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Easily Preventable Mistakes to Avoid While Considering Bankruptcy

Posted by on August 10, 2016 under Bankruptcy Blog | Be the First to Comment

Words I hate to tell new clients: “If only you’d come to talk with me sooner.”

Consumer bankruptcy attorneys are in the business of  helping people put back in order their financial lives.   Many times we succeed which makes the practice personally gratifying.  However, life is not perfect and some situations are beyond reach even with the strong medicine of bankruptcy. Difficult choices sometimes have to be made.

But the toughest situations are those in which the person took some action—usually not long before seeing me—which may have made some sense at the time but ended up being a mistake, a self-inflicted wound.

The goal of my next few blogs is to help you avoid these.

Here’s what we will be covering.

1) Preferences:  If within a certain amount of time before filing bankruptcy, a debtor pays any significant amount of money (or anything else of value) to someone she owes, the bankruptcy trustee could under certain conditions force that creditor to pay to the trustee whatever amount the debtor paid to the creditor. That creditor could be a relative or friend who had lent the debtor money, and the debtor felt a deep obligation to repay it before filing bankruptcy. This relative or friend could be sued by the trustee to make him or her “return” the money (but to the trustee, not to the debtor).

2) Wasting exempt assets:  New clients constantly tell me how they’ve borrowed against or cashed in their retirement funds in a desperate effort to pay their debts. Or they’ve sold a vehicle or some other precious asset. Then they learn that whatever they’ve sold or borrowed against would have been completely protected in their subsequent bankruptcy case. And the debts they paid with the proceeds would simply have been “discharged” (legally written off) in that bankruptcy. They have lost something of significant value in effect for no real benefit.

3) Surrendering a vehicle that could have been saved:  People often really need a vehicle but owe on it more than it is worth and can’t afford the payments. So they either voluntarily surrender it to the creditor, or wait to file bankruptcy until after it gets repossessed. Instead with a “cramdown,” they could well have been able to keep that vehicle by paying much lower monthly payments and paying much less for it overall.

4) Letting a creditor sue and take a judgment: If a debtor is sued by a creditor and waits until after a judgment is entered, in some situations, that judgment could make the debt harder to discharge in a subsequent bankruptcy case.

5) Selling a home out of desperation:  Bankruptcy—and especially Chapter 13—provides some amazing tools for dealing with debts related to a home, including  the first mortgage arrearage, the second mortgage lien, judgment liens, income tax and child support liens, and other liens of all sorts. Homeowners may hurriedly sell their home because of pressure from any of these kinds of creditors. But if they do so, they could lose out on the opportunity to hold onto their home by saving tens of thousands—or possibly even hundreds of thousands—of dollars. Or at least they could likely sell it at a higher price with more market exposure and/or sell it when the timing is better for their family.

As you can see, doing what seems right and sensible can really backfire if you don’t get legal advice about these kinds of unexpected consequences. In the next few blogs I explain these in more detail so that these mistakes will make sense to you and you can avoid them.  

Appreciating the Awesome “Automatic Stay”

Posted by on June 20, 2016 under Bankruptcy Blog | Be the First to Comment

The automatic stay goes into effect simultaneous with the filing of your bankruptcy petition. The “petition” is the document “commencing a case under [the Bankruptcy Code].” Sections 101(42) and 301(a). So the very act of filing the petition itself “operates as a stay.” Section 362(a).

The instantaneous effect of the automatic stay is amazing especially in comparison to most other court procedures. Most take weeks, or even in the case of emergencies at least days or hours. Usually some kind of request or motion needs to be filed to get the court’s attention, the other side is given some opportunity to respond, and then there may be a hearing of some sort, before finally a judge makes a decision.

But the automatic stay skips all that. It is, at least at the beginning, completely one-sided, in your favor. You “win” an immediate court order, without the creditors having any immediate say about it, without involving a judge at all.

