Category Archives: Bankruptcy

financial insolvency and bankruptcy laws

Counting the Cost of Student Loans

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Unlike borrowing for housing, transportation, and cash needs, the benefit of a student loan is intangible. Although it may assist in strengthening income over time, that gradual strengthening of income is contingent upon many factors such as type of degree, finishing the degree, health, aptitude for degree specific work, ability to market oneself at a job interview, and local market demand for that skill set.  Large debt for a house or a car gives an immediate tangible result, but  large debt for college does not give one a place to sleep or means to get to work. In that sense, its value cannot be measured in the immediate present.

Normally when a consumer makes mistakes and struggles with too much debt, he can use bankruptcy to adjust his lifestyle and debt. This is not so with student loans, unless a bankruptcy “adversary complaint” is used, which may be uncertain as to result. Thus this consumer debt does not allow for mistakes!

In the worst of nightmares, the student signs on for large private loans, while attending “for profit” schools, if he does not graduate money-dice.jpgand does not advance economically due to education/skills acquired in college, this is bad news.  Without the hoped for benefits of job advancement,  the financed education can assist in creating an onerous burden of debt perhaps too heavy to carry.  Credit report damage and economic pressures can lead to lifelong financial disorientation. Obviously, one is now hampered in other investments such as buying a home, starting a business, making a career change, having children, or marriage to a spouse who chooses to stay at home with the kids.

Regardless of the fact that education is always enriching and worthwhile, the student today is wise to “count the cost”. As a rule of thumb the prospective student loan borrower must ask: “will I make enough in the 10 years after graduation to amortize (and pay off completely in level payments) the entire student loan debt at 7% interest?

To “break it on down”, $50,000 of student loan debt would pay off at $580.54 per month, twice that amount will pay off at twice that amount, 1/2 of that amount will be paid off at 1/2 that amount.  See the chart below.  The big catch is, whatever that amount is, it must be paid every month (on time) for 120 months, no exceptions.  Of course this long term commitment does not take into account job loss or underemployment, divorce, sickness of children or spouse, or one’s own health issues.

And what will it take each month to pay off that $50,000 student loan?  The math says $580.54 per month AFTER that tax man is paid. That means the aftertax dollar must be “bulked up” by 1/3, or $193.51, to $774.06 to be earned each month, so the monies can be taxed by $193.51 and the student lender can be paid $580.54.  And this plan must be steadily carried out each month, on time, for 10 years.

Loan Amount Payment Income needed/month (before taxes) Income needed/year

(before taxes)

25,000 $290.27/mo.

x 10 years

$387.03/mo.

x 10 years

$4,644.36
$50,000 $580.54/mo.

x 10 years

$774.06/mo.

x 10 years

$9,288.72
$100,000 $1,161.08/mo.

x 10 years

$1,548.12/mo.

x 10 years

$18,577.44

So one must “count the cost”.  If not, student loans are a serious dilemma, and caution is advised.

When it comes to timely payment on any financial arrangement, the ability to pay is critical.  In coming months, I will be commenting on this thorny issue of student loans and the cost of college, in the hope of shedding some light on student loan pitfalls.  Of course, I am in the business of providing practical solutions in financial matters, and I welcome your questions as we explore this topic in coming updates.

Should Lawyers Be Polite with Opposing Counsel?

 Should Lawyers be Polite with Opposing Counsel and Parties?

Of course, the answer to this question is obvious. We should all be polite with all the folks we meet, in every circumstance. Nevertheless, human nature being what it is, we sometimes have lapses in our sense of decorum.

As a lawyer it is highly advantageous to have an appropriate sense of civility. Not only does it benefit the lawyer by polishing his professional reputation, and by easing the transaction, it’s also of great benefit to the lawyer’s client.

When everyone is more relaxed in their approach it eases the exchange of opinions and points of view. As officers of the law, attorneys should strive to be solution generators. Unfortunately, we’ve all heard the jokes involving attorneys creating problems instead of helping to solve them. Lawyers should avoid making the process more tedious, expensive, and emotional, if at all possible. Simple courtesy goes a long way in making this happen.

I recently had an exchange with an opposing party who was not represented by counsel. When we went before the judge in the trial he was somewhat disorganized in his presentation. Nevertheless, I encouraged him to take his time and present all the facts as best he understood them.  I could tell the judge appreciated this relaxed approach, and the opposing party felt that he had “been heard”. We both left the hearing with no bitter feelings.

