Debtor’s Prison in Washington

I woke up yesterday morning to a discussion on MSNBC’s Up with Chris Hayes billed as “the return of debtor’s prisons”: people in America are actually being sent to prison for failure to pay debts. It seems impossible to imagine, but it’s true, and it can happen right here in Washington state.

If a Washington state citizen is sued for a medical bill or other type of debt and she/he does nothing, the court will enter a default judgment against them. In Washington, many of these lawsuits are served without case numbers, so people assume that the summons and complaint is not a real court document that they have to respond to–surely you yourself have received more than a few highly official-looking mailings that turned out to be BS sales pitches. Unfortunately, these summonses are real, and the creditor or debt collector will enter a default judgment without your knowledge if you don’t respond within twenty days of being served. In some cases, in fact, the debtor is not actually served with the lawsuit at all, and rather is a victim of something we informally call “sewer service”: the process server says he or she served the debtor with the suit but never actually did it–the equivalent of just throwing the summons into the sewer. So a borrower may get a lawsuit default without ever getting sued.

The “debtor’s prison” aspect of the situation comes in when the creditor subpoenas the borrower for a “Supplemental Proceedings” hearing. This hearing is mandatory, and failure to heed the subpoena may lead to a bench warrant (an order for the arrest of an individual who has failed to appear at a legal proceeding). The borrower may never know about the bench warrant until they are pulled over for a traffic violation or are stopped at the U.S. border after a weekend vacation in Vancouver, B.C. Continue reading

Conversion from Chapter 13 to Chapter 7

I often face a question concerning whether to convert a Chapter 13 case or dismiss and re-file. There are several things to consider but in every case, I believe that debtors should should have a resolution that completes their case with some kind of debt relief.

In 2005, Congress changed the code to include the addition of claims against the estate or the debtor that arise after the petition date but before conversion, under Section 348.. Those claims will be allowed and treated as if they occurred prior to the filing of the bankruptcy, which means that you are safe in converting even if you have incurred new debt.

However, there is an additional issue, have you acquired property post-filing or has the value of a house, car, increased or decreased etc.. since the filing date? Have exemptions or other bankruptcy codes changed since the filing date? If any of those things have occurred, it may make sense to dismiss and re-file a new case with your attorney re-evaluating your assets and debts to make sure that you get discharge with a real fresh start.

Preserve Your Ability to File Bankruptcy at the Time You Want

Sometimes the timing of your bankruptcy filing hardly matters, but other times it’s huge.  The three examples in this blog should convince you that you want to avoid being rushed to file your case because a creditor sued you earlier and is now garnishing your wages. Instead you want to preserve the ability to file bankruptcy at a time that is tactically the best for you.

1. Choosing between Chapter 7 and 13:  Being able to file a Chapter 7 generally requires you to pass the “means test.” This test largely turns on a very special definition of “income.” For many people, their “income” under that definition can change every month, sometime by quite a lot. This means that you may not qualify to file a Chapter 7 case one month but then do so the next month. Being able to delay filing your case means being able to file when you will pass the “means test,” or at least more likely would do so, and therefore not be forced to file a Chapter 13 case. This means usually finishing your case in three or four months instead of three to five years, and almost always saving many thousands of dollars. Means Testing

2. Discharging—writing off—debts:  Getting certain debts discharged is harder if those debts were incurred within a certain amount of time before the filing of your bankruptcy case. So being able to delay the filing of your bankruptcy case makes it less likely the creditor on one of these debts would challenge your ability to discharge that debt. Or if such a creditor would still raise such a challenge, defeating it would be easier.  The amount at stake is the amount of that debt, plus often the creditor’s costs and attorney fees, and your own attorney’s fees.  Avoid or reduce the risk of continuing to owe that after your bankruptcy is over by avoiding getting creditor judgments against you.

3. Choosing property exemptions:  The possessions you are allowed to keep in a bankruptcy depend on which state’s exemption laws apply to your case. If you moved to your present state of residence within two years before your bankruptcy is filed, you will not be able to use that state’s exemptions but rather your former state’s. Especially if you are getting close to the two-year mark, having flexibility about when to file would allow you to pick whichever state’s exemptions were better for you. Otherwise, you may either lose an asset in a Chapter 7 case, have to pay the trustee to be able to keep it, or else even be compelled to file a Chapter 13 case to keep it. Bankrutpcy Exemptions

You may sensibly ask: if you do get sued, what are you supposed to do to avoid getting a judgment against you, so that you’re not later rushed into filling bankruptcy at an unfavorable time?  The answer: see a bankruptcy attorney as soon as you get sued to figure out how to deal with that law suit and with your entire financial circumstances. The earlier you get advice, the more options you will have.

