Man Arrested by U.S. Marshals For Outstanding Student Loan of $1,500

6227036996_77501c3a14_bA man was arrested recently in his Houston home by U.S. Marshalls for failure to completely pay the government for a small amount owed on a student loan.  Most student loans are backed by the U.S. government so when you don’t pay them you apparently now get to see the U.S. Marshalls at your door with guns drawn.  You don’t need to owe the U.S. government very much.  The man in question only owed $1500.

Paul Aker of Houston came outside slowly with his hands up and he was arrested by the marshals who had surrounded his home.  He said he did not have any idea why he was being arrested until he was in the car on his way to jail where the marshals revealed that he had an outstanding student loan debt.

Mr. Aker had actually paid off two student loans in the past and he believed he did not owe any more to the government.  The arresting agents asked him if he was in the habit of stealing from the U.S. government.

The U.S. Marshalls did release a statement explaining that it is their duty to serve federal process and to make arrests and they had apparently contacted Mr. Akers by phone to get him to appear in court and he refused.  It would have been a good idea for him to go to court before this unfortunate incident because he was forced to pay the government back for the cost of his arrest ($1258.60) in addition to the delinquent loan with interest.

They did “allow” him to pay off the debt in $200 monthly installments but I would ask what happens if he stops paying the monthly amount?  Do more armed agents show up at his door and arrest him again?  Most of my clients can’t afford such monthly installments and therefore they don’t continue to pay them.  Indeed in chapter 13 bankruptcies most debtors fall out of their chapter 13 plans for failure to pay.

I have written in the past about people being arrested and sent to debtor’s prison for unpaid debts but that is rare in America and it is not done at all in most states.  Debtor’s prisons were supposed to be completely outlawed in the 1800s.  The federal government appears to be the worst creditor of all to owe as their full military and police power can be turned against a person for some small student loan as we see here.  For many years similar heavy handed tactics have been reported to have been used by the IRS for unpaid back taxes.  With a private non-student debt you would not see anything like this.

Unfortunately there is not much bankruptcy can do for people with student loan debts.  Currently student loans cannot be discharged in bankruptcy (unless there is “extreme hardship”) though we attorneys are hoping that someday that law will be changed to allow people to escape these debts if they cannot pay them.  In America there is something like $1.2 trillion owed in student debts and no politician has yet done anything about it.

In the mean time I think it is a good idea to avoid these student loans wherever possible.  They last forever, they cannot be discharged in bankruptcy, and someday a tragedy could occur when an overzealous marshal pulls a trigger and possibly ends a person’s life for a few delinquent student loan dollars.

For those that already have the loans I would suggest you stay in continual contact with some representative of the government to work out whatever deal you can with them just like you would with the IRS.  If you do not you might have the misfortune of seeing armed federal agents surrounding your house who will place you under arrest and make you appear before a federal judge.  Let’s hope that someday the law will be changed and student loans will become dischargeable in bankruptcy even if the student debt has to be 10 or 20 years old before it is eligible for discharge.

Photo by a.mina from Flickr

 

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015. Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

Advertisements

Forgive yourself for your debt. Debt forgiveness is in the bible and bankruptcy is the answer.

forgive yourself 3I have written in the past (here) about how bankruptcy is sanctioned by the bible.  In the old testament in the book of Deuteronomy (15:1) it states thatbible 2 debts must be cancelled every seven years.   The Jewish people considered it very important to forgive debt completely after seven years.  They realized thousands of years ago that it was good for people and good for society if people had no long-term debt.  If they could not pay the debt I seven years then it was better for all to have it forgiven and lifted off the shoulders of the people.

The Christians said the same thing in the New Testament.  The Christians believed in forgiveness.  Jesus himself emphasized its importance.  I believe this includes forgiving yourself for the debt you have incurred but you cannot pay.  You blame yourself and you hang onto the debt you incurred a long time ago thinking that you will be able to pay it one day.  But this goes on and on.

It’s time to forgive yourself for charging up the credit cards, or returning an automobile you could not afford, and especially for medical debt which you cannot pay.  You may have thought you would have the money to pay it later but the money never came.  And now the debt is still there and the collectors are calling every day for you to repay it.  Some of them may even have sued you for it.

