Chapter 7 – Page 10 – Rochester Bankruptcy and Debt Relief

Converting From Chapter 13 to Chapter 7 Bankruptcy

While debtors who file Chapter 13 to protect certain assets are usually diligent in making their payments, sometimes the circumstances have a way of interfering with their ability to meet the plan’s requirements. It is possible that the debtor loses his/her job, missed a few payments, and creditors lifted stay, or the debtor decided that the assets were not worth preserving. One option that is always available in Chapter 13 is to dismiss the case, which the debtor has a right to do at any time in a Chapter 13. But this may leave you with credit card or other debt, or you may be worried that the house or car will be sold at foreclosure or repossession, or that the lender will go after you for a deficiency. In these cases, the best option is to covert your case to a Chapter 7.

In those situations, the debtor may still seek relief from the bankruptcy court, and convert the case from Chapter 13 to Chapter 7 bankruptcy, provided that the means test can be met. When converting the case from a Chapter 13 to a Chapter 7, there is still some paperwork that needs to be taken care of. The petition and schedules need to be updated with respect to the property, whether or not it is kept by the debtor. With respect to any property securing the debt, arrangements must be made with the creditor in order to keep it.

Schedules I and J for your income and budget along with the Means Test have to be updated to reflect that you no longer have the money to make payments in a Chapter 13 case . Once all of the paperwork has been revised, then the debtor must sign the amended schedules, so that they can be filed with the court.

Once the attorney files a Notice of Conversion with the Court and pays the $25 conversion fee, the Court will convert your case to a Chapter 7. There are also other consequences associated with the conversion. Initially, any money that the Chapter 13 Trustee is holding, less any administrative fees that the Trustee is due, will be returned to to the debtor. Any plan payments that are withheld from the debtor’s paycheck will be returned as well. A new Chapter 7 Trustee will be appointed and a new 341 hearing (meeting of the creditors) will be held. The debtor will also have to file a Statement of Intention with respect to any assets subject to creditors’ claims, and also file amended schedules listing any additional debt incurred between the filing of the Chapter 13 and the date of conversion.

If you are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a bankruptcy attorney.

Chapter 7 Bankruptcy and Denial of Discharge for Willful or Malicious Injury

One of the limitations on receiving a discharge in a Chapter 7 bankruptcy is that the debtor cannot discharge any debt for willful or malicious injury.

Section 523(a)(6) of the Bankruptcy Code precludes the discharge of a debt “for willful and malicious injury.” As noted by the United States Supreme Court in Kawaahua v. Geiger, 523 U.S. 57, 61 (1998), the “word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” For the same reason, nondischargeability under this section will attach only to injuries that are malicious. In the Second Circuit, the Court of Appeals set the standard for “willful and malicious injury” in its decision in Navistar Financial Corp. v. Stelluti (In re Stelluti), 94 F.3d 84 (1996). The Court concluded that “[t]he term ‘willful’ in this context means ‘deliberate or intentional,’” and that “[t]he term ‘malicious’ means wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Id. at 87 (citations omitted).

In a recent case, In re Alessi, Judge Bucki held that the deliberate failure to abide by the terms of the contract, amounted to willful and malicious injury. In Alessi, the debtor, Mrs. Alessi, not only failed to pay a debt, but a failure to pay from funds that the debtor had agreed specifically to earmark for that purpose. The uncontroverted facts showed that the funds resulting from a real estate transaction were accessible and not otherwise encumbered, that the debtor knew of her obligation to turnover the funds, and that through his counsel, Mr. Alessi made timely demand for payment, even though not obligated to do so. The resulting injury was willful, in that Ms. Alessi deliberately and intentionally refused to turn over the sale proceeds. By violating a contractual provision for use of committed funds, Amy Alessi inflicted a wrongful financial loss without just cause or excuse. Hence, she caused an injury that was malicious within the meaning of section 523(a)(6).

