What Happens to My Bankruptcy Case During the Coronavirus Pandemic?

Over the course of the last few weeks, it has become clear that the consequences of the COVID-19 (“Coronavirus”) pandemic are far reaching. In order to protect the health and safety of individuals, certain precautionary measures must be implemented.

Federal courts, including bankruptcy courts, have continued to operate subject to significant limitations. So far, here in Western New York, most of the proceedings, primarily motions and conferences, are going to be handled via telephone and/or video conferencing. Since bankruptcy relies on electronic filing, new Chapter 7 and Chapter 13 bankruptcy cases can still be filed.

Effective immediately, all in-person Chapter 7, 12, and 13 section 341 meetings (meetings of the creditors) scheduled through April 10, 2020, have been continued until a later date to be determined. Section 341 meetings may not proceed during this period except through telephonic or other alternative means not requiring personal appearance by debtors. Appropriate notice will be provided to attorneys and parties in accordance with bankruptcy law and rules for any telephonic meetings scheduled during this period.

I think that the situation is very fluid at this time, and may change depending on the circumstances. I will continue to update this post with new information as it becomes available.

Are Pension or 401k Loans Dischargeable?

A significant percentage of retirement plans, like pensions or 401k plans, allow you to borrow money from individual accounts in case of need. One of the most common situations is debtors borrowing money from their retirement accounts to try to pay back their debts. Unfortunately, if these debtors decide to file bankruptcy, the pension or 401K loans they took out will not be dischargeable in Chapter 7. Further, if a bankruptcy was filed, these retirement accounts could have been protected in their entirety since retirement accounts are fully exempt under either federal or New York exemptions in either Chapter 7 or Chapter 13 bankruptcy.

Bankruptcy court views loans from retirement accounts differently than a credit card, a car loan or a mortgage. When you borrow from your retirement account, you are essentially borrowing from yourself, and as result, the loan is not considered dischargeable in Chapter 7 bankruptcy. However, these loans can possibly be included in a Chapter 13 bankruptcy repayment plan, and any amount not repaid at the completion of the 3-5 year plan will typically be discharged. If you have already taken a loan against a pension or 401k account, then Chapter 13 might be the best option, depending on other factors. For many debtors, a pension or 401k account are their biggest assets that should be protected and a bankruptcy filing prior to borrowing money from those accounts would do that.

While borrowing from retirement funds is often seen as a last resort, it should not be. There could be a good reason to borrow against a retirement account in a healthy financial situation, but as a desperate effort to pay bills, borrowing from a pension or 401K will do more harm than good. Realize that if you are considering taking a loan against a retirement account that you have already reached the last straw. Discussing your bankruptcy options should really be the next step.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or 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 Rochester, NY, bankruptcy lawyer.

Update on Discharge of Student Loans – $221,000 in Student Loans Discharged

One of the more difficult problems associated with bankruptcy has been discharge of student loans. A recent decision by Chief Judge Cecelia Morris of U.S. Bankruptcy Court for the Southern District of New York, In re: Kevin Jared Rosenberg, enabled law grad Kevin Jared Rosenberg to discharge the $221,000 loan debt he acquired as an undergraduate at the University of Arizona and later at the Cardozo School of Law. The win by Rosenberg, who represented himself in the matter, is surprising in view of the common belief that student loan debt is all but impossible to discharge in bankruptcy.

What made this case different is how the bankruptcy judge applied “Brunner test”—which lays out the three criteria student loan borrowers must meet to demonstrate that repaying their loans poses an undue hardship—that has caught the attention of the bankruptcy law world. Morris’ opinion includes a strongly worded rebuke of how judges have traditionally applied the Brunner test, saying they have made it more onerous on borrowers than it was intended to be. “Over the past 32 years, many cases have pinned on Brunner punitive standards that are not contained therein,” Morris wrote. “Those retributive dicta were then applied and reapplied so frequently in the context of Brunner that they have subsumed the actual language of the Brunner test. They have become a quasi-standard of mythic proportions so much so that most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans.”

