Reaffirmations & Credit Reporting – Theory & Practice (Part 2)

Last week, we were discussing reaffirmation agreements in contrast to a “ride-through”; the latter of which is a method of keeping collateral after filing for bankruptcy without assuming the risk of liability on a deficiency balance should you default on the loan in the future, with the only risk being loss of collateral.
We were discussing the two main reasons why people would opt for a reaffirmation agreement instead of doing a ride-through, and having dispensed with the first (less common) reason, let’s continue on to the second more prolific reason…
#2 – Credit Reporting
Conventional wisdom these days suggests that secured creditors will report post-petition payments to credit bureaus if and only if a debtor enters into a reaffirmation agreement.  Creditors argue that if they report payments without a reaffirmation agreement, that they would be in violation of the discharge injunction.
While this may be conventional practice, we want to explore a little deeper to determine what legal responsibilities exist.  To do that, we’re going to try to answer two major questions.

1. If a reaffirmation agreement is not signed, are creditors violating the discharge injunction if they report post-petition payments?

I am unable to find any case law that suggests that making reports of payments to the credit bureaus – in the absence of a reaffirmation agreement – constitutes a violation of the discharge injunction.  And there’s an obvious reason for this – if a debtor makes payments on a ride-through and his payments are being reported – he is getting both the benefit of positive credit reporting AND reduced liability for not having signed a reaffirmation agreement.  Why on earth would he sue for violation of the discharge injunction?

11 U.S.C. § 524(a)(2) is the primary provision prohibiting the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor”.  It is difficult to imagine how reporting payments that a debtor makes could constitute an act to induce such payments.  The only conceivable issue here is if, during a ride-through, the debtor defaults and then – under the FCRA requirement that credit reporting be done accurately – the creditor reports a missed payment.  That could, conceivably, be considered a discharge violation if the debt was discharged in the absence of a reaffirmation agreement.  But the argument that the reporting of payments received as being a discharge violation is patently absurd.

2. If a reaffirmation agreement is signed, do creditors have an affirmative duty to report post-petition payments?

Simple answer is: NO.  There is no provision of the Fair Credit Reporting Act, nor the bankruptcy code, which imposes an affirmative duty upon any creditor to make reports to the credit bureaus.  This is true, even in cases that don’t involve a bankruptcy case.  Under FCRA, creditors are only obligated to make accurate reports, if they report at all.  There is no authority to compel them to make a report at all.

Failure to report payments does not constitute a violation of the discharge injunction.  See In re Bates, 517 B.R. 395 (Bankr. D. N.H. 2014)In re Manning, 505 B.R. 383 (Bankr. D. N.H. 2014), and In re Estrada, 439 B.R. 227 (Bankr. S.D. Fla. 2010).  (Estrada notes that language in a notice which threatens the suspension of credit reporting for failure to sign a reaffirmation agreement may be an impermissible violation of the automatic stay.)

Special thanks to Hon. Margaret D. McGarity and Atty. Michael J. Maloney for case summaries in Bates, Manning, and Estrada.

Summary

Continuing to make payments on secured loans like home mortgages or auto loans (and non-dischargeable debts like student loans) are a terrific way to reestablish credit history and rebuild your credit score after bankruptcy.  These are pre-existing loans, so there is no need to try to get financing approval despite just having filed for bankruptcy.

A ride-through is a less-risky way to proceed, in that in the event you default on a mortgage or auto loan in the future, you only stand to lose the collateral, and you cannot be held liable for a deficiency balance.

However, most secured creditors – as a policy – refuse to report post-petition payments to credit bureaus in the absence of a reaffirmation agreement (which does leave you potentially liable for a deficiency balance).  Although creditors have no affirmative duty to make reports, even with a reaffirmation agreement, they are not in violation of the discharge if they choose to condition their reporting on a reaffirmation agreement.

