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Can One Protect Their Tax Refund During Bankruptcy?

Posted on Monday, January 22nd, 2018 at 11:53 am    

The following post is part of our Law Student Blog Writing Project, and is authored by Jessie Smith, a law student from the University of Kentucky.

Bankruptcy in Northern Kentucky Series

Taxation is something few think about during most of the year, absent the occasional article in the paper or segment on the news concerning the potential for tax reform. However, during the latter portion of the year, particularly between the New Year Holiday and April 15, otherwise known as “Tax Day,” taxes are a topic that come to the forefront of most working Americans’ minds. Although most do not look forward to the prospect of “filing taxes,” many can expect a refund for the amount they have overpaid through the year. For those in the midst of bankruptcy, or considering filing for bankruptcy, a natural concern that arises is what may happen to their tax refund. Although everyone’s circumstances vary, and those that find themselves in this position should seek out legal counsel, this blog post aims to provide a general answer to that question.

Can One’s Tax Refund Be Protected During Bankruptcy, Or Is It Subject To Seizure?

When an individual files for bankruptcy in Northern Kentucky, the vast majority of that person’s assets (the “non-exempt” assets) become part of what is referred to as the “bankruptcy estate.” The “bankruptcy estate” is defined by the U.S. Bankruptcy Code in 11 U.S.C. § 541. Section 541 defines the estate in sweeping terms, and, under most circumstances, one’s tax refund will be considered part of the bankruptcy estate. Whether one’s tax refund becomes part of the bankruptcy estate depends on a variety of factors, including the timing of the filing of bankruptcy, the year in which the income for which the refund is given was earned, and under what Chapter of bankruptcy one files, as well as how one chooses to utilize their “exemptions.”

The best way by which to illustrate the above is by way of example. Hypothetically, if a “debtor” were to file Chapter 7 bankruptcy in January of 2017, and were to subsequently receive a refund for the 2016 tax year, then that money will become part of the bankruptcy estate. Many may find this result somewhat confusing, since the tax refund is received after filing for bankruptcy. The underlying reasoning is grounded upon the period of time in which the money was earned and paid to the IRS; since the money was earned, and taxes on that income were to paid to the IRS, prior to bankruptcy, then the money one receives in the form of a tax refund as the result of any overpayment in taxes is viewed as though it was received throughout the previous tax year, as opposed to after filing for bankruptcy. As one source puts it, the way in which the law views this scenario is somewhat analogous to a savings account – the money overpaid in taxes for the 2016 tax year is “saved” by the IRS, just as one would place funds in savings, and the subsequent tax refund is similar to a “withdrawal.” Thus, under this hypothetical situation, although the debtor does not, in reality, receive the funds until after filing for bankruptcy, the money was earned and taxes paid prior to the filing, and will therefore likely be swept into the bankruptcy estate.

Another example arises when one files for bankruptcy and receives a tax refund for the same year. The following facts are illustrious of this hypothetical scenario: debtor files for bankruptcy in June of 2017, and subsequently receives a tax refund for the 2017 tax year in April of 2018. The question arises: does the tax refund get swept into the bankruptcy estate, as was the result under the immediately preceding set of facts? The answer is “yes” and “no.”

Here, the tax refund will be divided into two separate and distinct groups, the first being that portion of the refund attributable to income earned prior to filing for bankruptcy, and the second being that portion attributable to money made after the filing. The first group (that portion of the tax refund that is based on income earned before filing) is subject to being swept into the bankruptcy estate, while the second group (that portion of the tax refund that is based on income earned subsequent to filing) will likely escape the clutches of the estate. In other words, the amount of the tax refund that is calculated based on income earned prior to June of 2017 will become part of the estate, while the amount attributable to income earned subsequent to June of 2017 may be protected.

Another example provides some clarity with respect to a third, commonly seen situation. Assume debtor files for bankruptcy in December of 2016, and later receives a tax refund for the 2017 tax year. The concern that immediately comes to mind is whether the 2017 tax refund will be protected, or whether it will be subject to seizure. Here, the debtor will most likely get to retain the full amount of the tax refund, because all the income upon which the taxes were assessed was earned subsequent to filing for bankruptcy. In other words, the entire amount of taxes overpaid for the 2017 tax year were paid after filing for bankruptcy, and would thus generally escape being swept into the bankruptcy estate.

A final wrinkle that may be a concern for some is what happens to their tax refund in the context of a Chapter 13, as opposed to a Chapter 7, bankruptcy. The answer is largely grounded in the legal ramifications associated with filing for one type of bankruptcy over the other. When a debtor files bankruptcy under Chapter 7, the bankruptcy trustee takes possession of all of the debtor’s non-exempt property and/or assets, liquidates them (hence the term often used to refer to Chapter 7 bankruptcies, “Chapter 7 Liquidation”), and distributes the cash to the debtor’s creditors. Generally speaking, after the liquidation and subsequent distribution occurs, the debtor is “discharged” of all debts incurred prior to the bankruptcy filing. Under Chapter 13, on the other hand, a debtor repays their debts through utilization of their income, and may retain some of their assets. The period of time in which a debtor makes payments toward their debts is often referred to as a “repayment plan,” and typically lasts three to five years. Once the repayment plan is completed, the debtor’s debts are “discharged.” However, the critical difference between Chapter 7 and Chapter 13 bankruptcies in the context of retention of one’s tax refunds is centered around what is called “disposable income.” To put it in very general, broad terms, under a Chapter 13 plan, one’s “necessary and reasonable” expenses (i.e., generally, those expenses required to live, including, but not necessarily limited to, food, clothing, shelter, etc.) are subtracted from their regular income, and the resulting figure is known as the debtor’s “disposable income.” Most often, when a debtor files a Chapter 13 bankruptcy, and files a repayment plan with the court, tax refunds are not considered in the debtor’s income, and is thus not utilized in calculating the debtor’s necessary and reasonable expenses and disposable income. Thus, when a Chapter 13 debtor receives a tax refund, the amount received is most often considered “disposable income,” since the repayment plan accounts for the debtor’s regular income, regular expenses, etc., but does not factor in the additional funds a debtor will receive when given a tax refund. To put it more simply, the tax refund is, in a way, considered “extra money,” money that the debtor does not need to pay for their “necessary and reasonable” expenses; therefore, it is considered “disposable income,” and will be used to pay the debtor’s debts during the course of the repayment plan. Generally speaking, unless there is some “necessary and reasonable” expense that has not been taken into account by the repayment plan, then the chances of a debtor retaining their tax refund throughout the repayment plan period in a Chapter 13 bankruptcy is slim.

Are There Other Ways One Can Protect Their Tax Refund In The Midst Of Bankruptcy? Can Tax Refunds Be Utilized For The Payment Of Legal Fees Rendered In Filing Bankruptcy?

Although options are varied, many facing bankruptcy may think of paying legal fees through utilization of one’s tax refund as a means of protecting their refund during bankruptcy. For those considering such an option, it should be noted that others have pursued the same means of protecting their tax refund in the past. To determine the feasibility of this option, the following case law will be discussed.

