Month: April 2015

Your Facebook Account Doesn’t Have to Die with You

By: Michael Havlik

In a 2014 estimate, there were almost 1.4 billion Facebook users in the world, with 890 million of these users spending an average of 21 minutes per day on Facebook. Even senior citizens, traditionally a demographic slow to adopting online technology, are seeing the value of creating a virtual life on social media. In fact, a recent reportfound that the fastest growing social media demographic is persons 50 years and older. Among all of these users, an estimated 4.75 billion pieces of content are shared daily.

Have you ever wondered what happens to your Facebook account–and all that uploaded content–after you die? Fortunately, recent changes to Facebook’s policy has made death a little less scary.

It has been said that “old age isn’t so bad when you consider the alternative.” Similarly, to fully appreciate Facebook’s new policy, it is worth discussing the alternatives. Consider the widely publicized saga of the Ellsworths family following the death of their son, Lance Corporal Justin Ellsworth. Justin, a Marine, died in combat in 2004 while serving in Iraq. After his death, the Ellsworth family wanted to make a memorial of his life by using the e-mails Justin had sent and received while deployed overseas. Yahoo!, the e-mail service provider, denied all requests by the Ellsworth family, citing that it was against their terms-of-service. It was only after a lengthy and costly court battle that Yahoo! gave the family access to Justin’s emails.

Even Facebook’s policy used to be onerous for heirs. In 2012, a family sued Facebook to compel Facebook to give them access to their son’s account. Their son had unexpectedly committed suicide, leaving no note or rationale for the coping family, and the family sought access to help solve the mystery. Even though the family won the lawsuit, Facebook refused to provide the access for some time afterwards.

All of that changed in February of this year (at least for Facebook users). Facebook’s new “Legacy Feature” allows account holders to designate a friend to have certain access after the user passes away. For instance, the legacy contact will be able to pin a post on the decedent’s timeline after death (such as a funeral announcement), respond to new friend requests, or update cover and profile photos. Additionally, users can elect whether they want their legacy contact to be able to download pictures, posts, and videos from their account. And lest you worry about those embarrassing messages with your ex—the legacy contact won’t be able to log in as you or read any private messages.

Alternatively, through this feature, you can tell Facebook to permanently delete your account after death.

Here’s how to designate your legacy contact:

  • From your Facebook profile, click on “Security”
  • Choose “Legacy Contact” at the bottom
  • Enter the name of a Facebook friend as your legacy contact. (Note: an email will be sent to the friend alerting them of their new status)

Differences Between Chapter 7 and Chapter 13 Bankruptcy

By: Michael Richardson

The bankruptcy laws offer two primary options for consumer bankruptcies: Chapter 7 or Chapter 13. This blog post describes the basics of each of these chapters. In addition, the costs, benefits, and eligibility requirements of each chapter are described.

A Chapter 7 consumer bankruptcy is commonly referred to as a “liquidation” bankruptcy. Basically, consumers who file for Chapter 7 must give up all of their non-exempt property[1] in exchange for a discharge of a portion of their debt. The ability to discharge (which means to completely get rid of) outstanding debt is a very attractive feature of Chapter 7. However, lawmakers thought that consumers were abusing the system. So, in the last 10 years, the laws were changed to make it more difficult for consumers to be eligible for Chapter 7 “relief.” If the court determines that a consumer has the means and financial ability to make consistent payments to the consumer’s creditors over time, then the court can either convert the case into a Chapter 13 consumer bankruptcy (discussed below) or the court can dismiss the case entirely.

A Chapter 13 consumer bankruptcy is “repayment” bankruptcy. Consumers who file for Chapter 13 are allowed to keep all of their property. In exchange, consumers must promise to pay a portion of their future income over to the court for a period 3 to 5 years. This is called a repayment plan. The consumer submits her own repayment plan, and both the court and the consumer’s creditors are required to approve the plan. In deciding whether to approve the repayment plan, the court will look at whether the consumer’s income is stable and consistent, among other factors. If the court approves the plan, the consumer must not miss payments or default in any way, because the court can convert the case to a Chapter 7 or dismiss the case entirely.

