Chapter 7 and 13 Bankruptcy Blog

Disclaimer: The information in this article is for training purposes only.  This article is written by Victoria Ring, a certified paralegal and bankruptcy specialist, who is not an attorney.

Normally when I work with attorneys on Chapter 7 and Chapter 13 bankruptcy petitions, debtors want to keep everything they own even if they are unable to afford the payment.  However, today, I encountered just the opposite.

A little over two months ago I prepared a Chapter 13 bankruptcy petition for an attorney I work with in the District of Colorado.  The debtor had three older motor vehicles and was 11 months behind on their mortgage.  We were able to propose a cram down to save the debtor about $85,000 on their mortgage as well as cram down on the motor vehicles, thus saving the debtor another $28,000.

The petition was finalized and everything was ready to be filed when the debtor called the attorney to say he was going to surrender two of the motor vehicles.  Because this was only the second petition my attorney had worked on, he naturally thought this would be a good thing for the debtor to do and did not see how it would affect the debtor in a bad way.  Therefore, he approved the transaction and emailed me to so I could update the bankruptcy petition.

WHY WOULD A DEBTOR GIVE UP ASSETS?

It is always helpful to understand why debtors do certain things because it will equip you to handle similar situations in the future.  Therefore, you may be wondering why a debtor would want to give up assets (such as the motor vehicles) when they are filing Chapter 13.  Through my many years of experience, I have often found that the core of the problem is normally derived from bad bankruptcy advice from non-attorneys.

When a person files bankruptcy, they will discuss their personal business with family, friends and neighbors BEFORE they will pick up the phone and ask their attorney for legal advice that they paid for.  And as you know, people who are not attorneys love to give legal advice.  It makes them feel important and knowledgeable.  However, you will find that family, friends and neighbors almost always tell horror stories about assets being taken in the middle of the night and people having to live on the street because they lost their home.  These stories often scare debtors and they will lose sight of what is logical and what is not.

Therefore, attorneys and their law staff need to be aware that this is a common problem when dealing with debtors and make it a point to educate their debtors and answer questions for them as it relates to their case.  A more informed debtor will make life much easier on the attorney and their law firm.

TIP: As a new bankruptcy attorney, you may not have all the answers.  That is why you may want to have your debtors watch some of the videos produced by the Federal Bankruptcy Court, which are excellent in answering many of the questions debtors have about bankruptcy.  The link to these videos is at: http://www.uscourts.gov/video/bankruptcybasics/bankruptcyBasics.html

Another good piece of advice to always keep in mind is that people only make changes when they believe the change is going to benefit them.  Therefore, someone has told this particular debtor that it would save them money if they gave up their motor vehicles.  But like all bad advice, this is not always the case.

IF A DEBTOR GIVES UP AN ASSET, DOES THIS SAVE THEM MONEY?

In the bankruptcy case concerning the Chapter 13 debtor I worked with, the debtor actually caused harm to himself by giving up the motor vehicles.  Here is the breakdown to understand why:

Car No. 1 – Market Value = $6,125.00 Lien Amount: $10,640.00 Cram Down saved debtor: $4,515 Benefit in Chapter 13: Monthly payment would have only been $102.00 because the debt would have been paid prorata over the life of the Plan.

Car No. 2 – Market Value = $5,065.00 Lien Amount: $11,687.00 Cram Down saved debtor: $6,622.00 Benefit in Chapter 13: Monthly payment would have only been $85.00 because the debt would have been paid prorata over the life of the Plan.

THE PROBLEMS THAT DEVELOPED FOR THE DEBTOR As you can see from the data above, filing a Chapter 13 would have benefitted the debtor in several ways in regard to his motor vehicles.  However, by surrendering them, the debtor loses all benefit from the use of the vehicles as well as the financial savings from the cram down.

Secondly, the debtor also could have qualified under 722Redemption.Com to upgrade the vehicles and improve his situation.

