Category Archives: Debt

Paying a Debt Previously Discharged in Bankruptcy

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon: 

As you may remember, you represented me in a Chapter 7 bankruptcy some time ago. I am now back on my feet and would like to pay a balance that I owed to my dentist prior to my bankruptcy. I included this debt in my bankruptcy, and it was discharged. 

Once I pay the debt off, is there some way to include in my bankruptcy records that I paid the balance or that it was satisfied post-bankruptcy?  Also, I’d like this to be reported on my credit report.

— Stephen

Dear Stephen:

It’s good to hear from you, and yours is a good question. Here’s my two-part answer.

You Cannot Record the Payment in Your Prior Bankruptcy

Your bankruptcy court papers contain a record of the debts you owed on the date you filed bankruptcy. Whatever payments you make after the bankruptcy is not a function of your case. There is no procedure for reporting the payment of this debt to the bankruptcy court.

Your Dentist Bill and Your Credit Report

Not all creditors report payment information to the credit reporting agencies. Generally, only financial institutions and debt collectors report debt payments. Your credit report will also usually include debts reflected in public records, such as court judgments and tax liens.

Many businesses don’t want to waste the time or money (or risk potential liability of incorrect reporting) to report to credit bureaus. As a result, it’s extremely unlikely that your delinquent dentist bill appeared on your credit report.

If, however, your dentist sued you and got a judgment for the debt, that judgment will appear on your credit report for 10 years. But your report must also reflect that the debt was “discharged in bankruptcy” and that the current balance due is $0.

(To learn more about what information appears on your credit report and how long negative items can be reported, see Nolo’s Credit Reports & Credit Scores area.)

Should You Pay Your Dentist?

The bankruptcy law specifically says that you can still pay any debt, if you want to. From your question, it sounds like you have decided to pay the dentist, but have not yet done so?

Good reasons to pay your dentist are because the dentist did a great job for you, and perhaps you would like to return there. A bad reason is because you think it might improve your credit rating — the payment of a discharged debt will not do that.

-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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Can I Get Rid of HOA Dues in Chapter 7 Bankruptcy?

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I would like to file for Chapter 7 bankruptcy to get rid of credit card debt and past due home owners association (HOA) dues. I currently live in my home. Can I discharge past due HOA dues in chapter 7 bankruptcy?

— Michael

Dear Michael:

The subject of past due HOA dues is tricky for many lawyers and bankruptcy clients, because there is so much misinformation about it.

Here is what you need to know about HOA dues and filing Chapter 7 bankruptcy. As you will see, it makes a big difference whether or not you are keeping the property.

If You Keep Your Home, You Must Pay HOA Dues 

If you are going to keep the property, you will have to pay the past due HOA dues. This requirement is no different than paying any past due mortgage payments as a condition of keeping your property. You must also pay all of the future dues and assessments for as long as you own the property.

Your HOA articles are a “covenant running with the land,” which means that it is sort of like a zoning regulation. Everybody in your home owner’s association has to obey the rules. For example, if you buy a piece of property that is zoned only for single family residences, you will be violating the zoning ordinance if you suddenly turn your house into a gas station.

In your case, you bought your home subject to the requirement that you would abide by the terms and conditions contained in the HOA articles. This includes paying all dues and special assessments.

If You Don’t Keep Your Home 

Things will turn out somewhat different if you plan to walk  away from the property, either by selling it or allowing a foreclosure sale to occur.  Here’s what happens to past and future dues:

  • You may be able to discharge your past HOA dues in your bankruptcy. (Learn more about the bankruptcy discharge.)
  • However, the bankruptcy law specifically provides that HOA dues that accrue after you file for bankruptcy will not be discharged. So, if you continue to own the property after your bankruptcy filing, you will still be liable for ongoing HOA dues. If you don’t pay the dues, the homeowner’s association can collect by: suing you for the money or even foreclosing on your property.

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 I Get Title to Building When Owner-Lender Dies?

