A California Bankruptcy Court Rejects U.S. Law Barring Same-Sex Marriage

By JOHN SCHWARTZ

A bankruptcy court in California has declared that the 1996 law barring federal recognition of same-sex marriage is unconstitutional, increasing pressure against the law.

“In this court’s judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple,” wrote Judge Thomas B. Donovan of the United States Bankruptcy Court for the Central District of California. In an unusual move, 19 other judges — nearly all of the 24 judges of the central district — also signed the decision.

The impact of the opinion could be limited, since the decision of the court is specific to the bankruptcy of the couple, Gene Douglas Balas and Carlos A. Morales. But the other judges’ signatures suggest that as a matter of policy they would rule similarly.

It is not the first blow to the law known as the Defense of Marriage Act. A federal judge in Boston declared the law unconstitutional last July, and that case is working its way through the legal system. The Department of Justice, however, is not driving that appeals process. In February, Attorney General Eric H. Holder Jr. announced in a letter to members of Congress that while the Obama administration would continue to enforce the law, it would no longer defend it in court and that classifications based on sexual orientation should be subjected to a tough legal test intended to block unfair discrimination.

Speaker John A. Boehner, Republican of Ohio, then announced that Congress would defend the law, and that it had hired former Solicitor General Paul Clement to argue on its behalf.

Mr. Balas and Mr. Morales cited Mr. Holder’s letter in their pleadings, and Judge Donovan quoted it approvingly in his 26-page opinion, and stated, “The Holder Letter demonstrates that DOMA cannot withstand heightened scrutiny.”

Mr. Balas and Mr. Morales were legally married under California law, and wanted to file jointly for bankruptcy. The trustee, the federal officials who oversee the bankruptcy process, moved to dismiss their petition under the Defense of Marriage Act. They then asked Judge Donovan to allow them to file jointly, and Monday’s decision was the result.

Adam Winkler, a professor at the law school at the University of California, Los Angeles, called the decision “a powerful statement about the status of gay rights today.” Professor Winkler said, “it shows the effect of Eric Holder’s letter in shaping legal decisions that came after it, almost as if it’s a precedent in the case.”

Mary Bonauto, the civil rights project director for Gay and Lesbian Advocates and Defenders, the group that brought the Massachusetts case, said she was not surprised to see another judge agree with the earlier decision, because the law “advances a blatant legal double standard.” Ms. Bonauto added, “In our system of justice, it’s the job of courts to call that out.”

One of those who signed Judge Donovan’s opinion, Judge Sheri Bluebond, said that a signing by other judges is “an unusual occurrence, but it is certainly not unprecedented.”

Judge Bluebond said bankruptcy judges signed on to their colleagues’ decisions when “threshold questions” were brought before one judge and the others in that district “so the bar would know where we stand,” and whether they would be able to file in those courts. While 20 judges signed the opinion and there are 24 in the Central District of California, Judge Bluebond said, “the fact that some judges did not sign on to it does not mean one way or another what their views on that issue are.”

“There could have been procedural reasons or just logistical reasons that they did not sign on,” she said.

It is unclear whether an appeal will be filed. Judge Donovan noted that the House Bipartisan Legal Advisory Group, which is leading the Congressional action, requested a brief delay in proceedings while it considered whether to intervene, but that “no further pleadings and no challenge” had ensued.

“The government’s nonresponse to the debtors’ challenges is noteworthy,” Judge Donovan wrote.

A spokesman for Mr. Boehner, Brendan Buck, said the ruling would not be appealed.

“Bankruptcy cases are unlikely to provide the path to the Supreme Court, where we imagine the question of constitutionality will ultimately be decided,” Mr. Buck said. “Obviously, we believe the statute is constitutional in all its applications, including bankruptcy, but effectively defending it does not require the House to intervene in every case, especially when doing so would be prohibitively expensive.”

Copyright 2011 The New York Times Company. All rights reserved.

Banks Amass Glut of Homes

EL MIRAGE, Ariz. — The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.

“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”

Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.

Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.

Before the housing implosion, the inflow and outflow figures were typically one-to-one.

The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.

“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”

A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.

But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.

Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike.

“My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?”

The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale.

“If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.”

The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.

Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.

“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”

Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property.

Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer.

The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking.

“If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”

Downtown Express article on our work opposing the sale of St. Vincent's Medical Center Greenwich Village campus to the Rudin family

BY Albert Amateau

U.S. Bankruptcy Judge Cecilia Morris approved the sale of St. Vincent’s Hospital’s Greenwich Village campus last week in a deal allowing Rudin Management to develop luxury residential condos and North Shore-Long Island Jewish Health System to operate a comprehensive care center with a 24-hour emergency department.

The ruling came in a packed courtroom on Thurs., April 7, almost one year after New York City’s last Catholic hospital filed for bankruptcy and ended its 161 years of serving the neighborhood.

In a joint statement, Michael Dowling, North Shore-L.I.J. chief executive officer, and Bill Rudin, chairman of Rudin Management, said they were “especially pleased that the judge confirmed what we’ve been hearing from residents, business owners and community leaders—the historic agreement reached last month by St. Vincent’s, North Shore-L.I.J. and the Rudin family is a great deal for the community and would ensure an innovative return of comprehensive healthcare to the neighborhood.”

Dowling and Rudin added, “We look forward to securing the necessary approvals from city and state officials and working closely with the community, so that we can restore high-quality healthcare on the West Side by 2013.”

Judge Morris delivered her decision after the two-and-a-half-hour hearing on Thursday morning.

“I realize how sad it was to close St. Vincent’s,” she said. “It has been hanging over our heads for a year,” she added, noting that she has heard pleas for alternatives intended to save the full-service, acute-care hospital. But she ruled there was no likelihood that alternatives would be found to improve on the Rudin-North Shore-L.I.J. proposal.

“The court must not blindly follow the most vocal interest group but must find the likelihood of a proposal that would lead to the plan for the liquidation of the Chapter 11,” she said, referring to the type of bankruptcy sought by St. Vincent’s trustees.

She overruled a recently filed objection by James Shenwick, an attorney representing former City Councilmember Alan Gerson and others; Gerson’s group had sought a 45-day adjournment in hopes of nailing down a better proposal than Rudin’s $260 million for St. Vincent’s creditors and North Shore-L.I.J.’s $100 million (plus another $10 million from Rudin) to convert the former hospital’s O’Toole Building into a 24/7 emergency medical department and ambulatory surgery center.

“For my clients, this is a matter of life and death,” said Shenwick at one point last Wednesday, drawing applause from the public and prompting Morris to warn that she would clear the courtroom if there were further demonstrations.

Shenwick told the court that Jim Partreich, a principal in the Pinetree Group, a real estate brokerage firm, has been talking to potential investors. The attorney added that the National Football League’s Retired Players Association wanted to be a partner in a hospital that could serve its members. But Shenwick did not specify who the other investors were. Neither did he mention the name of any “major academic medical center,” despite assurances by the alternative plan’s supporters that one or more were interested.

Gerson, who was at the April 7 hearing but did not testify, submitted an affidavit saying that unnamed medical centers and developers had told him they did not submit proposals because they believed the Rudin proposal was a “done deal” and that pursuing their interest would antagonize parties, “which could inflict economic retribution.”

The former councilmember’s affidavit concluded with Gerson saying, “I believe there is a reasonable probability that, if given an extension, I and fellow objectors could work with the community, government officials and potential medical centers and development participants to come up with a plan which will both provide both a greater payment to creditors and better meet community needs.”

But Morris rejected the argument and also overruled another proposal for a 45-day adjournment sought by Arthur Schwartz, attorney for the tenants’ association of the Robert Fulton Houses, a New York City Housing Authority development in Chelsea.

Schwartz is associated with the Gerson group in seeking an alternative to the Rudin proposal, but he did not join in the Gerson group’s objection because he was representing his Fulton tenants clients in a separate objection.

Schwartz told the April 7 hearing that he was disturbed both by the lack of details in the North Shore-L.I.J. proposal and by the lack of a formal bidding process for the sale negotiated by Rudin and North Shore-L.I.J. with St. Vincent’s creditors. He called for the adjournment in order to “make sure there is an arm’s-length transaction” that would allow other bidders to offer more money than Rudin and provide a full-service, acute-care hospital for the community.

Morris, however, said that negotiated, private sales of debtors’ assets are not unusual in bankruptcy cases if they are the result of sound business judgment. She also said that although the New York State Constitution requires the state to provide healthcare for low-income residents of Fulton Houses, it does not mean that a facility has to be on the shuttered St. Vincent’s campus.

Yetta Kurland, attorney for the Coalition for a New Village Hospital, also called for an adjournment, saying that the proposed North Shore-L.I.J. free-standing emergency department did not meet the neighborhood’s healthcare requirements. Kurland also faulted the privately negotiated aspect of the deal. But her pleas did not move the judge to grant a delay in the case.

Morris dismissed all moves to delay the sale. She said that Schwartz’s State Supreme Court lawsuit demanding that the state build a full-service hospital as a successor to St. Vincent’s “could take years.” She also said she doubted that Gerson’s group could raise a financially credible challenge to the Rudin-North Shore-L.I.J. proposal.

Kenneth Eckstein, attorney for St. Vincent’s, opposed any delay, saying, “Every month we don’t close costs, the estate is assessed $1.2 million in interest and carrying charges.” Stephen Bodder, attorney for St. Vincent’s unsecured creditors, said the proposed deal had the unanimous approval of creditors.

In approving the sale, Morris cited the fact that Rudin’s offer included a $22 million cash down payment. In addition, Morris said, the fact that Rudin’s offer was not contingent on city zoning or state Department of Heath approvals was an important reason for her decision. She noted that the current deal was a successor to Rudin’s 2007 contract to buy St. Vincent’s east campus. That deal, which included Rudin’s right to buy the property for 15 years, was canceled with the hospital’s bankruptcy filing last year.

As of last week, there were 18 medical tenants in the O’Toole Building, at 12th St. and Seventh Ave., on a month-to-month basis. Eight have agreed to leave by July 31, and the rest will meet with St. Vincent’s on May 19 in an effort to resolve their issues, according to a court-approved agreement.

Copyright 2011 Community Media LLC. All rights reserved.

NYT: Avoiding Refinancing Costs After Divorce

By LYNNLEY BROWNING

DIVORCED homeowners wrangling with the task of removing a former spouse’s name from the mortgage after buying out his or her equity stake in the marital house may think that refinancing is the only choice.

There is another, little-known option that can avoid refinancing and its costs, which generally run 3 to 6 percent of the outstanding loan principal, according to LendingTree. You simply ask your lender to remove the former spouse’s name, leaving the loan note in your name only.

The problem is that not all lenders or mortgage servicers offer this option, known as release of liability. The lenders and servicers that do will most likely run a separate credit check on you — requiring, for example, that you meet minimum credit scores (typically from Fannie Mae, the giant government buyer of loans), and ensuring that you are current with the monthly mortgage payments. They may also require that any investors in the loan, after it is sold off, agree to the deal.

And if you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option.

“This is a common and often messy business,” said Jack Guttentag, a mortgage expert and emeritus finance professor at the Wharton School of Business at the University of Pennsylvania. “Lenders seldom have a reason to take a co-borrower’s name off the note.”

But, he added, if a homeowner can prove that he or she can afford the payments and meet the required credit criteria — typically those of the investor in the loan — then release of liability may work.

Neil B. Garfinkel, a real estate and banking lawyer at Abrams Garfinkel Margolis Bergson in New York, says the lender “will require the borrower to prove that the borrower is able to support the monthly payments without the co-borrower spouse,” typically through monthly bank statements, annual tax returns and investment statements.

Having the name removed protects the credit of both parties, actually. If the former spouse failed to pay other debts, a lien could be placed on the home, and if you were delinquent on the mortgage payments, your former spouse’s credit could be hurt.

Most divorce settlements stipulate one of two outcomes for marital property. Either the house must be sold, or the person wanting to keep the property must buy out the other’s share, usually within months of the date of the settlement, and get the other party’s name off the mortgage — either through refinancing or a release of liability — typically within a year.

Under the second option, the former spouse signs a quit-claim deed at the divorce settlement, relinquishing his or her claim to the property. But while that action takes the former spouse off the house’s title and leaves it in one name only, it does nothing to remove his or her name from the actual mortgage.

Lenders or servicers typically charge $300 to $1,000 to execute a release of liability and require the property owner to pay an additional, nonrefundable application fee, typically $250 to $500. The process can take from 30 to 90 days, mortgage experts say.

One mortgage servicer, PHH Mortgage of Mount Laurel, N.J., requires that a homeowner with a loan sold to Fannie Mae have a minimum FICO credit score of 620 and a debt-to-income ratio of 50 percent or below (the ratio measures the amount of gross monthly income that goes to paying off all debts).

Still, a lender or servicer “generally has no obligation to release one of the borrowers,” Mr. Garfinkel said.

But Mr. Guttentag says homeowners may have one point of leverage. He suggested that qualified borrowers not accorded the release they seek tell their servicer or lender that unless a release of liability can be executed, the borrower will refinance the mortgage — at another lender.

“In such cases,” he said, “the servicer might agree to do it.”

Copyright 2011 The New York Times Company. All rights reserved.

Representation of objecting alternative purchaser group in the sale of St. Vincent's Hospital's Manhattan Campus

Yesterday, the U.S. Bankruptcy Court for the Southern District of New York approved the sale of the Manhattan campus of St. Vincent's Catholic Medical Centers to the Rudin real estate family and the North Shore-LIJ Health System.

We represented an alternative purchaser group (comprised of former New York City Councilmember Alan J. Gerson, attorney Dudley Gaffin and Dr. Robert Adelman) that objected to the sale. Please read articles about the sale in the Washington Square Journal and Crain's New York Business.

NYT: Learn How to Collect From Slow Payers

By HANNAH SELIGSON

SMALL-BUSINESS owners know it is cash flow or die. While the recession officially ended in June 2009, many companies are still reeling. Credit can be hard to come by, and profits have not completely bounced back. On top of that, many customers are taking longer than ever to pay their bills.

Exhibit A is Cisco Systems, one of the largest technology companies in the world, which announced last year that it would wait a full 60 days to pay its small-business suppliers — mostly because it had found that that was what other big companies were doing.

So how does a small business get paid in a tough economy without hiring a collections agency or alienating its clients? Better yet, how does it avoid ending up with a stack of unpaid invoices in the first place?

Judging from the experiences of the small-business owners interviewed for this guide, it is part art and part science.

DO YOUR DUE DILIGENCE It used to be that credit reports were expensive and only for big companies with large budgets. Not anymore.

Ron Phelps, commercial credit manager at Boulevard Tire Center, a tire distributor with 26 locations in Florida, pays $99 a month for Pulse, a service offered through Cortera, , an online business credit reporting system, that keeps tabs on his clients. Last December, Cortera’s monitoring system noted that there was a large federal tax lien on one of Mr. Phelps’s clients, a small trucking company. He cut off the company’s credit line.

“That very same day,” he said, “we decided just to make them a cash customer, because we were concerned about their ability to pay.”

Cortera also offers a free service that collects and analyzes payment histories on more than 20 million businesses. Think of it as Yelp for business credit — instead of reviewing restaurants and stores, its community gives feedback on how promptly a company pays.

“We are helping small businesses tell the world that this person is a deadbeat,” said Alex Cote, vice president for marketing for Cortera. (There are other services, including Dun & Bradstreet, that will assess the financial strength of a company.)

SET YOUR TERMS (WITH A SMILE) Diane Nicosia manages and coordinates major construction and design projects through her company, D. E. Nicosia & Associates, which is based in New Rochelle, N.Y. “I’m in charge of the budget and have to make sure vendors, architects and engineers get paid,” Ms. Nicosia said. “What I’ve learned is that you have to negotiate these days.”

On a recent project involving 45,000 square feet of office space in a Midtown Manhattan office tower, a construction company said it would back out of the deal after it found that it would take 90 days to get paid by Ms. Nicosia’s client, a Fortune 100 financial services and manufacturing firm. Ms. Nicosia met with her client’s senior management and found that the payment timetable was not set in stone; there was room to broker a schedule that could keep the construction company from walking.

“Most people don’t think to challenge the payment schedule,” she said, “but we have to step up as small-business owners and say, ‘This is my living.’ ”

What Ms. Nicosia learned through this negotiation process, which she said was very amicable, was that there are often options: “All they have to do is push a little button that says pay in 10, 30 or 60 days, and that gets your invoice in a queue, so I got my vendor paid faster by working with the right people in the company.”

GET THE PAPERWORK RIGHT Is your invoice perfect? Did you fill out all the forms (even the ones you may not know about)? Companies do not need much of an excuse, if any, to delay your invoice. So make sure not one piece of information is missing.

Do you know whether the invoice needs a purchase order number? Not having this number can leave invoices lingering in accounts-payable purgatory, and it is unlikely that accounts payable will call to tell you.

Is your invoice formatted correctly? Some companies accept invoices only in the form of a PDF. If you are a new vendor, did you fill out a new vendor form? Many companies require these forms to process a first-time payment (but do not always make that known).

KNOW WHEN TO LOSE A CLIENT If customers do fall behind, when do you decide to cut them off? And what do you do if it is a customer you think you cannot afford to lose?

At Boulevard Tire, delinquent accounts are placed in one of two buckets — 30 days overdue and 60 days overdue.

“We look at those lists long and hard and ask ourselves,” Mr. Phelps said, “is this someone I want to immediately put on credit hold? Or is there something salvageable here? Are they a first-time offender?”

There are, he said, no hard and fast rules. “It’s all about the dynamics,” he said. “For example, if we have a customer who is in dire straits, and they appear to be making an effort to pay, we might continue working with them.”

Still, the economics may ultimately dictate the decision. As Mr. Phelps pointed out, if your company has a 10 percent profit margin and you lose $10,000 on an account, that is an additional $100,000 in revenue that your company has to find.

DON’T RELY ON THE POST OFFICE To avoid having someone in the accounting department tell you that “the check is in the mail,” push for direct deposit or electronic transfer. That way, you can get paid exactly on the 45th or 60th day. There are also services available from banks that will allow checks to be faxed and scanned, with the money deposited into your account the same day.

Consider accepting credit cards or PayPal. Yes, there is a fee, depending on which card or service you use, but the cash comes almost instantly.

“Some credit card companies pay their merchants on the following day,” said George A. Cloutier, founder of American Management Services, a financial turnaround firm. “And in a climate where cash is so tight, that’s often worth the fee.”

LET THEM KNOW IT’S IMPORTANT Rachel Lawrence oversees invoicing and bill collection at Bright Power, an energy efficiency company based in Manhattan. She was trying to collect from a property management firm that was 30 days late on a $25,000 invoice.

“They kept giving me this excuse that they had changed accounting systems, which I think can be a delay tactic,” she said. “It got to the point where I really had to make it clear that I wanted payment, so I offered to physically pick up the check.”

Ms. Lawrence gave the property management company dates and times she would be available to make the 30-minute trip to its office in Midtown Manhattan. The firm agreed to have the check ready. “When you say this is important enough to me that I will go out of my way,” she said, “I think people respond.”

OFFER A DISCOUNT Mr. Phelps said he does not like to reward clients for not paying, but that in certain cases extending a discount on the condition that the debt be paid immediately in cash or a cashier’s check can make the money appear.

“We’d rather have something than nothing and save ourselves the time and effort of going to court,” he said, “but we probably wouldn’t enter into a credit relationship with that company in the future.”

And do not be afraid to give a 10 percent discount, said Mr. Cloutier: “For 1 or 2 percent, it’s probably not worth it to the person who owes the money, particularly if they are short on cash.”

Copyright 2011 The New York Times Company. All rights reserved.

NYT: Credit Card Data Tells Mixed Story

By STEPHANIE CLIFFORD

American shoppers did not shed their reliance on credit cards over the year-end holidays.

While the average debt on credit cards in December decreased by 4 percent compared with the same month a year before, Americans still carried an average of $4,284 on credit card statements in December 2010, according to data released this week by the credit monitoring company Experian.

The data offers conflicting versions of the economy’s already mixed picture. While some consumers spent more during the holidays because the economy was rebounding, others were still unable to cover expenses without leaning on their credit cards. And while holiday spending also appeared to have been more robust than in the last several years, even more recent data has shown a bit of a slowdown in consumption this year.

“You’ve got people who already had good credit and were pretty much managing their credit, and because of the risk, paid down their debt even more,” said Maxine Sweet, vice president for public education at Experian. Then there were “very dramatic increases in debt by people who, mainly, lost jobs, but also had medical emergencies, and turned to credit cards to carry them through the hard times.”

The most recent consumer credit report from the Federal Reserve showed that revolving credit, which is mostly credit card debt, increased by 3.5 percent in December at an annual rate, the first such increase in 27 months. (That data included “charge-offs,” or debt that the credit card companies considered essentially uncollectible, while the Experian data, since it was pulled from active credit files, did not.) Card spending (including credit, debit and electronic benefit-transfer cars) was up 6.5 percent in December compared with spending at the same stores a year earlier, according to First Data, which processes merchant transactions.

Retailers tend to benefit from credit card spending, as it often means people are spending beyond their budgets.

Holiday spending rose 5.5 percent in the 50 days before Christmas in 2010 compared with 2009, according to MasterCard Advisors SpendingPulse. Much of that was driven by increases in apparel, jewelry and luxury goods.

While many shoppers had vowed to spend only with cash this holiday season, that was a budgeting trick that not everyone could use.

The cash shoppers, Ms. Sweet suggested, “were the ones that were pretty much in control — they can say, ‘I’m going to be more conservative.’ ” People under more difficult circumstances had to put certain debts on their credit cards, she said. In February, the retail analyst David Strasser issued a note to clients saying that the increase in credit spending was good news.

Spending at Visa and MasterCard in the United States was up a combined 8.3 percent for the fourth quarter, Mr. Strasser noted, “a hopeful sign that big-ticket spending is in recovery mode for 2011.”

“Weak credit trends have clearly bottomed out,” he wrote, and the increases in credit card spending “will disproportionately help big-ticket retailers that were hit hard during the downturn, as credit was curtailed and consumers lacked liquidity to purchase big-ticket products.”

The Experian data, which is broken down by metropolitan area, also gives a sense of how different cities may be recovering from the recession.

The city with the highest card debt in December was San Antonio, with $5,177 due on average, 21 percent above the national average. (The figures include debts on regular credit cards and retail Visas and MasterCards, but not a retailer’s own card — so a Gap-brand credit card would not be included, but a Gap Visa card would.)

San Antonio was followed by Jacksonville, Fla., at $5,115, a city with one of the lowest average credit scores, suggesting that pure debt may have been piling up there. Dallas, which came in at fifth with $4,936, also has one of the lowest average credit scores in the country.

Atlanta was third, with $4,960, and Honolulu, with $4,939, was fourth.

In 2009, the list of cities with the most credit card debt was similar: Dallas, Atlanta, San Antonio, Jacksonville and the Waco, Tex., metropolitan area.

Jeanie Wyatt, chief executive of the San-Antonio based advisory firm South Texas Money Management, said the economy in the city had been quite steady.

“Our unemployment rate is lower than the national average,” she said, “the health care field has been fast-growing, and of course we still have a big military component, and tourism, and a growing energy component. People are feeling, I think, pretty good about their job security.”

She said San Antonians were largely living on working-class paychecks, which could explain some of the credit card debt.

“While San Antonio has a lower unemployment rate and a more stable economy, our wage earners are at that mid- to lower end,” she said. “I would presume that lower-income individuals tend to have a higher percentage of credit card debt.”

The cities that racked up the lowest credit card debt for December were Sioux Falls, S.D. ($3,446); the area in Tennessee and Virginia around Kingsport, Johnson City and Bristol ($3,449); Fort Wayne, Ind. ($3,476); Paducah, Ky.($3,515); and Davenport, Iowa ($3,515).

In December 2009, the cities with the lowest credit card debt were Altoona, Pa.; Lafayette, La.; Evansville, Ind.; Davenport, Iowa; and Cedar Rapids, Iowa.

VantageScore, a credit rating produced by the three major reporting bureaus, Experian, Equifax and TransUnion, gives a picture of whether the credit card spending came from economic confidence, or from desperation.

Midwest and West Coast cities dominated the list of cities with the 25 highest VantageScores. Wisconsin had three cities on that list (Green Bay, at No. 1; Madison, at No. 2; and Milwaukee, at No. 21). Several states had two: California (San Francisco and Santa Barbara), Minnesota (Minneapolis and the Valley City-Fargo area, which crosses into North Dakota), Oregon (Eugene and Portland) and Iowa (Cedar Rapids and Des Moines). There were no Southern or Southwestern states on the list of the top credit scores.

“Cities like Minneapolis, that always have great credit scores, actually have higher debt than other cities,” Ms. Sweet said. “But it’s offset by the fact that they never miss payments, and they always have high credit limits.”

The list of the 25 cities with the lowest VantageScores in December was heavily Southern. Texas had seven cities on the list (Harlingen, El Paso, Tyler, Waco, San Antonio, Dallas and Houston, going from lowest to highest credit scores). Other than two California cities (Bakersfield and Fresno) and Las Vegas, every other city on the list was from the South.

“Part of that is a lot just a lot of younger people moving in, and a larger migrant population — so by younger, meaning not just in age, but also less depth in their credit history, and we think that’s one factor,” Ms. Sweet said of the lower credit scores in Texas in particular.

“When you have these consumers who are in crisis with foreclosures and unemployment, that has to be driving up their credit card debt,” Ms. Sweet said.

Shoppers interviewed last December sounded quite cautious about their spending.

Julianne Cantarella, 43, was at the Garden State Plaza Mall in Paramus, N.J. (the New York metropolitan area is No. 42 on the Experian list of high credit card debt). Her house had finally sold over the summer after being on the market for a year and a half, she said, so she thought the economy was improving.

“But I did cut down on the money I’m spending and the amount of gifts I’m buying,” she said.

In Columbus, Ohio (No. 12 on the Experian list), Dorothy Huggins, 54, was shopping with her granddaughter.

“Everybody in our family is fine — nobody’s lost their jobs, but I have lots of friends and neighbors who have been hit,” Ms. Huggins said. “That made us more conservative this year because we’re wondering, are we next?”

“There are so many people hurting, through no fault of their own. And we’re fortunate enough to be doing well,” she said. “So we bought a lot less stuff this year.”

Christopher Maag contributed reporting from Columbus, Ohio, and Nate Schweber from Paramus, N.J.

Copyright 2011 The New York Times Company. All rights reserved.

NYT: Rebuilding Your Credit Score

By TARA SIEGEL BERNARD

Millions of consumers have fallen out of favor with the credit scoring gods.

Some lost their jobs or were just overwhelmed by mounting debt. Others got caught up in the real estate bubble or had major medical bills. Whatever the reason, the rising number of foreclosures, short sales, late credit card payments and the ultimate credit sin — bankruptcies — have left black marks on credit reports most everywhere.

So what can these people do to repair their credit?

The simple answer is to focus on the information that is used to generate the all-powerful FICO score — the measure used most frequently by traditional lenders to determine creditworthiness. Its scale runs from 300 points to 850 points; the higher the score, the better your credit standing. “FICO is still the 500-pound gorilla,” said John Ulzheimer, president of consumer education at SmartCredit.com. “In 2011, the best way to get credit from the mainstream lenders is to have a good FICO score.”

Consumers can hope that the banks will eventually consider alternatives to the traditional FICO score, which was developed by Fair Isaac Corporation and has been in wide use for about two decades. After all, as banks regain their appetite for lending, they will be looking for ways to differentiate between borrowers with the same scores, some of whom are temporarily struggling and others who chronically have trouble with money.

For now, though, the FICO score reigns. The best antidote to a poor score is time. Still, there are a half dozen ways to speed the process, or, at the least, avoid even more credit trouble.

What to Do

ASSESS YOUR SITUATION Before you even start to think about rehabilitating your credit, make sure that you can pay your bills on time and not do any more harm. If keeping up with your credit card bills is still an issue, then call the issuer, explain your situation and try to negotiate payments you can afford. Ask the issuer how that will be reported to the major three credit bureaus: Not paid as agreed, which can hurt your score? Or will the new terms say that you are now paying as agreed?

“You have to get in writing that this is what they agreed to do,” said Mechel Glass, director of education at CredAbility, a nonprofit consumer credit counseling agency. Ditto for other providers, like utility companies.

Then, assess all the damage by getting a free copy of your credit report from each of the three major credit reporting bureaus through annualcreditreport.com. Each of the major credit bureaus — Equifax, Experian and TransUnion — generate their own FICO scores based on the data they collect. Two versions of your FICO score are also available for $19.95 each, through myFico.com.

How far your credit score has fallen will depend on where it started, as well as the frequency and severity of your credit mistakes. If you had almost perfect credit, but because of the loss of a job your credit card bills ended up at a collection agency, you can expect to lose anywhere from 80 to 150 points from your FICO score. A short sale or foreclosure? Both, Mr. Ulzheimer said, “would turn a FICO 790 into a FICO 590 overnight.”

CLEAN UP YOUR SCORE Start with the low-hanging fruit. Let’s say you were late paying a bill from a company that no longer exists, or a bank that has since merged with a larger institution. If the credit reporting bureaus cannot verify the accuracy of that black mark, they are required to remove it. “Not only does it have to be correct, but it has to be verifiable,” Mr. Ulzheimer said.

Next, focus on paying off the loans — namely, credit cards — that will help give your score the most lift. Paying off a mortgage, a student loan or other installment debts, like car loans, feels good but that won’t necessarily do much for your credit score.

You also want to get your so-called debt utilization rate into good shape. FICO considers how the total amount of debt on each of your credit cards compares with your total available credit. The credit score “elite” — that is, people with FICO scores above 760 — typically don’t have debts that exceed 7 percent of their available credit. But if you are at 50 percent and can get the rate down to 30 percent, that will help.

LEAVE A NOTE Because prospective employers may pull a copy of your credit report, consider adding the equivalent of a doctor’s note to each of your reports explaining your hardship, like a job loss. All three major credit bureaus allow you to add a brief statement through their Web sites. FICO doesn’t consider these statements when formulating scores, however, so don’t expect it to sway lenders.

GET SECURED CARDS It will obviously be hard to get a traditional credit card when you have a poor credit history. Secured cards, if used strategically, can help nurse your credit back to health more quickly. These cards require you to put a set amount of money in a bank account, say $250 or $500, which is used as collateral. And the amount of available credit should be equivalent to the amount on deposit.

“What is the most predictive and powerful in your score are the things you’ve done most recently,” Mr. Ulzheimer said. “That cuts both ways. If you add a secured card and you pay it religiously and the balance is low, it will help your score a lot more quickly than if you do nothing.”

But read the fine print before signing up. Consumer advocates said some unscrupulous card issuers have charged the security deposit to the card. And be sure the issuer reports your payment information to the big three credit bureaus, since not all do.

Curtis Arnold, the founder of CardRatings.com, recommended two cards, both of which report payments to the big three: the Orchard Bank Secured MasterCard, which has an attractive interest rate of 7.9 percent, waives the annual fee in the first year and charges a moderate $35 annually thereafter. He also likes the Citi Secured MasterCard, largely because it offers an interest rate on the security deposit equivalent to an 18-month certificate of deposit, which he says is an industry first.

TALK TO A CREDIT UNION These institutions may be more willing to work with members who have checkered histories. Their offerings vary, but they may be more likely to consider alternative credit scores, offer free credit counseling or have products tailored for people with poor credit histories. “Certainly, many credit unions have credit builder or rebuilder loans, often structured as a loan with a built-in savings component so that a person gradually builds up funds that can act as partial collateral,” said Clifford Rosenthal, the president of the National Federation of Community Development Credit Unions, a trade association representing credit unions in low- and moderate-income areas.

ALTERNATIVE VERIFICATION There are other credit reporting agencies and services that — for a monthly fee, and sometimes a hefty one — will collect your payment history from sources that aren’t included in your traditional credit report or FICO score. At this point, however, most mainstream lenders base their decisions on the big three bureaus’ reports and FICO scores. So you’re better off saving your money. “All of those companies say they will report your accounts to a credit bureau, and they may be doing that,” Mr. Ulzheimer said. “But if it is not the big three, then who cares?”

This could change, of course, as banks become more willing to lend and potentially open to using other means to identify promising borrowers. Lenders may begin to consider rental payment histories, for instance. Or they may be willing to look at alternative credit scores that incorporate payment information that doesn’t show up on traditional credit reports.

Or perhaps one lender will permit so-called shoe box credit: Did you know that if you walk into a lender with a box stuffed with receipts proving that you paid your cable bill, for instance, that they are required to consider it? They aren’t obliged to give you a loan, but the regulation says they must consider the information.

What to Avoid

CREDIT REPAIR OFFERS You may have seen the advertisements for credit repair companies on the Web. “We really tell our clients to stay away,” said Ms. Glass, of CredAbility. One re-emerging scam, she says, involves companies that claim they can clean up your credit. Some companies manage to do this for a limited time by disputing all of your accounts, sending letters to the bureaus claiming the accounts aren’t valid. But after the credit bureaus validate the accounts and debts, they reappear on your report and your score will plummet again.

Legitimate credit repair companies exist, and they can assist in disputes. But there’s nothing they can do that you can’t do yourself at little cost. Besides, these companies often besiege the bureaus with letters, and the bureaus are allowed to ignore what they believe are frivolous disputes. Be wary of companies that do not disclose in writing that you can do these tasks free on your own, that guarantee results or that try to charge you before they perform any services.

CERTAIN CARDS Despite the tighter credit environment, Chi Chi Wu, a staff lawyer at the National Consumer Law Center, said the center was still receiving complaints about credit cards aimed at people with poor credit histories.

“These cards are pitched as a way to build credit, but with these kind of steep fees and high interest rates, there is a good chance they will hurt,” she said.

Copyright 2011 The New York Times Company. All rights reserved.

Jim Shenwick to talk on "Personal Bankruptcy: The Basics and Discharging Taxes in Bankruptcy"

The following is an outline of the talk Jim Shenwick will give to the New York Society of CPA's Small Firms Practice Committee on Monday, February 7, 2011.

Personal Bankruptcy: The Basics and Discharging Taxes in Bankruptcy

I. Introduction

Why do people file for bankruptcy today?
• Credit card debts
• Business reversals and job loss
• Falling real estate values
• High housing costs
• Student loans
• Divorce
• Medical bills and illness
• Guaranties of debt

II. Economic Conditions that are driving Personal Bankruptcy Filing
• 9.1% unemployment rate
• The effective unemployment rate is 17-18%
• The unemployment rate for recent college graduates is 20-21%
• $796.5 billion of revolving (credit card) debt as of November 2010
• The foreclosure rate is 11%
• 20-30% of homes are “underwater.”


III. What can a person with too much debt do?

A. Do nothing-“Hope and Pray”
B. Negotiate an “out of court” workout with creditors
Pros:
• Save the legal fees in filing a bankruptcy petition and the Bankruptcy Court filing fees.
• A workout may be a less “negative factor” on your credit report than filing for bankruptcy (“FICO Score”)
• Psychological relief in not filing for bankruptcy and “embarrassment or failure factor.”
Cons:
• You negotiate one creditor at a time-what if you can’t reach an agreement with all creditors-do you do the work?
• Who will do the negotiating-the debtor, a CPA or an attorney? (CPAs and attorneys will charge a fee for this work)
• The time and effort of drafting, revising and reviewing a Settlement Agreement, Release, Stipulation of Settlement or Stipulation of Discontinuance of litigation.
• Under § 108 of the Internal Revenue Code, debt relief is considered income and is taxable. This is “phantom income” (Creditor will have to file a Form 1099R with taxing authorities)

C. File Bankruptcy-Chapter 7, 11 and 13

IV. Overview of the three types of personal bankruptcy

A. Chapter 7-“Liquidation and Fresh Start”-the most common type of personal bankruptcy, this allows debtors to liquidate or discharge most (but not all) of their debts:

What debts are discharged in a Chapter 7 personal bankruptcy?
• Credit card debt
• Personal, business, automobile and real estate loans
• Lines of credit
• Medical bills
• Utility bills
• Personal and “good guy” guaranties-“good guy” guaranties are guaranties created for the leasing of commercial space.

• Of all of the solutions to too much debt, Chapter 7 bankruptcy will have the most negative impact on credit reports and will lower FICO score.
• Chapter 7 bankruptcy constitutes the vast majority of individual filings, and can be very helpful in dealing with many debtor/creditor problems that individuals have these days (90-95% of our bankruptcy filings are Chapter 7.
• Chapter 7 bankruptcy provides individuals who qualify to file under this chapter with a “discharge,” which can wipe out a significant amount of an individual’s debt.
• 1.6 million Americans filed for bankruptcy in 2010.



The Mechanics of a Chapter 7 Bankruptcy Filing
• Hire an attorney, provide data to attorney, bankruptcy petition is prepared, reviewed by client, filed with the Bankruptcy Court and Debtor attends § 341 meeting with attorney and Bankruptcy Trustee

B. Chapter 13- This type of personal bankruptcy provides for the reorganization of debts of an individual with regular income and allows them to retain real and personal property and business interests.

• Under BAPCPA, individuals must file for Chapter 13 bankruptcy if they earn too much and fail the means test.
• Corporations may not file Chapter 13 bankruptcy. Corporations may file Chapter 7 or Chapter 11 bankruptcy.

Chapter 13 bankruptcy is a good solution for individuals with:
• A lot of home equity
• Expensive cars
• A valuable lease
• A business they want to keep
• If a debtor’s income is greater than the median income for their state and household size, they will have to file a 5 year plan (rather than a 3 year plan).
• If a debtor has too much debt under § 109(g) of the Bankruptcy Code (noncontingent, liquidated, unsecured debts of more than $360,475 and noncontingent, liquidated, secured debts of more than $1,081,400), they do not qualify for Chapter 13.
• Chapter 13 bankruptcy will have an intermediate impact on credit reports and FICO score compared with Chapter 7 bankruptcy and an “out of court” workout.

The Mechanics of a Chapter 13 Bankruptcy Filing
• Hire an attorney, provide data to attorney, bankruptcy petition and Plan is prepared, reviewed by client and filed with the Bankruptcy Court, Debtor attends § 341 meeting with attorney and Chapter 13 Bankruptcy Trustee and attends hearing on Plan confirmation.


C. Chapter 11- Reorganization (for wealthy individuals or a corporation) or liquidation.
• The primary reason that individuals file for Chapter 11 is that they have too much income or assets or they have debts that fall outside the statutory limits for filing a Chapter 13 bankruptcy.
• The filing fee for Chapter 11 is $1,039 and legal fees are in excess of $10,000

V. “BAPCPA” and Personal Bankruptcy Basics

A. In 2005, Congress radically revised and amended Chapter 7 personal bankruptcy laws. These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.

B. Median Income. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy.

Family size New York State Median Income (effective November 1, 2010)
1 $45,548
2 $56,845
3 $67,292
4 $82,587

• Add $7,500 for each individual in excess of four.
• Median income figures are periodically revised by the Census Bureau.

C. Means Test-However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation) (Local Standards)–as well as many other factors. It is similar to preparing an “offer in compromise.”

D. However, with proper planning, most individuals or couples whose income exceeds the median income can still pass the Means Test and will be allowed to file for Chapter 7 bankruptcy, notwithstanding the legislative intent of the changes under BAPCPA, which was to try and minimize the number of individuals who could file for Chapter 7 bankruptcy and force them to either not file for bankruptcy or to file for Chapter 13 bankruptcy.

• If an individual’s debts are primarily business debts, then the Means Test does not apply.
• The data that is used to calculate the Means Test is a six-month rolling look back at the debtor’s income and expenses. Accordingly, if a debtor is self-employed, an independent contractor or a salesperson, they may be able to earn less and therefore pass the Means Test.
• If a debtor is married and living with his or her spouse who is not filing for bankruptcy, the non-filing spouse’s income and expenses must be included in the Means Test.
• Failing the Means Test means that a Chapter 7 filing would be deemed presumptively abusive under § 707(b)(2)(A) of the Bankruptcy Code. However, a debtor can rebut the presumption of abuse by showing special circumstances.
• Similarly, if a debtor’s after tax income is greater then expenses, the debtor has monies to make some payment to creditors, and a Chapter 7 filing would be presumptively abusive under the “totality of the circumstances” test in §707(b)(3) of the Bankruptcy Code.


VI. Dischargeability of Taxes in Bankruptcy

A. Certain “old income taxes” may be dischargeable if:
i. The tax return was filed more than two years prior to the bankruptcy filing (note that a return prepared and filed by the IRS is not deemed to be a filed return);
ii. The taxes are more than three years old;
iii. The taxes were assessed more than 240 days before the filing of the petition;
iv. There was no attempt to avoid or evade the taxes.

• Various events can toll or delay the calculation of these time periods, including a bankruptcy filing, a pending offer in compromise, failure to file a return, filing an amended return and requesting an extension of time to file a return.

If all of these conditions are met, the taxes are dischargeable in bankruptcy. Tax account transcripts from the Internal Revenue Service and the New York State Department of Taxation and Finance are needed in order to determine if the taxes are dischargeable.

B. Bankruptcy Litigation/Adversary Proceeding- The Debtor or the taxing authority can file an adversary proceeding (bankruptcy litigation) to determine if the tax debts are dischargeable. The Debtor can also enter into a payment plan with the taxing authority.


C. “No Attempt to Avoid or Evade the Taxes” Standard-the IRS has heightened its scrutiny of the discharge of income taxes in bankruptcy, and their position (based on case law) is that if you spend too much money on luxury items, and/or pay other creditors ahead of the IRS, and/or make yourself judgment proof, then according to the IRS, those tax debts would not be dischargeable, and the IRS will commence an adversary proceeding (litigation in a bankruptcy case) to object to the discharge of these taxes. See Wright v. Internal Revenue Service, 191 B.R. 291 (S.D.N.Y. 1995); Haesloop v. U.S. (In re Haesloop), 2000 Bankr. LEXIS 1104, 2000 WL 1607316 (Bankr. E.D.N.Y. Aug. 30, 2000); Lynch v. United States, 299 B.R. 62 (Bankr. S.D.N.Y. 2003); Epstein v. United States, 303 B.R. 280 (Bankr. E.D.N.Y. 2004)


D. What taxes are not dischargeable?
• Recent taxes (2009 and 2010 tax years)
• Payroll, sales and other trust fund taxes (employee portion of FICA and FUTA, not the employer portion)
• Property taxes assessed within one year of filing


E. BAPCPA (2005) requirements for Personal Bankruptcy

i. Under BAPCPA, in addition to the list of creditors, schedules of assets, liabilities, income and expenses debtors must now provide:
a. A certificate of credit counseling;
b. Payment advices from employers received 60 days before filing (if any);
c. A statement of monthly net income and any anticipated increase in income or expenses after filing;
d. Tax returns or transcripts filed in the most recent tax year;
f. Photo ID; and
g. Social Security card

ii. Failure to provide the documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in automatic dismissal of the case.

iii. Also new under BAPCPA, a debtor must have received pre-petition credit briefing (in person, by phone or internet) from an approved non-profit entity that outlined opportunities for credit counseling and assisted the Debtor in performing a personal budget analysis in the 180 days before filing a petition. Greenpath (http://www.greenpath.com), one of the approved credit counseling agencies, charges approximately $45. There are many other course providers besides greenpath, some with lower costs.

vi. Additionally, within 60 days after the first Meeting of Creditors, the debtor must also take a post-petition financial management course and file a certificate of completion with the Bankruptcy Court. The cost of this course from Greenpath is also approximately $45.

iv. The Bankruptcy Court may grant a waiver based on the Debtor’s sworn statement that they were unable to obtain the counseling services within five days of making the request and had to file immediately, but the waiver expires 30 days after the petition is filed.

v. The briefing is not required if the Bankruptcy Court determines that the Debtor is mentally incapacitated, physically disabled, or is an active member of the military in a combat zone.


F. What are the negatives of filing for Chapter 7 bankruptcy?

i. The filing stays on a person’s credit report for seven to ten years
ii. A debtor may only file for Chapter 7 bankruptcy every eight years (however, if a debtor files for Chapter 7, receives a discharge, and then gets into further financial trouble, they can file under Chapter 11 or 13 of the Bankruptcy Code).

VII. Chapter 13

A. What are the pros and cons?

i. Cons
a. The debtor is placed on an austerity budget and must pay their disposable income to the Chapter 13 Trustee on a monthly basis.
b. If the debtor is over the “median income,” then they must prepare a five year, 60 month plan. The shortest plans are generally three years.
c. The filing fee is $279 (which is $20 less then the filing fee for a Chapter 7 filing).
d. However, legal fees are greater than those for a Chapter 7 filing, since there are fees for preparing the plan, the hearing on plan confirmation, and the plan must be served on creditors and must be confirmable.
e. In the Southern District of New York, historically only 30% of Chapter 13 plans pay out over time.
f. Pursuant to §1322 of the Bankruptcy Code, first mortgages cannot be modified in Chapter 13. However, second mortgages can be modified and mortgages on investment properties and vacation homes can be modified.
g. The Chapter 13 Trustee receives a commission of 10% of the monies paid into a Chapter 13 plan.
h. With the increased New York State homestead exemption of $150,000 (for debtors residing in the New York metropolitan area), Chapter 7 can accomplish much of what can be accomplished with a Chapter 13 filing at a lesser cost to the Debtor.

ii. Pros
a. Chapter 13 allows the debtor to retain property that he or she would otherwise lose in a Chapter 7 liquidation (e.g. a car or a house with substantial equity)
b. A Chapter 13 debtor remains under bankruptcy court protection for the duration of the repayment plan (3-5 years)
c. Tax refunds are property of the bankruptcy estate and those monies must be transferred by the Debtor to the Chapter 13 Trustee

VIII. New York State Bankruptcy Exemptions

A. The most sweeping change in decades on what real and personal property is exempt from a debtor’s bankruptcy estate (the debtor’s property that can be distributed to creditors) in New York State took place last month. New York State Senate bill S.7034A and Assembly bill A. 8735A were signed into law by Governor Paterson on December 23, 2010. The new law became effective on January 22, 2011.

B. The scope of the bill is very broad, but a few of the major changes are:
i. The homestead exemption has increased from $50,000 to: $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; and $75,000 for the remaining counties in the state.
ii. The motor vehicle exemption has increased from $2,400 to $4,000. If the vehicle is equipped for a disabled person, the exemption is $10,000.
iii. The aggregate (combined) individual bankruptcy exemption for certain annuities and personal property under New York Debtor and Creditor Law § 5205(a) has increased from $5,000 to $10,000.
iv. The exemption for tools of trade (including professional instruments and library) has increased from $600 to $3,000.
v. The New York Banking Department will publish cost of living adjustments to exemption amounts every three years commencing April 1, 2012.
vi. Debtors are now able to choose whether to use the New York exemptions or the federal exemptions. This will be especially useful for Debtors who do not own a home, since the “wildcard” exemption in § 522(d)(5) of the Bankruptcy Code allows Debtors to exempt a significant amount of cash-$1,150 plus up to $10,825 of any unused amount of the homestead exemption.





C. A debtor may also exempt:
i. An unlimited amount of rental or utility security deposits.
ii. 120 days of food.
iii. $7,500 of monies recovered for a personal injury.
iv. A qualified IRA up to $1,000,000.

A married couple filing jointly for bankruptcy can double the amount of the monetary exemptions listed above.

The full text of the new law can be found at:
http://www.nyeb.uscourts.gov/announcements/ExemptionsSummaryLaw.pdf

IX. Real Estate/Family Home and Personal Bankruptcy

Chapter 7 bankruptcy can be very effective for individuals with real estate in which they live that is “underwater” (where the fair market value of the property is less than the value of the mortgages to which the property is subject)

A. When we talk about real estate, we’re talking about houses, townhouses, co-ops and condos. In order to qualify for the homestead exemption, a debtor must reside in the property at the time the bankruptcy is filed.

As I mentioned earlier, last month New York State increased the homestead exemption to $75,000, $125,000 and $150,000 per Debtor (varying exemptions for different regions of the state), so a married couple under New York law can exempt $150,000, $250,000 or $300,000 of equity in a residence. Let’s look at a few examples of how residential real estate issues play out in a Chapter 7 bankruptcy filing.

Real Estate Scenarios:

For example, let’s take a look at a married couple considering filing for bankruptcy and the value of their property and mortgage(s) on their property.

FMV $600,000
Mortgage ($500,000)
Equity $100,000

In this scenario, the couple could file for Chapter 7 bankruptcy, discharge their unsecured debts, and keep their house, provided that they continue to make mortgage payments.







FMV $700,000
Mortgage ($500,000)
Equity $200,000
NYS Homestead Exemption ($150,000)
Non-Exempt Equity $50,000

In this scenario in a Chapter 7 bankruptcy, the Chapter 7 Trustee would sell the house and receive $50,000 for the equity above the homestead exemption (less costs and expenses), and that money would be used to pay the couple’s creditors. The Trustee would pay $150,000 to the Debtors at the end of their case as a result of their homestead exemption. Alternatively, the debtors could repurchase the house from the Trustee by buying the equity from the Trustee (redemption).

FMV $400,000
Mortgage ($500,000)
Negative Equity ($100,000)

In this scenario, the house has a negative equity of $100,000 and is “underwater” and would not be sold by the Chapter 7 Trustee. However, in order to keep the house, the debtor must reaffirm the debt to the mortgagee before the case is discharged and continue to make the payments on the mortgage, notwithstanding the fact that the value of the house is less than the amount of the mortgage.
Reaffirmation is governed by section 524(c) of the Bankruptcy Code, and requires that the debtor file an agreement with the court stating that he or she agrees to be legally bound to repay the otherwise dischargeable debt. The reaffirmation agreement must be filed 60 days after the meeting of creditors. The debtor’s attorney must file an affidavit stating that such an agreement will not be a hardship for the debtor. In the case of a pro se debtor, the bankruptcy judge will interview the debtor to ensure the agreement is voluntary and that it does not present a hardship for the debtor. In any event, the debtor may rescind the agreement up to 60 days after the agreement is filed with the court, or the case is discharged, whichever is later.

Here’s a question for all of you-Under these circumstances why would the couple want to retain the house?

Wouldn’t they be better off economically to file for Chapter 7 bankruptcy and let the bank make a motion for relief from the automatic stay so they can foreclose and obtain title to the house? This a personal decision for the debtors would have to make, which may include non-economic considerations that would lead them to want to keep a house that is $100,000 “underwater.”

Scenario: One spouse files for bankruptcy, the other spouse does not and the house has equity.

In a Chapter 7 bankruptcy, the Trustee may be able to sell the house. However, under New York State law due to “tenancy-by-the-entirety” protection, the house cannot be sold. The creditor can docket a judgment against the property, which is good for 20 years, and the home cannot be sold or refinanced.

Under this scenario, NYS law may provide more protection to the non-filing spouse than bankruptcy law. See §§ 363(h), (i), and (j) of the Bankruptcy Code when dealing with a scenario where one spouse files for bankruptcy, the other spouse does not and the house has equity.

Note that if the home is transferred from one spouse to the other, this a fraudulent conveyance.

Planning opportunity: If the couple divorces, the house may be transferred from one spouse to the other for no consideration, pursuant to New York State equitable distribution law.

In Chapter 7 bankruptcy, the factors to be considered as to whether the Chapter 7 bankruptcy trustee can sell the house are: (i) the equity in the property; (ii) the respective ages of the debtor and the spouse; and (iii) the burden to the non-filing spouse of having to leave the house (i.e. the impact on minor children).


Section 363(h) of the Bankruptcy Code deals with the conditions which must be met for a Trustee to sell a co-owner’s interest in property (whether owned as tenants in common, joint tenants or tenants by the entirety), which include:

1. Partition of the property between the bankruptcy estate and the co-owners is impracticable;

2. Sale of the bankruptcy estate’s undivided interest in the property would realize significantly less for the estate than the sale of the property free of the interests of the co-owners;

3. The benefit to the bankruptcy estate of a sale of the property free of the interests of the co-owners outweighs the detriment, if any, to the co-owners.

In Community Natl. Bank and Trust Co. of New York v. Persky (In re Persky), 893 F.2d 15 (2d. Cir. 1989), the Second Circuit Court of Appeals reviewed a bankruptcy filing in which only one of the co-owners was indebted to the bank and filed for bankruptcy relief. The Court found that:

• The Bankruptcy Court had the power to review the Trustee’s discretion to sell the property.
• The benefit to the bankruptcy estate should be analyzed from the standpoint of the sale of the nondebtor spouse’s entire interest in the property, including their possessory and survivorship interests, in determining whether the property should be sold.
• Noneconomic factors should be considered when analyzing the detriment to the nondebtor spouse of a sale of the property.

Section 363(i) of the Bankruptcy Code provides that in a Chapter 7 bankruptcy, if the property is to be sold, the debtor’s spouse may purchase the estate’s share of the property.

Pursuant to §363(j) of the Bankruptcy Code, the Chapter 7 Trustee must distribute to the debtor’s spouse the proceeds of the sale (less costs and expenses), but not including any compensation of the Trustee, in accordance with the ownership interests of the non-filing spouse and the bankruptcy estate.

Pursuant to § 363(k) of the Bankruptcy Code, the mortgagee may also bid on the house and, if they’re successful, they may offset their secured claim against the purchase price of the house.


Mortgage Arrears and Chapter 7 Bankruptcy

The above scenarios assume that the debtors are current on their mortgage. If the debtors were not current, then the mortgage arrears would need to be cured in order to keep the house during Chapter 7 bankruptcy.

A. How does a debtor deal with mortgage arrears?

i. Negotiate with the lender prior to the bankruptcy filing.
ii. Negotiate with the lender after the bankruptcy filing for payment plan for the arrears. Pursuant to Bankruptcy Code § 524, a debtor must reaffirm within 60 days from the date of the first scheduled meeting of creditors. Once the reaffirmation is executed, unless the agreement is rescinded, the debtor is liable; if they default on the mortgage in the future after reaffirmation, the mortgage debt is not dischargeable.
iii. Loss mitigation in the Southern District of New York (see Section IX below)
iv. Conversion of a Chapter 7 case to a Chapter 13 case, pursuant to Bankruptcy Code § 706.
v. Abandon the house to the mortgagee pursuant to the Chapter 7 filing, if you can’t work out a payment plan with the lender.


X. The Southern District of New York’s Loss-Mitigation Program

A. In response to a growing number of mortgage defaults and foreclosures, the U.S. Bankruptcy Court for the Southern District of New York (NYSB) adopted Loss Mitigation Program Procedures in January 2009, which were revised in December 2010. A full description of the program is at: http://www.nysb.uscourts.gov/pdf/lossmit/RevisedLossMitigationProcedures.pdf

B. “Loss mitigation” includes the full range of solutions that can prevent either the loss of a Debtor’s property to foreclosure, increased costs to the lender, or both. Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction of the mortgage.

C. Use of the NYSB Loss Mitigation Program Procedures requires that: (1) the individual must reside in the Southern District of New York (which includes the counties of New York, Bronx, Westchester, Rockland, Putnam, Orange, Dutchess, and Sullivan) and (2) loss mitigation can only be requested for an individual’s primary residence. Loss Mitigation is available for cases assigned to select judges in the U.S. Bankruptcy Court for the Eastern District of New York (which includes the counties of Kings, Queens, Richmond, Nassau and Suffolk).

D. Parties are encouraged to request loss mitigation as early in the case as possible, but loss mitigation may be initiated at any time.

Conclusion:
• Fortunately, in this environment where many people have lost their jobs, have too much debt or own real estate that has depreciated in value have options-generally an “out of court” workout or a bankruptcy filing.
• Pre-bankruptcy planning is often times necessary and clients should consult with their CPA and an experienced bankruptcy attorney as soon as possible.

Jim Shenwick

Visit the Shenwick & Associates website: jshenwick.googlepages.com, which has detailed information regarding personal bankruptcy.

Please call or e-mail Jim Shenwick with any questions at (212) 541-6224 or jshenwick@gmail.com

Jim Shenwick to speak on "Personal Bankruptcy: The Basics and Discharging Taxes in Bankruptcy" on 2/7

Jim Shenwick will be speaking on "Personal Bankruptcy: The Basics and Discharging Taxes in Bankruptcy" to the New York State Society of CPA's Small Firms Practice Committee on Monday, February 7th. The meeting is from 8:45 - 10:00 am at 3 Park Ave., 18th Floor(the receptionist will have the room assignment). For further information or registration, please call (212) 719-8300.

NYT: For Vallejo, Bankruptcy Isn't Exactly a Fresh Start

By JONATHAN WEBER

Vallejo, which delivered a wake-up call to municipalities around the country when it filed for bankruptcy protection in 2008, outlined in court papers last week how it plans to get back on its feet, financially speaking. For residents, the plan makes for grim reading. And if you’re a public official or taxpayer who’s hoping that bankruptcy might be a way to solve your city’s financial problems, it will surely prompt you to think twice.

People think of bankruptcy as a way to wipe the slate clean of old obligations, but that’s only half true. Yes, it’s sometimes possible for businesses, individuals and governments to eliminate some — even most — debts through bankruptcy. But as Vallejo’s case underscores, the real point of bankruptcy isn’t to let a debtor walk away but rather to force a negotiation between debtors and creditors.

Those negotiations, and the litigation that often goes with them, are now mostly concluded in the Vallejo case, and the city hopes that the formal restructuring plan it just submitted will let it emerge from bankruptcy by summer.

Municipal bankruptcy — and, as The New York Times reported on Friday, a Republican-led effort in Washington to allow states to file some kind of bankruptcy — is increasingly on politicians’ radar as a way to break what are perceived as sweetheart contracts with public employee unions and cancel sometimes-lavish pension deals.

But Chapter 9 of the bankruptcy code, which covers municipal bankruptcy, is rarely used, and it’s not entirely clear what it does and doesn’t allow. (Many states don’t even allow municipalities to file.)

In Vallejo, the four unions representing city employees claimed that California law protected their contracts, but the bankruptcy court ultimately ruled that the city could cancel its collective bargaining agreements. That, in turn, forced the unions to agree to deals that they would not have accepted otherwise.

The city has cut retiree health benefits from $1,500 to $300 a month and stopped making payouts on accrued leave time.

But pension plans for retirees and current city employees, including one that allows police officers to retire at 50 with as much as 90 percent of their pay, remain untouched. The city chose not to test whether messing with pensions would be allowed even in bankruptcy, and so remains on the hook for some $195 million in unfinanced pension liabilities.

Meanwhile, much of the savings in the renegotiated union contracts come from severe work-force reductions: the police department is down to 90 sworn officers from 155 in 2003, and the fire department was slashed from 122 people and 8 firehouses to 70 people and 5 firehouses.

When voters complain about bloated government payrolls, I’d wager that taking an ax to the police and fire departments is not the solution they have in mind.

Now consider the $225 million in debt currently on Vallejo’s books. The bulk is owed by special districts, mainly the water authority, and is unaffected by the bankruptcy case. Only about $50 million in city obligations, mainly lease payments on buildings, will actually be restructured, with a net “present value” savings of around 40 percent.

Meanwhile, even a cursory look at the city’s finances makes it clear that a huge part of the problem has nothing to do with payrolls or pensions or bond debt. Rather, it has to do with revenue: city tax collections plummeted from $83 million in 2007-08 to $65 million in the most recent fiscal year, a result of the recession and the housing bust. Housing values have fallen an astonishing 67 percent.

So Vallejo stumbles forward: with minimal public safety services, a skeleton crew for road repairs, deferred maintenance on everything, and no money for “extras” like parks, libraries and senior centers. That will change only when — if? — revenues begin to climb.

Assuming the bankruptcy plan is approved, the city will have saved some money and shed some long-term obligations. But when you consider the $8 million and counting in legal fees, three years of angry litigation and uncertainty, the millions that contractors, city employees and retirees will lose (they stand to collect only 5 to 20 cents on the dollar for their claims), and the hit to the city’s reputation that will likely impair business growth (and tax collections) for years, it hardly looks like a victory.

Thinking about bankruptcy as a solution to your city’s financial troubles? There has to be a better way.

Jonathan Weber is the editor in chief of The Bay Citizen.
jweber@baycitizen.org

Copyright 2011 The New York Times Company. All rights reserved.

NYT: State Bankruptcy Option Is Sought, Quietly

By MARY WILLIAMS WALSH

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.

Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”

Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.

“States have adequate tools and means to meet their obligations,” the report stated.

No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.

Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.

Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed. That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.

But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.

“The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.

Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.

He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.

“Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”

Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.

“We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.

A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard. It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.

“I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.

Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.

Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.

The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.

Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.

“I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”

Copyright 2011 The New York Times Company. All rights reserved.

NYT: Court Rules on Debtors and Doctors in Training

By ADAM LIPTAK

WASHINGTON — Medical residents must pay Social Security taxes, the Supreme Court ruled on Tuesday.

In a second decision, this one featuring the first opinion from Justice Elena Kagan, the court ruled that some bankrupt debtors who own their cars outright are not entitled to shield a standard monthly amount for the “ownership costs” of their vehicles.

The case concerning medical residents considered a federal law that exempts students from paying Social Security taxes. Allowing residents to take the exemption would cost the federal government $700 million a year, the Justice Department said.

In announcing the decision, Chief Justice John G. Roberts Jr. said the question it presented boiled down to whether residents were “workers who study or students who work.”

Residents often work 50 to 80 hours a week, the chief justice wrote. They can make $50,000, and they often receive health insurance and paid vacations. But they work under the supervision of more senior doctors who also instruct them, and they attend lectures and take exams.

Chief Justice Roberts, writing for a unanimous eight-member court, said the law itself did not clearly answer whether residents were mainly workers or students. But he said a 2004 Treasury Department regulation had drawn a reasonable line.

The regulation says that students who would otherwise qualify for the exemption lose it if they work more than 40 hours per week, even if they learn from what they do.

“Regulation, like legislation, often requires drawing lines,” the chief justice wrote. “Focusing on the hours an individual works and the hours he spends in studies is a perfectly sensible way,” he went on, of drawing the line between students and workers.

Justice Kagan recused herself from the case, Mayo Foundation v. United States, No. 09-837, because she had worked on it as United States solicitor general.

But she wrote the majority opinion in the day’s second decision, Ransom v. FIA Card Services, No. 09-907, and she announced it from the bench in a crisp and conversational style.

The dispute in that case also concerned the meaning of a federal law, this one allowing some debtors a standard monthly allowance for car-ownership costs.

Jason M. Ransom, a Nevada man, claimed the applicable $471 allowance for a 2004 Toyota he owned outright. A credit card company seeking repayment objected, saying that only people making loan or lease payments should qualify for the deduction.

Over the course of his five-year repayment plan, the deduction would have allowed Mr. Ransom to shield $28,000 from creditors.

Justice Kagan, writing for the eight-justice majority, said “a debtor who does not make loan or lease payments may not take the car-ownership deduction.”

She acknowledged that the ruling could give rise to occasional curious outcomes. For instance, a debtor with only a single loan payment remaining would be entitled to the entire deduction.

“But this kind of oddity,” she wrote, “is the inevitable result of a standardized formula.”

She added that allowing Mr. Ransom to take advantage of the deduction could produce even odder results. “On Ransom’s view, for example, a debtor entering bankruptcy might purchase for a song a junkyard car” to take advantage of the deduction, Justice Kagan wrote.

Justice Antonin Scalia dissented, saying his colleagues had misread the law and misunderstood their own roles. “The point of the statutory language is to entitle debtors who own cars to an ownership deduction,” he wrote.

He was scornful of the majority’s effort to avoid odd practical results. “Our job, it seems to me, is not to eliminate or reduce those oddities,” he wrote, “but to give the formula Congress adopted its fairest meaning.”

And he countered what he called the “imagined horrible” of a wreck bought just to take advantage of the ownership deduction with one of his own.

“A debtor entering bankruptcy might purchase a junkyard car for a song plus a $10 promissory note payable over several years,” Justice Scalia wrote. “He would get the full ownership expense deduction.”

Copyright 2011 The New York Times Company. All rights reserved.