Tag Archives: bankruptcy

Can Student Loans Help You Qualify for Chapter 7 Bankruptcy?

StudentLoans_iStockIf you plan to file for bankruptcy and have a bundle of student loan debt, those loans might make it easier for you to be eligible for Chapter 7 bankruptcy.  A Texas bankruptcy court recently ruled that because a bankruptcy debtor’s substantial dentistry school loans were not consumer debts, he did not have to take the means test in order to file for Chapter 7 bankruptcy.

What Is the Chapter 7 Means Test?

In order to qualify for Chapter 7 bankruptcy, you must pass the means test. The Chapter 7 means test looks at your income and expenses and determines if you have enough money left over to repay your unsecured creditors a portion of what you owe.

The means test often prevents high earners from filing for Chapter 7 bankruptcy. For many debtors, Chapter 7 is preferable to Chapter 13 because it allows you to discharge most or all of your debts, and you don’t have to make payments to a plan for three to five years. (Of course, there are many situations when Chapter 13 is better than Chapter 7.)

Exceptions to the Means Test Requirement

There are several situations when debtors do not have to pass the means test in order to file for Chapter 7 bankruptcy. One of those is referred to as the business debt exception:  If the majority of your debts are not consumer debts, you don’t have to take the means test.

Texas Court:  Dentist School Loans Are Not Consumer Debts

In In re De Cunae, No. 12-37424 (Bkcy S.D. TX 2013), Mr. De Cunae, a dentist, filed for bankruptcy. He lost his dental practice after a difficult divorce, was a single father, and couldn’t work for a time because of a stroke. At the time of his bankruptcy filing, he was once again working as a dentist on a contract basis. He filed for Chapter 7 bankruptcy.

Mr. De Cunae argued that he did not have to pass the means test (his income was high enough that if he did have to pass it, he would have failed) because his student loans from dentistry school were nonconsumer debts, and therefore the majority of his debts were nonconsumer.  The Texas bankruptcy judge agreed, ruling that the portion of his dentist school loans (about $200,000) that was used for tuition, books, and fees, was not a consumer debt. On the other hand, the portion of the student loans that he used for household expenses (about $30,000) was consumer debt.

Loans Incurred With an “Eye Towards Profit” Are Not Consumer Debts

Bankruptcy courts often struggle to distinguish consumer and nonconsumer debts. The Fifth Circuit Court of Appeals (Texas is in this circuit) has come up with the following definition: A nonconsumer debt is one that the debtor takes out “with an eye toward profit.”

The Texas bankruptcy court found that Mr. De Cunae did not attend dentist school, nor incur loans to attend dentist school, only for self-improvement or self-esteem, as the United States Trustee argued. Instead, the court found that Mr. Cunae’s intent was to enhance his ability to earn a future living.  To the court, that seemed to fit squarely within the profit motive category — and therefore they were not consumer debts. The portion of student loans that Mr. De Cunae used for household expenses, however, were consumer debts.

Because he could classify most of his dentist school student loans as nonconsumer debt, Mr. De Cunea’s  total nonconsumer debt load outweighed his consumer debt load – and he was allowed to file for Chapter 7 bankruptcy without passing the means test.

Law v. Siegel: Did the U.S. Supreme Court Let a Conniving Bankruptcy Debtor Off the Hook?

US Supreme CourtIn a recent case, Law v. Siegel, the U.S. Supreme Court said that a bankruptcy trustee cannot “surcharge” (redirect funds from) a bankruptcy debtor’s exempt property to pay for the trustee’s attorney’s fees — even if the debtor defrauded the court. The decision was a blow to bankruptcy trustees. But it certainly doesn’t mean that debtors who lie and cheat will get off without penalty.

The Facts of Law v. Siegel

In 2004 Mr. Law filed for Chapter 7 bankruptcy in California.  His home was worth $363,348 and he claimed the full $75,000 of California’s homestead exemption. He also listed two liens against his home that, taken together, exceeded the value of his home. Because these three liens meant that he had no equity in his home, there was nothing left for creditors and he proposed to keep his home in the bankruptcy.