But the repayment doesn’t happen and it probably won’t happen.  So it’s time to forgive yourself for getting into debt in the first place.  Forgive yourself like you forgive others.  It’s in the bible.  In the New Testament.  You have all heard the saying; “to err is human but to forgive divine”.

freedom 4 Once you forgive yourself for the debt then maybe you can take the next step to rid yourself of it which is to file for bankruptcy to cancel your debts.  A bankruptcy discharge will lift your debt burden and let you get a fresh start and give you the freedom from your debt burden.  This freedom will allow you to live like you should and not be burdened by debt.  People have known for thousands of years how important this is.  Debt forgiveness was good enough for the ancient Jewish people of the bible and it’s part of Christianity too.  Bankruptcy is your legal, moral, and ethical pathway to debt forgiveness talked about in Deuteronomy.

I am a San Diego bankruptcy attorney.  For further questions please visit my website at www.farquharlaw.com .  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015. Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

“Accidents” photo courtesy of merfam.  Holy bible photo courtesy of Steve Snodgrass. Freedom photo courtesy of Josef Grunig

Be aware of the bankruptcy warning signs in your own life!

warningThere are many warning signs that can appear in person’s financial life that can signal that a person is insolvent and in need of warning 4declaring bankruptcy.  If you can recognize these signs then it is possible for you to prepare to file for bankruptcy.  A timely bankruptcy filing can avoid the pitfalls of irreversible financial mistakes.  I often discover that my clients have made these mistakes prior to coming to see me.

I wanted to warn people in this blog so they could consider bankruptcy when the financial danger first appears so they can avoid the mistakes that come with the failure to recognize the warning signs of an impending bankruptcy.  If these signs appear you may be in a situation where bankruptcy makes more sense than continuing with a charade or outright lie that you are “someday” going to pay your debts.

Many people continue with this denial for years and years and some make many financial mistakes because of it.  Some will cash in their retirement funds or sell other property to raise cash in an attempt to pay down their debts.   Retirement funds and many other types of property are exempt in bankruptcy.  It is always a mistake to cash in retirement funds or many other types of property that are exempt in a bankruptcy.   You can keep these assets in a bankruptcy and still get rid of your debts.

Some people will struggle along for long periods paying partial payments to creditors which will often cover only interest on their debts.   This only results in them their spending endless amounts of money which could have been saved had they only admitted to themselves that bankruptcy made sense.  Some will even borrow some money from friends and relatives in an attempt to pay down the debt.  This money is completely wasted and probably lost forever if these people eventually do file a bankruptcy.

1) The first warning sign is when you are paying interest only on credit card or other debts.  If you cannot pay down the debt itself but you are paying interest only then that is a sign of trouble ahead.  Interest rates will rise and just like our government you will eventually reach a point where your interest on your debts takes up a huge share of your income so that you cannot cover your basic monthly expenses for living.   This is an unsustainable situation and one which signals that bankruptcy make s a lot of sense for you.

2) Unemployment or underemployment.  If you have debts that you could afford to pay on when you high paying job but then you lose that job (or you get a job which pays far less) then you may be headed for bankruptcy.  Some will believe that they can magically still pay these debts even though they now need their now reduced income to continue to pay their monthly expenses.

3) When your expenses exceed your income each month before you pay your debts.  If you have no money left over after you pay your current monthly bills to pay past debt payments then it is probably time to consider bankruptcy.

4)  If you have had a vehicle repossessed and you have been hit with a large deficiency balance because of it then you may need a bankruptcy.  Some of my clients have multiple cars repossessed and they thus have multiple deficiency balances that can add up to tens of thousands of dollars.  If they cannot afford to keep up with payments on the vehicles prior to repossession then they will probably not have enough income to pay off the deficiency balance on the old car and somehow secure a new car to drive.

5) Another sign is if you suffered some outrageously high medical debt that is unpayable.  Many of my clients are uninsured or underinsured.  This works for some unless there is a need for an expensive medical procedure.  It is not long before the collectors are calling you to pay tens or even hundreds of thousands of dollars in medical bills.  They will demand that you repay just like any collector and you may not have the income to do it.

6) Then there is the constant steady unabated calls from creditors that you cannot pay so you do not answer your phone.  And this leads me to the all important  psychological  effects of long-term debt upon people.  The constant harassing calls and the knowledge that there is a debt out there that you have no way of paying is a tremendous psychological burden to people.  Bankruptcy lifts this burden, eliminates the debt and the terrible unending stress that goes with it.

7) Some people have multiple court judgments against them for unpaid bills.  These judgments could be for credit cards, deficiency judgments, unpaid medical bills, or debts of any kind for which a creditor has sued you and obtained a court judgment against you.  That creditor can now garnish your wages, seize your property, or demand you come into court for a debtor’s exam.  These “exams” will allow creditors to pry into your finances no matter how much you wish to keep them private.  These are to be avoided at all costs.