Do Non-Citizen Debtors Get All the Benefits of Filing Bankruptcy?

In my last blog entry I said that non-citizens—legal or not—can file bankruptcy. All they need is appropriate identification. But that raises two questions: 1) Would that non-citizen receive all the benefits from that bankruptcy that a citizen would receive?  2) And would filing the bankruptcy hurt a legal non-citizen’s efforts to become a citizen, or would it increase an illegal immigrant’s risk of deportation?

I’ll address the first of these questions now, and the second one in my next post.

Two benefits of bankruptcy pertain here:

  1. The protection of assets from the bankruptcy trustee (and thus from the creditors) through “exemptions.”
  2. The granting of a discharge of debts.

Exemptions:
The rules about what property of a debtor is exempt do not directly change with the debtor’s citizenship status, but there are potentially very important indirect effects.

Bankruptcies filed many states use that state’s own set of exemptions. So the federal bankruptcy court has to interpret that state’s definitions of those exemption definitions. Some of those definitions and the court’s interpretations of them can disqualify some immigrants. For example, Florida has a very generous homestead exemption, but In order to qualify for it, a debtor must be a permanent resident of the state with the intent to make the property in question his permanent residence. This residency requirement can be satisfied by a non-citizen only if he or she has gotten permanent resident status—a “green card”—as of the date of the filing of the bankruptcy. In a recent case, the immigrant was in the process of getting his permanent residency and in fact received that status three months after filing bankruptcy, but he was still deemed not to be a permanent resident at the time of his bankruptcy filing and so was denied a homestead exemption.

Discharge:
Again, the rules about what debts can be discharged and which cannot are the same regardless of citizenship. But some non-citizens have debts which were incurred in another country, leading to the question: Can those debts can be discharged in their U.S. bankruptcy case?

It depends.

First, assuming that the creditor is given appropriate notice of the bankruptcy, and the debtor successfully gets a discharge of his or her debts, that creditor will no longer be able to try to collect that foreign in the U.S.

But second, there is a good chance that the U. S. bankruptcy court’s discharge of this debt does not result in the discharge of the debt under the laws of the original country. If so, then that debt can continue to be collected according to the laws of that country, presumably against the debtor’s assets in that country, and perhaps in other countries outside the U. S. This depends on complicated international issues like treaties between the U.S. and that country, and whether they have “comity”—an agreement to respect each other’s laws—specifically in the area of bankruptcy. Otherwise, if the debtor has property outside the U. S., or intends to return to the other country, even just to visit, these issues should be investigated very closely, likely with both your U. S. bankruptcy attorney and one in the other country. In some situations, it even may be necessary to file the appropriate form of bankruptcy in the other country, assuming that exists and the debtor qualifies to do so.

Stopping the Foreclosure of Your Home Temporarily and Permanently through Bankruptcy

Both Chapter 7 and Chapter 13 can help you save your home. Which one is better for YOU?

You have almost for sure heard that the filing of a bankruptcy stops a foreclosure. You may have also heard that Chapter 13—the repayment version of bankruptcy—can be a good tool for saving your home in the long run. Both of these are true, but are only the beginning of the story. This blog today tells you more about stopping a foreclosure. My next blog will get into longer term solutions.

The “automatic stay” is the part of the federal bankruptcy law which immediately blocks a foreclosure from happening. The very act of filing your bankruptcy case “operates as a stay,” as a court order stopping “any act to… enforce [any lien] against any property of the debtor…  .”

But what if your bankruptcy case is filed and the mortgage lender or its agent can’t be reached in time so that the foreclosure sale still occurs? Or if there’s some miscommunication between the lender and its agent or attorney, with the same result? Or if the lender just goes ahead and forecloses anyway? Continue reading

Can Non-Citizens File Bankruptcy?

The answer is simple: Yes.

