Category Archives: Debt Settlement

settlement of debt, including understanding the collection process

Federal help for ITT students: discharge of student loans

In the light of the ITT technical Institute bankruptcy, many students are left with high student loan debt and no degree.  But there may be some relief available for those who have not yet graduated. It is the purpose of this post to explore those options that the reader might benefit, or pass the information along.

Perhaps a little explanation of the student dilemma in this typical “trade school” is in order. When a school such as ITT closes, the students can’t get the associates, bachelors, and master degrees hoped for;  thus, they are deprived of the “benefit of the bargain”.

For the student, the denial is more than just denial of ego satisfaction.  He has pinned his hopes  on the earning power that degree represents for him.  He anticipates that all will benefit from his efforts.  It will be wonderful for his family.

The school has a different idea:  it is called a profit model.  The measuring stick is the bottom line.  Product quality, marketing, and management are all expenses.  The less expenses the better.  This is what benefits the bottom line.  In this line of thinking, there is no value in educating the customer to become a well informed shopper. The prospective student doesn’t need to know about education cost & education value; such a concern would just interrupt the sales process.

But back to the end result:the school closes.  Now student loan debt is owed on a college degree that won’t be obtained at this institution, and may never be obtained at all.  Without a change of circumstance, the economic power that college degree represents will never materialize.  Some students lose hope, feeling themselves further behind, with more debt and less earning power than planned.

The “Closed school Discharge” is a mechanism put in place by the federal government, to allow the student who cannot complete his degree to seek relief from the student loan burden which he must carry. The information on that federal program can be found at https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/closed-school.  The form which needs to be filled out to apply for administrative discharge can be found at:

http://www.ifap.ed.gov/dpcletters/attachments/GEN1418AttachLoanDischargeAppSchoolClosure.pdf  .

Of course, use of government websites is not always as simple as it looks.  There are certain “gotchas” in the administrative procedure, which do not allow the student who transfers his credits to another school (or has already received his degree) to seek forgiveness of his student loans.

As is true with many government programs, the “simple” process has become quite complex. The student who wants to transfer his credits to a new institution often finds most (if not all) of his credits will not transfer.  This is because of lack of accreditation for the trade school from which he is transferring.

ITT Educational Services has increasingly been the subject of state and federal investigations in recent years.  These actions have resulted often in sanctions against ITT and penalties.  Nevertheless,   the US Department of Education does not recognize the validity of their own investigations, when the student who has his diploma petitions for student loan relief .

In  essence, the Department of Education wants each student to prove that he was defrauded, that “what he got” was too expensive for the results obtained.  In short, the student must prove the price of the education far outweighed its real world earning potential.

This burden falls on the student, even though both federal and many state governments are currently investigating inadequate instruction in rogue schools taking federal student loan moies.  Many of these investigations show oversight of federal student loan lending has been lacking.  Most often, significant findings of neglect and abuse on the part of trade schools were left unwatched but then “discovered” by government agencies.

So it can be tough getting an administrative discharge.  If denied, an appeal can always be taken directly to the Department of Education.  This is where the counsel of an attorney experienced in this area can be quite useful.

If the Department of Education administrative discharge appeal is not effective, every student has access to the federal courts. The student may seek to address the student loan debt directly with the Department of Education in an “adversary complaint” in the bankruptcy courts.

Due to the fact that ITT and other schools have recently lost their entitlement to federal funds from student loans, the courts will be burdened more and more with these issues, as will the Department of Education in considering administrative discharges. At this point in time, it seems that many of the “trade schools” in all probability will be closing in the coming months.

The law on student loans is evolving, as new facts come to light about trade schools, quality of instruction, and quality of job placements.  The ITT bankruptcy does not bode well for the student who did not get the benefit of his bargain, either in quality of instruction or job placement: he will have no recourse against ITT. His only recourse will be against the federal Department of Education, a powerful adversary.

