What is a bankruptcy reaffirmation agreement? Do I need one?

contractA reaffirmation agreement is simply an agreement that reaffirms or recreates a contract that has been broken by your chaper 7 bankruptcy.  After you file for bankruptcy all of your previous contractual obligations for things like credit cards, auto loans, jewelry and furniture loans, mortgage loans, and leases for personal or real property go away.  You no longer have those contractual obligations once you pull the trigger and file your case.  If your case goes all the way to discharge then these obligations go away forever.

This is what makes bankruptcy such a powerful tool for people.  Any contract that is difficult, onerous, or they just can’t afford is cancelled by bankruptcy.  This is what gives you a fresh start when it is all over as you can go on in life free from these big contractual balls and chains.

The problem is that some of these creditors have a secured interest in some property you bought from them.  This is not true of credit cards which are unsecured but it is true of cars, boats, jewelry, and furniture as well other types of property you could finance.  Whenever you buy something and make regular payments for it the seller probably took a security interest in the property you bought from them.

Though the contractual obligations owed by you are cancelled in a bankruptcy this security interest gives finance companies certain rights in the property that you purchased.  They can move against the property to repossess it after the bankruptcy case closes (or if they file a motion for relief from stay).

It used to be before the 2005 bankruptcy law change that you could buy a car, go bankrupt, and then continue to pay for and keep the car.  This was called the “ride through”.  You had that right before 2005 and people regularly did this in bankruptcy.  The creditors hated this because you could turn the car in at any time thereafter and be done with it.  Creditors could not then come after you for the “deficiency balance” because the contract was cancelled in bankruptcy.  They would be stuck with only the car of limited value.

So the creditors eliminated this option in the 2005 law.  A case called “Dumont” in the 9th circuit confirmed this and that was that.  Now the ride though option is gone and you must either reaffirm, pay off the balance, or surrender the car.

Even having said this though there is a loophole out there.  Most creditors will allow you to keep the car and pay though they are not obligated to do so because they don’t want people to return cars.  Many bankruptcy filers will not reaffirm and if the car company wants the car back then they will return it.  We call this “let them eat steel” because the finance companies then sell this car at a great loss when the could have had some payments.

Many car companies recognize this fact and they have allowed the “ride through”.  They therefore don’t exercise their legal right to repossession and they allow you to keep the car as long as your payments are current.

But there are those others like Ford and in San Diego the San Diego County Credit Union.  These lenders tend to demand that debtors sign and file reaffirmation agreements with the court or they will pick up their cars.  It appears that they may just want to make a point or scare people into signing reaffirmations.

It gets complicated here but you must at least attempt to get a reaffirmation agreement in the court or the creditors can and some will pick up cars.  Losing the car can be extremely inconvenient for those who want and need the car or for those who recently put down a large down payment.  It is also true that financing a new car can be difficult and costly right after a bankruptcy so sometimes reaffirmations make sense.  (Have your bankruptcy attorney discuss these issues with you when you are considering signing one).

If you go into court and attempt to get a reaffirmation and it is denied for some reason by the judge who does not think it in your best interest then there is still an out.  Many judges will insert special language into the judicial order that denies the reaff. that will prevent any pick up of the car by the finance company.  Consult your bankruptcy attorney in your area as he or she should know which judges do this and he will be sure to request such language into the judicial order.

This is especially necessary if you have one of those lenders who tend to be more demanding like Ford or in San Diego, the San Diego County Credit Union.

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.

Contract photo courtesy of Steve Snodgrass.

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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.

What the heck is an bankruptcy adversary proceeding? Why would someone bring one against me?

Adversary proceedings happen sometimes in bankruptcy cases.  I write about this because a debtor will sometimes file for bankruptcy and then get a notice of an adversary proceeding that has been filed in the case.  This can cause tremendous worry to the client.  But don’t despair, a good attorney will be prepared to handle one of these cases and protect your rights.

