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The United States Supreme Court has ruled that inherited Individual Retirement Accounts (IRAs) are not protected under federal exemption laws.   Clark  v. Ramekers, 573 U.S. ____ (2014).  Even though inherited IRAs are exempt under federal income tax laws, the court said they are not really “retirement funds” under Section 522(b)(3)(C) of the Bankruptcy Code.  Justice Sotomayor cited three key legal characteristics of inherited IRA accounts that are exactly opposite of how normal retirement funds operate:

  • The inherited IRA recipient may never invest additional money into the account. 
  • Inherited IRA beneficiaries must withdraw funds from the account right now regardless of how many years they have to retire. 
  • There is no tax penalty for withdrawing funds from an inherited IRA.

Whereas normal retirement accounts allow ongoing contributions, encourage savers to keep funds in the account and penalize those who take out money early, inherited IRAs do the opposite and thus are not really “retirement funds” in the eyes of the Supreme Court.  Although some beneficiaries may use the inherited funds for retirement, the Court was not satisfied.

The possibility that some investors may use their inherited IRAs for retirement purposes does not mean that inherited IRAS bear the defining legal characteristics of retirement funds.

Although a spouse may roll over an inherited IRA to his or her own IRA account and thus exempt the funds, children may not take advantage of the roll over option.

So, what is the status of inherited IRA accounts in Nebraska?  In addition to the federal exemption provided under §522(b)(3)(C), Nebraska has traditionally allowed debtors to exempt IRA accounts under Nebraska Statute 25-1563.01.  That statute exempts “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service.”  

Is an inherited IRA account a retirement fund that is “payable on account of illness, disability, death, age or lenght of service” of a debtor in a Nebraska bankruptcy case?  The same arguments used by Justice Sotomayor against extending the federal exemption to inherited IRA accounts could also be used aginst the Nebraska exemption statute as well.  So, until there is a new local ruling on this topic I would assume that all inherited IRA accounts are at risk in bankruptcy.  

Image courtesy of Flickr and State Library of New South Wales.

 

Student loan attorney Joshua Cohen (@studentloanlaw) writes an excellent critique of the Obama administration’s new executive order to lower student loan payments. The order will extend eligibility for the Pay-As-You-Go (PAYE) program that was previously only available to students who started borrowing after 2007 and who took out a new loan after 2011.  Those time restrictions are now lifted.  The extension is scheduled to go into effect at the end of 2015.

This is not a solution, it is a bandage. It doesn’t make college more affordable. It doesn’t cap maximum loan amounts. It doesn’t create underwriting standards. It doesn’t return bankruptcy or other consumer protections to federal student loans. It doesn’t address the private student loan debacle (you know, the loans that supposedly have underwriting standards that allow an 18 to 22 year old to rack up $100,000 in debt with no credit history, ropes in a relative as a co-signer, offers no flexible repayment terms, and is also exempt from discharge in bankruptcy? The real killer of the economy in my opinion). It doesn’t even apply to all federal student loans (Parent PLUS loans are not eligible)!  This is, at best, a baby step forward.

Cohen makes several strong points.

  • There is no maximum cap on student loans.  Schools and banks may pile on as much debt as they want without any underwriting standards at all.  There needs to be some minimal connection between the amount being borrowed and the ability to repay the debt.  Yes, we want to give all Americans the chance to improve themselves through education, but at some point there has to be a limit and an underwriting standard.
  • Private Student Loan Nightmare.  Prior to the Bankruptcy Reform act of 2005, Private Student Loans were dischargeable in bankruptcy.  Since 2005 banks have dramatically increased the amount of private student loans made and, unlike Federal student loans, private loans do not have income based repayment plans.  The level of frustration experienced by borrowers seeking to repay these debts is extremely high.
  • Parent PLUS Loans not eligible for the new plan.  The number of parents I see with student loan debt is amazing these days.  Folks who should be saving for retirement are commonly holding $50,000 or more of parent loans whose children graduate from college only to obtain a $10 per hour job.
  • These loans are having a dramatic impact on our economy by crowding out other forms of borrowing, such as mortgage loans, car loans and other loans that trigger economic activity. Young graduates are overly burdened by loans that prevent them from buying homes, starting businesses and families.  Is this good for America?

