BAPCPA – Page 3 – Rochester Bankruptcy and Debt Relief

Chapter 7 and Chapter 13 Bankruptcy, Recent Move by the Debtor and Applicable State Exemptions

Periodically, I see debtors who have moved recently to Rochester, New York, or nearby, from another state who wish to file either Chapter 7 Bankruptcy or Chapter 13 bankruptcy. The critical issue in those situations is to determine what state’s bankruptcy exemption laws, if any, will apply.

Under BAPCPA, which passed in 2005, the initial question is how long the debtor has resided in the present state of residence. If the debtor has lived in the same state for the two years prior to filing, then New York’s exemptions will apply. However, if the debtor has moved to New York from another state during the prior two years, then the following rules will apply.

If the debtor resided in the same state for at least 730 calendar days continuously (two years) prior to the filing of the bankruptcy petition, then the debtor can use that state’s exemptions. If the debtor did not live in the current state continuously for at least 730 days, then the debtor must pick the state in which he lived most of the time during the 180 days prior to the 730 days. In other words, the state that must be selected is where the debtor lived most of the time between 2 and 2 ½ years before filing.

If no state qualifies using the above rules (i.e., the debtor has lived in abroad) or if the 180-day state requires current residency or being a domiciliary to use its exemptions, then the debtor must use the federal exemptions. The default rule will only apply if the debtor did not live in any state during the 180 day period that began 730 days before filing, or if the state requires current residency or domiciliary. Under some circumstances, it is advantageous to the debtor to use the federal exemptions since they are typically more generous than New York’s exemptions.

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, New York, bankruptcy lawyer.

Small Business and Chapter 7 Bankruptcy

In the last few months, I have received a number of calls from owners of small businesses who want to file Chapter 7 bankruptcy, primarily due to credit card debt, but want to continue to operate their businesses. In most of these cases, the business owner have used personal credit cards to fund business operations. Since the time the credit cards were used, the business improved, and is now profitable or would be profitable where it not for the payments on credit card debt.

Unfortunately, in this type of situation, filing bankruptcy comes with a price. If you own a small business and are incorporated, the shares of that business are assets of the bankruptcy estate. Further, any accounts receivable of the business are an asset of the business that belong to the shareholder. Thus, if the shareholder files Chapter 7 bankruptcy, the bankruptcy trustee will treat the shares in the business, value them, and will try to sell them

Except in the case of a personal service business that has no significant inventory, receivables or any valuable assets, other than the experience and labor of its owner, the bankruptcy trustee will demand that the owner cease operating the business, and produce its records, value its assets and disclose other information related to the business to the trustee. As a result, a Chapter 7 bankruptcy filing is likely to result in the business being shut down, and its owner being forced to start over. Once the bankruptcy is completed, a new corporate entity can be formed and, assuming that the owner is able to resume operations and the business can be profitable, operations can be restarted.

Besides Chapter 7 bankruptcy, there are other options. Under appropriate circumstances, an owner of a small business can file a Chapter 13 bankruptcy assuming that the business is being operated as a sole proprietorship, and, if the business is large enough, Chapter 11 bankruptcy may be an option. In a Chapter 13 filing, it is usually difficult to predict what the cash flow of the business will be like and, therefore, it is difficult to come up with a bankruptcy payment plan.

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 lawyer.

Can You File Chapter 7 Bankruptcy If Your Income Exceeds Median Family Income?

In these uncertain economic times, I am getting this question more and more from people considering filing for bankruptcy all over Western New York. So can someone in Rochester making more than $75,000 file for Chapter 7 bankruptcy? The answer to that question is likely to be yes.

I have previously written about the means test component of the Chapter 7 bankruptcy. Under BAPCPA, the means test and its income standards were designed to be a bright line dividing those that were able to file Chapter 7 bankruptcy from those who were forced to file Chapter 13 bankruptcy. But the means test is more complicated than that, and the sheer median family income numbers alone are not alone dispositive, as discussed below.

The first Chapter 7 bankruptcy test the debtor has to pass in New York in order to qualify, is the Median Family Income test. It is the test that most debtors have heard about. Most debtors have heard about it from friends or relatives who filed for bankruptcy, usually along the lines “If you make over a certain amount, you can’t file.” Like most things you hear, these statements are only partially correct. The current Median Income limit in New York for a family size of one is $46,485. For a family size of two, the amount is about $58,109.

So how can someone filing for bankruptcy in Rochester who earns over $75,000 possibly file for bankruptcy in New York? The short answer is that BAPCPA, the bankruptcy law that was passed in 2005, allows you to take certain deductions when determining if you are qualified to file Chapter 7 bankruptcy. You can take standard IRS deductions that your bankruptcy lawyer knows about. You can deduct certain childcare expenses. You can deduct taxes that are being garnished from your wages. You can deduct your actual mortgage payments. You can deduct vehicle ownership expenses. You can deduct health care expenses. You can deduct food expenses. In other words, if you’re earning more than that median income test, you still absolutely have a possibility for filing for Chapter 7 Bankruptcy in Western New York.

While most of the deductions are technical in nature and require analysis of the debtor’s expenses and needs, I would recommend you speak with a Rochester bankruptcy lawyer and that lawyer will sit down with you and explain how the bankruptcy law requirements apply to you. This is what makes a difference to the debtors since a bankruptcy attorney can help someone in difficult financially situations. When meeting with the bankruptcy attorney, the debtor should discuss the full extent of his/her financial situation and when finished, should understand what course to take.

Chapter 7 Bankruptcy and Unpaid Tax Liabilities

One issue that periodically comes up in Chapter 7 bankruptcy cases is unsatisfied tax liability. As of late, the IRS and New York State Department of Taxation and Finance, have been aggressive in enforcing their claims with respect to unsatisfied tax liabilities.

One common problem associated with back taxes is that the amount owed by the debtor tends to grow rapidly because of the interest and penalties that are imposed by the taxing authority. In their collection efforts, the government agencies can engage in a variety of collection activities, including garnishment, levies, tax liens, seizure of physical assets, intercept of tax refunds, and other collection activities.

For many people with unpaid taxes, bankruptcy may be a way to improve their situation by either improving their financial state and having funds available to pay the taxes owed, or by discharging certain tax liabilities.

In Chapter 7 bankruptcy, certain past due taxes can be eliminated depending on how old the unpaid taxes are and whether the debtor filed an income tax return for the year the taxes came due. For some people filing a Chapter 7 bankruptcy will be a way to permanently eliminate their past-due taxes without having to pay them. To figure our whether or not your taxes can be discharged in bankruptcy you will need to know exactly what taxes you owe and for what years.

There are four general requirements for discharging an income tax in bankruptcy. In this post, I will discuss the first: 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 2005 income tax return was last due on April 15, 2006, the three-year requirement would be met after April 15, 2009.

A complication concerns the “last due” requirement. What happens when the debtor requests and receives an extension? The answer is that 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.

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.

Second, for an income tax to be dischargeable, it must not have been assessed with 240 days of the filing of the bankruptcy. When a return is timely filed, the assessment date is usually around the time a return is filed.

Third, if a return is filed late, it must not be filed within two years of a bankruptcy for the tax to be discharged. This requirement is subject to the following limitations: (1) amended returns count as returns for purposes of this rule; (2) if in the course of correspondence with the IRS, the debtor gives financial statements with all the information needed to complete a return, this can also be deemed to be a return.; and (3) the two-year period begins once the taxing authority actually receives the return, not when the return is mailed, as is the case with timely-filed returns.

The fourth requirement is that the income tax return must be filed by the tax payer, it must not be fraudulent, and the debtor must not have attempted to evade the tax.

If the above requirements are satisfied, a bankruptcy lawyer can help you by obtaining a discharge of unpaid taxes.

Refiling Chapter 13 Bankruptcy After Dismissal

As I have previously written, Chapter 13 bankruptcies involve many different issues. Once thing that bankruptcy lawyers point out to all debtors entering Chapter 13 bankruptcy is that the debtor has to make payments to the trustee, prior to the confirmation of the plan, and, of course, after the plan is confirmed. Sometimes, the debtor is unable to make payments, and, rather than asking his/her bankruptcy attorney to seek modification of the plan, does nothing. Under those circumstances, the Chapter 13 bankruptcy trustee will move to have the bankruptcy dismissed. Once the motion to dismiss is granted, and creditors resume collections activities, such as foreclosure, can the debtor refile?

The debtor can refile Chapter 13 bankruptcy, if it has been dismissed, at any time. However, changes to the Bankruptcy Code that were in Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) can limit the relief that the debtor receives when he/she refiles. If the Chapter 13 bankruptcy is refiled within one year of the dismissal, the automatic stay is in effect only for 30 days. This is a critical difference between a refiled Chapter 13 bankruptcy and the original filing. It means that within 30 days of the filing, the debtor’s attorney must file a motion in bankruptcy court seeking to extend the automatic stay. If the motion is not made, or granted by the bankruptcy court, creditors can resume collection activity.

In general, before a motion to dismiss is filed, or granted, the debtor should contact his/her bankruptcy lawyer to discuss all available options, including converting Chapter 13 to Chapter 7 bankruptcy, or amending the plan.

Confirmation Hearing in Chapter 13 Bankruptcy

As I have previously written about the procedural steps involved in a Chapter 13 bankruptcy, once the debtor attends 341 hearing, and the bankruptcy plan is filed, the next important event is the confirmation hearing.

The date set for the confirmation of Chapter 13 plans varies depending on where the case is filed. Here in Rochester, the date for the confirmation hearing is typically set between 30 and 60 days after the 341 hearing. The debtor(s) is required to attend it as the proposed plan is reviewied by the court and Chapter 13 Trustee. If the debtor fails to appear for the hearing, the judge can prevent or delay the confirmation. In other Courts, such as those in the Northern District of New York, confirmation hearings are usually scheduled approximately 60 days after the proposed Chapter 13 plan is filed with the Court.

Unlike other jurisdictions, here in Rochester, Judge Ninfo reviews each Chapter 13 bankruptcy case and the circumstances that led the debtor to file for bankruptcy. In addition, Judge Ninfo requires that a debtor file a checklist specifying the reasons that led to the filing. In addition, if the amount of unsecured debt exceeds $75,000, the debtor will be also required to file with the court a detailed letter of explanation, describing how the debt was accumulated. Also, approximately one week before the hearing, the Chapter 13 Trustee will file his report analyzing the case and either recommending confirmation of the plan or giving reasons why confirmation should be denied.

In cases where an objection to confirmation is filed, a confirmation hearing is held on the scheduled date and the objecting party, or its attorney, typically attends. The views of the debtor’s attorney, the objecting parties’ attorney and the Trustee are heard by the judge, who either confirms the plan, denies confirmation, or sets an evidentiary hearing on the disputed matter (which could be a valuation issue, a bad faith objection, a disposable income objection, etc.). Often the confirmation hearing is simply adjourned to allow the parties some time to try to resolve their differences.

The confirmation hearing is the critical step in any Chapter 13 bankruptcy. It is the responsibility of the bankruptcy lawyer to present a plan that not only protects his/her client(s) interests by making the payments manageable, but also to make sure that the plan will be confirmed by the court. That usually involves analyzing the parties’ income and expenses, and make certain that the budget is not excessive or has any frivolous expenses.

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.

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

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.

Creditor Can’t Contact Debtor After the Bankruptcy Is Filed

When you file your bankruptcy case,the creditors must stop calling you. They can’t continue garnishing your wages. They must stop all collection activities because every bankruptcy case protects the debtor with the “automatic stay.” The automatic stay prohibits creditors from taking actions against you, unless they obtain a permission from the bankruptcy court.

While there are some exceptions, primarily for matters involving marital obligations, otherwise known as “domestic support obligations”, for most people and most debts, bankruptcy provides real relief.

If creditors keep calling you, mailing you, garnishing your wages or taking other actions against you, call your lawyer immediately. Regardless of whether the creditors acted with or without the knowledge of your filing, a bankruptcy lawyer make them stop. Also, regardless of whether the creditors acted with or without the knowledge of your filing, the creditors may be liable for actual and even punitive damages as well as attorneys fees.

Section 362 of the US Bankruptcy Code states that § 362. Automatic stay states that the filing of a petition in bankruptcy operates as a stay “applicable to all entities, of the commencement or continuation, of any action against the debtor.” Section 362(k) states that an individual injured by any willful violation of a stay shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

So what’s a willful violation of a stay? The creditor needs to know that you have filed for bankruptcy. It must take an action to collect against the debtor after that stay is in effect. The creditor doesn’t need to willfully violate the stay, it needs to willfully take the action. That means the creditor needs to send out the collection letter after that creditor knows of the stay.

Here in Rochester, Judge Ninfo addressed the issue of willful violation of automatic stay in In re Engel, holding that mailing of a billing statement after the bankruptcy was filed was a willful violation of automatic stay. In Engel, the creditor was listed in bankruptcy schedules and was also contacted by the debtor’s attorney who demanded that the creditor stop any and all contact with the debtor. Even after the debtor’s attorney notified the creditor, the creditor mailed two additional billing statements. While the creditor claimed that the contact with the debtor was an unintentional mistake, the court found that the creditor’s actions were intentional and ordered a hearing on damages.