Remember that $25 billion settlement between 49 states and the five largest mortgage servicers that federal and state governments crowed about as a historic success? According to a New York Times article, about 15 of these states have quietly announced that they plan to use the cash they’re receiving from the mortgage servicers–$2.5 billion intended to fund programs to prevent foreclosure, investigate allegations of financial fraud, and help homeowners in financial distress–to pay their debts and make up budget shortfalls. States intending to divert settlement funds for their general budget include California, Texas, Missouri, Indiana, Virginia, and Georgia. Meanwhile, 27 states have vowed to devote all of their share of the settlement payout to fund housing programs.

To find out what your state intends to do with its portion of the $2.5 billion cash settlement, read the report by Enterprise Community Partners, an affordable housing advocacy group.

ASK LEON

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

Help! I filed Chapter 7 bankruptcy, and I have run into big trouble with the bankruptcy trustee. I have three cars (all nonexempt) that I want to keep if I can reach a fair deal to buy them back from the trustee. I have a 1986 Toyota pickup (hunk of junk), 1991 motor home (hunk of junk,) and my main vehicle which is a 2006 Toyota RAV 4.  The trustee and I agree that a fair buyback amount for the RAV 4 is $7,000. But the trustee insists I must also buy back the two other vehicles in an all or nothing deal, for $21,000. Can the trustee insist that I do this in order to get my RAV 4 back? Is there anything I can do?  

– Stanley

Dear Stanley,

There are things you can do. But first you should understand the bankruptcy trustee’s role and obligations. First, the bankruptcy trustee has the discretion to use “ordinary business judgment” when it comes to selling assets. This allows a trustee to decide the best way to sell a group of assets — individually or as one lot. A trustee also has a duty to maximize the money and assets in your bankruptcy estate by selling nonexempt assets for the best price possible.  (To learn how Chapter 7 bankruptcy works, the difference between exempt and nonexempt property, and more, see Nolo’s Chapter 7 Bankruptcy area.)

A trustee can’t legally give anybody a ”sweetheart deal.” A trustee also has the discretion to abandon any nonexempt assets (which mean they go back to the debtor) where such assets have “inconsequential value.”

Here, the trustee may feel that the value to the estate is maximized by selling everything in one single lot, the same way delinquent storage lots are sold to the public, ”winner take all.”

However, the trustee may believe your “junk” cars have no real value, and is playing poker with you to get a better price. You may have some good cards of your own to play.

Negotiate With the Trustee

You can make a counteroffer to the trustee.  For example, in this situation I might tell the trustee that my client will not pay more than the $7000 already offered; if the trustee doesn’t accept this offer within 24 hours, it will drop to $6000; and if not accepted at all, the trustee can come pick up the whole kit and caboodle immediately.

If the trustee is bluffing to squeeze more money out of you, this might force the trustee’s hand.

Bid at the Auction

If the trustee proceeds to offer the vehicles for sale, it is typical that the vehicles will be towed away to an auction yard.

Guess what? You are entitled to bid at the auction. You can attend the auction with your $7000, and bid under the same bidding rules as anyone else.

And you might even be able to buy the RAV 4 for far less than the $7,000 you originally offered. Here’s why. Bidders at these auctions typically inspect the items, but are not allowed to take a test drive and aren’t even allowed to start the engines. Items are sold ”as is.” This works to your advantage because other buyers can’t really be sure of what they might be buying.

You alone know the actual mechanical condition of each vehicle. That gives you a tremendous bidding advantage. At the price point where strangers will stop bidding, you may keep bidding confidently and win the auction because you know what you are really getting. At the end of the day, you may come out a very big winner, and the trustee may learn not to be so darn cocky.

Best of luck to you, Stanley!

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  

The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

ASK LEON

This is the first blog post in our new series, Ask Leon, where bankruptcy expert Leon Bayer will answer real-life bankruptcy questions from consumers.

Dear Leon,

I have a credit card in my name on my father’s credit card account. If I file for bankruptcy, will this freeze his card or affect him in any other way? The credit card account is his — he pays the bills.

 – Sandy

Dear Sandy,

The best way to avoid trouble is for your father to take you off the credit card account until your bankruptcy is fully completed and the case is closed. After that, your dad should be able to add you right back on the account.

