This article describes a growing trend in real estate:
Facing Default, Some Walk Out on New Homes
By JOHN LELAND
Published: February 29, 2008
When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.
In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.
Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.
Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”
You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.
Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.
“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.
For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.
“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.
In recent months top executives from Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages.
Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. “I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ ” Mrs. Newhouse said.
“You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,” she said. “And sometimes the bank people who call these consumers aren’t really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative.”
The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.
“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”
In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.
Since the Depression, American government policy has encouraged homeownership as an absolute good. It protects people from increases in rent and allows them to build equity as they pay off their mortgages. And it creates stability in communities, because owners are invested in their neighbors.
But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.
The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.
“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.
Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”
Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.
“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”
When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”
For Raymond Zulueta, the decision to go into foreclosure, and to hire You Walk Away, brought him peace of mind. The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts.
Consumer advocates and others question the value of You Walk Away’s service.
“We are more interested in servicers and borrowers coming to mutual resolutions through loan remediation,” said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Even though we are not seeing good outcomes, we’re not willing to throw up our hands and say people should walk away from their homes based on the advice of a company that stands to profit from foreclosure.”
Jon Maddux, a founder of You Walk Away, said the company’s services were not for everybody and were meant as a last resort. The company opened for business in January and says it has just over 200 clients in six states.
“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”
Mr. Zulueta said he felt he had let down the lender, himself, and his family.
“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”
Copyright (c) 2008 The New York Times Company. All rights reserved.
Friday, February 29, 2008
Tuesday, February 19, 2008
Mortgage and foreclosure update
This month, we’re going to update you on the latest Congressional and judicial developments in the rapidly escalating debate over mortgages and foreclosures.
1. On December 12, 2007, the House of Representatives Judiciary Committee narrowly ordered H.R. 3609, the “Emergency Homeownership and Mortgage Equity Protection Act of 2007” to be reported as amended out of committee for consideration by the full House. The bill would allow bankruptcy judges to modify the terms of a Chapter 13 debtor’s mortgage loan. Among those terms that a judge could tweak are the loan's interest rate, remaining value and maturity.
The substitute bill that was reported out of the committee would limit relief to subprime or nontraditional loans that are in foreclosure or at least 60 days overdue. Judges would also have the authority to determine if debtors qualified for relief under the current means test. The bill applies to existing nontraditional and subprime mortgages originated between Jan. 1, 2000 and the bill's enactment.
Although the compromise bill was nominally bipartisan, only one Republican on the committee voted for the bill. Many opponents of the bill, including The Financial Services Roundtable, argue that the changes could have unintended consequences, by pricing people with poor credit risks out of the mortgage market and causing lenders to require higher interest rates or down payments or both.
However, the bill gained the support of the National Association of Federal Credit Unions, since the definition of a “nontraditional” loan would be limited to interest-only mortgages and adjustable-rate mortgages with payment options that can lead to negative amortization. Credit unions don’t typically provide these types of loans.
On October 3, 2007, Sen. Dick Durbin (D-IL) introduced S. 2136, the “Helping Families Save Their Homes in Bankruptcy Act.” It would allow bankruptcy court judges to reduce the remaining values, interest rates, and maturities of existing mortgages. Specifically, the bill allows cramdowns for principal residential mortgages for homeowners in Chapter 13 bankruptcy. During proceedings, judges would have the discretion to fix the APR over a 30-year period. The bill also exempts the debtor from the requirement for credit counseling if the court receives certification that the home has been scheduled for a foreclosure sale. In addition, any prepayment penalties can be waived. Another provision in the bill prohibits a bankruptcy judge from allowing a claim that is subject to any remedy for damages or rescission due to failure to comply with the Truth in Lending Act or any other state or federal consumer protection law. The bill has been the subject of hearings in the Senate Judiciary Committee.
Look for closely contested floor votes on these bills this spring.
2. In In re Maisel, No. 07-43324-JBR (Bankr. D. Mass. 11/15/07), Wells Fargo Bank was allegedly the current holder of the note and mortgage and filled a motion for relief from the automatic stay. However, the Bankruptcy Court called upon the lender to prove that it was the holder of the note and mortgage. At the hearing, Wells Fargo presented an assignment of the documents dated four days after Wells Fargo’s motion was filed.
The Court observed that Section 362 of the Bankruptcy Code plainly limits motions for stay relief to parties in interest and that Federal Rules of Bankruptcy Procedure 9011 requires movants to make factual assertions that have evidentiary support. In this case, Wells Fargo was unable to provide evidentiary support for its assertion that it was a party in interest when the motion was filed because it did not yet have a colorable claim to the property.