Thus, if you are a debtor, you may have an obligation to follow through on the contracts where the funds are specifically designated for a given purpose. If you fail to do so, you may be denied a discharge.

Debtor and Bank’s Right of Setoff

One of the common issues that may arise in a bankruptcy, is that the debtor may have one or more accounts at a bank to which the debtor owes money. In those situations, the bank may assert its right of setoff.

The right of setoff in New York is available to a lending institution pursuant to Section 9-g of the Banking Law. Under that section, banking institutions have a long established right of setoff where a borrower is indebted to the institution and also has money on deposit with the institution. This right of setoff is preserved in bankruptcy by Section 553(a), which provides that,

“Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case[.]”

At a first glance, the setoff appears to require a motion to lift the automatic stay since Section 362(a)(7) specifically covers “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor[.]”. Thus, under the statute, in order to exercise that right, the bank must make a motion to lift automatic stay. However, here in Rochester, in In re Catalano, Judge Ninfo has ruled that under some circumstances, the bankruptcy court will not require the motion to lift stay and set the following policy.

If a banking institution has a clear right of setoff under New York law and the debtor has funds on deposit with it in the amount of $750.00 or less, and also owes the institution a debt in excess of the funds on deposit, the institution may setoff the amount on deposit without obtaining formal relief from the automatic stay, provided that it gives the written notice described herein, and the trustee or debtor does not demand a hearing because there is a genuine dispute as to the asserted right of setoff.

As stated in the decision, the banking institution shall give written notice to the trustee, debtor and debtor’s attorney, if there is one, that: (1) asserts its right of setoff; (2) is accompanied by copies of the debtor’s schedules or other documentation that demonstrates the right of setoff; (3) sets forth a “contact person” at the institution, along with that individual’s address, direct telephone number and a fax number; and (4) advises that unless the trustee or debtor has a genuine dispute as to the validity of the asserted right of setoff, it will be effected ten (10) days after the date of the mailing of the notice. In the event that the trustee or debtor notifies the contact person of a genuine dispute as to the asserted right of setoff, the banking institution shall be required to bring a formal motion to terminate the automatic stay under Section 362(d).

This policy makes it extremely important that the debtor fully discloses his/her financial situation to the bankruptcy lawyer and also allow the bankruptcy attorney to engage in prefiling planning to protect the debtor’s assets from the potential right of setoff.

Your Homestead Exemption in Chapter 7 Bankruptcy

In New York, the debtors can protect the equity in their residences by utilizing their homestead exemption. Equity is typically defined as the difference between the market value of the property and the debt owed on it. The homestead exemption is one of the most ways to protect your biggest asset, your home, from the claims of your creditors. In New York, an individual debtor can protect up to $50,000 of equity in home by filing Chapter 7 bankruptcy, $100,000 if the debtor spouses are filing jointly. In order to take the benefit of the homestead exemption, the property has to be your residence when you file the bankruptcy.

I am often asked if the debtor can lose the benefit of the homestead exemption. My usual response is that the debtor could lose the benefit of the homestead exemption only in extreme circumstances. Typically, in order to lose the benefit of the exemption, the debtors must engage in fraudulent conduct or a clear showing of bad faith. Further, the wrongful conduct must be related to the homestead exemption.

If, for example, you own a $300,000 investment property in addition to your $100,000 residence, but you wrongfully claim in your bankruptcy petition that you live in the $300,000 property, you may lose the right to claim the exemption. As long as the debtor does not lie or attempt to hide the property from the bankruptcy court, the debtor will not lose the homestead exemption.

Student Loans Guaranteed By Parent and Bankruptcy

Recently I have been seeing a lot of debtors who have guaranteed their children’s student loans. When I am asked whether I can do something about those loans in Chapter 7 or Chapter 13 bankruptcy, my usual answer is no. The reason for this is that the government guaranteed student loans are not dischargeable in bankruptcy, except in extreme hardship situations, regardless of whether the borrower is the student or the parent who guaranteed the loan. Unfortunately, it is not uncommon for the student to default on the loan. In those situations, the full weight of the loan will have to be carried by the parent who guaranteed the loan. If the parent is already having difficulties paying his/her bills, this may be the final straw to push the debtor into bankruptcy.

