Diamond Speaks His Mind on Bankruptcy and Related Topics

When Redemption of Consumer Goods Makes Sense in a Chapter 7?

In the previous Blog I discussed Reaffirmation, which is one of the ways for a debtor in Chapter 7 bankruptcy to keep property secured by a lien such as an automobile.  There are alternatives to reaffirmation. There are two ways to eliminate a debt secured by property, one of which is to give the property back to the creditor and the other allows you to keep the property by redeeming it as allowed by the bankruptcy laws. 

The kinds of property that can be redeemed is limited to consumer goods which are used  primarily for  household purposes, such as furniture, a refrigerator, washing machine, dryer, personal computers, televisions and automobiles.  The advantage only works to the debtor's advantage if the creditor is underwater (upside down) with its debt.  When the collateral is worth less than the debt you only have to pay the creditor what the property is worth rather than the entire debt.   An example would be if you owe a computer company $2,000 on a PC that is only worth $500, you would only have to pay the company $500.  The only disadvantage is that you have to pay the creditor in cash.  Having to pay cash is often a challenge for many individuals just emerging from bankruptcy.  In the right situation redeeming consumer goods can work a lot better than a reaffirmation agreement.

To redeem property requires a court order.  Your lawyer files the appropriate documents with the Bankruptcy Court, a hearing is set at which time the court places a value on the property.  You pay the creditor cash for the value of the property determined by the court and the creditor releases its lien. You now own the consumer good free and clear of debt.        

Why Some Reaffirmation Agreements Are Approved And Others Are Not?

A reaffirmation agreement is a contract that is used in a Chapter 7 Bankruptcy case that must be approved by the Bankruptcy Judge, in most cases without a court hearing.  In general, the purpose of this agreement is to agree to repay what is owed to a creditor, in almost all cases the debt is secured by something that the debtor bought and wishes to keep.  A good example would be an automobile.  If the Debtor wishes to keep the car and still owes money on the car, he/she must agree to continue to pay for the car. 

A reaffirmation agreement is sent to the Debtor's lawyer by the Creditor, who then obtains the client's signature and then must certify that the reaffirmation agreement is in the debtor's best interest and does not present an undue hardship, as set forth in the bankruptcy code.  The document is then filed with the Court and approved by the Judge without a hearing.  However, as with all things in life, there are exceptions that would trigger a hearing before the Bankruptcy Judge, at which time the client, through his/her attorney would have to justify the reaffirmation agreement. 

One example, is that the debtor's budget filed as part of the paperwork that started the bankruptcy case does not demonstrate that the debtor would have the money to pay for the car the debtor wants to retain.  In this case, the debtor would have to find a way show the Judge that the payments could be made without creating undue hardship. 

Another example, would be the debtor wishes to reaffirm an unsecured debt and the debtor's lawyer is unable to certify the reaffirming the debt is in the debtor's best interest.  In this case the Judge is going to want to know what makes this particular unsecured claim different from the other unsecured claims, that he should allow the debt to be reaffirmed.  Justifying this type of reaffirmation usually requires demonstrating to the Judge that there is something unique about either the debt or the relationship between the debtor and the creditor.  An example of a reaffirmation agreement that I presented to the court was a situation in which the debtor had a career in the military and served his country honorable for a long time and had retired in El Paso to be close to a large military base as well as a military hospital.  He had always shopped on post and had always had a military credit card allowing him to make credit purchases on post.  His argument was simple -- He had always shopped on post and always had a military credit card and that the use of this credit card was not a contributing factor to his bankruptcy.  In short, he wanted to continue to do what he had been doing for over thirty years.  When I finished arguing the debtor's position the judge did not hesitate in making a ruling.  He stated:  "I come from a military family and I understand the special relationship that exists between this person and this particular creditor.  I further understand that not to allow this debt to be reaffirmed would be a life changing event for this retired person.  The Reaffirmation Agreement was approved by the Court.     

 

 

 

  

 

MEANS TEST TWEAKED, SCORE TWO POINTS FOR THE CONSUMER

The "Means Test" became law as part of the Bankruptcy Consumer Protection Act Of 2005.  The test is mandated by the bankruptcy code including a long, vague and confusing explanation of exactly how to set up the test, which was left to the Office of the United States Trustee.  The backbone of the test is derived from the Internal Revenue Code.  The test has gone through more than a few changes as people in charge attempted to make the test fit the statute and has been subject to a number of court rulings both by the Bankruptcy Courts and the Courts of Appeal.  Two (2) changes that have recently taken place are:

     The Court of Appeals for the Fifth Circuit, the Appellate Court that Texas is subject to has recently ruled on whether or not a debtor is entitled to an "Ownership Expense" deduction when the vehicle is paid for.  The Court ruled that a debtor is entitled to an ownership expense deduction regardless of whether or not there is a debt against the vehicle.

