I know this sounds completely bizarre, but it may start happening more frequently in the near future.

In the past 30 days, I have encountered three new clients who have been “informally” advised by their mortgage lenders to file bankruptcy to deal with their unsecured debt PRIOR to completing a mortgage modification.

Lenders, in addition to the 31% rule (previously discussed in another post), are now taking a closer look at a homeowner’s total debt ratio – also known in the banking business as the “back end number.”.

In the cases I have encountered thus far, each client had a total debt ratio (mortgage payments, auto payments and credit card minimum payments) of in excess of 50% of their monthly gross incomes. It is my understanding that lenders may now not consider a homeowner for a modification unless their total debt ratio is less than 40% of their gross monthly income. For many homeowners, bankruptcy may now be the best alternative to eliminate credit card debt BEFORE applying for a mortgage modification.

As a former banker, I know that although the two ratio formula has been around forever, it has shifted over the years. Back in the early ‘90s (before mortgages began to be sold en masse), the rule of thumb was that mortgage debt should not exceed 28% of homeowner’s gross monthly income, AND that their total debt ratio should not exceed 34% of income. In the early 2000′s, the ratios shifted to as high as 35%/45% (and this was in addition to all of the other types of mortgages that were available, such as “liar” loans).

The pendulum now appears to be swinging back to the more “traditional” guidelines. If you are attempting to modify your mortgage, I suggest that you first calculate your total debt ratio and then speak to your lender . Instead of wasting valuable time processing an application for a modification which could be doomed from day one, it may be a good strategy to be proactive with your lender and ask whether they would be willing to consider you for a modification if you agree to deal with your unsecured (credit card) debt in a bankruptcy proceeding. In this environment, anything is possible….

In the recent past, I have seen a trend develop that, even as a parent, I find extremely disturbing – parents seeking bankruptcy protection in mid-life or in preparation for retirement that will remain saddled with their children’s student loan obligations long after they have discharged of their other debts.

Here’s an example: A couple in their early-mid 50′s that rent an apartment, with a combined income of in excess of $80,000 per year has $50,000 in credit card debt. In addition, while their child was in college, they co-signed for an additional $50,000 in student loans. Their child, now is his/her late 20′s, is having difficulty getting their career off the ground and cannot meet their student loan obligations. Mom and Dad, as the joint obligors, begin to make student loan payments for their child that could be as high as $500/month. Dad’s job then gets downsized and his $60,000 income is now $30,000. Mom and Dad now seek advise from a bankruptcy attorney (me). I now have to deliver the good news and the bad news that (a) they qualify for Chapter 7 bankruptcy; (b) they can obtain a discharge of their credit card debt; but ( c) they will still be obligated for their child’s student loans.

The reason for this is that, despite the provisions contained in Section 523(a)(8) of the Bankruptcy Code, which state that certain student loan obligations may be discharged in bankruptcy, in reality, this is NOT the case.

The rule of thumb in the case law on this issue was provided in In re Brunner The Court in Brunner basically held that so long as an obligor on a student loan is able bodied, has some net disposable income above their usual and customary living expenses, and is capable of making some type of payment on a student loan obligation, that student loan cannot be discharged in bankruptcy.

As a parent and a bankruptcy attorney for over 20 years, I give every parent this word of advise: Love Your Children, But Don’t Sign For Them! I know that you want to do everything you can to help your child to succeed in life, and this includes providing financial support. Financial support, though, does not have to mean co-signing for your child’s student loans.

If your child needs student loans to supplement their college expenses, let your child sign for them, even if you can afford to make the payments. You can always help them to make the payments for as long as you can afford to do so. The key is to love your child, and help them any way you can financially – so long as it is within your means. I am seeing too many couples who put their children ahead of themselves and are being forced to pay their children’s student loan obligations well into their retirement years. This trend will have to be dealt with by Congress at some point, but unfortunately, I do not see it materializing until our present economic house gets put back in order.

Beginning January 22, 2011, individuals filing for bankruptcy protection in New York were given the option of choosing either the New York State or Federal Exemptions to determine what personal property could be protected from creditors and trustees. This has proven to be a major benefit, particularly to those individuals who either rent or own homes with little or no equity.

The primary factor in determining which exemptions to claim in bankruptcy has always been home ownership. Under the old New York Law, there was, and still is to some extent, a “tradeoff” between protecting equity in a home and protecting “cash” assets such as bank accounts, non-retirement stock accounts, and the right to retain a tax refund in the year that a case is filed.