15 U.S.C. § 1681s-2 – Relevant Provisions
(a) Duty of furnishers of information to provide accurate information
(1) Prohibition
(A) Reporting information with actual knowledge of errors. A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.
(B) Reporting information after notice and confirmation of errors. A person shall not furnish information relating to a consumer to any consumer reporting agency if—
(i) the person has been notified by the consumer, at the address specified by the person for such notices, that specific information is inaccurate; and
(ii) the information is, in fact, inaccurate.
(D) Definition. For purposes of subparagraph (A), the term “reasonable cause to believe that the information is inaccurate” means having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information.
(2) Duty to correct and update information. A person who—
(A) regularly and in the ordinary course of business furnishes information to one or more consumer reporting agencies about the person’s transactions or experiences with any consumer; and
(B) has furnished to a consumer reporting agency information that the person determines is not complete or accurate, shall promptly notify the consumer reporting agency of that determination and provide to the agency any corrections to that information, or any additional information, that is necessary to make the information provided by the person to the agency complete and accurate, and shall not thereafter furnish to the agency any of the information that remains not complete or accurate.
(3) Duty to provide notice of dispute. If the completeness or accuracy of any information furnished by any person to any consumer reporting agency is disputed to such person by a consumer, the person may not furnish the information to any consumer reporting agency without notice that such information is disputed by the consumer.
(4) Duty to provide notice of closed accounts. A person who regularly and in the ordinary course of business furnishes information to a consumer reporting agency regarding a consumer who has a credit account with that person shall notify the agency of the voluntary closure of the account by the consumer, in information regularly furnished for the period in which the account is closed.
(5) Duty to provide notice of delinquency of accounts
(A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.
(B) Rule of construction. For purposes of this paragraph only, and provided that the consumer does not dispute the information, a person that furnishes information on a delinquent account that is placed for collection, charged for profit or loss, or subjected to any similar action, complies with this paragraph, if—
(i) the person reports the same date of delinquency as that provided by the creditor to which the account was owed at the time at which the commencement of the delinquency occurred, if the creditor previously reported that date of delinquency to a consumer reporting agency;
(ii) the creditor did not previously report the date of delinquency to a consumer reporting agency, and the person establishes and follows reasonable procedures to obtain the date of delinquency from the creditor or another reliable source and reports that date to a consumer reporting agency as the date of delinquency; or
(iii) the creditor did not previously report the date of delinquency to a consumer reporting agency and the date of delinquency cannot be reasonably obtained as provided in clause (ii), the person establishes and follows reasonable procedures to ensure the date reported as the date of delinquency precedes the date on which the account is placed for collection, charged to profit or loss, or subjected to any similar action, and reports such date to the credit reporting agency.
 (7) Negative information
(A) Notice to consumer required.
(i) In general.  If any financial institution that extends credit and regularly and in the ordinary course of business furnishes information to a consumer reporting agency described in section 1681a(p) of this title furnishes negative information to such an agency regarding credit extended to a customer, the financial institution shall provide a notice of such furnishing of negative information, in writing, to the customer.
(ii) Notice effective for subsequent submissions.  After providing such notice, the financial institution may submit additional negative information to a consumer reporting agency described in section 1681a(p) of this title with respect to the same transaction, extension of credit, account, or customer without providing additional notice to the customer.
(B) Time of notice
(i) In general.  The notice required under subparagraph (A) shall be provided to the customer prior to, or no later than 30 days after, furnishing the negative information to a consumer reporting agency described in section 1681a(p) of this title.
(ii) Coordination with new account disclosures.  If the notice is provided to the customer prior to furnishing the negative information to a consumer reporting agency, the notice may not be included in the initial disclosures provided under section 1637(a) of this title.
(C) Coordination with other disclosures. The notice required under subparagraph (A)—
(i) may be included on or with any notice of default, any billing statement, or any other materials provided to the customer; and
(ii) must be clear and conspicuous.
(8) Ability of consumer to dispute information directly with furnisher
(D) Submitting a notice of dispute. A consumer who seeks to dispute the accuracy of information shall provide a dispute notice directly to such person at the address specified by the person for such notices that—
(i) identifies the specific information that is being disputed;
(ii) explains the basis for the dispute; and
(iii) includes all supporting documentation required by the furnisher to substantiate the basis of the dispute.
(E) Duty of person after receiving notice of dispute. After receiving a notice of dispute from a consumer pursuant to subparagraph (D), the person that provided the information in dispute to a consumer reporting agency shall—
(i) conduct an investigation with respect to the disputed information;
(ii) review all relevant information provided by the consumer with the notice;
(iii) complete such person’s investigation of the dispute and report the results of the investigation to the consumer before the expiration of the period under section 1681i(a)(1) of this title within which a consumer reporting agency would be required to complete its action if the consumer had elected to dispute the information under that section; and
(iv) if the investigation finds that the information reported was inaccurate, promptly notify each consumer reporting agency to which the person furnished the inaccurate information of that determination and provide to the agency any correction to that information that is necessary to make the information provided by the person accurate.
(b) Duties of furnishers of information upon notice of dispute.
(1) In general. After receiving notice pursuant to section 1681i(a)(2) of this title of a dispute with regard to the completeness or accuracy of any information provided by a person to a consumer reporting agency, the person shall—
(A) conduct an investigation with respect to the disputed information;
(B) review all relevant information provided by the consumer reporting agency pursuant to section 1681i(a)(2) of this title;
(C) report the results of the investigation to the consumer reporting agency;
(D) if the investigation finds that the information is incomplete or inaccurate, report those results to all other consumer reporting agencies to which the person furnished the information and that compile and maintain files on consumers on a nationwide basis; and
(E) if an item of information disputed by a consumer is found to be inaccurate or incomplete or cannot be verified after any reinvestigation under paragraph (1), for purposes of reporting to a consumer reporting agency only, as appropriate, based on the results of the reinvestigation promptly—
(i) modify that item of information;
(ii) delete that item of information; or
(iii) permanently block the reporting of that item of information.
11 U.S.C. § 524 – Relevant Provisions

