Can bankruptcy lower my car payment?

When most people buy a car, they are "upside down" in the vehicle the second they drive it off the lot. "Upside down" means that the owner owes more for the vehicle than it is worth. When a financial hardship occurs, a large car payment on a vehicle that is worth far less than what is owed can feel like an anchor. Bankruptcy may offer options to assist a debtor out of this situation.

In a Chapter 7 bankruptcy, the owner has two options. He or she could keep the vehicle (and the payment) or the owner could surrender the vehicle with no further obligation on the lien, due to the bankruptcy discharge. This can seem like a hard choice because the Debtor often needs the vehicle as a primary source of transportation. Debtor may feel as though he or she will not qualify to finance a more modest vehicle. However, in today's car market, we are finding that our clients are qualifying for car loans as long as they can show an income source to repay the loan.

In a Chapter 13 bankruptcy there is a third option. The Debtor may choose to have the value of the loan reduced through what is commonly referred to as "cramdown". In order to qualify for cramdown, the car must have either been purchased more than 910 days prior to the bankruptcy filing, or the loan must be over 910 days old. There are other circumstances where cramdown may be allowed, such as certain cases where the vehicle is not a primary vehicle used for household purposes. The attorney for the Debtor will file a Motion to Value Collateral, seeking to reduce the amount owed to the actual value of the vehicle. The interest rate on the loan can also be reduced to a more reasonable interest rate.

In my experience, most of these Motions are resolved between the attorney for the Debtor and the attorney for the lender. However, when these Motions must have a Hearing in front of the Judge, there is sometimes an evidentiary issue because there is a need to have a live person in Court to testify as to the retail value of the vehicle, in order to prove the case. Therefore, I strongly recommend that any person who intends to take advantage of cramdown consider this necessity and make sure there is a qualified person who is willing to come to Court for this purpose before the Motion to Value is filed.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.

WARNING-FRAUDULENT DEBT REPAIR ORGANIZATIONS

People who are looking to obtain a loan are often desperate to have a good credit rating so that they can qualify for a lower interest rate. They may fall prey to companies that promise to “clean up” their credit report. These companies generally will charge a fee before any service is performed. Once they get the fee, the company may challenge everything negative that is on the person’s credit report. The reporting agencies have 30 days to investigate the claims. If they do not hear back from the creditors within the 30 days, the challenged items may be removed. However, the creditors will eventually get back to the reporting agencies and when they do, the negative comments will be put back on the report. At that point all the money that was spent to clean up the report will have been wasted.

Credit repair companies are regulated by The Federal Trade Commission (“FTC”). The FTC has issued rules and regulations that provide, among other things, that credit repair companies cannot collect any money from their customers until they have fully performed the services that they have promised to provide the customer. They must also provide each customer with certain disclosures and a enter into a written contract. Below is a copy of some of the regulations that govern credit repair companies.

The FTC has filed suit against several companies for violation the Credit Repair Organization Act. It has recently settled lawsuits it filed against Successful Credit Service Corporation, Lee Harrison Credit Restoration and the companies’ principals on charges that they falsely claimed they could clean up consumers’ credit reports and collected up-front fees for their services in violation of federal law. Successful Credit Service will need to pay $8.3 million and the amount for Lee Harrison is almost $2.5 million.

Clients often ask me if I can repair their credit. They hear advertisements on the radio or see ads on TV and believe the companies that offer these services are credible. I always advise them not to waste their money. Nothing that is accurate on the report can be removed. If there is something on the report that is not accurate, the client can write to the reporting agency him or herself and ask that it be removed.


By: Laura J. Margulies

CREDIT REPAIR ORGANIZATIONS(1)
SEC. 2451. REGULATION OF CREDIT REPAIR ORGANIZATIONS.
Title IV of the Consumer Credit Protection Act (Public Law 90-321, 82 Stat. 164)

SEC. 404. PROHIBITED PRACTICES.(7)

(a) In General.--No person may--

(1) make any statement, or counsel or advise any consumer to make any statement, which is untrue or misleading (or which, upon the exercise of reasonable care, should be known by the credit repair organization, officer, employee, agent, or other person to be untrue or misleading) with respect to any consumer's credit worthiness, credit standing, or credit capacity to-- (A) any consumer reporting agency (as defined in section 603(f) of this Act);(8) or

(B) any person--

(I) who has extended credit to the consumer; or

(ii) to whom the consumer has applied or is applying for an extension of credit;

(2) make any statement, or counsel or advise any consumer to make any statement, the intended effect of which is to alter the consumer's identification to prevent the display of the consumer's credit record, history, or rating for the purpose of concealing adverse information that is accurate and not obsolete to--

(A) any consumer reporting agency;

(B) any person--

(I) who has extended credit to the consumer; or (ii) to whom the consumer has applied or is applying for an extension of credit;

(3) make or use any untrue or misleading representation of the services of the credit repair organization; or

(4) engage, directly or indirectly, in any act, practice, or course of business that constitutes or results in the commission of, or an attempt to commit, a fraud or deception on any person in connection with the offer or sale of the services of the credit repair organization.