In In re Hunter, the United States Bankruptcy Court for the District of Kansas was faced with the question of whether the assignment of a debtor’s tax refunds to their attorney as a method by which to pay legal fees would be protected, or swept into the bankruptcy estate. The particular circumstances are as follows: the debtors executed an assignment, operation of which allowed for their attorney to receive the pre-petition portion of their tax refunds as a flat-fee retainer in exchange for legal services rendered in filing for Chapter 7 bankruptcy. The bankruptcy trustees moved the court for an order forcing the pre-petition portion of the debtors’ tax refunds into the bankruptcy estate.

In support of their motion, the trustees made three primary arguments. The first argument the trustees set forth was predicated on 11 U.S.C. § 544(a), which, generally, provides for the avoidance of “any transfer of property of the debtor or any obligation incurred” under certain circumstances. Those particular circumstances in this case, and from the point of view of the trustees, was that the debtors could not “assign what [was] an essentially undivided and unliquidated expectant interest based upon a notional ‘accrual’ date.” Secondly, the trustees argued that the “debtors [were] required to marshal away from that part of the refund to which the estate [was] entitled.” Finally, the trustees were of the view that assign that portion of their tax refund attributable to pre-petition earnings “‘burden[ed]’ the creditors by effectively forcing them to pay the debtor’s attorneys’ fees and that this burdensome effect render[ed] the assignments fraudulent transfers done for the purpose of hindering or delaying the debtors’ creditors.” The debtors, on the other hand, made one simple argument: “an assignment of pre-petition tax refunds for payment of a flat fee is no different than a debtor paying an attorney a flat fee in cash; the result in either event is that the payment does not become property of the estate,” they argued.

The court largely agreed with the debtors. The court looked to statutory and case law in reaching its conclusion, drawing upon 11 U.S.C. § 330(a)(1), United States Trustee v. Lamie, In re Wagers, and In re Carson. Drawing upon all the previously identified law, the court determined that a “flat-fee retainer assigned for work done incident to filing a chapter 7 does not become property of the estate”; rather, “the assignment of an anticipated tax refund as part of or all of a flat-fee retainer is enforceable against the estate, at least to the extent of the amount of the flat fee.” The court finally concluded: “the benefits . . . to the debtors and to their creditors of having chapter 7 debtors well represented to outweigh the relatively small detriment that these assignments may work on the creditors. The assignments of these debtors’ expectancy interests in their tax refunds, limited as they are by the amount of the flat fees owed and by the amount of the refund that would be determined attributable to the estate are valid and enforceable. They do not significantly differ from a cash retainer payment that depletes the debtor’s resources before she files a case. So long as the fees are not fraudulent or excessive, there is no basis for the Trustees to recover them.”

It is important to keep in mind that different courts are held and bound to differing rules of law, depending on the jurisdiction. Although the results reached in In re Hunter may seem encouraging, the results reached there are not necessarily applicable in other jurisdictions. As always, it is important to speak to counsel regarding one’s own personal circumstances before coming to any determinations on how best to proceed.

Editor’s note: In the Covington Division of the Eastern District of Kentucky Federal Court, where all Northern Kentucky bankruptcies are heard, the Court and Trustees regularly allow debtors to use their tax refunds to pay for the bankruptcy attorney’s fees.


Depending on a variety of factors, some of which have been discussed above, a debtor facing the possibility of filing bankruptcy may have some options when it comes to possible retention of their anticipated tax refunds. However, there are a wide array of considerations that must be kept in mind when discussing bankruptcy. Although this post has focused primarily on what many consider to be the most common types of individual, consumer bankruptcies (that is, Chapter 7 and Chapter 13), one may consider Chapter 11 under certain circumstances, as well. Another consideration that was not addressed here involves whether one even qualifies for Chapter 7, or would be pushed into a Chapter 13. Such a determination is based on many factors, one of which is referred to in the bankruptcy arena as the “Means Test.” These considerations are briefly mentioned here to illustrate that the general overview provided above is by no means exhaustive or authoritative, to simply demonstrate that everyone’s circumstances vary, and, depending upon those circumstances, one option may be more appealing than another. Ultimately, however, certain debtors may feel somewhat more comfortable traversing the obstacles of bankruptcy with the knowledge that they may be able to, in one way or another, protect an anticipated tax refund.

If you’re considering using your tax refund to file a bankruptcy, call Lawrence & Associates! We’ve been helping people in Northern Kentucky keep their tax refunds for more than a decade. We’re Working Hard for the Working Class, and we want to help you!

Jingle Bells or Jingle Blues?

Posted on Tuesday, January 16th, 2018 at 12:31 pm    

The following post is part of our Law Student Blog Writing Project, and is authored by Thomas Rovito, who is pursuing his Juris Doctorate at the Ohio State University.

How Holiday Credit Card Debt Could Impact Your Kentucky Bankruptcy

The consumer advocate news outlet NerdWallet estimates that the average American will spend $660 for holiday gift transactions. Two other statistics to note include that the number of Americans in credit card debt after the holiday season has been increasing, from 48% of shoppers in 2015 to 56% of shoppers in 2016, and that 27% of Americans did not have a holiday shopping budget in 2016; of those who did have a budget, 24% exceeded it. These statistics beg the question on what would happen if a shopper stocks up on Christmas presents using his credit card, and then subsequently files for bankruptcy. Will those retail store creditors turn into the Grinch and seek the return of gifts from family and friends, or would something else happen?

The answer is in the Bankruptcy Code. But before jumping headlong into the primary source material, secondary sources can provide guidance on this topic. For instance, the Administrative Office of the United States Courts has provided an overview of Bankruptcy Basics to introduce lay people to the topic. The Ohio State Bar Association and the Kentucky Bar Association both have pamphlets on bankruptcy. In addition, third-party sites, such as Findlaw and Nolo, have easy-to-use resources.

While the Bankruptcy Code is full of legal terms of art and abstract legal concepts, they can be broken down to individual and applicable ideas. For instance, there are six different forms of bankruptcy, but in most cases only Chapter 7 Liquidation or Chapter 13 Adjustment of Debts of an Individual with Regular Income would apply to individual consumers with credit card debt. In Chapter 7 bankruptcy, which is means-tested to prevent abuse, a trustee liquidates the debtor’s assets for cash to pay creditors, unless the specific piece of property is exempt, to give the debtor a fresh start. In Chapter 13 bankruptcy, a debtor may retain valuable assets, such as his home or vehicle, and structure payments to creditors in accordance with his income. Chapter 7 bankruptcy is typically quicker, taking about four months to obtain discharge, to Chapter 13’s duration of three to five years. All Northern Kentucky bankruptcies are filed in federal court in Covington, Kentucky.

The objective of the debtor should be to obtain a discharge, which “releases the debtor from personal liability for certain specified types of debts.” But not all debts are created equal. There is also a material difference between secured debt (“[d]ebt backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default,”) and unsecured debt (“debt for which a creditor holds no special assurance of payment, such as a mortgage or lien; a debt for which credit was extended based solely upon the creditor’s assessment of the debtor’s future ability to pay”). For more information on this distinction, please refer to 11 U.S.C. § 506. While most credit card debt is unsecured, it is important to note that some credit card companies and department store cards retain a security interest, or purchase money security interest, within their contracting agreement with the consumer, often in the fine print of the bottom of the credit card agreement. This security interest would act like collateral on outstanding transactions, and would give the credit card company or department store the right to repossess the property if it was not paid in full. While most credit card debt is unsecured, larger luxury purchases such as televisions, are likely covered by a security interest, and can be repossessed.

