As a manager of this property he took great pride in it.  Most people have pride in their homes and properties, especially if they invest time and money into repairs and construction.  That is a wonderful and normal human feeling.

In this case, I suggested that the man sell the property, even though it was about to produce enough rents to cover the mortgage, taxes, and overhead.  Why?

We took a look at his whole financial picture and saw some clues that he should look to sell now instead of exploring a bankruptcy or a foreclosure.
1.  His family didn’t wish to take over the property from him if he would sell it or deed it to them.
2.  He spent a great deal of time with the management of the property.  This is a fine hobby but took away time he could have been spending with his family here.
3.  The neighborhood isn’t fantastic, and he didn’t feel like he would be comfortable living in the property.
4.  Rents were going to increase, meaning it would be profitable.
5.  The real estate market is slowly getting better, leading to better sales.

The point was that he should sell high and try to recover what he owes on the property.  If a short sale was required, he could explore those options as well.  Changes to his income and expenses eliminated the need for a bankruptcy filing, and a foreclosure would lead to the same result (losing the property) but with a long stain on his credit and increased legal fees, as well as a potential claim by his second lender.

He came to see that the most flattering feeling he could get from this property would be an offer to purchase.  After all, nobody really wants to buy lousy, poorly maintained properties.  It would be a compliment to his hard work.

When it is best to sell or give up real estate?  Here are some general thoughts
1.  When the real estate requires so much work and money that it would become a money pit.
2.  You don’t want to hang on to the property forever, and the market is as high as it will be in the foreseeable future.
3.  It doesn’t generate any or enough rental income to cover the mortgage and upkeep.
4.  It is dangerous to live in
5.  It is no longer affordable based on your current income due to a decrease in income or increase in expenses

If you can’t or don’t want to retain real estate – either your home or other property – call or e-mail us to set up an appointment.  We can review how you can better your finances through a sale, a short sale, deed-in-lieu of foreclosure, a regular foreclosure, or a bankruptcy.

Some of these mistakes come from gossip or bad experiences in bankruptcy (including lying, bad attorneys, or other frustrations). Others come from rumors spread by the financial services industry to try to keep people out of bankruptcy (even though lenders can write off the uncollectable debt and take a tax break for it).  Even worse are errors from hacks – er, attorneys/writers – who blatantly skew statistics and facts about bankruptcy filings for their own purposes.  We can assure you that while nothing is ever certain with the law, the overwhelming majority of bankruptcies are successful, peaceful, and bring financial relief to our clients.

Here are some common statements about bankruptcy and the truth.

Statement 1:  Why not just settle debt? It’ll be better for your credit report and you won’t have to pay a lawyer to settle debts for 40-50 cents on the dollar.

Answer:  If your sole major debt is a $4,000 credit card and you can afford to pay a lump sum of $2,000, a credit card company may take it and waive the rest.  To do so, you’ll have to show you have a serious hardship (not just because you don’t feel like paying) and submit financial records to prove it.  You’ll also have to come up with a lump sum or a few significant payments, not a long term payment plan.  Unless you’re insolvent, you’ll have to pay tax on the forgiven debt.  But in the situation above, that’s fine because bankruptcy’s costs for a lawyer and the filing fees would make a bankruptcy unnecessary.  Where bankruptcy absolutely becomes necessary is if you are in the same financial situation but have $50,000 worth of credit card debt and medical bills.
Even if you get every card or hospital to settle for 10 cents on the dollar (an unrealistic goal for most clients), and even if you can avoid the tax on the 1099 for the forgiven debt, that’s still at least 2-3 times what you’d pay for a bankruptcy to discharge the debt altogether.  With so much debt, settlement is not only unrealistic, but it costs significantly more than a bankruptcy filing.  For an attorney not to disclose that is tantamount to malpractice.