(b) Payment in Advance.--No credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.
SEC. 405. DISCLOSURES.(9)

(a) Disclosure Required.--Any credit repair organization shall provide any consumer with the following written statement before any contract or agreement between the consumer and the credit repair organization is executed:

'Consumer Credit File Rights Under State and Federal Law

You have a right to dispute inaccurate information in your credit report by contacting the credit bureau directly. However, neither you nor any ''credit repair'' company or credit repair organization has the right to have accurate, current, and verifiable information removed from your credit report. The credit bureau must remove accurate, negative information from your report only if it is over 7 years old. Bankruptcy information can be reported for 10 years.

You have a right to obtain a copy of your credit report from a credit bureau. You may be charged a reasonable fee. There is no fee, however, if you have been turned down for credit, employment, insurance, or a rental dwelling because of information in your credit report within the preceding 60 days. The credit bureau must provide someone to help you interpret the information in your credit file. You are entitled to receive a free copy of your credit report if you are unemployed and intend to apply for employment in the next 60 days, if you are a recipient of public welfare assistance, or if you have reason to believe that there is inaccurate information in your credit report due to fraud.

You have a right to sue a credit repair organization that violates the Credit Repair Organization Act. This law prohibits deceptive practices by credit repair organizations.

You have the right to cancel your contract with any credit repair organization for any reason within 3 business days from the date you signed it.

Credit bureaus are required to follow reasonable procedures to ensure that the information they report is accurate. However, mistakes may occur.

You may, on your own, notify a credit bureau in writing that you dispute the accuracy of information in your credit file. The credit bureau must then reinvestigate and modify or remove inaccurate or incomplete information. The credit bureau may not charge any fee for this service. Any pertinent information and copies of all documents you have concerning an error should be given to the credit bureau.

If the credit bureau's reinvestigation does not resolve the dispute to your satisfaction, you may send a brief statement to the credit bureau, to be kept in your file, explaining why you think the record is inaccurate. The credit bureau must include a summary of your statement about disputed information with any report it issues about you.

The Federal Trade Commission regulates credit bureaus and credit repair organizations. For more information contact:

The Public Reference Branch
Federal Trade Commission
Washington, D.C. 20580'.

(b) Separate Statement Requirement.--The written statement required under this section shall be provided as a document which is separate from any written contract or other agreement between the credit repair organization and the consumer or any other written material provided to the consumer.

©) Retention of Compliance Records.--

(1) In general.--The credit repair organization shall maintain a copy of the statement signed by the consumer acknowledging receipt of the statement.

(2) Maintenance for 2 years.--The copy of any consumer's statement shall be maintained in the organization's files for 2 years after the date on which the statement is signed by the consumer.
SEC. 406. CREDIT REPAIR ORGANIZATIONS CONTRACTS.(10)

(a) Written Contracts Required.--No services may be provided by any credit repair organization for any consumer--

(1) unless a written and dated contract (for the purchase of such services) which meets the requirements of subsection

(b) has been signed by the consumer; or

(2) before the end of the 3-business-day period beginning on the date the contract is signed.

(b) Terms and Conditions of Contract.--No contract referred to in subsection

(a) meets the requirements of this subsection unless such contract includes (in writing)--

(1) the terms and conditions of payment, including the total amount of all payments to be made by the consumer to the credit repair organization or to any other person;

(2) a full and detailed description of the services to be performed by the credit repair organization for the consumer, including--

(A) all guarantees of performance; and

(B) an estimate of-- (I) the date by which the performance of the services (to be performed by the credit repair organization or any other person) will be complete; or (ii) the length of the period necessary to perform such services;

(3) the credit repair organization's name and principal business address; and

(4) a conspicuous statement in bold face type, in immediate proximity to the space reserved for the consumer's signature on the contract, which reads as follows: 'You may cancel this contract without penalty or obligation at any time before midnight of the 3rd business day after the date on which you signed the contract. See the attached notice of cancellation form for an explanation of this right.'.
SEC. 407. RIGHT TO CANCEL CONTRACT.(11)

(a) In General. -- Any consumer may cancel any contract with any credit repair organization without penalty or obligation by notifying the credit repair organization of the consumer's intention to do so at any time before midnight of the 3rd business day which begins after the date on which the contract or agreement between the consumer and the credit repair organization is executed or would, but for this subsection, become enforceable against the parties.