So how do these concepts apply to a consumer who builds up debt during the holidays? First, the consumer should look at the distinction between secured and unsecured debt. If the consumer has secured debt, or debt with collateral, then potential creditors could attach the property (like a home, car, or improvements on a vehicle) in the event of default. On the other hand, If the consumer has unsecured debt, which is the category of most consumer credit card purchases, then the creditor cannot attach the assets in event of default; however, the creditor may use a debt collector to compel payment, report the failure to credit agencies–reducing the debtor’s credit score and increasing the cost of future loans, or go to court to garnish the wages of the debtor. In addition, the ultimate disposition of the debtor’s credit card issues would also depend on whether the credit card company or department store retained a security interest in the property; if so, there is the possibility the property could be repossessed.

There is a matter of timing for debts to be considered dischargeable. Under 11 U.S.C. § 523(a)(2)(C), “debts owed to a single creditor and aggregating more than $675 for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable.” In plain English, this means that debts to a single company that add up to more than $675 for goods not necessary for the support of the debtor (for example, food, water, shelter), are presumed to allow the creditor to collect against the debtor. Thus, if you exceed more than $675 in holiday credit card debt on luxuries, and not essentials, it may impact future bankruptcy proceedings.

In addition, it is important to note that the bankruptcy court may deny discharge in a case if there are fraudulent conveyances, or an attempt to shift assets from the debtor to third-parties for the purpose of avoiding paying creditors. To learn more about this topic, please see 11 U.S.C. § 727; Fed. R. Bankr. P. 4005. In addition, the trustee of the estate or a creditor may petition the bankruptcy court to revoke a discharge “if the discharge was obtained through fraud by the debtor.” See 11 U.S.C. § 727(d).

Ultimately, a decision to file for bankruptcy is serious, as it may place your assets in jeopardy and drastically impact your credit rating. On the other hand, if it is structured correctly, bankruptcy can provide you with relief from creditors, especially after the holidays with consumer credit card debt, while preserving your most precious assets, such as your home or car. It is important to note the distinction between secured debt (secured by collateral) and unsecured debt (that is not secured by collateral) before engaging in holiday transactions, in addition to determining whether your credit card company retains any security interest in your transactions by reading the fine print of the credit card agreement. This information, when coupled with sound budgeting, fiscal discipline, and adequate financial disclosure, can make the difference between jingle bells or jingle blues this holiday season.

Lawrence & Associates has offices in West Chester, Ohio and Fort Mitchell, Kentucky. We’re Working Hard for the Working Class, and we want to help you!

What Will Happen to My Spouse If I File Bankruptcy?

Posted on Wednesday, January 3rd, 2018 at 9:59 am    

There are a lot of reasons to file a bankruptcy, and there are even more reasons to not want your spouse involved. From our Northern Kentucky office, Lawrence & Associates has filed thousands of bankruptcies and seen hundreds of scenarios where it would benefit the people in debt to have only one spouse file for bankruptcy. While we’ve discussed the effect on a non-filing husband or wife when their spouse needs to file bankruptcy before, there are many angles to this question that appear in multiple blog posts rather than all in the same place. This post will consolidate that information.

How Do You Decide Whether Both Husband and Wife Need to File Bankruptcy Together?

The most important consideration here is determining which debts are driving you toward bankruptcy, and whose name the debts are in. Debts that were obtained in both spouses’ names will make each spouse jointly and severally liable for payment of that debt. For example, if you are behind on your credit card payments and afraid of getting sued, a Chapter 7 bankruptcy is one way to get out from under that high interest rate debt. But who signed the credit card agreement and whose name is the account in? If only the husband or only the wife signed, then only that spouse will need to file bankruptcy. But if both spouses signed the agreement or have cards in their names, then both spouses MUST file bankruptcy to wipe out the debt. If only one spouse files, then the credit card company can still sue the non-filing spouse.

If you don’t know whether you might be liable for your husband or wife’s debt, the answer depends on where you live. We covered Kentucky’s equitable division rules previously in this blog, but only at the state level. At the county level, even in an area as small as Northern Kentucky’s seven counties, there is wide variation depending on the judges involved. Boone and Gallatin Counties have one family law judge; Kenton and Campbell counties each have their own family law judge; Pendleton and Robertson Counties share a family law judge with other counties outside the Northern Kentucky area, and; Grant, Bracken, and Mason Counties don’t have a family law judge at all! This wide variation creates a great deal of variability, but usually both spouses will be liable for debt even if only one spouse took out the debt. However, Lawrence & Associates’ attorneys are skilled at finding exceptions to the general rule, so ask before you assume this will apply to you.

Map of Boone, Kenton, Campbell, Gallatin, Grant, Pendleton, Mason, Bracken, and Robertson Counties in Northern Kentucky

Map of Boone, Kenton, Campbell, Gallatin, Grant, Pendleton, Mason, Bracken, and Robertson Counties in Northern Kentucky

One thing to bear in mind is that leaving one spouse’s name off of the bankruptcy will not affect what kind of bankruptcy you can file. High income earners must file a Chapter 13 bankruptcy, because federal law will not allow anyone to file a Chapter 7 if they are making more than median income for their state. However, that median income is the income of the household, not the person filing. So, for example, assume a Northern Kentucky family makes above median income because the wife is a highly paid doctor, while the husband is disabled. Even if only the husband has debt and only the husband needs to file bankruptcy, the husband will be forced into a Chapter 13 bankruptcy because the wife’s income raises the total household income above median. Leaving the doctor off the bankruptcy will protect her credit, but will not change the husband’s bankruptcy from a 13 to a 7.

Will Filing Bankruptcy Affect My Spouse’s Credit?

In general, credit is linked to a social security number, and only the bankruptcy filer’s social security number appears on the bankruptcy filing. Each person has a separate credit file for credit reporting purposes. Your debts, if the debts are truly yours alone, are not supposed to show in your spouse’s credit report. Similarly, your bankruptcy should not show in your spouse’s file if you have no joint debts.

Will My Spouse Have to Come to Court or Be Involved?

Your spouse will certainly know a bankruptcy has been filed – the court and your attorney will mail things to your home – but your spouse should not have to attend any hearings or meetings with an attorney in the vast majority of cases.

Will Anyone Notify My Spouse’s Employer?

It is illegal for a creditor to notify your employer or your spouse’s employer, or any family members, landlords, etc. in an attempt to collect a debt. Further, the bankruptcy court only sends notices to people listed on the bankruptcy, including the debtors, the creditors, and any co-signers. As long as your husband’s or wife’s employer doesn’t fall into those categories, there is no reason the employer should find out about the bankruptcy.

