Mortgage foreclosures

Happy holidays! This month we’ll be discussing something we hope you avoid this holiday season-mortgage foreclosures.

With the falling real estate market, many of the readers of this e-mail are aware of the rise in mortgage foreclosures. It is predicted that in 2008 there will be 1.8 to 2 million foreclosures. When a client calls an attorney and indicates that their house is being foreclosed upon, there are a number of options that the attorney should suggest or discuss with the client.

1. Is the party that is commencing the foreclosure action actually the party that owns the mortgage and the promissory note? On October 31, 2007, a federal District Court Judge in Ohio issued an opinion and order which dismissed 14 foreclosure actions by Deutsche Bank based on the fact that Deutsche Bank was unable to provide proof of ownership of the mortgage. This case can be read on our website here.

2. Is the client or the defendant able to work out a forbearance agreement with the mortgagee or the bank? Forbearance agreements may include the following different scenarios: an increase in the number of years in which the loan is due, a reduction in the interest rate on the loan, a separate payment plan for arrears on the mortgage, or the arrears being backended and paid after the mortgage is paid off in full.

3. Chapter 7 bankruptcy. With the increase in the New York State homestead exemption, each debtor in bankruptcy is allowed to keep a house in bankruptcy with no more than $50,000 in equity, so if a couple files for Chapter 7 bankruptcy, they would be able to keep a residence which is their homestead (a house, townhouse, co-op or condo which is their primary residence) and in which they have no more than $100,000 in equity. For bankruptcy purposes, equity is calculated by the difference between the value as determined by a broker price opinion letter or a formal appraisal less any outstanding mortgages, home equity loans or mortgage arrears.

4. Chapter 13 bankruptcy. If the debtors have a regular source of income and they’re generating sufficient income, they may be able to file a three to five year plan with the Bankruptcy Court where they would remain current on their mortgage payments and pay the arrears due the bank over a three to five year period. The debtor would need to show that they have a regular source of income and that the plan is feasible (i.e. that they have sufficient after-tax monies or disposable income to fund the plan).

5. Finally, there are several bills before Congress (in fact, one bill that has passed the House) that would allow a Bankruptcy Judge to modify the terms of a first mortgage which is a subprime mortgage and which would allow the judge to modify the interest rate or the term of the mortgage. Currently, Bankruptcy Judges are unable to modify first mortgages on houses. Shenwick & Associates is monitoring this bill and we will provide updates regarding the status of this bill and if the bill becomes law.

Real estate and personal bankruptcy

Last month, the Wall Street Journal published an article titled "Burned by Real Estate, Some Just Walk Away" on the rise in foreclosures that accompanied the collapse of the subprime mortgage market.

The article was informative and mostly correct, but got a few facts about real estate and personal bankruptcy wrong. Here’s our letter to the editor in response to the article:

To the Editor:

Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.

Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.

The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.

Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.

For more information on foreclosures and the relief bankruptcy protection can offer, contact Shenwick & Associates. Happy holidays!

Letter to the editor Wall Street Journal

To the Editor:

Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.

Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.

The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.

Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.

Educational expenses and bankruptcy

This month is a month of transition for us and many of our clients-vacations are over, the seasons are changing and many of us have children who are going (albeit reluctantly) back to school. This month we’re going to look at educational expenses and bankruptcy.

Before 1976, debtors could discharge their student loans and other educational debt in bankruptcy. In 1976, Congress amended the Higher Education Act (“HEA”) to make federally insured and guaranteed student loans nondischargeable if the debt had first become due less than five years prior to the bankruptcy filing and its repayment would not impose an undue hardship on the debtor and his or her dependents. Despite efforts to repeal this provision of the HEA and make educational debt dischargeable again, Congress retained the conditional dischargeability of educational debt when it enacted the Bankruptcy Code in 1978. Since then, Congress has further limited the dischargeability of educational debt by both broadening the class of creditor that can take advantage of the exception to discharge and tightening the conditions under which educational debt may be discharged.

Unfortunately for both debtors and courts interpreting the Bankruptcy Code, the section concerning educational debt merely says:

“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt - unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for - an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”

As the Bankruptcy Court for the Western District of Texas said in 2001, “the statute Congress crafted in gives the Courts absolutely no guidance as to what would constitute ‘undue hardship’ other than a Webster’s dictionary.” Consequently, bankruptcy judges have had a difficult time determining what debtors should be granted or denied discharge of educational debts. The courts have devised several tests for undue hardship, but the most frequently used test was articulated by the Second Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp. The Brunner test for undue hardship requires a three-part showing:

(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (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 loans; and (3) that the debtor has made good faith efforts to repay the loans.

