Secured Loans in Bankruptcy

A loan is “secured” when property is pledged by the borrower as collateral.  Should the borrower fail to repay the loan, the collateral is taken by the lender and sold to repay the debt. There are two types of secured loans: (1) purchase money security interest loans; and (2) non-purchase money security interest loans. 

Purchase money security interest loans (PMSI) occur when the lender loans money that the borrower uses to purchase a specific item and the lender retains a secured interest in the item. This is commonly the case with motor vehicles. The bank lends to the borrower for the specific purpose of purchasing an identified vehicle, and the bank takes a lien on the vehicle.  PMSI loans cannot be discharged in bankruptcy. However, under certain circumstances a PMSI loan can be “crammed down” by the bankruptcy court so that the amount owed is equal to the value of the collateral. 

Non-purchase money security interest loans (NPMSI) occur when the borrower already owns property that is used as collateral for a loan.  For instance, a borrower may take a loan from a finance company and use household goods and/or jewelry as collateral for the loan. The bankruptcy laws allow the debtor to exempt (up to a certain amount) household goods and jewelry, so the NPMSI loan can be avoided to the extent that the loan impairs the legal exemption. 

For example, let’s say that you take a loan from a finance company for $500 and secure it with your television worth $400. If you apply your legal household goods exemption to protect the full value of your television ($400), the finance company’s loan impairs the exemption. After the bankruptcy court grants a Motion to Avoid Lien filed by your bankruptcy attorney, the television is fully protected and the creditor is left with an unsecured loan. 

The bankruptcy laws contain many powerful provisions for protecting property. If you are in debt and need legal relief, speak with an experienced bankruptcy attorney and discover how the federal bankruptcy laws can discharge your debts, safeguard your property, and provide the financial fresh start you need.

Transferring Property Before Bankruptcy Can Be A Bad Idea

Modern bankruptcy laws permit the debtor to keep certain property necessary to maintain a modest standard of living. These laws, called exemptions, protect property from collectors so that the debtor has a reasonable chance at a fresh financial start after bankruptcy. However, while these protections afford the honest debtor a fresh start, some individuals try to get a head start by transferring property in an attempt to hide it from the bankruptcy process. As you can guess, concealing assets from the federal bankruptcy court is a bad idea. 

Section 548 of the Bankruptcy Code endows the bankruptcy court trustee with the power to undo a fraudulent transfer made within two years of the bankruptcy filing. Fraudulent transfers include any transfer made with the intent to hinder, delay, or defraud creditors; or transfers made while the debtor is insolvent which do not involve a fair value exchange. While the lookback period is set at two years by section 548, another section of the Bankruptcy Code (section 544) permits the trustee to apply state law to undo a fraudulent transfer. In many cases the state law lookback period is longer than two years. 

There is generally no issue if you have sold property and received a fair price. However, if you have transferred property in a less than honest fashion, the transfer may be undone. For instance, if you sell your car worth $5,000 to your brother for $500, and then file bankruptcy two months later, the trustee may seize the car from your brother and sell it to pay your creditors. Likewise, deeding jointly owned real estate to a non-filing spouse prior to filing bankruptcy can create a thorny legal dilemma.

 Every individual bankruptcy case must include a Statement of Financial Affairs which asks the debtor to list all property transferred within two years before the bankruptcy filing. It is important to answer this question honestly, and to discuss any recent property transfer with your bankruptcy attorney. 

If you are considering bankruptcy, consult with an experienced bankruptcy attorney and discuss your legal exemptions. In many cases your attorney can legally protect your property without the need to sell or transfer. Your attorney can advise you on the best course of action to protect your property and restructure your financial obligations.

When Paying Your Debts Can Cause Trouble

Many tough decisions are made when a family is struggling with debt.  Often debts are paid according to priority.  Those bills at the lowest priority may not get paid at all.  While this may be a good strategy under ordinary circumstances, it may back-fire when a bankruptcy is imminent. 

The act of paying one creditor while ignoring another is called a preference payment by the bankruptcy laws.  The debtor preferred to pay one creditor and not others.  A preference payment is defined as a transfer of money made before a bankruptcy filing, to pay on a pre-existing debt, made while the debtor is insolvent, and gives the creditor more than it would receive from the liquidation of the debtor’s assets during a Chapter 7 bankruptcy. 

In deciding who should get paid first, the Bankruptcy Code divides creditors into classes and creates a hierarchy of preferences.  For instance, the Bankruptcy Code prefers that child support is paid before credit cards, and that a secured car payment is paid before a medical bill.  In many cases a pre-bankruptcy preference payment is perfectly fine; in other cases it can create trouble for the debtor and the creditor.  This is especially true when one creditor in a class receives more than other creditors in the same class, or a creditor in a lower class receives money before creditors in higher classes. 

