Transcript How to help someone who can’t pay his debts

How to help someone who
can’t pay his debts
From budgeting to bankruptcy
How to analyze the problem
• What can creditor legally do?
– Now, and down the road
• No lawsuit filed
– Convince debtor to pay
– Force debtor to pay
• Lawsuit filed, no judgment
– Pre judgment remedies
• Post-judgment remedies
Prejudgment remedies
Private parties
• Remedy
– Self help repossession
• Cars
• Furniture, appliances
– Bank set off
– Wage assignment
– Constant dunning
letters, collection calls
• Debtor response
– Refuse to surrender
• Don’t expose car
• Don’t let them in house
– Move account
– Revoke it
– If debt collector,
FDCPA. If not debtor
collector, just say no
Prejudgment remedies by
government - replies short of bk
• Recoupment of welfare or unemployment
benefits, and offset against federal benefit
payments
– Ask for waiver; negotiate payment plan
• Tax refund intercept
– Reduce tax withholding
• Federal administrative wage garnishment
• Drivers license suspension, boot on car
Post-judgment remedies
• Wage garnishment
• Non wage garnishment and third party
citations to discover assets
• Forced sale of real or personal property
• Orders entered after citation to discover
assets
Debtor defenses
• State court litigation
– Defense, don’t owe amount claimed.
– Counterclaims
– Sue third party, either in same lawsuit or
separate lawsuit
• Exemptions
– Claiming exemptions
– Maximize exemptions – planning
• Bankruptcy !?
Illinois exemptions
735 ILCS 5/12-1001 & 12-1006
•
•
•
•
Necessary clothing
Alimony & child support
Retirement plans or accounts – unlimited
Social security, UI & public assistance
– Includes earned income credit
• Principal residence owned in tenancy by
the entireties is exempt from unsecured
debts owed only by one spouse
Illinois Exemptions
735 ILCS 5/12-901 & 5/12-1001
• Homestead - $15,000 one; $30,000 two or
more
– Real or personal, owned or leased
• Wild card any personal property - $4,000
• One motor vehicle - $2,400
• Can stack unused wild card onto motor
vehicle exemption
Exemption issues
Limits on exemptions
• Exemptions don’t work against
– mortgage foreclosure
– Purchase money security interests
– Debts for child support or alimony
• Exemptions work
– Against unsecured debts
– against judgment liens as long as home
equity is less than exemption amount
Repayment options
• Voluntary agreements
– to repay one creditor
• Creditor may be required to allow repayment over
time
• US Dept of Education regulations on many student
loans give right to affordable repayment plans
– To repay many creditors
• Credit counseling/ debt management plans?
• Cf. Chapter 13
Repayment options
• Court ordered or supervised
• State Court
– Small claims cases – S. Ct. Rule 288
– Debtor agrees to pay vs. creditor agrees to
forbear if payment made
• Bankruptcy court
– Chapter 13
– Chapter 7 with reaffirmation of selected debts
Change of pace
• Be tactful if you go down this path
• Can client reduce expenses?
– Client may need help with budgeting, or in
cutting back on life style
– Client may be eligible for programs such as
Medicaid or AllKids
• How about increasing income?
– Second job? Get at tenant or boarder. Apply
for government benefits. Benefits check up?
Analysis when money is owed.
• Doing “nothing”
– The judgment proof client.
• FDCPA or judgment proof letter.
• Allay client fears
– The vulnerable client
• Minimize loss./ hardship
• Payment plan; refinancing
• Threat of bankruptcy as negotiating tactic
– Bankruptcy overreaction, not a credible threat
Is bankruptcy an option?
• Will debt be discharged?
• Will client lose non-exempt property, or have to
pay value of property to prevent loss?
• Will client be forced into Chapter 13 repayment
plan that is more expensive than just paying the
debt?
• Will cost of bankruptcy outweigh benefits?
