One of the most difficult and annoying things for people to understand when they file a chapter 7 bankruptcy case is that while they may be filing bankruptcy on the credit card debt, medical debt or some other personal loan, and not the mortgage or car loan, the bankruptcy law does not make that distinction. In other words, if you are filing a chapter 7 bankruptcy case your discharge will wipe out not just the credit card and medical debt, but also the mortgage and car loan. And that’s a good thing just so you know! When your case concludes virtually all of your debt on your credit report (exception being student loans) will state the words “included/discharged in bankruptcy” and will show a zero balance. That includes the mortgage and the car loan(s).

Does that mean that you can keep your house or car without paying the mortgage or making the car payments? No, of course not. Otherwise, I would be filing for bankruptcy myself tomorrow morning. If you want to keep your car or house you have to keep making the payments after bankruptcy. However, if for whatever reason you do not want to keep the house/car then at any time you can choose –so long as you do not sign a Reaffirmation Agreement- to stop paying for the house and/or car. At that point the bank can foreclose on the house or repossess the car, but they cannot come after you personally. This is an advantage that people outside of bankruptcy do not have. Another huge advantage is the fact that your $300,000 mortgage or $20,000 car loan is now being reported on your credit report as zero debt being owed. That does wonders for your debt to income ratio and ultimately your credit score. Nothing will make your credit score ascend faster than having 0 debt! That means you get to eat your cake and keep it too. As in, you get to keep the house or car even though the debt is not reported any longer on the credit report as would be the case had you not filed for bankruptcy.

As far as why the mortgage/car loan is showing “bankruptcy status” and why your statements are indicating zero owed the moment you file your bankruptcy case? The answer is as follows:  When you file your bankruptcy case all creditors are entitled to receive notice of your bankruptcy filing- whether you want to bankruptcy them or not, and whether you are behind or not on your payments is irrelevant.  Every bank that you owe money to is entitled to get notice of your filing. Moreover, in light of the automatic stay (the legal principle that states “I am in bankruptcy so do not even think about trying to collect money from me”) the creditors/banks send statements in such fashion and take the position that you “technically” do not owe them any money. Again, the reality is that if you want to keep the property you have to continue paying for it after you file your case. In this sense the bankruptcy has changed nothing. You pay you keep, you do not they take!

Let’s start with the basics. Typically, particularly with credit card accounts, the answer is calls, calls and more calls.

Then what? Well, normally, most creditors after about 90 days will place the account in the hands of a collection agency. At this point it will no longer be Chase or Bank of America calling you day and night but rather it will be a collection agency that starts to hound you relentlessly.

Fortunately, there is a federal law called the Fair Debt Collection Practices Act (referred to as the FDCPA) that regulates the practices of bill collectors. The law does not apply to the original creditors –the credit card companies, hospital, car lender, etc.- but it certainly applies to the law firms, debt buyers and collection agencies hired to collect on behalf of the original creditor.

WHAT DO I NEED TO KNOW ABOUT BILL COLLECTORS?

They tend to break the law every day of the week and twice on Sunday. Why? For the same reason that John Dillinger responded to the question of “Why do you rob banks” with the sardonic answer “Because that is where the money is.” Similarly, most collection agencies will violate the FDCPA with some frequency because that is where the money is. Meaning, consumers pay. Why else would there be thousands of collection agencies out there?! Bill collectors operate under the mantra of “persistence breaks resistance.” They count on the fact that they can wear you down with a barrage of calls and that almost all people want to pay back the money that they owe as long as they have the ability to do so. They also know that most attorneys, let alone consumers, do not know what the FDCPA is. Or, that they simply will not dare or bother to sue them.

WHY SHOULD YOU, THE CONSUMER, CARE ABOUT THE FDCPA?

Because knowledge is power. In fact knowledge is sometime even money:) If you can prove even one single violation under the FDCPA you can recover up to $1,000.00 for a “technical violation(s)” and for serious cases with actual damages far more than that. And the beauty is that you do not have to pay any legal fees to your attorney. If the attorney wins the case for you the collection agency has to pay your attorney his/her legal fees as well as paying you, the consumer. Kind of like with a car accident case…we do not recover unless you recover motto.

Second, it allows you to take control. Rather than changing your phone number, or being startled each time the phone rings you can once again pick up the phone.