Failure to by the debtor to prove any of these factors can result in denial of discharge of the educational debt.

For more information about how educational expenses and debts can impact a bankruptcy filing, please contact Shenwick & Associates.

Chapter 13 changes under BAPCPA

As many of our clients may know, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) modified, but did not eliminate the process of filing for Chapter 13 bankruptcy. Chapter 13 bankruptcy is generally filed to protect assets such as a house, a car or a below-market lease.

With the fall in real estate values and increase in interest rates on variable rate mortgages, we have been receiving more calls from clients whose houses are either close to foreclosure or have been foreclosed on.

Here are a few of the changes BAPCPA made to filing for Chapter 13 bankruptcy:

1. If the Debtor’s income is above the median income ($42,896 for one earner, $51,994 for two people, $62,815 for three people, $74,501 for four people and $6,900 for each individual in excess of four), the Debtor may be required to file a Chapter 13 repayment plan where the Debtor repays a percentage of his or her debts over a period not to exceed five years, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where the debts are eliminated (discharged), unless the Bankruptcy Court rules that the Debtor’s circumstances are extraordinary.

2. If the Debtor is required to file a Chapter 13 case under the Median Income or Means Test, then the Debtor’s monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment.

3. If a Chapter 13 Debtor’s current monthly income combined with their spouse’s current monthly income is greater than the applicable median income, the plan proposed by the Debtor must not exceed five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses.

4. All returns “required” for the 4 years ending on the petition date must have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.

5. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee.

6. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13.

7. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case.

8. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property.

9. The Chapter 13 “super-discharge” that was obtainable under the Bankruptcy Reform Act of 1978 is greatly reduced under BAPCPA. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a)(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.

For more information about filing for Chapter 13 bankruptcy, please contact Shenwick & Associates.

Reclamation Claims and Defenses Aginst Claims of Preferential Transfers

We get a lot of questions about changes to the Bankruptcy Code under BAPCPA (which became effective on October 17, 2005). Based on inquiries we have received and an expected increase in Chapter 11 bankruptcy filings, here are updates on two issues: reclamation claims and defenses against claims of preferential transfers.

1. Reclamation Claims. Reclamation is a seller’s limited right to retrieve goods delivered to a buyer when the buyer is insolvent under the Uniform Commercial Code. Under Sections 546(c)(1)(A) and (b) of the Bankruptcy Code, the reclamation deadlines are now (1) not later than 45 days after the date of receipt of such goods by the debtor, or (2) not later than 20 days of the commencement of the case, if the 45-day period expires after the commencement of the case. Under the Bankruptcy Reform Act of 1978, the deadlines were before 10 days after receipt of such goods by the debtor, or before 20 days after receipt of such goods if the 10-day period expired after the commencement of the case.

2. Defenses against Claims of Preferential Transfers. A preferential transfer is a pre-bankruptcy transfer made by an insolvent debtor to or for the benefit of a creditor, thereby allowing the creditor to receive more than its proportionate share of the debtor's assets; specifically, an insolvent debtor's transfer of a property interest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate.

Section 547(c)(2) of the Bankruptcy Code, which provides a defense to claims of preferential transfers based on the ordinary course of business of the debtor or ordinary business terms of transaction, now states: "to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was-(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms." The previous standard under the Bankruptcy Reform Act of 1978 required that both (A) and (B) apply, but under BAPCPA, either clause may be raised as a defense, making it much easier for a creditor to defend against the claim of a preferential transfer.

Another defense new to BAPCPA is that in a case filed by a debtor whose debts are not primarily consumer debts (i.e. primarily business debts), the debtor can only pursue alleged preferential payments that exceed $5,000.

If you have questions about reclamation claims or preferential transfers, please contact Jim Shenwick.

