BAPCPA – Page 4 – Rochester Bankruptcy and Debt Relief

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.

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 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.

Failure to Disclose Assets in Bankruptcy, Confirmation of Chapter 13 Plan and Revocation of Confirmation Order

What happens if the debtors fail to disclose certain assets in their Chapter 13 bankruptcy and those assets come to light after the confirmation of their Chapter 13 plan? This situation was recently addressed by Judge Ninfo of the United States Bankruptcy Court for the Western District of New York in In re Cram.

On March 24, 2004, Richard and Pamela S. Cram filed a petition in Rochester, in the United States Bankruptcy Court for the Western District of New York, initiating a Chapter 13 case. A Chapter 13 trustee was appointed. On their Schedule B of Personal Property, the debtors stated that they had no “[o]ther contingent and unliquidated claims of [any] nature….”. On April 30, 2004, the court orally confirmed their Chapter 13 Plan, and on October 5, 2004 an order confirming the plan was entered.

At the time the bankruptcy was filed, the debtors had a pending medical malpractice claim which resulted a subsequent lawsuit. On June 14, 2005, the debtors’ lawyer filed an amendment to their Schedule B of Personal Property, which amended the answer to question No. 20 regarding contingent and unliquidated claims, but did not amend their Schedule C to claim any proceeds that might be received from the malpractice claim as exempt.

Between June 14, 2005 and April 7, 2008 the debtors or their attorneys did not notify the court of the existence of the pre-petition medical malpractice claim set forth in the amendment, which was a Section 541 asset of the estate at the time the court confirmed their plan, even though in confirming their plan pursuant to Section 1325(a), the court believed that the requirement of Section 1325(a)(4), that the creditors would receive at least as much under the plan that they would in a Chapter 7 liquidation.

Section 1325(a)(4) provides that:

(a) Except as provided in subsection (b), the court shall confirm a plan if—
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date[.] 11 U.S.C. § 1325 (2009).

This section is known as “the best interests test”.

Once the trustee learned of the settlement, he moved to revoke the discharge, as well as for other relief. He asserted that on April 28, 2008, after the discharge order had been entered on April 7, 2008, the trustee learned that the claim had been settled on or about February 20, 2008 for $125,000 and that neither the debtors, their bankruptcy attorneys nor their personal injury attorney ever notified the trustee of the settlement or any prior settlement offers. The trustee argued, inter alia, that in view of the settlement, the debtors’ confirmed plan did not meet the best interests test.

Unlike in Chapter 7 cases, the court, in confirming a plan in a Chapter 13 case, makes an affirmative determination, as required by Section 1325(a), that, among other things, the plan meets the best interests test. Judge Ninfo held that because of the debtors’ failure to disclose the malpractice claim, which was a Section 541 pre-petition asset of the estate, either at the time of the oral confirmation of their plan or when the confirmation order was entered, the plan did not meet the best interests test, and neither the debtors, nor the trustee, ever corrected that failure by taking the necessary steps to insure that the plan was amended to include the proceeds of any recovery on the malpractice claim, either before or after the settlement. Thus, the confirmation order had to be vacated, and with no confirmed plan completed, the debtors would not be entitled to a Section 1328 discharge and the court vacated the confirmation order pursuant to Section 105(a).

Judge Ninfo further held that when the debtors filed the amendment to include the malpractice claim, they, as debtors, and their bankruptcy attorneys, as officers of the court, had an affirmative obligation to advise the court, not simply the trustee or their creditors, of the undisclosed asset, so that the court would be aware that its confirmation of the plan was improper and its confirmation order incorrectly entered, and could insure that the confirmation order was vacated or a proper modification to the plan filed to include any recovery.

The court further granted trustee’s motion to dismiss the bankruptcy, unless prior to July 6, 2009, the debtors: (a) pay to the trustee the amount necessary for the trustee to make a distribution to their unsecured creditors of 100% plus 9%; or (b) otherwise make arrangements with the trustee for the payment of the necessary amount within a reasonable period of time that is acceptable to the trustee and the trustee files with the court the details of such an acceptable arrangement.

The lesson of this case is that the debtors and their bankruptcy lawyers have an affirmative obligation to disclose any and all assets of the debtors, including any contingent or unliquidated claims. In this case, the consequences to the debtors could have been much more severe.

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.

Chapter 7 Bankruptcy and Tax Refunds

If you file a bankruptcy case between January and April, you may be expecting a tax refund. Your Chapter 7 bankruptcy trustee may try to take your tax refund from you. Tax refunds are probably the largest single type of asset which debtors lose in bankruptcy. In New York, the tax refund may protected by your cash exemption up to $2,500, if you are not claiming a homestead exemption.

If only one spouse is filing for bankruptcy, and they file a joint tax return, Rochester Chapter 7 trustees usually take position that one half of the refund belongs to the trustee, subject to the applicable exemption.

