US Households Owe Record Amount – More Than During Recession

The New York Times and the Associated Press have been reporting new statistics just released by the “New York Fed.” I’m sorry, but I talk Minnesotan and “New York Fed” is not something in my vocabulary.  So I looked that up and find that it’s the Federal Reserve Bank of New York.  If you can’t believe them, then who can you believe.

The New York Fed says that consumer debt in the US now exceeds the level it was at before the recession.  I will admit that I’ve been wondering a bit, because over the past couple months my phone has been ringing a lot more than it did in 2015 and 2016.  I think the ringing of my phone might be a better barometer of what’s going on than the financial reports in the media.  I remember in 2008 when it started ringing like never before, they were still saying on the financial news networks that there was no sign of a recession.   The media in general wants to downplay economic problems.  So I figure if they are actually reporting a story like this, things are probably worse than they are admitting.

The New York Fed goes on to say, however, not to worry.  The new debt is proportionately more auto loans and student loans than it was in 2008, and besides the people with the debt are more credit worthy now.  In addition, home ownership is down and a higher percentage of mortgage debt is held by people over 65, as if that somehow was good news.  They admit that the student loan debt is getting up there and could be a bit high.  Also it might be that defaults on those auto loans are on the rise.  But a lot of the language in these stories is very soothing, so not to worry.

My opinion, based more on what I see with my own eyes, is this.  I think it is time to worry.  People may be back to work, but their earnings are down.  They still need to drive and the old car can only go so far, so they are getting car loans that they can’t really afford.  If they are not back to work they are back to school, getting student loans that they can’t afford.  Getting credit might be a bit more work than it used to be, but with the help of Credit Karma and other similar sites the lenders can still be manipulated into granting credit to people who really can’t afford it.  Maybe on paper they look more credit worthy, but that could be as much a fiction now as it was in 2008.  In other words, I believe individuals in this country are getting overextended again.  For many, another bubble may be about to burst.

This post is for general information purposes only, is not legal advice and does not create and attorney-client relationship.

 

Chapter 7 and Credit Card Debt

Credit Card DebtOne of the main reasons consumers seek bankruptcy relief is overwhelming credit card debt. If you qualify for a Chapter 7 bankruptcy, you could discharge most if not all of your unsecured credit card debt but there are circumstances where your credit card debt may not be dischargeable.

A bankruptcy places your creditors in order of priority. If your bankrupt estate has assets that are not exempt, the trustee could seize those assets and sell them off to repay your creditors in order of priority. Creditors who are unsecured or lack collateral for their loans are lowest in priority.

In most Chapter 7 bankruptcies, however, there are few if any unprotected assets available for distribution. In a no-assets case, unsecured creditors like credit card issuers are unable to collect anything for the unpaid balances on their cards and the debt is discharged.

Challenging the Discharge

There are situations, however, where the card issuer or company may successfully challenge the discharge. These include the following:

  • You obtained the credit card by falsifying information on the application
  • You never intended to repay the credit card company
  • The creditor has a purchase money security interest in the item

If you bought an expensive item with credit, you may have signed a purchase money security agreement even though you may have paid for the item with your credit card like a Sears card. In a bankruptcy, the creditor can claim that you either must return the item, pay its market value, or continue making installment payments for this item.

The more common issue that arises in a bankruptcy is your lack of intent to repay the creditor. Your payment history is vital in this instance as is your conduct in using the card.  A sudden change in the card’s use before filing is suspect. Here are some common mistakes that debtors make with their credit cards before filing for bankruptcy:

  • You made a number of large or expensive purchases with your card in the months leading to the bankruptcy filing.
  • You took out one or more cash advances.
  • You took an expensive vacation or traveled shortly before filing.
  • You maxed out the card.
  • You recently were issued the card and made a number of expensive purchases.
  • You made no payments on the new card.
  • You made no payments or only a few minimum payments after making large purchases or using it extensively just before filing.
  • You were unemployed while making these purchases.

Avoiding or Resolving Challenges to Discharge

If you are likely to have a challenge or objection to your bankruptcy discharge, you might want to consider one of the following strategies for either avoiding or resolving the potential challenge:

  • Wait at least 4-6 months before filing and make more than the minimum payments for each month. The longer you wait and make payments, the less likely the creditor can show that you lacked the intent to repay it.
  • Be prepared to settle with the creditor if or when the creditor makes an objection to dischargeability.
  • Consult with your bankruptcy attorney to see if a trial on this issue is advisable. If you win, you might be able collect attorney’s fees if the court finds that the claim was not “substantially justified.”
  • Consult with an attorney to see if a debt management program is more amenable.

Being prepared and having the advice of a knowledgeable bankruptcy attorney before you file will help you to avoid embarrassing, costly and potentially criminal acts.

The type of objection involved in most of the above situations is made when the creditor files what is called an adversarial proceeding in the bankruptcy court.  This proceeding is considered to be an action separate from the bankruptcy itself and has it’s own court file and it’s own set of documents.  Typically when you hire a lawyer to do a bankruptcy, the attorney fee will not include representation in adversarial proceedings.  The retainer agreement with your lawyer will probably actually EXCLUDE adversarial proceedings.  Defending  those is a practice area all by itself that many ordinary bankruptcy lawyers stay away from.

A good bankruptcy lawyer will screen your case in an effort to be sure that adversarial proceedings are unlikely.  If there is such a proceeding on the horizon, the creditor will tend to threaten an objection before actually filing one with the court.  Your regular bankruptcy lawyer may either try to talk the creditor out of it or try to settle the claim before the creditor files; but if the creditor actually gets to the point of filing the objection, you can expect an additional attorney fee and perhaps a referral to another attorney.

This article is for general information purposes only and is not intended to be legal advice.  Kelly Law Office is a Debt Relief Agency helping people file for relief under the federal bankruptcy code.

close
Facebook IconYouTube IconTwitter Icon