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I had the pleasure of attending the Nebraska Association of Trial Attorneys seminar held at the Nebraska College of Law a week ago, and it got me thinking about how much trial attorneys need to understand about the bankruptcy process.  In a nutshell, here are seven things every trial attorney should understand about bankruptcy.

1. Injury Claims Must Be Listed as Asset on Bankruptcy Schedules.   A debtor must list all his or her property in the bankruptcy schedules.  The bankruptcy estate includes every interest of the debtor including causes of action owned by the debtor.  This is especially critical in Chapter 7 cases where all of the property of the debtor is temporarily vested in the Chapter 7 Trustee until the Trustee reviews the asset schedules and interviews the debtor.  If the injury claim is not listed as an asset, the claim remains in the possession of the bankruptcy trustee, and that means the debtor does not have standing to proceed with the injury claim after the bankruptcy case is completed.  Armed with that information, counsel for the defense may seek a motion to dismiss the injury claim if it was not listed in the bankruptcy schedules since the debtor lacks standing and such a dismissal, of course, may then cause the unpleasant topic of an expired statute of limitations on the injury claim to arise.

Do you know if your PI client filed bankruptcy?  Is that question on your client intake form?  Is that question asked again prior to trial?  If the claim was listed, how was it listed?  Have you reviewed a copy of the bankruptcy schedules?  Have you checked the federal PACER computer system for possible bankruptcy case filings?  How will you respond to a client whose case is dismissed after the statute of limitations has expired when they say “I thought you knew that I filed bankruptcy because of all those medical bills I was facing?”  

2. Personal Injury Claims are Exempt under Nebraska Law (but it may constitute Disposable Income).  Nebraska Statute 25-1563.02 provides that “all proceeds and benefits,   including interest earned thereon, which are paid either in a lump sum or are accruing under any structured settlement providing periodic payments, which lump-sum settlement or periodic payments are made as compensation for personal injuries or death, shall be exempt from attachment, garnishment, or other legal or equitable process and from all claims of creditors of the beneficiary or the beneficiary’s surviving dependents unless a written assignment to the contrary has been obtained by the claimant.” Some Chapter 7 Trustees questioned whether this exemption protected compensation awarded for lost wages and medical expenses, however, the Nebraska Bankruptcy court ruled that the exemption expressly protects all proceeds and benefits including lost wages and medical expenses.  In re Rhea, BK 04-42427.

Although personal injury proceeds are exempt under Nebraska law, when a substantial settlement is received in the middle of a Chapter 13 payment plan this will open a discussion of whether the debtor is now able to pay a greater portion of their debts.  The Chapter 13 Trustee will need to be notified of the settlement and the trustee may inquire as to how the settlement will be spent.  The trustee cannot compel a turnover of the settlement, but they can seek to increase the bankruptcy payment or dismiss the case if it is apparent that not all of the funds received will be necessary to pay future medical bills or basic living expenses. 

3. Motion for Relief from bankruptcy stay required to allow litigation.   The filing of a bankruptcy petition causes a federal injunction to automatically come into existence that stays all collection efforts against the debtor, and this injunctive relief is commonly referred to as the “Automatic Stay.”    In a cause of action involving claims and counterclaims it may be necessary to obtain authority from the bankruptcy court to allow the personal injury claim to proceed.  Bankruptcy courts will commonly grant limited relief from the bankruptcy stay to allow the parties to an injury lawsuit to proceed with litigation under the provision that any settlement of the case be subject to future court approval.

4. Chapter 7 is Fast. Chapter 13 is Slow.  Which do you need?   Chapter 7 cases are completed in approximately 90 days whereas a Chapter 13 case is open for three to five years.  If a settlement of a claim is expected in the near future, most debtors are better off filing a Chapter 7 case so that they can be free of debt before they obtain possession of a large settlement.  A debtor who receives a large settlement before or during a Chapter 7 case may find that they are no longer eligible for the quick discharge if it is apparent that they have the ability to pay back some of their debt. Chapter 13 offers debtors the benefit of time.  It gives them the ability to reject low-ball settlement offers on their injury claim since they have the ability to hold off creditors while the case is pending.  Chapter 13 gives the debtor time to litigate their injury claim and to maximize their net recovery.  In addition, Chapter 13 offers flexibility in that a debtor may offer a minimal monthly payment to creditors at the beginning of the case while they are still healing from injuries or going through physical therapy and then increase the bankruptcy payment in the later years of the bankruptcy plan. 