One exception to this rule would occur if you choose to have your Chapter 13 bankruptcy payment (which goes to the Chapter 13 Trustee) pulled directly from your spouse’s paycheck. A paycheck garnishment is the most common way to make this payment, and the filing spouse sometimes between jobs, or has some other circumstance that makes pulling the payment from the non-filing husband or wife’s paycheck the most attractive option.

If you have any other questions about this topic, please call our Fort Mitchell, Kentucky office at 859-371-5997. We are one of the largest bankruptcy filers in Northern Kentucky and helped over 3,000 clients. We’re Working Hard for the Working Class, and we want to help you!

Will Student Loan Debt Cause the Next Financial Crisis?

Posted on Wednesday, August 30th, 2017 at 3:23 pm    

The following post is part of our Law Student Blog Writing Project, and is authored by Raphael Jackson, a law student from the Chase School of Law.

According to a recent New York Times article, at least $5 billion are at stake in a protracted legal dispute between student borrowers and creditors. At the center of this dispute is an organization called the National Student Loan Trust (NCT). The NCT is an umbrella organization of fifteen trusts. Having purchased nearly 800,000 student loans, the NCT is one of the largest owners of private student loan debt in the United States. The way the NCT works is that it buys private student loans then subcontracts to collection firms to file lawsuits in U.S. Courts.

Statistics from the student-loan financing website Make Lemonade indicate that 11% of students default on their student loan debt. Private lenders lack many of the powers afforded to federal lenders, such as interception of tax refunds, garnishing of social security benefits, or other seizures of federal income revenue. Therefore private lenders must rely almost exclusively on lawsuits in order to collect on debt. Although the NCT isn’t the only loan purchaser which takes its borrowers to court, NCT is considered to be the most litigious among them. According to the New York Times the NCT files an average of four lawsuits per day throughout the U.S.

Essentially NCT is in the business of purchasing debt, which is also known as securitization. Mass securitization is not an uncommon practice. However, because they purchased the loans in bulk from various private lenders, NCT often cannot provide an unbroken chain of title which links the borrower to the debt actually owed. As a result of this discrepancy, many judges are dismissing NCT cases in court.  Once a case is vacated in the court the borrower is no longer on the hook for the amount the creditor claims he or she owes.

What this means is that if you are one of the 800,000 former students whose student-loan debt is owned by the NCT, it is possible that your debt may be wiped clean.

How can you beat a law suit to collect on a student loan?

Transworld is the agency that NCT hires to collect their debt and take the consumers to court. According to a review conducted by the New York Times, the lawsuits brought about by the NCT/Transworld are failing in court due to their inability to prove ownership documents. This problem is similar to that which was caused by the ‘robo signing’ which plagued the subprime mortgage crisis of last decade. Attorney Robin Smith of the National Consumer Law Center commented “This is robosigning 2.0 with student loans...You have securitized loans in these large pools; you have sloppy record keeping,” as in the mortgage crisis.”

Federal loans afford a measure of protection to the consumer through income based payment plans, and the ability to discharge the loan in the event that the borrower’s school was closed down due to fraudulent dealings. Private loans on the other hand do not afford such protections to the consumer, furthermore the double digit interest rates, which balloon over time, can leave the borrower to pay hefty monthly sums which are unaffordable to most borrowers.

How do I know if I’m being sued for student debt?

You know you are being sued for the debt if you have received a summons and complaint in the mail. Once you received this summons and complaint from a court you have twenty days in Kentucky to answer it, or twenty-eight days in Ohio. If there are other defendants listed on the lawsuit they are probably your co-signers, who may be equally liable in court. To fail to respond to a summons within the thirty day time frame is to grant your lender a default judgment in court.

Traditionally many debt collectors relied on the default judgments they would receive by defendants’ who either ignored summons or quickly agreed to payment settlement terms. NCT typically puts out lawsuits within 6-12 months of the borrower’s default on the loan. Therefore, whether or not you intend on seeking professional assistance from an attorney be sure to mark your calendar. Once you receive the summons the clock on your lawsuit begins ticking.

Is it always in my best interests to quickly settle?

Some consumers arrange with law firms to make a settlement. What the debt collector is seeking is usually a “consent of judgment” along with an agreed upon monthly payment schedule. Keep in mind that once you sign you are consenting that you are legally liable for the debt. Before you have explored all of your legal options or verified the amount you actually owe, rushing into a settlement may not always be the best strategy. You may be one of the 800,000 consumers who has an affirmative defense. With the assistance of an attorney at the very least, with you may be able to work out a better settlement.

An affirmative defense is additional evidence which negates civil liability even if the initial charge can be proven. One typical affirmative defense is the statute of limitations. In the commonwealth of Kentucky, creditor’s generally take the position that the lawsuit must be filed within five years. In the state of Ohio, the statute of limitations on suing for student loan debt, or debt of any kind, is generally six years.

Finally, the NCT must show actual proof of the debt that you owe. This proof should be in the form of a loan agreement between you and the lender. Oftentimes in cases where the lender possesses some paper work evidence, the exact amount still may be in dispute.

If the collection agency has run the statute of limitations, they are still attempting to collect on the debt in spite of not having the proper documentation, this company may possibly be in violation of the Fair Debt Collections Act.

If you have been sued by your student loan provider, or you believe there is a discrepancy between the amount you owe and the amount that your lender is seeking to collect, contact an attorney as soon as possible for a free consultation.

When Is Creditor Harassment Illegal, and How Can You Stop Harassment?

Posted on Tuesday, August 1st, 2017 at 2:39 pm    

The following post is part of our Law Student Blog Writing Project, and is authored by Raphael Jackson, a law student from the Chase School of Law.

During the 2016-2017 school year, Colleges and Universities in the U.S. have awarded approximately; 1 million Associates degrees; 3 million Bachelor’s degrees; 790,000 Master’s degrees; and 180,000 PhD’s. According to the most recent statistics from the Federal Reserve there is 1.2 trillion owed in total student loan debt. Of these approximate 3 million graduates, 11% will default in their student loan debts. Even if you have not taken out student loans, chances are you have, at least once in your life, been in communication with debt collection agents.

Losing your job, being involved in an accident, or losing a loved one are some of the many things that can trigger an unexpected loss or income, or an increase in medical bills. Aside from being tragic these unexpected events can ultimately result in the victim falling into debt. If the consumer has defaulted it is important for them to work out any arrangement they can before the debt goes to a collection agency. Once your debt has been sold to a debt collection agency, it will have been handed off to an entirely new group of people. This new group of people have no knowledge or concern about how the debt was accrued. The collection agencies sole purpose is to collect debt in any way they can.

For those who have been contacted by a debt collector, one of the first steps is to: 1) verify the validity of the debt; and 2) verify that the company contacting you legitimately owns the debt.  Unfortunately many consumers feel the stigma that accompanies being in a state of indebtedness. Among the emotions associated with this stigma is a feeling of defeat and vulnerability. While in such a state of vulnerability, many consumers either forget or fail to realize that they are still entitled to protection against consumer harassment. Some debt collectors take advantage of this circumstance by employing improper tactics in their attempt to collect on your debt. Every consumer reserves the right to not be subjected to such improper tactics regardless of their financial circumstance. Many people acquire debt in the aftermath of a tragic life experience. In the aftermath of a tragedy these same people would be most vulnerable to harassment and exploitation. However, it is important for the consumer to realize that one simply does not relinquish their right to be treated with civility simply because they are in a state of indebtedness.

