Another bankruptcy question

Factual Questions
1

So my ex-landlord and I were chatting one day, and he starts telling me of his previous financial mistakes. This guy apparently doesn’t mind opening up :slight_smile:

He told me that he accumulated something like $25K in credit card debt, alongside other debts that actually had items backing them up (truck loan, equipment loans, etc)

Then he tells me that things got so bad, he declared bankruptcy, but he was never required to pay back his credit card debt, because before he went through the proceedings, it had been over 4 years since his last credit card payment. The truck loan, they repo’d the truck. The equipment loans were apparently worked out some other way, and he had to pay them back because he needed the equipment to make a living. The credit card companies TRIED to get his credit debts put into his bankruptcy repayment program, but were denied.

According to his lawyer (he says), there’s a law that says if it’s been over 4 years since your last credit card payment, the debt is considered no good from a legal standpoint and the creditor is no longer allowed to pursue you for payment. So he’s been suggesting to all his friends that if they’re underwater on credit cards, just stop paying and sit tight for 4 years - if you have nothing of value to seize, then you just have terrible credit for 4 years plus 7 years after THAT until it’s expunged from your credit report. As if that’s somehow LESS bad than paying the credit cards back.

This is in Pennsylvania. I think he is either misunderstanding what his lawyer told him, or maybe is making the whole thing up.

Does anyone know the straight dope on this one? Or perhaps could anyone tell me where to search for such a specific and esoteric piece of legal information? I ask because it chaps my ass when people somehow manage to get away with stuff like this, and I’m having a hard time believing it’s legit.

2

I suspect that your landlord’s credit card debt was written off before he started bankruptcy proceedings. There is nothing in the code that says simply stopping repayment absolves your debt.

When you file for bankruptcy you must show that you’ve exhausted efforts to repay your debts. So for example, that would mean engaging in some sort of credit counseling or attempting a repayment program. Going four years without paying might qualify, but only if you could demonstrate you were unable to repay, not simply unwilling.

However, the bankruptcy courts are are particularly unsympathetic to people who rack up consumer debt and seek to absolve that debt through a chapter 7 bankruptcy filing. They look at five years worth of your financial records, and if they think you just decided not to pay your credit cards, they’ll most likely insist you go chapter 13, not chapter 7. Long story short… that’s a painful process that you should avoid at all costs.

Once you file for bankruptcy, those credit card companies will come forward with settlement offers, and the court will take notice if you simply reject them all. They know more about the process than you do (or your friend, or most attorneys), and they’ll do everything they can to recover some portion of what you owe them.

It’s worth noting that all bankruptcies are handled in Federal Court, so there aren’t 50 variations of bankruptcy law state-by-state. Also, there were significant changes made to bankruptcy law in 2005, so his experience may have been different.

Here’s all the good info you could need right from the source.

3

That’s not quite right. Most of bankruptcy is pretty similar, but some things in a bankruptcy are decided according to state law, such as whether a security interest has been properly perfected, or what the debtor is allowed to claim as exempt property. There is a list of federal exemptions, but states have the right to “opt out” of using them in favor of their own exemption laws.

To the OP, I strongly suspect your friend misunderstood the advice he received from his lawyer. Also sounds like he may be practicing law without a license if he’s advising other people about their rights under the law.

4

It is generally the US Trustee’s Office that will decide whether or not to file a motion to convert a Chapter 7 to a Chapter 13, and it is highly unlikely that they would look at financial records going back more than 6 months, much less 5-years, to make that determination. They don’t care if you stopped making payments 3 years, 2 months, and 7 days ago. They also don’t particularly care what prior efforts have been made to repay the debt. They do care if your current income is such that a Chapter 13 repayment plan is feasible.

Once you file for bankruptcy, it is against federal law for a creditor to attempt to collect on a debt, which would include a settlement offer. If they did attempt to do so, and the offer was rejected, the bankruptcy court would not give a shit, other than perhaps doling out a fine for violating the bankruptcy “automatic stay”.

State law does impact every single Chapter 7 Bankruptcy filing (and to a certain extent Chapter 13s), but that’s a story for a different thread.

To the OP – state law determines the statute of limitations on a lawsuit to collect on a debt.

However, just because a lawsuit may be prevented by the statute of limitations, in most, if not all, states a creditor can still try to collect on the debt in other ways (letters and phone calls). Some states do have laws where they must disclose to the debtor if they are attempted to collect on a time-barred debt.

I’m a bankruptcy attorney, but I’m not your bankruptcy attorney, and none of the above should be construed as legal advice. When in doubt, go talk to a bankruptcy or collections attorney in your jurisdiction.

5

In many states the statute of limitations for credit card debt is 4 years from the date of first delinquency. If you are used you have to use that as a defense. 7 years after the date of first delinquency it drops off your consumer report.

For credit score purposes a paid charge off is just as bad as an unpaid one.

6

So not true. Homestead exemptions a prime example.

7

See now *you’re *saying exactly what my landlord was saying.