5. Motion to Employ Counsel Required in Chapter 13 Cases.  In order to be able to be paid compensation for representing a debtor in a personal injury case it is necessary to request approval of the bankruptcy court to employ counsel.  Those lawyers who provide legal services to a debtor without seeking court approval risk having their request for compensation denied.  If you volunteer services there is no right to demand compensation.  Bankruptcy Code Section 327 provides that a debtor may, with the Court’s approval, employ one or more attorneys as long as they do not hold an interest adverse to the bankruptcy estate.  An affidavit of the personal injury attorney stating that they have no adverse interest to the estate should accompany the motion along with a copy of the legal service agreement.

6. Reaffirmation of Legal Services Agreement in Chapter 7.  What is the effect on a legal retainer agreement that is not reaffirmed in a Chapter 7 proceeding?  The simple answer is that the agreement is discharged and the compensation to be paid for services rendered to a debtor after the Chapter 7 case is filed is no longer determined by the agreement.  For this reason it is essential that the personal injury attorney either execute a reaffirmation of the original retainer agreement or sign a new retainer agreement following the completion of the Chapter 7 case. 

7. Motion to Approve Settlement:  A settlement that is reached during a Chapter 13 case must be approved by the bankruptcy court.  The claim is property of the bankruptcy estate, and a debtor is incapable to transferring or converting estate property without prior court approval.  In addition, the Chapter 13 trustee will be interested in seeing a copy of the settlement and a statement of the future medical or income needs of the debtor to determine if the debtor’s bankruptcy payment should be increased.

Image courtesy of Flickr and The May Firm.

 

Working with bill collectors can be challenging.  They come in different flavors and styles—some low key and professional and others harsh and downright rude.  A frequent complaint I hear is that they won’t take payments and demand the entire balance be paid at once or they will sue.  The new model of bill collection firms is to invest in technology systems that implement rigid collection procedures that reduce reliance on individuals who exercise personal judgment about when to sue and when to establish payment plans.  Many collectors just don’t offer payment plans these day and that causes many debtors to give up making any payments at all.

Here is what you should do when attempting to pay off a debt owed to an inflexible bill collector machine.

  1. Figure out if you can really pay the debt at all.  Some debts are just too big to pay.  If all you can afford is $100 per month on a $50,000 medical bill, there is no point in making any payment.  Are you paying enough each month to pay off the debt in a reasonable time?   Most bill collectors want the debt paid in 12 months or they will start litigation.  If you don’t see the debt getting paid off in a reasonable period of time consider other options like bankruptcy or debt settlement.
  2. Can a Bill Collector Sue Me if I am Making Payments?   The answer is yes unless you have a written agreement allowing you to make payments.  Many people make a token payment of $20 under the false belief that if the collector accepts the payment they cannot sue.  Wrong.
  3. Send a Payment.  Don’t believe bill collectors when they say you cannot make payments.  Nonsense!  I’ve never seen a bill collector return a payment.  That does not guarantee that you won’t be sued for the debt, but at least the balance is decreasing.  When a bill collector sees payments coming in they treat you better and may hold off on litigation.
  4. Don’t Send a Personal Check.  Even if you are making payments the bill collector may start litigation and obtain a judgment for the debt. If you are making payments with a personal check you are telling the bill collector where you bank and they will send a garnishment summons to the bank.  Instead, make payments with a Money Order or use PayPal so they don’t know where you bank.
  5. Change Bank Accounts.  If the bill collector obtains a judgment and you have been using your bank account for a long time, chances are the collector may know where you bank .  To avoid a garnishment open a new account at a bank you have never used before.  Even better, open an account in another state.  With online banking and debit cards it is really easy to open an account in a place the bill collector would never discover.
  6. Demand Verification of the Debt in Writing.  Bill collectors are governed by the Fair Debt Collection Practices Act.  That law requires the bill collector to send written verification of the debt if you send them a letter demanding they verify the accuracy of the debt.  If nothing else sending a verification letter slows them down so you can make payments.
  7. File a Written Response to the Lawsuit.  Over 90% of all collection lawsuits result in Default Judgments because the debtor fails to file a written response to the lawsuit with the Clerk of the Court.  Always file a written response to any lawsuit to slow down the process and to verify that you are paying the true amount owed.  At the very least, filing a written response will give the debtor another 60 to 90 days to pay the debt.

