By RON LIEBERPLAIN CITY, Ohio — It isn’t easy to stand up in an open courtroom and bear witness to the abject wretchedness of your financial situation, but by the time Doug Wallace Jr. was 31 years old, he had little to lose by trying. Diabetes had rendered him legally blind and unemployed just a few years after graduating from Eastern Kentucky University. He filed for bankruptcy protection and quickly got rid of thousands of dollars of medical and other debt. But his $89,000 in student loans were another story. Federal bankruptcy law requires those who wish to erase that debt to prove that repaying it will cause an “undue hardship.” And one component of that test is often convincing a federal judge that there is a “certainty of hopelessness” to their financial lives for much of the repayment period. “It’s like you’re not worth much in society,” Mr. Wallace said. Nevertheless, Mr. Wallace made his case. And on Wednesday, nearly six years after he first filed for bankruptcy, he may finally get a signal as to whether his situation is sufficiently bleak to merit the cancellation of his loans. The gantlet he has run so far is so forbidding that a large majority of bankrupt people do not attempt it. Yet for a small number of debtors like Mr. Wallace who persist, some academic research shows there may be a reasonable shot at shedding at least part of their debt. So they try. Before the mid-1970s, debtors were able to get rid of student loans in bankruptcy court just as they could credit card debt or auto loans. But after scattered reports of new doctors and lawyers filing for bankruptcy and wiping away their student debt, resentful members of Congress changed the law in 1976. In an effort to protect the taxpayer money that is on the line every time a student or parent signs for a new federal loan, Congress toughened the law again in 1990 and again in 1998. In 2005, for-profit companies that lend money to students persuaded Congress to extend the same rules to their private loans. But with each change, lawmakers never defined what debtors had to do to prove that their financial hardship was “undue.” Instead, federal bankruptcy judges have spent years struggling to do it themselves. Most have settled on something called the Brunner test, named after a case that laid out a three-pronged standard for judges to use when determining whether they should discharge someone’s student loan debt. It calls on judges to examine whether debtors have made a good-faith effort to repay their debt by trying to find a job, earning as much as they can and minimizing expenses. Then comes an examination of a debtor’s budget, with an allowance for a “minimal” standard of living that generally does not allow for much beyond basics like food, shelter and health insurance, and some inexpensive recreation. The third prong, which looks at a debtor’s future prospects during the loan repayment period, has proved to be especially squirm-inducing for bankruptcy judges because it puts them in the prediction business. This has only been complicated by the fact that many federal judicial circuits have established the “certainty of hopelessness” test that Mr. Wallace must pass in Ohio. Lawyers sometimes joke about the impossibility of getting over this high bar, even as they stand in front of judges. “What I say to the judge is that as long as we’ve got a lottery, there is no certainty of hopelessness,” said William Brewer Jr., a bankruptcy attorney in Raleigh, N.C. “They smile, and then they rule against you.” Debtors themselves struggle with testifying in their undue hardship cases. Carol Kenner, who spent 18 years working as a federal bankruptcy judge in Massachusetts before becoming a lawyer for the National Consumer Law Center, said that one particular case stuck in her mind. The debtor had a history of hospitalization for mental illness but testified that she did not suffer from depression at all. “She was so mortified about the desperation of her situation that she was committing perjury on the stand,” Ms. Kenner said. “It just blew me away. That’s the craziness that this system brings us to.” Debtors also stretch the truth in other directions. In 2008, a federal bankruptcy judge in the Northern District of Georgia expressed barely disguised disgust in deciding a case involving a 32-year-old, Mercedes-driving federal public defender with degrees from Yale and Georgetown. With nearly $114,000 in total household income, the woman’s financial situation was far from hopeless, despite her $172,000 in student loan debt. No one keeps track of how many people bring undue hardship cases each year, but it appears to be under 1,000, far less than the number of people failing to make their student loan payments. In its most recent snapshot of student loan defaults, the Department of Education reported that among the more than 3.6 million borrowers who entered repayment from Oct. 1, 2008, to Sept. 30, 2009, more than 320,000 had fallen behind in their payments by 360 days or more by the end of September 2010. About 10.3 million students and their parents borrowed money under the federal student loan program during the 2010-11 school year. One reason so few people try to discharge their debt may be that such cases require an entirely separate legal process from the normal bankruptcy proceeding. In addition, those who may qualify generally lack the money