As discussed above, Chapter 7 and Chapter 13 consumer bankruptcies contain different legal consequences and eligibility requirements. Each chapter is suited for different consumer financial profiles, and there are important advantages and disadvantages of each chapter. Here are some important requirements and features of Chapter 7 and Chapter 13 bankruptcies:

  • Chapter 7 “Liquidation”
    • Main Benefit:
      • Ability to make a fresh start by discharging a large portion of outstanding debt
    • Downside:
      • Must give up all non-exempt property
    • Eligibility
      • Not all consumers are eligible
        • **But, those with “below-median” incomes are usually eligible
      • The court will compare the amount of debt with the amount of the consumer’s disposable income
      • A consumer may only receive a Chapter 7 discharge once very 8 years
      • A consumer may convert a Chapter 13 to a Chapter 7 case at any time
  • Chapter 13 “Repayment”
    • Benefits:
      • The consumer is able to keep all of her property
      • Discharge of some debt is potentially available at the end of the repayment plan
    • Downside:
      • Often, a consumer cannot discharge any debt
      • The consumer must endure a fixed budget and pay portion of her income to the court for 3 to 5 years
      • If consumer misses payments or otherwise defaults, the case is converted to a Chapter 7
    • Eligibility
      • Only available to individuals (not corporations or other organizations)
        • **But, individuals with business debts are eligible
      • The consumer must have stable and consistent income
      • The consumer may only have up to a limited amount of outstanding debt
      • The court must approve conversion from a Chapter 7 to a Chapter 13

The bankruptcy laws can be complicated, and Chapter 7 and Chapter 13 are different in many ways. For this reason, it is always recommended to consult with an experienced consumer bankruptcy attorney to discuss your options before filing for bankruptcy.

[1] For a discussion of exempt property in bankruptcy, please visit the blog post titled “Bankruptcy Basics – Exempt Property.”

Renting At Your Dream Destination

By: Glenn Sellers

Craigslist scams take all shapes and sizes. For tips on how to recognize these scams and stay safe, you can see a prior post I wrote here.

Since that post, a new breed of these scams has come to my attention. This scam is targeted at “destination communities” such as ski resorts and beach towns, so it is especially relevant to those of us at My Consumer Tips, a Colorado-based publication. If you live in, frequent, occasionally visit, or even just plan to visit a location like this, be sure to read up.

A common feature of destination communities is that individuals travel long distances to get to the “destination.” Whether in a remote region of the Rocky Mountains hours from the nearest major city, or a beach not too far south of Los Angeles, people will travel across the country or even the world to get to this destination.

This makes it difficult to check out a rental property beforehand. Maybe you plan on renting a beach house in the Florida Keys for the winter and you live in New York. Maybe you want to rent a villa in Northern California wine country for a weeklong stay, but you live outside Kansas City. Perhaps you’re trying to move to Aspen and live in Michigan, but need to find a condo before the move. In all of these cases, you’re looking to spend your money on a vacation or a move, not simply going to this far-off destination first to see if the lodging is acceptable.

Scammers know this and have been preying on it, posting fake advertisements for these types of rentals on Craigslist and similar sites. These scams will ask you to wire money as a deposit or prepayment, sometimes as just a $100 fee to hold the room, other times asking for the entire cost of the lodging up front. The latter scenario turned up tragically in one case out of Aspen earlier this year, where an X-Games athlete’s parents were scammed out of thousands of dollars when trying to book a rental to watch their son compete. When the family arrived from Canada, the supposed rental turned out to be a construction site and they never recovered their money.

One Colorado sheriff’s office has seen the problem so frequently that they have issued a public warning and have investigators dedicated to solving the problem. This sheriff’s office has jurisdiction over four world-class ski resorts, including Breckenridge, Keystone, Arapahoe Basin, and Copper Mountain, illustrating the sort of areas these scams frequently target. Still, there is little that law enforcement can do, as many of these scammers are based abroad and, being professionals, cover their tracks well.