(a)(2) A discharge in a case under this title operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.
(b)(2)(C) Subsection (a)(3) of this section does not apply if an agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if—
(1) such agreement was made before the granting of the discharge under section 727, 1141, 1228, or 1328 of this title;
(2) the debtor received the disclosures described in subsection (k) at or before the time at which the debtor signed the agreement;
(3) such agreement has been filed with the court and, if applicable, accompanied by a declaration or an affidavit of the attorney that represented the debtor during the course of negotiating an agreement under this subsection, which states that—
(A) such agreement represents a fully informed and voluntary agreement by the debtor;
(B) such agreement does not impose an undue hardship on the debtor or a dependent of the debtor; and
(C) the attorney fully advised the debtor of the legal effect and consequences of—
(i) an agreement of the kind specified in this subsection; and
(ii) any default under such an agreement;
(4) the debtor has not rescinded such agreement at any time prior to discharge or within sixty days after such agreement is filed with the court, whichever occurs later, by giving notice of rescission to the holder of such claim;
(5) the provisions of subsection (d) of this section have been complied with; and
(6)
(A) in a case concerning an individual who was not represented by an attorney during the course of negotiating an agreement under this subsection, the court approves such agreement as—
(i) not imposing an undue hardship on the debtor or a dependent of the debtor; and
(ii) in the best interest of the debtor.
(B) Subparagraph (A) shall not apply to the extent that such debt is a consumer debt secured by real property.
(f) Nothing contained in subsection (c) or (d) of this section prevents a debtor from voluntarily repaying any debt.
(j) Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim, if—
(1) such creditor retains a security interest in real property that is the principal residence of the debtor;
(2) such act is in the ordinary course of business between the creditor and the debtor; and
(3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.

Reaffirmations & Credit Reporting – Theory & Practice (Part 1)

A key component to helping people rebuild credit after filing for bankruptcy are post-filing payments on reaffirmed debts.  However, there’s a lot of confusion – even among attorneys and other professionals – about creditors’ obligations to report these payments.  So today, we’re going to examine key statutes, case law, and some anecdotal evidence.  We’re going to discuss what creditors legally are and are not obligated to do, and how these obligations may differ from what we see in common, every day practice.
But first, I’m going to assume that you have not read other posts on this blog about reaffirmations, so let’s hit up some basics: What is a reaffirmation agreement?

