Chapter 7

February 20, 2013

SIGNIFICANT TAX REFUND COULD HAVE NEGATIVE IMPACT ON BANKRUPTCY FILING

As tax season approaches, many Sacramento area residents look forward to getting their refund checks over the upcoming weeks. Whether filing for Chapter 7 or Chapter 13, however, local residents must keep in mind that any income received is taken into account when qualifying for bankruptcy.

Few people realize that by receiving a significant tax refund they may no longer qualify for the bankruptcy. In order to qualify for Chapter 7 the individual must pass one of 2 income requirements. The first is the median income test. This means in order to qualify for Chapter 7 a person must earn less than the “average household income” for the same family size in his or her geographic region for the 6 months before the month in which they file the bankruptcy. The tax refund comes into play in this case because the median income test must account for all sources of income in the time period. Thus, if a person receives a significant tax refund they may no longer satisfy the median income test.

The second way to qualify for Chapter 7 bankruptcy is under the means test. The means test is a complex equation and comparison of a person’s debt to income ratio. In this test a person who makes more than the average income for his geographic region may still qualify for the bankruptcy provided their debts and monthly expenses rise to a significant portion of their income. Again, the receipt of a significant tax refund could effect the numbers enough so that the individual does not qualify under the means test either.

December 12, 2012

Court Holds Domestic Support Obligations Not Automatically Dischargeable in Chapter 7 Bankrutpcy

by Matthew D. Roy

As a Sacramento Bankruptcy Attorney I must often explain to my clients that domestic support obligations, such as spousal support and child support, are not dischargeable in Chapter 7 bankruptcy. This concept frustrates many individuals trying to clean up his or her economic profile. I must also remind these individuals to keep in mind that child and spousal support are not the only domestic support obligations to come out of a family court that could survive the bankruptcy. A recent case stemming from the New Hampshire Supreme Court, In re Mason, demonstrates a perfect example of a non-dischargeable domestic support obligation.

Mrs. Mason filed for bankruptcy in 2010 after having received a divorce from the state of New Hampshire in 2007. The parties’ divorce decree held that both parties would be liable to pay one half of their 2006 tax burden. However, Mrs. Mason listed Mr. Mason as a co-debtor on their tax lien and a creditor in her Chapter 7 petition and attempted to discharge her half of the parties’ 2006 income tax bill. Ms. Mason received her automatic discharge in the Chapter 7. Each party later attempted to assert relief from the 2006 taxes under the “innocent spouse” doctrine. The IRS granted Mrs. Mason’s request and denied the request of Mr. Mason. Mr. Mason moved to hold Ms. Mason in contempt of the family court for not paying her share of the tax bill and for an order directing her to pay one half of the tax bill. The circuit court denied Mr. Mason’s request. They found that since the IRS had granted her petition for relief under the “innocent spouse” doctrine, that it changed the nature of the taxes from a debt to the IRS to a personal debt to Mr. Martin and since Mr. Mason failed to fight the discharge in bankruptcy court that he would lose. They also denied his request for attorney’s fees.

On appeal, the New Hampshire Supreme Court reversed the lower court and held that the modifications of the bankruptcy code in 2005 mean that the domestic support obligations are not discharged automatically. The question turned on whether the taxes were automatically non-dischargeable because they were a part of the divorce decree, such as child support, or whether Mr. Martin would have to fight the discharge in the bankruptcy court. In their decision, the New Hampshire Supreme Court compared the modified bankruptcy code with the older version. They found that the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA “) removed the previous ability to pay tests that the law previously required regarding the dischargeability of a debt. This courts interpretation of the law found the BAPCPA directs that any debts falling within particular categories are automatically non-dischargeable. Specifically, they held that a debt created by a divorce decree is one of the automatically non-dischargeable debts. Since the 2007 divorce decree required Mrs. Mason to pay one half of the 2006 tax bill the court found that her debt was automatically non-dischargeable and she lost.

October 9, 2012

Sacramento Retirees Facing Special Challenges in Bankruptcy

by Matthew D. Roy

All Sacramento area residents have been hit hard by the economic downturn of the last several years. Unfortunately, this downturn has begun to disproportionately affect senior citizens and people leaving the workforce. In the early 90’s people over 55 accounted for approximately 2 percent of bankruptcy filings. Today, seniors account for roughly 22 percent of all bankruptcy filings.

The main reason seniors have been subject to Chapter 7 and Chapter 13 in recent years is due to the rising costs of medical care and their reliance on expensive medications. According to a recent study, 70 percent of seniors who live in poverty have suffered from a major medical condition. Only 50 percent of seniors living above the poverty line have faced these maladies that range from cancer, heart disease, high blood pressure, etc . to name a few.