To ensure that debt collectors do not abuse their power, several states have enacted statutes designed to protect the consumer from unscrupulous debt collection practices. Ohio has enacted the Ohio Fair Debt Collection Practices Act. Although Kentucky has no similar state counterpart, residents of all states are protected by the Fair Debt Collection Practices Act (FDCPA).

What Debt Collectors Are Not Allowed To Do

The FDCPA is a document which enumerates what is considered “fair communication” in debt collection. The entire act consists of eighteen sections and several sub clauses. Among the information contained therein is: the definition of what would be considered harassment or abuse; definition of false and misleading information; and a delineation of the legal parameters of debt collection. The following bullet points cover a general understanding of the issues which most commonly affect the consumer as it pertains to what the debt collector isn’t allowed to do.

  • Harass you by phone- If you make it clear to a debt collector that you do not wish to be called by telephone they must respect this wish. Instead of constant phone calls you can request that the debt collectors relegate their correspondence to written communication. Debt collectors should not correspond by means of post card or any other form in which a third party may discover that you are being contacted in reference to a debt.
  • Contact you outside of a normal time frame – For those who do not mind phone correspondence, rest assured that debt collectors are not allowed to contact you between 9:00pm and 8:00am.
  • Target third Parties – Unless expressly authorized by the addressee, debt collectors are not permitted to intentionally contact third parties for the purposes of collecting your debt. This applies to spouses, children, co-workers, or anyone else who may answer the phone.  A second federal law, called the Telephone Consumer Protection Act also prohibits this kind of harassment.
  • Target you at Work – Unless expressly authorized by the addressee, debt collectors are not allowed to contact you at your workplace.
  • Engage in False Representation – Debt collection specialists are not allowed to represent themselves as court officers, law enforcement agents, or attorneys. They are also not permitted to threaten any legal action – or jail time – that they have no intention of following through with.
  • Circumvent your Attorney – Once you are represented by an attorney, or have otherwise referred the debt collector to contact your lawyer, the debt collector is no longer allowed to contact you directly.

What Can You Do If a Debt Collector Is Violating The Fair Debt Collection Practices Act in Kentucky or Ohio?

Among the debt collection workforce are a large number of part time, seasonal, or non-career employees. While there are several reputable legal firms and skilled attorneys that work in the business of Debt Collection, many of the debt collection specialist jobs require no more education beyond a GED and basic computer proficiency.

Thus, the consumer should never assume that all debt collectors are either thoroughly versed in the Federal Fair Debt Collection Practices Act, or particularly concerned about adhering to their training guidelines beyond what is required for them to remain employed. That being said, among those employed as debt collectors are students, stay-at-home parents, business owners, and others who have full time careers outside of their debt collection jobs.  Thus it should not be a surprise that many collection specialists are knowledgeable in fee dispute resolution and inclined to working with the consumer in an affable way.

Despite this fact, the consumer should never assume that all specialists will follow all guidelines in the absence of any reminders or specific requests from the consumer. It would therefore be wise to make such requests in writing, preferably with a certified letter.

If all else fails, contact an attorney to stop the harassment. Attorneys that can help with situation generally come in two varieties – those who file bankruptcies, and those who file civil actions under the Fair Debt Collection Practices Act. Either kind of attorney can help stop the harassment. A bankruptcy attorney is typically better for those who actually owe the debt and are no longer able to set up a reasonable budget to pay it back. A civil court, FDCPA lawsuit is better for those who don’t owe the debt, or who have the ability to make payments on it but simply need the creditor or collection agency to stop violating the law. When it pertains to creditor harassment each person has her own unique set of circumstances. By contacting either type of attorney, you can be ensured that the debt collector will cease harassing you; and that your attorney will be able to represent you in court if necessary.

At Lawrence & Associates, we file bankruptcies to stop creditor harassment, and we will bring the creditors to federal court for harassment that occurs after the bankruptcy’s filing. If you are being harassed by a creditor, call one of our attorneys today for a free consultation. We’re Working Hard for the Working Class, and we want to help you!

Medical Bills, Bankruptcy, and Trump – How the Pending AHCA Bill Could Affect Bankruptcy Filings

Posted on Wednesday, May 24th, 2017 at 9:37 am    

The following post is part of our Law Student Blog Writing Project, and is authored by Ian Fasnacht, a law student from Ohio State University Moritz College of Law.

The Affordable Care Act (ACA), also known as Obamacare, took effect in 2010 and has been the center of political tension for almost a decade. From 2010 to 2016, personal bankruptcy filings have decreased by 50%. Courts do not require individuals to disclose why they are declaring bankruptcy, but research indicates medical bills are the “single largest factor in personal bankruptcy” accounting for between 50 and 62% of all personal bankruptcy filings.

Also illustrative is 2010 Massachusetts, which had been operating under Romneycare for several years. Romneycare served as a base model for the ACA. Massachusetts in 2010 had a 30% lower personal bankruptcy filing rate than any other state in the Union. The average Massachusetts medical bills were also one-third of the average medical bills in every other state.

Because of the close correlation between personal bankruptcy filings and medical bills, the ACA is considered a driving factor in the decline of personal bankruptcy filings in recent years. Medical bills can be expensive and unexpected, which forces families and individuals into debt.

Potential Changes Under Trump

With President Trump and Congressional Republicans working to repeal and replace the ACA, will medical bills increase and cause personal bankruptcy filings to increase? Two proposed changes that could increase the number of personal bankruptcy filings are eliminating the individual mandate and retracting the expansion of Medicaid.

A. Eliminating the Individual Mandate

Eliminating the individual mandate may lead to an increase in personal bankruptcy filings as people choose to forego medical insurance due to higher premiums. The individual mandate requires all persons to purchase health care insurance or pay a penalty to the IRS for failing to have health insurance.

This provision was originally included in the ACA to drive down the average policy premium despite insurance companies being required to offer medical insurance regardless of a pre-existing condition. One of the criticisms is premium costs have risen in some areas of the country, and the individual mandate forces people to pay higher premiums.

However, if cheaper insurance options are not made available people may choose to not purchase health insurance, which would leave them financially vulnerable to unexpected medical bills.

If the final revision of the AHCA bill does not eliminate the individual mandate, the Trump administration could effectively eliminate the penalty by no longer requiring the IRS to ask taxpayers to disclose if they have purchased health insurance. Without the knowledge of who does or does not have insurance, the IRS would lose the ability to efficiently issue a penalty for not having insurance.

Instead of an individual mandate, the proposed AHCA bill would allow insurance companies to charge up to a 30% penalty to those who forego insurance and then purchase insurance after they have been diagnosed with an illness. This provision is designed to persuade rather than mandate participation. This change could have the same effect as people not purchasing health insurance because individuals may not be able to afford the higher deductibles for emergency health and may be forced to file bankruptcy.

