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.

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 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.

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.

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.

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:

  1. Payment on an antecedent (as opposed to current) debt;
  2. Made while the debtor was insolvent;
  3. To a non-insider creditor, within 90 days of the filing of the bankruptcy;
  4. 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.

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.

Bankruptcy Basics – Credit Counseling and Financial Education Requirements

Under the BAPCPA, debtors planning to file for bankruptcy, under either Chapter 7 or Chapter 13, must complete a consumer credit counseling course before they will be allowed to file a bankruptcy petition. Such credit counseling program needs to be completed within 180 days prior to the filing.

A pre-bankruptcy counseling session with an approved credit counseling organization usually includes an evaluation of the debtor’s personal financial situation, a discussion of alternatives to bankruptcy, and a personal budget plan. A typical counseling course lasts about 60 to 90 minutes, and can take place in person, on the phone, or on internet. The counseling organization is required to provide the counseling free of charge for those consumers who cannot afford to pay. If you cannot afford to pay a fee for credit counseling, you should request a fee waiver from the counseling organization before the session begins. Otherwise, you may be charged a fee for the counseling, which will generally be about $50, depending on where you live, the types of services you receive, and other factors. The counseling organization is required to discuss any fees with you before starting the counseling session.

Once you have completed the required counseling, you must get a certificate as proof. You can check if the organization providing the course is approved in the judicial district where you are filing bankruptcy by going to the U.S Trustee’s web site.  Once the course is completed, you will receive the certificate.  Credit counseling organizations may not charge an extra fee for the certificate.

In addition, once the bankruptcy is filed, debtor must obtain debt management counseling before being allowed to complete the bankruptcy process.  A debtor education course by an approved provider usually includes information on developing a budget, managing money, using credit wisely, and other resources. Like pre-filing counseling, debtor education may be provided in person, on the phone, or online. The debtor education session might last longer than the pre-filing counseling – about two hours – and the typical fee is between $50 and $100. As with pre-filing counseling, if you are unable to pay the session fee, you should seek a fee waiver from the debtor education provider. Make sure that you received the certificate from a debtor education provider that is approved in the judicial district where you filed bankruptcy. Check the list of approved debtor education providers at the U.S. Trustee’s web site.

There are three main objectives of the Personal Financial Management course:

  1. The help the debtor understand the benefits of creating short-term and long-term financial goals.
  2. To teach the debtor how to create a budget.
  3. To teach the debtor how to balance a checkbook and reconcile bank statements.

The purpose of these courses is to help the debtor become financially literate and avoid another bankruptcy.

Once you have completed the required debtor education course, you should receive a certificate as proof. This certificate is a different document from the certificate you received after completing your pre-filing credit counseling. Unless they have disclosed a charge to you before the counseling session begins, debtor education providers may not charge an extra fee for the certificate.

The Personal Financial Management course must be completed within 45 days after filing bankruptcy; but before receiving a discharge through bankruptcy. This is important because if the debtor does not complete this second course after filing for bankruptcy, the Chapter 7 or Chapter 13 bankruptcy may be closed without 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.

Chapter 7 Means Test

Under the current version of the bankruptcy law, in order to file a Chapter 7 bankruptcy, the debtor must pass a “means test” which will determine whether debtor, or his family, is eligible to file Chapter 7 bankruptcy.

The purpose of the means test is to keep debtors from abusing the bankruptcy system by filing when they don’t have to do so.  The presumption is that if the debtor fails the means test, he/she is trying to abuse the system.

If the debtor’s income is below the median income for families in New York, based on Census Bureau statistics, the debtor will be eligible for a Chapter 7 bankruptcy. The current means test figures for New York are listed here.

The means test uses the income of the debtor for the six months leading up to the filing of the bankruptcy.  The monthly income figure for that time is referred to as the debtor’s “current monthly income”.

Even if the debtor’s income has recently decreased, the use of the six months before the filing date may make the debtor’s income for bankruptcy purposes higher than it will actually be and place him/her into an income situation where he/she may be required to file a Chapter 13 bankruptcy.

If you make more than the median income for families in New York, your income over the past six months is considered, along with mortgage and car payments, back taxes and child support obligations, and school expenses up to $1,500 per year. You won’t be eligible for a Chapter 7 bankruptcy if, after deducting these amounts, and the living expenses provided in the Internal Revenue Service’s national collection standards, you have a monthly disposable income of more than $100.00 per month.

