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Financial Literacy Program for Young People

Heather Culp — Fri, 03 Feb 2012 06:22:38 +0000

As a bankruptcy attorney, I wish more young people included financial literacy and personal finance in their high school and post-secondary education. The Credit Abuse Resistance Education (CARE) Program is a good place for both students and parents (and unsophisticated consumers) to start.

The CARE program is designed to motivate young people to understand and appreciate the techniques necessary to avoid the severe consequences of credit abuse.

There are links to helpful and plain-spoken information about credit, debt and personal finance. In a similar vein, here are court-approved credit counseling services for those in bankruptcy.

If you need help sorting out your financial matters, you may want to consult with a qualified bankruptcy attorney, even if (perhaps especially if) your goal is preventing bankruptcy.

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$1 Trillion in Student Loans Not Dischargeable in Bankruptcy

Heather Culp — Mon, 30 Jan 2012 14:58:44 +0000

The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year, USA Today reported in late 2011.

Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York. Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reports. Taxpayers and other lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, including the fact that student debt cannot be shed in bankruptcy.

Count on paying your student loans

Many of our clients owe tens of thousands of dollars in student loans, either for their own education or their children’s, and this debt can be a real and crushing financial burden.

Most people understand that student loans are generally not dischargeable in a bankruptcy case. Section 523(a)(8) of the Bankruptcy Code provides that student loan debts (including private student loans) are not dischargeable in a bankruptcy case unless the debtor can show that repaying the debt would impose an undue hardship on the debtor and the debtor’s dependents. As my law partner Rick often says, if you’re deaf, blind, and missing all four limbs, you’ve got a 50/50 shot at proving undue hardship under this section.

Misleading information on discharging student loans

Interestingly, we’ve had perhaps five calls this fall and winter, from student loan obligors looking for an attorney to file a bankruptcy case and pursue a discharge of their student loan obligations. Each one of them has cited research that they’ve done on the Internet that leaves them with the misimpression that an attorney should be able to discharge their student loan debts easily and cheaply. Suffice it to say that we’ve not taken on this representation.

Here are several other posts we’ve written on student loans and bankruptcy.

Since you will have to pay your student loans at some point, a bankruptcy consultation with a qualified bankruptcy attorney can be extremely helpful.

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The Credit Abuse Resistance Education Program

Heather Culp — Thu, 26 Jan 2012 14:04:00 +0000

I belong to a number of professional organizations, including the American Bankruptcy Institute (ABI). As a bankruptcy attorney, I wish more young people included financial literacy and personal finance in their high school and post-secondary education.

The Credit Abuse Resistance Education (CARE) Program is a good place for both students and parents (and unsophisticated consumers) to start. The CARE program is designed to motivate young people to understand and appreciate the techniques necessary to avoid the severe consequences of credit abuse.

There are links to helpful and plain-spoken information about credit, debt and personal finance.

If you need help sorting out your financial matters, you may want to consult with a qualified bankruptcy attorney, even if (perhaps especially if) your goal is preventing bankruptcy.

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Dealing with Creditor Calls

Heather Culp — Wed, 25 Jan 2012 19:11:21 +0000

Some of the best advice a bankruptcy attorney can give is about timing: when to file. In many circumstances, we advise our clients to wait until a date certain to file, and to maintain the status quo until then, which often means dealing with a deluge of creditor and bill collector calls.

Just this morning, I e-mailed back and forth with a client who wants and needs to wait until this fall to file his bankruptcy case. He said that he’s getting constant calls from bill collectors at work, which is obviously never good. We discussed his right to mail a letter to his creditors, instructing them not to contact him by telephone. The Federal Trade Commission has an excellent page advising of this right, and how to exercise it, step-by-step; it also answers many other frequently asked questions about the federal Fair Debt Collection Practices Act.

Yes, you can find templates for cease and desist letters online. Use such templates at your discretion–this is not legal advice.

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Second Mortgage Options in Chapter 13 Bankruptcy

Heather Culp — Tue, 24 Jan 2012 13:17:52 +0000

Mortgage modifications are rare. Modifications for second mortgages present challenges of their own. Clients who are in financial difficulty are well advised to consider a Chapter 13 bankruptcy case as an option when they are current on their first mortgage but are not paying, in full and on time each month, their second mortgage (including a home equity loan or other debt secured by the property).