8) You may already have garnishments taking 25% of your income.  You now are operating with a reduced income and each creditor is standing in line to get his 25%.  You could pay this virtually forever if you owe enough money to creditors.  Bankruptcy will stop the garnishments, return your income level to what it should be, and banish the debts forever.

All of these are signs that bankruptcy probably would make sense for you and you should get some advice from a bankruptcy attorney.  If you have several of these warning signs (and even if you have only one) then bankruptcy is an option to consider.  There is a little bit of a miracle in bankruptcy.  It can wipe out your debts and free you from your debt burdens.  It is the only way I know of but we don’t need another because it works so well.  So think about if you have any of these signs and if you do then consider bankruptcy.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015. Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Warning sign courtesy of Free Grunge Textures.  Danger sign courtesy of Atomicjeep.

Ashamed to file bankruptcy? Afraid of doing something wrong or worse, stealing? Forget that, get your fresh start!

ashamed 2 I have had many clients who are ashamed to even talk about the possibility of being bankrupt and are therefore extremely reluctant to file for ashamed 3bankruptcy even if they desperately need to.  These clients may have a huge debt load that they cannot pay where they are having trouble even paying the interest on the debt.  They may have had credit cards they charged up and maxed out, or automobiles that were repossessed with huge deficiency balances owing, or they may have medical debts that are high.

In addition these debts may have been sold to collection agencies.  This means that the collection “experts” have purchased these debts and they are now motivated to collect them.  The collection agents are experts because they are mean and angry and demanding and even threatening.  Like the terminator machine in the movies they have one goal in life.  This is to get as much money out of you as quickly as they can.

The collection agents believe nothing you say because they assume you are lying and even if they did believe you they do not care about anything you say.  They want your money now and they will pull out all the stops to get it.  The only way to stop them is to pay them or through filing a bankruptcy.

Many of  my clients are unemployed because they were laid of or they may be underemployed because they are now working part-time.  These people may have a job currently that pays far less than the one that they had when they incurred the debt in the first place.  In addition they may have had medical procedures that they had no insurance for at the time that is costing them far more than they can possibly afford.

All of this can be occurring in my clients’ lives yet some of them are still holding back on filing a bankruptcy.  They still think that some miracle will occur that will help them pay and they do everything they can to resist a filing.

I believe people avoid bankruptcy because of the stigma that bankruptcy carries and has carried for some time.  In the 1929 stock market crash people jumped out of windows to avoid what they believed to be the shame of bankruptcy.  People still believe that bankruptcy carries shame and signifies failure of some kind and as Americans we hate failure and we wrongly believe that it is always bad.

But things have changed considerably.  Bankruptcy is not bad as many think now or ever.  Corporations file bankruptcy regularly and reorganize and then continue to function.  Even towns and cities do this and they can continue to carry on.  There is nothing dishonest or immoral about this whatsoever for them or for you.

You also can file bankruptcy, discharge your debts, and reorganize like a business or municipality.  There is no shame and no disgrace to this.  In fact it is usually the moral and legal and best thing to do when you cannot pay your debts.  It frees you and the creditor from the charade that someday you will pay the debt.  You can move on and the creditor can now write off the debt as uncollectable and take a deduction on his taxes.

In fact part of bankruptcy law is the concept of you the debtor getting a “fresh start”.  Bankruptcy laws themselves that have been with us for hundreds of years contain the fresh start language.  This is because bankruptcy was not created to cause humiliation or to put a sense of defeat into people.  It was created to liberate people and businesses, and later municipalities from the crushing effect of debt which cannot be paid by anyone.

Once freed from the debt an individual or entity can utilize the fresh start by starting anew and carrying on without the previous debt burden.  The psychological boost one can receive from a bankruptcy discharge is tremendous.  I know because my clients regularly tell me so.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015. Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

Couple photo courtesy of Justin maier.    Polar bear photo courtesy of thelearnr.

The bankruptcy warning signs for America are the same as for individuals or small businesses

Ever see ‘Flight of the Phoenix”?  I mean the original version of the movie with Jimmy Stewart.  It was a great movie about a plane load of people who crash-land during a sandstorm in an Sahara desert.  Most of the passengers survive the crash and they realize quickly that they will not be rescued and thus they must rely on themselves to stay alive and to find a way out of the desert without outside help.

A German engineer comes up with an ingenious plan.  He says that they can build a new aircraft with one of the engines from the old aircraft but this would require to attach parts of the wings from the old aircraft to this engine.  This would require a significant amount of work and re-design but the German engineer (played by Hardy Kruger) informs the others that he builds aircraft and that it indeed can be done.  After an intense debate session the survivors decide that they have few other choices so they go ahead with the project.

