Archive for February, 2012

Tuesday, February 28th, 2012

Consumer Protection Rules Announced by CFPB

The Consumer Financial Protection Bureau, an organization created by the Doddd-Frank Wall Street Reform and Consumer Protection Act, has announced rules to regulate and oversee some of the bigger players in the debt collection and credit reporting industries.

Given the power to regulate non-bank financial entities by the Dodd-Frank, the CFPB has faced opposition since its inception from various lobbying groups and a number of legislators who believe that regulation of such industries should not be part of the government’s realm.

Despite the resistance, however, the CFPB has apparently pushed ahead. The group’s recently announced oversight rules will apply to the following.

  • Debt collection firms that earn more than $10 million per year. According to numbers from the CFPB, this will include roughly 175 debt collection firms, or four percent of all debt collectors in the U.S. Don’t be fooled by that seemingly insignificant fraction, however: this four percent are apparently responsible for collecting 63 percent of debts in the U.S.
  • Consumer reporting agencies that make more than $7 million per year. About 30 consumer reporting agencies fall into this camp, or seven percent of such agencies nationwide. As with debt collectors, however, this wee percentage wields considerable power in its field: the seven percent of firms affected are responsible for collecting 94 percent of receipts from consumer reporting activities.

How Will You Be Affected?

The CFPB estimates that its newest proposed rules will impact the lives of millions of Americans. At present, the Bureau reports, roughly 30 million Americans have debts under collection.

In complaints filed with the Federal Trade Commission (FTC) and elsewhere, many of those have complained that debt collectors illegally tried to collect on debts. Among those illegal collection attempts were tries to collect so-called “zombie debt” and efforts to recover debts that were legally discharged in bankruptcy court.

Debts discharged by bankruptcy cannot legally be collected.

Once the new rules go into effect, Americans might see better behavior from the non-bank financial institutions they deal with on a daily basis. Some commentators, however, are less than optimistic about the potential impact of the rules.

After all, laws already in effect (including the Fair Debt Collection Practices Act and the Fair Credit Reporting Act) are supposed to protect consumers against many abuses from debt collectors and credit reporting agencies.

While the CFPB has the authority to oversee financial entities, it does not have the power to pass or enforce laws regarding this industry, and so may end up having a limited net effect on the way consumer debt and credit is handled in the U.S.

Wednesday, February 22nd, 2012

Why Whitney Houston Will Be Broke in Death

A recent article from the Huffington Post points out one of the minor tragedies that accompanied the larger tragedy of singer Whitney Houston’s recent death: that, despite her enormous talent and widespread popularity, the singer died more or less broke.

What’s more, because she had reportedly been living off advances from record labels for a number of years before her death, her estate now owes money to those companies—which means that, even in death, Houston will have debt.

When Can Debt Survive Death?

While it may not be one of the more pleasant aspects of debt to contemplate, some debts do have the ability to survive death. Here’s a look at when and how a debt survives death.

  • Jointly held debts. Debts held jointly by more than one borrower will almost certainly survive the death of the first borrower. Common examples include mortgages, car loans, or credit cards that spouses initiate in both their names. After the death of one borrower, the other borrower becomes responsible for repaying the balance of the debt.
  • Individually held debts. In most cases, debts that are held by an individual cannot be inherited by his or her survivors following death. In other words, a credit card’s debt will not pass on to a spouse or a person’s next of kin after that person dies.
  • The role of state property laws. The exception to the above is in community property states, where all debt incurred during a marriage is assumed to be jointly held debt. That means that in marriages, even debts taken out under the name of only one spouse may be “passed on” or “inherited” after death.
  • The role of the “estate.” Perhaps the simplest way that a debt can survive a debtor’s death is through the debtor’s estate. If a debtor has debt at the time of his or her death, money or proceeds from the sale of his or her belongings might be used to repay those debts before it can be distributed among heirs.

In the case of Whitney Houston, her debts to record labels will apparently be repaid by her estate. Proceeds from future sales of Houston’s music will be channeled into this estate, and the money in that estate will be distributed among those to whom Houston owed money at the time of her death.

Unfortunately, the dead cannot declare bankruptcy to have such debts removed.

What to Do if You’re Left with Debts after a Loved One’s Death

In order to determine whether or not you legally owe debts left behind by a loved one, you may want to speak with a lawyer in your state who can clarify the laws of debt and succession where you live.

Please note that some unscrupulous debt collectors will attempt to collect on debts that survivors don’t legally owe in hopes of “guilting” them into repaying their loved ones’ debts!

Back in October, T-Boz (born Tionne Watkins), a singer from the group TLC, filed for Chapter 13 bankruptcy protection. Last week, though, T-Boz had her case dismissed by the bankruptcy court, meaning that the singer’s creditors are legally free to pursue any and all claims against her.