(b) Cancellation Form and Other Information. -- Each contract shall be accompanied by a form, in duplicate, which has the heading 'Notice of Cancellation' and contains in bold face type the following statement:

'You may cancel this contract, without any penalty or obligation, at any time before midnight of the 3rd day which begins after the date the contract is signed by you.

To cancel this contract, mail or deliver a signed, dated copy of this cancellation notice, or any other written notice to (name of credit repair organization) at (address of credit repair organization) before midnight on (date)

I hereby cancel this transaction,

( date )

( purchaser's signature ).'.

©) Consumer Copy of Contract Required.--Any consumer who enters into any contract with any credit repair organization shall be given, by the organization--

(1) a copy of the completed contract and the disclosure statement required under section 405; and (2) a copy of any other document the credit repair organization requires the consumer to sign, at the time the contract or the other document is signed.
SEC. 408. NONCOMPLIANCE WITH THIS TITLE.(12)

(a) Consumer Waivers Invalid.--Any waiver by any consumer of any protection provided by or any right of the consumer under this title--

(1) shall be treated as void; and

(2) may not be enforced by any Federal or State court or any other person.

(b) Attempt To Obtain Waiver.--Any attempt by any person to obtain a waiver from any consumer of any protection provided by or any right of the consumer under this title shall be treated as a violation of this title.

©) Contracts Not in Compliance.--Any contract for services which does not comply with the applicable provisions of this title--

(1) shall be treated as void; and

(2) may not be enforced by any Federal or State court or any other person.
SEC. 409. CIVIL LIABILITY.(13)

(a) Liability Established.--Any person who fails to comply with any provision of this title with respect to any other person shall be liable to such person in an amount equal to the sum of the amounts determined under each of the following paragraphs:

(1) Actual damages.--The greater of--

(A) the amount of any actual damage sustained by such person as a result of such failure; or

(B) any amount paid by the person to the credit repair organization.

(2) Punitive damages.--

(A) Individual actions.--In the case of any action by an individual, such additional amount as the court may allow.

(B) Class actions.--In the case of a class action, the sum of--

(I) the aggregate of the amount which the court may allow for each named plaintiff; and

(ii) the aggregate of the amount which the court may allow for each other class member, without regard to any minimum individual recovery.

(3) Attorneys' fees.--In the case of any successful action to enforce any liability under paragraph (1) or (2), the costs of the action, together with reasonable attorneys' fees.

(b) Factors to Be Considered in Awarding Punitive Damages.--In determining the amount of any liability of any credit repair organization under subsection (a)(2), the court shall consider, among other relevant factors--

(1) the frequency and persistence of noncompliance by the credit repair organization;

(2) the nature of the noncompliance;

(3) the extent to which such noncompliance was intentional; and

(4) in the case of any class action, the number of consumers adversely affected.
SEC. 410. ADMINISTRATIVE ENFORCEMENT.(14)

(a) In General.--Compliance with the requirements imposed under this title with respect to credit repair organizations shall be enforced under the Federal Trade Commission Act by the Federal Trade Commission.

(b) Violations of This Title Treated as Violations of Federal Trade Commission Act.--

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

The Codebtor Stay

One of the little known facts about bankruptcy is the existence of the "codebtor stay". In most cases, when a bankruptcy is filed a "stay" is put into place. That means most proceedings against a Debtor's property must freeze in time and no further action can be taken against the property, so long as the stay is in effect.

In a Chapter 13 case, this stay will generally extend to codebtors. This is important because it means that a person who files a Chapter 13 may be able to protect co-signers of loans, without the co-signer having to file a bankruptcy. For example, if a person can no longer make payments on a loan that was co-signed for by a relative, but it was understood that the relative will not be the one making payments, that person can protect the co-signer from collection efforts and lawsuits by filing a Chapter 13 bankruptcy. There is no need for the co-signer to file an additional bankruptcy to obtain the benefits of the stay. The stay will be in effect so long as the case is open. However, the protection will stop if the Court grants relief from the stay, or there is a balance remaining after the Debtor completes the Plan.