They work diligently, mostly at night to avoid the heat, and they fight a great deal throughout the process.  Most of the movie is about their struggles during this aircraft conversion process.  Hardy creates more dissention as he takes extra rations of water for himself during the airplane conversion and several of the group die during this time.  When the aircraft is finally complete and ready to fly someone finally decides to ask Hardy Kruger what kind of airplanes he designed.

Hardy tells him proudly that he designs small model aircraft and that the largest one was may 3 feet wide.  The others are shocked but Hardy assures them that the mechanics are the same no matter how large or small the aircraft is.  He is proven right after the re-designed full-sized aircraft does indeed fly the crew to safety.

I would argue that we bankruptcy attorneys who deal with bankrupt individuals, couples, and small businesses every day can spot bankruptcy warning signs even if it is for something as large as the federal government.  We attorneys are just like the character Hardy Kruger played in Flight of the Phoenix.  We work on smaller bankruptcies everyday but the warning signsUSA are the same for our clients as they are for the feds.

They federal government has been borrowing and spending money to finance a lifestyle they cannot afford for some time now.  We have 16 trillion in debt and we will have 20 trillion in four years.  We keep spending and borrowing and we fail to cut our spending to equal what we get in revenue.  The interest on this debt is growing every day and if the interest rates rise then the interest alone will be beyond our ability to pay.

This is really the sign of bankruptcy for individuals, businesses, or municipalities.  And the signs are the same for the small entities and the large ones.  We attorneys deal with small entities but just like Hardy Kruger we realize that the dynamics are the same big or small.  Hardy’s plane flew and our government is bankrupt.

This is what Peter Schiff concludes in his new book, “The Real Crash: America’s coming Bankruptcy”.  He argues that the crash is coming due to the government’s continual lowering of interest rates that creates all of these bubbles; the dot-com, the housing, and now the government spending bubble.  The government will eventually have to raise interest rates to attract investment and when they do the interest we pay on our national debt could consume all of our revenue.  We would then be unable to function as a country.

Another book about the coming bankruptcy for America is “America’s Ticking Bankruptcy Bomb” by Peter Ferrara which appears to say virtually the same thing about our massive debt problem and what it will lead to.  Also there is the book by Senator Tom Coburn “The Debt Bomb: A Bold Plan To Stop Washington From Bankrupting America”.

Though these books so far are written primarily by conservatives I believe that everyone will agree that the debt belongs to all of us regardless of who got us there.  America must own the problem now and something must be done to avert the potential problems that the debt will create.

Forget for a moment that America as a sovereign cannot declare bankruptcy.  There is no higher governing authority than the nation-state at this point to oversee a bankruptcy of a country.  We must print money to inflate our way out of debt which could lead to something like the Weimar Republic with hyper-inflation or we must default.  If we default and just refuse to pay the debt then we will have extreme trouble in getting anyone to lend us money again without exorbitant interest rates.

But I am seeing a greater and greater number of authors, commentators, and others using the word bankruptcy in relation to America without knowing the warning signs as well as we bankruptcy attorneys do.  I agree with these people about the bankruptcy danger in America.  America seems to be headed in the direction of bankruptcy even though the federal government cannot actually file for bankruptcy.

We are spending and borrowing, spending and borrowing without a pause.  We are time and again failing to match our spending with our “revenue” and even if we do we have to somehow pay back all of the money we borrowed previously.  In the meantime we have to service the debt.  Our interest rates are low but our interest payments increase each year because we borrow more and we will have an impossible time paying back the debt we already owe, just like my clients.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!

For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

USA photo courtesy of Kevin Hutchinson.

What is a chapter 20 bankruptcy?

twentyIt is really just one bankruptcy followed by another.  It is a chapter 7 followed by a chapter 13 which added together equals 20 so it is called a “chapter 20”.  Most people have heard of bankruptcy chapters 7, 11, and 13 but a chapter 20 is really just a combination of a 7 and a 13 and there is no official chapter 20 that you can file.

In a chapter 20 bankruptcy someone will first file a chapter 7 and get a discharge.  They then decide some time later to file a chapter 13 bankruptcy.  A chapter 20 is sometimes referred to as a “no discharge chapter 20” because the debtor is not entitled to a discharge in the chapter 13 if he filed it within 4 years of his chapter 7 according to section 1328(f) of the bankruptcy code.