Judge Rosenthal wrote:
“Today, more and more homeowners turn to the bankruptcy system for protection when facing financial hardship or impending foreclosure. It is this Court's responsibility to ensure that these debtors receive the full protection of the Bankruptcy Code, including the benefit of an automatic stay, for as long as they are entitled to it. Unfortunately, concomitant with the increase in foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system. It is the lenders' responsibility to comply, and this Court's responsibility to ensure compliance. with both the substantive and procedural requirements of the Bankruptcy Code. Compliance with these rules is not difficult and this Court will require it in order to preserve the rights of debtors. Any motion filed with the Court must be true and have support as of the date of the motion. For example, a movant cannot state that it is the ‘current holder’ of an instrument if it is not. Similarly, this Court has seen motions for relief that state that a debtor is in postpetition default where the last payment was due prepetition, or allege that the debtor will be In default by the time of any hearing; these types of allegations are unacceptable to this Court. Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims.”
Although Wells Fargo did not have standing. the court granted the relief because the debtors intended to surrender the property.
Judge Rosenthal’s decision follows in the footsteps of In re Foreclosures Cases, a case decided last fall in the U.S. District Court for the Northern District of Ohio, Eastern Division, in which Deutsche Bank claimed to hold the notes and mortgages for properties it was attempting to foreclose on. The cases were dismissed without prejudice.
The lesson to be learned from these cases is that if a client is the target of a foreclosure action, it is incumbent upon counsel to review the mortgage and note and verify that the party making the motion for relief from the automatic stay or foreclosure is the party that owns those instruments and has standing to commence the action.
For the latest news on real estate and bankruptcy, please contact Shenwick & Associates.
1. On December 12, 2007, the House of Representatives Judiciary Committee narrowly ordered H.R. 3609, the “Emergency Homeownership and Mortgage Equity Protection Act of 2007” to be reported as amended out of committee for consideration by the full House. The bill would allow bankruptcy judges to modify the terms of a Chapter 13 debtor’s mortgage loan. Among those terms that a judge could tweak are the loan's interest rate, remaining value and maturity.
The substitute bill that was reported out of the committee would limit relief to subprime or nontraditional loans that are in foreclosure or at least 60 days overdue. Judges would also have the authority to determine if debtors qualified for relief under the current means test. The bill applies to existing nontraditional and subprime mortgages originated between Jan. 1, 2000 and the bill's enactment.
Although the compromise bill was nominally bipartisan, only one Republican on the committee voted for the bill. Many opponents of the bill, including The Financial Services Roundtable, argue that the changes could have unintended consequences, by pricing people with poor credit risks out of the mortgage market and causing lenders to require higher interest rates or down payments or both.
However, the bill gained the support of the National Association of Federal Credit Unions, since the definition of a “nontraditional” loan would be limited to interest-only mortgages and adjustable-rate mortgages with payment options that can lead to negative amortization. Credit unions don’t typically provide these types of loans.
On October 3, 2007, Sen. Dick Durbin (D-IL) introduced S. 2136, the “Helping Families Save Their Homes in Bankruptcy Act.” It would allow bankruptcy court judges to reduce the remaining values, interest rates, and maturities of existing mortgages. Specifically, the bill allows cramdowns for principal residential mortgages for homeowners in Chapter 13 bankruptcy. During proceedings, judges would have the discretion to fix the APR over a 30-year period. The bill also exempts the debtor from the requirement for credit counseling if the court receives certification that the home has been scheduled for a foreclosure sale. In addition, any prepayment penalties can be waived. Another provision in the bill prohibits a bankruptcy judge from allowing a claim that is subject to any remedy for damages or rescission due to failure to comply with the Truth in Lending Act or any other state or federal consumer protection law. The bill has been the subject of hearings in the Senate Judiciary Committee.
Look for closely contested floor votes on these bills this spring.
2. In In re Maisel, No. 07-43324-JBR (Bankr. D. Mass. 11/15/07), Wells Fargo Bank was allegedly the current holder of the note and mortgage and filled a motion for relief from the automatic stay. However, the Bankruptcy Court called upon the lender to prove that it was the holder of the note and mortgage. At the hearing, Wells Fargo presented an assignment of the documents dated four days after Wells Fargo’s motion was filed.
The Court observed that Section 362 of the Bankruptcy Code plainly limits motions for stay relief to parties in interest and that Federal Rules of Bankruptcy Procedure 9011 requires movants to make factual assertions that have evidentiary support. In this case, Wells Fargo was unable to provide evidentiary support for its assertion that it was a party in interest when the motion was filed because it did not yet have a colorable claim to the property.
