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.

If I’m bankrupt, how can I afford to hire an attorney for bankruptcy?

Filing for bankruptcy protection without an attorney is a treacherous venture into a legal minefield.  Neither the trustee nor the court can provide you legal advice or counsel, and essentially there is no one involved in the process who can look out for your rights and best interests.
Although most of the bankruptcy forms are relatively self-explanatory, there are any number of places where you could land yourself into trouble by inadvertent omission or error.  Schedule C (your property exemptions) and the Form 122 (the means test) are nearly impossible to do without legal training and access to the resources you need to know the relevant and applicable numbers.  Furthermore, the forms cannot fully convey the myriad of information concerning deadlines, documents, what to look out for (issue spotting), or even ensuring that you’ve asked yourself all of the questions you need to ask yourself.  There are limits in how much information and strategies you can glean from the forms, and the forms don’t provide you access to the bankruptcy statutes nor all of the case law that may be relevant to your case.  There are many tricks and strategies attorneys develop over their entire careers to address all of the various issues that can crop up, and if you choose to file without an attorney, you’re denying yourself access to that wealth of information.
But attorneys do not come cheap, particularly to someone who is struggling to pay their bills.  Here are the top three tricks that most people use to pay for their bankruptcy case.
There are exceptions to every rule, but in virtually every bankruptcy case, you will be advised by your attorney – as a matter of course – to stop making payments on your unsecured debts in anticipation of your bankruptcy filing.  This advice is not given because the attorney wants these funds, but because there are actual legal impacts to a bankruptcy case if you continue to pay your unsecured creditors – referred to as “preference payments”.  To say nothing of the fact that you’re throwing away money on debts that will ultimately be discharged in your bankruptcy filing.  Now, most people will need to continue paying on some debts – notably secured debts like mortgages and car loans that you intend to keep – and each case is different, so defer to your attorney’s advice on this matter.  But in general, you will be advised to stop making payments on your credit card bills, medical bills, payday loans, and more.  Side bonus: it frees up some money to pay for your bankruptcy case.
Most attorneys offer some sort of payment plan.  Every attorney is different in setting their own internal policies, and some are more flexible than others.  I consider myself fairly flexible – my clients can make any sort of payment with no minimum requirement and no specific due dates – provided that something is paid once a month.
Taking advantage of payment plans to retain an attorney provides you with limited formal protections under the FDCPA, but also some informal protections against creditors seeking to file lawsuits against you.  In my practice, many of my clients make smaller payments until they receive their tax refunds in the spring and use those to pay off whatever their remaining balance is – usually with plenty leftover to spare – depending on the size of their refund.
Admittedly not an option for everyone.  Even those who have access to this source may be too embarrassed to ask for the help.  But some people go this route, and there’s nothing wrong or illegal about it.  However, if you do choose to borrow money from a friend or family member, make sure that you wait to pay them back until after you receive your discharge.  Payments made before your bankruptcy case is filed could be considered an “insider preference”, and without getting into a lengthy discussion about that topic – suffice to say – this is not something you want to have to disclose to the trustee.  The statutes are fairly silent about money paid to insiders after a case is filed but before the discharge (the 3-4 months that a Chapter 7 case is typically pending).  To play it safe, I advise waiting until after the discharge, because the statutes expressly permit voluntary repayment of any debt.

Final Update Re: the Bankruptcy Form Updates

The new official bankruptcy forms go into effect on December 1, 2015.  Having perused the new forms, I would characterize the majority of the changes as accomplishing two major things…
First, the new forms have been formatted in such a way as to break-up some of the denser material on the forms.  The Voluntary Petition, for example, has been expanded from 3 pages to 7 pages.  The old version crammed a lot of material into a two column format with smaller font sizes.  The new version breaks up all of the various information requested into cleaner and more concise modules – the result being that there is more white space and the content spreads over more pages.  However, it also folds in the old exhibit concerning credit counseling courses, and reduced what used to span over 4 pages into a single page.
Second, the new forms bring certain questions front-and-center.  For instance, on Schedules A & B, the nature of ownership used to be a tiny column where “H”, “W”, “J”, or “C” were meant to be squeezed.  Debtors completing forms on their own would frequently miss that potion of the forms because of the way they were designed, and most debtors who had attorneys (who have software that prepare the schedules) didn’t notice the content in this column or understood what it meant.  The new version of the forms asks for more detail and makes presentation of those details much clearer than the older forms did.  Again, the consequence is that the new formatting sprawls over greater page space.
Overall, the average bankruptcy petition, schedules, and statement of financial affairs used to be about 60 pages – give or take – depending on the number of creditors an individual had.  I would estimate that the new average will be about 90 pages.
Although the new forms have no SUBSTANTIVE effect on law, the forms do explicitly ask a few questions that were not asked before, drawing a Trustee’s attention to facts that – although they always had to be disclosed – often times were overlooked because of the way the forms were structured.
For instance, the new forms ask several pointed questions to determine if a debtor or the debtor’s spouse lived in a community property state within recent years.  The forms also ask if a debtor has made payments – not only directly to an insider but also – to third parties for the benefit of an insider.

