A divorce lawyer called me today with a question about the impact of bankruptcy on a debtor’s obligations under a divorce decree. The divorce lawyer represented a man who was the co-signer of a credit card along with his ex-wife. The divorce decree provided that the ex-wife would be responsible for payment of this credit card debt.
In December, 2006, the wife filed a Chapter 7 bankruptcy and included the credit card debt in her petition. She did not list the ex-husband as a creditor in the case and the ex-husband did not receive official notice of the filing. The husband’s divorce lawyer wanted to know what, if anything, could the ex-husband do to protect his interests.
I responded by noting that Bankruptcy Code Sections 523(a)(5) and (a)(15) apply here. 523(a)(5) makes debts in the nature of alimony and support non-dischargeable where as (a)(15) provides that debts to a former spouse not in the nature of alimony or support but incurred by the debtor in connection with a divorce decree are not dischargeable.
Therefore, in my view, the ex-husband is a creditor by virtue of financial liability that he would incur if the debtor fails to pay the credit card debt.
I further advised my attorney colleague that she should contact the debtor’s lawyer and inquire as to whether the debtor would consent to an Order holding the obligation to the ex-spouse as non-dischargeable in the Chapter 7. Arguably, 523(a)(15) and 727(b) make these debts non-dischargeable automatically, but I would feel safer with an Order from the bankruptcy judge formally holding that these debts are not discharged in bankruptcy.
I also ran this scenario by my colleague Shayna Steinfeld, a lawyer who practices in the area of bankruptcy and domestic relations law and she concurred with my analysis and added two additional points:
1) that this property division debt would be dischargeable in a Chapter 13 (pursuant to Section 1328(a)(2); and
2) that the automatic stay of Code Section 362 may not apply (per Section 362(b) if the credit card obligation was in the nature of alimony or support.
The bottom line – the debtor wife is not going to be able to stick her ex-husband with this credit card debt, although the ex-husband may need to protect his rights by filing an appropriate pleading in the bankruptcy court. The wording of the divorce decree here is also critical in determining how this credit card obligation will be treated.
Filed under Chapter 7 issues, Divorce and bankruptcy issues by 
My colleague, Florida bankruptcy lawyer Jonathan Alper, recently wrote a post on his Florida Bankruptcy Law blog about issues arising in the case of a debtor’s receipt of an inheritance within six (6) months of filing. Under the bankruptcy law, any inheritance received by the debtor within six months of filing becomes property of the estate and can be seized by the trustee and distributed like any other non-exempt asset.
Chapter 7 trustees typically question debtors about any expected inheritance at the 341 hearing. Jonathan posed the question of what might happen if a debtor, knowing that he was the beneficiary of a will, advised his a sick or dying relative about the bankruptcy and the relative thereupon decided to change the beneficiary so that the assets would not be seized.
Jonathan concludes that the debtor has no duty to advise the trustee about the "new" beneficiary’s inheritance. He reasons that the dying relative is not part of the bankruptcy and that the relative has the right under State law to change the beneficiary at any point.
I agree with Jonathan’s analysis….to a point. I think that if the numbers are big enough, an aggressive Chapter 7 trustee would go after the proceeds of the estate and argue that circumstantial evidence suggests fraud. I think it is unlikely that the original beneficiary or the new one would admit that there was a concerted effort to move assets out of the estate. However, just as in the case of a "fraudulent transfer" that would deny discharge under Section 727 of the Code, intent can be inferred from the action of the parties.
I think the bigger issue here may relate to the nature of advice that bankruptcy lawyers can give to their clients. As a zealous advocate, a bankruptcy lawyer can advise his client about the six month rule, and, if asked, about wills and estate rules that permit a testator to change his beneficiaries. I also think that that bankruptcy lawyer should advise his client about the potential risk of a claim by the trustee.
To a certain degree, therefore, the bankruptcy lawyer’s job is to help his client manage risk, while at the same time avoiding being backed into a situation where the lawyer has independent knowledge of a client’s plan to misrepresent statements on bankruptcy schedules. Jonathan Alper concludes that his hypothetical debtor has a "legitimate position." I think this is the right way to analyze this type of ethical dilemma.
As long as the debtor (and his lawyer) have a reasonable argument grounded in statute or case law, is there any reason why the lawyer ought not provide his client with information about a range of choices starting with the most aggressive position?
Technorati Tags: Chapter 7 and expected inheritance, inheritance as property of the estate, Jonathan Alper
Filed under Chapter 7 issues, Protected property issues by
Evidence continues to mount that Chapter 7 will not be a friendly place for debtors who end up in the means test. As you know, you can only qualify for Chapter 7 if (1) their household income falls below the average income for a similarly sized family in your State, or (2) if your household income exceeds the average income, but you pass the "means test."
The means test sets out a budget using expense numbers that the IRS has deemed "reasonable." If your actual expense for a particular category exceeds the IRS number, too bad.
For example, if the IRS budget says that a family of 4 in Fulton County, Georgia may spend $1,529 for housing and utilities. If that family of 4 actually spends $2,000 for housing and utilities, they can only use the $1,529 in the housing/utilities column. For bankruptcy calculation purposes, this family has $471 "left over" and available to pay creditors in a Chapter 13.
Now, we learn that 401(k) loan repayments cannot be included in a means test budget. If you are paying back a 401(k) loan at $200 per month, for example, the Bankruptcy Court says that this $200 is actually "disposable" and available for creditors in a Chapter 13. The Court does not care that if you defaulted on a 401(k) loan you would face tax problems and possibly lose your retirement investment. Thanks to my colleague, attorney Bernd Stittleburg, who forwarded to me an email about the Lenton case from Pennsylvania and the Nockerts case from Wisconsin.
Bernd Stittleburg and I have both noticed that every Chapter 7 case that involves a means test inevitably results in an objection from the U.S. Trustee. I am therefore much less inclined to pursue Chapter 7 relief for a debtor whose income exceeds the means test numbers, and if I do take a "means test" case, I have no choice but to charge a substantially higher fee.
Congress created this means test to limit access to Chapter 7, and that goal is certainly being met. Unfortunately, honest but unfortunate debtors now have very little place to turn since bankruptcy relief is become less and less available.
Technorati Tags: means test, 401(k) loan repayment in bankruptcy, median income test, Bernd Stittleburg
Filed under Chapter 7 issues, Georgia Bankruptcy, Means Test issues, Median income test issues by
First, I think you have a very insightful blog about bankruptcy issues. I refer your blog to the bankruptcyforum.com sight to all the guest and members there. I’m just curious on your opinion to my following Bk Trip. I was working 2 full time jobs, making about 65g’s a year, I filed Bk13 (was in a no asset, unsecured cc debt/loans (unsecured) for about 65-70gs) My last cash advances were May 06 (minimal one for $500) in April 06 (big one for $4000-6000). Brief outline from the last cash advances to date of filing:
April – cash advance of about 4-6gs’
May – cash advance of about $500
July – filed Bk 13 end of July
Aug – Ch13 341 Meeting
* Trustee objected to my “good-faith,” payback of $250 a month *
The Median Test proved I was not in presumption of abuse and I had negative -$60 disposable income, Schedule I and J proved I had $800
October – Objection to confirmation goes Easter District, state of Virginia Judge
* Judge did not want say yay or nea and wanted me to re-submit another plan, Judge mentioned I was not forced to work 2 jobs, I could quit one and convert to Ch13, or I could resubmit a new plan * It only made sense for me to quit one job than have to payback $800 bucks for the next 5 years *
Oct – I quit one job, converted to Ch7
Nov – Ch7 341 meeting
Now I’m just waiting to discharge (hopefully by January) last day for creditor objections Jan 8, 2007
At the time I was in Ch13, I didn’t hear of any objections from creditors or even a peep about my recent cash advances from April-May. (due to being a gambler) I thought it my Bk would be a big issue. Not a peep about that either. Now that I’ve converted to Ch7 and another 60 day to objection starts over. My concern is what are the chances of objection/adversary’s coming up from creditors. My thoughts are this, I haven’t paid any of them since June/July its been IF you count from MAY until now (DEC) about 6-7 months since my last cash advance (I think its like 180 days one should wait if they’ve had heavy spending on their credit cards – and since mine were cash advances due to gambling – I would think it would be a big issue!)
What are your thoughts?
Thanks, Mickey aka Catchmeifyoucan
Jonathan Ginsberg responds: Mickey, thanks for the kind words. To answer your question….my experience has been that most credit card lenders will not object to dischargeability if the total debt owed to that particular creditor is $15,000 or less. I suspect that the cost of retaining counsel and pursuing smaller claims is too high. I also think that the more time between your use of the cards, the better. Here, you have a fairly large cash advance in April, but you do have a good faith payment in May, then a Chapter 13. You did not say how large your total balances are to any particular lender.
Under the old law, debts that were not dischargeable in a 7 would be dischargeable in a 13. That has now changed but I have not seen much of a change by the credit card lenders. Here, because your loans were most likely coded as a Chapter 13, you may slip through the cracks. This is even more likely if your case was filed in a busy filing district.
If the bankruptcy specialist at the credit card company wakes up, he would see that his company does have leverage to push you into some sort of a payback settlement. However, if you have not heard anything by now, you may be under the radar.
Technorati Tags: recent credit card use and bankruptcy, dischargeability action, credit card advance, Section 523(a), Chapter 7 discharge
Filed under Chapter 7 issues, Creditor discharge actions, Recent credit card use by
Requests for documents and records by Chapter 7 trustees at 341 hearings are now a fact of life in the consumer bankruptcy world. No longer will standing Chapter 7 trustees rely on a debtor's best estimates – everything in your petition is fair game for review.
I am now telling my Chapter 7 clients to save their receipts for every purchase they make. Food, out of pocket medical bills, transportation expenses (including gasoline and routine maintenance), utilities, insurance costs and school sports expenses for the kids seem to be the categories that attract the most attention by trustees.
You should assume that some poor soul in your trustee's office will have the task of comparing your receipts to the figures on your filed budget (Schedule J of your petition).
If at all possible, you should start collecting receipts far in advance of filing. If it turns out that your receipts show that you actually spend $200 or $300 less each month than you think, you may find yourself facing dismissal or a conversion to a Chapter 13.
Your need to provide receipts is especially important if your household income exceeds the median and we have to run your budget through the means test. Every means test case is scrutinized by both the Chapter 7 trustee assigned to your case and the United States trustee. As I have reported before in this blog, the United States trustee is looking for a reason to push you out of Chapter 7.
I advise my clients that while I will argue long and loud on their behalf, numbers do not lie. And if I have to spend several hours poring over receipts, meeting the the U.S. Trustee, and arguing a 707 Motion to Dismiss, they can expect to spend a significant sum of money for attorney's fees.
The time to get your attorney detailed information about your spending habits and records of what you actually spend is before you actually file. I realize that this type of planning is not always possible, but if you can prepare in this way, you will save yourself a great deal of aggrevation and probably save yourself money as well.
Technorati Tags: chapter 7 budget, Schedule J, standing Chapter 7 trustee, united states trustee for the northern district of georgia, atlanta bankruptcy, bankruptcy georgia
Filed under Chapter 7 issues, Georgia Bankruptcy by
Illinois bankruptcy attorney Mazyar Hedayat reminds us in his DuPage County Bankruptcy blog that random bankruptcy case audits will start on October 17, 2006. October 17 is, of course, the one-year anniversary of the effective date of the BAPCA change to the nation's bankruptcy laws.
One out of every 250 cases will be audited. Debtors and their counsel will have 21 days to provide:
- six months of pay advices
- six to twelve months of bank statements
- a copy of your divorce decree (if applicable)
- two to four years of tax returns
- copies of titles or deeds to real estate
- other financial information
if this information is not provided or if it is incomplete, your discharge may be denied.
In my office I plan to ask my clients for this information at the time the case is filed.
Technorati Tags: random case audits in bankruptcy, denial of discharge, united states trustee, random audit
Filed under Chapter 13 issues, Chapter 7 issues, Discharge issues by
My colleague, Orlando bankruptcy lawyer Jonathan Alper, recently wrote about the rules for voluntarily dismissing a Chapter 7 case. Jonathan discusses the McDaniel case out of Florida, where the bankruptcy judge allowed a pro se debtor to dismiss a case after the debtor discovered that his tax debt was not dischargeable. The sole reason that the debtor had filed Chapter 7 was to discharge tax debt and the judge used "the court's discretion" to find that fairness and a lack of prejudice to the IRS warranted approval of the debtor's request to dismiss.
Over fifteen years ago, I was involved in a similar case, but one that yielded very different results. In my case, a gentleman came to see me after filing a pro se Chapter 7. He had filed the case to stop a payroll garnishment, and his total debt was around $100,000 – mainly credit cards. The problem he was facing had to do with his mother's home. Several years prior, his mother had added him to her deed for estate planning purposes. His mother continued to live in the home (which had no mortgage debt) and she paid the taxes and insurance. The mother's home had a fair market value of $200,000.
The Chapter 7 trustee ran a title search and found the real estate. The trustee wrote both the debtor and his mother to advise them that the trustee intended to sell the mother's house to liquidate the equity or that the mother could "buy out" the estate's interest by taking out a mortgage against the property.
The debtor came to me because he wanted to dismiss the case and to keep his mother out of the picture.
I looked at the Code section and saw that it gave the judge discretion to grant a motion to dismiss on the grounds of fairness, debtor's best interest and lack of harm to the creditor. I argued to the judge that it was fundamentally unfair to the mother to take her house and that the creditors (all unsecured) would be receiving a windfall because this debtor foolishly failed to seek counsel before filing Chapter 7.
The judge disagreed. She ruled that once the debtor filed Chapter 7, he gave up control of his estate and that by virtue of his title interest in his mother's house, he had equity in her real estate. We eventually settled with the trustee for slightly less than half the equity and the mother ended up taking out a mortgage on the property.
I have also been involved in a Chapter 13 in which the debtor received a large lawsuit settlement and the Chapter 13 trustee successfully moved the court for an order disallowing the voluntary dismissal of his Chapter 13 case.
The lesson here is that in my view, you cannot assume that a bankruptcy judge will permit you to dismiss your Chapter 7. I suspect that the debtor described by Jonathan Alper did not have any non-exmept equity and probably had a friendly judge. You cannot always assume that your judge will cut you a break. My feeling is that filing a bankruptcy without the advice of counsel is dangerous in general. A bankruptcy case can take on a life of its own and you may not be able to turn back the clock.
Technorati Tags: voluntary dismissal of chapter 7, judicial discretion, chapter 7 trustee, settlement with the Chapter 7 trustee
Filed under Chapter 7 issues by