So the automatic stay gives you an immediate breathing spell, freezing all collection efforts against you, whether your creditors like it or not.  

Awesomely Broad Protection

This break from your creditors covers “any act to collect, assess, or recover” a debt—just about anything a creditor could do to.

Besides stopping all collection phone calls and bills, the automatic stay stops all court and administrative proceedings against you from starting, or from continuing. If your bankruptcy is filed right before a lawsuit is to be filed at court against you, the lawsuit can’t be filed. Same with a home foreclosure. A prior judgment against you can’t result in your paycheck or bank account being garnished. If you’re behind on your vehicle loan payments, the repo man can’t come looking for your vehicle. If you owe back income taxes to the IRS, it can’t record a tax lien against your home and vehicle.

The automatic stay is powerful stuff.

“Relief” from the Automatic Stay

Any creditor can ask the court to cancel the automatic stay so that the creditor can again take action against you, your assets, or the collateral in particular. The most common situation for this is a creditor asking for the right to take back the collateral securing the debt—to repossess a vehicle or to start or continue a home foreclosure. Whether or not the court will give it this right, or give “relief from stay” in any situation, depends on all the details of the case. It requires a careful analysis to be done by and discussed with your attorney.

Exceptions or Limitations to Automatic Stay

There are some, and we will address some of them in upcoming blog posts.

Help! I’ve Just Been Sued by a Creditor! What Do I Do Now?

Posted by Kevin on March 31, 2016 under Bankruptcy Blog | Be the First to Comment

Don’t react to getting lawsuit papers by avoiding them. React by helping yourself.  Get some competent legal advice about what this lawsuit really means, whether and how it can hurt you, and what you likely can do about it.

Lawsuits by most creditors aren’t “personal.” They’re just a business decision. The lawsuit papers you have in your hands tell you that the creditor has decided that suing you is a good bet.  It thinks that the lawsuit will help get the debt paid. The creditor likely even has in mind specifically how it expects to get paid.  It may well be targeting your bank account, your paycheck, your home, or some other income or asset.

The creditor is also making another easy bet—that in fact you won’t do anything about the lawsuit papers after getting them. At least not in time to prevent the lawsuit from turning into a judgment against you.  Most people don’t.

So the creditor is banking on you letting them get a “default judgment,” a court decision in favor of the creditor which happens automatically (or at least without a trial)  if you do not formally reply to the lawsuit on time.

Once armed with a judgment,  the creditor to start grabbing your money and your assets, through orders of the court, sometimes in ways you might not expect.

A Judgment against You is More than Just an Admission that You Owe the Debt

But even if the judgment does not result in giving a creditor a way to get money out of your right away, it has longer-term consequences.  For one,  judgments can be reported to credit agencies.  Affects your FICO score and, therefore, your ability down the line to get credit.   In addition, once the deadline to respond passes and a judgment is entered, you’ve give up on some important rights:

a) Your right to raise possible defenses. Creditors and collection agencies can be shockingly cavalier about whether the debts they are pursuing are legally valid. Think about it: since in the vast majority of the time consumers don’t respond to lawsuits and judgments are rubber stamped, there’s not much incentive for the creditors to get their paperwork right. You need to have an attorney review the lawsuit to find out if the statute of limitations on the debt has expired, or if you have any other defenses.  After the judgment is entered against you, it is extremely difficult, and a lot more expensive,  to raise any such defenses.

b) Your right to raise counterclaims. A counterclaim is your argument that the creditor did something wrong—in the way the debt was created or in how it was collected. Counterclaims say that you have been legally damaged, entitling you to compensation. A default judgment against you either waives your right to bring a counterclaim, or takes away the counterclaim’s leverage when it would do you the most good.

c) Your right to dispute facts. The debt could become more difficult to write off in bankruptcy after a judgment is entered, if certain facts are alleged in the lawsuit (and deemed admitted by your lack of a response).  This could put you at a serious disadvantage if you ever need to file bankruptcy.

That is not to say that you cannot, within a set period of time, come into court to set aside the default judgment and then raise those defenses. But, in NJ at least, you must file a motion and appear in court, and a judge makes the call.  It is difficult to do and expensive as opposed to filing your answer on time and putting forth your defenses as a matter of right.

If you do get sued, do not bury your head in the sand.  Consult and attorney.

Discharge in Chapter 7

Posted by Kevin on March 27, 2016 under Bankruptcy Blog | Be the First to Comment

The policy behind bankruptcy is to give an honest debtor a fresh start.  The fresh start begins with the filing of the bankruptcy petition.  By just filing, almost all attempts at collection of a debt are stopped by the automatic stay.  The fresh start is completed when the debtor receives a discharge.  A discharge means that the debt is cancelled, wiped out.

Not all debts are discharged, however.  And a discharge does not mean, in certain circumstances, that a creditor cannot make some recovery.  For example, in the case of a mortgage on your house, the bankruptcy discharge only applies to the debt.  Say, you borrower $500,000 from the bank.  You sign a note which is a promise to pay back the $500,000 with interest.  That is the debt.  And you sign a mortgage which is the collateral for the debt.  The mortgage says that if you do not pay back the $500,000, the bank can take your house.  The bankruptcy discharge knocks out the note, the debt, but not the mortgage.  So, the lender can foreclose on the house and get what it is owed from the house.  What if the house is only worth $300,000?  Then, that is what the bank gets.  The bank cannot come after you for the deficiency because the debt is discharged.

What debts are discharged in bankruptcy? Credit card debt, medical bills, personal loans without collateral, as stated above deficiencies on home mortgages but also deficiencies on car loans, most claims for injury based on negligence (car accidents, slip and fall, etc.), most judgments, business debts, guarantees, leases and older taxes for which you have filed a return which is not fraudulent, and the taxing authority has not filed a tax lien.

The Bankruptcy Code, however, does not discharge all debts.  Some are dischargeable sometimes.  Some are not dischargeable. For example, students loans are not usually dischargeable absent a showing of undue hardship.  The burden is on the debtor to prove undue hardship which is not easy in New Jersey.  Willful and malicious injury by the debtor to another, some debts incurred by fraud and/or dishonesty, and embezzlement may not be dischargeable, but the creditor must go to court to challenge the discharge.  The bankruptcy judge makes the decision whether the debt is dischargeable in these cases.

Payroll and sales taxes are not dischargeable (called trust fund taxes).  Other debts not dischargeable include income taxes recently incurred, domestic support obligations, criminal fines or restitution, injuries suffered when the debtor is intoxicated because of alcohol or drugs, post filing condo fees, and debts not put down in your schedules except in a no asset case.

So, if you are thinking about filing bankruptcy, you should speak first with an experienced lawyer so you can determine which of your debts may or may not be dischargeable.

Hey, I Finally Got a Job

Posted by Kevin on November 28, 2014 under Bankruptcy Blog | Be the First to Comment

You were downsized or your company went out of business, or your department was outsourced to India.  You lost your job and collected for as long as you could.  But what you collected in unemployment was not enough to pay all your bills, so you got sued, and some creditors got judgments against you.

While you were unemployed, it really did not make a difference that a few doctors, AMEX and Discover got judgments against you.  They could not levy on your unemployment benefits.  But, now the economy has gotten better and you just got an offer in your field at about 90% of what you were earning when things went sideways.

Now is the time for you to start thinking about how you are going to deal with those judgments (and other debts that have not been reduced to judgment).  With money in your pocket and a few new credit cards, your activity on the credit reporting agencies will increase.  Creditors will put 2 + 2 together and figure you have a job.  Then, the garnishments will start coming in.  Great way to impress a new employer.

Bankruptcy may be the answer.  Debt consolidation through a reputable credit counseling company may also keep the wolves away.  You owe it to yourself and family to look into these options.  Be pro-active.

Final word to the wise.  It is holiday season.  People are beating each other up at Macy’s all over the US today.  Maybe you are thinking that you can have one last fling and then take care of business after the New Year (if any of your credit cards still work).  Bad idea.  Why?  Because cash advances or purchase of luxury items over certain amounts within 70 to 90 days of filing can preclude a discharge of those debts.  In addition, it will make any bankruptcy more expensive.  So, play it straight.

Now is the time to speak with an experienced bankruptcy attorney.

Just Been Sued by a Creditor? How Bankruptcy Helps Right Away

Posted by Kevin on July 16, 2013 under Bankruptcy Blog | Be the First to Comment

Getting sued by a creditor is a wake-up call to consider filing bankruptcy. If it is the right thing to do, there are advantages to filing before your deadline to respond to the lawsuit.

If you get sued by a creditor, as discussed in my last blog it’s dangerous both short-term and long-term not to consult with an attorney. Today’s blog is about the immediate effect on that lawsuit if you do file bankruptcy.

The Basic Automatic Stay

The filing of your bankruptcy stops that lawsuit instantaneously. It doesn’t take a separate court order or any action by the bankruptcy court or judge to stop it. It’s the mere act of filing the bankruptcy case of itself that stops the lawsuit against you. The word “stay” in that statute means “stop.”

The Immediate Effect of the Automatic Stay

Timing is important with a lawsuit. A judgment will be entered against you if you don’t formally respond to the lawsuit by the stated deadline, and that judgment would give the creditor more ways to get money out of you. The entry of a judgment can also create a lien against your real estate, and filing bankruptcy afterwards will create complications in trying to clear that lien off your title.

So stopping the judgment from being entered in the first place can be very important.  The safe way to do that is to file bankruptcy plenty of time before your deadline to respond to the lawsuit. But if you are cutting it close, it helps that the automatic stay is effective instantaneously. If the creditor’s attorney is about to file documents to enter a judgment at court, but your bankruptcy is filed before that happens, that attorney can’t try to get a judgment quickly before the bankruptcy court acts, because the bankruptcy court doesn’t need to act. As its name says, the stay is automatic.

Telling the Suing Creditor about the Bankruptcy Filing

All your creditors will receive a formal notice of your bankruptcy filing, by mail and in some situations perhaps electronically. But that mailed notice is of course not instantaneous. It is mailed out a few days after the filing of your bankruptcy case, so that all of your creditors should know about it within about a week after you file. But that may well not be fast enough to stop the judgment documents from being filed by the creditor’s attorney and entered by that court. So in urgent situations either you or your attorney need to directly inform that attorney about the bankruptcy filing.

Creditors’ Violations of the Automatic Stay

But what if that attorney just goes ahead and submits the judgment papers, either from not finding out in time about your bankruptcy filing or in spite of knowing about it?

The judgment will not be effective, and the attorney will be required to undo the paperwork. If the entry of the judgment results in any damage to you (such as a garnishment of your bank account), the creditor would likely have to compensate you for the damage it (or its attorney) caused. These damages can include your attorney’s fees for enforcing the automatic stay. In circumstances where the bankruptcy court is persuaded that the creditor needs to be taught a lesson, the court may order the creditor to pay you punitive damages.  Because of these potential penalties, most creditors are cooperative about stopping their lawsuits immediately when they are informed about a bankruptcy filing.

The Bottom Line

As soon as you are sued by a creditor, the clock is ticking for a judgment to be entered against you. So use this lawsuit as an incentive to see an attorney right away to find out the short-term and long-term ways the judgment could hurt you. Find out whether bankruptcy is or is not a sensible option, and whether it is in your best interest to file a bankruptcy case before a judgment can be entered against you in the lawsuit.

