Last month, the Wall Street Journal published an article titled "Burned by Real Estate, Some Just Walk Away" on the rise in foreclosures that accompanied the collapse of the subprime mortgage market.
The article was informative and mostly correct, but got a few facts about real estate and personal bankruptcy wrong. Here’s our letter to the editor in response to the article:
To the Editor:
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
For more information on foreclosures and the relief bankruptcy protection can offer, contact Shenwick & Associates. Happy holidays!
Monday, November 26, 2007
Friday, October 19, 2007
Letter to the editor Wall Street Journal
To the Editor:
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
Friday, September 21, 2007
Educational expenses and bankruptcy
This month is a month of transition for us and many of our clients-vacations are over, the seasons are changing and many of us have children who are going (albeit reluctantly) back to school. This month we’re going to look at educational expenses and bankruptcy.
Before 1976, debtors could discharge their student loans and other educational debt in bankruptcy. In 1976, Congress amended the Higher Education Act (“HEA”) to make federally insured and guaranteed student loans nondischargeable if the debt had first become due less than five years prior to the bankruptcy filing and its repayment would not impose an undue hardship on the debtor and his or her dependents. Despite efforts to repeal this provision of the HEA and make educational debt dischargeable again, Congress retained the conditional dischargeability of educational debt when it enacted the Bankruptcy Code in 1978. Since then, Congress has further limited the dischargeability of educational debt by both broadening the class of creditor that can take advantage of the exception to discharge and tightening the conditions under which educational debt may be discharged.
Unfortunately for both debtors and courts interpreting the Bankruptcy Code, the section concerning educational debt merely says:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt - unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for - an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
As the Bankruptcy Court for the Western District of Texas said in 2001, “the statute Congress crafted in gives the Courts absolutely no guidance as to what would constitute ‘undue hardship’ other than a Webster’s dictionary.” Consequently, bankruptcy judges have had a difficult time determining what debtors should be granted or denied discharge of educational debts. The courts have devised several tests for undue hardship, but the most frequently used test was articulated by the Second Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp. The Brunner test for undue hardship requires a three-part showing:
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Failure to by the debtor to prove any of these factors can result in denial of discharge of the educational debt.
For more information about how educational expenses and debts can impact a bankruptcy filing, please contact Shenwick & Associates.
Before 1976, debtors could discharge their student loans and other educational debt in bankruptcy. In 1976, Congress amended the Higher Education Act (“HEA”) to make federally insured and guaranteed student loans nondischargeable if the debt had first become due less than five years prior to the bankruptcy filing and its repayment would not impose an undue hardship on the debtor and his or her dependents. Despite efforts to repeal this provision of the HEA and make educational debt dischargeable again, Congress retained the conditional dischargeability of educational debt when it enacted the Bankruptcy Code in 1978. Since then, Congress has further limited the dischargeability of educational debt by both broadening the class of creditor that can take advantage of the exception to discharge and tightening the conditions under which educational debt may be discharged.
Unfortunately for both debtors and courts interpreting the Bankruptcy Code, the section concerning educational debt merely says:
“A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt - unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for - an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”
As the Bankruptcy Court for the Western District of Texas said in 2001, “the statute Congress crafted in gives the Courts absolutely no guidance as to what would constitute ‘undue hardship’ other than a Webster’s dictionary.” Consequently, bankruptcy judges have had a difficult time determining what debtors should be granted or denied discharge of educational debts. The courts have devised several tests for undue hardship, but the most frequently used test was articulated by the Second Circuit Court of Appeals in Brunner v. New York State Higher Education Services Corp. The Brunner test for undue hardship requires a three-part showing:
(1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.
Failure to by the debtor to prove any of these factors can result in denial of discharge of the educational debt.
For more information about how educational expenses and debts can impact a bankruptcy filing, please contact Shenwick & Associates.
Tuesday, August 07, 2007
Chapter 13 changes under BAPCPA
As many of our clients may know, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) modified, but did not eliminate the process of filing for Chapter 13 bankruptcy. Chapter 13 bankruptcy is generally filed to protect assets such as a house, a car or a below-market lease.
With the fall in real estate values and increase in interest rates on variable rate mortgages, we have been receiving more calls from clients whose houses are either close to foreclosure or have been foreclosed on.
Here are a few of the changes BAPCPA made to filing for Chapter 13 bankruptcy:
1. If the Debtor’s income is above the median income ($42,896 for one earner, $51,994 for two people, $62,815 for three people, $74,501 for four people and $6,900 for each individual in excess of four), the Debtor may be required to file a Chapter 13 repayment plan where the Debtor repays a percentage of his or her debts over a period not to exceed five years, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where the debts are eliminated (discharged), unless the Bankruptcy Court rules that the Debtor’s circumstances are extraordinary.
2. If the Debtor is required to file a Chapter 13 case under the Median Income or Means Test, then the Debtor’s monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment.
3. If a Chapter 13 Debtor’s current monthly income combined with their spouse’s current monthly income is greater than the applicable median income, the plan proposed by the Debtor must not exceed five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses.
4. All returns “required” for the 4 years ending on the petition date must have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.
5. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee.
6. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13.
7. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case.
8. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property.
9. The Chapter 13 “super-discharge” that was obtainable under the Bankruptcy Reform Act of 1978 is greatly reduced under BAPCPA. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a)(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
For more information about filing for Chapter 13 bankruptcy, please contact Shenwick & Associates.
With the fall in real estate values and increase in interest rates on variable rate mortgages, we have been receiving more calls from clients whose houses are either close to foreclosure or have been foreclosed on.
Here are a few of the changes BAPCPA made to filing for Chapter 13 bankruptcy:
1. If the Debtor’s income is above the median income ($42,896 for one earner, $51,994 for two people, $62,815 for three people, $74,501 for four people and $6,900 for each individual in excess of four), the Debtor may be required to file a Chapter 13 repayment plan where the Debtor repays a percentage of his or her debts over a period not to exceed five years, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where the debts are eliminated (discharged), unless the Bankruptcy Court rules that the Debtor’s circumstances are extraordinary.
2. If the Debtor is required to file a Chapter 13 case under the Median Income or Means Test, then the Debtor’s monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment.
3. If a Chapter 13 Debtor’s current monthly income combined with their spouse’s current monthly income is greater than the applicable median income, the plan proposed by the Debtor must not exceed five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses.
4. All returns “required” for the 4 years ending on the petition date must have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.
5. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee.
6. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13.
7. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case.
8. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property.
9. The Chapter 13 “super-discharge” that was obtainable under the Bankruptcy Reform Act of 1978 is greatly reduced under BAPCPA. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a)(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
For more information about filing for Chapter 13 bankruptcy, please contact Shenwick & Associates.
Wednesday, June 20, 2007
Reclamation Claims and Defenses Aginst Claims of Preferential Transfers
We get a lot of questions about changes to the Bankruptcy Code under BAPCPA (which became effective on October 17, 2005). Based on inquiries we have received and an expected increase in Chapter 11 bankruptcy filings, here are updates on two issues: reclamation claims and defenses against claims of preferential transfers.
1. Reclamation Claims. Reclamation is a seller’s limited right to retrieve goods delivered to a buyer when the buyer is insolvent under the Uniform Commercial Code. Under Sections 546(c)(1)(A) and (b) of the Bankruptcy Code, the reclamation deadlines are now (1) not later than 45 days after the date of receipt of such goods by the debtor, or (2) not later than 20 days of the commencement of the case, if the 45-day period expires after the commencement of the case. Under the Bankruptcy Reform Act of 1978, the deadlines were before 10 days after receipt of such goods by the debtor, or before 20 days after receipt of such goods if the 10-day period expired after the commencement of the case.
2. Defenses against Claims of Preferential Transfers. A preferential transfer is a pre-bankruptcy transfer made by an insolvent debtor to or for the benefit of a creditor, thereby allowing the creditor to receive more than its proportionate share of the debtor's assets; specifically, an insolvent debtor's transfer of a property interest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate.
Section 547(c)(2) of the Bankruptcy Code, which provides a defense to claims of preferential transfers based on the ordinary course of business of the debtor or ordinary business terms of transaction, now states: "to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was-(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms." The previous standard under the Bankruptcy Reform Act of 1978 required that both (A) and (B) apply, but under BAPCPA, either clause may be raised as a defense, making it much easier for a creditor to defend against the claim of a preferential transfer.
Another defense new to BAPCPA is that in a case filed by a debtor whose debts are not primarily consumer debts (i.e. primarily business debts), the debtor can only pursue alleged preferential payments that exceed $5,000.
If you have questions about reclamation claims or preferential transfers, please contact Jim Shenwick.
1. Reclamation Claims. Reclamation is a seller’s limited right to retrieve goods delivered to a buyer when the buyer is insolvent under the Uniform Commercial Code. Under Sections 546(c)(1)(A) and (b) of the Bankruptcy Code, the reclamation deadlines are now (1) not later than 45 days after the date of receipt of such goods by the debtor, or (2) not later than 20 days of the commencement of the case, if the 45-day period expires after the commencement of the case. Under the Bankruptcy Reform Act of 1978, the deadlines were before 10 days after receipt of such goods by the debtor, or before 20 days after receipt of such goods if the 10-day period expired after the commencement of the case.
2. Defenses against Claims of Preferential Transfers. A preferential transfer is a pre-bankruptcy transfer made by an insolvent debtor to or for the benefit of a creditor, thereby allowing the creditor to receive more than its proportionate share of the debtor's assets; specifically, an insolvent debtor's transfer of a property interest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate.
Section 547(c)(2) of the Bankruptcy Code, which provides a defense to claims of preferential transfers based on the ordinary course of business of the debtor or ordinary business terms of transaction, now states: "to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was-(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms." The previous standard under the Bankruptcy Reform Act of 1978 required that both (A) and (B) apply, but under BAPCPA, either clause may be raised as a defense, making it much easier for a creditor to defend against the claim of a preferential transfer.
Another defense new to BAPCPA is that in a case filed by a debtor whose debts are not primarily consumer debts (i.e. primarily business debts), the debtor can only pursue alleged preferential payments that exceed $5,000.
If you have questions about reclamation claims or preferential transfers, please contact Jim Shenwick.
Monday, May 14, 2007
Funding a Chapter 13 plan
One of the many changes that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 was in the calculation of how a debtor funds a plan under Chapter 13 of the Bankruptcy Code. Section 1325(b)(2) and (3) define the disposable income which must be paid to unsecured creditors as current monthly income less amounts necessary for:
- the maintenance or support of the debtor or a dependent of the debtor, and
- a domestic support obligation that first becomes payable after the date the petition is filed, and
- charitable contributions of up to 15 percent of gross income, and
- payment of expenditures necessary for the continuation, preservation and operation of a business.
These subsections also require these amounts to be determined in accordance with the Means Test of Section 707(b)(2) if the debtor's income exceeds the median income in the state. For cases filed after February 1, 2007, the median income in New York State for one earner is $42,869, for two people is $51,994, for three people is $62,815 and for four people is $74,501. For cases filed on April 1, 2007 or after, $6,900 is added for each individual in excess of four.
Pre-BAPCPA, this amount was determined by the difference between Schedules I (current income of individual debtor(s)) and J (current expenditures of individual debtor(s)).
This new formula is clearly stated in a recent case from the U.S. Bankruptcy Court for the District of New Jersey, In re Brady, 2007 Bankr. LEXIS 501 (Bankr. D. N.J.). In that case, the Court overruled the objections to confirming the debtors' proposed plan and assertion that the debtors' plan should be based on Schedules I and J of the trustee and one of the unsecured creditors. The Court explicitly stated that the disposable income figure determined by Form B22C (the Means Test form) is then projected over the applicable commitment period, which is 60 months if the debtors have positive disposable income.
In another case from the United States Bankruptcy Court for the District of Oregon, In re Cummings, 17 C.B.N. 527 (Bankr. D. Ore. 2007), the Court ruled that Chapter 13 debtors may deduct the full amount of the IRS standard home and car ownership expenses regardless of the amount of their actual payments, thereby not penalizing "frugal debtors." Frugal debtors thus benefit from BAPCPA's treatment of housing and transportation allowances over the pre-BAPCPA reliance on judicial interpretation of the reasonableness of Schedules I and J. This represents one of the few positive changes that BAPCPA wrought on the bankruptcy landscape. Anyone with questions about filing for Chapter 13 bankruptcy should contact Jim Shenwick.
- the maintenance or support of the debtor or a dependent of the debtor, and
- a domestic support obligation that first becomes payable after the date the petition is filed, and
- charitable contributions of up to 15 percent of gross income, and
- payment of expenditures necessary for the continuation, preservation and operation of a business.
These subsections also require these amounts to be determined in accordance with the Means Test of Section 707(b)(2) if the debtor's income exceeds the median income in the state. For cases filed after February 1, 2007, the median income in New York State for one earner is $42,869, for two people is $51,994, for three people is $62,815 and for four people is $74,501. For cases filed on April 1, 2007 or after, $6,900 is added for each individual in excess of four.
Pre-BAPCPA, this amount was determined by the difference between Schedules I (current income of individual debtor(s)) and J (current expenditures of individual debtor(s)).
This new formula is clearly stated in a recent case from the U.S. Bankruptcy Court for the District of New Jersey, In re Brady, 2007 Bankr. LEXIS 501 (Bankr. D. N.J.). In that case, the Court overruled the objections to confirming the debtors' proposed plan and assertion that the debtors' plan should be based on Schedules I and J of the trustee and one of the unsecured creditors. The Court explicitly stated that the disposable income figure determined by Form B22C (the Means Test form) is then projected over the applicable commitment period, which is 60 months if the debtors have positive disposable income.
In another case from the United States Bankruptcy Court for the District of Oregon, In re Cummings, 17 C.B.N. 527 (Bankr. D. Ore. 2007), the Court ruled that Chapter 13 debtors may deduct the full amount of the IRS standard home and car ownership expenses regardless of the amount of their actual payments, thereby not penalizing "frugal debtors." Frugal debtors thus benefit from BAPCPA's treatment of housing and transportation allowances over the pre-BAPCPA reliance on judicial interpretation of the reasonableness of Schedules I and J. This represents one of the few positive changes that BAPCPA wrought on the bankruptcy landscape. Anyone with questions about filing for Chapter 13 bankruptcy should contact Jim Shenwick.
Wednesday, May 02, 2007
Jim Shenwick lecture at SUNY Optometry School on May 4th
Here's the outline:
I. What every Doctor should know before entering into an office lease.
1. The Parties to the Transaction (“the Team”)- The role of the Real Estate Broker/CPA/Lawyer/Insurance Agent/Architect
2. What is a Term Sheet?-Is it binding?
3. Term of Lease- How many years? Option to Renew, Option on Adjacent Space? Option to Purchase?
4. Use Clause- Broad use clause favors Tenant.
5. Rent- Base rent v. Additional Rent (Rent Estate Taxes, Porter Wages, Water Bill, HVAC) Free Rent, Commencement Date, Landlord Contribution to Buildout (?)
6. Assignment & Sublet – The most important clause in the lease?-What’s the Difference? An exit strategy for Tenant. Recapture of Space by Landlord, profit split with Landlord on assignment or sublet of space.
7. Alterations- Initial Build-out. Free rent period. Structural v. Non-Structural
Is Landlord consent needed? Pre-approval of alterations before lease is executed.
8. Security Deposit-Common Charge – How much? Who gets interest? Tenant Corporation? Personal guaranty, “Good Guy Guaranty” by principal of tenant.
9. Signage- How will your clients find your office? Sign on Building or Flag on Building. Door, Hallway, Elevator, Lobby- Who pays the cost?
10. Other Lease Provisions – Snow Removal, Garbage Disposal, Medical Waste Disposal? Insurance. How much?
QUESTIONS
II. What every Doctor should review in an existing lease before buying into a
practice.
1. “Due Diligence” check list- Lease should be abstracted to focus on key points:
2. Term- Enough time to amortize cost and develop practice?
3. Rent/Additional Rent Projections– Overhead that the practice must carry.
4. Use Clause – Lease allows for use you desire.
5. Sublet/Assignment – “Exit strategy” What is the difference? Procedure should be detailed in the Lease.
6. Alterations- Can you remodel space without the consent of the Landlord?
7. Background, Prior Experience, Net Worth, Balance Sheet.
8. Renewal Options- Generally favor the Tenant if they can be included in the lease.
III. Purchase of Real Estate.
1. For business use or personal use?
2. For business use professionals can mortgage (a) fee interest (such as a house or town house office and use for practice), co-op unit (maintenance) or a condominium unit (common charges). The cost is a set fee plus a percentage commission. No mortgage on building? There are fewer restrictions on the transfer of a condominium than on the transfer of a co-op unit.
3. For personal use choices are house, town house, co-op, or condominium.
4. Due diligence co-op-review of building financials, proprietary lease (in a co-op), board minutes, offering plan and amendments, house rules, building amenities, budget-are there any projected major repairs, pending litigation, asbestos issues, increase in maintenance/common charges, What percentage of financing allowed?
