Many people are confused about the difference between a charge-off and a bankruptcy discharge.  What is the difference, and which one is better? A charge-off occurs when your creditor, usually the bank with which you have your credit card, declares that your debt is unlikely to be collected.  The bank has, after assessing your situation, [...]

As many readers of this blog are aware, defaulted student loans are generally not dischargeable in bankruptcy except in special circumstances. The debtor must show that: (1) he or she cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off the student loan; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan; and (3) that the he or she has made good faith efforts to repay the loans. That was the holding in Brunner v. New York State Higher Education Services Corp., 831 F.2d. 395 (2nd Cir. 1987), the leading case on student loans and bankruptcy, and its reasoning has been adopted by most federal appellate courts. However, non-bankruptcy remedies are available under federal and state law for student loan debtors, including loan consolidation, deferment or forbearance: 1. Loan consolidation. Most federal student loans (except private loans) are eligible to be consolidated. However, if your loans are in default, you must meet certain requirements before you can consolidate your loans. Loan consolidation greatly simplify loan repayment by centralizing your loans to one bill and can lower monthly payments by giving you up to 30 years to repay your loans. You might also have access to alternative repayment plans you would not have had before, and you'll be able to switch your variable interest rate loans to a fixed interest rate. 2. Deferment. Deferment is a period during which repayment of the principal balance of your loan is temporarily delayed. Also, depending on the type of loan you have, the federal government may pay the interest on your loan during a period of deferment. The government does not pay the interest on your unsubsidized loans (or on any PLUS loans). You are responsible for paying the interest that accumulates during the deferment period, but your payment is not due during the deferment period. If you don't pay the interest on your loan during deferment, it may be capitalized (added to your principal balance), and the amount you pay in the future will be higher. 3. Forbearance. If you can't make your scheduled loan payments, but don't qualify for a deferment, your loan servicer may be able to grant you a forbearance. With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans (including all PLUS loans). There are two types of forbearance: discretionary and mandatory. For discretionary forbearance, your lender decides whether to grant forbearance or not. For mandatory forbearance, if you meet the eligibility criteria for the forbearance, your lender is required to grant the forbearance. For more information about possible solutions to coping with your student loan debts, please contact Jim Shenwick

I’ve spent hunks of the past couple of days working exemption issues in cases we’re filing. California has opted out but has a bankruptcy-only set of exemptions that largely mirror the federal bankruptcy exemptions. My typical client this year has substantially more income and more assets than the people I was seeing two years ago.  Today’s client has more to protect, so I wallow in exemption issues. In no particular order, here are the themes and problems that developed. Allocate grubstake to cash All other things being equal, if you have to choose between exempting cash and/or stock or vehicles, exempt the cash.  If the non exempt asset has associated costs of sale or uncertain value,  you will have an opportunity to negotiate with the trustee on the purchase of the asset by the client, or the timing of turnover. There’s little discussion about the value of money on deposit or stock for which there is a market. Count the transaction costs If it costs the trustee 10% of the value of a car to pick it up and send it to the car auction, you only need to exempt 90% of the vehicle’s value.  The remaining 10% of the value gets spent for costs of sale.  Nothing remains to be distributed to creditors. Don’t forget taxes The sale of stock or investment property may well trigger a capital gains tax to the bankruptcy estate.  The longer the client has held rental property the greater the likelihood that they have depreciated the property on the one hand and borrowed against its value on the other hand. Find out what the basis of the property is and calculate whether there is enough value in the property to pay costs of sale, capital gains taxes, secured debt and have anything remaining for creditors. Watch out for situations where the debtor has tax loss carryforwards that might offset the gains.  Those tax attributes pass to the estate on filing. Pin down the form of title Make sure you know how the debtor holds title.  One of my favorite approaches to difficult cases is a filing by only one spouse.  It becomes important to know how the spouses hold title. We were agonizing about some $25,000 in blue chip stock our married-filing-alone client held.  We determined it was acquired during marriage, making it, we thought, community property.  When we got the account statements, lo and behold, the account was held as husband and wife, as joint tenants.  Under applicable state law, joint tenancy is a form of separate property.  Voila, our lady’s interest in the shares was just halved. Under California law, property acquired by gift is the separate property of the recipient.  That allowed us,  in another case.  to exclude the engagement ring of a non filing spouse. Know your state property law and get the controlling documents so you include only what the debtor really owns. Challenge your client’s values Debtors, in my experience, often over estimate the value of their assets.  They hate to admit their home has fallen in value from a prior peak;  they recall what they paid for items, not what they would sell for today.  If values seem generous to you, prod. Yesterday’s case included an entry for art and antiques, with a $5000 value assigned, and my paralegal’s note that the client didn’t think she could get that amount in today’s market.  Well, then it’s not worth the amount assigned if it wouldn’t sell for that today. And, of course, if you can’t arrange the exemptions to cover the client’s accumulations, and spending down assets isn’t feasible, then consider Chapter 13. Image courtesy of NathanColquhoun. Last call for Saturday’s day long workshop on marketing your bankruptcy practice with imagination and elbow grease.  If you can get to Pasadena, join Jay Fleischman and I for an update on changes in the world of SEO and bunches of ideas for websites that really work for you.

