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Four Ways to Present Reaffirmation Agreements During Bankruptcy
Offering a reaffirmation agreement to a debtor going through Chapter 7 bankruptcy can allow a secured creditor to receive close to full value on debts for real and personal property. As part of a Chapter 7 debt discharge, a secured creditor normally repossesses properties if a debtor will be unable to repay the loan. However, the creditor most likely cannot hold the debtor liable for any deficiency after resale of the property. With a reaffirmation agreement, the debtor keeps the property as long as he or she can continue making payments. If the debtor defaults, the creditor can repossess the property, and the debtor would be liable for any deficiency after resale. Knowing the risk this may pose their clients, bankruptcy lawyers will discourage debtors from signing reaffirmation agreements. Creditors need to inform debtors of why a reaffirmation agreement may be to their advantage:
Convenience Fees Not Allowed Without Consent in Debt Agreement
Debtors have multiple payment methods they can use to transfer money when repaying debts. Some forms of payment incur additional convenience fees, such as when debtors use credit cards or money orders. Creditors have at times formed agreements with the third-party vendors to share these convenience fees. However, they should examine state laws and their contracts with debtors before entering such agreements. Creditors and debt collectors are often prohibited by law from collecting convenience fees and may be punished for doing so.
Federal and State Law
The Fair Debt Collection Practices Act states that a debt collector cannot institute a fee that increases the amount a debtor owes unless:
- The debt agreement authorizes the fee; or
- State law permits the fee.
Late fees are often included in debt agreements, which makes them legal. However, convenience fees may not be included because they are normally instituted by third-party vendors as a cost for using their services. Illinois’ Collection Agency Act states that convenience fees must be included in a debt agreement in order for a debt collector to collect or request them. Many states have similar laws, though some do not have any laws addressing convenience fees.
FHA Loans Add Extra Steps to Mortgage Foreclosure
The Federal Housing Administration, through the Department of Housing and Urban Development, offers protected loans to help lower income borrowers obtain mortgages. The FHA insures the loan, which gives the lender greater certainty that it will be compensated in case of default. As part of the FHA insurance, the lender must follow federal guidelines in contacting borrowers when they default on the mortgage. Failure to document compliance can halt foreclosure efforts on the property.
In-Person Meeting
According to the Code of Federal Regulations, the lender must have or attempt to have a face-to-face meeting with the borrower before the borrower has missed three months of required payments. If the lender does not have the meeting, it must show that it made a reasonable effort to contact the borrower, including:
- Sending at least one letter of notice, with delivery certified by the U.S. Postal Service; and
Be Careful When Creating Intercreditor Agreements
When a debtor borrows money from multiple creditors, an intercreditor agreement can be helpful in determining the rights of each creditor. The primary purpose of the agreement is to establish which creditor receives priority in case the borrower defaults on its debts. The higher-priority lender is called the senior creditor, and the other lender is called the junior creditor. In the event of default, the agreement may state that the senior creditor must be repaid in full before the junior creditor can take action on the debt. However, the agreement can also include provisions that will protect the junior creditor in case the senior creditor takes action that impairs the junior creditor's ability to collect on its debt. Depending on the severity of the action, a court can decide to strip the senior creditor of its priority claim on the debt.
The Risks in Working with Debt Settlement Companies
When debtors are worried about their ability to repay their creditors, they become susceptible to people who offer quick fixes. Some debt settlement companies are taking advantage of this by advertising misleading debt relief claims to debtors, such as:
- Being able to eliminate debts in months without bankruptcy;
- Stopping calls from debt collectors;
- Relieving their debts without affecting their credit ratings; and
- Allowing them to continue the same lifestyle with no consequence.