The bankruptcy trustee, Mr. Siegel, questioned the existence of one of the junior liens – that of Lin’s Mortgage and Associates. Long story short: After five years of litigation, the bankruptcy court ruled that the Lin’s Mortgage loan was fictitious. Law had made it up just so he could keep his home. The bankruptcy court ruled that Mr. Law defrauded his creditors and the court.

At this point, Mr. Siegel was in the hole for attorney’s fees to the tune of a whopping $500,000. Bankruptcy law allowed Mr. Siegel to take his fees out of the proceeds of the home sale, after paying off Mr. Law’s first mortgage. But that amount didn’t make a dent in Mr. Siegel’s fees. So, Mr. Siegel asked the court to “surcharge” Mr. Law’s $75,000 homestead exemption. Essentially, he asked the court deny the exemption, and allow Mr. Siegel to use the $75,000 to defray his attorney’s fees.

Needless to say, Mr. Law was not a sympathetic character and the bankruptcy court did not have a problem giving the $75,000 to Mr. Siegel. When Mr. Siegel appealed to the Bankruptcy Appellate Panel of the Ninth Circuit, those judges agreed with the bankruptcy court. He then appealed to the Ninth Circuit, which also agreed with the bankruptcy court.

Split in the Circuit Courts Over Surcharging

Although the bankruptcy court’s ruling seems like a no-brainer, there has been a split between the circuit courts over surcharging – and for good reason. The federal bankruptcy law (§522) which allowed Mr. Law to exempt $75,000 in his home specifically states that the exempted amount “is not liable for” administrative expenses, including attorney’s fees.  And that’s exactly what Mr. Siegel proposed – to use the $75,000 to pay his attorney’s fees.

But here’s the rub. The Ninth Circuit and a few others have ruled over the years that surcharging is allowed because:

  • §105(a) of the bankruptcy code gives the bankruptcy court the authority to do what is necessary to carry out the provisions of the bankruptcy code, and
  • the bankruptcy court has “inherent power”  to sanction litigation practices.

Enter the Supreme Court

The bankruptcy bar awaited the result with baited breath. On the one hand was the group of lawyers who serve as bankruptcy trustees. They were hoping the U.S. Supreme Court would allow the surcharge.

On the other side was the group of lawyers who regularly represent debtors. Those lawyers didn’t want a decision which gave bankruptcy courts more power to take away debtors’ exemptions. And this case was worrisome because “bad facts often make bad law.”

The Supreme Court Says No to the Surcharge

In the end, the Supreme Court held its nose and ruled for Mr. Law.

Its reasoning was fairly simple: A bankruptcy court cannot take an action that is specifically prohibited by another section of the bankruptcy code.

The Supreme Court said that while the bankruptcy court does have inherent power to sanction fraudulent debtors, and §105(a) does give it power to make orders to carry out the code, nonetheless, the bankruptcy court cannot do so if it contravenes another provision of the code. Here, the bankruptcy court’s actions overrode §522, which allows a debtor to exempt certain property. To be sure, §522 does allow a bankruptcy court to deny an exemption, but only for a reason specifically outlined in that section. To that end, §522 lists quite an array of exceptions and limitations to a debtor’s use of exemptions. In what has quickly become a popular quote among bankruptcy attorneys, the Supremes said:

“The Code’s meticulous – not to say mind-numbingly detailed – enumeration of exemptions and exceptions to those exemptions confirms that courts are not authorized to created additional exceptions.”

(Anyone who has dealt with bankruptcy exemptions, both attorneys and debtors alike, will agree that they are mind-numbing. It was nice to have that fact recognized by the highest court in the country.)

What Does This Mean for Bankruptcy Trustees?

The decision is not a good one for bankruptcy trustees. Mr. Siegel labored for five years to prove that Mr. Law had defrauded the court and his creditors. And now he can’t even touch the $75,000 exemption. Yes, there are consequences for Mr. Law (see below), but they don’t necessarily help Mr. Siegel recover his attorney’s fees.

What Does This Mean for Debtors?

This decision certainly doesn’t give free reign to debtors to play fast and loose with the bankruptcy code, or worse, to defraud the court.

The U.S. Supreme Court was very careful to point out the many sanctions that are available to deal with debtors like Mr. Law.

