December 15, 2019

Do You Have an Absolute Right to File Chapter 7 If You Pass the Means Test?

Mr. Ginsberg – I am a regular reader of your bankruptcy blog, and appreciate your time and efforts.  A recent post on another bankruptcy blog raised an interesting issue on which I am wondering if there is a consensus of legal opinion.

Essentially, the question is whether the revision of 707(b) under the BAPCPA effectively precludes a “double jeopardy” type situation in which a Chapter 7 debtor could be exempt from the “means test” but subsequently face a challenge on the basis of excess disposable income.  In the interest of brevity, I’ve copied the posting below:

Attorney Kevin Chern writes…
707(b)(2) May Help Debtors Under the Median Income
Tuesday, September 06, 2005
Under the old bankruptcy law, the trustee could bring a 707(b) motion alleging abuse based on a debtor’s ability to repay debt with expendable income. Under BARF 707(b)(2), the judge, trustee or creditor can all bring a 707(b) motion to dismiss if the debtor’s household has more than the median income for a household of that size. Logic dictates that, under the same provision, neither a creditor, nor the judge, nor the trustee has a right to bring a motion to dismiss no matter how much expendable income the debtor has so long as the debtor’s household has less than the median income for a household of that size.

So, in some situations under BARF, this bright line median income test will help debtors escape 707(b) objections. Of course, the judge or trustee can still bring a motion based on 707(b)(3) alleging that the case was not filed in good faith, but, certainly, no presumption of abuse exists.

What are your thoughts on the issue?  Any feedback you could provide would be appreciated.

Jonathan Ginsberg responds:  Chuck, I would respectfully disagree with Kevin’s analysis.  The median income/means test is a qualification test.  It is based on a 6 month look back, not on reality.   The Schedule I and J budget that you file with your actual Chapter 7 case reflects actual numbers as of the date of filing.  

For example, a debtor physician may satisfy the median income/means test because he was unemployed July-December.  If he gets a new job in January earning $200,000 a year, his Form B22 would show zero earnings and he would not trigger the presumption.  However, his schedule I & J would likely show significant disposable income.  I am not aware of any cases that support Kevin’s logic.   Further, whether a case is successfully challenged as an abuse vs. one challenged under the good faith provision ends up at the same place – a dismissed case.

It would be interesting to see if any Court has considered the double jeopardy argument.

[tags] 707(b), substantial abuse, good faith, Chapter 7, dismissal of Chapter 7, Kevin Churn, means test, median income test [/tags]

Georgia Foreclosures Up 99%

This morning’s Atlanta Journal/Constitution published an article entitled "Georgia Foreclosures Jump 99%; rate is nation’s 3rd highest."    According to this article, one out of every 449 houses will go into foreclosure.  Why the increase?  Interest rates on adjustable rate mortgages are going up.  In addition, underwriting standards by major lenders were relaxed over the past few years.

In my bankruptcy office, we have been seeing the increase in foreclosure traffic in the form of clients looking to file Chapter 13 to save their homes.  Chapter 13 stops a foreclosure and provides a three to five year payback of the mortgage arrearage.  However, Chapter 13 cannot stop a mortgage rate from adjusting nor can it change the terms of your mortgage.  Furthermore, when you file a Chapter 13, you still have to make your regular mortgage payment in addition to your Chapter 13 trustee payment.

One of the first tasks we undertake with our clients is the creation of a budget.  Once we know where your money is going, we can decide if saving your house through a Chapter 13 is feasible at all.  Many of my clients have never sat down to write out a budget – it can be enlightening and I recommend this process to anyone, homeowner or not.

The AJC article quotes my colleague at the bankruptcy bar, attorney Herb Heitman, who notes that lenders are much more willing to negotiate outside of bankruptcy than they were in the past.   I think that this point is very important.  While bankruptcy is a solution to a pending mortgage foreclosure, do not rule out direct negotiation with the lender.  If you go the direct negotiation route keep the following in mind:

  • start your negotiations early
  • if you work out a deal, insist on written confirmation
  • do not agree to give the lender direct access to your checking account
  • do not sign any sort of "Consent Judgment" or legally enforceable document without consulting with a lawyer
  • do not waive your right to file a Chapter 13

I would also urge you to be wary of contracting with fee-based debt negotiation services who promise to work out a deal.  I have ended up with last minute Chapter 13 clients who have also paid several hundred to several thousands of dollars for worthless negotiation services.

And finally, if you do decide to pursue a Chapter 13 bankruptcy, I strongly urge you to avoid any of those "bankruptcy paralegal" services you see out there.   While the Bankruptcy Code does permit "petition preparers," as a practical matter, I do not see how a petition preparer would not be engaged in the practice of law.   Given the complexity of the new bankruptcy law, I would be very wary of pursuing bankruptcy relief on your own or with a non-lawyer.

[tags] georgia foreclosures, adjustable rate mortgage, bankruptcy petition preparers, debt negotiation services, atlanta bankruptcy attorney [/tags]

Student Loan in Your Chapter 13 – Congratulations, You are Officially in Limbo!

We have run across a confusing predicament for Chapter 13 cases filed in the Northern District of Georgia that involve student loans.  According to one of the assistant trustees whose identity we will protect, the judges in the Northern District have not yet decided how debtors should treat student loans in Chapter 13 case.  

Pre-October 17, we could either pay the principal balances in full within the Chapter 13 plan, with accrued interest surviving, or we could pay student loans directly and not include principal in the plan.

Under the new law, however, we have been advised that the trustee will object to either treatment – we can't pay the student loans in the plan nor can we pay them directly.  What should we do?  "See if you can get the student loan into deferment status" was the reply.

On the other hand, an assistant trustee assigned to another judge takes a different, more reasonable perspective.  In cases assigned to her judge, we can pay student loans directly, outside the plan, or we can pay them in full as a special class in the plan, or we can pay them as general unsecured creditors, with the balance surviving the bankruptcy.  This approach gives me, as the debtor's lawyer, the most flexibility in crafting a repayment plan that might actually work.

Unfortunately there is a lack of consistency among the trustees.  Presumably this student loan purgatory will come to an end at some point, but for now, the cases will just be reset.

[tags] student loan in Chapter 13, special class [/tags] 

Full Disclosure on Bankruptcy Petitions a Must

My colleague attorney Scott Riddle recently posted on his Georgia Bankruptcy Blog an important reminder to both debtors and their counsel about the importance of full and complete disclosure of assets and debts in bankruptcy petitions.

The last paragraph of Scott’s post merits repeating:

The lesson to debtors is, obviously, disclose all of your assets and answer all questions truthfully (truth + fully).  You cannot over-disclose to your lawyer or on the schedules.  For debtors’ counsel, explain the criminal and civil (bankruptcy) penalties for false schedules, and get a signed statement that it has been explained.  It can’t be good marketing when a client is denied a discharge and gets indicted, especially if the client defends by claiming he/she didn’t understand what is supposed to be disclosed.

All of us who represent stressed out and anxious debtors have heard a request that “let’s just keep this between the two of us” and a confession about some hidden asset or loan repayment (in cash) to a relative.  My response, as would be the response of most of my colleagues in the consumer bankruptcy bar, is to the effect that (1) I am an officer of the Court and I will not participate in a scheme to mislead the bankruptcy court and (2) I am not going to put my livelihood in jeopardy for any client, ever.

In the case discussed in Scott’s blog entry, the omitted assets would not have created a problem for the debtor, but the judge or trustee in that case sent the file to the U.S. Attorney for criminal prosecution for Bankruptcy Fraud.  Because the debtor intended harm, he committed a crime – and ended up serving time in federal prison.

So, if you are considering bankruptcy, keep in mind this requirement of total and complete disclosure of all information, good, bad or indifferent.

Behind on Mortgage and Vehicles – is Chapter 13 an Option?

My mortgage is about to go into foreclosure–as we are two months behind right now and we also owe for June…The mortgage company will not accept a partial payment…and will initiate foreclosure proceedings very soon..we are also in trouble with our car notes and timeshare payments… should we consider bankruptcy if we cannot work out something with our lender???

Jonathan Ginsberg responds: Mark, if your mortgage company will not work with you, then your only real option is Chapter 13.  I think you are smart to consider this option early – which is preferable to waiting until a few days before foreclosure to look into the process.  At a minimum, you should do the following now:

1) request copies of all 3 credit reports (both you and your wife) – credit reports are free in Georgia but will take a few days to arrive in the mail (by contrast if you need them immediately, I can get them for $45 per person).  This is another advantage of starting early

2) get your credit counseling certificate.  Credit counseling is now mandatory and if you wait until the last minute, you may not be able to get an appointment.  I have a section about credit counseling on my Atlanta Bankruptcy web siteConsumer Credit Counseling of Atlanta and Hummingbird Credit Counseling are two organizations that my clients have used.

3) complete my bankruptcy intake form.  Please pay special attention to the budget portion.  Chapter 13 will not help you if you do not have enough stable income to pay your mortgage on-going and contribute to your Ch. 13 plan.  If you have fallen behind on your house and your car because you are not making enough money, you may need to consider surrendering one of these secured items to make a Chapter 13 plan feasible.  I can tell you that in almost every case, the Chapter 13 trustee will insist that you give up your time share.  If you fell behind because of an unusual circumstance (i.e., an unexpected job layoff, an illness, a pregnancy, etc.) then a 13 will catch you up.

As part of the questionnaire I would need copies of all pay stubs for income earned by you and your wife (regardless of whether she would be filing with you) for the period December, 2005-May, 2006.

I also think that during this process you should continue negotiating with your creditors.  And if you have numbers and knowledge about how Chapter 13 would work for you, you will be in a better position to evaluate your options.

I am happy to spend 30 minutes with you at no charge to review your completed questionnaire.  Let me know by phone or email if you would like to talk.

Budget Numbers that Apply to Your Case

One of the biggest changes in the new bankruptcy law has to do with the new approved budget figures now being used by the Bankruptcy Courts.  Previously, when I prepared a budget for a case filing, I spoke to my client, reviewed the budget shown on his questionnaire, tweaked it to get rid of any obvious problems and filed it.  As long as we were reasonable, there generally were no problems.

It does not work that way anymore.  Now, the definition of what is “reasonable” comes from the IRS.  These are the same IRS figures that are used in “Offer in Compromise” situations where the IRS is considering a reduction in tax debt.  In other words, the IRS standards are not particularly generous.

You can review the IRS standards at the U.S. Trustee’s web site or the web site for the Clerk of Bankruptcy Court, Northern District of Georgia.  You will notice that there are three different categories of approved budget figures:

– a national standard for allowable living expenses (food, clothing, personal care)

– a local standard based on the county where you live for housing and utilities

– a regional standard for transportation – Georgia is in the “south census” region

In addition the approved standards are updated approximately every 6 months, so before you file, ask your lawyer if the budget numbers are changing anytime soon.

All of these budget numbers are built into the computer program we use to prepare your bankruptcy.  The issues, of couse, arise when you are spending money for “unapproved” purposes, such as paying your child’s private school tuition or college tuition, paying for a child or parent’s car, paying for a home business, etc.

The Chapter 7 and Chapter 13 trustees are filing objections based on these budget figures and are leaving it to the Judges to figure out what is a reasonable deviation.

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