Now, under the Federal Exemptions, in certain circumstances, you can do both. Under the Federal “Wildcard” Exemption, an individual is now allowed to protect upon to $10,800.00 ($21,600.00 for a couple) in equity in a home PLUS up to another $10,825.00 ($21,650.00) in “any other” property, such as bank accounts, stock accounts, tax refunds, or additional equity in a late model automobile.

This has dramatically changed the landscape for an individual considering bankruptcy in New York. In a majority of cases, an individual who has marginal equity in an asset no longer has to fret about whether or not they will have to “make a deal” with a Chapter 7 Trustee to repurchase what was previously non-exempt equity in either a car or a tax refund, or in the alternative, either file Chapter 13 bankruptcy or not file at all.

If you have been considering bankruptcy, but have been afraid of losing your car or your tax refund, fear no more. Now is the time pull your head out of the sand and explore your options with an experienced bankruptcy attorney.

Does your debt feel like it is taking over your life? Has it caused you to lose sleep? Is it causing tension or arguments with your loved ones?  Here are eight tips that should help you cope with your debt and allow you to deal with the emotional and mental issues it causes.

1. Accept that your debt is a problem – Before you can truly tackle your debt and the associated stress and anxiety, you need to admit that it is a problem. Debt creeps up on many people, building slowly over time. Your debt may have grown from a small, manageable amount into something that feels completely out of control. The first step is accepting that your debt is a problem.
2. Open up to your loved ones about your debt – Once you have accepted that your debt is a major problem in your life, it is important to talk to someone about it. By opening up, you are sharing the burden of worry and it can help reduce feelings of stress. Be open with your spouse, as this affects them too, both emotionally and financially.
3. Take action – Stop ignoring your bills and review them! Go over everything, your monthly credit card statements, and your recurring expenses, like your mortgage and car payment as well as your income to create a budget. Once you have an idea of the depth of your problem, you can deal with it. Make an appointment with an experienced bankruptcy attorney to go over all of your options.
4. Restore your confidence – Taking immediate action will also be a benefit with a feeling of achievement. You will soon start to realize that your debt is a problem that you can overcome.
5. Get help coping with your debt – There are many different routes out of debt, including debt consolidation, Chapter 7 bankruptcy or Chapter 13 bankruptcy. It is important that you seek professional assistance to determine what option is right for you.
6. Addressing the stress your debt is causing – If you’ve been dealing with growing debt, you may feel some degree of stress or anxiety – all very natural and common ailments associated with the problem. There are things you can do in your every day life that should be able to help with these feelings. Remember to eat a healthy, balanced diet that will help your body and mind function through the stress. Also make sure to get lots of sleep and exercise on a regular basis.
7. Addressing the psychological aspects of debt – Many people spend money to boost their mood, reward themselves or to make up for disappointments. When this spending turns to debt and they can no longer shop as they used to, it can cause a downward spiral. If you have reached this point, you may want to seek professional advise to go over these issues.
8. Find the path away from debt – Last, as you start to solve your debt problem, with dedicated payments or bankruptcy, make a plan to ensure that you will not to go down the same road that got you into trouble.

Whatever your situation, remember that debt is just a problem that needs to be dealt with. You can and will overcome debt.

In recent posts, I have discussed some of the long-awaited changes impacting the property that New York residents can protect from creditors (and trustees) in a Chapter 7 or Chapter 13 bankruptcy proceeding (“exemptions”) that will take effect on January 22, 2011.

Upon further reflection of the changes, beyond the massive increase in the homestead exemption (from $50,000.00 to up to $150,000.00 in the NY Metro area), non-homeowners, or homeowners with little or no equity, may now opt to use the Federal Bankruptcy Exemptions for the first time.

The guidelines as to which set of exemptions to use are very clear cut: 

1. If a debtor must claim the NYS Homestead Exemption, they must claim all NYS exemptions (cannot use ANY Federal exemptions).

2. If a debtor can claim the Federal Homestead Exemption (or does not require any homestead exemption), they may claim EITHER NYS or Federal exemptions

Here are a sample of some of the Federal Exemptions

Homestead (11 U.S.C. 522(d)(1)) –  $21,625.00*

Household Furnishings (clothing/appliance/furniture) (11 U.S.C. 522(d)(3)) –  $11,525.00

Jewelry (11 U.S.C. 522(d)(4)) $ 1,450.00

Motor Vehicle (11 U.S.C. 522(d)(2) $ 3,450.00

Tools of Trade (11 U.S.C. 522(d)(6)) –  $ 2,175.00

Personal Injury Recovery (11 U.S.C. 522(d)(11)(D)) –  $21,625.00

*WILDCARD (11 U.S.C. 522(d)(5)) –  $ 1,150.00 plus any unused portion of Homestead up to $10,825.00

The wildcard exemption is new to New York. This exemption can be used to supplement any other exemption relating to personal property (cash, tax refund, motor vehicle, furniture, tools of trade). For example, if you own a motor vehicle that was $6,000.00 in equity, under the NY exemptions, you can only protect $4,000.00 of that equity (plus the NY wildcard, if applicable), but if you claim the Federal Exemptions, you can COMBINE the wildcard with the standard Federal auto exemption of $3,450.00 and use an additional $2,550.00 of the wildcard to protect the remaining equity in that vehicle.