If your monthly disposable income is more than $166.66, you have failed the means test, and cannot qualify for Chapter 7.

If your monthly disposable income is between $100.00 and $166.66, and that is enough to pay more than 25% of your unsecured, nonpriority debts (credit card bills, student loans, medical bills, and so on) over a five-year period, then you fail the means test, and Chapter 7 won’t be available to you.  If it is not enough to pay more than 25% of your unsecured, nonpriority debts over a five-year period, then you pass the means test, and Chapter 7 remains an option.

If you don’t qualify for a Chapter 7 bankruptcy, your only option would be a Chapter 13 bankruptcy.

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.

Debt Settlement – Does It Work?

Recently, I read a New York Times article, “Debt Settlers Offer Promises But Little Help“, that confirmed something that I already knew – debt settlement, in most cases, does not work and usually costs a lot more than a Chapter 7 or a Chapter 13 bankruptcy.  Also, most people working with debt settlement companies are likely to find themselves in the worse financial situation after entering debt settlement.  One quote summarizes how debt settlement industry does business:

Consumers who turn to these companies sometimes get help from them, personal finance experts say, but that is not the typical experience. More often, they say, a settlement company collects a large fee, often 15 percent of the total debt, and accomplishes little or nothing on the consumer’s behalf.

While I appreciate the fact that most debtors want to avoid filing bankruptcy, in my opinion, bankruptcy represents an opportunity for a fresh start for most people.  The critical difference between a bankruptcy and a debt settlement, despite what a debt settlement company may claim, is that the creditor does not have to agree to a debt settlement arrangement.  In a bankruptcy, under either Chapter 7 or Chapter 13, the creditor is obligated to follow the Chapter 13 repayment plan or accept results of the Chapter 7 discharge.

At the same time, if a debtor has a only a few debts, may have other alternatives to either filing a bankruptcy or working with a debt settlement company.

I have experience with “workouts” which is a term used to describe a non-bankruptcy negotiated modification of debt.  A workout is an out-of-court agreement between a debtor and his or her creditors for repayment of the debts between them, which is negotiated without all the procedural complications — and perhaps the stigma — of the bankruptcy process.  A typical workout takes form of either “composition”, which is a contract between the debtor and two or more creditors in which the creditors agree to take a partial payment in full satisfaction of their claims. Another option is an “extension”, which  is a contract between the debtor and two or more creditors in which the creditors agree to extend the time for payment of their claims. An agreement may be both a composition and an extension, i.e., an agreement to accept less money over a longer period of time.

There is no requirement that all of the debtor’s creditors agree to a composition or extension, but most of them must voluntarily support it for it to work. Creditors that do not agree to the workout are not affected by it and remain entitled to pursue other remedies to collect the debts owed to them. My role in this process is to negotiate such agreements on behalf of the debtor.

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.

Bankruptcy Basics – Meeting of the Creditors

The creditors’ meeting, otherwise known as 341 meeting, is a procedural step in every Chapter 7 and Chapter 13 bankruptcy.  In a typical 341 meeting, the debtor will be asked questions under oath by the bankruptcy trustee with respect to his or her financial affairs.  Most debtors are apprehensive of the 341 meeting.  While 341 meeting is also designated as the first meeting of the creditors, creditors seldom come to the first meeting, and there isn’t usually a second meeting.  Most of the time, it is a meeting of the debtor and the trustee appointed in the case.

There are two items that the debtor must have at the 341 creditor’s meeting.  The first one is a state issued photo identification card.  For most people, this is going to be their driver’s license.  The second item is the social security card.  If the debtor does not have these documents at the meeting, the trustee cannot go forward with the creditors’ meeting since the trustee must confirm the debtor’s identity.  Occasionally, trustee may permit the use of a W2 forms, annual social security statements, or a payroll check stub that contains debtor’s social security number.

Take the time to locate these documents before you arrive at the location for your creditor’s meeting.  Here in Rochester, bankruptcy trustees usually tell the debtors to have their identification and proof of social security number ready at the beginning of the meeting.  Most bankruptcy attorneys will ask the clients for those documents so they can be handed t the trustee.  I often have seen people anxiously looking through a purse or wallet for a social security card that they just know they have, only to find out that they don’t have it, or that they are too nervous to find.

The 341 meeting is not a test or a trial.  The trustee won’t be asking any trick questions.  Your lawyer is there for support and to make sure that the record created is truthful and accurate.  In order to have a successful 341 meeting all the debtor has to do is to follow these four steps:  (1) tell the truth; (2) listen to the question; (3) let the trustee finish before you start speaking; and (4) answer in as few words as possible.

