Category Archives: Bankruptcy

Official Bankruptcy Forms Will Change on December 1, 2014

Bankruptcy_Petition_iStock_000008359066XSmallThe Judicial Conference Committee on Rules of Practice and Procedure (how’s that for a mouthful) is responsible for revising and updating the official bankruptcy forms – those are the forms that you must use when you file for bankruptcy. In the past few years, the Judicial Conference has embarked on a project (the Forms Modernization Project) to make the forms easier to understand and fill out, especially for those people who are filing without an attorney.  (Learn more about completing the bankruptcy forms.)

The Committee has already revised a few of the official bankruptcy forms, and recently approved changes to another batch of forms.  As of December 1, 2014, bankruptcy filers must use new versions of the following forms:

Application to Pay Filing Fee in Installments. The new form removes the reference to the filing fee amounts.

Application to Have the Chapter 7 Filing Fee Waived. In the new form, the actual filing fee figure is no longer included on the blank order form.

Chapter 7 Means Test Forms. Currently, there is only one Chapter 7 means test form (Official Form 22A). Starting December 1, 2014, there will be three separate forms related to the Chapter 7 means test. (Learn more about the Chapter 7 bankruptcy means test.)

  • Form 22A-1. Chapter 7 Statement of Your Current Monthly Income. Everyone filing for Chapter 7 bankruptcy must complete this form. It calculates your current monthly income (which is actually based on your income from the previous six months) and compares it to the median income in your state for the same family size. If your income is above the state median, and you don’t fit into one of the categories in Form 22A-1-Supp, then you must also complete Form 22A-2. If your income is below the state median, then you don’t have to complete Form 22A-2.
  • Form 22A-1-Supp. Statement of Exemption from Presumption of Abuse Under §707(b)2). There are several instances when you do not have to pass the Chapter 7 means test in order to be eligible for Chapter 7 bankruptcy. If any of these apply to you, you must complete Form 22A-1-Supp.
  • Form 22A-2. Chapter 7 Means Test Calculation. If your income is above the median income in your state, you must complete Form 22A-2. This form goes through a series of steps that look at your income and expenses and determine if you can afford to repay a certain amount to creditors. If you “pass” this part of the test, you can file for Chapter 7 (assuming you meet other eligibility criteria). If you don’t pass, you cannot file for Chapter 7.

Chapter 13 Disposable Income and Plan Period Calculation Forms. Currently, there is one form (Official Form 22C) you complete in order to determine how long your Chapter 13 plan will last and the amount of your disposable income (which plays a large role in how much you must pay into your plan each month).  (Learn more about disposable income and the Chapter 13 plan.) Starting December 1, 2014, there will be two forms related to this inquiry:

  • Form 22C-1. Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period. Everyone filing for Chapter 13 bankruptcy must complete this form. It calculates your current monthly income and compares it to the median income in your state for a same size family. If your income is below the state median, your plan will most likely last three years, and you can use your actual expenses when calculating your disposable income. In this case, you don’t have to complete Form 22C-2. If your income is above the state median you must also complete Form 22C-2.
  • Form 22C-2. Chapter 13 Calculation of Your Disposable Income. If your income is above the state median, you must complete this form which calculates your disposable income using preset expense figures.

The forms also have a few other changes throughout. For example, one revision makes clear where to list Internet expenses and another accommodates a U.S. Supreme Court decision regarding future income changes in Chapter 13 bankruptcy.

On December 1, 2014 you’ll find the new forms, along with all of the other official forms, on the U.S. Court’s website, here.  You’ll also find an explanation of each of the new forms in Nolo’s Bankruptcy Forms area (articles on the new forms won’t be posted until December 1).

Tips for Getting a Great Reaffirmation Agreement in Bankruptcy

Would you like to negotiate a reaffirmation agreement in Chapter 7 bankruptcy so you can keep secured personal property for less? Below are my tips for getting a great deal when reaffirming car loans and debts for jewelry, furniture, major appliances, and electronics.

What Is a Reaffirmation Agreement in Bankruptcy?

Most folks who file Chapter 7 bankruptcy have secured personal property debts they want to reaffirm. (Personal property is anything that is not real estate.) Secured debts are those for which you pledge an item of property to guarantee payment of the debt. If you don’t make the loan payments, the creditor can repossess the property. Common examples include car loans, and loans money you owe for the purchase of furniture, large appliances, expensive electronics, and jewelry. (Here’s a more detailed definition of what secured debts are and how they work.)

