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In my Iowa bankruptcy practice I allow people to pay for their attorney’s fees over time.  The client can pay a small retainer to commit to a contract between us and then take as long as they need to pay off the balance–interest free. (Of course, a chapter 7 case cannot be filed until all the fees and costs are paid lest I be a creditor of the estate and discharge the debt against my self.  Not bright and also a violation of the law).

Now this is a nice benefit to the clients.  They like it and it helps them deal with troubling if not traumatic financial circumstances.  There is no boring deeply into their pockets, taking money from the necessity part of the budget–food, roof and a way to get to work.  But there is always some black hole associated with the clear space to travel.  This week I have had several clients who are facing such a hole–known as garnishments.

These clients are being sued.  Only a bankruptcy filing can stop the suit.  As they do not have the bankruptcy filing account paid off, a judgment will be obtained by the creditor who will then start taking a percentage of the client’s wages.  Now these clients are in a bind.

The amount taken depends on the disposable income level (i.e. gross income minus taxes). The percentage ranges from nothing for very low income people–making less than $1,256.57 per month–to 25% of the disposable income over the $1,256.57 per month. This applies to consumer credit judgments. For non-consumer credit the 25% garnishment is applied to amounts over $942.50 per month. (Note that social security checks are fully exempt–not considered wages for this purpose).

There is a maximum amount allowed to be taken by each creditor, each calendar year.  For earnings (which is the gross amount):

Over $12,000 it is $400;

Over $16,000 it is $800;

Over $24,000 it is $1,500;

Over $35,000 it is $2,000; and

Over $50,000 it is 10%

For past due Iowa taxes, there are no exemptions, no expiration date and the percentage is 100%!  (I know people who have quit their jobs and moved to other states to avoid this).

As one can easily compute, once the garnishment starts, getting the fees paid for bankruptcy becomes very hard. In fact, even paying rent/mortgage or getting food becomes extremely difficult.  Often, potential clients come to see me for the first time when the garnishment actually begins–even though they had some strong indications that a judgment and garnishment were looming in the air and they could have had the bankruptcy paid for before the suit.

So it is very important to recognize that even though one does not want to file bankruptcy, one may need to do so, and the earlier one takes an honest look at the horizon and admits the foul weather coming in, the better off one will be when the storm strikes.

See a specialist, an Iowa Bankruptcy attorney, as soon as one even thinks that one is on a slippery financial slope.

Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa

In a typical Iowa Chapter 7 bankruptcy case a discharge, final decree and case closure are generally provided around 61-70 days from themeeting of creditors.  You receive a document which certifies that you have been discharged from liability for payment of any and all debts which were made dischargeable by the Bankruptcy Code. (Some are not, like child support and most student law debt).  In other words, your bankruptcy is usually completed.  Congratulations!

This does not mean, however, that you can ignore any creditor’s attempt to collect these debts.  Sometimes they still try.  If any of your creditors try to collect a debt which you listed on your bankruptcy petition, you should contact me (or another attorney) so that you may assert your rights under the Bankruptcy Code and receive the full protection of your discharge–called a permanent injunction against collection.

The discharge also protects you from many types of discrimination based in you filing a bankruptcy or the debts you eliminated in the bankruptcy.  Generally, no government agency or employer can treat you differently than other people just because you filed a bankruptcy case or because of the debts you did not pay before the bankruptcy.

It is also important for you to be aware of your rights when applying for credit in the future.  There are laws which protect your rights.  If any of these laws are violated, you may be entitled to sue the creditor for damages, as well as make him pay your attorney fees.

The Equal Credit Opportunity Act forbids discrimination in the granting of credit, when such discrimination is based on race, color, religion, national origin, sex, marital status, age, or the fact that any of your income derives from a public assistance program such as welfare, Social Security, or unemployment compensation.

The Equal Credit Opportunity Act states that a creditor may not, either orally or in writing, discourage a person from making or pursuing an application for credit on any of the forbidden grounds.  Generally, a creditor may not ask information about a spouse or request the signature of your spouse or a cosigner except in limited circumstances.