One reason why people file a chapter 20 is because of the debt limits of a chapter 13.  Some want to file a chapter 7 to discharge the unsecured debt they owe to bring that debt within the limits of chapter 13.  Chapter 13s have specific debt limits and if you exceed them you could be forced into a chapter 11 which is far more complicated.  One strategy to avoid a chapter 11 is to file a chapter 7 to lessen the debt through the chapter 7 discharge and then do a chapter 13.  This would be an example of a “good faith” reason to file a chapter 20.

Another common reason why they would want to file a chapter 20 is because of the chapter 13 lien strip capability not offered in a chapter 7.  In a chapter 13 homeowners can strip (eliminate) second mortgages if they are completely unsecured.  Second mortgages are completely unsecured if you owe more on your first mortgage than the entire home is worth.  This leaves nothing (no equity in the home) to secure the second mortgage so it is in effect an unsecured debt.

But of course it is a lien that exists and will continue to exist on your house if you do nothing or even if you file a chapter 7 bankruptcy.  The lien will remain on you home virtually forever and the only way to get rid of an unsecured second mortgage it is to strip it off in a chapter 13 bankruptcy.

So some people try to get rid of their credit cards in a chapter 7 bankruptcy and then file a chapter 13 to strip the second mortgage.  If they just filed a chapter 13 without the prior chapter 7 they would have to pay some of the credit cards back in the chapter 13.  So it seems that filing a chapter 7 followed by filing an immediate 13 makes sense right?  After all you save all of those credit card payments you would have to make for 5 years in a chapter 13 right?

Wrong!  You cannot be seen to be manipulating the system just to get rid of your credit cards and then strip a mortgage.  This would be an example of a “bad faith” bankruptcy filing and this would be challenged by the bankruptcy trustees in an adversary proceeding.  If you file one chapter and then another to create a benefit for yourself that would not exist in either chapter then that could be considered bad faith.  So you must not attempt to merely get a credit card discharge and then apply for a lien strip.

This tactic would be considered bad faith because if you filed a chapter 7 you would not be allowed the lien strip.  If you filed just a chapter 13 you would have to make payments to the credit cards for the length of the chapter 13 plan.  The courts will want you to pick one or the other but no both chapter in succession merely to seek maximum benefits.

One way to avoid a possible bad faith challenge to your chapter 20 is to show that there has been a subsequent change in your situation since the filing of the chapter 7.  If for instance you intended to surrender your house at the time of filing the chapter 7 but your situation substantially changes after your chapter 7 discharge then you may have a valid new reason to keep your home.  You could get a divorce or suffer a lessening of income for instance.  Then you could possibly do a chapter 13 to strip the second mortgage and this could prevent a bad faith challenge.  Courts examine chapter 20s carefully though so you should be aware of this increased scrutiny over your case when you attempt one.

It is also possible that housing values change and your second mortgage might become unsecured sometime after your chapter 7 discharges.  If you are in a period where housing values are declining then the value of your house may drop below the value of your first mortgage sometime after your chapter 7 is complete.  Now you can strip the lien in a chapter 13 whereas before you filed the chapter 7 you could not.  This would be a valid circumstance that could defeat a bad faith claim.   There are many other possible good faith circumstances in addition to these mentioned above.

Chapter 20s used to be more common.  Doing a chapter 20 became a problem after the 2005 bankruptcy law was passed.  This law can be interpreted to not allow a chapter 13 discharge unless 4 years have passed since the filing of a chapter 7.  (A second chapter 7 cannot be filed until 8 years have passed since a first chapter 7).  This prohibition is contained in section 1328(f) of the bankruptcy code which relates to discharge.

With this code section in mind the question then becomes how can you receive a discharge from your second mortgage after the chapter 13 plan is completed if section 1328 disallows such a discharge?  This can create problems for you as you proceed with the chapter 20 bankruptcy.

Most courts have maneuvered around this by turning to other sections of the code and they have allowed you to do a chapter 20 anyway.  Remember though that the possibility is still there that you will get a challenge if you attempt to do a chapter 20.  It appears that at this time the law is not completely settled and the courts are not in complete agreement on this issue of allowing a chapter 13 within four years of filing a chapter 7.

It also appears to help if new debt exists.  If some sort of new debt has been acquired post chapter 7 judges apparently like that.  It seems as if there needs to be something to make payments on in the chapter 13 and not just a lien to strip.

Bt I still believe that the safest thing to do though is to not run afoul of section 1328(f) at all.  Just wait the required 4 years after your chapter 7 to file a chapter 13 and strip your lien.  You then won’t be in violation of 1328 and there should be no argument to stop you from filing.  Nobody wants to buy a court challenge or court case when filing bankruptcy.