Chapter 13 bankruptcy is a long-term commitment. For those who successfully complete the process of the three-to-five year plan, a discharge of remaining debt awaits, as well as the peace of mind of having paid off a chunk of their secured, non-dischargeable debt while keeping any asset they really wanted to keep. But if something [...]

We get so caught up in putting the right stuff in the right place on the bankruptcy schedules that it’s easy to lose sight of the big picture. Having learned that assets subject to a spendthrift trust provision aren’t property of the estate,  we omit them from the schedules.  Patterson v. Shumate. Forgetting, of course, that Schedule B asks for interests in retirement plans and pensions, which are not property of the estate. And forgetting, I think more importantly, that the schedules should tell the client’s story.  A story that makes sense and is complete. Half the story All this springs from a special appearance I made as the holiday approached.  I’m mindful of the string of cases that say that an attorney making a special appearance becomes the debtor’s attorney just as surely as the attorney hired by the debtor. So, I asked for the schedules in advance of the appearance.  I’d been told the debtor was working age but longtime disabled. The budget shows that the debtor lived alone, with  monthly living expenses of $1700 and disability income of $900.  How’d he do that? The schedules were no help.  No assets that throw off money.  No sign of a room mate.  No history of gifts in the SOFA.  No clue…. So I asked the attorney, before the trustee could ask me. Turns out, the debtor was the beneficiary of a special needs trust managed by a parent.  The trust paid out the difference between disability income and expenses. But there was no way to see that from the schedules prepared. My questions of debtor’s counsel pointed out that there was something essential missing from the schedules.  First, the debtor had an interest in the special needs trust.  It needed to be disclosed. My practice with assets that the debtor owns but aren’t property of the estate is to list them on B, label them in caps “NOT PROPERTY OF THE ESTATE” and put their value in the far right hand column as “0″.  If you put a value in that column, the program will spit out schedules that make it appear that there are significant non exempt assets. By listing it, I’ve met my disclosure requirements.  But just as importantly, I’ve told the whole story, given the trustee the big picture:  this disabled person makes it because  he has another source of income. So, take a look at the schedules you’ve prepared and ask if, taken as a whole, they tell the whole story.  If they don’t, tweak them so they reflect reality. (all but B-22, which is fiction from the start<g>). Image courtesy of Foto Havlin. Like This Article? You'll Love These! A Bankruptcy Exemption Planning Basic Attorney as added-value at 341 meeting Do Your Bankruptcy Schedules Tell the Client’s Story?