Judge Rosenthal wrote:
“Today, more and more homeowners turn to the bankruptcy system for protection when facing financial hardship or impending foreclosure. It is this Court's responsibility to ensure that these debtors receive the full protection of the Bankruptcy Code, including the benefit of an automatic stay, for as long as they are entitled to it. Unfortunately, concomitant with the increase in foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system. It is the lenders' responsibility to comply, and this Court's responsibility to ensure compliance. with both the substantive and procedural requirements of the Bankruptcy Code. Compliance with these rules is not difficult and this Court will require it in order to preserve the rights of debtors. Any motion filed with the Court must be true and have support as of the date of the motion. For example, a movant cannot state that it is the ‘current holder’ of an instrument if it is not. Similarly, this Court has seen motions for relief that state that a debtor is in postpetition default where the last payment was due prepetition, or allege that the debtor will be In default by the time of any hearing; these types of allegations are unacceptable to this Court. Lenders must take care in their haste to obtain relief from stay to ensure that the factual statements they make in their motions are true, have evidentiary support and support their claims.”
Although Wells Fargo did not have standing. the court granted the relief because the debtors intended to surrender the property.
Judge Rosenthal’s decision follows in the footsteps of In re Foreclosures Cases, a case decided last fall in the U.S. District Court for the Northern District of Ohio, Eastern Division, in which Deutsche Bank claimed to hold the notes and mortgages for properties it was attempting to foreclose on. The cases were dismissed without prejudice.
The lesson to be learned from these cases is that if a client is the target of a foreclosure action, it is incumbent upon counsel to review the mortgage and note and verify that the party making the motion for relief from the automatic stay or foreclosure is the party that owns those instruments and has standing to commence the action.
For the latest news on real estate and bankruptcy, please contact Shenwick & Associates.
Monday, February 11, 2008
Debt Relief Can Cause Headaches of Its Own
It wasn’t supposed to work this way.
Joseph A. Mullaney, a consumer affairs lawyer in New Jersey, was once a victim of a debt settlement company.
Credit card companies have long seduced customers with “buy now, pay later,” hoping they would pay at least a minimum amount month after month but never pay off their debts. Now, though, with the economy slowing and houses no longer easy sources of cash, a growing number of consumers cannot pay even the minimums.
In December, revolving debt — an estimated 95 percent from credit cards — reached a record high of $943.5 billion, according to the Federal Reserve. The annual growth rate of this debt increased steadily in 2007, reaching 9.3 percent in the last quarter, up from 5.4 percent in the first quarter.
The amount of debt that is delinquent — in which minimum payments are late but the accounts are still open — also appears to be on the rise. The Federal Reserve found that 4.34 percent of the credit card portfolios of the 100 largest banks that issue cards was delinquent in the third quarter of last year, up from 4.07 percent in the previous quarter. Charge-offs — accounts closed for nonpayment — also grew in that period, and banks expect charge-offs to keep rising in 2008.
“It’s not that card debt is unmanageable for everyone,” Adam J. Levitin, a credit expert and an associate professor of law at Georgetown University, wrote in an e-mail message. “Rather, it is unmanageable for some (and a growing group, it seems).”
What can borrowers do to extricate themselves?
If belt-tightening suffices, one option is a debt management repayment plan in which interest rates, but not balances, are reduced.
Ronald J. Mann, a law professor at Columbia University and a credit expert, describes credit industry practices as intended to enslave borrowers in a “sweat box.” He recommends a Chapter 7 bankruptcy that wipes out most credit card debt.
Many consumers, however, are loath to file for bankruptcy protection, said Mark S. Zuckerberg, a bankruptcy lawyer in Indianapolis. And others may find that they cannot qualify for a Chapter 7.
Then there is debt settlement, when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. Debt settlement generally works best when consumers can offer a lump sum, the experts said. But consumers may face taxes on the amount the creditor has forgiven.
“Done correctly, it can absolutely help people,” said Cyndi Geerdes, an associate professor at the University of Illinois law school who also runs a consumer debt clinic.
Consumers can arrange debt settlement themselves, and many Web sites offer advice. Consumers can also hire a lawyer or use debt settlement companies, many of which advertise online and on television. The experts agree, however, that “buyer beware” is the best advice when considering debt settlement companies.
A thousand such companies exist nationwide, up from about 300 a couple of years ago, estimated David Leuthold, vice president of the Association of Settlement Companies, which has 70 members and is based in Madison, Wis.
Deanne Loonin, a senior lawyer with the National Consumer Law Center in Boston, has investigated them. “It’s possible there are honest ones,” she said, “but I assume they aren’t until proven otherwise.”
Travis Plunkett, legislative director of the Consumer Federation of America in Washington, said distressed borrowers who cannot produce lump sums to settle with creditors were the most vulnerable to dishonest companies. In some cases, these companies tell consumers to stop paying monthly minimums, explaining that they will negotiate a settlement when borrowers have saved enough. Meanwhile, they take hefty monthly fees directly from clients’ bank accounts.
Creditors will not negotiate reduced balances with consumers who are still making monthly payments. But when they stop paying, total balances swell with fees and interest rates. And depending on the law in states where debtors live, creditors can attach wages and property to satisfy the new total owed.
“Many debt settlement companies never explain these risks clearly,” said Joseph A. Mullaney, a consumer affairs lawyer in Voorhees, N.J.