Judge Morris’ application of the second two prongs of the test in the Rosenberg case are surprising. Rosenberg claimed in his bankruptcy petition that his annual income as an outdoor guide is $37,000 and that he has a negative monthly outlay of $1,500. But the court did not consider any potential increase in his earnings on the grounds that the entirety of his $221,000 loan balance is due because he went into default. Judges usually take a 10 or 25-year view of earnings based on the length of the repayment plan. What makes this decision particularly interesting is that Judge Morris declined to use Rosenberg’s decision not to pursue a legal career, as evidence that he has not made a good faith effort to repay his loans.  In finding that Rosenberg made a good faith effort to repay his loans, Judge Morris credits him with making about 40% of his required loan payments, even though he was only required to make 26 payments over the course of 13 years due to securing multiple loan deferrals.

But whether Rosenberg’s case will be followed by other bankruptcy courts, including here in Western New York, is uncertain and will largely depend on whether Judge Morris’ decision is upheld on appeal. If the district court for the Southern District of New York, and subsequently U.S. Court of Appeals for the Second Circuit, uphold it, that would make it more likely that more borrowers will see their loans discharged.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Henrietta, 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 Rochester, NY, bankruptcy lawyer.

Determining Chapter 13 Repayment Plan Payment

If debtor does not qualify for Chapter 7 bankruptcy, that debtor is likely to qualify for Chapter 13 bankruptcy. The most important issue for anyone filing Chapter 13 is to know is how much their Chapter 13 Plan payment will be. In my opinion, given the typical 5 year duration of Chapter 13, properly set plan payment is the most important factor in whether the case will be a success.

Determining the amount of the payment can be challenging at the very beginning of the case. Early estimates of plan payment can change significantly as more information becomes available.

Generally, there are four tests applicable to determining the amount of the Chapter 13 Plan payment:

The Chapter 13 Means Test (officially, the “Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period and Calculation of Your Disposable Income”);
The Disposable Income Test;
The Chapter 7 Liquidation Analysis Test; and
The Required Payments Test

The Chapter 13 Means Test was imposed when BAPCPA became law in 2005. The Means Test’s purpose is to determine whether debtor’s Plan would be 3 years or 5 years long, and to have an objective way to determine the amount of the payment. This calculation uses one of the established four methods of determining your Chapter 13 Plan payment.

The Disposable Income Test is the only one of the four tests that is strictly based on debtor’s ability to pay. Initially, debtor’s net household income is calculated and from that figure, debtor’s actual reasonable monthly expenses are subtracted. The resulting number–disposable income–is Chapter 13 Plan payment. That calculation does not include a deduction for the debts that will be paid through the Chapter 13 case, such as mortgage arrears, car loan payments, student loan payments, tax payments, and credit card bills.

In the Chapter 7 Liquidation Analysis Test, bankruptcy attorney looks at how much debtor’s general unsecured creditors (typically credit cards, medical bills and personal loans) would receive in a hypothetical Chapter 7 case. In many cases, they would receive zero, because there are no non-exempt assets with equity, and creditors would get nothing in a Chapter 7 case. The total amount of payments under Chapter 13 plan can’t be less than the amount determined under the Liquidation Analysis Test.

The last test is the Required Payments Test. Usually, priority debt, such as recent taxes and domestic support obligations, must be paid in full during the course of the Chapter 13 case. Mortgage and other secured debt arrears must also be paid in full, along with unpaid attorney fees, trustee commissions and (in most cases) at least a nominal amount to the general unsecured creditors. Add these payments up, and you reach the Required Payments.

After all of the numbers under each test have been calculated, debtor is required pick the highest amount, which becomes the plan payment. At the same time, that figure may change during the case as creditors submit their proofs of claim, as debtor’s income, expenses and assets change. This figure may also change depending on trustee’s view of the debtor’s financial circumstances.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Henrietta, 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 Rochester, NY, bankruptcy lawyer.