In bankruptcy, if you have a debt that is secured by personal property you must either give up the property, redeem the property (pay market value for it), or reaffirm the debt (that is, agree to be responsible for the debt even after you get the bankruptcy discharge).  (Learn more about options for dealing with secured debts in bankruptcy.)

Reaffirming a debt is not to be taken lightly, so be sure you understand what it is and why you might want to do it.  You can learn about the pros, cons, procedures, and reasons for making a reaffirmation agreement here.

If you decide you do want to reaffirm a debt in Chapter 7 bankruptcy, you may be able to get a better deal by negotiating with the creditor. Here’s how.

Negotiating the Reaffirmation of a Car Loan

When you reaffirm a car loan in order to keep your car, you might be able to get loan terms than the ones you currently have. First, you need to know what kind of loan you have. Money you owe on a motor vehicle will fall into one of two categories: “purchase money” loan or “non-purchase money loan.” If you have a purchase money loan, you have a slim chance to get only a slightly better deal than you already have. If you have a non-purchase money loan, your chances of saving a bucket of money are quite good.

Purchase Money Car Loans

With a purchase money car loan, the debt is the original financing you obtained when you first bought the vehicle (you used the loan money to buy the car). Typical purchase money lenders include Ford Motor Credit, GMAC, Toyota Motor Credit, etc. It doesn’t matter if you bought your vehicle new or used – the loan is a purchase money loan if the vehicle was new to you, and the same, original financing is still in place.

Lenders holding a purchase money loan rarely offer you better terms in a reaffirmation agreement.

  • Loans offered by vehicle manufacturers. If the lender is connected to a vehicle manufacturer like GM or Ford, I find they will not budge. You can ask, but it will probably tell you to keep the original contract terms or else surrender the vehicle.
  • Major bank loans. Major banks rarely drop the amount you owe, but sometimes will agree to cut the interest rate which will, in turn, reduce your payment amount. According to recent experiences, if you have a vehicle loan with Wells Fargo Bank you stand a great chance of getting a decent reduction in the rate of interest. Other major banks may give you little or no relief.
  • Loans by small banks. The smaller the bank, the better your chances are to save money (the exception being Wells Fargo).

Keep in mind with all of these lenders: It costs nothing to ask.

Non-Purchase Money Vehicle Loans

Any other vehicle loan is a non-purchase money loan.  A person might take out a non-purchase money loan if he or she owns the vehicle “free and clear” (meaning the person doesn’t have a car loan). If you need fast money, you can take a loan out against your car. Typical non-purchase money lenders include companies that offer “title loans,” credit unions, small finance companies, and loan sharks.

Lenders with a non-purchase money agreement are likely to give you a good deal. This is because such loans are usually on older vehicles. The older the car and the higher the mileage, the better will be your chance to save a lot of money. It just makes sense. The lenders know they can’t sell an old car for very much money.

What to Ask For

When making an offer on a reaffirmation agreement, ask the lender to reduce the loan balance and the interest rate. Remember, this is a negotiation. You can expect the lender to come back with a counter offer. So, make your starting offer lower than the amount you are really willing to pay.

Tips for Getting What You Want

Now, here’s the inside super tip you have been waiting for. The non-purchase money lender does not want to repo your car unless you leave it with no other reasonable choice. When I negotiate, I like to tell the lender that the car is an awful mess. I say I am doing the lender a big favor by advising my client to pay something for it instead of giving it up. If my client has young kids, I tell the lender there are Cheerios jammed into all the seats, the kids have vomited or urinated on the upholstery, and that the interior does not smell “fresh as a daisy.” I remind the lender that my client will get a ton of new car offers from every new car dealer in the county as soon as the discharge is granted. And, to persuade my client to reaffirm the loan, I have to bring to my client a very good offer. I think you get the idea.

⇒⇒⇒ TIP: One more big tip: The more willing you are to surrender the item, the better deal you’ll get. This is true for cars, jewelry, and any other kind of personal property. It is especially effective on electronics and furniture, which have virtually no used resale value in the hands of a lender.)

Negotiating a Good Deal When Reaffirming Jewelry Debts

You can get great reaffirmation deals on jewelry. Did you buy your jewelry from a store in big shopping mall? If so, the $4,000 diamond you bought will probably only fetch around $500 at a pawn shop. (Don’t believe me? Take your jewelry to a pawn shop or two, and see what they offer. This will give you a starting point for negotiating with the lender.) Armed with knowledge of the street value of your jewelry, you should have no trouble getting a reaffirmation agreement for about half the amount you still owe on it.

Negotiating Reaffirmation Agreements on Furniture

To get a great reaffirmation deal on furniture, use the same negotiating tactics described above for non-purchase money car loans. The older the furniture, the cheaper you can get it for.

Would you like to keep your furniture for free? Here’s how. Tell the lender you are willing to surrender it because it’s not in good condition. (If you have kids who have beaten up your furniture, don’t be shy about revealing the details.) If you can tolerate the risk of actually losing the stuff, you will probably get to keep it. It has been decades since I have seen a lender repossess household furniture. It has no street value to the lender, and it actually will cost the lender money to haul it away. What if the lender schedules a time to pick the stuff up? Don’t panic – it doesn’t mean it actually will show up. More likely, the lender is just trying to scare you into paying for it.

Negotiating Reaffirmation Agreements on Major Appliances

Major appliances do have some street value, unlike furniture. You should expect to get your stuff for about half the amount you still owe. The older your items are, the more you will save. If you have an appliance that is more than three years old, there is a good likelihood the lender won’t ever pick it up, even if it schedules a pick-up date.

Negotiating Reaffirmation Agreements on Electronics

You can often get good reaffirmation agreements on electronics. Old computer equipment is worth nothing. However, if your items are less than one year old, the lender probably does want them.

As with other types of items though, you can take a chance and tell the lender to come pick the stuff up. The lender will tell you (or order you) to bring the electronics back to the store. Nope. Tell them “no.” Bankruptcy requires you to offer to surrender the secured item to the lender if you don’t work out a reaffirmation agreement.  But it does not require you to bring the items to the lender. If the lender wants it, it has to come get it. And, like anything else, it costs the lender money to come to your home and haul the item away. Chances are, the lender won’t show up — unless you recently bought the items.

by Leon Bayer

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  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.

Find Leon on Google+

 

 

 

Bankruptcy Means Test Median Income Figures to Change on November 1

The United States Census Bureau recently published new statistics on the median income for individuals and families in each of the 50 states, plus the District of Columbia.  On November 1, 2014, the median income numbers that you must use when filing for bankruptcy will reflect the recent Census Bureau changes.

Why Does the State Median Income Matter in Bankruptcy?

The median income amounts for each state play an important role in bankruptcy – they determine whether a person filing for Chapter 7 bankruptcy has to pass the means test, or not.  The means test looks at your income and expenses and determines if you can repay a certain amount to your creditors. If you can, you cannot file for Chapter 7 bankruptcy and instead must file for Chapter 13. (Learn more about how the bankruptcy means test works.)

However, if your income is lower than the median income for your family size in your state, you don’t have to take the means test at all – you automatically qualify for Chapter 7 bankruptcy (assuming you meet other Chapter 7 eligibility criteria).

The Median Income Chart for Bankruptcy

On the U.S. Trustee’s website, you can find a chart listing the median incomes in each state for individuals, families of two, families of three,  and families of four (if your family is large than four, you simply add another $8,100 per person to the 4-person figure). Use the figure that corresponds to your family size.

If you file for bankruptcy on or after November 1, 2014, you will use the figures based on the new Census Bureau statistics.  You can find those numbers here:  http://www.justice.gov/ust/eo/bapcpa/20141101/bci_data/median_income_table.htm.

Will I Lose Everything I Bought With Credit Cards If I File for Bankruptcy?

bankruptASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am getting ready to file bankruptcy. What happens to all the stuff I bought using my credit cards? Every single thing I own was bought during the past ten years using credit cards and department store cards. I mean, the shirt on my back down to the socks on my feet, to this computer, the tires on my car, the bed I sleep in, and the desk and chair I’m sitting in. Does all of it get taken away? 

I have this silly cartoon image of myself left standing in a barrel because everything, including my clothes, gets taken away when I get to court.   

Yours truly, 

Larry

Larry, My Good Man,

I have awesome news for you. There is a hardware store close to the bankruptcy court and they’re having a big sale on barrels. On your way to court, buy the one you like. But don’t pay with a credit card.

Seriously, the image of people walking out of bankruptcy court wearing barrels is something we won’t ever see. In most cases you don’t have to give up the things you bought on credit. Although there are some exceptions.

Credit Card Security Agreements

When you “buy” something with a credit card, when do you actually own it? It all depends on whether or not the credit card agreement contains a “security agreement.”

A security agreement is the same thing you have when you get a car loan. Your debt is “secured” by the item you owe the money for. The item you buy serves as collateral for the debt (it’s as if legal title on the item is being held hostage until you finish paying for the item). If you don’t pay as agreed, the creditor can repossess the item because you don’t yet own it.

