7 years 2 months ago

In a recent Opinion, Judge Opperman from the Eastern District of Michigan Bankruptcy Court held that a Chapter 13 debtor cannot exclude voluntary post-petition retirement contributions from disposable income.  This Opinion is significant for debtors, trustees, and creditors as it systematically changes the way the Eastern District of Michigan will treat post-petition voluntary retirement contributions in a Chapter 13. Read More ›
Tags: Chapter 13, Eastern District of Michigan

7 years 2 months ago

Scale of Justice.jpgReading the opinion just issued by the Bankruptcy Appellate Panel for the 8th Circuit in the case of Shaffer vs. Iowa Student Loan Liquidity Corporation, I am wondering if we are now witnessing a greater willingness of the bankruptcy courts to discharge student loans. 
Susan Shaffer is a single woman in her 30s with no dependants. She apparently suffers from mental health issues including eating disorders, depression, anxiety and self-harm (cutting).  She acquired $204,525 of student loans while obtaining a degree in psychology in 2002 and attending chiropractic school before dropping out in 2008.  She worked for a time as a revenue specialist before leaving that job after suffering bouts of depression.  After filing bankruptcy she found employment in the radiation oncology department at the University of Iowa.
Student loans are not dischargeable in bankruptcy unless they would impose an undue hardship on the debtor or the debtor’s family. (Bankruptcy Code Section 523(a)(8)).  The debtor must file an Adversary Proceeding against the student loan provider in the bankruptcy case and has the burden of proving the hardship by a preponderance of the evidence. 
Bankruptcy courts in the 8th Circuit apply a Totality of the Circumstances Test and look at several factors in considering whether the debt imposes an undue burden.  These factors include:

  • The debtor’s past, present and reasonably reliable future financial resources.
  • A calculation of the reasonable living expenses of the debtor and his or her dependants.
  • The age of the debtor.
  • The mental and physical health of the debtor.
  • Whether the debtor has participated in an Income Contingent Repayment Program (ICRP).
  • Whether the debtor has retirement accounts or equity in a home or other assets.

What is odd about the Shaffer decision is that this debtor was relatively young, well educated, had no dependants, and despite her problems with depression, she had no significant physical disability.  In addition, the debtor did not participate in any type of income contingent repayment program, and she had only been out of school for a short period of time before filing bankruptcy.  Wasn’t it a bit premature for the court to declare that the debtor would never be able to repay any of the debt when she still has about 30 to 40 more working years ahead of her?
Mental Illness.jpg
Contract the Shaffer case with the opinion issued in the Erik and Kathryn Nielsen case issue by the 8th Circuit BAP court in July of 2012.  In that case a couple with four young children were denied a discharge of $48,361of student loan debt despite an annual income of $30,000.  The Nielsen’s received $316 of monthly Food Stamps and about $8,000 of taxes refunds.  Erik Nielson suffered from a variety of work injuries including two broken wrists and was unable to work outside in cold weather or to handle large ladders in his job as a service technician.  The appeals court dwelled on the fact that the debtors had not applied for the income contingent repayment program and Kathryn Nielsen was not employed outside the home despite having a masters degree.  The court noted that under an ICRP the debtors would have to make no payment on the student loans until their income increased to over $55,000 per year. 
Which set of debtors had the greater hardship?  The married debtors earning $30,000 per year with four young children or the single debtor with similar income and no kids and no physical limitations but who suffers from depression?  It is hard to reconcile this difference.
Last year the 8th Circuit discharged $300,000 of student loans for a married couple in their mid 40s with five minor children, two of whom were diagnosed with autism.  In re Walker, 650 F.3d 1227 (2011).  Mrs. Walker had attended medical school but never passed the state licensing exam and later went on to obtain a degree in school psychology.  Mr. Walker was employed as a police officer earning about $60,000 per year.  Despite their eligibility for an ICRP payment of $593.98 per month and despite obtaining a $40,000 Chevrolet Suburban SUV loan costing $850 per month and obtaining a $48,000 second mortgage to install a screened deck costing $373.52 per month just shortly before filing bankruptcy, the 8th Circuit discharged the student loan debt.  The court stated that the “apparent contradictions in this case are troubling” but finally concluded that the reality of the situation is that special needs of the two autistic children would endure for many years to come and therefore discharged the debt.  
The single greatest obstacle to discharging student loan debts is the availability of income contingent repayment plans.  In the absence of physical or mental health issues in the debtor’s family, the courts tend to deny applications to discharge student loan debts when debtors have failed to exercise their ICRP options.  However, when physical and mental disabilities are present, I sense that the courts are more willing to weigh those factors into consideration as the Walker and Shaffer opinions demonstrate.