A Double Standard on Missing Creditors

A general rule in bankruptcy is that you are required to disclose all creditors on your bankruptcy schedules as a matter of due process.  All creditors – whether their debts are dischargeable or non-dischargeable, whether you intend to reaffirm their debts or not – have certain rights and responsibilities when the bankruptcy case is filed and the stay goes into effect, and therefore, they are entitled to notice so they can act appropriately.
11 USC 523(a)(3) generally makes debts non-dischargeable if they are not disclosed on your bankruptcy schedules, however, only under certain conditions.  Specifically, each one is predicated on the creditors ability to timely file a proof of claim.
Except… creditors of debtors in Chapter 7 Bankrputcy don’t file claims unless the trustee seizes an asset or recovers a preference for the benefit of creditors.  So unless there is an asset to liquidate in Chapter 7 or if the debtor files Chapter 13, there are no proofs of claim to file.
Combine this with Judge Kelley’s decision in Guseck, which holds that a case need not be reopened to add a garden-variety creditor that was inadvertantly ommitted from the debtor’s schedules.
The end result?  A debtor who forgets to list a debt in a no-asset Chapter 7 generally suffers no penalty if they forget a creditor.  They simply need to provide notice of the bankruptcy to the creditor after-the-fact, and – at worst – pay a filing fee to amend their schedules.  The debt is still discharged.
A debtor who forgets to list a debt in an asset Chapter 7 or in a Chapter 13 case will be stuck with a non-dischargeable debt if the error is not caught before the deadline for creditors to file claims.
It’s easy to know which chapter you’re filing under, but not always easy to know if a Chapter 7 case will be an asset case or a no-asset case.
The lesson?  Read your schedules of creditors (Schedules D-H) very carefully before your bankruptcy case is filed.  A credit report does not always reveal all debts.  Make sure that no debts are missing from the schedules.

How having your wages garnished could lead to a free bankruptcy.

A lawsuit has been filed against you.  Your wages have been garnished.  You decide that you can’t stay ahead anymore, and you decide to file for bankruptcy.
If the amount of your wages that have been garnished in the 90 days prior to filing bankruptcy exceeds $600, then it constitutes a preference under 11 U.S.C. § 547(b).  If the trustee lays no claim to the funds, the whole amount garnished in the 90 days prior to filing bankruptcy can be recovered under § 522(h).
Okay, admittedly, this isn’t a ‘free bankruptcy’ so much as it is a reimbursement (and likely only a partial reimbursement, depending on the recoverable amount relative to the costs to file bankruptcy).  Also, the money being reimbursed was your wages anyway, but since there was a legal garnishment, most people are simply appreciative to get it back.
But what about a real free bankruptcy?  Again, it would be a reimbursement, but there are ways to make creditors pay for your bankruptcy out of their funds (not yours) if they knowingly violate the automatic stay.  You are entitled to recover actual damages (for example, any wages actually garnished after your case was filed) no matter what.  But if you can prove that the creditor knowingly violated the stay, punitive damages can be awarded, too, and that can potentially reimburse you in full for the cost of bankruptcy.

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.