5. Closing Costs: Title insurance for fee, condominium or house purchase, transfer tax or flip tax for co-op, NYS and NYC Transfer Taxes, Mansion Tax?
QUESTIONS
IV. Dischargeability of Student Loans
BAPCPA-Department of Education-Lobby(?)-Hardship
§ 523. Exceptions to discharge (a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—(8) unless excepting such debt from discharge under this paragraph would impose an “undue hardship” on the debtor and the debtor’s dependents, for—(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
Case Law: Brunner v. New York State Higher Ed. Servs., 831 F.2d 395 (2nd Circuit Court of Appeals 1987)
• Inability to maintain a minimal standard of living for most of the repayment period
• These hardship circumstances will persist for a significant portion of the repayment period
• The debtor made a good faith effort to repay the loan
Congratulations on completing the program and best of luck in your career.
If you have any questions, please contact me.
I. What every Doctor should know before entering into an office lease.
1. The Parties to the Transaction (“the Team”)- The role of the Real Estate Broker/CPA/Lawyer/Insurance Agent/Architect
2. What is a Term Sheet?-Is it binding?
3. Term of Lease- How many years? Option to Renew, Option on Adjacent Space? Option to Purchase?
4. Use Clause- Broad use clause favors Tenant.
5. Rent- Base rent v. Additional Rent (Rent Estate Taxes, Porter Wages, Water Bill, HVAC) Free Rent, Commencement Date, Landlord Contribution to Buildout (?)
6. Assignment & Sublet – The most important clause in the lease?-What’s the Difference? An exit strategy for Tenant. Recapture of Space by Landlord, profit split with Landlord on assignment or sublet of space.
7. Alterations- Initial Build-out. Free rent period. Structural v. Non-Structural
Is Landlord consent needed? Pre-approval of alterations before lease is executed.
8. Security Deposit-Common Charge – How much? Who gets interest? Tenant Corporation? Personal guaranty, “Good Guy Guaranty” by principal of tenant.
9. Signage- How will your clients find your office? Sign on Building or Flag on Building. Door, Hallway, Elevator, Lobby- Who pays the cost?
10. Other Lease Provisions – Snow Removal, Garbage Disposal, Medical Waste Disposal? Insurance. How much?
QUESTIONS
II. What every Doctor should review in an existing lease before buying into a
practice.
1. “Due Diligence” check list- Lease should be abstracted to focus on key points:
2. Term- Enough time to amortize cost and develop practice?
3. Rent/Additional Rent Projections– Overhead that the practice must carry.
4. Use Clause – Lease allows for use you desire.
5. Sublet/Assignment – “Exit strategy” What is the difference? Procedure should be detailed in the Lease.
6. Alterations- Can you remodel space without the consent of the Landlord?
7. Background, Prior Experience, Net Worth, Balance Sheet.
8. Renewal Options- Generally favor the Tenant if they can be included in the lease.
III. Purchase of Real Estate.
1. For business use or personal use?
2. For business use professionals can mortgage (a) fee interest (such as a house or town house office and use for practice), co-op unit (maintenance) or a condominium unit (common charges). The cost is a set fee plus a percentage commission. No mortgage on building? There are fewer restrictions on the transfer of a condominium than on the transfer of a co-op unit.
3. For personal use choices are house, town house, co-op, or condominium.
4. Due diligence co-op-review of building financials, proprietary lease (in a co-op), board minutes, offering plan and amendments, house rules, building amenities, budget-are there any projected major repairs, pending litigation, asbestos issues, increase in maintenance/common charges, What percentage of financing allowed?
5. Closing Costs: Title insurance for fee, condominium or house purchase, transfer tax or flip tax for co-op, NYS and NYC Transfer Taxes, Mansion Tax?
QUESTIONS
IV. Dischargeability of Student Loans
BAPCPA-Department of Education-Lobby(?)-Hardship
§ 523. Exceptions to discharge (a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—(8) unless excepting such debt from discharge under this paragraph would impose an “undue hardship” on the debtor and the debtor’s dependents, for—(A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
Case Law: Brunner v. New York State Higher Ed. Servs., 831 F.2d 395 (2nd Circuit Court of Appeals 1987)
• Inability to maintain a minimal standard of living for most of the repayment period
• These hardship circumstances will persist for a significant portion of the repayment period
• The debtor made a good faith effort to repay the loan
Congratulations on completing the program and best of luck in your career.
If you have any questions, please contact me.
Friday, April 20, 2007
Spousal Debts
We’re often asked by couples if one spouse is responsible for the debts of the other spouse when only one spouse is filing for bankruptcy. Section 707(7)(B) requires that:
“In a case that is not a joint case, current monthly income of the debtor’s spouse shall not be considered for the purposes of subparagraph (A) [which prohibits the filing of a motion to dismiss for presumption of abuse if the current monthly income of the debtor and debtor’s spouse combined is less than or equal to the median family income in the applicable state and of the same household size] if-(i)(I) the debtor and the debtor’s spouse are separated under applicable nonbankruptcy law; or (II) the debtor and the debtor’s spouse are living separate and apart, other than for the purpose of evading subparagraph (A); and (ii) the debtor files a statement under penalty of perjury-(I) specifying that the debtor meets the requirement of subclause (I) or (II) of clause (i); and (II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor’s spouse attributed to the debtor’s monthly income.”
So when we ask a client to fill out Schedule I (Current Income) and Schedule J (Current Expenditures), they need to keep these conditions in mind. This provision is one of the many changes enacted by BAPCPA to the bankruptcy process. Therefore, case law is still rather sparse, but one interesting case is In re Travis, 353 B.R. 520 (Bankr. E.D. Mich. 2006). The facts of the case are as follows: the debtor was married and filed for Chapter 7 bankruptcy separately from his wife. The debtor’s Statement of Current Monthly Income and Means Test Calculation (the “B-22 Form”) stated that a presumption of abuse did not arise. The United States Trustee filed a motion to dismiss the bankruptcy pursuant to §707(b)(2) and §707(b)(3). The UST argued that had the debtor completed the form correctly, a presumption of abuse arose. The primary disagreement was regarding line 17 of the B-22 Form. The debtor and his non-filing spouse both entered figures on this line, and the UST argued that the debtor’s spouse could not include in this figure any amounts for food, utilities, clothing and personal items because those expenses are already accounted for when the debtor calculated his deductions, and this would be “double dipping.” The UST also objected to several other expenses and deductions taken by the debtor.
The Court noted that the calculation of current monthly income is complicated, not clearly defined, fact specific and open to interpretation. The Court mentions that the issue of a non-filing spouse’s income is not limited to post-BAPCPA cases. In Chapter 13 cases, the issue arises under §1325(b)(1), which requires a determination of the debtor’s available disposable income and in Chapter 7 cases, the non-filing spouse’s income has been considered in conjunction with a §707 substantial abuse motion by the UST.
Thus, while §101(10A)(A) excludes a non-filing spouse’s income, a non-filing spouse’s income must be accounted for under §101(10A)(B) to the extent that the non-filing spouse contributes on a regular basis to the household expenses of the debtor and the debtor’s dependents.
In the instant case, the Court agreed with the UST that some of the expenses claimed by the debtor’s non-filing spouse as her own expenses were either counted twice or were a contribution to the household expenses of the debtor and debtor’s dependents, and therefore could not be included in the Line 17 marital adjustment. Specifically, the Court cited the contribution of the non-filing spouse for food and utilities and a deduction for taxes.
However, the court also found that it was appropriate, on the facts of this case, for the non-filing spouse to take marital adjustment for clothing and personal items. The Court contrasts the debtor’s expenses (which are fixed by the IRS national standards for allowable living expenses and the IRS local standards for housing and utility payments) with that of the non-filing spouse’s expenses, which are not fixed.
The Court recalculated the B-22 Form based on its rulings and still found a negative disposable income under §707(b)(2). Therefore there was no presumption of abuse under §707(b)(2). The Court also reviewed the totality of the circumstances to determine if the debtor’s petition was abuse under §707(b)(3) and concluded that it was not. Therefore, the Court denied the UST’s motion to dismiss.
Any persons having questions about the impact of spousal income on bankruptcy should contact Jim Shenwick.
“In a case that is not a joint case, current monthly income of the debtor’s spouse shall not be considered for the purposes of subparagraph (A) [which prohibits the filing of a motion to dismiss for presumption of abuse if the current monthly income of the debtor and debtor’s spouse combined is less than or equal to the median family income in the applicable state and of the same household size] if-(i)(I) the debtor and the debtor’s spouse are separated under applicable nonbankruptcy law; or (II) the debtor and the debtor’s spouse are living separate and apart, other than for the purpose of evading subparagraph (A); and (ii) the debtor files a statement under penalty of perjury-(I) specifying that the debtor meets the requirement of subclause (I) or (II) of clause (i); and (II) disclosing the aggregate, or best estimate of the aggregate, amount of any cash or money payments received from the debtor’s spouse attributed to the debtor’s monthly income.”
So when we ask a client to fill out Schedule I (Current Income) and Schedule J (Current Expenditures), they need to keep these conditions in mind. This provision is one of the many changes enacted by BAPCPA to the bankruptcy process. Therefore, case law is still rather sparse, but one interesting case is In re Travis, 353 B.R. 520 (Bankr. E.D. Mich. 2006). The facts of the case are as follows: the debtor was married and filed for Chapter 7 bankruptcy separately from his wife. The debtor’s Statement of Current Monthly Income and Means Test Calculation (the “B-22 Form”) stated that a presumption of abuse did not arise. The United States Trustee filed a motion to dismiss the bankruptcy pursuant to §707(b)(2) and §707(b)(3). The UST argued that had the debtor completed the form correctly, a presumption of abuse arose. The primary disagreement was regarding line 17 of the B-22 Form. The debtor and his non-filing spouse both entered figures on this line, and the UST argued that the debtor’s spouse could not include in this figure any amounts for food, utilities, clothing and personal items because those expenses are already accounted for when the debtor calculated his deductions, and this would be “double dipping.” The UST also objected to several other expenses and deductions taken by the debtor.
The Court noted that the calculation of current monthly income is complicated, not clearly defined, fact specific and open to interpretation. The Court mentions that the issue of a non-filing spouse’s income is not limited to post-BAPCPA cases. In Chapter 13 cases, the issue arises under §1325(b)(1), which requires a determination of the debtor’s available disposable income and in Chapter 7 cases, the non-filing spouse’s income has been considered in conjunction with a §707 substantial abuse motion by the UST.
Thus, while §101(10A)(A) excludes a non-filing spouse’s income, a non-filing spouse’s income must be accounted for under §101(10A)(B) to the extent that the non-filing spouse contributes on a regular basis to the household expenses of the debtor and the debtor’s dependents.
In the instant case, the Court agreed with the UST that some of the expenses claimed by the debtor’s non-filing spouse as her own expenses were either counted twice or were a contribution to the household expenses of the debtor and debtor’s dependents, and therefore could not be included in the Line 17 marital adjustment. Specifically, the Court cited the contribution of the non-filing spouse for food and utilities and a deduction for taxes.
However, the court also found that it was appropriate, on the facts of this case, for the non-filing spouse to take marital adjustment for clothing and personal items. The Court contrasts the debtor’s expenses (which are fixed by the IRS national standards for allowable living expenses and the IRS local standards for housing and utility payments) with that of the non-filing spouse’s expenses, which are not fixed.
The Court recalculated the B-22 Form based on its rulings and still found a negative disposable income under §707(b)(2). Therefore there was no presumption of abuse under §707(b)(2). The Court also reviewed the totality of the circumstances to determine if the debtor’s petition was abuse under §707(b)(3) and concluded that it was not. Therefore, the Court denied the UST’s motion to dismiss.
Any persons having questions about the impact of spousal income on bankruptcy should contact Jim Shenwick.
Monday, March 26, 2007
Marrama
A recent Supreme Court case, Marrama v. Citizens Bank of Massachusetts et al., is a cautionary tale for debtors who try to play fast and loose with their bankruptcy filing.
Mr. Marrama had initially filed a Chapter 7 case, in which he made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. While he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. In fact, the home had substantial value and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his petition.
After his 341 meeting, when the trustee told Marrama’s counsel that he intended to recover the property as an asset of the state, Marrama made a motion to convert his case to Chapter 13. The Trustee, however, objected to the conversion and the Court held that neither section 706 nor section 1307(c) of the Bankruptcy Code limits a Court’s authority to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. The Court’s authority was based on Section 105 of the Bankruptcy Code, which gives bankruptcy judges broad authority to take the necessary actions to prevent an abuse of process.
What do we learn as attorneys or clients from this Supreme Court decision? Bankruptcy Court is a court of equity and in order to obtain a discharge, one must follow the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of the Bankruptcy Court and give full and fair disclosure to all creditors. When a debtor does not play by the rules, the Court will deny the debtor a right of conversion to in effect punish them for their failure to play fair with the Court. Any persons having questions about Marrama or bankruptcy should contact Jim Shenwick.
Mr. Marrama had initially filed a Chapter 7 case, in which he made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. While he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. In fact, the home had substantial value and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his petition.
After his 341 meeting, when the trustee told Marrama’s counsel that he intended to recover the property as an asset of the state, Marrama made a motion to convert his case to Chapter 13. The Trustee, however, objected to the conversion and the Court held that neither section 706 nor section 1307(c) of the Bankruptcy Code limits a Court’s authority to take appropriate action in response to fraudulent conduct by the atypical litigant who has demonstrated that he is not entitled to the relief available to the typical debtor. The Court’s authority was based on Section 105 of the Bankruptcy Code, which gives bankruptcy judges broad authority to take the necessary actions to prevent an abuse of process.
What do we learn as attorneys or clients from this Supreme Court decision? Bankruptcy Court is a court of equity and in order to obtain a discharge, one must follow the Bankruptcy Code, the Bankruptcy Rules and the Local Rules of the Bankruptcy Court and give full and fair disclosure to all creditors. When a debtor does not play by the rules, the Court will deny the debtor a right of conversion to in effect punish them for their failure to play fair with the Court. Any persons having questions about Marrama or bankruptcy should contact Jim Shenwick.
Thursday, February 22, 2007
BAPCPA Trends
We have a new address:
Shenwick & Associates
655 Third Avenue, 20th floor
New York, NY 10017
Please update your records accordingly.
According to a new paper on consumer bankruptcy trends and indicators, bankruptcy filings will soon be back at the levels they were before the Bankruptcy Protection Act (BAPCPA) of 2005. Although passage of BAPCPA caused a sharp spike in bankruptcy filings before it went into effect on October 17, 2005 and a dramatic fall-off thereafter, research by University of Illinois College of Law Professor Charles Tabb suggests that filings are about to return to pre-BAPCPA filing levels.
"The data indicate that BAPCPA was based on a canard," claims Tabb. "It does not appear that consumers have made a quantum shift to Chapter 13 from Chapter 7, as Congress had hoped would happen under BAPCPA. More importantly, the data suggest that BAPCPA was predicated on (to be generous) a false hope, that making the law 'tougher' would discourage consumer debtors from filing bankruptcy. The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt."
Tabb also found that Chapter 13 filings fell after BAPCPA went into effect (though not as much as Chapter 7 filings) and Chapter 13 filings didn't increase pre-BAPCPA. In Chapter 7 bankruptcy, a debtor can discharge (or liquidate) most of his or her debts. To file a Chapter 13 bankruptcy, a debtor may not have any more than $807,750 in secured debts and $269,250 in unsecured debts. A debtor must also have regular income that's sufficient to pay for basic needs (i.e. food, shelter, clothing, etc.) and fund payments to a plan (over three to five years) to repay creditors.
An abstract of "Consumer Bankruptcy Filings: Trends and Indicators" is available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931172
James Shenwick
Shenwick & Associates
655 Third Avenue
20th Floor
New York, N.Y. 10017
Work: 212-541-6224
Cell Phone: 917-363-3391
Fax: 646-218-4600
E Mail: jhs7@att.net
Web: http://jshenwick.googlepages.com
Shenwick & Associates
655 Third Avenue, 20th floor
New York, NY 10017
Please update your records accordingly.
According to a new paper on consumer bankruptcy trends and indicators, bankruptcy filings will soon be back at the levels they were before the Bankruptcy Protection Act (BAPCPA) of 2005. Although passage of BAPCPA caused a sharp spike in bankruptcy filings before it went into effect on October 17, 2005 and a dramatic fall-off thereafter, research by University of Illinois College of Law Professor Charles Tabb suggests that filings are about to return to pre-BAPCPA filing levels.
"The data indicate that BAPCPA was based on a canard," claims Tabb. "It does not appear that consumers have made a quantum shift to Chapter 13 from Chapter 7, as Congress had hoped would happen under BAPCPA. More importantly, the data suggest that BAPCPA was predicated on (to be generous) a false hope, that making the law 'tougher' would discourage consumer debtors from filing bankruptcy. The evidence shows that debtors file bankruptcy in very predictable numbers, depending not on what the bankruptcy law provides, but on how burdened they are with debt."