Once you apply for credit, whether orally or in writing, the creditor must give you a written notice within thirty (30) days stating specific reasons why credit is being denied, and setting forth your rights under the Equal Credit Opportunity Act.  Do not allow yourself to be discouraged from submitting an application; insist on a written statement of reasons for denial.

If a creditor does a credit check on you, it must disclose whether a denial of credit is based on information from a credit reporting agency, together with the name and address of that agency.  The credit reporting agency must then disclose to you the nature and substance of all information in its files.

The credit reporting agency may report your bankruptcy filing for ten (10) years; as to other debts, information may be reported for seven (7) years, except that any debts which have been discharged in bankruptcy should no longer be reported as having a balance owed and instead should be reported with a zero balance.  You should check your credit report to make sure that the debts discharged in your bankruptcy are being reported correctly.  You may get one free copy of your credit report per year from each of the national reporting agencies.  The three nationwide consumer reporting agencies have set up one central website, toll-free telephone number, and mailing address through which free annual reports can be ordered.  You can click on www.annualcreditreport.com, call (877) 322-8228, or complete the Annual Credit Report Request Form and mail it to:  Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Georgia 30348-5281.  The Form can be printed at www.ftc.gov/credit.

If you dispute the accuracy of any information which the credit reporting agency has in its file, you can ask the credit agency to reinvestigate.  This request should be made in writing using the agency’s dispute form or your own simple letter.  You should keep a copy of whatever you send.  The agency must reinvestigate by at least asking the source of the information to respond to your dispute.  If the source can not or does not verify the disputed information, it should be removed from your credit report.  If the reinvestigation does not resolve the dispute, you should contact our office.  You may also submit a short statement in writing telling your side of the story.  In all future reports, the credit agency must note your dispute.  The credit agency will send out a corrected record to anyone who inquired about your credit within six (6) months before the correction.

If you think you are going to have problems in applying for credit, you should take a witness with you to make sure that your rights, as outlined above, are being observed.  The creditor has no right to insist that your witness cosign for you, and you should be sure that this does not happen.

For more information on credit report issues click here.

If a creditor on a secured claim refuses to report that you are paying regularly you should request an annual statement of payments from the creditor and send this to the credit reporting agencies to help build your credit again.

Also, you should think carefully about your budget.  For an excellent basic budget plan visit other Blog entries to read about the issues to help you stay out of debt problems and build a financial safety net.  You can also listen to my Life and Debt Radio Shows  For an in-depth version of the points raised in the Blog and on Life and Debt, I highly recommend the book  All Your Worth by Harvard Professor Elizabeth Warren and her daughter Amelia Warren Tyagi, two of America’s leading champions for debtors.  This book gives a simple understanding of how to deal with your budget in the future in order to prevent debt problems, to maximize your income use and create financial security.  It is available at public libraries but can also be purchased in paperback from bookstores at a very reasonable cost.

Iowa Bankruptcy Attorney Robert J. Liptak
Fairfield, Iowa

When you can’t pay a bill which is due the process of aggressive debt collection quickly begins.   In Iowa there is an excellent law to protect you–the Iowa Debt Collection Practices Act (Iowa Code Sections 537.7101 to 537.7103).  The Federal Fair Debt Collection Practice law is very similar to the Iowa law but it applies only to third party debt collectors–not to a creditor collecting its own debt. Iowa law, however, defines everyone engaging in debt collection, directly or indirectly, as a debt collector which makes it cover anyone trying to get money from you.

