Chapter 7 and 13 Bankruptcy Blog

– Victoria Ring, Colorado Bankruptcy Training

For those of you just entering the field of debtor bankruptcy, this article will be very helpful to you because it addresses a very common problem that occurs when working with debtors.  The common problem is that debtors want their cake and eat it too. This statement may sound a little harsh but allow me to explain:

I am finding that many new attorneys entering the bankruptcy field do not have the training to screen their clients before sending us the petitions for input.  One of the easiest methods for an attorney to screen their clients is to find out how much equity is in their home before taking the case. During the intake it only takes a minute or two to find out approximately how much the debtors owe on their mortgage.  Then, while the client is still in the office, go to a computer and do a search on www.zillow.com.  Although Zillow is certainly not a court authority by any stretch of the imagination, it will tell you immediately the approximate amount of unexempt equity the debtor may have.

For example: I had a case today for a California debtor who had just divorced. There was $200,000 of equity in the home.  Since the debtor was divorced, he only had to claim $100,000 of this equity.  Under the 704 California exemptions, the debtor was provided with a healthy $75,000, leaving him with $25,000 that was UNEXEMPT.  Was the debtor happy about the $75,000 exemption?  Of course not.  The debtor was angry because he wanted to keep the $25,000 plus have all his debts excused.  Although most debtors may not realize it at the time, in reality they are being unfair and asking the attorney to commit fraud by making this selfish demand.

Unfortunately, most of the new bankruptcy attorneys that I work with do not understand the bankruptcy law well enough to properly advise their client.  Instead, they accept the case, have the client fill out the intake forms, pay the fees and send the paperwork to my team.  We input the petition and discover the problem with the equity in the home.  By this time, the attorney has invested his or her time, the debtor has spent several hours gathering information and we have worked inputting the case.  When we discover this problem we alert the attorney, the attorney talks to the client and the debtor decides not file bankruptcy.  The attorney is forced to refund some of the money because the attorney did not know how to properly explain the advantages to the debtor of filing a Chapter 13 instead.  In fact, if the attorney had called to discuss this case with me, I could have taught him how to turn this unhappy client from a Chapter 7 to a positive Chapter 13 because I deal with these issues all the time.

For example, this particular debtor had $38,000 in Schedule F debts and $25,000 of unexempt equity in his home.  The debtor did not want to surrender his interest in the property because he wanted to make sure his ex-wife and children had a home to live in.  This is admirable, but the court and creditors look at numbers because they are not emotionally tied to debtors. New attorneys must learn these types of skills so they can help the debtor understand why it may or may not be to their advantage to file bankruptcy at this time.

But for the particular debtor in our scenario, it would have been to his advantage to file a Chapter 13.  First of all, we could have proposed a 100% Plan which would have more than likely protected the $25,000 of unexempt equity.  Secondly, the Chapter 13 would have eliminated $73,000 in interest charges over the 5 year Plan period, the debtor would have paid off his student loan in full as well as the unpaid personal income taxes from 2002.  By presenting these positive factors to the debtor, the attorney may have saved this case and never had to refund money.  Plus the debtor would be happier once he understood the advantages.

(Note:  A key to good marketing is to point out advantages for the client.  If you can show a client how much money you can save them and how, they often will do whatever is necessary to comply with your requests and invest their time and money making it happen.  This is what makes a happy client and this is what generates referrals.)

But in this case, the attorney did not call to discuss the matter with me.  He simply told the client that he would have to pay $25,000 or lose his home.  This naturally scared the debtor to death and he decided not to file. Who can blame him?

It amazes me when things like this happen; and they happen quite frequently.  In fact, it may be shocking to you also.  I hope so, because I want this article to be shocking enough to help to prevent this from happening to you.  Also, please understand that this article is not intended in any manner to provide legal advice.  I am not an attorney and I am not trying to predict what a bankruptcy court to do by writing this article.  I am simply trying to help you understand the concept of fairness so you will know how to better deal with situations exactly like this in the future.

I wish you the best of success and encourage you to continue learning and working hard to protect the debtor; but in a fair and balanced way.