Tax Season Reminders

As your mailbox fills up with various W2s and 1099s, now is a good time for our annual reminder of certain tax-related issues in bankruptcy.
If you intend to file for bankruptcy (or think you might), do not use your tax refunds to pay unsecured debt until you have consulted with an attorney.  First – you would be wasting money on a debt that could be discharged.  Second – such a payment could be considered a preference and recovered by the Trustee for redistribution.  Third – using tax refunds to pay bankruptcy-related costs can help expedite your case to prevent things like creditor harassment, lawsuits, wage garnishments, bank levies, utility shut-offs, repossessions, and foreclosures.
Tax refunds are generally considered a contingent asset.  Most debtors can exempt their tax refunds and protect them from being seized by the Trustee.  Debtors who do not have sufficient exemptions to protect their refunds can plan their filing strategically to minimize the Trustee’s interest.  (For example, debtors using Wisconsin state exemptions to protect equity in real estate should file shortly after they have received their refund and deposited it, availing themselves to a depository account exemption.  Most other debtors can exempt their tax refunds with federal exemptions.)
All debtors who have filed Chapter 13 bankruptcy are required to submit copies of their tax returns to the Trustee.
Some debtors who have filed Chapter 13 bankruptcy may be required to submit 1/2 of their tax refunds to the Trustee.  Consult your bankruptcy attorney if your are uncertain about this obligation.
Debtors who plan to file under Chapter 13 (but haven’t yet) should plan to file their 2013 tax returns as soon as possible.   Cases filed after December 31, 2013 cannot be confirmed until after the 2013 tax returns are on file (even though they are not due to the IRS and state until 4/15/2014).
Debts discharged in bankruptcy are not income for federal tax purposes.  If you receive a cancellation of debt notice, show it to either your bankruptcy attorney or tax professional.
If you owe tax debt – certain debts more than 3 years old can be discharged in bankruptcy.  Tax debts entitled to priority status (generally, but not limited to taxes 3 years old or younger) can be folded into and paid through a Chapter 13 Plan with no interest.
If you owe tax debt and have already filed Chapter 13 Bankruptcy, notify your attorney immediately.  The IRS can file claims for post-petition taxes that will need to be funded.

Case Law Developments – Bronk and Clark

Last year I reported on two cases in the Western District of Wisconsin that had created some concern for debtors and debtors’ attorneys.  As always, I caution people who are reading this to be mindful that cases in the Western District of Wisconsin are not binding on cases in the Eastern District of Wisconsin (which covers the areas I typically practice in, including Green Bay, Appleton, Oshkosh, Marinette, Oconto, Sturgeon Bay, Kewaunee, Fond du Lac, and Sheboygan).  Nevertheless, I  like to share these cases because they may influence our judges here in the future, or be brought up on appeal to the circuit court, which would create binding law here.
The first case I reported on was Halling.  In this case, a son cosigned a loan for his mother, the mother made payments, and then later filed for bankruptcy.  Her payments on the loan would ordinarily just be considered an ordinary preference.  However, her payments were also deemed to benefit the cosigning son (the son being an insider) in terms of decreased liability from the son to the creditor.  Therefore, the payments the mother made to the creditor constituted an insider preference from the mother to the son.  The son was then sued to recover the value of this preference.  Unfortunately, there is no subsequent history on that case yet.
The second case was Bronk.  In this case, the bankruptcy court held that the debtor’s conversion of non-exempt assets into exempt assets was not done with intent to hinder, delay, or defraud creditors, but that the debtor – as account holder of several college savings accounts – was not entitled to take their value as exempt, as the statute permitting the exemption only permitted the beneficiaries to exempt their interest in such accounts.  Both issues have since been affirmed on appeal to the District Court.
There is a third case that I didn’t mention last time.  In re Clark, which has been appealed and ruled at 466 B.R. 135 (W.D. Wis. 2012).  In this case, the trustee objected to use of exemptions on an inherited retirement account.  On appeal, Judge Crabb noted that the statutes did not distinguish between retirement accounts that had been built up by the debtor and retirement accounts inherited by the debtor.  The decision of the bankruptcy court was overturned.