To see what you might have to give up, you need to check your credit card contracts for security agreements. Here’s what’s typical:

  • Major credit card issuer. Ordinarily, there won’t be a security agreement if the lender is a major credit card issuer like Visa, Mastercard, or American Express.
  • Store cards. Usually, there will be a security agreement if the lender is a department store, like Best Buy or Macy’s, or a jewelry store.

What Happens to Items Subject to a Security Agreement?

When you file bankruptcy, the creditors with security interests are entitled to either get paid or get the property back. But often you can keep the property, for several reasons.

  • You can usually negotiate very good settlement terms on personal property items that you still want to keep. (Learn more in Reaffirming Secured Debt in Chapter 7 Bankruptcy and Redeeming Property in Chapter 7 Bankruptcy.)
  • Creditors rarely repossess items that are old or obsolete.
  • Department stores typically exercise their security interest only against major purchases, what they call “white goods,” like washers and refrigerators. (In the old days, major appliances came in any color you wanted, so long as you only wanted white.) Department stores are not interested in taking back your clothing, mattresses, and inexpensive items like video games and dvds, which are called “soft goods.”

For practical information on negotiating a good deal on property you want to keep in bankruptcy, see Tips for Getting a Great Reaffirmation Agreement in Bankruptcy.

When Do You Own an Item You Charged?

When you make a payment towards your department store account, the store credits the payment against the oldest unpaid balance. When you have paid off the oldest item, you own it. The store then applies your next payments to the next oldest balance, and so on.

Items you charged on your major credit cards belong to you, not the store, because the major credit card bank has already paid the store for you. Your major credit card debts will normally be discharged in bankruptcy, and all the stuff like ordinary appliances, furniture, barrels, and clothing will be your “exempt” property.

Losing Nonexempt Property That You Charged on Your Credit Card

Even if you own an item, however, you might still lose it in bankruptcy. If the item is not “exempt,” the bankruptcy trustee in a Chapter 7 bankruptcy can sell the property and use the proceeds to repay your creditors. Most everyday items (like clothing, furniture, and the like) will be exempt. But if you have expensive jewelry or something else that is not exempt through your state laws, you may have to give it up. (Learn more about how bankruptcy exemptions work.)

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  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.

Find Leon on Google+

Do I Have to List a Debt to My Mom in My Bankruptcy?

Daughter and her upset mother having financial problemsASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am getting ready to file bankruptcy and am getting conflicting advice about whether I have to list a debt I owe to my mother. 

Over the past six years I have borrowed a total of $50,000 from my mother. We never signed anything, but she expects to be paid back if I am ever able to do so. Beyond that, she has not attached any other conditions. 

My hair stylist, who filed bankruptcy, says I only have to list the debts I can’t pay. I have consulted with two lawyers. One says I must list every debt, including the money I owe my mother. The other says I should list my mother’s debt, but if I don’t, no one will ever know. 

I’m sure you get this question all the time, but it’s a big issue for me. If I list my mother as a creditor, it might appear like I don’t trust her, and it will hurt her feelings. What should I do? 

Sincerely, 

R.M.

Dear R.M.,

It’s an excellent question and you are right – I get it all the time. I have probably answered it 30,000 times already will likely answer it another 20,000 times before I go up to the big bankruptcy court in the sky.

The short answer is that you are required to list all of your debts when you file for bankruptcy.

You Must List All Debts in Bankruptcy

You said you “borrowed” money from your mother. That means it’s a debt. When you file for bankruptcy, you must list all of your debts on your bankruptcy papers (called the petition and schedules). Contrary to your hair stylist’s understanding of the law, your bankruptcy schedule of creditors is not a wish list of the debts you want to eliminate. Rather, your bankruptcy papers are a financial statement, and the law requires that they be accurate. If the court finds that your schedules are not reliable or were prepared with no regard to accuracy, your case could be denied.

Case in point: I recently represented a creditor in a Chapter 13 bankruptcy case. I was successful in persuading the court to convert the case to Chapter 7, which is an extreme rarity, by proving that the debtor knowingly submitted materially false bankruptcy schedules. That debtor is now going to lose his house in a forced sale by the Chapter 7 trustee, and my client is going to get paid.

Strategies for Facing Your Mother

That said, I’ll give you some practical strategies that may allow you to do the right thing and prevent hurt feelings and embarrassment.

Let’s face it. Your mom already knows about your money troubles. Your consideration of bankruptcy should be no surprise to her. In fact, she may actually be glad to have you discharge your debts in bankruptcy instead of asking her to pay them.

You may feel better if you talk to mom, and “fess up.” You can explain that you are legally required to list all of your debts, and that the failure to do so can have serious consequences. You can also tell mom that the law allows you to repay debts after bankruptcy.