Thirdly, the debtor lost the monthly IRS expense allowance which was $950.00 for three motor vehicles but only $260 for one.  This alone increased the Chapter 13 Plan payment by an additional $690 per month.

WHAT HAPPENED TO THE EXTRA MONEY?

When the debtor gave up the two motor vehicles, naturally he no longer made a payment to the lienholder.  This gave the debtor an extra $550.00 per month which was applied to the UNSECURE creditors.  Instead of the debtor being in a 15 percent Chapter 13 Plan, they were now in a 30 percent Chapter 13 Plan; which means that the debtor is paying MORE money to the unsecured creditors but gave up a secure asset in the process.

Also, notice that if the debtor would have kept the vehicles, the debts could have been paid PRORATA over the 60 month life of the Chapter 13 Plan.  This reduced the payments from $550 per month to only $187.00.  Again, the debtor lost again by surrendering the motor vehicles.

TIP TO HELP PREVENT SITUATIONS LIKE THIS FROM HAPPENING TO YOUR CLIENTS

Regardless if you are a new attorney or a seasoned attorney, you should never provide a client with a definite yes or no answer until you have had the opportunity to examine the issue from all angles.  I was at a legal seminar one time and an attorney said: Attorneys never answer questions with yes or no; they always answer with – IT DEPENDS.  The other attorneys in the room laughed, but all of us is aware this is an excellent response if you need more time to research the issue.

Therefore, instead of feeling like you are trapped into providing bankruptcy advice when you are unsure what that advice entails; listen to the client and make sure you get all the facts.  Tell your client that you will need to review their case before you can provide them with an answer.  Assure them that every bankruptcy case is different and what may work for one person may not work for them.  This will provide you with some extra time to either research and get the answer online, contact an attorney mentor, or contact our office at 719-659-0743 and we will try to help you.

NETWORKING WITH BANKRUPTCY ATTORNEYS

As a new bankruptcy attorney or an experienced attorney new to bankruptcy, you may want to join the National Association of Consumer Bankruptcy Attorneys and the American Bar Association.  Both of these organizations provide you with access to a wide range of tools including the ability to join private forums and ask questions to experienced attorneys.

Another way to network is to find out if your local Bar Association offers classes and meetings for bankruptcy attorneys.  If so, make sure you attend and pass out your business card.  Not only is this a terrific way to find attorneys who are mentors but also you build your practice by accepting referrals from other attorneys who are often overloaded with Chapter 7 and 13 work.

A final suggestion is to join a social networking group such as LinkedIn and join all the bankruptcy attorney groups.  From your LinkedIn profile, click on GROUPS and do searches on the key words: bankruptcy attorney, bankruptcy court, chapter 7 attorney and chapter 13 attorney.  LinkedIn provides you with the ability to join up to 50 groups, so join as many as you possibly can.  Once you are a member, you can post questions to other attorneys and get help.

REFERENCE LINKS

http://www.linkedin.com http://www.nacba.org http://www.abiworld.org http://www.hg.org/northam-bar.html

TRAINING REFERENCE

http://www.bankruptcytrainingproducts.com/home/web-and-teleconference-training Have a wonderful week and keep working on ways to improve your skills in Chapter 7 and 13.

a lesson in client intake interviews and conflicting information

For the three weeks I have been working on one particular bankruptcy case.  Why is it taking so long?  The clients have been very difficult to interview and the husband and wife keep providing conflicting information.  Therefore, I decided to write this article to help you when you face the same problems, if you have not encountered them already.

The petition began like any other normal petition.  I entered the initial data into the bankruptcy software and compiled a list of questions to ask the clients.  When I called the client back I discovered the phone number the attorney provided was her work phone, so I apologized for the interruption and set up an appointment to talk with her after hours when she was at home.

The first problem I encountered was the inability to understand the clients due to their heavy Pilipino accent.  However, I did my best to get the answers to some of the questions.  For other questions, the wife handed the phone to her husband and I tried to communicate with him the best I could.  However, the husband could not understand who I was and was very reluctant to talk with me.  I had no choice at this time but to end the interview, let the attorney know my dilemma and ask him how he wanted me to proceed.

It took approximately 2 weeks before the attorney had the opportunity to talk with the clients and inform them of my role.  I was instructed by the attorney to call the clients and finish the interview.  Hint:  If you are an attorney, you should always let your clients know the names of people who may call them to obtain information.  This way you save a lot of time for your office and staff as well as confusion for your client.

Finally, after leaving voice mails for the clients and eventually getting in touch with them for a second interview, I was able to conduct 80% of the interview in about 2 hours time.  The reason I was unable to complete the interview is detailed in my notes to the attorney which are provided below.  However, the debtor(s) did nothing but hurt themselves by refusing to provide me with the crucial information I needed.  Now the attorney has to spend time getting it before we file the petition.  So eventually, they will have to answer the questions whether they want to or not.

When you encounter situations like this, it does not always mean that the debtor(s) are committing fraud or trying to be fraudulent in their answers.  Instead, some clients are reluctatant to answer questions because they are afraid it could get them in trouble, so they ask you or me to answer the questions for them.

For example: in one part of my conversation with the debtor, I asked him how much his family spent per month in food.  He said they spent $6,000.  You and I both know that this amount is too extreme and overinflated.  The IRS allowance for this family of 4 is only $1,370, so I immediately knew that this would not pass through the bankruptcy court without problems.  I told the debtor that $6,000 was much higher than the IRS allowance and that I needed a more realistic figure.  The debtor told me to make up any number that I needed to.  I told him that if I did, I would be committing unauthorized practice of law.  The debtor needed to provide me with a figure and that figure could not be $6,000.

But instead of trying to be sensible, the debtor became upset and started playing mind games.  He told me to try $5,000; but I told him this was too high.  Next he told me to try $4,500.  This immediately told me he was playing games and had no intention of providing me with an accurate figure to reflect his own household budget.  It was at this point that I stopped playing the game and told the debtor that he could discuss the matter with his attorney.

Remember: As a non-attorney, you should do everything you can (within your scope of power) to obtain the information you need to compile a well-detailed bankruptcy petition.  If the client refuses to provide that information or cooperate with you, do the best you can to get as much information as you can, then document details of the interview (as I have done below) and turn the matter over to your attorney. Ask your attorney how they want you to move forward and wait on their instruction.

MY NOTES TO THE ATTORNEY REGARDING THIS CASE provided for training purposes only

STUDENT LOAN ISSUES

From what I can understand, the clients have 2 sons with 2 separate student loans.  The first son (who is 21) has a student loan with Great Lakes for which the debtor co-signed.  This means that the debtor may need to start paying $300 per month for this student loan debt beginning in June 2010.

However, debtor claims that these are his student loans; however, he acknowledges that he did NOT attend school.  Because debtor did not attend school, the student loans must be in the name of the son who did attend.  I am sure that Great Lakes had to place the student loan in the name of the student, not the parent.  Yet, debtor says that I am totally wrong and became very upset.

Bottom line: We do not care if debtor wants to pay the student loan for his son who is able to work and pay his own debt; my ONLY concern is if the Chapter 7 bankruptcy will be over in order time to allow for this $300 monthly payment.  By allowing for this $300 monthly payment, Debtor’s income could be reduced on Schedule I; but the expense may not even be allowed by the court since the debt does not belong to debtor.  This is the part the debtor is not able to understand.  I do not believe the loan is solely in his name and that his son is the only one responsible for it; but if I am wrong, please let me know.

Since debtor is unable to clarify this information and provide me with a suitable explanation, I have NOT listed these loans since they are currently NOT due and at this point, are not in default and not the responsibility of the debtor(s).

DEPENDENT ALLOWANCE

The debtor(s) currently have both sons living with them.  One son is 21 and the wife said he has a job; however, the husband said he is still looking for a job.  The problem is, the 21 year old is NOT in school and therefore may not qualify as a dependent on the bankruptcy petition regardless of whether he is working or not.

