When a Creditor Garnishes Your Bank Account

After a court enters a money judgment against you, the judgment creditor can proceed to collect. Many experienced creditors like to start the post-judgment collection process by attacking your bank account.  In this way the creditor can attempt to seize a lump sum payment before settling in to collect from your wages. 

A bank account garnishment begins with the court directing the bank to freeze your bank account and turn over funds to the sheriff.  Once your account is frozen, any outstanding check will be refused payment (unless the amount of the judgment is less than the amount on deposit at your bank, then the bank can only partially freeze your account).  A garnished bank account can cause many problems for the debtor, especially when executed just after payday. 

Bank account garnishments are almost always a surprise.  The judgment creditor or collecting agent (often the sheriff of your county) must notify you and the bank, but typically the bank is first notified to freeze your account, then you are notified by regular mail.  This prevents any possibility that you can withdraw funds before the garnishment takes your money. 

There are defenses to a bank garnishment.  You may claim that all or a part of the deposited funds are exempt under state or federal law.  The notice of garnishment is often accompanied by a list of possible exemptions and notice procedures.  For instance, Social Security payments are generally exempt from garnishment.  However, once a Social Security payment is deposited into your account and co-mingled with other funds, the question becomes “what part of the account balance is Social Security (and exempt) and what part is not?”  A hearing is required to determine this answer and the burden is on you to prove that the funds in the account are exempt from creditor collection. 

Filing bankruptcy stops the commencement or continuation of a bank garnishment.  Bankruptcy stops collection actions and will discharge most judgments.  If there is a judgment against you and you fear a future bank account garnishment, speak with an experienced attorney and discuss how the federal bankruptcy laws can stop a judgment creditor cold.

Bankruptcy Can Provide A Second Chance At Financial Success

Some individuals are reluctant to use the federal bankruptcy process to legally adjust an unmanageable personal financial condition. Many of these people view bankruptcy as a personal failure, something to be avoided at all costs. In truth, bankruptcy is not a declaration of failure; it is simply the recognition of an inability to pay creditors. This may be caused by financial mismanagement; or it may result from illness, job loss, or another catastrophic event beyond your control. 

The United States has historically been called as a country of second chances and opportunity. Consequently, it is not surprising that the United States is more forgiving of failure and ready to give the honest person a second chance. In 1934 the Supreme Court stated that the purpose of bankruptcy law to give the “honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort.”  Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).  Bankruptcy attorneys often refer to this “new opportunity” as a financial “fresh start” that is provided by the bankruptcy discharge. 

Bankruptcy is not about the end of something, it is the beginning. It is a chance to restart without the burden of unmanageable debt. Bankruptcy is, what some of today’s economists call “failing forward.” When a person files bankruptcy, she is using the law to restructure her finances so that her chance of future success is more likely. American humorist Will Rogers once said, “Good judgment comes from experience, and a lot of that comes from bad judgment.” Obviously, a large part of “failing forward” is not repeating past mistakes, but mostly it is giving yourself, now wiser and armed with good judgment, a second chance to do better. 

If you are struggling with unmanageable debt and need to legally restructure your finances, consult with an experienced bankruptcy attorney. The federal bankruptcy laws can provide a second chance at a bright financial future, and an escape from a life buried in debt.

Talk To An Attorney Before Taking A Second Job

Many individuals trying to make ends meet take on extra work to pay off debt.  In some cases the added income is enough to make a difference.  In other cases the second job makes no difference, or can even make the financial situation worse. 

Working a second job can often create additional unexpected expenses.  Additional travel, food, and child care costs are a few added expenses that will eat away at any increased income.  A second job can create more stress on the family when one spouse is working and the other spouse must increase his or her responsibilities at home. 

For some people increasing the family’s income can have a big negative consequence on a future bankruptcy.  The bankruptcy “means test” is a calculation that determines whether your income is low enough for you to file Chapter 7 bankruptcy.  The means test is designed to prevent individuals with the ability to pay creditors from filing a Chapter 7 bankruptcy.  Higher income debtors must file Chapter 13 and repay their debts over five years. 

