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Archive for July, 2011

Wednesday, July 27th, 2011

Bankruptcy Fraudster Finally Headed for Jail

Bankruptcy fraud is a serious crime, as the story of Brent Farris illustrates.  According to the Kansas City Star, St. Louis resident Farris pleaded guilty to bankruptcy fraud in 2004 but fled the country and avoided getting caught until earlier this year.

Here’s a look at his somewhat sensational case.

  • In 2002, Farris, who at the time owned an art gallery in St. Louis, reportedly filed for bankruptcy.
  • During the case, he concealed from his bankruptcy trustee a painting worth about $300,000 with the intention of selling it later and keeping the profits.
  • The trustee suspected fraud and when Farris faced charges in 2004, he pleaded guilty and was sentenced to 20 months in prison and a fine of $300,000.
  • Farris reportedly fled the country before his sentence began and spent the next five years (from 2004 to 2009) on the lam, hopping between 14 countries.
  • In 2009, sources note that Italian authorities apprehended Farris, but he managed to break his house arrest and flee again.
  • Last year, Farris was discovered in Mexico. In March, he apparently pleaded guilty to the charges of failing to appear in court and was sentenced to 14 months in prison.

Who Does Bankruptcy Fraud Hurt?

In order to understand why the penalties for bankruptcy fraud are so severe (the maximum sentence is a five-year prison sentence and damages or fines up to $500,000), it helps to understand who’s hurt by bankruptcy fraud.

Consider this:

  • Bankruptcy protection is designed to help consumers. By giving consumers an alternative to repaying their financial obligations as originally agreed, bankruptcy provides a sort of emergency exit for those who get in over their heads financially.
  • Bankruptcy can hurt creditors. Of course, when a person does not repay a debt, someone loses out. Both Chapter 7 and Chapter 13 bankruptcy are designed so that creditors are often able to recover some of the money they lent to filers, though usually not the full amount the filer owes.
  • Bankruptcy fraud cuts into the creditors’ repayment. Concealing or transferring property before bankruptcy (or otherwise engaging in fraudulent behavior) reduces the amount of money creditors get from a bankruptcy case. And while it’s easy to paint the creditors as the bad guys, it’s important to remember that they’re often powerful organizations. Translation: if too many big companies are unhappy with the way bankruptcy laws work, they’ll likely lobby Congress until those laws are changed. After all, such changes were already introduced in the form of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

If you’re considering a bankruptcy filing, it’s important to make sure you avoid committing fraud, either intentionally or accidentally. A bankruptcy lawyer in your state can explain the laws more explicitly and help you keep your paperwork aboveboard.

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Posted in The Bankruptcy Courts, The Law and Your Money | Comments Off

Tuesday, July 26th, 2011

Borders Bankruptcy: Reorganization to Liquidation

The Borders bankruptcy case currently making headlines provides a helpful illustration of the difference between the two main forms of bankruptcy, reorganization and liquidation. Here’s a look at what we can learn about personal bankruptcy from the Borders situation.

Reorganization: Chapter 11 and Chapter 13 Bankruptcy

Reorganization bankruptcy is exactly what its name suggests: it allows filers to reorganize their debts and assets to catch up on overdue payments. When a business files for reorganization (usually under Chapter 11 of the U.S. Bankruptcy Code):

  • It continues operating. Some store branches may close and the company may “streamline” its operations to make itself leaner and more likely to turn profits when the bankruptcy concludes.
  • It repays creditors. Chapter 11 cases, like Chapter 13 cases, include a plan that allows the filing company to compensate its creditors at least in part for its debts.
  • It tries to emerge stronger. The goal of a business reorganization is to trim the fat and let the company get back on its feet with a more workable model.

The Borders situation, though, seems unable to benefit from a Chapter 11 bankruptcy. Sources suggest that this is because of a number of factors, including the weak economy, the changing face of books and the fierce competition it faces from online booksellers.

When an individual enters a reorganization plan (usually under Chapter 13 of the U.S. Bankruptcy Code), she also makes payments to her creditors. At the end of the repayment period (usually three to five years), her goal is to emerge debt-free and with financial habits that will keep her that way.

