Pre-Bankruptcy Asset Protection

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“I got my mind on my money and my money on my mind”

Snoop Dogg, circa 1996- (as quoted by the Yale Book of Quotations*)

Every so often I will have a client in my office that is on the periphery of needing to file for bankruptcy. They are making no progress paying down their debt, but are still current and able to stay afloat. A question arises- what do you do if you see bankruptcy looming in the distance and want to protect your assets? The solution is exemption planning.

As most people are aware, filing bankruptcy creates an estate. U.S. Courts define the bankruptcy estate as “all legal or equitable interests of the debtor in property at the time of the bankruptcy filing. (The estate includes all property in which the debtor has an interest, even if it is owned or held by another person.)” Essentially, when you file bankruptcy, an estate is created that takes legal control over all of your property. Nevertheless, Section 522 of the Bankruptcy Code allows bankruptcy debtors to “exempt” certain property from the bankruptcy estate. In the Chapter 7 context, a debtor is allowed to ‘exempt’ his/her property from being liquidated by the trustee. I.E.- exemptions are claimed in property that the debtor is allowed to keep through bankruptcy. Utah law outlines the exemptions that bankruptcy debtors are allowed to claim when filing bankruptcy in Utah.

So what do you do if you are preparing to file bankruptcy, or just looking long term in protecting your assets in the event you do someday need to seek bankruptcy protection? The answer is in pre-bankruptcy exemptions planning. Judge Joel T. Marker, before becoming a judge, served on the panel of Chapter 7 Trustees for the District of Utah. In 2008, Judge Marker wrote a great article explaining the ethical duties of attorneys in the area of pre-bankruptcy exemption planning that is useful for all bankruptcy attorneys to consult. Certainly this is a tricky area of bankruptcy law for debtor’s attorneys, as Judge Marker recognized: “Bankruptcy exemption planning is an area of law demarked by shades of gray rather than bright lines. 

The obvious question is this: Should debtors be allowed to convert their non-exempt assets into exempt assets directly before filing for bankruptcy?

A recent case in Idaho provides some guidance on the legal standards surrounding pre-bankruptcy exemption planning. Debtors James and Laura Thomas filed bankruptcy under Chapter 7 shortly after James was diagnosed with cancer and the debtors were unable to keep up with their debts. Shortly before filing bankruptcy (two weeks), the Thomas’ converted non-exempt property (non-exempt cash value in a life insurance policy) into an IRA, which, is apparently is completely exempt in Idaho. The Chapter 7 trustee objected to the debtors’ use of the exemption, essentially arguing that the debtors’ defrauded their creditors and should therefore not be allowed to reap the benefit of the exemption. The Bankruptcy Court overruled the trustee’s objection and allowed the debtors to exempt the two IRAs from the bankruptcy estate.

This case is enormously positive for debtors engaging in pre-bankruptcy exemption planning. The Court stated:

“Indeed, where the only evidence presented is that nonexempt assets were “deliberately converted to exempt assets just prior to filing the bankruptcy petition,” such evidence is “insufficient as a matter of law to establish fraud.”  Id. (quoting Wudrick v. Clements, 451 F.2d988, 990 (9th Cir. 1971)).  In other words, debtors may maximize their exemptions, even when they do so shortly before the filing of a bankruptcy petition.  See also House Report of Bankruptcy Reform Act of 1978, H.R.REP. NO. 95‐595, at 361 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6317(“As under current law, the debtor will be permitted to convert nonexempt property into exempt property before filing a bankruptcy petition.  The practice is not fraudulent as to creditors, and permits the debtor to make full   use  of  the  exemptions  to  which  he  is  entitled under the law.”).

Our office makes it a practice to engage our clients in legally allowed pre-bankruptcy exemption planning. We consider it our ethical obligation to advise and consult our clients on how best to protect their assets in the event they will be needing to seek bankruptcy protection.

Creditors have millions of dollars, politicians, and an army of lawyers on their side. Make sure you have someone competent on yours.