So you still want to go on a long vacation or move to a resort town, but don’t want to stay in an expensive hotel while you search for lodging in a tight housing market? Then heed the following tips:

  1. Try out AirBnB and VRBO. Both do rentals ranging from a night to indefinitely. While they may be more expensive than Craigslist, the extra cost comes with a company that guarantees your purchase. Both also provide assurances for the landlord, making them more confident to rent to a wide array of clientele. For more information about these, see the post created by one of my colleagues regarding the “Sharing Economy.”
  2. If you must use Craigslist, have a friend or loved one in the area visit the place first, or just stomach the travel and go yourself. The latter option might not be too appealing for faraway destinations, but if you’re putting a substantial amount of money on the line it’s better to be safe than sorry. It’s also devastating to show up somewhere expecting a room or condo that isn’t there or that you don’t have a legitimate right to.
  3. Use a secure form of payment. While trusted services like those listed above are the most secure, using other financial intermediaries that are a trusted source or provide fraud protection is still preferable. For example, if a landlord near Lake Tahoe asks you to send payment, inquire if they have an umbrella leasing organization that you can send money to or pay via credit card. A lot of legitimate landlords will have an association or property management company that can receive payment. Above all, do not just send cash, check, money order, or use a service like Western Union with an unverified landlord. If the landlord refuses using a trusted intermediary, it’s likely a fraud.

Guarantees and Warranties—Is There a Difference and Does it Matter?

By: Andre Kaiser 

100% Satisfaction Guarantee. You’ve read the phrase before, probably on a food product or maybe the packaging of a consumer electronics item. How does this “satisfaction guarantee” relate to the term “limited warranty” that consumers find familiar? While the terms “guarantee” and “warranty” may have become synonymous in the minds of some consumers, the two are actually quite different. Understanding the difference helps consumers know their rights and what remedies they are entitled to.

Much of the confusion starts with the fact that, at a fundamental level, both guarantees and warranties provide remedies to consumers who have an issue with a good they have purchased. Another similarity is that the offering party in both a guarantee and a warranty is legally bound to the terms of the agreement.

A basic distinction between guarantees and warranties is satisfaction as opposed to malfunction. Dissatisfaction with a product is not generally a circumstance that a warranty will cover. A guarantee on the other hand would generally provide a remedy for dissatisfaction. A manufacturer’s warranty is an assurance or stipulation given by a manufacturer against defects in the components and workmanship with a promise to cure any defects. In contrast, a guarantee is a promise that something is of specified quality, content, benefit, etc., or that it will perform satisfactorily for a given length of time. A warranty can be thought of as an insurance policy the purchaser has against the manufacturer for product defects for a certain period of time, while a guarantee is a promise of satisfaction offered to the purchaser. Warranties are more like a contract in which the manufacturer is promising quality and consistency in the product while guarantees can be more subjective to what an individual consumer hopes to get out of a product.

Perhaps an example can further clarify the difference. Consider Connie Consumer who buys a printer, which is manufactured by Perfunctory Printers. Perfunctory provides Connie with a warranty that the printer will print 100 pages per minute and guarantees that Connie will be happy with the printer’s ease of set-up and use. If Connie notices that her new printer only prints 99 pagers per minute, she could request that Perfunctory fix the printer so that it meets the warranted standard under the warranty. Instead, if the printer has an interface that Connie finds confusing and frustrating to use, under the guarantee she can return the printer for a full refund. Note that the warranty does not require Perfunctory to take the printer back, just to fix it. The guarantee, however, allows Connie to return the printer for a full refund on essentially a “no questions asked” basis.

Another distinction between guarantees and warranties is who provides each of them. As the name implies, a manufacturer’s warranty is always going to be provided by the manufacturer of the good. As discussed earlier an extended warranty could be provided by the manufacturer but more likely will take the form of a service contract provided by a third party seller. A guarantee could be offered by the manufacturer, the seller, or both. For a guarantee that is printed on the packaging of the product, the consumer should generally reach out to the manufacturer if they are dissatisfied with the product or good. However, some third-party sellers provide their own satisfaction guarantee in the form of allowing returns on products for a certain period of time.

