Bankruptcy Versus Debt Consolidation Services

Like you, I constantly see ads for companies that claim they can negotiate down your balances with your creditors, get your interest rate lowered, and consolidate your bills into one low monthly payment.  These ads run on TV, radio and the internet all times of the day and night.  Some of these companies are legitimate and do truly want to help you get out of debt while others are fly-by-night operations who take your money and run.  Whether they are legitimate or not, they all have one thing in common—they cannot stop your creditors from coming after you for payment. How do I know? Because I represented creditors in the past and creditors have certain rules for those people trying to collect the debts on their behalf.  If the offer from your credit counseling agency does not meet the requirements a collection agency is given by the creditor, the collection agency can accept the proposed payments but does not give up their right to sue you on the entire remaining balance of the debt.

One of the many advantages of filing bankruptcy is that, when your case is filed, you are afforded the protection of the Federal Laws regarding bankruptcy.  The best and most well known provision is the “automatic stay”.  When your case is filed, your creditors are not allowed to contact you or try to collect the debt—they are automatically stopped from these acts.  I like to think of it as they have their arms tied behind their backs.  This gives you a time to breathe, regroup, and get your ducks in a row while your attorney, the trustee and the Judge look at your financial situation and find a solution with your help.

When Your Back Is Against The Wall Because Of Debt, What Can Filing Bankruptcy Do For You?

Have you ever gotten behind on paying a monthly debt and then stopped paying altogether? Did you begin to avoid phone calls from your creditors or the monthly billing statement you get in the mail? Did you ever begin to ignore the debt and pretend it didn’t exist? Have you ever cashed out all or part of a retirement account to catch up on your bills?

Many people who owe money to their creditors can answer “yes” to one or more of these questions. Owing debts that you can’t pay can become overwhelming, stressful, and add unnecessary pressure to your life.  But ignoring the debt can cost you more in the long run.  Pretending that it doesn’t exist or ignoring it doesn’t make it go away. Filing bankruptcy can stop creditors from collecting debts that they are owed.  Below are a few instances of how filing bankruptcy can help.

IRS Tax Levy/Garnishment of wages or bank accounts – Filing bankruptcy can stop money from being involuntarily taken from your paycheck or bank account.  If a creditor sues you for a debt and gets a judgment against you, then they can execute on that judgment and garnishment may occur.  It is better to file bankruptcy once you are sued rather than waiting until you are being garnished simply because you have full access to your money without restrictions.  

Suspended driver’s license – If you are involved in a motor vehicle accident and are determined to be the responsible party who must pay for damages, then you could be sued by a plaintiff insurance company to pay the debt arising from the accident.  You risk your license being suspended if you don’t pay.  If you bankrupt such debt, you can prevent or have the suspension of your license lifted.

Past due utility accounts – If you are on the verge of having your utilities shut off due to non-payment, chances are you may have other debts that you haven’t paid as well.  Filing bankruptcy can prevent a shut off of your utilities.  You may then have continued utility service and start fresh with a zero balance account. 

Does any of this apply to you? It is always best to seek counsel before things get too far out of control.

My Credit Card Company Is Offering A Credit Monitoring Service: Is This Service Worth It?

Several companies have sprung up that promise to help protect you against identity theft. How do they do this? By monitoring your credit. An alert is sent to you when changes to your credit occur such as when a new account is opened or a new address associated with you is logged with a credit reporting company. Some credit monitoring services are independent companies and some are operated by credit reporting agencies such as Trans Union and Experian.

While there are advantages to using these services, there are some problems with them such as:

1)      If you receive a Notification from a monitoring company, your information may have already been used illegally by someone who has opened up a new credit account with your stolen identity. 

2)      The monitoring services cannot catch certain forms of identity theft that don’t access your credit report such as a person using a stolen identity to a) obtain a Payday advance loan, b) apply for a job; or c) apply for a driver’s license. 

3)      Most of what these services offer, you can do yourself.   You can file fraud reports and place fraud alerts and credit freezes on your credit files with credit reporting companies.

Many people believe that credit monitoring activities will make them completely secure against identity theft. That simply isn’t true. However, credit monitoring can be an important piece of your protection package. Some other things you can do include:

• Leave important documents in a safe place at home.
• Only carry the credit cards or other cards you plan on using that day (do not carry your Social Security Card).
• Properly destroy old credit cards, checks and unneeded receipts
• Shop only on secure Web site with companies you trust. 
• Check your bank and credit card statements monthly for any suspicious activity.
• Personally check your credit report at least once a year. 

Since the cost of a monitoring service usually runs $10 to $15 a month, it may be worth it for the peace of mind in knowing that you are purchasing a little added insurance to avoid being the next victim of identity theft.

Is An Inheritance Part Of A Chapter 13 Bankruptcy Estate?

Facts:  Client is in the final few years of a 15% Chapter 13.  He inherits ½ interest in a home worth about $85,000 and $50,000 in stocks.  He only has about $20,000 of total unsecured debt left in his bankruptcy.  His Chapter 13 payments are only $200 per month.  The Trustee filed a motion to increase his plan to 100%.  Result:  Debtor sells stock and pays off his Chapter 13 at 100%.

At first glance, the bankruptcy statues would lead you to believe that any inheritance acquired by the debtor at least 180 days after the filing is the debtor’s property.  Section §541 describes property of the estate and mentions only those inheritances acquired within 180 days after filing a petition – 11USC §541(a)(5)(A). 

However, Section §1306(a)(1) states that property of the estate includes everything listed in §541, and all property acquired by the debtor after the filing of the petition but before the case is closed.  Compare that to Section 1327(b) which states “confirmation of a plan vests all of the property of the estate in the debtor”.  Further, §1327(c) says that property vesting in the debtor is “free and clear of any claim or interest of any creditor provided for in the plan” (11USC §1327(c)). 

