How to help someone who can’t pay his debts

From budgeting to bankruptcy

How to analyze the problem

• What can creditor legally do?– Now, and down the road

• No lawsuit filed– Convince debtor to pay– Force debtor to pay

• Lawsuit filed, no judgment– Pre judgment remedies

• Post-judgment remedies

Prejudgment remedies Private parties

• Remedy– Self help repossession

• Cars• Furniture, appliances

– Bank set off – Wage assignment– Constant dunning

letters, collection calls

• Debtor response– Refuse to surrender

• Don’t expose car• Don’t let them in house

– Move account– Revoke it– If debt collector,

FDCPA. If not debtor collector, just say no

Prejudgment remedies by government - replies short of bk

• Recoupment of welfare or unemployment benefits, and offset against federal benefit payments– Ask for waiver; negotiate payment plan

• Tax refund intercept– Reduce tax withholding

• Federal administrative wage garnishment

• Drivers license suspension, boot on car

Post-judgment remedies

• Wage garnishment

• Non wage garnishment and third party citations to discover assets

• Forced sale of real or personal property

• Orders entered after citation to discover assets

Debtor defenses

• State court litigation – Defense, don’t owe amount claimed. – Counterclaims– Sue third party, either in same lawsuit or

separate lawsuit

• Exemptions– Claiming exemptions– Maximize exemptions – planning

• Bankruptcy !?

Illinois exemptions 735 ILCS 5/12-1001 & 12-1006

• Necessary clothing

• Alimony & child support

• Retirement plans or accounts – unlimited

• Social security, UI & public assistance– Includes earned income credit

• Principal residence owned in tenancy by the entireties is exempt from unsecured debts owed only by one spouse

Illinois Exemptions735 ILCS 5/12-901 & 5/12-1001

• Homestead - $15,000 one; $30,000 two or more– Real or personal, owned or leased

• Wild card any personal property - $4,000

• One motor vehicle - $2,400

• Can stack unused wild card onto motor vehicle exemption

Exemption issuesLimits on exemptions

• Exemptions don’t work against– mortgage foreclosure– Purchase money security interests – Debts for child support or alimony

• Exemptions work– Against unsecured debts– against judgment liens as long as home

equity is less than exemption amount

Repayment options

• Voluntary agreements– to repay one creditor

• Creditor may be required to allow repayment over time

• US Dept of Education regulations on many student loans give right to affordable repayment plans

– To repay many creditors • Credit counseling/ debt management plans?• Cf. Chapter 13

Repayment options

• Court ordered or supervised

• State Court– Small claims cases – S. Ct. Rule 288– Debtor agrees to pay vs. creditor agrees to

forbear if payment made

• Bankruptcy court– Chapter 13– Chapter 7 with reaffirmation of selected debts

Change of pace

• Be tactful if you go down this path• Can client reduce expenses?

– Client may need help with budgeting, or in cutting back on life style

– Client may be eligible for programs such as Medicaid or AllKids

• How about increasing income? – Second job? Get at tenant or boarder. Apply

for government benefits. Benefits check up?

Analysis when money is owed.

• Doing “nothing”– The judgment proof client.

• FDCPA or judgment proof letter. • Allay client fears

– The vulnerable client• Minimize loss./ hardship• Payment plan; refinancing

• Threat of bankruptcy as negotiating tactic– Bankruptcy overreaction, not a credible threat

Is bankruptcy an option?

• Will debt be discharged? • Will client lose non-exempt property, or have to

pay value of property to prevent loss?• Will client be forced into Chapter 13 repayment

plan that is more expensive than just paying the debt?