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– by Victoria Ring, Colorado Bankruptcy Training

In the old days (not long ago) when a person decided to file bankruptcy they normally really needed to file bankruptcy.  But today, a large number of cases are filed with the fraudulent intention of taking advantage of the bankruptcy system and it is up to every one of us working in this field to do our part to protect the system or we risk even more regulations and hoops to jump through.

The best way to accomplish this goal is to demand that debtors provide verifiable documentation about their income for the past six months.  During the last month I have witnessed four cases involving debtors who claim to work as a 1099 employee but they have no verification of income and expenses to back up their statements.  When confronted for additional data, normally the debtor (who is trying to hide something) will give the attorney and their staff conflicting stories.

One attorney we helped this past week told us that the debtor had given him 100 different stories.  The attorney wanted us to call the debtor and see if we could get the truth.  First of all the debtor would not answer the phone and gave the excuse that he avoided phone calls because of credit collectors.  Note:  Don’t fall for this. The debtor knew he was filing bankruptcy and that his attorney will need to get in touch with him during the process.  In my experience, debtors avoid phone calls because they: (1) Are too paranoid to face their problems and want to forget about them; or (2) They are hiding something and need time to think up a good excuse.  (Please understand that I am not trying to be harsh.  I am just stating facts.)

In all case scenarios we worked on this past week, the debtors were required to provide six months of income statements.  Of course 1099-employees do not receive a paycheck from an employer, but they must have some type of accounting system to show the income and expenses for their business.  If they do not, something is odd.   Keep in mind, that some debtors will tell you that they do not keep records to avoid providing you with information about their actual income, so you need to go a step further.  You need to get the debtors to provide you with a Profit and Loss statement for their business, regardless of whether they have one or not.  They can write one up and provide to their attorney.  And the income figures the debtors provide need to match the bank deposits from their business and personal checking accounts.  If not, creditor objections are very probable.

That’s right.  You need BOTH the business and personal checking account statements for the past six (6) months; and if you want to go an extra step, compare the figures with the IRS Income Taxes that were filed the year before.  Of course these figures may not be exact, but comparing them will often allow you to determine if the debtor is providing you with fraudulent data in an effort to hide their income.  For example:  If the IRS Tax Forms that were filed in 2009 showed a loss of $20,000, and the 2010 bank statements show the debtors are depositing $5,000 a month; something is wrong.  A business does not normally operate an entire year, go in the red $20,000 and suddenly make $5,000 every month.

Use logic in your analysis of the data the debtor provides whether you are an attorney or working for an attorney.  Doing so will protect the attorney, fulfill due diligence and protect the system from fraudulent debtors.

Visit us online at: http://www.coloradobankruptcytraining.com

DEAR VICTORIA

I would love to enroll in your Chapter 7 class starting on July 5, but I may not be able to attend all the classes.  Do you give credit for any classes that I miss?

REPLY

Yes, when you enroll, any classes that you miss will be credited to you.  We will assess this on a case-by-case basis, depending on the number of classes you missed compared to the number of classes you were able to attend.  However, regardless of the outcome, you will receive full credit for all the classes when you enroll.

To enroll for the first class beginning on July 5, visit: http://www.bankruptcytrainingproducts.com/home/web-and-teleconference-training DEAR VICTORIA I had a question regarding illegal immigrants. I have a pro bono client that has been using a made up social security number for 10 years. He just informed me that the social is not valid and he is in the country illegally. Under the federal rules there is no explicit law stating that he has to be a citizen however I know at the 341 meeting they will ask for a valid social security card. Any thoughts?

REPLY

An illegal alien cannot file bankruptcy. To be truthful, I would immediately report this person to the authorities.  I personally think what this client is asking of the United States is a total outrage and I encourage you to get him or her out of your life immediately.  People like this do nothing but cause havoc within the system because they have spent years taking advantage of the United States.  This illegal client should have obeyed our laws and got a green card many years ago.

Again, I think this is an outrage and total abuse of the system if this client can even conceive trying to take advantage of our laws simply because he cannot pay his bills.  I doubt he ever paid taxes to the United States because he worked illegally in our country for 10 years and now he wants more?  This is not fair, let alone right!!!

RESPONSE FROM ATTORNEY

Thank you. I completely agree with you. I received the client from a public law center in Orange County that was supposed to prescreen clients. The client gave me his phony social and then called me a week later to inform me that it was made up.  I was not sure if I had a legal obligation to continue to represent him however I actually just spoke to him and informed him that I have to withdraw and that he is committing fraud. It is amazing how long he was able to use a false social for employment and credit. Again thanks for your help.