However, the second son, who is 20 years old, is still in college and will not be graduating until 2012. Again, the student loan would not even be due until this date, yet debtor said he wants to plan ahead and include the amount in his bankruptcy.  In fact, he got angry because I told him the court may not allow for this student loan repayment and therefore I was not placing it on Schedule J unless the attorney advised me otherwise.  I tried over and over again to explain to the client that we were only concerned with TODAY not tomorrow; yet, he became more agitated and upset with me.

Therefore, I listed both sons on Schedule I but the attorney may receive objection from the trustee.  Hopefully the trustee will allow the son who is still going to college as a dependent but it cannot be guaranteed.  The clients both need to get their stories straight before they go to court.  You may want to counsel them only to say YES and NO and not to start telling stories since their stories are always conflicting.

GE MONEY BANK DEBT

The debtor(s) listed on their client intake forms that they had a debt owed to GE Money Bank in the amount of $6,194.47 but it was a credit card.  Since the account number they provided was not a credit card number, I talked with them about it.

I discovered that the debt was SECURE because they purchased 4 television sets.  However, the debtor was unable to describe the TVs to me.  I cannot believe that 4 televisions are worth over $6,000 unless they are of a better quality than the $800 the debtor claims.  First he told me the televisions were very OLD (but would not tell me how old).  Next he told me he owed GE Money Bank $3,000 but added some more stuff in January (less than 90 days ago) that brought the total to $6,000.  When I asked him what items he had previously purchased for the original $3,000 debt, he said it was for the television sets.  When I asked him what he purchased in January, he again said it was the television sets.

This conversation continued like this for almost 15 minutes and I tried every way to try and help the debtor understand that I needed a complete inventory of the GE Money Bank debt but he kept giving me conflicting information.

My thoughts: Since this debt is such a touchy subject, debtor may have purchased these items less than 90 days ago because he knew he was filing bankruptcy.  As you know, any debt made within the past 90 days could be subject to non-discharge and the clients may have to pay this debt or give up the televisions.

Please find out:

1.   A complete inventory of everything included in the $6,194.47 debt 2.   A complete inventory of any purchases made to GE Money Bank within the past 90 days, which includes January. 3.   A complete description (brand name and size of screen) for each television set 4.   The monthly payment made to GE Money Bank 5.   Are they behind in payments?  If so, which months? 6.   Do they plan to catch up the back payments or surrender the televisions?

THE RECENT FINE FOR SPEEDING TICKET

In general conversation debtor mentioned that he has a court appearance set for March 23 to appear for a speeding ticket.  When I tried to find out about the ticket the debtor refused to go into detail. The only information I could pull from him was the court date and the amount of the fine, which is $332.  I did a search online through PACER as well as the Los Angeles Traffic Court but I could not locate any records on this traffic violation.

Debtor stated that he already paid the fine but still he needed to appear in court.  I suggest you check this out.  If the $332 was the entire fine paid in full, it needs noted on the bankruptcy petition. If the $332 is only a partial payment, I need to know that also.  Additionally, I need to know the:

1.   Case number 2.   Case caption 3.   Parties in the case 4.   Date of ticket 5.   Name and address of the court handling this matter

ADDITIONAL QUESTIONS

Debtor could not tell me if he was behind in payments on the 2002 BMW.  If he is behind, he will need to catch up those payments before the 341 Meeting or a potential objection could be challenged by the creditor since this case will more than likely be a Chapter 7.  In the petition we have asked the creditor to accept a LOWER monthly payment as well as a CRAM DOWN.  The original amount owed was $14,474 on the 2002 BMW but the Nada Guides has a market value of $6,025.  We are saving the debtor(s) $8,449.00 but if they do not show a good faith effort to catch up any past due balances, the deal could be lost and receive an objection from the creditor.

If they are only 1 month behind in payments, this may not be an issue; however, debtor was unable to provide me with this information and became upset when I asked him the question several times so I gave up.

SUMMARY

I hope my notes help you when you work on future petitions.