Nevertheless, it is the authors opinion that any student who has not been able to complete his degree due to school closure should apply for the administrative discharge.  If there are issues and complexities, as always seem to arise, competent legal counsel should be used to sort out the mess.

The hope of the next generation that an education will bring them to a satisfying adulthood hangs in the balance. We should not let these young folks down, and saddle them with debt which cannot be paid off.

Financing Issues and Workouts

One of the most common causes for failure in a small business is a lack of capitalization. Businesses often start up with too little cash. Over time, this lack of money becomes amplified, and ultimately those businesses fail. The reason why they fail is not that they don’t have a good product, lack integrity in the marketplace, or fail to perform. They fail simply because they have run out of cash, in the middle of a normal learning curve in servicing the marketplace. Of course, loans can be helpful, but they do not replace a good business model, which allows for mistakes along the way and sufficient time to perfect your business approach.

Even without the luxury of borrowed funds, entrepreneurs feel much stress once cash flow problems arise. It’s hard to pay loans, salaries, utilities, and all the other bills that become due. The pressure increases. Whether there are loans or not, the bills must be paid, and relatives, credit card lenders, and banks are insistent. Frequently, the issue becomes the “burn rate”. In other words, “how long can a business hold on?”

Often the bank or lender have no idea what their financial problems are: sound projections and presentation of a good business plan can do much to assist with the renegotiation of debt. In any event, when default on the loan occurs everyone loses. Neithe the bank nor the borrower obtain anything from insolvency proceedings.

For this reason, our office seeks to help entrepreneurs with planning procedures, before cash flow problems arise. Nevertheless, when these crises do arise, sound counsel is necessary to navigate the dangerous waters of default and reassure the bank that the storm can be weathered.

Sometimes assets need to be sold, lines of business need to be assessed for profitability, and real estate mortgages or personal guarantees need to be added to strengthen security of outstanding loans. Nevertheless, if the entrepreneur believes his value proposition is sound, he is wise to “bet the farm” on his expertise, and continue to plow ahead. In these cases, reassuring the bank, returning liquidity to the business model, and moving toward profitability is an immediate necessity many lawyers lack this kind of business experience, and cannot be of help in this area of business. When faced with the task, most human beings like easy work. Negotiation of loans can be hard work.

I still remember the entrepreneur who came to me to explain his business was not profitable, and he didn’t need the large amount of warehouse space that was under lease. In addition, he was in danger of defaulting on the lease, and having the goods warehoused subject to a landlord’s lien. While exploring his options, he realized as we talked that a competitor (who was a dear friend) might be willing to give him storage space, and even assist him with expanded lines of credit. Since moving his location he is much happier, and profitable too!

In another case the individual owned the real estate from which his business operated. By selling the real estate he was able to become current with suppliers, giving him enough time to sell additional customers, enhancing his profitability. Further, the cash received from selling the real estate allowed him to progress forward without financial worries.

Of course, there are a myriad number of options that a good business lawyer helps his clients explore every day. As a small business owner myself, I believe that the key is flexibility. When we listen to our clients, their needs can best be served by applying our experience to assist them in creating satisfactory legal results.

If you are in need of this kind of help, please do not hesitate to give us a call for a candid opinion as to whether we can help in your situation. We would be more than pleased to be of assistance to you. Call us today at (317) 266-8888. As an alternative, you can email me personally at any time: mike@mikenorrislaw.com.

The Impact of Credit Report Collection Accounts

When applying for a mortgage, everyone knows that your credit report rating is of great importance. If you can lower the interest rate the lender charges you, you can save thousands of dollars each year on hundreds of thousands of dollars borrowed for your home purchase. In addition, as most of us know, the credit report will show your payment history on cars (and other installment loans), and it will also show your credit history on credit cards (and other revolving accounts).

Many do not know that the credit report also picks up the docket from local courts, and reports any judgments that have been filed against you. In addition, one more matter is reported by the Bureau, which is of great significance to those who have borrowed money: their accounts which are in collection.

