Which type of bankruptcy to choose?
Attorney Michael Goldstein discusses the differences that consumers need to be aware of when determining if it is a better idea to filea Chapter 7 bankruptcy or a Chapter 13 reorganization.
Top Consumer Debt Radio Podcasts
Below are some of our favorite podcasts we have recorded over the past year.
Saturday July 17, 2010 – Alternatives to loan modifications
Saturday July 3, 2010 – Liability from 4th of July Parites
Saturday June 12, 2010 – Identify Theft
Saturday May 29, 2010 – Why Loan Modifications are failing
Saturday May 22, 2010 – How to handle Medical Bills
Saturday May 1, 2010 – Truth about the Obama Refi Program
Saturday April 24, 2010 – Fraudulent and deceptive lending practices
Saturday March 27, 2010 – How to fix your credit report
Saturday March 20, 2010 – Non discharable debts
Saturday March 13, 2010 – Income tax issues
Saturday Janaury 2, 2010 – Bankruptcy Myths and facts
Saturday January 16, 2010 – Social Security Protection
Saturday January 23, 2010 – issues small business owners face
Saturday February 6, 2010 – Issues facing the unemployed
Saturday February 13, 2010 – Protecting your job and employment status
Saturday February 20, 2010 – The History of Fico Score
Saturday February 27, 2010 – Debt settlement vs. Bankrutpcy
How to track the ownership of your mortgage
I recently came across this very interesting chart created by Dan Edstrom, of DTC Systems, demonstrating how convoluted the ownership of a mortgage can be these days. The scary thing is that the mortgage tracked in the chart below is proportedly a normal home loan that any of us might have. I might expect a high risk “B-loan” to follow such a ridiculous track, but how scary is it to see what the banks and investors have done. It is no wounder there are so many issues these days with improper foreclosures.
How to protect your tax refund from the Trustee
When someone who is facing financial difficulty decides to file for bankruptcy there are many secondary choices they must make. They may be able to decide which chapter of bankruptcy they should file, Chapter 7 liquidation or Chapter 13 reorganization. Once that decision has been made the Debtor then needs to decide, should they keep their home; should they keep their boat? Depending on their income and assets though the biggest choices typically revolves around their more liquid assets though. Which assets should they protect from the Trustee in a Chapter 7 bankruptcy case, and which ones should they expose.
In many situations there is no choice, due to the fact that a cap has been hit on an asset, such as a bank account, lost wages in a law suit or equity in a car. However, one such asset that is typically very difficult to exempt, unless a Debtor uses the Federal exemptions and has a wild card available is an anticipated or even realized tax refund. Under 11 U.S.C. § 542(a), any property that the Debtor held prior to filing his or her bankruptcy becomes property of the estate and is subject to turnover to the Trustee upon request.
In the past, if a Debtor has money owed to him from the Internal Revenue Service, such an asset must be listed on Schedule B of the bankruptcy petition and generally, the Trustee will look to take those funds as part of the liquidated bankruptcy estate, or demand that the unsecured Creditors be paid at least that amount in a Chapter 13 plan based upon the B22 analysis. This was true until very recently when an ingenious Debtor, James Winslow Graves and his bankruptcy attorney beat the system. You see, a Trustee is only entitled to demand an asset which the Debtor has a right to. This is no different then the legal theory “you can only give title to what you own”.
What this Debtor did was simply allow the IRS to take his tax refund and hold it in their possession until such time as he may need to pay taxes in the future. Now this may sound almost like a fraudulent transfer, but the IRS code is very clear on the matter. Under the tax code, once a tax payer elects to leave those funds on deposit with the United States and apply the overpayment to his or her future tax liability, that decision is irrevocable, or as my six year old child would say, “no take backs”! More specifically, the tax code states, “no claim for credit or refund of such overpayment shall be allowed for the taxable year in which the overpayment arises.” 26 U.S.C. § 6513(d).