When a family that would otherwise pass the bankruptcy means test increases its income, there is a danger that the increase will push the income over the threshold and force the debtors into Chapter 13.  Additionally, the trustee may flag the case for abuse when a debtor voluntarily quits a job and decreases the family income prior to filing bankruptcy.  The debtor is demonstrating that he could afford to repay something, but has chosen to not pay creditors by quitting the second job. 

If you are struggling with debt, consult with an experienced bankruptcy attorney before taking on a second job.  It is important to have an understanding of the risks involved and a clear strategy for getting out of debt.  As the saying goes, “Hope for the best, but plan for the worst.”  Just make sure that your plan doesn’t leave you in a worse financial position.

“Let the Borrower Beware” When Dealing With Credit Unions

Most credit unions and some banks use “Loanliner” documents. These agreements are standard loan documents developed by CUNA Mutual Group and sold to financial institutions.  Over 70% of all credit unions use Loanliner documents for their lending transactions.  Included in standard Loanliner lending agreements is a provision in which the borrower agrees that all other loans with the lender are cross-collateralized. 

Cross-what? 

Cross-collateralization is basically the use of collateral from one loan to secure other loans. The cross-collateralization clause from a recent Loanliner agreement reads: “the security interest also secures any other loans, including any credit card loan, you have now or receive in the future from us and any other amounts you owe us for any reason now or in the future.”  Credit unions are fond of using this clause in vehicle loan agreements to secure all other credit union debts with the vehicle.  This often causes surprises (and anger) when an unsuspecting credit union member tries to trade-in his car and discovers that the debt on the vehicle includes a personal loan, a line of credit, and credit card balances. 

There are a few options if you are faced with a cross-collateralized auto loan.  First, you can file a Chapter 13 and cram-down the loan to match your vehicle’s value. Any remaining debt is discharged at the end of the Chapter 13 case. During a Chapter 13 case, you can pay a cram-down over three to five years. 

During a Chapter 7 case, your attorney can simply ask the credit union to draft a reaffirmation agreement for the vehicle without regard to other debts. You are basically asking the credit union to voluntarily strip off the cross-collateralized loans.  If the credit union refuses your request, you have two options: (1) surrender the vehicle and discharge all debts to the credit union; or (2) redeem the vehicle. Redemption is a process exclusive to a Chapter 7 bankruptcy case where the debtor keeps a vehicle by paying the value of the vehicle, not the total debt that is owed. While similar to a Chapter 13 cram-down, redemption differs in that the payment to the secured creditor must be a lump sum. Payments are not permitted. 

If you have an auto loan through your local credit union, review the loan paperwork with your attorney for a cross-collateralization clause.  Your bankruptcy attorney can discuss your options with you and help arrive at the best financial decision for your family.

Homeowners Have Options for Underwater Mortgages

If you are a homeowner who owes more money on your mortgage than your home is worth, there are a several options for saving your home. One of the latest is an $11 billion program through the Federal Housing Administration called “Short Refi.” Under this program a non-FHA borrower may be able to obtain a new FHA-insured mortgage. 

To qualify for the Short Refi program, the homeowner must be current on the monthly mortgage payments. The new primary FHA-backed loan cannot exceed 97.75 percent of the value of the property; and the second mortgage cannot exceed 15 percent of the property value. Additionally, the lender must agree to write off at least 10 percent of the loan’s principal balance.

Fannie Mae and Freddie Mac loans do not qualify for the Short Refi program. The New York Times reports that 23 lenders have signed on to the Short Refi program and are offering refinancings. Notable non-participants are Bank of America, Citibank, and JP Morgan Chase. 

There are several programs available to save an underwater mortgage, so the homeowner is not stuck with a “one-size-fits-all” refinancing dilemma. One federal refinance program that has seen some recent success is the Home Affordable Refinance Program (HAMP). Refinancing a mortgage under HAMP during bankruptcy is specifically authorized and can save the homeowner significant money when combined with a bankruptcy discharge. Additionally, debtors in Chapter 13 bankruptcy may be able to strip off a second or third mortgage if the loan is entirely unsecured. For instance, if the value of the home is $200,000, and the first mortgage is $200,000 or more, then any additional mortgage or lien on the property would be entirely unsecured and could be stripped off during Chapter 13 bankruptcy. 