Liquidation: Chapter 7 Bankruptcy

When a company liquidates (under Chapter 7 of the U.S. Bankruptcy Code), it sells off its assets and ceases operations. In other words, if Borders does indeed file for Chapter 7 bankruptcy, it will no longer be around. Business liquidations usually:

  • Involve a sale: This might come in the form of an “everything must go” sale of merchandise in stores, an auction to other businesses, or some combination of the two.
  • Lead to partial repayment: The proceeds from the sales are generally used to repay in full or part any creditors to which the company owes money at the time of filing.
  • Mean job losses: In Borders’ case, the company would have to close its 399 remaining stores and likely lay off the more than 10,000 people it currently employs.

Individuals who file for Chapter 7 usually don’t have enough income to make repayments to creditors. The liquidation part of an individual bankruptcy filing involves the bankruptcy trustee selling a filer’s non-exempt assets to raise money to repay creditors in part.

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Posted in Bankruptcy News and Events, The Truth about Bankruptcy | Comments Off

Wednesday, July 20th, 2011

Foreclosure after Bankruptcy

Chapter 13 bankruptcy is sometimes considered “famous” for helping people avoid or delay foreclosure. But it’s important to understand that filing for Chapter 13 (or even Chapter 7 bankruptcy) does not guarantee that you will avoid foreclosure.

Here’s a look at foreclosure laws and how foreclosure after bankruptcy works.

Preventing Foreclosure During Bankruptcy

Filing for bankruptcy temporarily stops foreclosure in most cases. Here’s why:

  • A legal protection called the automatic stay takes effect as soon as the bankruptcy case is filed. The automatic stay halts all collection actions, including creditor calls, repossession and foreclosure.
  • This protection typically stays in effect for the duration of the bankruptcy case. That could be as little as four to six months for a Chapter 7 case and as long as three to five years for a Chapter 13 case.

But the protection of the automatic stay only lasts as long as a filer sticks to the terms outlined by the bankruptcy agreement. In Chapter 13, that means making regular monthly payments according to the repayment plan.

If the filer can’t catch up on mortgage payments even with the help of bankruptcy, foreclosure might still be an option after the bankruptcy case ends.

Liens, Second Mortgages & Foreclosure after Bankruptcy

Things can get tricky, too, when filers have second mortgages or home equity lines of credit (HELOCs) when they file for bankruptcy. And thanks to the housing market that collapsed in 2007, many Americans currently do have multiple mortgages or loans attached to their homes.

Here’s how they’re treated by the bankruptcy court:

  • A HELOC in Chapter 13 bankruptcy: In Chapter 13, filers are required to make payments to their primary mortgage lender and to the bankruptcy trustee. The trustee distributes these payments among priority debtors. After the case concludes, the HELOC may be eliminated (discharged). The lender will have gotten a percentage of trustee payments during the case.
  • A HELOC in Chapter 7 bankruptcy: Chapter 7 may cancel the debt on a home equity credit line, but it cannot cancel the lien that creditor has on the house. In fact, a HELOC lender may still be able to foreclose on a filer’s house after bankruptcy is over (though if there’s no equity in the house, this would be unlikely). One way to avoid post-Chapter 7 foreclosure is to reaffirm payments to a HELOC lender in during bankruptcy.
  • Second mortgages in Chapter 13: Second mortgages that are no longer secured by a home’s value can be discharged in Chapter 13 bankruptcy. Underwater homes may have second or third mortgages that are not secured any longer by the house’s value (that is, the amount of the loans totals more than what the house is currently worth). However, discharging a second mortgage will not affect what a bankruptcy filer owes on a first mortgage.

Could You Face Foreclosure after Bankruptcy?

If you’re considering filing for bankruptcy as a way to escape foreclosure, it’s essential to speak with a bankruptcy lawyer to make sure you understand how your mortgage will likely be affected by a bankruptcy filing – and whether you might find yourself facing foreclosure after you get your discharge.

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Posted in Home Foreclosure, The Truth about Bankruptcy | 3 Comments »

Monday, July 18th, 2011

Can Caring for Parents Lead to Medical Bankruptcy?