Here’s a look at what went wrong with T-Boz’s bankruptcy filing, and what you can do to make sure your case proceeds more smoothly.

In Bankruptcy Court, Follow the Rules

There’s a reason that the U.S. Courts recommend working with a bankruptcy lawyer during a personal bankruptcy filing: the laws that govern the bankruptcy court are complex and outlined in difficult-to-decipher legalese. T-Boz, it seems, failed to follow the rules adequately. Here’s what happened.

  • The bankruptcy petition. T-Boz filed a petition under Chapter 13 of the U.S. Bankruptcy Code, seeking a chance to repay her creditors over a period of three to five years. After filing the initial paperwork with the bankruptcy court, bankruptcy filers have a limited period of time in which to submit supplementary documents and paperwork. Failure to do so could result in the court dismissing your case.
  • The repayment plan. Within 30 days of filing an initial petition, Chapter 13 filers are required to make the first payment according to the repayment plan they submitted. Those who don’t make this payment risk losing the court’s protection. T-Boz apparently listed more than $768,000 in debts, but made no effort to submit her first payment after filing her bankruptcy petition.
  • The creditors’ meeting. Roughly 45 days after filing a bankruptcy petition, filers are required to attend the Creditors Meeting, at which they must attest to the truth and completeness of all information in their bankruptcy petitions. Creditors may attend this meeting (hence its name), but often do not. Because this meeting is required of all bankruptcy filers, those who do not attend risk having their cases dismissed. T-Boz, it seems, did not show up at her Creditors Meeting.

How to Keep the Bankruptcy Court’s Protection

Those who follow the rules of the bankruptcy court enjoy a powerful legal protection called the automatic stay, which prevents creditors of all types from making collection actions while a bankruptcy case is pending.

When the automatic stay is lifted, creditors are free to pursue debt collection by normal means. Because T-Boz failed to adhere to the rules set out by the bankruptcy court, she will now likely have to deal with collection actions from her creditors until she files for bankruptcy a second time, which she will be eligible to do 180 days after the dismissal of her original case.

Generally speaking, those who wish to avoid the unpleasantness of bankruptcy court dismissal may benefit from the guidance and instruction offered by a bankruptcy lawyer practicing in their state.

In October, Friendly’s restaurants filed for bankruptcy protection, closing about 100 of its 500 locations scattered along and slightly inland of the East Coast. Now emerged from bankruptcy court, sources note that the restaurant has shifted its focus toward ice cream products designed for distribution to grocery retailers, and is seeing positive results.

Here’s a look at the details of that shift and what individual bankruptcy filers can learn from it:

  • This year, Friendly’s introduced branded ice cream products into 2,400 Walmart locations, 300 A&P and Pathmark supermarkets, 200 Food Lion stores, 178 Giant Food outlets, 70 Target locations, and others. In total, Friendly’s increased its supermarket presence by 40 percent.
  • At present, Friendly’s already outsells national competitors (including Breyers, Edy’s, and Turkey Hill) in some New England stores.
  • Last year, the Friendly’s ice cream cake manufacturing plant produced 1 million cakes for distribution, up from 300,000 a few years before.
  • The chain’s Executive VP of Retail Financing has noted on the record that he would like to double the chain’s supermarket presence in the next three to five years.

Adjusting to the Times after Bankruptcy

Analysts have noted that the restaurant industry was one of the hardest hit by the recession. Since the crash of the housing market, Americans have been eating out less often and less lavishly—meaning, in some cases, that diners are skipping appetizers and dessert when they did go out for a meal.

For Friendly’s, this translated to a serious decrease in what had once been its bread and butter: in-restaurant sales of ice cream products. Even as Americans’ consumption of ice cream in restaurants decreased in recent years, though, our ice cream eating at home rose significantly.

Friendly’s made the difficult decision to shift its long-time focus on restaurant ice cream sales to the potentially more lucrative grocery store sales. Why difficult? Because in order to produce the quality and quantity of ice cream demanded by grocery store customers, Friendly’s had to overhaul its factories, which reportedly cost several million dollars.

The expense may have contributed to the company’s need for bankruptcy protection, but it also paved the way for success following its bankruptcy discharge. Now, Friendly’s is on the road to recovery thanks to its in-store sales of ice cream products.

Here’s how you can make Friendly’s bankruptcy maneuvers work for you:

  • Think long-term. We usually know what financial decisions will make the most sense for us in the long term, but we’re often pressured to make other decisions. Ultimately, choices made with the long view in mind will pay off… in the long run.
  • Don’t fear bankruptcy. Done right, bankruptcy allows individuals and companies shed debt and emerge healthier, stronger, and able to get ahead financially.
  • Mind the times. Things that worked for you last year or ten years ago may not work today. The sooner you accept that and adjust your finances accordingly, the easier your transition out of bankruptcy is likely to be.