Please be reminded that each individual’s case is unique as is the combination of exemptions that could be used in each case.  If you have any questions about the changes in the New York State Exemption Laws, please contact our office.

On January 22, 2011, the amount of equity that an individual homeowner in New York State can protect from creditors in bankruptcy shall increase from $50,000.00 to $150,000.00.

This increase could prove to be a major benefit to boomers and retirees in our area who may:

…own their home (including coops and condos) free and clear or have a substantial equity position in their home;

…are either on a fixed income or are at an income level that would qualify them for a Chapter 7 Bankruptcy under the Means Test;

…have considered bankruptcy because of the burdens of credit card and/or other debt obligations,  BUT

…have been previously unable to file for protection under Chapter 7 bankruptcy because of the amount of equity in their home.

For example, a retired couple, on a fixed income, that owns a coop apartment in Queens will now be able to protect up to $300,000.00 in equity from their creditors in bankruptcy. This change in the law will now allow homeowners to discharge their debts in bankruptcy without placing either their home or other assets at risk, assuming that you meet all of the other qualifications for Chapter 7 Bankruptcy.

If you believe that you may fall into this category, you owe it to yourself to contact our offices at 800-479-6330 to schedule a free, non-obligation consultation in which we can assess your current situation and determine whether you may qualify for Chapter 7 bankruptcy under the new exemption guidelines.

One of the most popular questions that I am asked by both prospective and existing clients is “How long will it take for me to re-establish my credit?” The real answer is – not nearly as long as you may have thought before reading this posting.

If you think about it, this is truly an amazing question. Here you are speaking to a bankruptcy lawyer because you are buried in credit card debt, and you are inquiring about “getting back into the game.” The “game” as I call it, is the cycle of credit that the banks have allowed us to create over the past 30+ years.

The only reality regarding your credit is that the filing of a bankruptcy petition is reported to the major credit bureaus and remains on your report as a public record filing for up to 10 years. Beyond that, there are no hard and fast rules of thumb as to how long it will take to re-establish credit.

Yes – it is extremely important to re-establish credit after bankruptcy. Let’s face facts. We live in a plastic society. You need to have a credit card, even if just for an emergency. The hope is that, coming off of a bankruptcy filing, you will realize that you will need to use credit a little more safely going forward, and the banks know it. They also know that (a) you can only receive a discharge in bankruptcy once every eight (8) years; and (b) if they offer you a line of credit, and you accept it, THEY WILL LOVE YOU because you can’t bail out of them for another eight (8) years!!

Believe it or not, the banks will actually come back to you – your will not have to go to them. It may not be the banks that you have scheduled in your bankruptcy filing, but there are thousands of banks out there that want you as a new customer.

I recently received an email from a client who had recently filed Chapter 7 bankruptcy approximately 60 days earlier, and was awaiting the issuance of her discharge. I was amazed to find out that she had already received three solicitations in the mail and was inquiring about whether she should accept any of them. Unfortunately, this is how easy it has become to re-establish credit.

Practically speaking, I used to advise clients that it would take between 1-2 years to begin to re-establish credit. Now, I honestly don’t know. What I do know is that it will happen much sooner than you may have ever expected…..

The New York Times reported that, on Thursday, July 29, 2010, the Federal Trade Commission announced restrictions on companies that mislead innocent consumers that they can reduce or eliminate unsecured debt.

The new rules, which will take effect this fall, will prohibit Debt Settlement and Debt Consolidation Companies from charging a fee before they settle or reduce an unsecured debt, such as a credit card. The rules will also require that Debt Settlement Companies set up dedicated accounts for debt relief payments by consumers (similar to escrow accounts), disclose how long it will take to settle or reduce a debt (similar to the new regulations imposed on the credit card companies disclosing the amount of time it will take to pay off a credit card), and the potential negative consequences that may occur during the process (such as the impact of defaulting on credit cards and creditor collection and enforcement efforts).