– Filing fee, attorneys fees, administrative expenses
– Effect on cost of future credit
Traps for clients
• Fraudulent transfers
– Actual fraud
– Constructive fraud
• Preferences
– What are they? Cf. fraudulent transfers
• Failing to take full advantage of
exemptions
– Commingling exempt and non-exempt funds
More traps for clients
• Paying the wrong debts
– Unsecured instead of secured
– Dischargeable instead of non-dischargeable
– Low interest instead of high interest
– Balance transfers can have hidden fees
– Paying persistent creditors
• Transforming dischargeable debts into
nondischargeable debts
– E.g. paying taxes with credit card
Still more traps for clients
• Bankruptcy fraud
– Bankruptcy requires full disclosure
– While many past financial sins are forgiven,
must be completely honest during the
bankruptcy
• Throwing good money after bad
– Example – taking money out of 401(k) that is
not enough to avert bankruptcy
• Bad timing
Timing can be everything
Reasons to file sooner
•
Deadlines
• to stop foreclosure,
• Eviction for
nonpayment
• tax deeds,
• Loss of car
• sale
• 5/10/14 day notice
runs out
• Right to redeem
expires
• Before public or
private sale
More reasons to file sooner
• If ongoing garnishment or utilities are off
– every day counts a little bit
• If home equity is growing and will exceed
homestead exemption
– waiting only benefits creditors
• Involuntary transfer that can be set aside
as preferential or fraudulent transfer
– Can only go back so many days from filing bk
Timing – reasons to wait
• Expenses still exceed income
• No health insurance
• Recent credit card charges
• over $500 for luxury goods within 90 days
• Over $750 for cash advances within70 days
• Recent voluntary transfers
• Need to complete exemption planning
• Tax refund not yet received and spent down
• Income taxes owed will be dischargeable
Who can/ should file?
• Husband and wife can file joint petition
– Joint filing fee same as for individual
• But may not need to
– Co debtor stay may protect non filing spouse
– Only one is vulnerable; can file later if needed
• Heirs and other non-signers can file
– Debtor who owns property but didn’t sign
mortgage can file Chapter 13 to save
property
No right to dismiss Chapter 7
• There is no right to dismiss Chapter 7
case
• If debtor is caught hiding assets, etc. can
get worst of both worlds.
– No discharge
– Trustee takes assets and sells them
– May lose right to exemptions
Slogan of the day
• Bankruptcy should be a last resort, but not
a last minute decision
Purposes of Bankruptcy Code
• Fresh start
– For the honest but unfortunate debtor
• Who can’t afford to pay debts – see “means test”
• Reorganization (Chapters 11, 12, 13)
– Plan to pay at least some debts
– Individual debtor retains property
– Business can continue to operate and save
jobs
Key concepts
• Automatic Stay
– Protects debtor
– Protects property of the estate
• Property of the bankruptcy estate
– Broad definition– all property rights & interests
• Discharge
– Injunction against collection of debts
– Some debts may not be discharged
Automatic Stay
Overview
• Automatic
• Broad scope
– Related concept – extension of time
• When stay does not apply
• Relief from automatic stay
Extension of time
• Trustee has up to 60 days to take action if
the time for such action had not expired
when the case was filed. 11 USC §108(b)
• This can be used to get more time to
redeem property taxes
• Debtor may get more time by filing
Chapter 13.
Automatic Stay
Notable exceptions
• Criminal and regulatory actions
• Establishing paternity
• Establishing or modifying alimony or
support
• Collecting alimony or child support
• Post-petition debts
Exempt property
• Debtor keeps exempt property
• Property must be listed and claimed as
exempt
• Illinois has opted out of federal exemptions
• Debtor can claim
– Illinois exemptions
– Non bankruptcy federal exemptions
– complicated if moved from out of state in last
2 years
Discharge of debts
• Purpose – fresh start for debtor
• Discharge is injunction against collection
attempts
– Remedy for violation is contempt
• Doesn’t cover post-petition debts
• Must complete debtor education
Discharge
Fresh start
• Utility service
– Cannot be denied because of dischargeable
debt
– Must pay deposit but not old bill
– If stolen service, Chapter 13
• Drivers license
– Restored if suspended for nonpayment of
debt
• No discrimination by governmental units or
employers
Discharge
Exceptions to discharge
• Some debts are never discharged
– Creditor can collect once automatic stay ends,
does not need express permission from court
• Debts which are discharged unless
creditor takes timely action in bankruptcy
court