Student loan debt now exceeds $1.2 trillion and this figure is projected to increase steadily in the next decade.

If you are reading this article, there is a good chance you have been sued by a junk debt buyer such as Midland Funding, Encore Capital, Portfolio Recovery, Cavalry SPV, CACH LLC, Midland Credit Management, LVNV Funding LLC, or Unifund CCR Partners.  These are companies that purchase delinquent credit card debts for generally 3 to 7 cents on the dollar.

Debt buyers typically buy nothing more than a list of names and balances owed without any real proof of the debt.  By that I mean they do not acquire a signed copy of the credit card contract or a record of all payments and charges made to an account.  They lack an explanation of how charges were assessed from month to month and almost never can provide a copy of the many amendments made to the credit card agreement.  In short, they generally lack any proof of the debt.  In fact, the seller of the debts usually states that there is absolutely no guarantee that the debts are actually valid.

Why would a debt buyer spend millions to purchase unverified debts?  Because 95% of the time when they sue for payment the debtor does not file a written Answer to the lawsuit and they obtain a Default Judgment for the entire balance due, whether they can prove the debt or not.  The debt buying industry is founded on volume and default judgments.  They don’t have to prove their case because nobody makes them.

So, if you have been smart enough to file a written answer to the debt buyer lawsuit, what happens next?  Well, in a surprising number of cases the debt buyer will just let the case get dismissed.  However, my general experience is that the debt buyer’s attorney will send you a variety of discovery documents in the form of Interrogatories, Requests for Admissions and a Motion to Produce Documents.  It is extremely important to respond to these requests within 30 days.  Failure to respond will allow the debt buyer’s attorney to seek a Summary Judgment .

Although filing a written Answer to a lawsuit and responding to discover is absolutely essential, if is this all you do you are missing a key element to your defense.  You are playing an entirely defensive game and are forgetting the most important factor or these lawsuits:  the debt buyer has the burden of proof and generally cannot prove their case.  You need to play offense.  You need to make them respond to questions and to admit or deny basic facts and to produce documents.  And if they cannot respond to your questions and requests, maybe you should file the motion for Summary Judgment.

Here are some questions you may want to ask the debt buyer’s attorney:

  • Identify every person who has or may have personal knowledge of the claims, defenses, or allegations in this lawsuit, including all persons you may call as a witness at trial.
  • Identify all documents you claim demonstrate Defendant’s consent to be obligated on the account.
  • Identify all documents you claim entitle you to ownership of the account.
  • State all transactions on the account. Include in your answer the following: All late charges assessed to the account, and the date of each charge; All over-limit charges to the account, and the date of each charge; All charges to the account, including cash advances, and the date of each charge; and All payments to the account, and the date of each payment.
  • Explain in detail how you calculated the total amount due on each date a statement was sent to Defendant.

In addition to asking questions (what lawyers call “Interrogatories”), demand that they send you every documents regarding the account, including the contract, amendments to the contracts, every billing statement, and all other documents relevant to the litigation.

After sending all this to the debt-buyer’s attorney, mark your calendar for 30 days later.  Did you receive a response?  If not call the debt buyer’s attorney.   It might be a good time to chat about a reasonable settlement.  They filed a lawsuit with no proof of the debt, and that is outrageous.  Put them on the defensive.  Why shouldn’t their attorney be sanctioned for filing a frivolous lawsuit?  How is this not a violation of the Fair Debt Collection Practices Act (FDCPA) to file a lawsuit with no proof of the debt?  Shake them up.  Turn the tables on them. Play offence.

* Image courtesy of Flickr by Paul De Los Reyes

A report issued by the Consumer Financial Protection Bureau (CFPB) found that a debt buyer dismissed 70% of its lawsuits when the consumer filed a written answer to the lawsuit. 