The remedies that a warranty and a guarantee each provide can also be used to distinguish the two. In general, a warranty offers to repair malfunctioning or broken parts. However, not all warranties are created equal and in some cases a warranty may not provide for the repair of a defective part. Computers are a prime example of this where “Orange Computers” (Orange) might be the “manufacturer” of the computer and assemble everything, but the processor is actually made by another company, and the hard drive by a third company. In such a situation the warranty Orange provides may only cover the parts Orange itself manufactures and not the processor or hard drive. A warranty usually will not provide for full replacement unless multiple attempts have been made to fix the product to no avail. Thus it is always important to check the terms of the warranty to determine what actually is covered. A guarantee usually only offers the consumer replacement or refund on a product that the consumer is dissatisfied with or for a product that isn’t working properly. Thus, a warranty can be thought of as covering the individual parts or components of the product while the guarantee covers the product as a whole.  However, this will depend on the terms of the warranty or guarantee.

Warranties and guarantees are not necessarily free. The “costs” may be rolled into the price of the product, and warranties can often be extended by paying extra. Sometimes an “extended warranty” is offered by the manufacturer, but more often it is offered by the third-party seller of the good (retailer). Nonetheless, a guarantee may be essentially free when it is part of a free promotion for customer satisfaction. Thus, when a good comes with a guarantee the consumer can generally return the product and get a full refund on their purchase within the guarantee period. But once that guarantee period expires, if the consumer becomes dissatisfied they are likely out of luck. However, this is not always a hard and fast rule. Manufacturers and sellers both want to keep consumers happy and thus might refund a product outside of the stated guarantee period.

Understanding these differences can help consumers know where to look for a remedy if they are unsatisfied with a good they have purchased, or if the good malfunctions.

Payday Lenders in Disguise

By: Charles Clark 

This blog has periodically covered the dangers of payday loans. Payday loans charge extremely high interest rates and often leave borrowers deep in debt. Sources show that the average consumer who takes on a payday loan is in debt for over 6 months, is charged an annual interest rate of over 400%, and has to extend the original payday loan 9 times. There is almost never a situation in which a consumer in need should turn to a payday lender for fast cash.

There are a number of alternative options when consumers need cash or need to pay down existing debt. Those alternatives include setting up a payment plan with creditors, salary advances, credit counseling, credit union loans, emergency assistance programs, and — as a last resort — credit card cash advances. As this blog has shown, taking out a payday loan will almost always leave consumers in deeper debt than before taking out the loan.

There are many individuals and organizations trying to educate consumers on the danger of payday loans, and deter consumers from taking on payday loan debt. Many state governments, including Colorado, have passed laws that limit the interest rate payday lenders can charge. These laws are an attempt to protect consumers from predatory financial products. While the Colorado law has helped consumers to some extent, the industry continues to grow and 77% of Coloradans still live within 5 miles of a payday lender.

Many states have recognized the problem with payday loans and are addressing the issue through laws and regulations. However, some of these payday lenders have adapted their business model in an attempt to make sure they don’t have to comply with the law. The new business models create a type of payday lender in disguise – they essentially function like a payday lender and offer extremely high interest rates without having to comply with payday loan laws. The following are a few examples of loans to be careful of:

  • Auto title loans: Also known as a car title loan, this is a loan where the borrowers car is used as collateral. This means that if the borrower does not make loan payments on time then the lender can repossess the borrowers car and sell it in order to repay the borrowers debt. Similar to payday lenders, auto title lenders often charge extremely high rates of interest to borrowers.
  • Tribal affiliated loans: Due to the increase in regulation many payday lenders have started partnering with Indian tribes in order to offer payday loans over the Internet. By partnering with Indian tribes many of these lenders do not have to comply with US law. Partnering with Indian tribes is a way for these payday lenders to keep taking advantage of consumers by charging excessive interest rates.
  • Mobile Home Loans: Recently, reports have uncovered unfair lending practices by mobile home manufacturers. Such reports have found that loan terms have included high interest rates, undisclosed fees, and terms that would make selling or refinancing the home impossible. As always, before financing the purchase of a mobile home consumers should talk to financial professionals they trust and not just the sellers of the mobile home.

Your Foreclosure Rights

By: James Wilson

Foreclosure is a scary process. Navigating the waters and understanding the process is daunting. There are significant benefits to individuals and the community in the preservation and growth of home ownership. Included in the laws designed to protect consumers, Colorado has adopted the Foreclosure Protection Act (the “Act”) to help ease the burden on consumers faced with foreclosure.

