Category Archives: Credit Cards

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+

Can a Credit Card Debt Be Reported on a Child’s Credit Report?

Real bank or piggy-bank?ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I got a Chapter 7 discharge about a year ago. Long before filing bankruptcy I got an extra credit card for my daughter to use. At that time the bank assured me that I would be the only person liable for charges on the card. My daughter just got her credit report and the credit card account appears as a charge off. 

How did the company get her social security number? And didn’t it violate the agreement it made with me? My daughter is now 17 years old, and I’m sick over the thought that I ruined her credit. 

Yours truly, 

Marjorie

Dear Marjorie,

I suggest that your daughter dispute the debt on her credit report. It’s not hard to do. You can learn how in Nolo’s article How to Dispute Errors on Your Credit Report.

In her dispute, she should state two things:

  • that the credit card account is not hers, and
  • that even if it was, she is under age 18 and is now voiding the contract, so does not owe the credit card company anything

I think this credit dispute will be quickly resolved in her favor. If it is, that annoying item will disappear from her credit report.

Here is a little background on each of these arguments.

The Credit Card Account Is Not Hers

The credit card company told you that you would be the only one liable for the charges, so the account never belonged to your daughter. Your daughter should state these facts in her dispute.

What If the Agreement Did Hold Your Daughter Liable?

But what if the credit card agreement did hold your daughter liable?  It’s likely you no longer have documents proving the contrary. And credit card companies do issue extra cards to authorized users and hold the user liable. In this case, because the bank has her social security number, is it possible the agreement said she would be liable?

A Minor Can Void a Contract

Even if the credit card agreement did hold your daughter liable for the credit card debt, she can void the contract before she turns 18.

Because the law says that minors lack the capacity to enter into a contract, it gives minors the option to either (1) honor the contract, or (2) void the contract before he or she turns 18.  (There are a few exceptions: Minors cannot void contracts for necessities, like food and shelter.)

Your daughter should immediately notify the credit card company and the credit repair agency that she is voiding the contract.  She can do this by stating:

“While I believe that I never had a contract with [credit card company], if I did, I am now voiding the contract.  I am under the age of 18.”

At that point, since there is no contract in place, your daughter does not owe the credit card company anything, and she can dispute the entry on her credit report.

A Novel Argument?

And if you want to try something new, consider this. Last July, the new Children’s Online Privacy Protection Act Rule (COPPA Rule) took effect in California. If you use the above tactics and still cannot get the item removed, you could hit the credit card company with a demand to remove the item on the ground that it is violating COPPA by publishing information pertaining to the identity of a minor.  It might be a stretch to say that a credit report (which has a limited viewing audience) is “publishing” information about a minor and therefore violating COPPA, but it doesn’t hurt to make the argument. Rather than test new legal waters, perhaps the credit card company (or the credit reporting agency) will back down and remove the item.

-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+

Filing Bankruptcy When Ex Won’t Pay Joint Debts Per Divorce Agreement

man tearing up agreementASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am wondering if I should file for bankruptcy. I just got served with a lawsuit for an old credit card debt that my ex and I incurred when we were married. According to our divorce agreement, my ex is supposed to pay these debts.  But he hasn’t paid up. Why don’t the banks leave me alone and go after him? If I file bankruptcy, does that get my ex off the hook? 

Sincerely, 

Carol

Dear Carol,

I think you are on the right track – it’s time for you to visit a bankruptcy lawyer who can fully explore your debt issues. A good lawyer can answer your questions, determine if you are eligible to file, and let you know how you can bring this all to an end. Most bankruptcy lawyers don’t charge for a consultation. (Learn about how to find a bankruptcy lawyer.)

You Still Have Legal Rights Against Your Ex Spouse

When a divorce agreement assigns debts to your ex spouse for payment, and he fails to pay them (which means he has failed to perform under the divorce agreement), you have legal rights to assert against him. For example, you might ask the family court to hold him in contempt of court because he has failed to comply with the divorce agreement. You may have already considered this and decided not to follow this path – perhaps because it is costly and time consuming. Or maybe it would be futile if your ex’s financial situation is no better than yours.

What Can You Do If Your Ex Spouse Files Bankruptcy and You Don’t?