WHAT ARE THE MOST COMMON VIOLATIONS EMPLOYED BY BILL COLLECTORS?

1.      Leaving voice mails in which they fail to identify themselves as a collection agency and fail to tell you the name of the collection agency. You would be surprised at how many times they will leave a message without disclosing this information. Why? Because they figure you are more likely to call them back about that “important matter” if they do not reveal who they are. Bottom line: Save those voice mails. There might be $1,000.00 in there!

2.     Calling and leaving an urgent message with your neighbor or more commonly a relative. Why do they do that? Because most people are mortified at the thought that their mom or cousin now know that a collection agency is calling them and will relent and pay the collector in order to keep them from further embarrassing them. This tactic is absolutely illegal. A collector can maybe call once to a third party in seeking “location information,” but beyond that they can only call and communicate with the consumer or their attorney. They are not allowed to “air out your dirty laundry.” So if this happens to you be sure to save the name and phone number that is passed along to you. And instead of a payment you can reply to the message with a lawsuit!

 3. The third most common method employed by bill collectors is lying or being less than 100% truthful. The problem with bill collectors is that they are pretty impotent. Unlike Tony Soprano and his posse they cannot break legs or burn down your store. In fact, the only thing that they can do is call you incessantly (actually, in most instances, they cannot even do that), send you collection letters, and report your account to the credit bureaus. That is it. So if you do pick up the phone (and I strongly encourage you to do so) and you hear them say anything along the lines of “if you do not pay then we are going to sue you, garnish you, put lien on your house, get a judgment against you” or in the most extreme examples “have you arrested” understand that not only are they full of baloney, but they are violating the FDCPA and inviting you to sue them and collect up to $1,000.00 for their empty threats. Only the original creditor can sue you. Only the original creditor can get a judgment against you IF they sue you first and win. Only the…you get the idea. Collection agencies are a “paper tiger!”

Scenario 1: You file for bankruptcy on your own
Part of the deal when filing for bankruptcy is that you have to disclose all of the assets that you own. When people typically think of assets they normally think of houses, cars, furniture, stock, and money in the bank. Tax refunds, or the potential of a tax refund however is not something that most people think of as an asset when contemplating bankruptcy. But the fact of the matter is that the US Supreme Court has made it clear: tax refunds are indeed part of the bankruptcy estate. Part of the estate simply means that it is potentially up for grabs.

The other key thing to keep in mind is that in bankruptcy if you want to keep the asset, you have to exempt the asset. And this is where many people who file a chapter 7 bankruptcy without an attorney (pro se if you want to use fancy Latin terminology) trip up. Around this time of the year (January –May) many people are expecting a tax refund. The tax refund needs to be listed on the bankruptcy petition, properly exempted AND you need to file a timely Homestead Deed. Merely exempting it on the bankruptcy petition is not enough. That last part, the Homestead Deed, really trips people up.
Which brings me to my final point: the chapter 7 trustee is not your friend. So, just because he or she seems nice, and just because they smile at you when they meet with you at the meeting of the creditors does not mean that they will not jump at the opportunity to take your money. And if you think that they will feel sorry for you because you have decided to file on your own, you better think again. They are there to represent the interest of the unsecured creditors. And by the way, just because it is the end of the year, say November 2013, and you decide to file for bankruptcy at that point it does not mean that the 2013 tax refund is not up for grabs. It is in indeed. Once again, it must be listed and properly exempted.
Scenario 2: The careless bankruptcy attorney
If your attorney is in a hurry or careless you could lose part or all of your tax refund. This is especially true if you normally get a sizable tax refund around this time of the year (say $4,000 for instance). How? Because Virginia’s Homestead Exemption typically only gives you $5,000 to exempt your assets with. That means that if you have some other assets that need to be exempted and there are no other exemptions other than the Homestead Exemption (say a life insurance policy with some cash value, a couple of thousand worth of stock, a car with some significant equity, etc) then you will now find yourself in a pickle. You will have to give up something and that something may be worth several thousand dollars.
The solution? Instead of filing your bankruptcy case in January or February of the year before you have filed and received your tax refund simply delay the filing of your case by a few months. So, file your tax return as early as possible, collect your sizable tax refunds as quickly as you can and then spend that tax refund money on necessary household items. Get braces for your daughter, fix your car, put some new windows in the house, pay your bankruptcy attorney their legal fees -that’s especially important- and when most/all of that money is gone a few months later than you can safely file your bankruptcy case. Notice that I said spend your money on life’s necessities. I did not say take a trip to Vegas or “donate” that money to your brother.
So barring the above scenarios, or if you simply are not expecting a significant tax refund, then chances are you have nothing to worry about.

