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10 Top Tricks Of The Lending Industry

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consumer credit

The tricks lenders use to sell you a bad loan are limited only by the imagination of the lender. And they’re all conceived with one end in mind — big profits, not helping you.

And, unlike Pinocchio’s ever-growing nose,  the consumer doesn’t see any tell-tale signs that warn of deception at work when credit’s being peddled.

Here are 10 widely used tricks to  get you to make a bad deal for credit.

1. YOUR CREDIT’S BAD.

So you have to take this lousy deal.

A blemished credit record is no reason to accept credit at 25%, 50%, or even several hundred percent annual interest. Or “low-interest” credit scams that tack on big fees for pre-payment, late payment, documents or credit reports.

Even folks with tarnished credit can get loans and credit cards that don’t charge an arm and a leg to borrow. Shop around!

2. YOUR CREDIT’S GOOD.

So we’re offering you all these ‘pre-approved’ credit cards.

Sometimes the same debt pushers who tell you one day that your credit’s no good will stuff your mailbox the next day with “pre-approved” credit cards, home equity loans and other high-cost money.

Debt pushers throw loans and credit cards at unemployed college students, people fresh out of bankruptcy and others who can’t afford them.

So don’t be flattered when someone offers you credit. Credit is the business of making money off your debt – off you. Make sure it’s both necessary and fair before accepting any loan.

3. LOW MONTHLY PAYMENTS!

Forever.

Paying $100 a month for 24 months costs a lot more than paying $150 a month for 12 months. And minimum monthly payments on credit card bills and such can have you paying interest on a take-out pizza for decades!

So don’t base your borrowing decisions on low-monthly-payments alone. Low monthly payments are great – for the debt pushers. They’re practically pure interest and they can stretch your payments out endlessly.

4. ACTUAL COSTS MAY VARY.

By hundreds or thousands of dollars.

If it looks too good to be true, it probably is.

  • 0% interest to start.
  • Bounced check “protection.”
  • Buy now – pay later!
  • Low initial costs and extra “protection” are often just smoke screens.

The question to ask is: “What will this cost me overall?” Because fees and penalties are among the sneakiest credit-pusher games.

Some “low interest” credit cards permanently rocket up to 30 or 40 percent after a single late payment. Or if you spend just $1 over your credit limit. Or if you missed or paid late on another bill from another lender!

Credit-pusher traps are horrific and, worse, they’re often perfectly legal.

5. THESE ARE THE RULES.

For now. We can change them whenever we want.

Standard contract law just doesn’t apply. Loans and credit cards can simply send you a notice with the monthly statement that they’re changing the rate, the due date, the fees and penalties, or the amount of time you have to pay off the loan. Simple as that.

Missing this small single notice locks borrowers into terms they never agreed to.

6. WE NEED THESE PAPERS BACK TODAY.

Sorry. No time to take them to your lawyer.

A rush job is a sure sign of trouble.

If you can’t take a loan contract home or to an attorney, walk away. There’s something there they don’t want you to see.

7. YOU’RE ONE OF US.

We’re just like you. Trust us.

  • Seniors to seniors.
  • Military to military.
  • African-American to African-American.
  • Christian to Christian.

Credit pushers are as conniving in their recruitment as they are in their sales. It’s called affinity marketing.

But just because the salesperson looks like you doesn’t mean they have your interests in mind. Affinity marketers are another way to distract borrowers from the price and terms of a bad deal.

8. THE FINE PRINT SAYS IT ALL.

We win. You lose.

The fine print in almost every consumer agreement – from phone and internet to college loans and employment contracts — says that if you get into a dispute with the vendor or lender you have to settle it their way, through binding mandatory arbitration.

But the arbitration game is rigged. The other side often picks who does the arbitrating – and it may cost you lots of money to even get the case heard.

There are so many arbitration clauses out there that it’s hard to avoid them. But if you see one you should take your business elsewhere.

9. GET YOUR CASH NOW!

And don’t pay attention to what it costs.