There are two basic requirements for the co-debtor stay to be in effect. First, it must be a "consumer debt", meaning car payments, mortgage payments, credit cards, etc. Second, the co-signer must be an individual and not a corporate entity.

We have had many cases where a client comes to us because they have defaulted on a loan and the lender is seeking recovery against a co-signer, who only co-signed in an effort to assist the client. This is a very unfair situation because the co-signer was simply trying to help somebody and never thought he or she would be subject to collection efforts or, worse yet, a lawsuit. Employing the co-debtor stay is a good way to protect people who were just trying to lend a hand.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.

Mortgage Lender Sanctioned for Charging Excessive Unexplained Fees

Once a debtor files for Chapter 13 bankruptcy, the mortgage lender must adjust its records so that the next payment due after the filing of the case is applied to that month’s payment and not to any previous month. All the pre-petition arrears that the debtor may owe the mortgage lender are being paid by the Chapter 13 Trustee through the plan. In order to receive payment by the Trustee, the lender must file a proof of claim in the debtor’s bankruptcy case. The claim will advise the court of the balance due on the loan as well as the amount of pre-petition arrears.

In the recent case of Fleming v. National City Mortgage, (In re Fleming), from the Bankruptcy Court in the Southern District of Ohio, the mortgage lender had filed a proof of claim in the debtors’ case. Two years later the debtors attempted to refinance their loan but were unable to do so because the payoff figure given to them was $7,688 higher than the amount shown on the lender’s proof of claim. This was despite the fact that they were current on their mortgage payments. A year later they again attempted to refinance. This time the payoff figure was $8,653 higher than the amount shown on its proof of claim. The largest single item on the payoff figure was a charge for $21,420 in foreclosure costs. The proof of claim indicated an amount for foreclosure costs of less than $3,000. The debtors filed an adversary proceeding against the lender to determine the exact amount of what was owed on the loan.

Instead of answering the question of what was owed, the lender engaged in litigation and discovery tactics that increased the costs to obtain the answers. The court found that the debtors would never be able to match the defendant’s financial resources and would inevitably have to abandon the cause and their home. The court entered a default judgment against the lender as the “only viable recourse to avoid such an unjust result.” The court then ordered the lender to amend its records so that the amount due conforms with the Chapter 13 Trustee’s records, that it correct the debtors’ credit reports and also pay the debtors their attorneys fees and costs incurred in pursing the case.

I am involved in litigation against mortgage lenders in the bankruptcy court in my state for similar problems. The mortgage lenders’ tactics are the same in my cases as they were in the Ohio case. Getting the lenders to answer discovery requests in a straightforward manner has been almost impossible. It has taken multiple hearings in one of my cases for the lender to answer basic questions. I only hope the judges in my state will be as bold as the judge in Ohio.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Requirements to Take Pre and Post Filing Classes

Under the new bankruptcy law effective in 2005, a person filing for bankruptcy must take a credit counseling class before the case is filed and a debt management class after it is filed. These classes can be taken over the telephone or over the Internet. The pre-filing class usually takes 90 minutes to complete and the post-filing class usually takes two hours to complete. The companies that offer the courses must be approved by the U.S. Trustee’s Office. The fees charged by these companies range from $14.00 to $50.00 per course. Although I have heard of companies charging much more. If my clients use the companies I recommend, they will be paying the least amount for each course, thereby saving themselves a lot of money. When the debtor has completed the course, the company will issue a certificate that indicating that the person completed the course. The certificate will indicate the date and time the course was completed. The pre-filing certificate is good for six months. If the case is not filed within six months of the course completion, the person will need to take the class again. The bankruptcy court will give the debtor a deadline to complete the post-filing debt management class. If the debtor has not taken the class before the deadline, the court will close the case and no discharge order will be entered.

Section 1099(h) (4) of the Bankruptcy Code allows certain individuals to file cases and be granted a discharge without taking these classes. To be eligible under this section, the person must be “unable to complete those requirements because of incapacity, disability, or active military duty in a military combat zone. For purposes of this paragraph, “incapacity” means that the debtor is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities; and “disability” means that the debtor is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing...”

I have had elderly clients who are incapacitated due to dementia be excused from taking the classes. However, prisoners, although the prison officials refuse to allow them to take the course, have been denied a waiver by the bankruptcy court and were still required to take the classes. The bankruptcy court has held in a recent case in Ohio, In re Denger, that a debtor’s incarceration, standing on its own, cannot be equated with a “disability” for purposes of Section 109(h)(4).

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Property that can be kept in a Chapter 7 Bankruptcy

Many people believe that if they declare a Chapter 7 Bankruptcy, they will lose all of their property. This is not a correct assumption. All states have exemption statutes or have incorporated federal exemption laws which allow Debtors to retain some property.

When a Chapter 7 Bankruptcy is filed, the Debtor must list all of his or her personal belongings and other property. The Debtor must determine the value of each item. In most states, the law allows the Debtor to keep, or "exempt", a certain cash value of property. When an exemption is used, the Debtor can retain whatever portion of the value of the property that has been exempted. For example, if a Debtor owns a vehicle worth $8000 and wants to keep the vehicle, the full $8000 value can be exempted (if allowed by the applicable law), and the Debtor can retain the vehicle. The $8000 that was exempted would count toward the total amount of exemptions that are allowed by the law that is applicable to the Debtor's case.

Laws on what can be exempted vary from state to state. In some states, a primary residence can be exempted as a matter of law, with certain requirements including requirements related to the length of residency in the state. In other states, funds in retirement, pension, IRA, or 401k can be exempted without counting toward the total value of a Debtor's general exemptions. It is important to have a good concept of what you can retain if you do file a Chapter 7 Bankruptcy. Failing to exempt your property correctly could result in the loss of belongings that may have been retained if the case were filed properly. A good attorney can tell you more about the property that you could retain if you file for bankruptcy.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.

Reaffirmation

After a debtor files for bankruptcy, many creditors ask him or her to sign a reaffirmation agreement. A reaffirmation agreement is a written agreement between the debtor and the creditor whereby the debtor agrees to continue making the payments to the creditor even though the debt would ordinarily be discharged. This means that this particular debt is not canceled when the debtor receives the discharge. It becomes a new contract between the debtor and the creditor. If the debtor does not pay the creditor as he or she is required to do under the reaffirmation agreement, then the creditor may pursue all collection efforts against the debtor, including suing the debtor and obtaining a judgment and garnishing wages.

The advantage of reaffirming the debt is that the creditor may allow the debtor to continue using its services. For example, if the debtor had a loan with a credit union, by reaffirming the debt, the debtor may be able to get new loans with the credit union once the reaffirmed debt is paid in full. If the debtor does not reaffirm the debt with the credit union, then the credit union will usually suspend the debtor’s privileges.

Debtors are not obligated to reaffirm any debts and should consider whether they can afford to make the payments called for under the terms of the reaffirmation agreement before they consent to it. If after the agreement is signed and filed with the court the debtor realizes he or she made a mistake, they have 60 days to cancel the reaffirmation agreement. The debtor does not have to state a reason for the cancellation and if canceled timely, the creditor must return all monies sent to it pursuant to the agreement.

It may not be necessary to reaffirm the entire amount requested by the creditor. The debtor’s bankruptcy lawyer may be able to negotiate with the creditor to reduce the interest rate, lower the principle balance due or lower the amount paid each month. The reaffirmation agreement will state the original terms and also the new terms. If the new terms are still beyond the debtor’s budget, I would recommend that the debtor not sign the agreement.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Debtors Must Disclose All Business Interest

One of the questions asked on the Statement of Financial Affairs (one of the forms that comprise a bankruptcy petition) is whether the debtor had any interest in a business within the last six years, and if so they need to be listed. If the debtor has a current interest in a business, that interest must also be disclosed in his Schedules. Failure to list these interests could jeopardize the debtor’s right to a discharge.

An example of this can be found in a recent case in the Bankruptcy Court in West Virginia. In this case the debtor had a 10% interest in a business and his brother owned the other 90%. Prior to filing the case the debtor received a total of $1,000 of income from the business. The day after he filed, he received another $1,200.00 of income. He did not disclose his interest in this business or the income he received anywhere in his petition. One of his creditors filed a complaint objecting to his discharge due to his failure to disclose this information. The court found that although his interest in the business may not be valuable, it was no excuse for the debtor’s failure to disclose it. The court also found that the debtor knew of his business interest as it was disclosed in his tax returns. Therefore, the court ruled that the debtor either made an intentional false statement or at a minium showed a reckless indifference to the truth and denied him a discharge.

It is therefore critical that if you own an interest in a business, even if it is a very small interest, that information must be disclosed in your petition. I have found clients may forget about a business that they may have started a few years ago, but did not earn much money, if any, from that business during its operation. A review of the tax returns they filed for the last few years however, discloses this business interest. When I then meet with the debtors, I remind them of this business and get its starting and ending dates, the type of business it was and their interest in the business and put all that information in the petition. If you are filing a case without a lawyer make sure to review all your past tax returns so that information on those returns is consistent with the information on your petition.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Can Taxes be Discharged in a Bankrutpcy?

A common belief is that income taxes are never dischargable in a bankruptcy. This belief is incorrect. In some cases, income taxes can be discharged in a bankruptcy. Under the bankruptcy code, both Federal and State income taxes may be discharged if they meet certain requirements.

In order to discharge income taxes in a bankruptcy, the taxes must be for a tax year that occurred three or more years prior to filing the bankruptcy case. This is usually calculated by using the April 15 (tax day) date and counting forward. For example, if a person owes taxes for the tax year of 2005 and files his or her case before April 15, 2009, he or she would not be able to discharge the 2005 income tax liability. However, if one files the case after April 15, 2009 the taxes likely can be discharged. (The date is usually moved from April 15 to October 15 if an extension was filed). The IRS or State must also have assessed the liability more than 240 days before the case is filed.

The next requirement is that the taxes have to have been filed more than two years prior to filing the bankruptcy. Therefore, if a person did not file his or her taxes on time, the taxes may not be dischargable, even though they were for a tax year that ended more than two years before the case was filed.

There are other exceptions, including the rules that a person who filed a fraudulent tax return, or was trying to evade tax liability, will not have the tax debt discharged. A good attorney can tell you more about the ability to discharge taxes in a bankruptcy and whether your income tax debt can be wiped out if you file for bankruptcy.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.

Creditors Cannot Take Action to Collect Debts After Filing

Under the bankruptcy law, once you file the case all collection activity must come to a stop. The court notifies all your creditors of your filing usually within a few days of the date you filed the case. That means that once the creditors get notice of the filing they may not send you any bills in the mail, call you on the phone or file a law suit to collect the amount owed. If they ignore the law, they can be subject to both compensatory and punitive damages.


In a recent case in New York, the Bankruptcy Court ordered a bank to pay the debtor $15,910.00 in damages because it had sent the debtor nine collection letters after the case was filed and also called her asking for money despite having notice of the filing. At the trial the bank representative testified that its operations division does not stop sending collection letters to its customers even if they tell the bank that they had filed for bankruptcy. The court found that the bank did get notice of the filing from the Clerk’s Office and therefore should have ceased all collection efforts. Because it did not, it was liable to the debtor for damages, including reimbursing her attorney’s fees and punitive damages.


The lesson from this case is that if you have filed a bankruptcy case and continue to receive collection letters or harassing phone calls, you should let your attorney know. You may be entitled to damages including punitive damages.


Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.

Can you get rid of a second mortgage by filing bankruptcy?

There is no doubt about it, we are living in an interesting time. One of the few advantages of a down economy is that, under the proper circumstances, people with two mortgages can actually eliminate their second mortgage through a Chapter 13 bankruptcy. Getting rid of a second mortgage, also known as "lien stripping" or "lien avoidance", can be done when the value of the property is less than the value of the first mortgage.

The logic is simple. In a bankruptcy, there are "secured" and "unsecured" creditors. A secured creditor has collateral securing its loan, while an unsecured creditor does not. A mortgage company is a secured creditor because it secured the loan with the house. A credit card company would be an unsecured creditor because it has no collateral securing its loan. When people file a Chapter 13 bankruptcy, they must repay the past mortgage arrears 100%. Unsecured creditors may not be getting 100% of their debt paid. When the case is over, any debt owed to an unsecured creditor is discharged.

To get rid of the second mortgage, an attorney files a Motion with the Court asking to "avoid" the second mortgage. The basis for filing is that under the law if there is no equity for the second mortgage, the second mortgage may be avoided. If the Court agrees with the Motion, it moves the second mortgage from the "secured" column to the "unsecured" column. When the bankruptcy is over, the second mortgage gets wiped out along with the credit cards and other unsecured debt. The Order avoiding the second mortgage and the discharge from bankruptcy must be recorded in the Land Records where the property is located.

It is important to understand all options available before taking the step of filing a bankruptcy. Nobody wants to file a bankruptcy, but if you do file, make sure you only have to do it once. An attorney can assist in maximizing the benefits.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia.