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06

Jul 2010

Before bankruptcy, can I spend down my money?

Posted by / in Virginia Bankruptcy / 1 comment

Suppose, when you are filing bankruptcy in Virginia, you have too much cash.  You can turn it over to the bankruptcy court to divide among the people you owe money to.  Or you can find legal ways to spend it.

(When you file bankruptcy in Virginia, you are only allowed to have $5,000.00 in cash.  That’s about the lowest in the country.  It’s $10,000 if you are over age 65.  Also, your paid for car valued at more than $2,000.00 counts against that limit. )

A lot of people have too much.

Here are some things you can do:

Need to spend down cash? See the dentist

1.   Postponed dental work.  Many people in a tight spot financially haven’t gone back to the dentist to get necessary things taken care of.  You might need three or four thousand dollars worth of dental work.  And they can’t repossess your teeth.

2.  Laser vision correction.  Same as the dentist if you need it.

3. Roth IRA.  Everyone who is working is allowed to fund a Roth IRA–whatever other retirement you have (or don’t have.)   the limit is $5000 per person–$6000 if you are over age 50.  During the January – April 15 (tax deadline) time frame, you can contribute for both the current and the prior year.  Although I cannot give you investment advice, I can saw that I have IRA’s with Fidelity and Vanguard.

4.  Repairs around the house.  If you are planning to keep the house, maybe the gutters need to be replaced, or the a/c unit needs an upgrade.  The court can’t repossess fixtures–things that are attached to the house.

5.  The Virginia College Savings plan.   The 11 USC 541(b)(5) of bankruptcy code protects college saving plan money if it has been in the plan for more two years.  ($5000 one to two years.) But, Virginia law gives an immediate, unlimited exemption for the Virginia College Savings plan.  (The one set up by the state.)  One of the bankruptcy trustees here is challenging that,  so we need to be cautious until the court rules.

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27

May 2010

Filing bankruptcy in Virginia to stop garnishment? You have rights.

Posted by / in Virginia Bankruptcy / No comments yet

Many people keep hoping they can avoid filing bankruptcy in Virginia, until they get a garnishment.   If filing bankruptcy is a last resort, garnishment tells you that you’ve arrived.

Garnishment law is one of the few places where Virginia law is better for the consumer than most other places.  (Well, better than most places that allow garnishments.  In North Carolina, for example, they can’t garnish your pay at all.  Except for taxes, child support and that kind of thing. )

Virginia garnishment law

Virginia garnishment law is one of the few areas where people have more rights in Virginia than in many other states.

Virginia garnishment law is better because of the “return date.”  In many states, a garnishment starts and just keeps running until they have squeezed the whole debt out of you.   If your being garnished for say an $8,000 credit card, that could take a long time.  Virginia garnishment law is not like that.

A Virginia garnishment usually runs for six to twelve weeks, and it ends on the return date.  (When you first get the garnishment, you might think the return date is the start date.  It’s not,  it’s the stop date.  For more information on garnishments generally, see my website on Virginia garnishment law.)

If you file bankruptcy in Virginia, before that return date, you can get that money back.  Everything they have taken during that six to twelve week period comes back to you.  (As long as you haven’t used up your $5000 Virginia “homestead exemption.”)

If you need to file bankruptcy in Virginia, but can’t get it done before the return date, here’s what to do.   Your lawyers can give you a homestead deed, to record in the county where you live.  (There’s a $31.00 filing fee.)

Then you can take the recorded homestead deed to the return date on your garnishment, and get your money back yourself.  (More details are here.)

I help two people a month get back their garnished money that way.  Then they usually use part of what they get back to pay for filing bankruptcy.

Virginia garnishment law is one of the few areas where Virginia gives rights to the consumer, better than a lot of places.

 

PS  I’m attaching some of the leading cases on this area of the law.  My thanks to Linda Jennings, a bankruptcy lawyer in Colonial Heights, for these cases.

In re Wilkinson.  In_re_Wilkinson[1]

In re Banks.  In Re Banks. WDof VA

Wilson v VA Nat. Bank  Wilson vs. VA Nat. Bank

Here’s more info on why filing bankruptcy stops a Virginia garnishment.

 

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16

May 2010

File bankruptcy? Or pay $1,134,164 for $7,783 credit card

Posted by / in Weekly Posts / No comments yet

Maureen O’Malley, a leading bankruptcy lawyer in Herndon, Va,  sent me this credit card disclosure.  It shows it will take $1.1 million to pay off $7783.37.  And it will take 2670 years to do it.  You can see for yourself here. (The person’s name and account number are deleted, of course, but this is for real!)

This is the worst I’ve ever seen, but I’ve seen plenty disclosures that are shocking.  This one shows the impact of the 27% interest combined with the $39 over limit fee.  Anybody can see why this person has to file bankruptcy.

At the minimum payment, this person can never pay this card off.  Well “never” is not exactly right, but it will take a million dollars and two thousand years.

The banks, who fought for the bankruptcy law of 2005, said that somehow the American people were at fault for the big jump in the number people who file bankruptcy.  Actually, the fault is with the high interest rates charged by the banks.  And by the failure of Congress to do anything about it.

Before 1978, the state governments could set a limit on interest rates charged to each state.  And they did.  (One reason for this regulation is that interest rates are hard for most of us to calculate in our heads.)

In 1978, the Supreme Court threw that out.  In Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. (439 U.S. 299), the Supreme Court ruled that a law passed back in 1863 blocked the states from protecting their own citizens.

After 1978, if just one state raised its interest rates, banks set up in that state could charge the higher rate anywhere in the country.   South Dakota was the first state to do that.  And they invited Citibank to move there.  Delaware followed.  (That’s why so many of credit card payments are still mailed to South Dakota or Delaware.)  Interest rates skyrocketed everywhere.

That’s why people who file bankruptcy increased from about 300,000 per year in the early 1980’s, to way over a million a year today.

If Congress really wanted fewer people to file bankruptcy, it would be easy.  Cap credit card interest rates at 12%.  In four or five years, bankruptcies would be cut in half.  In five years, I’ll be 67–I’ll be ready to retire.

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03

May 2010

At the bankruptcy attorneys convention, what I learned

Posted by / in Chapter 7 Bankruptcy / 1 comment

Attorney Leigh Faugust and I just got back from the annual convention of the National Association of Consumer Bankruptcy Attorneys.  We met in San Francico, along with twenty four other bankruptcy  attorneys from Virginia and 1600 attorneys from across the country.

We attended 14 hours of classes, had dinner with old and new friends, traded ideas and strategies late into the night.

One thing I learned that surprised me.

We heard it from Mark Redmiles,  Deputy Director of the Office of the United States Trustee.  He’s the top guy nationally in charge of enforcing the “means test”.  That’s the formula Congress put in place in 2005, to block chapter 7 bankruptcy for people who supposedly can afford to pay.

Redmiles reported that one only out of every eight chapter 7 bankruptcies approved nationally was filed by bankruptcy attorneys for people who did not have automatic Chapter 7 eligibility.

People have automatic eligibility if they earned less than the median income for their family size.  In Virginia, those median income numbers are:

Family size        one                two               three              four

Virginia         $48,190    $64,890     $73, 887    $85,633

Only one out of eight bankruptcies approved nationally as Chapter 7 are over the numbers for their state.

Five out of eight of my approved Chapter 7’s are over.  That’s five times the national average!

What is going on?  Northern Virginia is a high income and high cost of living area in a low income state.  The automatic eligibility formula that bankruptcy attorneys use to get most bankruptcies approved, usually doesn’t work here.

But experienced bankruptcy attorneys do get people here approved.  They get approved using the long formula means test–taking every time in your budget, compared to the allowances for that item, and using the ones we can to show the court why you can’t afford to pay.

The 2005 bankruptcy law made details very important.  But, they are more important here in Northern Virginia than almost anywhere else.   And it’s more important here than most places to have experienced bankruptcy attorneys on your side.

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25

Mar 2010

After bankruptcy what if I don’t pay my second mortgage?

Posted by / in Chapter 7 Bankruptcy / 624 comments

After chapter 7 bankruptcy, I often advise my clients, just don’t pay the second mortgage.

Now, if you don’t file bankruptcy and stop paying the second mortgage, two things would happen.  They will call you day and night; and eventually they would sue you and garnish you.  Bankruptcy keeps them from doing either of those.

Will they foreclose you?  That’s the big question.    The second mortgage can sell your house to a new homeowner only if they pay off the first mortgage.  If the value of your house has dropped below what you owe on the first, that’s just a way for them to lose more money.  They are not going to do that.

Virginia Bankruptcy Lawyer Robert Weed

I often advise my clients, just don’t pay the second mortgage. This is a strategy that takes nerves of steel.

To put it another way, the second mortgage won’t kick you out of your house just to be mean.  They will only do it to make money.  If they can’t make money, they won’t do it.

So, what are they going to do?  They will wait patiently for you to keep paying the first, and hope the value comes back up (and the balance on the first drops) that at some point you have equity that they can grab.

So, if you follow this just-don’t-pay-the-second strategy, you know you will never have any equity in your house.  If you go to sell five years or twenty years down the road, the second will still be sitting there.   (With five or twenty years of interest and late fees.)

So when does this just-don’t-pay make sense?  Suppose you have five more years before your youngest is out of high school.  Once that’s done, you might want to move to a smaller place anyway.  Then you can stop paying the first mortgage too, and move out.  The bankruptcy still protects you from both of the mortgages.  (You’d have to keep paying the HOA until the first mortgage forecloses.)

Does this strategy hurt your credit?  It does and it doesn’t.  It doesn’t hurt your credit score, because that second mortgage will  just show bankruptcy and can’t show any late payments after that.  (For my clients, we check to be sure.)  But it does hurt your being able to buy again.

For loans like car loans–or interest rates on your credit cards–your credit score pretty much controls, so you’ll be able to get a care loan at a good rate.  Your score will be good, if you’ve built up new, good credit.

But to get a mortgage, a different rule applies.  The March 2, 2010 manual released by Fannie Mae, (link here https://www.efanniemae.com/sf/guides/ssg/sgpdf.jsp) says what you have to do to get an insured mortgage. You have to be two years after the bankruptcy (with extenuating circumstances), but you have to be three years after a foreclosure.   Even though there will not be a foreclosure on your credit report, there will be one on the land records, and a mortgage lender will check there, too.

So if you follow this just-don’t-pay-the-second strategy, you keep the house for three or five or seven years; then you have to plan to rent for three years or so.  Then you’d be able to buy again.

If real estate goes up a lot over the next ten years, you’d be better financially to move out of the house right after the bankruptcy, rent for three years right away, and then buy again.  (If real estate stays flat, then not being able to buy for ten years doesn’t lose you anything.)

But if you want to keep your children in the same school and the same house, just-don’t-pay-the-second is a good plan.

What if you want to keep this house long term?  One way to do that would be with a second mortgage relief Chapter 13.  See my website on that.  http://virginiasecondmortgagerelief.com/

Or, you can not pay the second for a couple years, save some money, and then offer them a cash settlement.  Say you owe $75,000 on the second mortgage, file chapter 7 bankruptcy, and pay them nothing for three years.   If the value of your house is still less than you owe on the first, and you offer them $7000 to call it even, they might agree.   If you move out, they get nothing.

That strategy takes nerves of steel.  And it works best if you go for several years of not paying them–you want them to get used to getting nothing, so your offer of 10 cents on the dollar looks good.  I’ve seen it work.

Here’s an example where Chase, after getting nothing for four years, offers to settle at $20,000 second mortgage for $2000.  And here’s an example of HSBC offering to settle as $126,000 second mortgage for $12,600.

Here’s an offer to settle at $28,500 for $4250.  My client filed bankruptcy in 2010–this offer came in 2014.

 

PS  In January 2015, Bank of America forgives the whole amount.

Ahmad filed bankruptcy with me in 2011.  He got the best possible deal–Bank of America offered to forgive the whole amount of his seocnd mortgage.

 We had a BOA home equity line of credit for around $33K that was included in our BK back in 2011. I received a letter today from BOA that they have agreed to forgive this amount and we don’t owe them a penny on that. I had a question will that show up in our credit and will it hurt our credit in any way? It took us few years to build our credit and get back up and we don’t want this to damage our credit but we are grateful that is being forgiven…..