  • The bankruptcy court can deny Mr. Law’s discharge, so that he’d still be on the hook for his debts. (The Court recognized that in this case, because of a settlement, Mr. Law didn’t have any debts to discharge. In most bankruptcy cases, however, this would be a big stick.)
  • The bankruptcy court can impose sanctions on a debtor for bad faith litigation tactics. It won’t take much to put Mr. Law in this category.
  • A debtor who commits fraud can be subject to criminal prosecution, and possibly go to jail for up to five years.

Can a Lender Take Your Mortgage Statements Hostage to Force You to Reaffirm?

HASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I filed Chapter 7 bankruptcy in California the spring of 2013. I have a first and second mortgage on my home. Although it was, and still is, underwater, I want to keep it. My lawyer said I didn’t need to do anything in the bankruptcy other than continue making payments on both loans. 

My mortgage payments have not been appearing on my credit report. And my mortgage lender recently stopped sending monthly mortgage statements. When I called, the lender told me that because I didn’t reaffirm the debt in my bankruptcy, it cannot send mortgage statements or report my payments to the credit bureaus. 

The lender said that the only way to remedy this is to reopen my bankruptcy and reaffirm the loan. Did my lawyer mess up? 

Carol  

Dear Carol,

Your lawyer did nothing wrong. Here’s why.

Courts Don’t Like Home Loan Reaffirmations in Bankruptcy 

When you sign a reaffirmation agreement in bankruptcy, you agree to resume personal liability on a debt that the bankruptcy would have otherwise wiped out.

In California, most bankruptcy judges routinely refuse to approve the reaffirmation of mortgages. Bankruptcy judges don’t want people to saddle themselves with debt loads that were set to be discharged in bankruptcy. Most judges believe that it’s not in anyone’s best interest to reaffirm a mortgage. For the most part, reaffirmation agreements are unnecessary if you want to keep your home – if you keep paying your loan on time, you can keep the home.

If you don’t reaffirm, your payments won’t appear on your credit report. But the courts are more concerned with keeping everyone out of future debt trouble than with helping them get back into it.

Why It’s Usually Not a Good Idea to Reaffirm Your Mortgage

The danger of reaffirming is that if you later change your mind about keeping the house, or fall behind on payments and lose your home to foreclosure, you’ll be on the hook for a deficiency.

What’s a deficiency? If your home is underwater and you lose it to foreclosure, the difference between the sale proceeds from the foreclosure and what you still owe on your mortgages is called the deficiency. (Get details on how deficiencies work.)

In most situations, California law does not allow a mortgage lender to come after you for a deficiency on a first mortgage of your residence (but there are exceptions). Not so for the second mortgage. The mortgage lender can sue you to recover the deficiency and then once it gets a judgment, garnish your wages, levy your bank account, and more. (Learn more in Deficiency Judgments After Foreclosure in California.)

Your bankruptcy wiped out your personal liability on both the first and second mortgages – so the lender cannot come after you for a deficiency if you later lose the home to foreclosure. It would not have been in your best interest to reaffirm those loans in the bankruptcy, because then you would be liable for a deficiency. Of course, it would have been in your mortgage company’s best interest for you to reaffirm.

Your Lender Is Holding Your Mortgage Statements Hostage to Force You to Reaffirm

You say your mortgage company recently stopped sending you statements. If it couldn’t send statements because you didn’t reaffirm the mortgage, then why was it able to send statements from the spring or 2013 up until now? Obviously, your lender can send statements, if it chooses to.

And thanks to a new federal law, your mortgage lender might be required to send you periodical mortgage statements. There are exceptions to this new rule though.  (To learn more, see Nolo’s article The Periodic Statement Rule: Monthly Mortgage Statement Requirements.)

What Can You Do?

Your mortgage company has stopped sending statements in order to coerce you into reaffirming your loan. Nice people, huh?

I suggest you send a letter to your mortgage company referring to the periodic statement rule and requesting that it comply with the rule and start sending mortgage statements. You can tell the company that if it doesn’t comply with the rule, you’ll submit a complaint with the Consumer Financial Protection Bureau.

If that fails, talk to a lawyer.

-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 Landlord Post a Notice That I’ve Filed for Bankruptcy?