Your Bankruptcy Might Provide Your Mom With a Tax Benefit

Now, get this. Your mom might actually benefit if you file bankruptcy – it may make her eligible for tax relief by demonstrating that your debt is “uncollectable.”

Here’s how this works. If the debt is discharged in your bankruptcy, she will have what the IRS calls “absolute proof of loss.” In other words, it establishes that she can’t ever collect the debt. See, IRS Publication Topic 453 – Bad Debt DeductionNormally, your mother would have to sue you and make reasonable efforts to force you to pay before deducting your debt as a “bad debt.” But having your debt discharged in bankruptcy allows her to skip those steps. She should speak to a tax advisor to determine if she is eligible for this tax deduction.

One last point: Please tell your stylist to stick to hair, and stop handing out legal advice.

–Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  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.

Find Leon on Google+

Worried About Losing Your Wedding Ring or Other Jewelry If You File for Bankruptcy?

ringsMost people who file for Chapter 7 bankruptcy don’t have a lot of expensive jewelry. But many own a wedding or engagement ring, or perhaps another special jewelry item, like great grandma’s ruby ring or grandpa’s cufflinks. And while bankruptcy is often fraught with more pressing concerns (Will I lose my home? Can I get that debt collector to stop hounding me?  What about that huge tax bill?), the possibility of losing your wedding ring, heirloom jewelry, or even just a special watch, necklace, bracelet, or pair of earrings can add more mental stress to the process.

Nolo’s New 50-State Series on Your Jewelry in Bankruptcy

So what does happen to those jewelry items when you file for Chapter 7 bankruptcy? As you’ll see below, the answer depends on where you live (or more accurately, which state bankruptcy exemptions you can use).  We outline some of the common ways that states allow you to keep some, or all, of your jewelry. But even more helpful is Nolo’s recently published 50-state (plus the District of Columbia) series on what happens to jewelry in your state.

Exemptions and Jewelry in Bankruptcy

In Chapter 7 bankruptcy you must give up certain items of property. The bankruptcy trustee sells this property and uses the proceeds to repay (at least in part) your unsecured creditors.

Not all of your property is up for grabs, however. (In fact, most Chapter 7 bankruptcy filers give up little or no property.) Each state plus the District of Columbia has enacted laws that protect certain types of property. These laws are called exemptions. Some property is exempt no matter what the value, and other property is exempt only up to a dollar amount. The idea behind exemptions is that someone filing for bankruptcy should not be stripped of basic things needed for living – like shelter, clothing, furniture, a car, and the like. (Learn more about how bankruptcy exemptions work.)

Some states allow you to choose between a set of state exemptions and the federal bankruptcy exemptions. Others only allow you to use state exemptions.  (Find out which bankruptcy exemptions you can use.)

Common Exemptions That You Can Use to Protect Jewelry

The exemptions that are available to you vary by state. Below are some of the types of exemptions that your state might have that you can use to protect jewelry.

Wedding and anniversary ring exemption. Many states allow you to keep wedding and engagement rings, no matter their value. Others put a dollar limit on your wedding ring. Still others don’t have a special exemption for wedding rings.

Jewelry exemption. Some states have a specific exemption that allows you to exempt jewelry up to a certain dollar amount. Some states can be quite generous in this exemption.

Heirloom exemption. Some states have an exemption for family heirlooms – sometimes to an unlimited value and sometimes up to a certain dollar amount. You may be able to use an heirloom exemption to keep jewelry that has been passed down to you from family members.

Wearing apparel exemption. Many states specifically state that you can keep your wearing apparel, often to an unlimited value. Some state bankruptcy courts have ruled that a debtor can exempt a moderately-priced watch, cufflinks, or other modest jewelry item under the wearing apparel exemption.

Wildcard exemption. A wildcard exemption allows you to apply a certain dollar amount to any type of property. If your state has a wildcard exemption (such exemptions can range from as little as $200 to as much as $25,000), you most likely can apply some or all of it to your jewelry.

Find the Jewelry Exemptions in Your State

To find the specific exemptions that relate to jewelry in your state, go to Nolo’s State Bankruptcy Information page and choose the link to your state. You’ll see a list of articles related to bankruptcy in your state, including an article on keeping jewelry.

Getting Rid of Private Student Loans in Bankruptcy: Will Congress Change the Law?

Processed by: Helicon Filter;A bill that would allow people to wipe out private student loans in bankruptcy might be gaining momentum in Congress.  Although the Private Student Loan Bankruptcy Fairness Act of 2013 (H.R. 532) has been kicking around since January 2013, recent activity indicates that some representatives in Congress are still interested in leveling the playing field between private student loan lenders and borrowers. But unless the bill becomes law, the private student loan industry will continue to have their cake, and eat it too.

