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May 12, 2011

Protection From Garnishment for Social Security, Veterans Benefits

A new treasury rule, effective May 1, 2011, will provide more protection to receipients of federal benefits from garnishment of their bank accounts.

ManGrabbingPiggyBank_iStock.jpgGarnishment and Federal Benefits: The Basics

If a creditor gets a judgment against you, it has various tools to collect on that judgment. One tool allows the creditor to garnish (grab the money in) your bank account. But there are limits to garnishment. Judgment creditors cannot grab funds that come from certain sources, including some types of federal benefits such as Social Security, Supplemental Security Income, veterans benefits, and a few others.

Although these types of funds cannot be seized by creditors, in practice, when banks got a garnishment order in the past, they often froze all funds in the account (up to the amount of the debt), without regard to whether the funds were protected from garnishment. This means the bank accountholder would not be able to access those funds for weeks or months. The accountholder could object to the garnishment of the protected funds to prevent the bank from turning them over to the judgment creditor. But many people were unable to complete the paperwork and procedure to do so, and so lost funds that never should have been seized.

The New Rule: The Onus is on the Bank

The new rule puts the onus on the banks. Banks receiving garnishment orders must now determine if the bank account has protected federal benefits that have been electronically deposited into the account within the previous two months. If the bank discovers that there are protected funds, it cannot include those funds in the account freeze.

What This Means for Accountholders

Federal benefits received and deposited in a bank account via paper check are not protected by this new rule. Nor are funds received (even if received electronically) more than two months prior to the garnishment order. However, the regular state procedures for challenging a garnishment order will still be available for these types of funds. Federal benefit recipients currently receiving paper checks should consider switching to electronic deposit of their benefits.

For More Information

If you receive federal benefits and think you might need protection from bank garnishments, be sure to read about the nitty, gritty details of this new rule (this post just covers the very basics). For the short term, you can get an excellent summary of the new rule, as well as recommendations for how beneficiaries of federal benefits can best protect themselves, from the National Consumer Law Center at http://shop.consumerlaw.org/pdf/nclc-rpts-repo-jan-feb-2011.pdf.

By Guest Blogger Kathleen Michon

April 18, 2011

New Mexico Debt Collection Rule Is a Victory for Debtors

FinalNoticeIStock.jpgNew Mexico's Attorney General will begin enforcing a new Rule which requires debt collectors doing business in New Mexico to (1) make a good faith effort to determine if collection of a debt is time-barred (meaning it is too late to sue for recovery of the debt in court) and (2) if it is time-barred, to so inform the debtor. The collector must also tell the debtor that signing a new agreement to pay the debt, or making a partial payment might "revive" the debt, resetting the time period that the collector has to sue on the debt. (To learn more about time-barred debts, and what that means for collection of the debt, read Nolo's article Time-Barred Debts: When Collectors Cannot Sue You for Unpaid Debts.)

The Attorney General implemented the rule in order to end "an industry-wide [debt collection] practice that tends to or does mislead or deceive" consumers by failing to provide important information to consumers - that is, that a debt is so old that it is legally unenforceable in court. The new Rule is a victory for consumers. As New Mexico Attorney General King said: "This Rule is intended to ensure that debt collectors provide important information to consumers so that they can make informed decisions when they are confronted with a demand to pay an old unenforceable debt."

The law went into effect on December 15, 2010, but the Attorney General delayed enforcement until March 15, 2011 in order to give debt collectors time to revamp their practices. You can read the Attorney General's announcement here. The announcement contains a link to the text of the new rule.

By: Guest Blogger Kathleen Michon 

March 28, 2011

Reestablishing Credit During the Recession

CreditCardsIStock.jpgA number of the people I counsel want to know how soon they can restore their credit after bankruptcy. The prerecession standard advice was two years for a credit card with decent interest and four years for a mortgage with indecent interest.

But that was then. Now, because so many people have bad credit because of foreclosures, late payments, and bankruptcies, it's hard to say what decisions the credit issuers will be making in the next several years. Will they be more forgiving because of the need to pull in people who might not have qualified a few years ago, or will they get tighter and not give credit at all until more time has elapsed after the bankruptcy? Only Fair Isaac (FICO) knows for sure, sort of.

For sure, if you want to reestablish credit, the old ways are probably still the best ways. Get a major credit card, periodically make purchases, scrupulously make your payments on time, get a second card, same thing, work to build your credit line, never max-out your cards, and so on. There are a number of other tips on the Fair Isaac website at http://www.myfico.com that will help you lift your credit score to the maximum extent possible. The more you follow that advice, the better off you'll be. You can get Nolo's Credit Repair, by Robin Leonard and Margaret Reiter (Nolo) for even more on this subject. Or check out the free articles and FAQs in Nolo's Credit Repair for Bad Credit area of its website.

But should you even try to get your credit back? I often tell people I'm counseling that working to get your credit back is like an alcoholic learning how to drink better. Credit is simply the opportunity to go into debt, and once in debt it's really hard to get out. When you've received your bankruptcy discharge you will usually be completely solvent (except perhaps for debts like student loans and recent income taxes). Why spend energy for the privilege of going back into debt? There are lots of reasons why people feel it's a rational thing to do, but all you're really doing is preparing to live beyond your means.