Closed_Restaurant_iStockASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I filed a Chapter 7 bankruptcy and listed the debt I owed to my restaurant’s landlord. I voluntarily returned the premises to the landlord and got a discharge in Chapter 7 shortly thereafter. The landlord took possession of the premises and posted a notice on the window of the restaurant that says, “John L. filed bankruptcy and is no longer here.” He also taped a copy of my bankruptcy petition and schedules to the restaurant’s window. Can I do anything to make him take the notice down? It’s humiliating to have my former customers see this. I have tried to be reasonable, but he is a jerk. 

Sincerely, 

John 

Dear John,

Oh, I so agree with you. The guy sounds like a real jerk. Unfortunately, you can’t do anything legally to make him take the notice down, but his actions may make it harder for him to rent the place in the future.

Your Landlord Did Not Violate the Bankruptcy Discharge

A creditor violates the bankruptcy discharge when it tries to collect a debt that was discharged in bankruptcy. Although your bankruptcy discharged the debt you owed to the landlord, the landlord hasn’t done anything to try to get you to pay the debt.

If the landlord sent you a letter offering to take down the bankruptcy notice in exchange for you paying what you previously owed, then you’d have a “smoking gun” that you could use to prove that the landlord was trying to collect on the discharged debt. But without any collection attempts, the landlord hasn’t violated the discharge order and you can’t take any legal action to make him remove the notice.

Your Landlord Might Have Trouble Renting the Building

If it’s any consolation, though, your landlord’s actions may make it difficult for him to rent the space. When they see the posted notice, prospective tenants will see what a jerk the guy is. As you know, running a restaurant is hard enough without constant warfare with the landlord. A prospective tenant is likely to ask, “Do I really want to rent from a hothead like this?”

I think the place will probably stay empty until the landlord takes down the bankruptcy papers, which means he loses a month’s rent for every month he keeps the notice up.

-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.

Can I Wipe Out City Fines in Bankruptcy?

Alarm Bell over whiteASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

The Case of the False Alarm

Dear Leon, 

I’m getting ready to file bankruptcy. I have a small plumbing business. I owe money to the city for several fines incurred because police responded to false burglar alarms at my shop. Can I wipe out these fines in bankruptcy?  

Travis

Dear Travis,

Good question – the answer could go either way. Whether you can discharge the city fines in your Chapter 7 bankruptcy depends on how the municipal ordinance is worded and how the penalty amount was determined.

Most Government Fines Cannot Be Discharged in Bankruptcy

Ordinarily, fines and penalties owed to a government entity are automatically nondischargeable in bankruptcy; the government entity doesn’t have to file of a complaint or objection to prevent their discharge.  (Learn more about the bankruptcy discharge.)

Exception: Compensation for Actual Pecuniary Loss

However, there is an important exception to this rule. If the government fine is meant to compensate for an “actual pecuniary loss” rather than to penalize the business, then it is dischargeable. In other words, you can wipe out the fines if the government was simply passing on to you its actual cost of responding to the false alarms.

A few examples will demonstrate how this works.

Example 1. Say the fine is $200, and that $200 is the actual average cost incurred by the city to respond to a false alarm. In this case, the full amount of the fine goes towards compensating the government for its actual loss. This fine would be dischargeable.

Example 2. Say the fine is $1,000, but the city’s actual cost of responding to a false alarm is only $200. In this case, the fine is a penalty, and is not dischargeable in bankruptcy.

-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 the IRS and Student Loan Creditors Collect From Me When I’m on SSI?

Erasing DebtASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I am writing for a friend who doesn’t speak English.  He is worried about creditors levying his bank account to collect two old debts (a student loan and a tax debt). Should he file for bankruptcy? 

Juan is 61 years old and recently started receiving Supplemental Security Income (SSI). He will qualify for Social Security benefits soon. The student loan debt is very old (30 years) and is now $18,000 but was originally around $8,000. He hasn’t paid the loan for a long time and the creditor told him they “can take his Social Security or his SSI.” 

The second debt is old federal income taxes, around $10,000. He has failed to file tax returns for many years (perhaps as many as ten), but he has had little or no income during the same period. He wants to know if the IRS can take some or all of his SSI or later his Social Security for unpaid taxes. 

