I have been a personal bankruptcy lawyer in Atlanta for more than 30 years and one of the trends that I have seen over all these years has been that personal bankruptcy is more complicated and confusing now than it is ever been in the past.
Back in 1988, for example, I would often see pro se (people who filed bankruptcy without a lawyer) appearing at 341 hearings and Chapter 13 confirmation hearings. At that time, a pro se filer could head over to Office Depot and buy Chapter 7 or Chapter 13 forms, fill them out with a pen, make copies and stand in line with everyone else to file a case.
In those days, there was no online access to the Clerk of Courts office and everyone – lawyers and non-lawyers – would have to stand in long lines with 5 or 6 copies of bankruptcy petitions and wait for the clerk to hand stamp each copy.
Bankruptcy schedules in 1988 were fairly straightforward and other than figuring out how to declare the right exemptions to protect property, a reasonably intelligent person could muddle through a Chapter 7 case. Chapter 13 cases were problematic for pro se filers even in the 1980’s but occasionally a friendly trustee would take the time to help a non-lawyer navigate the waters of Chapter 13.
Bankruptcy in 2018 – Complex and Complicated
Fast forward to 2018 and I think that a pro se filer has little to no chance at successfully completing either a Chapter 7 or Chapter 13 case without guidance from an experienced lawyer.
Earlier this week, I volunteered at a program sponsored by the Georgia State College of Law in Atlanta where I was available to pro se bankruptcy filers to answer general bankruptcy questions. Another local bankruptcy lawyer was there as well. We had several folks stop by and every person we spoke to had a huge mess on their hands.
No one understood how bankruptcy exemptions worked and every pro se filer either overstated their permitted exemption, used the wrong statute or failed to declare any asset as exempt at all.
One gentleman I spoke with had filed a Chapter 7 to stop a foreclosure and had just appeared at Motion for Relief from Stay where the judge lifted the automatic stay to allow a state foreclosure proceeding to commence. In case you were not aware, Chapter 7 is not the right bankruptcy choice for someone trying to save a home – this gentlemen should have filed a Chapter 13 to set up a repayment plan.
I am not blaming these folks for not knowing what to do – I would fare no better trying to complete a complicated tax return or fill out immigration paperwork. My point is that these men and women who came to ask for help were trying to understand a very non-intuitive area of law that requires knowledge of federal and state statutes and knowledge of local rules of practice.
The individuals who came to the pro se clinic at least had some idea that they needed help. For every person who stopped by there are 100 more who neither understand what to do, nor do they know what they do not know.
Risks for Pro Se Filers
Bankruptcy schedules for both Chapter 7 and Chapter 13 have become lengthier and more complex. The clerk requires cases to be filed electronically (the Clerk in Atlanta has a scanner at the clerk’s office for pro se filers to use). Information online is plentiful but not necessarily accurate or up to date. For example, as I write this blog post in June, 2018, a search of “Georgia bankruptcy exemptions” includes a link to Justia, a respected legal publisher, and an outdated version of the Georgia exemption statute. If you relied on this version of the exemption statute you would conclude that you can only protect $10,000 of equity in real estate. In fact, Georgia law now allows you to protect $21,500 of equity.
Another very real risk to filing pro se is that some decisions in bankruptcy cannot be “undone.” For example, if you own or have ownership interest in a house worth $100,000 that is not encumbered by any debt, and you file Chapter 7 in Georgia, your case would show significant non-exempt equity. The Chapter 7 trustee would seize that non-exempt equity and force a sale of your house and there is nothing you could do to dismiss your case. This is an extreme example but one that does happen, and there are other serious consequences of starting a bankruptcy case without understanding all the implications of filing.
Is it fair to struggling consumers that filing bankruptcy has become so complicated and confusing? No, it is not fair at all. I understand why a person with no money would balk at spending close to $2,000 to file Chapter 7.
Unfortunately, however, you do not really have any good options other than hiring a lawyer to help you file bankruptcy. Filing bankruptcy on your own without a lawyer will inevitably create more problems than you could ever expect.