Contrary to common belief, almost all secured debts are dischargeable.  In terms of dischargeability, they are no more or less special than other unsecured debts like credit cards, payday loans, or medical bills.  This is how and why people are able to file for bankruptcy, walk away from a home or vehicle that they don’t want, and not be liable for a deficiency balance.
But secured liens are not extinguished in bankruptcy (except in rare case of stripping unsecured mortgages in Chapter 13, judgment liens, etc.).  So while a secured creditor may not be able to pursue you for a deficiency balance, they can act upon their security interest and foreclose or repossess collateral if you default on the loan.  And of course, that right exists even if you don’t file for bankruptcy – bankruptcy just extinguishes their right to pursue you for money on the loan.  So you can’t just stop paying your mortgage and expect to be able to continue to remain in your home, even if you file for bankruptcy.
A reaffirmation agreement takes your dischargeable pre-petition obligation and converts it into a post-petition obligation that is not discharged in bankruptcy.  In other words, if you enter into a reaffirmation agreement and default, then not only can the creditor repossess the collateral, but they can also pursue you for a deficiency judgment.
Reaffirmations are NOT required.  On the contrary.  They are voluntary agreements.  A creditor can no more require you to sign a reaffirmation agreement than you can require a creditor to sign one.  In fact, some creditors – as a policy – don’t bother with reaffirmation agreements.
Strictly from a liability standpoint, I (along with most other attorneys I’ve spoken to) would prefer that our clients not enter into a reaffirmation agreement.  There is always the possibility that something will happen down the road, and you are unable to continue to make payments on your mortgage or car loan.  Without a reaffirmation agreement – the worst thing that the creditor is entitled to do is repossess the collateral.  With a reaffirmation agreement – the creditor can repossess the collateral AND seek a deficiency balance.
What I (and most other attorneys) prefer are what we refer to as a “ride-through”.  A ride-through is when a bankruptcy debtor retains collateral, continues to make normal monthly payments on a secured loan, but does so without a reaffirmation agreement.  This way, the debtor keeps their property, but minimizes their risk in case something happens down the road.
Sounds great!  Why doesn’t everyone do a ride-through?  Why don’t attorneys INSIST that their clients just do a ride-through?  Well, two reasons.
#1 – The Risk of Repossession
This almost never happens.  Many years ago, there were rumors that Wells Fargo was foreclosing on homes and repossessing vehicles, even though the debtors were current on their payments.  The sole reason they foreclosed and repossessed?  The debtors had not signed a reaffirmation agreement, which Wells Fargo considered a technical default and grounds for exercising their security interests.
11 U.S.C. § 521(a)

(6) [I]n a case under chapter 7 of this title in which the debtor is an individual, not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors under section 341(a), either –
(A) enters into an agreement with the creditor pursuant to section 524(c) with respect to the claim secured by such property; or
(B) redeems such property from the security interest pursuant to section 722.

In Steinhaus, Idaho Central Credit Union argued that this language (revised under BAPCPA in 2005) limited a debtor to 3 options: reaffirm, redeem, or surrender.  Since Steinhaus had not entered into a reaffirmation agreement within the proscribed time period, ICCU demanded termination of the automatic stay, an order compelling surrender of property, and an order authorizing foreclosure.  The court agreed that 11 U.S.C. § 362(h) permitted ICCU to obtain termination of the automatic stay, but disagreed that it had authority to compel surrender of collateral or to authorize foreclosure.  In re Steinhaus, 349 B.R. 694 (Bankr. Idaho, 2006).

The right to repossess is still controlled by applicable state law, and we get a pretty good discussion of that in Henderon, a Nevada case that specifically deals with Nevada law that differs from the Uniform Commercial Code.  In this particular case, it was decided that the contract provision invoking an ipso facto right of recovery based solely on the filing of bankruptcy or lack of a reaffirmation agreement was invalid under Nevada law.  In re Henderson, 492 B.R. 537 (Bankr. Nev., 2013).

Wisconsin’s default provisions are outlined at Wis. Stat. § 425.103.  I’ll include them here for reference, but I’m not going into an analysis of the code.  The point is that since the right of recovery is an issue of state law, the bankruptcy court has no authority to compel surrender of collateral, which means you – as a bankruptcy debtor – can force this issue before a state court judge.  An informal survey suggests that most judges are not inclined to permit repossession based solely on the lack of a reaffirmation agreement.