Tabb also found that Chapter 13 filings fell after BAPCPA went into effect (though not as much as Chapter 7 filings) and Chapter 13 filings didn't increase pre-BAPCPA. In Chapter 7 bankruptcy, a debtor can discharge (or liquidate) most of his or her debts. To file a Chapter 13 bankruptcy, a debtor may not have any more than $807,750 in secured debts and $269,250 in unsecured debts. A debtor must also have regular income that's sufficient to pay for basic needs (i.e. food, shelter, clothing, etc.) and fund payments to a plan (over three to five years) to repay creditors.
An abstract of "Consumer Bankruptcy Filings: Trends and Indicators" is available at:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=931172
James Shenwick
Shenwick & Associates
655 Third Avenue
20th Floor
New York, N.Y. 10017
Work: 212-541-6224
Cell Phone: 917-363-3391
Fax: 646-218-4600
E Mail: jhs7@att.net
Web: http://jshenwick.googlepages.com
Wednesday, January 17, 2007
Worthwhile Bankruptcy Articles
Lexington, Ky.
"I owe about $12,000 in unsecured debt, and my payments just keep going up,” a troubled citizen signing himself T. P. recently informed a personal-finance columnist. He always paid more than the minimum amount due on his credit card bill, but “still the balance never goes down,” T .P. wrote. “Is there any way to get the interest rate down?”
The interest rate that so oppressed T. P.? A towering 29.99 percent. At this rate, the columnist said, if T. P. continued to pay little more than the monthly minimum, it could take him more than 30 years to pay off his balance — even if he never went shopping again.
Trying to fight off a collection agency while paying little or nothing on his credit card debt, another desperate borrower, R. Z., appealed to this same columnist. How could he prevent interest charges and late fees from mounting? He couldn’t, replied the columnist, as long as he legally owed the money.
Consumers like T. P. and R. Z. find themselves caught in the complexities of today’s bankruptcy laws. And their predicament is increasingly common.
Thirty years ago, the unlucky R. Z. would probably have struck many of his acquaintances as something of a deadbeat: Hadn’t he voluntarily run up a debt and then tried to slip out of the deal? T. P., on the other hand, would have received sympathy as the victim of a heartless usurer (if interest rates equal to one-third of the principal had been legal in those days).
But in today’s strange alternative universe of credit card banks, the term “deadbeat” refers not to the improvident borrower but to the solid citizen who prides himself on paying off his balance every month. As anybody with a mailbox knows, credit card issuers make unrelenting efforts to lure accounts from one another as well as to establish new accounts. And what these lenders seek are “revolvers,” people like R. Z. and T. P., who are likely to pay little more than the monthly minimum — and who eventually find themselves in thrall to mushrooming interest payments, abundantly garnished with late fees.
As for the morality involved in lending money at exorbitant rates, the word “usury” itself has taken on a quaint, archaic sound, like “jousting” or “necromancy.” What happened?
In 1978, the United States Supreme Court delivered a landmark decision that freed banks to charge the interest rates allowed in their home states to customers across the country. This decision, at a time of high inflation, unleashed a national credit storm: states scrambled to relax usury laws in order to attract banks, while banks rushed to establish affiliates in states that weakened or abolished such laws. R. Z. and T. P. are the natural products of this unhappy change. One obvious recourse for people like them is to file for bankruptcy. There’s the stigma to consider, of course. But making such a move would allow R. Z. to end the harassment by the collection agency and both men to make fresh starts free of unsecured debts.
Unsurprisingly, in the 25 years since the credit explosion began, personal bankruptcy filings have risen sharply. Bank advocates have argued that this reflected debtors’ increasing abuse of the protections granted by the Bankruptcy Reform Act of 1978. Personal bankruptcies, said the industry, were costing every household a hidden tax of $400 a year, in the form of rising prices and higher interest rates. It mounted a campaign against what banks called an “epidemic” of defaults by debtors.
In 2005, these suffering financial institutions succeeded in securing the adoption of new federal legislation, the marvelously named Bankruptcy Abuse Prevention and Consumer Protection Act. Nobody who favored this bill chose to see that the bankruptcy epidemic had been produced in large measure by the banks, or that the real hidden costs were the usurious interest rates these banks charged borrowers.
Two simple comparisons demonstrate the point: From 1980 to 2004, personal bankruptcy filings increased 443.45 percent, which is certainly impressive. But over the same time, consumer credit debt rose a bit more, by 501.29 percent. In 1980, less than one personal bankruptcy case was filed for each $1 million in consumer credit outstanding; the figure was slightly smaller in 2004.
Bankruptcies tend to rise as amounts of credit rise. No mystery there, and certainly no epidemic. It all suggests that the bankruptcy code was performing remarkably well.
But the banks got what they wanted from Washington. Since the law has been on the books, people like R. Z. and T. P. have continued to receive all kinds of credit offers (no limits there), but they may have a much harder time now fending off disaster through bankruptcy protection.
A group of credit-counseling firms that provide bankruptcy screening — a step the new law requires — report that 97 percent of the clients could not repay any debts at all, and 79 percent sought relief for reasons beyond their control, like job loss and large medical expenses and, notably, rising credit card fees and predatory lending practices.
A boomerang effect has appeared, too. The new law contains a provision forcing many debtors into Chapter 13 compulsory repayment plans. The bill’s backers expected this fresh squeeze on debtors to produce more cash for the banks, but the trend appears to be downward.
In adopting the provision, Congress disregarded the advice of every disinterested group that has looked at the question, including three presidential commissions, the Congressional Budget Office and the Government Accountability Office. It also ignored a past House Judiciary Committee report, which declared that such compulsion might well amount to the imposition of involuntary servitude.
So the lending goes on. People classed as the “working poor,” now beginning to be tapped by the credit card vendors, no doubt constitute a rich supply of coveted potential revolvers — fresh customers for the banks to draw into the credit maze, with its minimums and its unending late fees. In signing the 2005 act, President Bush declared that it would make more credit available to poor people. Unquestionably so. And 30 percent interest was just what they needed, wasn’t it?
Joe Lee is a federal bankruptcy judge. Thomas Parrish is the author of “Roosevelt and Marshall.”
Copyright 2007 The New York Times Company. All rights reserved.
"I owe about $12,000 in unsecured debt, and my payments just keep going up,” a troubled citizen signing himself T. P. recently informed a personal-finance columnist. He always paid more than the minimum amount due on his credit card bill, but “still the balance never goes down,” T .P. wrote. “Is there any way to get the interest rate down?”
The interest rate that so oppressed T. P.? A towering 29.99 percent. At this rate, the columnist said, if T. P. continued to pay little more than the monthly minimum, it could take him more than 30 years to pay off his balance — even if he never went shopping again.
Trying to fight off a collection agency while paying little or nothing on his credit card debt, another desperate borrower, R. Z., appealed to this same columnist. How could he prevent interest charges and late fees from mounting? He couldn’t, replied the columnist, as long as he legally owed the money.
Consumers like T. P. and R. Z. find themselves caught in the complexities of today’s bankruptcy laws. And their predicament is increasingly common.
Thirty years ago, the unlucky R. Z. would probably have struck many of his acquaintances as something of a deadbeat: Hadn’t he voluntarily run up a debt and then tried to slip out of the deal? T. P., on the other hand, would have received sympathy as the victim of a heartless usurer (if interest rates equal to one-third of the principal had been legal in those days).
But in today’s strange alternative universe of credit card banks, the term “deadbeat” refers not to the improvident borrower but to the solid citizen who prides himself on paying off his balance every month. As anybody with a mailbox knows, credit card issuers make unrelenting efforts to lure accounts from one another as well as to establish new accounts. And what these lenders seek are “revolvers,” people like R. Z. and T. P., who are likely to pay little more than the monthly minimum — and who eventually find themselves in thrall to mushrooming interest payments, abundantly garnished with late fees.
As for the morality involved in lending money at exorbitant rates, the word “usury” itself has taken on a quaint, archaic sound, like “jousting” or “necromancy.” What happened?
In 1978, the United States Supreme Court delivered a landmark decision that freed banks to charge the interest rates allowed in their home states to customers across the country. This decision, at a time of high inflation, unleashed a national credit storm: states scrambled to relax usury laws in order to attract banks, while banks rushed to establish affiliates in states that weakened or abolished such laws. R. Z. and T. P. are the natural products of this unhappy change. One obvious recourse for people like them is to file for bankruptcy. There’s the stigma to consider, of course. But making such a move would allow R. Z. to end the harassment by the collection agency and both men to make fresh starts free of unsecured debts.
Unsurprisingly, in the 25 years since the credit explosion began, personal bankruptcy filings have risen sharply. Bank advocates have argued that this reflected debtors’ increasing abuse of the protections granted by the Bankruptcy Reform Act of 1978. Personal bankruptcies, said the industry, were costing every household a hidden tax of $400 a year, in the form of rising prices and higher interest rates. It mounted a campaign against what banks called an “epidemic” of defaults by debtors.
In 2005, these suffering financial institutions succeeded in securing the adoption of new federal legislation, the marvelously named Bankruptcy Abuse Prevention and Consumer Protection Act. Nobody who favored this bill chose to see that the bankruptcy epidemic had been produced in large measure by the banks, or that the real hidden costs were the usurious interest rates these banks charged borrowers.
Two simple comparisons demonstrate the point: From 1980 to 2004, personal bankruptcy filings increased 443.45 percent, which is certainly impressive. But over the same time, consumer credit debt rose a bit more, by 501.29 percent. In 1980, less than one personal bankruptcy case was filed for each $1 million in consumer credit outstanding; the figure was slightly smaller in 2004.
Bankruptcies tend to rise as amounts of credit rise. No mystery there, and certainly no epidemic. It all suggests that the bankruptcy code was performing remarkably well.
But the banks got what they wanted from Washington. Since the law has been on the books, people like R. Z. and T. P. have continued to receive all kinds of credit offers (no limits there), but they may have a much harder time now fending off disaster through bankruptcy protection.
A group of credit-counseling firms that provide bankruptcy screening — a step the new law requires — report that 97 percent of the clients could not repay any debts at all, and 79 percent sought relief for reasons beyond their control, like job loss and large medical expenses and, notably, rising credit card fees and predatory lending practices.
A boomerang effect has appeared, too. The new law contains a provision forcing many debtors into Chapter 13 compulsory repayment plans. The bill’s backers expected this fresh squeeze on debtors to produce more cash for the banks, but the trend appears to be downward.
In adopting the provision, Congress disregarded the advice of every disinterested group that has looked at the question, including three presidential commissions, the Congressional Budget Office and the Government Accountability Office. It also ignored a past House Judiciary Committee report, which declared that such compulsion might well amount to the imposition of involuntary servitude.
So the lending goes on. People classed as the “working poor,” now beginning to be tapped by the credit card vendors, no doubt constitute a rich supply of coveted potential revolvers — fresh customers for the banks to draw into the credit maze, with its minimums and its unending late fees. In signing the 2005 act, President Bush declared that it would make more credit available to poor people. Unquestionably so. And 30 percent interest was just what they needed, wasn’t it?
Joe Lee is a federal bankruptcy judge. Thomas Parrish is the author of “Roosevelt and Marshall.”
Copyright 2007 The New York Times Company. All rights reserved.
Monday, January 08, 2007
Keeping the CPA in BAPCPA
This article appeared in the January 2007 issue of The Trusted Professional, a newspaper of the New York State Society of CPAs.
Keeping the CPA in BAPCPA
By William R. Lalli, CPA, NYSSCPA Tax Policy Manager
The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) of 2005 became effective on Oct. 17, 2005. The new law had the overwhelming endorsement of the credit card industry, perhaps because, according to the Federal Government, nearly one million Americans file for bankruptcy every year.
James Shenwick, of Shenwick & Associates—a law firm focusing its practice solely on bankruptcy, real estate and corporate law—gave a presentation to the NYSSCPA’s Closely Held and S Corporations Committee on Nov. 17, 2006, in which he outlined key, drastic changes in bankruptcy law, the industry’s motivation for the changes and the impact on the need for CPA services in this area.
Changes Ushered In by BAPCPA
Nearly half a million Americans filed for bankruptcy in October 2005 alone, probably in order to have their petition considered before BAPCPA took effect. This is an indication that, under the new law, things will not be as rosy. The 500-page law contains many details, but makes obvious two considerations:
1. There is now an increase in the cost and complications of filing for clients and their service providers.
2. There is a resultant decrease in the number of people who are eligible to file for Chapter 7 bankruptcy protection.
Shenwick explained that BAPCPA is a radical departure from previous law. For example, he said, in order to be successful in filing, debtors must provide the bankruptcy trustee with a copy of their federal tax return for the year ending before they filed their petition. Section 1308 of the Bankruptcy Code contains many new tax-return responsibilities for Chapter 13 debtors, including that all returns required for the four years ending on the petition date have been filed with the taxing authority by the day before the first scheduled meeting of creditors. In other words, more tax returns need to be filed if petitioners want to be successful in filing for bankruptcy protection—a departure from past requirements.
The debtor must provide a copy of tax returns to any creditor that requests them on a timely basis, or the Court will dismiss the case. Further, BAPCPA contains new median income tests and means tests that are complicated calculations, according to Shenwick.
Industry Support
The bill became law with the strong endorsement of the credit card and banking industries. Many of the new terms favor these BAPCPA-backers; fewer petitioners are being successful and fewer debts are being discharged.
Nearly every other element (aside from those related to tax information) of the process has become more stringent. There are new definitions of current monthly income, debt relief agencies, domestic support obligations and median family income. Credit counseling is required, and debtors must file copies of all payment advices or other evidence of payments. Changes in budgets must be filed with the Court. Moreover, a debtor must receive and file a certificate from an approved, nonprofit budget and credit-counseling agency and file a copy of the debt repayment plan.
More Potential Clients
Shenwick’s presentation made the members aware that taxpayers anticipating bankruptcy have a greater need for professional services. BAPCPA has created a need for services related to tax reporting and filing and financial planning assistance, exceeding that under previously existing law, that CPAs are uniquely qualified to provide.
While bankruptcy is something that lawmakers would hope is less frequent rather than more, the laws were designed to help taxpayers and the economy in the long term. Thus, while generated by the misery and financial failure of many, the impetus for new business and practice development for CPAs must be responded to, in the public interest.
Uncertain Future
Currently, there are several bills before Congress written to undo various BAPCPA provisions. In addition, the GAO is studying the impact BAPCPA is having on industry and the economy. For now, it is having one of its intended results: the number of filings is down overall and more debtors are filing chapter Chapter 13 petitions than Chapter 7 petitions. While the numbers are down, the need is up for competent help from attorneys and CPAs for debtors to be successful in their filing.
William R. Lalli, CPA, can be reached at wlalli@nysscpa.org.
Keeping the CPA in BAPCPA
By William R. Lalli, CPA, NYSSCPA Tax Policy Manager
The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) of 2005 became effective on Oct. 17, 2005. The new law had the overwhelming endorsement of the credit card industry, perhaps because, according to the Federal Government, nearly one million Americans file for bankruptcy every year.
James Shenwick, of Shenwick & Associates—a law firm focusing its practice solely on bankruptcy, real estate and corporate law—gave a presentation to the NYSSCPA’s Closely Held and S Corporations Committee on Nov. 17, 2006, in which he outlined key, drastic changes in bankruptcy law, the industry’s motivation for the changes and the impact on the need for CPA services in this area.
Changes Ushered In by BAPCPA
Nearly half a million Americans filed for bankruptcy in October 2005 alone, probably in order to have their petition considered before BAPCPA took effect. This is an indication that, under the new law, things will not be as rosy. The 500-page law contains many details, but makes obvious two considerations:
1. There is now an increase in the cost and complications of filing for clients and their service providers.
2. There is a resultant decrease in the number of people who are eligible to file for Chapter 7 bankruptcy protection.
Shenwick explained that BAPCPA is a radical departure from previous law. For example, he said, in order to be successful in filing, debtors must provide the bankruptcy trustee with a copy of their federal tax return for the year ending before they filed their petition. Section 1308 of the Bankruptcy Code contains many new tax-return responsibilities for Chapter 13 debtors, including that all returns required for the four years ending on the petition date have been filed with the taxing authority by the day before the first scheduled meeting of creditors. In other words, more tax returns need to be filed if petitioners want to be successful in filing for bankruptcy protection—a departure from past requirements.
The debtor must provide a copy of tax returns to any creditor that requests them on a timely basis, or the Court will dismiss the case. Further, BAPCPA contains new median income tests and means tests that are complicated calculations, according to Shenwick.
Industry Support
The bill became law with the strong endorsement of the credit card and banking industries. Many of the new terms favor these BAPCPA-backers; fewer petitioners are being successful and fewer debts are being discharged.
Nearly every other element (aside from those related to tax information) of the process has become more stringent. There are new definitions of current monthly income, debt relief agencies, domestic support obligations and median family income. Credit counseling is required, and debtors must file copies of all payment advices or other evidence of payments. Changes in budgets must be filed with the Court. Moreover, a debtor must receive and file a certificate from an approved, nonprofit budget and credit-counseling agency and file a copy of the debt repayment plan.