Bankruptcy Stops Wage Garnishments Before They Can Hit You

Posted by Kevin on September 10, 2012 under Bankruptcy Blog | Be the First to Comment

Bankruptcy protects your paycheck because it’s more powerful than a creditor’s garnishment court order

A garnishment is effectively a court order which tells your employer to pay a portion of your paycheck to the creditor instead of to you. Except in rare circumstances, a creditor can’t get that garnishment order without first suing you and getting a judgment saying that you owe the debt. A judgment is the court’s decision that you do indeed owe the debt, how much you owe, and the amount of any additional costs. A judgment authorizes a creditor to use a variety of powerful ways to get money or property out of you to pay the debt, often (but not always) including through wage garnishment.

Bankruptcy stops wage garnishments at four stages of the process:

  • before the creditor files a lawsuit, by stopping that lawsuit from being filed in the first place
  • very shortly after a lawsuit is filed, by preventing that lawsuit from turning into a judgment
  • after a judgment is entered, by not allowing the creditor to get a garnishment order
  • after a garnishment order is signed by the court where the judgment was entered, by trumping the garnishment court order with a more powerful bankruptcy “automatic stay”

So your bankruptcy prevents most garnishments from happening. It stops future hits on your paycheck from a “continuous garnishment,” in which there is one garnishment order requiring money to be taken out of your paycheck until the debt is paid. And it also stops new garnishments on an old judgment, for example, when a creditor finds out about your new employer.

Bankruptcy Stops Some Wage Garnishments Only Temporarily

In preventing upcoming wage garnishments, bankruptcy USUALLY does so permanently. This happens when a debt is discharged (legally written off) in the bankruptcy case, as most debts are. Once a debt is discharged, under Section 524(a)(2) of the Bankruptcy Code an injunction is imposed against the collection of that debt every again, by any means including garnishment. So in those situations the bankruptcy filing stops the garnishment, forever.

So when are garnishments NOT stopped permanently? Garnishments are just temporarily stopped by your bankruptcy filing if the debt is NOT being discharged in the Chapter 7 case—such as certain taxes, most student loans, and a few other kinds of debts. The automatic stay preventing the garnishment is in effect only from the time the case is filed until the entry of the discharge about three months later.  So, for example, if the IRS was garnishing your wages before the filing of your bankruptcy to collect on a tax that is not being discharged, the IRS can resume doing so after the discharge is entered (unless in the meantime arrangements are made with the IRS to make monthly payments on that debt, which hopefully you would be able to do after the discharge of your other debts).

Bankruptcy Does Not at All Stop A Few Rare Kinds of Wage Garnishments

If you are filing a Chapter 7 case, the automatic stay does not protect you from wage garnishment to pay child and spousal support obligations, for either current or back support. This means that an ongoing garnishment for support will not be stopped by a bankruptcy filing. And if there had been no garnishment earlier, those garnishments could actually start during your bankruptcy case.

Fortunately, Chapter 13 DOES stop garnishments for support, and provides a way to catch up on back support while under the protection of the bankruptcy court.

Present and Past Wage Garnishments

We’ve covered the effect of bankruptcy on future garnishments, including those that would have gone into effect right after the bankruptcy filing. But what about garnishment orders that go into effect just before filing bankruptcy? For example, what if you’re racing to file bankruptcy after a judgment is entered, but your bankruptcy is filed and the automatic stay goes into effect a day or two after the garnishment order is signed but before any money comes out of your paycheck? And how about after the money has been paid by your employer to the creditor, days or even weeks before your bankruptcy filing? Under what circumstance could you possibly get that money back? The next two blogs will get into these questions about present and past garnishments.

Just got a Job, Think about Bankruptcy

Posted by Kevin on January 16, 2012 under Bankruptcy Blog | Be the First to Comment

Now, that my seem like a harsh title.  You may have spent an extended period on unemployment because of the prolonged economic downturn.  While you were on unemployment, you used up all your savings and went into debt.  You sent out hundreds of resumes and spent hours on the net looking for a job- even if it was for less than your prior jobs.  Things are now looking up.  You are back to work.  But, now is the time to be wary.

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