Fast-cash places like “payday lenders” and automobile “title pawn” shops give fast loans – so fast that the borrower never sees what are often the worst deals that even credit pushers have to offer.

Even a hundred-dollar loan from these vultures can put a person on a treadmill that can ruin a family’s finances for years.

And watch out at income tax time for “Rapid Refunds” or “Refund Anticipation Loans”- that’s just borrowing your own tax-refund money at ridiculously high rates!

10. LIVE LIFE THE WAY YOU WANT.

And spend years paying for it.

Take that vacation! Buy those fancy wheels! If someone’s willing to lend you the money then surely you can afford it, yes?

Well, maybe not… Don’t let those who will profit from your payments talk you into deals by making it look like you’ve got the power.

To tell the truth

This list  comes from material put out ten years ago by Americans for Fairness in Lending.  Their copyright notice asked that it be shared.

They are no longer around, dissolved, I suspect, when the Dodd Frank bill passed Congress.  Our work here is done.

Dodd Frank created the Consumer Financial Protection Bureau, Elizabeth Warren’s idea to create a governmental counter-weight and watch dog on those who sell to consumers.

Just recently the CFPB instituted a rule concerning mandatory arbitration clauses.  See Trick 8 above.

The rule prohibits covered businesses selling to consumers from including fine print in their contracts that bar the consumer from joining a class action suits.

Class actions are usually the only way that consumers ripped off in small amounts can effectively get redress for their financial injuries.  Which of course, big businesses want to be free to inflict, without worrying about pesky consumer lawyers.

But that’s my cynicism, or is it experience, showing.

CFPB or no, these lender tricks work, and will continue to work to snare the unsuspecting or the desperate.

So, be a smart consumer.  Hone your spidey senses for these credit pitches and proceed with caution.

Image courtesy of Tristan Schmurr

Life After Bankruptcy: What’s It Really Like?

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life after bankruptcyWhat’s life really like after bankruptcy?

Everyone suffering through financial difficulties wants to know whether filing bankruptcy just trades one form of pain for another.

Will you be shut out of the American dream forever?  Unable to function in a world centered on electronic payments?

Here’s a collection of our best stories and advice on the world of your fresh start.

Your credit heals

Damaged credit improves over time, just like wounds heal. A credit report is not like a wine glass that once it’s broken, it’s gone forever.

 

after bankruptcy8 Tasks after bankruptcy

You’ve still got work to do after your bankruptcy to enjoy your fresh start.  Figure out where you are, money wise, and apply the lessons of the debtor education class you took to get the discharge.

 

after bankruptcyRenter to homeowner
Even with generous California exemptions, this aging client had nothing coming out of bankruptcy because she had nothing going in. Three years later, she’s a homeowner.

 

debts after bankruptcyDealing with debts that survive bankruptcy

A few unsecured debts can’t be discharged in bankruptcy; it’s a short list.  Some liens are your assets remain a charge on the collateral for that lien, but not on your new acquisitions.

 

car loan after bankruptcyGetting new wheels
How do you hold on to your ride, or replace your aging car after bankruptcy? Understand the impact of a shedding debts through bankruptcy.

 

bankruptcy discharge has teethDefending your discharge

The bankruptcy discharge is a federal court order;  it has teeth.  If creditors ignore your right to be free of collection efforts, you may have to bite back.

 

life after bankruptcyBankruptcy can be a life-changing event, for the positive

Life after bankruptcy can be what you make it.  You get a chance to make some new choices and to strip some sources of stress from your life.  How will you color it in?

More

Is it better to just keep making minimum payments?

Secret alternative to bankruptcy

How debt makes you dumb

DIK Remedies For Foreclosure Breed Bankruptcy Tragedies

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Warning: virulent outbreak of do-it-yourself bankruptcies all around.

Symptoms:  panic over prospect of foreclosure

Supposed remedy:  file your own skeleton Chapter 13 bankruptcy

Prognosis: enjoy the stay for about 2 weeks, followed by foreclosure relapse

Homeowners facing foreclosure

Three different would-be clients called in a 10 day period this month, facing foreclosure.  And all three had the same tragic, but avoidable story.