• Will cost of bankruptcy outweigh benefits?– Filing fee, attorneys fees, administrative expenses– Effect on cost of future credit

Traps for clients

• Fraudulent transfers– Actual fraud– Constructive fraud

• Preferences– What are they? Cf. fraudulent transfers

• Failing to take full advantage of exemptions– Commingling exempt and non-exempt funds

More traps for clients

• Paying the wrong debts– Unsecured instead of secured– Dischargeable instead of non-dischargeable– Low interest instead of high interest– Balance transfers can have hidden fees– Paying persistent creditors

• Transforming dischargeable debts into nondischargeable debts– E.g. paying taxes with credit card

Still more traps for clients

• Bankruptcy fraud– Bankruptcy requires full disclosure– While many past financial sins are forgiven,

must be completely honest during the bankruptcy

• Throwing good money after bad– Example – taking money out of 401(k) that is

not enough to avert bankruptcy

• Bad timing

Timing can be everythingReasons to file sooner

• Deadlines• to stop foreclosure,• Eviction for

nonpayment• tax deeds,

• Loss of car

• sale• 5/10/14 day notice

runs out• Right to redeem

expires• Before public or

private sale

More reasons to file sooner

• If ongoing garnishment or utilities are off– every day counts a little bit

• If home equity is growing and will exceed homestead exemption– waiting only benefits creditors

• Involuntary transfer that can be set aside as preferential or fraudulent transfer– Can only go back so many days from filing bk

Timing – reasons to wait

• Expenses still exceed income• No health insurance• Recent credit card charges

• over $500 for luxury goods within 90 days• Over $750 for cash advances within70 days

• Recent voluntary transfers • Need to complete exemption planning

• Tax refund not yet received and spent down

• Income taxes owed will be dischargeable

Who can/ should file?

• Husband and wife can file joint petition – Joint filing fee same as for individual

• But may not need to – Co debtor stay may protect non filing spouse– Only one is vulnerable; can file later if needed

• Heirs and other non-signers can file– Debtor who owns property but didn’t sign

mortgage can file Chapter 13 to save property

No right to dismiss Chapter 7

• There is no right to dismiss Chapter 7 case

• If debtor is caught hiding assets, etc. can get worst of both worlds. – No discharge– Trustee takes assets and sells them– May lose right to exemptions

Slogan of the day

• Bankruptcy should be a last resort, but not a last minute decision

Purposes of Bankruptcy Code

• Fresh start– For the honest but unfortunate debtor

• Who can’t afford to pay debts – see “means test”

• Reorganization (Chapters 11, 12, 13)– Plan to pay at least some debts– Individual debtor retains property– Business can continue to operate and save

jobs

Key concepts

• Automatic Stay– Protects debtor – Protects property of the estate

• Property of the bankruptcy estate– Broad definition– all property rights & interests

• Discharge – Injunction against collection of debts– Some debts may not be discharged

Automatic Stay Overview

• Automatic

• Broad scope– Related concept – extension of time

• When stay does not apply

• Relief from automatic stay

Extension of time

• Trustee has up to 60 days to take action if the time for such action had not expired when the case was filed. 11 USC §108(b)

• This can be used to get more time to redeem property taxes

• Debtor may get more time by filing Chapter 13.

Automatic StayNotable exceptions

• Criminal and regulatory actions

• Establishing paternity

• Establishing or modifying alimony or support

• Collecting alimony or child support

• Post-petition debts

Exempt property

• Debtor keeps exempt property• Property must be listed and claimed as

exempt• Illinois has opted out of federal exemptions• Debtor can claim

– Illinois exemptions– Non bankruptcy federal exemptions– complicated if moved from out of state in last

2 years

Discharge of debts

• Purpose – fresh start for debtor• Discharge is injunction against collection

attempts– Remedy for violation is contempt

• Doesn’t cover post-petition debts• Must complete debtor education

DischargeFresh start

• Utility service– Cannot be denied because of dischargeable

debt– Must pay deposit but not old bill– If stolen service, Chapter 13

• Drivers license– Restored if suspended for nonpayment of

debt

• No discrimination by governmental units or employers

DischargeExceptions to discharge

• Some debts are never discharged– Creditor can collect once automatic stay ends,

does not need express permission from court

• Debts which are discharged unless creditor takes timely action in bankruptcy court

• Student loans are only discharged if debtor proves undue hardship in bankruptcy court– Alternatives – loan consolidation, deferrals