(2) ”Default”, with respect to a consumer credit transaction, means without justification under any law:(a) With respect to a transaction other than one pursuant to an open-end plan and except as provided in par. (am); if the interval between scheduled payments is 2 months or less, to have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the scheduled or deferred due dates, or the failure to pay the first payment or the last payment, within 40 days of its scheduled or deferred due date; if the interval between scheduled payments is more than 2 months, to have all or any part of one scheduled payment unpaid for more than 60 days after its scheduled or deferred due date; or, if the transaction is scheduled to be repaid in a single payment, to have all or any part of the payment unpaid for more than 40 days after its scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(am) With respect to an installment loan not secured by a motor vehicle made by a licensee under s. 138.09 or with respect to a payday loan not secured by a motor vehicle made by a licensee under s. 138.14; to have outstanding an amount of one full payment or more which has remained unpaid for more than 10 days after the scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(b) With respect to an open-end plan, failure to pay when due on 2 occasions within any 12-month period;(bm) With respect to a motor vehicle consumer lease or a consumer credit sale of a motor vehicle, making a material false statement in the customer’s credit application that precedes the consumer credit transaction; or(c) To observe any other covenant of the transaction, breach of which materially impairs the condition, value or protection of or the merchant’s right in any collateral securing the transaction or goods subject to a consumer lease, or materially impairs the customer’s ability to pay amounts due under the transaction.

As a matter of practice, most creditors will permit a ride-through, and there are two major reasons for this.  First – if a debtor is willing to continue make payments on a secured debt, they’re going to receive more money if they permit the ride-through rather than immediately demanding turnover of the collateral.  If the debtor defaults, they still have a right of recovery and sale later on.  (For example, if collateral is worth $10k at auction and a debtor makes $500/mo payments for a year before defaulting, the creditor potentially gets $16k out of the deal; whereas they only get the $10k if they repossess immediately.)  The circumstances in which a creditor may not want to wait for a default is where there is significant risk or danger that the property will be damaged or wasted before the default, significantly devaluing the asset by the time it can be sold.

The other reason most creditors permit a ride-through is because threatening to repossess in the absence of a reaffirmation agreement would conceivably be a violation of the discharge at 11 U.S.C. § 524(c)(3)(A).

Final BAPCPA Anniversary Reminder

Tomorrow is the 8 year anniversary of BAPCPA.  At this time, everyone who filed a Chapter 7 bankruptcy case right before the law changed in 2005 is eligible to re-file a Chapter 7 bankruptcy case (assuming no other bankruptcy case has been filed since then, and assuming that you meet the income requirements – if you do not qualify, Chapter 13 may still be a viable option of relief for you).
I know this may seem a little corny, but we are nothing if not that, here at Holbus Law Office!  To commemorate this milestone, we will have a birthday cake – and any clients or prospective clients who stop in tomorrow can have a piece for free.

BAPCPA Anniversary Reminder #4

This is just a reminder to those of you who filed bankruptcy before BAPCPA went into effect and intend to file again when their 8 years is up, please call us to schedule an appointment today, instead of waiting until October.
As you may remember from my previous post, a lot of people felt compelled to file bankruptcy during the 2005 hysteria, erroneously believing that they would be unable to file for bankruptcy once BAPCPA went into effect.  In many cases, the October 17 deadline induced people to file prematurely – before it would have been in their best interest to file.
Without the imminent nature of another round of changes to the bankruptcy law, people are able to approach bankruptcy more level-headed, better educated, and able to make more informed decisions.  Nevertheless, there will be some who are waiting for October 17, 2013, when they will once again be eligible for another Chapter 7 discharge, and intend to do so quickly because of an imminent threat of wage garnishment or other invasive debt collection actions.
If you believe that you may be facing such an imminent threat, don’t wait until the last minute to meet with an attorney.  The bankruptcy laws have indeed changed, and while it is certainly possible to file, the requirements that one must fulfill before they can be eligible are substantial.  In other words, bankruptcy is more complex nowadays than it was 8 years ago, and it takes a little longer to get a case ready to file than it did 8 years ago.  By speaking to us now, you can use the time between now and your eligibility date to prepare yourself for your next bankruptcy case, and hopefully be able to approach bankruptcy this time around in such a way that you won’t have to undergo something like this again in the future.
I expect to have additional information regarding the new “modernized” bankruptcy forms, which will go into effect December 1, 2013 – shortly, and that will be shared with you.
At Holbus Law Office, we know we’ve done our job if you only need our services once.