It is critical for someone who filed bankruptcy to be honest during 341 hearing.  It is just as critical for the debtor to be honest with his/her attorney prior to the hearing, before the petition is prepared out and filed.  If the debtor’s statements during the 341 hearing contradict the petition, and those contradictions were deliberate on the part of the debtor, that means the debtor may have already committed perjury, which is a federal offense.  When the petition is filed, the debtor, by signing his or her petition, swore that the petition was truthful.

There are a number of questions that a trustee is required to ask the debtor at the meeting of creditors.  They are as follows:

1.   State your name and current address for the record.

2.   Please provide your picture ID and Social Security number card for review.

3.   Did you sign the petition, schedules, statements, and related documents and is the signature your own? Did you read the petition, schedules, statements, and related documents before you signed them?

4.   Are you personally familiar with the information contained in the petition, schedules, statements and related documents? To the best of your knowledge, is the information contained in the petition, schedules, statements, and related documents true and correct? Are there any errors or omissions to bring to my attention at this time?

5.   Are all of your assets identified on the schedules? Have you listed all of your creditors on the schedules?

6.   Have you previously filed bankruptcy? (provide trustee with case number and the discharge information to determine discharge eligibility in this case)

7.   What is the address of your current employer?

8.   Is the copy of the tax return you provided a true copy of the most recent tax return you filed?

9.   Do you have a domestic support obligation? To whom? Please provide the claimant’s address and telephone number, but do not state it on the record. Are you current on your post-petition domestic support obligations?

10.   Have you filed all required tax returns for the past four years?

There are also other questions that a trustee may ask you:

1.   Do you own or have any interest whatsoever in any real estate? If owned: When did you purchase the property? How much did the property cost?  What are the mortgages encumbering it?  How did you arrive at the value of the property?

2.   Have you made any transfers of any property or given any property away within the last one year period?

3.   Does anyone hold property belonging to you? If yes: Who holds the property and what is it? What is its value?

4.   Do you have a claim against anyone or any business? If there are large medical debts, are the medical bills from injury? Are you the plaintiff in any lawsuit? What is the status of each case and who is representing you?

5.   Are you entitled to life insurance proceeds or an inheritance as a result of someone’s death?  If you become a beneficiary of any one’s estate within six months of the date your bankruptcy petition was filed, the trustee must be advised within ten days through your counsel of the nature and extent of the property you will receive.

6.   Does anyone owe you money?  Who owes the money and where are they?

7.   Have you made any large payments, over $600, to anyone in the past year?

8.   Were federal income tax returns filed on a timely basis? When was the last return filed? Do you have copies of the federal income tax returns?  At the time of the filing of your petition, were you entitled to a tax refund from the federal or state government ?

9.   Do you have a bank account, either checking or savings? If yes: In what banks and what were the balances as of the date you filed your petition?

10.   When you filed your petition, did you have:

a. any cash on hand?
b. any U.S. savings bonds?
c. any other stocks or bonds?
d. any certificates of deposit?
e. a safe deposit box in your name or in anyone else’s name?

11.   Do you own an automobile? If yes: What is the year, make, and value? Do you owe any money on it? Is it insured?

12.   Are you the owner of any cash value life insurance policies? If yes: State the name of the company, face amount of the policy, cash surrender value, if any, and the beneficiaries.

13.   Do you anticipate that you might realize any property, cash or otherwise, as a result of a divorce or separation proceeding?

14.   Have you been engaged in any business during the last six years? If yes: Where and when? What happened to the assets of the business?

As log as you and your bankruptcy lawyer are prepared, your 341 hearing is likely to be completed quickly.  If you are missing documents or if trustee requires additional information, your hearing may be rescheduled to a later date.

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.

Bankruptcy Basics – Domestic Support Obligations

On occasion, a divorce may result in one or both of the parties filing for bankruptcy, often without an adequate understanding of the limited relief available in the bankruptcy court. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (”BAPCPA”) directly addressed issues related to the dischargeability of marital debt and support obligations, as well as to the effect of the automatic stay on collection and enforcement proceedings out of divorce and family law litigation.  Under BAPCPA, domestic support obligations (usually alimony, child support and property distribution) are given priority over almost every other creditor.