We see situations where people whose incomes have been cut will forego paying the second mortgage while staying current with the first. When they are able to resume payments on the second mortgage balance but the mortgage company is unwilling to modify their mortgage so that they can catch up on the missed payments, Chapter 13 is a court-supervised way to accomplish the goal.

(Mortgages are actually called “deeds of trust” in North Carolina, but we’ll use the term mortgages here.)

We have dealt using Chapter 13 to help homeowners catch up on missed mortgage payments (first and second mortgage payments) in other posts.

Three options in Chapter 13 for a second mortgage

There are three options for a second mortgage in a Chapter 13, where the debtor is current on the first mortgage:

1. Get caught up on the second mortgage through bankruptcy plan payments. The second mortgage arrearage, as of the date of the filing of the bankruptcy petition, is paid back in full through the plan payments, over time.

Chapter 13 cases typically involve proposing a plan to pay back creditors over sixty monthly payments (five years); a debtor can propose a plan to pay what’s owed as of the date of the bankruptcy filing back, in sixty monthly installments. At the same time, the debtor must make each current mortgage payment.

For example, if a Chapter 13 case is filed on October 1, 2011, and as of that date, the borrower is past due on a total of $12,000.00 in second mortgage payments, then the debtor can, through a Chapter 13 bankruptcy case, pay the $12,000.00 back over sixty months, but must at the same time pay each and every month all mortgage payments (first and second). Thus, in October, the debtor must pay his or her October 2011 first and second mortgage payment PLUS the Chapter 13 payment, a portion of which goes to paying the pre-petition second mortgage arrearage. This goes on for sixty months (the life of the Chapter 13 case).

2. Surrender the property and discharge the debt that is secured by it. Sometimes, borrowers either simply cannot afford to pay second mortgage arrearages in a Chapter 13 case (see above) while at the same time remaining current on their mortgages, or decide not to make those payments because the debt exceeds the value of the property (it is “underwater”). These situations often cause a borrower to decide to give up (surrender) the property in a bankruptcy case and discharge the mortgage debts.

Depending on the borrower’s overall financial situation, the borrower may qualify for Chapter 7, discharging the debt and making no payments to the mortgage lender – or, be limited to a Chapter 13, discharging the debt and paying a fraction of what’s owed to the mortgage lender (the payment depends on the debtor’s individual financial circumstances).

The mortgage lenders will eventually foreclose on the surrendered property, and their recovery is limited to (a) the proceeds realized from the foreclosure sale and (b) any payment through the Chapter 13 plan. Because the property is being surrendered as part of the bankruptcy case, the mortgage debts are treated as unsecured (because the house goes through foreclosure) and are paid the same amount as credit cards, medical bills, and other unsecured debt, according to what the plan proposes that unsecured creditors be paid (generally less than 10 cents on the dollar, but the plan payment depends entirely on each borrower’s financial situation).

3. Strip the second mortgage through an adversary proceeding in the Chapter 13 case. This is a complex subject that my law partner, Rick Mitchell, covered thoroughly in another post.

Evaluating the various ways of dealing with mortgaged real property is too complex for a blog post. This one is designed to give you hope for a solution that is monitored by the federal bankruptcy courts and that your mortgage lenders will probably not tell you about. Call a qualified bankruptcy attorney.

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Will Bankruptcy Prevent Me from Getting a Student Loan?

Heather Culp — Thu, 19 Jan 2012 13:51:47 +0000

Clients often ask us whether filing a bankruptcy case will affect their eligibility for student loans.

Generally, these are parents who plan to seek PLUS loans for their kids’ college educations, but sometimes it is the client who plans to go back to school and needs financial assistance in order to do so.