If your home is underwater and you are struggling with debt, speak with an experience bankruptcy attorney and discuss your options. In many cases you can discharge your unsecured debt through bankruptcy and refinance or modify your underwater home loan to new, affordable terms. Get the facts about rescuing your underwater mortgage today.

Rising Gas Prices Impact Debtors in Bankruptcy

Debtors in bankruptcy are required to disclose all household income and expenses. While the debtor’s income is often relatively easy to determine through pay stubs and bank records, calculating expenses can be more elusive. When completing your bankruptcy schedules it is important to be realistic. Often changes in the economy can significantly affect your budget. The recent spike in gas prices has impacted the budgets of American families, and changes calculations within your bankruptcy case. 

The U.S. Energy Information Administration recently determined that the average price for a gallon of regular unleaded gas in the United States is $3.567. That is a change of almost $.78 from the same time last year. Many economists believe that the national average will climb to over $4.00 per gallon. In fact, in some states (notably California) gas is already over the $4.00 mark. 

It is important to account for this increase in your family’s budget. If you drive 12,000 miles per year and your car averages 25 miles per gallon, you use 480 gallons of gas per year, or 40 gallons per month. At the national average price of $3.567 per gallon, you spend almost $143 per month on gas. That is already $31 more per month/per vehicle than a year ago. If gas prices climb to $4.00 per gallon, the additional cost to a two income, two car family will be approximately $97 per month more than last year. 

Higher gas prices have also contributed to an increase in food prices. According to the U.S Department of Agriculture, food prices for a family of four with school-aged children averaged $1184.50 during the month of January. That’s $26.20 per month more than the same time last year. 

While not every budget increase will necessitate a change in your bankruptcy schedules, any significant change that occurs after you sign your bankruptcy schedules should be brought to the attention of your bankruptcy attorney. While only a small percentage of cases will be affected by increases to a debtor’s expenses, it is important to keep your attorney apprised of changes in your finances during your case.

Discharging Student Loans in Bankruptcy

Beginning in the 1970’s, many college graduates chose to discharge their student loan debt immediately after graduation. As a result, Congress tightened the restrictions on discharging government-backed student loan debt, and by 1998 federal student loans were not dischargeable except under circumstances of undue hardship.  Today the standard is whether repayment of the student loan “would impose an undue hardship on the debtor and the debtor’s dependents.” 

“Undue hardship” seems like an easy hurdle to clear.  If you are broke, the choice may be buying food or paying on the student loan, right?  Unfortunately, courts have taken a very narrow and hard-line approach in construing the undue hardship standard.  Consequently, it is very difficult to discharge student loans in bankruptcy.  A good example of this is found in the recent case of Wallace v. Educational Credit Management Corp., 2010 WL 5764771 (Bky.S.D. Ohio Dec. 1, 2010). 

The bankruptcy debtor in Wallace graduated with bachelor’s degree in sociology and over $30,000 in student loan debt. Wallace was able to work one year making a little over $12,000 before being forced to quit working due to complications from diabetes. Over the next few years he lost one eye, and had a kidney and pancreas removed.  By 2008, he was legally blind and receiving $811 each month in social security disability.  His monthly expenses were determined to be $790. 

Wallace and his attorney filed an adversary case in the bankruptcy court seeking to discharge the student loan debt under the undue hardship standard.  The Bankruptcy Court for the Southern District of Ohio looked at three factors (known as the Brunner test) in reaching its decision: 

1. whether Wallace could maintain a “minimal” standard of living if forced to repay the student loan debt;
2. whether additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the student loan repayment period; and
3. whether Wallace made a good faith effort to repay the student loans. 