So, what sort of problems have people been running into when trying to do a short sale on their home?

• The banks simply refuse to work with them. Beyond the ton of anecdotal evidence that exists out there, I have had countless bankruptcy clients of mine report the same thing: Short sales, just like a loan modification, are extremely hard to come by. You line up a potential buyer, you submit paper work to the bank countless times, and months later, after many hours of negotiations with the bank, they deny the short sale.
• You want to do the right thing, but the bank still sues you. Far worse than the problem of the bank not accepting the short sale as an alternative to foreclosure, is the fact that many folks out there fall into a false sense of security thinking that once they have completed the short sale that the worst is behind them. They think they can move on with their lives. But many times the bank will say, not so fast, we want a bunch of money from you now as well or we will be seeking a “deficiency judgment” against you. In other words, what the bank is saying is thank you for the hard work in helping us find a buyer for your home, but you still owe us –for example- $40,000! If you had a home equity line (HELOC) in addition to your mortgage, it is almost a matter of certainly that you will be getting sued. The CNN Money article You Lost Your House But You Still Have to Pay does a great job of explaining this issue.
• Your credit score takes a serious beating. You would think that by doing a short sale instead of a foreclosure that you would be rewarded with a higher credit score. Well, not so. The Washington Post article titled Short Sellers May Take a Big Hit On Their Credit Scores reveals that your credit score is pretty severely damaged even if you manage to complete a short sale.

So, what are the advantages of filing for bankruptcy once you realize that the writing is on the wall and you need to let go of the house? Why file for bankruptcy now instead of later?

• You can have a solid credit score within 3 years of obtaining a bankruptcy discharge. Hard to believe, but once your credit score has taken a nose dive, nothing will get you to a good credit score faster than a bankruptcy discharge. Having zero debt reported on your credit report –which is what a bankruptcy discharge will do for you- will do wonders for your credit score. It is that whole debt to income ratio that you may have heard about. And since most people thinking about doing a short sale on their home no longer have a pristine credit score, the bankruptcy will certainly not ruin your credit at this point.
• You can avoid having to ruin your credit once again. The banks can sue you years after the short sale has taken place, just when you have a respectable credit score once again. You may be able to still file for bankruptcy, but now you will have to ruin your credit score once again.
• You can save yourself lots of money. I do not care who your attorney is. Here in Virginia, usually there is not much a defense to a “deficiency judgment” suit brought by the original bank who lent you the money. Typically you end up settling with the bank, assuming you have the means to do so, and that means paying them thousands of dollars.
• Once you come to the realization that you may need bankruptcy relief after all, you may no longer be eligible for a chapter 7 discharge. Typically, when people are thinking about doing a short sale in lieu of walking away from the home, is at a time of a job loss, divorce, or the like. It is at a time when they would typically qualify for a chapter 7 discharge. But, nearly 4 years later, when the bank/HELOC files that lawsuit, you have typically bounced back, have a good paying job, and regretfully, may no longer qualify for a chapter 7 bankruptcy.

Having taken all this into account, if you are still adamant about doing a short sale, then at least hire an attorney. A lawyer, unlike a realtor, is typically far more equipped at negotiation with the bank and obtaining a release from personal liability on your behalf.

And if the bank will not waive your personal liability in writing, and your credit score is still taking a beating, than what is the point of a short sale?!

If the foregoing options are not available to you, and if bankruptcy, for one reason or another, is simply not an option, you may be able to persuade the creditor to release the garnishment if you simply pay them a reduced amount then actually owed. Why would a creditor agree to a reduced amount than actually owed? Well, because all creditors are aware that most people have bankruptcy as an option so they would rather get something, rather than nothing. Moreover, all creditors prefer to get paid now, rather than later. Do not get me wrong, for this to work they will almost always expect a pretty hefty lump sum payment. So, you may be able to negotiate something like a $2,000 lump sum payment on a $8,000 judgment for instance.