Don’t worry, Ahmad, this will nto hit your credit.  and not have any tax consequences either.  And I’ll straighten it out if it does.

This nerves of steel strategy does not always work; but it works a lot.

 

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27

Feb 2010

I quit paying–how long after bankruptcy can I keep my house?

Posted by / in After Bankruptcy / 4 comments

Some people file bankruptcy just before the foreclosure .    They have given up trying to keep the house–just can’t afford it.  They want to get some time to save some money before they have to move.  They ask, how long do I have?

In Virginia, the short answer is at least three months.

When you file Chapter 7 bankruptcy, you are protected by the automatic stay.  A stay is a court order.  And the automatic stay is, automatic.  Everybody who is trying to take your money or property is automatically told to stop.    That includes the foreclosure.  http://en.wikipedia.org/wiki/Automatic_stay.

The foreclosure lawyers need to get permission from the bankruptcy judge to start the foreclosure again.  (This is called relief from the automatic stay–they will send you a copy of that court paper.)  Getting that permission from the judge will take them about six weeks.

Once they get permission it should take them five or six more weeks to put through the foreclosure sale. (Should is an important word in that sentence and we’ll come back to it.  Sometimes they take a lot longer.)

In Virginia the foreclosure  take effect on the date of foreclosure sale.   All your rights are gone.  (Some states give you months afterward to buy the house back.  Not here.)

Now you are a tenant without a lease in your own house.  (Somewhat better than a trespasser, but not much.)  Most people want to be out by that point.  That will be about three months after the  Chapter 7 bankruptcy was filed.

What about cash for keys?  If you are still in the house after the foreclosure sale, what happens next?  It partly depends on the new owner.  Sometimes the new owner will decide to buy your cooperation–to pay you cash for keys, to get you to move out promptly and leave the place clean.

You don’t have any legal right to cash for keys, but if the new owner thinks that’s the easiest way to go, you can sometimes get several thousand dollars.  Click here https://robertweed.com/resources/CashforKeys.pdf for s sample cash for keys letter.

What if I get a mean owner? If you get a mean new owner, they will evict you.  That’s a two step legal process.  First, they will file an unlawful detainer–a court paper saying you have to be out.  In Virginia they can do that in less than three weeks.   A couple weeks after that, if you are not gone, the sheriff will put you out.  Here’s how the Fairfax County sheriff’s office describes eviction.  http://www.fairfaxcounty.gov/sheriff/eviction.htm.

What if they don’t foreclose? I said earlier that they should foreclose you about six weeks after they get permission from the judge.  Fairly often it takes them longer; sometimes a whole lot longer.     

The main reason for that, I think, is that the foreclosure lawyers are overwhelmed. There are way more foreclosures today than there have ever been, and they are having trouble keeping up with the work.  So sometimes they don’t get to you for a while; and some people get lost in the shuffle.

A second reason can be the condo fees. Even after the bankruptcy you are still the owner until the foreclosure sale.   The condo fees are an after bankruptcy debt and you have to pay them.   If the bank thinks they’ll have a hard time selling your unit, they might rather let you pay the condo fees for the next six months, and then foreclose you when they think they could sell your condo quickly.

(Make no mistake, your condo association will sue you–fast–for those after bankruptcy condo fees.  The foreclosure crisis is really hurting the condo associations and they have no room in their budgets for being reasonable.)

With those two factors, I am sometimes seeing five or six months go by after the bankruptcy before the foreclosure sale.

How can I plan? Obviously planning is easier if you have a smaller family.  If you can get everything pretty much packed up, ready to move, you can keep living for free (except for the condo or HOA) for as long as they will let you.  Be ready to go when they actually set up a sale date; and wait to see if they offer you cash for keys.

With a bigger family, that’s harder.  Finding a place to move to will be harder and you have to pay more attention to things like school districts.  Of course, you don’t need me to tell you everything is harder when you have to take care of your kids;  you know that.