I was on the trail of an epidemic.

Each had filed an emergency bankruptcy petition to address a looming foreclosure.  They then did nothing to file the balance of the schedules necessary in their cases.

How dismissal differs from discharge

Without schedules,  the case was dismissed, automatically. No court hearing, just tossed out for failure to follow the order that says “you’ve got two weeks to file the rest of the papers”.

And they did the same thing all over again a little bit later, again filing only the bare minimum of paperwork, before the second case is dismissed.

With two cases dismissed in the past 12 months, there will be no automatic stay in a third case.  The  bankruptcy won’t prevent the lender from foreclosing.

As a bankruptcy attorney, my bag of remedies was essentially empty.

Why homeowners sucked in

I understand the appeal of the automatic stay: it’s a lynch-pin of bankruptcy relief.

The automatic stay is powerful:  it applies to all creditors, it makes actions in violation of the stay void, and it becomes effective instantly upon filing bankruptcy.

The necessary paperwork to initiate a case is minimal, and the filing fee is just over $300.

Pretty seductive if you are panicked about losing your home.

Multiple filings labeled abuse

The pattern of debtors filing, getting dismissed, and filing again irked lawmakers back when the last round of bankruptcy amendments passed Congress in 2005.

After “reform”, every debtor gets a stay in their case.

File a second case within 12 months after the first was dismissed, and the stay lasts only 30 days.  The court will consider extending the stay if the debtor applies and gets an order within that 30 days.

File a third case, after two dismissals within 12 months, and there simply is no stay.

Chapter 13 can save your home

The tragedy in all of this is that Chapter 13 works, if you want more than just a two week stay.  Few problems that threaten foreclosure can be solved in two weeks.

How 13 can save your home

Understand that letting your case be dismissed cripples your  ability  to use bankruptcy in another case.

More

What should bankruptcy cost

How to interview a bankruptcy lawyer

Don’t wait til the day before foreclosure

Image courtesy of torange.biz.

What Happens To Liens In Bankruptcy?

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While most liens survive a bankruptcy discharge, some liens get wiped out.

Think of mortgages, tax liens, and judgment liens.

Each of them is a lien, but some get different treatment in bankruptcy.

Some liens can even be reduced or eliminated .

Lien basics

A lien gives the creditor holding the lien an interest in the debtor’s property, real or personal.  With that interest comes the right to compel a sale of the property to pay the debt secured by the lien.

Liens come in three varieties:  voluntary, judicial, and statutory.

Ordinarily, the lien must be paid off before any of the value in the collateral goes to the owner of the property.

And while you’re stuck with some liens after bankruptcy, some can be whittled down to size, and some can be eliminated altogether when you file bankruptcy.

But first, we’ve got to know which kind of lien we’re dealing with.

Voluntary liens

Voluntary liens are ones that you agree to create in favor of a creditor.  A mortgage is a classic example, as is the lender’s lien on your car.

In business, a lender often insists on a lien on business assets to secure repayment of a loan.  The lien puts the lender ahead of other unsecured creditors in the fight to be paid.

Judicial liens

Judicial liens are, not surprisingly, created by judges.  They result from court judgments or orders creating temporary liens during the course of a lawsuit.

State law determines whether a judgment automatically becomes a judicial lien.  In California, the winning party must take an additional step of recording an abstract of judgment to create a lien on real estate in that county.

Statutory liens

Statutory liens are created by law.  Tax liens are ones we encounter most frequently.

Provisions of the tax statutes say that unpaid taxes become a lien on all the taxpayer’s assets.

Bankruptcy changes the rules

A cornerstone proposition in bankruptcy law says that a lien is only a “secured claim” to the extent that there is value in the asset for the lien to attach to.

A creditor may have a lien with a face value of $100,000.  But if the property it attaches to had only $15,000 of available equity, the lien holder has a secured claim for $15,000 and an unsecured claim for $85,000.

Another cornerstone of bankruptcy law says that, without additional proceedings in bankruptcy court, liens survive bankruptcy as a charge on the property they attach to.

So, we really want to know which liens are vulnerable to being voided or whittled down by a proceeding in bankruptcy and in which chapter of bankruptcy those proceedings can be brought.

Judicial liens lose to exemptions

In any chapter of bankruptcy, the debtor can avoid (invalidate) a judicial lien that impairs an exemption to which the debtor is entitled.  11 USC 522(f).

Depending on the numbers, the lien can be eliminated altogether if there is not enough value in the asset to pay the exemption and have anything left for the lien.  Or, the judicial lien may be reduced as required so there is value to fund the exemption.

This works only for judicial liens.  Exemptions don’t protect assets from voluntary or statutory liens.

Chapter 13 smites worthless liens

Lienholders are at risk in Chapter 13, where the debtor is reorganizing his financial affairs, in ways they are not in Chapter 7.

Liens that aren’t secured claims ( that is, that don’t attach to value equal to the lien) can be voided at the completion of the payment plan.

With two exceptions, even voluntary liens, which are usually beyond altering, can be stripped down to collateral value.  The exceptions are

  • voluntary liens on a principal residence where the lien attaches to some value, and
  • purchase money liens created within 910 days of a bankruptcy filing to buy a vehicle.

In all other situations, a lien is worth only the value of the collateral that secures it.

So, huge tax liens get cut down to the value of the available collateral, and wiped out at plan’s end.  Totally unsecured deeds of trust or mortgages can be avoided.

You gotta appreciate the power of Chapter 13.

More

How Chapter 13 works

Understand tax liens in bankruptcy

Cutting the car loan down to size

When Your Bank Account Is Seized: California Action Plan

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bank levy

Time is short when you get a notice that a creditor has levied your bank account.

California has protections that may allow you to recover money that’s been seized.

But success in getting your money back depends on prompt action and following the procedures.

Bank levy basics

A creditor with a judgment is entitled to levy your bank account to collect the money you owe.

All about judgments

You have an offsetting right to keep some money by claiming exemptions.

A levy only catches the money that is in your account when the levy is served.  It doesn’t affect money deposited to the account later.

Your bank has few choices when a levy is served.  By law, it must hold the money in the account on the day the levy is served for the creditor.

And it must deliver to you a notice of the levy and information about your rights to claim exemptions.

What you can keep

Let’s assume that the money in the levied bank account consists of your wages.

California exemption law protects a minimum of 75% of take home pay.  A non-support creditor simply can’t reach the 75% that is exempt. Cal. Code of Civil Procedure 704.070.

If your wages were already garnished before they were paid to you, what you take home is exempt from further levy.

And, you may be able to protect more than 75% of your wages if you show that you need more than 75% to provide for yourself and your family.

Two new-in-2020 exemptions protect cash in the bank, whatever its source. CCP 704.220 shelters a month’s worth of living expenses pursuant to a state index. CCP 704.225 is broader, protecting cash necessary for the support of the debtor and his/her dependents.

California law grants absolute protection to the assets of and distributions from private retirement plans and retirement-focused profit sharing plans.  CCP 704.115.

Public retirement benefits are also exempt.  CCP 704.110.

Federal law protects Social Security.

Claiming funds exempt

Here’s what you need to do to contest the levy.

When a bank account is levied,  CCP 700.010 requires the levying officer to serve on the judgment debtor these documents:

  • the writ of execution (issued by the court)
  • a notice of the levy
  • a list of exemptions prepared by the Judicial Council

The last item, the list of exemptions, is your key to regaining some part of the bank balance if they are traceable to wages.

The notice of levy contains the critical instructions and the time line:

To claim an exemption, you complete the Claim of Exemption form and give it to the levying officer, typically the sheriff.  If you contend that the levied money is necessary for your support and for the support of your dependents, you also complete the Financial Statement.