Funding a Chapter 13 plan

One of the many changes that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 was in the calculation of how a debtor funds a plan under Chapter 13 of the Bankruptcy Code. Section 1325(b)(2) and (3) define the disposable income which must be paid to unsecured creditors as current monthly income less amounts necessary for:

- the maintenance or support of the debtor or a dependent of the debtor, and

- a domestic support obligation that first becomes payable after the date the petition is filed, and

- charitable contributions of up to 15 percent of gross income, and

- payment of expenditures necessary for the continuation, preservation and operation of a business.

These subsections also require these amounts to be determined in accordance with the Means Test of Section 707(b)(2) if the debtor's income exceeds the median income in the state. For cases filed after February 1, 2007, the median income in New York State for one earner is $42,869, for two people is $51,994, for three people is $62,815 and for four people is $74,501. For cases filed on April 1, 2007 or after, $6,900 is added for each individual in excess of four.

Pre-BAPCPA, this amount was determined by the difference between Schedules I (current income of individual debtor(s)) and J (current expenditures of individual debtor(s)).

This new formula is clearly stated in a recent case from the U.S. Bankruptcy Court for the District of New Jersey, In re Brady, 2007 Bankr. LEXIS 501 (Bankr. D. N.J.). In that case, the Court overruled the objections to confirming the debtors' proposed plan and assertion that the debtors' plan should be based on Schedules I and J of the trustee and one of the unsecured creditors. The Court explicitly stated that the disposable income figure determined by Form B22C (the Means Test form) is then projected over the applicable commitment period, which is 60 months if the debtors have positive disposable income.

In another case from the United States Bankruptcy Court for the District of Oregon, In re Cummings, 17 C.B.N. 527 (Bankr. D. Ore. 2007), the Court ruled that Chapter 13 debtors may deduct the full amount of the IRS standard home and car ownership expenses regardless of the amount of their actual payments, thereby not penalizing "frugal debtors." Frugal debtors thus benefit from BAPCPA's treatment of housing and transportation allowances over the pre-BAPCPA reliance on judicial interpretation of the reasonableness of Schedules I and J. This represents one of the few positive changes that BAPCPA wrought on the bankruptcy landscape. Anyone with questions about filing for Chapter 13 bankruptcy should contact Jim Shenwick.

Jim Shenwick lecture at SUNY Optometry School on May 4th

Here's the outline:

I. What every Doctor should know before entering into an office lease.

1. The Parties to the Transaction (“the Team”)- The role of the Real Estate Broker/CPA/Lawyer/Insurance Agent/Architect

2. What is a Term Sheet?-Is it binding?

3. Term of Lease- How many years? Option to Renew, Option on Adjacent Space? Option to Purchase?

4. Use Clause- Broad use clause favors Tenant.

5. Rent- Base rent v. Additional Rent (Rent Estate Taxes, Porter Wages, Water Bill, HVAC) Free Rent, Commencement Date, Landlord Contribution to Buildout (?)

6. Assignment & Sublet – The most important clause in the lease?-What’s the Difference? An exit strategy for Tenant. Recapture of Space by Landlord, profit split with Landlord on assignment or sublet of space.

7. Alterations- Initial Build-out. Free rent period. Structural v. Non-Structural
Is Landlord consent needed? Pre-approval of alterations before lease is executed.

8. Security Deposit-Common Charge – How much? Who gets interest? Tenant Corporation? Personal guaranty, “Good Guy Guaranty” by principal of tenant.

9. Signage- How will your clients find your office? Sign on Building or Flag on Building. Door, Hallway, Elevator, Lobby- Who pays the cost?

10. Other Lease Provisions – Snow Removal, Garbage Disposal, Medical Waste Disposal? Insurance. How much?

QUESTIONS


II. What every Doctor should review in an existing lease before buying into a
practice.

1. “Due Diligence” check list- Lease should be abstracted to focus on key points:

2. Term- Enough time to amortize cost and develop practice?

3. Rent/Additional Rent Projections– Overhead that the practice must carry.

4. Use Clause – Lease allows for use you desire.

5. Sublet/Assignment – “Exit strategy” What is the difference? Procedure should be detailed in the Lease.

6. Alterations- Can you remodel space without the consent of the Landlord?

7. Background, Prior Experience, Net Worth, Balance Sheet.

8. Renewal Options- Generally favor the Tenant if they can be included in the lease.


III. Purchase of Real Estate.

1. For business use or personal use?

2. For business use professionals can mortgage (a) fee interest (such as a house or town house office and use for practice), co-op unit (maintenance) or a condominium unit (common charges). The cost is a set fee plus a percentage commission. No mortgage on building? There are fewer restrictions on the transfer of a condominium than on the transfer of a co-op unit.