As part of a debt collector examination, Supervision reviewed collection lawsuits initiated by the entity. Examiners found that in 70% of the cases, when the consumer filed an answer, the entity would dismiss the suit because it was unable to locate documentation to support its claims.

Junk debt buyers purchase nothing more than a list of names and amounts owed, but they do not receive any real proof of the debt.  They receive no copy of the credit card contract, no record of the payments and charges to the account, no copy of the multiple amendments to the contract, no evidence of whether the contract is written or oral, and no explanation of of how the finance charges were calculated. 

Despite the entity’s express or implied representations to consumers that it intended to establish that consumers owed a debt in the amount claimed in court filings, in numerous instances, the entity misled consumers because it demonstrably had no such intention.

Do we have consumer fraud issue here?  Debt buyers are intentionally misleading consumers by filing lawsuits they have no intention of litigating since they lack meaningful proof of the debt.

What about the remaining 30% of cases not voluntarily dismissed?   The CFPB report does not answer this question, but we may assume that the vast majority of those were settled before going to trial. 

Although I do find that many junk debt lawsuits filed by Midland Funding, Cach LLC, Portfolio Recovery, Sherman Acquisitions and others will be dismissed when a written answer is filed with the Court, the more common experience is that the debt buyer will hit the consumer with lame discovery requests to lay the groundwork for a Summary Judgment motion.  (“Please admit or deny that you owe the amount stated in the lawsuit.”  Hint, your reply should be Deny!) Failure to respond to such discovery gives the debt buyers the right to seek a judgment without any real proof of the debt.

The lesson here is that when you are sued by a debt buyer you should always file a written response to demand proof of the debt.   

Foreclosure comes in two forms:  Judicial and Non-judicial.  Judicial foreclosure proceedings are lawsuits filed in the District Court of Nebraska against the property owner to determine the amount owed and, if the owner is in default, it results in a publicly advertised Sheriff Sale of the real property.  The homeowner receives a Summons from the Sheriff along with a copy of the foreclosure lawsuit showing the amount due.  The homeowner has the right to dispute the amount owed and to seek an accounting of the loan and to demand proof that he bank has the right to foreclose.  Once the Court has determined the amount due and the right of the bank to foreclose, a Decree of Foreclosure is entered and the bank may then proceed to schedule public auction that is conducted by the County Sheriff.

A great advantage to homeowners caught in a judicial foreclosure proceeding is the availability of applying for a Stay of Foreclosure, something that is not available in the non-judicial Trustee Sales. 

In Nebraska, the homeowner in a judicial foreclosure proceeding has the right to seek a Stay of Foreclosure Request of either three, six or nine months, depending on how many years are left to pay off the mortgage.  The closer the loan is to being paid off, the longer the stay.   What that means is that the homeowner can delay the Sheriff Sale for 3, 6 or 9 months if they request a stay in writing to the Court.

If the mortgage loan matures in more than 20 years (which means that you have owned the home for less than 10 years if you have a traditional 30-year mortgage), then the stay is for 3 months.  If the mortgage loan matures in less than 20 years but more than 10 years, the stay is 6 months.  If the loan matures in less than 10 years, the stay is 9 months.  Again, you must file with the Clerk of the Court a written application to stay the foreclosure, and the application must be filed within 20 days after the Decree of Foreclosure is entered.  See Nebraska Revised Statute, Section 25-1506(a).

Is there a disadvantage to applying for a Stay of Foreclosure?  Yes, and it is a very real disadvantage if you are disputing the amount owed or the bank’s right to foreclose.  “When a defendant requests a stay of sale pursuant to § 25-1506, the defendant is precluded from appealing from the foreclosure decree. Production Credit Assn. of the Midlands v. Schmer, 233 Neb. 785, 448 N.W.2d 141 (1989); Federal Farm Mtg. Corporation v. Ganser, 145 Neb. 589, 17 N.W.2d 613 (1945); Ohio Nat. Life Ins. Co. v. Baxter, 139 Neb. 648, 298 N.W. 530 (1941); Carley v. Morgan, 123 Neb. 498, 243 N.W. 631 (1932); Ecklund v. Willis, 42 Neb. 737, 60 N.W. 1026 (1894); McCreary v. Pratt, 9 Neb. 122, 2 N.W. 352 (1879). A request for a stay of sale is also a waiver of any prior error in the proceedings. Id.”  Deutsche Bank National Trust Co. v Siegel, 777 N.W.2d 259, 279 Neb. 174, 182 (Neb. 2010).