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

Six years ago I bought an 11-unit apartment building in Los Angeles, California. The seller carried a note for most of the purchase price. The seller died a month after I bought the property, which was six years ago. I don’t know who to pay and no one has contacted me for the note payments. I have paid nothing on the note for these past six years.

Can I file a quiet title lawsuit or adverse possession or some other kind of lawsuit to get free and clear title to my building?

Thank you.

Sheila

Dear Sheila,

The Los Angeles County Public Guardian is the branch of government that deals with unclaimed property when the owner has died. You need to notify them. They can open a probate case to administer the mortgage for the rightful heirs. If no heirs are found then the mortgage “escheats” to the State of California for the public treasury.

The bottom line:  You still owe the mortgage note to somebody, and you also owe the six years of mortgage arrears. A Chapter 13 bankruptcy case may help if you are serious about keeping the building, but do not have enough money to bring the loan current all at once. A Chapter 13 may stop any foreclosure, and give you up to five years to get current on the note. (Learn more about how you can use Chapter 13 to catch up on mortgage arrears.)

-Leon

Guest blogger 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+

Why Did My Mortgage Lender Pay My Delinquent Property Taxes?

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon:

I own a home and am current on my mortgage. I recently fell behind on my property taxes. My lender paid the taxes and is now billing me for them. Why would the bank pay my taxes?  And what happens if I don’t reimburse the lender for the tax payments?

Dear Stan:

If you don’t pay your property taxes, the bank will advance money to pay the property taxes, then turn around and bill you for that cost. If you don’t reimburse the bank for the taxes you owe, your lender can foreclose on your home.

Here’s why this happens.

The Lender Wants to Protect Its Interest in the Property

If you have a mortgage on your home or other real estate, the lender has a security interest in your home. If you default on the mortgage, the lender can take the home back to get reimbursed for the mortgage payments you owe. This is called foreclosure. Not surprisingly, the lender wants to protect its interest in your property, and make sure nothing happens that will hurt its ability to foreclose or to get reimbursed for mortgage payments.

For this reason, your lender will require you to maintain fire insurance and other types of homeowner’s insurance. In addition to keeping the property insured, the lender will also require that you stay current on the property taxes (this will be part of your mortgage contract). Here’s why the lender cares about your property taxes being current.

Why Does the Lender Care About Property Taxes?

Under the California State Constitution, property taxes become a priority lien on the property as soon as the county tax assessor issues an assessment notice for the tax. The “priority part” means that the property tax lien jumps ahead of the mortgage.

If the taxes remain unpaid for a long enough time (usually five years), then the county has a tax sale of the property. The tax sale of the property is not subject to the other liens against the property. This means the buyer at the tax sale takes title free and clear of any other encumbrance, not even the mortgage! Hence, banks are scared to death of letting property be sold at a tax sale because it wipes out their mortgage.

A mortgage lender is in for a horrible loss if they let that happen. Somebody might walk away with the property as the successful bidder at a tax sale, paying far less than market value, and the mortgage lender might get absolute nothing!

How the Lender Protects Itself

Lenders can protect themselves from losing their collateral at a tax sale by monitoring the tax delinquency status on every parcel they have loaned against. If the borrower fails to pay the property tax, the lender will advance the money to pay the taxes. That removes any danger of a potential tax sale, and then the lender can bill the owner for the taxes that the lender has paid.

Paying the taxes also allows a lender to take their sweet time in foreclosing on the borrower. For example, a bank won’t rush through a foreclosure if it already has too many repossessed condos in their inventory.

If you have delinquent taxes, you can work with the IRS to structure a payment plan. Learn more in our Back Taxes & Tax Debt area.

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.

Find Leon on Google+

Aggressive Hospital Debt Collection Company Under Fire

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.

 

Can Bankruptcy Prevent a Utility Shut-Off?

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.

 

Using a Chapter 13 Cramdown to Reduce Your Car Loan

car loan photoChapter 13 bankruptcy has a lovely thing called a cramdown. It allows you, in certain situations, to reduce the balance of your car loan (and loans on other secured property) and pay lower interest on that loan. Here’s how it works.