Image courtesy Flickr and GrBusinessGroup

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The 8th Circuit Bankruptcy Appellate Panel denied Kathryn Nielen’s application to discharge her student loans, and the result, although discouraging in many respects, is not all that surprising. (Nielsen vs. ACS Inc, No. 13-6034, 8th BAP 2014)  The debtor graduated high school in 1995 and went on to obtain an Associates of Science degree in biology and then a Bachelor’s of Science in Health Services Administration followed by a Masters of Business Administration degree in 2001.  At the time she filed bankruptcy she was 36 years old and married with 4 children.  The debtor claimed medical problems due to allergies and mold exposure, but the court did not believe these conditions prevented the debtor from working.

 Several factors were decisive in turning down the application to discharge her student loans:

  1. Poor Work History.  The court described the debtor’s work history as “minimal, if non-existent.”  The debtor offered many excuses for her lack of employment such as being overqualified for many jobs or lack of job experience, but the opinion suggests that the minimal work history was due to a lack of effort and not lack of opportunity. 
  2. Opportunity for Job Advancement.  The debtor’s spouse had opportunity for advancement at his employment.  In addition, the debtor’s spouse was not exploring the possibility of higher paying jobs and was not supplementing his income with part-time employment.  (Does a father of 4 children really have to take on a 2nd job to discharge student loans?  Isn’t being a father of 4 young children a full time job in itself?  The court continues a trend of chastising debtors who turn away work to tend to family matters.)
  3. Too Many Assets. The debtors had a retirement fund and equity in a home.  (Is home ownership a disqualification for student loan discharge?  Isn’t the real question whether the mortgage payment exceeds comparable rental rates?)
  4. Extra Income Available. The debtors discharged a significant amount of credit card debt they were servicing prior to bankruptcy.  Clearly the funds that were used to pay credit cards could now be paid towards the student loan debt.
  5. Significant Tax Refunds.  The debtors received $7,000 of tax refunds, much of that coming from Earned Income Credit or Child Tax Credits.  Such refunds have to be included in the calculation of the average monthly income.
  6. Family Debts were Repaid.  When funds were available to repay debts in the past the debtors opted to repay family loans instead of making payments on student loans. 
  7. Post-Trial Change of Circumstances Ignored.   Following the trial the debtor and her husband separated and divorced.  Claims of spousal abuse existed, but this information was ignored by the appeals court since it occurred after the trial.  The appeals court is limited to reviewing facts presented at trial.
  8. Self-imposed Income Limits.  The court found that the debtor’s ability to seek employment were mainly self-imposed.  Choosing to focus on raising a family, although admirable in many respects, is not well received by bankruptcy courts when seeking a discharge of student loans.
  9. Income Contingent Repayment Plan (“ICRP”).  The debtor had not applied for an income-contingent repayment plan with the Department of Education.  The student loans (36 separate loans) appear to have been federal loans available for an income based repayment and not private loans, although the opinion does not explicitly state one way or the other.  The debtor was eligible for a zero monthly payment ICRP, so no real hardship existed by denying the debtor’s application.  It is fair to say that a debtor has virtually no chance of discharging federal student loans in bankruptcy where no effort to comply with an income-based payment has been made, especially if the payment would be zero.  Private student loans, however, offer no such income based payments and for this reason are more frequently discharged in bankruptcy.
  10. Thirty-Six Separate Loans.  The debtor did not ask the bankruptcy court to evaluate each of her 36 loans for discharge separately.  In the 8th Circuit the bankruptcy courts will take a loan-by-loan analysis to determine which, if any, loans might be discharged.  Unfortunately, the debtor did not seek such an evaluation.  
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I recently met a client who first learned that she had been sued when she received a post card in the mail from the court indicating that a default judgment had been entered against her.  Frequently I meet clients who first learn of a judgment when their paychecks or bank accounts become garnished.  “How can they garnish me when I never had a chance to go to court!” is the common complaint.

