Correcting Erroneous Credit Reports

People reviewing their credit reports sometimes find errors including the listing of a delinquent debt, which in fact is no longer owed. As a bankruptcy lawyer , I sometimes have clients returning to me long after their discharge asking, why debts that were discharged by the bankruptcy are still showing up on their credit reports. The simple answer is that credit reporting agencies make mistakes, lots of them, which of course leads to the question of what one can do to correct the errors.

By law when an individual challenges an item on a credit report the credit reporting agency is required to investigate and correct any errors within 30 days. Since credit reporting agencies are big bureaucracies that are not particularly user friendly, you have a better chance of success writing them a letter than calling on the phone. Many advisers would tell you that the letter should be sent certified. You should include with the letters copies of all documents that support your position. In the case of a bankruptcy I would include a copy of the notice of filing from the court and a copy of your discharge. It is also a good idea to include the pages from the credit report with the erroneous information circled. You should also write to the company that supplied the erroneous information to the credit reporting agency with the same documentation telling them to correct the mistake as well.

The results of this process are not always satisfactory. Sometimes after supposedly doing an investigation the credit reporting agency will conclude that it is no error. This is of course frustrating and while you can theoretically bring a law suit for damages in this situation, not many people want to go through that ordeal. Nevertheless the official procedure does correct the problem in many cases and should be used.

New Debts Incurred While In a Chapter 13 Bankruptcy

While the idea of a Chapter 13 Bankruptcy is for debtors to devote all of their available income to paying off what they owe, and not to incur any new debts, this is not always how it works. An unexpected health problem may lead to new medical debts, or the person’s car might completely give out, and she might need a new vehicle to continue going to work. Even if there is no such clearly justifiable reason for incurring the new liability, it can take strong self discipline to convert from living beyond your means, to pulling in your belt enough to eliminate past excesses. Thus sometimes even the best intentioned debtor can slip up and accept a newly offered credit card that arrives in his mail box one fine spring day.

One option a debtor in a Chapter 13 has in this situation is to amend his bankruptcy plan to include the post petition debt. This is not an automatic right though. For most new debts the individual has to persuade both the court and the new creditor to go along with the idea. The court of course has to approve any amendments to a Chapter 13 bankruptcy plan, and the creditor has to agree to file a proof of claim with the bankruptcy court.

The creditor might well be uninterested in filing a proof of claim, because in most Chapter 13 bankruptcies he will end up receiving less than 100% of what he is owed. On the other hand, if the creditor refuses to file the proof of claim he can go after the debtor for the full amount due after the discharge. The key phrase here though is “after the discharge.” While the Chapter 13 plan is in affect the automatic stay forbids the post petition creditor from taking any action to collect the debt. On the theory that a bird in the hand is worth two in the bush, the new creditor may thus find himself with a genuine incentive to enter the Chapter 13 plan and start getting payments now.

Transfer of Property Before Filing Bankruptcy

When an individual files a Chapter 7 bankruptcy , the court may take away any of his property that is not exempt under the law and use it to pay his creditors. Exemptions from creditors under Illinois law include among other assets, $15,000.00 of equity in one’s home, $2,400.00 of equity in a car, and up to $4,000.00 of any personal property.

Debtors sometimes believe that the way to avoid losing property that is not exempt is to give it away to a friend or relative prior to filing bankruptcy. However, the law labels this type of transaction a “fraudulent transfer” and the bankruptcy code provides ways for the trustee is avoid these fraudulent transfers and recover the property from the person who received the gift.

Since in most cases the debtor would have still lost the property in bankruptcy, if he had not made the transfer in advance, it might seem that he has nothing to lose by trying. However, this is not always true. A number of courts have held that the trustee can recover property transferred right before bankruptcy by an insolvent debtor, even if it would have been exempt in the bankruptcy. In other words the debtor can lose his exemption in a house or a car by attempting to pull off what he considers a clever scheme, when in fact his shenanigans were not even necessary in the first place.