The bankruptcy code is specific

The Bankruptcy Code contains a specific provision forbidding those making student loans from discriminating against student loan borrowers because of their bankruptcy. 11 U.S.C. §525 is the anti-discrimination provision of the Code, and subsection (c) provides as follows:

(1) A governmental unit that operates a student grant or loan program and a person engaged in a business that includes the making of loans guaranteed or insured under a student loan program may not deny a grant, loan, loan guarantee, or loan insurance to a person that is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, or another person with whom the debtor or bankrupt has been associated, because the debtor or bankrupt is or has been a debtor under this title or a bankrupt or debtor under the Bankruptcy Act, has been insolvent before the commencement of a case under this title or during the pendency of the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

(2) In this section, “student loan program” means any program operated under title IV of the Higher Education Act of 1965 or a similar program operated under State or local law.

11 U.S.C. §525(c) was added to the Bankruptcy Code in 1994. Importantly, it applies to both governmental and private lenders (banks) and prevents both from student loan discrimination on the basis of bankruptcy.

From our extensive bankruptcy experience, here’s what we know

There is not much case law explaining or shedding light on how this provision applies to real people and real facts. However, based on our experience, we can tell our bankruptcy clients that:

if no one is willing to make student loans to those with a bankruptcy on their credit report, then the pool of potential borrowers would be greatly reduced, and this hasn’t happened yet, to our knowledge.
the financial problems that necessitate a bankruptcy filing may very well hinder your ability to obtain student loans, so you may be damned either way.
bankruptcy provides the honest debtor with a fresh start, discharging debts and freeing up income that can now be demonstrated as available to repay student loans; anecdotally, one of our clients this past year called because the local school to which she’d been admitted told her she had a better chance of qualifying for student loans after she obtained a Chapter 7 discharge.
a parent’s bankruptcy does not affect a dependent’s creditworthiness, or the dependent’s eligibility for student loans.
while in a Chapter 13 bankruptcy case, a debtor may not incur additional debt without court approval.

Bottom line, if you’re considering bankruptcy and have any concerns or questions the treatment of your student loans, consult a qualified bankruptcy attorney.

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Military Personnel Exempt from Bankruptcy Means Testing

Heather Culp — Wed, 18 Jan 2012 02:48:49 +0000

On December 13, 2011, the President signed into law H.R. 2192, the National Guard and Reservist Debt Relief Extension Act of 2011. My dad retired from the Army Reserves as a lieutenant colonel, and we are all aware of the sacrifices made by those on active duty. That’s why I’m happy that this law exempts certain military and homeland defense members from a means-test presumption of abuse in determining eligibility for Chapter 7 bankruptcy relief. In essence, it extends a similar protection that has been in place for a while now. There is, of course, fine print.*

The Chapter 7 means test

We’ve written about the means test before. In a nutshell, absent special circumstances, if a debtor “fails the means test” then he is she is not eligible for a Chapter 7 bankruptcy case. The means test deals with a debtor’s net available income that could be used to make some payment to creditors; if you “fail the means test” it is because you have the financial means to make some payment to your creditors. People generally fail the means test because their net available income is too high. Failing the means test is not the end of the world; it just means that absent special circumstances, these individuals must file a Chapter 13 bankruptcy case and make some partial payment to creditors in order to discharge their debts.

Chapter 13 bankruptcy cases generally last five years, and involve 60 monthly payments to the local Chapter 13 trustee, who then pays creditors. Obviously, a Chapter 7 bankruptcy–with no payment to creditors, and a discharge in about four months– is more attractive than a Chapter 13 bankruptcy. Qualifying military/defense personnel with higher income and debt problems can still qualify for Chapter 7 bankruptcy relief if they file within the 540-day window outlined in the fine print.*

A good bankruptcy attorney can and should assist with calculating these periods of time, and determining whether a client qualifies for this means test exclusion.

*The National Guard and Reservist Debt Relief Extension Act of 2011 exempts, through December 18, 2015, military and homeland defense members from a means-test presumption of abuse in determining eligibility for Chapter 7 bankruptcy relief, if, after September 11, 2001, they were on active duty or performing a homeland defense activity for at least 90 days. The exemption, found in the Bankruptcy Code at 11 U.S.C. § 707(b)(2)(D), expires on the 541st day after the debtor was released from active duty or the performance of the homeland defense activity, giving these folks about a year and a half, after their service, in which to file their bankruptcy case and discharge their debts without worry as to whether their income will be too high to qualify for Chapter 7.