Thanks in advance for your expertise,  

Manny

Dear Manny,

Based on what you’ve told me, Juan can most likely get rid of his student loan debt because he is totally and permanently disabled. And it is almost certain that he doesn’t have enough income for the IRS to take anything from him for the old tax debt. Bankruptcy won’t be necessary.

Discharging Student Loans Based on Total and Permanent Disability

There are basically two types of student loans – subsidized (often called federal student loans) and unsubsidized (called private student loans). Subsidized loans are made or guaranteed by governmental entities. They subsidize the interest rate so that the loan interest will be less than what private lenders normally charge. Unsubsidized student loans are made by private banks. They usually charge an interest rate that is higher than subsidized loans, but still less than ordinary consumer loans.

I am sure that Juan has a subsidized loan. When he got his student loan 30 years ago, private unsubsidized loans were basically unheard of.

The distinction is important for Juan. Lenders of subsidized loans are subject to federal regulations that allow for the loan balance to be forgiven if the borrower is totally and permanently disabled, and without financial means to pay the loan. Because Juan is 61 years old and receiving SSI, he must have already convinced the Social Security Administration that he has a total, permanent disability, and lack of any other income.

How to Cancel a Student Loan Due to Disability

If Juan’s loan is indeed subsidized, he can apply online here:  www.disabilitydischarge.com.  You can submit your SSI award letter to prove you are disabled if the award says your review is not sooner than five years. Otherwise, you will need to get a letter from your doctor. (To learn more about canceling student loans because of disability, see Nolo’s article Canceling Student Loans: Permanent Disability or Death.)

Getting Rid of Unsubsidized Student Loans

If Juan has an unsubsidized loan, he is out of luck. Private lenders normally will not forgive a loan. However, in this situation he might be able to discharge the loan in bankruptcy. While wiping out a student loan in bankruptcy is difficult, lately more and more courts are discharging loans like Juan’s – very old loans where the debtor is elderly and disabled and has no hope of earning income in the future. Unfortunately, Juan would likely need an attorney to help him do this, and it sounds like he doesn’t have the money to pay what could become very high legal fees to fight with the student loan collectors.

IRS Collection Standards: When the IRS Cannot Take Your Income 

Now let’s deal with Uncle Sam, the good old IRS. According to the website of the IRS Taxpayer Advocate, the IRS can take a person’s Social Security benefits in order to repay tax debts. However, as the advocate’s website also states, the IRS must allow the tax payer to retain enough money to cover modest basic necessities. These living expense allowances are called Collection Financial Standards.

I am certain that Juan’s SSI benefit does not leave him enough to pay for basic necessities pursuant to the Collection Financial Standards. His income won’t even come close to exceeding the amount of money he is legally allowed to keep.

Juan should immediately contact the IRS and ask them to mark his account as “current uncollectable status.” They will verify his income, match it up to the living expense allowances in their collection standards, and see that his income is below the level they are allowed to collect from. It is a process that can be done on the telephone, and they will do the form for him.

Let’s recap. Juan should request forgiveness of his student loan on the grounds of total, permanent disability. He should also contact the IRS and request “current uncollectable status.”

Juan won’t need to file for bankruptcy.

— 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+

If I Had a Hammer: Keeping Tools of the Trade After Bankruptcy

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I filed bankruptcy last year. I work as a mechanic and use my own tools. One of my creditors is a company that sells tools to mechanics on credit. I bought tools from this company and made payments to them for several years, occasionally buying something new from them. 

Because of financial difficulties, I stopped making payments and the company sued me in small claims court. I never went to court because I filed bankruptcy and got a discharge.

Now the tool company is demanding that I pay off my entire balance on the account all at once, or else it will repossess all the tools I bought from them. Can the company do that? I thought my bankruptcy put me in the clear because they never showed up to object. Isn’t there a law saying that a workman’s tools are protected?

Help!

Jose in California

Dear Jose,

I have seen this problem many times. In fact, I’m sure I can correctly guess which tool company you are talking about.

Your bankruptcy did not wipe out the tool company’s right to repossess your tools. However, the company’s decision to sue you in small claims court probably did – so that it cannot now repossess your tools. Read on to learn how this all works.