Over 90% of all collection lawsuits result in a default judgment.  Most folks just figure they owe the debt and chose not to contest the lawsuit, even if the amounts are wrong.  However, a big reason for default judgments is that the defendant moved and the lawsuit summons was served at an old address.  So, when the Sheriff cannot serve the lawsuit because the has defendant moved the Sheriff will typically file a report with the court that says “attempted to deliver, defendant not found at this address, unable to deliver summons.”  The Sheriff typically does not report that the defendant has moved to another address, he just reports that the defendant could not be served.

The Problem of Alternate Service: 

 So, what does the creditor do when they cannot serve summons to the defendant at his or her last known address? They file a Motion for Alternate Service.  Under this procedure, the Sheriff will go back to the last known address and tape a copy of the summons to the door and the creditor will also send a copy by regular U.S. mail.    Now that is all fine and dandy if the defendant actually lives there, but what good is this when the defendant has moved?  Of course, the defendant who no longer lives at the former address never gets a copy of the lawsuit and consequently does not file a written response with the Court.  The result?   Yes, the creditor gets a default judgment since no written response was filed with the court and garnishments soon follow.

A recent client reported that the Sheriff actually served notice on her 10 year old daughter who then failed to give it to her mother.  Service on a ten year old?  Can they really do that?

The Solution: Motion to Vacate Default Judgment:

If a creditor has not properly notified you of a lawsuit and obtained a default judgment as a result, the corrective action is to file a Motion to Vacate the default judgment.  The Nebraska court system provides a standard form.  Here is a better form.  It is important to tell the court why the service was ineffective (i.e., you moved or you were on vacation or the person who accepted service did not give you a copy ,etc.).  A recent client reported that the Sheriff actually served notice on her 10 year old daughter who then failed to give it to her mother.  Service on a ten year old?  Can they really do that?  Actually, that notice was somewhat questionable, but the creditor got a default judgment anyway.   

The practice of allowing creditors to obtain default judgments by alternate service is especially troubling when the same creditor has been calling the debtor at work on a regular basis.  Why didn’t the creditor have summons served at work when residential service was note made?  A typical motion for alternate services states the following:  “The Plaintiff shows and affirms to the Court that the Defendant cannot be served by reasonable diligence by one of the following methods of service:  Personal service, residence service or certified mail service, and as a result moves the Court to allow the use of an alternate method of service as provided by statute.”  I would argue that Reasonable Diligence requires at at least one attempt to serve at work, especially if the debt collector has been calling their work, and that failure to make such an effort could be viewed as a violation of the Fair Debt Collection Practices Act.

Image courtesy Flickr and David Singleton.

About one month after a bankruptcy case is filed the debtor must attend a court hearing and meet the bankruptcy trustee.  Sometimes this hearing is called the “Meeting of Creditors” because creditors have the right to attend and ask questions, although they rarely do.  Lawyers call this hearing the “341 Hearing” because is required under Section 341 of the Bankruptcy Code.

Most hearings take about 2 to 5 minutes to complete.  Larger business hearings may take longer.  For Chapter 7 cases the court will randomly appoint one of Nebraska’s six  Chapter 7 Trustee’s to the case.  We never know what trustee will be assigned to the case in advance.