According to Ms. Geerdes, whether a creditor takes legal steps depends on its analysis of each debtor.
Mr. Leuthold said his association’s members served consumers who had already stopped making payments and had no better options. And his members must pledge to inform clients of risks and spell them out in contracts, he said.
David Johnson, senior vice president of ByDesign Financial Solutions, a nonprofit charity in Commerce, Calif., says he advises consumers to avoid companies that charge large fees upfront or through payments.
“It certainly would seem likely that there would be less incentive to push to settle quickly,” Mr. Johnson wrote in an e-mail message. He recommended that consumers look for services that charge after settlement, about 20 percent of the amount of the negotiated reduction in balance.
Desperate consumers may turn to debt settlement, Mr. Mullaney says, because “they usually want to pay their debt” but are also “intrigued with the proposition of getting out of it without the dishonor of declaring bankruptcy and with the prospect of compromising the actual principal that they owe.”
And company employees can be smooth talkers, said Susan Block-Lieb, a law professor at Fordham University and a consumer affairs expert. “You’ve got these really convincing, calm people with a really complicated formula, who are saying, ‘Don’t worry.’ ”
Katherine Taylor, the maiden name of a white-collar worker in Austin, Tex., who did not want to be further identified because she is a supervisor, said she realized last summer that she and her husband would soon be unable to make monthly minimums on their $59,000 in credit card debt. After seeing a television advertisement, Ms. Taylor said she typed “Christian debt settlement” into her computer. “I wanted an agency with high ethics,” she explained.
On the first phone call with one based in Austin, she agreed to let the company take $676 from her bank account for five months, then $416 for the next 13. “I was told that if I stopped making payments and saved up almost $24,000 on my own, in 48 months I would be free and clear and my credit score would improve,” Ms. Taylor said.
Late last year, unable to reach the settlement company by phone and getting constant calls from collectors, Ms. Taylor contacted a local Better Business Bureau office. She was advised to close her bank account immediately and file a complaint.
Offered a partial refund by the service, she is considering her options.
Mr. Mullaney himself was a victim of a debt settlement company. He was determined, he said, to avoid bankruptcy, a black mark for lawyers. But after starting practice in 2003, he said he realized that he would not be able to afford both student loan payments and the minimums on his $33,500 in credit card debt. He searched online for a debt settlement company run by a lawyer, and by phone closely questioned one based in Anaheim, Calif.
As instructed, Mr. Mullaney stopped paying his credit cards, started paying monthly fees and saved aggressively, he recalled. But without warning, three of Mr. Mullaney’s four creditors took legal action. “Finally, the cloud of irrational belief in the concept disappeared, and I realized the scam I’d fallen for,” he said.
On Oct. 17, 2005, the last day before changes in federal bankruptcy law made it harder to obtain a Chapter 7, Mr. Mullaney filed for bankruptcy protection and eliminated his credit card debt. “I’ve found redemption, through using my legal degree and what I’ve gone through, in counseling others who sit before me ashamed and in tears,” he said.
Marc S. Stern, a bankruptcy lawyer in Seattle, said most consumers should not negotiate for themselves. “It’s too emotional, and a lawyer can say things about clients that they never will, like he’s a deadbeat and you’re never going to get any more from him,” Mr. Stern said.
Experts agreed that deals may be struck with many original creditors for 50 to 80 cents on the dollar, while debt buyers, who paid 20 cents or less on the dollar, may settle for a lower amount.
Debt settlement companies are regulated by state attorneys general and the Federal Trade Commission, but they are rarely prosecuted. To improve regulation of this interstate business, the Uniform Law Commission, sponsored by state governments and based in Chicago, is promoting a model law that covers credit counseling and debt management companies. It was in force in four states last year, and an estimated five state legislatures will vote on it this year, said Michael Kerr, the commission’s legislative director.
Mr. Leuthold says his association welcomes regulation but has reservations about the model law, including its volume. “Some say it is long and complicated, 80 pages, and a lot of states don’t want that level of detail,” he said.
Until the states or Congress act, credit card holders are “naked in the world,” said Elizabeth Warren, a law professor at Harvard and a bankruptcy expert. “Unscrupulous debt counselors have built their business models around taking advantage of desperate people.”
By Jane Birnbaum. Copyright 2008 The New York Times Company. All rights reserved.
Joseph A. Mullaney, a consumer affairs lawyer in New Jersey, was once a victim of a debt settlement company.
Credit card companies have long seduced customers with “buy now, pay later,” hoping they would pay at least a minimum amount month after month but never pay off their debts. Now, though, with the economy slowing and houses no longer easy sources of cash, a growing number of consumers cannot pay even the minimums.
In December, revolving debt — an estimated 95 percent from credit cards — reached a record high of $943.5 billion, according to the Federal Reserve. The annual growth rate of this debt increased steadily in 2007, reaching 9.3 percent in the last quarter, up from 5.4 percent in the first quarter.
The amount of debt that is delinquent — in which minimum payments are late but the accounts are still open — also appears to be on the rise. The Federal Reserve found that 4.34 percent of the credit card portfolios of the 100 largest banks that issue cards was delinquent in the third quarter of last year, up from 4.07 percent in the previous quarter. Charge-offs — accounts closed for nonpayment — also grew in that period, and banks expect charge-offs to keep rising in 2008.
“It’s not that card debt is unmanageable for everyone,” Adam J. Levitin, a credit expert and an associate professor of law at Georgetown University, wrote in an e-mail message. “Rather, it is unmanageable for some (and a growing group, it seems).”
What can borrowers do to extricate themselves?
If belt-tightening suffices, one option is a debt management repayment plan in which interest rates, but not balances, are reduced.
Ronald J. Mann, a law professor at Columbia University and a credit expert, describes credit industry practices as intended to enslave borrowers in a “sweat box.” He recommends a Chapter 7 bankruptcy that wipes out most credit card debt.
Many consumers, however, are loath to file for bankruptcy protection, said Mark S. Zuckerberg, a bankruptcy lawyer in Indianapolis. And others may find that they cannot qualify for a Chapter 7.
Then there is debt settlement, when a debtor and creditor agree that payment of a negotiated, reduced balance will be payment in full. Debt settlement generally works best when consumers can offer a lump sum, the experts said. But consumers may face taxes on the amount the creditor has forgiven.
“Done correctly, it can absolutely help people,” said Cyndi Geerdes, an associate professor at the University of Illinois law school who also runs a consumer debt clinic.
Consumers can arrange debt settlement themselves, and many Web sites offer advice. Consumers can also hire a lawyer or use debt settlement companies, many of which advertise online and on television. The experts agree, however, that “buyer beware” is the best advice when considering debt settlement companies.
A thousand such companies exist nationwide, up from about 300 a couple of years ago, estimated David Leuthold, vice president of the Association of Settlement Companies, which has 70 members and is based in Madison, Wis.
Deanne Loonin, a senior lawyer with the National Consumer Law Center in Boston, has investigated them. “It’s possible there are honest ones,” she said, “but I assume they aren’t until proven otherwise.”
Travis Plunkett, legislative director of the Consumer Federation of America in Washington, said distressed borrowers who cannot produce lump sums to settle with creditors were the most vulnerable to dishonest companies. In some cases, these companies tell consumers to stop paying monthly minimums, explaining that they will negotiate a settlement when borrowers have saved enough. Meanwhile, they take hefty monthly fees directly from clients’ bank accounts.
Creditors will not negotiate reduced balances with consumers who are still making monthly payments. But when they stop paying, total balances swell with fees and interest rates. And depending on the law in states where debtors live, creditors can attach wages and property to satisfy the new total owed.
“Many debt settlement companies never explain these risks clearly,” said Joseph A. Mullaney, a consumer affairs lawyer in Voorhees, N.J.
According to Ms. Geerdes, whether a creditor takes legal steps depends on its analysis of each debtor.
Mr. Leuthold said his association’s members served consumers who had already stopped making payments and had no better options. And his members must pledge to inform clients of risks and spell them out in contracts, he said.
David Johnson, senior vice president of ByDesign Financial Solutions, a nonprofit charity in Commerce, Calif., says he advises consumers to avoid companies that charge large fees upfront or through payments.
“It certainly would seem likely that there would be less incentive to push to settle quickly,” Mr. Johnson wrote in an e-mail message. He recommended that consumers look for services that charge after settlement, about 20 percent of the amount of the negotiated reduction in balance.
Desperate consumers may turn to debt settlement, Mr. Mullaney says, because “they usually want to pay their debt” but are also “intrigued with the proposition of getting out of it without the dishonor of declaring bankruptcy and with the prospect of compromising the actual principal that they owe.”
And company employees can be smooth talkers, said Susan Block-Lieb, a law professor at Fordham University and a consumer affairs expert. “You’ve got these really convincing, calm people with a really complicated formula, who are saying, ‘Don’t worry.’ ”
Katherine Taylor, the maiden name of a white-collar worker in Austin, Tex., who did not want to be further identified because she is a supervisor, said she realized last summer that she and her husband would soon be unable to make monthly minimums on their $59,000 in credit card debt. After seeing a television advertisement, Ms. Taylor said she typed “Christian debt settlement” into her computer. “I wanted an agency with high ethics,” she explained.
On the first phone call with one based in Austin, she agreed to let the company take $676 from her bank account for five months, then $416 for the next 13. “I was told that if I stopped making payments and saved up almost $24,000 on my own, in 48 months I would be free and clear and my credit score would improve,” Ms. Taylor said.
Late last year, unable to reach the settlement company by phone and getting constant calls from collectors, Ms. Taylor contacted a local Better Business Bureau office. She was advised to close her bank account immediately and file a complaint.
Offered a partial refund by the service, she is considering her options.
Mr. Mullaney himself was a victim of a debt settlement company. He was determined, he said, to avoid bankruptcy, a black mark for lawyers. But after starting practice in 2003, he said he realized that he would not be able to afford both student loan payments and the minimums on his $33,500 in credit card debt. He searched online for a debt settlement company run by a lawyer, and by phone closely questioned one based in Anaheim, Calif.
As instructed, Mr. Mullaney stopped paying his credit cards, started paying monthly fees and saved aggressively, he recalled. But without warning, three of Mr. Mullaney’s four creditors took legal action. “Finally, the cloud of irrational belief in the concept disappeared, and I realized the scam I’d fallen for,” he said.
On Oct. 17, 2005, the last day before changes in federal bankruptcy law made it harder to obtain a Chapter 7, Mr. Mullaney filed for bankruptcy protection and eliminated his credit card debt. “I’ve found redemption, through using my legal degree and what I’ve gone through, in counseling others who sit before me ashamed and in tears,” he said.
Marc S. Stern, a bankruptcy lawyer in Seattle, said most consumers should not negotiate for themselves. “It’s too emotional, and a lawyer can say things about clients that they never will, like he’s a deadbeat and you’re never going to get any more from him,” Mr. Stern said.
Experts agreed that deals may be struck with many original creditors for 50 to 80 cents on the dollar, while debt buyers, who paid 20 cents or less on the dollar, may settle for a lower amount.
Debt settlement companies are regulated by state attorneys general and the Federal Trade Commission, but they are rarely prosecuted. To improve regulation of this interstate business, the Uniform Law Commission, sponsored by state governments and based in Chicago, is promoting a model law that covers credit counseling and debt management companies. It was in force in four states last year, and an estimated five state legislatures will vote on it this year, said Michael Kerr, the commission’s legislative director.
Mr. Leuthold says his association welcomes regulation but has reservations about the model law, including its volume. “Some say it is long and complicated, 80 pages, and a lot of states don’t want that level of detail,” he said.
Until the states or Congress act, credit card holders are “naked in the world,” said Elizabeth Warren, a law professor at Harvard and a bankruptcy expert. “Unscrupulous debt counselors have built their business models around taking advantage of desperate people.”
By Jane Birnbaum. Copyright 2008 The New York Times Company. All rights reserved.
Wednesday, January 16, 2008
2008 changes to bankruptcy law
We hope the start of your 2008 has been happy and healthy and that you’ve been able to keep all of your New Year’s resolutions!
This month, we’d like to review the changes in bankruptcy law that took effect on January 1, 2008.
1. Median income. The new median income for a New York State household with 1 earner is $43,352. For a household with 2 people, the median income is $52,891, for 3 people, $62,882 and for four people, $75,513. The median income is increased by $6,900 for each individual in excess of 4.
2. National Standards: Food, Clothing and Other Items. The new National Standards for food, clothing, housekeeping supplies, personal care products and services and miscellaneous are $494 for 1 person, $925 for 2 people, $1,123 for 3 people and $1,331 for 4 people. $246 is added to the allowance for each additional individual in the household.
3. Local Standards: Housing and Utilities. These are set at the county level. For New York County (Manhattan), the new Local Standards are: $671 for non-mortgage expenses and $3,102 for mortgage or rent for 1 person, $788 for non-mortgage expenses and $3,643 for mortgage or rent for two people, $830 for non-mortgage expenses and $3,840 for mortgage or rent for 3 people, $926 for non-mortgage expenses and $4,281 for mortgage or rent for 4 people, and $941for non-mortgage expenses and $4,350 for mortgage or rent for 5 or more people.
4. Local Standards: Transportation. Nationally, $163 is allowable for public transportation costs and $478 for ownership costs for each car (up to 2). In the New York Metropolitan Statistical Area, $268 is allowable for operating costs for 1 car and $536 for 2 cars.
5. National Standards: Out-of-Pocket Health Care Expenses. This is a new standard. Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. For each person under 65, the standard amount is $54. For each person 65 and older, the standard amount is $144. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.
6. Marital Adjustment. Under Section 101(10A)(B) of the Bankruptcy Code, “current monthly income” includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent). The marital adjustment line on the calculation of current monthly income now has lines for specifying the basis for excluding spousal income (such as payment of the spouse’s tax liability or the spouse’s support of persons other than the debtor or the debtor’s dependents) and the amount of income devoted to each purpose.
7. Tax Relief for Mortgage Debt Forgiveness. At the end of the year, President Bush signed into law a bill that exempted mortgage debt forgiven through a foreclosure, a short sale (where a home is sold for less than the amount of the loan) or a loan restructuring from being treated as taxable income. Ordinarily, forgiven debt is treated as taxable income. The legislation is retroactive to Jan. 1, 2007 and scheduled to expire at the end of 2009
2008 also inaugurates a new way for Shenwick & Associates to work with our bankruptcy clients. We now offer a Web-based Questionnaire to our clients who are filing for bankruptcy protection.