Bankruptcy Gets Rid of Personal Liability for Debt, But Not the Tool Company’s Security Interest in Your Tools

If you examine your agreement with the tool company, the paperwork will probably say that you gave the tool company a security interest in the tools until they had been paid for. This is just like when you buy a car and get a car loan – you don’t get full title to the car until it is paid for.

A valid security agreement (like a car loan), survives a bankruptcy discharge. While you are no longer personally liable for the tool debt (which means the tool company cannot sue you for reimbursement), the company can repossess the tools if you don’t pay.

There is an exemption that helps to protect your tools of the trade when you file bankruptcy. But that exemption only applies to tools that you already own or that you have equity in.

You Can Keep the Tools That You Have Already Paid Off

Under California law, each payment you make on a retail installment contract should be applied to the oldest thing that you purchased. After the oldest purchase gets paid off, the payments are applied to the next oldest thing in the time line, and so on.

If you made payments for any length of time, it is possible that some of the oldest purchases have been paid for. The tool company has no right to repossess anything that has already been paid for. If say, your earliest purchase was an expensive tool set, maybe it is not fully paid for. But also, it may be partially paid for because all your payments were applied against the price for just that set (after paying interest). If so, you can pay just the remaining balance for that specific purchase and keep that tool set, instead of having to pay off the entire accrued debt that includes subsequent purchases.

The Tool Company May Be Barred From Repossessing Your Tools

However, because the tool company sued you  before your bankruptcy, it cannot now try to repossess your tools. Here’s why.

The California Retail Installment Sales Act says that if you don’t pay, a creditor may repossess the merchandise or sue you for the balance due. The law says a creditor must choose one or the other remedy — we lawyers call this an election of remedies.

When the tool company sued you, it chose to seek a money judgment against you in court. In doing so, it forfeited its right to repossess the tools.

Guess what? It sounds like you can keep the tools without paying them a dime.

I suggest you get a lawyer to write a reply to the tool company or to help you get the company off your back.

-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+

 

The National Mortgage Settlement and Lien Strip Poker

poker chipsASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I am in Chapter 13 bankruptcy with a confirmed plan, and I did a lien strip to remove my second mortgage (it is a second deed of trust with Bank of America). I just got a letter from BofA saying they are forgiving my second mortgage, they will send documents showing the loan is forgiven, and there is more nothing I need to do. My bankruptcy lawyer says that I’m not supposed to get the lien strip until I complete my five year Chapter 13 plan and get a discharge, and that therefore I must finish my Chapter 13 case in order to gain the benefit of the lien strip.  Is the bank writing this off now rather than waiting the five years? 

I just want to get a second opinion because it’s confusing.  

Thanks, 

Molly

Why BofA Forgave Your Loan

Good Golly Miss Molly!

You’ve lucked out. And I get to answer a fun question.

Of course, I have not seen the actual letter you received. However, it sounds exactly like letters many of my own clients have received. If it is, your second mortgage lender has indeed decided to give up now, instead of waiting the five years. Assuming I’m right, I’ll explain why this happened. I’ll also explain where it puts you. (But you should still take all the paperwork to a lawyer who is familiar with this.)

The National Mortgage Settlement: Banks Must Pay Owe $10 Billion for Mortgage Reduction

The Bank of America, along with Ally, Wells Fargo and several other banks are parties to the National Mortgage Settlement (NMS), a legal settlement requiring them to forgive a certain amount of home mortgage debt, including second mortgages. The settlement allows the banks to decide which loans to forgive, but the loans must total $10 billion. (You can learn more about the NMS at http://nationalmortgagesettlement.com/.)

Think about this settlement as if it were a debt that the banks owe to the public. They pay the debt by forgiving loans totaling $10 billion. After they do that, the debt is paid. Sounds like a good deal for consumers, doesn’t it?

Did Government Lawyers Get a Good Deal for Homeowners?

In agreeing to this settlement, the banks (but maybe not the government) realized that they could get full credit towards paying the $10 billion they owed by forgiving loans that were uncollectable anyway. Think about your loan. You’re not making payments on your loan. Throughyour bankruptcy, you are on track to discharge your personal liability for the loan. And your loan is already subject to a lien strip order. From the bank’s point of view, their chances of collecting money on your loan are slim to none.