The Trustee will typically ask the following questions:

  • State your name and address.
  • Show me your photo identification and proof of your social security number.
  • How many people live in your home?
  • Have you filed bankruptcy before?  If so, when?  Was it a Chapter 7 or 13?
  • Do you own any real estate?  When did you purchase the property?  How did you value the real estate?  Appraisal?
  • Does the government owe you a tax refund?  If so, how much?  Did you receive the refund before or after your case was filed?  How much did you receive last year?
  • Do you own a vehicle?
  • Did you list all of your debts in the bankruptcy?
  • Did you list all of your property on the bankruptcy schedules?
  • Did you list all your income and expenses on the bankruptcy schedules?
  • Do you own a business?  If so, are you incorporated?  Do your customers owe the business money?  If so, how much?
  • Do you expect an inheritance in the next 6 months?
  • Have you transferred any property in the last year?
  • Have you transferred or sold any real estate in the past 5 years?
  • Have you claimed the Exemptions you are entitled to under state law?
  • Did you get a copy of the US Trustee’s Information Sheet?
  • Have you paid any creditor more than $600 in the past 90 days?
  • Have you paid any relative or business partner in the past year?  (Think hard about that tax refund.  Did you repay family loans with the refund?  Don’t do that before bankruptcy.)
  • What were the colors of your wedding? (Believe it or not, one of our Trustee’s thinks this is a funny question!)

Image courtesy of Flickr.

The Home Affordable Modification Program (HAMP) has helped thousands of Nebraskans to modify their home mortgage payment.  A loan modification can lower the interest rate, establish an escrow account to pay taxes and insurance, and cure past due mortgage payments.  When this program works it is really magical—a loan can go from unaffordable and in foreclosure to being affordable and in good standing overnight.

You may be able to obtain a HAMP loan modification if the following is true:

  • You are struggling to make the payment because of a financial hardship
  • You are delinquent or in serious danger of become delinquent on the loan.
  • Your mortgage was obtained on or before January 1, 2009.
  • The property has not been condemned.
  • You owe less than $729,750.

The problem is, the banks are difficult to work with and homeowners get lost in the shuffle of paperwork and red tape.  There are horror stories of banks losing the paperwork over and over again.  The rules are complicated and not all loans are eligible for modification.

So how do you level the playing field?  How do you make sure the bank plays fair and that your application is really taken seriously?

The best way to make sure your loan modification is properly handled is to have a certified housing counselor review and submit the paperwork.  The Department Housing & Urban Development (“HUD”) provides a list of approved housing counselors in Nebraska here.

Some of the key benefits of submitting the application through a HUD counselor:

  • It is harder for the bank to claim they never received the paperwork when HUD counselors submit the paperwork.
  •  HUD counselors submit thousands of applications so they know the correct way to fill out the paperwork.
  •  There are a variety of modification programs available.  HUD counselors know what programs you qualify for and which ones you do not.
  •  HUD counselors usually charge no fee or a minimal fee to process the application.

Can you obtain a loan modification if you have filed for bankruptcy?  The short answer is yes.  In fact, when facing a foreclosure it is often a good strategy to file Chapter 13 to stop the foreclosure sale and then to immediately file a new loan modification application with a HUD counselor.  Chapter 13 cases can be dismissed or amended if the application is accepted.  Chapter 13 gives you time to properly file the application in an organized manner.

Image courtesy of Flickr and Andrey 77 dron

 

The 8th Circuit Court of Appeals has ruled that a homeowner has a private right of action to sue their mortgage lender when the bank fails to properly process the application.  Topchain v JPMorgan Chase, No. 13-2128 (8th Cir. 2014).  This is a significant case because the HAMP laws do not specifically state whether a homeowner may sue their mortgage company when the bank wrongfully refuses to offer a permanent loan modification. Sure, HAMP laws require the banks to modify certain mortgage loans, but what do you do when they refuse to follow the law?  According to the 8th Circuit, you may sue them for breach of contract.

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Under the Home Affordable Modification Program (“HAMP”), an eligible homeowner receives a Trial Period Plan (TPP) that typically requires the homeowner to make 3 modified payments.  If the TPP payments are made on time, the homeowner then receives a permanent loan modification agreement. 

In an amazing display of arrogance and bad faith, Chase argued that no contract was ever formed because it did not sign the agreement.