The Bankruptcy Code does not limit who may file based on citizenship status. It states that “only a person that resides or has a domicile, a place of business, or property in the United States… may be a debtor… .”  The “person” is simply defined to include an “individual” (as well as a “partnership and corporation”). The point is that there is no requirement about needing to be a citizen, or even to being legally in the country. So everyone, citizen or non-citizens, legal or illegal, can file bankruptcy.

But the person must meet one of the above categories of who may be a “debtor.”

One often used category is to have a “domicile,” meaning simply being physically present in one location with the intention of making that place the person’s present home. Generally the longer the person has been in one place and the more he or she has put down roots—such as getting a state drivers license—the easier to show intent to establish a domicile.

Having any meaningful amount of property, such as bank or other financial accounts, or a vehicle, would itself likely be sufficient to qualify as a debtor.

Any other requirements? The bankruptcy filing documents ask for a Social Security number, but there is nothing in the Bankruptcy Code which requires that. If the person filing bankruptcy has a legal Social Security number appropriately issued by the Social Security Administration, it should be used. Otherwise, the person should get an Individual Taxpayer Identification Number (“ITIN”) from the IRS, and use that. The “IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs.”

Anything else? In most places, the bankruptcy filer will also need to show proof of identity at the so-called Meeting of Creditors, to allow the bankruptcy to verify that the person present there answering the questions under oath is a real person and the one who filed the bankruptcy documents. This aims to prevent identity scams. Proof of identity generally requires two things: 1) a document showing your SSN or ITIN—such as the original Social Security card it that’s available, or some other paper received from the government or from an employer showing the number; plus 2) some form of photo identification—such as a driver’s license or passport.

So is that it? Well, yes, with these conditions met the non-citizen can file for bankruptcy. But two big questions remain that just can’t get swept under the rug:

  1. Would a non-citizen potentially have problems qualifying for any of the benefits of bankruptcy, such as getting a “discharge” (legal write-off) of the debts, or claiming property exemptions in order to keep the property?
  2. Does filing the bankruptcy harm a legal non-citizen’s efforts to become a citizen, or does it increase an illegal immigrant’s risk of deportation?  

Sorry for keeping you in suspense, but I’ve covered enough for one day and so l’ll address have to these important questions in my next two blogs.

Keep Your Vehicle In Spite of Paying Less Every Month

What if you really need to hang on to your car or truck, but can’t afford the monthly payments? Or if you’ve fallen behind and just can’t catch up?

“Straight bankruptcy”—Chapter 7—won’t help you here. Most of the time, you have to either quickly catch up or you lose the vehicle. And very few vehicle lenders will negotiate about the payment amount in a Chapter 7 case. With rare exceptions, it’s take it or leave it.

BUT, if you meet two conditions, you may have the option to KEEP your car or truck, NOT make up any missed payments, all while LOWERING your monthly payments. This even REDUCES the total amount you must pay before the vehicle is yours free and clear.

The two conditions you must meet:

  1. You got your vehicle loan at least two and a half years ago.
  2. You owe more on the vehicle than it’s worth.

If so, through a Chapter 13 vehicle loan “cram-down,” we can re-write the terms of that vehicle loan. First, we can reduce the balance down to the fair market value of the vehicle. This can sometimes shave thousands of dollars off the balance. That in itself would reduce the monthly payment. But then also, depending on how many months of payments remained on the vehicle loan compared to the projected length of your Chapter 13 plan, we may be able to stretch out the term of the loan. If so, that would lower the monthly payment even further.

An example will make this clearer. Say you were 4 years into a 6-year vehicle loan (meeting the 2-and-a-half-year condition), with a balance of $11,000 but the vehicle worth only $7,000 (meeting the owe-more-than-it’s-worth condition). Further, say the regular monthly payments were $498, with 24 months of them to go. Under a cram-down rewriting of the loan under a 3-year Chapter 13 Plan, the balance to be repaid would reduced to $7,000, and the term stretched to the 36 months of the Chapter 13 case. So now the monthly payment would be reduced to about $220, less than half the $498 regular monthly payment. Even though in this example it’s taking three years instead of two to pay it off, you’re saving close to $4,000. Plus we’re reducing the monthly payment to something much more affordable.