In addition, here in Rochester, some of the Chapter 7 trustees frequently ask for a copy of the debtor’s income tax return for the year the bankruptcy is filed in. This request may make place early in the year, even though the tax return would not be filed several months later. The trustees’ goal is to see whether or not a portion of the income tax refund can be pro rated from the beginning of the year to the date of filing bankruptcy. If this prorated portion of the income tax refund is large enough, the trustee may make a demand that a portion fo the refund be turned over to the trustee.

One way of dealing with these issues is to wait to file your bankruptcy until after the tax refund was spent on family necessities. It is important to disclose the tax refund to your lawyer and the trustee, since a bankruptcy trustee can simply write to the Internal Revenue Service and have it send the tax refund directly to the trustee, and a deliberate failure to disclose information can be a basis for a denial of discharge.

Chapter 13 Bankruptcy and Property Tax Arrears

Because most mortgages contain real estate tax escrow provisions, there are not as many Chapter 13 debtors who have unpaid real estate taxes due when they file their Chapter 13 plans as there are debtors who have mortgage arrearages. However, Chapter 13 debtors frequently do have significant unpaid real estate taxes due on their residences, and in many cases, the need to pay these unpaid real estate taxes over time in order to save their homes is one of the primary purposes of the Chapter 13 filing.

If you are filing Chapter 13 bankruptcy, and you have real property tax arrears, a typical plan will provide for a payment of such arrears in full over the life of the plan. Local municipalities, to whom such taxes are owed, will be treated as secured creditors under the plan and will receive full payment of taxes owed. In addition, any such municipality will be entitled to interest on the money owed.

Here in Rochester, local municipalities usually receive 18% interest rate on the real property tax arrears. Once the bankruptcy is filed, any such arrears will be subject to the New York State judgment interest rate of 9%. Judge Ninfo has previously addressed this issue in In re Clark, holding that the statutory rate is an appropriate post-confirmation interest rate under Section 1325(a)(5)(B)(ii) to be paid.

In view of the above, a bankruptcy lawyer must make sure that the proposed plan allows for full repayment of property tax arrears, together with appropriate interest, and that the debtor is able to afford payments under the plan.

Chapter 7 and Right of Redemption

A “redemption” is provided for under Section 722 of the Bankruptcy Code and is available for Chapter 7 debtors. That provision allows an individual debtor to retain personal property when that property has been used to secure a debt. The debtor must pay the fair market value of the item to the creditor. That fair market value determines to what extent the creditor is secured. The second choice is to pay the amount of the secured creditor’s debt. The third choice is to sign a reaffirmation agreement and continue to be legally obligated on the debt again. The last choice is to surrender the item to the secured creditor. Under Section 722, a debtor may be able to get the lien released for far less than what he owes. So, for example, if you owe a creditor $10,000 on a car and the fair market value of the car is $5,000, the Bankruptcy Code allows you to pay you $5,000 to redeem the car. That amount must be paid in one lump sum to that creditor. If the creditor agrees with the value, then either the debtor or the creditor has to submit a stipulated order of redemption. If the creditor does not agree with the value, then the debtor has to file a motion for redemption, and a hearing will be set with the judge deciding what the value of the item is. There are deadlines involved in the redemption process. The debtor has to have the money to redeem the item and be able to pay the creditor, with many debtors turning to family members and friends. There are also financial institutions that offer financing in such situations.

Redemption should be considered as an option in Chapter 7, if you own a vehicle that is worth thousands of dollars less than the debt on the vehicle – in other words, you are upside down on the vehicle. It should also be considered if the debtor is behind on payments or has a spotty payment history. In Western New York, Judge Ninfo has ruled that the standard for determining the value of a motor vehicle to be redeemed under Section 722 is its wholesale value. See In re Barse. You and your lawyer should carefully examine redemption as option if there is a significant disparity between the amount owed and the property’s fair market value.

Removing Judgments After the Bankruptcy

If a creditor obtains a judgment against a debtor, that judgment, if filed, becomes a lien against any real property owned by the debtor. Any such judgment lien against real property can be removed from the property, if the lien impairs an exemption you claim in your bankruptcy. In New York State, you can only remove a judgment lien against your personal residence. Debtor’s bankruptcy attorney usually files a motion pursuant to section 522(f) of the Bankruptcy Code. A typical motion includes a number of attachments such as a copy of the deed, mortgage, current mortgage statement, a recent appraisal of the property, and copies of the judgment filed in the local County Clerk’s office.

Typically, the debtor is faced with the following situation. The debtor owns a home with the total equity of less that New York’s homestead exemption, which is currently $50,000 for a single debtor and $100,000 for a married couple filing jointly. What a $50,000 homestead exemption means is that the debtor can have up to $50,000 of equity in the residence ($100,000 for a married couple) and your home will not be taken or threatened by the bankruptcy trustee or other creditors. If there are judgments against the debtor, they are viewed as impairing debtor’s exemption in the property and gives the debtor the right to remove them.

If you do not own a residence when you file your bankruptcy, you do not need to set aside the judgment in the County Clerk’s office, but the underlying debts are discharged regardless whether the judgment is removed. This may become a a problem if you purchase (or inherit) real property after your bankruptcy. In that situation, even though there is no actual lien against the newly acquired property, it may appear that there is to someone searching the Clerk’s office. This is because they will see a judgment against you, and they will see that you own the property. Without knowing about the intervening bankruptcy and the discharge of the debt that underlies the judgment, they could draw the conclusion that the judgment was in fact a lien against the property.

The problem often surfaces if there comes a time that you want to borrow against, or refinance the property. Most lenders are sophisticated enough to recognize that any pre-bankruptcy judgments are usually discharged and a typical judgment search, or a title search, in Monroe County will include a check of the Bankruptcy Court’s records. It is also the reason to keep a copy of your discharge after the bankruptcy so that the lender can have easy verification that the bankruptcy resulted in a discharge.

If you are dealing with debt problems in Rochester, New York; 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 13 and Payment of Student Loans Under the Plan

Unless the bankruptcy debtor can satisfy the daunting legal standard of “undue hardship,” student loans are not dischargeable in a bankruptcy case. However, the mere fact that student loans will not be discharged does not mean you should give up on the bankruptcy process. For a chapter 13 debtor, the question might be, how should the chapter 13 payment plan propose to treat the student loan debt?

Some attorneys try to distribute more of the debtor’s income to student loan debts than to other debts by simply inserting a provision into the chapter 13 plan which says that the debtor will continue to pay the student loan out of his or her own pocket, rather than have the chapter 13 trustee pay toward the student loan. This would have the important advantage of paying more (usually) toward the student loan than would be paid if the trustee made the payments from the plan.

The presumptive authority for paying a student loan “outside the plan” is contained in the bankruptcy law’s section 1322(b)(5). This section permits the maintaining of payments on any debt where the last regularly scheduled payment is due after the final chapter 13 plan payment is due. Section 1322(b) reads as follows:

(b) Subject to subsections (a) and (c) of this section, the plan may–

designate a class or classes of unsecured claims, as provided in section 1121 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;
modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
provide for the curing or waiving of any default;
provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim;
notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

Section 1322(b) allows the chapter 13 debtor to continue making student loan payments directly to the creditor, much the same as the debtor would continue paying his mortgage payments, assuming that the bankruptcy trustee agrees with this interpretation and the bankruptcy court confirms it. However, here in Rochester, the Chapter 13 trustee disagrees with this interpretation of the statute and, instead, takes a position that the student loans should be paid pro-rata as other unsecured creditors. The trustee’s position is based on the argument that making full student loan payments, while in Chapter 13, treats student loan lenders better than other unsecured creditors and, in fact, does so at their expense. While Judge Ninfo has not written on this issue, I think that he would agree with the trustee’s position. Thus, it is critical to discuss these issues with a bankruptcy lawyer prior to the filing.

Bankruptcy Basics – Preferences

The Bankruptcy Code permits a trustee to recover from creditors payments made shortly before the bankruptcy filing, where the payment gave the creditor more than other creditors in a similar position would get through the bankruptcy process.

The policy behind the statute is to reduce the advantages that a creditor might get by suing or by collection activities that force the debtor into bankruptcy. That is accomplished by making payments received in the 90 days before the filing recoverable in bankruptcy by the trustee.

It is neither wrong for the debtor to make a preferential payment, nor is it wrong for a creditor to accept such payment. The preference statutes are simply an attempt to achieve equity between creditors.

Bankruptcy Code §547 defines a preference as:

Payment on an antecedent (as opposed to current) debt;
Made while the debtor was insolvent;
To a non-insider creditor, within 90 days of the filing of the bankruptcy;
That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.

Any payments to a fully secured creditor are not usually preferences, because the creditor would not get more than he would have in bankruptcy, where the creditor would get the value of the collateral.

While the look back period for preferences is usually 90 days, the bankruptcy code also permits the recovery of payments on claims owed to insiders, such as relatives, friends, corporate officers or directors, or related entities, made within 1 year of the bankruptcy filing. This provision attempts to prevent the debtor from paying relatives, friends and business decision makers at the expense of other creditors.

Preference recovery is generally a matter between the trustee and a creditor. When the creditor is a third party, the debtor may not care very much. When the creditor in question is a relative or a friend, however, most debtors are very concerned. If a bankruptcy case is filed within a year of these payments to relatives and friends, the trustee may take the money from the friend or relative the debtor paid, and redistribute it to creditors in accordance with the bankruptcy laws.

There are some procedural issues that apply to preferences. For example, a payment made by check is effective as of the date the check cleared, not the date on the check or the date it was mailed. There are also some defenses to preferences, usually available in a business rather than a consumer setting. Preferences can be voluntary payments, like a check sent in payment of an invoice, or involuntary, like attaching a bank account.

A debtor needs someone with knowledge and experience in these issue on his side. One of the most valuable things an experienced bankruptcy attorney can do is prevent problems for you, and unintended consequences for your family members or business partners. It is also best to seek such advice before you make that payment, or transfer that asset. Lawyers can control damage in most situations, but we prefer to prevent a problem arising in the first place and this can be accomplished in most situation with pre-bankruptcy planning.