Debt Settlement or Chapter 13 Bankruptcy Which is Better?

Posted by Robert Weed / in Chapter 13, Weekly Posts /

Debt Settlement or Chapter 13 Bankruptcy: Which is Better?

My friend Roberta knew she was in financial trouble, but she wanted to try pay her debts. Rather than file Chapter 13 bankruptcy, she signed up for a debt settlement company, who promised her a “customized reduction plan.”  Over 18 months she paid $23,673.00.  And the debt settlement company settled two of her credit cards:  A Chase card for $10,496; and another Chase card for $9719.  With their fees and overhead, Roberta’s payments to debt settlement totaled $3458 more than the total of the debts they settled.

That debt settlement company promises “you will settle your debts for less than you owe.” Settling for less than you owe doesn’t necessarily save you money.  It depends on how much less they settle for.  That’s because most debt settlement companies charge you a 25% fee.  (Plus a monthly account fee, usually $10.00) That fee isn’t 25% of what they save you–it’s 25% of the whole debt.  So if the creditor is only willing to settle for 75% of what’s due, you have no savings at all.  

Spending that extra $3458 wasn’t the worst of it.  

While she was settling the two Chase cards, her other creditors weren’t getting paid. Two Bank of America cards, two Citibank cards, and a Target card were all reporting her to the credit bureaus every month as late.  She had nineteen months of being reported as late–and of those 13 months were reported as “charged off.”  

Finally, after being ignored for 19 months, Bank of America sued.  (I say finally because Roberta was lucky–or unlucky–that she didn’t have Discover or Capital One. Both of those companies are much quicker to sue than Bank of America.)  That’s when she realized debt settlement was not working for her.

I See Debt Settlement a Lot

Since I’m a bankruptcy lawyer, I see a lot of people who get sued while they are paying their debts through debt settlement. The two debt settlement outfits I see most often are the biggest, Freedom Debt Relief and National Debt Relief.   (Freedom Debt Relief calls what they do “debt resolution.” National Debt Relief says they do “debt relief.”) 

Roberta’s experience is typical of what I see.  She kept really good records, so I could understand exactly how it worked out for her.

The big debt settlement companies have thousands of happy customers. Maybe you’ll be one of them.  To help you decide, I put the advantages of debt settlement compared to Chapter 13 for you to read and think about.  (I’ve written on this twice before, but not in much detail.) 

Debt Settlement vs Chapter 13: What are the Advantages?

Settlement Fees

Debt Settlement: 25% of the total debt (NOT just 25% of what you save.) On $45,000 in credit cards, that’s $11,250. Plus $9.95 a month, another $597.00.  That comes to $11,847.

Chapter 13: 10% of each payment, plus $5485 in legal fees.  Total $9,985. 

Advantage Chapter 13.

 

Tax Consequences

Debt Settlement:  You get a debt forgiveness 1099 when the credit card company settles for less than the entire amount.  If the Debt Settlement Company reduces your debt by $22,500, you get a 1099-C for that and you likely owe $6,243.60 in federal and Virginia income taxes.

Chapter 13.  There are no taxes on debt discharged in Chapter 13 or Chapter 7 bankruptcy.

Advantage Chapter 13.

 

Total You Have to Pay

Debt Settlement companies try to get creditors to settle for 50 cents on the dollar.  But while you are paying off your first few settlements, the other creditors continue to add interest (often at 29%) and late fees.  (Usually, after six months, the credit card companies stop adding interest.)  

Chapter 13 freezes the balances on your credit cards and unsecured loans.  In Chapter 13 you have to pay “all you can afford” according to a formula written in the law and applied by the bankruptcy court, but never more than the total of the debt, sometimes far less.

Advantage: It depends. Debt Settlement is definitely better if the creditors all settle quickly and if the bankruptcy court would decide you can “afford” to pay your debts in full.  Otherwise Chapter 13 can be better.