More Potential Clients
Shenwick’s presentation made the members aware that taxpayers anticipating bankruptcy have a greater need for professional services. BAPCPA has created a need for services related to tax reporting and filing and financial planning assistance, exceeding that under previously existing law, that CPAs are uniquely qualified to provide.
While bankruptcy is something that lawmakers would hope is less frequent rather than more, the laws were designed to help taxpayers and the economy in the long term. Thus, while generated by the misery and financial failure of many, the impetus for new business and practice development for CPAs must be responded to, in the public interest.
Uncertain Future
Currently, there are several bills before Congress written to undo various BAPCPA provisions. In addition, the GAO is studying the impact BAPCPA is having on industry and the economy. For now, it is having one of its intended results: the number of filings is down overall and more debtors are filing chapter Chapter 13 petitions than Chapter 7 petitions. While the numbers are down, the need is up for competent help from attorneys and CPAs for debtors to be successful in their filing.
William R. Lalli, CPA, can be reached at wlalli@nysscpa.org.
Monday, December 18, 2006
Silent Lease Issues and Holiday Greeting from Shenwick & Associates
Happy holidays to all our clients, friends and other loved ones! As we wrap up 2006, two changes of note we wanted to alert you to:
1. We now have a Spanish web site at http://jshenwickspanish.googlepages.com for personal bankruptcy.
2. We'll be relocating in early 2007. We'll let you know as soon as we have all the details.
This month, we'll continue with our coverage of "silent" lease issues that may be important to you as a tenant, but that standard lease forms from landlord's don't deal with.
I. Maintenance and Cleaning
a. Structural repairs-Require the landlord to maintain and repair the structural elements of the building (including the roof and foundation) and maintain and keep in good repair parking, common areas, as well as sidewalks. "Structural elements" should be a defined term in the lease, and defined as broadly as possible to cover everything except improvements that are specific to a particular tenant.
b. Building and Systems Maintenance-The landlord should maintain electrical, sewage, plumbing, HVAC and other building systems, at least to the point of entry. Inspect building systems, and consider whether to require the landlord to maintain service contracts.
c. Maintenance standards-The landlord should maintain the building (including empty retail spaces and all common areas) in a manner appropriate to the space. Services should include security, repainting and re-carpeting.
d. Cleaning standards-Specify standards for the landlord's services, both within the premises and in common areas. Limit the scope of, and try to define the price of "extras." If the standards say the landlord does not to clean any "computer areas," this will exclude a lot of space for modern offices.
e. Cleaning Hours-Specify the earliest time or latest time that cleaning may commence.
f. Garbage Removal-Specify locations, access, timing and other arrangements.
II. Quiet Enjoyment
a. Watch for "quiet enjoyment" being conditioned on no default. Instead, make it conditional upon the landlord not having terminated the lease.
b. If a sidewalk shed, fence or scaffolding for any construction project impairs access or visibility, you may want the right to reduce the rent.
For any such project: (1) try to set limits on the scope and duration of the obstruction; (2) seek the right to install advertising signs at the landlord's expense; (3) prohibit other advertising signs; and (4) require the landlord to promptly remove all unauthorized postings or graffiti.
c. Try to limit where dumpsters may be installed.
d. Damages for a breach of the covenant of quiet enjoyment is difficult to prove consider providing a liquidated damages clause instead.
Jim Shenwick
Shenwick & Associates
jhs7@att.net
1. We now have a Spanish web site at http://jshenwickspanish.googlepages.com for personal bankruptcy.
2. We'll be relocating in early 2007. We'll let you know as soon as we have all the details.
This month, we'll continue with our coverage of "silent" lease issues that may be important to you as a tenant, but that standard lease forms from landlord's don't deal with.
I. Maintenance and Cleaning
a. Structural repairs-Require the landlord to maintain and repair the structural elements of the building (including the roof and foundation) and maintain and keep in good repair parking, common areas, as well as sidewalks. "Structural elements" should be a defined term in the lease, and defined as broadly as possible to cover everything except improvements that are specific to a particular tenant.
b. Building and Systems Maintenance-The landlord should maintain electrical, sewage, plumbing, HVAC and other building systems, at least to the point of entry. Inspect building systems, and consider whether to require the landlord to maintain service contracts.
c. Maintenance standards-The landlord should maintain the building (including empty retail spaces and all common areas) in a manner appropriate to the space. Services should include security, repainting and re-carpeting.
d. Cleaning standards-Specify standards for the landlord's services, both within the premises and in common areas. Limit the scope of, and try to define the price of "extras." If the standards say the landlord does not to clean any "computer areas," this will exclude a lot of space for modern offices.
e. Cleaning Hours-Specify the earliest time or latest time that cleaning may commence.
f. Garbage Removal-Specify locations, access, timing and other arrangements.
II. Quiet Enjoyment
a. Watch for "quiet enjoyment" being conditioned on no default. Instead, make it conditional upon the landlord not having terminated the lease.
b. If a sidewalk shed, fence or scaffolding for any construction project impairs access or visibility, you may want the right to reduce the rent.
For any such project: (1) try to set limits on the scope and duration of the obstruction; (2) seek the right to install advertising signs at the landlord's expense; (3) prohibit other advertising signs; and (4) require the landlord to promptly remove all unauthorized postings or graffiti.
c. Try to limit where dumpsters may be installed.
d. Damages for a breach of the covenant of quiet enjoyment is difficult to prove consider providing a liquidated damages clause instead.
Jim Shenwick
Shenwick & Associates
jhs7@att.net
Wednesday, November 22, 2006
Hidden Costs In Commercial Leases In NYC
November 21, 2006
Dear Friends & Clients:
HIDDEN COSTS IN COMMERCIAL LEASES
Happy Holiday! Last month's email on commercial lease negotiations was so popular that readers asked for another email on commercial leases.
Please be sure to checkout Shenwick & Associates website at http://jshenwick.googlepages.com and its blog at http://shenwick.blogspot.com/
Hidden costs in office leases are expenses that a landlord should be paying which are passed along to tenants. If the tenant pays these costs the result is that the landlord is making a profit instead of merely being made whole. Careful negotiation by a tenant can result in significant savings to "additional rent" items and minimize the possibility of the tenant receiving a surprise bill from the landlord during the lease term. Some issues to look for include:
1. Additional Rent clauses which are used to have the tenant pay for increases in real estate taxes and operating expenses. The tenant's proportionate share should from a tenant's perspective be the ratio between the square footage of the space the tenant occupies and the total square footage of the building. Some leases provide that this calculation be based on the rented or occupied space and not the total building area. If the landlord insists on using a calculation based on occupied square footage as opposed to total building space, the tenant should attempt to negotiate an agreed upon percentage to be used to determine the tenant's proportionate share of space.
2. Base Year, which is used to calculate when the tenant will have to pay the landlord additional building expenses and taxes. The Base Year for taxes and operating expenses are both subject to negotiation. From the tenant's perspective, these amounts should be as high as possible. Real estate taxes may be subject to adjustment years after the Base Year and a reduction in taxes could result in a windfall for the landlord that is unfair to the tenant. One possible strategy for a tenant is to have the base year consist of an average of 2 years.
3. Porter Rates are the most favorable way to calculate an increase in operating expenses from the perspective of the landlord. General operating expenses are day-to-day expenses of running the building, which are subject to increase. The tenant usually pays its proportionate share of the increases in operation expenses over the base amount. The Porter's Wage is calculated as the difference between the Porter Wage Rate as determined by the collective bargaining agreement and the wage rate determined by the collective bargaining agreement for the escalation year. Porter wages allow a landlord to make a profit on what should be a reimbursed expense.
Less onerous is an increase based on the Consumer Price Index. If the CPI is used some expenses should be carved out of this formula such as interest or penalties on taxes that the landlord is required to pay or the payment of interest or principal on the landlord's debt service.
4. Capital improvements enhance the building and allow the landlord to charge more rent, so the landlord should pay for these improvements, though it's less clear who should be responsible for payment when the improvement is required by law or obsolescence. For example, at what point should a long term tenant in the last year of a lease pay for an improvement with a useful life of 15 years past the lease term? The tenant should not pay more than its proportional share (in the example, 1/15th of the cost of the improvement in the last year of a 15 year lease).
Any person with questions regarding commercial lease issues should contact Jim Shenwick.
Dear Friends & Clients:
HIDDEN COSTS IN COMMERCIAL LEASES
Happy Holiday! Last month's email on commercial lease negotiations was so popular that readers asked for another email on commercial leases.
Please be sure to checkout Shenwick & Associates website at http://jshenwick.googlepages.com and its blog at http://shenwick.blogspot.com/
Hidden costs in office leases are expenses that a landlord should be paying which are passed along to tenants. If the tenant pays these costs the result is that the landlord is making a profit instead of merely being made whole. Careful negotiation by a tenant can result in significant savings to "additional rent" items and minimize the possibility of the tenant receiving a surprise bill from the landlord during the lease term. Some issues to look for include:
1. Additional Rent clauses which are used to have the tenant pay for increases in real estate taxes and operating expenses. The tenant's proportionate share should from a tenant's perspective be the ratio between the square footage of the space the tenant occupies and the total square footage of the building. Some leases provide that this calculation be based on the rented or occupied space and not the total building area. If the landlord insists on using a calculation based on occupied square footage as opposed to total building space, the tenant should attempt to negotiate an agreed upon percentage to be used to determine the tenant's proportionate share of space.
2. Base Year, which is used to calculate when the tenant will have to pay the landlord additional building expenses and taxes. The Base Year for taxes and operating expenses are both subject to negotiation. From the tenant's perspective, these amounts should be as high as possible. Real estate taxes may be subject to adjustment years after the Base Year and a reduction in taxes could result in a windfall for the landlord that is unfair to the tenant. One possible strategy for a tenant is to have the base year consist of an average of 2 years.
3. Porter Rates are the most favorable way to calculate an increase in operating expenses from the perspective of the landlord. General operating expenses are day-to-day expenses of running the building, which are subject to increase. The tenant usually pays its proportionate share of the increases in operation expenses over the base amount. The Porter's Wage is calculated as the difference between the Porter Wage Rate as determined by the collective bargaining agreement and the wage rate determined by the collective bargaining agreement for the escalation year. Porter wages allow a landlord to make a profit on what should be a reimbursed expense.
Less onerous is an increase based on the Consumer Price Index. If the CPI is used some expenses should be carved out of this formula such as interest or penalties on taxes that the landlord is required to pay or the payment of interest or principal on the landlord's debt service.
4. Capital improvements enhance the building and allow the landlord to charge more rent, so the landlord should pay for these improvements, though it's less clear who should be responsible for payment when the improvement is required by law or obsolescence. For example, at what point should a long term tenant in the last year of a lease pay for an improvement with a useful life of 15 years past the lease term? The tenant should not pay more than its proportional share (in the example, 1/15th of the cost of the improvement in the last year of a 15 year lease).
Any person with questions regarding commercial lease issues should contact Jim Shenwick.
Tuesday, November 21, 2006
Outline of Speech Given by James Shenwick at NYS Society of CPA regarding Personal Bankruptcy & BAPCPA on November 17, 2006
I. Introduction
A. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 (also known as the Bankruptcy Reform Act) went into effect on October 17, 2005.
B. October 17, 2005 will go down as a sad day in American History.
1. What is the purpose of bankruptcy law?
a. Is the purpose of bankruptcy law to give individuals a “fresh start”?
b. Do we have bankruptcy laws because we are a comparing and compassionate society?
c. Is bankruptcy a safety valve for society?
C. The name of the law is misleading. The title “Bankruptcy Abuse Prevention” suggests that the old system was abusive? Was it?-1.5 million Americans file for bankruptcy on average each year.
1. Why do people file for bankruptcy?
a. Credit card debt, medical bills, student loans, the cost of housing, business reversal, illness, job loss and divorce.
b. It is estimated that in October 2005 500,000 Americans filed for bankruptcy to beat the effective date of the new law.
i. According to an article in the New York Times business section, various banks and credit card companies said that they were surprised by the volume of the filings-should they have been?
2. There are about two provisions in this poorly drafted 500 page bill that are pro-consumer regarding personal bankruptcy. Those concern (a) Reaffirmation Agreements, which require extensive disclosures, and must outline the rights of the debtor and must specify the amount of the debt being reaffirmed, additional charged or costs imposed upon the debtor, the annual percentage rate, the simple interest rate and, if elected by the creditor, a statement of the repayment schedule. If secured, the disclosure must contain description of the property upon which the creditor’s lien attaches and the original purchase price of the items (if the security interest is not a purchase money interest, the disclosure must contain the amount of the original loan). The disclosure must include a statement that the debtor has the right to consult an attorney, that the reaffirmation agreement must be filed with the court before it becomes effective, and that the debtor has the right to rescind the reaffirmation within 60 days of its filing and (b) Reduction of dischargeable unsecured claims-the Court may reduce a dischargeable unsecured claim by up to 20% if the creditor unreasonably refused to negotiate an alternative payment schedule proposed by an approved credit-counseling agency. The repayment proposal must have offered at least 60% of the debt and must have been made at least 60 days prior to the petition §502(k)-Will this provision be of any use to consumers?
3. What do debtor’s attorneys, creditor attorneys, Judges and US
Trustee say about this law?
4. Will attorneys continue to do chapter 7 bankruptcy filings based on the increased personal exposure?
5. Legal fees for those attorneys who continue to do personal bankruptcy work are expected to double.
6. Malpractice rates are predicted to increase in the next year for those attorneys who do personal bankruptcy work and/or malpractice insurers will refuse to provide coverage for liability from BAPCPA-Is this what the banks and credit card companies expected or wanted to happen?
D. Why did President Bush sign the bill so that it takes effect on a Monday, rather than on a Tuesday, Wednesday, Thursday or Friday? The Bankruptcy Courts are closed on Saturday and Sunday therefore limiting the ability of people to file for bankruptcy -was this accidental or intentional?
E. Why did the bill increase the chapter 7 filing fee from $209 to $274?
1. This is a $65 increase or a 31% increase-this increase is unconscionable for people that need to file for bankruptcy protection.
F. Would a better name for the bill have been the “Bankruptcy Bill that Was Bought and Paid for by Credit Card Companies and Banks”?
1. The banks and credit companies have lobbied for this bill for about 8 years and it is said that they spent about $40 million dollars lobbying for this bill.
2. Who speaks for debtors or poor people in this country?
i. Professor Elizabeth Warren a professor at Harvard Law School and an expert on personal bankruptcy has been vehemently opposed to this bill.
G. In analyzing this bill there are 2 driving factors: (1) increase the cost and level of effort or aggravation to file for clients and attorneys and (2) decrease the number of people that file for chapter 7 bankruptcy protection.
H. How did the old system work? Was the old system broken?
1. Under the old system there were no restrictions on the ability of an individual or corporation to file for chapter 7 bankruptcy protection.
a. The only limitation was section 707(b) of the Bankruptcy Code dealing with “substantial abuse.” If a debtor’s after tax income was greater than there ordinary and necessary personal and business expenses then their case would be converted to chapter 13 of the Bankruptcy Code which was a 3-5 year payment plan creditors.
2. How does the new system work for national emergencies such as Hurricane Katrina?
a. U.S. Trustee’s Office has waived the pre-bankruptcy filing credit counseling requirement for victims of Hurricane Katrina-will this set a precedent for future national catastrophes?
II. New Definitions in the Bankruptcy Law:
A. Section 101(10A) defines a new term of art, “Current monthly income,” with reference to the 6 months preceding the petition month. Current monthly income is the platform for the new “means test” in § 707(b) and for calculating disposable income for median income debtors in § 1325(b) of the Bankruptcy Code.
B. Section 101(12A) defines a “debt relief agency” to include many bankruptcy practitioners.
C. Section 101(14A) broadly defines “domestic support obligation” to include alimony, maintenance and support accruing before or after the petition and owed to various individuals or entities. This new definition is used in many sections dealing with dischargeability, priorities, confirmation of plans, etc.
D. Section 101(39A) defines “median family income” by reference to census data, adjusted by the Consumer Price Index. Many sections of the new Code–including the means test in § 707(b) and the disposable income test in § 1325(b)–use median family income as a measuring stick to trigger important consequences.
III. New Bankruptcy Code Provisions:
A. Multiple bankruptcy filings-The minimum time between filing Chapter 7 cases has been raised from 6 years to 8 years.
1. If a discharge has been granted in a Chapter 7 case, a Chapter 13 case apparently may be filed, but before a discharge can be entered in the Chapter 13 case, the debtor’s Chapter 13 plan must continue until at least 4 years from the date of the Chapter 7 discharge.
B. Credit Counseling Requirement:
No individual may be a debtor under the Bankruptcy Code unless, within 180 days before filing the petition, the debtor received an individual or group briefing (including 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. The court may grant an exemption based on the debtor’s sworn statement but exemption expires 30 days after the petition. The briefing is not required if the court determines that debtor is incapacitated (mentally), disabled (physically), or is an active member of the military in a combat zone. § 109(h)(1)
C. Representation of Creditors:
The representation of a creditor holding a consumer debt at a Chapter 7 or Chapter 13 meeting of creditors need not be by counsel but may be through an employee or agent of the creditor, and that agent is permitted to represent multiple creditors. This authorization may not be limited by any local or state rule governing the unauthorized practice of law. § 341(c)
D. Notice of address of Creditors:
Any entity may file with any bankruptcy court a “notice of address” for all notices in all cases under Chapter 7 or Chapter 13 in all bankruptcy courts. This “notice of address” must be used for all noticing by a court 30 days after filing unless the entity files a (different) “notice of address” in a specific case. A notice of address filed in a specific case must be used by the court or by the debtor five days after filing. § 342(e) and (f)
E. Notice to a Creditor:
1. Notice provided to a creditor–by the debtor or by the court-inconsistent with the new rules in § 342 shall not be effective until the notice has been “brought to the attention” of the creditor. If the creditor “designates a person or organizational subdivision” to receive bankruptcy notices and has a reasonable procedure to deliver notices to such person or subdivision, then a notice has not been “brought to the attention” of the creditor until the designated person or subdivision receives the notice. § 342(g)(1)
2. Notice to be given by a debtor to creditors must be to the address designated by the creditor, either in communications to the debtor or by the creditors preferred address as provided to the court. Such notice to creditors must include account numbers.
F. Valuation of Personal Property. In individual Chapter 7 and 13 cases, the value of personal property securing an allowed claim shall be replacement value on the date of the petition without deduction for sale or marketing costs. For goods acquired for personal, family or household purposes, replacement value means the price a retail merchant would charge for property of that kind given its age and condition. §506(a)(2)
G. Payment Advices. Debtors must file copies of “all payment advices or other evidence of payment” received by the debtor from an employer in the 60 days prior to the filing. The failure to file payment advices is one of the grounds for “automatic dismissal” on the 46th day under §521(i). § 521(a)(1)(B)(iv)
H. Changes in Budget Must Be Filed With Court. Debtors must file a statement showing any “reasonably” anticipated increase in income or expenditures within the year after filing. §521(a)(1)(B)(vi)
I. Mandatory Pre-Petition Credit Counseling. Before a person can file bankruptcy a debtor(s) must receive and file a certificate from an APPROVED, non-profit budget and credit counseling agency that describes the services and opportunities for available credit counseling and assistance in performing an individual budget analysis provided to the debtor and the debtor must file a copy of the debt repayment plan, if any created prior to filing. §521(b).
1. What is the value of these services other than to increase the cost of bankruptcy filings and delay bankruptcy filings?
2. In September 2005, the Internal Revenue Service denied tax-exempt status to several credit counseling agencies, partly because they relied too heavily on banks and credit companies for their funding.
i. Are these credit counseling services more than shills for the credit card companies?
3. The US Trustee’s Office provides a list of Credit Counselors.
J. Tax Returns.
1. “Not later than 7 days before the date first set for the first meeting of creditors,” Chapter 7 and Chapter 13 debtors “shall provide” to the trustee a copy (or transcript) of the federal tax return for the tax year ending before the petition, for which a return was filed.
2. The debtor must provide a copy (or transcript) of the return to any creditor that timely requests it. The court “shall dismiss” the case if the debtor fails to comply. §521(e)(2)(A),(B) and (C)
3. New §1308 of the Bankruptcy Code contains many new tax return responsibilities for Chapter 13 debtors, including that all returns “required” for the 4 years ending on the petition date have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.
K. Possession of Property. Chapter 7 debtor shall not retain possession of personal property subject to a purchase money interest (collateral) unless within 45 days of the first meeting of creditors the debtor either reaffirms or redeems the property. §521(a)(6)
L. Asset Protection Trusts. Under new §548(e), a trustee can avoid the debtor’s transfer in an interest in property made within 10 years of the filing if the transfer as made to a self-settled trust or similar device by the debtor for the benefit of the debtor and the transfer was made with the actual intent to hinder, delay or defraud any creditor.
IV. Limitations on the Automatic Stay:
A. Serial Filing-no automatic stay arises if the debtor had two or more cases pending within the previous year, but were dismissed. Upon request of any party, the court shall enter an order confirming that no stay is in effect. Within 30 days of the filing of the petition, any party can request the court to impose a stay only if the party demonstrates that the later filing is in good faith.
B. Child and spousal support obligations must be brought current and kept current during the pendency of a bankruptcy. The automatic stay does not apply to the withholding of income that is property of the estate or property of the debtor for the payment of a domestic support obligation pursuant to a judicial or administrative order or statute.
C. Licenses. The automatic stay does not apply to the withholding suspension or restriction of a driver’s, professional, occupational or recreation license upon nonpayment of support. § 362(b)(2)(D)
D. Tax Refunds for Support Obligations. The automatic stay does not apply to the interception of tax refunds to collect support obligations. § 362(b)(2)(F)
E. Pension Plan Loan Repayments. The automatic stay does not apply to the consensual withholding of income from a debtor’s wages to repay a loan incurred by a debtor from a qualified pension, profit sharing, stock bonus or thrift savings plan.
F. Eviction. If a lessor obtained a judgment for possession (warrant of eviction) before the bankruptcy petition was filed, the automatic stay does not apply to the continuation of an eviction.
V. Exemptions
A. A debtor’s exemptions are determined by examining state law for the state where the debtor has been domiciled for 730 days prior to the filing of the petition. If the debtor has not been domiciled in a single state for 730 days, exemptions are determined by the debtor’s domicile for the majority of the 180 days that preceded the 730-day period. §522(b)(3)(A). If you’re living in a state for less than two years that has more favorable provisions than the one you previously lived in, you can’t use the more favorable provisions.
B. The maximum amount of a qualified IRA that may be exempted is $1,000,000. §522(n)
C. Homestead exemptions would be capped at $125,000 if the debtor acquired the property during the 1215-day period preceding the date of filing. Note that New York State recently increased the homestead exemption to $50,000 per debtor, so a married couple under New York law can exempt $100,000 of equity in a residence.
VI. Nondischargeability of Debts
A. The presumption of nondischargeability for unsecured debt is lowered to debts incurred within 90 days of the filing that aggregate at least $500 for luxury goods or services and cash advances aggregating more than $750 within 70 days. §523(a)(2)
B. The exception to discharge for student loans is expanded to encompass all student loans as defined by the IRC §221(e)(1), expanding nondischargeable student loans to for profit and nongovernmental entities. §523(a)(8)(B)
C. Loans to a pension fund are nondischargeable in Chapter 7. §523(a)(18)
D. The nondischargeability of a non-support domestic obligation under §523(a)(15) would no longer be dependent upon the initiation of a timely adversary complaint under §523(c). Under Chapter 7, the non-support domestic obligation would survive the discharge. The “greater hardship” exception to the exception has been eliminated. §523(c)
VII. Debt Relief Agencies
A. “Debt relief agencies” may include attorneys that provide bankruptcy assistance to persons with consumer debt and nonexempt assets worth less than $150,000. DRAs are required to do what they promise to do, are prohibited from making statements or counseling statements that are untrue (and that “upon the exercise of reasonable care, should have been known” by the agency), are prohibited from making misleading statements about the services offered by the agency and are prohibited from advising an assisted person to incur more debt if they are thinking of filing a bankruptcy. State consumer protection agencies are empowered to enforce these provisions and if a Debt Relief Agency violates these provisions, actual damages can be recovered on behalf of the assisted person. Attorneys’ fees can be awarded in actions brought against Debt Relief Agencies. §526
B. Debt relief agencies must disclose the costs of services, must provide to all clients a written notice of their rights and obligations (statements must be true, debtors must disclose all assets and liabilities, debtors must reveal their “Current Monthly Income,” and the cases are subject to audit), must provide a copy of the contract to the client, must disclose that an attorney may not be necessary to file a bankruptcy, and must maintain copies of disclosures given to any person for two years. §527
C. A Debt Relief Agency must disclose in advertising: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” Advertising must not mislead a consumer to believe that credit counseling is offered rather than bankruptcy assistance. §528
D. However, on October 17, 2005, the date BAPCPA went into effect, the Chief United States Bankruptcy Judge for the United States Bankruptcy Court for the Southern District of Georgia ruled “that attorneys regularly admitted to the Bar of this Court or those admitted pro hac vice are not covered by the provisions of the Code regulating debt relief agencies, including without limitations §§ 101(12A), (4A) 526, 527 and 528, and are excused from compliance with any of these requirements or provisions, so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise.”
VIII. The Median Income and Means Test
A. Using your state’s median income (in NY, $42,896 for 1 earner, $51,994 for 2 people, $62,815 for 3 people, $74,501 for 4 people (add $6,300 for each individual in excess of 4)), your attorney determines whether your income, determined by averaging the past 6 months is above or below that median.
B. If your income is above the state median income, you may be required to file a Chapter 13 repayment plan where you repay a percentage of your debts over a 36-60 month period, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where your debts are eliminated, unless the Bankruptcy Court rules that your circumstances are extraordinary.
C. If you are required to file a Chapter 13 case under the Median Income or Means test, then your monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment. BAPCPA limits the amounts you can claim as expenses.
D. The person preparing a bankruptcy petition must give assurances about the accuracy of the contents of the petition. In the case of attorneys, they must make “reasonable inquiry to verify that the information contained in such documents is well grounded in fact.”- Debtor’s attorney may have to reimburse trustee’s and creditors prosecution costs, including attorney fees, if §707(b) motion is granted and attorney violated rule 9011 in filing the case under Chapter 7. Civil penalties may also be imposed. §707(b)(4)
1. This provision of the law may be unconstitutional and may be challenged by the American Bar Association.
E. Abuse is presumed if the debtor’s Current Monthly Income:
- less “scheduled” contract payments due to secured creditors over five years divided by 60,
-less arrearages or “any additional payments” which would be necessary in a Chapter 13 plan for the debtor to keep possession of a house, car or other necessary property, divided by 60,
-less priority debts divided by 60,
-less the expenses specified by the IRS in its financial analysis standards–National and Local and Other Necessary Expenses,
-less other actual expenses as permitted by the IRS, less health and disability insurance expenses and a health savings account,
-less “family violence” expenses,
-less up to 5% additional expenses for food,
-less up to 5% additional expense for clothing,
-less the actual monthly costs of caring for an elderly, chronically ill or disabled household or family member, even if not a dependent,
-less the actual expenses of administering a Chapter 13 case not to exceed 10% as determined by the U.S. Trustee,
-less up to $1500 per year actual expenses for each dependent child under 18 in school, divided by 12,
-less additional costs for home energy expenses
is equal to or greater than $100 and greater than 25% of the debtor’s non-priority, unsecured debts. §707(b)(2).
Stated differently, one must first calculate the debtors Current Monthly Income, deduct expenses permitted by the Statute, and multiply that amount by 60. That figure is the debtor’s “Net Monthly Income”. Then calculate what amount equals 25% of the debtor’s unsecured nonpriority debt. If this amount is less than $6,000, then the debtor’s Net Monthly Income cannot exceed $6,000. If this amount is greater than $6,000 but less than $10,000 the debtor’s Net Monthly Income can not exceed $10,000. If a debtor has $40,000 of unsecured debt then their Net Monthly Income cannot exceed $10,000 and any debtor with $24,000 or less of unsecured debt cannot have Net Monthly Income which exceeds $6,000.
1. This provision is so complex that it is unclear whether debtors will be able to file without the assistance of attorneys.
2. The U.S. Bankruptcy Court for the Middle District of Florida has created a means test calculator at: http://www.flmb.uscourts.gov/calculator.htm and the United States Trustee has means testing information at
http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm
3. All of the bankruptcy software programs now include a Means Test Calculator.
IX. Chapter 13
A. If a Chapter 13 debtor’s current monthly income combined with spouse’s current monthly income is greater than the applicable median income, the plan proposed by the debtor must be for at least five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses. §1322(d)(1)
B. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property. §1326(a)(4)
C. Chapter 13 discharges
1. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13. §1328(f)(1)
2. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case. §1328(f)(2)
3. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee. §1328(g)
4. The Chapter 13 “super-discharge” that is obtainable under current law is greatly reduced under the Bankruptcy Reform Act. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a0(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
X. Dismissal for Failure to file Documents and Schedules
In addition to the list of creditors, schedules of assets, liabilities, income and expenses, debtors must provide:
a. certificate of credit counseling
b. evidence of payment from employers, if any, received 60 days before filing
c. statement of monthly net income and any anticipated increase in income of expenses after filing
d. tax returns or transcripts for the most recent tax year
e. tax returns filed during the case including tax returns for prior years that had not been filed when the cases began and
f. a photo ID, among other items.
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 after the time period has passed.
XI. Where do we go from here?
A. There are 6 bills before Congress which are attempting to overrule or void various provisions of the bill.
B. Speak to your Congressman and voice your opinion to get this Bankruptcy Bill repealed or amended.
C. What will happen to chapter 7 bankruptcy?
1. It is estimated that filing volume will decrease by 20 to 25%
2. Will attorneys do chapter 7 filings?
3. Can individuals file without attorneys due to the complexities in the law?
D. Will this bankruptcy bill aid credit card companies and banks? See the attached article which indicates that credit card companies may make out work under this bill.
E. Will technology make it possible to continue to practice in this area of the law?
1. On line credit counseling services
2. On line websites that will enable attorneys to search for assets and liabilities for clients prior to filing-“due diligence”
F. The impact of the law will also depend on how the U.S. Trustee’s Office enforces the law and how bankruptcy judges interpret the law.
G. The Shenwick & Associates website has detailed information regarding personal bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act.
JHS
A. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 (also known as the Bankruptcy Reform Act) went into effect on October 17, 2005.
B. October 17, 2005 will go down as a sad day in American History.
1. What is the purpose of bankruptcy law?
a. Is the purpose of bankruptcy law to give individuals a “fresh start”?
b. Do we have bankruptcy laws because we are a comparing and compassionate society?
c. Is bankruptcy a safety valve for society?
C. The name of the law is misleading. The title “Bankruptcy Abuse Prevention” suggests that the old system was abusive? Was it?-1.5 million Americans file for bankruptcy on average each year.
1. Why do people file for bankruptcy?
a. Credit card debt, medical bills, student loans, the cost of housing, business reversal, illness, job loss and divorce.
b. It is estimated that in October 2005 500,000 Americans filed for bankruptcy to beat the effective date of the new law.
i. According to an article in the New York Times business section, various banks and credit card companies said that they were surprised by the volume of the filings-should they have been?
2. There are about two provisions in this poorly drafted 500 page bill that are pro-consumer regarding personal bankruptcy. Those concern (a) Reaffirmation Agreements, which require extensive disclosures, and must outline the rights of the debtor and must specify the amount of the debt being reaffirmed, additional charged or costs imposed upon the debtor, the annual percentage rate, the simple interest rate and, if elected by the creditor, a statement of the repayment schedule. If secured, the disclosure must contain description of the property upon which the creditor’s lien attaches and the original purchase price of the items (if the security interest is not a purchase money interest, the disclosure must contain the amount of the original loan). The disclosure must include a statement that the debtor has the right to consult an attorney, that the reaffirmation agreement must be filed with the court before it becomes effective, and that the debtor has the right to rescind the reaffirmation within 60 days of its filing and (b) Reduction of dischargeable unsecured claims-the Court may reduce a dischargeable unsecured claim by up to 20% if the creditor unreasonably refused to negotiate an alternative payment schedule proposed by an approved credit-counseling agency. The repayment proposal must have offered at least 60% of the debt and must have been made at least 60 days prior to the petition §502(k)-Will this provision be of any use to consumers?
3. What do debtor’s attorneys, creditor attorneys, Judges and US
Trustee say about this law?
4. Will attorneys continue to do chapter 7 bankruptcy filings based on the increased personal exposure?
5. Legal fees for those attorneys who continue to do personal bankruptcy work are expected to double.
6. Malpractice rates are predicted to increase in the next year for those attorneys who do personal bankruptcy work and/or malpractice insurers will refuse to provide coverage for liability from BAPCPA-Is this what the banks and credit card companies expected or wanted to happen?
D. Why did President Bush sign the bill so that it takes effect on a Monday, rather than on a Tuesday, Wednesday, Thursday or Friday? The Bankruptcy Courts are closed on Saturday and Sunday therefore limiting the ability of people to file for bankruptcy -was this accidental or intentional?
E. Why did the bill increase the chapter 7 filing fee from $209 to $274?
1. This is a $65 increase or a 31% increase-this increase is unconscionable for people that need to file for bankruptcy protection.
F. Would a better name for the bill have been the “Bankruptcy Bill that Was Bought and Paid for by Credit Card Companies and Banks”?
1. The banks and credit companies have lobbied for this bill for about 8 years and it is said that they spent about $40 million dollars lobbying for this bill.
2. Who speaks for debtors or poor people in this country?
i. Professor Elizabeth Warren a professor at Harvard Law School and an expert on personal bankruptcy has been vehemently opposed to this bill.
G. In analyzing this bill there are 2 driving factors: (1) increase the cost and level of effort or aggravation to file for clients and attorneys and (2) decrease the number of people that file for chapter 7 bankruptcy protection.
H. How did the old system work? Was the old system broken?
1. Under the old system there were no restrictions on the ability of an individual or corporation to file for chapter 7 bankruptcy protection.
a. The only limitation was section 707(b) of the Bankruptcy Code dealing with “substantial abuse.” If a debtor’s after tax income was greater than there ordinary and necessary personal and business expenses then their case would be converted to chapter 13 of the Bankruptcy Code which was a 3-5 year payment plan creditors.
2. How does the new system work for national emergencies such as Hurricane Katrina?
a. U.S. Trustee’s Office has waived the pre-bankruptcy filing credit counseling requirement for victims of Hurricane Katrina-will this set a precedent for future national catastrophes?
II. New Definitions in the Bankruptcy Law:
A. Section 101(10A) defines a new term of art, “Current monthly income,” with reference to the 6 months preceding the petition month. Current monthly income is the platform for the new “means test” in § 707(b) and for calculating disposable income for median income debtors in § 1325(b) of the Bankruptcy Code.
B. Section 101(12A) defines a “debt relief agency” to include many bankruptcy practitioners.
C. Section 101(14A) broadly defines “domestic support obligation” to include alimony, maintenance and support accruing before or after the petition and owed to various individuals or entities. This new definition is used in many sections dealing with dischargeability, priorities, confirmation of plans, etc.
D. Section 101(39A) defines “median family income” by reference to census data, adjusted by the Consumer Price Index. Many sections of the new Code–including the means test in § 707(b) and the disposable income test in § 1325(b)–use median family income as a measuring stick to trigger important consequences.
III. New Bankruptcy Code Provisions:
A. Multiple bankruptcy filings-The minimum time between filing Chapter 7 cases has been raised from 6 years to 8 years.
1. If a discharge has been granted in a Chapter 7 case, a Chapter 13 case apparently may be filed, but before a discharge can be entered in the Chapter 13 case, the debtor’s Chapter 13 plan must continue until at least 4 years from the date of the Chapter 7 discharge.
B. Credit Counseling Requirement:
No individual may be a debtor under the Bankruptcy Code unless, within 180 days before filing the petition, the debtor received an individual or group briefing (including 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. The court may grant an exemption based on the debtor’s sworn statement but exemption expires 30 days after the petition. The briefing is not required if the court determines that debtor is incapacitated (mentally), disabled (physically), or is an active member of the military in a combat zone. § 109(h)(1)
C. Representation of Creditors:
The representation of a creditor holding a consumer debt at a Chapter 7 or Chapter 13 meeting of creditors need not be by counsel but may be through an employee or agent of the creditor, and that agent is permitted to represent multiple creditors. This authorization may not be limited by any local or state rule governing the unauthorized practice of law. § 341(c)
D. Notice of address of Creditors:
Any entity may file with any bankruptcy court a “notice of address” for all notices in all cases under Chapter 7 or Chapter 13 in all bankruptcy courts. This “notice of address” must be used for all noticing by a court 30 days after filing unless the entity files a (different) “notice of address” in a specific case. A notice of address filed in a specific case must be used by the court or by the debtor five days after filing. § 342(e) and (f)
E. Notice to a Creditor:
1. Notice provided to a creditor–by the debtor or by the court-inconsistent with the new rules in § 342 shall not be effective until the notice has been “brought to the attention” of the creditor. If the creditor “designates a person or organizational subdivision” to receive bankruptcy notices and has a reasonable procedure to deliver notices to such person or subdivision, then a notice has not been “brought to the attention” of the creditor until the designated person or subdivision receives the notice. § 342(g)(1)
2. Notice to be given by a debtor to creditors must be to the address designated by the creditor, either in communications to the debtor or by the creditors preferred address as provided to the court. Such notice to creditors must include account numbers.
F. Valuation of Personal Property. In individual Chapter 7 and 13 cases, the value of personal property securing an allowed claim shall be replacement value on the date of the petition without deduction for sale or marketing costs. For goods acquired for personal, family or household purposes, replacement value means the price a retail merchant would charge for property of that kind given its age and condition. §506(a)(2)
G. Payment Advices. Debtors must file copies of “all payment advices or other evidence of payment” received by the debtor from an employer in the 60 days prior to the filing. The failure to file payment advices is one of the grounds for “automatic dismissal” on the 46th day under §521(i). § 521(a)(1)(B)(iv)
H. Changes in Budget Must Be Filed With Court. Debtors must file a statement showing any “reasonably” anticipated increase in income or expenditures within the year after filing. §521(a)(1)(B)(vi)
I. Mandatory Pre-Petition Credit Counseling. Before a person can file bankruptcy a debtor(s) must receive and file a certificate from an APPROVED, non-profit budget and credit counseling agency that describes the services and opportunities for available credit counseling and assistance in performing an individual budget analysis provided to the debtor and the debtor must file a copy of the debt repayment plan, if any created prior to filing. §521(b).
1. What is the value of these services other than to increase the cost of bankruptcy filings and delay bankruptcy filings?
2. In September 2005, the Internal Revenue Service denied tax-exempt status to several credit counseling agencies, partly because they relied too heavily on banks and credit companies for their funding.
i. Are these credit counseling services more than shills for the credit card companies?
3. The US Trustee’s Office provides a list of Credit Counselors.
J. Tax Returns.
1. “Not later than 7 days before the date first set for the first meeting of creditors,” Chapter 7 and Chapter 13 debtors “shall provide” to the trustee a copy (or transcript) of the federal tax return for the tax year ending before the petition, for which a return was filed.
2. The debtor must provide a copy (or transcript) of the return to any creditor that timely requests it. The court “shall dismiss” the case if the debtor fails to comply. §521(e)(2)(A),(B) and (C)
3. New §1308 of the Bankruptcy Code contains many new tax return responsibilities for Chapter 13 debtors, including that all returns “required” for the 4 years ending on the petition date have been filed with the taxing authority by the day before the first scheduled meeting of creditors. The Chapter 13 trustee may “hold open” the meeting of creditors for limited periods to allow the debtor to file unfiled returns.
K. Possession of Property. Chapter 7 debtor shall not retain possession of personal property subject to a purchase money interest (collateral) unless within 45 days of the first meeting of creditors the debtor either reaffirms or redeems the property. §521(a)(6)
L. Asset Protection Trusts. Under new §548(e), a trustee can avoid the debtor’s transfer in an interest in property made within 10 years of the filing if the transfer as made to a self-settled trust or similar device by the debtor for the benefit of the debtor and the transfer was made with the actual intent to hinder, delay or defraud any creditor.
IV. Limitations on the Automatic Stay:
A. Serial Filing-no automatic stay arises if the debtor had two or more cases pending within the previous year, but were dismissed. Upon request of any party, the court shall enter an order confirming that no stay is in effect. Within 30 days of the filing of the petition, any party can request the court to impose a stay only if the party demonstrates that the later filing is in good faith.
B. Child and spousal support obligations must be brought current and kept current during the pendency of a bankruptcy. The automatic stay does not apply to the withholding of income that is property of the estate or property of the debtor for the payment of a domestic support obligation pursuant to a judicial or administrative order or statute.
C. Licenses. The automatic stay does not apply to the withholding suspension or restriction of a driver’s, professional, occupational or recreation license upon nonpayment of support. § 362(b)(2)(D)
D. Tax Refunds for Support Obligations. The automatic stay does not apply to the interception of tax refunds to collect support obligations. § 362(b)(2)(F)
E. Pension Plan Loan Repayments. The automatic stay does not apply to the consensual withholding of income from a debtor’s wages to repay a loan incurred by a debtor from a qualified pension, profit sharing, stock bonus or thrift savings plan.
F. Eviction. If a lessor obtained a judgment for possession (warrant of eviction) before the bankruptcy petition was filed, the automatic stay does not apply to the continuation of an eviction.
V. Exemptions
A. A debtor’s exemptions are determined by examining state law for the state where the debtor has been domiciled for 730 days prior to the filing of the petition. If the debtor has not been domiciled in a single state for 730 days, exemptions are determined by the debtor’s domicile for the majority of the 180 days that preceded the 730-day period. §522(b)(3)(A). If you’re living in a state for less than two years that has more favorable provisions than the one you previously lived in, you can’t use the more favorable provisions.
B. The maximum amount of a qualified IRA that may be exempted is $1,000,000. §522(n)
C. Homestead exemptions would be capped at $125,000 if the debtor acquired the property during the 1215-day period preceding the date of filing. Note that New York State recently increased the homestead exemption to $50,000 per debtor, so a married couple under New York law can exempt $100,000 of equity in a residence.
VI. Nondischargeability of Debts
A. The presumption of nondischargeability for unsecured debt is lowered to debts incurred within 90 days of the filing that aggregate at least $500 for luxury goods or services and cash advances aggregating more than $750 within 70 days. §523(a)(2)
B. The exception to discharge for student loans is expanded to encompass all student loans as defined by the IRC §221(e)(1), expanding nondischargeable student loans to for profit and nongovernmental entities. §523(a)(8)(B)
C. Loans to a pension fund are nondischargeable in Chapter 7. §523(a)(18)
D. The nondischargeability of a non-support domestic obligation under §523(a)(15) would no longer be dependent upon the initiation of a timely adversary complaint under §523(c). Under Chapter 7, the non-support domestic obligation would survive the discharge. The “greater hardship” exception to the exception has been eliminated. §523(c)
VII. Debt Relief Agencies
A. “Debt relief agencies” may include attorneys that provide bankruptcy assistance to persons with consumer debt and nonexempt assets worth less than $150,000. DRAs are required to do what they promise to do, are prohibited from making statements or counseling statements that are untrue (and that “upon the exercise of reasonable care, should have been known” by the agency), are prohibited from making misleading statements about the services offered by the agency and are prohibited from advising an assisted person to incur more debt if they are thinking of filing a bankruptcy. State consumer protection agencies are empowered to enforce these provisions and if a Debt Relief Agency violates these provisions, actual damages can be recovered on behalf of the assisted person. Attorneys’ fees can be awarded in actions brought against Debt Relief Agencies. §526
B. Debt relief agencies must disclose the costs of services, must provide to all clients a written notice of their rights and obligations (statements must be true, debtors must disclose all assets and liabilities, debtors must reveal their “Current Monthly Income,” and the cases are subject to audit), must provide a copy of the contract to the client, must disclose that an attorney may not be necessary to file a bankruptcy, and must maintain copies of disclosures given to any person for two years. §527
C. A Debt Relief Agency must disclose in advertising: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” Advertising must not mislead a consumer to believe that credit counseling is offered rather than bankruptcy assistance. §528
D. However, on October 17, 2005, the date BAPCPA went into effect, the Chief United States Bankruptcy Judge for the United States Bankruptcy Court for the Southern District of Georgia ruled “that attorneys regularly admitted to the Bar of this Court or those admitted pro hac vice are not covered by the provisions of the Code regulating debt relief agencies, including without limitations §§ 101(12A), (4A) 526, 527 and 528, and are excused from compliance with any of these requirements or provisions, so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise.”
VIII. The Median Income and Means Test
A. Using your state’s median income (in NY, $42,896 for 1 earner, $51,994 for 2 people, $62,815 for 3 people, $74,501 for 4 people (add $6,300 for each individual in excess of 4)), your attorney determines whether your income, determined by averaging the past 6 months is above or below that median.
B. If your income is above the state median income, you may be required to file a Chapter 13 repayment plan where you repay a percentage of your debts over a 36-60 month period, and not allowed to file a traditional Chapter 7 liquidating bankruptcy where your debts are eliminated, unless the Bankruptcy Court rules that your circumstances are extraordinary.
C. If you are required to file a Chapter 13 case under the Median Income or Means test, then your monthly expenses will be limited to the IRS National and Local Standard Expense guidelines, subject to limited adjustment. BAPCPA limits the amounts you can claim as expenses.
D. The person preparing a bankruptcy petition must give assurances about the accuracy of the contents of the petition. In the case of attorneys, they must make “reasonable inquiry to verify that the information contained in such documents is well grounded in fact.”- Debtor’s attorney may have to reimburse trustee’s and creditors prosecution costs, including attorney fees, if §707(b) motion is granted and attorney violated rule 9011 in filing the case under Chapter 7. Civil penalties may also be imposed. §707(b)(4)
1. This provision of the law may be unconstitutional and may be challenged by the American Bar Association.
E. Abuse is presumed if the debtor’s Current Monthly Income:
- less “scheduled” contract payments due to secured creditors over five years divided by 60,
-less arrearages or “any additional payments” which would be necessary in a Chapter 13 plan for the debtor to keep possession of a house, car or other necessary property, divided by 60,
-less priority debts divided by 60,
-less the expenses specified by the IRS in its financial analysis standards–National and Local and Other Necessary Expenses,
-less other actual expenses as permitted by the IRS, less health and disability insurance expenses and a health savings account,
-less “family violence” expenses,
-less up to 5% additional expenses for food,
-less up to 5% additional expense for clothing,
-less the actual monthly costs of caring for an elderly, chronically ill or disabled household or family member, even if not a dependent,
-less the actual expenses of administering a Chapter 13 case not to exceed 10% as determined by the U.S. Trustee,
-less up to $1500 per year actual expenses for each dependent child under 18 in school, divided by 12,
-less additional costs for home energy expenses
is equal to or greater than $100 and greater than 25% of the debtor’s non-priority, unsecured debts. §707(b)(2).
Stated differently, one must first calculate the debtors Current Monthly Income, deduct expenses permitted by the Statute, and multiply that amount by 60. That figure is the debtor’s “Net Monthly Income”. Then calculate what amount equals 25% of the debtor’s unsecured nonpriority debt. If this amount is less than $6,000, then the debtor’s Net Monthly Income cannot exceed $6,000. If this amount is greater than $6,000 but less than $10,000 the debtor’s Net Monthly Income can not exceed $10,000. If a debtor has $40,000 of unsecured debt then their Net Monthly Income cannot exceed $10,000 and any debtor with $24,000 or less of unsecured debt cannot have Net Monthly Income which exceeds $6,000.
1. This provision is so complex that it is unclear whether debtors will be able to file without the assistance of attorneys.
2. The U.S. Bankruptcy Court for the Middle District of Florida has created a means test calculator at: http://www.flmb.uscourts.gov/calculator.htm and the United States Trustee has means testing information at
http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm
3. All of the bankruptcy software programs now include a Means Test Calculator.
IX. Chapter 13
A. If a Chapter 13 debtor’s current monthly income combined with spouse’s current monthly income is greater than the applicable median income, the plan proposed by the debtor must be for at least five years. On the anniversary date of a confirmed plan, a debtor must file a new statement of income and expenses. §1322(d)(1)
B. Within 60 days of the filing of a petition, a Chapter 13 debtor must provide to lessors of personal property or purchase money secured creditors reasonable evidence of insurance on the property that the debtor retains. The debtor must continue to provide proof of such insurance for as long as the debtor retains possession of the property. §1326(a)(4)
C. Chapter 13 discharges
1. A debtor may not receive a discharge in Chapter 13 if the debtor received a discharge in a Chapter 7, 11 or 12 case filed within four years of the filing of the Chapter 13. §1328(f)(1)
2. A Chapter 13 debtor may not receive a discharge if the debtor received a discharge in a previous Chapter 13 case filed within two years of the filing of the current case. §1328(f)(2)
3. The court may not grant a Chapter 13 discharge unless the debtor has completed an educational course concerning personal financial management as approved by the U.S. Trustee. §1328(g)
4. The Chapter 13 “super-discharge” that is obtainable under current law is greatly reduced under the Bankruptcy Reform Act. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a0(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge.
X. Dismissal for Failure to file Documents and Schedules
In addition to the list of creditors, schedules of assets, liabilities, income and expenses, debtors must provide:
a. certificate of credit counseling
b. evidence of payment from employers, if any, received 60 days before filing
c. statement of monthly net income and any anticipated increase in income of expenses after filing
d. tax returns or transcripts for the most recent tax year
e. tax returns filed during the case including tax returns for prior years that had not been filed when the cases began and
f. a photo ID, among other items.
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 after the time period has passed.
XI. Where do we go from here?
A. There are 6 bills before Congress which are attempting to overrule or void various provisions of the bill.
B. Speak to your Congressman and voice your opinion to get this Bankruptcy Bill repealed or amended.
C. What will happen to chapter 7 bankruptcy?
1. It is estimated that filing volume will decrease by 20 to 25%
2. Will attorneys do chapter 7 filings?
3. Can individuals file without attorneys due to the complexities in the law?
D. Will this bankruptcy bill aid credit card companies and banks? See the attached article which indicates that credit card companies may make out work under this bill.
E. Will technology make it possible to continue to practice in this area of the law?
1. On line credit counseling services
2. On line websites that will enable attorneys to search for assets and liabilities for clients prior to filing-“due diligence”
F. The impact of the law will also depend on how the U.S. Trustee’s Office enforces the law and how bankruptcy judges interpret the law.
G. The Shenwick & Associates website has detailed information regarding personal bankruptcy under the Bankruptcy Abuse Prevention and Consumer Protection Act.