The Ohio Bankruptcy Court decided that while the first prong of the Brunner test was met, Wallace “failed to demonstrate that his state of affairs is likely to persist for a significant portion of the repayment period of the Loan.” The Bankruptcy Court ordered Wallace to pay $20 per month, but stayed final judgment on the issue until 2012 and would review the case.  In a bit of ironic prose, the court stated that “It remains to be seen into which group Wallace will land, whether he will find work or remain unemployed.”  

As you can see from the Wallace case, student loans are very difficult to discharge.  If you believe you can meet the undue hardship test, discuss your with an experienced bankruptcy attorney.  While not impossible, discharging student loans is a very high bar to clear.

Your Post-Discharge Debt

Most bankruptcy cases end with a discharge order from a federal bankruptcy judge.  The discharge is a permanent injunction that prohibits pre-bankruptcy creditors from collecting against the debtor, and is a “fresh start” for the debtor.  It effectively eliminates many debts and allows the debtor to start over with his or her finances. 

Taking care of your finances after receiving your bankruptcy discharge is extremely important.  The bankruptcy law requires that you complete a financial management course prior to your discharge which teaches basic management techniques.  While this course is helpful, the first step in managing your finances after your bankruptcy is to identify any post-discharge debts. 

First, what personal debt survived your bankruptcy case?  Post-discharge personal debt generally falls into one of three categories: (1) debt automatically excepted from discharge; (2) debt excepted from discharge by court order; and (3) post-petition debts.  Debts automatically excepted from discharge include student loans, most taxes, and child support obligations.  Debts excepted from discharge by court order include debts involving fraud or other bad conduct.  Post-petition debts are debts that first arise after the day you file your bankruptcy case.  Post-petition debts are not included in your bankruptcy case and are not discharged. 

Second, do you have property debt that survived the bankruptcy?  In certain cases the personal obligation to pay a debt may be discharged, but the property lien survives.  Although you owe nothing to the creditor, items secured by a property lien may be repossessed.  Consult with your attorney and determine what, if any, property may be at risk of repossession after your bankruptcy. 

Finally, did you agree to any new financial obligation during your bankruptcy case?  Be clear about any new or changed financial obligation that you agreed to during your bankruptcy case.  If you executed a reaffirmation agreement, redemption loan, or modification, make sure you understand the terms and obligations contained in that agreement. 

You and your attorney should discuss the impact of your bankruptcy discharge on your debts.  Be certain that you understand which obligations are discharged and which survive the bankruptcy case.  Your bankruptcy attorney is happy to discuss your options for managing any debt that survives the bankruptcy discharge.

How Bankruptcy Can Stop A Lawsuit

A lawsuit can cause tremendous anxiety.  Many lawsuits are filed every day by creditors seeking to collect on credit card debts and medical bills.  Common sense should tell you that if you owe the money, there are few legitimate defenses that will prevent a judgment.  

When you are served with notice of a lawsuit, you will need to defend the lawsuit.  If you fail to respond to the lawsuit, fail to answer discovery requests (interrogatories, requests for admissions, production of documents, etc.), or fail to show up to court, the court may enter a judgment against you.  Even if you are successful in navigating all of these procedural landmines, you may lose your case.  Once the plaintiff has a judgment against you it can seize property or garnish your wages.  A lawsuit will also be recorded on your credit report where it stays for seven years (or longer).  Do you need a lawyer?  Yes!  Will it make a difference?  Probably not. 

If you are facing a lawsuit for a bad debt, you should consider whether a personal bankruptcy can help.  Once a bankruptcy petition is filed, you are under the protection of a federal judge’s court order directing creditors to stop all collection actions, including any pending litigation.  This protection is called the automatic stay, because it stops creditors immediately upon filing the bankruptcy case. The automatic stay also stops wage garnishments (except for a few narrow exceptions like child support), foreclosure actions, and property seizures.  Once the bankruptcy court discharges a debt or state court judgment, the creditor can no longer enforce the debt against you. 

While a single lawsuit may not be a good reason to file a lawsuit, it usually is a warning sign that you need help.  If you have been sued, contact an experienced bankruptcy attorney and review your legal options.  Bankruptcy can stop a lawsuit and discharge credit card debt, medical bills, and personal loans.