The Trustee in this case argued the position that the refund amount was property of the estate under 11 U.S.C. § 541(a)(1), and that, since Debtors were receiving the benefit of the application of the refund, the funds should be treated as an account receivable of the Debtors, and Debtors should therefore be required to turn over an equivalent amount to the estate. However, both the Bankruptcy Court and the 10th Circuit Federal Court held that the tax code is clear and specific in its language and intent. The courts held the Debtor once he filed his taxes, had no rights to the tax refund and as a result could not “take it back”. If you find yourself in a similar position, The Florida case of In Re Graves, Docket Number. 08-1462 and In re Graves, 396 B.R. at 73 is the case to cite. The Creditors and the Trustee may think it unfair and even borderline deceptive, but the courts have spoken with its full opinon..
How will a loan modification affect your credit score?
As homeowners continue to default on their mortgage obligations, and try to reorganize their finances the need to work their lenders has become increasingly important. As I have discussed in the past in this blog, loan modifications are not a new fad, or President Obama’s great new invention, but rather a tried and true tactic known as negotiation. With this said, many homeowners are concerned though as to what will the impact be on their credit score should they opt for a HAMP or traditional loan modification or credit workout.
According to an article by Moe Bedard, on September 29, 2010, “a recent VantageScore Solutions survey using more than 400,000 active, anonymous consumer credit files shows that loan modification options have very little effect on [credit] scores.”
In order to forecast a consumer’s projected credit score, it has been suggested that a crystal ball and tarot cards may be in order. This suggestion though is a bit far fetched, even for the ever difficult, but not completely unpredictable FICO score rating. With respect to the contention that one’s credit score will decrease with a loan modification, which is a very dangerous statement to make. Not only is it likely that credit scores may not be impacted in a significant way by loan modification, but they may save a homeowner’s house. The reason credit scores are not affected much may in fact be rather simple. Approximately 35% of your credit score is based upon the amount of debt. If you enter into a loan modification, the amount of debt is not generally altered in any way and in some cases, under the HAMP program, very small amounts of principal may even be set aside, up to $83 per month. Another approximately 35% of the FICO score is based upon your payment history. If a homeowner was behind on making payments and enters into a loan modification, and their new payment history is reported, then a credit score can only improve. Now, it is true that some mortgage servicers do not report during a loan modification or even report a late payment if the payment is not set up properly, however, for the most part, homeowners’ credit should not be affected in a manor that should come into play when considering a loan modification.
I want to add a note of caution though to anyone trying to workout a deal with their bank. As we have seen all too often, many investors are offering temporary or even full blown modifications only to withdraw their offer down the road. With that said, in many situations, a bankruptcy, may be a better option to allow a consumer to catch up on their arrears. As with any complex legal situation, it is advisable to consult with a bankruptcy lawyer in your area.
How to reduce Credit Card Interest Rate
The Credit Card Act has provided a great deal of added protection for consumers in the use of credit cards and the manor in which banks can market to its customers. However, one area that was not addressed was limiting the rate that can be charged after proper notice is provided to existing customers. As a result, many consumers have found that just trying to stay current on their credit card payments is very difficult, especially when you try to pay back the amount that you charge each month. The reason for this is that the past debt with its interest payments tends to increase each month through negative amortization.
There are a number of ways to reduce your inertest rates. However, one way that will work very well for those high rate cards, which consumers typically do not use any longer, but do carry significant balances is to negotiate with your credit card company on the rate based upon some consideration the consumer can provide. For example, you may want to propose to not use the card any longer, but just pay back the principal and interest currently owed to the creditor. In consideration for that, ask if the credit card company will reduce the interest rate. This in affect will shut off your credit card, but at the same time, allow you to pay the debt down.
The key to negotiating to pay and not use the card is to not harm your credit rating or FICO Score. The reason being, you do not want other creditors to reduce your limits or raise your interest rates based upon a reduction in your credit score. The question then begs to be asked, how will such an arrangement be reported on your credit report? It is imperative that when negotiating with the Credit Card Company, you require them to continue to report your account as open and current. This type of negotiation is not a debt settlement, and you are not proposing to pay any less then 100% of the unsecured balance. All that is happening is the Credit Card Company can take solace in knowing that the consumer poses no additional risk to incur fees that can not be paid back
Changing laws on mall gift cards
Have you ever received a gift card for the mall or one of those pre-paid Visa or MasterCard, only to find out when you tried to use them that the card has expired, or due to the length of time, much of the funds were not available for your use? This is an unfortunate occurrence for many consumers. However, as of August 22, 2010, the Federal Credit Card Act has established a new set of rules and regulations relative to gift cards. The specific issues this new law tackles is relative to limiting penalty fees and rate increases, and expiration dates not listed on the card.