2.  You cannot discharge student loans in bankruptcy.
Answer:  This is another major misstatement, largely perpetrated by student loan lenders.  In order to discharge student loans, there is a very high standard (possibly relaxed by a recent decision in the 7th Circuit Court of Appeals for Illinois/Indiana/Wisconsin) where you have to demonstrate a good faith attempt to make payments and a serious reason why it’s impossible to pay anything back.  Essentially the situation is for people who are unable to earn a significant income, will likely never have the means to do so, leaving the possibility of repayment fruitless.  That’s a high standard for sure, but it’s by no means impossible.  (Think a 60 year old disabled person with only $700 per month in social security/disability coming in, with expenses of $1000 per month and $60,000 of outstanding student loans).  With or without an attorney, people have successfully discharged significant private and government-backed student loan debt.

3.  I want to file bankruptcy, but if I do, I’ll lose my (car, boat, beagles, RV, bank account, retirement accounts, etc.)

This aggravates me this most because it assumes that the point of bankruptcy is to take everything from the debtor.  The exact opposite is true:  an honest but unfortunate debtor gets a fresh start (in Chapter 7, or a repayment plan in Chapter 13) in exchange for listing, valuing and exempting assets.  Every state has a scheme of exemptions (with some, like Wisconsin, allowing federal exemptions, while others, like Illinois, do not).  The easiest way to find out what you can maintain:  Talk to a competent bankruptcy lawyer.  Call us at Lakelaw or e-mail us. Even if we don’t practice in your jurisdiction, we can refer you to a qualified consumer attorney in another area.  You’ll be surprised, but typically 90% of Chapter 7 cases or so are no-asset  7 cases where the filing debtor turns over nothing.

The moral of this story:  Speak with an attorney and learn the truth before believing what people write and say to scare people away from bankruptcy.  It may not be for everyone, but for most debtors, it’s a huge relief and worthwhile decision.

Judge Halfenger’s decision in the Brown case expressed frustration when the motion simply stated the debtor was “gathering documentation”.  There was no affidavit or explanation why the motion was filed on the very last day with no affidavit or support.  In plain English, explain why 14 days is not enough, or the Judge may simply say it’s too late and dismiss the case for failure to file required documents.

Don’t let your case get dismissed.  File your schedules on time or have a very good reason why not.  Speak to a Lakelaw attorney to determine what falls under “cause” to extend the time frame.

These might seem to solve the problem, but they don’t.  This is because a decision out of the Western District of Wisconsin called In re Bronk held that a debtor in bankruptcy cannot exempt the value in an EdVest account using the Wisconsin 815.18 exemption.  The District Court in the Western District agreed, and that case is up on appeal right now to the 7th Circuit Court of Appeals in Chicago.

However, a recent case out of Milwaukee’s Eastern District of Wisconsin Bankruptcy Court disagrees with Bronk.  In the case of In re Eckerman, Chief Judge Pamela Pepper held that a proper reading of the statute allows for the state protection for a debtor’s contributions to the EdVest Account.

This matter will probably be pursued on appeal in both cases before a final decision is issued.  To be safe, stay tuned and be warned if you plan on using EdVest accounts to protect cash in the event of a bankruptcy filing.

In a recent decision by Judge Kelley in the Eastern District of Wisconsin, the Court held that the creditor, American Family Mutual Insurance Company, was too late when it moved to reopen a long completed Chapter 13 to challenge an improper plan.  Even though the case was completed before the Espinosa decision, the principle still applied.

Creditors who receive a Chapter 13 plan should ALWAYS review them.  That is free advice from counsel for Chapter 13 debtors.

As the Eastern District of Wisconsin has made clear over the last year, you cannot litigate and lose a state court foreclosure case, then turn around and relitigate the case in bankruptcy court.  The Rooker-Feldman doctrine (as described here in this previous blog post) prevents this second bite at the apple.

This decision was quite thorough because in addition to standard objections to the proof of claim and standing arguments, the debtors/adversary plaintiffs also alleged common law fraud, RICO violations, and other claims against the original lender, the servicer/proof of claim filer, and numerous individuals and law firms.  Thus, the judge was required to analyze the merits of each before ultimately dismissing each and every claim.