Within a few days, a written decision came from the judge, and it was partially in favor of each party. Since there were details to be worked out beyond what the judge had decided, I called the opposing party. There was no return phone call after my first voicemail. Calling him a second time, I fully intended to leave a voicemail that I would be filing a motion to compel enforcement of the judge’s order, should I not get a return call.

As an attorney with decades of experience, I know how costly it is to force “agreement”, when a more pleasant demeanor could, perhaps, create a less expensive solution more pleasing to all parties. I had no desire to type up and file motions with the court, drive out to the courthouse, have a hearing, irritate the judge with our lack of cooperation, and create hostility and antipathy with the opposing party. Nevertheless, if my second phone call was not returned, I felt I had no choice.

Much to my delight, my adversary answered the phone when I placed that second call. We both agreed that the hearing had been without contention, and he indicated to me that I had been “a perfect gentleman” in allowing his side of the story to be heard, and helping him with the presentation of his exhibits before the court.

Since there were certain details that remained to be worked out, and he had to do some fact-finding before we could do so, I encouraged him to take 7-10 days, as he requested, after which we would talk again. As the judge has already ordered the sale of the asset (our main goal), and the adversary simply wanted to have it independently appraised, there was no harm in honoring his request.  He was most pleased, and we agreed that we will talk again within 10 days.

Since this matter is one that has dragged on for a number of years for my client, it was a pleasant surprise to me that we seem headed toward resolution, only a few short months after she retained my services. I’m looking forward to letting my client know we may be able to keep her bill down, achieving a more efficient result through gentlemanly conduct.

Certainly not every lawyer thinks this way.  I fully understand the various twists and turns of legal thinking and conduct.  However, the legal system should be a way to resolve disputes, not aggravate them. It’s a way to teach people respect for the law and each other, and teach good manners as a way of efficiently advancing  polite society.

Of course, this doesn’t always happen–sometimes matters can become contentious between two opposing parties. But it’s always a pleasant surprise when people can work out their differences in a mutually satisfactory (and pleasant) way.

 

When is Chapter 7 Bankruptcy the Best Option?

When  is Chapter 7 Bankruptcy the Best Option?

When the borrower doesn’t have assets that a trustee can liquidate, a Chapter 7 bankruptcy can be quite useful.

Of course, there’s no doubt that a Chapter 7 bankruptcy is a less expensive way to resolve large amounts of debt, and this is its primary advantage over Chapter 13 bankruptcy or debt settlement. However, Chapter 7 bankruptcy is not always an available option. For instance, if a debtor’s income exceeds federal government guidelines then they will not qualify for a Chapter 7.

Most of us know that too much income or equity in a home makes it difficult to file Chapter 7 bankruptcy. However, there are other qualifiers that are significant, although their importance is not usually readily apparent. Monies in a trust, the ability to liquidate life insurance policies, a personal injury lawsuit, the expectation that the inheritance will soon be paid, and other situations can create problems in a Chapter 7 bankruptcy.  This can be quite a disappointment to the filing individual, who had believed or been told that nothing would be taken from him in the Chapter 7 proceeding.

Since most creditors are apprehensive about bankruptcy, often the mention of the “B word” allows for a productive settlement discussion, so that everyone can get “half a loaf” rather than going away empty-handed. As an attorney with 35 years of experience, I think bankruptcy is, as a last resort, an excellent settlement tool. Most creditors understand that it is much more productive to dialogue towards a mutual solution (i.e., debt settlement), rather than force the borrower into bankruptcy.

I find bankruptcy to be a highly effective backstop, which encourages creditors and borrowers to come to the table and work out a mutually satisfactory solution.  Most of us just don’t want bankruptcy, whether we are borrowers or lenders.

Since both the creditor and the debtor have something to lose, they are mindful that perhaps it is best to compromise. Unfortunately, in many situations where lawyers are involved, the costs of a settlement are needlessly driven to exorbitant heights, with the lawyers charging far more in legal fees than is necessary without considering the practical alternatives. In our office we attempt to steer away from solutions that are not cost-effective.