BAPCPA Anniversary Reminder #3

This is just a reminder to those of you who filed bankruptcy before BAPCPA went into effect and intend to file again when their 8 years is up, please call us to schedule an appointment today, instead of waiting until October.
As you may remember from my previous post, a lot of people felt compelled to file bankruptcy during the 2005 hysteria, erroneously believing that they would be unable to file for bankruptcy once BAPCPA went into effect.  In many cases, the October 17 deadline induced people to file prematurely – before it would have been in their best interest to file.
Without the imminent nature of another round of changes to the bankruptcy law, people are able to approach bankruptcy more level-headed, better educated, and able to make more informed decisions.  Nevertheless, there will be some who are waiting for October 17, 2013, when they will once again be eligible for another Chapter 7 discharge, and intend to do so quickly because of an imminent threat of wage garnishment or other invasive debt collection actions.
If you believe that you may be facing such an imminent threat, don’t wait until the last minute to meet with an attorney.  The bankruptcy laws have indeed changed, and while it is certainly possible to file, the requirements that one must fulfill before they can be eligible are substantial.  In other words, bankruptcy is more complex nowadays than it was 8 years ago, and it takes a little longer to get a case ready to file than it did 8 years ago.  By speaking to us now, you can use the time between now and your eligibility date to prepare yourself for your next bankruptcy case, and hopefully be able to approach bankruptcy this time around in such a way that you won’t have to undergo something like this again in the future.
Remember that the 8 year time between discharges only applies if you filed a Chapter 7 in 2005 and intend to re-file under Chapter 7 now.  People who filed under Chapter 13 previously, or intend to file under Chapter 13 now have shorter windows and are already eligible for discharge.
At Holbus Law Office, we know we’ve done our job if you only need our services once.

Beyond the Means Test

Nearly 8 years after the implementation of BAPCPA, and while not everyone understands it, most people have at least heard of the infamous “Means Test” – the form that calculates how much disposable income a debtor has available for his or her unsecured creditors.  The Means Test looks back at your past six months of gross income, doubles it to compute your gross annual income, and compares it to the median income level for your state and household size.  If below, you’re presumed to have no disposable income, and qualify for Chapter 7 Bankruptcy (if no prior bankruptcy disqualifies you).  If above median, you must complete the second part of the Means Test, which accounts for certain actual expenses, certain debt repayments, and certain IRS living standards to compute disposable monthly income.  Again, if your DMI is low enough or negative, you are in Chapter 7 territory.  Too high, and you’re in Chapter 13 territory.
But is that the end of the income inquiry?  No.  You must still prepare a budget – Schedule I (income) and Schedule J (expenses).  If, after preparing a reasonable budget, it shows that you have a considerable amount of disposable income – you could be forced into Chapter 13 Bankruptcy under 11 U.S.C. § 707(b).  This provision, at (3) allows the court to either dismiss or convert a case if the totality of the circumstances demonstrates that the debtor filed a petition for Chapter 7 relief in bad faith, or that a filing would be abusive of the bankruptcy system.  Most attorneys refer to this section as “the smell test” (if the case seems like it shouldn’t be filed under Chapter 7 – if it smells funny – then it perhaps shouldn’t be).
Why would the Means Test and the budget tell different stories about how much money a debtor has available for unsecured creditors?  I have discovered three major themes that crop up every time there is a discrepancy between the budget and Means Test.
One.  The Means Test does not count all income – namely, Social Security income.  Usually not a big deal, since most people’s social security benefits are a pittance, their sole source of income, and not enough to cover their monthly expenses.  Nevertheless, once I’ve ruled out a Means Test problem, if a debtor is getting SSA income, I do have to look at the big picture to make sure that my client is not going to have a budget problem.
Two.  The IRS living standards are often more generous than what my clients actually spend.  You wouldn’t think so, but I have found it to be true in the majority of my cases.  Sometimes we have the opposite problem – an expense that is not an allowed deduction on the Means Test (which is a topic, perhaps, for a different day).  But again, the big one I keep an eye out for is the debtor who does not have a home mortgage or rent expense.  This may happen anytime they live with mom and dad, or with a boyfriend or girlfriend.  The Means Test assumes a home payment.  But if that expense doesn’t exist on the budget, that’s a significant expense that is missing.
Three.  The Means Test looks to the past to predict the future.  The budget just looks to the future.  So, a single debtor with no kids who has been on unemployment for 4 out of the past 6 months may easily pass the Means Test, but if his new job has him making $60k a year, it is going to be difficult, if not impossible, to create a reasonable budget that shows he has no disposable income left over.
There is a fourth unusual circumstance.  11 U.S.C. § 707(b) applies only to debtors whose debts are primarily consumer debts.  A debtor whose debts primarily arose from the operation of a business – they are not subject to the Means Test.
But what about their budget?  11 U.S.C. § 707(a) – which does apply to business debtors – allows the court to dismiss for “cause”.  Three examples are given in this section, but they are not held out as an exhaustive list.  Most courts have held that since the ‘smell test’ is laid out in 707(b), if Congress had meant for it to apply to non-consumer debtors, then it would have been explicit in 707(a).  But not all courts agree.
In re Rahim, 442 B.R. 578 (Bankr. E.D. Mich. 2010) – held that a debtor who continued to live a lavish lifestyle with no effort to curtail his expenses – was not entitled to Chapter 7 relief, despite his debts being primarily non-consumer.  This ruling was upheld by the District Court on appeal (federal district courts have appellate jurisdiction over federal bankruptcy courts).
While this decision is not binding on courts in our jurisdiction, it is worth noting that the case exists – and that it may be used as persuasive authority in the future on a case in our area.