Often, your car note is no longer fully secured by your car. This happens because cars depreciate quickly. For example, say you buy a car in 2010 for $15,000. You get a loan for $15,000, which is secured by the car (which means if you default on the loan, the lender can take your car to cover the amount you still owe under the loan contract). Now it’s 2011 and you owe $13,000 on the car note, but the car is only worth $10,000. Because the lender’s loan is no longer fully secured by the car (only $10,000 of the loan is secured), $3,000 of that loan is unsecured.

And here’s where a cramdown comes in. In Chapter 13 bankruptcy, you can reduce the principal balance of your car loan to the replacement value of the car. So, in the above example, you could reduce your loan balance to $10,000. Even better, the interest rate on this new balance is set by the district in which your bankruptcy court is located at what is often a lower rate than your original rate. (This is called the Till rate after a Supreme Court case by the same name.)

What about the remaining $3,000 in the above example? The amount of the loan that is no longer secured by the property (your car) is reclassified as unsecured debt. It’s added to your other unsecured debt, which you pay off over time through your Chapter 13 repayment plan. Most debtors pay only a portion of their unsecured debt over the life of their plan – which means you’ll most likely pay much less than $3,000.

There are two catches: You must pay the new loan balance by the end of your repayment plan. This would give you either three or five years (depending on how long your plan lasts) to pay the balance. And, you can only use a cramdown on cars you purchased at least 2 ½ years before filing for bankruptcy.

 

New Federal Rules Aimed at For-Profit School Rip-Offs

Yesterday, June 2, 2011, the Department of Education released final rules aimed at for-profit schools — requiring them to better train their students for gainful employment. Under the new rules, if schools don’t meet certain standards for their graduates, students will not be able to get federally backed student loans to attend the school.

The Background: For-Profit School Rip-Offs Hurt Students and Taxpayers

For years (decades really), many for-profit schools have enticed low-income students to sign up for large amounts of student loans  with the promise of  getting a good job when they graduate. Sadly, the instruction offered at some of these schools is of such poor quality that students graduate with no chance of getting a job in their field of study. While those attending for-profit schools represent only 12% of all students receiving higher education, they represent a whopping 46% of all students with defaulted student loans.

The end result: Huge profits for the  schools, huge debts with no chance of increased income for the students, and lost money to the taxpayers (because of all the loan defaults).

The New Rules: Preparing Students for Gainful Employment

The new rules will require schools to demonstrate that a certain percentage of their graduates have received training adequate to be gainfully employed in a recognized occupation. The rules will apply to nonprofit and for-profit schools, although the Department of Education predicts that only 1% of nonprofit institutions will be impacted by the regulations.

Under the regulations, schools must meet one of the following three tests:

  • at least 35% of former students are repaying their loans (which means reducing their loan balance by at least $1)
  • the estimated total annual loan payment of a typical graduate does not exceed 30% of the graduate’s discretionary income, or
  • the estimated total annual loan payment of a typical graduate does not exceed 12% of the graduate’s total earnings.

The regulations will not go into effect until July 1, 2012.  Schools will get “three strikes” (meaning, missing the above metrics) before they are kicked out of the federal student loan borrowing programs.

I think the more important regulations rolled out are those that will require schools to disclose to students: total program costs, loan repayment rates, and the debt-t0-income ratio for typical graduates, among other things.

Will the New Rules Make a Difference?

Quite frankly, that the bar has been set so low (do you really want to attend a school where only 35% of former students can repay $1 of their student loans?)  says a lot about how bad the scams are right now. So, yes, the new regulations will put a few of the worst schools out of business (the Department of Education estimates about 5%), and will force some schools to clean up their act, at least a little bit. But students still need to go into these for-profit schools with their eyes wide open. To that end, the regulations requiring schools to disclose some important facts about costs, loan repayment amounts, and how much their graduates earn will hopefully do more to protect unsuspecting students than do the “three strikes” rules. Maybe once students see the numbers, they’ll opt for community college or other nonprofit learning institutions.