 

Shapiro, Fred R. (2006), The Yale Book of Quotations, Yale University Press, p. 717, ISBN 0-300-10798-6

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Ahead of the Game

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When your debt has begun to grow out of control, the worst thing you can do is simply ignore it. Almost always difficulty in repaying debt begins when a person’s income is cut. Whether its through a job loss, divorce, or a decrease in hours at work- the loss of income makes it extremely difficult to stay current on your bills. When beginning to fall behind on payments, sometimes people will rush to a pay day loan company to make their other payments. This then begins a cycle of shopping around to different pay day loan companies to stay current on the previous loan. Eventually, you are in over your head and your income begins to be garnished. It is much better to jump ahead of the game when you first realize that you won’t be able to stay current on your payments. Then you are not backed up against a wall and left scrambling at the last minute to search for a solution. When you want a debt collector to stop calling you and hassling you- tell them in writing to stop. Sometimes creditors will even call you at work- or call family members- in an effort to get money out of you. The Federal Consumer Protection Bureau has sample letters that you can use when dealing with aggressive debt collectors. Use the law to your advantage. By far, bankruptcy is the best way to put the law on your side and to get a fresh start. Get ahead of the game and get a handle on your debt today by contacting our law office. The Richards Law Group is constantly given positive ratings by our clients. Call today for a free consultation and see what we can do for you.

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Judgments

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In my experience one of the most pressing matters leading people into filing for bankruptcy is collection on judgments.

A vast majority of people, when they receive mail that they don’t want to open, they throw directly to the dumpster. I know I am this way with advertisements and campaign ads. When I used to work in politics our rule of thumb in designing effective campaign advertisements was “What will people see as they walk from their mailbox to their garbage can?” Collection notices are treated in a similar manner.

The problem with avoiding collection notices and bills is that, as much as we would like them to, they will not go away. Throwing them away will most likely lead to one thing- a lawsuit.

When a creditor files a lawsuit in Utah, typically you have 10-20 days to file a response, or an “answer.” If you do not file an answer- then the court will enter a default judgment against you. Once there is a judgment- the creditor then can begin the process of enforcement to take money from you- either through garnishment or execution of your property.

If you own property, then another common collection tool is for the creditor to file a copy of the judgment with the local county recorder. Once that is filed, the judgment actually becomes a lien against your property.

When people get to this point, typically they come in to file for bankruptcy protection. As soon as a person files for bankruptcy, the automatic stay provisions of 11 U.S.C. 362 come into effect and creditors can no longer collect (or enforce judgments) against you or your property (wage garnishments, property foreclosure, etc.)

The bankruptcy discharge, however, does not have any effect on liens against real property. Even though the debt will be eliminated (unless the debt is excepted from the discharge under certain conditions), the lien against the property will remain.

It is important for your bankruptcy attorney to know if there is a judgment recorded against your property- because there is a way out of that lien under Chapter 7. If your property has a mortgage (or two) against it, and your property has no value, then your bankruptcy attorney can file a motion in your Chapter 7 case to avoid the judicial lien against your property. If a judgment lien impairs your right to a homestead exemption (found in 11 U.S.C. 522), then the bankruptcy law allows you to avoid the lien altogether through the filing of a formal motion in conjunction with your main bankruptcy case. Remember- the mere filing of your bankruptcy or the discharge will have no effect on liens against your property. A formal motion MUST be filed as well after the bankruptcy case is initiated.

If you are struggling with creditors and collection – call me. It is much better to jump ahead of the collection process rather than rushing into it. I offer a free consultation to all new clients- so call today and find out your options. Put the law on your side.

 

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Sharks

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According to a study commissioned by the Utah Department of Financial Institutions, Utah pay day loan companies charged an average of 473.52 percent interest. “At least one Utah payday-loan company charged an astronomical 1,564 percent annual interest last year — meaning it collected $30 in interest each week per $100 loaned.” The Salt Lake Tribune reports. Pay day lenders have made a lot of hay in recent years, partly because they have had the implicit support of the Utah Attorney General’s Office. 