Incidentally, suppose he files bankruptcy and you don’t? You may be glad to know that if he files Chapter 7 bankruptcy, it won’t erase your legal rights to enforce the divorce agreement. You can still seek to recover reimbursement from him for debts covered by the agreement that you were forced to pay because of his failure to abide by the agreement. (These debts could be discharged in Chapter 13, however.)

Why Won’t the Banks Go After Your Ex and Leave You Alone?

The divorce agreement was made solely between you and your ex. The creditors were not part of the deal. They previously had the legal right to go after each person who was legally obligated on the debt. Your divorce agreement has not changed that. If both of you were obligated under the contract, the creditors still have the legal right to collect from each of you.

If you file bankruptcy, you can most likely discharge your obligation to pay the debt, but it does not eliminate your ex spouse’s liability. Once your liability for the debt is gone, perhaps the creditors will go after your ex more aggressively.

You Must List Your Rights Against Your Ex Spouse in Your Bankruptcy Case

If you file bankruptcy, your right to seek reimbursement from your ex spouse should be listed as a possible asset, even if you know that enforcement of the agreement would be futile. It is possible that the bankruptcy trustee in your case would sue your ex on behalf of your bankruptcy estate to make him pay what he owed you under the divorce agreement. (As a practical matter it rarely happens because usually the ex spouse is just as broke as the debtor. But if your ex has money, it could happen.) The right to make that decision belongs to the trustee in your case. The trustee can’t exercise the right to make a decision if the trustee doesn’t know about it. And there can be severe penalties against you for failure to correctly list all assets, even when assets have no apparent value. So be sure you list it.

Sincerely,

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+

 

Paying Off Credit Card Debt v. Filing for Bankruptcy

CreditCard2ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am making my credit card payments on time, but they are a substantial amount each month. Would it be a good idea to file for Chapter 13 bankruptcy to pay them back? Would that look better on my credit report than if I filed for Chapter 7 bankruptcy? And will the credit card accounts have to be closed once they’ve been paid in full, or will I get to keep them? 

Thanks, 

Wally

Dear Wally,

I predict you’re going to feel great by the time you finish reading the bankruptcy advice I have for you.

The Credit Card Debt Trap

You make your credit card payments on time, but you don’t see any progress in getting them paid off. You are not the only person in this situation, and that’s because of credit card interest. Consider this: If you have a balance of $5,000 on your credit card and are paying 14% APR, it will take you 22 years to pay it off. That assumes you always make the minimum requested payment, on time.

Can I cheer you up some more? Over that 22-year period, you will end up paying a whopping $5,887 in interest, on top of the original $5,000 balance. That’s a total of $10,887 to buy something that cost only $5,000. (And it’s likely that whatever you bought is long gone by the time you pay off the balance.)

Paying the Debt Off Outside of Bankruptcy

So what’s the best way to avoid this scenario? My first choice for you would be to avoid bankruptcy by paying the debt down yourself. To do this, however, you’ve got to make more than the minimum payment each month.

Let’s go back to the example above. Let’s say your minimum monthly payment on the balance was $100.  If you paid $240 per month, you would pay the debt off in just two years. You’d still pay $761 in interest, but you’d save yourself 20 years of debt payments, and $5,126 in interest.

(For tips and strategies to get out of high credit card debt, visit Nolo’s Managing Credit Card Debt topic area.)

Discharging the Debt in Bankruptcy

If you can’t step up your monthly payments, and you have no better alternative, bankruptcy can be a great way to deal with debts. It’s true that bankruptcy will damage your credit. However, almost all of my clients already had miserable credit by the time they began considering bankruptcy. Thus, they had nothing left to lose.

Keep this in mind though:  If good credit is extremely important to you, then do not file any kind of a bankruptcy case. If getting out of debt is more important than your credit, you should consider Chapter 7 or Chapter 13 bankruptcy. Your credit will look the same regardless of which chapter you file. The credit card accounts will remain closed, even if you pay them back under Chapter 13.  (To learn more about what happens to credit card debt in bankruptcy, visit Nolo’s Credit Card Debt and Bankruptcy topic area.)

For further guidance on your particular situation, consult with one or two experienced bankruptcy lawyers. You should be able to find lawyers who will give you free consultations.

-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+

Bankruptcy v. Debt Settlement

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I’ve got trouble. I just got sued by a credit card company for around $9,000. I have one other delinquent credit card debt for about $15,000. I make around $32,000 per year. It takes all my money just to live. Those are my debt issues, but here’s the real trouble. I have leukemia again, after being in remission for almost five years. I live in California. 