Under bankruptcy law, a “domestic support obligation” is any debt incurred before or after a bankruptcy filing that is owed to or recoverable by a spouse, former spouse, child or governmental unit; in the nature of alimony, maintenance or support; and established pursuant to the terms of a divorce decree, separation agreement, property settlement agreement, court order or administrative determination.

In Chapter 7 bankruptcy, essentially all marital and domestic relations obligations are not dischargeable, regardless of whether they are support in nature, property divisions or “hold harmless” agreements, provided they were incurred by the debtor in the course of a matrimonial proceeding or a divorce action which resulted in a separation agreement, divorce decree, court order or administrative determination.

A debtor’s obligation to pay marital debts directly to a third party ( ie., pay the mortgage on former marital residence) and to hold the former spouse harmless on said debts is also deemed to be non-dischargeable if the obligation has the effect of providing support to the former spouse. A debtor’s duty to pay the following expenses are usually deemed to be in the nature of support and not dischargeable: educational expenses of a minor child; medical insurance coverage for a minor child; and life insurance, with the minor children as beneficiaries.

Attorney’s fees owed by debtor to his own lawyer are clearly dischargeable in bankruptcy, but as a general rule, attorney’s fees owed by debtor to a former spouse’s attorney are not dischargeable, if the underlying legal proceeding resulted in the entry of an order or judgment directing payment of maintenance or spousal support to the former spouse.

The division of a debtor’s pension benefits during the divorce action is usually accomplished by entering a Qualified Domestic Relations Order (”QDRO”). Since division of a pension is considered to be a transfer by debtor of a present interest in his pension, and as such, it is not a debt that can be discharged in bankruptcy.

If there are assets in a Chapter 7 bankruptcy, and you owe any domestic support obligations (alimony, child support, that sort of thing) to your spouse, former spouse or child, the trustee will pay that first.  Next, the trustee will pay any domestic support obligation owed to a governmental unit.

In Chapter 13 bankruptcy, past due domestic support obligations owed by a debtor are not dischargeable, unless they are paid in full over the life of the Chapter 13 plan. However, if a debt created by a separation agreement or judgment of divorce is not in the nature of support, it sometimes can be discharged in Chapter 13 without being paid in full.

For a Chapter 13 Plan to be confirmed by the Bankruptcy Court, it must: pay in full to the former spouse all domestic support obligations owed by debtor at the time of the bankruptcy filing, and the debtor must be current on all domestic support obligations incurred after the bankruptcy filing.  Past due support obligations are generally required to be paid in full through the debtor’s plan but an exception can be made if the creditor agrees.  Support debts have a first priority, meaning they are paid before other kinds of priority debts, like taxes.

A Chapter 13 Plan, even if confirmed by the bankruptcy court, is subject to dismissal if the debtor fails to pay any post-petition or post-confirmation domestic support obligations, and a Chapter 13 discharge will not be entered by the bankruptcy court unless and until a debtor certifies that all domestic support obligations have been paid and that the debtor is current on such obligations.

The automatic stay created by a bankruptcy filing bars the commencement or continuation of most legal proceedings, but it has no effect on a proceeding to establish paternity; to establish or modify a child support order, determine child custody or visitation issues, or dissolve a marriage, except to the extent that such proceeding may seek to determine a division of marital property in which the bankruptcy estate also has an interest. In those situations, the divorce can be granted without first obtaining relief from the automatic stay, but the marital property cannot be divided without obtaining such relief.

The automatic stay also does not prevent the post-petition collection of domestic support obligations such as alimony or child support from any property belonging to the debtor, providing that the bankruptcy estate does not also have an interest in the same property; from automatic wage deduction orders created by a statute or judicial or administrative order; from the interception of debtor’s federal or state income tax refunds, or
from the withholding, suspension or restriction of a debtor’s driver’s license or professional or occupational license. Therefore, Bankruptcy Court does not offer much protection for someone seeking to avoid the domestic support obligations.

