I. Introduction
Why do people file for bankruptcy
today?
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Credit card debts
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Business reversals and job loss
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Falling real estate values
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High housing costs
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Student loans
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Divorce
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Medical bills and illness
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Guaranties of debt
II. Economic Conditions that are driving
Personal Bankruptcy Filing
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4.9%
unemployment rate
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The
effective unemployment rate is 9.7%
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The
unemployment rate for recent college graduates is 7.2%
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$935.3
billion of revolving (credit card) debt as of January 2016
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The
foreclosure rate is 1.2%
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11.5% of
homes are “underwater.”
●
Student
loans total approximately $1.4 trillion
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:
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Save the legal fees in filing a bankruptcy
petition and the Bankruptcy Court filing fees (usual minor in comparison to the
amount of debt a debtor has).
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A workout may be a less “negative factor” on
your credit report than filing for bankruptcy (“FICO Score”). However chapter
13 (partial payment of debts) is better on a credit report than chapter 7
(discharge of debts)
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Psychological relief in not filing for
bankruptcy and “embarrassment or failure factor.”
Cons:
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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)
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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?
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Credit card debt
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Personal, business, automobile and real estate
loans
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Lines of credit
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Medical bills
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Utility bills
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Personal and “good guy” guaranties-“good guy”
guaranties are guaranties created for the leasing of commercial space.
●
Chapter 7 bankruptcy will have the most negative
impact on credit reports and will lower FICO score (however after receiving a
chapter 7 discharge a debtor will be
able to rehabilitate their credit and obtain credit
●
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).
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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.
●
Over 819,000 individuals and corporations filed
for bankruptcy in 2015.
The Mechanics of a Chapter 7 Bankruptcy Filing
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Hire an attorney, provide data to attorney,
bankruptcy petition is prepared, reviewed by client, filed with the Bankruptcy
Court and Debtor attends one § 341 meeting with attorney and Bankruptcy Trustee
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The filing fee for a Chapter 7 bankruptcy is
$335.
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.
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Generally used by a person who owns assets that
would be liquidated in a chapter 7 bankruptcy such as a house with alot of
equity, a business or some other type of valuable asset
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Under BAPCPA, individuals must file for Chapter
13 bankruptcy if they earn too much and fail the means test.
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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:
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A lot of home equity
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Expensive cars
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A valuable lease
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A business they want to keep
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If a debtor’s income is greater than the median
income for their state and household size, they will have to file a five year
plan (rather than a three year plan).
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If a
debtor has too much debt under § 109(g) of the Bankruptcy Code (as of April 1,
2016, noncontingent, liquidated, unsecured debts of more than $394,725 and
noncontingent, liquidated, secured debts of more than $1,184,200), they do not
qualify for Chapter 13.
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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
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Hire an attorney, provide data to attorney,
bankruptcy petition and Plan is prepared, reviewed by client and filed with the
Bankruptcy Court, Debtor attends one § 341 meeting with attorney and Chapter 13
Bankruptcy Trustee and attends hearing on Plan confirmation before the
Bankruptcy Judge.
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The filing fee for a Chapter 13 bankruptcy is
$310.
C. Chapter 11- Reorganization (for wealthy
individuals or a corporation) or liquidation.
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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.
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An individual Chapter 11 is modeled on a chapter
13 bankruptcy but allows more
flexibility to the Debtor
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The filing fee for Chapter 11 is $1,717 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
April 1, 2016)
|
|
1
|
$49,086
|
|
2
|
$62,451
|
|
3
|
$72,074
|
|
4
|
$88,747
|
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Add $8,400 for each individual in excess of
four.
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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.
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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. Student Loans
A.
Student loans, both public and private student loans
are non-dischargeable under Bankruptcy Code section 523(a)(8) unless the debtor
can qualify for a “hardship discharge”
B.
The seminal case in the county on hardship discharge is
Brunner v. New York State Higher Education Services Corp., a 2nd Circuit
Court of Appeals case which held that in order to qualify for a hardship
discharge a debtor must show 1. that they made a good faith effort to repay
their student loans (they made some payments before the hardship arose), 2. the
hardship will continue during the term of the loan (10 to 15 years) and 3. As a
result of the hardship they will not be able to repay the loan and maintain a
“minimal” standard of living
C.
This is a difficult standard for debtors. They
generally must have a severe physical or mental disability, they will need to
hire an expert (doctor or psychologist who will testify at trial) and they will
need to commence an adversary proceeding (bankruptcy litigation) at a cost in
legal fees and expert witness fees in excess of $10,000.
D.
As of late many judges, law professors and lawyers have
criticized Brunner, but it is still the law
E.
There have been proposals to allow student loan
defaults to be addressed in chapter 13 bankruptcy filings.