When the debtor tells about this situation, I, as a bankruptcy lawyer cannot offer much help. Since the bankruptcy court here in Rochester has taken a position that in Chapter 13 bankruptcy the student loans will be paid, along with other unsecured creditors, pro rata, even a five year repayment plan might not reduce the loan significantly. In Chapter 7, the student loan would not be dischargeable.

As much as it pains me to say it, it is a bad idea for a parent to cosign a government guaranteed student loan. Further, parents guaranteeing the loans of their children face having student loans risk as they approach retirement. If the repayment of the loan is deferred by the student, this will keep the parents exposed to the debt until it is repaid, sometimes decades later. It entwines the two generations financially long after the student is an adult. If the parent is approaching retirement, it is not likely that the parent would have the money to pay off student loans.

Discharging Income Taxes in Bankruptcy

There are four general requirements for discharging an income tax in bankruptcy. Initially, the tax must be one for which the return was not last due within three years of the filing of the bankruptcy. Therefore, if a 2006 income tax return was last due on April 15, 2007, the three-year requirement would be met after April 15, 2010.

The “last due” requirement may be complicated by the debtor’s actions. If the debtor requests and receives an extension, the three-year clock starts after the last extension. See In re Wood, 866 F.2d 1367 (11th Cir. 1989). The three-year period is also tolled during the time when the taxing authority is barred from collecting the debt because of a prior bankruptcy.

The second requirement is known as the 240-day rule. For an income tax to be dischargeable, it must not have been assessed with 240 days of the filing of the bankruptcy. When a tax is assessed is sometimes complicated and depends on the practices of the federal or state taxing authority. For federal taxes, the I.R.S. regulations state that “the date of the assessment is the date the summary record is signed by an assessment officer.” This is not the same time as when the return is filed. However, when a return is timely filed, the assessment date is usually around the time a return is filed.

A debtor will know that a tax has been assessed when they are notified by the taxing authority of the tax claim. The exact date of assessment of a federal tax can be obtain by requesting and analyzing a debtor’s tax transcript.

Another related requirement is that, to be discharged in a bankruptcy, an income must not be not yet assessed but be assessable at the time that the bankruptcy is filed. Pursuant to 26 U.S.C. § 6501(a), tax liability must be assessed within “three years after the return was filed….” Therefore, even if a tax has not yet been assessed for some reason at the time a bankruptcy case is filed, and the case postdates the applicable return by three years, this requirement for dischargeability will met.

The third requirement relates to the timing of when the return is filed. If a return is filed late, it cannot not be filed within two years of a bankruptcy for the tax to be discharged. Under this rule, amended returns are treated as original filed returns. Also, if the debtor provides to the IRS with correspondence containing financial statements with all the information needed to complete a return, this can also be deemed to be a return. The two-year period begins once the taxing authority actually receives the return, and not when the return is mailed, as is the case with timely-filed returns.

The final requirement is the following. The return must be filed. A substitute return filed by a taxing authority on behalf of a taxpayer is not considered a return for these purposes. There is, however, a split of authority on whether a return filed by a debtor after a substitute return is filed can is considered a return for this test. The return must not be fraudulent and the debtor must not have attempted to evade the tax.

Tax evasion is generally rare and courts disagree on what is deemed to constitute tax evasion for purposes of this test. Tax evasion is found usually in situations where a debtor is hiding assets, constructing complicated transactions for tax purposes, or making false and misleading statements to avoid tax. However, evasion has also been found to exist in some cases in which a debtor has simply not paid a tax while having the ability to do so.

If you have pending tax liabilities, and you believe that you can satisfy all or some of the above requirements, you should meet with a bankruptcy lawyer to determine whether a Chapter 7 bankruptcy will result in a discharge of some or all of your tax liabilities.

