Cancellation of Debt / Tax Return Filings

You’ve received a form 1099-C from one of your creditors for “cancellation of debt”.  What are you supposed to do with it?

  1. First and foremost, bring it to the attention of a tax professional – either an accountant, tax attorney, or other professional tax preparer.
  2. The federal government considers canceled debt to be income for tax purposes.  However, this is not always the case – there are exceptions – and sometimes canceled debt is not income that you have to pay taxes on.
  3. 26 U.S.C. § 108 controls when a canceled debt is or isn’t income.
  4. The good news is that if the debt was discharged in bankruptcy, it is not taxable income.
  5. If the debt was not discharged in bankruptcy (but canceled before you filed for bankruptcy), then it may or may not be taxable income, depending on whether a different exception applies. You should consult with a tax professional to determine if you qualify for an exception.
  6. Even if your debt was discharged in bankruptcy, don’t just ignore the 1099-C.  A tax professional can help you determine which forms you need to file – but start with IRS Form 982.  The IRS will also receive a copy of the 1099-C, and if the canceled debt isn’t mentioned on either your 1040 or on Form 982, you are going to trigger an investigation from the IRS.

Reaffirmations & Credit Reporting – Theory & Practice (Part 2)

Last week, we were discussing reaffirmation agreements in contrast to a “ride-through”; the latter of which is a method of keeping collateral after filing for bankruptcy without assuming the risk of liability on a deficiency balance should you default on the loan in the future, with the only risk being loss of collateral.
We were discussing the two main reasons why people would opt for a reaffirmation agreement instead of doing a ride-through, and having dispensed with the first (less common) reason, let’s continue on to the second more prolific reason…
#2 – Credit Reporting
Conventional wisdom these days suggests that secured creditors will report post-petition payments to credit bureaus if and only if a debtor enters into a reaffirmation agreement.  Creditors argue that if they report payments without a reaffirmation agreement, that they would be in violation of the discharge injunction.
While this may be conventional practice, we want to explore a little deeper to determine what legal responsibilities exist.  To do that, we’re going to try to answer two major questions.

1. If a reaffirmation agreement is not signed, are creditors violating the discharge injunction if they report post-petition payments?

I am unable to find any case law that suggests that making reports of payments to the credit bureaus – in the absence of a reaffirmation agreement – constitutes a violation of the discharge injunction.  And there’s an obvious reason for this – if a debtor makes payments on a ride-through and his payments are being reported – he is getting both the benefit of positive credit reporting AND reduced liability for not having signed a reaffirmation agreement.  Why on earth would he sue for violation of the discharge injunction?

11 U.S.C. § 524(a)(2) is the primary provision prohibiting the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor”.  It is difficult to imagine how reporting payments that a debtor makes could constitute an act to induce such payments.  The only conceivable issue here is if, during a ride-through, the debtor defaults and then – under the FCRA requirement that credit reporting be done accurately – the creditor reports a missed payment.  That could, conceivably, be considered a discharge violation if the debt was discharged in the absence of a reaffirmation agreement.  But the argument that the reporting of payments received as being a discharge violation is patently absurd.

2. If a reaffirmation agreement is signed, do creditors have an affirmative duty to report post-petition payments?

Simple answer is: NO.  There is no provision of the Fair Credit Reporting Act, nor the bankruptcy code, which imposes an affirmative duty upon any creditor to make reports to the credit bureaus.  This is true, even in cases that don’t involve a bankruptcy case.  Under FCRA, creditors are only obligated to make accurate reports, if they report at all.  There is no authority to compel them to make a report at all.

Failure to report payments does not constitute a violation of the discharge injunction.  See In re Bates, 517 B.R. 395 (Bankr. D. N.H. 2014)In re Manning, 505 B.R. 383 (Bankr. D. N.H. 2014), and In re Estrada, 439 B.R. 227 (Bankr. S.D. Fla. 2010).  (Estrada notes that language in a notice which threatens the suspension of credit reporting for failure to sign a reaffirmation agreement may be an impermissible violation of the automatic stay.)

Special thanks to Hon. Margaret D. McGarity and Atty. Michael J. Maloney for case summaries in Bates, Manning, and Estrada.

Summary

Continuing to make payments on secured loans like home mortgages or auto loans (and non-dischargeable debts like student loans) are a terrific way to reestablish credit history and rebuild your credit score after bankruptcy.  These are pre-existing loans, so there is no need to try to get financing approval despite just having filed for bankruptcy.

A ride-through is a less-risky way to proceed, in that in the event you default on a mortgage or auto loan in the future, you only stand to lose the collateral, and you cannot be held liable for a deficiency balance.

However, most secured creditors – as a policy – refuse to report post-petition payments to credit bureaus in the absence of a reaffirmation agreement (which does leave you potentially liable for a deficiency balance).  Although creditors have no affirmative duty to make reports, even with a reaffirmation agreement, they are not in violation of the discharge if they choose to condition their reporting on a reaffirmation agreement.

15 U.S.C. § 1681s-2 – Relevant Provisions
(a) Duty of furnishers of information to provide accurate information
(1) Prohibition
(A) Reporting information with actual knowledge of errors. A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.
(B) Reporting information after notice and confirmation of errors. A person shall not furnish information relating to a consumer to any consumer reporting agency if—
(i) the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and
(ii) the information is, in fact, inaccurate.
(D) Definition. For purposes of subparagraph (A), the term “reasonable cause to believe that the information is inaccurate” means having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information.
(2) Duty to correct and update information. A person who—
(A) regularly and in the ordinary course of business furnishes information to one or more consumer reporting agencies about the person’s transactions or experiences with any consumer; and
(B) has furnished to a consumer reporting agency information that the person determines is not complete or accurate, shall promptly notify the consumer reporting agency of that determination and provide to the agency any corrections to that information, or any additional information, that is necessary to make the information provided by the person to the agency complete and accurate, and shall not thereafter furnish to the agency any of the information that remains not complete or accurate.
(3) Duty to provide notice of dispute. If the completeness or accuracy of any information furnished by any person to any consumer reporting agency is disputed to such person by a consumer, the person may not furnish the information to any consumer reporting agency without notice that such information is disputed by the consumer.
(4) Duty to provide notice of closed accounts. A person who regularly and in the ordinary course of business furnishes information to a consumer reporting agency regarding a consumer who has a credit account with that person shall notify the agency of the voluntary closure of the account by the consumer, in information regularly furnished for the period in which the account is closed.
(5) Duty to provide notice of delinquency of accounts
(A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.
(B) Rule of construction. For purposes of this paragraph only, and provided that the consumer does not dispute the information, a person that furnishes information on a delinquent account that is placed for collection, charged for profit or loss, or subjected to any similar action, complies with this paragraph, if—
(i) the person reports the same date of delinquency as that provided by the creditor to which the account was owed at the time at which the commencement of the delinquency occurred, if the creditor previously reported that date of delinquency to a consumer reporting agency;
(ii) the creditor did not previously report the date of delinquency to a consumer reporting agency, and the person establishes and follows reasonable procedures to obtain the date of delinquency from the creditor or another reliable source and reports that date to a consumer reporting agency as the date of delinquency; or
(iii) the creditor did not previously report the date of delinquency to a consumer reporting agency and the date of delinquency cannot be reasonably obtained as provided in clause (ii), the person establishes and follows reasonable procedures to ensure the date reported as the date of delinquency precedes the date on which the account is placed for collection, charged to profit or loss, or subjected to any similar action, and reports such date to the credit reporting agency.
 (7) Negative information
(A) Notice to consumer required.
(i) In general.  If any financial institution that extends credit and regularly and in the ordinary course of business furnishes information to a consumer reporting agency described in section 1681a(p) of this title furnishes negative information to such an agency regarding credit extended to a customer, the financial institution shall provide a notice of such furnishing of negative information, in writing, to the customer.
(ii) Notice effective for subsequent submissions.  After providing such notice, the financial institution may submit additional negative information to a consumer reporting agency described in section 1681a(p) of this title with respect to the same transaction, extension of credit, account, or customer without providing additional notice to the customer.
(B) Time of notice
(i) In general.  The notice required under subparagraph (A) shall be provided to the customer prior to, or no later than 30 days after, furnishing the negative information to a consumer reporting agency described in section 1681a(p) of this title.
(ii) Coordination with new account disclosures.  If the notice is provided to the customer prior to furnishing the negative information to a consumer reporting agency, the notice may not be included in the initial disclosures provided under section 1637(a) of this title.
(C) Coordination with other disclosures. The notice required under subparagraph (A)—
(i) may be included on or with any notice of default, any billing statement, or any other materials provided to the customer; and
(ii) must be clear and conspicuous.
(8) Ability of consumer to dispute information directly with furnisher
(D) Submitting a notice of dispute. A consumer who seeks to dispute the accuracy of information shall provide a dispute notice directly to such person at the address specified by the person for such notices that—
(i) identifies the specific information that is being disputed;
(ii) explains the basis for the dispute; and
(iii) includes all supporting documentation required by the furnisher to substantiate the basis of the dispute.
(E) Duty of person after receiving notice of dispute. After receiving a notice of dispute from a consumer pursuant to subparagraph (D), the person that provided the information in dispute to a consumer reporting agency shall—
(i) conduct an investigation with respect to the disputed information;
(ii) review all relevant information provided by the consumer with the notice;
(iii) complete such person’s investigation of the dispute and report the results of the investigation to the consumer before the expiration of the period under section 1681i(a)(1) of this title within which a consumer reporting agency would be required to complete its action if the consumer had elected to dispute the information under that section; and
(iv) if the investigation finds that the information reported was inaccurate, promptly notify each consumer reporting agency to which the person furnished the inaccurate information of that determination and provide to the agency any correction to that information that is necessary to make the information provided by the person accurate.
(b) Duties of furnishers of information upon notice of dispute.
(1) In general. After receiving notice pursuant to section 1681i(a)(2) of this title of a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall—
(A) conduct an investigation with respect to the disputed information;
(B) review all relevant information provided by the consumer reporting agency pursuant to section 1681i(a)(2) of this title;
(C) report the results of the investigation to the consumer reporting agency;
(D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other consumer reporting agencies to which the person furnished the information and that compile and maintain files on consumers on a nationwide basis; and
(E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1), for purposes of reporting to a consumer reporting agency only, as appropriate, based on the results of the reinvestigation promptly—
(i) modify that item of information;
(ii) delete that item of information; or
(iii) permanently block the reporting of that item of information.
11 U.S.C. § 524 – Relevant Provisions

(a)(2) A discharge in a case under this title operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.
(b)(2)(C) Subsection (a)(3) of this section does not apply if an agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if—
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;
(2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;
(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that—
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of—
(i) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;
(5) the provisions of subsection (d) of this section have been complied with; and
(6)
(A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as—
(i) not imposing an undue hardship on the debtor or a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.
(f) Nothing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.
(j) Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim, if—
(1) such creditor retains a security interest in real property that is the principal residence of the debtor;
(2) such act is in the ordinary course of business between the creditor and the debtor; and
(3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.

Reaffirmations & Credit Reporting – Theory & Practice (Part 1)

A key component to helping people rebuild credit after filing for bankruptcy are post-filing payments on reaffirmed debts.  However, there’s a lot of confusion – even among attorneys and other professionals – about creditors’ obligations to report these payments.  So today, we’re going to examine key statutes, case law, and some anecdotal evidence.  We’re going to discuss what creditors legally are and are not obligated to do, and how these obligations may differ from what we see in common, every day practice.
But first, I’m going to assume that you have not read other posts on this blog about reaffirmations, so let’s hit up some basics: What is a reaffirmation agreement?

Contrary to common belief, almost all secured debts are dischargeable.  In terms of dischargeability, they are no more or less special than other unsecured debts like credit cards, payday loans, or medical bills.  This is how and why people are able to file for bankruptcy, walk away from a home or vehicle that they don’t want, and not be liable for a deficiency balance.
But secured liens are not extinguished in bankruptcy (except in rare case of stripping unsecured mortgages in Chapter 13, judgment liens, etc.).  So while a secured creditor may not be able to pursue you for a deficiency balance, they can act upon their security interest and foreclose or repossess collateral if you default on the loan.  And of course, that right exists even if you don’t file for bankruptcy – bankruptcy just extinguishes their right to pursue you for money on the loan.  So you can’t just stop paying your mortgage and expect to be able to continue to remain in your home, even if you file for bankruptcy.
A reaffirmation agreement takes your dischargeable pre-petition obligation and converts it into a post-petition obligation that is not discharged in bankruptcy.  In other words, if you enter into a reaffirmation agreement and default, then not only can the creditor repossess the collateral, but they can also pursue you for a deficiency judgment.
Reaffirmations are NOT required.  On the contrary.  They are voluntary agreements.  A creditor can no more require you to sign a reaffirmation agreement than you can require a creditor to sign one.  In fact, some creditors – as a policy – don’t bother with reaffirmation agreements.
Strictly from a liability standpoint, I (along with most other attorneys I’ve spoken to) would prefer that our clients not enter into a reaffirmation agreement.  There is always the possibility that something will happen down the road, and you are unable to continue to make payments on your mortgage or car loan.  Without a reaffirmation agreement – the worst thing that the creditor is entitled to do is repossess the collateral.  With a reaffirmation agreement – the creditor can repossess the collateral AND seek a deficiency balance.
What I (and most other attorneys) prefer are what we refer to as a “ride-through”.  A ride-through is when a bankruptcy debtor retains collateral, continues to make normal monthly payments on a secured loan, but does so without a reaffirmation agreement.  This way, the debtor keeps their property, but minimizes their risk in case something happens down the road.
Sounds great!  Why doesn’t everyone do a ride-through?  Why don’t attorneys INSIST that their clients just do a ride-through?  Well, two reasons.
#1 – The Risk of Repossession
This almost never happens.  Many years ago, there were rumors that Wells Fargo was foreclosing on homes and repossessing vehicles, even though the debtors were current on their payments.  The sole reason they foreclosed and repossessed?  The debtors had not signed a reaffirmation agreement, which Wells Fargo considered a technical default and grounds for exercising their security interests.
11 U.S.C. § 521(a)

(6) [I]n a case under chapter 7 of this title in which the debtor is an individual, not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors under section 341(a), either –
(A) enters into an agreement with the creditor pursuant to section 524(c) with respect to the claim secured by such property; or
(B) redeems such property from the security interest pursuant to section 722.

In Steinhaus, Idaho Central Credit Union argued that this language (revised under BAPCPA in 2005) limited a debtor to 3 options: reaffirm, redeem, or surrender.  Since Steinhaus had not entered into a reaffirmation agreement within the proscribed time period, ICCU demanded termination of the automatic stay, an order compelling surrender of property, and an order authorizing foreclosure.  The court agreed that 11 U.S.C. § 362(h) permitted ICCU to obtain termination of the automatic stay, but disagreed that it had authority to compel surrender of collateral or to authorize foreclosure.  In re Steinhaus, 349 B.R. 694 (Bankr. Idaho, 2006).

The right to repossess is still controlled by applicable state law, and we get a pretty good discussion of that in Henderon, a Nevada case that specifically deals with Nevada law that differs from the Uniform Commercial Code.  In this particular case, it was decided that the contract provision invoking an ipso facto right of recovery based solely on the filing of bankruptcy or lack of a reaffirmation agreement was invalid under Nevada law.  In re Henderson, 492 B.R. 537 (Bankr. Nev., 2013).

Wisconsin’s default provisions are outlined at Wis. Stat. § 425.103.  I’ll include them here for reference, but I’m not going into an analysis of the code.  The point is that since the right of recovery is an issue of state law, the bankruptcy court has no authority to compel surrender of collateral, which means you – as a bankruptcy debtor – can force this issue before a state court judge.  An informal survey suggests that most judges are not inclined to permit repossession based solely on the lack of a reaffirmation agreement.

(2) ”Default”, with respect to a consumer credit transaction, means without justification under any law:(a) With respect to a transaction other than one pursuant to an open-end plan and except as provided in par. (am); if the interval between scheduled payments is 2 months or less, to have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the scheduled or deferred due dates, or the failure to pay the first payment or the last payment, within 40 days of its scheduled or deferred due date; if the interval between scheduled payments is more than 2 months, to have all or any part of one scheduled payment unpaid for more than 60 days after its scheduled or deferred due date; or, if the transaction is scheduled to be repaid in a single payment, to have all or any part of the payment unpaid for more than 40 days after its scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(am) With respect to an installment loan not secured by a motor vehicle made by a licensee under s. 138.09 or with respect to a payday loan not secured by a motor vehicle made by a licensee under s. 138.14; to have outstanding an amount of one full payment or more which has remained unpaid for more than 10 days after the scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(b) With respect to an open-end plan, failure to pay when due on 2 occasions within any 12-month period;(bm) With respect to a motor vehicle consumer lease or a consumer credit sale of a motor vehicle, making a material false statement in the customer’s credit application that precedes the consumer credit transaction; or(c) To observe any other covenant of the transaction, breach of which materially impairs the condition, value or protection of or the merchant’s right in any collateral securing the transaction or goods subject to a consumer lease, or materially impairs the customer’s ability to pay amounts due under the transaction.

As a matter of practice, most creditors will permit a ride-through, and there are two major reasons for this.  First – if a debtor is willing to continue make payments on a secured debt, they’re going to receive more money if they permit the ride-through rather than immediately demanding turnover of the collateral.  If the debtor defaults, they still have a right of recovery and sale later on.  (For example, if collateral is worth $10k at auction and a debtor makes $500/mo payments for a year before defaulting, the creditor potentially gets $16k out of the deal; whereas they only get the $10k if they repossess immediately.)  The circumstances in which a creditor may not want to wait for a default is where there is significant risk or danger that the property will be damaged or wasted before the default, significantly devaluing the asset by the time it can be sold.

The other reason most creditors permit a ride-through is because threatening to repossess in the absence of a reaffirmation agreement would conceivably be a violation of the discharge at 11 U.S.C. § 524(c)(3)(A).

Unnecessary Requests

You filed a Chapter 7 bankruptcy and received your discharge.  A year later, you apply for a loan.  The loan officer asks to see a copy of your discharge order and bankruptcy schedules to verify “what was included”.  The loan officer also runs your credit report and sees an outstanding debt that was supposed to have been discharged in the bankruptcy.  You call the creditor to ask them to report the debt correctly to the bureaus.  The creditor claims to be unaware of your bankruptcy and requests a copy of your discharge order and bankruptcy schedules to verify that “they were included”.
Do either the loan officer or the errant creditor really need the bankruptcy schedules?  No, they do not.

Stated another way, the Chapter 7 discharge is “good against the world,” including unscheduled creditors.  The discharge is said to be good against the world in the sense that it applies to all unscheduled debts except those that are expressly made nondischargeable by § 523.  In re Guseck, 310 B.R. 400, 402 (Bankr. E.D. Wis. 2004).

There are only two bits of information that the loan officer or the creditor need.  Proof of your discharge (the court order, which you should keep with your personal records for the rest of your life), and the date your bankruptcy case was filed (so that creditors can verify that their debt arose from before the petition date).  That’s it.
If the loan officer or the creditor are really interested in seeing your schedules, they are a matter of public record and can be obtained directly from the bankruptcy court: http://www.wieb.uscourts.gov/index.php/court-info/court-info/4-the-courthouse/the-clerks-office/95-obtain-copies-of-documents (or thy may register for their own PACER account: https://www.pacer.gov/).
However, if they choose to act against you based solely on an omission on bankruptcy schedules or not being provided with the schedules, they may still be guilty of violating the discharge injunction.

Reaffirmation Agreements That Never Were

Scenario:  John Doe filed Chapter 7 Bankruptcy in 2013, discharging about $60k in unsecured debt while reaffirming on his mortgage and car loan.  He has never missed a payment since his bankruptcy case was filed.  Now, 2 years later, he has pulled his credit report and is dismayed to find out that while his auto loan payments have been reported, his mortgage payments have not.  As a result, his credit score hasn’t improved as much as he would have hoped by now.  He calls his bankruptcy attorney and finds out that while he entered into a reaffirmation agreement on the auto loan, he did not enter into such an agreement on the mortgage.  Instead, he was doing what is referred to as a “ride through” – making payments sans a reaffirmation agreement.
Why is this happening?
To be honest, we’re not really sure.  Last October, after the conclusion of the Annual Bankruptcy Update in Milwaukee, I had a discussion with 7 other attorneys concerning a lender’s requirement to report payments with or without a reaffirmation agreement.
On the one hand, the Fair Credit Reporting Act (FCRA) only requires creditors to make accurate reports to the credit bureaus.  It does not, however, confer an affirmative duty to report at all.  In other words, any creditor can choose to report or not report, but if they do report, those reports must be accurate.
There was nothing in either the FCRA nor the bankruptcy code that any of us were aware of that indicated that lack of a reaffirmation agreement meant that a lender could not report payments, nor that filing a reaffirmation agreement forced a lender to report payments.  (In fact, it is entirely possible that payments might not be reported, even if a reaffirmation agreement is filed.)
It just seems to be “the way it is” – a matter of convention and policy rather than law.  At least one attorney reported being told by a creditor that the creditor’s policy was to not report without a reaffirmation agreement because to do so would be a violation of the discharge injunction.  Not only do we feel that argument is specious, but the inducement that creditors are making (no reaffirmation, no reporting) might itself be the bigger violation of the discharge injunction.
To the best of my knowledge, this has not yet been litigated in this district.
Can a reaffirmation agreement be filed now so that my payments get reported?
No.  At least, not in the Eastern District of Wisconsin.  The judges here (and I imagine in most districts) have a very strict policy that reaffirmation agreements will not be approved if they are entered after the discharge order is issued, and that cases cannot be reopened for this purpose.
Whose fault is this?
Usually, it’s nobody’s fault.  Reaffirmation agreements are voluntary agreements between a debtor and creditor.  A creditor cannot force an unwilling debtor to enter into an agreement, nor can a debtor force an unwilling creditor to enter into an agreement.
Unless someone deliberately obstructed transmission of the agreement, or if the debtor failed to notify the creditor of their intent, or if the creditor simply neglected to draft the agreement – there is no blame.
Why didn’t my bankruptcy attorney draft the reaffirmation agreement?
I have yet to meet a single debtor attorney who drafts reaffirmation agreements.  And I think we all refuse to draft them for the same reasons.  Reaffirmations are agreements between the creditor and debtor.  I’m happy to review the agreement, advise in favor of or against signing the agreement, and signing off on the agreement when appropriate.  But the agreement should still be drafted by one of the parties to the agreement.  And the creditor has access to contractual information (interest rates, maturity dates, current payoff balances, etc.) necessary to properly complete the agreement that the debtors’ attorney may not have access to (at least, not all of the information).
This is the worst thing ever!
Not necessarily.  Reaffirmation agreements turn otherwise dischargeable debts into non-dischargeable debts.  Yes, secured debts like mortgages and auto loans are dischargeable and presumed to be discharged in the absence of a reaffirmation agreement.  One of the nice things about a ride-through is that it allows you to retain your property without assuming the risk of having to pay a deficiency if you ever default and have your property repossessed.
In other words, let’s say a year after you file for bankruptcy, you default on your mortgage payment.  Without the reaffirmation agreement, the lender is only empowered to foreclose the property.  They cannot collect a balance from you.  With the reaffirmation agreement, they can foreclose AND collect a deficiency balance from you.
In fact, the only good reason to sign a reaffirmation agreement is for the credit reporting to help rehabilitate your score.  But there are other ways to rebuild credit.
I still want my payments reported, gosh darn it.
You have a couple of options, but none guaranteed to work.
  1. Talk to the lender.  Ask them to report your payments.  (This works better with smaller local banks and credit unions than it does with the big banks.)  If the creditor failed to provide you with an agreement – tell them that you would have signed the agreement if they had drafted one.  Since they chose not to, it’s hardly fair to punish you for their inaction.
  2. Refinance.  This is going to be difficult without the payment history to help rebuild your credit.  If you’re refinancing with the same lender – many of them refuse to refinance because of the lack of the reaffirmation agreement (which is really stupid, because with the refinance, they have a legal claim to the money; without it, they do not).
  3. Dispute the lack of reporting with the credit bureaus.  This has been suggested by a few attorneys.  Gather evidence of all of your post-petition payments and send them in to TransUnion, Experian, and Equifax.  Explain that your payments haven’t been reported because a reaffirmation agreement was not filed.  The problem with this approach is that – if you’re disputing a credit reporting error – there’s no error to correct.  Again, FCRA only requires that creditors report accurately, it does not require them to report at all.  Even if the credit bureaus do amend your report to show the payments, it still doesn’t mean that your lender will report payments going forward, which means that you will have to continually update the bureaus yourself.

Pioneer CU / Capital CU

In recent days, I’ve received multiple complaints from clients who are receiving collection letters from Capital CU on debts that should have been discharged in bankruptcy.
In each case, the client had multiple loan accounts (secured and unsecured) with Pioneer CU, reaffirmed on the secured loan and not the unsecured loan.  The unsecured loans would otherwise have been secured by cross-collateralization, but they were not part of the executed reaffirmation agreement and therefore discharged in bankruptcy.
In short, Capital CU is making collection attempts in violation of the discharge injunction.
I have spoken to a representative at Capital CU and have been advised that there was a notation issue when the accounts transferred from Pioneer’s systems to Capital’s systems.
If you receive a collection letter on a debt you believed was discharged in bankruptcy, call my office before making any payments.  These issues should be easily resolved when brought to Capital’s attention.

Why are debt collectors so rude?

The Problem
I will often hear from my clients stories about how debt collectors are rude to them.  It comes as a surprise to many that debt collectors are unswayed when you tell them you don’t have money to pay a bill.  You tell them that they can’t squeeze blood out of a turnip, yet they keep harassing you – screaming, threatening, and humiliating.  They call you 10… 20… 30… 40 times a day – at all hours.  Then they start calling you at work.  They start calling your family and friends – anyone whose number they can get their hands on who they think you might be able to convince you to pay the debt.  Anyone who they think you’ll be embarrassed to have find out that you’re behind on your bills.
But you’ve told them over and over again that you simply don’t have the money.  Why are they being so stubborn?
Why?  For two simple reasons: because of money and because it works.
The Explanation
To understand the influence of money, it’s helpful to know a thing or two about debt collectors.  There are generally three types.  In-house debt collectors – people who, for example, work for the hospital that you just had surgery at and whose job it is to make phone calls to try to collect on the bill.  Third party collection agencies – companies who are essentially contracted out to do the collections for a creditor and who are generally paid a percentage of the debt payments that they successfully recover.  Junk debt buyers – these are third party companies that purchase the right to a debt (giving the original creditor some immediate funds, though less than what was originally owed).
In each case – the debt collectors are highly motivated to collect the debt.  In the case of collection agencies, they usually don’t get paid unless they recover money for the original creditor.  In the case of debt junk buyers, they lose out on their investment if they are unsuccessful in recovering money to cover the purchase.  Individual employees within these companies might also be given an incentive to collect on the debt as many of them are paid a commission for what they collect.
Money is a strong motivator in all sorts of facets of life, so when a debt collection company’s livelihood hinges on getting you to pay your debt, they are understandably not going to fold just because you told them that you’re broke.  They are going to harass and badger you until they’re sure that you really don’t have any money, and then they’re going to keep at it.
In the process of explaining the influence of money, I’ve also covered a great many reasons why these tactics work.  They are harassing.  People will break open piggy banks to scrounge up some money to make a payment to debt collectors, if it means their telephone will stop ringing off the hook.  People will take loans out on their 401(k) or look to a home equity loan if it means that they won’t be outed as delinquents.  There is incredible social stigma against defaulting on your debt – with many of our parents instilling this notion in our heads that if we incur a debt, we have a responsibility to pay it.
The Consequences
A surprisingly small percentage of people who are unable to keep up on their bills ever resort to bankruptcy.  The majority of people who are suffering from harassing debt collectors will eventually cave in.  They’ll find the money, somewhere.  Many of them will (please forgive the cliché) rob Peter to pay Paul.
This is unfortunate, because in many cases where someone is struggling to pay debt, they are already past the point where they are capable of ever paying back their debt.  But they will spend several months or even years funneling money from one place to another, trying to keep up on bills, before reaching the inevitable conclusion that they must file bankruptcy.  By then, they’ve squandered thousands of dollars on debt that could have been discharged if they had sought professional advice sooner.
The Solution
Although bankruptcy is seen by many as a choice of last resort, if you are struggling with debt, you should at least consider consulting with an experienced bankruptcy attorney to determine what your rights and options are before you end up throwing more good money after bad.
People file for bankruptcy – ultimately – for the benefit of a discharge.  Meaning that debts get wiped out, and these debt collection agencies can never again call you to try to collect on them.
But even before you get your discharge, there are benefits.  For example, once your bankruptcy case is filed, most debtors receive the benefit of an automatic stay – a temporary injunction that prohibits your creditors and debt collectors from certain collection actions (including harassing phone calls, collection letters, lawsuits, wage garnishments, bank levies, utility shut-offs, repossessions, and foreclosures) while the bankruptcy court sorts through your petition and schedules to determine that bankruptcy relief is appropriate and justified.  In most cases, the automatic stay continues uninterrupted until you receive your discharge, offering a seamless transition and offering protection against most collection efforts from the moment your case is filed.
Even before you file for bankruptcy, the mere act of retaining an attorney can provide certain benefits.  Under the FDCPA, third party collection agencies cannot continue to call and harass you.  Although other legal remedies may still be available to them before your bankruptcy case is filed, most debt collection agencies will back off entirely because it may no longer be worth it to them to pursue you for the debt.
For example, a collection agency could file a lawsuit against you before you file for bankruptcy.  But, for all they know, you will file your bankruptcy case the day after they file a lawsuit in court.  In that case, they’ve wasted time and money, court filing fees and likely attorney fees, on a lawsuit that isn’t going to go anywhere.  (Bankruptcy prevents collection lawsuits from being filed and terminates any that are already in progress.)
For the same reason, original creditors (who are not covered by the FDCPA) are also likely to leave you alone once they confirm that you have retained an attorney to file for bankruptcy.
If paying back your debt is still very important to you, there are other options that we can help you with, including Chapter 13, Chapter 128, and budget counseling.

Discharge Violations and the Collection of Business Debts

From time to time, I will receive a phone call or letter from a former client of mine, concerned that they are still receiving billing statements in violation of the discharge they received in bankruptcy.  Sometimes, these are legitimate complaints.  Sometimes, the creditor wasn’t listed on the bankruptcy schedules (and for no-asset Chapter 7 cases, that’s not a big deal under Judge Kelley’s Guseck case).  In either case, we send a polite reminder to the creditor, and 99% of the time, that’s the end of it.  Very rarely do discharge violations need to be litigated in front of a bankruptcy judge.

It’s worth pausing to note that, unlike stay violations, which have a clear statutory basis for the recovery of damages – 11 U.S.C. § 362(k) – there is no such provision in § 524.  To receive awards and sanctions in a discharge violation, you must invoke the court’s general powers and authorities in § 105 and case law.  The standard of proof is ‘clear and convincing’ evidence.  And if the violating creditor is the IRS – administrative remedies at 26 U.S.C. § 7433(3) must first be exhausted.

Sometimes, the creditor that the client is complaining about was listed on their schedules, was discharged, and yet – I have to tell my client that there is no violation of the discharge.  Why?  Because my client owned a business – either a corporation, partnership, LLC, or other separate legal business entity.  Let’s consider a very common example, so we don’t wander off into the land of abstracts.,,
John Doe is the sole owner, operator, and representative of Acme, LLC.  Acme LLC incurred a business loan through Moneypenny Bank, which John Doe was required to personally guarantee.  Acme LLC doesn’t do very well, and as a result, John Doe ceases business operations and files an individual bankruptcy case.  He does everything his lawyer tells him to do, he receives his discharge, and a month later, he starts receiving bills from Moneypenny Bank.
What went wrong?
Well, nothing, actually.  John Doe filed for bankruptcy.  Acme LLC did not.  The bankruptcy discharge protects John Doe from being personally collected against from Moneypenny Bank.  However, Moneypenny Bank can still attempt to collect against Acme LLC.  John Doe continues to receive correspondence because he is the owner and representative of Acme LLC.  John Doe looks at the billing statements again and realizes that the bills are not addressed to him (John) but to his business (Acme).
While this is not a violation of the discharge, John is annoyed by the billing statements.  Is there anything he can do to stop the billing statements?
Moneypenny can continue to collect against Acme LLC until one of three things happens…
Option 1:  Acme LLC pays the debt, as agreed.  This option is the likely route if John Doe intends for Acme LLC to continue to exist and operate.  Since John Doe is the sole owner of the LLC, this means that the money is ultimately coming out of his own pocket.  But that is the consequence of owning the LLC.
Option 2:  Acme LLC can file bankruptcy.  This is generally an unnecessary step if John Doe intends to fold the business.  There may be certain benefits to liquidation under Chapter 7 (such as the distribution of assets to priority creditors).  If Acme LLC is to continue operating but needs to file bankruptcy, it would have to do so under Chapter 11.  In either event, I leave it to bankruptcy attorneys who specialize in business filings to explain those benefits.
Option 3:  Formally dissolve Acme LLC.  Dissolution of a business is the corporate equivalent of death of an individual.  Creditors can’t collect against dead people (though they can collect against probate estates).  Nor can Moneypenny Bank collect against an LLC that doesn’t exist.  Again, I leave it to business attorneys to discuss the proper steps to formally dissolve a business (you want to make sure your LLC is dissolved properly to avoid issues with government agencies and taxing authorities).  But this is the simplest and most straightforward way to deal with the problem if John Doe does not intend to continue on with Acme LLC.
Of course, Moneypenny Bank will retain certain rights.  For example, if they have a lien on assets – they will be able to exercise those security rights.  They may also have rights if Acme LLC owns non-pledged assets.  To determine specific consequences of dissolution, speak to a competent business attorney.

What you need to know about wage garnishments.

Filing for bankruptcy is an excellent way to stop wage garnishments.  The automatic stay immediately stops all collection actions, and the discharge wipes out the judgment debt.
However, as any quality bankruptcy attorney will tell you, filing for bankruptcy requires some time and work.  If you want you case done properly and without errors, you should expect that the process will take a couple of weeks, minimum.  In other cases, people need to deliberately wait to file their case for any number of reasons.
But you’re facing a wage garnishment NOW.  What can you do to avoid wage garnishment until your bankruptcy case is ready to be filed?
Let’s start out with some basic facts that you should know about wage garnishment.  Note: everything in this post is specific to Wisconsin law.  If you have been sued in another state, consult with an attorney who practices in that state.
  • The maximum amount that can be garnished is 20% if your “disposable earnings” (your gross wages, minus amounts taken out for federal tax, state tax, and social security taxes, but does not include other deductions such as insurance or union dues).  If you have child support deducted from your paycheck, then the combined amount of child support deductions and the wage garnishment can be no greater than 25% of your disposable earnings.
  • Garnishments typically last for 13 weeks.  They can end sooner if the underlying debt is fully paid.  They can be extended for a longer period either by stipulation, or by a new application that takes effect after the first 13 week period is up.  Also, public employees can be garnished until the debt is paid off.
  • You can only be garnished by one general creditor at a time (does not include tax levies, federal student loan levies, and child support).
  • You cannot be fired solely because of a wage garnishment (though most employment in the United States is “at-will” employment, which means an employer can fire you for any reason or no reason at all, so long as it is not solely for a discriminatory reason).  There is also an exception to this rule if you have a collective bargaining agreement that permits termination under such circumstances.
  • You may dispute a wage garnishment.  To do so, click here for the form.  Send a copy to the Clerk of Courts, the creditor and/or the creditor’s attorney, and your employer.  Your employer must not garnish you if you file one of these responses, unless and until the court overrules your application and directs the employer to proceed with the garnishment.  Your employer must wait at least 5 days after your pay date before sending garnished funds to the creditor, to allow time for you to file a dispute.
  • Most creditors cannot touch certain types of income (such as social security).  However, if you owe debt to the government, social security and other types of income can become fair game.

You may be exempt from wage garnishment.  If you are, make sure that you file a response with the court and copy your employer.  Your employer is not required to investigate on his own to determine whether or not you are garnishment-proof.  All exceptions (except proof of bankruptcy filing or discharge) require a judicial determination.
You may be garnishment-proof if:
  • You have filed bankruptcy and the automatic stay is still pending.  (In pending Chapter 13s, only until property of the estate revests back to you.)
  • You have received a bankruptcy discharge, and the debt was incurred before your bankruptcy case was filed.
  • Your household income is below the federal poverty guidelines.
  • If your household income is above the federal poverty guidelines, but the garnishment would bring you below the guidelines, you can only be garnished to the extent that it brings you down to the poverty guidelines.
  • Currently, or in the past six months, you have received – or determined to be eligible for – public assistance (food stamps, W2, SSI, etc.).

Serial Filings & the Effect of Conversion

Some of my clients have to file a Chapter 13 Bankruptcy because they filed a previous Chapter 7 Bankruptcy within the past eight years, and are ineligible for a Chapter 7 discharge.  Very often in these Chapter 13 cases, which last three to five years, at some point during the case, their prior bankruptcy now occurred more than eight years ago, prompting the inevitable question: “Can I convert to Chapter 7 now?”
The answer, of course, is no.  But let’s talk about why.
To prevent abuse of the system, the bankruptcy code limits discharges in serial bankruptcy cases to situations where a certain period of time has elapsed – the period of time depending on which chapters of bankruptcy are being considered.
The most common time limit is between two consecutive Chapter 7 bankruptcy cases.  If you file a Chapter 7 Bankruptcy, you cannot get another Chapter 7 discharge for eight years.
If you filed a Chapter 13 Bankruptcy first, you cannot get a Chapter 7 discharge for six years (with exceptions, which I’m not going to get into for purposes of this discussion).
If you filed a Chapter 7 bankruptcy first, you cannot get a Chapter 13 discharge for four years.  If you filed a Chapter 13 bankruptcy first, you cannot get another Chapter 13 discharge for two years (which is rare, since most Chapter 13 cases run for 3-5 years anyway).
A couple of things to note.  First, of all, you do not need to be eligible for a discharge to file under Chapter 13 (meaning you can file Chapter 13 virtually anytime – again with certain restrictions and caveats).  I don’t think there is a bar to filing Chapter 7 if you’re ineligible for a discharge, but it’s a colossal waste of time and money, and nobody does it.
Second, when measuring the applicable time period (2, 4, 6, or 8 years), the relevant dates to consider are the date your last bankruptcy case was filed with the court and the date your next bankruptcy case will be filed with the court.  Simplified: filing dates control this issue.
However, the discharge (which occurs months (Chapter 7) or years (Chapter 13) after a bankruptcy case is filed) does come into the equation, and this generates a source of confusion.  And this is where conversion comes in.
Let’s say that you filed Chapter 13 bankruptcy on October 17, 2005, completed it, and received your discharge.  You would be eligible to file Chapter 7 anytime after October 17, 2011 (6 years later).
But what if, instead, you filed Chapter 13 bankruptcy on October 17, 2005, but converted to Chapter 7 on October 17, 2007 and received your discharge on December 25, 2007?  Are you still eligible to file a Chapter 7 case on October 18, 2011?
The answer is no.  The date of conversion and the date of discharge are irrelevant.  We still look to the original filing date of October 17, 2005.  However, we look at the TYPE of discharge you received.  In this example, the person received a Chapter 7 discharge.  It is therefore as though the person filed a Chapter 7 case on October 17, 2005, and accordingly, he cannot refile a Chapter 7 until 8 years later, on October 17, 2013.
Sound confusing?  It sort of is, but it can be boiled down pretty simply.  The law doesn’t care what chapter you originally filed under – it cares what chapter you ultimately received your discharge under, and the date your case was originally filed.

File date to file date, but look at the type of discharges received.  7 to 7, 8 years; 7 to 13, 4 years; 13 to 7, 6 years; and 13 to 13, 2 years.

Using this logic, you can understand why you can’t convert a case from Chapter 13 to Chapter 7 once your eight years have passed.  In this example, the debtor files and receives a discharge under Chapter 7 on October 17, 2005.  Under the rules, he cannot refile a Chapter 7 until October 18, 2013.  In the meantime, the debtor gets into more financial trouble and can’t wait for 2013.  So he files a Chapter 13 case in 2011.  When October 2013 rolls around, he cannot convert to Chapter 7.  Why?  Because it would be as though he originally filed a Chapter 7 in 2011, which he was ineligible to do.
In order to get the Chapter 7 discharge, the debtor would have to dismiss the Chapter 13 case and re-file under Chapter 7.  This happens sometimes, BUT, take caution!  Remember when I said you could file Chapter 13 virtually anytime – with certain caveats and conditions?  Dismissing your Chapter 13 case and refiling Chapter 7 might not be the wise thing to do.  First of all, depending on the circumstances of your dismissal, you will most likely be barred from refiling ANY bankruptcy case for 180 days.  Not everyone is in the situation where they can afford to go 180 days without a discharge and an automatic stay.  Additionally, if your prior bankruptcy case was pending in the 365 days prior, you may be faced with an automatic stay that lasts for only 30 days, and has to be extended by the court after a showing of good faith.
P.S.  If you’re wondering why I kept referencing October 17, 2005, it’s because we are now less than a year away from the eight year anniversary of BAPCPA.  Prior to 10/17/05, there was a massive surge of Chapter 7 bankruptcy filings fueled by fear that people would either be forced into Chapter 13 or be prohibited from filing at all.  Consequently, we do expect to have a noticeable spike in bankruptcy filings a year from now when all of those people become eligible to refile under Chapter 7.  If you are not one of those people, but are struggling financially, you might want to consider visiting an attorney now before the surge.