should have been paid.

WHAT SHOULD YOU DO IF YOU ARE SUED FOR A MEDICAL DEBT THAT INSURANCE SHOULD HAVE PAID?

  1. File a Written Response to the Lawsuit.  Over ninety percent of all collection lawsuits result in a Default Judgment because the debtor failed to file a response to the lawsuit.  The response must be in writing and must be filed with the Clerk of the Court within 30 days of receiving the court summons.  Read this article to learn how to file a response to a lawsuit.
  2. Contact your Health Insurance Company.  Did they receive an insurance claim from the hospital?  Was the claim denied?  Did they send you an Explanation of Benefits to state how much of the claim would be paid?  It’s time to get organized.  Pull out the three-ring binder and organize all medical bills and Explanations of Benefits.
  3. Contact your doctor.  Did your doctor file a claim?  Can they send you a copy of the claim they filed?  Was the claim properly coded to ensure payment?  Lots of medical claims are denied because the paperwork is completed incorrectly.  Your doctor wants to get paid and they can help determine why a claim was not paid.  Show them the denial of claim coverage and ask for help.
  4. Appeal the Claim Denial.  You have the right to appeal the denial of your medical claim, although few people take this sensible step. It costs nothing to appeal a claim denial.  Your health insurer has an appeal form that is generally available on their website to protest a claim wrongfully denied.  Your doctor’s office may be able to help with the appeal.
  5. Sue the Health Insurance Company.  If you were sued for a medical debt that your health insurance company  wrongly denied, consider suing your insurance company.  You may need to appeal the claim denial with the insurer first, but if that result is unsatisfactory you have to right to sue them for payment.
  6. Negotiate the Debt.  Contact the attorney suing for the debt and ask if they would reduce the debt in exchange for a quick lump-sum settlement.  Keep in mind that most collection attorneys are in court much of the week and you may need to speak through their paralegal about the settlement.  Also, remember that you should never send money to the collection company until you have a settlement letter in hand.
  7. File Bankruptcy.  According to a Harvard study, medical bills account for nearly 62% of all bankruptcies filed.

The insurance industry is experienced in denying claims.  Sometimes they only pay claims when they perceive that they will be sued if they don’t honer their contract.  Demand that they fully explain why your claim is being denied and if their answer seems like nonsense, it probably is. Fight back.  Get educated. Get help.

Image courtesy of Flickr and daleonsouth.