Seniors therefore face a unique set of challenges when confronting economic turbulence. This is due, in large part, to the fact that elderly people tend to have limited incomes and there exists a lower probability of increasing income or earning additional income from employment opportunities as the individual continues to age. These real limitations have a direct impact on the individual’s decision of whether to file a Chapter 13 or a Chapter 7 bankruptcy.

March 6, 2012

Victory for Chapter 7 Debtor in Student Loan Discharge Case

by Matthew D. Roy

As a Chapter 7 and Chapter 13 bankruptcy attorney in Sacramento I frequently receive calls from people who consider bankruptcy because they have oppressive student loan debt. Student loans are a major issue for many bankruptcy filers. I predict these issues will continue to increase and the laws will ultimately need revision as the problems surmount; students, have been denied the opportunity to discharge their debt even when the amounts are astronomical and the student has little means to make payments.

In what can be considered a victory for individuals with student loans, the Sixth U.S. Circuit Court of Appeals decided in In re Gourlay that Sallie Mae, the student loan organization, could not set a default judgment aside that had been obtained by debtor Kristin Gourlay. Sallie Mae failed to respond to adversary proceeding filed by Gourlay which attempted to find the debt dischargeable. The Sixth Circuit found that the bankruptcy court was within its rights to find that the failure was not excusable neglect, the court said; service was proper and the appropriate person simply failed to respond.

Kristin Gourlay filed for Chapter 7. During the case she filed an adversary proceeding seeking to determine the dischargeability of her student loans owed to Sallie Mae. She owed Sallie Mae approximately $25,500. Her bankruptcy attorney sent Sallie Mae a timely summons by certified mail, and the return card was signed by someone believed to be a part time employee at the company’s Virginia headquarters. The deadline for a response came and went without a response from Sallie Mae. Gourlay filed for a default judgment about a week later. The Bankruptcy Court intitially rejected her motion due to improper service. However, Gourlay served the summons again. When there was still no response, the bankruptcy court granted her second motion for default judgment. Eighteen days after the default judgment became final, Sallie Mae moved to set it aside for excusable neglect. The Bankruptcy Court ultimately rejected this, finding that internal breakdowns are not excusable neglect, and Sallie Mae appealed.

October 18, 2011

Court Holds Bankruptcy Trustee May Collect Funds From Checks Not Cleared on Day of Bankruptcy Filing

by Matthew D. Roy

As a Sacramento bankruptcy attorney, I typically take a client’s case before the he or she files the bankruptcy petition. I do this in order to help him or her prepare the petition before the actual filing Chapter 7 or Chapter 13. Preparation for bankruptcy can mean a lot of things, including making strategic decisions regarding which assets are important to an individual. Understanding the bankruptcy process and knowing the complex rules become an important aspect of any Chapter 7 or Chapter 13 filing in order to eliminate or minimize a person’s exposure to his or her creditors.

Unfortunately, unrepresented litigants often fail to understand the complexities involved in a case and that seems to be what happened with a debtor in In re Ruiz, a case from the Bankruptcy Appellate Panel of the Tenth U.S. Circuit Court of Appeals. In this case, Jose and Carrie Ruiz wrote checks for business purchases, a charitable donation and their monthly mortgage payment just before petitioning for Chapter 7 bankruptcy. The checks had not yet cleared on the day of the petition, so their trustee argued that they technically still had the money and should be required to turn it over to the estate. A bankruptcy court in Utah disagreed, but the BAP reversed it, requiring them to turn over about $3,700.

The Ruiz’s checks were written between March 29 and April 23 of 2010; they filed their bankruptcy petition electronically on April 24. On their schedules, the Ruiz’s listed a checking account with $10.02. This was the number that would be true once the checks cleared; however, the account actually contained $3,764.99. The last of the four cleared on April 28, 2010. During the section 341 hearing, the Ruiz’s trustee discovered the discrepancy and moved to require them to turn over the rest of the money. The bankruptcy court denied the Trustee’s motion and found that the disputed money was not debtor property. Rather, it found that the checking account was a debt owed by the bank to the Ruiz’s, and that debt was the estate’s property; the bank had actual control and possession of the money. The court further held that the trustee, not the Ruiz’s, had the obligation to collect that debt on behalf of the bankruptcy estate. The trustee appealed.

January 4, 2011

2011 May See Decline in Chapter 7 and Chapter 13 Personal Bankruptcy Filings

by Matthew D. Roy

Economists and legal experts believe that 2011 could see a slowdown in personal bankruptcy filings. As indicators point to an improving economy and consumers borrow less money, “there is less reason for people to take the step of filing for bankruptcy” according to University of Illinois Professor, Robert Lawless.