JHS
James Shenwick Outline of Speech at NYS Society of CPA on S Corporations and Closely Held Corporations and BAPCPA on November 17, 2006
SHENWICK & ASSOCIATES
230 Park avenue
17th floor
New york, NY 10169
telephone: (212) 541-6224 Ext. 7592
telecopier: (646)-218-4600
Cell Phone: 917-363-3391
Email: jhs7@att.net
Website: http://jshenwick.googlepages.com
Blog: http://shenwick.blogspot.com/
November 17, 2006
New York State of CPA’s-S Corp and Closely Held Company Committee
BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT (“BAPCPA”) AND “SMALL BUSINESS” CASES
I. Valuation of Small Businesses in Bankruptcy
A. S Corporations are a tax concept and not a bankruptcy concept.
B. Valuation of S Corporations and Closely Held Businesses are
important in bankruptcy-unlike publicly traded corporations where shares are traded daily valuation is more difficult
C. Bankruptcy Code section 541 creates a “hypothetical estate” when a person or entity files for bankruptcy and those interests must be valued
D. Types of Bankruptcy for Corporations. Corporations may only file for chapter 7 or chapter 11 bankruptcy
i. Chapter 7 is a “liquidation” and Chapter 11 can be a “liquidation” or reorganization.
E. When valuing closely held entities in bankruptcy attorneys look at the following assets:
i. Cash and checking account balances
ii. Accounts receivable (not more than 90 days past due)
iii. Inventory
iv. Real estate or under market leases
v. Furniture, Fixtures and Equipment
vi. Goodwill (do small businesses have good will?)
Less liabilities
F. Minority Discounts and Shareholder Agreements
i. What would a hypothetical investor pay to own 5% of the shares of the ABC Corp.?
ii. What happens if the ABC Corp. has a shareholder agreement or otherwise restricts the transfer of those shares?
iii. Who are the likely parties to buy shares in a closely held corporation? (existing shareholders?)
G. Personal Service Corporations for professionals, doctors, artists and others?
i. What is the value of this asset if the professional files for bankruptcy and then ceases to work for that corporation?
ii. Should professional service corporations liquidate or reorganize?
H. Confirmation Standards in Chapter 11. To confirm a chapter 11 bankruptcy plan one of the standards is that creditors must receive $1 more than they would get in a chapter 7 bankruptcy filing so valuation is an important issue.
I. Trustee Role in Closely Held Corporation Bankruptcy Case. If an individual files for chapter 7 bankruptcy and owns shares of stock in a closely held corporation the Bankruptcy Trustee is obligated to investigate the assets owned by the debtor and value those assets. If the assets have value the Trustee is required to sell those assets and distribute the proceeds to unsecured creditors and if the assets have no value they are abandoned back to the debtor when the case is closed.
II. Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) and Small Business Cases
A. BAPCPA which took effect on October 17, 2005 is the greatest change to bankruptcy law in the last 25 years and while most of those changes effected personal bankruptcy many changes also affected corporate bankruptcy and small business cases.
B. Small Business Cases-a “small business debtor” is a person or organization engaged in non-real estate commercial or business activities with an aggregate secured and unsecured debt of not more $2,000,000.
C. Types of Creditors in Bankruptcy. There are 3 types of creditors in bankruptcy cases: unsecured creditors (trade vendors, credit cards), secured creditors (mortgages and Uniform Commercial Code-1 and security interest creditors) and administrative and priority creditors (non-dischargeable taxes, claims incurred after the date of a bankruptcy filing, student loans, divorce obligations).
D. Filing and Reporting Requirements of BAPCPA. BAPCPA imposes new duties on small business debtors and on the United States Trustee in small business cases. The filing and reporting requirements include financial statements, federal income tax returns, profitability information, projected cash receipts and disbursements, a comparison of projections to actual results and certification of compliance with tax filings and payments. Small business debtors must maintain insurance appropriate to the industry and the debtor must allow the United States Trustee or representative to inspect the debtor’s business premises, books and records.
E.United States Trustee must conduct an initial debtor interview early in the case to begin to investigate the debtor’s viability, inquire about the debtor’s business plan, information the debtor of its obligations and develop an agreed scheduling order. The United States Trustee may inspect the debtor’s business books and records and is expected to monitor the debtor to determine if they can confirm a plan. If confirmation of a plan appears unlikely, the United States Trustee must make a motion in the Bankruptcy Court for conversion or dismissal of the case.
F. The Disclosure Statement and Plan process has been simplified by BAPCPA by permitting the small business debtor to make its required disclosures regarding the plan (a) in the plan itself, (b) in a prescribed form or (c) in a separate disclosure statement. The hearing on the disclosure statement can be combined with the plan. The small business case plan must be filed no later than 300 days after the date of the order for relief (the date the bankruptcy petition was filed). The Bankruptcy Court must confirm the plan no later than 45 days after a plan is filed. It is difficult to obtain extensions for any of these deadlines.
G. Judges Discretion pursuant to BAPCPA also removed some of a Bankruptcy Judge’s discretion in deciding whether a case should be converted or dismissed. The factors in deciding whether a case should be converted or dismissed are: substantial or continuing loss, the absence of a reasonable likelihood of rehabilitation, gross mismanagement of the estate, failure to maintain appropriate insurance, unauthorized use of cash collateral, failure to comply with an order of the court, unexcused failure to satisfy timely any filing or reporting requirement, failure to timely file or pay taxes owed after the date of the bankruptcy filing, failure to file a disclosure statement, or to file or confirm a plan within the time fixed by the Bankruptcy Code or Court Order.
H. Motion to Dismiss. The Court is also required to reach a decision on a motion to dismiss not later than 30 days after the motion is filed and to render a decision no later than 15 days after commencement of the hearing.
I. Multiple Filings and the Automatic Stay. If a debtor files a bankruptcy petition within 2 years of an order dismissing a prior small business case or within 2 years of the order confirming a plan in a prior small business case the automatic stay will not apply to the new case.
JHS
230 Park avenue
17th floor
New york, NY 10169
telephone: (212) 541-6224 Ext. 7592
telecopier: (646)-218-4600
Cell Phone: 917-363-3391
Email: jhs7@att.net
Website: http://jshenwick.googlepages.com
Blog: http://shenwick.blogspot.com/
November 17, 2006
New York State of CPA’s-S Corp and Closely Held Company Committee
BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT (“BAPCPA”) AND “SMALL BUSINESS” CASES
I. Valuation of Small Businesses in Bankruptcy
A. S Corporations are a tax concept and not a bankruptcy concept.
B. Valuation of S Corporations and Closely Held Businesses are
important in bankruptcy-unlike publicly traded corporations where shares are traded daily valuation is more difficult
C. Bankruptcy Code section 541 creates a “hypothetical estate” when a person or entity files for bankruptcy and those interests must be valued
D. Types of Bankruptcy for Corporations. Corporations may only file for chapter 7 or chapter 11 bankruptcy
i. Chapter 7 is a “liquidation” and Chapter 11 can be a “liquidation” or reorganization.
E. When valuing closely held entities in bankruptcy attorneys look at the following assets:
i. Cash and checking account balances
ii. Accounts receivable (not more than 90 days past due)
iii. Inventory
iv. Real estate or under market leases
v. Furniture, Fixtures and Equipment
vi. Goodwill (do small businesses have good will?)
Less liabilities
F. Minority Discounts and Shareholder Agreements
i. What would a hypothetical investor pay to own 5% of the shares of the ABC Corp.?
ii. What happens if the ABC Corp. has a shareholder agreement or otherwise restricts the transfer of those shares?
iii. Who are the likely parties to buy shares in a closely held corporation? (existing shareholders?)
G. Personal Service Corporations for professionals, doctors, artists and others?
i. What is the value of this asset if the professional files for bankruptcy and then ceases to work for that corporation?
ii. Should professional service corporations liquidate or reorganize?
H. Confirmation Standards in Chapter 11. To confirm a chapter 11 bankruptcy plan one of the standards is that creditors must receive $1 more than they would get in a chapter 7 bankruptcy filing so valuation is an important issue.
I. Trustee Role in Closely Held Corporation Bankruptcy Case. If an individual files for chapter 7 bankruptcy and owns shares of stock in a closely held corporation the Bankruptcy Trustee is obligated to investigate the assets owned by the debtor and value those assets. If the assets have value the Trustee is required to sell those assets and distribute the proceeds to unsecured creditors and if the assets have no value they are abandoned back to the debtor when the case is closed.
II. Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) and Small Business Cases
A. BAPCPA which took effect on October 17, 2005 is the greatest change to bankruptcy law in the last 25 years and while most of those changes effected personal bankruptcy many changes also affected corporate bankruptcy and small business cases.
B. Small Business Cases-a “small business debtor” is a person or organization engaged in non-real estate commercial or business activities with an aggregate secured and unsecured debt of not more $2,000,000.
C. Types of Creditors in Bankruptcy. There are 3 types of creditors in bankruptcy cases: unsecured creditors (trade vendors, credit cards), secured creditors (mortgages and Uniform Commercial Code-1 and security interest creditors) and administrative and priority creditors (non-dischargeable taxes, claims incurred after the date of a bankruptcy filing, student loans, divorce obligations).
D. Filing and Reporting Requirements of BAPCPA. BAPCPA imposes new duties on small business debtors and on the United States Trustee in small business cases. The filing and reporting requirements include financial statements, federal income tax returns, profitability information, projected cash receipts and disbursements, a comparison of projections to actual results and certification of compliance with tax filings and payments. Small business debtors must maintain insurance appropriate to the industry and the debtor must allow the United States Trustee or representative to inspect the debtor’s business premises, books and records.
E.United States Trustee must conduct an initial debtor interview early in the case to begin to investigate the debtor’s viability, inquire about the debtor’s business plan, information the debtor of its obligations and develop an agreed scheduling order. The United States Trustee may inspect the debtor’s business books and records and is expected to monitor the debtor to determine if they can confirm a plan. If confirmation of a plan appears unlikely, the United States Trustee must make a motion in the Bankruptcy Court for conversion or dismissal of the case.
F. The Disclosure Statement and Plan process has been simplified by BAPCPA by permitting the small business debtor to make its required disclosures regarding the plan (a) in the plan itself, (b) in a prescribed form or (c) in a separate disclosure statement. The hearing on the disclosure statement can be combined with the plan. The small business case plan must be filed no later than 300 days after the date of the order for relief (the date the bankruptcy petition was filed). The Bankruptcy Court must confirm the plan no later than 45 days after a plan is filed. It is difficult to obtain extensions for any of these deadlines.
G. Judges Discretion pursuant to BAPCPA also removed some of a Bankruptcy Judge’s discretion in deciding whether a case should be converted or dismissed. The factors in deciding whether a case should be converted or dismissed are: substantial or continuing loss, the absence of a reasonable likelihood of rehabilitation, gross mismanagement of the estate, failure to maintain appropriate insurance, unauthorized use of cash collateral, failure to comply with an order of the court, unexcused failure to satisfy timely any filing or reporting requirement, failure to timely file or pay taxes owed after the date of the bankruptcy filing, failure to file a disclosure statement, or to file or confirm a plan within the time fixed by the Bankruptcy Code or Court Order.
H. Motion to Dismiss. The Court is also required to reach a decision on a motion to dismiss not later than 30 days after the motion is filed and to render a decision no later than 15 days after commencement of the hearing.
I. Multiple Filings and the Automatic Stay. If a debtor files a bankruptcy petition within 2 years of an order dismissing a prior small business case or within 2 years of the order confirming a plan in a prior small business case the automatic stay will not apply to the new case.
JHS
Tuesday, October 10, 2006
Commercial Lease Checklist
Shenwick & Associates has represented many tenants in commercial lease negotiations, provided below is a leasing checklist that we have developed. Any person with questions regarding lease negotiations should not hesitate to email or call Jim Shenwick.
1. Free rent-does the Lease reflect the deal between Landlord and Tenant?
2. Are the premises in a land-marked building?
3. Request a copy of the most recent tax bill-Tenant should only pay its pro rata share of taxes
4. Is the electricity direct meter, sub-meter or rent inclusion?
5. Assignment and sub-let should be allowed for (a) Tenant's sale of its business, (b) merger of its business, (c) Tenant goes public, (d) assignment of its lease to a related entity or division. In a sublet or an assignment, for a proposed deal, the Tenant should be required to provide Landlord a term sheet of the material terms and conditions and not a complete assignment or sublease.
- If the Lease allows Landlord recapture in an assignment or sublet situation, then the Lease should provide that if the Landlord elects to recapture space, the Tenant can withdraw it request for the right to an assignment or sublet.
6. Non-structural alterations should be allowed as a matter of right by Tenant
7. Security Deposit. Interest on security deposit should go to Tenant without request or notice once per year and returned to Tenant 30 days after lease ends. Security Deposit should decrease over time if no default by Tenant under Lease (“burn down”) and Landlord cannot apply security deposit without notice to Tenant.
8. Landlord consent to particular use and assistance in getting a liquor license if it is a restaurant deal
9. Sprinkler installation, monitoring, and maintenance who pays? (What %)
10. Electricity capacity of present wiring and watts per square foot
11. Signage in lobby (directory), elevator, floor and door (window signage, flag if retail)
12. Right to make deliveries to the premises at any time of the day for retail tenant.
13. Sidewalk maintenance is not the responsibility of retail tenant-other than snow removal
14. Landlord should pre-approve the private carter for retail tenant
15. Tenant not pay Landlord's expenses for initial renovation plan review
16. Renovation-pre-approval by Landlord of plans or not unreasonably withheld standard for Tenants alterations
17. Water bills by direct meter for use other than of sink and toilet by Tenant.
18. Heating should be provided even if Tenant is in default of lease obligations
19. Vault taxes should be the responsibility of Landlord
20. Get copy of certificate of occupancy from Landlord and make sure that Tenant's use is permitted
21. Insurance rider should be reviewed by Tenant’s insurance agent
22. Construction clause should be reviewed by Tenant’s architect
23. Brokerage clause indemnification language should be mutual
24. Real Estate tax clause should permit increases to be paid by Tenant over 12 months
25. Move in and Move out-no charge for use of elevator by Tenant or employees, independent contractors or agents of Tenant.
26. Condition of Space. Upon commencement of lease Landlord should be responsible for structure of premises- HVAC, plumbing, bathrooms, electrical and fire panels and sprinkler. Premises must be free of hazardous materials and asbestos.
27. Non-disturbance, Attornment and Recognition Agreement should be provided for in Lease for a large Tenant from Landlord’s mortgagee and/or ground lessor or superior tenant.
28. Landlord should take no more than 1 week to 10 days to review plans, specifications and contractors selected by Tenant.
29. Storage Space for Tenant-check if it is available in the building
30. Cleaning specifications should be referenced in Lease and attached to the lease
31. Sunset provision for escalations-any escalation bills from the Landlord should be void if they’re not sent to the Tenant 90 days after the end of the lease. Any escalation bill from the Landlord that’s two years beyond the applicable period should be null and void as well.
32. Discontinuance of electricity by Landlord –if the Landlord wants to discontinue electricity for the Tenant, then the Landlord must discontinue electricity for all Tenants in the building.
33. Holdover Provision-lease should provide for a partial holdover payment based on the number of days in the month, not solely for a full month’s holdover by Tenant.
34. Mitigation of Damages-if the Tenant vacates the space, Landlord should agree to use reasonable efforts to lease the space to a third party and minimize the damage to Tenant.
35. Confidentiality Clause-if the Landlord wants the lease terms to be kept confidential, then this condition should be reciprocal and the Landlord should agree that it will not disclose any information regarding the lease that pertains to Tenant.
1. Free rent-does the Lease reflect the deal between Landlord and Tenant?
2. Are the premises in a land-marked building?
3. Request a copy of the most recent tax bill-Tenant should only pay its pro rata share of taxes
4. Is the electricity direct meter, sub-meter or rent inclusion?
5. Assignment and sub-let should be allowed for (a) Tenant's sale of its business, (b) merger of its business, (c) Tenant goes public, (d) assignment of its lease to a related entity or division. In a sublet or an assignment, for a proposed deal, the Tenant should be required to provide Landlord a term sheet of the material terms and conditions and not a complete assignment or sublease.
- If the Lease allows Landlord recapture in an assignment or sublet situation, then the Lease should provide that if the Landlord elects to recapture space, the Tenant can withdraw it request for the right to an assignment or sublet.
6. Non-structural alterations should be allowed as a matter of right by Tenant
7. Security Deposit. Interest on security deposit should go to Tenant without request or notice once per year and returned to Tenant 30 days after lease ends. Security Deposit should decrease over time if no default by Tenant under Lease (“burn down”) and Landlord cannot apply security deposit without notice to Tenant.