Chapter 7 Bankruptcy, Student Loans and Hardship Discharge

Almost everyone who has student loans knows that student loans are not dischargeable in bankruptcy. So why would a debtor meet with a bankruptcy lawyer regarding student loans? There are several good reasons to discuss your particular situation with a bankruptcy lawyer.

Sometimes a bankruptcy, either Chapter 7 or Chapter 13, can eliminate or reduce other debt, freeing up income to make the student loan payments more affordable. A Chapter 13 bankruptcy can pay some, if not all, of the student loan debt. If a Chapter 13 payment plan does not pay the student loans in full, it may be possible to propose a plan that will pay enough to reduce principal and make the debt more manageable. If you have a loan that will be forgiven, a Chapter 13 may help you deal with the payments until you have the opportunity to take advantage of debt forgiveness programs.

There are also provisions which allow a bankruptcy court to determine that the student loan debt creates an undue hardship. Section 523(a)(8) of the bankruptcy code says that student loans cannot be discharged in either chapter 7 or chapter 13, unless repaying the student loans would be an undue hardship on you or your dependents. Unlike some other exceptions to dischargeability, this section contains no deadline for either you or the student loan creditor to bring the matter before the bankruptcy court. Although the courts have interpreted that provisions very narrowly, and it is very difficult to litigate these issues for various reasons, you and your bankruptcy lawyer may be in a position to take advantage of those provisions.

Here in Rochester, Judge Ninfo addressed dischargeability of student loans and the so-called “hardship discharge” in In re Martin, holding that in order to obtain a discharge, the debtor must meet the three-part test established in Brunner v. New York State Higher Education, 831 F.2d 395 (2nd Cir. 1987). This test has been summarized in In re Kraft, 161 B.R. 82 (Bankr. W.D.N.Y. 1993) as:

[A] Debtor seeking to discharge an education loan must show:

1. That the Debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself (and any dependents) if forced to repay the loans;

2. That additional, exceptional circumstances exist, strongly suggestive of continuing inability to repay over an extended period of time, or indicating a likelihood that her current inability will extend for a significant portion of the loan repayment period; and

3. That the Debtor has made good faith efforts to repay the loans.

In Martin, the debtor received a hardship discharge based on the following set of facts: “(1) the Debtor did receive an Associate’s Degree in Liberal Arts from Monroe Community College in May, 1988; (2) since her graduation, the Debtor has been unemployed and for a number of years has been receiving Social Security Disability, Medicaid, food stamps and Section 8 housing assistance; (3) the Debtor is a counseling client of the University of the State of New York/Office of Vocational and Educat ion Services for Individuals with Disabilities (“VESID”) where she has been counseled to set a vocational goal of “homemaker;” (4) the Debtor is in individual therapy at the Steuben County Community Health Center; (5) the Debtor suffers from several ongoing medical problems, including degenerative arthritis in her knees, morbid obesity, chronic asthma, hypoactive thyroidism and fibromyalgia; (6) VESID reports that its evaluation revealed the Debtor suffers from chronic depressive feelings and has suicidal thoughts; (7) the Debtor has no present employment prospects because of her physical and psychological conditions; and (8) there exists no indication of any likely change in the Debtor’s state of affairs.” Thus, a rather extreme set of circumstances must be present in order to receive a bankruptcy discharge. At the same time, each case should be judged on its own merits and carefully evaluated by a bankruptcy lawyer to determine how the debtor could benefit by filing bankruptcy.