The moral here:  If you believe you are the victim of foreclosure fraud, please contact us immediately.  If you have a judgment of foreclosure entered in state court, it is extra important that this be discussed before you decide to challenge it in bankruptcy court.  Contact a Lakelaw attorney for more information.

First – what is a preference?

11 U.S.C. § 547(b) defines preferential transfers.

Section 547 provides that the trustee may avoid (or set aside) transfers of the debtor’s interest in property:

1. to or for the benefit of a creditor;
2. for or on account of an antecedent debt owed by the debtor before such transfer was made;
3. made while the debtor was insolvent;
4. made – (A) on or within 90 days before the date the petition was filed; or (B) if the creditor was an insider, on or within one year before the date the petition was filed; and
5. that enabled the creditor to receive more than the creditor would have received if – (A) the case were a case under Chapter 7 of the Bankruptcy Code; (B) the transfer had not been made; and (C) the creditor received payment of such debt to the extent provided by the provisions of Chapter 7

How does this work in real life?  Let’s take a recent example.  This client did not file a Chapter 7 for the reasons below (as well as concerns about equity in her property).

Daughter borrows $20,000 from her father.  This is treated as a loan, not a gift.  There likely is no written contract, but payments are made regularly and are expected.  Therefore, father is a creditor.  Prongs 1 and 2 are satisfied.  Payments are made in the year before filing, so prong 4 is satisfied.  The debtor, while she may have equity in assets, was still likely insolvent due to her high credit card debt, so prong 3 is satisfied.  Prong 5 might be a question, because we don’t know what amount her father would have received from the trustee if she filed and held equity.  Still, the odds were high that the father would have been sued by the trustee to recover the money she repaid him.

One defense to a preference payment is discussed in a case called In re Grisham.
The defense is called “the ordinary business defense”.  How do we establish this?

First, the debt must be incurred in the ordinary course of business  or financial affairs of the debtor and vendor.  Second, the transfer must have been made in the ordinary course of business or financial affairs of the debtor and vendor. This element is often referenced as the “subjective” test to the ordinary course of business defense  Third, the transfer must have been made according to ordinary course of business terms within the respective industry. This element is often referenced as the “objective” test of the ordinary course of business defense.  See “In Defense of a Preference,” Business Credit,  Sept., 2004, Pages 36-39

This case is important because it establishes that repayment of a personal loan to a family member could fall under the ordinary course defense.  Both the Judge and trustee appeared surprised by the arguments of the debtor and the case law they provided.  But the debtor ultimately lost because she couldn’t produce any evidence that the loans were in the ordinary course of her uncle’s business.  Make no mistake, proving this defense is very difficult and rare.  It isn’t often that both a debtor and their family member are both in the business of borrowing and repaying money.

The moral here is that sometimes there are defenses to these preferences.  Talk to Lakelaw before filing about pre-filing transfers of money, repayments of loans, and we’ll see if we can argue against a turnover of the money.

Debt collectors and lenders cannot sue a borrower once the financing in question has been statute-barred. A statute of limitations is the deadline for filing a lawsuit.

But it can be difficult for borrowers to rid themselves of the burden. The time it takes for a debt to become statute-barred depends on the type of debt and the state in which it originated.

Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling, said that due to the varying statue regulations “making a blanket answer [is] difficult.”

Cunningham said people often get this confused with how long a collection can show on the report, which is not the same, although just as difficult to figure out.

The time for statute-barred debts is measured from when the last payment was made towards a debt, when a debt was acknowledged in writing, or when a lender contacted the borrower and/or took action about the debt.

In the case of an auto loan, most lenders will try to collect the payments owed, repossess the vehicle, or turn the case over to a debt collection agency.

David Leibowitz, founder and managing member of Illinois-based law firm, Lakelaw, said time-barred debt is often referred to as zombie debt because “it somehow springs back to life.”

Leibowitz said statutes of limitations are affirmative defenses.