SUMMARY FROM VICTORIA

Back in the old days when someone went to an attorney to file bankruptcy, they normally needed to file bankruptcy.  It was not a wonderful thing to do.  Most people felt very bad that they had to file.  But today, people look for loop holes in the bankruptcy law so they can take advantage of the system.  This is sad, and it means that honest people need to get wise in order to prevent as much fraud as possible.  If we do not fight for the prevention of fraud, the innocent people will suffer.

One way to prevent fraud is to use the tips in my latest video, which you can view online at: http://www.youtube.com/watch?v=oInwBLMGvKA

DEAR VICTORIA

A little over a decade ago, attorneys were not permitted to advertise.  But today, attorneys have the right to do so.  The problem is that many attorneys have no clue about marketing.  Is this a subject you teach?

REPLY

I incorporate marketing skills training when I set up operational procedures for law firms.  It is my personal belief that marketing needs to be a part of the day-to-day life inside the law firm.  From the person who answers the telephone to the attorney sending an email to the client; all methods of marketing must be implemented in order for them all to work together for the benefit of the law firm.  In this manner, marketing is free or very low-cost.  Personally, I do not think it is a good idea to pay others to market your website.  With all the fraudulent marketing schemes out there; it is more advantageous to do the job yourself and control the entire operation.  This way you can also fine tune your law firm income and adjust methods as necessary.  No hired marketing firm is going to do that or care that much for your law firm.

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A quick lesson in the Means Test, Schedule J and the Chapter 13 Plan.

http://www.youtube.com/watch?v=FoldzGDhV3I

STEPS FOR CHANGING A CHAPTER 7 PETITION TO A CHAPTER 13

1.   Prepare the petition as you would a Chapter 7.

2.   Complete the Means Test to make sure the debtor qualifies for a Chapter 13.

Additional qualifications of debtor to be eligible to file a Chapter 13:

a.   an individual (no corporations or partnerships); b.   have a regular income greater than reasonable living expenses; c.   have liquidated, unsecured debts not exceeding $336,900 and secured debts not exceeding $1,010.650.

3.   To change a Chapter 7 to a Chapter 13, the following adjustments need to be made within the Chapter 7 bankruptcy petition:

a.   Change to a Chapter 13 on the Voluntary Petition b.   Also on the Voluntary Petition, under the Statistical Information tab, the box needs checked to indicate there will be funds left over to pay creditors.

c.   Item 9 on the Statement of Affairs needs changed from a filing fee of $299 for a Chapter 7 to $274 for a Chapter 13.

d.   On the average, most attorneys charge $1,000 extra for a Chapter 13 compared to a Chapter 7.  Therefore, attorneys can place this additional fee into the Chapter 13 Plan. If so, change:

i.   Attorney Compensation Statement to show money is owed by debtor. ii.   Add in the additional Attorney Fees into the Chapter 13 Plan to match the Attorney Compensation Statement

4.   Classify all secure debts on Schedules A and B.

5.   Balance out Schedule J and use the amount left over as your beginning Chapter 13 Plan payment.  This is your starting point.

6.   Enter in the Chapter 13 Plan payment into the Chapter 13 Plan calculator.  Make adjustments until you balance out the Chapter 13 Plan.

___________________________

Notice: If you are an attorney also seeking to open a Chapter 13 bankruptcy practice, Chapter 13s are my specialty.  I love doing them and there is no doubt that I can teach you the skills you need to start offering Chapter 13 services to your clients and immediately increase your law firm profits.  My training costs are very low, starting at $100 per hour for online training.  So contact me at

http://www.coloradobankruptcytraining.com/contact.html

I just placed a free 1 hour training audio containing various tips and techniques for preparing Chapter 13 petitions and plans. It should be a great benefit to you and your clients. There is no hidden costs and you can download it free at: http://www.coloradobankruptcytraining.com/audio01.html

Typical Scenario:

Debtor borrowed money from a friend or relative and has been paying them back on a monthly basis.  When the debtor files bankruptcy, they may or may not list this debt in the intake.

