Thursday, September 29, 2016

How to pass the "means test"

Here at Shenwick & Associates, we've written extensively about the "means test," which is a complex calculation that debtors must pass to qualify for relief under chapter 7 of the Bankruptcy Code if they're over the median income for their state and household size.

Since the means test was implemented as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, we've filed hundreds of Chapter 7 cases, and usually manage to vault potential debtors over the hurdle of the means test. Here are a few of our tips and strategies on how to pass the means test:

  1. Determine if a majority of a debtor's debt is non–consumer/business debt. If it is, they are exempt from the means test.
  1. Make sure that all of your expenses are listed: 
    • Taxes are deductible from the means test–includes FICA, Social Security, federal, state and local income taxes. These can add up for most debtors, and has made the margin of difference between passing and failing in many cases.
    • Involuntary deductions from wages, such as mandatory retirement plans, union dues, uniform costs, and work shoes, but not voluntary 401(k) contributions or loan repayments. 
    • Term life insurance, health insurance and disability insurance.
    • Payments on secured claims (for mortgage, car loans, etc.) coming due in the 60 months following filing, as long as the debtor is keeping the collateral. 
    • Continuing charitable contributions, up to 15% of gross income.
    • Child care expenses for babysitting, nursery school, daycare and preschool. 
    • Out of pocket health care expenses, to the extent they exceed the national standards amount of $54/month per household member under 65 and $130/month per household member 65 or over.
  1. Add other members to the household to increase household size. Bring the kids back home!
  1. If possible, reduce your income and your spouse's income for six months (the lookback period for the means test). 
  1. Make sure your expenses from a business or rental property are fully listed to minimize your net income. In one case, a client who was providing independent transportation services failed to listed his expenses. Once we listed those and deducted them from his gross income, he passed the means test.
  1. If you have a spouse, make sure that you're deducting any part of your spouse's income not used for the household expenses of you or your dependents (i.e. for your spouse's tax debts or support of people other than you or your dependents).
If you have questions about your unique financial situation and whether you might be eligible to file Chapter 7 bankruptcy, please contact Jim Shenwick.

Wednesday, August 31, 2016

Consumer and non-consumer/business debt in bankruptcy

Here at Shenwick & Associates, we've written extensively about the "means test," which is a complex series of calculations based on household size and income to determine if a debtor is eligible to file for Chapter 7 bankruptcy. However, the means test only applies to individuals whose debts are primarily "consumer debts," as opposed to business debts, pursuant to § 707 of the Bankruptcy Code. Congress did not define the word "primarily," but most courts have defined the word to mean more than half. If more than 50% of the debtor's debts are non-consumer debts or business debts, the debtor is automatically eligible to file for Chapter 7 bankruptcy without doing the means test, and the presumption of abuse does not apply.

What are consumer debts? Section 101(8) of the Bankruptcy Code defines a consumer debt as "debt incurred by an individual primarily for a personal, family, or household purpose." Many bankruptcy courts have developed a "profit motive" test. If the debt was incurred with an eye towards making a profit, then the debt should be classified as business debt. Accordingly, a mortgage on an individual's home would be considered consumer debt; however, if a vacation home were purchased for investment purposes and rented out, then the mortgage would qualify as business debt. If an individual uses credit cards for consumer purchases, then those debts are consumer debts; however, if an individual used the credit card for business purposes, then in all likelihood that debt would be deemed business debt. If an individual guaranteed a debt for a business obligation, that personal guaranty would be deemed business debt, as would the investment losses.

According to the Office of the United States Trustee's position on legal issues arising under the means test regarding a declaration of non–consumer debts:

  • Less than 50% of total scheduled debt was incurred for personal, household or family purposes.
  • Purpose of debt is judged at the time the debt was incurred. 
  • Home mortgages are typically consumer debt.
  • Most tax debts are not typically consumer debt. 
However, with respect to tax debts, a number of bankruptcy courts outside the Second Circuit have held that those debts are business debts. See In re Brashers, 216 B.R. 59 (Bankr. N.D. Okla. 1998), which holds that the debtor's income tax obligations do not constitute consumer debt; see also Internal Revenue Service v. Westberry (In re Westberry), 215 F.3d 589 (6th Cir. 2000), which also holds that taxes are not consumer debt. Many subsequent courts examining this issue have followed the Westberry analysis.

For all of your questions regarding debts, whether they be credit card, medical, consumer, business, taxes, secured or unsecured, please contact Jim Shenwick.