If you are facing the possibility of being displaced from your home, your first step should be to contact the Colorado Foreclosure Hotline at 1-877-601-HOPE (4673). Making this call will connect you to a housing counselor who can help offer free assistance. On their website (www.coloradoforeclosurehotline.org), the Hotline points out that, “There were 19,622 foreclosures in Colorado in 2011…but four out of five that met with a Colorado Foreclosure Hotline housing counselor successfully avoided foreclosure.” Many factors go into whether or not you can avoid foreclosure, but knowing the right questions to ask could be the difference between staying in your home or rushing to find alternative housing opportunities. Things you should discuss with a housing counselor include setting up alternative payment arrangements, and the timelines that lenders must follow before initiating, and during, the foreclosure process.

Often times the most appropriate action will be to engage an attorney familiar with foreclosure and consumer protection laws. An attorney will be able to help you consider warnings that the Act and the Colorado Attorney General have identified with regard to consumer foreclosures.

 

Foreclosure Process

In order to initiate the foreclosure process, your lender is required to send you a thirty (30) day notice to allow you the opportunity to speak with a housing counselor and your lender’s loss mitigation department. Only after the expiration of this notice period can your lender proceed with the formal foreclosure process. If you do receive one of these notices, do not ignore it. As indicated, four out of five people who call the Hotline have the opportunity to stay in their home.

If the foreclosure process proceeds past the notice stage, you will receive a series of additional notices setting forth, among other things, information related to the date of sale. Initially, the sale is set to take place in 3-4 months, but delays and postponements could push the actual sale date farther down the road. Depending on where you live—and even if you have vacated the property—you may have continuing obligations with regard to the property, such as HOA assessments, until the property is actually sold. This is one of the most critical reasons to consult a knowledgeable attorney in order to understand what responsibilities you may carry until the property transfers.

Do not forget that you have the right to cure the default on your loan up to fifteen (15) days before the date of foreclosure sale. In order to cure the default you are required to file certain notices with your lender and public officials. An attorney can help you make sure your notices are properly drafted and sent to all the necessary parties.

 

Foreclosure Consulting Contracts

The Act specifically addresses the engagement of a foreclosure consultant. Generally speaking, a foreclosure consultant is an individual you hire in a non-attorney relationship to assist you through the foreclosure process, and who is not affiliated with your lender. The Colorado Attorney General warns that various individuals may contact you to help you avoid foreclosure after you are in default on your mortgage. By law, these individuals are required to follow certain rules in the Act, which you should ensure are followed before agreeing to pay a foreclosure consultant a fee. A consultant is not allowed to charge or collect any fee from you until the consultant has fully performed his or her services.

A consultant is also required to provide you with a written contract for you to keep at least twenty-four hours before you sign it. The contract must contain the following notices:

  • The consultant cannot ask you to sign any document that transfer your ownership to the consultant or his or her associates.
  • The consultant cannot guarantee that they will be able to refinance or arrange for you to keep your home.
  • You have the right to cancel the contract at any time by written notice. The consultant is required to provide you with a “Notice of Cancellation” form. If you are unsure about how to properly complete this form, call the Hotline!
  • If you cancel, you must repay certain expenses plus interest spent by the consultant on your behalf.

The Attorney General also warns against individuals and scams that offer short-term loans that allow you to cure the current default, but leave you unable to pay off the short-term loan. You should also be extremely cautious of any individual who wants you to transfer title to your property with an option to repurchase at a later date. Before you make any decision related to a current or foreseeable foreclosure, call the Hotline and speak to an attorney.

Does Posting a Legal Notice on your Facebook Wall Protect Your Copyright and Privacy Rights?

By: Michael Havlik 

Earlier this year, anyone actively on Facebook probably saw a resurgence of friends posting a copyright/privacy notice on their wall, addressed to Facebook, and attempting to restrict Facebook’s privacy policies as applied to the user. The message, often full of arcane legalese and citations to various statutes, usually ends with a warning that you, as the user’s friend, remain unprotected unless you perpetuate the message by copy/pasting it to your own wall.

Is there any validity to the message, and any reason why you should post it on your wall? To answer that question, we’ll analyze several of the common claims and citations included in these messages.