After submitting a HAMP application and making his trial payments, Chase sent Topchain a modification agreement.  Topchain signed the agreement and returned it to Chase, but Chase never signed the agreement.  In an amazing display of arrogance and bad faith, Chase argued that no contract was ever formed because it did not sign the agreement and thus Topchain could not sue them for breach of contract.  The 8th Circuit balked at this defense.  First, the court ruled that Chase probably waived the requirement of signing the agreement when they verbally told Topchain that the agreement was accepted.  Second, the court ruled that Chase most likely waived the signature requirement by accepting payments provided under the agreement for ten months.  Consequently, the case was sent back down to the trial court for litigation on the breach of contact claim.

Homeowners can sue their mortgage lender for not complying with HAMP regulations.  A private right of action exists for homeowners.  This is a significant victory for homeowners.

Regardless of the outcome in Topchain’s case, the take away is that homeowners can sue their mortgage lender for not complying with HAMP regulations.  A private right of action exists for homeowners.  This is a significant victory for homeowners.

Other courts have also ruled that HAMP gives homeowners contractual rights to sue their bank when they fail to establish permanent loan modifications for eligible borrowers. See Wigod v Wells Fargo Bank, N.A. 673 F.3d 547 (7th Cir. 2012), Corvello v. Wells Fargo Bank, N.A., 728 F.3d 878 (9th Cir. 2013), Young v. Wells Fargo Bank N.A., 717 F.3d 224 (1st Cir 2013).

Homeowners who are unable to pay their mortgage generally lack the financial resources to sue their mortgage company when their HAMP application has been unfairly denied or delayed.  However, Chapter 13 bankruptcy cases offer a forum to litigate HAMP issues with the added benefit of granting protection from foreclosure while that litigation takes place. 

Many questions will have to be resolved by the bankruptcy courts now that it is clear that homeowners have contractual rights to obtain HAMP modifications.  May a pre-bankruptcy mortgage arrearage be cured through a Chapter 13 Plan calling on the bank to modify the loan?  Is the wrongful denial of a loan modification a basis to defend a Motion for Relief from the automatic bankruptcy stay when the homeowner defaults on post-petition payments?  May the debtor file an adversary proceeding against the mortgage company when a loan modification is wrongfully denied?  This could get interesting.

Image courtesy of Flickr and David Shankbone.

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It costs a lot of money to go broke, literally.  Chapter 7 fees vary from case to case, but the average case filed in Nebraska ranges from $1,200 to $1,500 depending on the complexity of the case and the attorney hired.  Clients frequently ask if their case can be filed before all fees are paid.  The clear answer to this question is no.  Bankruptcy laws simply do not allow an attorney to accept payment of Chapter 7 legal fees after the case is filed.

A recent case involving Louisiana bankruptcy attorney Glay Collier underscores this rigid rule.  Collier advertised a “No Money Down Chapter 7” where he would charge $100 before the case was filed and then debit his client’s bank account for the remaining fees to be paid after the case was filed.  It goes without saying, an attorney can file a lot of cases for no money down, and Collier did just that.  Unfortunately, when a client failed to make the monthly payment Collier retaliated by failing to file necessary documents and the case was dismissed.  The client hired another attorney and sought damages. 

The Louisiana bankruptcy court imposed $40,000 of sanctions and damages against attorney Collier

In a thundering opinion, the Louisiana bankruptcy court imposed $40,000 of sanctions and damages against attorney Collier for multiple violations of the bankruptcy code.  The Court also referred the case to the Chief Judge of Louisiana for a determination of further sanctions and possible disbarment.  The Court ruled that the “Credit/Debit Authorization From” signed by the debtor prior to filing the bankruptcy case could not be used after the case was filed since that form became void the moment the case was filed.   Once the case was filed the bank account debits ceased to be voluntary and were thus deemed a violation of the bankruptcy stay.