Thursday, August 18, 2016

New York Times: The Big Pause You Should Take Before Co-Signing a Student Loan

By Ron Lieber

So someone has asked you to co-sign for a student loan.

Chances are, it’s your child or grandchild, or perhaps a niece or nephew. You have unrelenting faith in this teenage freshman, or near certainty that graduate school will lead to a lifetime of gainful employment. And maybe you feel badly that the family has not been able to save enough to pay the bills outright.

Fine. But be very, very careful.

When you co-sign for a loan, you, too, are responsible for it. If the primary borrower can’t pay, you have to. If that borrower pays late, your credit could get nicked as well. And the mere existence of the loan on your credit report may keep you from being able to get other kinds of loans, since lenders don’t always want to do business with people who already have a lot of debt.

In some cases, the lender will try to collect from a co-signer even if the primary borrower is dead, as a recent collaboration between ProPublica and The New York Times revealed. Legislators in New Jersey held hearings on the matter this week.

After a postrecession lull, the so-called private loans — which generally have less favorable rates and terms than federal loans, and tend to require co-signers — are making a comeback of sorts. About one in 10 undergraduates takes one out, according to Sallie Mae, the biggest lender. Undergraduate and graduate students together borrow $10 billion to $12 billion in new private loans each year, according to MeasureOne, a market research and consulting firm, and the trajectory has been upward since the 2010-11 school year.

The $102 billion in outstanding private student loans make up just 7.5 percent of the $1.36 trillion in total student loan debt; the rest is made up of federal student loans. Undergraduates, however, can borrow only so much each year from the federal government before hitting limits.

So for anyone who wants to borrow more, there are the private loans, which usually come from Sallie Mae, banks and credit unions or other entities. The Consumer Financial Protection Bureau has a helpful guide on its site that explains the difference between federal and private loans in some detail.

Most private lenders require borrowers to have a co-signer to get a loan at all or to get a better rate. During the 2015-16 academic year, 94 percent of new undergraduate private loans had a co-signer, while 61 percent of graduate school loans did, according to MeasureOne’s analysis of data from six large lenders that make up about two-thirds of the overall market.

Tempted to help out by lending your signature and good credit history to someone? Your participation could indeed make a difference. Credible, an online loan marketplace, examined about 8,000 loans and found that undergraduates looking for loans who had co-signers qualified for loans with (mostly variable) interest rates averaging 5.37 percent. Students flying solo got a 7.46 percent quote.

For graduate students, the numbers were 4.59 percent for duos and 6.21 percent for people going it alone. For its average undergraduate loan — $19,232, paid off in eight years — the savings over time would be $1,896, which comes to about $20 a month.

But co-signing comes with plenty of risk. The Consumer Financial Protection Bureau outlined a number of them in a report it issued last year. In theory, most lenders provide a process by which the co-signer can be removed from the loan at the primary borrower’s request.

Perhaps the biggest concern for co-signers ought to be the bureau’s assertion last year that lenders turn down 90 percent of the borrowers who apply for these releases. The bureau’s director, Richard Cordray, described the process as “broken.”

But Sallie Mae said that more than half of its borrowers who make this request succeed. For PNC, the figure was 45 percent for the last 12 months. Citizens Bank reported a 64 percent number, while Wells Fargo said so few people had asked for a release that it did not track the number. (It’s possible that many don’t know that it’s possible, as the bureau chided lenders for not making the rules clear.)

What accounts for this gap? The bureau’s sample includes many loans that the original lenders sold to investors. These anonymous loan owners may not have the same incentive to be customer-friendly as big-name banks.

Some co-signers can’t get a release because the primary borrower doesn’t have sufficient income or a good enough credit score — fair and square. But sometimes it’s neither fair nor square. The bureau reports numerous instances where people make several months’ worth of payments in a lump sum but then don’t get credit for the consecutive monthly payments that some lenders use to keep score on people who are aiming to release their co-signers.

Worse still, co-signers who make payments themselves may discover after the fact that the lender requires the primary borrower to make years of on-time monthly payments before it will consider a release. So efforts by the co-signer to help the primary borrower stay on track may foil their very attempt to get themselves off the loan later.

There are rarer horrors, too, where the death or the bankruptcy of the co-signer causes an automatic default, according to the bureau. At that point, a mourning child can receive a bill for the full balance, and debt collectors may chase after the executor of the estate for a dead grandfather who co-signed a loan years ago. The big banks that offer private student loans say they do no such things.