B. Decreases in Medicaid

The AHCA may eliminate the Medicaid expansion provision that accounted for half of all insurance coverage gains under the ACA. The ACA included a block grant to states to expand their Medicaid programs. The expansion would provide Medicaid to anyone making 138% times the poverty line ($33,600 for a family of 4). States could refuse the Medicaid expansion, but 31 states, including Ohio and Kentucky, accepted the expansion.

The AHCA may eliminate the Medicaid expansion offered to states and return Medicaid coverage to pre-ACA levels (100% of the poverty line or $24,300 for a family of 4). The potential change would require all those who do not qualify for medical expansion to purchase insurance in the open marketplace. If there is not an individual mandate, those removed from Medicaid may choose not to purchase health care insurance and be at risk of unexpected medical bills. Alternatively, they may select a policy with a low premium but high deductible and minimal coverage. If a severe illness occurs, minimum coverage policies may not offer substantial financial assistance and force individuals or families into debt.

No changes to the ACA are finalized, but potential changes may lead to higher personal bankruptcy filings. A better understanding of potential effects on personal bankruptcy filings will be available after changes to the ACA are finalized.

Medical Bills, Bankruptcy, and You

Regardless of what changes occur to federal law, high medical bills can lead to bankruptcy. Bankruptcy may provide a solution for financial hardship created by burdensome medical bill debt.

A. Medicals Bills Can be Discharged in Bankruptcy

Medical bills are considered an unsecured debt, in contrast to secured debt, such as a home mortgage secured by the value of the home. All unsecured debt is dischargeable in chapter 7 bankruptcy, except for student loans. Chapter 13 bankruptcy requires the filer to repay part of their debt, but medical bills can be partially dismissed. Chapter 7 and chapter 13 bankruptcy have different income and debt requirements, it is best to speak with an attorney to determine which, if any, is best for you.

B. Spouse and the Doctrine of Necessity

Generally, one spouse is not obligated to pay the debts of another spouse. However, if assets were held jointly, i.e. joint credit cards, then the surviving spouse would be obligated to pay. One exception to the general rule is the doctrine of necessity.

Under Ohio’s doctrine of necessity, spouses are responsible for all bills of necessity, such as food, shelter, and health. Therefore, some medical bills may be considered a necessity and debt collectors can sue a surviving spouse. Bankruptcy may be a solution to discharge debts of necessity.

Kentucky has a similar doctrine of necessity, but only holds the husband liable for the debts of his wife; the wife is not liable for the debts of her husband.

Debt collection agencies do file suit over unpaid medical bills, which can lead to liens or seizure of real and personal property. However, collection agencies will often offer the opportunity to establish a payment plan before filing suit. Speaking with an attorney can help you understand your rights and determine what debts must be paid.

C. Filial Responsibility Laws

Ohio and Kentucky have filial responsibility laws, which hold adult children responsible for caring for their parents. Care can include assisted living or medical bills. However, these laws are rarely enforced due to other available assistance.

Filial responsibility laws are rarely enforced because nursing homes need to prove the parent resident is unable to pay. However, Medicaid is typically available if parent residents do not have enough money. If Medicaid bills remain unpaid, the State can collect from the parent’s estate.

Generally, parental debts are not their children’s responsibility and it may be best to contact an attorney to understand your rights and obligations.

Have you been hit with medical bills and have no hope of paying them in this lifetime? Lawrence & Associates may be able to help you! Call today for a free consultation. We’re Working Hard for the Working Class, and we want to help you!

The Fair Debt Collection Practices Act and How it Protects You

Posted on Monday, February 6th, 2017 at 10:14 am    

The following post is part of our Law Student Blog Writing Project, and is authored by Caitlin DiCrease, a law student from Ohio State University Moritz College of Law.

What is the Fair Debt Collection Practices Act?

The Fair Debt Collection Practices Act (“FDCPA” for short) is a federal law under 15 U.S.C. § 1692, created in 1977 to stop creditors from harassing individuals during the debt collection process. Its purpose is to protect consumers from being inappropriately threatened or intimidated by debt collectors. The FDCPA prohibits collections agencies from making threats, using deception, and engaging in other unfair or harassing actions, as well as requires that the collections agency act in a professional and reasonable way when attempting to collect on a debt.

Debt collection is a real problem that impacts over 30 million individuals in the United States, which is approximately 14% of the country’s adult population. Many Americans have debts that are or could be subject to the debt collection process. The average debt amount is $1,500.00, but much larger amounts can result from excessive use of credit cards, medical bills, or other debt. As such, debt collection is an incredibly large and profitable industry.

In the 1970’s, Congress began investigating debt collection practices and found that there was “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors.” Additionally, the reports showed that “[a]busive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.” These results caused Congress to pass the FDCPA in an attempt to protect consumers and to regulate the debt collection process. The FDCPA protects all consumers who have fallen into personal debt from the predatory and harassing behavior that collections agencies may engage in, such as calling multiple times a day, threatening legal actions unrelated to the underlying debt, and speaking to a third-party about the consumer’s debt.

What type of debt is covered by the FDCPA?

Debts such as personal credit cards, auto loans, medical bills, mortgages, and other personal debts are covered by the FDCPA. Any household or family debts are also covered. However, the act does not apply to debts that have accumulated through the running of a business. Additionally, the FDCPA only covers debts that were entered into voluntarily – debts from fines, parking tickets, or other court-imposed debts are not included.

What does the FDCPA protect against?

Most often, debt collectors will contact consumers via email, letter, or phone. When a collections agency contacts you, there are certain behaviors that are not allowed under the FDCPA. These behaviors fall into the main categories of (1) harassment; (2) deception; (3) threats; and (4) unfair practices.

Harassment: There are no bright-line tests to determine what is harassment under the FDCPA. Examples of harassing behavior includes publishing the names of debtors, using obscenities or profanities, repeatedly calling you, or calling you at inconvenient times (such as before 8:00am or after 9:00pm), and contacting you at work if you have told them not to do so. The FDCPA also prohibits a debt collector from contacting you if you have written a cease and desist letter requesting that they stop calling or sending collections letters.

Deception: A debt collector may not, under any circumstances, lie about their identity. They are prohibited from representing themselves as an attorney (unless they are a lawyer who works in debt collection) or as a representative from a government agency. They also may not falsely claim that you have committed a crime by failing to pay your debt, misrepresent the amount of any debt, or tell you that you may be arrested if you do not pay the debt. Collectors also cannot misrepresent legal documents that have been sent to you.

Threats: Collections agencies may not threaten you with legal action, unless they intend to take legal action and such action would be allowed by the court. A debt collector may not threaten to have you arrested, to seize your property or wages, or to deprive you of custody or welfare benefits. While a debt collector can sue you for unpaid debt, they cannot have you arrested and cannot take anything from you until they have a court order that allows them to do so. Furthermore, certain welfare benefits and custody payments are untouchable by debt collectors even after they have successfully sued for the debt.

Unfair Practices: These include contacting a third-party (such as a relative, neighbor, or employer) about your debt, and/or making misleading, or deceptive representations to you or a third-party. The only contact a debt collector may have with a third-party regarding your debt is contact for the purpose of obtaining your location or contact information. They may not disclose that you owe a debt to any third-party. Unfair practices also include using a false company name, sending you documents that appear to be from a government agency, trying to collect illegal interest fees on top of the original debt, or depositing a post-dated check early.