(Spoiler alert: as humorously detailed in this video, the message is essentially a hoax, utter nonsense, and has no legal effect whatsoever.)

“I do not give Facebook or any entities associated with Facebook permission to use my pictures, information, or posts, both past and future.”

Facebook’s terms of service state that users “grant [Facebook] a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post.” This is fairly standard language on any social media website. It is binding to all Facebook users, and you cannot modify this “contract” unilaterally by posting a disclaimer on your wall. Coincidently, it is also binding on you regardless whether you’ve read the terms of service or not. If you aren’t comfortable with granting Facebook a license to use your content, you have one option: don’t upload your content on Facebook.

 “I declare that my rights are attached to all my personal data, drawings, paintings, photos, video, texts etc. published on my profile and my page. For commercial use of the foregoing my written consent is required at all times. This places me under the protection of copyright.”

Contrary to the apparent public belief, Facebook does not claim any “copyright” or ownership to any of your personal information that you upload. Also, “my rights are attached…” is meaningless legalese in this context. When this verbiage began circulating several years ago, Facebook released a statement clarifying that “anyone who uses Facebook owns and controls the content and information they post, as stated in our terms. . . . That is our policy, and it always has been.” Indeed, the current terms of service state that “[y]ou own all of the content and information you post on Facebook.”

“…Unless you post this message on your wall, anyone can infringe on your right to privacy once you post to this site.”

This is false. To the contrary, the public can only access the content that you don’t protect using Facebook’s privacy controls.

“NOTE: Facebook is now a public entity. All members must post a note like this. If you do not publish this statement at least once you tacitly allowing the use of your photos, as well as information contained in the profile status updates.”

True, Facebook went public on May 18, 2012. This only means, however, that anyone can now buy and sell its shares on a public market exchange; being a public entity doesn’t change anything under applicable privacy laws. Also true: by using Facebook, you have affirmatively (albeit tacitly) agreed to be bound by the website’s terms of service agreement. This “contract” states that you agree to give Facebook a license to all your information that you upload. Think of this as the price of admission.

“The violation of privacy can be punished by law (pursuant to the UCC and Rome Statute).” Or the alternative, a reference to the “Berne Convention.”

Although the “UCC,” “Rome Statute,” and “Berne Convention” are all real laws, they have nothing to do with internet privacy. The “UCC” is short for the “Uniform Commercial Code,” a set of standardized laws that all states have enacted to govern commercial activity. These laws generally deal with the sale of goods, not privacy rights. The Rome Statute of the International Criminal Court was adopted in 1998 and deal with international crimes against humanity, genocide, and the like. Similarly, the Berne convention, though a real law, is inapplicable in this context.

Discharging Debts Through Bankruptcy

By: Michael Richardson 

An underlying policy of bankruptcy law is to help consumers receive a fresh start in their financial lives. Many times, the only way to help people receive this fresh start is to allow them to completely get rid of a certain amount of debt. Getting rid of debt through bankruptcy is a process called discharge.

Discharge of debt occurs at the end of a consumer’s bankruptcy case. After the consumer’s non-exempt property has been collected and sold at auction, the proceeds of the auction sale are distributed to the consumer’s creditors. Once all of the auctions proceeds are gone, the consumer can discharge many of her debts one and for all. Indeed, the ability to discharge burdensome debt is one of the more attractive provisions of the bankruptcy laws.

However, not all of kinds of debt can be discharged through bankruptcy, and it is important to be aware of the types of consumer debts that are “non-dischargeable.” Debt that is “non-dischargeable” is debt that survives through the end of bankruptcy, and the consumer will still owe the same amount of that particular debt. For example, many consumers likely wonder if they can discharge their student loan debt through bankruptcy. Unfortunately, student loan debt is non-dischargeable through bankruptcy. The reason for this is because Congress decided that if a consumer could discharge her student loan debt by filing for bankruptcy, then lenders of student loans would be less willing to loan students money to pay for tuition. So, Congress created bankruptcy laws that do no allow for the discharge of student loans in order to encourage more institutions to lend students money to pay for their education.   Other debts that are non-dischargeable include state and federal taxes, debt obtained through fraud by the consumer, domestic support obligations, fines or penalties payable to the government, and debt resulting from deliberate actions of the consumer resulting in harm to another person or entity.[1]