The United States Trustee recently filed a complaint against Colorado attorney Kevin Heupel for his firm’s use of a “no money down” program.  Heupel doubled the price of his service for the No Money Down option and required clients to sign a bank account debit agreement before the bankruptcy case was filed.  Without any court authorization, Heupel zapped money out of his client’s bank accounts right after the bankruptcy was filed and failed to report the full amount of his fees.  The US Trustee’s complaint alleged that debtors were not informed that continuation of the payments were voluntary and required a court-approved Reaffirmation Agreement to be valid.  Heupel also did not inform his clients of the impermissible conflict of interest that prevents a bankruptcy attorney from being a creditor in his client’s case.  As a result of the US Trustee’s complaint and media attention to the case, Kevin Heupel recently filed for Chapter 11 protection.

This is a key point:  Chapter 13 cases can be converted to Chapter 7 at any time.

So what does a person do if they absolutely have to file a bankruptcy case now because 25% of their paycheck is being garnished?  The best answer is to file Chapter 13.  Yes, Chapter 13 is a 3 to 5 year payment plan, but a Chapter 13 case can be filed in Nebraska for as little as $75 down. (Local Nebraska bankruptcy rules require at least $75 of the $310 court fees to be paid when the case is filed, with the remainder due in a reasonable time.)  Also, if more than $600 of a debtor’s paycheck has been garnished in the 90 days prior to filing, that money can generally be recovered by filing a turnover action, thus providing the necessary funds to fully pay attorney fees to convert the case to Chapter 7.  This is a key point:  Chapter 13 cases can be converted to Chapter 7 at any time (provided the debtor was eligible for Chapter 7 when the case was filed). 

No money down Chapter 7?  Nope, can’t do that.  Pay $75 down for Chapter 13 and flip to a Chapter 7 after payment of remaining court fees and attorney fees are paid?  Yes, that may be an option.  If debts are out of control there is always a way to figure out the legal fees.  If lawsuits have been filed there are ways to delay the judgments.  If bank accounts have been hit with garnishments there are ways to exempt the funds.  Never assume you can’t afford to go broke.

Image courtesy of Flckr & Kevin Dooley.

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Charlie was a bad man.  With his aggressive personality he intimidated and threatened others if they didn’t give into what he demanded.  He grew rich on the work of others and reminded everyone that without him they were nothing, but such men are destined to fail because they never have enough and so they continuously pledge their empire to gain an even larger empire.  In the process they go too far and eventually make risky investments that fail starting a cycle of going from bank to bank and victim to victim seeking precious cash to keep operations going.  Realizing that everything he owned would soon be taken away as the banks began to seize his assets, Charlie transfers assets to family members and trusted confidants.  But the banks start litigation for unpaid debts and their attorneys ask sharp questions about where all the assets went to and it becomes obvious that there is nowhere to hide.  Feeling cornered, Charlie hires a cheap attorney who asks few questions of the know-it-all businessman and files a bankruptcy case.  Of course, the bankruptcy petition fails to list all his assets and is completely blank as to all the transfers that occurred in the past year.  Predictably, the bank’s attorneys show up at the bankruptcy Meeting of Creditors and begin pounding Charlie with questions about the location of his assets and the various transfers and demand explanations for the inconsistencies between what he wrote down on his loan application and the reality of his financial situation.  Charlie gets a bad feeling that filing bankruptcy was an unwise decision and requests that his case be dismissed only to find that the Court and his executioners have no intention of letting him walk away.  Welcome to the bankruptcy electric chair, Charlie.

Bankruptcy is a process designed to illuminate, not to conceal.  To file bankruptcy is to strap oneself in for an examination. 

When you have something to hide the last place you should be looking to park yourself is in the United States Bankruptcy Court.  Although bankruptcy does protect a certain amount of exempt property there is a limit to the property exemption laws and that which is not exempt must be turned over to the Chapter 7 Trustee for liquidation.  So, bankruptcy courts have a dual purpose: to protect and to liquidate.  To facilitate the liquation function the Bankruptcy Code gives Chapter 7 Trustees special powers to avoid and undo fraudulent property transfers or preferential transfers to inside creditors (i.e., transfers to family members or business associates).  In addition, the bankruptcy petition signed by debtors under penalties of perjury require a debtor to list each and every property transfer occurring within two years of filing bankruptcy and the Trustee may void fraudulent transfers occurring during the prior four years.  The Trustee must be furnished bank statements and tax returns and creditors can easily schedule “2004 Exams” to interrogate debtors about their financial dealings.  In short, bankruptcy is a process designed to illuminate, not to conceal.  To file bankruptcy is to strap oneself in for an examination.