6 years 5 months ago

Guest Post by Ashley Bertoldo, student at Brigham Young University

The automotive industry crises that emerged at the end of the 2000’s was a result of numerous unforeseen occurrences as well as poor strategic decisions on the part of company executives. Due to the relatively high profit margins on SUV and trucks as opposed to mid-size and compact cars, the executives of several car-manufacturing companies decided to double down on their larger vehicles. Profits were expected to soar as a growing number of factories began producing these larger vehicles. Unfortunately for these companies, the price of oil increased in the mid-2000s, which prompted consumers to opt for smaller vehicles. These companies had already begun to experience financial losses before the downturn of 2008. Due to problems in the financial industry, raw materials for vehicle production increased in price and the number of sales decreased. The auto companies then found that they were in debt, meaning they owed more money than they actually had. The companies were on the verge of collapse.

Policy-makers agreed that the hundreds of thousands of jobs that were on the line were worth saving. Several different ideas emerged regarding what should be done in order to save jobs and allow these companies to continue operating. Mitt Romney stated that the companies should be put through a managed bankruptcy. In a managed bankruptcy, the company would have been able to continue ownership of the majority of its property while eliminating most of its debts in exchange for new ones. The opinion was that private investors would be able to invest in the company and pay off old debts in exchange for a future promise of repayment or small ownership in the company. If necessary, the federal government would have guaranteed the loans to the auto companies. The downside to this approach was that during this time, very few investors and firms were willing to risk any money or give any credit whatsoever. Doubts persist as to whether or not enough money would have been raised. The other alternative was a bailout, in which the US government would have loaned or given money to the automakers and let them continue business as usual. The problem with this approach is the fact that more money would have been lent to a company, which had shown its inability to be profitable, thus prolonging the inevitable decline.

The eventual outcome was a hybrid of the two. The companies were forced to undergo a period of restructuring, in which the company was reorganized and the government lent them money to pay off their immediate debts. The companies emerged more efficient, but it would be at the expense of the federal government until the automakers were able to pay off their new debts, which did eventually happen.Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.

7 years 2 months ago

Are Taxes Dischargeable Through Bankruptcy? Some taxes are dischargeable through bankruptcy, but some are not eligible for discharge due to the year the taxes are due and the timeliness of filing the taxes.  If income taxes are more than three years old, they usually can be discharged.  The three year time period is based on the due date of the taxes, which generally is April 15th unless the debtor has been granted an extension.  If the taxes would be due within three years of the filing of the bankruptcy, the taxes would not be eligible for discharge.  It is not based on the end of the tax year but the due date for filing the tax return.  Therefore, if it is November, 2012, tax years 2008 and earlier would be discharged, but 2009, 2010, and 2011 would not because their due dates would be April 15th, 2010, 2011, and 2012, which is within the three year time period before the filing of the bankruptcy. Even if the taxes are more than three years old, taxes are not dischargeable if they have been filed within the last 2 years.  If the taxes are not filed timely and less than two years before the filing of the bankruptcy, the taxes cannot be discharged through the bankruptcy.  If taxes are unable to be discharged through the bankruptcy, debtors can call the IRS or their state Department of Revenue and attempt to work out a payment plan to repay their non-dischargeable tax debt.  Sometimes debtors are able to pay the taxes over a longer period of time.  It is still important for debtors to list their tax debt in the petition regardless of the ability to discharge the debt, however, so the IRS and Department of Revenue will get notice of the bankruptcy filing. For more information, please contact a St. Louis or St. Charles bankruptcy attorney today.