The judgment creditor then has a choice.  It can agree that the levied funds are exempt and they are returned to you.  Or, the judgment creditor can set a hearing before a judge to challenge your claim of exemption.

Serve papers on time

The burden is on you as the judgment debtor to complete your clams of exemption and get them back to the levying officer on time.

A successful claim of exemption protects your funds from this levy.  While it may give the creditor some visibility into your finance, it doesn’t solve the bigger problem created by the judgment.

Consider consulting with a credit counseling agency or a bankruptcy lawyer to assess the bigger picture of your finances.  Even if the creditor has a judgment, the debt may still be dischargeable in bankruptcy.

More

Collection lawsuits in California

Property safe from creditors under California law

Myths about bankruptcy

Image © vladimirfloyd

Bankruptcy Alternatives Cost More, Deliver Less

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bankruptcy alternatives

Bankruptcy alternatives often suck.

The on-line story of one customer of a debt settlement company particularly sticks with me.

Using the “services” of this company, the poster now has six judgments of record and two garnishments in process. The debt settlement company, however, has its full fee.

One man I represented went to a debt management company before he found me.  The “plan” to get him out of debt was that he send the company 50% of his gross income (that’s before taxes and any other deductions) every month.

I have never seen a client who could keep body and soul together in the Bay Area on 50% of their gross income.

When his “plan” collapsed, he was meeting with a bankruptcy lawyer.  The debt management company was counting its fees.

Getting fat on fear

Such stories, and there are lots of them, are emblematic of the profit that debt settlement firms and credit management outfits make on the consumer’s fear of bankruptcy.

Most folks will do anything to avoid bankruptcy, either out of ignorance of how bankruptcy works or a values-driven preference for paying their debts.

Feed that fear and you profit.

Appeal to the inherent desire to do right by creditors, and you get your money before it’s obvious the debt is simply too large to pay off.

When is bankruptcy the best choice

Bankruptcy isn’t right or necessary for everyone, but it would improve the lives of a great many more working families than actually file.

My rules of thumb about when bankruptcy is best:

  • The older you are, the more likely you should file
  • The smaller your retirement savings, the more likely you should file
  • The larger your debts for recent taxes or family support, the more likely you should file
  • The greater your debts in general are to your income, the more likely you should file.

Do your get-out-of-debt homework

Everyone considering paying money to an organization promising to get them out of debt ought to see a bankruptcy lawyer before signing up with an alternative service.

A lawyer can tell you about  how bankruptcy would work for you and the risks in debt settlement.

myths about bankruptcy

Bankruptcy can often wipe out debt with no payment at all to  creditors and get you immediate relief without negative tax consequences.

People with high incomes or more assets than they can protect in Chapter 7 can reorganize their debt, frequently at a small fraction of the debt, through Chapter 13.

With a real understanding of  the alternatives to bankruptcy, there would be fewer of these sad stories.

More

When you want to pay your creditors in full

Why I love Chapter 13

Questions to ask a bankruptpy lawyer

Image courtesy of Flickr and Financial Match.

Life And Death of Debt In California

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statute of limitations on debt

CPR has its place when human life is involved. Human life is precious.

But when what’s dying is the legal right to collect a debt?   Not so fast.

You don’t want to breathe new life into an old debt that is legally dead.

Yet you can do that, unintentionally reviving a debt that is legally dead  by giving it new life when it’s approaching its life’s end.

California statute of limitations can be tricky.  I  originally intended in this post to explain the rules around the statutute of limitiations.  I wanted to show you how to keep from unwittingly extending your legal exposure to a debt.

I’ve concluded that the law is simply too complicated and evolving to provide a nuanced, reliable guide so you can avoid screw ups.

So, I’m adopting the Nancy Reagan approach to the statute of limitations.

Just Say No! 

NO, I don’t owe it.

NO, I won’t pay it.

While it may stretch the truth as to whether you owe it, it’s simple and safe.  It keeps you from adding to your exposure to old debts.

Admit nothing.