These days, the rising cost of health care is a serious worry for many Americans. Bankruptcy filers often cite high medical bills as one factor that led them to seek protection, leading analysts to coin the phrase “medical bankruptcy.”

But one less-discussed phenomenon involving medical debt and bankruptcy revolves around this issue of elder care. The truth is, though, that taking care of aging parents or family members may lead to bankruptcy. Here’s a look at the problem and some methods to prevent it.

The Cost of Aging

Various studies have shown that long-term care for older people can be shockingly expensive. Sources report that:

  • After Alzheimer’s diagnosis, the average patient spends $400,000 for medical care.
  • On average, nursing homes come with a price tag of $7,000 per month.
  • Assisted living facilities cost a monthly $3,300 on average.
  • An average couple that retires at 65 in 2011 can expect to fork over $230,000 in medical costs during the course of their retirement.
  • As many as 65 percent of people over 65 will need long-term care at some time in the future and there’s a 75 percent chance that one member of a retirement-age couple will.

Because many people don’t save enough money to cover these expenses, the burden of providing long-term care may fall to other family members (particularly those who are still working).

Protecting Yourself & Your Loved Ones from Medical Debt

Filing for bankruptcy can provide relief from medical debt. But if you take some precautionary measures, you may be able to keep yourself out of bankruptcy court while still keeping your aging family members in good health.

Insiders recommend taking the following steps:

  • Buy long-term care insurance. This is a kind of health insurance exclusively for those who end up needing long-term care. The earlier in life you begin paying into the system, the lower rates you’re likely to get. Sources recommend doing some research on long-term care insurers, though: the costs and services vary widely and you can save yourself money by getting insurance tailored to your likely needs.
  • Understand the Medicaid option. While retirees have access to Medicare, that program doesn’t cover long-term custodial care. It is possible to qualify for Medicaid as a retiree, though, a program that does offer long-term care. Talk with a healthcare professional about your potential to qualify.
  • Don’t drain your retirement account early. During tight financial times, the temptation to drain a retirement account or 401(k) may be hard to resist. But it’s important to remember that using money from those accounts before they’ve “ripened” will result in serious tax penalties. Plus, the money can’t be replaced. Further, retirement accounts are protected in bankruptcy court, meaning that even if you file for bankruptcy, you’ll get to hang on to your future funds.

Medical costs can be frustratingly high, especially for those who need intensive or persistent care. Taking action while you’re healthy can save you serious money when you get sick.

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Posted in Economic News: How Are We Doing?, Finance 101: Secure Your Future | Comments Off

Wednesday, July 13th, 2011

Personal Bankruptcy Filings Down This Year

Recently released data show that consumer bankruptcy filings in the first half of 2011 fell by eight percent compared with the first half of 2010. The numbers, reported by the American Bankruptcy Institute, paint a potentially hopeful picture for the overall rate of economic recovery:

  • From January 1, 2011 to June 30, 2011, a total of 709,303 personal bankruptcy cases were filed in the U.S.
  • In the first six months of 2010, 770,117 personal bankruptcy cases were filed.
  • This year has seen eight percent fewer personal bankruptcy filings than last year.
  • Personal bankruptcy filings in June 2011 also fell compared to those in June 2010: 119,768 cases were filed this year; 126,270 cases were filed in June 2010.
  • Compared to May of 2011, June filings rose by four percent.

What Do Personal Bankruptcy Filings Mean for the Economy?

It’s impossible to measure the health of the economy by looking at only a single indicator. But still, these bankruptcy numbers seem to follow other trends in economic factors:

  • Overall, unemployment has been steadily decreasing for several months. The pace of the decrease has been slow – this seems to mirror the slight decrease in personal bankruptcy filings and suggest a gradual economic recovery.
  • The last two months have shown slight upticks in the unemployment rate, which might also be reflected in the May-to-June increase in bankruptcy filings.
  • Bankruptcy filings are still on pace to hit or surpass a million this year, meaning that the economy is still a long way from fully healthy.