The difference in the balance on your vehicle loan contract and the reduced amount you would pay through your Chapter 13 plan (the $4,000 or so in the example) would be treated as unsecured debt. It would be lumped in with the rest of your unsecured debts, and would be paid through your Plan at whatever percentage all your unsecured creditors were being paid. This can be a low percentage and sometimes even nothing. It would usually be determined by how much your budget says you can afford after living expenses.

So if your vehicle loan meets the two conditions above, you will likely be able to reduce both your monthly payment and the total amount needed to pay off your vehicle. All without having to cure any previously missed payments, and without risk of repossession as long as you fulfill the terms of your Chapter 13 plan.

Who Is the Bankruptcy Trustee and How Can He or She Help or Hurt Me?

The three kinds of trustees in consumer bankruptcy have tremendous power over you. So it’s important to know what they do, and how to stay in their good graces. I’ll introduce them in this blog—the Chapter 7 trustee, the Chapter 13 trustee, and the United States Trustee. Then in the next three blogs I’ll tell you more about each of them.

1. Chapter 7 Trustee: Determines either that you have no “non-exempt” assets to collect or else pursues any such assets in order to liquidate them and pay the proceeds to your creditors. Reviews your documents and presides at your Meeting of Creditors for this purpose. Can conduct other investigation such as reviewing the public record. Can also pursue “fraudulent transfers” or “preferences”—money or assets either that you gave or sold to someone or that creditors got or took from you within a certain amount of time before the filing of your bankruptcy case.

2. Chapter 13 Trustee: Determines if your proposed Chapter 13 Plan meets legal requirements, raises objections, and works with your attorney to adjust your Plan to satisfy any such objections. The trustee or a staff attorney usually presides at your Meeting of Creditors. You send your Plan payments to the trustee (or a designated collection office), who disburses these funds to your creditors according to the terms of your Plan. The trustee and his or her staff cannot give you legal advice, but will provide you some help in completing your case successfully.

3. U.S. Trustee: Is part of the U.S. Department of Justice, overseen by the U.S. Attorney General. The U.S. Trustee (“UST”) appoints and supervises the group (“panel”) of Chapter 7 trustees and the “standing” Chapter 13 trustees. Each regional UST, through a staff usually including an attorney and/or accountants, monitors the administration of bankruptcy cases, most closely with Chapter 11 business cases. They are most often involved in consumer cases in raising objections to the eligibility of debtors to file Chapter 7 cases. In rare cases, they can refer potential bankruptcy crimes to the U.S. Attorney for investigation and prosecution.

Again, in my next blogs I’ll tell you more about each one of these trustees, especially how to avoid worrying about them by taking the right steps in your bankruptcy case.

Washington Foreclosure Fairness Act Homeowners Mediation Program

The Washington State Legislature passed a new law this year requiring all lenders to offer borrowers mediation before foreclosure. The goal of the law, which takes effect starting July 22, 2011, is to allow more Washington State homeowners to modify the loans to avoid foreclosure.

Under the current system, many homeowners are losing their homes unnecessarily simply because they are unable to navigate the Making Home Affordable Modification Program (aka “HAMP”). Many of these homeowners would be able to stay in their homes with a little help. At Seattle Debt Law, our attorneys have already attended training on the new law and we are prepared to assist clients through the process.

There are numerous reasons why you may need an attorney consultation even if you are following all the guidelines of the state sponsored program. The new law gives important deadlines and notices that you must comply with to take advantage of the mediation, but even if you miss those deadlines, you can still get help all the way up to the day before foreclosure. Don’t let the predatory lenders take your house—fight back and stay informed!

For more information, visit the Foreclosure Mediation Program website or read the Department of Commerce’s handout on the program.

Putting the “Payday” in “Payday Loan”

This is interesting:

Lobbying expenditures from the payday loan industry more than doubled from $2,045,000 in the 109th Congress to $4,182,550 in the 110th Congress, according to a new report from Citizens for Responsibility and Ethics in Washington (CREW).

The report, released Tuesday, finds that federal campaign donations by the employees and political action committees of 13 industry companies and trade associations “jumped 80% between the 2006 and 2010 midterm election cycles.”

The top three recipients, and five of the top nine, were Democrats–not particularly surprising, perhaps, because the Democrats were in charge during the last Congress, but discouraging for a party that’s supposed to be on the side of consumers. It will be interesting to see how things change this cycle.

The full report is here.