to hire a lawyer or the pluck to file a suit without one. Nor is the process quick, since the lender or the federal government often appeals when it loses. And even if clients can pay for legal assistance, some lawyers want nothing to do with undue hardship cases. That’s the approach Steven Stanton, a bankruptcy lawyer in Granite City, Ill., settled on after trying to help David Whitener, a visually impaired man who was receiving Social Security disability checks. The judge was not ready to declare him hopeless and gave him a two-year “window of opportunity” to recover from his financial situation, saying he believed that Mr. Whitener had the potential to obtain “meaningful” employment. Mr. Stanton did not see it that way. “It’s the last one I’ve ever done, because I was just so horrified,” he said. “I didn’t even have the client pay me. In all of the cases in 30 years of bankruptcy work, I came away with about the worst taste in my mouth that I’ve ever had.” Those who do go to court face the daunting task of arguing against opponents who specialize in beating back the bankrupt. They will often square off against Educational Credit Management Corporation, a so-called guaranty agency sanctioned by the government to handle a variety of loan-related legal tasks, from certifying students who are eligible for loans to fighting them when they try to discharge the loans in bankruptcy court.  On its Web site, the agency paints a picture of how much of a long shot an undue hardship claim is, noting that people “rarely” succeed in discharging student loan debt. Some academic researchers have come to a different conclusion, however. Rafael Pardo, a professor at the Emory University School of Law, and Michelle Lacey, a math professor at Tulane University, examined 115 legal filings from the western half of Washington State. They found that 57 percent of bankrupt debtors who initiated an undue hardship adversary proceeding were able to get some or all of their loans discharged. Jason Iuliano, a Harvard Law School graduate who is now in a Ph.D. program in politics at Princeton, examined 207 proceedings that unfolded across the country. He found that 39 percent received full or partial discharges. His assessment of E.C.M.C.’s view of the rarity of success? “I think that’s wrong,” he said. While his sample size was small and he agrees that it’s not easy to prove undue hardship and personal hopelessness, his assessment of bankruptcy data suggests that as many as 69,000 more people each year ought to try to make a case. And they don’t necessarily need to pay lawyers to argue for them, as he found no statistical difference between the outcomes of people who hired lawyers and those who represented themselves. Dan Fisher, E.C.M.C.’s general counsel, said it had no opinion on whether more borrowers should try to make undue hardship claims. As for the “rarely” language on its Web site, he said the company stood by its assertion that it was uncommon for an undue hardship lawsuit to end in a judgment discharging the loans in its portfolio. Sometimes, getting any judgment is a challenge, as judges may delay a decision if the case seems too close to call or there is a possibility that the facts may change reasonably soon. Radoje Vujovic, a North Carolina consumer bankruptcy lawyer, for instance, had more than $280,000 in student loan debt and just $23,000 in annual income. When Judge A. Thomas Small, a federal bankruptcy judge in the eastern district of North Carolina, examined the case in 2008, he decided to wait two years before rendering final judgment, given that Mr. Vujovic thought his law practice might grow. “Must the cost of hope be permanent denial of discharge of debt?” Judge Small asked in his written opinion. “The answer to that question cannot be an unequivocal ‘yes.’ Hope is not enough to end the inquiry and, ironically, permanently tip the scales against a struggling debtor.” The Department of Education, unhappy with the two-year delay, appealed before the period was up and persuaded a higher court to overturn the ruling. “I would stand by my decision,” Judge Small, who is now retired, said in an interview. “If you’re forced to make that decision, all you have is speculation, and speculation is really not good enough to overcome the burden of proof.” Getting judges out of the speculation business, however, would require a new law or an entirely new standard, possibly from the United States Supreme Court. Neither appears likely anytime soon. In the meantime, Doug Wallace, the blind man in Ohio, is nearing the end of his long wait for a ruling. In December 2010, C. Kathryn Preston, a federal bankruptcy judge in the southern district of Ohio, tried to assess Mr. Wallace’s hopelessness by pointing to expert testimony that blindness does not necessarily lead to an inability to ever work again. But she also noted that because he lived in a rural area, he faced significant transportation obstacles. So she set a new court date for Sept. 5, to give him “additional time to adjust to his situation.” The question for Mr. Wallace then became what sort of adjustments he was supposed to make aside from a court-ordered $20 monthly loan payment. His routine has not changed much. Aside from hernia surgery a few months ago, his days consist of sitting close to the television (he can just make it out through one eye that still has a bit