Importantly, however, a consumer might be able to discharge her student loans and other non-dischargeable debt if she can show what is called “undue hardship.” A consumer with undue hardship usually cannot maintain a minimal standard of living if forced to repay the loans and the court sees that these burdensome circumstances will persist into the future. It must be noted that the standard for proving undue hardship is a high standard and somewhat difficult for consumers to show in bankruptcy. If, however, the consumer can prove undue hardship, then a court has the ability to discharge the student loan debt or at least reduce the amount owed.

In addition, the bankruptcy laws are very clear in saying that dishonesty is frowned upon. In fact, a court may completely deny the ability of a consumer to discharge her debt if it finds that the consumer has lied to the court or to the consumer’s creditors. In these cases, where the court finds that the consumer has been intentionally dishonest regarding her bankruptcy, the consumer may not be able to discharge any of her debt thereby eliminating one of the most beneficial parts of filing for bankruptcy.

In summary, filing for bankruptcy can allow for a consumer to discharge a significant portion of her debt and allow the consumer to leave bankruptcy with a fresh start. However, some kinds of debt cannot be discharged, unless undue hardship is shown. As with all aspects of filing for bankruptcy, is it vital to consult with an attorney to discuss your options.

[1] For full list of non-dischargeable debt, see § 523(a).

Eligibility for Bankruptcy and the Means Test

By: Michael Richardson 

When most people think of bankruptcy, they think of Chapter 7 Liquidation bankruptcy. A Chapter 7 bankruptcy involves the consumer (or “debtor”) giving up her non-exempt property in exchange for the discharge of a certain amount of her debt. Indeed, the ability to discharge debt through bankruptcy is one of the most attractive features of the bankruptcy laws. Discharging your debt is the first major step on the road to a fresh start.

 

However, not all consumers are eligible for Chapter 7 bankruptcy. In 2005, the bankruptcy laws were amended in response to a growing concern that consumers were abusing the system. Specifically, there were a growing number of complaints from creditors that it was too easy for consumers to file for bankruptcy, and that consumers were taking advantage of the discharge provisions. So, the creditors successfully lobbied Congress to pass what is called the “means test” for Chapter 7 Liquidation bankruptcy.

 

The means test is very complicated. Basically, the means test calculates the amount of income that is available to the debtor after into taking account certain expenses and the nature of the debt itself. The amount of income remaining after this calculation will determine whether the debtor is presumptively abusing the bankruptcy laws. In other words, if the debtor has more than a specified amount of income available to repay her creditors, then the law says the debtor should not obtain the discharge relief that bankruptcy provides. A simple example of the means test at work will be helpful.

 

Let’s say a debtor, who we will call Deborah, lives in Colorado and earns $7,000 per month in income. The means test starts by comparing Deborah’s income with the median income of debtors with the same size household in Colorado. If Deborah’s income is equal to or below Colorado’s median income, Deborah automatically “passes” the means test and further calculations are unnecessary. In this example, however, Deborah’s income is above the median income for Colorado, so we must take a closer look at the rest of her financial situation. Deborah’s monthly expenses are $6,850, and Deborah has $20,000 of debt. So, after deducting her monthly expenses from her monthly income ($7,000 minus $6,850), Deborah is left with $150 of disposable income per month and a total debt of $20,000. According to the means test, Deborah is presumed to be abusing the bankruptcy laws. Deborah’s monthly disposable income compared with her total outstanding debt makes her ineligible for the discharge provisions of Chapter 7 Liquidation bankruptcy. In other words, the law states that Deborah likely has the financial ability, or “means,” to make meaningful payments to her creditors without allowing her to discharge this debt. Here, Deborah’s case might be converted to a Chapter 13 repayment bankruptcy, or be dismissed altogether.

 

Now let’s say that everything is the same except for the fact that Deborah has $100,000 in outstanding debt. In this scenario, the law says that Deborah is not presumed to be abusing the system. Deborah’s $150 monthly disposable income compared to her $100,000 in total debt makes her eligible for Chapter 7 Liquidation bankruptcy. Here, the amount of Deborah’s total debt is such that she does not have the financial ability to make meaningful payments to her creditors, and therefore Deborah should be eligible to discharge some of her debt through bankruptcy.

