Warning from the United States Bankruptcy Court

I just received an alarming email from the United States Bankruptcy Court that reads:

Phone scammers are targeting bankruptcy filers in several states, using personal information from filings and posing as attorneys to get intended victims to immediately wire money to satisfy a debt.

The National Association of Consumer Bankruptcy Attorneys issued a warning that “Under no circumstances would a bankruptcy attorney or staff member telephone a client and ask for a wire transfer immediately to satisfy a debt. Nor would the bankruptcy attorney and staff ever threaten arrest if a debt isn’t paid.”

Bankruptcy filers in Vermont and Virginia reportedly have received calls. Vermont’s Attorney General says scammers use software to “spoof” the Caller ID system so the call appears to be originating from the phone line of the consumer’s bankruptcy attorney. Typically the calls come late in the evening or during non-business hours to make it difficult for intended victims to verify the call by contacting their attorney.

Consumers receiving this kind of call are advised to hang up and contact their bankruptcy attorney as soon as possible. Do not give any personal or financial account information to the caller.

Can I discharge debt incurred in a divorce

Often times when a married couple decides they need to file for divorce, there is a lot of debt incurred during their marriage. In order to facilitate the divorce in the separation agreement, the couple agrees to split their debt in some allocation, which applies some of the debt to a spouse, who subsequently decides to file bankruptcy. The question I as a bankruptcy attorney often hear is, “can I discharge my ex’s debts incurred in my divorce, that I now have to pay?” Unfortunately, the answer to this varies based upon the situation.

Most unsecured debts a person incurs are dischargeable in bankruptcy. However, Section 523 of the Bankruptcy Code lists certain debts deemed non-dischargeable. It should be noted that child support or alimony which collectively is referred to by the bankruptcy courts as “domestic support obligations” cannot be eliminated in any bankruptcy proceedings.

A second type of debt incurred in a divorce is credit card debt or other unsecured debt that the married couple agree to split in a contract approved by the Family and Probate Court called a Separation Agreement. As a matter of law it should be noted that a debt in support of a property settlement is not binding on the bankruptcy court in determining dischargeability, and a court can look behind such language to determine the real nature of the debt. In re Johnson, 445 BR 50 (Bankr. Court, D. Massachusetts 2011) citing, In re Golio, 393 B.R. 56 (Bankr.E.D.N.Y.2008). More specifically, the Bankruptcy Court for the District of Massachusetts can rule that any financial obligation agreed to in a separation agreement relative to credit cards and other debts are not a domestic support obligations and is can be discharged.

If a debt owed is not for support, 11 USC § 523(a)(15) sets out the test to determine if it might still be nondischargeable in bankruptcy. More specifically, the debt can be discharged if the person filing bankruptcy does not have the ability to pay such debt from income or property … not reasonably necessary to be expended for the maintenance or support of the person filing for bankruptcy or their children, or … if discharging such debt would result in a benefit to the person filing bankruptcy that outweighs the detrimental consequences to a former spouse. In plain simple English, in deciding of debts incurred during the marriage can be discharged, the Bankruptcy Court will analyze the respective financial situation of the ex-spouses at the time of they entered into the separation agreement or the Family Court entered an order.

Separate from simply owing a debt to a third party, such as American Express, in many divorce decrees, there is language that protects the former spouse from debt relief. This clause is called a hold harmless provision. A hold harmless obligation creates a new liability, independent of the preexisting liability to the collections agency that protects the other spouse safe from the third party creditor. Higgins v. Harn, No. 07-81072, 2008 Bankr. Lexis 100, at *9 (Bankr. C.D. Ill. Jan. 10, 2008). If the underlying debt is for support, such as a medical expense, then it may be deemed a domestic support obligation and cannot be avoided with a bankruptcy. However, if the hold harmless provision relates to a credit card debt, then it may be dischargeable only in Chapter 13 reorganizations, where the spouse can file a proof of claim, but not dischargeable in a Chapter 7 case, and will be deemed a priority debt.

A final type of debt that often is incurred in a divorce case, is through an agreement or by a court order to pay for the former spouse’s attorney fees. Macy v. Macy, 114 F.3d 1 (1st. Cir. 1997); Mellor v. Mellor, 340 B.R. 419, 421(Bankr. M.D. Fla. 2006). See also Nelson, Keys & Keys v. Hudson, No. 06-81745, 2007 Bankr. Lexis 3943, at *3 (Bankr. C.D. Ill. Nov. 27, 2007) ( an awards of attorney’s fees for services in obtaining support orders are held nondischargeable notwithstanding a provision for direct payment to the attorney so long as the payment is for the benefit of the Debtor’s former spouse or child.  However, it should be noted that attorney’s fees owed to the lawyer representing the person filing bankruptcy is typically deemed an unsecured debt and can be eliminated through any chapter of bankruptcy.

The bottom line is that if you are in the process of filing for a divorce and are facing a great deal of financial hardship, you may want to consult with an experienced bankruptcy lawyer to both protect your rights with respect to a possible bankruptcy filing of your former spouse, and to determine if you can discharge your own financial obligations.

Does the Means Test Control Your Chapter 13 Plan Payment?

The United States Supreme Court rejected the argument that the means test has to be applied rigidly and controlled the disposable income calculation without exception.  Hamilton v. Lanning 130 S. Ct. at 2478 (2010).  The Court recognized that in some cases, a Debtor’s financial circumstances have changed significantly from the prior six (6) months to filing a bankruptcy case and the values used in calculating the means test do not strictly apply to actual disposable income, ID at 1274.  In order to determine how much money a Debtor truly has to contribute to the Chapter 13 plan as demonstrated by their allowable disposable income, a Bankruptcy Court should take into account for “known or virtually certain information about the Debtor’s future income and expenses” ID at 1278.  Based upon the foregoing, notwithstanding the implementation of a uniform formula and many standardized expense amounts, the means test is not to be inflexibly applied.  Rather, the factual circumstances of each individual debtor are legally relevant.

How to save money by refinancing your home

Often times, consumers are faced with daunting bills from credit cards,
mortgage payments, utility bills and other financial obligations. We all
incur these debt with the best of intentions to pay back our creditors
when the bills are due. However, over time debts can out of control and
our ability to budget appropriately becomes more and more difficult due
to limited income and all of our creditor looking to get paid. Surely
there must a way to stretch our money so that we can pay everyone.

Well, there is a way to reduce the money going out the door by leveraging
assets many of us already own. One of the best ways to save money to
help stay current on all of your bills by refinancing the mortgage on
your house. This can benefit you in one of two ways; first, you may be
able to pull out equity from your home to pay down higher interest bills
thereby reducing the monthly payment or eliminating balances on credit
cards. Alternatively, you may be able to reduce the interest rates on
your largest bill, the mortgage, thereby increasing your monthly income
to pay other bills. In addition in some situations, you may be able to
even shorten the term to pay back your mortgage and as a result, build
new equity in your home faster.

Although this may be a good way to help reduce your monthly payments and
make it easier to handle all of those pesky credit cards and utility
bills, you should weight the benefits against the drawbacks. When you
refinance your home, you are starting from scratch. That is, you will be
getting a brand new mortgage and incurring possible closing costs. If
there are costs associated with the refinance, you should find out if
those costs will be added to the mortgage payment, which could change the
dynamics for you. You also want to ensure that your current mortgage
does not have a prepayment penalty hidden in the fine print. If it does,
you will want to add that to the closing costs to be sure you know what
your new mortgage balance will be. In some cases, even though you will
be reducing your monthly payment, you may actually increase the principal
owed on the mortgage, so you do want to make an informed decision as to
what end result best meets your current financial needs and goals.

Can I use money in my bank account during a bankruptcy case?

Bank AccountOften times when someone files for bankruptcy, they do still have some money in their bank account. However, as soon as you file your case, an estate is created that contains everything you own. What this means is that you will no longer be in control over your assets for a period of time, typically 3 months during a standard Chapter 7 bankruptcy case. However, much of your assets, including money in your checking or savings accounts is protected and can be used by you if properly claimed as exempt from the bankruptcy estate.

After you file your bankruptcy case, there will be a person called a Trustee who is responsible for administering the estate. This Trustee is tasked with liquidating any assets you have which cannot be protected by the bankruptcy code, See 11 U.S.C. § 522(D). With this said, you do have a duty to disclose how much money you have in financial institutions on your personal property schedule (schedule B). Once you do this, depending upon the state which you are filing and what exemptions are available to you, and whether you have any equity in your home, you may be able to protect up to and use as much as $11,975.00. However, in other situations, you can only protect a very limited amount, depending upon what other assets you have and if you need to use part of your exemptions to protect them, such as a tax refund, equity in a vehicle or other such things.

As with most things in the law, every case is extremely fact specific and unique. To that end, you will want to consult with an experienced bankruptcy attorney who can advise you on whether or not you can exempt and use funds in your bank.

Can second mortgages be stripped in Chapter 13 without a discharge?

There are several situations where a homeowner needs to file for bankruptcy, and due to a lack of substantial income qualifies to file under Chapter 7, rather than Chapter 13.  This is important because in a Chapter 7 case, all of a filer’s unsecured debt such as credit cards, medical bills and other non-secured debts can be eliminated.  One of the major problems with this is that if the homeowner has a second mortgage or home equity line that is worth less than the value of the real estate, they can not be stripped from the property.   Another issue that arises from time to time are debts that cannot be discharged in Chapter 7, such as mortgage arrears and taxes incurred within 3 years of filing.  When one of these non-discharable debts is present, often times a good bankruptcy attorney will suggest filing a “chapter 20”, which is to say, file the Chapter 7 and get a discharge of all unsecured debts and then the next day after the case is closed file a Chapter 13 to reorganize and get 5 years to pay back the other debt.

A significant benefit of a Chapter 13 in addition to getting time to pay back those non-dischargable debts is also the ability to strip a lien (mortgage) from the property entirely.  This is done by demonstrating to the Court that there is no equity in the property to secure against a junior lien.  For example, the house is worth $250,000.  The first mortgage is for $300,000, and a second mortgage is for $40,000.  In this case, a Debtor could argue that at a foreclosure, the second mortgage holder would not receive any money, because the first would get everything and still be owed part of their loan.

The problem that many people in this situation have is that they are not entitled to a second discharge of debt for many years after the Chapter 7.  However, the Bankruptcy Court’s have recently ruled that a discharge is not necessarily needed to strip a second mortgage.

The United States Supreme Court has ruled that a debtor can include a mortgage lien in a chapter 13 plan if the personal obligation secured by the mortgaged property had been discharged in a prior chapter 7 case.  Johnson v. Home State Bank, 501 U.S. 78 (1991).  Moreover, many appellate courts and bankruptcy appellate panels have held that § 1322(b)(2)’s anti-modification provision does not bar a chapter 13 debtor from stripping off a wholly unsecured lien on the debtor’s principal residence.  See, e.g. Griffey v. U.S. Bank (In re Griffey), 335 B.R. 166, 167-70 (10th Cir. BAP 2005); Domestic Bank v. Mann (In re Mann), 249 B.R. 831, 840 (1st Cir. BAP 2000);

In summary, Section 1328(f)(1) merely precludes a chapter 13 debtor from receiving a discharge if the debtor received a discharge in a chapter 7 case filed within four years of the chapter 13 case. But that section in no way limits any other rights available to the debtor under the Bankruptcy Code, such as the right to strip off unsecured junior liens under § 506(a) and § 1322.  This decision has most recently been affirmed by the 11th circuit in Wells Fargo Bank v. Scantling, No. 13-10558 (11th Cir. June 18, 2014).  The bottom line is this, even if you filed for bankruptcy and received a discharge of debt, there is nothing stopping you from refiling a Chapter 13 to remove a second mortgage or home equity loan right away.


How to calculate disposable income for a Chapter 13 Plan

Often times a consumer realizes that they will need to file a Chapter 13 bankruptcy in order to catch up on some missed payment to their mortgage, car loan, or simply need to file due to the fact that their household income exceeds the median income in their state.  The biggest question that needs to be asked at this point is, how much do I have to pay into the reorganization plan each month?  The answer to this question is not always a simple calculation.  There are a few things that need to be taken into account in order to determine how much one must pay to propose a confirmable Chapter 13 plan.

The first issue to analyze is whether the Debtor has any arrears which must be paid back.  What this means is that if there are any missed payments to a mortgage, car loan or some other type of secured debt, the Debtor must propose to pay back 100% of those missed payments if they want to retain the property.  Additionally, if there are any taxes or other priority debt in arrears, those must also be paid back in full, interest and penalty free over the course of the plan.

The second issue to consider is whether the Debtor owns any property that is not exempt in a Chapter 7 case.  For example, if the Debtor has an investment property that has $30,000 of equity, which cannot be protected with any applicable exemptions under either state law or Section 522 of the Bankruptcy Code, then the Debtor must propose to pay his or her creditors through the plan at least as much as the non-exempt equity is valued.  This test is called the liquidation analysis.

The final step that must be taken is to determine how much actual disposable income a Debtor has available to fund his or her Chapter 13 Plan payment.  What this means is that any income left over after payroll deductions, and reasonable living expenses are taken into account, how much money is left to pay into the plan each month.  A Debtor is required to propose 100% of that disposable income in order to meet the best interest of the Creditors test.  This final step is where many people run into problems, in that your disposable income must demonstrate you can fund a plan to at least meet the requirements under the first to issues of secured debt and non-exempt assets.

It is clear from this blog post that in order to calculate a Chapter 13 bankruptcy plan, one must understand not only how much debt they owe, but also what kind of debt and how much their assets are valued in order to move their case forward.  For this reason, it is important when filing a Chapter 13 case to consult with an experienced bankruptcy attorney before filing anything.

Can Bankruptcy Help If Your Offer In Compromise Fails?

Discharge Tax DebtI heard the story all too many times. You filed an Offer in Compromise over 12 months ago and you received a letter simply rejecting your offer. The explanation for the rejection makes no sense to you for this was the best offer you could make to resolve your tax liability. I will tell you that you are not alone in your experience for only about quarter of Offers get approval each year. This means that nearly 75% of the people who have faith In the Federal Government to help them in a bad situation with their taxes are in for a rude awakening.

Offer in Compromises are a nice idea and a great way for the Internal Revenue Service (IRS) to extend the three year statute of limitations to collect against a tax debtor. Once an Offer is submitted the statute of limitations is stayed in order to allow the IRS the 12 to 24 months to process your Offer. Meanwhile, the tax debtor’s life is put on hold and the IRS is able to prevent the tax debtor from pursuing options that will discharge tax debt.

So what can you do if your Offer is rejected and that the odds are not in your favor to get an Offer actually accepted?

We see a lot of people in our office with tax issues and a lot of people completely devastated by rejections of Offers. If we had our chance to meet with anyone considering putting all the work into submitting an Offer in Compromise, we would save the tax debtor the time, energy, and frustration. Offers statistics clearly indicate that this process is not going to be a success for the tax debtor. If the IRS was a sports team, the fans would be complaining to get a new coach with nearly 75% rate of loss.

Nevertheless, there is a successful option for tax debtors and the success rate is in the control of the tax debtor and not some third party IRS agent pushing paper. A Chapter 13 bankruptcy case is your best option for tax debt. Now, I know the word “bankruptcy” scares people off which is unfortunate for it is the only Federal Government law that can with absolutely cure a tax debt issue without question.

Why a Chapter 13 case is the best option is because Title 11 allows a tax debtor to cure tax debt over a payment plan of 60 months without the threat of the IRS collecting against the debtor. That is right you put up a big STOP SIGN to the IRS thanks to the automatic stay pursuant to 11 U.S.C. §362. So no more worries of threatening IRS debt or increasing of your overall tax debt due to the fact that the IRS is stayed from issuing out penalties of interest while you are in a Chapter 13 case.

Additionally, a Chapter 13 case allows you to treat the interest and penalties as unsecured debt. In other words, you will pay a minimum amount like maybe 5% (this amount depends on your disposable income) and the rest of the interest and penalties will be discharged. So all that interest and penalties tact upon your tax debt will not need to be paid in full and will no longer hinder your ability to cure your debt.

Finally in a Chapter 13, you can avoid tax liens. Anyone with a tax lien knows how trapped you feel. Often tax liens lead to levying of your bank accounts as well as your wages. Chapter 13 stops all levies on bank account as well as wages. So you can have your life back as you knew it was before you got into tax debt.

The reasons to file a Chapter 13 bankruptcy case is overwhelming. You the tax debtor are in control and you can have 100% success rate.