I will be starting chemotherapy soon. I am physically reaching the point where I have to go on disability. My life savings is about $7,000 in an IRA account. That’s all I’ve got, plus really excellent health coverage from my job. I would like to settle with my two creditors, provided they remove anything derogatory from my credit report. I can get a letter from my doctor to show the creditors if that will help me get settlements. I understand that if I make settlements, I might owe some extra income taxes? 

So, what in the world do I do? Any insights from you would be a huge help to me right now. 

Thanks, 

Keith C.

Dear Keith,

Thank you for reading our bankruptcy blog. I understand what a pernicious disease you have. I hope you will knock it down and get back into remission. You have asked if I can explain your legal options. I know you don’t expect a perfect answer to such tough questions, but I’ll do my best to help.

Debt settlement is certainly an option for you. Bankruptcy is another option. Let’s analyze them both.

Bankruptcy

Based on what you mention, bankruptcy is probably an option. You have just a couple of old debts that should be dischargeable, you have no assets to lose, (your IRA account will be protected) and you already live pay check to pay check. You sound like a perfect candidate for Chapter 7 bankruptcy.

My only hesitancy over bankruptcy is that you might be stuck with large future medical debts if you lose your insurance. Also, the best of medical plans could leave a person owing a lot of money under some circumstances. Hopefully that won’t happen to you. However, a lawyer should be able to point out all possible outcomes that are reasonably foreseeable.

Debt Settlement

Now, let’s analyze debt settlement. My law partner Jeffrey Wishman is an absolute wizard at settling debts. He feels that given your financial and medical circumstances, settlements as low as 25% of the total owed may be possible, especially if your doctor provides a diagnosis letter with a grim prognosis. Sharing a letter like that with your creditors can be extremely helpful during the negotiation process. If successful, debt settlement will free you from your present debt worries.

However, even a 25% debt settlement is going to use up all the money that you have. I really don’t want you losing all your savings to pay for debt settlements, especially since you have no present ability to replace your savings. Also, you will soon be on disability which may provide less income than your normal salary.

Taxes Owed on Forgiven Amounts in Debt Settlement

Let’s examine the possibility of you owing income taxes on the amount of debt that gets forgiven. Forgiven debt is counted as income, and normally you would owe incomes taxes on that money, just the same if it had been earned in that amount at your job. Fortunately, there is an exception to that rule, and the exception is in your favor.

An individual will not owe any income tax on the forgiven portion of debt, provided that you were financially insolvent. Insolvency is measured by the value of all your assets and comparing that to the total of your debts. If you owe more money than the value of all your assets, you are insolvent. Based on what you said in your question, you are insolvent unless you own something of value that you haven’t mentioned. I am assuming that all of your personal property such as clothing, furniture, appliances and personal effects have no real value. You do have $7,000 in your IRA, but that is less than the total of all your debts. Hence, you are probably insolvent.

(To learn more, see Nolo’s article Tax Consequences When a Creditor Writes Off or Settles a Debt.)

Can You Get Derogatory Information Removed From Your Credit Report?

Now let’s examine your request that any settlement include a deletion of negative information from your credit reports. That will not happen. Here’s why that is.

Credit reporting is a big business. Credit bureaus sell your credit report to financial institutions. Those banks and other institutions rely on the accuracy of the reports in making decisions to extend credit to you. You can’t manipulate your report by deleting true but derogatory information. To learn more, see our articles on Credit Repair.

The Best Option for Now:  Do Nothing

Now, for the BIG question:  What should you do? My advice – do nothing right now. Absolutely nothing. Here is my thinking. If you file for bankruptcy now, you might have more debt from medical bills later. And if you settle your debts, you won’t have any money left.

Both your disability income and your IRA can’t be touched by creditors. In the meantime, the creditors can all have fun going to court, but you don’t have anything they can take from you. When you are out of the woods and back to work, it will probably be the right time for you to file bankruptcy.

I hope you are well soon. Consult bankruptcy lawyers whenever questions arise.