Basically, in order to reconcile §1306(a)(1) and §1327(b) and (c), and to capture newly acquired property for the purposes of the bankruptcy estate, Courts rely on §1325(b) –the plan must provide that all of debtor’s “disposable income” be applied to make payments, and then §1329 is used as authority for the Trustee to modify a debtor’s plan after confirmation.  The basic argument is that although property vests within the Debtor pursuant to §1327(b), a windfall will be captured for the creditors on a motion to modify under §1329.  Is an inheritance this late into a Chapter 13 “disposable income” under §1325(b)?  I would think that property excluded by §541, or property otherwise exempted from the estate would not be, but case law seems to result in the opposite analysis. 

A few debtor friendly cases indicate use of the ‘best interest of the creditors’ analysis under 11 USC §1325(a)(4) – basically are the creditors better off than they would be under Chapter 7?  And in Chapter 7, creditors would most likely not be entitled to an inheritance received over 180 days past the filing date.  However, in spite of the Code, Courts have increasingly held that the Chapter 13 estate includes gifts, inheritances, and windfalls that are acquired after the filing.  There are several cases where acquiring property (like lottery winnings – see In re Koonce, 54 BR 643 (Bankr DSC 1985), law suit settlements, insurance settlements, inheritances– see In re Nott, 269 BR 250, 257, 258 (Bankr. MD Fla 2000) and In re Euerle, 70 BR 72 (Bankr DNH 1987), large gifts or loans – see Doane v Appalachian Power Co, 19BR 1007 (Bankr WD Va 1982)) has forced Debtors to pay more to their creditors than originally planned for in the Chapter 13.  In a recent case in the Western District of Kentucky, a Motion by filed the Trustee resulted in a debtor turning over $205,431.43 to complete his plan at 100% because he won the lottery. 

I imagine basic public policy concerns might be behind most of these Court rulings, but isn’t a Chapter 13 supposed to give the debtor a fresh start?  It seems like under the Code, any property acquired after the filing should be property of the debtor giving him complete right to control the property.  And if so, why is it considered disposable income?  Are real property and stocks considered “disposable income”?  Why is a debtor penalized for falling into good fortune after filing a Chapter 13?  After all, this is not property that was committed to funding the plan.  Shouldn’t post-petition acquisitions be used for post-petition obligations?  What if Debtor’s case was converted to Chapter 7?  Then the property would not be part of the estate – he could keep the inheritance and the creditors wouldn’t even get their promised 15%.  Would the conversion be considered in “bad faith” after the Trustee’s motion has already been filed?  Hmmm.

Devising A Financial Strategy After Divorce

          One of the most common causes of divorce is financial difficulties. Once your divorce is over your finances may get worse before they get better. What can you do to lessen the impact? 

          Calculate your net worth by taking inventory of your assets and liabilities.  Summarize all of your assets including the value of your home, cash, savings or checking accounts, any valuables such as jewelry, antiques or artwork and any retirement accounts.  Subtract the amount that you owe on all of your debts.  Be sure to include payments that are made quarterly or yearly.  

          Prepare a budget based on your new income level and stick to it.  Look at your income and liabilities.  Be sure to budget for car repairs and other unexpected expenses.  If the amount you spend is more than your income, you will need to make some choices about expenses you can cut.  You may need to take your lunch to work, or cut back on activities for yourself and your children.  

          Make certain that joint accounts with your ex-spouse are closed. You do not want to be held responsible for debt that your ex agreed to pay in your settlement. Be sure to check the mortgage, automobiles, insurance and credit cards.  Take the appropriate steps to transfer titles if needed.  Be sure that any joint checking or savings accounts are closed. Establish new accounts and credit if you haven’t already done so. 

           Update your beneficiary on your life insurance, investments and retirement plans. Remember to update your will and any trusts.  If your ex-spouse covered you on their health insurance, get your own policy or make sure you are covered by COBRA benefits. 

          Try to keep emotions out of your financial decisions and don’t dwell on the split from your spouse.  It is up to you to take care of yourself in all aspects of your life, including your money.

Can I Contribute To My 401K After My 401K Loan Ends While In My Chapter 13 Bankruptcy?

In these times of uncertainty about whether social security will be available in the future, it is more important than ever that contributions to retirement accounts be done.  One Judge in the Eastern District of Kentucky has decided that you can contribute to your 401K plan after your 401K loan ends rather than pay the extra amount into your bankruptcy.  This is a big change in the practice of Chapter 13 bankruptcy in the Eastern District of Kentucky.  In the past the Trustee has required that once a 401K loan is paid off the plan payment would then have to increase by the amount of the monthly 401K loan amount.  For debtors who were not contributing to their 401K because of the loan, this meant that they could not contribute to their 401K during the Chapter 13 plan.  If a debtor is making a payment on a 401K loan and contributing to the 401K at the same time, this will not apply to that debtor.  They will still be required to increase their plan payments when the 401K loan ends.

 Example: Debtor is filing a Chapter 13 plan on January 1, 2010 with payments of $500 per month for 5 years.  He has a 401K loan of $250 per month that ends in December of 2012.  He is not currently contributing to his 401K.  The past practice would require that he increase his payment to the Chapter 13 plan in January of 2013 to $750 per month. Under the new opinion, he would not have to increase his payment to the Chapter 13 plan and instead could apply the $250 per month to a 401K contribution.

 The Trustee has asked that in these cases the debtor be required to notify the Trustee within 10 days of the ending of the 401K loan with proof that the amount was now being contributed to the 401K.  If this does not occur then the debtor may be required to turn over the funds to the Trustee as part of the plan payment.

In Re: Seafort and Schuler   08-22380/08-22417