of vision) and regular trips to the gym with his father. His college diploma hangs on the living room wall, and at night he sleeps underneath it on the couch of the rental house he shares with his father and sister. Mr. Wallace’s sister, a community college student, is sometimes around during the day while his father works at a Honda factory. There are few visitors. “I’ve got friends around here, I’m sure, but they’ve got lives for themselves,” he said. “So I don’t really bother them.” The judge did not explicitly order him to move closer to a training center, and his lawyer, Matt Thompson, said that doing so would set him up for certain failure. “I don’t think there is anyplace he could go in central Ohio and live on $840 a month,” he said. Logistics aside, Mr. Wallace said that it was hard to imagine his overall situation ever improving and wondered who would hire a blind man in this economic environment. “Do I think I’m hopeless?” he said. “Well, yeah, I mean, by looking at it you would think I am hopeless. Like it won’t get better for me.”Copyright 2012 The New York Times Company.  All rights reserved.

In these demanding financial times, many clients of Shenwick & Associates are seeking to modify troubled real estate loans without filing for bankruptcy. As we have discussed in prior e-mails, many alternatives exist in bankruptcy to deal with troubled real estate loans. Now we will look at strategies to deal with troubled real estate loans outside of bankruptcy. If an individual owns real estate and the property is underwater (the fair market value of the property is less than the outstanding liens encumbering the property (mortgages, home equity lines of credit, etc.)), and/or the owner/borrower of the property is having difficulty making mortgage payments, there are a number of options or strategies that the owner/borrower may want to discuss with their lender(s): 1. Many banks take the position that they will consider hardship issues with borrowers unless the loan is in default (the loan payments are past due). The consequences of being in default from loan payments range from lower credit scores for the owner/borrower to the lender commencing a foreclosure action on the property, which may be irreversible. The issue of whether a borrower should default on a loan is an extremely important decision, and should be discussed and analyzed with an accountant and/or attorney. 2. Short Sale. A short sale is a sale of the property which will net less than the amount required to pay off the principal amount of the loan on the property. In these difficult times for real estate, many banks are more amenable to approving short sales than they used to be. The first step in this process is to find a buyer for the property, then enter into a contract of sale with a special rider provision that discloses to the purchaser that the property will only be sold if the short sale is consented to by the seller's bank. Another issue that must be addressed in the short sale is relief of indebtedness income. This topic was addressed in this prior post, but there are tax consequences when the property is sold for less than the balance of the mortgage, which must be discussed with the owner/borrower's accountant and/or attorney. However, if the bank will approve the short sale, then this will allow the seller to sell the property, with some impact on his or her credit report and tax consequences; however, the net result is that the seller longer has to worry about a property that is underwater. 3. Another strategy is to ask the bank to do a "workout." The borrower may ask the bank to reduce the principal amount of the loan, decrease the interest rate or lengthen the term of the loan to reduce the amount of the monthly payments. In order to do a workout with a bank, the borrower must show a hardship. It is this attorney's experience that many banks are loathe to reduce the principal amount of the loan, and if the loan has been packaged and sold to investors, then it is more difficult for the bank to do a workout. 4. Deed in Lieu of Foreclosure. If a loan is in default and the property is underwater, then the borrower may ask the bank to do a "deed in lieu of foreclosure." Under New York law, in lieu of a foreclosure, the owner of the property can agree to deed the property to the bank. Again, there are tax consequences and credit implications in this strategy, and the bank will only agree to take back the property if they truly believe that there are no sellers available to purchase the property. An issue that often comes up in deeds in lieu of foreclosure is what happens to the deficiency–that is, the difference between the value of the property and the amount of the loan. The bank may require the seller to pay all or some portion of that deficiency over time. 5. Purchase of the Mortgage. Another strategy is for the owner of the property to have a friend, family member or investor approach the bank and purchase the defaulted or troubled mortgage loan at a discount. There is no perfect fit or solution to many troubled real estate purchases; however, the owner/borrower needs to be flexible, and oftentimes one of the above strategies can help ameliorate the problem. Before a borrower undertakes one of these strategies, they should consult with their accountant and an experienced real estate/workout attorney, such as Jim Shenwick.