Know Your Iowa Rights

PROHIBITED PRACTICES 

The debt collector(s) cannot:

• Threaten or use violence
• Falsely accuse you of a fraud or any other crime
• Report or threaten to report false accusations to any person, including a credit reporting agency
• Threaten to sell your debt to someone else who will engage in abusive collection practices
• Falsely threaten that nonpayment will result in arrest or that your wages will be garnished or your property will be seized
• Take or threaten to any action prohibited by law
• Use profanity or obscene language
• Trick you into paying for collect calls or telegrams
• Repeatedly or continuously call to the point of harassment, or call at unusual hours
• Communicate by postcard or include anything on an envelope that relates to debt collection
• Contact a third party except to locate you
• Contact your employer or credit union more than once every three months for the purpose of obtaining debt counseling services for you
• Contact your employer more than once a month for the purpose of verifying employment
• Contact the parents of a minor debtor, a trustee, a conservator, or a guardian more than once every three months
• Publish or post your name
• Misrepresent the amount of money owed
• Tack on collection fees and charges
• Pretend he’s an attorney if he’s not
• Send you legal-looking documents when they’re not court documents
• Try to trick one spouse into signing a document making him or her liable for the other spouse’s debt
• Try and get you to sign a document saying that you owe a debt that’s been discharged in bankruptcy
• Contact you directly if you have an attorney

Also, the debt collector must disclose the name of the debt collection agency and state that he is collecting a debt in a phone call.

Iowa law allows individual consumers to sue debt collection agencies. A successful lawsuit filed in the state can result in an award of actual damages and statutory damages. This is in addition to being able to sue a debt collection agency for violation of the Fair Debt Collection Practices Act. The FDCPA makes certain debt collector tactics illegal, and gives you the right to sue a debt collection agency in federal court. If the debt collection agency has broken the law, you can receive actual expenses, attorney fees, and up to $1,000.

It is very useful to retain an attorney to represent you in Iowa because the harassment and collection calls made directly to you must then stop.  The debt collectors must always communicate with the attorney once they have been given this information.  After that they can only file lawsuits against you to try to collect the debt.  Also, if you file a bankruptcy, not only must the communications by the debtor collectors stop, but civil lawsuits for money collection generally come to an end unless permitted by the bankruptcy court (which is unusual).

Iowa Bankruptcy Attorney Robert J. Liptak
Fairfield, Iowa

A tremendous concern for bankruptcy lawyers nowadays is the incredible difficulty in discharging student loan debt.  (See Elizabeth Warren’s comments). It used to be (just before the turn of the century) student loans which were in default for over 7 years could be discharged.  With high pressure and effective lobbying from the credit industry this discharge was repealed. Then, with years of more intense lobbying, by 2005 the definition of what a student loan was had greatly expanded to include all types of “educational” loans–basically anything that provides some training.

Since then we have seen an amazing growth in the privatizing of student loans with high initial and adjustable interest rates.  In order to discharge a student loan in bankruptcy there is a “hardship” requirement which basically allows a discharge only if it is nearly impossible to pay any of it back.  That actually requires an adversarial procedure aside from the bankruptcy, which can mean additional costs to the debtor.

According to a New York Times article in April, 2011, student loan debt in 2010 outpaced credit card debt for the first time and is likely to pass $1,000,000,000,000 (that’s correct, trillion). The rising costs of college and loan rates means that many people will be paying for their loans for longer and longer periods of time.  Imagine people will still be paying their loans when it is time for their kids to go to college. Of course, that presumes that student loan debt does stop people from getting married because they can’t afford it (which is happening).  When a person is leaving school with a lot of debt, their choices are different than in the past.  Buying a home, getting married, starting a family, starting a business or even taking a satisfying job in a place that makes one happy are not options because of paying off a lot of student debt.

Hefty student loans carry lots of risks in the current economy.  Moreover, the government is slashing grants for low income students while university costs are increasing.  As the loan amount goes up and the doomed economy continues to hurt the middle and lower classes, there is an ever exploding default rate on student loans.  In addition, as unemployment rates are increasing and as is evident–when the economy gets tight the money still continues to flow upward in the corporate world–those at the bottom of the pyramid lose financially.  It’s not an easy task to switch jobs or make up for the defaults that occur during the unemployment period.