The History of Private Student Loans in Bankruptcy

Before 2005, bankruptcy law treated private student loans just like other unsecured debt such as credit card debt and medical bills. This meant that if you filed for bankruptcy, in most cases you could discharge all of your private student loan debt. (There were a few exceptions, for example if you engaged in fraud.)

That all changed with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. In one fell swoop, Congress lumped private student loans together with federal student loans. That means that if you file for bankruptcy today, you can only discharge private student loans if you prove that repaying the debt would cause you an undue hardship. This is a very difficult standard to meet. (Learn more about the undue hardship test for student loans.)

Why Private and Federal Student Loans Should Not Be Lumped Together

Federal student loans and private student loans are very different. If you apply for a federal student loan, the government does not take into account your credit history or ability to repay the loan (with one exception – you cannot get a federal PLUS loan if you have an adverse credit history). Nor do those factors affect your interest rate. Because interest rates are capped for federal loans, even if you are a very poor credit risk, the government cannot assess more than the capped rate. Interest rates for federal student loans are often much lower than the average interest rate attached to private student loans.

Private student loan lenders, in contrast, function like other unsecured creditors. Like credit card companies, private student loan lenders can choose to lend to you, or not. If you have bad credit, they’ll hedge their risk by charging you a very high interest rate.

Federal and private student loans are different when it comes to repayment as well. Borrowers of federal loans can avail themselves of a number of flexible repayment plans. These programs allow borrowers to stretch out payments, reduce monthly payments to an amount based on income, wipe out portions of debt by working in certain fields, and more. In some cases, borrowers can pay little to nothing for many years, and then have the remaining debt forgiven. (Learn more about the various repayment programs for federal student loans.)

If you have private student loans, none of these programs are available to you. If you are struggling to make monthly payments, you can try to work something out with your lender. But there’s nothing that will force the lender to negotiate with you. If you want to reduce your payment, stretch out payments, get a lower interest rate, or the like – good luck.

It doesn’t seem fair that private student loan lenders get special treatment in bankruptcy. We don’t provide the same privileges to other lenders, like car loan lenders or credit card companies. So private student loan lenders can charge extremely high interest rates, refuse to lend to people with poor credit histories, require cosigners, but still get protection from discharge in bankruptcy. Essentially, they can have their cake and eat it too

Is Congress Catching On?

In 2013 representative Cohen, along with 14 other congress members, introduced the Private Student Loan Bankruptcy Fairness Act (H.R. 532). HR 532 would remove the special treatment that private student loans currently get in bankruptcy, and put them on the same level as other unsecured creditors. If this bill became law, bankruptcy filers would be able to discharge private student loan debt in bankruptcy.

Sounds great. But unfortunately, according to Govtrack.us, the bill has a 2% chance of becoming law (ouch).  Which is not surprising, given the track record of Congress of late. Plus, it’s been sitting around since January of 2013.

A Glimmer of Hope?

It may be too early to give up though. In March (in large part due to some effective pushing by members of the National Association of Consumer Bankruptcy Attorneys) an additional five representatives joined as cosponsors (bringing the tally to 39 in all).  Does this mean the bill is gaining momentum? Let’s hope so.

Preventing World War III: What Happens If Your Ex Gets a Tax Bill After You File for Bankruptcy?

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Hi Leon,

My domestic partner and I used to own a house together — we were both on the first mortgage and second mortgage home equity loan. We split up, and she transferred her share of the house to me in a settlement agreement. She remained on the mortgages because the lender would not take her name off and I couldn’t refinance in my name only because the home had no equity.

Eventually, I filed personal bankruptcy and lost the home in foreclosure to the first mortgage holder. The second mortgage holder forgave the debt on the second mortgage and then issued an IRS 1099 to my ex-partner. The second mortgage holder would not issue a 1099 to me because it said I am protected by the bankruptcy.

My ex is now trying to get me to pay her income taxes. She has contacted a lawyer who is trying to get the loan file from the lender.

Can you think of some way to unwind all this craziness before it erupts into World War III with litigation and big lawyer fees? 

Many thanks and have a good evening.

Best,

Diane

Dear Diane,

Most likely, you have no legal obligation to repay your ex for any income taxes she might owe. If that’s the case, she may be in violation of the bankruptcy’s discharge order if she comes after you. A simple reminder of that (from a lawyer) will hopefully stem World Word III.

And your ex might not even owe income tax on the forgiven mortgage debt. If that’s the case, there would be no reason for her to even start World War III.

