And don’t think that limiting access to your profile to “friends” only will help.  Facebook information can easily be subpoenaed – do not assume any right to privacy for your online materials.

How has Facebook and similar sites impacted the world of consumer bankruptcy.  In this guest post, Charlotte bankruptcy lawyer Damon Duncan, identifies three situations where your careless use of Facebook could have serious bankruptcy implications:

Over the past several years social networking sites have exponentially grown at an incredible rate. According to Facebook, they have over 500 million active users spending 700 billion (with a “B”) minutes per month on Facebook. Needless to say, it has a huge audience.  Could some of that audience be members of the United States Trustee’s office or your creditors? Here are three ways Facebook may ruin your bankruptcy:

1.     Personal Property Not Listed

As a part of your bankruptcy you are required to list out your personal property. This personal property may then be protected using federal or state exemptions. Any property not listed or not protected may be seized by the Bankruptcy Trustee.

If you have pictures posted from Christmas showing your new four-wheeler or new big screen television and that personal property is not listed in the bankruptcy petition that was filed in February, then the Trustee may have the ability to seize that property or require you to pay the non-exempt equity in the property.

Instead, what if you file in March and you forget to list the new engagement ring that you get on Valentines Day but have pictures showing your new “bling” and changed your Facebook status from “Dating” to “Engaged to…” the Trustee could (although unlikely) try to come after that engagement ring or make you pay back the non-exempt equity.

2.     Vacations, Trips and Luxury Spending

Another way your social media could damage your chances at a successful bankruptcy filing is if the Trustee or Bankruptcy Court finds out that you have been taking “luxury trips” with your credit cards or other funds. If you post pictures of family trips to the Caribbean or a romantic getaway to Paris, France the courts could require you to pay back the expenses incurred on the vacation. When posting pictures to Facebook then this could raise questions in the Trustee’s eyes as to how you have been spending your money.

3.     New or Unlisted Jobs

If you have filed a Chapter 13 bankruptcy then you should be making monthly payments to the bankruptcy Trustee. Those payments were largely determined by your income and the amount of disposable income you had at the end of each month at the time of your bankruptcy filing.

If you just received a new job offer and are excited to tell family and friends by posting an announcement on your wall about your new job and the pay raise the comes along with it then this could be information that the Chapter 13 bankruptcy Trustee may be able to use to increase your monthly payments. Again, the more money you make should result in more disposable income. The Trustee can then use that extra disposable income to pay back more of your debts.

Along the same lines of getting a new job – what if you have a side business but in your opinion, you don’t make a substantial amount of income from it so you don’t list it down on your bankruptcy petition. Well, if a Trustee finds out about this other business then this income could be recalculated into your monthly income which may push you above the Means Test forcing you to file a Chapter 13 bankruptcy and pay back at least a portion of what you owe to creditors.

Many people have grown to love social media, especially Facebook. It has been a great way to stay in touch with family and friends. Despite that, it has also opened a window that allows others to peer into your personal life. I doubtmany Trustees or creditors are looking up debtors to see if they are telling the truth about their personal assets. However, it can take less than two minutes to find out a lot about a person and their assets by simply lookingonline. Making your profile private is an easy way to keep people from finding out too much information about you. More importantly, be sure to disclose all of your assets and property to your attorney. If they know about your property then they can almost always protect it, or at least put you in the best situation to keep as much of it as possible.

Damon Duncan and Duncan Law, LLC are bankruptcy lawyers in Charlotte, NC.  Visit their web site by clicking on the link or call them at 704-563-1224 begin_of_the_skype_highlighting 704-563-1224 end_of_the_skype_highlighting.

Here’s how it works: Let’s say that you own a home worth $250,000.   Perhaps that home was worth $350,000 three or four years ago but its market value has dropped because of the recession.  The balance on the first mortgage is $270,000 and the balance on the second mortgage is $45,000.

In this case, a Chapter 13 debtor can ask his bankruptcy judge to “strip away” the second mortgage debt since all of the value in your home is encumbered by your first mortgage.  In other words, if you were to sell your house, the first mortgage lender would not be paid in full and the second mortgage lender would get nothing.  The second mortgage lender is, therefore, unsecured.

Lien stripping only works when:

• you are a debtor in a Chapter 13 case
• the fair market value of your house is less than the balance due on your first mortgage

The Clerk’s Office of the Northern District of Georgia has provided us with sample lien stripping motions, which you can review by clicking on the link.