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Mediation in Superior Court Civil Actions

Chris Culp — Tue, 10 Jan 2012 22:26:30 +0000

North Carolina Supreme Court’s Rules require that most cases be referred to the Mediated Settlement Conference Program before trial.

I chose to become a certified mediator after 20+ years of litigating cases and seeing the program at work first hand. I’ve seen the benefits of mediation as compared to litigation, most notably the drastically-reduced legal fees and speedy resolution.

Reduced legal fees: because time is money

Here’s why it’s cheaper to mediate than to litigate:

Mediations are usually completed in a day. It takes that long to seat a jury.
Mediators are paid at least $150 per hour and a one-time administrative fee of $150 is paid to courts. Granted, you will also pay your attorney to accompany you during mediation, but owing to the speed of the process, you will be paying less to your attorney in mediation than in a jury trial.
Can you place a cost on an hour of your time away from work and family? Many people forget to consider the financial drain they incur when sitting in a courtroom instead of working or pursuing other interests. Add to that the emotional toll of a protracted legal proceeding.

Mediation FAQs

Who selects a mediator? You and the other party jointly choose a mediator. This means you can select a practitioner with a background in the nature of the dispute.

Does the mediator make decisions? No. Unlike a judge or jury, the mediator’s ultimate goal is to help the parties resolve the dispute themselves. No record of the mediation is passed along to a judge or jury.

Can I reject mediation and go straight to trial? Generally speaking, no. If you have a compelling reason why your case should not be mediated, you may ask the Court for an exemption. Mediation is never binding, and studies have shown that cases are sometimes settled more quickly once they go to court because of the channels of communication that were opened by a skilled mediator.

Can I bring my attorney? You must do so. If at some point during the mediation you wish to speak privately with your lawyer, you will be given the opportunity to do so.

If you are involved with a Superior Court matter and referred to the Mediated Settlement Conference Program, please review my credentials and consider my services.

No related posts.

Chapter 13–Lien Stripping: Hope for Homeowners

Richard Mitchell — Tue, 10 Jan 2012 13:46:50 +0000

After several years of speaking with our clients about loan modifications to save homes and hearing a sad litany of misinformation and outright deceptions, it has become painfully obvious that loan modifications are more smoke and mirrors than reality.

Does this mean that there is nothing that homeowners can do to try to save their homes? Unfortunately, in most instances the answer is yes.

However, there is a way that some homeowners can protect their homes by the use of something called lien stripping.

Lien stripping: great option for the few who can qualify

Unfortunately, lien stripping works only in a narrow set of circumstances. There are three elements that must be present.

First, there must be a first and second mortgage on the home. A home equity line of credit (“HELOC”) is one form of second mortgage.
Second, the value of the home must be such that there is no equity to secure the second mortgage.
Third, if the homeowner did not have to pay the second mortgage payment, he or she would be able to afford the home.

If these three elements are present the homeowner may file a Chapter 13 bankruptcy reorganization and propose a plan that strips the second mortgage. Stripping means that the second mortgage is removed as a mortgage lien on the home, and the second mortgage lien debt becomes a general unsecured debt that can be paid pennies on the dollar.

John and Jane Doe strip their lien

An example of lien stripping involves John and Jane Doe. The Does have a home with a value of $175,000. They have a first mortgage lien to Number One Lender Bank of $180,000 with a payment of $1,500 per month. They have a second mortgage lien of $50,000 to HELOC Bank with a payment of $350 per month that is an interest only payment. The Does can afford the first mortgage payment, but they cannot afford both the first mortgage and second mortgage payments. In addition, they realize that the property is worth far less than what is owed on it, and since the loan with HELOC Bank is interest only, they are making little if any progress toward creating any equity in the home.

In this situation, the Does can file a Chapter 13 reorganization case and propose to strip HELOC Bank’s second mortgage lien. The debt owed to HELOC Bank is treated in the plan as a general unsecured creditor along with other general unsecured creditors such as credit cards, medical bills and the like.

The general unsecured creditors are paid based on the financial ability of the Does to make payments and in many instances these payments can be five percent or less of the debt, with no interest, over a period of up to five years. At the end of the plan, the bankruptcy court will enter an order stating that the HELOC Bank’s second mortgage lien no longer encumbers the Does’ home.

