Why I Advise Most People to Try Coaching Before Filing a Chapter 13

Posted on February 16, 2019February 17, 2019 by Dawn Kennedy

I am a lawyer, so it may be odd that I recommend to many people that they should try financial coaching as an option before filing for Chapter 13 bankruptcy. It is also, in many cases, an unpopular opinion with both consumers and some lawyers. I’ll get this out of the way upfront. Yes, I can take a bankruptcy matter, but I find there are many cases where it may do more harm than good. It is also tax refund season, and many people wait for their refund to file so they can afford the bankruptcy filing fees. In fact, I have received a few calls in my practice about it lately, so I thought I would get my rationale into an article.

First, a few bankruptcy basics. When most people think about filing bankruptcy, they are referring to a Chapter 7. A Chapter 7 bankruptcy (meaning filed under Chapter 7 of the Bankruptcy Code) wipes out or “liquidates” almost all of the debtors unsecured debt, but there are exceptions. As well as some rules regarding secured debt such as cars and mortgages. It’s not just a wave of a magic wand, and since 2008, requires the debtor “pass” means test, if the household income is below certain thresholds. There are of course special exceptions, and what law doesn’t have exceptions?

What if the consumer “fails” the means test? Then the bankruptcy code they are eligible to file under is a Chapter 13. A Chapter 13 is basically a court approved repayment plan to creditors. The bankruptcy filing creates an estate, and a bankruptcy trustee manages the repayment for three to five years until it is completed and the bankruptcy (estate) is discharged.

So now we know the basics, why coaching before filing? My top three reasons.

First, the consumer keeps control of his or her income while debt is paid. When a consumer files bankruptcy, all of the debts and all of the income are listed on various “schedules.” The consumer’s assets, meaning property, bank accounts, disposable monthly income, etc. become the “bankruptcy estate.” This includes the consumer’s income, because it is what the filer is promising the bankruptcy court he or she will use to repay the debts. A repayment plan is submitted to the court, and if approved, the estate (with the payment plan) will be managed by a bankruptcy trustee, who works for the court.

So, the consumer no longer gets to control his or her income. It is an asset promised to pay debts, and all debts are paid from this estate for the length of time that bankruptcy is in repayment. This also means that any income increase, such as a raise or bonus, at any time the estate still exists will belong to the trustee. The trustee may demand that more money be paid to the creditors, particularly if the increase exceeds 10% of the consumer’s current income. And you cannot lie to the court. Never a good idea. And most of the time the consumer must submit personal tax returns to the court annually anyway. This is for as long as the estate exists.

Only after discharge will the consumer regain control. While it is true a certain percentage of the debt can be discharged at discharge, most of the debt must be repaid. The general rule is that at least as much of the debt that would have been discharged if the consumer qualified for a chapter 7, and the court can order more based on disposable income and assets.

Another note, if the consumer owes family money, and pays some of it back in the months preceding a bankruptcy filing, the trustee, under what is known as a “claw back,” can demand the family member return the money so it can be added to the estate. This is because the court will presume that the money was paid to a “preferred” creditor.

Second, coaching can help change attitudes and habits, a bankruptcy often doesn’t. Consumers are already required to go through a credit counseling type personal finance class before filing any bankruptcy and again before it can be discharged. I can’t speak to the effectiveness of these courses. But you can potentially see the limited change in money habits these courses have by looking at the average of Chapter 13 bankruptcies that successfully make if the full five years to discharge.

Only about one in three approved payment plans makes it through to discharge. Yup. Only about 33%. Yikes. Another statistic? Approximately 8% of bankruptcies are from re-filers, which account for about 16% of annual filings. More than 1 in 20 filings each year are from consumers who already filed once before. Yes, life can happen to anyone, and I am not here to judge, but if the consumer worked with a Ramsey Preferred Coach, I would take a bet that there would have been an emergency fund prior to that second filing.

When someone works with a coach, the repayment of debt comes not from fear of the court or trustee, but from a sincere desire to change from habits that can be personally harmful, to those habits that give peace of mind. The “not owing a monthly payment to anyone who charges a $39.00 fee if you are one second late with a payment” peace of mind. Also, a coach can keep you accountable. How can you forget to budget if you meet with a coach each month for a while? What if something comes up and you have a question? There is a coach walking beside you for support. Coaching is not forever either, and many people don’t even need three to five years of coaching, unlike a Chapter 13.

Third, the consumer may be asked about filing a bankruptcy long after it is removed from a credit report, and it may affect future opportunities. I find this to be a heartbreaking fact that many people do not really consider prior to filing. Everyone is thinking about the credit report, the “ten years” hit in the “public records” section. But that is just one part. Consumers are often asked on a job application, mortgage loan application, security clearance application, “Have you ever filed bankruptcy?” Which is not the same as, “Have you filed bankruptcy in the last ten years?” And the “have you ever” question must be answered YES. This can lead to loss of some future opportunities that were never even thought of before.