BAPCPA Anniversary Reminder #2

This is just a reminder to those of you who filed bankruptcy before BAPCPA went into effect and intend to file again when their 8 years is up, please call us to schedule an appointment today, instead of waiting until October.
As you may remember from my previous post, a lot of people felt compelled to file bankruptcy during the 2005 hysteria, erroneously believing that they would be unable to file for bankruptcy once BAPCPA went into effect.  In many cases, the October 17 deadline induced people to file prematurely – before it would have been in their best interest to file.
Without the imminent nature of another round of changes to the bankruptcy law, people are able to approach bankruptcy more level-headed, better educated, and able to make more informed decisions.  Nevertheless, there will be some who are waiting for October 17, 2013, when they will once again be eligible for another Chapter 7 discharge, and intend to do so quickly because of an imminent threat of wage garnishment or other invasive debt collection actions.
If you believe that you may be facing such an imminent threat, don’t wait until the last minute to meet with an attorney.  The bankruptcy laws have indeed changed, and while it is certainly possible to file, the requirements that one must fulfill before they can be eligible are substantial.  In other words, bankruptcy is more complex nowadays than it was 8 years ago, and it takes a little longer to get a case ready to file than it did 8 years ago.  By speaking to us now, you can use the time between now and your eligibility date to prepare yourself for your next bankruptcy case, and hopefully be able to approach bankruptcy this time around in such a way that you won’t have to undergo something like this again in the future.
At Holbus Law Office, we know we’ve done our job if you only need our services once.