This was no surprise to me. I see it everyday. In any given month, at least a half dozen or so new clients of mine have pay day loans that they are fighting with. In my opinion, these lenders count on their customers to default on their loans so they can run to small claims court, get a judgment, and start to garnish. 

I’ve seen these lenders create false ‘security’ documents and threaten to take away client’s property if loans are not repaid (when they have no legal right to do so). I’ve seen them send private investigators to client’s homes and threaten to arrest them if payment is not made. 

Bankruptcy is the best weapon to use against these lenders. If you are trapped in the vicious cycle of pay day loans, call today for a free consultation. 

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A New Beginning

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Most everyone has heard by now that the city of Detroit is going through bankruptcy. On December 3, 2013 U.S. Bankruptcy Judge Steven Rhodes held that the city of Detroit can move forward in reorganizing their financial affairs through the bankruptcy process.

“The city no longer has the resources to provide its citizens with basic police, fire and emergency services,” Judge Rhodes said, ruling that Detroit, once the nation’s fourth-largest city, “was and is insolvent.” This case will make new law regarding Chapter 9 bankruptcy and will impact thousands of Michigan residents and workers.

Sometimes in the law, lawyers, judges, and clients all lose perspective of the larger picture. Article I, Section 8 of the United States Constitution gives Congress the authority to establish a process for individuals and businesses to file for bankruptcy relief. Bankruptcy, in one form or another, has been around for centuries. When Abraham Lincoln filed for bankruptcy he spent the next 17 years paying off his debts. President Lincoln overcame many personal setbacks to become the greatest president in American history. One of those setbacks was a failed business venture that led him into bankruptcy. Fortunately for us, when people file bankruptcy now, they don’t have to spend the next decade of their life repaying their debts. Congress enacted the current Bankruptcy Code in 1978 and has amended it several times since. Although the laws and procedure surrounding bankruptcy have dramatically changed over the years- the philosophy is still the same: The U.S. Supreme Court has stated that:

“(Bankruptcy) gives to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” – Justice Sutherland, in Local Loan Co. v. Hunt 292 U.S. 234, 54 S.Ct. 695 (U.S. 1934).

Bankruptcy exists to give people, families, cities, farms and businesses a fresh start in life. If debt is holding you, your family, or your business hostage- give me a call and let us assist you in planning for your future.

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Thanksgiving Proclamation

Thanksgiving Proclamation

“No human counsel hath devised nor hath any mortal hand worked out these these great things. They are the gracious gifts of the Most High God, who while dealing with us in anger for our sins, hath nevertheless remembered mercy.” – A. Lincoln

Happy Thanksgiving!

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Protection

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One of the primary reasons individuals, couples, and businesses file for bankruptcy is to receive protection from their creditors. Upon filing bankruptcy all creditors must stop every form of collection- whether it be foreclosure, repossession of property, wage garnishments, and even letters and telephone calls. Federal law prohibits creditors from taking any action to collect from you once the bankruptcy has been filed. This protection is referred to as the “automatic stay” in bankruptcy.

The Dallas Morning News is reporting that a bankruptcy judge in Texas recently chastised Ally Financial, the nation’s top vehicle loan company, for consistently and willfully violating the automatic stay provisions of the bankruptcy code. The article reports that “U.S. Bankruptcy Judge Stacey G.C. Jernigan writes in plain language that she believes Ally Financial Inc., the nation’s top auto finance company, violated federal bankruptcy rules designed to protect debtors. She accuses the lender of improperly harassing debtors who’ve filed bankruptcy to get them to pay off a debt they no longer owe. After seeing evidence and hearing testimony, she concludes that Ally routinely sent form letters designed to confuse debtors in the hope of picking up extra monthly payments.”