No Tax on Forgiven Debt If Your Ex Was Insolvent

As you and your ex are aware, the IRS treats forgiven mortgage debt as income. That’s why the mortgage lender issued the IRS 1099 to your ex.

However, if your ex was financially insolvent in the year that the debt was forgiven, she won’t have to pay any income tax on that debt. If she can establish that (she should consult with a CPA), she may be able to amend her tax return so that she doesn’t owe the extra tax. (I hope it is not too late for her to amend her return, assuming she was insolvent.)

What does it mean to be insolvent? To determine if she was insolvent at the time, she would add up the value of her assets and compare that number to the amount of her outstanding debts, including the old second mortgage. If her debts were greater than her assets, then she was insolvent. Here is the link to the IRS Publication explaining all of that in simple language. I suspect she had no significant assets? If so, she should be “home free.” (Nice pun?)

Another Way to Avoid Tax on Forgiven Mortgage Debt?

Depending on what you and your ex used the second mortgage for, she also might be off the hook for the tax.  Congress created an exception to the mortgage forgiveness tax if you used the mortgage money to purchase or improve your home. If that’s the case, you don’t have to pay tax on the forgiven debt.  (Learn more about the Mortgage Forgiveness Debt Relief Act.)

But here’s the catch:  That exception ended on December 31, 2013. If your second mortgage lender forgave the debt 2013 or before, and you used the money to improve your home, your ex is probably off the hook.

If the debt was forgiven in 2014, it’s still possible (some say likely) that Congress will extend the mortgage forgiveness tax exception through 2017, and make the extension retroactive.

You Are Not Liable for Taxes on the Forgiven Debt

It was legally correct for the lender to issue the 1099 to your ex instead of to you. That is because your bankruptcy got rid of your personal liability for the debt on the second mortgage, so there was no debt to forgive. It is actually refreshing that hear that the lender is following the law (for a change).

Do You Have to Reimburse Your Ex for Any Extra Taxes She Has to Pay?

But even though you don’t owe taxes to the IRS, must you reimburse your ex for any taxes she has to pay to the IRS? It’s likely your domestic settlement agreement says yes, but, as we discuss below, your obligation to her was probably discharged in your bankruptcy.

Your domestic settlement agreement. A domestic settlement agreement will usually operate just like a marital settlement agreement. It divides up all of your joint assets, and assigns responsibility between each of you for payment of joint debts. Because you kept the house, the agreement probably required you to pay the mortgages and hold your ex harmless from the mortgages and any other debts assigned to you.

But any obligation to reimburse your ex was probably discharge in the bankruptcy. Here’s why.

If You Listed Your Ex in Your Bankruptcy

You should have listed your ex as a creditor in your bankruptcy because she was the co-obligor on your mortgage debts. If listed, your liability to her may have been discharged in the bankruptcy (assuming the debt was dischargeable, see below).

If You Didn’t List Your Ex in Your Bankruptcy

Even if you didn’t list your ex in your bankruptcy, you’re probably still OK. The bankruptcy law says that unlisted debts are also discharged provided a few conditions are met:

  • the unlisted debt was the type of debt that would be normally be dischargeable, and
  • the bankruptcy was a “no asset bankruptcy case.”

Dischargeable debts in Chapter 7 are generally anything except most kind of taxes, student loans, family support, and debts arising from intentional misconduct.

A no asset case means the court never set a deadline for creditors to file claims because there was no money to be distributed. Most Chapter 7 bankruptcies are “no asset” cases, and it is a fair assumption that yours was, too.

Was the Debt Arising From Your Domestic Settlement Agreement Dischargeable? 

Normally, obligations arising from a divorce or separation agreement are not dischargeable in bankruptcy. (See the list of debts that are not wiped out in Chapter 7.) But, this is only if the agreement was made with a spouse, a former spouse, or child.

But since you called your ex your “partner” I assume you were not married. If so, that is a good thing for you in this case. You can discharge your obligations under the domestic settlement agreement because you did not make the agreement with a spouse or former spouse.

In summary, any obligation to hold your ex harmless from the mortgage debts was dischargeable in your bankruptcy provided that:

  • she was not your spouse, and
  • the claim was listed in your bankruptcy, or if not listed, your bankruptcy was a “no asset” case.

Preventing World War III

If your ex lawyers up and comes after you to pay her tax debt, she may be held in contempt of the bankruptcy court’s discharge order. A creditor cannot pursue collection of a debt that has been discharged in bankruptcy.

A well written “lawyer letter” defending your position should be enough to make the other side back down. See if your former bankruptcy lawyer can help you with that, or find one right away who can do that for you.

–Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  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.

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Will My Name Be in the Newspaper If I File Bankruptcy?

Pub_Notice_in_NewspaperASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am getting ready to file bankruptcy. Obviously, it is something that I am not proud of. Some people have told me that I will have to publish a notice in the newspaper saying that I have gone bankrupt. That would be embarrassing. Is there any way I can get around it? 

Sincerely, 

Jack

Dear Jack,

Don’t worry. There is no such requirement in modern American bankruptcy law. However, there was a time in legal history when such a notice was required. Perhaps that is the reason some people think that a bankruptcy notice has to be published. Actually I get this question quite often.

A Bit of Bankruptcy History

In 1712 the British Parliament passed “An Act to Relieve Insolvent Debtors.” One feature of that law imposed a legal requirement to print a notice in a newspaper advertising the meeting of creditors in every bankruptcy case.

The reason behind the requirement was not to shame the person filing. Instead, it was to prevent secretive proceedings for the benefit of insiders seeking to defraud other creditors who had not received notice.

The publication rule was a great benefit to newspapers, who charged for printing the notices as advertisements. The most prominent of such papers is the London Gazette, which is the first newspaper to be regularly published in London, and is still in business.

No Publication of Bankruptcy Filing 

Unless you are a celebrity or a public figure (in which case the gossip magazines will be sure to talk about your filing), I’m pretty sure no one will care about your bankruptcy nor will it appear in any newspaper or magazine.

Of course, future lenders and creditors will care, and will see it on your credit report.  But you can take steps to rebuild your credit after bankruptcy in order to minimize its impact.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  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.

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Use It or Lose It: The Automatic Stay in a Third Bankruptcy Case

1_2_3ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I need to file a bankruptcy case to stop the foreclosure of my home. But there’s a catch. I already filed two Chapter 13 bankruptcy cases in the past ten months and both were dismissed. The first because of some bad advice I got. The second because I

found out too late that I needed to file a motion to continue the protection of the automatic stay within 30 days. 

The foreclosure is back on track and I need to stop it so that I can save my home. I’m handling the bankruptcy on my own.

So here’s my question. Since I didn’t use up my right to file a motion to continue the stay in the second bankruptcy, can I file another Chapter 13 case and also file the motion? It seems to me that my right to file the motion is preserved because I haven’t exercised it yet. 

Sincerely,

Grace

Dear Grace,

You don’t preserve your right to ask the court to continue the automatic stay by not using it. It’s a “use it or lose it” right during bankruptcy case number two. However, you may be able to get the court to impose a stay as to your lender in the third bankruptcy. Whether this will work depends on how much time you have before your home is foreclosed.

Here’s a bit more about repeat bankruptcy filings and the automatic stay.

The Automatic Stay in Your First Bankruptcy Case

As you correctly understand, only the filing of your first bankruptcy case created an automatic stay. Under the automatic stay, most creditors must stop collection activities during your bankruptcy. That automatic stay encompasses foreclosures – so your lender had to stop the foreclosure proceedings when you filed the first case. (To learn more, see Nolo’s article Bankruptcy’s Automatic Stay.)

The Automatic Stay in Your Second Bankruptcy Case

If you file a second bankruptcy case within one year from the filing of the first, the automatic stay only lasts 30 days. The court can extend the 30 days, but you have to file a motion asking the court to do so. In order to get the extension, you have to convince the court that you filed your second case in good faith as to creditors you are trying to encompass under the extension.

The court will only grant such an order during the first 30 days of case number two. This doesn’t leave you much time (as you found out). Experienced bankruptcy lawyers normally file an emergency motion to extend the stay on the same day as the second case is filed. Doing that provides the best chance of having the court consider the motion before expiration of the deadline.

The Automatic Stay in Your Third Bankruptcy Case

If you file for bankruptcy a third time within one year, the automatic stay doesn’t kick in at all. You can, however, ask the court to impose the automatic stay. Again, you’ll have to do this by motion and you’ll only have 30 days to get the order.

If you haven’t yet filed your third bankruptcy case, consider talking to a bankruptcy lawyer. An experienced lawyer may be able to file the motion requesting the automatic stay along with your bankruptcy case, and get the motion heard before 30 days have passed.  You’ll have to convince the court that you haven’t filed your third case in bad faith. (Learn more about the automatic stay in repeat bankruptcy filings.)

Whether this strategy will work depends on when the foreclosure sale is scheduled.  If the sale is scheduled to take place in less than 30 days, you’ll be out of luck.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  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.

Find Leon on Google+