Overcoming the Guilt or Shame of Bankruptcy & Chapter 13 as an Option

“I was taught growing up that if you incur a debt, you’re responsible for paying it.”
“I always pay my bills.  I never wanted to have to file for bankruptcy.”
“I could have avoided this if only my credit card company would drop my interest rate.”
Despite all of the jokes and political rhetoric about people who welch on their debts, deadbeats, welfare recipients, the “moocher class”, etc., the fact of the matter is – the stigma associated with bankruptcy and not paying one’s bills is extremely prevalent.  These are ethical principles that are ingrained into our minds at an early age, and difficult to overcome.
Unfortunately, some people get so bogged down by these dogmas, that they delay doing anything about their finances until it’s too late – and they are faced with imminent invasive collection actions such as wage garnishments, bank levies, utility shut-offs, lawsuits, repossessions, and foreclosures.
Instead of getting the fresh start they needed, they dragged their heels until their debts spiraled out of control.
For those of you that believe that bankruptcy is morally repugnant, I urge you to consider Chapter 13 Bankruptcy.
Some debtors are required to file for Chapter 13 instead of Chapter 7 because they are ineligible to file Chapter 7 due to a prior bankruptcy or their income disqualifies them.  Others file Chapter 13 to obtain extra protections for assets or to avoid foreclosure.
As your bankruptcy attorney, I owe you a fiduciary duty.  In the past, I’ve discouraged people from filing Chapter 13 unless they absolutely had to.  Let’s be honest – Chapter 13 is longer, more difficult, and requires adherence to a disciplined budget.  But if someone insists on filing Chapter 13 strictly for moral reasons, I would rather they do that than not do anything at all, which would only make financial matters worse in the long run.
What is Chapter 13?  Generally-speaking, it is a 3 to 5 year debt consolidation and repayment program.  We take all of your debts, pool them together, and break them up into different categories.  Based on the types of debts you have and the circumstances of your case, certain types of debts must be paid in full while most of your debts are paid pennies on the dollar.  That percentage is based primarily on income, but sometimes other non-income factors come into play.  The unpaid percentage is usually discharged (with the exceptions of certain non-dischargeable debts, such as student loans) just like in Chapter 7 Bankruptcy.
Debts that are not dischargeable in Chapter 7 Bankruptcy – such as domestic support obligations, taxes, and student loans – can be rolled into and paid in a Chapter 13 Bankruptcy.  Virtually everyone qualifies for Chapter 13 Bankruptcy (there are debt limitations that few people ever come close to breaching – $383,175 unsecured debt and $1,149,525 secured debt, as of the date of this post).
And if you absolutely, positively are unwilling to do bankruptcy at all, consider alternative debt relief options, such as Chapter 128 or our Budget Counseling Services.

April is Financial Literacy Month

Did you know that only three states in the U.S. mandate that kids receive a semester of instruction in personal finance education?  18 states have it folded into another class, leaving 29 states with no requirements whatsoever.
I have always believed that strength comes from knowledge.  Knowing what to look out for in sales contracts and marketing gimmicks can help you be a better consumer.  Understanding how much impact an interest rate or a loan term has on debt can help you make wise financial decisions.
Consider our new budget counseling services to help you arm yourself with the information you need to be wiser and stronger.

Beware of Tax Refund Fraud

Last week’s news about HeartBleed, identity theft has been a topic on everyone’s mind.  But internet hacking software isn’t the only way thieves can harm you.  A few weeks ago, one of my pending Chapter 13 cases encountered a slight snag.
Among other things, the debtor in this particular case had a modest amount of tax debt owed to the Internal Revenue Service.  As a below-median debtor, she would be required to turn over one half of her tax refunds each year for the benefit of unsecured creditors.
The Internal Revenue Service filed a motion to use my client’s 2013 tax refund to offset her tax debt.  In a case like this, there’s no point in objecting.  We want this to happen.  Better that the IRS take the entire refund than unsecured creditors get paid half of it.  The IRS is required to be paid on its priority claim – unsecured creditors are not.  Although the decrease in IRS liability does not automatically trigger a modification under 11 USC 1329, it certainly gives us wiggle room in the future if the debtor needs such a modification and has a qualifying event to trigger it.
Accordingly, I had no plans to object.  Until I received an e-mail from my client, who asserted that she hadn’t filed her 2013 tax returns yet.  Initially, I assumed there was a misunderstanding or mistake.  I alerted the IRS to my client’s statement, and they flagged the return on which they based their motion to offset as a potential fraudulent return.
A few days later, the IRS notified me that a partial refund check had been sent to my client, and they asked me to warn my client not to cash it.  I did so immediately, but unfortunately, my client had already received, cashed, and spent the check.  A few days later still, my client sent me her actual tax returns, which I then forwarded to the IRS.
You might ask yourself why – with a motion to offset pending and with the return flagged as fraudulent – the IRS issued a refund check to my client.  Well, the answer to the first part is that the fraudulent return made a claim for a refund that exceeded my client’s tax debt – so the IRS refunded the difference while retaining the amount needed to satisfy her debt while the motion was pending.  The answer to the second part – the refund was issued before the return was flagged as fraudulent.
The story had one more interesting twist.  The purpose of filing a fraudulent tax return is for the thief to receive the refund money while using a different taxpayer’s identity.  How then, did the refund check wind up in my client’s possession?
Upon close inspection of the transcript of the fraudulent return, I noticed that although the thief used my client’s name and social security number, the thief had used a different routing and account number – directed at a bank in New Jersey.  Unfortunately for the thief (and my client), the IRS sent a check by mail rather than wire the money (presumably because of the pending bankruptcy and motion to offset).
The lesson of the story is, of course, to not cash a refund check for a return you haven’t filed yet.  If something seems too good to be true, it probably is.
In this case, the IRS will still intercept my client’s refunds, but it will be used to pay for the improper refund check.  And since her actual refund is less than the errant refund, there will be additional liability by the time all of this is sorted out.
Remember that under 11 USC 1305, the IRS can file a claim in your Chapter 13 bankruptcy case for a tax debt that arises after you file for bankruptcy.  This is a power that is reserved for only a few creditors.If you believe you have been the victim of tax refund fraud, visit the IRS at http://www.irs.gov/uac/Identity-Protection.