The additional advantage of waiting the full four years to comply with section 1328 is that it is a longer period in which to argue changed circumstances.  It is harder for anyone to argue bad faith if you waited a full four years after your chapter 7 to file a chapter 13.  This is because people don’t generally plan that long in advance and circumstances do naturally do change considerably in four years.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

 

Twenty photo courtesy of takomabibelot.

Are we headed for deflationary depression instead of hyperinflation?

At least one analyst thinks so.  According to financial advisor and author Dan Shaffer America and the rest of the world are currently at the beginning of a deflationary depression period.  He believes that we are presently seeing the beginning of this depression and it will last for many years to come.  Presumably overall prices will fall dramatically in this period according to Shaffer’s prediction.

He says that governments have borrowed huge amounts of money and this has driven up public debt dramatically.  We have had TARP and the stimulus package to name a few of these public spending programs but none of them have stimulated the economy.

We still have high unemployment and no sign of a real recovery.  According to an article posted online recently in Yahoo Finance the economy is sputtering.  Unemployment rose in May officially from 8.1% to 8.2%.  Far fewer jobs were created than were anticipated according to the article.

Shaffer points out that Chinese manufacturing is stalling and there is the European economic crisis.  Several countries in Europe have massive debt problems with Greece at the forefront but Spain, Italy and others are all in trouble too.  Manufacturing in Britain is shrinking at a fast pace and even France and Germany are showing a slowdown in the manufacturing sector according to the Yahoo Finance article.

Shaffer seems to indicate that all of this government spending has only served to pump more air into a series of bubbles.  We have already seen the housing bubble burst but their are others that are ready to burst he says.  There is the manufacturing bubble and the student loan bubble not to mention the overall consumer debt bubble.   He indicates that all of these bubbles must eventually burst when the air (government spending) is withdrawn as it inevitably must be.

In America the Fed has responded to this overall economic crisis by dropping interest rates to historic lows.  Interest rates are now lower than what they were even in the great depression and they are at the lowest level in history according to Dan Shaffer.  According to the Yahoo Finance article the Fed has bought $2.3 in bonds to help the recovery.  The Fed has also signaled that it will keep these interest rates low until late 2014 at least.

In the article they state that there is little more that the Fed can do as it has dropped interest rates as low as they can for the foreseeable future and it seems to have little effect.  The federal government too is in trouble too as it has borrowed and spent with TARP and the stimulus package around $2 trillion and this has not created growth in the economy.

So now the government is out of options.  They have borrowed, spent, and the fed has lowered the interest rate to zero.  What else can the government do?  We now have a $16 trillion public debt to show for these borrowing and spending policies and little economic recovery.  The spending has indeed left us with nothing but record large government debts.

I hear echoes of history here where FDR’s treasury secretary Henry Morgenthau, Jr. said “we have tried spending money.  We have spent more than we have ever spent before and it does not work”.  He was speaking here of FDR’s new deal which he was a primary architect of.  The new deal policy was to borrow and spend money endlessly in an attempt to stimulate the economy but at the end of 8 years the unemployment rate was just as high as it was when FDR’s administration began spending money.

Today we have done almost exactly what was done in the 1930s with similar results.  You think we would learn from history that this massive borrowing and then spending does not lead to recovery but just to massive debt.  Now with the heavy debt load and the lack of recovery the American public naturally wants to put a brake on the spending.

A public demand has been building for the last few years that government spending be curtailed.  We have seen this with groups like the Tea Party and others that have demanded an end to this spending and a reduction of deficits.  Whether you agree with these groups or not their demand have reached the ears of Congress.

This is where Shaffer seems to believe that we will get into trouble.  He claimed recently on Fox business that this government spending does eventually find its way into the private sector.  When government spending is lowered in the near future he says this will result in less buying power for world markets.  This could result in deflationary pressures throughout the world as the bubbles burst.  Prices could then dramatically decline instead of increase.

He seemed to say that government spending has propped up the stock market although temporarily.  Now that the times have changed and people want to put the brakes on borrowing and spending this removal of the government money will result in severe economic problems because of a collapsing of prices.

The government has also tried printing money with QE1 and QE2 and there are calls to do a QE3.  I argued in a previous blog that this will only lead to massive inflation and that could lead to disaster.  This is what lead Germany to Hitler through the massive money printing and inflation of the Weimar republic.  The National Socialists (NAZIs) were just another political party with limited influence until the money printing inflation cycle drove the German economy to a terrible crisis.  This all made people turn to Hitler for a solution and we all got the holocaust of World War Two with 60 million dead.