Lottery Winnings and Inheritances

From time to time, I like to point out absurdities in the bankruptcy statutes that demonstrate how obtuse Congress was when crafting BAPCPA.
Take 11 U.S.C.§ 541, for instance.  It outlines what does and does not comprise a bankruptcy estate.  When a bankruptcy case is filed, everything you own and everything you have an interest in becomes property of a “bankruptcy estate”.  It doesn’t mean you lose your property, but this provision is actually very important in the creation of the automatic stay protections.  In Chapter 7, the trustee will evaluate your property exemptions, determine what – if anything – is not exempt and then liquidate those assets for the benefit of unsecured creditors, and relinquish the remaining bankruptcy estate assets back to you.  You’ll probably never see any of this take place – it’s more of a legal formality on paper.  In Chapter 13, a similar procedure happens, but typically, all is released except for future wages earmarked to fund the repayment plan.
So now you know what a bankruptcy estate is.  What’s funny about sec. 541 is that it includes property that you inherit up to 180 days (about 6 months) after your bankruptcy case is filed.  So, if you file bankruptcy on January 1, and on April 15, your mom dies and leaves you a pot of gold – that pot of gold is most likely going to your unsecured creditors.
Some people think it’s unfair.  First of all, the debtor wasn’t entitled to the inheritance at the time his or her bankruptcy case was filed.  9 times out of 10, the debtor could not have reasonably known that something like this was going to happen.  Second, it’s sort of a shitty thing to do to someone who just lost a relative.  “Hey, sorry your mom died.  And to add insult to injury, I’m taking this money that she willed to you.”
The law on its own is not terribly absurd.  It was designed to prevent people who knew that they were going to be getting a sizable inheritance shortly from a sick relative from screwing over their creditors simply by filing bankruptcy before the relative died.
What makes this law absurd is that sec. 541 is completely silent to lottery or gambling winnings.  Theoretically, you could file bankruptcy on January 1, win $100 million playing Powerball on January 2, and keep the entire winnings.  But if you inherit, say $50k from your mom on January 3 – most if not all that money is going to your creditors.
And just to clarify, the 180 day rule on inheritances is based on entitlement, not acquisition.  What that means is that if someone dies in that 180 days and you’re entitled to inherit something – regardless of when those funds are ever ultimately transmitted to you – that money is property of the estate.  I have a small handful of bankruptcy cases held open right now because we are waiting for a probate case to wrap up.  Some probate cases drag on for years.  (These issues typically do not delay entry of the discharge order, it just leaves the case open for administrative processing.)
Now, I may be misleading you by saying that winning $100 million in the lottery the day after filing means your winnings are safe.  There is certainly a theory that your case could be dismissed or converted to Chapter 13 under 11 U.S.C.§ 707(b).  At this time, I am unaware of any such case (I’ve searched for cases citing 707(b) and either ‘gambling’ or ‘lottery’, with no results).  That’s not surprising.  The instances of lottery winnings are – by nature – statistically rare.  Combining that with a recent bankruptcy filing is going to yield even fewer instances.  But some day, I’m certain this issue will come up, and it will be interesting to see how it unfolds.

BAPCPA Anniversary

BAPCPA – the Bankruptcy Abuse Prevention and Consumer Protection Act – went into effect for cases filed on or after October 17, 2005.  At the time – most people didn’t know what BAPCPA meant, or how it would affect bankruptcy.  Most believed – erroneously – that they would not be allowed to file bankruptcy once BAPCPA went into effect.
The result being a massive spike in bankruptcy filings in the month prior to BAPCPA went into effect.
This October 17, 2013, will be the eight year anniversary of BAPCPA.  This anniversary is significant because there are hundreds of thousands of people who filed just before BAPCPA went into effect who – because of the limitations on multiple discharges – are going to become re-eligible to file this autumn.
Many people filed for bankruptcy in 2005 out of fear, with little or no regard to their long-term finances.  It is generally agreed that when possible, it is best to wait to file for bankruptcy after one reasonably expects any financial hardship has ended.  People who filed in 2005 may have been in the middle of receiving substantial health care, for example, and because they filed before they were finished with their medical care, they continued to accrue massive medical debt after their case was filed, and therefore were unable to fully benefit from their discharge.
This is just one way in which the 2005 hysteria would have caused people to file bankruptcy prematurely.  We anticipate there will be a number of people needing to re-file after October 2013 when they become re-eligible for a Chapter 7 discharge.
Here at Holbus Law Office, we encourage our clients to contemplate bankruptcy with great care.  Bankruptcy is a serious process, and while it may not be the financial crippler that it once was (yes, people can recover financially after bankruptcy), it does still have consequences.
I personally do not believe that people should rush into bankruptcy.  So, for those of you who are waiting for October 17, 2013 to roll around…  For those of you who are getting ready to file bankruptcy again to stop a pressing problem – such as wage garnishment, utility shut-off, repossession, or foreclosure – I urge you to talk to an attorney now.
We offer free, no-obligation consultations so we can evaluate what options (including non-bankruptcy options) are best for you.  By meeting with an attorney now, you can afford yourself plenty of time to decide if bankruptcy is right for you.  For those who need to file soon after October 17, meeting with an attorney now can also help make sure that you are ready to file as soon as you become eligible, and that you are doing all the right things financially so that there are no problems with your next bankruptcy case.