Straw Loans

Straw loans are what happens when someone purchases a product (such as a vehicle) or otherwise incurs debt for the benefit of someone else.  This is pretty common among family members.  Someone with bad credit or no credit may rely on a friend or relative to get the vehicle or loan on their behalf, and make payments to the lender.

There are a few issues with straw loans – and some that are specifically problematic in bankruptcy, so let’s discuss some of these.

Problem #1 – The Loan Might Be Illegal

Notwithstanding state laws designed to curtail fraud, individual contracts may prohibit the incursion of a straw loan.  Many mortgages and auto loans are granted with the condition that the borrower be the homeowner or primary driver. If the home or vehicle is purchased for someone else’s use, that could violate the terms of the contract.

Problem #2 – The Person Whom the Loan Benefits Isn’t Improving Their Credit by Payments Made on a Straw Loan

Although the beneficiary of a straw loan gets the immediate benefit of the vehicle or cash borrowed, the payments they make on the loan is not doing anything to help out their credit, since they are not on the loan.  In contrast to loans with cosigners, only the person who legally incurred the debt is being affected credit-wise. To the extent payments are being made, that will help their creditworthiness, but the actual incursion of the debt (plus – god forbid the loan go into default) will damage their creditworthiness.

Problem #3 – Insider Preference Issues in Bankruptcy

If you are the beneficiary of a straw loan (meaning someone bought a home or vehicle or something else for you), and you’re making payments on that loan, these payments are either insider preferences (if payments are made to the person who got the loan for you) or preferences benefiting an insider (if payments are made directly to the lender).  Either way, the trustee in your bankruptcy case may be able to sue the insider (the person who got the loan for you) to recover that preference payment you’ve made to them or on their behalf.  In essence, you are paying on someone else’s debt.  Whether you reaped the benefit of the loan is immaterial – legally, on paper, it is not your debt.  From the bankruptcy court’s perspective, you should be paying your own debts before you attempt to pay someone else’s debt.

As always – WORDS ON PAPER MATTER.  The informal agreements that commonly exist between family members do not trump what appears in black-and-white on a credit agreement.

Problem #4 – Household Contribution Income

Let’s take problem #3 and switch the roles.  Instead of it being the beneficiary of a straw loan filing for bankruptcy, let’s say it’s the person who got the straw loan who needs to file for bankruptcy.  If that’s you, and your family member is paying you to pay a debt that is – ON PAPER – legally YOUR DEBT, then you are receiving what we refer to as “household contribution income”.  For people who are near or above median, this can result in you having to pay more to unsecured creditors than you would otherwise be required to pay.

2016 Foreclosure Statistics

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Total
Brown 36 36 39 23 26 25 19 30 35 14 33 25 341
Calumet 6 8 5 6 4 5 3 8 4 5 4 3 61
Door 3 4 8 7 3 1 2 2 7 2 2 2 43
Florence 0 1 1 0 2 1 0 0 0 0 0 1 6
Forest 1 2 0 0 2 1 1 0 1 1 1 4 14
Kewaunee 3 3 2 4 2 3 1 11 3 3 4 4 43
Langlade 1 10 11 3 5 3 3 10 3 1 5 2 57
Manitowoc 10 16 15 10 16 7 5 10 10 10 16 12 137
Marinette 9 4 10 10 4 4 3 8 9 6 4 6 77
Menominee 0 0 0 2 0 0 0 0 0 0 0 0 2
Oconto 11 7 9 4 4 4 10 3 7 7 3 4 73
Shawano 7 11 7 6 3 4 6 5 8 6 11 5 79
NEWI Total 87 102 107 75 71 58 53 87 87 55 83 68 933
STATE Total 822 893 945 824 728 666 636 808 779 625 768 639  

Trustee Garcia’s free financial management course has been discontinued.

All bankruptcy debtors must complete two counseling courses – one in credit counseling in order to be eligible to file bankruptcy and a second in financial management in order to be eligible to receive a discharge.

For years, Trustee King (retired) and his successor Trustee Garcia have offered a free financial management course to Chapter 13 debtors who have been assigned to them.  I have not charged my Chapter 13 clients for the financial management course on the assumption that they would enroll in this free course.

However, on account of dropping attendance figured, this free course is being discontinued.  The last course will be held in Oshkosh next month.  Accordingly, those who have not yet completed the second counseling course (or those whose cases aren’t even filed yet) will need to take the course through a different provider.

Yearly Reminders

As we get our feet firmly planted into 2017, this is a courtesy reminder of periodic changes…

  1. If you own real estate and your bankruptcy case is not yet filed, you will need to provide a copy of your 2016 property tax bill (which would have been issued in December 2016).  If you previously submitted your 2015 tax bill, it is no longer useful.
  2. Although 2016 income tax returns are not due to the IRS and Wisconsin Department of Revenue until April 2017, Chapter 13 cases filed after December 31, 2016 cannot be confirmed until the 2016 tax returns are filed.  So, if you’re expecting to file a Chapter 13 case in the near future – file your 2016 tax returns ASAP.
  3. If you are filing Chapter 7, you should provide a copy of your 2016 tax returns if they are filed before your bankruptcy case is filed.  2016 tax returns will be required for any bankruptcy case filed after April 15, 2017.
  4. The winter moratorium on power shut-offs ends on April 15, 2017.  If you are delinquent on paying your utility bills, talk to a bankruptcy attorney now and get your case ready to file ASAP.  Do not wait until April to decide you need to do something – you won’t be the only person rushing to file to avoid a shut-off.

Voicemail Tag

I take pride in the fact that as a solo practitioner, I can speak to my clients directly without them having to run a gauntlet of call center staff.

Unfortunately, the physical laws of the universe prevent me from being in all places at all times.  Sometimes, when a client calls me, they get my voice mail because I am in court, talking to another client, or on the phone with someone else.  But unless the call clearly does not require a response, I will return all messages as soon as I get them.

I am continuously baffled by some people’s reluctance to use voice mail. If I don’t answer the phone, it’s not because I’m ignoring you. Hanging up and calling and hanging up and calling in rapid succession doesn’t magically teleport me back from court; and if I’m meeting with a client, the rapid-fire calls are a real nuisance.

Call once, leave a message, and I will return your call (or e-mail you, if an e-mail is more appropriate) as soon as I get your message.

And if you do get my voice mail, actually tell me what you’re calling about.  That way – in the off chance I call you and get YOUR voice mail (because you also cannot be in all places at all times), I can at least get an answer to you without having to play voicemail tag.