Failing the Means Test:  How to File for Chapter 7 Anyway The Means Test was designed to weed people out of bankruptcy.  Congress feared that people were filing for bankruptcy who could afford to pay off their debts but simply chose not to.  In order to keep such fraud at bay, Congress passed additions to [...]

By JESSICA SILVER-GREENBERG The same problems that plagued the foreclosure process - and prompted a multibillion-dollar settlement with big banks - are now emerging in the debt collection practices of credit card companies.As they work through a glut of bad loans, companies like American Express, Citigroup and Discover Financial are going to court to recoup their money. But many of the lawsuits rely on erroneous documents, incomplete records and generic testimony from witnesses, according to judges who oversee the cases.Lenders, the judges said, are churning out lawsuits without regard for accuracy, and improperly collecting debts from consumers. The concerns echo a recent abuse in the foreclosure system, a practice known as robo-signing in which banks produced similar documents for different homeowners and did not review them."I would say that roughly 90 percent of the credit card lawsuits are flawed and can't prove the person owes the debt," said Noach Dear, a civil court judge in Brooklyn, who said he presided over as many as 100 such cases a day.Last year, American Express sued Felicia Tancreto, claiming that she had stopped making payments and owed more than $16,000 on her credit card.While Ms. Tancreto was behind on her payments, she contested owing the full amount, according to court records. In April, Judge Dear dismissed the lawsuit, citing a lack of evidence. The American Express employee who testified, the judge noted, provided generic testimony about the way the company maintained its records. The same witness gave similar evidence in other cases, which the judge said amounted to "robo-testimony."American Express and other credit card companies defended their practices. Sonya Conway, a spokeswoman for American Express, said, "we strongly disagree with Judge Dear's comments and believe that we have a strong process in place to ensure accuracy of testimony and affidavits provided to courts."Interviews with dozens of state judges, regulators and lawyers, however, indicated that such flaws are increasingly common in credit card suits. In certain instances, lenders are trying to collect money from consumers who have already paid their bills or increasing the size of the debts by adding erroneous fees and interest costs.The scope of the lawsuits is vast. Some consumers dispute that they owe money at all. More commonly, borrowers are behind on their payments but contest the size of their debts.The problem, according to judges, is that credit card companies are not always following the proper legal procedures, even when they have the right to collect money. Certain cases hinge on mass-produced documents because the lenders do not provide proof of the outstanding debts, like the original contract or payment history.At times, lawsuits include falsified credit card statements, produced years after borrowers supposedly fell behind on their bills, according to the judges and others in the industry."This is robo-signing redux," Peter Holland, a lawyer who runs the Consumer Protection Clinic at the University of Maryland Francis King Carey School of Law.Lawsuits against credit card borrowers are flooding the courts, according to the judges. While the amount of bad debt has fallen since the financial crisis, lenders are trying to work through the soured loans and clean up their books. In all, borrowers are behind on $18.7 billion of credit card debt, or roughly 3 percent of the total, according to Equifax and Moody's Analytics.Amid the surge in lawsuits, credit card companies are facing scrutiny. The Office of the Comptroller of the Currency is investigating JP Morgan Chase after a former employee said that nearly 23,000 delinquent accounts had incorrect balances, according to people with knowledge of the investigation.Linda Almonte, a former assistant vice president at JP Morgan, claimed in a whistle-blower complaint that she had been fired after alerting her managers to flaws in the bank's records.The currency office, which oversees the nation's largest banks, is also broadly looking into the industry's debt collection efforts, focusing in part on the documents included with lawsuits. A spokeswoman for JP Morgan declined to comment.The Federal Trade Commission is working with courts across the country to improve the process for pursuing borrowers who are behind on their credit card payments, mortgages and other bills. In a recent review of the consumer litigation system, the commission found that credit card issuers and other companies were basing some lawsuits on incomplete or false paperwork."Our concerns center on the fact that debt collection lawsuits are a pure volume business," said Tom Pahl, assistant director for