7 years 2 months ago

Can Debtors be Arrested for Not Paying Their Debts? Many debtors/clients inquire whether they can be arrested if they are unable to make payments on their debts.  Creditors sometimes threaten to come to their home and arrest them if they are unable to make their payments, even if they inform the creditor of their intent to file a bankruptcy.  Often, this threat is used to encourage payment and to frighten the debtor.  This information, however, is often incorrect and misstated.  Before a debtor can be arrested for a civil matter, such as a lawsuit for not paying a debt, there is a procedure that must be followed.  The arrest does not occur immediately.  The creditor must file a lawsuit against the debtor in the appropriate court and serve the debtor so the debtor is aware of the court proceeding and has an opportunity to appear.  The debtor can either choose to appear in court or not.  If the debtor doesn't appear, the court will issue a default judgment in favor of the creditor.  The debtor can also enter into a consent judgment and agree to a payment plan or take the case to trial and let the judgment enter a judgment.  If a judgment is entered against the debtor and the debtor refuses to pay or is unable to pay, the creditor has the ability to freeze or levy the debtor's bank account or garnish their employment up to 25 percent or 10 percent for head of household.  If the creditor is unable to garnish, the creditor can pursue a warrant for the debtor's arrest.  This is a last resort and cannot be done without first having a judgment. Therefore, the creditor cannot arrest a debtor at their home if they have not pursued a warrant through the proper court procedure. If a bankruptcy is filed, the creditor would be required to cease all contact with the debtor and would be unable to continue with pursuit of a lawsuit, judgment, or warrant against the debtor. For more information, please contact a St. Louis or St. Charles bankruptcy attorney.

7 years 2 months ago

Two new court opinions were recently handed down by the 5th and 10th Circuit Court of Appeals on the issue of whether Social Security income is considered “projected disposable income” under the Bankruptcy Code.  Projected disposable income is income that must be paid over to creditors during a 3 to 5 year Chapter 13 payment plan.
In the Matter of Benjamin Ragos, the 5th Circuit Court of Appeals upheld the ruling of a Louisiana bankruptcy court which ruled that, pursuant to Section 407 of the Social Security Act, income from Social Security is not projected disposable income in calculating the chapter 13 payment.  The court rejected the Chapter 13 Trustee’s argument that such income should be included and further rejected the Trustee’s argument that the failure to include such income constituted bad faith thus preventing confirmation of the debtor’s payment plan. 

We cannot square Trustee's argument with the apparent intent of Congress. If Congress excluded social security income from current monthly income and disposable income, it makes little sense to circumvent that prohibition by allowing social security income to be included in projected disposable income.”

Section 407(a) of the Social Security Act provides that “none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”
In the case of Fred Fayette Cramer, the 10th Circuit Court of Appeals also ruled that Social Security payments should not be considered as projected disposable income in Chapter 13 cases as well, and the court also ruled that the failure to pay such income to creditors does equal bad faith in confirming the plan.  

When a Chapter 13 debtor calculates his repayment plan payments exactly as the Bankruptcy Code  and the Social Security Act allow him to, and thereby excludes SSI, that exclusion cannot constitute a lack of good faith.”

How is Social Security income treated in Nebraska bankruptcy cases?  The answer was given in the case of Fink v Thompson by the 8thCircuit Bankruptcy Appellate Panel (In re Thompson), 439 B.R. 140, 144 (B.A.P. 8th Cir. 2010).  The 8thCircuit stated that “[t]he plain language of the Bankruptcy Code specifically excludes Social Security income from a debtor's  required payments in a Chapter 13 plan.”   (see also Carpenter v. Ries (In re Carpenter), 614 F.3d 930, 936-37 (8th Cir. 2010) ("§ 407 operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate.")
It is now very clear that neither the monthly income received by a retired or disabled debtor nor the lump sum payments typically associated with disability claims are at risk in either Chapter 7 or Chapter 13 cases.