Don’t extend the statute of limitations

The statute of limitations allows enforcement of a legal right through the courts only if brought before the running of the statute.

Broad brush, you can extend your legal exposure to an old debt in two ways:

  • Make a payment on the debt
  • Admit that you owe the debt

Important to note that either of these ways of extending the life of a debt are acts that you, the person who owes the money, take.

The debt collector can’t extend the statute unilaterally.  Only by getting you to do something against your interests is the life of the debt prolonged. Here’s how they try to do it.

Payment breathes new life

Making a payment on the debt is putting your money where your mouth is:  you wouldn’t pay anything if you thought you didn’t owe money.

So payment is seen as proof that you owe the money.

Payment starts the statute of limitations clock running again, from the beginning.

That’s where the debt collector’s request for a “good faith” payment on a debt you can’t pay off at this time is so insidious.  The debt collector cares far less about the amount of that “good faith” payment than he does about the fact that you’ve just extended your legal exposure to the debt for an entirely new period.  What that period is we’ll discuss below.

Admitting the debt is fatal

An admission that you owe the debt, even without payment, can reset the SOL clock.

California law provides that only an admission of the debt in writing can extend the statute:

No acknowledgment or promise is sufficient evidence of a new or continuing contract, by which to take the case out of the operation of this title, unless the same is contained in some writing, signed by the party to be charged thereby, provided that any payment on account of principal or interest due on a promissory note made by the party to be charged shall be deemed a sufficient acknowledgment or promise of a continuing contract to stop, from time to time as any such payment is made, the running of the time within which an action may be commenced upon the principal sum or upon any installment of principal or interest due on such note, and to start the running of a new period of time, but no such payment of itself shall revive a cause of action once barred.  Code of Civil Procedure 360.

Yet there are precious few cases on the subject.

And while traditionally, the statute of limitations that applies to any collection suit was the law of the state where the defendant lives, recent cases make that less certain.  Topping off the uncertainty, the 9th Circuit Court of Appeals recently ruled that in bankruptcy, the statute of limitations of the state whose law applied to the contract controlled, not the shorter statute where the debtor lived.  Sterba

All of which makes saying nothing, or saying no, the safest course of action if you have an old debt that you can’t pay.

Why have a statute of limitations

Pubic policy says we want legal disputes resolved sooner rather than later.  If a lawsuit is involved,  we want the evidence  available and memories fresh.

It’s the legal version of  SNOOZE, YOU LOSE.

A debt collector or a debt buyer has the same statute of limitation as the original creditor.

When does the limitations clock start running

The SOL clock starts running on the limitations period upon the last activity on the debt.  That activity could be a payment on a debt;  it could be a charge on an open account.

If there are neither charges nor payments on a contract debt after that, the period runs for four years in California. 

Once the limitations period has run, the person who owes the debt has a slam-bang winner of a defense if the creditor files a lawsuit to collect. 

Cheat sheet on statute of limitations from the California Courts

More from the FTC on time barred debts.

More here on debt collection lawsuits

  What to do when you’ve been sued

Fighting back against wage garnishment

 

Debts To The Government: Can They Be Wiped Out

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Uncle Sam public domain

It’s easy to assume that debts owed to the federal government can’t be discharged in bankruptcy.

Easy, but wrong.

Just because the creditor is Uncle Sam doesn’t mean the debt can’t be wiped out in bankruptcy.

In fact, debts to the government range from freely dischargeable to not-in-this-lifetime nondischargeable.

Honesty required for discharge

All of the discussion that follows assumes that your debt to the government is honestly incurred, and is unsecured.

Secured debts, those for which there is a lien, generally survive a bankruptcy discharge.

So tax liens and SBA liens live beyond a Chapter 7 discharge.  

More on limits on tax liens after bankruptcy.

Debts dischargeable in bankruptcy

Income taxes for years more than three years before the bankruptcy filing are dischargeable.  You count the three years from the due date of the return.  If there is a tax lien, the lien survives on existing assets, but doesn’t attach to new property.  More on taxes in bankruptcy

Social Security overpayments  can be wiped out in bankruptcy.  After a bankruptcy filing, your current benefits are not subject to reduction on account of a prior overpayment.  More from SSA.