Who cannot use lien stripping

Simply having a second mortgage will not help a number of homeowners. In order to have the ability to strip a second or third mortgage lien, there must be not one penny of equity securing the second mortgage lien.

In the example above, if we assume that the value of the property is $185,000 with all the other factors remaining the constant, there will be $5,000 in equity securing HELOC Bank, thus the Does cannot strip the lien.

Do not hesitate to attempt lien stripping

Consultation with a qualified bankruptcy attorney is essential for those thinking about lien stripping. If the attorney believes that the property is low enough to allow for lien stripping, it makes sense to proceed since creditors do not have incentive to fight the proceeding. After all, if the creditor prevails, and the debtor afford the payments to keep the home, the creditor can’t get paid anyway. In a closed case the call will go to the debtor.

The problem we usually see is when there is sufficient equity in the home to prevent lien stripping while at the same time, the homeowner cannot pay the first mortgage. This is truly cause for a bankruptcy consultation.

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Debt Resolution Programs: Beware, Beware

Heather Culp — Wed, 21 Dec 2011 13:38:53 +0000

We’ve been seeing more new folks with an interest in “debt resolution” – either they are considering joining a program, or made the mistake of joining one and now need a bankruptcy lawyer to pick up the pieces. Most of these new clients are motivated by a desire to “do the right thing” and honor their debts, and thus try to avoid bankruptcy, or don’t understand how bankruptcy works(or a combination of the two).

Here’s a case where bankruptcy makes sense

By way of example, in November, I spent an hour or so going over a married couple’s financial situation. They had approximately $60,000 in credit card debt, and were upside down on both cars and their house. An online search led them to an out-of-state company offering “debt resolution programs” (also known as debt settlement, debt negotiation, or debt arbitration). The program promises to negotiate on the debtors’ behalf to settle unsecured debts (typically, credit card and medical debt) for less than full value, in exchange for a lump sum payment. They gave me a six-page written proposal from this debt resolution program, offering the debtors their choice of payment plans of 12, 24, 36, 48, 50, or 55 months, with the monthly payments from the debtors to the debt resolution program decreasing, the longer the payment term. For example, options included 12 monthly payments of about $3,800 ($45,600) or 55 monthly payments of approximately $800 ($44,000). The written offer assured the debtors that their personnel could “manage” creditors by stalling them if they threatened to file lawsuits (but did not offer to represent the debtors in any such lawsuits or to defend them). The offer urged the debtors to choose this program instead of bankruptcy, in order to avoid the “stigma” associated with it. I found no mention of the dreaded debt forgiveness income associated with debt settlement, an irresponsible omission. Through talking with these folks, it was clear that they qualify for Chapter 7 bankruptcy, with no payments to their unsecured creditors. All of their credit card and medical debt is dischargeable in a Chapter 7 bankruptcy case – compared with more than $40,000 worth of payments in the “debt resolution program.” They can keep their house and cars in a Chapter 7 bankruptcy case, if they want to continue making the payments; if they don’t, then those debts will be discharged as well (and the property surrendered to their lenders). They will pay an attorney’s fee and a filing fee for their Chapter 7 case, the total of which will be much less than 10% of the payments required by this debt resolution program. I can’t tell you how relieved they were to hear this.

Here’s a case of debt resolution gone wrong

Last month, I also met with a new client who’d paid around $1,000 a month to a different out-of-state debt resolution program, for nearly a year, only to find none of his debts had been settled, and one credit card company had sued him in Mecklenburg County court. The debt resolution program gave him a form “answer” for the lawsuit, which was worthless. A judgment will be entered any day against him, if it’s not already been entered. He will be filing a bankruptcy case, and regrets the money wasted on this program. In November, my husband Chris told me that while in Gaston County Superior Civil Court for a Monday “calendar call” of the matters on the docket, a few unrepresented people told the presiding judge that they’d paid a debt resolution company to handle their credit card debt, and were not happy to hear from the judge that they’d wasted their money, and that judgments would be entered against them and in favor of the credit card company. Every single case is different, depending on the client’s circumstances.

If you have considered a debt resolution program, please talk to a good, experienced bankruptcy attorney before walking down that costly road.

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