My primary goal is to reduce agitation between parties, limit cost, and be able to move on to more productive matters more quickly.  Given the bad public reputation of the legal profession, I want to give my clients practical solutions, without too much aggravation.  Quite frankly, it is my opinion that it should be the goal of the law to come up with effective solutions that allow all parties involved to move on. Since law is primarily a settlement device, and not “trial by combat”, we want to make sure everyone receives a fair share of a solution’s benefits. Using this approach, I have time and time again learned that the opposing counsel and his client can be used as allies, in assisting me to keep my client’s fees down.

Chapter 7 bankruptcy is an essential tool to help resolve debt issues and restore a client’s peace of mind. For that reason, I’m glad we have a solution in the law that allows people to eliminate debt, and move on to matters that are more productive.

Chapter 13 vs Debt Settlement: Which is More Cost-Effective?

 Chapter 13 versus Debt Settlement: Which is More

Cost-effective?

Often  clients are forced with a choice between Chapter 13 bankruptcy or debt settlement, because they cannot qualify for a Chapter 7 bankruptcy. This can happen for several reasons: possession of assets which prohibit them from filing a Chapter 7, or income that is too high to qualify for a Chapter 7 bankruptcy.

Of course, if you have cash assets, creditors prefer debt settlement, as “cash is king”.  Often this method is best in the eyes of both creditors and debtors.

In counseling clients about this dilemma, I like to break it down to one simple question: which is more expensive?  In answering this question we can come up with a simplified understanding of comparative benefit, and decide which approach should be taken.

To begin, it’s useful to understand that debt is always settled as a percentage of a face amount. Whether you owe $5,000 or $15,000, to the creditor it’s all the same: “What percentage can I collect?”  Creditors generally have a huge number of accounts, and their main goal is to see how much of the money owed they will be able to recover.

Generally, a 40% to 60% settlement is quite a good deal for the debtor. A settlement at 80% to 90% of the original debt is often more than the borrower feels he can afford. Obviously a 80% to 90% settlement is optimal for the creditor, preferably paid immediately.

For ease of the discussion, I’ll discuss this in terms of percentages, not dollars. In other words, when we talk about debt settlement versus Chapter 13 bankruptcy the primary question I wish to address for my client is: “what percentage of the debt must be repaid?”

In a Chapter 13 bankruptcy, where the borrower has an annual household income of $80,000-$90,000, it is most likely that he will have to pay back 100% of the debt. Because there are trustee fees and legal fees attached to the proceeding, it is not uncommon that he would pay 115% of the debt. The advantage to filing a Chapter 13 is that you’re given a period of five years to pay off your debts, under a payment plan.

On the other hand, debt settlement may confer a clear advantage, especially if it can be accomplished at 2/3 of the debt (including attorney fees). However, in debt settlement taxes must be considered. Assuming the borrower owes another 13% of the debt in taxes (which will have to be paid within the next year) this means the debt settlement would be the least expensive option. Specifically, that debt settlement would cost the borrower 80% of the original amount owed, after consideration of taxes in calculating the total cost.

In comparing Chapter 13, (which has a total cost of 115%), versus the total cost of debt settlement at 80%, it is clear there is a difference. Specifically, that difference is 35%. In other words, the consumer can often save more than a third of the debt amount, simply by doing debt settlement instead of Chapter 13 bankruptcy.

So looking at the cost-benefit analysis makes it very clear that debt settlement can often be less expensive for the borrower. However, debt settlement is not a good alternative  when the borrower doesn’t have the cash to settle in full at the time the deal is struck. For that reason, Chapter 13 bankruptcy can be an excellent way to arrange over many months the settlement of debt, allowing five years of payments to liquidate the entire debt interest-free, and without the danger of collection lawsuits.

Which one is right for you?  The best advice I can give to you: give us a call at (317) 266-8888. We are happy to answer your questions, and give you sound advice on what can become a very complex matter if not analyzed thoroughly.

Bank Workouts

While negotiating debt workouts with banks in the last few months, I’ve noticed a number of clients coming into my office with a significant financial problem: the bank has a lien on all of their assets, and they don’t have the cash flow to ensure that everyone gets paid, including the landlord, the bank, and other general creditors.