“Too many of these companies pick the last dollar out of consumer pockets and, far from leaving them better off, push them deeper into debt, even bankruptcy,” said FTC Chairman Jon Leibowitz in announcing the regulations. He also stated that these rules “…will stop companies who offer consumers false promises of reducing credit card debts in half or more in exchange for large, upfront fees.”

For the past 20+ years, I have been warning consumers of the inherent weaknesses in the Debt Settlement Process. Too many times, I have encountered clients who have dealt with Debt Settlement Companies, paid them exorbitant up-front fees, only to ultimately file for Chapter 7 bankruptcy. (See our post on Debt Consolidation vs. Chapter 13 Bankruptcy)

The FTC is to be commended for finally bringing this issue to the forefront and placing controls on Debt Settlement Companies.

Section 341 of the United States Bankruptcy Code provides creditors the right to meet with the debtor to determine if a discharge or a reorganization of debt is appropriate based upon the facts and circumstances presented by a debtor in their bankruptcy petition. While creditors technically have the right to attend these proceedings, and to question the debtor, creditors rarely appear at these proceedings.

In a Chapter 7 bankruptcy case, the Meeting of Creditors serves two important purposes. First, the Court, through examination by the Court appointed Trustee, verifies that all of the representations contained in your bankruptcy petition are true and correct to the best of your belief and knowledge. This is also your opportunity to correct any errors that may exist in your petition and schedules that could impact your testimony, such as changes in employment or income, or the addition of any property or creditors that were inadvertently left off of your schedules. Second, the Bankruptcy Court Trustee also utilizes this meeting to verify on behalf of the Court that there are no assets that maybe considered non-exempt, which could be sold by the Trustee to repay part, or all, of your debt. A typical meeting of creditors in a Chapter 7 case takes approximately 5-10 minutes to complete.

In Chapter 13 bankruptcy case, you are also required to appear before a Court appointed Chapter 13 trustee. In a Chapter 13 case, the Meeting of Creditors serves a slightly different purpose. In addition to verifying that all of the representations in your petition and schedules are true and correct, the Chapter 13 trustee will also verify that you have calculated the means test properly, and that you have the financial ability with which to make the payments proposed in the proposed Chapter 13 plan. Verification of your ability to make payments in a Chapter 13 bankruptcy case is based upon both your testimony at the meeting and various documentation, usually bank statements, tax returns and/or pay statements, that must be presented to the Chapter 13 trustee to verify the representations made in your Chapter 13 petition. As in a Chapter 7 bankruptcy case, a typical meeting of creditors in Chapter 13 bankruptcy case takes between 5-10 minutes to complete.

Are you approaching retirement? Are you still burdened with massive minimum monthly payment obligations on your credit cards? Are you concerned that you will not be able to continue to maintain these payments once you stop working?

Over the past 20 years, I have encountered countless individuals in mid-life who have agonized over the prospect of filing Chapter 7 bankruptcy. I call it the “moral dilemma”. We have been ingrained with the concept that you work hard and pay your bills on time. I have also observed that most individuals reach a personal “breaking point” in which they come to realize that they have to consider filing for bankruptcy.

If you have answered “Yes” to the questions above, I suggest that you consider a different approach. Although it is never too late to actually file for bankruptcy, you could end up in a more advantageous financial position in retirement if you consider bankruptcy in the last 5 to 10 years before you retire.

Many people exhaust everything they have – including retirement funds – to avoid filing for bankruptcy, but yet end up in a situation where it is still necessary to file bankruptcy.

In New York where I practice, all ERISA qualified retirement accounts (IRA, KEOUGH, 401k, 457, etc.) are fully protected from the claims of creditors, even in Chapter 7 bankruptcy. Technically, it is considered exempt property, or an exemption.

The worst thing that you could do is to tap your retirement savings to pay credit card debt. If you are considering Chapter 7 Bankruptcy, do not look to your retirement savings to bail you out. I ask you to look only at your present cash flow. If you cannot meet your obligations based upon your present cash flow, I suggest that you seek the counsel of a qualified bankruptcy attorney.

If you act before you spend down your retirement savings, you may still be able to eliminate your credit card and other debts and still retain your nest egg as you approach retirement.

Unfortunately, if you have already tapped some or all of your retirement savings, attorneys cannot go back and get the money that was already paid out. What we can do is to assist you to protect your remaining and future retirement savings. Filing for bankruptcy will help to stop the harassing phone calls and letters, and leave you debt free so that you can move forward as you approach retirement. While it is never too late to file, the smart move is to seek counsel when the first sign of trouble is apparent – not after you have exhausted your retirement savings.