Archives for May 2015

Filing bankruptcy? Your bank may freeze your checking account!

Most people filing a bankruptcy have money in one or more bank accounts. Under certain circumstances, and for one bank in particular, a bankruptcy filing could cause the accounts to be frozen by the bank, at least temporarily, despite the protections of the “automatic stay” the prevent creditors for taking control of a debtor’s property after a bankruptcy is filed.

Money in the bank is an asset of a bankruptcy estate which comes under the control of the trustee. But debtors are entitled to exempt a certain dollar amount of that money and keep it. Technically, the exemptions do not receive final approval until at least 30 days after the First Meeting of Creditors is closed, which will not happen for at least 60 days after the bankruptcy is filed.

Most bank loan agreements have provisions allowing the bank to “setoff” a debt in default against money the bank holds. (ie take the money to pay or pay down the debt that is owed). One would think that a bankruptcy filing would make this illegal, but years ago the US Supreme Court said that it was ok for a bank to “administratively freeze” a debtor’s checking or bank account for a short while, as long as the bank acted promptly to get bankruptcy court approval by a motion to lift the automatic stay. Thus, we tell our clients who happen to owe Bank A money to move their money out of that bank before filing bankruptcy.

A few years back, Wells Fargo Bank as a nationwide policy has started a program to check the accounts of any customer who files bankruptcy. If the total amounts on deposit exceeds a certain amount (I am told it is between $3500 and $5000), they immediately freeze the account and notify the trustee. I am told this started because a trustee successfully sued Wells Fargo for letting a debtor empty a bank account after a bankruptcy filing, taking money that was not the debtor’s to keep.

Most, but not all, courts have so far backed Wells Fargo up on this, but the practice is troubling. Supposedly, there is no harm because the trustee will promptly check out the account and authorize a release of the funds if they are properly exempt. Many trustees applaud the practice, citing cases where hidden bank accounts or under-reported account balances were revealed.

For the hapless but honest debtor, the practice can be traumatic. Suddenly, they have no money. Checks may start bouncing (and of course there are the resulting bank fees!). The trustee may be away or slow to react. Or unwilling to release the funds for one reason or another. Meanwhile, many people have automatic payroll deposits into their account. If the account is frozen this money becomes unavailable. Since earnings from personal services post-petition are not estate property, at least in Chapter 7, this means that the bank freeze has unlawfully seized money that the debtor is unquestionably entitled to. What about joint accounts or convenience accounts? In New Jersey, the money in a joint account generally belongs to the account holder that put it there. So does that mean that the non-debtor spouse has his money frozen too? A convenience account is an account where the debtor is the named account holder for someone else, typically an elderly or infirm relative. Same problem.

One bankruptcy court in New York has ruled that the Wells Fargo freeze violates the automatic stay. I am told this is on appeal.

Until the courts can get this right, people filing bankruptcy need to be aware, fully informed and prepared to avoid these problems.

How Chapter 7 Really Works When Reaffirming a Vehicle

Protecting Your Car When You File For Chapter 7 Bankruptcy Protection

If you face insurmountable debt, you can seek to permanently discharge debt by filing for protection under Chapter 7. The bankruptcy laws limit the type of debt that can be discharged, and also require that reaffirm the debt on any cars or vehicles on which there is a lease or purchase loan. If you own a motor vehicle that you want to keep but which is subject to a auto loan or lease (and assuming it does not have such a large amount of equity that it cannot be fully exempted from sale by a trustee) you still have to take certain steps to prevent a repossession after your bankruptcy discharge.

Reaffirming Your Car Loan in a Chapter 7 Proceeding

A reaffirmation is essentially a new agreement to repay the amount owed on your vehicle. To reaffirm a car loan, you will be required to sign an agreement stating that, in exchange for keeping your car, you agree to continue to make the payments on the car and to remain fully liable on the debt. In essence, this agreement takes the loan out of the debts that will be discharged. The bankruptcy court will review the proposed reaffirmation to make certain that the payment is one you can afford, and that having the car payment will not impose an unreasonable hardship on you and your family. If your attorney, acting as an “officer of the court” can certify to the court that the loan or lease is one you can afford based on your income and expenses, approval typically happens as a matter of course. If your attorney cannot do this, the Court will schedule a hearing to question you about the loan and to determine if it will nevertheless approve the loan.