“In collection” simply means a collection agent is attempting to collect on the alleged debt. This does not mean the debt is owed, or that a judgment has been entered by a court allowing for garnishment of wages. It simply means that the collector is trying to collect money on a debt he says is owed.

You may be “in collections” and not even know it. Nevertheless the rest of the world knows, and the obvious inference is that you’re unwilling or unable to pay your debts. This little known secret of the credit reporting agencies can have great significance when you’re attempting to secure an apartment or job, get a loan, or even get utilities turned on.

Surprisingly, statistics show that 35% of Americans currently have unpaid bills reported to collection agencies, according to an Urban Institute study conducted in the last few months. And it’s not just hospital bills, auto loans, and student loans. Even past due gym membership fees or unpaid cell phone contracts can end up with a collection agency.

And the collectors are always ready. The Federal Reserve Philadelphia bank branch estimate that in 2013 the collections industry employed 140,000 workers, to recover $50 billion of debt that year. Oddly enough, delinquent debt is overwhelmingly concentrated in southern and western states. Texas cities have a large share of their populations reported to collection agencies: Dallas (43%), El Paso (44%), Houston (44%), McAllen (52%), and San Antonio (45%). And the blight is not limited just to Texas. Almost half of Las Vegas residents have debt in collections, and other southern cities a large number of their people facing debt collectors: Orlando, Jacksonville, and Memphis, among others. But some cities fare better, with some demographic populations have low collection rates, just around 20% for Minneapolis, Boston, Honolulu and San Jose (California).

How do these differences come about? Some say this can be blamed on income disparities, and a stagnant economy. US Labor Department statistics show wages have barely kept up with inflation during the five-year recovery starting in 2009, and after-tax income fell for the bottom 20% of earners during that same period.

So what is the morale of the story? The wise consumer will make sure his debts stay out of collection. This practice will reap rich rewards when it comes time to buy a home or car, secure a job or apartment, or secure the lowest loan rates.

Who Pays What and How? Confusion Between Insurers, Medical Providers, and Patients

As all of us know, medical debt is a growing problem in this country. People are living longer, and medical complications arise with age. Insurers have created a complex payment system, and medical providers often worry whether they’ll be paid or not. In the midst of all this, medical costs have skyrocketed, with many consumers unaware of what they’re being charged, or how they can afford to pay the bill. It’s been said that the country is going through a medical crisis; with a rapidly changing environment for care, cost, insurability, and long-term sustainability of our current medical care system.

In this blog post I’m not going to look at the role of medical insurance providers, nor the quality of care provided by our healthcare system. I want to discuss how the medical provider is paid by the patient, when insurance doesn’t apply, and the consumer has no quibble with the quality of services he was provided.

It often happens that consumers are taken by surprise when it comes to medical costs. An unexpected visit to the emergency room or a sudden medical crisis can cause costs to spiral out of control. Assuming insurance doesn’t cover the medical costs, what options does the patient have to negotiate the cost of medical services? Obviously, this situation is aggravated by the fact that many times a patient doesn’t have time to “shop around” in order to find the right price for comparable medical services.

Of course, it is a far more transparent transaction when the insurer isn’t involved. Third parties tend to make the negotiation between the first two parties more complex, and more difficult. When a patient can deal directly with the doctor or hospital, he or she has a greater awareness of what he’s committed to pay, and how best to move the transaction forward.

Aside from cost, a lawyer looks at the transaction as essentially a contractual one. The parties get together and agree on particular services to be provided, and those services have a particular market value. Regardless of what the parties have agreed on in terms of price, the contract is effectively completed by the performance of the services. But what happens when there is no agreement on price? Is the consumer cut off from the option to negotiate, when he didn’t know exactly what he was being charged, and the service was provided without discussion of cost?

This is the essence of the dilemma that patients face. Let’s say, for instance, that a patient receives emergency services (for which he is grateful). After he gets home from the hospital, he wants to pay the “fair market value” of the services, but was never told the cost. When he is confronted with the bill a number of months later, from a number of different providers to whom he has no relationship, what is the appropriate charge which should be paid? Is he bound to all of those providers for monies to be paid as stated in each invoice? What if he gave no consent to the provision of all of those individual services, and never met a number of those individual providers? As every consumer knows, these decisions can be a fairly exhausting set of concerns.

But the law looks at this type of situation in a much more straightforward manner. If there was no agreement on price, price being one of the essential terms of the agreement, there is no enforceable contractual arrangement. In essence, the consumer is free to negotiate with the provider as to the fair market value of the services after they have been provided, due to the fact the provider failed to secure agreement on the contract price. Failing to get the consumers agreement, there is no contract price, and the price is then open to negotiation by the parties.

This brings up the legal theory known as quantum meruit, which is a Latin phrase meaning, “how much has been earned”. Through comparing a particular medical service to other similar services in the marketplace, the consumer can bring a qualified expert opinion in to make the case as to an appropriate price. Obviously, medical providers don’t wish to squabble over the price they’ve stated is due. Nevertheless, the patient has the right to negotiate, and given competent evidence of the fair market value of the service, he has the right to pay what is deserved, not what is claimed.

Of course, all of this can become fairly tangled in the legal transaction, as medical providers do not wish to communicate on these issues, they simply wish to have the bill paid. If the bill they assert is due is not paid, typically they will send it to collectors and the collector will demand payment or put a negative reference on the credit report.

Moving further along, the medical provider may send the bill to an attorney who will seek a judgment, with the consumer totally unaware of the dangers involved until they eventually receive notice of garnishment. Once a judgment is obtained, the medical provider may issue a garnishment of wages, attachment on bank accounts or other property, or a lien on the consumer’s home. Of course, these are fairly harsh remedies, given the fact that there was no agreement on price when the service was performed. This type of process is often a one-sided transaction: “I billed you as I pleased, and now I’m going to take it out of your wages”.

Do you have a medical bill over $20,000 that you suspect is not in fact a “fair price” for the service performed? I’m happy to consult on these matters, and may be able to help you get some relief, if approximately 60 percent of the bill can be paid in cash. Quite often, the amount that’s owed to the medical provider, according to the Social Security reimbursement standards, is approximately half of the bill which the medical provider demands is due. Should you choose to investigate these matters, please do not hesitate to call our office, and ask to discuss these matters with me personally. Give us a call at (317) 266-8888, or email me directly at mike@mikenorrislaw.com.

Offers In Compromise To The Indiana Department of Revenue

In a procedure similar to the federal offer in compromise, the state of Indiana allows a taxpayer to be considered for a lesser payment, provided he makes full financial disclosure and is current on tax filings.  According to the rules of the Department of Revenue, an offer in compromise can settle a debt which is owed for a lesser amount in two ways:  1) with a “one time” lump sum payment, or 2) with a short payment plan starting with an immediate down payment.  If a payment plan is proposed, these offers are considered most favorably if they are for 24 months or less.

Of course, many taxpayers want to consider the offer in compromise after a levy of wages or a bank account freeze.  Most often, this is an attempt at settlement that is “too little too late”.  At this point, bankruptcy should be considered to stop the collection process.  Bankruptcy is normally quite effective here, and I have used it personally many times as a negotiation tool, or as a remedy of last resort.

Nevertheless, if income is fully disclosed (including past tax returns), and income and expenses are documented in detail, an offer in compromise will be considered.  At the time the offer is submitted, the  specific down payment should be forwarded, along with the taxpayer’s proposal for a monthly payment amount. Note that the down payment must be received with that offer before it can be considered.

The Department of Revenue reserves the right to review these cases periodically even after they have been accepted and payments commenced.  They may require updates on information previously submitted. However, if all future returns are filed on time and all amounts due are timely paid, the chances are good that a taxpayer who has had his offer in compromise accepted will be able to successfully complete the program.

Having reviewed a number of these situations with the Department of Revenue, it is my opinion that offers in compromise are difficult to achieve, through the Department of Revenue Taxpayer Advocate Office.  Nonetheless, working with the revenue officer at the government center in downtown Indianapolis frequently will lead to a settlement that is effective for all parties.

Questions?  Please don’t hesitate to call and talk to me personally, at (317) 266-8888.

Retail Merchant Employees Can Be Responsible To Collect Taxes!

Not everyone in a retail business realizes it, but whatever goods are sold, taxes must be collected for the state by the business.  This applies to both sales and payroll taxes. Of course, some in the middle of a cash flow pinch will choose to ignore this responsibility, or pay the taxes “when they get around to it”. What happens in these cases?

Many don’t realize that the individual who runs the corporation, and those who cut the payroll checks for the corporation, can also be liable for payment of the taxes. The theory is that the taxes are held “in trust”, which means that the individual working for the corporation, and the corporation itself, are holding funds for the state.

It’s similar to how the bank holds funds for an individual in an ordinary checking account.  In this way of looking at it, the “bank account” which the business holds for the benefit of the state (which is the 7% sales tax and employee state income taxes withheld) cannot be drained of funds. It is the duty of the business, and the chief financial officer, to make sure that “bank account” is maintained for the state, and that those funds are paid over to the state. If those funds are not maintained, it’s considered embezzlement.

This theory can result in significant problems for the retail merchant.  Officers of the corporation who are considered responsible for its money affairs, are often unaware that they can be held personally liable. Of course, if the corporation goes broke, the liability does not go away; responsible officers can and will be pursued by the state for the trust fund tax liabilities, including both sales tax and state payroll tax withholdings.  Even if those officers move on to other employment, they can find that they owe significant liabilities due to their activities as past corporate officers.

All of these unpleasant possibilities can be avoided, if the taxes are paid on time. Nevertheless, where this is not possible, it is appropriate to consider the effects of delinquent tax payment, and how the corporation’s business or the assets of the responsible officers may be affected.

It should be noted that one of the more harsh but frequently neglected provisions of the Indiana code regarding taxes concerns the priority of payment, or how payments are credited against monies owed. When a taxpayer is behind, the partial payment is first applied towards penalties, then to interest, and last to the tax liability. This means that partial payments do not have a strong effect to reduce the original tax liability, until penalties and interest are paid in full.

In addition, the corporation which is struggling but which has not yet gone out of business may find that its registered retail merchant certificate (RRMC) will be revoked. In this case, the Department of Revenue will place signs on the taxpayer’s place of business, informing customers that the corporation can no longer conduct retail sales at that location. If those signs are removed or retail sales are continued, there is a risk of additional fines (or even imprisonment) as these offenses are considered a class a misdemeanor according to Indiana Code 6–2.5–4.

Of course, as long as monthly tax reports are submitted, along with appropriate payments, there will be no problems. But if those reports are not submitted on a timely basis, the state will investigate, and issue a demand notice for payment.  My next blog post will explain the problems that can arise in such a situation.

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.

Debt Settlement Success Stories

Debt settlement can have fairly broad applications, as the examples below indicate. Whether in a divorce proceeding, a business workout, or an individual consumer’s return to solvency, debt settlement can be a very useful tool.

Recently an entrepreneur came to see us–the franchise he had purchased wasn’t making enough money to stay afloat. We negotiated with the franchisor, so that the franchise could be relinquished. In addition we negotiated with the landlord to make sure any claims he had were settled. The most difficult matter was the SBA loan: $220,000.

Fortunately, we were able to negotiate the SBA loan down, working with the bank and obtaining Small Business Administration consent, so that 11% of the debt was tendered in cash, after which the loan was considered paid in full. The entrepreneur is now back running a successful CPA practice, and much happier than he was trapped in a dying franchise operation.

In another case, an entrepreneur came to see us regarding his small business–again, his cash flow had dried up and he was going to be forced to shut down. After doing some cash flow analysis with us, he realized that although he was running three separate businesses, only one was profitable. He arranged to sell off the other two lines of business, and continue operations with the third. However, he had substantial lines of credit which were appropriate for debt settlement. These debt settlements were done on his behalf at approximately 40%.