Just to be clear, please understand that there are many creditors out there who may not be willing to “play ball” since they know that they have all the leverage in the world at this point. They can garnish your wages for a good five or six months, and then turn around and do it all over again until they have been paid in full. So, if that is the creditor you are up against, or if you simply do not have a couple of thousand dollars to offer them, then at this point you may have no other choice then to file for bankruptcy.

Finally, this strategy that I propose here makes senses if you credit score and credit report is looking pretty good. If the garnishment at hand is pretty much the only creditor chasing you down at this point and you have minimal other delinquent accounts, then by all means, see if you can buy them out. However, if your credit report looks as bad as my 8^th grade school report (I was a mediocre student back then) and you owe thousands of dollars to a whole slew of creditors, then the above advice would not make sense. At that point, just cut you losses and file for bankruptcy.

I then go on to explain that in order for me to help them they would need to fire their current bankruptcy attorney –talk about awkward- and retain me. Mind you, retaining me at this point will not be cheap since right of the bat I will have to file a motion with the court and attend a hearing and get the judge’s permission to enter the case. Suffice to say, the potential client is anything but thrilled upon hearing this. In fact, most feel stuck at this point. You want to “break up” with your current bankruptcy attorney, but are finding it very hard to do so. Ouch!

The fact of the matter is that a chapter 7 bankruptcy filing is over and done with in about 100 days from the time your file. By contrast, a chapter 13 bankruptcy filing typically last anywhere from three years to five years. Moreover, a chapter 7 bankruptcy filing usually does not involve too much work after the creditors hearing takes place, which is about one month after filing. Not so with a chapter 13 bankruptcy. The “real fun” usually begins after the creditors hearing as you try to ensure that your case gets confirmed. And while the confirmation of your chapter 13 Plan pretty much signifies that “the fat lady has sung,” the fact of the matter is that there are all kinds of issues that can and typically do pop up after your case is confirmed. Here are some common illustrations:

• There are issues with the proof of claims. You filed a 100% plan for instance, but lucky for you not all creditors filed timely claims.
• Your car that was part of the bankruptcy filing just got totaled.
• Unfortunately you lost your job and are wondering how that impacts your bankruptcy case.
• You suffered a short term set back and would like to see if you there is any way to suspend your payments to the trustee for a few months.
• Bank has just filed a Motion for Relief from the Automatic Stay because you have not kept up with your mortgage payments since the filing of your case.
• The chapter 13 trustee is demanding your tax refund from last year, but you have already spent it.
• You lost your part time job that you had at the time of the filing of your case and are wondering if your payments to the bankruptcy trustee can be reduced.
• You need a new car loan and realize that you need the court’s permission before you get a new loan.

So what’s the point of all of this? When selecting a bankruptcy lawyer, particularly in the context of a chapter 13 case, understand that he or she is going to be your attorney for many years to come. Understand that issues will come up during the next 3/5 years and that you will need to have access to your bankruptcy lawyer and you will need his help. Understand that while “how much does it cost” is a legitimate concern, the more important thing to ask yourself is “how much will I be getting in return?”

Oh, and in case you are still wondering, most bankruptcy attorneys in this area charge $3,000.00 for a chapter 13 bankruptcy case. For an excellent article on the “how much does it cost” issue revolving bankruptcy filing, please see what Charleston bankruptcy lawyer Russell A. DeMott had to say in his blog article titled Bankruptcy Lawyer’s Fees: “How Much Is it?”

Who is Portfolio Recovery, LVNV Funding, Midland, etc? They are simply companies that buy consumer debts from the original creditors like Bank of America, a.k.a FIA Card Services (the branch of Bank of America that handles their credit card accounts), Capital One, Discover and other credit card companies. They buy these accounts for a fraction of what is owed on the original account after the accounts have been charged off and then they sue the person that allegedly owes the money. It is purely a volume business. They buy tens of thousands of accounts each year, file lawsuits on just about all of them, and while they certainly do not collect on all the accounts they purchased, they still make a ton of money because they purchase so many accounts.