Debtor and Ability to Reopen Bankruptcy

Generally, chapter 7 debtors have the right to reopen their cases for various purposes after their case is closed. Usually, the court will allow the debtor to do so to remove judicial liens for otherwise discharged debt via 11 U.S.C. §522(f) motion, or to add an overlooked creditor, or to file a financial management course certificate, or perhaps for another purpose.  In In re May E. Jones, Case No. 03-21929, debtor moved to reopen the case 13 years after it was closed, to amend the schedule of real property,  disclosing (for the first time) her interest in a parcel of real property and seeking to have the property abandoned to her under 11 U.S.C. §554. If the court were to reopen the case, a substantial real estate asset would likely revert to the debtor.

After reviewing the parties’ submissions and conducting an evidentiary hearing, Judge Warren found that the debtor was aware of her interest in the real property at the time the bankruptcy was filed but did not disclose that interest in her petition.  The court further found that reopening of the case would not be to the benefit to the creditors, and the debtor could not establish that she had acted in good faith at the time her Chapter 7 bankruptcy case was filed.

Concluding his decision, Judge Warren wrote:

The Court will not accept Jones’s invitation to turn a blind eye to the signals pointing toward bad faith, so that she can have the undisclosed assets abandoned back to her. That seems a bit like a parent rewarding a child who was caught hiding her failing report card with a hot fudge sundae.

What is the takeaway from this case?  The cardinal rule of bankruptcy is full and complete disclosure. Here, the debtor did not fully disclose all of her assets and did not act in good faith. Thus, the court denied her motion and debtor could not benefit from her actions. The above situation is unusual both in the length of time from the time of discharge and the relief sought.  However, I believe that it illustrates a simple principal that in bankruptcy a debtor cannot benefit from his wrongful conduct.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or 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 Rochester, NY, bankruptcy lawyer.

 

Student Loans and Possibility of Discharge

I have previously written about dischargeability of student loans in bankruptcy. For most people filing bankruptcy does not result in a discharge of a student loan under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) amendments. The code, as amended, does not provide for the discharge of a student loan in a bankruptcy. In order for the student loan to be discharged, the debtor must brings a lawsuit, known as adversarial proceeding, and ask bankruptcy judge to make a determination that the continued existence of the student loan will create an “undue hardship” on the debtor. Under the applicable prior decisions, “undue hardship” is the most difficult part, that is the debtor must convince the bankruptcy court judge that in this case under the circumstances applicable to this debtor, the debtor will not be able to make any significant payments on the student loans owed. The high burden of proof makes these lawsuits extremely difficult.

However, under appropriate circumstances, it may be possible to determine what position the Department of Education may take on student loan dischargeability. The Department of Education recently issued a guidance letter on whether a student loan dischargeability lawsuit will be litigated or whether the Department of Education will recommend agreeing to the discharge.

The Department of Education seems to be focusing on a number of factors such as debtor’s efforts in trying to repay the loans, physical or mental disability leading to inability to work, likelihood of significant future income and factors beyond debtor’s control that led to the filing of bankruptcy.

Private student loan lenders have no such policy and it will be up to the individual creditor/lender to determine if their attorney will defend such a lawsuit vigorously or agree to settlement before a trial or go to trial.

It is never easy to obtain discharge of student loans in bankruptcy and all potential alternatives should be explored. Another option may be Income-Based Repayment (“IBR”). This program was designed to make sure that graduates who aren’t earning a significant income after graduation aren’t spending all their income on repaying their student loans and may result in a significant payment reduction and potential loan cancellation.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or 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 Rochester, NY, bankruptcy lawyer.

Making a Choice Between Bankruptcy and Short Sale

Homeowners who are underwater on their home mortgages (underwater mortgage means that the homeowner owes more than his/her house is worth) often attempt to do a short sale. A short sale occurs when the homeowner sells the home to a third party for less than what is owed on the note, and the mortgage lender accepts the proceeds of the sale in full satisfaction of the note. The mortgage lender must approve the short sale before it can go through. A short sale can be a good option for homeowners who do not want to keep their homes, and are willing to move out almost right away.