the F.T.C.'s division of financial practices. "The documentation is very bare bones."The lenders disputed the suggestion that they file lawsuits that include flawed or inaccurate documentation."We look at account records in our system to individually verify the accuracy of information before affidavits are filed and testimony is given," said Ms. Conway, the American Express spokeswoman, who declined to comment on specific borrowers.The industry has faced similar criticism over practices stemming from the housing crisis. Amid a surge in foreclosures, state attorneys general accused the banks of using faulty documents without reviewing them and improperly seizing homes. In February, five big banks agreed to pay $26 billion to settle the matter.The errors in credit card suits often go undetected, according to the judges. Unlike in foreclosures, the borrowers typically do not show up in court to defend themselves. As a result, an estimated 95 percent of lawsuits result in default judgments in favor of lenders. With a default judgment, credit card companies can garnish a consumer's wages or freeze bank accounts to get their money back.In 2010, Discover sued Taryn Gregory for more than $7,000 in credit card debt. Ms. Gregory, of Commerce, Ga., had fallen behind on her bills, but said she had accumulated only $4,000 in debt.After the suit was filed, Ms. Gregory, a 41-year-old child care assistant, asked Discover for proof of the balance. The resulting documents, which were reviewed by The New York Times, have inconsistencies. One statement, for example, says it was produced in 2004, but advertisements on the bottom of the document bear a 2010 date.The lawsuit against Ms. Gregory is still pending. Discover declined to comment. Judges have also raised concerns about witnesses and affidavits.In May, Michael A. Ciaffa, a district court judge in Nassau County, N.Y., challenged the paperwork signed by a Citigroup employee in Kansas City, Mo. He found that one document "has the look and feel of a robo-signed affidavit, prepared in advance," according to court records. The case is still pending.Emily Collins, a spokeswoman for Citigroup, said: "We continually review the effectiveness of our controls and policies for credit card collections, and ensure that affidavits are validated for accuracy and signed by Citi employees with knowledge of the client's account. Citi Cards has a range of programs to support our clients who may be facing financial difficulty, and we make every effort to work with our clients to prevent delinquency."A review of dozens of court records showed that the same employee signed documents in cases filed against borrowers in three other states. In one lawsuit in Seattle, the employee attested in an affidavit in May that a customer, Vickie Sawadee, owed $14,000 on her Citigroup credit card. Although Ms. Sawadee was behind on her payments, she said she does not owe the full amount. She hired a lawyer to defend her case.Many judges said that their hands are tied. Unless a consumer shows up to contest a lawsuit, the judges cannot question the banks or comb through the lawsuits to root out suspicious documents. Instead, they are generally required to issue a summary judgment, in essence an automatic win for the bank."I do suspect flaws," said Harry Walsh, a superior court judge in Ventura, Calif. "But there is little I can do."Copyright 2012 The New York Times Company.  All rights reserved.

People who find themselves in financial hardship never want to be there. And contrary to the opinions of some politicians, most of them want to make good on their debt. But wanting to do the right thing and making the best decision for you are two different things in some cases. It is important to [...]

When you file for bankruptcy, who receives your home depends on a lot of factors.  You may get your home if it falls under certain laws, called exemptions.  Your creditors may receive it if they have a mortgage on it with what is called priority, meaning that they stand first in line. In this case, [...]

Wherever you decide to file for bankruptcy, that location is presumed to be the right one until it is successfully challenged by a creditor or the trustee in your case, whose job it is to administer your estate.   However, once challenged, there is a rule for where to file.  You can file where you were [...]

What is a Cram down? Cram down is only available in chapter 13 bankruptcy and is a way to reduce the total amount you will pay to obtain a free and clear title to your vehicle. If you purchased your vehicle more than 90 days prior to filing for bankruptcy protection and the fair market [...]

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When you file for bankruptcy, you have to tell all your creditors that you file.  Once you have notified them of the case, they are required to file a proof of claim, which is paperwork establishing to the court that you owe them something.  If they fail to file the proof of claim, they may [...]