     Is a debtor entitled to an additional deduction with a vehicle that has high mileage?  Obviously a car that has low mileage costs less to operate than a vehicle with high mileage.  The Office of the United States Trustee has determined that a debtor is entitled to an extra deduction for vehicles that have over 200,000 miles on them.  Exactly how much of a deduction is unclear at this point and is apparently determined on a case by case basis.

The result of the foregoing is that the bar has been lowered to some extent as to whether or not a debtor can be eligible to file a Chapter 7 bankruptcy rather than a Chapter 13 bankruptcy.

 

 

DISCHARGABILITY OF STUDENT LOANS IN BANKRUPTCY

In an average bankruptcy case, regardless of the chapter (7,13) filed, student loans are not dischargeable.  In the Western District of Texas, payments on student loans may not be included in a Chapter 13 Plan unless such plan proposes to pay the unsecured creditors 100% of their claims.  Instead, student loans are deferred until after the Chapter 13 plan has been completed. All the while interest is accruing on these loans. 

There are possibilities that present opportunities to discharge student loans, as set forth below: 

 1. The opportunity to discharge a student loan is to determine whether or not the loan made is actually a student loan.  The provisions of the bankruptcy code dealing with student loans are very specific, although very broad as to what constitutes a student loan that is non-dischargeable.  Therefore, each loan must be examined to determine whether or not the loan is of a type that falls within the definition of the statute.  If it does not, then the loan is dischargeable like any other unsecured claim.

 2. The opportunity to discharge a student loan is set forth in the statute and reads in part "unless accepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for..."  The burden of proof a debtor must overcome is very high but not impossible.  What constitutes "undue hardship" is in fact driven and therefore is dependent on the facts in each case.

 3. A potential opportunity that is presented is more complex and deals with the situation where a loan was made but the educational institution failed to furnish that which was promised at the time the loan was made.  An example of this type of situation is where an educational institution failed before the institution furnished or completed the course(s) and the student was unable to transfer all or any portion of the credits that would have been received to a second institution.  Whether or not this type of situation would allow the loans to be discharged would in all probability depend on the relationship between the financial institution making the loan and the educational facility.

All of the above is complicated by a case decided by the Supreme Court commonly referred to as "Seminole".  The case limits the Bankruptcy Court's jurisdiction to decide certain issues if they only involve States rights.  Therefore, if the student loan referred to is made by a state institution and does not involve any federal institutions, the court may not have the power to hear and determine any of the above.

 

 

 

 

 

Harassing Phone Calls From Creditors Can Be Stopped

A consumer being harassed by ‘Debt Collectors' has significant rights under federal law: including the right to demand that a Creditor stop communicating with you.   Under the "Debt Collection Practices Act", a federal statute, there are two (2) ways to stop those harassing phone calls or for that matter any form of communication to you. 

1- To inform the Creditor that you are being represented by an attorney and providing the Creditor with the name, address and telephone number of the attorney you have hired. The applicable provision can be found in Section 1692c(a)(2) of the Statute.

• 2- Write a letter to the Creditor informing the Creditor that you are not going to pay the debt and that you wish all forms of communication to stop. The applicable provision can be found in Section 1692c(c).

BANKRUPTCY JUST A SIGN OF THE TIMES!

 Life is uncertain that's for sure.  You watch the news and we're told these are scary times and that our ‘banking institutions' have made mistakes and need help - billions of dollars of help.  Where is the money coming from - looks like it may come from you and me.

So, perhaps it's time to reconsider the stigma of filing for bankruptcy.  Let's face it - if you are not able to keep up with your expenses - why not take advantage of the laws that allow for ‘debt forgiveness'.   Bankruptcy does not give you permission to be irresponsible - bankruptcy gives you the ability to manage your finances (Chapter 13) or wipe out your unsecured debts (Chapter 7).   

No one likes to admit they made mistakes or even acted a bit irresponsible.  But no one likes arguing with their spouse over money and the tension that fear and unmanageable debt adds to a marriage can feel like the last straw.  Our debts don't define us.  Our ‘toys' and our ‘careers' don't define us.  When you look in the mirror and review your personal character inventory - how do you rate?  Are you someone that is caring, loving, generous of spirit, honest, forthright, etc.? I believe that's what defines us.The bottom line is - if you've made mistakes with finances - forgive yourself; if you have medical bills, lost your job, your divorce set you back, your mortgage payments are currently unaffordable - help yourself and your family by seeking ‘debt forgiveness'.  At least that's honest.  Now, can we say that about many of our financial institutions that have either failed or on the verge of failure?  Just something to thing about............