In 2009, when Chrysler accepted a federal bailout and filed for bankruptcy protection, many critics shook their heads, suggesting that the carmaker should be allowed to fail if it was not producing cars that appealed to the market.

But just two years after emerging from bankruptcy protection, Chrysler has earned a profit, and appears to be on target to continue doing so in coming years. Here’s a look at the specifics of Chrysler’s success, why bankruptcy worked for the car manufacturer, and what individual bankruptcy filers can learn.

Chrysler’s Bankruptcy by the Numbers

  • In 2009, Chrysler accepted $12.5 billion in bailout funds. Though the carmaker repaid its loans, analysts estimate that the public lost about $1.3 billion on the deal, all told.
  • In 2011, Chrysler notched a profit of $183 million, up significantly from a loss of $652 million in 2010. Forecasts for 2012 predict that the company will earn $1.5 billion this year.
  • Sales in 2011 jumped at home (24 percent) and abroad (22 percent), totaling 1.86 million vehicles.
  • Sources note that January 2012, sales were up 44 percent compared to the same month a year ago.
  • In the fourth quarter of 2011, Chrysler recorded a net income of $225 million, up from 2010’s net loss of $199 million.

Why Bankruptcy Worked (and What We Can Learn)

Part of Chrysler’s post-bankruptcy success might be attributed to an improvement in the overall economic situation. The country is not in as dire straits now as it was when the company filed its bankruptcy petition. However, the bankruptcy court success of both Chrysler and GM (which filed for bankruptcy around the same time and is now similarly profitable) resulted from a number of important factors, including these.

  • Knowing when to file. As with individual bankruptcy cases, timing matters in corporate bankruptcy. For individuals, waiting too long to file a bankruptcy petition can be counterproductive, especially if a filer burns through savings or retirement accounts in an effort to repay debtors. Under the protection of the bankruptcy court, retirement accounts and some savings are protected from creditors.
  • Cutting unproductive arms. Chrysler closed down a number of dealerships and cut off less-productive brands under its aegis in an effort to streamline its operations. The cuts paid off, allowing the company to produce vehicles that people are more interested in buying. Individuals in bankruptcy may be able to completely eliminate certain debts, and can generally rearrange others to make repayment of those debts easier.
  • Changing strategy. Moving out of bankruptcy, Chrysler plans to introduce new models of cars (and bring back some old favorites) in order to meet the changed demands of the public. Individuals emerging from bankruptcy must similarly assess their daily behaviors and expenses, and make significant changes to prevent a recurrence of debt.

An Atlanta-area bookstore surprised its fans last week when it filed for Chapter 7 bankruptcy protection to deal with its $508,673 in debts. At the time of the filing, it seems, Outwrite Bookstore had less than $300 in its checking account, a circumstance that underscored the dire financial straits the bookstore found itself in.

Part of a Larger Trend

While Outwrite’s Chapter 7 filing in particular came as a surprise (the bookstore had admitted financial troubles in recent months, but had apparently held a fundraiser to help with relocation costs even as it was paying a bankruptcy lawyer to help it draw up plans for winding down), its place in the grand scheme of booksellers these days is nothing new.

With online giants like Amazon underselling most of its competition, many independent (and even not-so-independent, ahem, Borders) brick-and-mortar sellers have felt a serious strain.

Individual Chapter 7 vs. Business Chapter 7

When Outwrite filed its Chapter 7 petition, the bookstore cited only $78,311 in assets, compared with its debts exceeding $500,000. Most of those assets, it seems, took the form of office supplies and inventory the store still had on hand.

It’s not entirely uncommon to see individual Chapter 7 bankruptcy cases with similar disparities in debt and assets. Here’s why Chapter 7 bankruptcy tends to work well for those with few assets to their name:

  • Chapter 7 bankruptcy offers a full discharge of certain debts, meaning that filers are not required to repay those debts. For a business like Outwrite, choosing Chapter 7 makes sense when there’s no clear way to earn the money needed to repay creditors. For individuals, Chapter 7 can provide relief from debts that are unrealistically higher than a filer’s income (such as exorbitant medical bills or credit card debts).
  • Filers can keep their necessities. Chapter 7 bankruptcy is a form of protection, not punishment. Filers are granted several “exemptions,” which outline property a filer can keep in order to make a fresh financial start after the bankruptcy case is finished. Any property or assets that the court deems unnecessary to reasonably make a living may be sold in a liquidation sale.
  • Chapter 7 offers relief from creditors. Chapter 7 filers enjoy the legal protection of the automatic stay during their bankruptcy cases. This stay prevents creditors from taking any collection actions against them. Once a debt is discharged in bankruptcy, creditors have no legal claim to it, and cannot rightly take collection action.
  • Chapter 7 moves quickly. In a matter of months, filers can complete the bankruptcy process and restart their lives uninhibited by the debts of their past. In their lives after bankruptcy, filers are free to rebuild their wealth.