3. For personal use choices are house, town house, co-op, or condominium.

4. Due diligence co-op-review of building financials, proprietary lease (in a co-op), board minutes, offering plan and amendments, house rules, building amenities, budget-are there any projected major repairs, pending litigation, asbestos issues, increase in maintenance/common charges, What percentage of financing allowed?

5. Closing Costs: Title insurance for fee, condominium or house purchase, transfer tax or flip tax for co-op, NYS and NYC Transfer Taxes, Mansion Tax?

QUESTIONS

IV. Dischargeability of Student Loans

BAPCPA-Department of Education-Lobby(?)-Hardship

§ 523. Exceptions to discharge (a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—(8) unless excepting such debt from discharge under this paragraph would impose an “undue hardship” on the debtor and the debtor’s dependents, for—(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Case Law: Brunner v. New York State Higher Ed. Servs., 831 F.2d 395 (2nd Circuit Court of Appeals 1987)
• Inability to maintain a minimal standard of living for most of the repayment period
• These hardship circumstances will persist for a significant portion of the repayment period
• The debtor made a good faith effort to repay the loan

Congratulations on completing the program and best of luck in your career.
If you have any questions, please contact me.

Spousal Debts

We’re often asked by couples if one spouse is responsible for the debts of the other spouse when only one spouse is filing for bankruptcy. Section 707(7)(B) requires that:

“In a case that is not a joint case, current monthly income of the debtor’s spouse shall not be considered for the purposes of subparagraph (A) [which prohibits the filing of a motion to dismiss for presumption of abuse if the current monthly income of the debtor and debtor’s spouse combined is less than or equal to the median family income in the applicable state and of the same household size] if-(i)(I) the debtor and the debtor’s spouse are separated under applicable nonbankruptcy law; or (II) the debtor and the debtor’s spouse are living separate and apart, other than for the purpose of evading subparagraph (A); and (ii) the debtor files a statement under penalty of perjury-(I) specifying that the debtor meets the requirement of subclause (I) or (II) of clause (i); and (II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor’s spouse attributed to the debtor’s monthly income.”

So when we ask a client to fill out Schedule I (Current Income) and Schedule J (Current Expenditures), they need to keep these conditions in mind. This provision is one of the many changes enacted by BAPCPA to the bankruptcy process. Therefore, case law is still rather sparse, but one interesting case is In re Travis, 353 B.R. 520 (Bankr. E.D. Mich. 2006). The facts of the case are as follows: the debtor was married and filed for Chapter 7 bankruptcy separately from his wife. The debtor’s Statement of Current Monthly Income and Means Test Calculation (the “B-22 Form”) stated that a presumption of abuse did not arise. The United States Trustee filed a motion to dismiss the bankruptcy pursuant to §707(b)(2) and §707(b)(3). The UST argued that had the debtor completed the form correctly, a presumption of abuse arose. The primary disagreement was regarding line 17 of the B-22 Form. The debtor and his non-filing spouse both entered figures on this line, and the UST argued that the debtor’s spouse could not include in this figure any amounts for food, utilities, clothing and personal items because those expenses are already accounted for when the debtor calculated his deductions, and this would be “double dipping.” The UST also objected to several other expenses and deductions taken by the debtor.

The Court noted that the calculation of current monthly income is complicated, not clearly defined, fact specific and open to interpretation. The Court mentions that the issue of a non-filing spouse’s income is not limited to post-BAPCPA cases. In Chapter 13 cases, the issue arises under §1325(b)(1), which requires a determination of the debtor’s available disposable income and in Chapter 7 cases, the non-filing spouse’s income has been considered in conjunction with a §707 substantial abuse motion by the UST.

Thus, while §101(10A)(A) excludes a non-filing spouse’s income, a non-filing spouse’s income must be accounted for under §101(10A)(B) to the extent that the non-filing spouse contributes on a regular basis to the household expenses of the debtor and the debtor’s dependents.

In the instant case, the Court agreed with the UST that some of the expenses claimed by the debtor’s non-filing spouse as her own expenses were either counted twice or were a contribution to the household expenses of the debtor and debtor’s dependents, and therefore could not be included in the Line 17 marital adjustment. Specifically, the Court cited the contribution of the non-filing spouse for food and utilities and a deduction for taxes.

