Tax Refunds Predicted to Fund Over 200,000 Bankruptcies

Just finished reading a USA Today article which refers to a study by the National Bureau of Economic Research. The study says they expect over 200,000 American households to use their income tax refunds to pay for filing bankruptcy.

“Last year the average tax refund was $2,913, NBER says. That’s enough for many Americans to file for bankruptcy,” says the article. “Those who have trouble saving money will delay filing for bankruptcy until they have a one-time cash infusion, such as tax rebates or tax refunds.”

It’s not news to me that people often will use their tax refunds to hire me or someone like me to prepare a bankruptcy filing. The predicted number, however, seems pretty high to me even though it is a nation wide number. If asked to guess off the top of my head what the number would be, I would have figured about half that – maybe 100,000.

Well, tax day is Tuesday – April 17th this year. Getting the returns filed is important. I no longer will file a bankruptcy case in a situation where all the tax returns have not been filed first. But take care of yourself and don’t get too frantic about it. In particular, don’t have a car accident over it.

Big Meeting Tonight

The state bar association bankruptcy section is meeting tonight. The topic will be lien stripping.

Judging just from the announcements concerning tonight’s meeting, a bit of controversy seems to be brewing. At first the topic was announced as how to lien strip or words to that effect. Then the topic was changed to something like “a discussion of the pros and cons of lien stripping.”

I believe that sooner or later the process of lien stripping will be commonplace in Minnesota. Right now the procedure still seems a bit unsettled. I’ll have more to say after tonight. Perhaps my opinion will change. I would probably be willing to try it if I had the right case.

Student loan horror stories

Two student loan horror stories:

Story No. 1. I’ve heard back from one of my former clients that student loans are now harder to get than they were before filing. In fact, that particular person seems to have been cut off entirely from student loans. It means for that client, who happens to have been employed as well as in school, that money will have to be set aside in advance before going back to school. So there is an unexpected delay in educational plans. It may be significant that this was a person who was relying on private student loans, not government student loans.

There’s what appears to be good article on the subject of bankruptcy and student loan eligibility at finaid.org. They say that bankruptcy should not effect eligibility for government student loans, but that it is common for there to be a problem with private student loans. This might explain why I haven’t been hearing from most of my clients or former clients about any such difficulties. I believe that most of my clients, if they do have an ongoing financial aid program at a college or school, are using government lenders not private lenders.

Story No. 2. Again, it’s a problem with a private lender. Client is no longer in school, but has a student loan and wants to keep paying. However, for several months now the client has not been able to find anybody who will accept the payment. There seems to be a musical lender shell game in progress. After the bankruptcy filing, the original lender seems to have transferred the loan to another institution. The new lender seems to have transferred it again, but the client can’t seem to find out where. I’ve made some calls about it, but it seems impossible to get a real person. When one does get a real person, they just say you’ll hear from someone soon. But so far that’s not happening. Frankly I wonder if someone has lost the file. The problem is of course that student loans don’t ever really go away, and sooner or later this thing is going to pop up with somebody demanding payment. And I’m sure whoever it is won’t be forgiving any of the interest that has been accumulating during this time that the loan seems to have disappeared.

I’ve been telling my clients that if they will be needing more student loans after we file, then they better check with the lender and their financial aid office at school to try and get a preview in advance as to what the effect of the bankruptcy might be.

Lien Stripping Update in "Minnesota Lawyer"

Just noticed that Minnesota Lawyer has a good recent article on the subject of lien stripping and the status of the availability of this process for Minnesota residents. This is a process in Chapter 13 bankruptcies involving people who have second mortgages. It has to be a situation where the value of the house is less than the balance on the first mortgage. The theory is that in cases where the homestead is worth less than the balance on the first mortgage, then the second mortgage is not really a secured debt.

One prepares and files a Chapter 13 bankruptcy in which the second mortgage is put in with the unsecured debts. If it succeeds, the debtors should be able to come out the other end – usually after paying in on a Chapter 13 plan for five years – with only one mortgage on their house instead of two. This could really help a lot of people. The trouble right now is that the availability of the process is still under appeal. Besides that, the exact procedure for clearing the lien of the second mortgage from the title as a matter of real estate law is still under discussion.

Once the appeals are over and both the bankruptcy laws and the real estate laws have been fully nailed down, this could be really something. For now I have not found myself willing to subject a client of mine to all the risks involved in this procedure. To me it just doesn’t seem quite ready for prime time. I know lawyers who are going full steam ahead with this, however, and I could refer you to one it you’d like to at least look into it.

Beware of Undead Debt – Don’t let them reboot the Statute of Limitations

Over the New Year weekend I saw a Wall Street Journal article. It was about certain banks and credit card companies trying to trick people into paying expired debts. Those would be debts so old that they are now barred by the statute of limitations.

In Minnesota the statute of limitations on most obligations is six years. That means anything you haven’t paid on for six years is probably not a debt that can be legally collected. The Wall Street Jounal article describes a plan where people with such expired debt are offered new credit cards, but in exchange for getting the card they are required to pay off some of their old expired debt. The marketing for these new credit cards can be very misleading. A lot of people are signing up for these deals without understanding that the debt they are being asked to pay as a condition of getting the new card is rally old and now bogus.

I see that Yahoo Finance has republished the article or part of it, which you can find here.

Tip if you are sued for expired debt: Last time I checked, in Minnesota a bill collector can still sue you and still get a default judgment for debt which is past the statute of limitations. That’s because the statute of limitations is an affirmative defense that must be raised in a response to the lawsuit. So if you are sued for debt that you think is probably expired, you need a lawyer to help you raise that defense. Properly raised, the statute of limitations is a defense that makes the debt go away – but ONLY if it is properly raised as a defense. I would discourage you from trying to raise the defense yourself. You can try, but it’s complicated and would be easy to mess up.

Mentioned in Lien Strip article – Not exactly a Claim to Fame

Seems I was quoted in an article in yesterday’s Sunday Pioneer Press. The topic was a process called lien stripping. It involves taking a second mortgage in a Chapter 13 case and throwing it in with the unsecured debts. The second mortgage gets treated as if it were a big credit card instead of a mortgage. At least in theory, at the end of the Chapter 13 payment plan, the mortgage is then just gone. This can only be done in a case where the value of the homestead is less than the balance owing on the first mortgage. The bankruptcy court is asked to treat that second mortgage as if it was unsecured, because as a practical matter there is no security.

I say “in theory” in the above paragraph because the situation is that this process is so new – at least here in Minnesota – that nobody knows quite for sure exactly how it should be done. That is still being worked out. For one thing, the case (Fisette) which says we can do it is being appealed. I don’t expect it to be overturned, but that could happen. For another thing, nobody knows for sure how to clear the title of the second mortgage. The mortgage can be gone as a matter of bankruptcy law, but still be a problem as a matter of real estate law. Real estate law is as if it’s on a different planet than bankruptcy law – maybe in a different solar system. There’s a need for adjustments between the two legal systems before lien stripping can be expected to go smoothly. While those adjustments might be in process, they are certainly not completed at this time.

The whole thing is a bit too up in the air for me, and so far I have been reluctant to try doing any of this. I have been explaining it as a possible option, and I have been referring people who are interested to some of the lawyers who have been doing them – such as Mr. Theisen and Mr. Andresen. People like them should be given credit for having the gumption to push for this, particularly Craig Andresen who is the one who has the case on appeal.

This is a developing area and I’m sure to have more to say about it later.

Life Estates and Fraudulent Transfers

Seems I’ve been hearing a lot lately from people who have what they call a remainder interest subject to a life estate. If you search the archives of this blog there should still be an older item there where I called life estates an idea from hell. A life estate is created when someone transfers ownership of real estate – such as a cabin or farm – to some younger relatives, but keeps the right to live there and use the property for the rest of their life. The transfer is done by means of a deed. The person who keeps the right to use the property during their lifetime is said to have a life estate, and the people to whom the rest of the ownership was transferred are said to have a remainder interest. Typically the person with the life estate is a parent, and the people with the remainder are the children. Sometimes the parents will do it without telling their children.

The people who receive the remainder interest usually don’t think much of it because they can’t use the property now, but the law considers it an asset that they own right now. If you need a bankruptcy it can be a big problem. A remainder interest can be bought and sold, and there actually is a market for such things. There are investors out there who buy them. Most of the time the value of the remainder interest is enough so that it becomes impossible to file a Chapter 7. The will trustee claim the remainder interest as an asset for the creditors. It could make a Chapter 13 difficult too.

When I explain all this to somebody who is unfortunate enough to have one of these things, they often will say “well then I’ll deed it back and get rid of it.” My response to that idea is that it would be considered fraud to do that. There are both state and federal fraudulent transfer statutes that make it possible to undo the transfer when it is for the purpose of hiding an asset from creditors. When it is done in anticipation of a bankruptcy, it might be considered bankruptcy fraud which is actually a felony. Concealing an asset can be grounds for having a bankruptcy case dismissed without a discharge, even though the trustee might recover the asset from whoever it was transferred to first. So you can lose the asset, keep all your debts, and maybe be charged criminally besides. It’s hard to believe it can get that bad but it can.

Before filing a bankruptcy for someone, I often ask them to check with any elderly relatives who might have done one of these arrangements. I need to know for sure that no such property interest exists.

A couple of years ago the Minnesota legislature created a new alternative to the life estate. Now one can do what they call a transfer on death deed. The difference between the deed creating the life estate and the transfer on death deed is that the latter is revocable. It has no effect until the grantor actually dies, so what it really does is create a right to inherit a particular piece of real estate without putting the property through probate. For bankruptcy purposes this new idea scares me. I’m not sure if I trust it. I would want to be sure that it was tested in some court decisions before I rely on it.

At the Bankruptcy Institute Today

You might find it hard to get a hold of me today. I’ll be in classes all day at the Bankruptcy Institute. This is an annual event sponsored by the Minnesota State Bar Association’s Minnesota Continuing Legal Education. I was here all day yesterday too.

The highlights yesterday for me were the case law update and the session on “Advanced Chapter 13 Plan Drafting.” Another good session was the one on business owner bankruptcies. Today so far the best thing has been a joke one of the presenting judges just told: something about how what a judge needs is grey hair so he looks serious and hemorrhoids so he looks concerned.

More later.

Harleys and Bankruptcies Don’t Mix

At least that would be the general rule. All rules of course have exceptions.

I just spoke by phone with a person who needs a bankruptcy. The trouble is that he or she is the owner of a Harley-Davidson motorcycle. It’s not paid for. There’s still a loan on the bike with a monthly payment. The usual story in that situation is that if you want to file a bankruptcy – any kind of bankruptcy – the bike has to go. Sell it or surrender it, but it has to go before we can file.

Most of the time when I explain this to the owner of a Harley, it’s the last I hear from that person.

I just spent a very quiet and peaceful weekend at a campground in southern Minnesota. I found that there happened to be a group of over 100 bikers there, mostly if not all riding Harley-Davidsons. I barely noticed them. They partied and carried on, but in a quiet and respectful way. In fact they were some of the most well behaved people I’ve ever seen. I learned later that they were a group of retired police officers, some from Minnesota and some from Chicago. Most of them were dressed in typical biker attire, including jackets and hats bearing one or more variation of the Harley-Davidson logo. Those bikes were obviously an important part of their social life.

Powerful attachment to a Harley-Davidson motorcycle is a phenomenon I’ve seen repeatedly. Often as with the retired cops it can be a really good thing. But I can’t change the way the bankruptcy trustees view these things. In a bankruptcy case, unless it’s paid for and so old that it’s not worth much, a Harley tends to be an asset that they want to seize or a frivolous expense that they won’t allow or both. It’s just not a good thing for anybody contemplating bankruptcy.

Minnesota 13th in Country in Surplus Lawyers

I took a look this morning at a news digest from the Minnesota State Bar Association. A story that caught my eye was full of charts and graphs comparing the number of lawyers admitted to the bar to practice law compared with the number of job openings. You can see the full story at economicmodeling.com.

For the year 2010 Minnesota had a lawyer surplus of 510, according to the article. Only New York, California, New Jersey, Illinois, Massachusetts, Pennsylvania, Texas, Florida, Maryland Connecticut, and North Carolina had bigger surpluses. The nation as a whole had a lawyer surplus of $27,269.

Interesting enough, our neighbor Wisconsin actually had a lawyer deficit of 14. In other words, Wisconsin had 14 more job openings than there were new lawyers to fill them. The only other state with a deficit was Nebraska. Nebraska’s deficit was only three, however; pretty close to break even.

Whenever I get a call from my Alma mater, the University of Minnesota Law School, asking for a financial donation, I have had to ask myself whether I feel that Minnesota really needs more lawyers. The answer to that question for me has always been in the negative. This article seems to confirm that.