8. Landlord consent to particular use and assistance in getting a liquor license if it is a restaurant deal
9. Sprinkler installation, monitoring, and maintenance who pays? (What %)
10. Electricity capacity of present wiring and watts per square foot
11. Signage in lobby (directory), elevator, floor and door (window signage, flag if retail)
12. Right to make deliveries to the premises at any time of the day for retail tenant.
13. Sidewalk maintenance is not the responsibility of retail tenant-other than snow removal
14. Landlord should pre-approve the private carter for retail tenant
15. Tenant not pay Landlord's expenses for initial renovation plan review
16. Renovation-pre-approval by Landlord of plans or not unreasonably withheld standard for Tenants alterations
17. Water bills by direct meter for use other than of sink and toilet by Tenant.
18. Heating should be provided even if Tenant is in default of lease obligations
19. Vault taxes should be the responsibility of Landlord
20. Get copy of certificate of occupancy from Landlord and make sure that Tenant's use is permitted
21. Insurance rider should be reviewed by Tenant’s insurance agent
22. Construction clause should be reviewed by Tenant’s architect
23. Brokerage clause indemnification language should be mutual
24. Real Estate tax clause should permit increases to be paid by Tenant over 12 months
25. Move in and Move out-no charge for use of elevator by Tenant or employees, independent contractors or agents of Tenant.
26. Condition of Space. Upon commencement of lease Landlord should be responsible for structure of premises- HVAC, plumbing, bathrooms, electrical and fire panels and sprinkler. Premises must be free of hazardous materials and asbestos.
27. Non-disturbance, Attornment and Recognition Agreement should be provided for in Lease for a large Tenant from Landlord’s mortgagee and/or ground lessor or superior tenant.
28. Landlord should take no more than 1 week to 10 days to review plans, specifications and contractors selected by Tenant.
29. Storage Space for Tenant-check if it is available in the building
30. Cleaning specifications should be referenced in Lease and attached to the lease
31. Sunset provision for escalations-any escalation bills from the Landlord should be void if they’re not sent to the Tenant 90 days after the end of the lease. Any escalation bill from the Landlord that’s two years beyond the applicable period should be null and void as well.
32. Discontinuance of electricity by Landlord –if the Landlord wants to discontinue electricity for the Tenant, then the Landlord must discontinue electricity for all Tenants in the building.
33. Holdover Provision-lease should provide for a partial holdover payment based on the number of days in the month, not solely for a full month’s holdover by Tenant.
34. Mitigation of Damages-if the Tenant vacates the space, Landlord should agree to use reasonable efforts to lease the space to a third party and minimize the damage to Tenant.
35. Confidentiality Clause-if the Landlord wants the lease terms to be kept confidential, then this condition should be reciprocal and the Landlord should agree that it will not disclose any information regarding the lease that pertains to Tenant.
Monday, September 25, 2006
ARE STUDENT LOANS DISCHARGEABLE IN BANKRUPTCY?
Subject: Bankruptcy Update Are Student Loans dischargeable?
Many clients have asked if student loans are dischargeable. This is a difficult issue because generally they are not dischargeable. A few years back the rule used to be that if the debt was greater than 7 years old, they were dischargeable. That is no longer the case. Now, one must satisfy three criteria to prove hardship. A 1998 case, In re Lebovits v. Chase Manhattan 223 BR 265 (Bkrtcy E.D.N.Y. 1998) , held that the debtor has the burden of providing each prong of the three-prong test established in Brunner v. NY Higher Education Services Corp 831 BR 395.
For a student loan to be dischargeable the debtor must show:
1. Inability to maintain a minimum standard of living.
2. These circumstances will persist for a significant portion of the repayment period.
3. The debtor made a good faith effort to repay loan.
Briefly, we will review each of these requirements to determine ones eligibility:
1. A minimum standard of living is defined as more than a showing of tight finances, however, it does not require the debtor to prove that he/she lives at the poverty level. The Debtor must demonstrate that he/she will not be able to maintain a "minimum" standard of living if forced to repay the loans. For example, in Lebovits v. Chase Manhattan Bank, the Lebovits' were able to satisfy their burden of demonstrating that they could not afford to repay their student loans while maintaining even a minimal standard of living for themselves and their dependants.
2. To determine that ones circumstances will persist for a significant portion of the repayment period, one must satisfy their burden by demonstrating that additional circumstances exist indicating that the state of affairs is likely to persist for a significant period of time covering the loan repayment period. In Lebovits v. Chase Manhattan Bank, the Lebovits' were able to satisfy this criteria by demonstrating the ages of their children and that as their young children got older, their financial burden would most likely become even more onerous.
3. Lastly, to determine ones good faith effort, one must demonstrate they have made attempts to satisfy their loan commitment and have made payments to the lender, despite undue hardship. One must show how you have attempted to maximize income and minimize expenses. In the Lebovits case, the mere fact that the debtors had made only three payments on their loans prior to filing for bankruptcy relief, was enough to satisfy the good faith effort despite their financial hardship.
We would be happy to assist clients in determining whether their student loans are dischargeable. Jim
Many clients have asked if student loans are dischargeable. This is a difficult issue because generally they are not dischargeable. A few years back the rule used to be that if the debt was greater than 7 years old, they were dischargeable. That is no longer the case. Now, one must satisfy three criteria to prove hardship. A 1998 case, In re Lebovits v. Chase Manhattan 223 BR 265 (Bkrtcy E.D.N.Y. 1998) , held that the debtor has the burden of providing each prong of the three-prong test established in Brunner v. NY Higher Education Services Corp 831 BR 395.
For a student loan to be dischargeable the debtor must show:
1. Inability to maintain a minimum standard of living.
2. These circumstances will persist for a significant portion of the repayment period.
3. The debtor made a good faith effort to repay loan.
Briefly, we will review each of these requirements to determine ones eligibility:
1. A minimum standard of living is defined as more than a showing of tight finances, however, it does not require the debtor to prove that he/she lives at the poverty level. The Debtor must demonstrate that he/she will not be able to maintain a "minimum" standard of living if forced to repay the loans. For example, in Lebovits v. Chase Manhattan Bank, the Lebovits' were able to satisfy their burden of demonstrating that they could not afford to repay their student loans while maintaining even a minimal standard of living for themselves and their dependants.
2. To determine that ones circumstances will persist for a significant portion of the repayment period, one must satisfy their burden by demonstrating that additional circumstances exist indicating that the state of affairs is likely to persist for a significant period of time covering the loan repayment period. In Lebovits v. Chase Manhattan Bank, the Lebovits' were able to satisfy this criteria by demonstrating the ages of their children and that as their young children got older, their financial burden would most likely become even more onerous.
3. Lastly, to determine ones good faith effort, one must demonstrate they have made attempts to satisfy their loan commitment and have made payments to the lender, despite undue hardship. One must show how you have attempted to maximize income and minimize expenses. In the Lebovits case, the mere fact that the debtors had made only three payments on their loans prior to filing for bankruptcy relief, was enough to satisfy the good faith effort despite their financial hardship.
We would be happy to assist clients in determining whether their student loans are dischargeable. Jim
Friday, September 22, 2006
Real Estate Strategy and Personal Bankruptcy
Real Estate Strategy in Personal Bankruptcy
We live in environment of low interest rates, appreciated real estate and individuals or couples who have lost jobs and have accumulated a significant amount of debt. What are the options for these people?
Let's look at a recent example from a couple that consulted with Shenwick & Associates: The couple owns a house which has appreciated in value in the amount of $80,000.00 (this is determined by taking the fair market value of the house less outstanding mortgages, brokerage expenses, NYS and NYC transfer taxes and legal fees. Capital gains which may be due are beyond the scope of this email).
The couple owes $20,000 in taxes (which are non-dischargeable in bankruptcy), $30,000 in student loans (which are also non-dischargeable in bankruptcy) and $40,000 of credit card debt, which would be dischargeable in a chapter 7 bankruptcy filing by the couple. Recently the husband lost his job and they are living on the wife's salary. They have sufficient income to pay the mortgage and the student loans. What can this couple do?
Let's explore some options-
1. They can do nothing (the ostrich effect) and wait for a creditor to sue (usually the credit card companies) and creditors who obtain a judgment will docket the judgment against the house preventing the couple from selling or refinancing the house.
2. The couple can sell the house-providing that there are no judgments or liens against the house-but what do they do with the sales proceeds of $100,000? What creditors if any should they pay?
3. An optimal strategy may be to sell the house, pay the non-dischargeable debts and then file for chapter 7 personal bankruptcy protection. Let's explore this option in greater detail. The couple can sell the house, at the closing they can payoff the non-dischargeable taxes ($20,000.00), the non-dischargeable student loans ($30,000.00) and use the balance of the money $30,000.00 to pay living expenses, rent an apartment, buy life insurance or an annuity. When they have otherwise spent or used the balance of the money, they can then file for chapter 7 personal bankruptcy and discharge the $40,000.00 of credit card debt to obtain the benefit of a "fresh start" in bankruptcy (The Couple is allowed to exempt or keep $5,000.00 of cash in a chapter 7 bankruptcy filing.) CAVEATS THE COUPLE MUST PREFERENCE PROOF THE PAYMENTS TO THE STUDENT LOAN AND TAX AUTHORITIES BY WAITING A MINIMUM OF 90 DAYS FROM THE DATE THAT THE CHECKS TO THE STUDENT LOAN AND TAX AUTHORITIES CLEAR! CLIENTS SHOULD CONSULT WITH AN ATTORNEY PRIOR TO USING THIS STRATEGY!
4. A variation on the strategy in paragraph 3 would be to use the $30,000 proceeds from the sale of the house to negotiate a settlement with the credit card companies who are owed $40,000.
Jim Shenwick
We live in environment of low interest rates, appreciated real estate and individuals or couples who have lost jobs and have accumulated a significant amount of debt. What are the options for these people?
Let's look at a recent example from a couple that consulted with Shenwick & Associates: The couple owns a house which has appreciated in value in the amount of $80,000.00 (this is determined by taking the fair market value of the house less outstanding mortgages, brokerage expenses, NYS and NYC transfer taxes and legal fees. Capital gains which may be due are beyond the scope of this email).
The couple owes $20,000 in taxes (which are non-dischargeable in bankruptcy), $30,000 in student loans (which are also non-dischargeable in bankruptcy) and $40,000 of credit card debt, which would be dischargeable in a chapter 7 bankruptcy filing by the couple. Recently the husband lost his job and they are living on the wife's salary. They have sufficient income to pay the mortgage and the student loans. What can this couple do?
Let's explore some options-
1. They can do nothing (the ostrich effect) and wait for a creditor to sue (usually the credit card companies) and creditors who obtain a judgment will docket the judgment against the house preventing the couple from selling or refinancing the house.
2. The couple can sell the house-providing that there are no judgments or liens against the house-but what do they do with the sales proceeds of $100,000? What creditors if any should they pay?
3. An optimal strategy may be to sell the house, pay the non-dischargeable debts and then file for chapter 7 personal bankruptcy protection. Let's explore this option in greater detail. The couple can sell the house, at the closing they can payoff the non-dischargeable taxes ($20,000.00), the non-dischargeable student loans ($30,000.00) and use the balance of the money $30,000.00 to pay living expenses, rent an apartment, buy life insurance or an annuity. When they have otherwise spent or used the balance of the money, they can then file for chapter 7 personal bankruptcy and discharge the $40,000.00 of credit card debt to obtain the benefit of a "fresh start" in bankruptcy (The Couple is allowed to exempt or keep $5,000.00 of cash in a chapter 7 bankruptcy filing.) CAVEATS THE COUPLE MUST PREFERENCE PROOF THE PAYMENTS TO THE STUDENT LOAN AND TAX AUTHORITIES BY WAITING A MINIMUM OF 90 DAYS FROM THE DATE THAT THE CHECKS TO THE STUDENT LOAN AND TAX AUTHORITIES CLEAR! CLIENTS SHOULD CONSULT WITH AN ATTORNEY PRIOR TO USING THIS STRATEGY!
4. A variation on the strategy in paragraph 3 would be to use the $30,000 proceeds from the sale of the house to negotiate a settlement with the credit card companies who are owed $40,000.
Jim Shenwick
Chapter 13 Questions and Answers Bankruptcy Pre-BAPCPA
Chapter 13 of the Bankruptcy Code
It is this author's experience that chapter 13 of the Bankruptcy Code is the least understood chapter of the Bankruptcy Code-provided below are 10 frequently asked questions about chapter 13.
10 Most FAQ (Frequently Asked Questions) About Chapter 13
1. Who can file under chapter 13 and what is the filing fee?
Any person or unincorporated entity may file under chapter 13 and the filing fee is $194.
2. What are the debt limitations for filing chapter 13?
Unsecured debts of less than $290,525 and secured debts of less than $871,550.
3. Why file a chapter 13?
To save a car, house or lease from foreclosure or sale.
4. What is the difference between chapter 7, chapter 11, and chapter 13?
A chapter 7 filing is a liquidation of the debtor's property to obtain a discharge for a debtor and give them a "fresh start"
-A chapter 11 filing is a full-blown reorganization which is expensive and time consuming
-A chapter 13 filing may be thought of as a blend between chapter 7 and 11
5. What is the most important document in a chapter 13 filing?
The plan! It is prepared by counsel for the Debtor and filed with the Court-it provides how much money the debtor will pay to the chapter 13 trustee, how long the debtor's payments will continue, which creditors will be paid inside the plan and which creditors will be paid outside of the plan.
6. Who is a chapter 13 trustee?
A chapter 13 trustee is an attorney appointed by the United States Trustee to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor's plan, and administer the debtor's chapter 13 case until it is closed.
7. When must the debtor begin making payments to the chapter 13 trustee and how must they be made?
The debtor must begin making payments to the chapter 13 trustee within 30 days after the debtor's plan is filed with the Court, and the plan must be filed with the Court within 15 days after the case is filed. The payments are usually made on a monthly basis.
8. How long does a chapter 13 plan last?
Chapter 13 plans generally range from 3 years to a maximum of 5 years.
9. What is required for court approval of a chapter 13 plan?
The Court may confirm a chapter 13 plan if: (1) the plan complies with the legal requirements of chapter 13, (2) all required fees, charges and deposits have been paid, (3) the plan was proposed in good faith, (4) each unsecured creditor will receive under the plan at least as much as it would have received had the debtor filed under chapter 7, and (5) it appears that the debtor will be able to make the required payments and comply with the plan.
10. What if the court does not approve a debtor's chapter 13 plan?
If the Court will not approve the plan proposed be a debtor, the debtor may modify the plan and seek court approval of the modified plan. If the court does not approve a plan, it will usually give its reasons for refusing to do so, and the plan may then be appropriately modified so as become acceptable to the court. A debtor who does not wish to modify a proposed plan may either convert the case to chapter 7 or dismiss the case.
Shenwick & Associates is available to assist all clients with any personal bankruptcy or debtor/creditor issues.
Jim Shenwick
It is this author's experience that chapter 13 of the Bankruptcy Code is the least understood chapter of the Bankruptcy Code-provided below are 10 frequently asked questions about chapter 13.
10 Most FAQ (Frequently Asked Questions) About Chapter 13
1. Who can file under chapter 13 and what is the filing fee?
Any person or unincorporated entity may file under chapter 13 and the filing fee is $194.
2. What are the debt limitations for filing chapter 13?
Unsecured debts of less than $290,525 and secured debts of less than $871,550.
3. Why file a chapter 13?
To save a car, house or lease from foreclosure or sale.
4. What is the difference between chapter 7, chapter 11, and chapter 13?
A chapter 7 filing is a liquidation of the debtor's property to obtain a discharge for a debtor and give them a "fresh start"
-A chapter 11 filing is a full-blown reorganization which is expensive and time consuming
-A chapter 13 filing may be thought of as a blend between chapter 7 and 11
5. What is the most important document in a chapter 13 filing?
The plan! It is prepared by counsel for the Debtor and filed with the Court-it provides how much money the debtor will pay to the chapter 13 trustee, how long the debtor's payments will continue, which creditors will be paid inside the plan and which creditors will be paid outside of the plan.
6. Who is a chapter 13 trustee?
A chapter 13 trustee is an attorney appointed by the United States Trustee to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor's plan, and administer the debtor's chapter 13 case until it is closed.
7. When must the debtor begin making payments to the chapter 13 trustee and how must they be made?
The debtor must begin making payments to the chapter 13 trustee within 30 days after the debtor's plan is filed with the Court, and the plan must be filed with the Court within 15 days after the case is filed. The payments are usually made on a monthly basis.
8. How long does a chapter 13 plan last?
Chapter 13 plans generally range from 3 years to a maximum of 5 years.
9. What is required for court approval of a chapter 13 plan?
The Court may confirm a chapter 13 plan if: (1) the plan complies with the legal requirements of chapter 13, (2) all required fees, charges and deposits have been paid, (3) the plan was proposed in good faith, (4) each unsecured creditor will receive under the plan at least as much as it would have received had the debtor filed under chapter 7, and (5) it appears that the debtor will be able to make the required payments and comply with the plan.
10. What if the court does not approve a debtor's chapter 13 plan?
If the Court will not approve the plan proposed be a debtor, the debtor may modify the plan and seek court approval of the modified plan. If the court does not approve a plan, it will usually give its reasons for refusing to do so, and the plan may then be appropriately modified so as become acceptable to the court. A debtor who does not wish to modify a proposed plan may either convert the case to chapter 7 or dismiss the case.
Shenwick & Associates is available to assist all clients with any personal bankruptcy or debtor/creditor issues.
Jim Shenwick
Subscribe to:
Posts (Atom)