An adversary proceeding is literally a lawsuit within a bankruptcy case.  A case within a case.  It means that someone objecting to or fighting about something in the bankruptcy case.  Somebody is letting you know that they have a problem with some aspect of your bankruptcy and they are going intervene in your case to get their problem/objection dealt with.

An adversary proceeding can be brought by just about anyone.   A debtor, a creditor, or even the bankruptcy trustee who is tasked with looking for things like fraud in a bankruptcy case. Almost anyone can file one if they have a legal claim against the debtor or his property.

An adversary proceeding most often happens when someone is intervening in the bankruptcy case to say that some debt is not dischargeable.  Allegations of fraud are the most common reason to file one of these.  Creditors or the trustee himself can file an adversary to challenge the dischargeability of some debt if fraud is suspected.  These are the cases filed under the “exceptions to discharge” under 11 USC § 523(a)(2) of the bankruptcy code.  In addition to fraud, but less often, misrepresentation, false pretenses or other allegations can be pleaded in these cases.

The fraud cases usually come down when a credit card company files an adversary challenging a large charge made on one of your credit cards prior to filing.  These same companies can also object to a large cash advance taken out on a card especially if the cash advance is taken out at a gambling casino.  (I have had a number of these cases over the years as this is more common than one might suspect).

There can be other larger allegations of fraud that can allege fraud over some asset like real estate.  These cases can reach into the millions.  If you find that an adversary was filed against you for very large debt then it is even more important to contact an attorney right away to protect your rights.  With all of these cases is the other side wins then the debt they are challenging will be deemed not discharged in bankruptcy and you will still owe it when the bankruptcy case is finished.  This tends to defeat the whole point of bankruptcy and therefore these cases must be dealt with quickly and correctly.

If it is the trustee who is trying to recover property for the bankruptcy estate (property that was transferred out of the estate prior to filing) then he would file an adversary action alleging fraudulent transfer.  In that case he would go after the recipient of the property which could be a problem if it is a relative or friend of the debtor.  (See here for more on fraudulent transfer).

Other reasons for adversary proceedings would be when a creditor believes a bankruptcy was filed in bad faith.  A debtor can also file an adversary proceeding against a creditor for violations of the bankruptcy automatic stay when a creditor attempts to collect a debt which he cannot because of the bankruptcy.  There are adversary proceedings filed by the debtor’s attorney to strip off second mortgages.

There are numerous reasons for adversary but contact a bankruptcy attorney right away if you get one filed against you.  There are distinct timelines to respond to one of these and definite procedures for doing so.

I am bankruptcy attorney in San Diego who handles adversary proceedings for both settlement and trial.  Please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com for more info. about any of these topics.  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: “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” please send a request by e-mail to: farquharesq@yahoo.com.

“Occupy Chicago” wants to forgive student loans. Your student loan bailout should be through bankruptcy!

The “Occupy Wall Street” movement has created many spinoff movements all over the country like the one here in San Diego.  After hearing criticism for their lack of coherent demands, the “Occupy Chicago” chapter came out with a list of demands on Monday.  Among other things, like taxing the wealthy and attacking Wall Street, they want student loans forgiven.  I argued in a blog that I posted Sunday on the Occupy San Diego movement that student loans should be dischargeable in bankruptcy.

In the face of the bailouts that Wall Street firms and banks received more and more people are asking “where is our bailout”?  Regular people have a tremendous amount of debt which they cannot afford and they believe that justice demands that they need some consideration from government.  It is true that almost 50% of people pay no income taxes but should we bailout the 99% with massive wealth transfers?

I say no.   Most people in this country will not go for that.  I have argued for years on my blog that a bailout plan already exists for the 99% of us that are neither rich nor giant corporations.  It’s called bankruptcy and bankruptcy allows you to legally walk away from your debts and have them discharged so you no longer owe them.  You can then get a fresh start debt free and keep what money you earn from employment.  Everyone can avail themselves of bankruptcy.  You don’t have to be a privileged person or corporation to get it.  In fact if you make too much money you will be means tested out of a chapter 7.

So bankruptcy is available for regular people but there is a problem.  Student loans cannot be included in bankruptcy.  Student loans currently are not dischargeable in bankruptcy.   They do therefore indeed last forever or until you allege “undue hardship” which is very hard to prove.  If these student loans were to be included in the lists of debts that people could discharge in bankruptcy then regular people would not be saddled with them forever.  They could escape them and move on in life with their student loans forgiven.

This could be done so much more easily and fairly in the context of bankruptcy than through some government blanket forgiveness.  Bankruptcy has been around for hundreds of years and the systems are in place to handle forgiveness of debt through the filing of bankruptcy.  There are trustees and judges to oversee each individual to make sure that the people asking for forgiveness really can’t afford to pay these debts back because the have neither the income or assets to do so.

In bankruptcy there are even proscribed exemptions that allow each person to keep a certain amount of property.  For most of the 99% this would amount to people keeping all of their property because most people don’t have more than these allowed exemption amounts.

This solution will also be so much more palatable to the American public.  It allows the forgiveness of the student loan debt but within the confines of the bankruptcy system.  Each individual would have to file for bankruptcy to get his student loan debt forgiveness.  He would then be examined by a Trustee and he would face a judge if fraud or other problems came up.   His income and expenses would be looked at to determine that he could not pay his debts with his current income and thus he is formally bankrupt. Those who could afford to pay the loans would then have to do so in some form but many many student loan debtors would be able to escape these loans if they were dischargeable in bankruptcy.  Bankruptcy is no blanket gift.

And it would be fair.  Many people with student loans cannot afford to pay these loans and they have very little hope of paying them back.  They are under employed or more likely unemployed and they cannot afford their living expenses let alone these student loans that have not even landed them a job.  It is simply not fair that a person who used their credit cards to excess can discharge those debts but the person trying to get an education and a job can never escape them even if they have no money and no job.

But many people will say that if we make student loans dischargeable in bankruptcy then student loans will be harder to get.   Maybe that is a good thing and people won’t borrow money for degrees that won’t lead to a job.  But I also believe that as credit cards are still obtainable by most people today and they are dischargeable in bankruptcy.  Bankruptcy has not stopped that industry and dischargeable student loans will not stop lenders from lending money for these loans either.

It also should not matter whether the loans are government or private.  If  they are private then the loans should be treated like credit cards and if government loans are owed then forgiveness of these loans is only fair in light of the bailouts given by the government to the financial industry.  Whether government or private though the effect is the same on people.  They can’t afford to pay them back in many cases.  (Remember also that IRS tax debt is dischargeable after only 3 years and the IRS still continues to operate).

And for further fairness you could make student loans dischargeable after a period of time say 10 or even 20 years.  If the student has not paid them back by that time then they are certainly having a problem and they probably can’t pay them back.  It is only fair to allow people to escape them in time.

I am a bankruptcy attorney practicing bankruptcy law in San Diego, CA.   For further information please visit my website at www.farquharlaw.com or www.freshsatartsandiego.com.   Or call my office for a free consultation at (619) 702-5015.  If you or someone you know are considering bankruptcy then get my Free e-book “13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPCTY FILING” by e-mailing me at farquharesq@yahoo.com.

Has a creditor threatened you with jail if you don’t pay them? FDCPA says this is illegal!

Has a creditor threatened you with jail for non-payment of a monetary debt?  This is most probably illegal according to the Fair Debt Collection Practices Act (FDCPA).  Collectors often harass and threaten debtors with all sorts of things that they have no right to threaten.  They will often threaten jailing you if you don’t pay today!  A person just contacted me with this problem and the client was threatened by a creditor to have police show up at their work and arrest them if they did not pay today!  And this creditor did not even file a lawsuit yet!

This is clearly illegal!  With no lawsuit filed there is no judgment and with no judgment no legal right to collect on this debt.  This creditor would have to first obtain this judgment which would give them the right to collect but in California there is no going to jail for owing strictly monetary debts.  And to threaten that police will show up at someone’s work and arrest them when they cannot is a violation of FDCPA section 807(4).

In that section it clearly states that an implication that non-payment will result in arrest or imprisonment unless that action is legal and intended by the party is a violation of this law.  In my client’s case there is no arresting or jailing someone for owning monetary debts so this threat was a violation of the law.  If my client could prove it then we could win damages against this collector.  I told this person to tell the collector that they were recording the call next time and see how fast he hangs up.

Section 807(5) restates this and says that any threat to take any action that is not legal or intended is a violation of the FDCPA.  So this collector violated this section too.  My question is can we get this guy to say this clearly into the microphone so we can replay it for the judge?

So don’t take any crap off of these creditors.  I hate to hear these stories and I answer these e-mails immediately.  We live in a great country where we pride ourselves in our freedom but if these collectors can violate the law with impunity then it threatens all of us.

In a previous blog I discussed how these collectors by far receive the greatest number of complaints to the Federal Trade Commission.  They routinely harass, threaten, bother and annoy people and they are now routinely violating the law I believe.  So know your rights and don’t allow them to bamboozle you.

I am an attorney who practices bankruptcy law in California.  For more information 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! 

If you or someone you know needs to file bankruptcy please get my FREE E-BOOK; 13 THINGS YOU SHOULD DO TO PREPARE FOR YOUR BANKRUPTCY FILING” by e-mailing me at: farquharesq@yahoo.com.

Cash for keys! It’s still available after a foreclosure. My advice is get that cash!

(For the current state of the foreclosure crisis see this blog: http://bit.ly/JGU1dZ ).

How many times does someone hand you cash?  I’m sure it’s not often but it is the case that lenders are offering cash for keys after a foreclosure.  You may or may not be upset about the foreclosure and you may actually be relieved that the process is all over.  You may have tried a short sale that failed (or you may have never attempted one) and now the foreclosure sale has taken place and you are being contacted by the new owner of your property to find out from you what your plans are.

Remember that this new owner will have to evict you legally before he can get you out of this house that you formerly owned even though he is the new legal owner of the property.  He cannot throw you into the street.  There is no “self-help” allowed and the only way a new owner can get you out of your former home is through the eviction process.  You are no squatter.  You originally entered the property legally.   You are the former owner with the legal right to be there until a judge evicts you in court.

In California eviction means that the landlord has to give you a 3 day notice, followed by a filing of an unlawful detainer action, followed by a trial, followed by a sheriff who will actually remove you.  This all takes time and money.  To get you out will take around 4 to 6 weeks depending on how behind the courts and the sheriffs are.  In addition he has to hire attorneys, pay filing fees, and wait until the process finishes.

Or he can pay you money.  The going rate is about $3000 so don’t sell cheap.  Many of my clients have been offered and have received this money.  It will cost the landlord almost that much to proceed with and eviction plus there is the time involved.  The landlord may ask you to leave quickly (like in a week) but you can always try to negotiate for more time.  Just don’t scare him off so he doesn’t pay you.  Remember though that he will know the costs of legally removing you and that is your leverage.

You have a legal right to be in this home until he goes through the lengthy and costly legal process of removing you.  You can remind him of that if it helps the negotiations but always remember that you have legal rights.  If you don’t exercise them you will lose them.  You will be saving him time and money if you get out quickly with no hassles for $3000.

An extra $3000 can help a lot with bills and getting a new place.  If you can get more time then do so but if not then I suggest you take the money.

If you need a bankruptcy now to get rid of credit card or automobile deficiency or medical debt then call me and we will discuss how to free you up from the rest of your debt.

I am a San Diego bankruptcy attorney.  Please visit my website for more information 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!  If you or someone you know may need to file a bankruptcy get my FREE E-BOOK: “13 THINGS YOU SHOULD DO TO PREPARE FOR OUR BANKRUPTCY FILING” by e-mailing me at: farquharesq@yahoo.com.