Avoiding Bad Contracts

Two weeks ago, I was in negotiations with a marketing service provider.  A contract was sent to me for my signature.  I noticed that the contract referenced several ‘terms of service’ documents that were supposedly available on the provider’s website (except that, on inspection, only a couple of the documents were actually available).  So, I kindly asked the sales representative to e-mail the full TOS packet to me (incidentally, he copied the incomplete documents that were available on the website and e-mailed those to me).
Last weekend, I decided to read the TOS.  What I found was alarming.  It contained extremely open-ended language that favored the service provider with few remedies available at all to an aggrieved customer.  For example, the service provider could refuse to publish marketing material “for any reason or no reason at all”.  Additionally, they could make alterations to my content without notice to me and that I expressly waived my right to review any alterations they made.  Should I wish to back out of the agreement, I had a short window (though that window would close long before I would actually encounter such problems), and if I canceled after that, I was still responsible for full payment, though they could pull all of the marketing early.
A bunch of positives for them.  Nothing but negatives for me.
This isn’t uncommon.  Whoever drafts the contract is – naturally – going to draft terms that are most favorable to them.  But any ethical party will make some concessions – make available certain remedies – should the drafter fail to live up to his side of the bargain.  There was none of that evident in this agreement.
Now, would this vendor have screwed me over in all the ways they could have under this agreement?  Probably not.  It’s entirely possible that I would have had an uneventful and cooperative business relationship.  The sales representative personally assured me that they would never act in such a manner as their Terms of Service suggested they could.  He may have been right.
But suppose I did end up in conflict with the vendor (which is not – you know – entirely out of the realm of possibility).  What then?  Well, the TOS lays it out pretty clear that I don’t have any remedies.  My next option is to file a lawsuit (or defend the one the vendor would certainly bring against me after I refuse to continue paying them).  In court, my defense would be “well, the sales rep [who, incidentally, is no longer employed with the service provider] gave me verbal assurance that this wouldn’t happen,” to which any judge in her right mind would dismiss since the language of the contract clearly said otherwise.
Weighing my options, I refused to sign the contract and decided not to pursue relations with that vendor.
Most people don’t read contracts very closely.  For one thing – contracts in this litigious day and age tend to be extremely long and mind-numbing.  For another thing – if we really need a product or service, we’re not inclined to bite the hand that is proposing to feed us.  We figure that if we get screwed, we’ll cross that bridge later (possibly forgetting that ‘later’ will eventually become ‘now’ and something we have to deal with.
I don’t tell you this story to boast about how cool I am for reading the TOS agreement.  Truth is, I’m guilty of not paying close attention to contract terms myself.  I’m often saddened when I think of how much better off I would be today if I hadn’t made certain mistakes in the past.  Most of them are small, but they add up over time.
Anyway, the moral of this story is to read contracts closely, to think ahead and not just focus on the here and now.  And most importantly – that no matter how much you want something – you CAN walk away and refuse to sign an agreement that makes you uncomfortable.

Court Filing Fee Increase

The Judicial Conference of the United States has announced an increase to several filing fees – the most pertinent of them being the filing fees for new petitions under Chapter 7 and Chapter 13.  These changes go into effect June 1, 2014.
Cases filed on or before May 31, 2014 will enjoy the current filing fee rates of $306 (Chapter 7) and $281 (Chapter 13).  Cases filed on or after June 1, 2014 will have to pay the new rates of $335 (Chapter 7) and $310 (Chapter 13), which represents a $29 increase in each fee.