When he first came to see us, this gentleman was in his mid 70s. He is now in a position to retire, as he preserved some retirement savings. He’s no longer burdened with unprofitable lines of business. As an added benefit, because his outstanding debt was significantly reduced, his credit score actually increased!

If you have these kinds of practical concerns please do not hesitate to call our office so that we can counsel you on the “ins and outs” of debt settlement. If you’re worried about these issues, call our offices now at (317) 266-8888.

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 2)

This is my second post on credit reporting, to explain how it works.  The attached clip explains “how it used to be”, in contrast to the numbers oriented style in vogue for the last 2 decades.  Often we wish:  “Why can’t it be just like it used to be”?  This series will explain how our modern system of credit reporting (and granting loans) started.

In understanding how our system evolved, we have a better understanding of why and how we got to the point where we stand 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.

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.

Why do credit counselors insist on bloated debt payments in consumer budgets?

So often, people come into my office to talk about debt, after talking to a “consumer credit counselor”.  The counselor has recommended a budget to them, lean on basics but heavy on consumer debt payments.  After a few months, the budget collapses under the strain of unrealistic expectations.  Why are these “counselors” so unrealistic about budgets?

This entire industry was studied in a Senate Report in 2005.  The title of that report is: “Profiteering in a non-profit industry: abusive practices in credit counseling”.  The U.S. Senate Homeland Security Committee was up in arms over “the marketing of debt management plans”, and the practices of the industry as a whole were examined.  See the Senate Report:   Credit Counseling, Senate report.

That report reviews that “credit counseling” was first started and funded by credit card companies in the mid-60s to stem losses from customers who did not pay.  The theory was that a “kinder, gentler” collector might increase yields for credit card lenders.  By encouraging the consumer to “tighten his belt” and use the lender’s “counseling service” to collect monies for credit card and debt payments, more money could be collected.

Of course, referrals to any third party source of information, such as attorneys, are actively discouraged, (which I’ve found in my experience).  The lender doesn’t want his collection agent to lose control over the consumer’s cash flow.

The arrangement is quite cozy.  The consumer is charged an extremely modest amount for the “credit counseling” service, say $15 per month.  Of course, the goal is not to raise funds from consumer fees.  The goal is to get as much of the consumer’s income as possible, for debt payments.  Modest changes in interest rate and payment are made with some lenders who use the collection service, other lenders refuse to alter any payment terms but will still pay the “counseling service” for collecting payments for them.  All the while, the consumer is told that this collection agent is “in his corner”.

And this is the key:  As long as the debtor doesn’t know that the credit counselor is actually a collector working on a percentage, then any payment plan seems to make sense.  But what the counselor rarely reveals, and the consumer who trusts his counselor doesn’t know:  the counselor is a collector working on commission, to be paid a percentage of what he collects.  Lenders who pay these collection fees understand that this is just another business expense, a cost of collection.  Why lower interest rates or payments? The more the counselor/collector collects, the bigger the payoff for all.

What are the percentage fees collected as a kickback?  See on page 33 of the report, footnote 164:  up to 30% of the monies collected is the kickback.  At this rate, everybody makes money…except the consumer.

It is no stretch of the imagination to believe that lenders have controlled the “credit counselors” they fund, and that they have done it for years.  See footnote 166:  “Some creditors also began issuing more detailed…standards, in effect becoming a regulator of credit counseling practices”.  Clearly, with the majority of credit counseling monies coming from lenders, this is an industry that has been “bought and paid for”.  Footnote 177 makes it clear that the credit counselor get the majority of his revenue from kickbacks, and is “obligated to comply with creditor standards”.

Wisely, the Senate Report insists in its’ last page on full disclosure of the “existence and nature of any financial relationship with a creditor of the consumer”.  Armed with information on kickbacks, any consumer would be well advised to steer clear of the conflicted consumer credit collector who portrays himself as a counselor.

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.