SBA loans are just loans, subject to discharge in bankruptcy.  The complication with SBA loans is that they are often secured.  It’s important to determine what assets, if any, are pledged to support the loan.  A bankruptcy discharge will prevent the SBA from suing you to collect its loan from your wages, savings or other assets;  the collateral you gave the lender when the loan was negotiated survives.

More on SBA loan guarantees

Student loans may be dischargeable

Government guaranteed student loans occupy the middle ground in our range of possibilities.  A student loan guaranteed by a governmental entity can be discharged if the borrower can show a bankruptcy judge that repayment would create an “undue hardship” on the debtor or the debtor’s dependents.  The standard is pretty tough.

Some bankruptcy courts will discharge part of a student loan.  Those courts find that repayment in full is a hardship, but partial repayment is possible without undue hardship.  The 9th circuit which includes California, is one of those circuits allowing partial discharge of student loans.

Government debts that survive bankruptcy

Fines and penalties owed to a government that are imposed to punish, rather than compensate, can’t be discharged in Chapter 7.  There is an exception for tax penalties:  if the tax is dischargeable or the event that triggered the penalty occurred more than three years ago, the penalty can be wiped out.  11 USC 523(a)(7).  In Chapter 13, all tax penalties are dischargeable.

Trust fund payroll taxes are never dischargeable in bankruptcy.  The trust fund portion of payroll taxes is the taxes withheld from the employee’s paycheck for payment to the government.  Officers of corporations who short the government for trust fund taxes can be personally liable for shortfall.

Military scholarships and incentive pay remain collectible despite bankruptcy.  Most of these exceptions make the debt non dischargeable for a period of years, shorter than the usual statute of limitations.  Here’s a more extensive list of governmental exceptions to bankruptcy discharge.

Non dischargeable debts in bankruptcy

Even if a debt is non dischargeable at the end of a bankruptcy case, some of the bankruptcy rules still apply.

Collection of non dischargeable debts is still stayed by the automatic stay.  The stay remains in place til the debtor is otherwise discharged, or until a bankruptcy judge lifts the stay as to that debt.

The statute of limitations still  controls how long a debt is legally enforceable.  The running of time on statute of limitation is suspended while the stay is in place, and sometimes for a specified additional period.  But just because a debt is not dischargeable in bankruptcy, applicable law may still allow it to die of old age.

What You Think About Chapter 13 Is Dead Wrong

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bankruptcy misunderstanding

The difference between bankruptcy’s Chapter 7 and Chapter 13 is often expressed this way:   

Liquidation: the process of turning assets into cash

Chapter 7 is a liquidation proceeding

Chapter 13 is a repayment plan

And therein lies the biggest misconception about Chapter 13: 

13 does not necessarily repay everything you owe.

It’s a repayment plan alright, but not necessarily a 100% repayment .

You may not pay much at all, to any creditor.  It depends.

How much you repay

The amount you repay to creditors through your plan is determined by comparing

Rough and dirty, you calculate the number for each of these factors, and your plan must pay the largest of the three tests.  That payment is spread over 3 to 5 years.

Which creditor gets 100%

Bankruptcy law gives special standing for repayment to two common kinds of creditors.

  • Family support (alimony, child support, or other Domestic Support Obligations)
  • Recent income taxes or payroll taxes

These creditors have a priority for payment,  ahead of all other unsecured creditors.  They get paid in full.  The interest that accrues on family support obligations even survives the Chapter 13 discharge.

Therefore, to get court approval of a plan, the plan payments must be sufficient to make these payments, along with any fees of the Chapter 13 trustee and any of your attorneys fees to be paid through the plan.

Your cosignors are protected

Chapter 13 has a special feature that permits a debtor to separately classify a debt cosigned by someone else.