Sure it's nice to have credit for an emergency, but people would be much better off reigning in their spending and saving as much and as fast as possible, and using their savings if necessary for an emergency. You may not feel like you're addicted to credit or spending (same thing), but chances are you are and are just in denial. Now I would never say this to your face because you would just deny it and be angry at me. Well, maybe you're still angry at me but at least I don't have to see it. Please accept the fact that my intentions are good -- to keep you solvent and out of debt.

December 15, 2010

Chapter 7 Bankruptcy: Beware of Preferences and Pre-Bankruptcy Transfers

Many issues that arise in Chapter 7 bankruptcy relate to the means test. (For more on these, see my previous blog post Common Chapter 7 Bankruptcy Means Test Issues.) However, there are several issues that commonly arise in Chapter 7 bankruptcy that do not relate to the means test. These include preferences and pre-bankruptcy transfers.

Preferences

Preferences are payments made to some but not all creditors prior to your bankruptcy filing. Basically (with some exceptions), you can't make more than $600 total in payments to an arms-length creditor within a three-month period prior to your bankruptcy filing date -- and you can't make payments to creditors who are relatives or business associates within the year prior to you bankruptcy filing.

If you do engage in a preference, the bankruptcy trustee can demand that the recipient of the money turn it over to be distributed to your creditors. Where I have most-often encountered this rule is when a client has borrowed money from mom or dad or sis and then repaid them out of a tax refund. Believe me, it's not easy trying to explain that you can prefer mom over Citibank when it comes to repaying your creditors.

Pre-Bankruptcy Transfers

A related rule concerns pre-bankruptcy transfers. More than a few people who contemplate bankruptcy decide to give some of their valuable property to a friend or relative. Big mistake.

The basic rule is that while you are insolvent you can't make any transfers of real or personal property within the two year period prior to your bankruptcy filing unless you receive fair value in exchange and, if asked, are able to account for what you did with what you got. Most often, a violation of this rule occurs because of a lack of understanding about how bankruptcy works. Simply put, most property that people try to unload could have been kept under their state's exemption system - so there was no need to unload it in order to keep it. But, once you have done the deed it's often hard (but not impossible) to undo it.

To learn more about bankruptcy, check out Nolo's Bankruptcy Center.

November 11, 2010

Timing Your Bankruptcy Filing

There are many factors to consider when deciding when you should file for bankruptcy. Here are a few common reasons for delaying or speeding up a bankruptcy filing.

Reasons to Delay a Bankruptcy Filing

Your income recently decreased. One good reason to delay a filing is if your income over the last six months puts you over the means test limit but a recent decrease in your income would put you under the limit if you waited a month or two to file. Remember, the means test is based on your average gross income received during the six-month period just prior to the month you file. So, if you file in October you would average your income during the months of April through September.

You face foreclosure but the sale is not yet scheduled. An impending foreclosure is another reason to delay you filing (or speed it up, see below). If the foreclosure sale hasn't been scheduled yet, you may want to delay your filing until the sale is both scheduled and close to taking place. This tactic will result in a delay of the sale for at least two months and sometimes longer, which will give you an extra couple of months of payment-free shelter.

Certain credit card use. Still another reason to delay filing is if you used a credit card within the previous 90 days or obtained cash advances within the previous 70 days. If the credit card charges totaled more than $550 on any one card and were for luxuries, or the advances on any one card exceeded $850, the creditor can obtain a court ruling that the charges or advances will not be discharged in your bankruptcy. If you have recent charges or cash advances that might survive your bankruptcy you should consider delaying your filing until the three month or 70-day period has expired.

Other reasons. Other common reasons you might want to delay filing are:

  • you made preferential payments to creditors (wait 90 days or one year to file, depending on the type of creditor)
  • you transferred property for less than fair value within the past two years and the property is valuable enough that the bankruptcy trustee may go after it (typically over $1,000)
  • you had a previous bankruptcy case dismissed within the past year (or in some cases within the previous 180 days)
  • you are seeking a mortgage modification (the bankruptcy may bring the modification process to a screeching halt) 
  • you are seeking to discharge back income taxes (wait until three years have passed since the taxes first became due or until two years have passed since you filed a return), or
  • you filed a previous bankruptcy in which you obtained a discharge (wait until you are eligible to file again).

Reasons to Speed Up Your Bankruptcy Filing

Sometimes, you'll want to file for bankruptcy right away. If your income greatly increased during the last few months, but was much lower during the previous three or four months, the sooner you file the better your chance of passing the means test. Also, if your house is in foreclosure and the sale is scheduled and you want to delay the sale, you should file for bankruptcy immediately.

To learn more about choosing the right time to file for bankruptcy, see Nolo's article Should I File Bankruptcy Now or Wait?  Or visit, Nolo's Bankruptcy Center for articles, FAQs, Legal Updates, books, and software on bankruptcy.