Are you familiar with the term cognitive bias? A cognitive bias represents an error in reasoning or decision making when you disregard accurate information in favor of your subjective preferences and beliefs.
In other words, you exhibit a cognitive bias when you “go with your gut” rather than more objective information.
Taken to an extreme, cognitive biases can lead you into bankruptcy, or can prompt bad choices when you are in bankruptcy. Here are some examples.
Have You Fallen Victim to the Sunk Cost Fallacy?
One cognitive bias I see frequently in my bankruptcy practice is the sunk cost fallacy. It usually takes the form of a client refusing to surrender an expensive and unaffordable house or car because “I have put so much money into that house/car I would be throwing all that money away if I gave it up.”
Obviously, your financial capacity to pay a car note or mortgage in the future has nothing to do with what you have invested in that item in the past. Either you can comfortably afford your purchase or you can’t, and if you are contemplating bankruptcy you should fight against the sunk cost fallacy. There is an old saying “don’t throw good money after bad” which is the correct frame of mind if you are struggling with a sunk cost decision.
Has a Slick Salesperson “Framed” You?
Another cognitive bias I see frequently is called the framing effect. This occurs when a salesperson offers selective facts to induce you to make a purchase you really don’t need. Time share salespeople use the framing effect to convince you that you will save tens of thousands of dollars on your vacations by buying a time share in Orlando or Myrtle Beach as compared to the cost of staying in a hotel for a unique vacation every year.
After the purchase, of couse, you discover that maintenance fees and one time assessments eat up your savings, that you probably won’t want to go to the same place every year, that the weeks you can “trade” don’t fit into your schedule, and that there is absolutely no market to sell an unwanted time share.
Even if you can use the sunk cost fallacy to try to justify your time share purchase, I challenge anyone to argue that two or more time share accounts make sense – but I see struggling families stuck with multiple time shares all the time.
Water purification systems, solar panel installations and carpet shampooing systems are often pushed by aggressive salespeople who use the framing effect to convince customers to spend money they don’t have on services or products they don’t need.
Bankruptcy Can Help Undo Bad Decisions
There are many more cognitive biases identified by psychologists but you get the picture. Everyone falls prey to lapses in judgment. We all rationalize wants by characterizing them as needs and if we are talking about a $100 pair of shoes vs a $50 pair, not much harm is done.
But if you can’t pay for necessities like food, clothing and shelter because your disposable income is paying for housing or transportation that you cannot afford, or for non-necessities like a time share or a water purification system, it may be time to talk to a bankruptcy lawyer. Bankruptcy can get you out of bad deals and undo poor decision making. More importantly bankruptcy can help you regain your peace of mind and can help restore peace in your family.
My community was recently rocked by two businesses who were suddenly in Chapter 7 bankruptcy with unhappy clients and customers. Chapter 7 bankruptcy for business is a very different process than when people file for Chapter 7 bankruptcy. A business in Chapter 7 no longer is able to conduct business and any assets are subject to liquidation by the appointed Chapter 7 trustee.
Questions and letters to the editor followed regarding the bankruptcies as community members wondered what could be done. One business was a car sales lot and the other was a funeral home. In each case, allegations of misconduct flew as those who were owed money (who were now creditors) felt that the bankruptcy filings were unfair to the “creditors”. In the funeral home case, there have been press releases from the Department of Justice advising that any creditors should file a claim with the bankruptcy court. Surprisingly, there were only a few claims filed before the deadline (and no claims were filed in the car sales case).
First, look at why you were listed as a creditor. In the funeral home case, customers of the funeral home who had prepaid for funeral services or who had prepaid for internments were not going to get those services/goods that they had paid for in advance. In the car sales lot case, customers who had paid for clear titles to vehicles did not receive what they had purchased. Each of those people was now a creditor of the failed business.