DischargeDebts that are never discharged

• Child support and alimony

• Criminal fines and restitution orders

• Drunk driving resulting in personal injury

• Trust fund taxes

DischargeDebts that may be discharged

• Income taxes~ > 3 years, 3 months & 15 days old, return filed

• Debts where creditor fails to timely object– Fraud– Theft, embezzlement, breach of fiduciary duty– Willful and malicious injury

DischargeChapter 13 enhanced discharge

• Chapter 13 need not pay 100% of unsecured debts

• Successful Chapter 13 discharges – Civil fines– Debts incurred to pay taxes– Property settlements and division of debts

arising out of divorce

Discharge and secured debtOnly personal liability is discharged

• Personal liability on a debt is discharged– Non filing co-obligors are still liable

• But valid liens on property survive

• Debtor not liable for any deficiency after repossession or foreclosure

Secured debtsChapter 7 – ways to retain property

• Avoid liens on some exempt property– Judicial liens that impair exemptions– Non purchase money liens on household goods

• Redemption (redemption lenders for cars)– Has to be at retail value, not wholesale

• Reaffirmation on original terms– As if bankruptcy never happened for this debt

Secured debtChapter 13 options

• “Cram down” – If creditor is “under secured”– Pay value of collateral, not amount of debt– Plus interest – prime rate is starting point

• Can’t cram down most home mortgages– Can cure past default and maintain current payments

• Can’t cram down – cars bought within 910 days of filing – personal property bought w/in 365 days

Serial filings – waiting periods for getting another discharge

• Filing a Chapter 7 now, must wait– 8 years since previous Chapter 7 – 6 years since previous Chapter 13

• Filing Chapter 13 now, no discharge if – Chapter 7 within 4 years– Chapter 13 within 2 years

• Measured from filing date to filing date

Case analysis – Chapter 7

• Liquidation analysis– Is there non exempt property?

• Dischargeability analysis– Debts that can never be discharged– Debts that could be discharged in Chapter 13

• Secured debts, leases – What property can debtor keep?– Could debtor keep property in Chapter 13?

• Disposable income analysis

Case analysisChapter 13

• Debtor may want to file Chapter 13 even if no discharge, to save property

• Unsecured debt that can be paid 100% even when other debts are paid less– Rent arrears if lease being assumed– Utility service obtained by fraud or theft (only

the nondischargeable portion)– Long term debts not in default (student loans)

Will bankruptcy succeed?

• Chapter 13– Why will client be able to pay debts, when

couldn’t pay before? What is favorable change in circumstance?

• Chapter 7– If underlying problem is negative budget, will

client be in the same boat in a few years?

How to file

• Forms require full financial disclosure

• Credit counseling before filing case.

• “Emergency” filing can be done to beat deadline– minimal documents filed– 15 days to file the rest

• Bankruptcy help desk – expanding hours

Credit counseling

• Has to be from approved agency

• Within 180 days of filing case

• Fee – approx $50 but waivers available

• Can be done by telephone or internet

• Better not to file case on same day as credit counseling– But if time is critical, file same day, and fight to

keep case going

How to file What to file - fees

• Filing fee– Chapter 13 - $274– Chapter 7 - $299– Pay in installments – any chapter

• If can’t pay in installments, waiver of fee?– Fee waiver only in Chapter 7 case– Income less than 150% of poverty guidelines

Pre-bankruptcy planningWhen is it proper?

• Preventing or undoing client mistakes– Sanctions for improper actions are harsh

• None of the benefits of bankruptcy, all of the burdens

• Exemption planning is allowed (be reasonable)– Defrauding or hindering creditors is not

• File required tax returns

Denial of discharge andother sanctions

• Denial of discharge– Sanction for hiding assets, destroying

records, and other misconduct in the bankruptcy case

– Can’t discharge any debts in later Chapter 7

• Bar to refiling another case– 180 day bar if case voluntarily dismissed after

creditor files motion to lift automatic stay – Court can bar refiling for debtor abuse

Safety & privacy issues

• Domestic violence– Bankruptcy filings are public records and

are on internet– Sealing records/ protective orders – 11

USC 107(c)– Creditors meetings (§ 341 meetings) open

to the public

• Loss of privacy – public records, available for 8 cents a page