 

Do All Credit Card Companies Participate?

Debt Settlement:  Some major credit cards refuse to participate in debt settlement programs.  Participation is voluntary.

Chapter 13:  Chapter 13 is a federal law. Creditors can apply to the bankruptcy court to get paid. Or if they don’t apply, the debt is discharged (cleared) even though they get nothing.

Advantage:  Chapter 13

 

Court Cases

Debt Settlement: National Debt Relief posts this warning in bold.  “If you don’t repay or settle the debt, the debt collector can sue you.” Unless you have enough money to settle with all your debts quickly (and pay the settlement fees) the creditors NOT getting paid are likely to sue.

Chapter 13: Chapter 13 is a court order for the creditors to leave you alone. They can’t garnish, they can’t sue, and all pending court cases are stopped.

Advantage:  Chapter 13

 

Is Debt Settlement Legal?

Debt Settlement: While still operating legally in Virginia, Freedom Debt Relief has been shut down in Connecticut, Georgia, Hawaii, Illinois, Kansas, Maine, Mississippi, New Hampshire, New Jersey, North Dakota, Oregon, Rhode Island, South Carolina, Vermont, Washington, West Virginia and Wyoming.  The Consumer Finance Protection Bureau sued them in 2017 and in 2019 Freedom Debt Relief agreed to pay a fine of $25 million.

Chapter 13 is established by law. When you file Chapter 13 you have a law on your side.

Advantage: Chapter 13

 

Credit Reporting

Debt Settlement:  When you stop paying your credit card in a debt settlement program, the credit cards show on your credit report as late. When they are 180 days late, they show on your credit report as “charged off.”  As you settle some accounts, those are updated to show “Paid in settlement” (Code AU). Meanwhile, the accounts not settled keep reporting 180 days past due and “charged off” every month.

Chapter 13: In Chapter 13, your accounts are noted as Chapter 13. (Code D). When the Chapter 13 is completed, they are notes as Discharged through Chapter 13. (Code H)

Advantage: Chapter 13.

 

Security Clearance

Debt Settlement tells you to stop paying all your bills–and some admit they do NOT start to negotiate until you’ve been making monthly payments to them for six to twelve months.  That’s six months or more when none of your creditors are getting paid anything. And after that, the debts are settled usually one at a time, while other continue to go later. Just not paying your debts looks irresponsible.  

Chapter 13 proposes a payment plan to a judge. That shows your security clearance officer that you have taken responsibility for your problem and are working out a solution.

Advantage: Chapter 13.  

 

Conclusion Debt Settlement or Chapter 13

When they work, Debt Settlement programs can save you about 25%–which after taxes would be more like 15%–of the total you owe and they spread your payments out over three years or so. That savings can be substantial.  But, if some of the credit cards get tired of waiting while you settle with others, then you have a year or two of terrible damage to your credit, followed by the sheriff bringing court papers to your door. You end up where you didn’t want to be, talking to a bankruptcy lawyer about Chapter 13. Or maybe Chapter 7.

PS On Roberta.

I told you at the top that Roberta paid $23,673.00 on her debt settlement plan. Where did she get that money?

Through most of the last 19 months, Roberta was able to get a COVID forbearance on her mortgage payment.  She was able to pay the debt settlement company by NOT paying her mortgage, and putting the missed payment on the end.  Of course that means she really could NOT afford debt settlement at all. It also means that she would have been able to propose a very low payment in Chapter 13, because in Chapter 13 the court allows you to budget the money you need to pay your mortgage.  That $23,673.00 was money down the drain.

 

 

 

Sports Gambling Comes to Virginia

Posted by Robert Weed / in Weekly Posts /

Sports Gambling Comes to Virginia

Like most people, I’ve noticed that ads for sports gambling have taken over the TV (at least on basketball and college football, which is about all the TV I watch.) Sports gambling was legalized in Virginia April last year and began in January 2021.