Unlike Chapter 13, Chapter 7 does not provide for an absolute right of the debtor to dismiss the case.

Charlie’s request to dismiss his case was denied.  The court may only dismiss a Chapter 7 case for good cause. (See In re Turpen, 244. B.R. 431 (8th Cir. BAP 2000), and the primary factor in such a motion is whether it is in the best interest of the creditors to dismiss the case. In re Schafroth, 2012 Lexis 2346 (Bankr. New Mexico) (debtors who claimed $120,000 deposited in Swiss bank account were exempt were not allowed to dismiss case when exemption denied).  Unlike Chapter 13, Chapter 7 does not provide for an absolute right of the debtor to dismiss the case.  For Charlie’s creditors their best interest is served by keeping him locked into his electrifying bankruptcy chair, to use the powers of the bankruptcy proceeding to return transferred property and to investigate his business associates and banking relationships.  He has given them powers to attach his property that would not existed to the same degree outside of bankruptcy. 

Got something to hide?   Don’t want to answer too many questions?  The last place you want to find yourself is in a witness chair of the United States Bankruptcy Court.  Do yourself a favor, look for a sunny beach instead.

Image courtesy of Flicker.

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The Consumer Financial Protection Bureau has filed a lawsuit against the debt collection firm of Fredericak J. Hanna & Associates and its three principal owners “for operating a debt collection lawsuit mill that uses illegal tactics to intimidate consumers into paying debts they may not owe.”  The CFPB complaint alleges that the Hanna firm files thousands of lawsuits that are based on faulty or unsubstantiated evidence.

According to CFPD Director Richard Cordray the Hanna firm is “taking advantage of consumer lack of legal expertise to intimidate them into paying debts they may not even owe.  Today we are taking action to put a stop to these illegal debt collection practices.”

The CFPB alleges that the Hanna firm “operates like a factory” by producing hundreds of thousands of lawsuits without any meaningful attorney involvement against consumers who may not actually owe the debt.  One attorney at the Hanna firm signed over 130,000 lawsuits in a two-year period which the CFPB says is misleading to consumers since no attorney could actually review that many lawsuits for accuracy.

The Hanna firm also systematically uses sworn statements (“affidavits”) from its clients attesting to the validity of the debts even though it is obvious that the signers could not possibly know if the information is correct. 

The Hanna firm relies on deception and faulty evidence to drag customers to court and collect millions, . . . We believe they are taking advantage of consumer lack of legal expertise to intimidate them into paying debts they may not even owe.  Today we are taking action to put a stop to these illegal debt collection practices.” Richard Cordray, Director of the CFPB.

Are these types of lawsuits filed in Nebraska?  Absolutely, and it is common for these lawsuits mills to attach essentially worthless affidavits to the lawsuit or to offer such sworn statements in Summary Judgment motions.   These sworn statements generally are signed by an employee of the debt buyer!  The statements usually state something like this:  “I know from my experience in reviewing such records and from common knowledge of how Credit Cards work that those records are made and maintained by individuals who have a business duty to make entries in the records accurately at or near the time of the event that they record.”

See the problem with this statement?  The statement is not “I am the custodian of the credit card company’s business records.”  Rather, the statement is “I know a guy who maintains these records.”  To admit such statements into evidence as a Business Record exception to the Hearsay rule of evidence (See Nebraska Rule of Evidence 27-803(5)), the sworn statement must be made by a record keeper of the credit card company, not the debt buyer.  But those statements are hard to get, so the debt buyers use these deceiving sworn statements to fool the Courts and the uneducated defendants that they have evidence of the debt when they really do not.  This is the misleading practice the CFPB is calling out as deceptive, misleading and illegal.