The above rules will apply to the proceedings in New York State courts. In Ross v. Sperow, 57 A.D.3d 1255 (3rd Dept. 2008), the Appellate Division had to address a situation where one of the parties was seeking to enforce a counsel fee award after the other party filed for bankruptcy. In Ross, multiple violation petitions had been filed by the parties over the course of several years. In August 2006, Family Court upheld mother’s motion for attorneys fees and directed father to pay $5,000 of the mother’s attorneys fees. Father filed for a Chapter 7 bankruptcy thereafter, and listed the award of attorneys fees as an unsecured debt. Father’s bankruptcy was discharged in January 2007. Mother brought a violation petition which alleged that father failed to pay the attorneys fees.  Father moved to dismiss petition on ground that he discharged counsel fee award in bankruptcy. The Appellate Division stated that state and federal courts have concurrent jurisdiction over issue of dischargabilityof a particular debt and held that domestic support obligations in the nature of support are exempt from discharge in bankruptcy. While father contended that counsel fees incurred were for custody and visitation proceeding, the record reveals that mother’s initial petition commencing the proceeding raised issues of financial need and hardship.  According to the Appellate Division, term “in the nature of support” is broadly interpreted in the context of discharge of debt obligations in bankruptcy and held that the award of counsel fees was in part in the nature of support, and as such, exempt from discharge in bankruptcy.

It is very important for your bankruptcy lawyer to be aware of any outstanding domestic support obligations if you are filing for bankruptcy.  Here in Rochester, bankruptcy trustees routinely ask during the meeting of creditors (also known as 341 meeting), if the debtor has a domestic support obligation.  If there is a domestic support obligation, the bankruptcy trustee will want to know to whom such obligation is payable, will ask the debtor to provide the claimant’s address and telephone number, and will inquire if the debtor is current on his or her post-petition domestic support obligations.

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.

Car Ownership and Bankruptcy

I am often asked what happens to the debtor’s car if he or she is forced to file for bankruptcy.  The answer to that questions depends on whether the car is owned by the debtor outright, is being financed, or is leased.

If the car is owned outright, and its value is less than the value of New York’s vehicle exemption, currently limited to $2,400, then the debtor can keep the car without any bankruptcy related consequences.  This is true for the debtor filing either a Chapter 7 or a Chapter 13 bankruptcy.   If the value of the car is greater than the allowed exemption, in a Chapter 7 case,  the bankruptcy trustee can demand that the debtor turn the car to the trustee.  Subsequently, the trustee would have the vehicle sold at an auction, and the debtor would be repaid the value of his or her exemption, and the rest of the money would be paid to the creditors.   If a car is jointly owned by a debtor and someone else (such as a spouse), then the debtor will only be entitled to 1/2 of the equity.  If debtor and a spouse file a joint bankruptcy petition, they can “double up” or stack their exemptions (i.e., $4,800 in one vehicle owned by them jointly, or $2,400 in two vehicles total).  If the car is financed, the relevant value is the value of the equity in the vehicle, that is the difference between the market value of the vehicle and the amount owed to the lender.

When filing Chapter 7 bankruptcy, you have three options for handling a car loan.  You can reaffirm your loan with the lender.  That means that you agree to continue making regular payments on your car.  In exchange, as long as your are making payments on the loan, your lender will not repossess the car.  Whether you sign a reaffirmation agreement is strictly voluntary.  Another option, although rather rare, is redemption.  The debtor agrees to make one lump payment to the lender representing the car’s fair market value, regardless of what is owed on the loan.   Any amount owed on the car in excess of its current value can be discharged as part of the bankruptcy.  The final option is to surrender the car if you cannot afford to continue making payments.  Any debts associated with the car will be discharged.

In Chapter 13, a debtor can keep his or her car even if the equity is greater than the allowed exemption amount, as long as the value of equity in excess of the exemption is distributed to creditors through the chapter 13 plan, i.e., satisfying the good-faith test.  Chapter 13 bankruptcy can effectively halt car repossession and will allow the debtor to repay any arrears on the loan over the life of the Chapter 13 plan.  In addition, in a Chapter 13, the amount the debtor will pay may depends on how long ago the car was purchased.  If the  car was purchased in the last 910 days (30 months), the debtor must usually pay the full amount owed, regardless of the car’s current value.   However, under appropriate circumstances, the interest rate on the loan may be reduced by the bankruptcy court.  If the car was purchased more than 30 months ago, the debtor is likely to have to pay the lender the amount representing the car’s present value over the life of the repayment plan.  The amount representing the car’s value is treated as secured debt, and the remainder of the debt is treated as unsecured.  This is particularly significant where the car is upside down, i.e., the amount owed significantly exceeds the car’s value.  Those situations may result in significant savings to the debtor.

If the debtor is leasing a car, he or she has two options.  The debtor can reaffirm the lease and keep the car, while continuing to make payments.  Alternatively , the debtor can reject the lease, return the car, and discharge any debt associated with the lease.

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.