• Student loans are only discharged if
debtor proves undue hardship in
bankruptcy court
– Alternatives – loan consolidation, deferrals
Discharge
Debts that are never discharged
•
•
•
•
Child support and alimony
Criminal fines and restitution orders
Drunk driving resulting in personal injury
Trust fund taxes
Discharge
Debts that may be discharged
• Income taxes
~ > 3 years, 3 months & 15 days old, return filed
• Debts where creditor fails to timely object
– Fraud
– Theft, embezzlement, breach of fiduciary duty
– Willful and malicious injury
Discharge
Chapter 13 enhanced discharge
• Chapter 13 need not pay 100% of
unsecured debts
• Successful Chapter 13 discharges
– Civil fines
– Debts incurred to pay taxes
– Property settlements and division of debts
arising out of divorce
Discharge and secured debt
Only personal liability is discharged
• Personal liability on a debt is discharged
– Non filing co-obligors are still liable
• But valid liens on property survive
• Debtor not liable for any deficiency after
repossession or foreclosure
Secured debts
Chapter 7 – ways to retain property
• Avoid liens on some exempt property
– Judicial liens that impair exemptions
– Non purchase money liens on household goods
• Redemption (redemption lenders for cars)
– Has to be at retail value, not wholesale
• Reaffirmation on original terms
– As if bankruptcy never happened for this debt
Secured debt
Chapter 13 options
• “Cram down”
– If creditor is “under secured”
– Pay value of collateral, not amount of debt
– Plus interest – prime rate is starting point
• Can’t cram down most home mortgages
– Can cure past default and maintain current payments
• Can’t cram down
– cars bought within 910 days of filing
– personal property bought w/in 365 days
Serial filings – waiting periods
for getting another discharge
• Filing a Chapter 7 now, must wait
– 8 years since previous Chapter 7
– 6 years since previous Chapter 13
• Filing Chapter 13 now, no discharge if
– Chapter 7 within 4 years
– Chapter 13 within 2 years
• Measured from filing date to filing date
Case analysis – Chapter 7
• Liquidation analysis
– Is there non exempt property?
• Dischargeability analysis
– Debts that can never be discharged
– Debts that could be discharged in Chapter 13
• Secured debts, leases
– What property can debtor keep?
– Could debtor keep property in Chapter 13?
• Disposable income analysis
Case analysis
Chapter 13
• Debtor may want to file Chapter 13 even if
no discharge, to save property
• Unsecured debt that can be paid 100%
even when other debts are paid less
– Rent arrears if lease being assumed
– Utility service obtained by fraud or theft (only
the nondischargeable portion)
– Long term debts not in default (student loans)
Will bankruptcy succeed?
• Chapter 13
– Why will client be able to pay debts, when
couldn’t pay before? What is favorable
change in circumstance?
• Chapter 7
– If underlying problem is negative budget, will
client be in the same boat in a few years?
How to file
• Forms require full financial disclosure
• Credit counseling before filing case.
• “Emergency” filing can be done to beat
deadline
– minimal documents filed
– 15 days to file the rest
• Bankruptcy help desk – expanding hours
Credit counseling
•
•
•
•
•
Has to be from approved agency
Within 180 days of filing case
Fee – approx $50 but waivers available
Can be done by telephone or internet
Better not to file case on same day as
credit counseling
– But if time is critical, file same day, and fight to
keep case going
How to file
What to file - fees
• Filing fee
– Chapter 13 - $274
– Chapter 7 - $299
– Pay in installments – any chapter
• If can’t pay in installments, waiver of fee?
– Fee waiver only in Chapter 7 case
– Income less than 150% of poverty guidelines
Pre-bankruptcy planning
When is it proper?
• Preventing or undoing client mistakes
– Sanctions for improper actions are harsh
• None of the benefits of bankruptcy, all of the
burdens
• Exemption planning is allowed (be
reasonable)
– Defrauding or hindering creditors is not
• File required tax returns
Denial of discharge and
other sanctions
• Denial of discharge
– Sanction for hiding assets, destroying
records, and other misconduct in the
bankruptcy case
– Can’t discharge any debts in later Chapter 7
• Bar to refiling another case
– 180 day bar if case voluntarily dismissed after
creditor files motion to lift automatic stay
– Court can bar refiling for debtor abuse
Safety & privacy issues
• Domestic violence
– Bankruptcy filings are public records and
are on internet
– Sealing records/ protective orders – 11
USC 107(c)
– Creditors meetings (§ 341 meetings) open
to the public
• Loss of privacy
– public records, available for 8 cents a page