If you file for bankruptcy while you are affiliated with his credit card account, there is a major risk that the credit card issuer will close the account, even if your father keeps it current. That could hurt your father’s credit, and deny both of you future access to that source of credit.

– Leon

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta. 

Picture this: You rush your child to the emergency room, only to be greeted at the door by someone who looks like a hospital employee, demanding payment for a previous medical bill before your child gets treatment.

Sound crazy? Not if the hospital you rush to has a contract with medical debt collection company Accretive Health.

According to the Minnesota attorney general, Accretive Health regularly places employees in hospitals and tries to collect debts from people about to go into surgery, labor and delivery, or the emergency room. It’s likely that many patients believe the debt collectors are hospital employees, and think they won’t get care unless they pay up. In the process, the attorney general alleges, Accretive has access to private medical information about patients, in violation of various federal laws.

You can read more about Accretive’s aggressive and possibly illegal debt collection tactics in today’s New York Times article.

In the meantime, if you are struggling with medical debt, check out Nolo’s article on Managing High Medical Bills.

Subprime lending. Mortgage-backed securities. TARP. HAMP. MERS. An article on the ProPublica site, “The Great American Foreclosure Story,” details how the foreclosure crisis came to be and why government programs designed to help homeowners failed. The article puts a face to the story–a 58-year-old grandmother with custody of her three grandchildren, who was forced to move from her three-bedroom home in Florida to a tent on a rural plot of land with no electricity on Hawaii’s Big Island. “Ramos’ story is remarkable not because it’s unique but because it isn’t.”

For those with shorter attention spans, ProPublica has also produced a music video, “The Great American Foreclosure Song,” that encapsulates the foreclosure crisis in four minutes.

In a victory for debtors, a Kansas Bankruptcy Court has upheld the constitutionality of Kansas’ newest bankruptcy exemption. The new exemption, which became effective on April 14, 2011, allows Chapter 7 bankruptcy debtors to protect money they receive as a result of the Earned Income Tax Credit (EITC).

How Bankruptcy Exemptions Protect Your Property in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, the bankruptcy trustee takes all nonexempt property (including tax refunds, cash, personal property, and real estate), sells the property, and uses the proceeds to pay the debtor’s creditors. However, if a debtor’s property is deemed “exempt” by state or federal law, the trustee cannot take the property. In most Chapter 7 bankruptcies, the debtor loses little or no property, because most or all of the debtor’s property is exempt.

For a comprehensive explanation of how exemptions work, which exemptions apply to you, and more, see Nolo’s Bankruptcy Exemptions area.

Kansas’ New Exemption:  EITC

In April, 2011, the Kansas legislature created a new bankruptcy exemption. The new law allows bankruptcy debtors to protect their EITC money. This tax credit is designed to assist low- and moderate-income families. The Kansas law does not allow debtors to protect this money from creditors outside of bankruptcy.

The Trustee’s Challenge to the Kansas EITC Bankruptcy Exemption

The Chapter 7 bankruptcy trustee, in In re Westby, No. 11-40986, 2012 Bankr. LEXIS 1428, (Bankr. Kan. April 4, 2012), challenged the constitutionality of the Kansas exemption. She argued that because the statute applied to bankruptcy proceedings only, and not to other debt collection proceedings, it violated the Uniformity Clause of the Constitution. She also made other constitutional challenges to the law.

Several other courts, most notably the Bankruptcy Appellate Panel in the 6^th Circuit, have held that bankruptcy-only exemptions (exemptions that apply in bankruptcy, but do not apply when creditors are trying to collect against a debtor that has not filed for bankruptcy), are unconstitutional. That 6^th Circuit BAP decision, In re Schafer, is currently on appeal. Most courts have held that bankruptcy-only exemptions are constitutional.

In this case, the judge, in a 55-page opinion, found that Kansas’ EITC bankruptcy exemption did not violate the Uniformity Clause or any other constitutional provision.

Hold onto your hats, however, because the bankruptcy trustee is likely to appeal the decision.