   The 11th Circuit has just come out with a case sustaining the Bankruptcy Court's disallowance of a $495,000 commission to a real estate agent finding a conflict of interest.  In re New River Dry Dock, Inc., 2012 WL 5675911 (11th Cir. 2012).  The Realtor was employed to sell a marina owned by a chapter 11 debtor for a 4% commission.  An order authorizing employment was entered based on the Realtor's declaration that he was disinterested.  The Agent contacted an investor with whom he had a prior relationship, and submitted a stalking horse bid for $12.25 million, which was below the appraised value, and which bid was ultimately successful.     After the order authorizing employment but before the sale the buyers offered the Realtor an opportunity to manage the property after the sale or to obtain an ownership interest in the business.  This offer was not refused (though the order was not clear on whether it was formally accepted), and the buyers expected that the Realtor would be involved after the closing.  Further, the Realtor performed a number of tasks for the buyers prior to the closing.   None of the arrangements for post-sale involvement were disclosed to the court.  At the time of the sale the Realtor was overpaid $45,000.  The Realtor also paid a $37,000 'finder's fee' out of his commission to a third party which was not disclosed to the court. Subsequent to the closing the plan, which included a provision for a release against professionals, was confirmed    Two years after confirmation the court was advised of these facts and sua sponte entered an order why the Realtor should not disgorge his commission, ultimately ruling on summary judgment that both the $45,000 overpayment and the $490,000 commission must be disgorged.    The Realtor argued that the release in the confirmed plan prevented the court from requiring a refund of his fees.  The 11th Circuit ruled that the court retains jurisdiction over fees even after conclusion of a case.  As a professional employed under 11 U.S.C. §327 the Court retains authority over such fees pursuant to 11 U.S.C. §§328(c) and 330(a)(2).  The fees were approved without the Court's knowledge of the conflict, and once the Court learned of the conflict it had the right to revisit such fees.  The Realtor also objected that the ruling was made on summary judgment.  The 11th Circuit found that the undisputed facts established a conflict of interest.  The discussions of post-sale involvement gave the Realtor a reason to close the sale even if it was not in the Debtor's best interest.  The fact that there was no formal guaranty of employment does not change the result given the Realtor's strong expectation that he would work for the buyers.  While no specific harm to the estate was shown, no harm is required to require disgorgement of fees.  The issue is solely whether he could have unbiasedly made decisions in the best interest of the estate.     The 11th Circuit also rejected the Realtor's objection to a sequestration order, finding authority under §105(a) to order sequestration, and that the Florida head of household exemption does not prevent garnishment of funds from a business owner that does not pay himself a set wage or salary. 

A Chapter 13 plan often sounds like a great idea at the time you file for bankruptcy.  But three to five years is a long time, and it is not uncommon for people to lose their jobs or face other financial hardships during that time.  If you lose your job during the course of your [...]

Talk to Chuck and lose your IRA? That’s the prospect suggested by a recent bankruptcy case from ED TN  featured in the ABI Journal this month. In a nutshell, the case held that lien granting language in the standard Merrill Lynch brokerage account agreement was a prohibited transaction with respect to an IRA. Daley, 459 B.R. 270 (E.D. Tenn. 2011) The Chapter 7 trustee was successful in defeating the debtor’s  claim of exemption in the IRA, even though the brokerage house had never sought to exercise its right to a lien on the IRA. The bankruptcy court’s decision was upheld on appeal to the district court in September. The Daley case was followed in a N.D. CA district court case Yoshioka, 2011 U.S. Dist. LEXIS 147483.  Yoshioka is a class action against Charles Schwab complaining that the lien creating language in the Schwab agreement put the tax exempt status of the IRA’s at risk. Back story These cases don’t come out of the blue, if you step back far enough.  California bankruptcy cases, inevitably involving doctors, have long held that the debtor doesn’t get an exemption in funds that are nominally held in retirement accounts, but are actually used for non retirement purposes. In 2011, the 11th Circuit  affirmed a bankruptcy court that denied an exemption in a $700,000 self directed IRA based on the debtor’s use of the funds for investment and cash management outside of the IRA.  The prohibited transactions cost the IRA its tax exempt status and thus the exemption. Willis v.  Menotte.  The bankruptcy court decision is at 411 B.R. 783; the District Court opinion, adopted by the Court of Appeals, is at 2010 U.S. Dist. LEXIS 44773. Thus the principles underlying the Daley decision aren’t new;  the application to an innocent and merely facial violation of ERISA is distressing. Heads Up I haven’t decided just what my advice to clients needs to be.  I’m certainly going to look at the terms of my own Schwab brokerage account with IRA protection in mind. My gut reaction is to tell clients to move any IRA’s in  brokerage accounts to other custodians while this plays out. Given the exposure to the bankruptcy community that the Daley decision has received, this issue will be with us for a while. Image courtesy of Nemo.   Like This Article? You'll Love These! Remember the Big Stuff: Protecting Retirement and Business Assets How Much Of Your Client Are You Exposing? Here’s A Way To Rescue Your Client’s Exemptions

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.

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.