I believe that Shaffer’s theory of a massive price reducing deflation instead of hyperinflation must be considered as a real possibility.  It is certainly another possible outcome of the current economic crisis.  Prices could dramatically fall when government spending is inevitably withdrawn.

Is it more likely that prices will collapse as government withdraws spending?  Are we headed into a deflationary downward spiral or is it more likely that massive inflation will occur as governments print more money?

We don’t know for sure.  Our debt situation and money printing policies are similar to the Weimar Republic of the 1920s but the argument for deflation is also compelling.  Will prices drop dramatically or will they inflate beyond all expectations?  Either way we appear to be headed for a crisis in the world.  We have been there before but the results were not good.  When economies collapse and order is gone people yearn for someone to restore order.  That person or persons could become a detriment to the whole world like Hitler was in the 1940s.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.   Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

What is a chapter 11 bankruptcy and how do they work?

A chapter 11 bankruptcy is designed to first protect and then help a business survive and succeed.  If a business is struggling under the weight of a tremendous debt then a chapter 11 can be filed to preserve the business.  Public policy says that a business is a going concern that employs people and thus should be saved from breakup and destruction.

A chapter 11 can also be filed by an individual instead of a business if that individual has debt that exceeds the debt limits of a chapter 13.  This is less common than business chapter 11s but it gives individuals with a great amount of debt an opportunity to file a payback type of bankruptcy if they can’t file a chapter 7.

A chapter 11 business filing will theoretically give a business time to reorganize and develop a plan to pay back the creditors at least partially.  The problem is that though many are filed most chapter 11 bankruptcies for small businesses do not work.

If a business is failing then it is unlikely that a suspension of the collection efforts of creditors will save it.  There is usually insufficient income generated by the business to pay much of its debts.  If the business reaches this point where it needs a chapter 11 then the business model is probably unworkable.  Most attorneys will advise their clients to at least consider the possibility of closing the business.  In the end most chapter 11s are converted to chapter 7s or they are dismissed.

In addition chapter 11s are very expensive to file.  The filing fees are over $1000 and in addition there are administration fees charged by the court.  There is a tremendous amount of work for the attorneys to do too and thus large attorney fees are also required.  There are also numerous legal documents and motions that must be filed on the first day and then more of these within the next 7 days.

There are also numerous trips to court.  Court appearances are necessary to ask the judge for permission to do many things like pay your attorneys.  The business becomes the “debtor in possession” after the filing but the business must take out all new bank accounts after the filing is done and it must close all of the old bank accounts.  On each account it must be stated that this business is in chapter 11.  The debtor in possession can run the business though during the chapter 11.

Then there are the reports.  Profit/loss statements must be filed along with balance sheets and monthly operating reports.  Keeping business accounts in a chapter 11 is very difficult and must be done correctly.   The court must be specially petitioned for permission to pay an accountant and other experts to do this kind of work.

All of this is why chapter 11s work better for a large business than a small one.  Most law firms will charge $20,000 at least to do one and the court fees, accountants, and business specialists must be paid are in addition to these fees.  Large law firms handling large businesses are the norm in workable chapter 11s.

There is also the problem of the creditors committee that must be set up with a chapter 11.  The creditors of the business must be gotten together to approve of the reorganization plan for the business and the reorganization plan must be carefully produced.  The reorganization plan is a plan that the business comes up with to both run the business and pay back part of the debts.  This plan must then be approved by the creditors committee.

With a small business the formality of a creditors committee may be waived but if there is one or two large creditors they are definitely have something to say.  They may be foreclosing on property or want their other assets back or they may want to break up the business.  Creditors can even demand that the management of the business be turned over to someone else (instead of the business owner) resulting in you losing control of the day-to-day operations of the business.

There are advantages to a chapter 11 like it does not have a five-year limitation to paying back creditors like a chapter 13.  Also you may be forced into one if you have more debt than is allowed in a chapter 13.  (And remember that individuals can file a chapter 11 bankruptcy in cases where their debt exceeds 13 limits and where a chapter 7 will not work).

But remember the purpose of the 11 is to turn around a business and make it work.  If the judge thinks you are using it for another purpose like stalling the paying of creditors or for stalling a foreclosure then he could move for sanctions, move to dismiss the case, and even lift the automatic stay.

In a SARE cases (single asset real estate) it is common that the debtor/business filed when a foreclosure was pending.  The creditor/mortgage holder will then move to lift the stay and sell the property unless the debtor makes payments or files a “workable” plan.  Both of these things the debtor may not be able to do.  Therefore in these cases the lifting of the stay is often allowed and the property is then sold at foreclosure.

You can see from this short blog on chapter 11s that they are expensive, time-consuming, extremely complicated, and prone to dismissal or failure.  The good news it that there are alternatives to these 11s.  Contact a competent bankruptcy attorney to discuss your options if you are considering filing a chapter 11 bankruptcy.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation about a chapter 11 bankruptcy or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

After filing will bankruptcy be a “skeleton” in your closet?

I just read an article that really set me off.  According to an article posted online by the Washington Guardian 13 people running for the US Senate have bankruptcies or criminal records.  One candidate, Scott D’amboise, filed for chapter 7 bankruptcy protection in 2003 where he listed more than $100,00 in credit card debt, doctors bills, and a mortgage.

In the article they state that D’Amboise’s son had a medical crisis that caused him to undergo seven operations and at the time his medical coverage was insufficient to pay for these expenses.  His $100,000 in credit card debt was also probably related to that medical bill too.  This is very common as many of my clients run up their credit cards in an attempt to pay medical bills before they throw in the towel and file for bankruptcy.

Though this type of bankruptcy scenario seems common to me the article takes on a disapproving tone about these bankruptcies.  They describe these people as “candidates with past troubles” and they include bankruptcies and criminal records in the same article which mixes the two up as if they are the same thing.

Bankruptcy is a legal, moral, and federally approved and legitimate way of dealing with debts that one cannot pay.  There is certainly nothing immoral, unethical, or criminal about it.  To include criminal issues and bankruptcy in th same article is extremely unfair.  D’Amboise in under a legal, moral, and ethical duty to provide medical care to his son.  If he does not have the money to pay for it then he has to borrow just like all my other clients and just like any of us without the resources to pay the medical bills.

The monthly payment on a $100,000 credit card debt would be astronomical depending on the interest rate and probably beyond the ability of the vast majority of Americans to pay.  If D’Amboise did not file for bankruptcy he would be hounded by creditors who mostly have no mercy and will call his home endlessly.  He would then be subject to lawsuits and collection efforts which would tap his bank accounts and garnish his wages leaving hin even less money to live on and pay his bills which would undoubtably get him into further trouble.

Another candidate, Hector Balderas, apparently filed for bankruptcy back in 1995 when he was a college student working on an assembly line.  How many college students do you know that also work on assembly lines?  Instead of congratulating him for his hard work there seems to be a strong note of disapproval for his filing bankruptcy when he was only 21 years old.

The article then goes on to talk about the crimes of other candidates as well as alleged bankruptcy fraud of another candidate.  To compare bankruptcy with crime and fraud is a very bad and unfair thing to do in my opinion.  Bankruptcy is certainly legal and often he only good option for people in serious debt.  There are other options to bankruptcy when one has a high degree of debt except they are all worse than bankruptcy for the debtor.

Bankruptcy settles debt by discharging it legally.  If debtors have any surplus assets (above the allowable exemption amounts) those assets are sold to pay their creditors.  The whole system is monitored by a series of bankruptcy trustees and a bankruptcy judge as well as federal law enforcement to prevent fraud and crimes.

How is it then that we still get these articles that seem to connect bankruptcy with fraud and crime as if they are all the same sort of skeletons in closets?  This is ludicrous and wrong. Bankruptcy is not doing something wrong, it is doing something right.  If you have debts you cannot possibly pay and the wolves are at your door to take your bank accounts, your assets, and your income what are you to do?

You can’t escape the debts and you can’t pay them but you have to live.  Many hide or go underground to avoid this situation and that is wrong.  Some check out altogether and that is tragic.  The right thing to do is to admit you cannot pay and file a bankruptcy.  If your kid needs operations then what choice do you have?   He must have the operations which can run into the hundreds of thousands of dollars.  Who in America can pay for this?  Very few.

Again there is often only one good and right and moral and legal answer to this debt situation and that is bankruptcy.  But let’s not mix that up with criminality because it is legal and has been so for hundreds of years.  It is also moral and sanctioned in Deuteronomy in the Old Testament of the Bible.  Bankruptcy has been around a long time and its time we stop trying to put a scarlet letter on any one who does the right thing and files one.

It is time for bankruptcy to come out of the closet and shed its skeletal image.  I say file one and be proud that you took the moral, legal, ethical, and right path to debt freedom and not another road that leads to bad things. The good news is that after a few of these people get elected and the public sees that they are still good people then they will pave the way for others to run for political office proudly after having done the right thing and filed bankruptcy.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.