As always, please contact Shenwick & Associates for the most up to date bankruptcy services.
This month, we’d like to review the changes in bankruptcy law that took effect on January 1, 2008.
1. Median income. The new median income for a New York State household with 1 earner is $43,352. For a household with 2 people, the median income is $52,891, for 3 people, $62,882 and for four people, $75,513. The median income is increased by $6,900 for each individual in excess of 4.
2. National Standards: Food, Clothing and Other Items. The new National Standards for food, clothing, housekeeping supplies, personal care products and services and miscellaneous are $494 for 1 person, $925 for 2 people, $1,123 for 3 people and $1,331 for 4 people. $246 is added to the allowance for each additional individual in the household.
3. Local Standards: Housing and Utilities. These are set at the county level. For New York County (Manhattan), the new Local Standards are: $671 for non-mortgage expenses and $3,102 for mortgage or rent for 1 person, $788 for non-mortgage expenses and $3,643 for mortgage or rent for two people, $830 for non-mortgage expenses and $3,840 for mortgage or rent for 3 people, $926 for non-mortgage expenses and $4,281 for mortgage or rent for 4 people, and $941for non-mortgage expenses and $4,350 for mortgage or rent for 5 or more people.
4. Local Standards: Transportation. Nationally, $163 is allowable for public transportation costs and $478 for ownership costs for each car (up to 2). In the New York Metropolitan Statistical Area, $268 is allowable for operating costs for 1 car and $536 for 2 cars.
5. National Standards: Out-of-Pocket Health Care Expenses. This is a new standard. Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. For each person under 65, the standard amount is $54. For each person 65 and older, the standard amount is $144. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.
6. Marital Adjustment. Under Section 101(10A)(B) of the Bankruptcy Code, “current monthly income” includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent). The marital adjustment line on the calculation of current monthly income now has lines for specifying the basis for excluding spousal income (such as payment of the spouse’s tax liability or the spouse’s support of persons other than the debtor or the debtor’s dependents) and the amount of income devoted to each purpose.
7. Tax Relief for Mortgage Debt Forgiveness. At the end of the year, President Bush signed into law a bill that exempted mortgage debt forgiven through a foreclosure, a short sale (where a home is sold for less than the amount of the loan) or a loan restructuring from being treated as taxable income. Ordinarily, forgiven debt is treated as taxable income. The legislation is retroactive to Jan. 1, 2007 and scheduled to expire at the end of 2009
2008 also inaugurates a new way for Shenwick & Associates to work with our bankruptcy clients. We now offer a Web-based Questionnaire to our clients who are filing for bankruptcy protection.
As always, please contact Shenwick & Associates for the most up to date bankruptcy services.
Friday, December 14, 2007
Mortgage foreclosures
Happy holidays! This month we’ll be discussing something we hope you avoid this holiday season-mortgage foreclosures.
With the falling real estate market, many of the readers of this e-mail are aware of the rise in mortgage foreclosures. It is predicted that in 2008 there will be 1.8 to 2 million foreclosures. When a client calls an attorney and indicates that their house is being foreclosed upon, there are a number of options that the attorney should suggest or discuss with the client.
1. Is the party that is commencing the foreclosure action actually the party that owns the mortgage and the promissory note? On October 31, 2007, a federal District Court Judge in Ohio issued an opinion and order which dismissed 14 foreclosure actions by Deutsche Bank based on the fact that Deutsche Bank was unable to provide proof of ownership of the mortgage. This case can be read on our website here.
2. Is the client or the defendant able to work out a forbearance agreement with the mortgagee or the bank? Forbearance agreements may include the following different scenarios: an increase in the number of years in which the loan is due, a reduction in the interest rate on the loan, a separate payment plan for arrears on the mortgage, or the arrears being backended and paid after the mortgage is paid off in full.
3. Chapter 7 bankruptcy. With the increase in the New York State homestead exemption, each debtor in bankruptcy is allowed to keep a house in bankruptcy with no more than $50,000 in equity, so if a couple files for Chapter 7 bankruptcy, they would be able to keep a residence which is their homestead (a house, townhouse, co-op or condo which is their primary residence) and in which they have no more than $100,000 in equity. For bankruptcy purposes, equity is calculated by the difference between the value as determined by a broker price opinion letter or a formal appraisal less any outstanding mortgages, home equity loans or mortgage arrears.
4. Chapter 13 bankruptcy. If the debtors have a regular source of income and they’re generating sufficient income, they may be able to file a three to five year plan with the Bankruptcy Court where they would remain current on their mortgage payments and pay the arrears due the bank over a three to five year period. The debtor would need to show that they have a regular source of income and that the plan is feasible (i.e. that they have sufficient after-tax monies or disposable income to fund the plan).
5. Finally, there are several bills before Congress (in fact, one bill that has passed the House) that would allow a Bankruptcy Judge to modify the terms of a first mortgage which is a subprime mortgage and which would allow the judge to modify the interest rate or the term of the mortgage. Currently, Bankruptcy Judges are unable to modify first mortgages on houses. Shenwick & Associates is monitoring this bill and we will provide updates regarding the status of this bill and if the bill becomes law.
With the falling real estate market, many of the readers of this e-mail are aware of the rise in mortgage foreclosures. It is predicted that in 2008 there will be 1.8 to 2 million foreclosures. When a client calls an attorney and indicates that their house is being foreclosed upon, there are a number of options that the attorney should suggest or discuss with the client.
1. Is the party that is commencing the foreclosure action actually the party that owns the mortgage and the promissory note? On October 31, 2007, a federal District Court Judge in Ohio issued an opinion and order which dismissed 14 foreclosure actions by Deutsche Bank based on the fact that Deutsche Bank was unable to provide proof of ownership of the mortgage. This case can be read on our website here.
2. Is the client or the defendant able to work out a forbearance agreement with the mortgagee or the bank? Forbearance agreements may include the following different scenarios: an increase in the number of years in which the loan is due, a reduction in the interest rate on the loan, a separate payment plan for arrears on the mortgage, or the arrears being backended and paid after the mortgage is paid off in full.
3. Chapter 7 bankruptcy. With the increase in the New York State homestead exemption, each debtor in bankruptcy is allowed to keep a house in bankruptcy with no more than $50,000 in equity, so if a couple files for Chapter 7 bankruptcy, they would be able to keep a residence which is their homestead (a house, townhouse, co-op or condo which is their primary residence) and in which they have no more than $100,000 in equity. For bankruptcy purposes, equity is calculated by the difference between the value as determined by a broker price opinion letter or a formal appraisal less any outstanding mortgages, home equity loans or mortgage arrears.
4. Chapter 13 bankruptcy. If the debtors have a regular source of income and they’re generating sufficient income, they may be able to file a three to five year plan with the Bankruptcy Court where they would remain current on their mortgage payments and pay the arrears due the bank over a three to five year period. The debtor would need to show that they have a regular source of income and that the plan is feasible (i.e. that they have sufficient after-tax monies or disposable income to fund the plan).
5. Finally, there are several bills before Congress (in fact, one bill that has passed the House) that would allow a Bankruptcy Judge to modify the terms of a first mortgage which is a subprime mortgage and which would allow the judge to modify the interest rate or the term of the mortgage. Currently, Bankruptcy Judges are unable to modify first mortgages on houses. Shenwick & Associates is monitoring this bill and we will provide updates regarding the status of this bill and if the bill becomes law.
Monday, November 26, 2007
Real estate and personal bankruptcy
Last month, the Wall Street Journal published an article titled "Burned by Real Estate, Some Just Walk Away" on the rise in foreclosures that accompanied the collapse of the subprime mortgage market.
The article was informative and mostly correct, but got a few facts about real estate and personal bankruptcy wrong. Here’s our letter to the editor in response to the article:
To the Editor:
Your article on the increase in investment property foreclosures [“Burned by Real Estate, Some Just Walk Away,” October 18, 2007] generally provided useful information to your readers, but was wrong in its closing advice-to avoid bankruptcy protection. As an experienced bankruptcy attorney (our caseload is rapidly increasing notwithstanding BAPCPA), filing for bankruptcy is alive and well, with 1 million cases expected to be filed this year, many resulting from real estate.
Filing for bankruptcy can have several important advantages for distressed real estate investors. Bankruptcy will discharge any liability for abandonment of real estate and will also discharge all loans, legal fees, bank fees and court charges related to real estate and other creditors. Additionally, the tax liability from abandoning real estate is discharged in a Chapter 7 bankruptcy.
The conclusion of the article, advises avoiding filing for bankruptcy because it’s tougher in some cases to protect assets such as your primary residence from your creditors in bankruptcy. This statement is inaccurate in New York State. Two years ago, the New York State Legislature increased the homestead exemption to $50,000, so a couple that is married and jointly files for Chapter 7 bankruptcy can protect a home with up to $100,000 in equity. In this market of falling home prices, many clients can file for Chapter 7 bankruptcy and protect their house. If a couple has more than $100,000 in home equity, they can protect their home by filing for Chapter 13 bankruptcy and pay off their creditors over a three to five year period.
Bankruptcy isn’t for everyone-but you do your readers a disservice by ignoring the benefits a “fresh start” via a discharge of debts in bankruptcy which can provide relief to people who are caught up in our country’s growing storm of foreclosures.
For more information on foreclosures and the relief bankruptcy protection can offer, contact Shenwick & Associates. Happy holidays!
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!
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
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