You can also rescind a reaffirmation agreement within 60 days or at any time before your discharge, and return the vehicle without any further obligation.

If you do not agree to reaffirm the loan and offer to do so, the auto lender will have the right to repossess the vehicle even if you are current on payments. Many auto lenders, especially Ford Motor Credit, are vigorous about this. So to avoid the risk of repossession, an offer to reaffirm, and the signing of a reaffirmation agreement when presented, are necessary.

You want to be careful about entering into a reaffirmation agreement. By doing so, you are essentially agreeing that you will remain fully personally liable for all payments or money due under the car loan or lease without the protection of a discharge in bankruptcy. So, for example, if 6 months after your bankruptcy discharge you fall behind on payments and the lender repossesses then sells the car, it can still sue you for any unpaid balance or deficiency. For a lease, if you owe money at the lease end, you will have to pay up.

Of course, you are protected by the automatic stay, and the lender cannot call, write or take legal action to collect car payments from you until your discharge or until it gets an order for “stay relief”. But once this hurdle is crossed, you could lose your car even if you are remaining current on payments.

Contact Neuner & Ventura, LLP

We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Heading for bankruptcy? Paying your children’s college expenses could create “clawback” headaches for them and their college

Many parents in financial difficulty still place a priority on helping their children with tuition and other college expenses. While this is entirely understandable, parents who pay colleges for their adult children could be creating problems for both their children and the colleges if they later file for bankruptcy protection.

Recent reports in the Wall Street Journal and elsewhere have exposed a growing trend: bankruptcy trustees are suing colleges to “claw back” money paid by parents in bankruptcy. This has led the colleges to seek payment from the students, or to withhold transcripts until the money is repaid. It has even spawn a proposed bill in Congress to prevent bankruptcy trustees from filing such suits.

The underlying legal theory for such “claw-back” suits is not that novel. Trustees have the right and indeed the obligation to pursue getting back money or property that a debtor in bankruptcy has “fraudulently” transferred, so the money can be made available to pay creditors (and to pay the trustee and his attorneys). The payment need not have been done with actual intent to defraud creditors. It is sufficient if it was made without the parent/debtor getting “reasonably equivalent value” in return for what is paid, and if the payment was made at a time the parent was insolvent or unable to pay current or anticipated debts.

In essence, the trustees argue, the parents paying the college education expenses of an adult child are making a gift to that child. Gifts are by definition not made for “reasonably equivalent value”. They take away money that could have been used to pay the parent’s creditors.  Love and affection are not considered “reasonably equivalent value”.

If the parent takes out a loan or co-signs a student loan for the child but all the money goes to the child or her college, the effect is the same. It is still an avoidable gift.

Ironically, if the parent making the payment is required to do so under a divorce settlement incorporated into a divorce decree, the problem disappears. Why? Because the parent has a legal duty to pay that is enforceable by the divorcing spouse, and by making the payment the parent is relieved of part of that obligation. This is no different than when one pays a debt that is owed. The corresponding reduction in debt creates reasonable value in exchange.

Generally, in New Jersey, parents do not have a legal obligation (absent a divorce situation) to support their children after they achieve the age of majority or become “emancipated”.

There are ways around this problem for parents in financial difficulty. One option is to file bankruptcy first, then pay the college expenses out of future income or assets that are protected in bankruptcy (such as pensions or profit sharing plans),  after the bankruptcy is over. But for most people in this situation, they and their children need to have a sober and honest discussion about what is practical and in every one’s best interests in the long run.

Careful planning and advice of qualified professionals is a must. These are difficult decisions and should be thought through carefully as part of a broad based plan for getting a “fresh start”. With years of trustee and bankruptcy experience, we have the ability to help distressed parents sort it all out.

Filing Bankruptcy Without Your Spouse

You may have personal financial issues that you brought into a marriage, or that really have little or nothing to do with your spouse. You can file a petition in bankruptcy without including your spouse, but how the two of you will be treated will depend in part on where you live and what property or debt you have together.