What Can Personal Bankruptcy Do for Unemployed Americans?

Surveys given to those who file for bankruptcy in the U.S. almost always indicate that unemployment plays a contributing role in prompting people to file for bankruptcy protection. And it’s no wonder: bankruptcy can offer powerful protections to those who have lost their job or had their hours reduced.

Specifically, bankruptcy offers:

  • Protection of assets: Once filers submit their bankruptcy petition, the court protects certain assets from repossession and/or garnishment. In Chapter 7 bankruptcy, these protections are called “exemptions.”
  • Protection from creditors: For the duration of any bankruptcy case, a legal protection called the automatic stay prevents creditors from making contact with or collecting from filers. The automatic stay can halt foreclosure, vehicle repossession, wage garnishment, debt lawsuits and more.
  • Discharge of debts: At the end of a successful bankruptcy case, the court discharges (that is, eliminates) all eligible debts. Filers are not responsible for repaying discharged debts.
  • Time to catch up on payments: In Chapter 13 bankruptcy, filers get a chance to catch up on late payments with help from the court.
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Posted in Economic News: How Are We Doing?, Year in Bankruptcy | Comments Off

Monday, July 11th, 2011

Toni Braxton’s Bankruptcy Exemptions

Celebrity bankruptcy is nothing new. Cyndi Lauper, Mike Tyson, Willie Nelson and Donald Trump – among others – have filed for bankruptcy protection at some point in the past. And right now, singer Toni Braxton is reportedly working out the terms of her second bankruptcy filing (the first was in 1998).

Braxton’s Chapter 7 case, filed last year in California, highlights some interesting Chapter 7 bankruptcy rules. Here’s a look at what she’s facing in court and what ordinary folks can learn about bankruptcy from her situation.

  • Non-dischargeable debts: Some of the debts listed in Braxton’s Chapter 7 petition include those considered non-dischargeable in court. Tax debt, for example, often falls into this category (sources report that Braxton’s case included a debt of nearly $400,000 to the Internal Revenue Service). Chapter 7 filers may have certain debts excused, but they’re on the hook for repaying the non-dischargeable debts even after the end of the bankruptcy case.
  • Exemptions: Chapter 7 bankruptcy filers are able to keep certain possessions out of the liquidation sale used to raise money for creditors. The specific exemptions filers get depend on their state of residence, but usually include a home, a car, clothing, work tools and other household necessities. In Braxton’s case, her lawyer has reportedly worked out a deal that will permit her Grammy awards and some other luxury items (like a Porsche and a piano) not usually protected in bankruptcy.
  • Bankruptcy trustees: The trustee’s job in a bankruptcy case is to get as much money as possible from a filer’s estate and to use that money to repay creditors. In Braxton’s case, the trustee required the singer to work out a deal with the IRS for her tax debts. Sources note that, as of now, Braxton has agreed to make monthly payments to the government, which will have a lien on some of her more valuable possessions. This means that, if she falls behind on payments, the government can seize the property connected to the lien in lieu of payment.
  • The goal of bankruptcy: Bankruptcy is intended to help filers eliminate debt while helping creditors recover as much of the money they’re owed as possible. In order to strike that balance, the court prioritizes some types of debt (like tax debt) over others (like credit card debt). A filer’s money (including any funds raised from selling non-exempt assets) is then distributed to the most important creditors first.
  • Life after bankruptcy: While any number of external factors can lead a person to seek bankruptcy protection more than once, celebrities who file repeated bankruptcy petitions (especially those like Braxton, whose albums have sold millions of copies) remind us of the importance of making the most of the fresh financial start bankruptcy offers. After bankruptcy, filers must take steps to change their financial habits – otherwise, they’re likely to end up in bankruptcy court again.
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Posted in Bankruptcy News and Events | Comments Off

Wednesday, July 6th, 2011

When Debt Collectors Have the Wrong Guy (or Gal)

Dealing with debt collectors can be stressful enough when you know you actually owe them money. But with cases of identity theft and mistaken identity, some people have the unpleasant experience of debt collector harassment when they don’t owe anything at all.