However, the court also found that it was appropriate, on the facts of this case, for the non-filing spouse to take marital adjustment for clothing and personal items. The Court contrasts the debtor’s expenses (which are fixed by the IRS national standards for allowable living expenses and the IRS local standards for housing and utility payments) with that of the non-filing spouse’s expenses, which are not fixed.

The Court recalculated the B-22 Form based on its rulings and still found a negative disposable income under §707(b)(2). Therefore there was no presumption of abuse under §707(b)(2). The Court also reviewed the totality of the circumstances to determine if the debtor’s petition was abuse under §707(b)(3) and concluded that it was not. Therefore, the Court denied the UST’s motion to dismiss.

Any persons having questions about the impact of spousal income on bankruptcy should contact Jim Shenwick.

Marrama

A recent Supreme Court case, Marrama v. Citizens Bank of Massachusetts et al., is a cautionary tale for debtors who try to play fast and loose with their bankruptcy filing.

Mr. Marrama had initially filed a Chapter 7 case, in which he made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. While he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. In fact, the home had substantial value and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his petition.

After his 341 meeting, when the trustee told Marrama’s counsel that he intended to recover the property as an asset of the state, Marrama made a motion to convert his case to Chapter 13. The Trustee, however, objected to the conversion and the Court held that neither section 706 nor section 1307(c) of the Bankruptcy Code limits a Court’s authority to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. The Court’s authority was based on Section 105 of the Bankruptcy Code, which gives bankruptcy judges broad authority to take the necessary actions to prevent an abuse of process.

What do we learn as attorneys or clients from this Supreme Court decision? Bankruptcy Court is a court of equity and in order to obtain a discharge, one must follow the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of the Bankruptcy Court and give full and fair disclosure to all creditors. When a debtor does not play by the rules, the Court will deny the debtor a right of conversion to in effect punish them for their failure to play fair with the Court. Any persons having questions about Marrama or bankruptcy should contact Jim Shenwick.

BAPCPA Trends

We have a new address:

Shenwick & Associates
655 Third Avenue, 20th floor
New York, NY 10017

Please update your records accordingly.

According to a new paper on consumer bankruptcy trends and indicators, bankruptcy filings will soon be back at the levels they were before the Bankruptcy Protection Act (BAPCPA) of 2005. Although passage of BAPCPA caused a sharp spike in bankruptcy filings before it went into effect on October 17, 2005 and a dramatic fall-off thereafter, research by University of Illinois College of Law Professor Charles Tabb suggests that filings are about to return to pre-BAPCPA filing levels.

"The data indicate that BAPCPA was based on a canard," claims Tabb. "It does not appear that consumers have made a quantum shift to Chapter 13 from Chapter 7, as Congress had hoped would happen under BAPCPA. More importantly, the data suggest that BAPCPA was predicated on (to be generous) a false hope, that making the law 'tougher' would discourage consumer debtors from filing bankruptcy. The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt."

Tabb also found that Chapter 13 filings fell after BAPCPA went into effect (though not as much as Chapter 7 filings) and Chapter 13 filings didn't increase pre-BAPCPA. In Chapter 7 bankruptcy, a debtor can discharge (or liquidate) most of his or her debts. To file a Chapter 13 bankruptcy, a debtor may not have any more than $807,750 in secured debts and $269,250 in unsecured debts. A debtor must also have regular income that's sufficient to pay for basic needs (i.e. food, shelter, clothing, etc.) and fund payments to a plan (over three to five years) to repay creditors.

An abstract of "Consumer Bankruptcy Filings: Trends and Indicators" is available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931172

James Shenwick
Shenwick & Associates
655 Third Avenue
20th Floor
New York, N.Y. 10017
Work: 212-541-6224
Cell Phone: 917-363-3391
Fax: 646-218-4600
E Mail: jhs7@att.net
Web: http://jshenwick.googlepages.com

Worthwhile Bankruptcy Articles

Lexington, Ky.

"I owe about $12,000 in unsecured debt, and my payments just keep going up,” a troubled citizen signing himself T. P. recently informed a personal-finance columnist. He always paid more than the minimum amount due on his credit card bill, but “still the balance never goes down,” T .P. wrote. “Is there any way to get the interest rate down?”