Selling Jointly owned property

In New Jersey, Pennsylvania and most states outside the western United States, Florida and Louisiana “community property” between a husband and wife does not apply. This means that unless a divorce has already been filed when the bankruptcy is filed, any property that titled exclusively to you, as well as your rights and interest in jointly owned property becomes part of your bankruptcy estate.

A bankruptcy will generally not remove the claims or interest of your spouse in jointly owned property. However, if the property has enough equity or value that your interest in it cannot fully be protected by exemptions available to you in bankruptcy, it can be subject to sale.

In New Jersey, even property that is held as “tenants by the entireties” (ie as husband and wife) can be sold by a bankruptcy trustee over the spouse’s objection. If that were to occur, the non-debtor spouse has certain rights and protections. First, the trustee has to show the court that the benefit to creditors from a sale outweighs the harm to the non-debtor spouse. If the value is high enough, this will commonly be the case. Secondly, the spouse is entitled to his/her share of the net proceeds after paying costs of sale and any mortgage or valid secured debt. Third, the spouse can outbid the proposed purchaser to buy out the debtor’s interest in the property.

This is a situation that absolutely requires careful consideration and advice from an experienced, knowledgeable bankruptcy attorney.

No Discharge of Joint Debt

If you do file for protection under Chapter 7 without your spouse, any discharge of joint debts will only affect your obligation. Even though your debt is discharged, your spouse will still be required to repay his or her portion.

The flip side of this is that your household income will still have to be used to pay your non-filing spouse’s debts and joint debt. If there is not enough money to do this, a joint bankruptcy filing may be needed.

These are situations that need careful and detailed review by an experienced bankruptcy attorney knowledgeable about both bankruptcy and divorce issues, as well as the process of trustee sales of assets. At Neuner and Ventura LLP, we have that background.

Contact Neuner & Ventura, LLP

To schedule an appointment, call our office at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request. There is no cost or obligation for your first meeting.

Representing Clients across South Jersey

The Implications of Bankruptcy for a Cosigner

What is the Potential Impact on a Cosigner if You File a Bankruptcy Petition?

It is fairly common practice, when an applicant doesn’t have sufficient credit history or fails to qualify for a loan, for the lender to extend credit anyway, if a family member or someone else co-signs on a note. What happens, though, when the applicant encounters financial difficulties and chooses to file for bankruptcy protection? What are the implications for the co-signer?

The Effect of Bankruptcy on the Obligations of a Co-Signer

When a debtor files for bankruptcy protection under Chapter 7, there is no protection extended to the co-signer who remains liable to pay the amount due. A Chapter 7 filing will only discharge the obligation of the debtor. The automatic stay of collection efforts does not protect the co-signer from a lawsuit..

There are ways that you can protect a co-signer in a Chapter 7 bankruptcy. First, if the loan is a mortgage or auto loan, you can get or remain current on payments and keep paying. For auto loans or leases (the most common co-signer situation) you can opt to reaffirm the debt (but you have to do this so it is presented to the court before your discharge) This means that you waive the right to discharge that debt and confirm that you accept personal responsibility to pay it after the bankruptcy is final. If you do this and keep making payments on the debt even after the bankruptcy is final, action against the co-debtor is unlikely.

Chapter 13 offers much more protection to co-signers and guarantors on non-business “consumer debt” such as auto loans or leases. In Chapter 13, the automatic stay extends to co-signers and co-debtors under what is known as the “co-debtor stay.” While the stay will end when the Chapter 13 period expires, your co-signer will have protection for the three-to-five year term of the Chapter 13 reorganization.

A creditor may seek to have the stay lifted with respect to a co-signer under limited circumstances, including :

  • A determination that it was the co-signer who actually received the benefit of the debt
  • The creditor will suffer “irreparable harm” if the stay is not lifted
  • The Chapter 13 plan does not call for payment in full by the end of the reorganization period

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we provide a free initial consultation to every client. To set up a meeting, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

Recognized Quality & Experience