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23

Feb 2010

Your credit report after bankruptcy

Posted by / in After Bankruptcy / 16 comments

<h2>Your credit report after bankruptcy</h2>

Getting back to good credit is one of the three big reasons to file Chapter 7 bankruptcy.   (The other two are so your creditors can’t call you and so they can’t garnish you.)  Unfortunately,  probably half the people who go through bankruptcy don’t get their credit report fixed.

How should your credit report look?  In 1990, the Federal Trade Commission issued a staff commentary explaining what the credit bureaus had to do to meet the requirement that people’s credit reports be complete and accurate.  (UPDATE:  When the Consumer Finance Protection Bureau took over this area from the FTC, the FTC deleted their commentary.)

The Federal Trade Commission staff  said three things.

First, that a debt discharged in bankruptcy should show a zero balance.  ( “A consumer report may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt.” )

Second, that a debt discharged in bankruptcy should show a discharged in bankruptcy status.   (“Similarly, a consumer reporting agency may include delinquencies on debts discharged in bankruptcy in consumer reports, but must accurately note the status of the debt (e.g., discharged …”)

Third, that the credit bureaus need to stay on top the the creditors to make sure they send in the required updates–specifically to update past due accounts that are then included in bankruptcy.  (“A consumer reporting agency must employ reasonable procedures to keep its file current on past due accounts (e.g., by requiring its creditors to notify the credit bureau when a previously past due account has been paid or discharged in bankruptcy…”)

In spite of these three requirements, spelled out by the Federal Trade Commission, probably half the people who are discharged in a chapter 7 bankruptcy still have errors on their credit report.  It’s better than it was ten years ago, when probably seven out of ten people came out of bankruptcy with these kinds of errors.  But it still stinks.

The problem now is largely practices that were legalized by a class action lawsuit in California that was supposed to fix the problem.  This is the Terri White class action and it didn’t help much.  To settle the law suit, the credit bureaus agreed to stop things that had already been stopped.  And they were allowed to ignore smaller problems that are getting more and more common, now that they have an official ok.

The big problem, that had mostly stopped, was putting after bankruptcy “charge offs”–meaning you owe the money but aren’t paying–instead of “discharge,” meaning you don’t owe it any more.

Ten years ago, several major credit card issuers always reported charge off instead of discharge.  First USA, Bank One and Fleet were the worst, and the credit bureaus did nothing about it.

A handful of law firms around the country started suing them.   James L Manchee in Texas,  http://www.mancheelawfirm.com/, Kathy Cruz in Arkansas, http://cruzlaw.com/ and Charles Juntikka, in New York City http://www.cjalaw.com/ .  Jason Krumbein, http://www.krumbeinlaw.com/, and myself here in Virginia.

All three of those brands were taken over in big mergers.  First USA and Bank One became part of Chase.  Fleet was gobbled up by Bank of America.  The new owners of those credit card lines didn’t want the hassle.  By the time of judge in the Terri White case told the credit bureaus they needed to fix that problem, it had pretty much been fixed.

New problems were created.    The credit bureaus are not required to update accounts that have been sold.  HSBC, when they get notice of a bankruptcy, always “sells” their accounts.   (Who is buying bankruptcy accounts?)   Then they say–both HSBC and the credit bureaus–that they don’t have to show the account was discharged in the bankruptcy.  It just stays as a zombie account on your credit report.  You’ll notice this is the opposite of what the FTC said (although never enforced)–the the credit bureaus were supposed be sure the creditors told them when a past due account had been discharged in the bankruptcy.

The same rule applied to “minor” derogatories.   If the credit card is only 90 days past due, they can leave it as past due and never show the bankruptcy.

Even worse.  They can leave the bad credit sitting on your credit report if your account is closed.  More and more we are seeing bank and credit card companies just “close” your account when they get notice of the bankruptcy–and just park it on your credit, ignoring the fact that it was discharged by the bankruptcy.

What’s the lesson of all this.  When your bankruptcy is over, your credit report will probably not be right.  Unless you or your lawyers, check it, disputes it, and sues to protect your rights, it will look like some of your debts were missed by the bankruptcy.

That will drag down your credit score; and cause problems with future lenders, possible employers, and security clearance agents, who will want to know why this or that debt was not taken care of.

The bankruptcy is not really over until the credit report is right.

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