In these situations an old saying by Donald Trump seems appropriate: “When you owe the bank 1 million bucks and can’t pay it, you have a problem. When you own the bank 10 million bucks and you can’t pay it, the bank has a problem.” In other words, when cash flow is tight, the entrepreneur needs everyone involved to work with him.

Of course, if everyone can work together, the hard-working entrepreneur can pull his way out of a slump. However, sometimes in such a situation despair can set in, and the entrepreneur becomes filled with apathy, losing his drive. The obvious solution is to give the debtor a little breathing room, so that he can get back to focusing on what’s most important to resolving their financial issues: cash flow.

In a number of recent situations, my first approach was to sit with the bank, once learning they had collateral and all the assets of the business. This may seem like a precarious or risky position, but actually it is to the small businessman’s benefit. When the bank has the first claim on all the assets, there is nothing to fear from general creditors, who have no claim on assets due to the fact the debt is unsecured. As you can see, keeping the bank happy is critical.

But just because the bank is happy doesn’t mean the debtor’s problems are over. The debtor must continue to work hard, and work steadily. Creditors need to be alerted to the fact that bankruptcy is possible, if workout discussions are not productive for all parties. The debtor’s attorney will need to handle all lawsuits, and everyone involved needs to be given enough information to understand exactly what’s going on.

Are you worried about these kinds of issues? Call me on my small-business hotline, to discuss these matters, or schedule a consultation in the office by calling (317) 266-8888. We will try our best to get to the bottom of your issues, and help you to solve them quickly with minimal aggravation.

Credit Reports (Part 1)

Years ago, it occurred to me that we all need to know something about credit, and how credit reports are made.  I put together a CD for clients explaining credit reports.  Now with advances in the web, I can get it to you without a CD! I hope this 12 part series is of use to you. Immediately thereafter, I will publish my 11 part series on credit report correction.

Here is the first audio clip.  Hope you can find the time to listen to the whole series.  There is a lot of good information in these old CDs from several years ago, still relevant today.

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Planning the use of money (Part 6)

By now, if you have reviewed the five videos in previous blog posts, you should have a fair idea of where your money is going, and where it needs to go. Now comes the hard part: actually making the necessary decisions.  Some expenses will definitely have to be modified.

Remember: every dollar saved is a dollar earned.  Indeed, the dollar saved is an “after tax” dollar, all of which you get to keep.  The dollar earned is a “before tax” dollar, and you will only get to keep 70 cents of it, at most.  So we can see that keeping expenses down definitely helps in money terms.

In personal terms, the stress that comes from unpaid bills is removed.  Family life is easier, and there is time for exercise and good diet.  Medical bills are less in the long term.  Although this is not true in every case, a simple budget can often help to organize and reduce stress in many other areas of life.

So make your life easier with a budget!  If you want the sample file I used to create these videos in MS Excel, just email me at
mike@mikenorrislaw.com
and I will be happy to send it with a reply.

I suggest you download the video file below, as viewing is easier due to a bigger screen size.  Or you can just click on the icon and the video will play immediately.  As always, please call if you have questions.

 

Download This Episode

PlayPlay

Can inaccurate credit reports be corrected?

Yes, they can.  The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act (FACTA), allows the consumer to question accuracy of reports, and furnish proofs to be considered in making corrections.  Several years ago, I taught a seminar just after a change in the law.  You can examine those seminar materials here:  Fair Credit Reporting and mortgage reporting, bky issues .  If you want to read the law yourself, you can access it here:  FCRA as amended by FACTA

In essence, those rules provide that you have the right to one free report each year, and you can apply for that report from each of the three credit reporting agencies (CRAs): Experian, Equifax, and TransUnion.  If you would like the form to use, you will find it here:  Annual Credit Report Request Form .  If you are turned down for a loan, you can get the credit report which was used to evaluate your credit, and it is also at no cost.

In order to dispute inaccurate (including incomplete) credit entries, you must contact the CRA with information showing the inaccuracy, and they have 30 days to investigate.  Hopefully, they will make the correction with no further effort on your part.

Review my attached writing to consider all the myriad ways a credit report can get inaccurate.  Frankly, it is amazing we have accurate reports.  A number of years ago, it was estimated that 40% of the reports have errors which will lead to denial of credit, and 80% of reports have errors in general.  With that in mind, looking at your report once a year is a good idea.