Chapter 7 Bankruptcy and Reaffirmation Agreement

When you file a Chapter 7 bankruptcy case, as a part of your petition, you also file a statement of intention with respect to property that is secured by consensual liens. That means that you have to inform the bankruptcy court here in Rochester what you intend to do with such property, such as your home that has a mortgage, your car, if it has a loan associated with it that is secured by a lien, or any other property in which your creditor has a valid security interest. You are given a choice of whether to continue to pay on such obligations or to, if you do not wish to sign a reaffirmation agreement, to allow the creditor to take the property back. A reaffirmation agreement in bankruptcy is a new contract signed between you and a lender that reaffirms your debt and personal liability for the obligation. The law requires you to “perform” your intentions regarding financed personal property within 45 days of the Meeting of Creditors (341 Meeting) or the automatic stay terminates. Before signing a reaffirmation agreement, it is a good idea to discuss it with your bankruptcy lawyer as it is a binding legal document. You can revoke it within 60 days after signing. It is not difficult to revoke the reaffirmation agreement since all that is needed, is a letter saying “I don’t want this agreement”, with the letter being sent to the court and to the creditor.

The Bankruptcy Reform Act of 2005 (“BAPCPA”) states that any reaffirmation agreement(s) must be entered into prior to the filing of a discharge in bankruptcy. The reaffirmation agreement must also be approved by the court and not rescinded by the debtor prior to the discharge being filed. The court can also refuse to sign the reaffirmation agreement, if it is of the opinion that the debtor cannot afford the payments called for under its terms. Some lenders state they will repossess vehicles unless the debt is timely reaffirmed. Other lenders feel that it is better to receive monthly payments rather than lose money by selling repossessed vehicles at auction prices.

As a debtor, there is little risk in signing a reaffirmation agreement provided that you feel you really need the property (such as a car or a home) and you know you can afford the payment.

Pay Stubs Requirement and Bankruptcy

One of the current requirement under BAPCPA is that a debtor must file all of their pay advices (pay stubs) for the 60 days preceding the filing with their bankruptcy petition. What happens if a debtor or his/her attorney omits one or more pay advices (pay stubs)? The answer to that question is that under the statute, it is a serious problem and the bankruptcy judge may dismiss your case.

However, some debtors are either unemployed at the time of the filing, or receiving unemployment, workers’ compensation or social security benefits, and therefore do not have pay stubs that can be filed.

In In re LaPlante, Judge Bucki held that because section 521(a)(1)(B)(iv) requires the filing only of those payment advices that a debtor receives from an employer, section 521(i) cannot effect the dismissal of a case filed by a debtor without income as an employee. Neither the Workers’ Compensation Board nor the Social Security Administration are employers of the debtor, and therefore the 60 day requirement is not applicable.

Thus, if you are receiving workers’ compensation benefits, social security or other non-employer payments, it is important to tell your bankruptcy lawyer about it in advance, so that appropriate documents are filed with your bankruptcy petition.

Workers Compensation and Chapter 7 Bankruptcy

If you file a Chapter 7 bankruptcy, what happens if you have a pending workers’ compensation claim? Generally, if you file for bankruptcy in New York, any money received as certain public benefits is usually exempt. However, workers’ compensation claims can result in significant lump-sum awards and a bankruptcy trustee may file an objection to the debtor claiming such award as exempt.

Here in Rochester, Judge Ninfo dealt with a similar situation in In re Herald, and his decision resolved these issues in Western New York. In order to resolve this issue in favor of the debtor, Judge Ninfo had to find that worker’s compensation award fell within the scope of §282.2(c) of New York’s Debtor Creditor Law, which exempts benefits received as a result of “disability, illness or unemployment benefit.”

After analyzing the legislative history of §282 of New York’s Debtor Creditor Law, Judge Ninfo concluded that the legislative intent was to exempt workers’ compensation proceeds. He further noted that in some situations this may give a debtor a head start, as opposed to a fresh start, where the debtor will receive a significant award after the bankruptcy filing, but found that any such award to be exempt nonetheless.

Thus, if you have a workers’ compensation case pending or your are receiving worker’s compensation payments, you can file a Chapter 7 bankruptcy and keep the award when you receive it. It is important to tell your bankruptcy lawyer about it in advance, so that the workers’ compensation claim is listed as exempt on your bankruptcy petition.