Jobs in law enforcement, for example, are difficult to obtain after filing. Not to lie, even getting a license to practice law can be a challenge because an applicant may not pass the Moral Fitness requirement. Military or government jobs requiring a clearance may be an issue. So, while there is protection against losing your job during a bankruptcy, and protection from discrimination at your current employer, no such protection exists if you try to change jobs later in private industry.

And that’s it. My three biggest reasons for advising consumers to try coaching first, before filing a chapter 13 bankruptcy. If you or someone you know is in a financial situation where bankruptcy has been raised in conversation, you (or they) may want to have a chat with a financial coach, first.

About Your Tax Refund

Posted on January 8, 2019February 8, 2019 by Dawn Kennedy

Somewhere around 80% of taxpayers get some sort of tax refund each year, and that was true again for 2017. The average refund amount was $2878.00. And while many people love to celebrate the lump sum when they get the check, the IRS shouldn’t be used as a savings account. Here are a few reasons why:

1. You could actually have the money to use throughout the year. If an employee paid every two weeks adjusted their withholding to be accurate as to what they really will owe, that average “refund” of $2787.00 becomes $110.00 in the paycheck every payday. This equates to roughly $220.00/ month into the household! With 78% of Americans living paycheck to paycheck, that is a big addition to the monthly budget.

2. The IRS controls the overpayment until they give it back. The IRS doesn’t pay interest on the extra amount you paid or allow you to access your own money until tax time. Once you have it withheld, or you send it in for the self-employed, it is in the IRS coffers until you file your tax return. And the government isn’t paying you any interest on the money they get to use until they have to refund the excess you gave them. In reality, you are losing control of your own income.

3. The cycle of debt/ pay with return is expensive. Many Americans go into debt throughout the year and pay off balances with a tax refund. This allows lenders to charge interest, even short term, and the debt is much more expensive than if the money was in your budget every month to use. An extra $220.00 a month can prevent the need to take on short term and expensive debt, especially if you use that money for an emergency fund.

It’s too late to affect your 2018 tax return and refund, because the 2018 tax year closed about a week ago on December 31st. But you can make changes now to bring home more money in each check, and to prevent a huge sum being refunded in 2019. Check your withholding, by checking your paystub, or ask HR. If you had a change in dependents such as a new baby, kid graduated and moved out, or got divorced, make sure the number of people you are paying taxes for is accurate.

For example, a family of four should be withholding properly for a family of four. One special note for a two-income family-the higher earner should be withholding the proper number of dependents; the second earner should claim zero. This prevents under withholding and a tax bill at the end of the year.

After your adjustments, enjoy the new sum in your paycheck, and for the first few months, why not squirrel the extra away in an account? You haven’t seen it regularly anyway. Only once a year in that government tax refund.

The Unspoken Danger of the UltraFICO- Creditor Judgments

Posted on October 30, 2018February 8, 2019 by Dawn Kennedy

In my last article on the “UltraFICO” I touched on the motivation for Fair Issacs Co. to change their scoring criteria to include consumers banking information, of course, only when the consumer provides this information. I also spoke to some of my particular issues of concern, including cybersecurity and creditors deciding to only use the UltraFICO calculation in future lending decisions because they know the consumer supplies banking information. But I have another concern, and it has nothing to do with FICO score or creditworthiness. I want to know what happens when a creditor receives a judgment against a debtor.

I have never met anyone who takes out credit without any intention of paying it back. But I know many people who lost a job, had an accident, had a medical issue, or other personal crisis that forced them to choose between their mortgage and Visa. And that is never a fun decision. But when it happens, sometimes Visa will sue. And Visa can get a court to order a judgment against the debtor. And that judgment has specific procedural rules but can be enforced through garnishment.

Each state has its own rules regarding creditor judgments. Which assets can be garnished, what percentage of a paycheck, whether a bank account can be raided, etc. But read that last statement again. Whether a bank account can be raided. It recently happened in Georgia. A law firm working for a creditor paid a private investigator to find the bank accounts of Connie James, and not only did the PI find the bank accounts, but the balances down to the penny. And they judgement was quickly settled, via a garnishment order, filed by the law firm against one of her bank accounts. Yup, with a court order, the law firm went in and just took the amount of the judgement. The firm recovered $2,624.00 in one fell swoop. And Mrs. James didn’t even know how the raid on her account occurred until she filed a complaint with the Georgia State Bar, which subsequently found that the law firm did not violate ethics rules. So be it.