One common area of inaccuracy is the listing of debt discharged in  bankruptcy.  Often, the report is not updated after bankruptcy.  Even though debt is washed out in bankruptcy, the credit report is silent as to that issue, giving the impression that the debt is still owed!  Thus, it is always wise to review the credit report 6 months after a bankruptcy discharge.  If you continue to pay on debt after a bankruptcy, the creditor must continue to report your payments after bankruptcy, in order for the report to be accurate.

Are collectors obliged to be polite?

From time to time, we get questions about the Fair Debt Collection Practices Act, and so I have posted it to this blog entry.  In essence, this federal law protects the consumer from harsh and abusive collection practices, allowing him/her to discuss debt issues without being threatened, harassed or humiliated.

This brief outline is hoped to be, for most consumers, a sufficient summary of the most relevant points.  Please bear in mind that I have not covered all of the law in its context; I am merely suggesting answers and statutory references for the questions I am most frequently asked in my practice.  For your reference, I have placed a highlighted copy of the statute here: Fair Debt Collection Practices Act

The first thing to remember is that only the debt collector is regulated.  The full time employee of a creditor does not have to pay attention to this set of restrictions.  See Section 803(6).

Collectors must call during normal hours, 8am to 9pm.  In addition, they may not call a consumer when they know he is represented by an attorney, or at the consumer’s place of business when such calls are prohibited.  See Section 805(a).

Further, all communication must cease if the consumer writes the collector, unless the communication is to notify the consumer of an impending lawsuit.  See Section 805(c).  These measures allow common sense structure to the phone contact with the consumer.  This is, in my opinion, good for everyone.

Certain obviously deceptive practices are forbidden, such as threats of violence, profanity, repeated calls to harass, and the failure to identify oneself.  See Section 806.

In addition, false and misleading representations are banned. Among those commonly  used statements are: exaggerating the amount or status of a debt, misrepresenting oneself as an attorney, threatening arrest, threatening a false credit report, or any other “deceptive means of collection”.  All of these misstatements are violations of the law.  See Section 807.

The collector cannot collect more than is owed, per Section 808.  The same section also puts some restrictions on postdated checks.  Read that section to become more acquainted with your rights.

Damages under the statute at Section 813 are realistically limited to $1,000 per occurrence plus attorney fees.  And the collector who can prove an innocent mistake will be absolved of fault, with no damages awarded to the consumer.  Nevertheless, this federal statute places significant limits on the abusive collector, who now must “mind his manners”.

Does this automatically curb all collection abuses?  Of course not.  But a polite reminder that you are aware of the statute will often lead to a more civil conversation.  A more polite conversation is often a more productive one.  Ultimately, this is often the best way to save time and money for all parties concerned.

Does Debt Settlement really work?

Lately, I have done a fair amount of lecturing to CPAs and others about debt settlement, illustrating the techniques used for handling debt with this bankruptcy alternative.  For a description of the relative advantages in comparison t0 Chapter 13 bankruptcy, I have composed a summary:Chapter 13 compared to Debt Settlement.

Of course, some will worry about tax issues in debt settlement, as well they should.  The good news is that an insolvent debtor can escape taxation on debt forgiveness, using the IRS insolvency rules.  Want to calculate if you qualify?  Use the Insolvency Worksheet.

If you are a professional who wants the best information, I would suggest IRS Pub 4681 , which details the rules in depth.  Also, the IRS website on this topic is useful:  Debt Forgiveness IRS websites .  In any event, those loaded up with consumer debt should consider debt settlement as a useful alternative to Chapter 13 bankruptcy, or other debt workout alternatives.

A radio show…….why bother?

Most Saturday mornings, I start the day with a warm cup of coffee while I read the newspaper, or maybe several different newspapers, if I haven’t yet caught up with the news of the week.  After immersing myself in reading for a while, I take some time to peruse the articles that I’ve arranged on the kitchen table in front of me.

As the “theme of the week” becomes clearer, I’m typically lost in thought while I organize the main “themes” and my presentation.  And before you know it I’ve got the topic for my weekly radio show.

Once done, I critique it. Was it compelling?  Lucid?  Relevant?

Why bother?  Just for the thrill of thinking out solutions to everyday problems in a world where people need someone to trust.  In the practice of law, communication is everything.  Let us start with building trust, based on reliable and solid advice.