The bankruptcy court has made it very easy to file a claim, also known as a “proof of claim”. It can be done via mail using the Bankruptcy Court’s official form or via the internet on each court’s website (the link for Oregon, for example, is here). A link to each Bankruptcy Court’s website is found here.
There are rules about the documents to be submitted with the claim (which prove that the debtor owes money to the creditor). Those documents cannot disclosure account numbers, social security numbers, or minor children’s names. The documents cannot violate the medical privacy laws. Whoever files the documents must make sure that this kind of information is hidden or “redacted” from the documents.
When do claims get paid by the trustee?
The bankruptcy trustee has a period of time to review claims to make sure that the claims are accurate and valid. The trustee also liquidates assets, if any, of the business, to change those assets into funds to pay claims. After the trustee reviews, the trustee submits a report to the Court. Just because a claim is accepted does not mean it will be completely paid. There may not be enough funds. The trustee pays debts in a certain order, with domestic support, taxes, and administrative priority claims being paid first. Then, other claims are paid, such as secured taxes, before any unsecured claims are paid. Often, only a percentage of a claim is paid.
Why should you file a claim?
If a debt is owed, a creditor should file a proof of claim in order to be paid. If no claim is filed, no payment will be made. The payment may not be 100% but at least you attempted to be paid what you were owed.
What should a consumer/creditor avoid doing?
The automatic stay protects ALL debtors in bankruptcy. It is important that a consumer who suddenly finds that they are a creditor not violate the bankruptcy rules about attempt to collect a debt during the bankruptcy or after the bankruptcy is completed. Sanctions can be awarded against any creditor who violates the rules, even the unwary consumer creditor.
Some time ago, I posted a video on my YouTube channel posing the question “Can I Go to Jail for Not Paying Credit Card Debt?” The answer to this question is “no” – if you don’t pay your credit card bill, the lender bank can sue you for money damages, but they have not power to throw you in jail.
Only the state or federal government has the power to incarcerate you for not paying debts and the type of debts that could result in jail time include unpaid such obligations as past tax debt, fines due to governmental units, past due child support and other debts owed to governments.
Interestingly I get comments on this video claiming that the commentator or someone the commentator knows has been put in jail for common private debt like unpaid credit card bills and other signature loan.
It turns out that there is some truth to what my video viewers are saying.
Statistically, less than 5% of defendants to these lawsuits respond and well over 90% of collection lawsuits go into default, which means that no written answer is filed to the lawsuit, or that the plaintiff does not show up in court to contest the allegations.
When a lawsuit goes into default, the plaintiff wins automatically and it will obtain a judgment from the court stating that you owe the money as alleged in the lawsuit. Armed with that judgment the plaintiff – now called a judgment creditor – can garnish your wages, seize your bank account and place a lien on your property.
This obligation, which was an unsecured debt backed by your promise to pay, has, by virtue of a default judgment, turned into a secured debt, with the security (collateral) being your wages and everything you own.
This is why you should never ignore a lawsuit and you should call a lawyer immediately if you are sued.
Often, however, the judgment creditor does not know where you work, what you own or anything else about you that would help it satisfy its judgment. In these circumstances your judgment creditor will serve you with post-judgment interrogatories or serve you with notice to appear at a deposition where you can be questioned about your assets and income.
Not surprisingly, if you never responded to the original lawsuit or notice of hearing, there is a good chance that you won’t respond to any post judgment discovery (interrogatories, depositions, etc.). This is where real trouble can begin.
Judgment Creditors Use the Civil Justice System to Criminalize Debt Collection
Judgment creditors know that most debtors will not voluntarily cooperate with the post-judgment discovery process. If you do not respond or appear, the creditors attorney will go before the judge and ask the judge to issue a civil warrant for your arrest. The warrant is issued because of your failure to respond to discovery and appear in court.
These warrants go into the computer systems of local police agencies and the next time you get pulled over for a minor traffic violation or are involved with the police for any reason, you will be flagged for the outstanding warrant and then put in jail.
The only way to get out of jail is to pay bail equal to what you owe, and most people don’t have hundreds or thousands of dollars available to pay. So they sit in jail for weeks or months. Keep in mind as well that most judgments include a provision adding interest so you may have to come up with significantly more money than you originally owed.
The same process can happen if you owe a relatively small traffic fine or fines for other minor offenses. Your failure to pay can turn into contempt of court and then incarceration.
So, while debtors’ prisons do not technically exist in the United States, an aggressive and knowledgeable collection law firm can easily use the contempt power of the civil justice system to throw you in jail for not paying a private debt.
It may be tempting to ignore debt you cannot pay with the hope that the creditors will get frustrated and just go away. Unfortunately the collection system in the United States has become very streamlined and very efficient so that your account is not likely to fall through the cracks.
You Can Fight Back Against Aggressive Debt Collection
The good news is that you have some leverage in the form of the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Telephone Consumer Protection Act. You also have the bankruptcy option available to you. These laws offer both debt relief and negotiation leverage. Because collection agencies and collection lawyers work on dozens and dozens of files, they often make mistakes and you can fight back.
But if you ignore adverse collection activities and wait until you are sitting in jail to seek legal help, you may forfeit some of your rights and you may not have the time or resources to fully assert your rights.
We bankruptcy lawyers may sound like a broken record but here is our advice: if you owe money that you cannot pay, or if you are sued for a debt, don’t guess about your options. Call a bankruptcy lawyer for advice. Most personal bankruptcy lawyers will speak with you at no cost and you are certain to know more when you finish the call than when you start.
The Automatic Stay is an order entered by the federal bankruptcy court directing that all debt collection actions against a debtor that has filed for bankruptcy protection stop. In most bankruptcies, the stay ordered is entered automatically by the court clerk when the case is filed. There are some statutory exceptions that apply in the event of repeat filings.
The automatic stay is authorized by 11 USC §362, a section of the bankruptcy code that details its provisions. This important statute prevents the taking of just about any type of action that improves or advances the position of a creditor after the case has been filed, including but not limited to:
The commencement or continuation of any judicial, administrative or other process against the debtor;
The enforcement of a judgment that was obtained before the bankruptcy was filed;
Any act to take possession or control of an asset of the debtor or the bankruptcy estate;
Any action to create, improve, complete or enforce any lien against an asset of the debtor or the bankruptcy estate; or,
The setoff of any debt owing to the debtor that arose before the bankruptcy case was filed.
The automatic stay is intended to provide time for the debtor to reorganize financial affairs or the bankruptcy trustee to liquidate assets in an orderly manner and distribute proceeds to creditors in order of priority.
The automatic stay will not stop criminal proceedings against the debtor. It does not prevent the commencement or continuation of many domestic relations matters or other special proceedings such as:
An action to establish paternity;
An action to establish or modify an order for domestic support obligations;
A proceeding concerning child custody or visitation;
An action to dissolve a marriage (except for the division of property);
A proceeding regarding domestic violence;
Actions for the collection of domestic support obligations (when property of the estate is not involved);
The withholding of income for the payment of a domestic support obligation;
The withholding, suspension or restriction of a driver’s license, professional or occupational license, or recreational license under state law to enforce the payment of a domestic support obligation.
There are some other, less common exceptions that apply in specialized situations generally related to the police powers of the government to enforce laws or regulate commercial activity.
The 2005 bankruptcy code revisions contained some important new provisions that limit the power of the automatic stay. In order to prevent repeated bankruptcy filings, when a bankruptcy case has been dismissed once within one year, the stay order only remains in effect to protect the debtor for a period of 30 days unless the court agrees to extend it. If there have been two bankruptcy cases dismissed within one year, there is no automatic stay at all for the debtor.
The automatic stay is an important benefit accorded to a debtor in bankruptcy. Because bankruptcy rules can be very technical, and a case can be dismissed for many reasons, the possible loss of the automatic stay makes it particularly important to get things right when the bankruptcy is filed. This is a good reason to hire a competent bankruptcy lawyer to help you.
The automatic stay is a very powerful court order that gives the debtor a breather and stops creditors in their tracks. It can stop a wage garnishment, a tax levy or the foreclosure sale of a home or other property. It can even stop the collection efforts of the IRS or other tax collectors. If the bankruptcy is properly filed, the automatic stay will give the debtor a second chance to keep their home and protect their income.
The bankruptcy stay does not last forever. It can be removed by the court to allow a foreclosure to go forward or a car to be repossessed to protect the rights of a creditor. However, when it is possible for the debtor to bring a defaulted home or car loan current, or when a financial reorganization is possible, the automatic stay can be an important ally for a debtor in bankruptcy.
One of the more powerful tools available to you when you file a personal bankruptcy has to do with your option to cancel an installment contract and surrender secured collateral. This applies to all forms of secured collateral, including such things as houses, motor vehicles, furniture, and jewelry.
In a Chapter 7, your surrender of secured collateral will usually mean an end to your obligation to the secured creditor. Any remaining debt owed to the creditor for a deficiency balance will be treated as unsecured debt and unsecured debt is generally going to be eliminated with your Chapter 7 discharge.
In Chapter 13, however, your act of surrendering collateral does not necessarily mean that you are done with the now unsecured creditor. Unsecured creditors often do get paid in Chapter 13 – sometimes as little as 1 penny on the dollar, but sometimes as much as 100 pennies on the dollar (i.e, they are paid in full).
In fact, debtors often find themselves in Chapter 13 because they have too much equity in property to fit in to a Chapter 7, or because they have too much disposable income to qualify for a Chapter 7. In these cases, unsecured creditors are likely to receive distributions from the Chapter 13 plan.
When you surrender “big ticket” secured property like a house or a car, the secured creditor can file, or amend a prior filing, to reflect an unsecured debt arising from their deficiency claim. For example, if you file your Chapter 13 and include a $25,000 debt to Ford Motor Credit, and you elect to surrender that vehicle back to Ford in your plan, Ford will ask the bankruptcy judge to lift the automatic stay, sell the vehicle, then file an unsecured claim for any deficiency balance.
In this example, if Ford sells the surrendered vehicle for $15,000 at an auto auction, Ford would have the right to file a $10,000 unsecured claim.
If your plan calls for a 100% dividend to unsecured creditors, that $10,000 unsecured claim will increase your plan obligation by approximately $167 per month.
As a practical matter, your surrender of secured collateral could also create delays in the confirmation of your case. I am currently representing a Chapter 13 debtor in a case filed in September 2017. Our plan, filed at the same time as the case, calls for surrender of a large SUV to the secured creditor. Despite this, the secured creditor filed a secured proof of claim totaling $18,000 plus interest.
I called and wrote the creditor to try to move the surrender along. Despite my efforts, nothing happened – the creditor took no initiative to recover the vehicle.
Finally, after about 6 weeks, I filed a Motion to Disallow Claim. I appeared in court but the creditor did not show up. The judge issued an order disallowing the secured claim but allowing the creditor to file an unsecured claim.
Finally, in December, the creditor picked up the vehicle. In early February, the creditor filed a motion for relief from stay (this is necessary so that the creditor can sell the vehicle). This motion is scheduled for a hearing in late February. I have no objection to the motion because I want the vehicle sold.
Assuming the creditor follows Georgia law regarding the sale of a surrendered vehicle, we won’t have a deficiency claim filed until mid-March at the earliest.
Meanwhile, the Chapter 13 trustee keeps resetting the confirmation hearing in this case because we don’t have a final list of all claims. Remember, this case was filed in September, 2017 and it is unlikely to be confirmed until late March or even April of 2018. And I may have to increase the plan payment if the deficiency balance comes in higher than expected. Very frustrating for all concerned but we are at the mercy of the slow moving secured creditor.
If you plan to surrender a house in your Chapter 13, you could very well face the same issues, depending on how your state law provides for real estate deficiency claims.
Did you ever wonder if you will lose your property if you file bankruptcy? Can you keep your home, your car, your household goods? What about your clothes and jewelry?
How Exemptions Work in Bankruptcy - YouTube
The part of bankruptcy law that tells us what you can keep while using bankruptcy to get rid of debts are the bankruptcy exemption laws that apply in your case. Exemptions are a strange part of bankruptcy law in that different rules apply depending on where you file your case. Your state may have its own exemption statute, or it may use the federal statute, or it may allow you to choose one or the other.
In the examples shown in this video, I refer to Georgia law since I work and practice in Atlanta, The rules that apply in your state will be different and you should always seek advice from an experienced lawyer in your city or town.
If your attorney does not understand how exemptions work, you could end up in the wrong type of bankruptcy, or you could lose property that should be protected. Similarly, if you have recently moved into a new state, your lawyer will have to advise you about the correct exemption laws to use.
Finally, be very aware that information about bankruptcy exemptions published on the Internet may be outdated or inaccurate. In this video, I show you an example of outdated exemption rules published by a well known and well respected legal publisher.
An increasing number of our senior citizens are faced with the same problems faced by many of our young adults: student loans. A recent PBS story, “More older Americans than ever are struggling with student debt,” highlights an issue that many bankruptcy attorneys have seen in recent years. As the article notes, ” The number of Americans age 60 and older with student loan debt quadrupled between 2005 and 2015 to nearly 3 million. And the average amount they owe has nearly doubled from 12-thousand dollars to almost 24-thousand.” That’s a lot of debt–my cheap calculator doesn’t have enough digits to display it, but it works out to about $72 billion dollars.
[Grand]Parent Plus loans, co-signing on private student loans, children and grandchildren who go into default on these loans, and even old, unpaid student loans they took out years ago are all resulting in collection efforts against seniors who just wanted to help a child or grandchild get a college education. And once a loan goes into default, the powers of the student loan collectors are massive. If a government loan, there is no statute of limitations, meaning that they can collect, quite literally, forever. I once had a client who was sued in 2014 for a student loan from 1976. Perfectly legal. (I was successful in getting the Court to throw the case out of court because of a doctrine called the “statute of repose,” meaning that because of the passage of time, my client could not have been reasonably have been expected to keep the records showing that he paid off the loan in the 1980s.) Government collectors can obtain an “administrative garnishment,” meaning that they can garnish wages and attach your bank accounts without having to sue and get a judgment. They can even garnish your Social Security! Private student loan collectors do have to deal with the statute of limitations, and do have to sue you before they can garnish or attach.
What are your options if you are faced with a student loan in default? One option that you may not have considered is a Chapter 13 bankruptcy.
“Aren’t student loans non-dischargeable?” most people ask. Not always, However, depending on circumstances, it nevertheless can be difficult and expensive to obtain the discharge in bankruptcy of student loans. But a discharge isn’t always necessary for a Chapter 13 to help.
When you file for Chapter 13, a provision of the Bankruptcy Code called the Automatic Stay goes into effect immediately. The Automatic Stay prohibits all creditors–including student loan creditors–from taking any action that could be considered an attempt to collect a debt from you or your assets. They cannot call you. They cannot send you nasty letters. They cannot send you bills. They cannot sue you, or continue with a pending lawsuit. They cannot attach, garnish, repossess, or foreclose on your assets. All proceedings immediately stop. The Automatic Stay remains during the entire course of your case, five years for a typical Chapter 13.
What do you need to do during that time? You have to make a monthly payment to a trustee, who takes that payment and distributes it to all of your creditors. How much will that payment be? It depends on your circumstances. But many of my senior clients in these circumstances have little more than Social Security and a small pension as income, so their payment is small–$25.00 a month. And as long as they make it, the Automatic Stay completely protects them from all collection efforts.
A Chapter 13 isn’t a long-term remedy–until Congress changes the law to allow for the discharge of student loans, it usually will not result in the discharge of the student loan. But it will stop the immediate problems, the calls, letters, garnishments and attachments. It will relieve a significant amount of stress, both emotional and financial. It will let you move forward instead of being dragged backwards. It will let you live your life free from the student loan collectors. It is something to seriously consider.
If you are facing a foreclosure, vehicle repossession, wage garnishment or other financial crisis, Chapter 13 bankruptcy can be a great tool to stop the chaos. As the type of bankruptcy that includes a repayment plan, Chapter 13 can empower you to reduce your monthly payments, eliminate accruing interest on credit card debt, reduce your total indebtedness – all while protecting your real and personal property from creditor actions.If you are facing a foreclosure, vehicle repossession, wage garnishment or other financial crisis, Chapter 13 bankruptcy can be a great tool to stop the chaos. As the type of bankruptcy that includes a repayment plan, Chapter 13 can empower you to reduce your monthly payments, eliminate accruing interest on credit card debt, reduce your total indebtedness – all while protecting your real and personal property from creditor actions.
When Chapter 13 plans work, they can literally be life changing and every experienced bankruptcy attorney can recount stories of grateful clients who successfully completed their Chapter 13 plans with property intact and debt gone.
Unfortunately, however, most Chapter 13 plans fail before completion – in some jurisdictions the failure rate is 65% or higher. Often repayment plans fail not because of bad faith on the part of debtors or even because of unrealistic budgeting.
Sometimes cases fail because debtors don’t fully understand their obligations under their filed plan, or because their lawyers are inexperienced with Chapter 13 law and practice.
Many times plans fail because of the same unpredictable factors that drive people into bankruptcy in the first place:
unexpected job loss or changes
unexpected home or vehicle repair needs
Unfortunately, most Chapter 13 trustees will not allow you to allocate any money from your household budget to an “emergency fund.” Instead, every penny of your disposable income must be paid into your Chapter 13 plan.
This means that for the duration of your Chapter 13 case – usually 60 months (5 years) you have to hope that you experience no interruption in pay, no unexpected home or vehicle repairs, and no family emergencies. And if you do have an emergency you have to contact your lawyer and file a motion to suspend payments, or reduce your plan payments and hope that the numbers work and that you can struggle through.
Statistics, in the form of the high rate of failing Chapter 13 plans, suggests that the bankruptcy system’s current approach to household budgeting does not work but until a change occurs in the “institutional mindset” we are stuck with the current system.
If your Chapter 13 Repayment Plan is Dismissed by the Court You Can Refile…With Strings Attached
If your case does get dismissed because of your failure to keep your trustee payments current, you (usually) do have the option to refile. However the bankruptcy law does not assume good faith for refiled cases.
A number of years ago, bankruptcy judges looked at refiled Chapter 13 cases on a case by case basis. And, yes there were some abuses. Dishonest debtors would file Chapter 13 to stop a foreclosure, then transfer the property to friends and relatives who would file, dismiss and refile solely for the purpose of avoiding foreclosure and living in homes for free. In states with judicial foreclosure, where the process can take months or years, a scheming debtor could live for free indefinitely.
Obviously these cases of abuse captured the headlines, even while the majority of dismissed Chapter 13 plans arose from the classic factors of income loss and/or untimely expenses.
Cases of abuse make for good theatre, so Congress decided to solve a small problem with a sledgehammer. In 2005, Congress changed the bankruptcy laws to discourage refiled cases. Under the law, if your Chapter 13 case is dismissed, and you refile a second case within 1 year from the date that the first case was still in force, the automatic stay will remain in force for only 30 days. If you want the stay to remain in force longer, you have to file a Motion, get a court date and appear before a bankruptcy judge to explain why your second case was not filed in bad faith.
If you need to file a 3rd or subsequent case within one year that a prior case was pending, the automatic stay does not go into effect at all, meaning that if you are trying to stop a foreclosure or repossession, bankruptcy will not help you in an emergency situation. You can schedule a hearing before a judge to explain why your third case is legitimate but you can expect a 20 to 30 day wait time before a hearing can be scheduled.
Should You Refile?
Given the likelihood that your Chapter 13 case will fail, your requirement to project a 5 year budget that does not allow for emergencies, and the hostility of the bankruptcy law to refiling, what should you do if your Chapter 13 case is dismissed because of an unexpected financial event?
I think that you and your lawyer should have a realistic talk about what to do. You may decide to give Chapter 13 another shot but if you do, recognize that you could be “throwing good money after bad” and only delaying the inevitable.
When I counsel Chapter 13 clients about refiling I look critically at all secured debt. Would it make sense to look for a cheaper place to live or a less expensive form of transportation? Can we give up hard assets to make the Chapter 13 plan less expensive and my clients’ budget less tight? Does it make sense to look into filing or converting to Chapter 7 and starting over?
If we do choose to refile, does my client understand the risks and the reality that this refiled case is his/her last chance to make Chapter 13 work? Is household income stable enough to get us through at least one year, if not the full 5 year term of a Chapter 13 plan?
However you decide to proceed, you should go into a refiling with a different mindset that you might have with a first time filing. I tell my clients “if you are meeting with a bankruptcy lawyer everything needs to be on the table.” This is never more true than when considering refiling your Chapter 13 case.
Next to home mortgages, motor vehicle loans are often your most expensive purchase. According to USA Today, the average transaction cost of a new car or truck sold in the U.S. was around $33,500. Lenders are now extending vehicle purchase loans to 6 years or longer, and when interest rates are factored in, you can easily find yourself responsible for $40,000, $50,000 or more.
Unlike real estate purchases, motor vehicles are depreciating assets. If you finance your car or truck over 4 to 6 years, there is a good chance that you will owe more on your vehicle until year 3 or 4 of your contract. This means that in the event of a financial crises such as an illness or job layoff, you won’t be able to eliminate your financial obligations by selling your vehicle.
If you “roll over” your loan into a new loan for a less expensive car, you’ll just delay your day of reckoning because you will end up owing far more on the less expensive car than it will ever be worth.
Further, your installment payment is not your only vehicle expense. Insurance costs can rise quickly and unexpectedly if you or a family member has an accident. Routine maintenance and service such as new tires and brakes can add to your cost of ownership.
In sum, an unexpected job loss or change, illness, insurance claims or any number of other factors could turn that shiny new car into a major financial headache.
Bankruptcy and Car Loans
Personal bankruptcy offers a number of options to address this “too expensive car” problem. The easiest choice would be to use the power of bankruptcy to cancel contracts and surrender your vehicle back to the lender. In a Chapter 7, any deficiency balance will be discharged as an unsecured debt, and in a Chapter 13, any deficiency balance will be paid as an unsecured debt, often at pennies on the dollar – if the lender even bothers to file a proof of claim.
Another option would be to use the cram down provision in the Bankruptcy Code to restructure your vehicle installment loan as part of a Chapter 13 bankruptcy. Applicable if your loan originated more than 910 days (about 2 ½ years) prior to filing, a Chapter 13 cram down allows you to modify the interest rate (usually) and to reduce your outstanding principal balance to equal the fair market value of your vehicle.
If you owe substantially more than the value of your vehicle, this cram down can save you thousands of dollars.
Even if you cannot cram down your loan, you can still reduce your monthly payment by including the unpaid balance in your Chapter 13 plan and setting a payment to the vehicle lender that fits your budget. You are not obligated to pay the contract rate to the vehicle lender in a Chapter 13.
Obviously the decision to file a Chapter 7 or Chapter 13 should be made in consultation with an experienced bankruptcy lawyer and with full knowledge about how bankruptcy will impact you.
However, if you are having or foresee problems with payments due one or more vehicle lenders, you should certainly learn about and consider your bankruptcy options.