As for more likely events, like credit-sullying late payments, just 4.37 percent of borrowers were at least 30 days late on their loans at the end of the first quarter, according to MeasureOne’s look at the big private lenders. But it’s not necessarily the same 4.37 percent who are overdue at any given moment. Moreover, that number will go higher during the next downturn, and there might be more than one bad economic cycle during any individual’s tenure as a co-signer.

A survey of people who had co-signed on loans of all sorts found that 38 percent ended up paying at least some money, 28 percent were aware of damage to their credit and 26 percent saw relationships suffer as a result.

So where does this leave someone trying to help and tempted to co-sign? The tough-love reply goes like this: If you need a private loan as an undergraduate especially, then your college of choice is simply not affordable. Federal loans plus savings and current income should be enough to pay all of your costs, and if they aren’t, then it’s community college and living at home for you. And no, we won’t take the debt on in our names only or yank money from home equity, since we need to think about retirement and not be a burden to you later.

But can you really bring yourself, as a parent in particular, to deny a teenager or an ambitious graduate student a shot at the better opportunities that a more prestigious and expensive school might bring, as long as the debt isn’t outsize? Even an aspiring engineer who will earn plenty?

Many people simply will not be able to say no. So a few words for them. First, keep in mind that the teenagers you’re betting on may never graduate. And if they don’t, the odds are higher of the co-signer being liable for the private loan while the college dropout earns a modest hourly wage. So be especially wary if you think there is even a chance that your child or grandchild is not committed to college.

Finally, look the primary borrower in the eye and draw out a commitment of total and utter transparency. “Don’t assume that the primary borrower is making the payments, and make sure you have an open enough dialogue that they will tell you about it before they miss that payment,” said Dan Macklin, co-founder of SoFi, a company that helps many people refinance older student loans. “I’ve seen too many people where it’s an embarrassment and not spoken about, and it’s not very healthy.”

Copyright 2016 The New York Times Company.  All rights reserved.

Monday, August 01, 2016

Statute of limitations for and credit reporting of debts

Here at Shenwick & Associates, most clients come to us with concerns about debt, from either the perspective of a debtor or a creditor. This month, we’re going to take a look at the difference between how debts are treated by law and how debts are listed on a credit report. As with all actions (lawsuits), there is a statute of limitations on how long creditors can sue you to collect on a debt, get a judgment against you, and garnish your wages or levy against your financial accounts. In New York, the statute of limitations is six years, pursuant to section 213 (2) of the Civil Practice Law and Rules (CPLR) (for “an action upon a contractual obligation or liability, express or implied . . .”). However, once a judgment has been entered against you, a creditor has up to 20 years to enforce that judgment, pursuant to section 211(b) of the CPLR. However, there are two major caveats to be aware of regarding the statute of limitations:
  1. Sometimes, creditors and/or collection agencies will attempt to sue debtors even after the statute of limitations has expired. If you or an attorney that represents you fails to appear in court to claim that the statute of limitations on the debt has expired, the court may issue a default judgment against you, and then the 20 year period for enforcing the judgment starts running.
  2. If you acknowledge a debt (in writing and signed) and/or make a payment on a debt, that will restart the 20 year period for enforcing the judgment.
With regard to reporting of debts on a credit report, rather than the state laws that govern the statute of limitations to collect on a debt and enforce a judgment, credit reports are governed by federal law, specifically the Fair Credit Reporting Act (“FCRA”), which is codified at sections 1681 through 1681x of title 15 of the U.S. Code. Under the FCRA, credit reporting agencies are required to remove information about a debt after seven years, regardless of the ownership or sale of the debt (i.e. to a collection agency) or whether or not you’ve acknowledged the debt. The seven year period commences 180 days after the last payment on the debt. However, there are also some exceptions to these general reporting requirements. They don’t apply to consumer credit reports to be used in connection with: (1) a credit transaction involving, or which may reasonably be expected to involve, a principal amount of $150,000 or more; (2) the underwriting of life insurance involving, or which may reasonably be expected to involve, a face amount of $150,000 or more; or (3) the employment of any individual at an annual salary which equals, or which may reasonably be expected to equal $75,000, or more. Remember that consumers are entitled to free credit reports every 12 months from the three big credit reporting agencies (Equifax, Experian and TransUnion) from Annual Credit For all of your questions about debts and credit reports, please contact Jim Shenwick.