However, before going through with a short sale, a homeowner should see if Chapter 7 Bankruptcy would be a better option. In a Chapter 7 Bankruptcy, the homeowner’s liability on the note is discharged and the home does not have to be surrendered right away and the homeowner does not have to immediately move out of the house. The homeowner can continue to live in the house without making any payments while the lender goes through the lengthy process of foreclosure. In New York, foreclosures can take years before the mortgage lender can hold a foreclosure sale. Even after the house is sold at foreclosure sale, the new buyer (which is often the mortgage lender itself) has to start eviction proceedings to evict the homeowner from the home. This may give the homeowner time to save up money for a move or a new home. Any shortfall that may result from the sale of the house is eliminated in the bankruptcy, meaning the homeowner owes the mortgage lender nothing when they move.

A final, and highly significant, difference between Chapter 7 Bankruptcy and short sale is tax advantages of a bankruptcy filing. When a mortgage lender accepts a short sale, the homeowner will have to pay taxes on the amount forgiven by the lender. Under the tax code, debt forgiveness is considered income and the mortgage lender will generally send the homeowner IRS Form 1009-C form for it. The homeowner will have to report it as income on his/her tax return. As a result, the amount of forgiven debt will be added to the homeowner’s income as miscellaneous income, and while not subject to self-employment or social security tax, it will be subject to income taxes. If the amount of the forgiven debt is significant, the debtor may face an unexpected tax liability amounting to thousands of dollars. In a Chapter 7 Bankruptcy, there is no tax liability for the debt that is eliminated as a result of the filing.

Deed in lieu of foreclosure is similar to a short sale. The main difference is that unlike short sale where the property is transferred to a third party, in deed in lieu of foreclosure, the property is transferred directly to the lender. It has tax consequences identical to those of a short sale.

Short sales and Chapter 7 Bankruptcies are both good options for homeowners who want to walk away for their homes and their mortgages. When your home is underwater and you are considering a short sale, it is important to talk to an experienced bankruptcy lawyer first. That way you can review your options and make an informed decision.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or 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 Rochester, NY, bankruptcy lawyer.

Can Debtor Keep a Credit Card After Filing Bankruptcy

I am often asked if debtor can keep a credit card after the bankruptcy is filed, especially if the credit card does not have a balance. Generally, debtors are always interested in trying to keep a credit card after the bankruptcy is filed whether as a means of having credit for emergencies or renting a car or hotel room.

My answer to these questions as follows.  Initially, the debtor is required to disclose to the bankruptcy court everyone the debtor owes money to. So, if there is money owed to a credit card issuer, this debt would have to be disclosed and listed in the petition, and, ultimately, discharged.

If the card does not have a balance, it does not need to be listed.  However, that card is still going to be closed by the issuer after the bankruptcy is filed, both for Chapter 7 and Chapter 13 bankruptcy cases. Essentially all credit card issuers subscribe to an automatic monitoring service such as AACER or one of AACER’s competitor. Those services will notify the bank even if a particular credit card is not listed in the petition.

In my experience, in nearly every case, all credit cards will be cancelled within days of the bankruptcy filing. Thus, it makes no difference if the card with zero balance is listed, but I usually list it anyway.

Once the debtor completes his or her Chapter 7 bankruptcy, the debtor is likely to be able to obtain new credit cards within 1 to 2 years after receiving the discharge.  At the same time, my advice to the debtors is not to open new credit cards or if a credit card is necessary, to open one with a low credit limit or a secured credit card. There is always a risk that debtor will become overextended once again, and it is prudent to avoid it.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or 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 Rochester, NY, bankruptcy lawyer.

Timeline of Chapter 7 Bankruptcy Case

Typical debtor(s)’s Chapter 7 bankruptcy case begins once a Petition is filed with the Bankruptcy Court. If the debtors are married, they may file a joint Petition. Debtor’s petition includes schedules listing assets, creditors, income, expenses, executory contracts, leases, and co-debtors. The Schedules are customarily filed along with the Petition. The Declaration Regarding Payment Advices and Credit Counseling Certificate are also usually filed along with the Petition. The filing fee is paid at the time of filing.