When a preference payment occurs within 90 days of the bankruptcy filing, the bankruptcy trustee can ask the court to order the preferred creditor to turn over the payment(s) for distribution according to the hierarchy of preferences.  This period is increased to one year if the creditor is an “insider” creditor.  An “insider creditor” is generally a relative, business partner, etc. who has a special relationship with the debtor. 

Common preference payment scenarios include:

1. Repaying a personal loan from a family member just before filing bankruptcy;
2. Paying one business vender, while ignoring others.
3. Transferring a credit card balance from one card to another.
4. Paying off a credit card, medical bill, or personal loan just before bankruptcy. 

When the trustee requests turnover of a preference payment, the creditor is faced with either complying with the request or litigating the matter in bankruptcy court.  There are legitimate preference payment defenses which largely depend on the circumstances of the payment.  However, the general practice of bankruptcy trustee is to sue first and ask questions later. 

If you are struggling financially, seek out legal advice early and avoid making mistakes with preference payments.  An experienced bankruptcy attorney can help you make wise financial decisions and avoid preference payment situations.

Law of Unintended Consequences Hurts Big Banks

In 2004 and 2005, the banking industry spent millions lobbying for tougher bankruptcy laws.  Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. collectively spent $25 million during that period.  The big banks’ efforts paid off in a major overhaul of the Bankruptcy Code in 2005 making it more difficult for struggling families to discharge credit card debt.  However, the banks did not foresee the current housing crisis, and new research suggests that the 2005 changes to the Bankruptcy Code may have caused mortgage default rates to rise. 

A paper published by the National Bureau of Economic Research states that the 2005 changes “raised the cost of filing and reduced the amount of debt that is discharged” thereby making it more difficult for debtors “to shift funds from paying other debts to paying their mortgages[.]“  In other words, before the 2005 changes, many debtors struggling with a mortgage arrears and credit card debt could file bankruptcy, discharge the credit card debt, and free-up money to pay the mortgage.  The new bankruptcy provisions make this process more difficult.  As a result, fewer debtors are able to afford to save their homes through the bankruptcy process. 

Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank said, “Be careful what you wish for.  [The banks] wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures.” 

If you are facing overwhelming debt and want to keep your home, there are many alternatives available to you.  An experienced bankruptcy attorney can review your finances and explain your legal options for discharging or repaying your debts.  Bankruptcy is not the only option for saving a home from foreclosure, and many cases are successfully resolved using a combination of bankruptcy and non-bankruptcy methods.  Get the facts today and solve your debt dilemma!

Do I Have To List It In My Bankruptcy?

A common question from clients preparing to file bankruptcy is, “Do I have to list it?” “It” can be an item of property, a financial obligation, a source of income, or even a reoccurring bill. The simple answer is, “Yes!” You must list all of your assets, debts, income and expenses. The bankruptcy process expects and relies on honest disclosures from the debtor. These financial disclosures are made under oath and threat of perjury. You must disclose everything. 

Disclosing ownership of an asset doesn’t mean you will lose that property. Statistically, only four percent of all Chapter 7 bankruptcy cases have an asset that is turned over to the trustee. Federal and/or state exemption laws protect most property during bankruptcy, however property exemptions are only recognized when the asset is listed and the legal exemption is properly claimed. An asset that is concealed during your bankruptcy case will not receive the full protection of the exemption laws. 

Likewise, disclosing income does not mean that you will be forced into a Chapter 13 repayment case. Most debtors pass the means test without much effort. In the remaining cases, most only require small adjustments. Disclose all of your income early during the bankruptcy process, and your attorney can discuss your legal options for discharging unsecured obligations without filing a Chapter 13 repayment case. 

Intentionally failing to disclose a debt means that the debt is not discharged. Unfortunately, it also means that you have committed perjury since you attested to having listed all of your debts. Perjury is a federal crime, and you may be denied a discharge. Occasionally a debtor wants to omit a creditor from the bankruptcy case. Your attorney can help you with this decision. For instance, a credit card with a zero balance is not a debt and there is no disclosure requirement. In theory, since the credit card company is not listed as a creditor, it does not receive notice of the bankruptcy, and the credit relationship is not disturbed. Realistically, the credit card company will discover the bankruptcy independently and may restrict the account. 

When it comes to bankruptcy it is important to be completely honest with your attorney. Your attorney can advise you on making the best disclosure decisions while staying within the legal requirements of the bankruptcy laws. Don’t hide a financial fact! Discuss it with your attorney and protect your legal rights.