Which debt collectors are subject to the FDCPA?

The FDCPA only applies to debt collectors. A debt collector is any person who regularly collects, or attempts to collect, consumer debts for another person or institution. This means that it does not apply to the original creditor, but will apply to any party that subsequently acquires the debt. Debt collection agencies subject to the regulations of the FDCPA include collection agencies, lawyers who collect debts on a consistent basis, and companies that buy debts from the original creditors.

To break this down, say you have accumulated debt on your store credit card from Company A. If Company A is attempting to collect on the debt, they most likely are not subject to the FDCPA provisions. However, if Company A has sold the debt to Collections Agency B, and Collections Agency B attempts to collect on the debt by contacting you, it must abide by the requirements of the FDCPA. Collections Agency B, therefore, may not contact you late at night, harass or threaten you, or make deceptive statements in its collections process. Many creditors engage in this process of “selling debt” to collections agencies, and in fact most debt that remains unpaid will be sold to a third-party debt collector.

What can I do if a debt collector is violating the FDCPA?

The Federal Trade Commission (“FTC”) is the government agency responsible for enforcing the provisions of the FDCPA. If a debt collector is violating the rules of the FDCPA, you have the ability to sue the collector in state or federal court within one year of the violation. If you win the case, you can recover damages suffered as a result of the illegal corrections methods – such as lost wages and medical bills. Many states also have their own versions of the Fair Debt Collections Practices Act that can impose additional sanctions on debt collectors who have acted illegally. However, even a successful suit against a debt collector for violations of the FDCPA will not eliminate the debt that you owe.

To report a violation of the FDCPA, you may contact the FTC, your state’s Attorney General’s office, the Consumer Financial Protection Bureau, or an attorney.

What happens if a debt collector sues me?

Under the FDCPA, a debt collector cannot make threats to sue you if they have no intention of starting a suit, or if there is no legal basis for a suit. They can, however, sue you in an attempt to collect the unpaid debt. If the collector wins the suit against you, the court will enter a judgment stating the amount of money you owe and an order allowing the collector to take the money from you through a garnishment. Garnishment is when the court directs your bank to turn over portions of your paychecks or funds in order to pay off the debt.

Unlike wages, many federal benefits cannot be garnished by a debt collector. These include Social Security Benefits, Supplemental Security Income, Veteran’s Benefits, and Civil Service, Federal Retirement, and Disability Benefits. These federal benefits can only be garnished for debts of child support, alimony, taxes, or student loans. They cannot be taken by an ordinary debt collector, even if that collector has won a suit against you.
You will receive a notice when a debt collector has started a lawsuit against you. If the debt collector files a lawsuit, you should respond to the lawsuit either personally or through a lawyer. Ignoring the suit will not make it go away and could result in a default judgment being entered against you. A default judgment can damage your credit score. If you have ignored the lawsuit, you also will lose the opportunity to object to the garnishment of your wages.

Have a problem with debt collectors? Maybe we can help! Call Lawrence & Associates and ask for a free consultation. We’re Working Hard for the Working Class, and we’d like to help you!

When a Civil Defendant Files for Bankruptcy

Posted on Monday, September 12th, 2016 at 10:09 pm    

Justin Lawrence wrote this article to teach other attorneys how to handle a personal injury case, such as a car accident or a slip-and-fall, when the defendant in the case files for bankruptcy.  If you have a personal injury or workers’ compensation claim, the case law and advice in this article can help you navigate the minefield that this situation creates – if and only if you are certain you fully understand the terminology and statutory law underlying the case decisions.

If you have any questions about how to pursue a personal injury or workers’ compensation claim when the responsible party is in bankruptcy, or how to navigate such a claim when you have to file bankruptcy, please give us a call.  We’re Working Hard for the Working Class, and we would like to help you!

Suing a Tortfeasor in Bankruptcy for Insurance Proceeds

Credit Card Purchases: Why Calculating Interest Is the Most Important Step You’ll Ever Take

Posted on Friday, August 19th, 2016 at 11:02 am    

credit-cardsCredit cards are ubiquitous in American society. We get offers to take out a new credit card when we turn eighteen, prisoners get offers to take out credit cards while they are still in jail, and even the recently deceased still get offers to take out a credit card well after the day they died. It is obvious that credit card companies don’t pay much attention to whom they are loaning money to, and therefore have no idea whether they’ll get paid back. So how do they make money? The answer lies in the magic of compound interest.

Most of Lawrence & Associates’ bankruptcy clients never think about the massive amount of money they will put toward compound interest in their lives. Many schools don’t teach students how to manage their finances, and many parents don’t learn these lessons through life experience in time to pass them on to their children. For the poor and middle class, a multi-generational cycle of dependence on debt is now in full swing, where grandparents were sold on an idea that the American Dream is fueled by debt, and their grandchildren already have more debt – starting with student loans – than they can pay off in their working lives.

Some debts are necessary; almost no one can buy a home without financing a large part of the purchase. And some debts are smart; it can be a good idea to take out a low interest SBA loan for the purpose of financing a well-planned business venture. But many debts are neither necessary nor smart, and this brings us back to credit cards. It is important for anyone anticipating a credit card purchase to understand the effect that compound interest will have on their purchase. Unfortunately, a shockingly small minority of people know how to calculate compound interest.

How to Calculate Compound Interest

Before making any credit card purchase, the buyer should determine whether they can pay this purchase off at the end of the credit card’s monthly billing cycle. A credit card purchase paid off before the end of the monthly billing cycle incurs no interest, and is actually a smart decision because it improves the buyer’s credit. Only purchases that cannot be paid before the end of the monthly billing cycle will incur interest and need to undergo the following calculation:

The Compound Interest Formula looks like this:

There are also a number of compound interest calculators on the internet that will perform this calculation for you, taking into account the effect of your monthly payment toward the debt. (The monthly payment toward the debt makes the formula shown above even more complicated.)

The numbers are staggering once you take a look at this. This article shows how an average credit card debt of $15,956, with the average credit card interest rate of 12.83%, results in the credit card company making a whopping $2,629,628.64 off of you in interest between ages 25 and 65. Again, that is over two-and-a-half million dollars in interest on a balance under $16,000!!!

Is it any wonder 819,240 Americans filed bankruptcy in 2015? Despite that huge number of filings, the credit card industry rakes in billions of dollars every year. As shown by the example above, the interest they charge is so astronomical that the credit card industries are mathematically certain to make tremendous amounts of money even if a large number of the people they lend to file bankruptcy or otherwise don’t pay them back. This is why credit card companies don’t bother checking a person’s credit score, or even whether they are still alive, before sending them a credit card offer. It is a volume industry, and the more money they lend the more they are likely to make.

What Can You Do If You Have Crippling Credit Card Debt?