Debt settlement companies tout their services as a win for all parties. The debtor relieves his or her debt, and the creditor receives some compensation for the debt. As a creditor, you know the downside of working with debt settlement companies. They ask debtors to send payments to them instead of you, delaying your reimbursement by years. Once the company has accumulated enough of the debtor’s money, it will come to you with a lower settlement offer than what you may have been able to negotiate directly with the debtor. However, the debtor may have more to lose than you from using a debt settlement company. You can help yourself and your debtors by explaining the drawbacks to them:
Fast-Tracking Foreclosure on Abandoned Properties
When a lender concludes that it must foreclose on a mortgage, it likely wants to get through the process as quickly and smoothly as possible. The sooner the lender can reclaim the property, the sooner it can try to find a new buyer and recuperate the cost from the failed mortgage. However, the foreclosure process does not work quickly. While this is inconvenient for all mortgage lenders, the situation is most dire for those trying to foreclose on an abandoned property. Recognizing this problem, Illinois is one of the few states to have a fast-track foreclosure law.
Foreclosure Process
Illinois is a judicial foreclosure state, meaning the lender must go to court to receive a judgment on the foreclosure. The process includes:
- Filing a foreclosure complaint against the borrower after 120 days of missed payments;
- Giving the borrower 30 days to respond and 90 days to reinstate the mortgage;
Bankruptcy Law Allows Debtors to Continue Retirement Contributions
A Chapter 13 bankruptcy trustee in Illinois recently objected to a debtor’s request to exclude $200 per month from his disposable income in order to contribute to his 401K retirement plan. The trustee questioned the motivation of the decision because the debtor had not made any contributions to the plan in the six months prior to filing for bankruptcy. However, an Illinois bankruptcy court denied the objection, stating that the debtor was within his rights. The ruling shows how bankruptcy courts treat retirement plan contributions as a protected expenditure.
Chapter 13 Plans
As opposed to Chapter 7 bankruptcy, Chapter 13 bankruptcy involves creating a repayment plan instead of liquidating assets. Qualified debtors must submit documents that detail their:
- Creditors and debts owed;
Bank of America Stuck in Debt Collection Dispute with Client
Illinois trial and appellate courts have been going back and forth on a debt collection case between Bank of America and a small business owner. Bank of America is suing the former owner of All About Drapes for the remaining value of an unpaid loan, plus interest and legal fees. The business owner counters that he was induced into signing the loan agreement because the bank falsely claimed that his previous line of credit was expiring. The trial court has twice ruled in favor of Bank of America in a summary judgment, but the appellate court overturned that decision each time.
Case Details
The business owner had originally created an open-ended line of credit with LaSalle Bank. He would borrow money to help him through the winter months — when his business was slow — and paid the bank back at a two percent interest rate. Bank of America purchased LaSalle Bank in 2008, and the business owner began seeing an August 2009 maturity date on his bills. The owner explained to multiple employees at the bank that his line of credit did not have a maturity date. The bank insisted that:
New Regulations Target Payday Loan Industry
The Consumer Financial Protection Bureau has created new regulations meant to protect borrows against risky short-term and long-term loans with balloon payments. Commonly known as payday loans and vehicle title loans, these types of loans are usually issued in storefronts and online to consumers who need immediate cash and have difficulty obtaining a traditional loan. The CFPB claims that creditors who issue these loans use unfair and abusive practices by giving loans that they know consumers will be unable to repay and being overly obtrusive in their collection methods. With the new regulations, the CFPB hopes to make the payday loan industry adhere to some of the standards established in other credit industries.
Which Loans Are Affected
The CFPB says that the rules will apply to two types of loans:
- Short-term loans lasting 45 days or fewer; and
Successor Liability Can Hold Companies Accountable for Debts
A company that has extensive debts has many means by which it can attempt to avoid its creditors. One such way is when a second company purchases the debtor company and its assets. The debtor company often no longer has its own assets that its creditors can claim. Creditors may instead seek compensation from the second company that purchased the debtor company. However, Illinois law presumes that a buyer is not responsible for the debts and liabilities of the company it purchases. Business owners may try to abuse the law by essentially continuing to run a company under another name, while dodging creditors. Fortunately, Illinois courts allow creditors to claim successor liability in order to collect debts from successor companies. The creditor must prove one of four established exceptions that transfer debt liability to a successor company.
Expressed or Implied Transfer of Debt
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