Students who borrow to attend for-profit colleges are especially likely to default. They make up about 12 percent of those enrolled in higher education yet almost half of those defaulting on student loans.  According to the Department of Education about a quarter of students at for-profit institutions defaulted on their student loans within three years of starting to repay them.

Those attending for-profit colleges often do not complete their program and most never get a job in the field for which they were supposedly trained.  It all results in a negative mark on their credit report, which becomes the biggest barrier to moving ahead in their lives.  It delays their ability to buy a house.  It hurts their employment prospects, their finding an apartment, and almost anything they try to do.

Another thing that happens very frequently is parents, a relative or third party co-signed the loan.  There are all kinds of rules which allow or even require this (which is not the point here).  The point is if possible DO NOT co-sign on loans.  They will never go away for you until the loan is paid in full. Default on the loan by the person getting the education means you are responsible.  The lender can go after your wages and tax refunds in many cases.  It may even be able to go after your social security payments–which you never envisioned–if the loan is connected with the government.

Be very cautious in taking student loan and particularly in co-signing for them. This is a web of debt that is strangling the young and now even the elders of our working class.

Iowa Bankruptcy Attorney Robert J. Liptak
Fairfield, Iowa

When your debt is starting to mount and you feel that you need to confront the creditors, (or they are hounding you like wild wolves) you may be thinking about debt settlement companies to assist you.  There is a lot of advertising out there and it is very alluring.  While these plans may sometimes work, my general experience as a bankruptcy attorney–and that of the vast majority of the 4,500 members of the National Association of Consumer Bankruptcy Attorneys–NCABA) is the plans do not work very well at all.  By the numbers, they are also a scam.  Here are some reasons why:

• These companies generally negotiate the interest rate at the beginning which looks good.  They collect your monthly payments, put them in escrow, subtract their fees, which are relatively big, and when you reach a certain amount they approach a company on your list and offer a settlement amount.  Pending the settlement there accrues additional interest, late fees and over-limit fees that can eat up much of the “savings” which were the goal of these negotiations. (See example below.) Th interest rate sometimes reverts back or is even increased because it is taking so long to settle

• Many large credit companies and debt collectors refuse to negotiate at all with debt settlement companies.

• The settlement company does not do anything that you couldn’t do for yourself.  If you wait long enough, the debt buyers will offer you the same terms–sometimes better.

• The overwhelming majority of folks never stick with the payments for long enough, which means that the rather large fees of the settlement agent are earned for doing nothing. You wind up worse off then where you started.

•  Creditors trash the client’s credit rating and often sue; none of this is stopped during the payment period.

• Your damaged credit rating is not healed from any of this–even after you settle.

•  Debt settlement will hurt your credit longer than bankruptcy, since the debts continue to be reported as bad debts for longer period of time.

• For all amounts settled, a 1099-C is issued to you and the IRS for the forgiven debt. Taxes must be paid on this amount–which comes usually as a shock in the next tax year.

• Debt settlement companies do not underscore the 1099 issue at all and many do not even tell you of the debt forgiveness taxes you will be responsible to pay.

Let’s give an example by doing the math:

You have credit card account with a balance of $10,000.  The debt settlement company settles it for $5,000 after 18 months.  Here’s why this is a bad deal for you:

• The credit card balance is significantly higher when you finally settled. During the 18 months necessary to build up the lump sum settlement, there would be $720 in late fees (18 @ $40), $720 in over-limit fees (18 @ $40), and interest of $4,500 (30% APR on $10,000 for 18 months [not including compounding]).  So at the end of 18 months, instead of a $10,000 credit card balance, the balance is $15,940.00.  In addition, collection costs are added, typically 15%, further increasing the balance to $17,440.

• Now, the difference between the balance when settled–$17,440 and the $5,000 paid is $12,440 forgiven debt.  As a result you owe an additional $4,665 in taxes on the settlement (assuming you are single at 25% federal and 12.5% state tax rate).