You can read the full opinion on the website of the Kansas Bankruptcy Court, here: http://www.ksb.uscourts.gov/images/ksb_opinions/JMK_11-40986-45.pdf.

Let’s say you’re a homeowner and you stopped paying your mortage months ago. You’ve exhausted all your options to avoid foreclosure, and you’re just waiting for your house to be auctioned off before moving on. Then your lender invites you to turn over ownership of your home in exchange for being allowed to continue occupying your home as a tenant for the next three years at a below-market rental rate. On top of that, your mortgage debt would be forgiven and the foreclosure would be cancelled. What would you do?

Bank of America is hoping most homeowners would say “yes” to the offer, as it begins testing its new Mortgage-to-Lease program this month. While B of A is handpicking a group of about 1,000 borrowers in New York, Nevada, and Arizona for its pilot program, if successful the program could be offered to a broader set of homeowners (and serve as a blueprint for similar programs offered by other lenders, including Fannie Mae and Freddie Mac). Those eligible for the pilot program include homeowners whose mortgages are owned by B of A (this excludes the 9 million mortgages serviced by B of A but owned by outside investors), whose mortgages have been delinquent for at least two months, who live in their homes, who don’t have second mortgages or home equity lines of credit, and who have either exhausted all other foreclosure alternatives (such as loan modification, short sale, or deed in lieu of foreclosure) or ignored offers to apply for such alternatives. B of A would initially retain ownership of the leased homes, then later sell them to investors.

The benefits to distressed homeowners are many: They would avoid the black mark of a foreclosure on their credit history. They wouldn’t have to convince a landlord that they would be responsible renters despite their low credit rating. For homeowners living in one of the many states that allow lenders to sue borrowers to recover a deficiency (the difference between the outstanding mortgage debt and the foreclosure sale price) after foreclosure, they wouldn’t have to worry about still owing money to their lenders after foreclosure. And they would be able to stay in their homes without the worry of the sheriff knocking on their door at any time.

Despite these benefits, some critics think participation by homeowners in the program will be low. With foreclosures languishing for years in some cases, homeowners may decide to simply stay put in their homes for free, building up a nice nest egg in the meantime. Only time will tell whether these mortgage-to-lease programs will help to solve our current mortgage crisis or simply be another boondoggle.

In February, the newly formed federal Consumer Financial Protection Bureau (CFPB) put out a call to student loan borrowers:  If you have a beef regarding a private student loan, file a complaint on the CFPB website.

What Is a Private Student Loan?

If a bank or other financial institution loaned you money to attend school, and that loan is not backed by the federal government (that is, it’s not federally guaranteed), you have a private student loan.

The CFPB Now Oversees Private Student Loans

Prior to the formation of the CFPB, there was no one agency that oversaw and regulated the private student loan industry. (Public student loans, on the other hand, are regulated by the Department of Education.) Since July 2011, the CFPB has taken over that role. As part of its oversight, the CFPB has created an ombudsman program. The ombudsman will review complaints about private student loans and assist those borrowers.

Types of Complaints

The CFPB ombudsman is urging students and former students to file complaints of any nature. Some examples of complaints it anticipates receiving include:

• trouble making payments
• confusing advertising or marketing terms
• billing disputes
• deferment and forbearance issues, and
• debt collection and credit reporting problems.

You can find the online complaint form, here.

Or, if you don’t want to file a formal complaint, but just want to tell your story, you can do that here.

What Will the CFPB Do?

The CFPB states that it will help all student loan borrowers who are having trouble:

• getting a private student loan
• repaying a private student loan
• managing a student loan that has gone into default, or
• dealing with a student loan that has been referred to a debt collector.

Once the CFPB receives your compliant, it will give you a case number so you can track progress of the complaint.  It will forward your complaint to the financial institution involved and then keep track of progress. The CFPB says it expects to have cases come to resolution within 60 days. It’s unclear from the information on the CFPB’s website what role the ombudsman will take in resolving those issues.

The CFBP will use the information it gathers from borrowers’ complaints and stories to report to Congress on the private student loan industry.

Another Handy Tool

The CFPB also has a handy online tool, the Student Debt Repayment Assistant, to help you figure out your student loan repayment options. You can also find information about repayment in Nolo’s article Student Loan Repayment Options.

How to Contact the CFPB

• Call the toll-free phone number at 1-855-411-CFPB (2372)
• Visit online at www.consumerfinance.gov
• Fax the CFPB at 1-855-237-2392
• Mail a letter to P.O. Box 4503, Iowa City, Iowa 52244

As soon as the historic $25 billion National Mortgage Settlement was announced, scammers came out of the woodwork to prey on desperate homeowners.

Attorneys general in a number of states, including California, Virginia, and Maryland, have issued warnings to homeowners to avoid mortgage settlement scammers. The warnings advise homeowners to be wary of the following:

• Websites containing the words “mortgage settlement.” To get trustworthy information on the mortgage settlement, go to the National Mortgage Settlement website created by the attorneys general who negotiated the settlement.
• Requests for an up-front fee in return for a quick settlement payout. Homeowners are not required to pay any sort of fee to receive aid through the National Mortgage Settlement.
• Third-party phone calls. If you are eligible for help through the settlement, your bank will contact you. If you’re afraid your bank won’t be able to find you, contact your bank directly.
• Requests for personal financial information. Some scams involve phone calls or emails, where the scammer asks the homeowner for bank account numbers and promises to deposit the settlement money directly into those accounts. You should never give your bank account number or or other personal financial information to anyone over the telephone or email. If you’re unsure whether the call or email is from your loan servicer, contact your servicer directly.

If you believe you were contacted by a mortgage settlement scammer, contact your state attorney general’s office. Contact information for the attorneys general who signed off on the settlement can be found on the National Mortgage Settlement website.

If you are behind in gas, electric, water, phone, or other utility payments and the utility company is threatening to shut-off your service, Chapter 7 bankruptcy can help.

No Utility Shut-Offs When You File for Bankruptcy

The bankruptcy code has a specific section that sets forth the obligations of utilities when you file for bankruptcy – it’s found at 11 U.S.C. §366.  The law prohibits utilities from altering, refusing, or discontinuing service because you filed for bankruptcy or owe back payments that will be discharged in the bankruptcy.

You Have 20 Days to Provide Assurance That You Will Pay Future Bills

There’s an important caveat to this rule: You have 20 days to provide the utility company with “adequate assurance” that you will pay future utility bills. If you don’t provide this assurance, the utility company can shut off your service.

If you don’t provide adequate assurance, can the utility automatically cut off your service without further court permission? Although the code is not entirely clear on this point, many jurisdictions operate under the assumption that the utility can do this. This means that you should come to some type of agreement with the utility or seek court intervention before the 20-day period passes.

What Is Adequate Assurance of Payment?

According to the law, “adequate assurance” can include:

• a cash deposit
• a letter of credit
• a certificate of deposit
• a surety bond
• prepayment for future service, or
• any other form of security that is agreed upon between the utility and you or the bankruptcy trustee.

What a utility will accept as adequate assurance depends on the particular utility and what is deemed acceptable in your jurisdiction. If you are providing a deposit, the utility probably cannot demand an amount that is greater than limits set by state utility regulations. As for other types of assurances, case law has created “guidelines.” A local bankruptcy attorney should know the views of your court, as well as the normal practices of your local utility.

Explore Other Options

Although bankruptcy can be an effective tool for preventing utility shut-offs, you should explore other options if you weren’t already contemplating bankruptcy for other reasons. For example, many states prohibit utility shut-offs during extreme weather — this may provide you with time to get current on payments. Some states have discount programs for elderly residents, residents that are ill, or low-income residents. All states must follow state notification procedures before cutting off services — if the utility failed to follow these procedures, you may be able to avoid shut-off (but will probably need an attorney to help you challenge the utility).  In many cases, nonbankruptcy alternatives for dealing with utility bills provide a quicker or better solution than bankruptcy.

Filing an Emergency Bankruptcy

If you are facing imminent shut-off of a vital utility, you may have to file bankruptcy immediately. You can file a bare bones petition to start the process, and then file the rest of the bankruptcy documents within 14 days. This is often called an emergency bankruptcy. To learn more, see Nolo’s article Emergency Bankruptcy Filing.