The effectiveness of these new disclosure requirements will depend on how they are presented to students, and how much “policing” the Department of Education is able to do.  In my experience, the scam trade schools are quite creative when it comes to “burying” the fine print, especially when the prospective students don’t speak English or have little education.

All in all, however, the regulations are a step in the right direction. At least the Obama administration, with these new rules, has called attention to the billion dollar for-profit school industry that often leaves students and taxpayers in the lurch.

To learn more about the new regulations, check out the Department of Education’s press release on the subject.

 

Protection From Garnishment for Social Security, Veterans Benefits

A new treasury rule, effective May 1, 2011, will provide more protection to receipients of federal benefits from garnishment of their bank accounts.

Garnishment and Federal Benefits: The Basics

If a creditor gets a judgment against you, it has various tools to collect on that judgment. One tool allows the creditor to garnish (grab the money in) your bank account. But there are limits to garnishment. Judgment creditors cannot grab funds that come from certain sources, including some types of federal benefits such as Social Security, Supplemental Security Income, veterans benefits, and a few others.

Although these types of funds cannot be seized by creditors, in practice, when banks got a garnishment order in the past, they often froze all funds in the account (up to the amount of the debt), without regard to whether the funds were protected from garnishment. This means the bank accountholder would not be able to access those funds for weeks or months. The accountholder could object to the garnishment of the protected funds to prevent the bank from turning them over to the judgment creditor. But many people were unable to complete the paperwork and procedure to do so, and so lost funds that never should have been seized.

The New Rule: The Onus is on the Bank

The new rule puts the onus on the banks. Banks receiving garnishment orders must now determine if the bank account has protected federal benefits that have been electronically deposited into the account within the previous two months. If the bank discovers that there are protected funds, it cannot include those funds in the account freeze.

What This Means for Accountholders

Federal benefits received and deposited in a bank account via paper check are not protected by this new rule. Nor are funds received (even if received electronically) more than two months prior to the garnishment order. However, the regular state procedures for challenging a garnishment order will still be available for these types of funds. Federal benefit recipients currently receiving paper checks should consider switching to electronic deposit of their benefits.

For More Information

If you receive federal benefits and think you might need protection from bank garnishments, be sure to read about the nitty, gritty details of this new rule (this post just covers the very basics). For the short term, you can get an excellent summary of the new rule, as well as recommendations for how beneficiaries of federal benefits can best protect themselves, from the National Consumer Law Center at http://shop.consumerlaw.org/pdf/nclc-rpts-repo-jan-feb-2011.pdf.

 

New Mexico Debt Collection Rule Is a Victory for Debtors

New Mexico’s Attorney General will begin enforcing a new Rule which requires debt collectors doing business in New Mexico to (1) make a good faith effort to determine if collection of a debt is time-barred (meaning it is too late to sue for recovery of the debt in court) and (2) if it is time-barred, to so inform the debtor. The collector must also tell the debtor that signing a new agreement to pay the debt, or making a partial payment might “revive” the debt, resetting the time period that the collector has to sue on the debt. (To learn more about time-barred debts, and what that means for collection of the debt, read Nolo’s article Time-Barred Debts: When Collectors Cannot Sue You for Unpaid Debts.)

The Attorney General implemented the rule in order to end “an industry-wide [debt collection] practice that tends to or does mislead or deceive” consumers by failing to provide important information to consumers – that is, that a debt is so old that it is legally unenforceable in court. The new Rule is a victory for consumers. As New Mexico Attorney General King said: “This Rule is intended to ensure that debt collectors provide important information to consumers so that they can make informed decisions when they are confronted with a demand to pay an old unenforceable debt.”

The law went into effect on December 15, 2010, but the Attorney General delayed enforcement until March 15, 2011 in order to give debt collectors time to revamp their practices. You can read the Attorney General’s announcement here. The announcement contains a link to the text of the new rule.

By: Guest Blogger Kathleen Michon