Judge Jernigan then awarded the debtor $11,000 in damages from Ally Financial for sending out these confusing letters. Bankruptcy judges take seriously the protection that bankruptcy provides for debtors and enforce this protection through sanctions. Occasionally, a judge will impose treble damages, which tripes the amount of damages actually suffered by a debtor.

Bankruptcy can provide protection from your creditors, and it is nice to see that judges are enforcing this protection. If you are the victim of aggressive collection activities, contact us today so that we can help you obtain the protection of federal bankruptcy law.

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Cram down for Clunkers

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A few years ago the U.S. government established a program called ‘cash for clunkers.’ Essentially, the idea was to provide economic incentives to U.S. residents to purchase a new, more fuel-efficient vehicle when trading in a less fuel-efficient vehicle.  The program was moderately successful.

Chapter 13 provides a huge benefit for people with older car loans. Through Chapter 13, you can ‘cram down’ the total car loan to match the current market value of the car. For example, if you own a car worth $5,000 but your loan balance is $10,000, then you can cram down your loan to $5,000 (the value of the car) through your Chapter 13 repayment plan.  The remaining $5,000 of the balance will be lumped in with your other unsecured debts (like credit cards). This means you’ll likely pay only a percentage of that unsecured debt, and the remainder will be wiped out at the completion of your plan. This means you will end up owning the car free and clear at the end of the bankruptcy.

The only catch with this is that your loan has to be over 910 days old (about 2 1/2 years). So- if your car is older and you are facing financing difficulty- then Chapter 13 may be a good option for you. Call today for a free consultation to consider your options.

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Your Credit

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A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

One of the most common questions I am asked is “how will bankruptcy affect my credit?”

Most people that I meet with that are considering filing for bankruptcy are in financial trouble. Most have medical bills, underwater car loans and mortgages, charge cards, credit cards, and collection accounts. By the time someone is looking into filing for bankruptcy- his or her credit is probably already shot. I like to refer to bankruptcy as the chemotherapy for someone’s financial disease. When your credit gets to the point where you have several judgments, repossessions, evictions, and have several accounts that have gone to collections- then bankruptcy can be the tool to clear it all up.

Bankruptcy will always impact your credit score. Your credit score certainly should not be the main consideration when deciding on whether to file for bankruptcy—your family should.

The best way to determine who bankruptcy will effect your credit is to speak with a local bankruptcy attorney. Call (801) 781-2026 today for a free consultation to see if bankruptcy is right for you.

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The Student Loan Monster

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Most people are aware that, typically, student loans cannot be discharged through the usual bankruptcy process. Instead, Congress requires student loan borrowers to initiate an adversary proceeding, a separate lawsuit filed within the bankruptcy case, in which they have to prove that repaying their student loan debt would be an “undue hardship.”

The US News and World report is reporting that a law school graduate in California recently succeeded in his battle to discharge some of his student loans. 

Not only that, but a recent study by Princeton professor Jason Iuliano shows that in 2007 over 69,000 student loan borrowers probably could have discharged their student loans. Only 300 did. That is an incredible gap. Iuliano concludes that “the real failing of the student loan discharge process is lack of participation by those in need. Incredibly, only 0.1 percent of student loan debtors who have filed for bankruptcy attempt to discharge their student loans. That statistic is even more surprising in light of this Article’s finding that a debtor does not need to hire an attorney to be successful. In fact, debtors without attorneys were just as likely to receive discharges as debtors with attorneys were.”

Discharing your student loans is not easy, it takes an extra step in the bankruptcy process and can be incredibly time consuming. Its for this reason that a lot of bankruptcy attorneys don’t even attempt this process. I am looking for the right case to test this in the 10th circuit. 

A vast majority of the clients I meet with are not interested in including their student loans in their bankruptcy. They feel that they received a substantial benefit from their education and want to keep paying. For most people, the only thing stopping them from repaying their student loans is their other debts. If you, or someone you know, is struggling from oppressive debt, call today for a free consultation. If your student loans are causing an undue hardship on you and your family, I can help you navigate the bankruptcy process to possibly get out from under those debts.

 

 

 

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