So, why is Midland, Portfolio Recovery, LVNV, etc. suing you? Well, because they want to make money of course and they are counting on you to make their job very easy. These “debt buyers” –as they are commonly referred- prey on the fact that at some point, in the vast majority of cases, you did in fact owe some money to one of the big banks/credit card companies from whom they bought these accounts. They know that most people want to do the right thing and pay what they owe if they have the means to do so. Right of the bat they have a psychological edge on you. Again, most people want to pay back what they owe if they have the financial means to do so. Second, statistically speaking, they know that about 80% of people who get a Warrant in Debt will not bother showing up in court. They also know that among the minority of people that do show up in court will not be retain the services of an attorney. That means an easy judgment –as in victory- for them followed by an easy wage garnishment once they figure out where your work. Bottom line, they are counting on your incorrect assumption that they are entitled to your money. They are counting on the fact that you will not pick up the phone, hire an attorney, and fight back!

Is there any way to defend yourself from a lawsuit by Midland, Portfolio, LVNV or some of these other “debt buyers”? Yes! You can hire an attorney like myself who handles these kind of lawsuits to defend you in court. Notice that I did not say anything about filing for bankruptcy! While I am primarily a bankruptcy lawyer, I firmly believe in the notion of using bankruptcy as a last resort. As far as what type of results can you expect if you hire me do defend you in court? Well, why I certainly cannot make any guarantees, and while every case is different, if the past is an indicator, then it will not surprise me if I can dispose of your lawsuit without you having to fork over a penny to the company that sued you. To be clear, I am talking about the situation where the plaintiff is in fact a “debt buyer” as opposed to the original creditor.

How much will it cost me to hire you to defend me in court? While each case is different, all I can say is that the cost will be a whole lot less than what you are being sued for. A flat fee arrangement will be worked out from the get go.

Here is what the United States District Court For The Eastern District of Virginia, Alexandria Division, had to say in a opinion handed down on April 10, 2012 in the final paragraph of the court’s ruling: “….Plaintiffs’ counsel’s experience in other foreclosure-avoidance actions should have made clear that the claims and theories advanced here and in those cases lack merit. In this district alone, all of the many foreclosure-avoidance actions plaintiffs counsel has initiated have been voluntarily dismissed, remanded, or ultimately unsuccessful on the merits. In the Fourth Circuit, plaintiff’s counsel has fared no better; to the contrary, the Fourth Circuit has never concluded that any of his foreclosure-avoidance theories was meritorious. It is therefore unsurprising that plaintiffs’ counsel has been specifically and repeatedly admonished for his practice of advancing meritless claim in foreclosure-avoidance actions, and yet, as this case shows, he continues to assert substantially similar claims based on many of the same arguments.”

The Court then concluded the opinion by essentially stating that in a show of mercy they would spare the attorney and not sanction him! As in not order him to pay thousands of dollars for bringing a case before the court that lacked any merit or validity. Let me say that again, the Federal Court in Alexandria, Virginia not only stated that all legal arguments made by the homeowners against the bank in an effort to stop the bank from foreclosing were not valid, but the arguments presented were so lacking in merit, where so contrary to Virginia law, that the lawyer representing the homeowner ought to be punished for wasting the bank’s and the court’s time!

So, while “produce the note” or “show me the note” may get you somewhere in Florida, here in the Commonwealth of Virginia, you better think again.  Same goes for that whole notion of attacking MERS and their right to foreclose or claiming that the substitute trustee on the Deed of Trust may not foreclose. As the Court stated: “Virginia does not recognize a cause of action for wrongful foreclosure.”

Bottom line: before you hand over one-half of your mortgage payment each month to a law firm specializing in “foreclosure defense” (which is typically how these law firm collect their legal fees) understand that what you are buying is months of delay while the matter is litigated in court.  At the end of the day, there is no such thing as a free lunch and there is certainly no such thing as a free house. This is not Massachusetts, Florida or New York where these arguments may fly. This is the Commonwealth of Virginia and there is a reason that it has a reputation for being conservative and creditor friendly.

Besides, if delay of the inevitable is all you are looking for, if merely buying time before the foreclosure ensues is your objective, then a chapter 13 bankruptcy can do that for you at a fraction of the cost.

Before anyone can garnish your wages or bank account they have to sue you first (unless that person is the IRS. They can skip this step). And if you live in Virginia then that lawsuit will most commonly arrive by way of a Warrant in Debt.  Please see my other article specifically on the topic of Warrant in Debts in Virginia titled What is a Warrant in Debt?

The key thing to remember is that the party suing you has to ensure that you are properly served with the lawsuit. And properly served either means that a process server walks up to you and says “are you John Doe?” and then hands you the Warrant in Debt (Yup, just like on Law & Order). Or, a more common way to properly serve someone with a lawsuit in Virginia is to simply post the Warrant in Debt on the front door of the home where that person resides. That last part of the previous sentence is important. The person taking you to court has to make sure that you are served with the lawsuit at your current place of residence, and not where you used to live!

So what seems to occur quite often or at least often enough? The person being sued no longer lives at the address where they were served with the Warrant in Debt. Since they do not know about the lawsuit the creditor simply shows up in court and gets a default judgment.  Once the creditor has obtained a judgment, they can begin garnishing you. And the person does not realize what has happened until such time as they are being garnished.

So, what have I done for several clients in this instance? I file a Motion to Reopen Case and to Set Aside Default Judgment with the court where the garnishment is pending and show up for the Hearing on my motion. I then have my client testify that the reason that they never responded to the original lawsuit –that would be the Warrant in Debt- that lead to the judgment is because they have not lived at the address where they were served for months or years. I present evidence to back up my story. As long as the judge is convinced of the facts he will then enter an Order making the previous default judgment void. And since there is no longer any judgment, then the garnishment has to be set aside as well. Meaning, the judgment is made to disappear and the garnishment is quashed.

What’s the downside? Well, under these circumstances the judge will in essence give the creditor a second bite at the apple. Meaning, instead of the lawsuit simply going away, the judge will “make you” answer the lawsuit. But now, instead of the creditor simply getting a judgment against you behind your back and without you knowing what is going on, this time you will have your day in court. You will be able to defend yourself against the lawsuit.

So, here it is. Here is one way that you can deal with a garnishment summons without bankruptcy. Notice I said “deal” with a garnishment, as opposed to necessarily “stop” a garnishment.

File a Homestead Deed- After the garnishment is already underway you will be served with the garnishment summons. Note that there will be no advance warning. You will either notice some bounced checks if it is a bank garnishment or you will get a call from HR if it is a wage garnishment. On the garnishment summons, in the upper right hand corner, will appear a hearing date and time, normally referred to as the “return date.” On a wage garnishment that date may be as far out as six months from the time the garnishment is issued by the court.

At that point you can prepare this relatively simple document called a homestead deed, take it to the land records of the county where the garnishment is pending, file it there and then, on the “return date” on your garnishment advise the judge that you have filed a homestead deed. Do that correctly, and you should be able to get back all the money that has been garnished so far and take out of your paycheck or that was sitting in you bank account.

So, what is the problem with using a homestead deed in Virginia to deal with a garnishment? Why have you not heard more about it? Well, for starters, unlike a bankruptcy, it does not actually stop a garnishment. To the contrary, the garnishment will be in place for months typically before you get before the judge and get your money back. Meanwhile you have to live with your bank account being frozen and checks bouncing or your wages being deducted. Can you go for six months while your paycheck is slashed by 25%?!

Second problem with the homestead deed is that it offers a “band aid approach” to treating a wound, or as a colleague of mine is fond of saying…it is just lazy lawyering. Why? Because in the great state of Virginia, the homestead deed, your “get out of jail card” can protect only up to $5,000 of cash or garnished funds during the entire course of your life time. Meaning, if $3,000 has been garnished from your wages during the past 6 months and you file a homestead deed and present it at the “return date” you may have won a battle, but you will lose the war. Why? Because all the creditor has to do is issue another wage garnishment the very next day and start the garnishment all over again. Eventually, that $5,000 protection that you get will be exhausted. Again, that’s 5K of protection for life. Those over the age of 65 or disabled veterans in fact get $10,000 over the course of their lifetime.

Finally, the last major disadvantage to using up your entire homestead deed is that eventually you will probably have no choice but to file for bankruptcy and some of your assets my now be exposed. Most folks need at least some of that $5,000 under the homestead deed when they file their bankruptcy case.

Having said all that, if you have waited until the day before your “return date” to address your garnishment, and if there is no time to file a bankruptcy, or you simply do not want to file for bankruptcy, a homestead deed may be just what the doctor ordered!

In my next blog article I will address the second method for dealing with a garnishment without filing for bankruptcy.