• If your settlement plan is successful, you would emerge from your program solvent, and would thereby be ineligible for Form 982 relief.  (This is federal tax form to try to prove to the IRS that you were insolvent at the time of the debt forgiveness and should not owe taxes on the amount). By paying you set yourself up to be ineligible.

• You also paid $1,866 in fees @ 15% to the debt settlement company (which is low) based on a balance of $17,440 and a settlement of $5,000.

So, when adding in the actual cost of the settlement ($5,000), as a result of using the debt settlement service, you settled a $10,000 claim by paying $11,531, and have to put up with 18 months of nasty calls and letters, and possibly lawsuits, judgments and garnishments.

If this is not a scam, then why are attorney generals all over the US investigating these companies, trying to stop these results?

Oh, by the way, then there is “Zombie debt” in which the creditor who settled with the debt settlement company, sells your account to a debt collector for pennies on the dollar.  This may not be proper due to the 1099-C issue but it is still happening.  The new owner of the debt argues that the debt is  actually still owed pursuant to the contract with the creditor.  The debt collector renames it, gives it new account numbers,  posts it to your credit report after some while and then starts trying to collect on it.

When you finally figure out that it was the settled debt of 3 or 5 years ago, and bring it up with the debt collector, they laugh at you, and claim you still owe on the original debt contract and must pay up…. Phase two of harassment has begun and intensifies.  You will need to hire a lawyer.  More fees.  The collector’s argument is that no new consideration was offered to create a new contract and no intervening court dispute is of record, so you are back to the beginning.  Now depending on how much time has passed, the $12,440 forgiven is much, much higher!  This is a nightmare and frankly litigation time.  It is no fun.

Whereas, if you filed bankruptcy to deal with this debt, it would be liquidated, no 1099-C would effect you as section 108 of the Internal Revenue Code has forgiven the taxes, your credit rating started to heal, it cost much less, and it was less stressful. Even if some zombie debt issue comes up later on your bankruptcy case can be re-opened to deal with a violation of the permanent injunction against collecting a discharged debt!

Creditor law and practice is massive and in the creditors’ favor.  The bankruptcy law is the one really powerful and effective way to respond–like the slingshot of David against Goliath.  It works….

Iowa Bankruptcy Attorney Robert J. Liptak
Fairfield, Iowa

It happens too frequently in many types of transactions which definitely have serious potential legal consequences that the parties do not use an attorney–on either side of the table.  When the one side is you and the other side is a big corporation that is asking you to sign reams of boilerplate documents (which were actually written by their tall building lawyers) you are obviously at an extreme disadvantage.  What bankruptcy lawyers typically see is unfair, unsolicited and unexpected consequences to the little guy.

But what about the situation where both parties are little guys–friends, relatives, small local businesses –that are trying to get the deal done without coughing up any fees to attorneys?  People often go to the web to get forms for their dealings.  Or, they just put it together themselves based on what they both agree to.  Seems fair, seems to be an arms length agreement, and it certainly is a lot cheaper.  So what is the problem?

In many cases this is fine.  Yet, in some it results in a disaster because a step is missed, proper procedure is not adhered to or the form itself actually is not acceptable at all.  For example, I have had bankruptcy clients who received a $12,000 loan from some close friends to settle another court case.  The lender wrote up a note with a security clause in it.  The collateral was the house.  My clients have been regularly paying on the agreement but after 8 months found themselves facing bankruptcy.  They had judgments against them creating liens on their house and new lawsuits coming at them–all of which exposed my clients to wage garnishments, levies against bank accounts (with mandatory direct deposits from employers) and risk of losing other property that potentially was not exempt under Iowa exemptions for bankruptcy.

In short, we had to file rather quickly.  It turns out, though, that the agreement they signed with their friends not only was not filed within 30 days after execution which is required by law, it also was not in any form acceptable to the court.  The lenders at that point had a lawyer draft a mortgage that was in the proper form which they had executed and filed.

