U.S. Supreme Court Ruling Will Affect Future Bankruptcy Filings
Ransom Decision Will Impact Future Bankruptcy Means Test Calculation
Earlier today, the U.S. Supreme Court issued an 8-1 ruling in Ransom v. FIA Card Services, N. A., that will affect how future means testing is done in Chapter 13 bankruptcy cases. The means test is designed to calculate a debtor’s ‘disposable income,’ which is a portion of the monthly plan payment a chapter 13 debtor pays each month to a Chapter 13 trustee. The means test allows certain expenses and deductions to be subtracted from your gross income: the more deductions you can prove and support, the less money will be applied as disposable income. Ransom decided the issue of allowing a deduction for a car that does not have a lease or finance payment.
Wisconsin Courts and the US Trustee offices had been allowing the $496 a month deduction, even through there wasn’t a lien or lease on the vehicle, pursuant to the Ross-Tousey decision. The Ransom decision, issued by the highest court in the land, no longer allows debtors to use the deduction. Bottom line for potential bankruptcy filers: you are better off having a lien on your vehicle, than not, prior to filing a bankruptcy. However, it is not advised that you put a lien on a vehicle for the sole purpose of gaining this deduction, and you should speak with a bankruptcy professional before making such a decision.
The consequences of the Ransom decision increase the potential amount of money that will be paid back to unsecured creditors over the life of a Chapter 13 plan. Thus, the $496 monthly deduction that can no longer be subtracted from your monthly disposable income, translates to almost $30,000 over a 60 month plan, that would be otherwise available for your unsecured creditors.
The means test landscape is constantly shifting, and I won’t be surprised to see changes in how Ransom is applied over time. I’m harboring a solid guess that the US Trustees will rely on the Ransom decision to make it harder for those with above-median incomes to rebut a presumption of abuse when attempting to file a Chapter 7 case instead (by arguing that their expenses and deductions are too onerous to make Chapter 13 plan payments.) For the time being, make certain that your means test is reviewed by a bankruptcy attorney who is familiar with the new case law.
Blockbuster Files Chapter 11
My guess is that business bankruptcies receive more favorable treatment in the public eye than personal bankruptcies. When I ask people about their views of a retail chain or an airline reorganizing through bankruptcy, their responses are usually lukewarm to positive. When I ask them their perception on an individual bankruptcy, the reaction is usually more muted and negative.
I detect a sentiment held by some that its ok for businesses to fail and rebound, but individual families who choose bankruptcy should have something to be ashamed about. On the flip side, others are quick to judge a company for choosing reorganization under Bankruptcy. I think people would feel more optimistic, and less judgmental, about any bankruptcy filing if they knew how they worked.
Chapter 11 relief is available to individuals, partnerships and corporations like Blockbuster, to restructure debt.
In most cases, the Chapter 11 filer continues to own its assets and operate business, under the supervision of their creditors through a formal committee. The debtor works with the committee and proposes a reorganization plan in hopes to save the company, trim the corporate debt, and repay the creditors to the best of its ability. Tremendous flexibility is anticipated in the code, which is why a chapter 11 can sometimes accomplish what a chapter 7 and chapter 13 bankruptcy could not.
I think that a Chapter 11 for Blockbuster could be a great opportunity for their company. The last thing we need is another source of jobs to vanish and I’m glad to see a company take the initiative against their negative debt profile. However, sometimes a broken or outdated business model can spell permanent doom, and I hope they manage a foothold against their competition.
Proposed Bill Could Allow Discharge of Private Student Loans in Bankruptcy
Some good news for debtors struggling with private student loan debt: a bill is headed to the Judiciary Committee which may allow private student loans to be discharged in bankruptcy. I received this email from the National Association of Consumer Bankruptcy Attorneys earlier today:
Dear NACBA Member,
Yesterday, the House Judiciary Subcommittee on Commercial and Administrative Law took the first steps in reversing language in the 2005 bankruptcy law related to private student loan debt by approving on a 6-3 party line vote H.R. 5043, the Private Student Loan Bankruptcy Fairness Act. NACBA has been actively involved in helping to draft and supporting the legislation which will restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt. Under the bill, privately issued student loans will once again be dischargeable in bankruptcy. To view a text of the legislation, go to http://thomas.loc.gov and insert the bill number.