That way, a Chapter 13 plan can provide for 100% payment of the cosigned debt, protecting the cosignor from collection action. And during the Chapter 13 payment period, the cosignor is protected by the automatic stay.

Unsecured creditors out of luck

The brutal truth is that general unsecured creditors holding medical bills, personal loans, judgments for money, and credit card debt may get nothing in Chapter 13.

That’s because the available money is paid first to priority claims and the costs of administration of the case.  So a debtor with little disposable income may propose a plan that pays only the costs of the plan and the priority creditors.

Chapter 13 makes creditors face reality

The strength of Chapter 13 is that it often forces unsecured creditors to accept that there simply isn’t enough money to pay their claim.

The bankruptcy schedules show it, and the bankruptcy judge enforces it.

It is that coercive effect that makes Chapter 13 so much more effective than debt settlement:  if the numbers support it, the plan can pay them little or nothing.

So, don’t be put off by the phrase “repayment plan”.

Chapter 13 pays creditors only what you can afford, over a limited period of time, in the order of the importance of the debt.

That’s why I love Chapter 13.

More

Debt settlement is a dud

How secured debt can scuttle a Chapter 13

What bankruptcy should cost

California Homestead Exemption: The Truth Isn’t What You Think

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patchwork

“They can’t take my house, whatever happens.  Right?”

The young man in my office “knew” how the California homestead works: he insisted that his home was exempt as a California homestead, even if he filed bankruptcy.

He “knew” that credit card debt was dischargeable.

And that “knowledge” lead to his conviction that , in bankruptcy, he could keep the house and ditch the credit card debt without payment.

Wrong.

In his mind, bits of legal truth got stitched together into a bankruptcy myth.  Let’s piece together the truth.

California homestead at work

True:  every California homeowner can claim a homestead in their principal residence.  CCP 704.720

UPDATE:California homestead increased

But:  the homestead is limited to a certain amount of value.  For the single guy sitting across my desk, that amount was $75,000.  Equity in his condo in excess of that isn’t protected by the homestead.

Worse, the homestead is only effective against certain kinds of creditors.  The tax liens that were of record for old tax years aren’t defeated by a state law homestead.   So the tax liens remain enforceable. *

Credit card debt is dischargeable

True:  unsecured credit card debt (not incurred by fraud) can be wiped out in bankruptcy.

But: the discharge speaks to whether the debt survives the bankruptcy and is enforceable afterwards.  Being dischargeable doesn’t mean that creditors don’t share in the bankruptcy distribution. So, if there is non exempt value, dischargeable debts share in the pool of money.

Asset value matters in bankruptcy

True:  every debtor can claim exemptions that protect the exempt amount from being paid out to creditors in the bankruptcy case.

But:  the asset value not protected by an exemption is available to pay the claims of creditors, as far as that value goes.  For most unsecured creditors, all they get from the debtor is their pro rata share of the non exempt property of the estate.   Any unpaid balance is discharged.

Bankruptcy truths

So when the bits of the law my client got right are expanded and seen as a whole,  any bankruptcy discharge was unlikely to result in paying less to his creditors. His house represented far more value than the debts, dischargeable and non dischargeable, that he owed.

Likely, in either Chapter 7 or Chapter 13, his creditors would get 100% of their claims.  In my view, any amount he might save in reducing the interest accruing on those claims to the bankruptcy interest rate would be eaten up by the legal fees to file the case, and the credit hit he would incur.

True story of huge savings on credit card debt

The one critical bankruptcy advantage might be the power of the automatic stay:  if the mortgage lender threatened a foreclosure before he could cure the secured arrears, bankruptcy could stop foreclosure long enough to either propose a Chapter 13 plan, or arrange family help to keep the house.

* In Chapter 13, the homeowner could strip a tax lien down to the value of the home after all senior liens were subtracted.  The stripped down lien would have to be paid in full through the plan.  The balance of the tax lien would be treated as an unsecured claim.

More

Bankruptcy myths abound

Everything you need to know about the California homestead exemption

Who gets paid first in bankruptcy

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