I suspect that mortgage companies will mount challenges to lien stripping.  There has already been a Minnesota case where a local judge there refused to allow lien stripping.   One day this issue may be considered by the United States Supreme Court.  For now, however, most bankruptcy judges will allow lien stripping and if your second mortgage or HELOC is fully unsecured, you may want to consider it as well.

My friend and colleague, Charleston bankruptcy lawyer Russ DeMott has published a clear explanation of how he approaches the mortgage lien stripping process (in his district, they refer to lien stripping as “mortgage stripping” but the concept is identical.  You can read Russ’ post by clicking on the link.  Russ correctly points out that out of banks and mortgage companies have not cooperated in out of court mortgage modifications and that lien stripping remains perhaps the most reliable tool to modify a mortgage.

I have successfully “stripped” several junior mortgages.  Not surprisingly, the main issue that arises has to do with the fair market value of the home.  You may need to pay for an appraisal to convince the judge that the second mortgage is, in fact, fully unsecured.

All of these choices, by the way, create unintended consequences – if you are reaching that point of desperation where you are thinking about selling things, cashing out retirement plans, etc., I would rather that you call me  before taking any action because of the risk that you might unknowingly lose some of the benefit from your bankruptcy filing, or possibly disqualify yourself altogether.

Retirement plan loans such as 401(k) loans create a variety of issues and are almost always a bad idea in a bankruptcy context.   Presumably you borrow against your 401(k) because you need cash now, you expect to repay that loan in the near term, you want to preserve your 401(k) account for the future, and because you do not want the tax consequences associated with cashing out your 401(k).

Bankruptcy trustees, however, look at 401(k) loans in a different light.   They see any allocation to repay a 401(k) loan (and sometimes any ongoing contribution to a 401(k) plan) as an unnecessary reduction of disposable income that would otherwise be available to pay creditors.    401(k) loan payments cannot be counted as allowable deductions in your means test calculations.   And both Chapter 7 and Chapter 13 trustees and/or creditors will often object if you include a 401(k) loan repayment allocation in your Schedule I and J budget in either a Chapter 7 or Chapter 13.

Since 401(k) plan funds are generally considered “exempt” or sheltered property in a Georgia Chapter 7 or Chapter 13, your best choice often means not using your 401(k) as a last gasp source of cash.

401(k) loans and on-going 401(k) contributions do not make bankruptcy impossible, but they do complicate matters.  If you are in financial trouble and are thinking about raiding your 401(k) or retirement plan but have not done so, you should not take any action until you have spoken to a bankruptcy lawyer.   If you have already cashed out or borrowed against your 401(k), make sure that your attorney is aware of this fact.

Because the bankruptcy process can seem informal, it can be easy to forget that a Chapter 7 or Chapter 13 filing is made up of documents filed in a federal district court and subject to investigation by the F.B.I.

Attorney Gini Nelson, a New Mexico bankruptcy lawyer, recently published a post about bankruptcy fraud in the Bankruptcy Law Network blog.  Gini’s post includes a link to the IRS.gov site containing examples of bankruptcy fraud investigations.   I found the IRS.gov link especially interesting in that one can get a sense of the type of fraud that bankruptcy debtors have attempted and the level of fraudulent activity that generated prosecution.  Given the highly interconnected and electronic public record access that is available to bankruptcy trustees as well as government investigators I can’t believe any of these folks believed that they would not be caught.

The issue in Lanning is one that has troubled bankruptcy lawyers since 2005, when the “means test” was added to the Bankruptcy Code.   The means test functions as a test – do you have the “means” or disposable income to fund a Chapter 13 repayment plan?  If the means test shows that you do not have sufficient disposable income to make a Chapter 13 work, then you qualify for Chapter 7.

As one of the assistant United States trustees once told me – the purpose of the means test is to disqualify as many people as possible from Chapter 7, and to force them into Chapter 13.

In practice, the means test does not work very well in predicting who can make a Chapter 13 work.  One of the biggest complaints has to do with the mechanical nature of means testing.   To run a means test, I have to gather pay stubs from the past 6 months.  I then create a monthly average, which represents available income.  Next I prepare a means test budget, but I do not use actual expense amounts.  Instead, the means test tells me how much my clients are allowed to spend for food, medicine, utilities, etc.  And where do these budget numbers come from?  Means test numbers are based on IRS budgets used in delinquent tax repayment plans.  In other words, the means test budget allocations are not especially generous.

This explanation of the means test is somewhat oversimplified, but you get the main idea – every bankruptcy debtor’s income and expense numbers have to be run through the means test, and not surprisingly this somewhat mechanical test produces some absurd results.

The classic example of absurd results occurs when a debtor has received a Christmas bonus or a one time payment.  That bonus/one time payment has to be included in the monthly income numbers even if it is not guaranteed or likely to happen again.  In other situations a debtor may have earned a comfortable income but has now lost his job – under a strict reading of the means test, he earns too much money to file Chapter 7.  And he can’t afford to file a Chapter 13 because he now has no income.

The Supreme Court has injected some common sense into this situation.  In the Lemming case, which was filed in Topeka, Kansas, the debtor’s 6 month average was skewed by a one time payment arising from a buyout from her former employer.  The debtor filed a Chapter 13 plan that called for a payment that the debtor could afford based on her actual, current income.  The trustee objected on the grounds that the means test dictated a higher number (that the debtor clearly could not afford based on his actual income).

The Topeka bankruptcy judge agreed with the debtor and approved a plan that Ms. Lemming could afford.  The trustee appealed and lost in the 10th Circuit Court of Appeals.  The trustee appealed again and the Supreme Court granted certiorari.

The Supreme Court affirmed the decision of the 10th Circuit Court of Appeals and held that bankruptcy judges need not apply a “mechanical approach” to means testing in Chapter 13 cases.  Instead, judges should “take into account other known or virtually known certain information about the debtor’s future income or expenses.”  Rather than looking backwards, judges can take a forward looking approach and consider the realities of a debtor’s income.   This forward looking approach should be considered in cases with unusual facts and the Lemming decision should not be construed as an invalidation of the means testing formula.

Despite the Supreme Court’s warning that a “forward looking” approach should only be used in limited situations, I suspect that bankruptcy judges will use “Lemming arguments” mitigate some of the harsh results of Chapter 13 in general.   Bankruptcy judges recognize that Chapter 13 cases often do not work because means testing and aggressive trustee arguments force debtors to agree to plans that commit debtors to pay every last dime to the trustee.  Unfortunately, family emergencies and unexpected things happen over the course of a five year bankruptcy plan and many plans will fail – not because the debtor did anything wrong, but because there is no “give” in the plan.

I predict that judges will use the rationale of Lemming to reduce some of the harsh results of the means test and help debtors improve their chances at success in Chapter 13.

If you want to read the Lemming decision, click on the link.  I also found a nice summary of Lemming in attorney Jordan Bublick’s fine South Florida bankruptcy blog.

Chapter 13 bankruptcy is a tool that can be used to save your home from foreclosure.  But the big question sometimes isn’t “can I save my home,” but “should I save it?”

We all know that there’s been an epidemic of foreclosure resulting from the recent economic downturn.  Jobs were lost, values plummeted, and foreclosures have been on the rise.

So it’s natural to wonder, “can I file Chapter 13 bankruptcy to save my home from foreclosure?”  However, when you meet with a bankruptcy lawyer to explore your options, you need to explore all your options—bankruptcy and otherwise.  And that might be not saving your home.

When you’re having financial problems and seek advice, you should take the opportunity to review your entire financial situation.  Can you afford your vehicle payments? Can you “tighten the belt” and cut back on some unnecessary expenses?  And most significantly, “should you try to save your home?”

In my Charleston, South Carolina bankruptcy practice, I get calls every week from folks facing foreclosure.  The potential bankruptcy client’s question is always a “can we?”  Can we stop foreclosure?  Can we make the lender listen?  Can we catch up on these payments we’ve missed?  Can we protect our home? Can Chapter 13 bankruptcy help?

But I always focus on the “should we.”  Here are some factors to consider when deciding whether you should use Chapter 13 to keep your home:

• Can you afford the mortgage payments?  Do you have large house payments you can’t really afford, perhaps with more than one mortgage?  For example, it may be that you can afford payments of $1800 a month, but your current payments are $2800 per month.  Absent a mortgage modification, that’s a tough nut to crack every month.
• Is your interest rate scheduled to adjust?  It may be that you can afford your payments now but maybe not once your payments adjust.
• Do you have equity in your home?  (Equity is the value of the property less any liens (like mortgages, outstanding taxes, assessments, and home owner’s dues).  Lately, I’ve been getting calls from clients who not only have no equity, but actually have “negative equity.”  For example, your house might be worth $250,000 and you owe $350,000.  If that’s the case, you might not want to try to save your home from foreclosure.  You’d actually have more equity if you rented!
• Is this where you want to live for the indefinite future?  If not, perhaps you should use your financial problems to reevaluate where you want to live.  Perhaps renting in another area would lessen your commute or allow your children to enroll in a better school?

These are just a few factors you should consider.  You should weight all the pros and cons of saving your home. You can then have your bankruptcy lawyer help you decide whether filing Chapter 13 bankruptcy to save your home really makes sense.

Jonathan’s note: in addition to the very relevant points Russ makes, let me add this:  if you decide that saving your house in a Chapter 13 does not make sense, a “fresh start” Chapter 7 could be appropriate.  Similarly, you can still file a Chapter 13 to reorganize  your other debts while you surrender your home.   My point – personal bankruptcy is not a “one size fits all” solution – a good bankruptcy lawyer can offer you several options to consider, many of which you may have never considered.

If there is one lament that I hear from my colleagues, it is this – “I wish my clients would call me earlier, when there is time to evaluate bankruptcy and non-bankruptcy options.”  Sometimes, when there are only days or hours to go before a foreclosure, an emergency Chapter 13 may be your only choice.   Even if bankruptcy is something you really do not want to think about, you would be wise to establish a relationship with a bankruptcy lawyer before you end up facing a crisis.

I bring this case to your attention for several reasons.  First, you should recognize that Chapter 7 trustees are very conscious of the likelihood that a certain percentage of debtors will fail to disclose assets.  While it may seem that your Chapter 7 trustee is not paying much attention to any particular case, I suspect that trustee training programs provide trustees with profiles of the types of debtors likely to omit important information as well as resources to search for evidence of hidden assets.

In the Texas debtor’s case I wonder how he thought that a vehicle sale would be missed by the trustee, given that vehicle liens are public record, as are vehicle registrations.

These days almost any sale of real estate or motor vehicles will generate a paper trail of tax forms, insurance records and title documents.  Further I have personally seen situations where an unhappy ex-wife or a former friend will draft a “poison pen” letter to the trustee will allegations about improper activities by a bankruptcy debtor.

Second, be aware that Chapter 7 trustees and the U.S. trustee like to pursue fraud cases periodically to send a message to debtors and debtors’ lawyers that the trustees are paying attention.   Bankruptcy lawyers may be tempted to say “don’t worry about it,” to avoid extra expense and complication but playing fast and loose with disclosure rules can create major problems for both debtors and their lawyers.

Occasionally I meet with a client who may say something like “between you and me, no one knows this but….”    This type of statement is the last thing that any bankruptcy lawyer wants to hear.  From my perspective that client is really saying “I am thinking about committing a federal crime and I want you to help me.”  My license to practice law is not worth the fee for any one case and I have and will continue to decline representation for any client who wants to use my office to file inaccurate schedules.

Nobody likes to surrender assets, especially in a bankruptcy case that may have come about because of factors beyond one’s control (such as a layoff, unfair treatment by a lender, a lawsuit judgment that you did not know about).   In most bankruptcy cases you will not lose in assets.   However, losing a few hundred or thousands of dollars is a far better fate than federal prison.

What happens if you need to file a Chapter 13, you have not yet filed your tax return for last year, but you know that a refund will be coming your way.  The simple answer is that unless you are paying back your creditors at 100%, your Chapter 13 will demand that you turn over your tax refund check, and will use that money to pay your creditors.  If you know that a refund is headed your way, make sure to tell your lawyer before you file – there are some steps you can take to preserve some or all of your tax refund money.

Your Chapter 13 trustee will also want future refunds paid to the trustee.  This situation is easier to handle – you will want to adjust your payroll withholdings so that you do not have any refund coming.  As far as the Chapter 13 trustee is concerned, your tax refund is kind of like a savings account that artificially reduces your net pay amount.

All of the Chapter 13 trustees in the Northern District of Georgia require debtors who are paying less than 100% to creditors to include in their Chapter 13 plans a provision that authorizes the IRS to intercept any refund payable during the years that your plan is in effect and send this money to the Chapter 13 trustee.  And until now, the IRS has cooperated with the Chapter 13 trustees in redirecting refund money.

In January, 2010, however, a federal district court in Michigan has rules that the Chapter 13 trustee does not have the power to compel the IRS to serve as its collection agent.  In the case of United States v. Carroll, a judge in the Eastern District of Michigan ruled that there is no legal basis for the IRS to withhold money and deliver it to the trustee because Congress has not waived the IRS’ “sovereign immunity” that would otherwise leave the IRS vulnerable to contempt actions and other enforcement actions by the trustee (in other words, if the IRS failed to withhold a debtor’s refund, the trustee would not have the right to sue the IRS for damages or for remedial action).  The Michigan judge issued an order forbidding the bankruptcy courts there from confirming any Chapter 13 plan that has the income tax refund seizure language.

I would not be surprised if bankruptcy courts elsewhere in the nation begin to follow the path set by the Michigan judge.  We’ll know soon enough, but I suspect that the trustees in the Northern District may discontinue their demand for an income tax provision involving the IRS in Chapter 13 plans.

I do not expect, however that Chapter 13 trustees here or elsewhere in the country will permit Chapter 13 debtors from keeping large tax refunds.  I suspect that trustees will still demand provisions that obligate debtors to tender their tax refunds but they will expect the debtors to send in the money, rather than having it withheld by the IRS.  I will continue to advise my clients to minimize their refunds to avoid the problem entirely.

Needless to say, losing this automatic tax refund payment mechanism will make enforcement of tax refund plan provisions much more difficult.  It will be interesting to what if anything Chapter 13 trustees do to address this potential administrative nightmare.

The National Data Center allows Chapter 13 debtors to access their case at no charge through its website: www.13datacenter.com. In order to view your case on-line, you must first register for a user name and password. Just go to the www.13datacenter.com website and locate the box that asks for User Name and Password. If you are a new user, click the link “New Debtor Access – CLICK HERE” to register for a user name and password.

Step 1: You will be asked a series of questions to verify your identity. Make sure to enter your name exactly as it appears on your petition, your social security number and your case number.

Step 2: Once you’ve entered all information requested in the first screen, you will be taken to the second screen. Select one of the creditor names listed, which must also be one of the creditors included in your Chapter 13 petition. Select your correct mailing address (NOT the address of the creditor). Finally, select the name of the Trustee that has been assigned to your case.

Step 3: Once the second screen is submitted, you’ll be taken to the third screen. Here you will be able to choose your own username and password, as well as enter your email address.

Once you’ve completed Steps 1 – 3 of the registration process, you will receive an email with your username/password and will be automatically re-directed to the National Data Center homepage. Log-in using your username and password and freely navigate the National Data Center website to view your case on-line and keep tabs on where the money is going.

Post by Susan Blum.

Mr. Espinoza’s story began in 1988.  Sensing that airline baggage handling was not a great long term career, Mr. Espinoza enrolled  in a technical school to learn computer drafting and design, and he financined his education with a student loan.  Unfortunately, he was not able to find a job using his new education and he found himself in a financial bind when American Airlines froze wages and reduced his hours.

By 1992, Mr. Espinoza found himself living paycheck to paycheck and unable to pay down his $13,000 student loan.  At that point, he contacted a lawyer and filed a Chapter 13 bankruptcy.   The Chapter 13 plan prepared by Mr. Espinoza’s lawyer provided for full payment of the balance due on the student loan over the term of the plan but it did not provide for payment of $4,000 in accrued interest or for future interest.

The student loan lender was given notice of this plan provision and did not object.  The bankruptcy judge to whom Mr. Espinoza’s case was assigned issued an order of “confirmation” that formally approved the plan.   Mr. Espinoza dutifully sent in his trustee payments and approximately 5 years later, after payments were made per the confirmed plan, the judge issued a “discharge order” declaring debtor Espinoza free and clear of all debt.

In 2003 and 2004, Mr. Espinoza’s student loan creditor renewed its efforts to collect the student loan debt interest.  The creditor contends that the Bankruptcy Code does not permit the discharge of any part of student loan debt unless the debtor files a special lawsuit in his bankruptcy case to ask for a finding of “undue hardship.”  The creditor contends that a bankruptcy  judge cannot discharge student loan debt or interest on a student loan debt through a confirmation order in the absence of a hardship discharge finding.

The United States government, 24 states and the student loan lending industry are supporting the student loan creditor in this case.   You can read the court documents and more information about the Espinoza case by clicking on the link.  The Supreme Court’s decision in this case is expected within the next few months.

I will be very surprised if the Court rules in favor of the Espinoza position.  The Bankruptcy Code seems fairly clear in placing the burden of showing undue hardship on the debtor – to make a non-dischargeable debt dischargeable because the lender did not object to a provision buried in a Chapter 13 plan seems contrary to the plain language of the code.  It will be interesting to see what happens.

UPDATE:  in March, 2010, the Supreme Court ruled in favor of Mr. Espinoza, but on very narrow grounds.   The Court noted that the bankruptcy judge erred in confirming Mr. Espinoza’s plan without first finding “undue hardship,” but also found that the student loan creditor waited too long to try to correct this error.  The Court specifically suggests that its ruling in this case does not have broad applicability and thus the “plan provision” tactic should not be used by debtors to bypass the “undue hardship” laws.