The interest rate that so oppressed T. P.? A towering 29.99 percent. At this rate, the columnist said, if T. P. continued to pay little more than the monthly minimum, it could take him more than 30 years to pay off his balance — even if he never went shopping again.

Trying to fight off a collection agency while paying little or nothing on his credit card debt, another desperate borrower, R. Z., appealed to this same columnist. How could he prevent interest charges and late fees from mounting? He couldn’t, replied the columnist, as long as he legally owed the money.

Consumers like T. P. and R. Z. find themselves caught in the complexities of today’s bankruptcy laws. And their predicament is increasingly common.

Thirty years ago, the unlucky R. Z. would probably have struck many of his acquaintances as something of a deadbeat: Hadn’t he voluntarily run up a debt and then tried to slip out of the deal? T. P., on the other hand, would have received sympathy as the victim of a heartless usurer (if interest rates equal to one-third of the principal had been legal in those days).

But in today’s strange alternative universe of credit card banks, the term “deadbeat” refers not to the improvident borrower but to the solid citizen who prides himself on paying off his balance every month. As anybody with a mailbox knows, credit card issuers make unrelenting efforts to lure accounts from one another as well as to establish new accounts. And what these lenders seek are “revolvers,” people like R. Z. and T. P., who are likely to pay little more than the monthly minimum — and who eventually find themselves in thrall to mushrooming interest payments, abundantly garnished with late fees.

As for the morality involved in lending money at exorbitant rates, the word “usury” itself has taken on a quaint, archaic sound, like “jousting” or “necromancy.” What happened?

In 1978, the United States Supreme Court delivered a landmark decision that freed banks to charge the interest rates allowed in their home states to customers across the country. This decision, at a time of high inflation, unleashed a national credit storm: states scrambled to relax usury laws in order to attract banks, while banks rushed to establish affiliates in states that weakened or abolished such laws. R. Z. and T. P. are the natural products of this unhappy change. One obvious recourse for people like them is to file for bankruptcy. There’s the stigma to consider, of course. But making such a move would allow R. Z. to end the harassment by the collection agency and both men to make fresh starts free of unsecured debts.

Unsurprisingly, in the 25 years since the credit explosion began, personal bankruptcy filings have risen sharply. Bank advocates have argued that this reflected debtors’ increasing abuse of the protections granted by the Bankruptcy Reform Act of 1978. Personal bankruptcies, said the industry, were costing every household a hidden tax of $400 a year, in the form of rising prices and higher interest rates. It mounted a campaign against what banks called an “epidemic” of defaults by debtors.

In 2005, these suffering financial institutions succeeded in securing the adoption of new federal legislation, the marvelously named Bankruptcy Abuse Prevention and Consumer Protection Act. Nobody who favored this bill chose to see that the bankruptcy epidemic had been produced in large measure by the banks, or that the real hidden costs were the usurious interest rates these banks charged borrowers.

Two simple comparisons demonstrate the point: From 1980 to 2004, personal bankruptcy filings increased 443.45 percent, which is certainly impressive. But over the same time, consumer credit debt rose a bit more, by 501.29 percent. In 1980, less than one personal bankruptcy case was filed for each $1 million in consumer credit outstanding; the figure was slightly smaller in 2004.

Bankruptcies tend to rise as amounts of credit rise. No mystery there, and certainly no epidemic. It all suggests that the bankruptcy code was performing remarkably well.

But the banks got what they wanted from Washington. Since the law has been on the books, people like R. Z. and T. P. have continued to receive all kinds of credit offers (no limits there), but they may have a much harder time now fending off disaster through bankruptcy protection.

A group of credit-counseling firms that provide bankruptcy screening — a step the new law requires — report that 97 percent of the clients could not repay any debts at all, and 79 percent sought relief for reasons beyond their control, like job loss and large medical expenses and, notably, rising credit card fees and predatory lending practices.

A boomerang effect has appeared, too. The new law contains a provision forcing many debtors into Chapter 13 compulsory repayment plans. The bill’s backers expected this fresh squeeze on debtors to produce more cash for the banks, but the trend appears to be downward.

In adopting the provision, Congress disregarded the advice of every disinterested group that has looked at the question, including three presidential commissions, the Congressional Budget Office and the Government Accountability Office. It also ignored a past House Judiciary Committee report, which declared that such compulsion might well amount to the imposition of involuntary servitude.

So the lending goes on. People classed as the “working poor,” now beginning to be tapped by the credit card vendors, no doubt constitute a rich supply of coveted potential revolvers — fresh customers for the banks to draw into the credit maze, with its minimums and its unending late fees. In signing the 2005 act, President Bush declared that it would make more credit available to poor people. Unquestionably so. And 30 percent interest was just what they needed, wasn’t it?

Joe Lee is a federal bankruptcy judge. Thomas Parrish is the author of “Roosevelt and Marshall.”

Copyright 2007 The New York Times Company. All rights reserved.

Keeping the CPA in BAPCPA

This article appeared in the January 2007 issue of The Trusted Professional, a newspaper of the New York State Society of CPAs.

Keeping the CPA in BAPCPA

By William R. Lalli, CPA, NYSSCPA Tax Policy Manager

The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) of 2005 became effective on Oct. 17, 2005. The new law had the overwhelming endorsement of the credit card industry, perhaps because, according to the Federal Government, nearly one million Americans file for bankruptcy every year.

James Shenwick, of Shenwick & Associates—a law firm focusing its practice solely on bankruptcy, real estate and corporate law—gave a presentation to the NYSSCPA’s Closely Held and S Corporations Committee on Nov. 17, 2006, in which he outlined key, drastic changes in bankruptcy law, the industry’s motivation for the changes and the impact on the need for CPA services in this area.

Changes Ushered In by BAPCPA

Nearly half a million Americans filed for bankruptcy in October 2005 alone, probably in order to have their petition considered before BAPCPA took effect. This is an indication that, under the new law, things will not be as rosy. The 500-page law contains many details, but makes obvious two considerations:

1. There is now an increase in the cost and complications of filing for clients and their service providers.
2. There is a resultant decrease in the number of people who are eligible to file for Chapter 7 bankruptcy protection.

Shenwick explained that BAPCPA is a radical departure from previous law. For example, he said, in order to be successful in filing, debtors must provide the bankruptcy trustee with a copy of their federal tax return for the year ending before they filed their petition. Section 1308 of the Bankruptcy Code contains many new tax-return responsibilities for Chapter 13 debtors, including that all returns required for the four years ending on the petition date have been filed with the taxing authority by the day before the first scheduled meeting of creditors. In other words, more tax returns need to be filed if petitioners want to be successful in filing for bankruptcy protection—a departure from past requirements.

The debtor must provide a copy of tax returns to any creditor that requests them on a timely basis, or the Court will dismiss the case. Further, BAPCPA contains new median income tests and means tests that are complicated calculations, according to Shenwick.

Industry Support

The bill became law with the strong endorsement of the credit card and banking industries. Many of the new terms favor these BAPCPA-backers; fewer petitioners are being successful and fewer debts are being discharged.

Nearly every other element (aside from those related to tax information) of the process has become more stringent. There are new definitions of current monthly income, debt relief agencies, domestic support obligations and median family income. Credit counseling is required, and debtors must file copies of all payment advices or other evidence of payments. Changes in budgets must be filed with the Court. Moreover, a debtor must receive and file a certificate from an approved, nonprofit budget and credit-counseling agency and file a copy of the debt repayment plan.

More Potential Clients

Shenwick’s presentation made the members aware that taxpayers anticipating bankruptcy have a greater need for professional services. BAPCPA has created a need for services related to tax reporting and filing and financial planning assistance, exceeding that under previously existing law, that CPAs are uniquely qualified to provide.

While bankruptcy is something that lawmakers would hope is less frequent rather than more, the laws were designed to help taxpayers and the economy in the long term. Thus, while generated by the misery and financial failure of many, the impetus for new business and practice development for CPAs must be responded to, in the public interest.

Uncertain Future

Currently, there are several bills before Congress written to undo various BAPCPA provisions. In addition, the GAO is studying the impact BAPCPA is having on industry and the economy. For now, it is having one of its intended results: the number of filings is down overall and more debtors are filing chapter Chapter 13 petitions than Chapter 7 petitions. While the numbers are down, the need is up for competent help from attorneys and CPAs for debtors to be successful in their filing.

William R. Lalli, CPA, can be reached at wlalli@nysscpa.org.