Now in October and November, I’ve met two people who each lost more than $40,000 betting on sports in the last six months.  (Neither had a gambling problem before.)

Maybe a couple times a year I talk with people who are considering bankruptcy because of casino gambling at National Harbor.  From where I set, sports gambling is fast becoming a far bigger problem.  

I’m wondering if it takes about a year for sports gambling to suck people in.  A few bets here and there, a little more, and suddenly it’s a destructive, life-wrecking addiction.

That’s good news for bankruptcy lawyers.  But very bad for American families.

 

 

 

Getting Your Mortgage Statements After Bankruptcy

Posted by Robert Weed / in Weekly Posts /

Are you getting your mortgage statements after filing bankruptcy?

Some mortgage companies use bankruptcy as an excuse to stop sending mortgage statements. (Or they send them to your lawyer, not to you.) The law is completely clear. The law says to keep sending them to you. 

That law is Regulation Z. The Consumer Finance Protection Bureau issues and enforces regulations under the Truth In Lending Act. Here’s what that regulation says.

First, the mortgage servicer has to send you a monthly statement.  That’s 12 CFR 1026.41(a)(2).  (Sometimes consumers accidentally give up a right in small print without knowing it. So the official interpretation says the consumer can’t do that. You cannot give up your right to receive monthly statements.)

Second, bankruptcy does not change that. That’s in 12 CFR 1026.41(f). While they need to keep sending the monthly statement, they also need to say that they know about the bankruptcy and that the statement is for information purposes.  §1026.41(f)(2)

Third, you or I can tell them to stop.  We can tell them directly, or through papers we file with the bankruptcy court. If you are not planning to pay and keep  the house, we can tell them to stop sending those bills.  §1026.41(a)(2)(B).  (Some mortgage companies want your lawyer to request that you KEEP getting your statements.  That stands the law on its head.  The Official Interpretation says your lawyer has the authority to tell them to STOP sending payments.  Your lawyer does NOT have the authority to tell them to keep sending payments. Why? Because Regulation Z says to send the statements without being asked.)

What If You Don’t Get Your Mortgage Statements After Bankruptcy

OK.  They are supposed to keep sending your mortgage statements. What if they just don’t?

Send them an email and link this page. (Copy me on the email.) We’ll see how that works.  

The Consumer Finance Protection Bureau has enforcement authority.  Complain to the CFPB here.  Especially since the 2020 election, the CFPB is good about following up. Hope that works.

But if that fails, can you and I to to court to make them follow Regulation Z? That’s at best a gray area. It looks like we don’t have your own private right to go to court if this right is violated.  

Can the bankruptcy court help?

The bankruptcy court has general power to carry out the provisions of the bankruptcy law.  11 USC 105.  So, can the bankruptcy court require the mortgage company to do what they are supposed to do, so that you can do what you are supposed to do?

Maybe. Several of us talked about this problem at the 2021 annual meeting of the National Association of Consumer Bankruptcy Attorneys.  I’m hoping they do a class on it next year.

 

PS Here’s the notice:

Here’s the notice to send to the mortgage servicer, if they are NOT sending you the monthly statement.

************************************************************************************************************

NOTICE TO MORTGAGE SERVICER

Mortgage servicer!  We are sending this reminder of the law to you.

Regulation Z orders you to send monthly statements to your customers, including the ones that have filed bankruptcy.  But you are NOT doing that. That’s why I’m sending you this this notice.

Please do what you are required to do. Send your customer the mortgage statements every month, like you are required to do.  You do NOT need my permission as your customer’s lawyer to send them.

You can take this as permission if you insist. But you do NOT need my permission to follow the law.  Just do it! — Robert Weed, Lawyer.

 

 

After Bankruptcy: Please Don’t Go Out and Co-Sign for a Car

Posted by Robert Weed / in After Bankruptcy, Weekly Posts /

After Bankruptcy: Please Don’t Go Right Out and Don’t Co-Sign for a Car

Got an email last week that made me sad.  Cherry filed Chapter 7 bankruptcy back in 2017.  She recently went to buy a car and ended up getting financed by Santander at 21%. After she did that, she asked why is her credit score so low, four years after bankruptcy?

When I looked at her credit report, here’s what I saw. Two months after her bankruptcy was discharged, she got a car loan with Regional Acceptance.  Regional Acceptance finances cars at terrible rates for people with terrible credit.  

I asked her, didn’t I warn you not to try to finance a car until at least two years–three is better–after the bankruptcy?  She said she didn’t “finance” a car: she just “co-signed for a friend.”

(The friend, of course, only paid for a year; and then the car got repossessed. Obviously the friend had really bad credit; so bad that Cherry right out of bankruptcy was needed as a co-signer.)

Instead of having the best credit of her life, four years after bankruptcy, Cherry’s score is stuck in the mid 500’s.  And Regional, if they bother, has two more years where they can sue and garnish her.

Two lessons.  First, if you have any way at all to get to work, do not finance a car until two years after your bankruptcy is discharged. Second, don’t co-sign for anybody whose credit is worse than yours. Ever.   

Please Don’t Co-Sign for a Car and Mess Up Your New Start in Life

Improving your credit score is one of five ways that bankruptcy gives you a fresh start.  Three years after bankruptcy you can have as good a credit score as anyone you know.  Don’t mess that up.  Don’t co-sign for a car for a friend.

 

 

 

 

A Million Dollar Mistake: Personal Injury and Bankruptcy

Posted by Robert Weed / in Virginia Bankruptcy, Weekly Posts /

A Million Dollar Mistake: Personal Injury and Bankruptcy

Under Virginia law, the bankruptcy court cannot take away a personal injury claim.  Injured in a car accident? Hurt in the hospital? Anyone in Virginia can file bankruptcy and still keep those claims.

Steven Ramsdell, one of the top bankruptcy lawyers here, is desperately trying to save a possible million dollar injury claim involving a Mr. Barnes, who “forgot” to tell the bankruptcy court about his personal injury.

Barnes filed bankruptcy in June 2020 and it was discharged in October 2020.  Two months later, Barnes sued a Loudoun County doctor for a million dollars, claiming a wrong prescription caused permanent damage to his liver.  In May 2021, the Loudoun County Circuit Court court threw Barnes put of court.

That’s How To Lose Your Personal Injury Claims In Bankruptcy

Here’s what happens when someone forgets to tell the bankruptcy court about your car accident or any other personal injury.

Those rights are forfeit. Two ways.

First, because forgetting to tell the bankruptcy court about the claim means forgetting to protect that claim. So the injury claim now belongs to the bankruptcy trustee. Sometimes in law, “you snooze, you lose.”

Now, Barnes will ask the bankruptcy court to cut him some slack.  If the bankruptcy judge finds Barnes “forgot” because of “excusable neglect,” he may get a second chance to claim and protect his rights. 

Supposed a mortgage company overcharged someone and they didn’t know they were owed a refund. Forgetting to tell the bankruptcy court about that would easily be excusable neglect.

Barnes, on the other hand, sued his doctor less than three months after his bankruptcy was over.  Does that look like “excusable neglect.”  Or does it look like lying? 

Second, even if the bankruptcy judge helps him out, the state court judge can still toss out the suit for judicial estopple.  If Banes told the bankruptcy court that nobody owed him any money, how can he come into the state court and claim the doctor’s insurance owes him a million dollars?

Imagine this in the state court.  “You are telling this court, Mr. Barnes, that you are in constant pain? But you didn’t mention that pain when you met with your bankruptcy lawyer? Why should any jury believe you?”

Today, we don’t know how the Barnes case will turn out. Last week, the bankruptcy judge agreed he’d at least give Barnes a chance to explain his side.