Everyone else seems to be saying - “Nope, stuck with that debt for life, better pay it off or else they’ll come get you in one way or another.”

I tend to think the truth falls somewhere in the middle, because it’s perfectly legit to believe that someone could earn enough money to pay off the credit card debt, but not actually be able to pay it off because of the way they prioritize their money being spent, like house and food comes before CC debt. I’m sure however that the process for determining that is incredibly tortuous and the details of it were either completely overlooked by my friend or were hidden from him by a friendly attorney.

I’m truly curious, because looking at the state of the economy today, I wouldn’t be surprised if mass CC debt defaults became headline news the way foreclosures have been up til now. There’s a heck of a lot of CC debt out there, and if a large enough hunk of those consumers stopped paying, I’m sure it’d cause a “meltdown” of it’s own.

8

I went through personal bankrupty in Minnesota last year.

There is a requirement for credit counselling, pre-filing and post-hearing (twice). I worked with an on-line company that did minimal followup, most probably because they seriously f’d it up and I had to badger them for the completion papers, which had to be filed by a 30-day post hearing deadline.

There was no settlement attempt or any attempt to get me to sign anything. They aren’t allowed to contact you and try to do anything like that, it has to go through your attorney. If they contacted mine, I never heard about it.

9

None of this is really accurate.

  • The Courts have nothing to do with pushing you toward any particular chapter - that is done by the USDOJ United State Trustee’s Office, and they do it by having you complete a Means Test.

  • You don’t have to demonstrate that you’ve done anything to repay your debt - no one really cares. All you have to do is demonstrate you are insolvent, which is done with the Means Test, and schedules listing your assets v. your liabilities

  • Credit care companies cannot contact you with anything after you file without getting a specific release from the Court to do so. And they wouldn’t contact you to settle - you don’t have the resources to settle. Plus, in 90 days, you’ll be getting a discharge, so there’s no reason to settle.

I have no idea what the landlord was talking about, but he’s mostly wrong about everything. If he filed a bankruptcy, then he got a Discharge, which means he never has to pay them back.

10

Alright then. That’s kind of what I thought.

However - I now wonder - what does happen if one decides to NOT pay back his credit card debt, and simply ignores any and all attempts by the credit card companies to settle? Basically, not paying anything anymore. Is there a “time limit”?

11

If there is a discharge in bankruptcy, absolutely nothing should happen. That creditor should never again seek to collect that debt. If they do, they could face sanctions from the bankruptcy court.

If there is no bankruptcy filing, then the creditor will likely file suit, win a judgment, and seek to collect that judgment according to state law, which may include garnishing wages or bank accounts, or filing it as a lien against any property owned by the debtor.

12

Yeah, no company to which you owe debt is going to sit back and do nothing for 4 years. They’re going to hound you with debt collectors and file suit to seize your assets and garnish your wages.

Hence, you cannot simply “ignore” them for four years and be in the clear.

13

There is a time limit in all states. You have to realize there are three things to consider

  1. Credit report. Bad info stays on it for seven years
  2. Time to collect on the debt
  3. Time to collect on the judgement.

#2 and #3 vary from state to state.

I had horrible credit at one point, and thought about bankruptcy. The attorney said, “Why bother, they can’t get anything from you. You have nothing.”

And it was true. I was in my 20s, I traveled a lot, I didn’t make much. I was making so little that they couldn’t attach my salary. And I had nothing else.

Some states like Texas and South Carolina, they can’t even attach your salary.

After seven years the bad marks dropped off my credit and to the date, as soon as the bad info fell off I got offers for new credit cards and I rebuilt my credit.

The old collectors eventually found me but they couldn’t enforce anything. They can send you letters, big deal.

The thing is in some states judgments can be collected on for 20 years, that’s a long time. So while the old debt falls off, they judgment can still be there.

The reason the attorney told me not to file bankruptcy was she said, it wasn’t worth it. She said, "What if you file and then you go to the hospital. You have no health insurance, then you’re going to be stuck paying that. Or at least they’ll hound you for the next 7 years, till you can file Chapter 7 again. (Chapter 7 is now once every ten years).

So if you are “judgment proof” it may not be in your interest to do anything about it.

But you have to live on a cash basis and make sure you don’t have a bank account. I was a collector and one thing that collection agencies will do is get a judgment to attach your bank account. Since they don’t know where you bank, they simply send it to every bank in a ten mile radius from your house. Since most people bank close to home.

The other thing to watch out for is the information subpoena. They can’t throw you in jail for not paying but an information subpoena is an order to show up in court and tell the court your actual worth.

This includes all money and bank accounts. This is why you shouldn’t keep any bank accounts. It’s unlawful to lie to the court. Also you MUST show up and tell them you have nothing. If you fail to show up you can be picked up by the police and put in jail, because the charge is contempt of court.

14

Then that’s how he got away with it. As a self employed cabinet maker he almost never had any taxable income. He’s terrible with money, and usually was in the hole to somebody.

Nothing to seize except the items that had liens, and no wages to attach since he had no predictable income.