Your Chapter 13 Repayment Plan

The central feature of a Chapter 13 bankruptcy is the repayment plan. The Chapter 13 plan is a proposal by the debtor to repay certain debts in installments over three to five years. A plan must be filed within 14 days after the bankruptcy petition is filed, and a copy or summary of the plan is mailed to all creditors. Creditors or the bankruptcy trustee may object to the debtor’s plan which may require modification. Ultimately the repayment plan must be “confirmed” by the bankruptcy court. 

Many Chapter 13 plans make no payments to unsecured creditors.  The amount paid to unsecured creditors is largely guided by the outcome of the bankruptcy means test, which makes an initial presumption of the debtor’s ability to pay unsecured creditors over three to five years. The Chapter 13 Plan must provide payment of at least as much for unsecured creditors as they would have received had the debtor filed a Chapter 7 liquidation bankruptcy.  Any priority claims must be paid in full and include a plan for paying secured debts during the plan term.  Long term debts, like a mortgage payment or student loans, do not need to be paid off during the plan term, but the plan may provide for the cure of a defaulted note. 

Plan payments are made to the Chapter 13 Trustee, who receives a fee for distributing the debtor’s monthly payment to creditors.  The debtor’s first plan payment is due 30 days after the case is filed, however the Chapter 13 Plan may not be confirmed by the bankruptcy court until a later date.  If a debtor fails to commence making plan payments to the trustee, a motion to dismiss the case will be filed.  In most cases is recommended that the debtor execute a voluntary wage withholding to pay the Chapter 13 Trustee, although there is no requirement to do so. 

If you are considering a Chapter 13 bankruptcy, it is important to discuss your repayment plan with your attorney. While it is possible to amend a repayment plan when your financial circumstances change, you and your attorney should propose a Chapter 13 plan that is both affordable and realistic.  The success of your Chapter 13 case depends upon your ability to follow through with your plan.

Is Debtors’ Prison Making a Comeback?

In the early days of this country it was common for debtors to be imprisoned until their debt was paid. Popular history records that the last debtors’ prison was closed in the 19^th century and the practice of incarcerating a person on account of a debt was abolished. However, the prohibition against debtors’ prison has always had its loopholes; the most well-known examples are tax evasion and child support delinquency. In one case a former corporate lawyer, H. Beatty Chadwick, was imprisoned for more than 14 years for failing to turn over money related to a divorce case. The judge who released him decided that after 14 years Mr. Chadwick either could not or would not pay. 

Since the start of the recession more debtors are being arrested for not paying debts. The Washington Post reports that “more than a third of all U.S. states allow borrowers who can’t or won’t pay to be jailed.” This process generally occurs after an individual fails to show up to court, but sometimes results from failing to make court-ordered payments to a creditor.  In one case the Post reports that a 26 year old woman was arrested for failing to show up to a court hearing over a $1,159.87 credit card debt. When she posted a $500 bond, that money was turned over to the creditor. 

While many state judges appear to be using the power of their office to influence debtors to pay their creditors, these judges cannot circumvent the power of the federal bankruptcy laws. When a debtor files bankruptcy, all debts owed prior to the date of the bankruptcy fall under the jurisdiction of the federal bankruptcy judge. All state court proceedings must automatically stop, including the execution of a state court contempt of court warrant to coerce payment. This automatic stay is a very powerful protection and gives the debtor a chance to propose a plan to either discharge the debt or repay it over time. 

If you are threatened with a lawsuit, don’t ignore it. Speak with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can protect your income, your property, and even your freedom.

How Often Can I File Bankruptcy?

The federal bankruptcy laws do not limit the number of times an individual can file for bankruptcy protection. When an individual is facing overwhelming debt and needs relief from creditors, the bankruptcy laws provide powerful protection. In some cases that protection can be a discharge of debt. In other cases, it means an opportunity to repay what is owed. 

An individual may file multiple bankruptcies for many reasons. When a discharge of debt is needed, the federal law limits time between discharges. After you receive a discharge in a previous Chapter 7 bankruptcy case, you must wait 8 years before you can receive another Chapter 7 discharge; and 6 years to receive a Chapter 13 discharge.  If you received a discharge in a previous Chapter 13 bankruptcy case, you must wait 4 years before you can receive a Chapter 7 discharge; and 2 years to receive another Chapter 13 discharge. 

The above time periods are measured from the date the previous case was filed.  For instance, if you filed a Chapter 7 bankruptcy on June 1, 2005, then on June 1, 2013 you will be eligible to file a Chapter 7 bankruptcy case and receive a discharge. However, on June 1, 2011 you are eligible to file a Chapter 13 bankruptcy and receive a discharge. 