 

Deborah’s example is meant only to provide a basic understanding of the means test. The actual language of the law is very technical and is frequently criticized as being needlessly confusing and complicated.[1] In any case, a consumer who is considering bankruptcy should be aware that not everyone is eligible for the discharge provisions of Chapter 7, and the bankruptcy court will look closely at the consumer’s current financial situation to determine whether Chapter 7 is appropriate or not. As always, consultation with an experienced bankruptcy lawyer is highly recommended.

[1] For the actual language of the statute, see 11 U.S.C. § 707(b).

Bankruptcy Basics – Exempt Property

By: Michael Richardson

In a traditional Chapter 7 liquidation bankruptcy, the court will gather all of the debtor’s property to eventually sell at auction. The proceeds from the auction sale are then disbursed to the debtor’s creditors to satisfy existing debts. Once all of the auction proceeds are disbursed, the debtor is discharged from bankruptcy.

While this process is seemingly straightforward, a consumer considering bankruptcy might wonder: can the court sell all of my property? The short answer to this question is no.

Certain property is exempt from sale at auction, and the debtor who filed bankruptcy is permitted to keep some of her property. These “exemptions” reflect an underlying policy of United States bankruptcy law – we want to leave every debtor with enough basic property to have a reasonable chance to successfully emerge from bankruptcy. In other words, exemptions help provide a debtor with a fresh start.

In Colorado, the following types of property are exempt from sale, up to a certain dollar amount, in a Chapter 7 liquidation bankruptcy[1]:

  • Homestead: real property, mobile home or manufactured home you occupy up to $60,000 or $90,000 if occupied by an elderly (60+) or disabled debtor or spouse
  • Insurance Benefits: disability benefits up to $200 per month; if lump sum received, the entire amount is exempt
    • Includes group life insurance policy or proceeds
  • Pensions: ERISA – qualified benefits, including IRAs
  • Personal Property:
    • Clothing up to $1,500;
    • Food and Fuel up to $600;
    • Household goods up to $3,000;
    • Jewelry and articles of adornment up to $1,000;
    • Motor vehicles used for work up to $3,000;
    • Pictures and books up to $1,500;
    • Full amount of any federal or state earned income tax credit refund
  • Tools of the Trade: Horses, mules, wagons, carts, machinery, harness, and tools of farmer up to $25,000
    • Also includes the library of a professional up to $3,000 or stock in trade, supplies, fixtures, machines, tools, maps, equipment, books and business materials up to $10,000
    • Also includes livestock and poultry of farmer up to $3,000

A consumer might wonder what happens if she owns a piece of property that falls into one of these exemption categories, but the property is worth more than the dollar limit of the exemption. For example, a debtor owns an item of jewelry that is valued at $1,500, but Colorado law allows an exemption for jewelry only up to $1,000. In that case, the jewelry would be sold at auction for $1,500. The debtor would receive $1,000 from the sale, and the remaining $500 would be distributed to the creditors.

Importantly, property that is subject to a security interest affects whether the debtor may successfully claim an exemption. For example, let’s say a debtor who has filed for bankruptcy owns a car worth $3,000. When the debtor purchased the car, the dealership provided financing in exchange for a security interest in the car in the amount of $2,000. In that case, the car would be sold for $3,000, the dealership would receive $2,000, and the debtor would keep the remainder up to the limit of the exemption.

Finally, there is also something in the bankruptcy context called “exemption planning.” Let’s say a debtor knows that she will file for bankruptcy within the next few weeks. Aware of the exemptions available to her, the debtor converts non-exempt property into her homestead in order to maximize the amount of exemptions available. While some courts have found this type of conduct permissible, the debtor walks a fine line in these situations. If a court finds that the debtor has funneled assets into exempt property with the intent to defraud creditors, the court may completely prohibit the debtor from discharging any of her debt, or even dismiss the debtor’s case entirely.

[1] This is not an exhaustive list. For the full list of exemptions under Colorado law, see Colo. Rev. Stat. §13-54-102(1).