The bill now goes before the full Judiciary Committee. Though time is short in this legislative session, we are hopeful that the bill will see full Committee action before the end of the year. Similar legislation has been introduced in the Senate (S. 3219) by Senators Durbin (D, IL), Whitehouse (D, RI) and Franken (D, MN).
We know that many NACBA members are confronted by clients with substantial student loan debt, both private and government-issued. Yesterday’s action was the first step in restoring fairness to the bankruptcy process.
Student loans are a growing concern for many families. For those with Federal Student Loans they can opt for deferral or Income-Based Repayment. There is very little that can be done to help those struggling with private student loan debt. I’ll keep you posted on the bill’s progress.
The Wisconsin 128: A Non-Bankruptcy Relief Option
One alternative to bankruptcy, available only to Wisconsin residents, is a “Wisconsin 128.” I advise this option for clients who are only facing issues with unsecured debt, and who can afford to pay back some or all of their unsecured creditors, over a three year period.
Once you identify all the unsecured creditors that you wish to include, a plan is proposed and filed in state court, who then appoints a trustee who acts as a receiver for the plan payments and makes distributions according to the plan. You enjoy the protections of the Wisconsin 128 plan if you remain current on your payments to the trustee (which can be deducted automatically from your paycheck and save you on trustee fees.)
What benefits do I receive if I put my bills in a Wisconsin 128 plan?
Upon filing your plan, all collection efforts of the creditors included in the plan must cease, including garnishments. Interest and penalty ceases to accrue upon filing of the Wisconsin 128 (unless it’s child support or state taxes.)
Interest accrued prior to filing the Wisconsin 128 still must be paid through the plan. You receive many of the same benefits that you would under a bankruptcy stay (I won’t address distinctions here, which could be important to your case and why you should speak to an attorney who is familiar with both bankruptcy and the laws of the Wisconsin 128, before deciding.)
What debts can be included in a Wisconsin 128 plan?
Unsecured debt that can be placed in a Wisconsin 128 includes medical bills, dental bills, late rent, credit card bills, pay day loans, personal loans, civil judgments, tickets and fines, past due utility bills, and in limited cases, state and municipal taxes.
What debts cannot be included in a Wisconsin 128 plan?
Secured debts cannot be solved through a Wisconsin 128, such as past due mortgage payments, and past due car payments. Domestic support obligations such as child support arrears should not be included. A Wisconsin 128 cannot resolve property taxes, and the IRS will not recognize a Wisconsin 128 for any tax liability.
Must I include all my unsecured creditors in a Wisconsin 128 plan?
No. There are some circumstances where it won’t make sense to include all of your unsecured debt, and you can always include creditors that you initially left out of the plan by amendment.
How do I know if I should consider a Wisconsin 128 plan?
A Wisconsin 128 is an excellent solution for the right circumstance. You should speak to an attorney who is familiar with both bankruptcy and Wisconsin 128 procedure before you decide. A good starting point is to estimate your plan payment after you total the unsecured debt balances you wish to include, add 10% to represent costs and administration, and then divide it by 36. For example, if you are getting garnished on a debt that is $3,000.00 and wish to only include that debt in your Wisconsin 128 plan, you would estimate a total debt obligation of $3,300.00 ($3,000 + $300) and divide it by 36 to estimate a payment of: $91.67 per month.
Can I file a Wisconsin 128 without an attorney?
A Wisconsin 128 can be filed through my office for a fraction of the price of a bankruptcy. I’ll give you a firm price once I’ve met with you and reviewed your circumstances.
Can I file a Wisconsin 128 without an attorney?
Certainly. I could pull my own teeth, too, I suppose. However, it is advised you have an attorney advocate at all stages of the Wisconsin 128 filing.
Call my office at 715-842-2500 and schedule a free consultation with my office to see if a Wisconsin 128 is right for you.
Loan Modifications and Short Sales
Consumers are getting shelled with letters, radio ads and offers from lenders and companies to modify home loans and “consolidate” debt. I could devote an entire blogosphere to how misleading I think most of these ads are, presenting their listeners with the illusion that the company has an inside track on “the new law” that they can use to help them. Another growing industry are those who claim to be short sale or loan modification experts. It’s the same bill of goods: stay tied to debt you can never afford to repay.
How many times do these commercials warn you not to file bankruptcy? I often wonder if they are trying to imply that you will lose your home if you file for bankruptcy. In the vast majority of cases, you can file bankruptcy and keep your home and avoid foreclosure. What I hear when the ads warn you to not file bankruptcy is: don’t file bankruptcy until we’ve capitalized on your fears and taken every last cent from you before you have no other choice but to file bankruptcy.
Your best bet when considering a loan modification, or a short sale, is to work with your bank or lender directly. Anybody in the middle will just increase your debt.
Loan Modifications
You’ve received that promising letter in the mail from your lender or third-party program to save your home: now what? Go ahead and try, but expect a long, drawn out process and a lot of red tape. Less than 10% of mortgage negotiations are approved for a reduced mortgage rate and at least half of those fail less than a year after the modification. Many report getting foreclosed upon during the process of negotiation the loan.
Talking heads on the television will tell you that a bank will do anything to avoid foreclosure. Not true. Most mortgages are insured and the bank cashes in on these policies when a house goes into foreclosure. The bank often chooses the route that leads them to a more secure bottom line. The banking industry does not sail their collective ship with a moral compass to reduce payments to keep you in the home. The majority of people who successfully get a mortgage loan modification end up going into default soon after. There are exceptions, but be forewarned.
Short Sales
A short sale is where the bank agrees to allow you to sell your home for less than what you owe the bank. I think they call them short sales because it’s designed to leave the seller short. Watch out for short sale brokers, who you may end up wasting a lot of money on if the bank refuses to work with them. It is best to negotiate your short sale price directly with the bank. One of the dangers a short sale may bring you is that you will be responsible for any deficiency.
So, what’s in it for you? You can avoid foreclosure and there is the possibility that it may give you favorable treatment for future credit. Surprisingly, walking away from the home via foreclosure can be a better alternative than dealing with a deficiency (provide they waive it via the foreclosure) than the nightmare of waiting month after month for a bank to approve the sale only to grant you the privilege of owing them a deficiency after the sale.
Why Loan Modifications and Short Sales May Not Work
It’s hard to tell folks sometimes, but there is a real possibility that some people cannot afford to keep their home, and no loan modification or short sale will change that reality. Debt counseling or working with our office can reveal a budget and give people ideas on how to move forward. There are options that wont involve increasing your debt load through debt consolidation schemes, loan modifications and short sales, and if you are faced with a difficult decision concerning your house, call our Wausau office for an free initial bankruptcy consultation.
Bankruptcy Can Stop Wage Garnishment
What is a Garnishment?
Garnishments can make a significant impact on your ability to support yourself and your family. The garnishment procedure is easy to start and often difficult to challenge. The amount garnished will include payment for the judgment creditor’s attorneys’ fees and the cost of filing the garnishment (over $200 in most counties.) Each garnishment order is effective against your wages for 13 weeks.
You must be provided an answer form, which affords you the opportunity to challenge the garnishment. The law may allow you to avoid the garnishment if you can show your income is below the poverty guidelines, which are included with the garnishment forms. You can also avoid garnishment if you can prove that you received need-based public assistance within 6 months of the earnings garnishment, or if you are eligible for such assistance. Child support payments take precedence over garnishments.
Our office can easily spot defenses during a consultation and review of the garnishment paperwork, and a recent pay stub. You may still have time to challenge your garnishment. However, there is a strong possibility that your employer and the judgment creditor followed all the rules and you’re stuck with the garnishment.
How Can I Stop Wage Garnishment?
There are four ways to avoid an earnings garnishment:
- - change jobs;
- - pay your judgment in full;
- - seek relief under “Chapter 128″ of the Wisconsin Statutes; and
- - file bankruptcy.
Change jobs? Job-hopping is an unwise strategy in a recession, and can cost you far more than what you hope to save by ducking the wage garnishment. Furthermore, some aggressive judgment collectors will find out where your new job is, or focus on your bank accounts instead. All the while, post-interest judgment continues to accrue.
Pay it off? Your financial circumstances might be favorable enough to pay the underlying judgment of your garnishment, but our office would need to know more about your situation before advising that you borrow money from another source of money to pay the judgment in full.
File a “Wisconsin 128″? There is a procedure under the Wisconsin Statutes, sometimes referred to as a “Wisconsin 128″ or “Chapter 128.” Filing for relief under the state statute also stops the garnishment. This procedure is less expensive, easier to apply for, and allows you to choose which debt you wish to be restructured. However, you must pay off all the debt that you allocate to the plan within three years. The plan can be changed and restarted, as circumstances arise, but the law insists that the debtor doesn’t abuse the system. Our office can provide you with more detail and help you file a Wisconsin 128 case.
File Bankruptcy? Bankruptcy stops garnishment proceedings upon filing your case, and with limitation, can return money seized through garnishment back to you. Bankruptcy can also provide effective relief for any other debts you may have. Explore this website to learn more about bankruptcy and dispel some of the myths. For example, you typically won’t lose your house, or your car, or your household belongings. Your overall credit profile can improve in some cases, especially if you avoid incurring debt after you file. You can get rid of most types of debt, including the judgment used to garnish your wages.
Call our office for a free bankruptcy consultation at 715-842-2500, and get rid of your garnishment for good.
Get Your Driver’s License Reinstated Through Bankruptcy
State financial responsibility laws for motorists, such as those in Wisconsin, provide that a driver’s license may be suspended until debt for a civil judgment arising out of a car accident is paid in full. The suspended driver usually has a tougher time paying the debt because they don’t have the same flexibility to maintain or find work with the loss of their driving privilege. These judgments are often in the tens of thousands of dollars, and many suspended drivers eventually wonder if they’ll ever get behind the wheel again.
The United State Supreme Court, in 1971, held in Perez v. Campbell that, if the debt related to the financial responsibility law is discharged in bankruptcy, the license can be reinstated. Chapter 13 debtors can also get their driver’s license reinstated through the bankruptcy court during the life of their bankruptcy plan. The same principle applies to parking or traffic violations, if not classified as “crimes” under state law. You will not get your license reinstated if it was suspended or revoked for any other reason than the nonpayment of money (too many points, etc.)
Once you file a bankruptcy in Wisconsin, you simply submit a copy of your bankruptcy petition to the DMV and your license will be reinstated. However, you will be required to pay a reinstatement fee and carry SR-22 insurance. The only way to avoid these additional requirements is to file your case prior to your suspension hearing.
Bankruptcy is an excellent solution for those clients who need to reinstate their driver’s license, but cannot afford to pay a judgment or fines. The best time to file is prior to your suspension.
If you are facing a drivers license suspension, or have a suspended drivers license and need to get back on the road, call our Wausau office for a free initial bankruptcy consultation at 715-842-2500.
Income Based Repayment Can Ease Student Loan Payments
New Student Loan Legislation Doesn’t Help Existing Borrowers
The Health Care and Education Reconciliation Act 2010 (aptly known by some as “the new health care law”) has made tremendous waves throughout the news media, twitter, facebook and for talking heads on TV. However, some folks may overlook the “Making College More Affordable” program contained within the new legislation.
Many of our clients are burdened with student loan debt, so I was curious if the new law provided relief for existing borrowers.