Here’s a look at how debt collectors might get the wrong person and what you can do if you’re on the wrong end of the phone.

Identity Theft or Mistaken Identity?

Generally speaking, there are a few reasons a person would get collection calls intended for someone else. These include:

  • Identity theft: When someone uses another person’s identifying information (Social Security Number, credit card numbers, bank account numbers, etc.), that’s identity theft. Some thieves apply for jobs with stolen SSNs, some open new credit accounts and some simply use existing accounts. To check whether someone besides you has been using your information, log on to AnnualCreditReport.com for a free check of your credit report. If debt collectors are calling because of identity theft, you might have a lot of work ahead of you straightening things out. The sooner you check your reports, the better.
  • Mistaken identity: In this situation, a debt collector simply mistakes you for someone with a similar (or identical) name. Those with common names are naturally more susceptible to this than those with unusual names, but it could happen to anyone. In some cases, third-party identity checkers will contact you before you receive debt collection calls to verify your name and phone number. If you get a call like this, insist on learning as much as you can.
  • A combination: It’s possible that a credit reporting company accidentally combined two credit reports (i.e. merged information from the reports of two people with similar or identical names). If this has happened to you, you need to take action to get your credit situation sorted out. It will require a little effort, but it’s essential to avoid future confusion and to maintain your individual credit.

Dealing with Debts that Aren’t Yours

So what can you do if debt collectors won’t leave you alone about someone else’s debt? Thanks to the Fair Debt Collection Practices Act, you can take action:

  • Review your credit report. Make sure your identity isn’t being used by anyone other than yourself.
  • Send the collectors a letter explaining why you are not responsible for these debts and asking them to stop contacting you.
  • Request written proof that you are the one who owes these debts. Because the debt collector is unlikely to be able to do this, you may never hear from them again.

If you are unable to convince collectors of your identity, you may want to consider enlisting legal help.

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Posted in Identity Theft, Your Credit Score | Comments Off

Tuesday, July 5th, 2011

Joint Bank Accounts in Bankruptcy

In a world where a person’s credit score is one of the most important numbers in her life, it’s no wonder that some parents are eager to help children by naming them joint bank account holders.

This used to be common practice with credit cards: parents would make children “authorized users” to help them improve their credit rating. But the credit bureaus caught on and no longer consider “authorized user” status a boost to a credit score.

Having a child listed on a bank account certainly might still benefit him, but it could hurt you financially if he decides to file for bankruptcy.

Your Cash in Bankruptcy

So what happens to joint accounts when one person files for bankruptcy? It varies depending on state law, but here are some possibilities.

  • Presumption of joint ownership: Some states have laws that indicate that any jointly owned accounts are considered to belong to both people listed on the account. In these states, half of the money in a joint account would be considered the property of the filer and could be used to repay creditors.
  • Rebuttal of presumption: The good news, however, is that filers usually have a chance to rebut (that is, disprove) their actual ownership of the money. A filer might do this by demonstrating that the other joint account owner (who is not filing for bankruptcy) deposited most or all of the funds into that account. This requires some careful legal action, so a lawyer’s help is valuable.
  • Repayment plan: If the bankruptcy filer chooses Chapter 13, the value of the money in the joint account might be taken into consideration. That is, the filer might be expected to pay more than he can really afford to creditors because the court views half of the joint account money as his. (A lawyer can clarify whether rebuttal would be possible in your state.)

Avoiding Bankruptcy Fraud with Joint Accounts

One other consideration for joint account holders considering bankruptcy is bankruptcy fraud. This is a crime that can ruin a filer’s chances at a bankruptcy discharge, lead to a steep fine (up to $500,000) and even cause jail time.

One action that might be considered fraudulent in court is the improper transfer of property or assets before filing for bankruptcy. In other words, if a joint account holder takes himself off the account just before filing for bankruptcy, the court might be suspicious of the action and still consider the funds fair game for the bankruptcy case.

Waiting periods for transferring assets before bankruptcy vary by state. Asking a lawyer about what’s legal where you live is likely your best bet.

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Posted in Filing Requirements, The Law and Your Money | Comments Off