“If the defendant does not raise them, then the defense is waived,” he said.

The statute of limitations for credit cards is usually shorter than limitations for other versions of debt such as auto loans.

Leibowitz said debt on a written contract, in Illinois, has a 10-year statute of limitation. Auto loans fall under this category. In the same state, general claims last five years and credit card debts last for four years.

Not all states are as extreme though. For example, in both Texas and California, written contracts on auto loans have a four year limitation.

But there is a loophole that creditors take to renew their time to collect the debts.

“Once a debtor pays even a small payment on an otherwise time barred debt, then the statute of limitation is revived and starts all over again,” he said. “Debt collectors often try to ‘refresh’ stale debt by getting a consumer to pay even a small payment on it.”

In addition to statute of limitations, Leibowitz warns of auto loan collection deficiency rules.

When auto loans are not paid on time, lenders auction the car off to try to reclaim their lost profit. What is received at auction is deducted from what is still owed on the auto loan. This becomes the deficiency balance. These balances are often sold to debt buyers, then collectors, which can be later used in a judgment against a borrower.

Deficiency balances are yet another area of debt that needs to be considered when auto loan payments are not met, further complicating the auto lending industry.

“Because cars are so pervasive to our society, most states have statutes for cars,” Leibowitz said.

Since each state varies, it is best for borrowers to check a state’s government website for up-to-date limitations.

If that poses a difficulty, it is best to seek legal counsel to navigate the complicated rules. Leibowitz said that statute of limitations, state-by-state, are available but that consumers should get specific details from a local lawyer due to the potential for differing claims.

“A retail installment sale contract for automobiles may have a different statute of limitation since it is governed typically by the automobile or motor vehicle code in each state — and each state is different,” he said. “This is not an area of uniform law.”

This article was provided by Loans.org.

The rules are very clear and simple:  Measured from the date the prior bankruptcy was filed (not converted), a debtor must wait 8 years before filing another Chapter 7 bankruptcy and receiving a discharge.

Sure, there are other options available in the meantime – debt consolidation programs, Chapter 13 Bankrupty plans, Chapter 128.21 Debt Amortizations (for Wisconsin residents).  These all require a steady income with disposable money to pay creditors.  In this economy, not everyone has that.

My two cents:  Meet with me (or another well-trained bankruptcy attorney) and look over your finances.  If you make so little money you can’t be garnished, you may simply want to wait to file.  If a small Chapter 13 plan payment is possible, that might work as well, but you should never file a Chapter 13 plan unless you know in good faith you can make it work.  It’s simply too much time for you, an attorney, the court and trustee, not to mention money and a toll on the system.  Also, you should never try to file a Chapter 13  bankruptcy and plan without an attorney – I was in court recently when a judge told a pro se debtor that she wouldn’t even file a bankruptcy without an attorney!

Still, there may be options available.  Call us or e-mail us to discuss.

We don’t always like the outcomes, and occasionally judges do make errors in their rulings or rule based on information that later turns out to be wrong.  So what can we do in Bankruptcy Court about it?

The Rooker-Feldman doctrine, based on two Supreme Court cases, says federal court s (like bankruptcy courts) can’t sit as appellate courts for state court decisions we don’t like.  If a trial court judge in the Circuit Court of Ozaukee County, Wisconsin rules against a client and says a foreclosure is proper, we can’t appeal that decision in Bankruptcy Court.  It’s a final order and would have to be appealed in state court.

This is very important because many people look to not only file for bankruptcy, but also to ask the judge to avoid a mortgage or cancel a judgment that could turn into a non-dischargeable debt.  In many cases, these decisions come when clients, who can’t afford to hire lawyers to investigate and defend them adequately, are held in default or easily lose in summary judgment.

This is why the first level is so important and why, if the client wants to fight their case in Bankruptcy Court, lawyers must make sure there isn’t a final judgment to try and set aside.

The moral of the story:  Fight early or else you might not get to fight at all.