Bankruptcy Exemptions For Spousal Pensions

Retirement plans such as pensions, IRAs and 401ks are designed to provide a worker security in his old age, and they can frequently provide additional benefits to his heirs or spouse. On top of the tax benefits created by the Internal Revenue Code for these plans the worker can also exempt these funds from any creditor claims in a bankruptcy. This double benefit leads me as a bankruptcy lawyer to think they are frequently the best investment an individual can make. Recent court cases however have placed some limitations on creditor protections, when someone other than the worker himself holds the retirement plan.

One such decision that came down in 2014 was In Re Burgeson 504 B.R. 800 (Bankr. W.D. Pa. 2014). This case concerned the pension benefits received by the wife in a divorce. In Burgeson the Debtor filed bankruptcy, while she was in the process of a divorce. She had requested that the divorce court award her an equitable portion of her husband’s pension plan, but the court did not order the transfer of the pension until later. The trustee claimed that in this case the woman’s interest in the pension was not exempt from creditor claims and the bankruptcy court agreed. While the wife would have received the exemption, if she had owned the pension, the judge made the distinction that at the time she filed bankruptcy she did not yet own the pension. This was because she had only asked for a share of the pension and the divorce court had not yet awarded it to her. So according to the bankruptcy judge at the time she filed, she only owned a potential claim against her husband under the divorce law, which was not covered by the exemption against creditor claims that appears in the bankruptcy law.

Divorce Debts In Chapter 13 Bankruptcies

Since public policy does not favor a person abandoning one’s dependents to the wolves, courts have been holding for over a century that child support and alimony are not dischargeable debts in bankruptcy. And since 2005 the law has been that virtually all other payments, such as property settlements, owed to one’s spouse under a divorce judgment are not dischargeable either. In some cases however the bankruptcy treatment is still stricter for child support or alimony than it will be for property settlements. This occurs for example in a Chapter 13 bankruptcy , in which an individual makes monthly payments over a three or a five year period to repay part of his debts. The different treatment arises, because child support and alimony are priority debts, and people in a Chapter 13 bankruptcy must repay 100% of their priority debts to receive their discharge. Property settlements however are not priority debts, and the Chapter 13 debtor only needs to pay back the same percentage, as he pays to his other unsecured creditors. The amount paid to general unsecured debtors in Chapter 13 is based on the ability to pay and frequently is only 10% of the debt.

With this variation in results disputes sometimes arise over whether a certain marital debt is child support or alimony rather than a property settlement. In these controversies the bankruptcy court makes this decision, and what the debt is called in the divorce judgment is not binding under the bankruptcy law. Factors considered include whether the party receiving the payments needs support and whether they are made on an installment basis. Unfortunately as the old saying goes “Hard cases make bad law,” and since a failure to support children can lead to some tragic situations, courts have not been totally consistent in these cases. Some judges for example have ruled that a judgement ordering someone to pay his former spouse’s car payments or mortgage payments create priority support debts, but other court cases have reached the opposite conclusion. This of course sometimes makes it difficult to predict in advance whether a court will rule that a debt is support rather than a property settlement.

Education IRAs

In today’s society the cost of sending one’s children to college can wreak havoc in a family budget. Besides using student loans many parents end up taking out second mortgages or liquidating retirement savings to meet these expenses, and the financial strain involved has certainly helped drive more than one family into Chapter 7 Bankruptcy. In order to bring some relief of this burden the Internal Revenue Code contains certain tax benefits for taxpayers with educational expense. Although these incentives are not nearly as generous as tax benefits for homeowners or oil drillers they do provide some assistance. One such form of assistance is the Education IRA.

Education IRAs, officially known as Coverdell Education Savings Accounts, allow a tax benefit for saving for educational expenses. While most people think of college, when saving for education expenses, Education IRAs can also be used for vocational schools, high schools, or even elementary schools. Unlike with some tax benefits for higher education, distributions from Education IRAs can be applied for tuition of part time students. In order for distributions to be used for room and board though, the student must be attending the educational institution at least half time.

An Education IRA is a trust fund which must be set up when the beneficiary is either under age 18 or a special needs individual. Up to $2,000.00 a year can be contributed to an education IRA. The allowable contribution is phased out for high income individuals. While the contributions are not tax deductible the income that accumulates in the trust may be distributed tax free, when it is used to pay qualified expenses. Distributions of income made for non qualifying expenses are subject to regular income tax plus a 10% penalty.