The Federal Law which is supposed to keep your banking information private, the 1999 Gramm-Leach-Bliley Act, forbids anyone from attaining your bank accounts by “pre-texting” meaning, “under false pretenses.” Where there is a court order to find assets? Hmmm. It appears to be a gray area because the law office that garnished Mrs. James said it was, “common practice” to hire a PI to get the info.

Wow, scary story, but how is this relevant to credit bureau scores, right? Well, why would a creditor or creditor’s attorney with a judgment hire a private investigator if Experian already has your banking info? A court ordered judgment and subpoena straight to Experian cuts out the middle man. Based on judgment enforcement today, each state would need to pass legislation limiting access to account information- but how can you restrict that information AFTER the consumer gives consent to use the information to apply for credit? As I mentioned in my last post- Experian will likely keep the consumer banking information used to calculate scores. And, remember, the summary of bank accounts was already sent to the lender for consideration in the UltraFICO calculation.

Imagine emerging from personal circumstances that caused a financial hardship, only to learn (as you go to pay your bills), that Visa enforced their judgment against you- by emptying your account. They waited on the judgment until you started a new job, received a tax return, or an inheritance, or whatever, then boom. This is the unspoken danger of giving Experian banking information for the calculation of the UltraFICO, one that has, as of yet, been mitigated by legislation to protect consumers

Credit: nlipw.com

Where Did 2018 Go? Thoughts on the 12 Weeks Until Black Friday

Posted on September 25, 2018February 8, 2019 by Dawn Kennedy

This past weekend consisted of various discussion with the (grown) children about Halloween costumes for the grands and some early planning for the holidays, and it hit me, we are close to the 2018 holiday season. This year has flown by, way too quickly. And now there are only 12 weeks until Black Friday, or for many people, six paydays. But before you close this article, call me “scrooge”, and delete me from your friends list because I want to chat about the Black Friday in September, give me a moment, and I will explain. So why is “Black Friday” my measure of the season and not the actual festivities on, say, Christmas or Hanukah?? Because that shopping day after the turkey traditionally “kicks off” the holiday season. And the spending begins for many. And we love to spend.

In 2017, consumers spent an average of $967.00, between Black Friday and Cyber Monday, accounting for approximately 20% of ALL annual online shopping those days. The amount budgeted on gifts for children has averaged about $500.00 per child, relatively unchanged over the last few years. But gifts aside, there are other expenses around the big season from food, wrapping paper, shipping costs, travel expenses, and new outfits that don’t always make it into the average household budget. In fact, last year almost two-thirds of the average holiday budget went to “non-gift” spending.

All these articles quaintly mention the “holiday budget” as if this was planned in advance. I really don’t know anyone, myself included, who likes a holiday budget. Because sometimes I see something and think, “wow, this is great for…”and want to purchase that thing. For many people, the total holiday cost is really only unveiled after the revelry as the statements start coming in the mail. And the reality comes in January that for too many people, they blew out past the budget, and accumulated quite a bit of debt for the season. The average American woke up in January 2018 with over $1050.00 in DEBT. Not what was spent as a whole, but what they spent in the hole to finance the season. For the 78% of average American families living paycheck to paycheck, an additional $1000.00 in debt, and at incredibly high interest rates, is a burden.

Good news, we all have twelve weeks, or an average of six paychecks to squirrel away some cash. But even better? Companies with seasonal hiring opportunities are at the best it has been in years, and with low unemployment, retailers are competing for seasonal employees. The reported average wage is $12.00/ hour for temps, but Costco is reportedly paying $20.00 and hour!

It’s not too early to start to plan the season. And not just where you are going for dinner on which days. It’s time to think about how to pay for it. Too many people raid emergency funds and take loans from retirement accounts to fund the holidays. And because these holidays come every year, it can become a vicious cycle. But, with all this time available before the shopping and revelry begins, that second job, or extra shift, or part-time side hustle may be just what you need to make this season “Merry and Bright.”

source: imtresidential.com

Why is My Paycheck Short? I wasn’t Sued

Posted on August 14, 2018February 8, 2019 by Dawn Kennedy

When a debt is in default to a federal agency, notably student loans for many Americans, a debtor’s wages can be garnished without a lawsuit through a process known as “Administrative Wage Garnishment” (AWG). This process is different from garnishments based on having a judgment against someone after a lawsuit, because the Treasury does not need to obtain a court order to have an employer withhold up to15% of an employee’s “disposable income.”

Now, there are specific rules surrounding these processes to get you to pay back the debt. For example, an employee must be at the current job for at least 12 months, and the employee left the previous job involuntarily through something like a layoff. But generally, they can take your money, right out of your paycheck, without taking you to court. And it can be frustrating and scary because the agency is in control of the money, and you are short and have other bills to pay.