In some cases a discharge is not needed. A debtor can file a Chapter 13 bankruptcy and repay debts without receiving a discharge. In this situation there is no legal limitation between bankruptcy cases. This strategy is especially useful when faced with non-dischargeable debts that must be fully paid. The obligation is paid over time under the supervision and protection of the bankruptcy court.  In some rare cases of abuse a bankruptcy court will deny the debtor relief. This may occur when a debtor has shown a history of repeated bankruptcy filings that have been dismissed. 

If you have received a discharge and need the protection of the bankruptcy laws for a second time, discuss your situation with an experienced bankruptcy attorney. The bankruptcy laws are meant to help the honest, but unfortunate debtor and can help you straighten out a difficult financial dilemma.

Who Will Know About My Bankruptcy?

One of the most common questions asked about the bankruptcy process is, “Who will know about my bankruptcy case?”  Filing bankruptcy is usually very confidential, but the Bankruptcy Code and Federal Rules of Bankruptcy Procedure dictate that notice of your bankruptcy case must be sent to certain individuals and businesses. 

Bankruptcy is a legal process and is a matter of public record.  Few newspapers will publish bankruptcy filings in the “public notices” section.  While this was a common practice for newspapers in the past, the sheer number of bankruptcy filings makes reporting personal bankruptcies impractical.  This year more than a million and a half people will file bankruptcy, and more than 5.7 million people have filed since September 30, 2005.  Unless you are a public figure or your bankruptcy case is somehow newsworthy, it likely will not appear in any section of a newspaper. 

You are required to submit a list of the names and addresses of every individual or business you owe when your case is filed.  Everyone on that list is sent a notice of your bankruptcy case.  The notice also prohibits the creditor from taking any further collection activity.  The bankruptcy court will send notices only to the names on your list of creditors, to your attorney, and a notice to your address.  Friends and family members are not sent notices unless you identify them on your list. 

Your employer may receive notice regarding your bankruptcy in a few limited circumstances.  Obviously, if you owe your employer money, your employer will be notified.  A second circumstance is when you file a Chapter 13 repayment bankruptcy and wish for your employer to withhold the plan payment from your wages.  Finally, there may be a reason to notify your employer, like if your employer is under a court order to garnish your wages. 

Since your bankruptcy case is a matter of public record, an individual may contact the bankruptcy court to obtain information about your case.  Most bankruptcy courts have an automated telephone system that will provide basic case information to the public.  Some individuals are able to access the Public Access to Court Electronic Records (PACER), an electronic public access service that allows users to obtain bankruptcy case information via the Internet.  PACER registration is free, but the system charges an access fee per page. 

The typical bankruptcy case is quick and confidential.  However, every case is different.  If you have specific questions about the effects of filing bankruptcy, consult with an experienced bankruptcy attorney.  Your attorney can explain the benefits of the federal bankruptcy laws and the process for discharging your debts.

I Have My Bankruptcy Discharge. Now What?

You should obtain a copy of your credit report immediately after receiving your bankruptcy discharge. Federal law entitles you to one free credit report from the “big three” credit reporting agencies, Experian, Equifax, and TransUnion, every twelve months. The easiest way to obtain your free credit report from each of these agencies is by visiting AnnualCreditReport.com. 

After receiving your free credit reports, check each report for errors. First, any debt discharged by your bankruptcy should be listed as “Discharged in Bankruptcy” with a “Zero Balance.” Second, there should not be any negative activity reported after the date that you filed your bankruptcy case. This includes any new collection agency report after your filing date. Third, any debt that was reaffirmed should not be listed as “Discharged in Bankruptcy,” and should list your on-time payments. Finally, in some cases inaccurate information will be reported. For instance, a car voluntarily surrendered back to a creditor during a bankruptcy is not a “repossessed vehicle” and should not be reported as such. 

Correcting any errors on your credit report is simple and easy. Each reporting agency has procedures from contesting erroneous information, either by mail or on-line. Once the credit agency has updated its records, it must issue you a free corrected report. Review this new report for errors; do not assume that the report has been correctly amended. You may need to correspond with the agency several times and supply documentation regarding your bankruptcy case. It is your responsibility to ensure that your credit report is accurate. Neither the bankruptcy court, nor your attorney, nor your creditors are responsible for sending the credit reporting agencies information regarding your bankruptcy case. 

Updating and correcting your credit reports is the first step on the road to rebuilding your credit after bankruptcy. Fortunately, this step is free and takes very little effort. Be sure to correct your credit reports and then closely monitor your credit regularly for the first two years after your bankruptcy discharge. With timely payments and by carefully protecting your credit file, your credit score will increase quickly.

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