Monday, February 6th, 2012

Sandwich Chain Quiznos Avoids Bankruptcy

News outlets have reported in recent weeks how the recession hit Denver-based sandwich chain Quiznos. In fact, until recently, many sources assumed Quiznos would opt for bankruptcy protection to alleviate its debt burdens brought on by a lowered demand for sandwiches and a price war with its main competitor, Subway.

But this week, the sub shop decided to avoid bankruptcy court by ceding control of its operations to Avenue Capital, one of its major creditors. According to sources, the deal will involve a takeover of corporate management by Avenue, while franchise operations should continue to operate normally.

Bankruptcy & Bankruptcy Alternatives for Individuals

At the corporate level, the Quiznos decision to avoid bankruptcy made sense: in exchange for eliminating some of the sandwich chain’s debt, Avenue got to take corporate control. If the new owner plays its cards right, it could make the changes necessary to turn Quiznos around and return it to profitability.

Individuals may face similar choices. Here’s how to navigate the world of debt-relief options.

  • Creditor negotiation: Essentially the Quiznos route, this method of easing debt may benefit both parties. Debtors get some of their debts forgiven by their creditors, and creditors don’t have to worry about having those debts completely eliminated by the bankruptcy court. In some cases, individuals can negotiate with creditors for modified repayment terms (such as lower interest rates, reduction in principal, or lowered monthly payments) in exchange for refraining from filing bankruptcy. Note: if you’re interested in creditor negotiation, be sure to let your creditors know that you’re considering a bankruptcy filing, and be sure to get any new agreements in writing.
  • Credit Counseling: This bankruptcy alternative involves visiting with a credit counseling professional to work through a debt-elimination plan. These plans may be comprehensive, including budget outlines, repayment schedules, and suggestions for future credit and debt usage. Note: if you’re considering credit counseling, be sure check your local Better Business Bureau for complaints against the firm.
  • Debt Settlement: In debt settlement, the debt settlement agency communicates with a debtor’s creditors to negotiate better debt repayment terms. While potentially very effective, debt settlement can also end in disaster (when firms unscrupulously take consumer money without actually helping them resolve their debt issues). Note: if you’re considering debt settlement, be sure to consult with the BBB and other online resources to determine the quality of the company you’re working with.

When to Choose Bankruptcy

It’s important to note that, while bankruptcy is not the right choice in all debt situations, it remains the only debt elimination solution that is regulated at the federal level and offers filers protection from debt collectors and creditors through the court's automatic stay.

Wednesday, February 1st, 2012

Bankruptcy Class Action Settlement Update

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In 2009, a class action lawsuit brought in California challenged credit-reporting bureaus TransUnion, Equifax, and Experian with improperly reporting debts discharged in bankruptcy. The defendants (that is, the credit-reporting bureaus) eventually came to a settlement with the plaintiffs (the people responsible for bringing the suit), to the tune of $45 million.

The court approved the settlement by issuing an Order Granting Final Approval, but on August 12, 2011, the defendants filed a brief challenging that order, in regards to attorney fees and costs of the case. The result of this appeal won’t be known until at least later this year: the deadline for Appellants to file relevant briefs with the court is January 23, 2012, and Appellees have until February 24, 2012.

Will You Get Settlement Money?

The lawsuit was brought because Equifax, Experian, and TransUnion improperly reported debts that had been discharged in bankruptcy on consumers’ credit reports. Rather than noting that these debts were “discharged through bankruptcy,” the credit bureaus noted that they were “120 days late” or that they had been charged off by the credit issuer.

Incorrectly reporting the status of a debt is illegal (which is why the lawsuit was filed), but it also caused a lot of grief for the people affected. When a debt is still reported as active, debt collectors may try to collect on that debt.

The result was that people who had filed for bankruptcy and gone through the entire bankruptcy process precisely to eliminate their debts and stop getting hassled by debt collectors were having to deal with debt collectors anyway (along with the stress of trying to sort out why their credit reports were incorrect).

You are eligible to collect some of the settlement if…

  • You are a member of the “class” represented by this class action case. To be a part of the class, you must have received a debt discharge under Chapter 7 AND had a credit report issued by one of the defendants (i.e. the three credit reporting bureaus) between March 15, 2002 and May 11, 2009 with incorrectly reported discharged debts.
  • You must have submitted a claim form with relevant information no later than November 30, 2009.

If you missed the deadline, however, don’t worry too much. Even though the settlement amount seems large, it will be spread out over so many individuals that it likely won’t result to more than a few dollars per person.

If, however, you’re interested in exploring other legal options regarding errors on your credit report, you may want to consult with a lawyer about the recourse available to you.