So, getting an extra three to nine months to live in the home is great, but if the homeowner really wants to litigate the amount due and the bank’s right to foreclose it may be better to seek the protection of Chapter 13 bankruptcy rather than to surrender precious rights by filing for a stay of foreclosure.  But if all you are asking for is a few months to move then requesting a stay of foreclosure may be just the break you need.

I will be attending the American Bankruptcy Institute’s Student Loan Debt Crisis Symposium being held in in Washington DC on May 30.  The timing of this event could not be better.  The student loan problem keeps getting worse and it is high time that bankruptcy practictioners create workable solutions for the millions of Americans who are trapped under the weight of these debts.  The common belief that student loans are never dischargeable is absolutely not true.  What is true is that Courts are looking at these debts with fresh eyes and the lenders have created new options to help struggeling borrowers. 

If you are attending this conference or if you have questions regarding student loans please contact me.

Sam Turco

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If you have been sued by a credit card company or by a debt buyer such as Midland Funding, CACH LLC, LVNV Funding, Portfolio Recovery, Cavalry SPV, Asset Acceptance, Unifund CCR Partners or Encore Capital, you need to take immediate action.  Here are three things you must immediately do to win the credit card lawsuit in Nebraska:

  1. File a Written Answer to the Lawsuit.  Over 90% of the time defendants fail to respond to the lawsuit and the creditor is awarded a Default Judgment.  Not filing a written answer to any lawsuit is probably about the biggest financial mistake you can make.  Just by filing a simple written response there is a substantial chance the creditor will drop the lawsuit since they often cannot prove you owe the debt.  Written responses must be filed with the Clerk of the Court within 30 days of receiving the lawsuit papers (the “Summons”). 
  2. Demand a Copy of the Contract.  Most junk debt buyers do not have any proof that you owe the debt.  As documented by the 162-page Federal Trade Commission Report on the debt buyer industry the debt buyers “did not receive any documents at the time of the purchase.  Only a small percentage of the portfolios included documents, such as account statements or the terms and conditions of credit.”   It is hard for debt buyers to win a breach of contract case unless they can produce . . . err . . . the contract.  Write a letter to the plaintiff’s attorney demanding all their documents, including that often nonexistent contract.
  3. Respond to the Plaintiff’s Discovery Requests.  If you are bold enough to file a written response to a credit card lawsuit, the creditor’s attorney will likely send you “Discovery” requests such as Interrogatories (written questions you must answer) , Request for Admissions (requests to admit or deny certain facts), and Requests for Production of Documents (send us all your paperwork).  Watch out, this is a set up.  If you fail to respond to these discovery requests the court will issue a summary judgment in favor of the creditor.  You can avoid that unpleasant result by just responding to their requests within 30 days.  If you really want to stir up the hornets nest, reply in kind by demanding that they answer your questions, request for admissions and provide documents to you.  Don’t be intimidated—you have the right to demand answers as well.

As documented by the 162-page Federal Trade Commission Report on the debt buyer industry the debt buyers “did not receive any documents at the time of the purchase.  Only a small percentage of the portfolios included documents, such as account statements or the terms and conditions of credit.” 

As kids we all learned the story of the foolish Chinese emperor who paid his tailor for invisible clothes only to be embarrassed by a child who shouted that The Emperor Wears No Clothes!  In a similar fashion, these credit card plaintiffs pack no proof of the debt, and the smart person should seek out legal help to prevent a default judgment and subsequent wage garnishment.  For a reasonable flat fee, Sam Turco Law Offices will defend you against these credit card lawsuits.  Call or email for a free consultation.