7 years 2 months ago

Shortly after you file for bankruptcy, the Court sends you a notice to appear at a meeting of creditors, also called a “341 meeting”.  This meeting will take place roughly about a month after your case is filed.  The notice will contain the date, address, time and the name of the trustee that will be [...]

7 years 2 months ago

I want to challenge the conventional wisdom that filing bankruptcy should be considered a last resort. Does that sound self serving coming from a bankruptcy lawyer? Maybe. But consider this table: Balance monthly payment time to payoff interest rate total interest total payoff $10,000 $300 44 months 15% $3,043 $13,043 $50,000 $1,500 44 months 15% $15,217 $65,217   As you can see, under the best of circumstances, it will take you 4 ½ years and $13,043 to pay off that $10,000 credit card debt, assuming that: you are no longer using your credit card for future purchases you have not been late, thereby keeping your interest rate from jumping to a penalty rate you make only the minimum payment of $300 per month Under this best case scenario, $50,000 of credit card debt will require $1,500 per month and you will end up paying interest charges totaling $15,217 for payoff of $65,217. What happens if you miss a payment? In addition to the late fees, your interest rate rises from 15% to a penalty rate, which is typically 29%. With a 29% interest rate, and a $300 per month minimum payment, your interest charge on that $10,000 balance will total $10,959 (totaling $20,959) and almost 6 years to pay off the debt.  A $50,000 balance, payable at $1,500 per month, will produce interest charges of $54,793 for a total of $104,793 over that 70 month period. Balance monthly payment time to payoff interest rate total interest total payoff $10,000 $300 70 months 29% $10,959 $20,959 $50,000 $1,500 70 months 29% $54,793 $104,793   You can run your own numbers at: Remember, these calculations assume no on-going use of your credit cards and minimum payments only. The point here is this: if you have $50,000 or more of credit card debt, you are in a very deep hole that will require a great deal of austerity and discipline to escape.  More importantly, your capacity to pay off this debt will require stability in both your income and expenses.  Late or missed payments at any point during the payoff term can have catastrophic implications in terms of the interest rates you pay. Why Bankruptcy?why not bankruptcy
The bankruptcy option can offer a huge benefit economically. There are certainly non-economic factors to consider, such as:

  • impact on your credit reports
  • moral or religious aversion to filing bankruptcy

but speaking solely in terms of economics, the bankruptcy option is worth considering. If you can qualify for Chapter 7, you would be looking at a cost in the neighborhood of $1,500 to $2,000 to totally wipe out the $50,000 credit card debt. Basically for one monthly payment on your balance, your debt can simply go away. If you do not qualify for Chapter 7 and have to go to Chapter 13, you may end up paying back some percentage of your unsecured debt. However, there is no accrual of interest in Chapter 13 – you pay only the balance due at the time of filing. So if your plan called for a 100% payout to unsecured creditors, you would pay $50,000 (not $65,000 and certainly not $104,000) to your credit card lender over 5 (not 6) years. If your plan calls for a 50% dividend to unsecureds, then the $50,000 would turn into $25,000. Obviously other factors will go into your decision to file for bankruptcy, but I wanted to use the credit card example to demonstrate in very clear dollars and cents terms just how powerful bankruptcy relief can be.The post When Bankruptcy Makes More Sense than Struggling to Pay Off Debt appeared first on theBKBlog.

7 years 2 months ago

The short answer is no…you do not have to surrender your home if you file for bankruptcy.  If you are having financial trouble and problems making your ongoing mortgage payment, I would first recommend contacting your lender and trying to modify your mortgage.  Some lenders will work with you, but if they are not willing [...]

7 years 2 months ago

Vowing to make the billionaires pay their “fair share”, the country has a true consumer advocate in Massachusetts now.  Elizabeth Warren, a law professor who moonlights as a true champion of the middle class consumer, beat incumbent pretty-boy Scott Brown for the Massachusetts Senate seat vacated by Ted Kennedy.  Warren created the Consumer Protection Bureau although Wall Street interests had her ousted from her position as director when they saw her headlights in their rear view mirrors.  If there is anyone who can give the middle class hope, it is her.  Congrats Senator Warren!