The good news is that new borrowers will have an easier time repaying their loans:
“New borrowers who assume loans after July 1, 2014, will be able to cap their student loan repayments at 10 percent of their discretionary income and, if they keep up with their payments over time, will have the balance forgiven after 20 years. Public service workers – such as teachers, nurses, and those in military service – will see any remaining debt forgiven after just 10 years. More than 1.2 million new borrowers are projected to qualify and take part in the expanded IBR program.”
The bad news is that there isn’t additional relief for existing borrowers.
Existing Borrowers Should Explore Income Based Relief
Income Based Relief may allow qualified borrowers with federal student loans (except PLUS) to drastically reduce their monthly student loan payments. In some cases, a borrower pays what they can for 10 or 25 years and the balance is then eliminated provided they made qualifying payments for the applicable term. IBR has been around since 2009, and the website I encourage you to visit is: ibrinfo.org.
Unfortunately, private student loans are not covered using IBR. If you are unsure if your student loans are federal, call your student loan lender and ask.
Once you’re certain your loans are federal (except PLUS loans) your next step should be to contact your lender and get the paperwork started.
Student Loans and Bankruptcy
Eliminating or modifying student loans through bankruptcy is difficult, if not impossible for some clients. However, you should consider all your options. A chapter 13 bankruptcy provides even more flexibility in handling student loan debt, even though you can’t discharge it. Filing a chapter 7 or chapter 13 bankruptcy operates as an automatic stay, and prevents collection efforts against you for the duration of your case.
The first step when considering any student loan for discharge is to see what type of student loan you have. A student loan cannot be discharged if it was “made, insured or guaranteed by any governmental unit, or made under any program funded in whole or in part by a government or a nonprofit institution.” If your loan cannot be discharged, the next analysis is to determine if you are eligible for an “undue hardship” exception. A successful motion may eliminate or reduce your student loan if the right factors are present in your case.
Our office handles student loans through bankruptcy and we would be happy to analyze your situation during a free initial consultation.
Bankruptcy Wisdom from Don Reckseen
What follows is a bankruptcy memo written by a long-time friend and mentor, Don Reckseen, who is among many things, a bankruptcy attorney in Colorado. I have tremendous respect for him and his approach to bankruptcy, and with his permission, I’m sharing his perspective:
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Prologue
One of the areas I got the most from was bankruptcy. You can see people heave a sigh of relief—they are scared, frustrated, embarrassed and disillusioned all at once. Curing their debt problems is easy—any secretary can do it—but reinstating their morale, now that needs an expert. I got so good at this and got such satisfaction that I fidgeted waiting for the next BR client. (I quit before the new rules.) Here is my bankruptcy speech:
Memo
First, you need to understand that bankruptcy is not a declaration of defeat or failure like it was in your parents time (anytime before 1970). It is now a financial planning tool, and it is an effective one.
Next, there are two things about history you should understand.
1) When Columbus sailed, everyone thought he was “going over the edge”, so he could not find crews. But a faraway voice from the debtor’s prison wailed “I’ll go”. After reaching America, the men came ashore, found a big rock, and chiseled “In this country, you do not have to pay your debts” on it. This simple factor is the main reason why our economy developed in a unique (and it still is) way because it took the government out of private business. Until then, no one believed that private individuals could run an economy, but it not only worked, it exploded into an incredibly powerful economy. The new rule, however, having a huge effect on the economy, was largely ignored because there was very high social pressure for people to pay their bills. This pressure lasted until after WW II. Then, strange things began to happen.
2) Ford discovered that you could make more money by giving your workers more money. Sears discovered that you could make more money by not requiring your customers to pay. Your parents and grandparents preached: “Whatever you do son, protect your credit.” That advice was valid in the cash economy of the time, but the economy shifted dramatically to a credit economy, and that advice needs modificati9on. What your ancestors were talking about when they used the word “credit”, was “your good name and community reputation”. But soon, the credit economy changed everything*, and now, NO ONE has a good name or a community reputation. (Do any of your friends, associates or relatives pay all their bills in a timely fashion?? A) You don’t know, and B) You don’t care.)
*If $100,000 worth of groceries leaves the supermarket on Friday, the night deposit will be $10,000 or less.
Today the word credit has a new meaning (ask Dad or Granddad if this is what they meant by “credit’.) “Credit” now means the ability to buy things you cannot afford. To the extent this is true, we should advise our children—“Do not get credit.” (This is Suzy Orman’s advice—she gets it.) This is the second historical development you should try to understand.
Finally, since you are so saddled with the “credit” brainwashing of your ancestors, take heart. Look at your creditors. They sold you things on credit or paid for things you wanted but could not afford. That is their business. On the day they did this, as businessmen, they knew just how many of their borrowers would file bankruptcy, and, just like Sears knows just what they will lose to shoplifting, they add this cost into their transaction with you.
Read your contract—it says: “I promise to pay $____ per month, unless I elect to file bankruptcy, in which case, you get zero. In return for your allowing me this option, I agree to pay 19 percent interest.”
So, by filing bankruptcy, you are not “breaking a promise”, you are simply electing an option given to you by the creditor. The simple new economic fact is that the lenders and sellers do not need to ever collect on the principal, so long as they are paid an extremely high interest rate. Sears built its tower with money borrowed from insurance companies that was secured by Sears customers accounts, and pays its Tower mortgage with interest collected from those same accounts. The principal is irrelevant.
DON’T FEEL BAD. Become a one unit cash economy and you will be much happier than almost everyone—it is orange crate furniture until you save enough for a kitchen table, just like your granddad. Or participate in the credit economy, but not with vigor, and “don’t buy things you cannot afford.”
Amen, Don. I hope others gain relief from your perspective.
Credit and Bankruptcy
Many folks believe that once you file bankruptcy, you’ll never obtain credit, or have to wait 10 years before you can borrow money again. This article will give you an overview of why these notions aren’t true.
Can you get credit after your bankruptcy discharge?
Yes, in fact many clients report getting credit card offers in the mail shortly after they file. However, the interest rates won’t be as favorable and the credit limits should be lower than what many borrows experienced in the last decade.
However, ask yourself why you need credit to begin with. You should focus on how to accumulate any leftover income in the form of savings or investments. I advise my clients to start saving enough money in the bank to cover their basic needs for three or four months before even considering borrowing any money, for any reason.
Will I be able to purchase a house after a bankruptcy discharge?
Yes. Most lending programs and data we’ve seen suggest that you can qualify for a home mortgage within 18 to 24 months after a bankruptcy discharge. However, your chances are improved if you have a stable income, a down payment, and little or no other debts. Again, bankruptcy helps by eliminating the very debt that may have jeopardized your chances for getting a home mortgage, had you applied before filing bankruptcy.
Is my credit record ruined by filing bankruptcy?
Your ability to borrow money, bankruptcy or no, has less to do with a credit score than your overall solvency. The more important question most lenders ask in our new economy is: does the borrower have more assets and income than debt?
Your debt-to-income ratio actually improves in most cases after filing bankruptcy which assists your overall credit profile. The bankruptcy event will remain on your credit for up to 10 years, but it isn’t the only factor that establishes your credit worthiness.
However, some lenders who are unfamiliar with bankruptcy may make a negative judgment about your application for credit.
What should I look out for on my credit report after my bankruptcy discharge?
The debts you listed in your bankruptcy will still remain on your credit report. Your bankruptcy should be listed, too, which will alert potential lenders that all discharged debt listed on your credit report is no longer legally enforceable. In plain language: your credit report should prove that your bankruptcy wiped out the legal claims of your old creditors, and that you have less debt than before you filed bankruptcy.
Our office recommends that you don’t use your annual free credit report to assist with the filing of bankruptcy, but to save the free annual credit report to clean up any errors on your credit report that may arise after you receive your bankruptcy discharge. I would allow at least a couple of months to pass before expecting the credit reports to catch up with the bankruptcy discharge.
Feel free to review a Summary of the Fair Credit Reporting Act to understand your rights when it comes to credit reporting.