Forgiving an uncollectable loan, just like yours is, makes good sense for the banks. It is similar to you giving a bag of old clothes to charity and getting a tax deduction for worthless stuff you were about to put in the trash.

If You Were a Bank, Which Loans Would You Forgive?

You would certainly keep loans that customers pay on time. That improves your balance sheet and keeps the bank healthy.

Because you must forgive some loans, you would probably choose loans that are in default. Even better, you would look for defaulted loans that are already involved in bankruptcy with a lien strip.

Small wonder why the bank picked your loan to forgive. For them, using your loan to pay off a bet was like drawing four aces in poker. Forgiving your loan (and the loans of others) makes the public think they are swell guys, but in your case (and many others), it doesn’t really cost them anything. They weren’t going to get paid on that bag of old loans anyway. But forgiving uncollectable loans pays off the settlement.

All in all, your bank is likely very happy with this deal. It gets to pay the settlement with a big bag of trash, instead of paying with real money. It also gets a tax deduction, just like you do for donating a bag of old clothes.

Here’s Where This Leaves You

Do you still need your Chapter 13 bankruptcy?  If the only reason you filed for Chapter 13 bankruptcy was to strip off your second mortgage, then perhaps you can dismiss the case and get out of bankruptcy right now. (But don’t do that until the lender records a full reconveyance of the deed of trust and a bankruptcy lawyer gives you the OK to dismiss.)

If you still have other debts to discharge, you may be able to convert your Chapter 13 to a Chapter 7 case.

A good reason to stay in your Chapter 13 is to cure arrearages that you might owe on your first mortgage. The forgiveness of your second mortgage does not alter what you owe on your first mortgage. Your Chapter 13 bankruptcy might also be managing debts that are nondischargeable, like taxes.

A knowledgeable bankruptcy expert can guide you on making the best choices.

– 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+

Payday Loan Terror Tactics

Devil with piggybankASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I plan on filing for bankruptcy soon. I have a few payday loans that I have been rolling over and paying interest on. The payday loan people said if I try to stop payment on my check to them, it is the same as writing a bad check and they will have the district attorney press charges against me. If I don’t pay them am I going to be in serious trouble? They also said I can’t discharge a payday loan in bankruptcy. I am so worried that I can’t sleep.  

Thanks, 

Steve 

Dear Steve,

Your failure to pay the payday loan “people” (I use that term loosely), will not get you in trouble. I am assuming that your bankruptcy case will be filed very soon.

How a Payday Loan Works

Here’s how a payday loan works. You give the payday loan company a post-dated check (the payday loan company actually creates an electronic check for you with a specific check number, just as if it were a paper check.) In return it gives you cash in an amount less than the face value of the check. The payday loan company holds the check for a few weeks (often until your payday). At this time, you must pay the company the face value of the check, usually by allowing it to cash the check. If you can’t make good on the check, the lender requires you to pay another fee.

(Here are some reasons why it’s best to avoid payday loans.)

Stopping Payment on a Payday Loan Check Is Not Bad Check Fraud

Putting a stop payment order on a post-dated check you gave to a payday loan company is not the same as writing a bad check. A “bad check” is a check that you knew was not good at the time you wrote it, but the payee did not. In contrast, when you give a post-dated check to a payday loan company as security for a payday loan, both you and the company know the check was not good on the day you gave it.

Here’s an example. I give a bad check at the grocery store and walk out with a bag of groceries. I might face prosecution for writing a bad check if it can be shown that I knew I had no money in the account when I wrote the check. A payday loan is different. The company knew you had no money to back up your check on the date you borrowed the money. So long as you had the honest belief at the time you borrowed the money that you would repay it when due, there has been no wrongdoing. In fact, the payday loan people consented to your delay in payment by letting you pay extra interest to roll over the loans.

The Payday Folks Lied to Scare You. Now Get Some Sleep

Doctors have recently proven that sleep is good for you. Get some. The payday folks have lied to scare you. They are the ones who should be losing sleep. In your case I don’t think they will ever get paid.

In my 34 years of bankruptcy law experience, I have never seen a payday lender so much as try to challenge anyone’s bankruptcy.

Go ahead and stop payment on the checks that you gave to the payday loan “people.” Tell them I said “Merry Christmas.”

– 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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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+