We were under a gun to file the bankruptcy for the reasons stated above. Unfortunately, the mortgage according to bankruptcy law was an unperfected (not filed) document which was transformed into a perfected document too close to the bankruptcy filing. This is called a preference, favoring one unsecured creditor over another.  The rule is 90 days for ordinary creditors and one year for insiders (such as relatives, partners and very close friends).

When preferences happen the trustee can avoid the “payments” (which in this case is the value of the transfer) and ask the CREDITOR for the money back to spread it out among all the unsecured creditors.  So, the lender needs to pay the trustee what my client is paying them.  In effect they are an unsecured creditor because they made a mistake of not having the correct form of documents and in not perfecting the filing.

In this case, my clients would have had to wait over a year from the filing of the mortgage to protect against the insider type preference.  Under the facts they could not do that or they would have exposed themselves to thousands of dollars in garnishments and levies.

By not having legal advice in the circumstances–saving some money–the loss to the lender will likely be thousands of dollars in negotiating with the trustee.  They were penny rich, but pound poor…

Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa

The issue of debt settlement continued for my clients today as one informed me that with about $86,000 in outstanding unsecured debt, the credit card companies have continued to reduce their settlement offers to an average of 14% across the board.  In sum, if he can come up with $12,000 as lump sum payments these accounts would be “settled”.

He was very enticed but with my previous warnings he asked each of them about the debt forgiveness 1099 that he would receive– and on which he would be paying taxes.  The math shows that $74,000 is income (i.e. the debt forgiven amount equals income).  This sum is taxable! The collectors all admitted that a debt forgiveness 1099 would be issued, but one ingenious collector offered that my client should parcel all this out over two or three years of settlement and that would spread his taxes over time.  Seduction continues…

My client is insolvent in the bankruptcy sense.  He could file a simple chapter 7 in Iowa and get all this debt discharged–even though he has a homestead with a lot of equity in it.  The Iowa homestead exemption is unlimited against all unsecured debt incurred after the homestead was initiated. So the creditors can’t get at that equity.

A person who can show they were insolvent when the debt was forgiven can file Form 982 IRS  and attempt to convince the IRS that the forgiven sums are not taxable.  Filing a Chapter 7 bankruptcy is a  way under the law for no debt forgiveness taxes to be due.   However, if there was no bankruptcy, the entire value of the house would be considered an asset.  In this case, there is a valuable house worth about $300,000.  Now, subtract the liens of $120,000.  The IRS would argue that my client is not insolvent.  He is totally in the black with $180,000 in equity–which is not seen as exempt in this context  So filing the bankruptcy would be an advantage while not filing would create taxes on $74,000 of debt forgiveness income. In short, my client would be in trouble because those are taxes that could not be discharged for years–and in the meantime, the IRS would be actively pursuing ways to collect the money even if the client claims he does not currently have any. Add in late fees, penalties and interest and the amount becomes exorbitant.

So the bottom line is do not listen to debt collectors. They will not generally offer the full story and the hidden downsides of the settlement.  In fact, they often trick you into settling–which turns out not to be a real settlement at all.

Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa

One thing you should not generally do is take out a loan against the title of your paid for car from title loan companies.  Maybe your local friendly bank could work, but title loan companies are a major rip-off.  For example, I have an Iowa bankruptcy client who had borrowed $712 against a lien-free vehicle worth $2,000.  It was a one year loan.  The interest rate was 301.93%.  That is not a typographical error–the 0 was there!  In the course of the year she would have paid $1,593.79 plus the $712. In other words, her total payback was to be $2,305.79.  Moreover, reading the contract closely I saw that in fact she only received $600 cash because $10 went to pay for the lien and she had been convinced that she should join the Continental Car Club which cost $102.  The monthly payment was $192.15 for a year to borrow only $600.

Apparently she was doing fine for about 9 months and then she missed a payment.  The contract said 10 days late and she was in default.  The result was the Illinois based title loan company called her and said if she could not come up with the cash that day it was going to send someone to repossess her car.  Of course it was her only car which she desperately depended on.  She is a single full-time working mom with three kids.  Unfortunately, she could not get the demanded amount and within the day the car was taken.  It was a nightmare for her…

The car went and she never received any information about what happened to it. It seemed that she only owed $800 at most including interest for the remainder of the loan period.  But the companies typically claim costs for collection, repossession, sale preparation, auction and other charges–some of which are flat out junk–so according to them no equity remains.  She received nothing–not even an explanation.

The moral of the story is stay away from title loan companies. They are not only profit oriented, but rip-off oriented right from the beginning until you lose your car and all the equity you had in it

Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa

When you get seriously behind in payments of unsecured debt, such as credit card, charge card or medical debt, there are heightened efforts by the creditor or a third party debt collector to squeeze the money out of you.  They use many tactics to try to accomplish this–from term negotiation and debt settlement to law suits with judgments and wage garnishment.  The reasons why the creditor chooses one line of attack over another does not always make sense even to bankruptcy attorneys.  There are lots of variables and internal business policies that lead to the chosen tactic, so it it hard to predict.

One weapon that is often used is the so called debt settlement offer.  Let’s say you owe $10,000 on a credit card and it went into default.  The company or its debt collecting goons call and attempt to get you to pay the entire amount.  Now, of course, you would have not gone into default if you could have even kept up with the small minimum monthly payment compared to a lump sum of $10K.  But they demand that anyway.  You can’t pay.  They continue to call and may get intense for a while–rude, crude and harassing,  At some point however (when they realize you aren’t going to pay such a large amount) you are usually offered an opportunity to pay only a fraction of the entire amount owed. This often happens near the end of the month when the collector’s monthly quotas need to be reached. This can be very enticing.  It sometimes starts at 80% of the total owed, but you don’t have $8K either.

So that gets rejected and over the ensing months the process continues–60%, 50% and if there is no plan to sue you, get a judgment and garnish you, then they may even come down to 20%.  Now that is a lot more enticing.  What if you can get $2K and get rid of $10,000 worth of debt?  Wouldn’t that be great?  It is a huge savings, the creditor is off your back and you won’t have to deal with this thorn in your foot any more.  So you sell something, borrow from a relative, take out a loan from your IRA or 401 (k) or make a loan against the equity of your house or title of your car.  You work diligently to somehow come up with the money and pay the $2K to the creditor.  So it’s all good, right?

Actually, wrong.  Besides the errors in doing any of the aforesaid ways to get the money (which are dealt with in other Liptak Law blogs) you still defaulted on a legal contract.  Even though the company accepts the $2K, the contract still says you owed a total of $10K.  What they do behind the scenes, more and more often, is sell the balance to a third party for pennies on the dollar.  The new collector waits for a while (could be years), gives the account some new numbers, re-dates it and reports it to the credit rating agencies.  After a suitable amount of time goes by you are approached by the new collector who demands the $8K.  After your finally realize that this was related to the debt you settled, you raise the settlement point.  Well, unfortunately, you still legally owe the $8K and the new collector will start the collection negotiation, settlement or suit process all over again–and you do not have a leg to stand on. In fact, adding more contractual collection costs, interest, late fees and penalties (and depending on how much time went by) you could actually owe much more than the original $10K that was claimed as owed which you thought you settled. (Bankruptcy lawyers call this zombie debt).

But let’s suppose this horrible outcome does not happen to you.  Thank the lord.  However, what will happen by law is that you originally paid only $2K for $10K that you contractually owed.  In other words, the “gracious” creditor forgave you $8K worth of debt.  What they did not tell you (as often occurs when you hire a debt settlement company too) is that the following year you will receive a debt forgiveness 1099 from the creditor, which of course is reported to the IRS.   What does that mean?  It means you have $8,000 in additional income and have to pay taxes on it.  Well, being in an economic hard place has just gotten worse as an unexpected bill to the IRS means additional taxes–money you likely do not have. This is a frightening circumstance for many people.  You may be able to get out of this if you are insolvent per IRS form 982.  But you certainly are in an uneasy spot.