The Debt Management Service

The Debt Management Service and their Office of Debt Management (ODM) is basically the Treasury’s collection agency. In addition to AWG, there are other processes that can be used to collect on debts owed to the government, such as taking tax refunds to apply to debts, called an “offset.” If you are a Veteran receiving disability compensation, or a retiree, your money can be garnished to satisfy an ODM debt. In fact, your entire monthly disability compensation benefit can be taken. If you receive a Social Security check, and are, or your student borrower is, in default, they can garnish your social security check. Not kidding here.

This post is meant to be a strong reminder that nobody should ignore federal debts. Again, getting a letter from a government agency can be frightening. Period. The Internal Revenue Service (IRS) is the best known, and there are a ton of ads on tv for help with “tax debt.” But these other types of federal debt? Many people are surprised at the power these other agencies have. Not unlike the IRS.

If you are being garnished, and you do not owe a debt to the agency, my suggestion is to contact a lawyer immediately. You may be a victim of identity theft, or the treasury may have wrong information about the debtor, and you are unfortunately targeted. There are stories of two “John Smiths” with a single digit off on the Social Security or account number. Make sure you do not ignore the notices that you may think are just mistakes, you may end up with a paycheck surprise. Not in a good way.

Steps You Can (and should) Take

Student Loans- if you are more than a few months behind in payments, know that after 270 days they CAN intercept your tax return and garnish your wages. If you take steps, such as contacting the servicer, there are steps to take. If you are already in garnishment, get some legal or financial help to see what you need to do to “rehab” your account and stop the garnishment.

Other Federal Debts- similar advice, contact the Treasury Department in charge of collecting your debt, or get legal or financial help in dealing with the agency. For Veterans there may be an option for a waiver, or a payment plan so you receive a portion of your compensation while paying back principal debt.

Final tip. Remain calm and respectful. If you receive a letter, call the numbers on the letter. If not, here is the general contact site for the Treasury Collections Department. You can take back control of your money, even if you are being garnished by a government agency. Get a plan, get help if you need it, and you can get through it.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Law Office of Dawn K. Kennedy or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

What Have You Earned? What Have You Kept? Get your Social Security Statement

Posted on July 17, 2018February 8, 2019 by Dawn Kennedy

The federal government stopped mailing annual Social Security statements to everyone back in 2011. They are still available, but you have to use the internet. I don’t mention this earnings statement because I believe the Social Security program is solvent, or have a prediction whether it will be fixed, or even necessarily believe any “projected benefits” will ever be received by the time I am ready to retire. What the statement will tell you is how much you have earned each year, as reported to the Social Security Administration, since you started working and reporting income to the SSA.

We can go back (waaaay back) to 1990 and look at the average net income earned by average Americans over the last 26 years. The SSA reports $20,172.11 in 1990 and $46,640.94 in 2016. Meaning that for average Americans, we take home more than double each year now than we did in 1990. On the bottom of the SSA statement there is a number- your total earnings to date. In other words what you have earned over your working life.

If you worked and earned an average income from 1990-1999 you would have brought home about $209,056.00. From 2000-2009 about $351,192.00. And from 2010-2016 about $304,037.00. So, if we added the average net income earned and taken home by average Americans from 1990-2016, we get a mind blowing $864,289.00. Well over three quarters of a million dollars. And many people earn well above that annual average.

So, what do we KEEP? According to the latest statistics? Not much. Some of us have a 401k with auto withdrawal and a match at work. But, around 20% of those with a 401k have loans against the accounts taken to cover financial emergencies! Savings accounts are in bad shape as well, in 2017 about 57% of Americans have less than $1,000.00 in savings.

Where is it all going? To service debt. At various interest rates, for various reasons. Average Americans are paying their dollars to cars, homes, student loans, credit cards and personal loans. Excluding a mortgage payment, we send creditors a whopping $1181.00 per MONTH or $14,172.00 a year. Many Americans send much more than that to others.

It’s eye-opening, or at least it was for us. Debt is taking our income, payments that we can do other things with. Like save. Or pay cash for cool things. Or support organizations we feel strongly about. If you are ready to take back your income, you can start anytime. Even if you are still paying oodles of interest and have $1.87 in an IRA right now, its never too late to start. Its never too late to grab a hold of your hard-earned income with a plan to take back your earnings from the current situation.

If your income is flying away the moment after payday, it’s time to make it behave. Make a monthly budget and write down where each dollar goes. Give it a job. Be the smart boss over your hard-working money. Your money likes to have a job. “This month you little dollar, yes YOU, will pay the water bill! YAY!”. If you want an easy to use, free online budgeting tool, I recommend Every Dollar. Money stress really begins when you run out of dollars before you run out of jobs for them to do. Run out of jobs and reassign your money where you want it to work!