PS  I should add that Steven Ramsdell was NOT the lawyer who first handled Barnes bankruptcy case. Barnes, of course, may be tempted to blame the problem on the first lawyer who handled his bankruptcy.  That first lawyer knew Barnes hadn’t worked for five months. Was that because of this injury? Should the bankruptcy lawyer have asked?

A lot of people will be sweating when the bankruptcy judge decides on “excusable neglect.”

The Wells Fargo Home Projects Card and Chapter 13

Posted by Robert Weed / in Chapter 13, Weekly Posts /

The Wells Fargo Home Projects Card and Chapter 13 Bankruptcy

The Wells Fargo Home Projects Card is issued differently than most credit cards. As far as I can tell, they don’t market it directly to consumers. Instead, they get home improvement businesses to sign people up. That way Wells Fargo finances the home improvement and the business gets paid.  Makes sense to me.

What doesn’t make sense to me is this:  Wells Fargo uses that card to butt in line ahead of other credit card creditors in Chapter 13 bankruptcy.  That’s because Wells Fargo claims to be a secured creditor.  Secured creditors have to be paid ahead of regular credit cards in a Chapter 13 bankruptcy payment plan. 

What’s a Secured Creditor?

What’s a secured creditor?  A secured creditor is a creditor with a “security interest.” UCC § 9-102(a)(73).  The Wells Fargo Home Projects card agreement claims they have a security interest:  “You grant us a purchase-money security interest under the Uniform Commercial Code in the goods purchased on your Account.”

What’s a security interest?  Your car finance company has a security interest in your car.  The car finance company has a lien attached to the title of your car.  If you don’t pay; they can come get it.  (Bankruptcy clears your personal liability–you don’t have to pay. But the car still has to pay.)

Consumer goods–something like a washing machine–don’t have a title.  But the people who finance them are still have a security interest.  They are secured automatically.  UCC § 9-309(1). Automatically, as long as you sign a paper with a description of the washing machine, so it can be reasonably identified.

Years ago Sears was very aggressive asserting their right to payment after bankruptcy on things like washing machines.  So aggressive that they ended up getting hit with multi-million dollar sanctions by the bankruptcy court in Massachusetts.  Conley v Sears 222 BR 181. D Mass 1998.  A few years later, Sears got out of the business of issuing their own credit cards.

Wells Fargo though isn’t claiming a security interest in a car, or in a washing machine.  In the cases I’ve seen, they claim a security interest in “trim,” in “replacement,” in “remodeling,” and most often in “items purchased.”

I call BS on the Wells Fargo Home Projects Card

I call BS on Wells Fargo.  These come nowhere near the legal requirement that the consumer sign an agreement that provides a description of the collateral. UCC § 9-203(b)(3)(A).  “Items purchased” could be anything. That’s not a description. By law, it’s not a description unless it “reasonably identifies what is described.” UCC § 9-108(a).

Second, a security interest does not exist in “ordinary building materials” once they become part of the building.  Trim obviously becomes part of the building. UCC § 9-334(a).

On their website, Wells Fargo tells home improvement businesses what kinds of things they finance. Here’s the list.

Flooring       Siding     Windows/Doors   

Remodeling   Roofing    HVAC

Doors and HVAC are a gray area.  Are they part of the building, or not?  Could go either way.  But Wells Fargo can never be secured in flooring (once it’s installed, of course.) Or siding. Or windows, or remodeling, or roofing.   

It looked to me like Wells Fargo always claims a legal right that they hardly ever actually have.

Wells Fargo Caved In

In the case of Merida Mejicanos, 21-10600-KHK, Wells Fargo Home Projects claimed a security interest in “trim” and “door replacement.”  I objected, and privately dared them to come in and fight.  They caved.  Without admitting they were wrong, they dropped their claim. They said they wanted to avoid “the risk of further litigation.”

The big risk of course is that the judge would write that they were wrong–and other lawyers and judges would read it.