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.