Another Update on Discharge of Student Loans – The Challenge of Obtaining a Discharge

I wrote in 2020 about a bankruptcy case, In Re Rosenberg, where the court discharged $221,000 in student loans that were accumulated by a law school graduate. At the time, I had substantial doubts that the decision would be upheld on the inevitable appeal.

As I anticipated, the bankruptcy court’s decision was reversed by the district court.

U.S. District Judge Philip M. Halpern of the Southern District of New York said that the bankruptcy court should not have granted summary judgment to the debtor because he has not yet submitted sufficient evidence that repaying the loan would constitute an undue hardship.

Halpern said in his decision that he was expressing no opinion on whether the student loan at issue, totaling approximately $221,000, is dischargeable in bankruptcy. Halpern said that during the prior proceedings Rosenberg had not submitted enough evidence to satisfy the three-part test, known as the Brunner test.

The Brunner test goes through a three step analysis: (1) whether the debtor can maintain a minimal standard of living if forced to repay the loans; (2) whether an inability to maintain the minimal standard is likely to persist for a significant portion of the repayment period; and (3)whether the debtor had made a good faith effort to repay the loans.

Judge Halpern considered creditor’s allegations that Rosenberg’s inability to repay his student loan was “a monster of his own making,” as alleged by the Educational Credit Management Corp., which holds the debtor’s student loans.

While Rosenberg had obtained a law degree, he worked as an attorney only minimally, getting fired after a few months. He did some contract legal work on a sporadic basis, subsequently placing his law license in “retired status.”

When contract legal work ended in 2008, Rosenberg started an outdoor recreation company, sold it and then started a similar company. The new company offers outdoor guided tours.

Before starting the new company, Rosenberg moved out of his Brooklyn, New York, studio apartment and leased a house in Beacon, New York. The Beacon lease was $2,150 per month, a $700 increase from his rent in Brooklyn.

Rosenberg defaulted on the student debt after periods of deferment and forbearance. He had repaid less than $3,000 of the debt.

In support of his motion for summary judgment, Rosenberg submitted a vocational evaluation report that said he could work as a legal assistant or a paralegal, at an annual salary of $42,000 to $120,000; as a retail store manager, at an annual salary of $45,000 to $100,000; and in other customer service or sales roles at an annual salary of $36,000 to $50,000. He has also claimed that he had physical limitations as a result of prior injuries.

Judge Halpern said Rosenberg had not presented any admissible evidence establishing the severity of his injuries and the impact on his ability to work. He also noted that Rosenberg was earning about $1,500 less than needed to meet his current expenses of about $4,000 per month, which include rent of $2,150 per month.

Rosenberg “offers no substantive explanation as to why his expenses are necessary to maintain a minimal standard of living and points to no admissible evidence supporting his conclusory argument that they are, indeed, necessary,” Halpern said.

Nor was it clear whether Rosenberg made a good faith effort to repay the loan. According to the court, the debtor “presumably made enough money to move out of New York City and rent a two-bedroom house—and ultimately made less than $3,000 in payments on a debt that ballooned from an initial balance of $116,465 to over $220,000.”

According to the decision, “[t]hese considerations are compounded by plaintiff’s apparent decision to abandon his career in law (i.e., he field for which he assumed the debt in the first place), his admission that he filed the Chapter 7 proceeding with the purpose of discharging the presumptively nondischargable student loan, and his representation that he has no interest in rehabilitating the debt through a repayment program. … This constellation of evidence certainly suggests a lack of good faith and that plaintiff has, indeed, placed himself in this predicament”.

Given that the district court remanded the case back to the bankruptcy court, it is likely that it will be tried at some point in the future.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Henrietta, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

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

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

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

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

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

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Henrietta, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Debtor and Ability to Reopen Bankruptcy

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

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

Concluding his decision, Judge Warren wrote:

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

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

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

 

Student Loans and Possibility of Discharge

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

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

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

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

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

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Making a Choice Between Bankruptcy and Short Sale

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

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

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

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

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

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Can Debtor Keep a Credit Card After Filing Bankruptcy

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

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

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

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

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

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Unpaid College Tuition Can Be Discharged In Bankruptcy

Generally, pursuant to Section 523(a)(8) of the Bankruptcy Code student loans are not dischargeable in bankruptcy, unless the debtor is facing truly remarkable circumstances. However, unpaid college tuition is not treated the same way and can be discharged in bankruptcy.

In a recent case, D’Youville College v. Girdlestone (AP 14-1018 W.D.N.Y. 2015), Bankruptcy Judge Carl L. Bucki held that unpaid college tuition is treated differently than unpaid  student loans and that the changes in the bankruptcy code in 2005 did not alter the results of the earlier Second Circuit cases. In D’Youville, the debtor attended the college only for a semester and had agreed to pay tuition but did not sign a promissory note.

In Girdlestone, Judge Bucki followed the holding in Cazenovia College v. Renshaw (In re Renshaw), 222 F.3d 82 (2d Cir. 2000), which held that the mere obligation to pay tuition does not constitute a loan that is non-dischargeable under the Bankruptcy Code.

D’Youville College argued that under the amendments to 11 U.S.C. § 523(a)(8) that Congress adopted in 2005, unpaid tuition should be treated the same was as student loans. In 2005 the Bankruptcy Code provisions related to student loans were changed, and even private student loans, not guaranteed by the government or provided by a school receiving government funding, were no longer dischargeable in bankruptcy. Section 523(a)(8)(B) of the Bankruptcy Code now states that the debtor will not receive a discharge of “any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.” According to Internal Revenue Code §221(d)(1), a “qualified education loan” means “any indebtedness” that a taxpayer incurs to pay certain qualified higher education expenses.

Judge Bucki held that “under the Bankruptcy Code, nondischargeability extends not to any such “qualified education loan,” but only to “any other educational loan that is a qualified education loan.” Further, according to Cazenovia College, “to constitute a loan there must be (i) a contract, whereby (ii) one party transfers a defined quantity of money, goods, or services, to another, and (iii) the other party agrees to pay for the sum or items transferred at a later date.” 222 F.3d at 88. When a student unilaterally does not pay tuition, the student may be indebted to the school, but that indebtedness does not make the transaction a loan. Based on the above, Judge Bucki held that because Cazenovia College would deny this status to the claim of D’Youville College, D’Youville’s claim is not excepted from discharge under 11 U.S.C. § 523(a)(8).

Since it is very difficult to discharge student loans, the above decision represents a rare positive result for the debtor. However, most college graduates do not deal with the same issues because most colleges require payment before students can graduate and a significant number of students take out student loans as opposed to owing money directly to their school.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including 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 Rochester, NY, bankruptcy lawyer.

Bankruptcy Fraud and Revocation of Discharge

Once the discharge is granted, can it be revoked? This  question was addressed by the court had to address in In Re Galan, (W.D.N.Y. 2014).

Section 727(d)(2) provides that a bankruptcy judge should revoke the discharge if, the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.

In Galan, the debtor had failed to report his interest in real property and also had failed to disclose that he was in receipt of insurance proceeds related to the property. Once debtor’s failure to disclose these facts to the bankruptcy court was discovered, both the bankruptcy and the U.S. Trustee moved to revoke his discharge.

The court held that revocation of a debtor’s discharge is permitted pursuant to 11 U.S.C. § 727(d)(2), where a debtor “acquired property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee.” The provision is triggered when the debtor is in receipt of or becomes entitled to estate property, either before or after discharge. Since the court found that debtor submitted false testimony with regard to his prior dealings with bankruptcy court, the court disregarded his entire testimony as not credible and disregarded his explanations of his actions. After discussing the facts in detail, the court determined that revocation of discharge was warranted.

Galan demonstrates that it is always a bad idea to mislead the bankruptcy court. Also, debtor’s conduct could subject him to criminal prosecution.

Similarly to the above, a material fraud, which would have resulted in the denial of a debtor’s Chapter 7 discharge had it been known at the time of such discharge, can justify subsequent revocation of that discharge under Bankruptcy Code Section 727(d)(1).

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Bankruptcy and Eviction

If you are behind on the rent and are hoping to buy some time, or wipe out the obligation to the landlord altogether, under appropriate circumstances, Chapter 7 or Chapter 13 bankruptcy may be a solution. Filing for bankruptcy will usually wipe out the balance due for past due rent as of the date on which the case is filed. Rent for any period after the case is filed won’t be discharged. If the filing of the case is done correctly, you may also be able to buy some more time in the place before you have to move out.

The filing of a bankruptcy petition stops all efforts at collection, including an eviction proceeding. This automatic stay remains in effect until a creditor makes a request to the court and that request is granted, or until the case is closed or dismissed, or when your discharge is granted. Once the Chapter 7 or Chapter 13 bankruptcy case is filed, the eviction action has to stop as soon as the bankruptcy case is filed. Stopping the eviction means the debtor will get some extra time before having to move out.

However, there an exception to the above rule. If there a judgment for possession of the property due to failure to pay rent that was issued before the bankruptcy is filed, it is an exception to the automatic stay. This exception to the automatic stay will not apply if the debtor’s attorney did all of the following:

Specially marked the petition indicating a judgment of possession has been obtained on the rental property;

Provided the name and address of the landlord that obtained the judgment;

Filed with the petition and served on the landlord a certification under penalty of perjury that, under the applicable landlord-tenant law, there are circumstances under which debtor would be permitted to cure the entire monetary default that gave rise to the judgment for possession;

Along with the petition, deposited with the Clerk of the Bankruptcy Court any rent that would become due during the 30-day period after the filing of the bankruptcy petition; and

Within 30 days of the filing of the petition, filed with the bankruptcy court and served on the landlord a further certification (under penalty of perjury) that the entire monetary default has been cured.

If the tenant is being evicted because of a reason aside from failure to pay the rent – for example, conduct causing a health and/or fire risk; use of illegal drugs on property – then there is also an automatic exception from the automatic stay.

This exception applies only to residential property in which  debtor resides, if debtor is “endangering” the property or using, or allowing to be used, illegal controlled substances on the property. In order for this exception to apply, the landlord must file with the court, and serve on debtor’s attorney, a certification under penalty of perjury that such an eviction action has been filed, or that debtor, during the 30-day period preceding the date of the filing of the certification, have endangered property or illegally used or allowed to be used a controlled substance on the property.

If such a certification is filed then debtor is required to file an objection with the court and serve such objection on the landlord within 15 days of the landlord’s certification. The court will hold a hearing, and debtor will have the burden of proving that the landlord is incorrect.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Debtors and Failure to Turnover Nonexempt Assets

In Chapter 7 bankruptcy cases where debtors have nonexempt assets, debtors have an obligation to transfer those assets to the bankruptcy trustee. It is very common for such assets to be debtors’ tax refunds. In this situation, at the meeting of the creditors, debtors are asked to sign a stipulation which is usually incorporated into a subsequent court order, agreeing to turn nonexempt tax refunds, or a part of them, to the bankruptcy trustee.  If debtors do not do so, they are subject to serious consequences which may include loss of their discharge, contempt of court or monetary penalties. The loss of discharge is the most serious penalty from the debtor’s point of view, since it will leave the debts nondischargeable in this or any subsequent bankruptcy that the debtor may file.

But what if the debtors are unable to turn over such assets due to financial reasons? What if the tax refunds were used for living expenses since debtors simply had no other choice?

This issue was recently addressed in In Re Swan, Case No. 08-11210 (W.D.N.Y. 2014), where Judge Michael J. Kaplan had to decide what the consequences should be for the debtors who had failed to turn over nonexempt portion of their tax refunds to the bankruptcy trustee.  The Chapter 7 trustee sought denial of discharge, as well as a finding of contempt of court and monetary penalties. Judge Kaplan held that in the absence of dishonesty on the part of the debtors, loss of discharge would be too harsh of a remedy and the court should not automatically deny or vacate discharge. Judge Kaplan held that if failure to turn over the assets is not as a result of dishonest conduct on the part of the debtors, the appropriate remedy is a monetary judgment that the trustee would be free to collect. Further, Judge Kaplan also held that if the debtors are unable to turn over such assets to the trustee, they have an obligation to seek immediate relief from the Court.

This case further confirms that debtors always have to try to follow the court’s orders and, if they are unable to comply with them, they have to seek relief from the court. While the debtors in Swan did not lose their discharge, they were held in contempt of court and were subject to monetary penalties. All of this could have been avoided if they kept their bankruptcy attorney involved in the case and notified him of their financial difficulties.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.