August 2012

I recently fielded a question from a fellow bankruptcy attorney.  The question raised some interesting factors to consider when preparing a set of Chapter 13 bankruptcy papers.  First here is an edited version of the question:

Debtor only has $2,500 in credit card debt.  He has $120,000 in student loan debt and wants to do a chapter 13 to get some breathing room on the monthly student loan payments.  On Form 22C his disposable monthly income (DMI) is very high:  $2,800.  This is purely theoretical and includes his wife’s income, who will not be filing.  He doesn’t actually have that kind of disposable income.  My question is:  if we propose to pay 100% of the non student loan unsecured debt ($2,500), do we have to still pay the equivalent of $2,800/month for 60 months (which would all go to the student loans)?  Are student loans considered as part of the “general unsecureds” for the purpose of this calculation?   Although student loans are not currently dischargeable, we are not allowed to give them priority payments; but can we pay them less than DMI x 60?  Are we able to designate that certain payments go to principal?  Does the nonfiling spouse’s income HAVE to be considered when the plan is really meant to pay down the separate student loan debt of the filer husband?  She’s not liable on this debt as it was incurred before marriage.

For your edification, here is my response:
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An ongoing source of distress for debtors is truly abusive debt collectors.  Many of these alleged humans ignore the due process rights of debtors, lie, and break the law in their efforts to shake down debtors.  Can anything be done?  Finally, the federal and state governments are starting to take some action.

I.          The Problems

A.        Collectors Fail To Follow The Due Process Rules

I regularly have clients show me abstracts of judgment from state court cases in which they knew nothing about the suit until receiving the judgment.  Are my clients lying?  I don’t think so.  In fact, a California state senator had the same thing happen to him.  According to Jim Puzzanghera, in the August 20, 2012 Los Angeles Times:

Several years ago, debt collectors began pursuing state Sen. Lou Correa (D-Santa Ana) for an unpaid Sears bill they said he owed.  He told them they had the wrong man, but the debt collectors never wavered.  “These folks are very aggressive,” Correa said. “They’ll call back repeatedly and say, `Tell us some personal information so we can tell it’s not you.’  When all of a sudden is the burden of proof on me?”  Last year, Correa discovered his Senate paycheck was being garnisheed [sic] because of a $4,329 lien for the Sears debt.  Brachfeld had obtained a default judgment in court, even though, Correa said, the lawsuit was never served on him and he knew nothing of the claim or the court hearing.  He later learned that the debt belonged to a Luis Correa from Santa Ana. The man had a different Social Security number, different address, even different first name — the senator is legally Jose Luis Correa.  “I always pay my bills on time.  Then to have somebody garnish my wages, I thought was pretty astounding,” the lawmaker said.  He later resolved the problem and stopped the wage garnishment.  Now Correa is supporting a bill by state Sen. Mark Leno (D-San Francisco) to require debt collectors to document that they are pursuing the right person for the correct amount of money.  The bill passed the Senate and is pending in the Assembly.

If these entities can abuse a state senator, where does that leave the average person without any political clout?
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Way back on October 13, 2011 I wrote about the coming wave of city bankruptcies.  I quoted several sources which predicted municipal defaults on a large scale.  If you’ve been keeping up with the news you know that the wave is starting to crest.

I.          Recent California City Bankruptcies

In just the last few weeks several California cities have filed for Chapter 9 bankruptcy protection, and many more are close to filing.

A.        Stockton

According to the June 28, 2012 issue of Reuters:

Stockton, California, became the largest city to file for bankruptcy in U.S. history on Thursday after years of fiscal mismanagement and a housing market crash left it unable to pay its workers, pensioners and bondholders.

And all over Stockton you can hear the cheering:  “We’re number one, we’re number one” because they’re the largest governmental entity to file for bankruptcy.  Whoops, not so fast Stockton.  Later in the article we read:

Stockton becomes the nation’s most populous city to file for Chapter 9 bankruptcy. But Jefferson County, Alabama, remains the biggest municipal bankruptcy in terms of debt outstanding, as it had a debt load exceeding $4 billion when it filed in 2011.  Stockton has about $700 million in bond debt.

How do you like that?  What a disappointment!  Beaten by a county in Alabama!  That’s gotta hurt.  I mention the Jefferson County bankruptcy because when I wrote my October 13, 2011 post, I stated that they had only defaulted on their municipal bond obligations, and had not yet filed.  But they came through with a subsequent bankruptcy filing.

By the way, if you read that October 13, 2011 post I hope you heeded my warning and divested yourself of any investments you may have had in municipal bonds.  As the wave of municipal bankruptcies continues, those instruments are going to drop in value pretty quickly.  Some of them already have junk bond status.
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