November 3, 2010

You Can't Choose Which Debts or Property to Include in Your Bankrupty

Many people I counsel start out by saying that they want to "bankrupt" certain debts and not others, or they want to keep certain items of property out of their bankruptcy. In other words people think they can pick and choose which debts and property go through bankruptcy and which don't.

My response is always the same. No can do. In for the penny, in for the pound. All your property and all your debts that are known to you must be listed in your bankruptcy papers. Once we get that straight I explain that some debts can be reaffirmed (which means the filer will be personally liable for them after bankruptcy). I also explain that more often than not the property they are concerned about keeping can be kept under their state's exemption system.

So why do I make such a big deal about listing everything ? Because bankruptcy fundamentally works on the honor system. You put a ton of information in your bankruptcy papers under penalty of perjury and most, if not all, is unquestioned throughout the bankruptcy process. For that reason, bankruptcy officials are sticklers on complete and accurate disclosure of everything you are asked to disclose. A breach of this disclosure duty will be treated with severity, including a dismissal of your bankruptcy and possibly even a criminal prosecution for perjury. (Learn more in Nolo's article Filing Bankruptcy? Disclose Everything, Hide Nothing.)

So, forget about the idea that you can keep creditors or property out of your bankruptcy. List everything, and most likely you'll be able to keep the property you want to keep, and reaffirm the debts you want to continue paying anyway.

October 27, 2010

The New Bankruptcy Law: Little Change for Most Debtors (Other Than Pricier Lawyers)

In 2005, Congress made big changes to the bankruptcy laws. In the six-month lead up to those changes, Chapter 7 bankruptcy filings spiked because people were told that the new laws would make it much harder to file for bankruptcy. After the new law took effect, filings plummeted, in part because people now believed (thanks to the pre-change marketing efforts by bankruptcy attorneys) they could no longer file under Chapter 7. Due to the great recession, however, filings are once again spiking and are close to the pre-change level.

So what's the story? Is Chapter 7 bankruptcy harder to file now than it was before the law changed, or was that perception wrong (and wrongheaded)?

As with so many things in life it's kind of an 80-20 proposition. For about 80% of Chapter 7 bankruptcy filers, the main change has been that many bankruptcy lawyers doubled their fees. So, for people using lawyers, Chapter 7 has become much more expensive. Not a trivial change to be sure. But, if people in this 80% category file without a lawyer -- which is a feasible option in most cases -- then they will see little change overall. The other changes (the main ones include a credit and budget counseling requirement, submission of tax returns and wage stubs, and a reaffirmation agreement if you want to keep a late model car you're making payments on) have proved to be relatively insignificant and easy to comply with.

June 8, 2009

Linking Healthcare Costs to Bankruptcy -- More Spin Than Truth?

A recent Harvard law school study indicates that health care costs are "behind" roughly 60% of bankruptcy filings. My personal experience gleaned from counseling close to 1,500 bankruptcy debtors since 2005 would suggest a much lower figure, at least under the commonly accepted definition of "behind."  For example, according to my experience, in a typical bankruptcy case the credit card debt load alone comes in around $30,000 whereas the actual medical debt is usually less than $1,000. Does this mean that my clients' medical debt is "behind" their bankruptcies? I wouldn't think so, but add a relatively small portion of the credit card debt that may be pushing their bankruptcies, and the word "behind" becomes somewhat more credible. Still, not counting mortgages, car loans, student loans and tax debts, a large majority of the debt (in my cases at least) has come from purchases and personal loans for living necessities, family vacations, car and home maintenance, "toys" and, not insignificantly, from penalties and interest for late payments and overcharges.

Are my clients healthier than the norm? I don't think so, but almost all of them receive their primary health care through Medicare, Medi-Cal (a state-specific variant of the federal Medicaid program), or employment-related benefit programs. To be sure, some of them have gone without while others have been left with residual debts due to co-payments and the occasional uncovered treatment or prescription -- a relatively insignificant part of their overall debt load. There are, of course, exceptions to this -- an uncovered trip to the emergency room with a $15,000 price tag or the like has provided the bankruptcy filing trigger more than a few times.

So, if I were issuing a report based on my cases, I could honestly say that health care debts have been part of the mix, but I wouldn't want to insinuate that medical costs were the most important factor. Of course, since I only serve California debtors, their experience may be way different than that attributed to bankruptcy debtors in other states -- and the Harvard poll may be perfectly accurate outside of the Golden State.

Still, the timing of the report -- derived as it is from a poll taken some two years earlier -- is suspicious given the fact that the national health care debate is about to begin in Congress. It makes me suspect that the poll is being reported in a manner to serve an agenda -- one that is tilted towards significant health care reform. Simply put, someone is wagging the dog, but don't get me wrong. That's my agenda too. I just wish that polls and the statistics that are drawn from them were not so consistently used to manipulate public opinion in a particular direction rather than to tell "just the facts, ma'am" and let those who read them draw what conclusions they will. Jeez, I know, my naïveté runneth over.