Debt settlement is not what it may be marketed to be.  See an attorney before you take this step because the initial cost (for the legal fee) could offset the real costs to you down the road.

Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa

Bankruptcy clients are usually very worried about losing their car(s) when filing.  The car is essential for work, family and various mobility needs.  Debtors fear the bank is going to take back the vehicle which will make their lives even worse, if not financially crippled (e.g. no car, no job).

Sometimes the client has read the loan contract.  Standard boilerplate agreements with banks now even contain a clause that says that filing bankruptcy is a default under the contract and all of the money is then due!  As a result, the hesitancy to use bankruptcy and the fear this misunderstanding of the law generates are huge.

My first question to these people is, how much equity do you have in the vehicle?  Usually clients owe more then the car is worth, which means the loan is underwater and a lender taking back the vehicle by repossession or surrender will lose money.  Some lenders do not seem to want to minimize the loss but most are more conservative if the debtor has been paying, so are not in a hurry to take back the car.  But even if there is a perverse desire by the creditor to lose money or is substantial equity in the vehicle there is still a factor that favors the debtor.

Are you current in your payments to the bank?  Clients who have been worried about the vehicle usually say yes, they have been paying religiously (or often it is an automatic withdrawal).  Well, that means in bankruptcy law, for states like Iowa, that a debtor can ride through the bankruptcy, a phrase bankruptcy attorneys like to use.  This is not true for all states but it certainly is true for Iowa–regardless of what the loan agreement or the collecting agent says about bankruptcy as a default (called an ipso facto clause).

The reason for this is that the Iowa consumer law holds that the only way a car can be repossessed under the contract is if one is in arrears (i.e. behind under the contract terms).**   If one is current and continues to pay during the bankruptcy and into the future after the bankruptcy is closed then the lender may not repossess the vehicle because the law says there is no default.  The trick is to keep current.  Lenders do stopsending monthly statement so there is no reminder, which had been the crutch for many people. Also, one must not only keep on top of paying on time but should also keep very careful records as lenders are notorious for botching up books–sometimes intentionally.

In the situation in which there were automatic monthly withdrawals one must be very cautious because these will immediately stop after the lender receives notice of the bankruptcy filing.  Besides your bankruptcy lawyer telling you this is going to occur you will not get reminders that the withdrawal has stopped (or that you will no longer receive a statement) –until of course the bank calls to say that you are in arrears and they want to repossess!)  Saying “I forgot” does not cure the late payment–which does violate the contract. The client needs to keep on her toes until the loan is paid in full.

Another trick the lending bank proposes is called a reaffirmation requirement (actually, just a request) to the debtor during the bankruptcy.  This is a newly executed contract under bankruptcy law that removes the agreement from the protection of bankruptcy.  Many creditors insist that clients must sign these if they want to keep their vehicle.  In some unfortunate states the courts have held that this is what the bankruptcy law means.  That is not the case in Iowa.  Reaffirmations do not have to be signed to keep the vehicle if the debtor remains current on the payments.  As long as current there is no violation of the contract and a repossession may not take place. (Although some creditors, especially credit unions, still repossess the vehicle. The situation requires state court intervention so the client can assert her rights.  Too many times though clients concede rather than facing another court hearing).

What happens when one does sign the reaffirmation agreement in Iowa then after the bankruptcy can no longer stay current?   As a result, there is a default, repossession and a deficiency on what is owed (i.e the car is worth less than the outstanding loan balance plus costs). The problem is that bankruptcy protection does not cover the deficiency because of the new contract. The debtor will now owe it.  On the other hand, if no reaffirmation was signed, a subsequent default and deficiency IS covered by the bankruptcy retroactively.  The debt has already been liquidated and not owed.

So baby, you can drive your car–ride through the bankruptcy and beyond in Iowa–as long as you stay current.

**The car needs to be insured also.

Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa