Chapter 13 Bankruptcy Information

Bankruptcy is not something that anyone wants to do, but it is often the best course of action for a consumer in debt.   Filing for bankruptcy is often seen as a failure, sign of weakness or immoral.  Understandably, people who file don’t go around telling everyone how much better life is for them now that they filed, but people sure are quick to mention how terrible it is to file.

In an effort to avoid filing bankruptcy, people will often try many different ways to avoid filing including working with a credit counseling company in a debt management program or a settlement program.

When credit card debt goes bad, banks sometimes sell it to vulture investors at a steep discount.  The vulture debt buyer then often tries to sue on the account to collect more than they paid.   And their lawsuits are often the final straw forcing folks bankruptcy, where the debt buyer usually wants a share of any repayment too.

Buying bad — “distressed” — debt is a large, highly automated and risky business.  The debt buyers pay very little and get very little information about the account history, the borrowers, and how the balances are calculated.  And consumers are encouraged to take on faith that the balance was calculated properly — and that the debt buyer is really the owner of the account.  Debt buyers would prefer that courts accept their word of honor too.

The 2005 amendments to the Bankruptcy Code modified the landscape for a key defense to bankruptcy preference actions. Preference actions are when a trustee or debtor in possession sue a creditor for the return of payments made in the 90 days before a bankruptcy. The concept is that creditors that receive more than similarly situated creditors by extracting unusual pre-bankruptcy payments from the struggling debtor should have to give the money back so that it can be shared equally with their peers. This creates a disincentive to employ coercive collection techniques when a debtor is teetering on the edge of bankruptcy. However, there is a defense to a preference case that allows the recipient of the money to keep it if the transfer was “ordinary”. There are several other defenses to preference actions (some of which I discuss here), but I will be highlighting the ordinary course of business defense, and more specifically, the “ordinary business terms” prong of that defense.

Buy a home after bankruptcy?  Seems like a stretch for all but those who win the lottery once the discharge is issued.  But play your cards right and you could be worrying about scheduling a closing date sooner than you ever thought possible.

After filing bankruptcy, you’re debt free.  No more calls, no more lawsuits.  Suddenly, the world feels a bit brighter and filled with possibilities.  You start looking around your rental and thinking you might want to buy a home.

In order to buy a home after filing bankruptcy, you’re going to need to worry about two things.  They are:

One of the concerns about filing for bankruptcy is that those folks will never be able to obtain credit again after filing for bankruptcy protection and assistance.     Most times, nothing could be further from the truth as bankruptcy may actually improve folks’ credit score, according to my clients’ experiences (and as explained by Smart Money on their website).  Every debt collection note on a credit report, every late payment, every negative notation affects a debtor’s credit score.   Bankruptcy?  It doesn’t add to the negative credit score; it replaces a number of negatives with ONE negative notation of “discharged in bankruptcy” with the account showing a “zero” balance.   That act usually improves a debtor’s credit score.   As my colleague Doug Jacobs stated in his article on this site, debtors should list all of their debts to insure that a financial fresh start is obtained.  There are a number of other ways to improve your credit score.

Number 4.  You received a Summons and Complaint for foreclosure.  Now you are being sued by your mortgage company and in danger of losing your property.  You have a short period of time to respond, usually 30days or less in Illinois.

Number 3.  You received a letter from a collection lawyer giving you a deadline to catch up your delinquent mortgage payments and threatening foreclosure.  The next step the bank will take is to sue you.

Number 2.  You receive a notice from your financial institution that your payments are in default.  The next letter you will receive will be from the mortgage company’s lawyer.

jumper.jpg  Approximately 10-20 folks each week come to my office to talk with me regarding bankruptcy and nearly all of those folks in my office believe that they have failed.  That their lives will be ruined because the neighbors will know, the boss will know, the pastor/rabbi will know, and worst of all, their “Mom” will find out that they have filed for bankruptcy and now…they will be thought of as a loser, a deadbeat, a cheat, or a no-count bum.   As my colleague, Brett Weiss says, “they believe they are a bad person for filing bankruptcy.”  My response is to point to the very large statute of Mickey Mouse/Steamboat Willie in my hallway and ask whether they think Walt Disney was a “no-count bum”.   I point to the print of Abraham Lincoln on my office wall and ask “was HE a deadbeat?”  I ask if they remember Harry Truman….”was he a cheat?”  I point to the Ford driven by one of my staffers and ask “Was Henry Ford a loser?”

Bankruptcy can stop collection and eliminate tax debt in many situations. For more details on tax discharge see the article I wrote about Bankruptcy Tax Discharge on my personal site. While bankruptcy can be a very useful tool in dealing with the Internal Revenue Service and state collectors, it will not solve all problems.  In many cases, a tax debt that would qualify for bankruptcy discharge is rendered non-dischargeable when the taxpayer fails to file a tax return and the IRS or state collection authority uses their statutory authority to assess.  Some types of tax, such as employment tax, are not subject to discharge.  Fortunately, there are other ways to stop or manage collection problems.

For the last few years, I have witnessed a steady stream of homeowners flowing through my office who are dumbfounded by their inability to get a mortgage modification.  And for years, I have been telling them all the same thing:

YOUR SERVICER DOESN’T WANT TO MODIFY YOUR LOAN!

The truth of the matter is that, of all the options available to a mortgage servicer to deal with a distressed homeowner, mortgage modification is the least desirable for the servicer of your loan.

The term debt relief agency appears in a legal context for the first time in bankruptcy law in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 [The Act]. The first chapter of this new bankruptcy reform law can be found at Title 11 U.S.C. 101. This is the General Provisions chapter and it contains definitions of words of art used throughout the Act, and includes the term “debt relief agency”.

Debt relief agency office