-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+

 

Moral and Ethical Questions About Bankruptcy

Leon Bayer PhotoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I hope you can answer this. This is a moral question not a legal question. I want to file bankruptcy. I owe about $30,000 in credit card debts. I am a single mom with two kids. I am totally struggling. I haven’t had any money to make payments in a long time. I can barely buy food. Bill collectors are driving me crazy. A Los Angeles bankruptcy lawyer I talked to said I am a perfect candidate for Chapter 7 bankruptcy. I asked my family to help me pay the lawyer fee and my family wants to give me the money to pay off my debts instead of file bankruptcy. What do you think I should do?  Thanks.

Catherine

Dear Catherine,

Moral and ethical questions concerning bankruptcy are very much included within this blog.

You stopped paying the debts and you are still struggling to meet basic living expenses. It sounds to me like you will need financial help from your family for some time to come. I think it’s fine if your family pays off your debts, provided they are so wealthy that they won’t miss any of the money. If not, the money they have offered might be better spent on helping you and your kids with necessities. Things like a reliable car, a decent place to live, and grocery money are more important. I would rather see your family help you and the kids with that money.

Paying off your already-delinquent debts does not save or restore good credit. It doesn’t pay your rent or put food in the fridge.

If you decide to pay the debts, consider making settlement offers instead of paying them in full. Most creditors will gladly accept 20% to 50% of what you owe as full settlement of delinquent debts.

After everything is considered, bankruptcy sounds to me like the best way to help 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.

Find Leon on Google+

Got a Consumer Complaint?

If you have a complaint about your credit card company, student loan holder, mortgage lender, car loan lender, or bank, you can log your grievances on the new Consumer Financial Protection Bureau  (CFPB) website.

The CFPB is now fielding complaints in the areas of:

  • credit cards
  • student loans
  • mortgages
  • car loans
  • bank accounts or services

To file a complaint, visit the complaint center on the CFPB website at (www.cfpb.gov/complaint.)

Once a complaint is lodged, the CFPB confirms that the lender has in fact done business with the consumer. The lender then has 15 days to respond to the complaint and 60 days to address the problem. To learn more about the complaint process, see the CFPB’s Consumer Reports: A Snapshot of Complaints Received.

The CFPB has already created a database that compiles credit card complaints, and has made this information public. The database doesn’t disclose the consumer’s name, but does disclose how the credit card company dealt with the issue. The CFPB plans to have similar databases for the other types of complaints in the future.

I Am an Authorized User on My Dad’s Credit Card. What Happens If I File for Bankruptcy?

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. 

Consumer Financial Protection Bureau Still Has No Director

In July, I blogged about the nomination of Bill Cordray as the Director of the Consumer Financial Protection Bureau (CFPB), the new federal agency created in the wake of the financial debacle on Wall Street that was responsible, in part, for the contraction of the U.S. economy. The CFPB is a government watchdog agency, overseeing consumer protection for all things related to lending, including credit cards, private student loan, pay day loans, and mortgages.

(You can learn more about consumer protection here.)

Since July, Republicans have continued to fight against the CFPB, vowing not to approve a Director until the agency is restructured. The U.S. Chamber of Commerce has also expressed its opposition to the CFPB, arguing that it would be too powerful as it currently stands.

Without a Director, the CFPB is prevented from performing some of its intended tasks, including overseeing some financial sectors that currently have no agency watching over them (like mortgage brokers and payday lenders).

Several days ago, the Senate Banking Committee approved Cordray as the Director of the CFPB. This is definitely a welcome move by consumer advocates. But Senate Republicans continue to promise to block the nomination of any director to the CFPB until the agency’s powers are diluted.

 

Launch of New Consumer Financial Protection Bureau

July 21, 2011 marked the official launch of the new Consumer Financial Protection Bureau (CFPB).  The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 after the earlier financial debacles. The Bureau will be responsible for overseeing consumer protection compliance of banks and credit unions with assets over $10 billion – essentially serving as a government watchdog over all things related to lending, including credit cards and mortgages. It will also be able to write rules for a range of existing consumer protection statutes, and enforce those rules against banks and credit unions with $10 billion in assets.

Consumer advocates were thrilled that Obama tasked Professor Elizabeth Warren, a noted consumer protection expert, with setting up the Bureau. However, advocates were less than thrilled when the Republicans threw up road blocks to her nomination as director of the Bureau. Instead, Obama appointed Richard Cordray, a former Ohio attorney general, as director of the new agency. Although he’s no Elizabeth Warren, Cordray does have a good track record for consumer protection and many believe he was a good pick.