After filing Chapter 7 Bankruptcy, the following events take place.

Immediately:

Automatic Stay Order will be issued which prohibits  creditors from sending you letters, calling you, or taking any additional collection and/or legal action against debtor(s). Garnishments on bank accounts and paychecks must stop.

Bankruptcy Trustee will be assigned to your bankruptcy case and Meeting of Creditors will be scheduled.

The date to complete Financial Management Course is scheduled.

Approximately 15 days after bankruptcy case filing:

The Bankruptcy Clerk will mail debtor(s) and creditors the Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines, which provides the date set for your meeting of creditors and other important deadlines.

Within 30 days of bankruptcy case filing:

Statement of Intention must be filed, informing the court if debtor(s) plan to keep any collateral property or if you intend to submit it to your creditors. The Statement of Intention is usually filed along with the Petition, but debtor(s) can change his/her position on these issues.

14 days before 341 Meeting:

Debtor(s) most recent tax returns, paystubs, real estate documents, vehicle related documents, and other financial information are due to the Trustee 14 days before the date first set for the 341 meeting.

Approximately 4 weeks after bankruptcy case filing:

Meeting of Creditors, often referred to at a 341 meeting, will be held.

30 days after your 341 Meeting:

Deadline for the Bankruptcy Trustee or your creditors to object to your exemption claims.

Debtor(s) must perform his/her intentions as stated in the Statement of Intentions. Debtor(s) will need to surrender the property, reaffirm the debt, or redeem property for the allowed secured claim.

45 days after 341 Meeting:

Debtor(s) must have completed his/her Financial Management Education Course and filed a certificate of completion within 45 days of the first date set for the 341 meeting.

60 days after 341 Meeting:

Creditors must object to discharge of debts that were obtained by false pretenses, a false representation, or actual fraud; debt from fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny; and debt for willful and malicious injury. This deadline applies to objections to discharge of: consumer debts owed to a single creditor of more than $500 for luxury goods or services obtained within 90 days before a Chapter 7 bankruptcy. Creditors must also object within 60 days of the original 341 date for debts involving misconduct including transfer, destruction or concealment of property; concealment, destruction, falsification or failure to keep financial records; making false statements; withholding information; failing to explain losses; failure to respond to material questions; having received a discharge in a prior bankruptcy case filed within the last 6 years.

Trustee must determine if debtor(s) bankruptcy case should be dismissed due to abuse or debts discharged.

Reaffirmation agreements, if relevant, must be filed with the court.

More than 60 days after 341 Meeting:

Debtor(s)’s discharge will be filed by the Bankruptcy Clerk. However, at this point in time, the discharge is not absolute or final. The trustee can ask that the discharge be set aside if the debtor does not turn over non-exempt property, if the debtor fails to perform other duties, or if there were other matters pending which would result in the denial of the discharge.

90 days after 341 meeting:

All creditors (except for government entities) must file their proofs of claim if they wish to share in the payments from debtor(s)’s bankruptcy case if any assets are available for liquidation.

180 days after bankruptcy case was filed:

Government agencies or units must file a proof of claim within 180 days of the bankruptcy case filing.

Debtor(s) no longer risk losing property acquired or become entitled to after the bankruptcy case is filed as a result of inheritance, bequest, devise, property settlements involving divorce, or beneficiary on life insurance. Any inheritance that debtor(s) become entitled to after the bankruptcy case is filed is at risk of being liquidated by the Trustee if debtor(s) become entitled to it within 180 days of filing.

Final Decree will be entered by the Court officially closing the bankruptcy case. The Final Decree is often received near the time of the Discharge if your bankruptcy case is a no-asset bankruptcy case. If the Trustee is liquidating non-exempt assets, the bankruptcy case will remain open to allow the Trustee to distribute the funds to creditors and file a final report.

The above represents a typical timeline for a Chapter 7 Bankruptcy case.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or 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 Rochester, NY, bankruptcy lawyer.