Lien Perfection

Among the many documents requested by trustees are copies of mortgages and, in the case of vehicles that have liens on them, titles for those cars.  Ever wonder why?
Under 11 U.S.C. § 547, the trustee has the authority to void certain transactions called preferences.  Although the statute is quite lengthy, the vast majority of preferences include payments to individual creditors in excess of $600 (§ 547(c)(8)) in the 90 day period before the bankruptcy case is filed (§ 547(b)(4)(A)) or between 90 days and 12 months for insiders (§ 547(b)(4)(B)) – insiders being relatives and business partners.
It also includes acts to perfect a lien (§ 547(c)(3)) unless the lien was perfected within 30 days of acquisition of the collateral.  To err on the safe side, most attorneys will boil this down into simplified advice: new liens should be created and perfected at least 90 days before filing bankruptcy – and the date appearing on the title or the recording stamp of a mortgage is usually referenced.
Why are preferences avoidable and what happens if the trustee can avoid a preference?  Preferences are voidable by statute in order to deter certain activity and fulfill a public policy goal.  The activity being deterred is the debtor making payments and bestowing benefits to certain “preferred creditors” at the expense of all of their other creditors at large.  While the debtor may think that their Kohl’s credit card is worthy of special treatment, Congress and the Bankruptcy Courts look down on the practice of showing favoritism.  All creditors within a certain class ought to be treated equally in bankruptcy.
So, if a preference is voidable, that means the trustee has first dibs on whatever has been voided.  In the case of an ordinary preference or insider payment – he can sue to recover the preference payments.  In other words – that $5,000 you paid back to your mom right before filing for bankruptcy – that will likely have hurt your mother more than it helped her.
The trustee can also void improperly perfected liens: liens that were not perfected before the bankruptcy case was filed, liens that were perfected within 90 days of filing bankruptcy but after 30 days after acquisition.  In this event, the trustee steps into the shoes of the lien holder.  The debtor cannot exempt the value of a voided preference ahead of the trustee’s interest.
What usually happens?  Well, the trustee has a non-exempt asset that he wants to liquidate for the benefit of unsecured creditors.  This often results in a bidding war between the improperly perfected lienholder and the property owner / debtor.  The debtor is seldom in the financial ability to make an offer, but the potential to buy back the property with better financing terms exists – regardless of the probability.
Since the likelihood of a debtor obtaining financing is slim, the worst case scenario involves the debtor losing the collateral to the trustee and still being liable to the lienholder for the money due under the note.  As such, it is usually preferred that all PMSI liens be properly perfected before a bankruptcy case is filed.

A side-by-side comparison of Chapter 7 and Chapter 13 Bankruptcy.

Chapter 7
Chapter 13
Liquidation of non-exempt assets, discharge of general unsecured debts.
Reorganization and repayment plan.  Debts split into categories. Some paid in full, others paid a percentage based on income and other factors.
Time between filing and discharge is approximately 4 months.
Time between filing and discharge is approximately 3-5 years.
More Expensive
Must be below median or be able to “beat” the Means Test.
Surplus disposable income on either the Means Test or the budget.
Prior Bankruptcy
Ineligible to file if filed a prior Chapter 7 in the last 8 years or a prior Chapter 13 in the last 6 years.
Eligible to file even if not eligible for a discharge. Eligible for discharge 4 years after prior Chapter 7 or 2 years after prior Chapter 13.
If equity exceeds allowable exemptions, trustee can sell for benefit of unsecured creditors.
Assets are not liquidated, but repayment plan may require a minimum threshold paid to unsecured creditors to make them as whole as they would have been under Chapter 7.
Stay Protections
Both chapters stop collection efforts, lawsuits, wage garnishments, and utility disconnection.
Repossession & Foreclosure
Automatic stay suspends pending actions temporarily, but no adequate protection for arrears.
Arrears are cured. Foreclosure and repossession fully stayed pending successful completion of repayment plan.
Codebtor Stay
Other Issues
Preference payments, insider payments, transfers of assets, excessive gambling losses, and fraudulently incurred debt all pose the risk of adversary proceedings or denials of discharge.
Chapter 13 is sort of a fix-all remedy to anything that might be a problem in Chapter 7. Many issues become non-issues, or are mitigated with a floor amount paid to unsecured creditors spread out over the life of the repayment plan.
Non-dischargeable debts simply survive the bankruptcy.
Certain non-dischargeable debts (priority debts, such as taxes and child support) are paid in full.  Other non-dischargeable debts (such as student loans) can be paid down concurrently with unsecured creditors.
Most people have improved credit scores about 12 months after bankruptcy is filed, assuming they have made payments on surviving debts (e.g. mortgages, car loans, or student loans).
Credit rebuilds a little faster in Chapter 13 than in Chapter 7.