Given all we’ve said above, a large percentage of the people reading this article are statistically likely to be in credit card debt that they have no hope of paying off. How can they get a fresh start and return to financial stability? There are many ways, but the surest way is to file bankruptcy on the credit card debt. A Chapter 7 bankruptcy wipes out credit card debt completely. A Chapter 13 bankruptcy requires you to make payments toward credit card debt, although often the debtor pays only pennies on the dollar. In either event, the debtor – who has probably paid off the original debt many times over – saves a large amount of money on credit card interest.

Bankruptcy has other benefits as well. All running interest on credit card debt must stop. All lawsuits must stop. Collection calls must stop. In a bankruptcy, for the first time, the debtor has all the muscle and all the power. Credit card companies must follow laws that are favorable to the debtor, rather than the laws that are typically more favorable to the creditor.

If you think you may need to file bankruptcy on credit card debt, call our attorneys for a free consultation. We’ll let you know if bankruptcy is right for you, and if so, what kind of bankruptcy you should file. There is no obligation to a consultation, and our friendly staff will make you feel at ease. We are working hard for the working class, and we can help you!

Understanding the Rights a Mortgage Company Has After Bankruptcy

Posted on Monday, July 18th, 2016 at 2:25 pm    

The following post is part of our Law Student Blog Writing Project, and is authored by Mark Ashley Hatfield, a Juris Doctor student at the University of Kentucky College of Law.

Understanding the Rights a Mortgage Company Has After Bankruptcy

house-304005_960_720Most homeowners in America do not own their home free and clear. In fact, a study conducted by online real estate marketplace, Zillow, revealed that the percentage of American homeowners who do own their home free and clear hovers around the low-figure of 30%. This means that roughly 70% of homeowners do not own their homes outright and are dealing with mortgage companies on a regular basis. Understanding that home ownership is one of the most significant responsibilities a person can have, it is particularly important to understand the rights you sign away to a mortgage company when you are securing money for your home. This article will examine a recent Ohio Supreme Court case (Deutsche Bank Natl. Trust Co. v. Holden) that establishes the rights a mortgage company retains even after the mortgager (the homeowner) has filed bankruptcy.

Imagine the following fact-pattern: a family refinances a mortgage on their home, signs a promissory note to ensure the lender the money will be paid back, and in a few years, when hard-times hit, the family is unable to make the mortgage payments. Consequently, the family, after seeking advice and attempting to resolve the issue, files for bankruptcy relief. Perhaps you have heard a similar story or experienced a similar situation yourself, but for Glenn and Ann Holden, it was not just a story they overheard, it was their personal experience.

On September 1, 2005, the Holdens refinanced the mortgage on their home and Mr. Holden signed a promissory note for $69,300 in favor of Novastar Mortgage, Inc., and both Holdens signed a mortgage identifying Mortgage Electronic Registration Systems, Inc. (MERS) as mortgagee (lender). Around November 1, 2005, Deutsche Bank purchased the debt, and the next month, the loan servicer, JPMorgan Chase Bank, received physical possession of the original note, indorsed in blank (“a signature by the creator of an instrument, such as a check, which enables any holder of the instrument to assert a claim for payment”), on behalf of Deutsche Bank. Thereafter, the Holdens made their mortgage payments to Chase Bank. Less than four years later, in August of 2009, the Holdens were struggling to make their mortgage payments. After seeking advice from Chase Bank, the Holdens decided to default on their loan in order to be able to seek a modification on their loan. Unfortunately, the Holdens were still unable to receive a modification on their loan and resulted to a petition for Chapter 7 Bankruptcy. The bankruptcy court subsequently granted the petition and discharged the Holdens obligation on the promissory note. Shortly after, on September 17, 2010, Deutsche Bank received an assignment of the mortgage from MERS. I know this paragraph is very dense with facts, but understanding the facts of this case is important to make sense of the court’s ruling; so feel free to re-read it a few times if necessary.

The court battle itself would begin nearly a year after the recording of the mortgage assignment when Deutsche Bank filed a foreclosure action against the Holdens on August 12, 2011. Here are where the detailed facts come back into play. The Holdens filed an answer and counterclaim premised on the fact that Deutsche Bank did not actually own the promissory note or the mortgage at the time it commenced its foreclosure action against them. This is an argument stemming from the fact that, as you may recall, the note was endorsed in blank. Meaning there was no proof, besides the testimony offered by Deutsche Bank, that the note had been transferred to it from Novastar. After this initial filing, the case proceeded through the Ohio court system making its way to the Ohio Supreme Court as follows: Deutsche Bank won on a summary judgment (no question of fact that Deutsche Bank was the rightful owner of the note) motion at trial; Ohio’s Ninth District Court of Appeals reversed the trial court’s decision explaining that Deutsche Bank had failed to show they were the owners of the note; and Deutsche Bank appealed to the Supreme Court.

Before the Supreme Court of Ohio was the issue of whether Deutsche Bank had standing (“whether the claimant has sufficient personal stake in the litigation to obtain a judicial resolution of the controversy”) to foreclose on the Holden’s home in order to collect the debt of which they were owed. The peculiar facts of this case, as you may remember, is that the Holdens had already filed for bankruptcy by the time the foreclosure was commenced. Not only had they filed, but they were granted their petition, and relieved of the debt owed under the 2005 promissory note. This little twist in the facts forced the court to look to its precedent for guidance.

The court stated that they had previously recognized that “upon a mortgagor’s default, the mortgagee may elect among separate and independent remedies to collect the debt secured by a mortgage.” After listing several remedy options for the mortgagee, the court stated that it has “long recognized that an action for a personal judgment on a promissory note and an action to enforce the mortgage covenants are ‘separate and distinct’ remedies.” Thus, simply because a note has been discharged and mortgagees are legally unable to seek a personal judgement against the mortgagor on that note does not mean that the mortgagees are barred from raising an action on the mortgage itself. Essentially, although the bankruptcy court had relieved the Holdens of their obligation on the promissory note, their home was still not safe from foreclosure because the owner of the note and mortgage still had a property interest created by the default on the mortgage.

Stated succinctly by the court,
Where a promissory note is secured by mortgage, the note, not the mortgage, represents debt… When a debtor declares bankruptcy, the creditor’s surviving right to foreclose on the mortgage can be viewed as a ‘right to an equitable remedy’ for the debtor’s default on the underlying mortgage. (citations omitted)
The court, after stating its position, stated that Deutsch Bank still had the burden of proving that it was the rightful holder of the note. Clarifying one of its older opinions, Schwartzwald, the court said that this burden did not include a magical combination of documents. The party bringing the claim simply needed to show that it had a personal stake in the outcome. Here, even though the note showed no physical signs of being transferred to Deutsch Bank, the facts presented were enough for the court to deem that Deutsch Bank had standing to bring the foreclosure action.

The takeaway from this case should not be a newfound (or increased) fear of dealing with mortgage companies. Instead, the key takeaways should be a better understanding of your state laws and how mortgage relationships may affect you in the future. Here, the Holdens filed bankruptcy in hopes of being relieved from their debt. The Ohio court was not so inclined to share the same belief, however, and established a principal that allows the holder of the mortgage “standing to foreclose on the property and to collect the deficiency on the note from the foreclosure of the sale of the property.” Learn from this case. Make sure you understand the mortgage process and have a firm grip on your financial situation before signing the dotted line.

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