American consumers filing for Chapter 7 or Chapter 13 topped 1.5 Million in 2010. This number represents an increase of 9% from 2009. The Southwestern and Southeastern States accounted for a majority of the increased filings last year. It appears that conditions in the Southeast have improved to some degree with decreased filings in states like Tennessee, South Carolina, and Alabama. However, communities in the Southwest remain mired in the economic turmoil experienced by numerous households across the country. Both California and Arizona saw an approximate 25% increase in bankruptcies from 2009. The economic crisis has forced individuals to make difficult choices or uncomfortable compromises with regard to managing their monthly budget. Numerous households have been forced to make these decisions with regard to their houses or mortgages.

Here in the Sacramento metropolitan area I have met many people who continue to hold onto mortgages they cannot afford because they are unable to get a loan modification or, until real estate values rebound, refinance their property. The fact remains, however, that personal bankruptcy is available to individuals who have extreme amounts of debt and are unable to pay their financial obligations. Eliminating staggering debt, or creating a plan to repay it, can help individuals use their financial resources more efficiently to meet other financial obligations.

November 15, 2010

How to Determine if Bankruptcy is the Best Option for You

by Matthew D. Roy

The decision to file for either Chapter 7 or Chapter 13 is a big one. This decision is one that requires substantial consideration and expertise. One of the most significant aspects of my work as a Sacramento Bankruptcy Attorney is to advise Sacramento area residents as to whether bankruptcy is a viable decision for him/her to begin with. Many individuals who schedule a consultation with my office are anxious to avoid filing Chapter 7 or Chapter 13 and come to my office in an attempt to explore the options available to them. In some cases, potential clients have specific matters that need to be addressed under their economic circumstances.

The first thing a person considering bankruptcy needs to take into account is the amount of debt the person has looming over his/her shoulders. Chapter 7 or Chapter 13 is really not a wise step to take if your debt to income ratio or debt to assets ratio are relatively low. The Bankruptcy code was revised in 2005, making it more difficult for a person to qualify for Chapter 7 in the first place. Thus, this question of whether bankruptcy can provide a solution to the debtor is often resolved by a simple mathematical equation. If an individual qualifies for Bankruptcy under the revised code, then there is a high probability that the individual has a high debt to income ratio which can be resolved by filing.

A simple way to calculate this ratio is for a person to examine his/her monthly expenses for all your necessary monthly obligations. This means the debtor needs to compile his/her monthly payments for things such as housing, vehicle, and living expenses. Do not include payments for credit cards or other nonessential expenses. Next, the debtor must compare that number with his monthly income. As a general rule, if the debtor cannot pay off his outstanding debts with the balance of his income that exceeds the necessary monthly expenses, over a three year period, bankruptcy may be a good option.

April 18, 2010

Sacramento Area Bankruptcy Laws Unsettled With Regard to “Stripping-off” an Unsecured Second Mortgage by Filing Chapter 7

by Matthew D. Roy

For those of you living in the Sacramento area that have a second mortgage on your real property which is essentially “unsecured” due to the fact that the value of your house has fallen below the amount secured by your first mortgage may be able to stop the bank from foreclosing and save your home by filing Chapter 7. In the case In Re Lavelle, 2009 Bankr., a bankruptcy judge for the Eastern District of New York allowed debtors to void the second mortgage lien held by the bank against their property by filing Chapter 7 when the value of their home fell below the amount secured by the first mortgage.

Since the case-law has not been settled in the Ninth Circuit, whose rules apply to those of us living in the Sacramento area, a debtor could conceivably prevent foreclosure and save their house so long as they can afford to continue making payments on the first mortgage after all other debts have been discharged in addition to the second mortgage. It makes sense that local judges could be inclined to interpret the bankruptcy code in a similar fashion as the court in the Eastern District of New York since a bank holding an unsecured second mortgage would not see a penny whether the house gets foreclosed on or the debt is stripped-off and voided under Chapter 7. Given the economic “fresh start” principles that Chapter 7 is designed to provide to a debtor, and the number of people that this interpretation of the law could help from losing their homes, I believe judges will become increasingly receptive to the argument. This view rests on a novel interpretation of the bankruptcy code, however, and would probably be an uphill legal battle. Nonetheless, In Re Lavelle shows at least one judge has become sensitive to the current economic situation and there is enough wiggle room in the law to provide a legal basis for making such a claim.

As a Sacramento bankruptcy attorney I have spoken with numerous clients with these types of questions. The only way to know for sure is by locating a debtor who finds himself in this situation to retain a lawyer who is willing to bring the case before a local court and present the argument. This would almost certainly become a drawn out legal process, but the courts would probably allow the debtor to at least remain in the property until all appeals have been exhausted and a final decision, perhaps by the United States Supreme Court, has been made. If you believe that you could benefit from this interpretation of the law it may be in your best interest to consult an attorney familiar on the subject.