There are several key changes to the law as it relates to these gift cards and gift certificates is that the law limits the expiration date to five years from the date of issue. So even if you have a card that indicates it is only good for a year, the issuing company will have to provide you with a new card should such a printed expiration occur less then five years from the date of purchase.
Additionally, just because you receive a gift card, does not mean you must use it right away or loose some of the value due to inactivity or service charge fees. More specifically, there must be no activity for over one year before such penalties can be assessed and even then only once per month can any funds be deducted.
Perhaps the most important aspect of the new law is the requirement for explicit written disclose of any penalties for certain uses on the face of the gift card. In addition, the contact information for the issuing company must be clearly identified on the card, so that should the user have any questions about any loss of funds, there is an indication of the proper company who is ultimately responsible. It should be noted though that cards produced before April of 2010 can still be sold on the open market until August 1, 2011.
The bottom line is that as consumer’s and as gift givers, we are all protected against the big banks and other Creditor’s selling us a bill of goods that can not be used for its intended purpose any longer.
Debt settlement companies may mislead you
Recently, I have heard many Creditor rights and debt settlement companies making statements about bankruptcy that are at best inaccurate, and at worst an attempt to dissuade Debtors from filing bankruptcy in lieu of loosing their home and entering into long-term pay back plans with Creditors that are not in a Debtor’s best interest. For example, I read one blog article, What No One Tells You About Bankruptcy, Foreclosure and Your Credit, that suggests filing bankruptcy will not always stop a foreclosure, or that your credit score will be harmed beyond repair for a decade by filing a Chapter 13 case.With all due respect to these positions on bankruptcy and its effect on credit, I would suggest that most homeowners facing foreclosure are already at the bottom of the credit score spectrum. Additionally, the only way to guarantee that a foreclosure is stopped is by filing a bankruptcy. Pursuant to section 362(a) of Title 11, once a bankruptcy case is filed, the foreclosure MUST be stopped, and the only way a creditor can continue is by filing a motion for relief from the automatic stay. In order for a creditor to do this, the homeowner must fail to make there subsequent payments.
I will grant you that many Chapter 13 cases do fail, but the reason for that are unrealistic plans, and underestimating a Debtor’s expenses on schedule J, or an artificially inflated income on schedule I based upon untrue revenues from self employment.
What I have found in my practice is that a Debtor needs to take a hard look at there situation and determine if their house is (1) worth saving, and (2) if the homeowner has enough income to stay current and pay back their missed armaments over a 5 year period.
With respect to the contention that one’s credit score will decrease with the filing of a bankruptcy and be harmed for up to 10 years, that is a very dangerous statement to make. In fact, it is actually possible for your FICO score to increase after your bankruptcy discharge. The reason for this is very simple, approximately 35% of your credit score is based upon the amount of debt. If you discharge thousands of dollars in debt, then that part of the calculation can only increase. Another approximately 35% of the FICO score is based upon your payment history. If by filing a bankruptcy, you no longer have debts to be in arrears on, then again you can only go up, over time as you make your chapter 13 plan payments. This is not to say that filing of a bankruptcy does not take a negative toll on your credit score, but it is balanced by the positives. In many situations, Debtors, especially those with a mortgage can rebuild their credit with in 24 – 30 months to the point of obtaining new secured debt loans. I do however, caution my clients to be careful not to fall into their old bad habits which created the need for the bankruptcy filing.
The bottom lines is that if you are facing a foreclosure or have a significant amount of unsecured debt, it is always a good idea to talk to a bankruptcy attorney or consumer debt advocate in your area before making any decision. Most of these attorneys such as me do not charge a consultation fee for the initial meeting and can provide you with a great deal of insight.
This post was originally published on the blog of Goldstein and Clegg, LLC