The problems this issue causes:

1.  If the debtor is filing a Chapter 13, the debtor will be using all of their disposable income to make their Chapter 13 Plan payment.  This means there will be no money left over to pay the friend or relative.

2.  If the personal loan is included in the Chapter 13 Plan, the friend or relative will be notified of the bankruptcy like all the other creditors.  The friend or relative will be required to file a Proof of Claim and they will be treated as an unsecured debt if no collateral was required for the loan.

3.  If the debtor qualifies for a Chapter 7, the personal loan from a friend or relative (which is normally unsecured) will be discharged in bankruptcy.  Although not obligated by law to do so, after the bankruptcy is discharged the debtor can make payment arrangements with this creditor or any other creditor to repay discharged debts.

What happens if the debt is not reported?

First of all, it is unlawful for the attorney, non-attorney or debtor to withhold any debt or asset information from being listed on a bankruptcy petition.  Secondly, the debtors sign a document within the bankruptcy petition that states they have accurately reported every debt they owe.

Thirdly, if the bankruptcy case is a Chapter 13, not providing for the debt will not provide any money to pay it.  This is because all disposable income is disbursed to paying the creditors.  If the creditor (friend or relative who loaned the debtor money) is not listed in the petition, there will be no money to pay them.

Can the personal debt be reaffirmed?

If a debt is unsecure, a Reaffirmation Agreement is worthless.  Suppose I borrowed $500 from you and said I would repay you.  What happens if I do not pay?  Unless I gave you an asset that you could repossess, there is nothing you can do except file a lawsuit and hopefully win a judgment, which may or may not be collectable.

Therefore, if the debtors sign a Reaffirmation Agreement on an unsecure debt, but they do not honor their agreement; there is no asset that can be taken.  Signing a Reaffirmation Agreement on the debt owed to the friend or relative will do absolutely nothing to the priority of the debt or help to assure the debt is paid differently from the other debts in the same class.

Can the debtor prioritize the debt?

Absolutely not.  Only the bankruptcy court can make the determination of the priority of debts.  If the debtors want to pay back their friend 100% of the money they loaned them but only offer the credit card companies 25% in the Chapter 13 Plan, do you think the credit card companies may be a little upset?  Of course they would, and the attorney can count on an Objection to the Chapter 13 Plan being filed against them.  This delays confirmation as well as creating more work for the attorney.

But this scenario happens quite often. If this situation happens to you, do not think it is rare.  Every bankruptcy attorney has encountered this same scenario and it much more common than you may think.   In fact, I remember encountering these same problems back in the early 1980s.  It is common for debtors to borrow money from family and friends prior to filing bankruptcy.  Of course most of them feel obligated to pay back the family or friend, which is also morally correct.  However, placing a creditor as priority above another creditor is considered an act of fraud and is never to be offered as an option for the debtor.

Suggestion for attorneys when faced with this situation.

Be honest and tell the debtor what may or may not happen concerning the debt owed to their friend or relative.  As provided for above, treatment of the debt will vary depending on whether the debtor is filing a Chapter 7 or a Chapter 13.

Also, remember to point out the positive points of the Chapter 13 Plan. For the attorneys that I prepare petitions for, I give them a summation that they can share with the debtor.  For example:

1.   2008 Toyota RAV4 crammed down from $28,078.97 to the market value of $16,375.00; thus saving the debtors $11,073.97.

2.   Interest rate on 2008 Toyota RAV4 was reduced from 14.5% to 2.0%.

3.   Due to the reduction in the amount owed on the 2008 Toyota RAV4, the monthly payment was kept the same but the length of the loan was reduced from 59 months to 35 months; thus paying the car off earlier.

4.    The televisions sets were proposed as EXEMPT since they are household items. Therefore, the payment of this debt was removed from the Chapter 13 Plan.  If the creditor does not object, the debtors will NOT have to repay the $4,200.00.

5.  Plan Summary: Monthly payments: $643.00 Length of payments:  60 months Unsecured Plan Percentage: 38%

Do you need assistance with your Chapter 13s?

If you are an attorney seeking attorney-quality work for preparing your Chapter 13 bankruptcy petitions, consider the virtual paralegal services of Victoria Ring and Michael Misenheimer.  For more information visit

http://www.coloradobankruptcytraining.com/petition_preparation.html