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Bankruptcy Law Changes Less Likely With Joe Biden on the Ticket

By Jonathan on August 25, 2008

Ever since the passage of the BAPCPA changes to the bankruptcy laws in 2005, consumer advocates have held out hope that a new presidential administration might roll back some of the more hard line changes to the Bankruptcy Code. Although support for the BAPCPA laws was bi-partisan, some Democrats have attempted to tie the nation’s housing crisis in with the changes to the Code. You may remember that earlier this year Democratic leadership attempted to push through legislation that would permit bankruptcy judges to change the terms of mortgages.

Senator Obama’s selection of Senator Joe Biden of Delaware would seem to dim the hopes of consumer advocates hoping for consumer friendly changes to the bankruptcy laws. Delaware, as you may know, is the home to corporate headquarters of many large and small corporations. According to StreetDirectory.com, businesses choose Delaware simply because of their flexible corporate laws, highly respected Court of Chancery, a business-friendly State Government, and a customer service oriented Staff of the Delaware Division of Corporations.

Given that most of the large credit card banks are incorporated in Delaware, it should be no surprise that Senator Biden was one of only three Democrats who voted for the BAPCPA changes to the bankruptcy law and that he supported it enthusiastically. My colleague Carmen Dellutri, writing in the Bankruptcy Law Network blog, comments that when reflecting on the Senate debate about the BAPCPA laws, “the first thing that comes to mind is the passion that Senator MBNA (Biden) put into getting the bill passed. He was a staunch supporter of the bill. He was also very instrumental in getting many of the amendments stricken [that would have benefited consumers over lenders]. ”

The Associated Press reports that during the time the BAPCPA laws were being debated in the Senate, credit card lender MBNA paid a consulting fee to Hunter Biden, Senator Biden’s son. Further, the AP reports that “MBNA employees have poured more than $200,000 into Biden’s Senate campaigns over the past two decades, making donors working for the credit card company the senator’s largest source of campaign money.”

It is, of course, unclear how much influence a vice president Biden would have on Barack Obama or his policies. However, it would certainly not be surprising if bankruptcy reform is not at the top of the list should Mr. Obama find himself in the White House.

Can I Discharge Auto Accident Damage Claim that Exceeds My Insurance Coverage?

By Jonathan on August 19, 2008

I am being sued for an accident that occurred in the state of Tennessee. The injured party was offered a settlement by my insurance company, but has refused. If this goes to trial and the injured party is awarded way more than my insurance limits I know that I am responsible for the difference. I have no assets and nothing to offer so I know they will probably garnish my wages. Can I declare bankruptcy to get out from under what may a huge debt? The injured party is suing me for $1.5 million. Thank you!
Margaret

Jonathan Ginsberg responds: Previously I had written a blog post about how an injured plaintiff can proceed if the defendant in a car accident claim files for bankruptcy. Generally, the defendant/debtor’s insurance company will still be obligated to honor its coverage and the plaintiff can usually seek relief from the automatic stay to pursue insurance damages, but the plaintiff cannot pursue the debtor/defendant personally for damages beyond the policy limits.

Margaret would fall into the defendant/debtor situation If she files for bankruptcy, any damages above the insurance limits would be discharged as to her personally. The exception would be if Margaret’s accident involved alcohol or drugs, or if there was some sort of intentional action by Margaret.

If I was advising Margaret, I would not rush into bankruptcy because of the possibility that the injured plaintiff might recover damages at trial that exceed insurance coverage. Margaret did not say how badly the plaintiff was injured, but in my experience plaintiff’s lawyers often ask for a lot more than they hope to recover. Further, if Margaret is really judgment proof, it very well may be that the plaintiff will accept an insurance settlement within the insurance policy limit.

If the defense attorney provided to Margaret by her insurance carrier believes that there really is risk that a recovery could leave Margaret with personal liability, then she may wish to get a bankruptcy consultation sooner rather than later.

Can I File a Chapter 7 By Myself, Without an Attorney

By Jonathan on July 22, 2008

This morning, I received an email from a gentleman named Jim, who writes:

How can I file chapter 7 by myself without paying someone, anyone $ 99.00 $199.00, $299.00 etc… Three different people( with a financial intrest of course) said representation is required.

Here is my response: Jim, you certainly have the right to file a Chapter 7 case by yourself. The forms are available either on-line or at an office supply store. There are also several books about how to do this. I am currently reviewing a book entitled The Complete Chapter 7 Personal Bankruptcy Guide by attorney Edward Haman that is published by Sphinx Publishing that is quite comprehensive.

Here are the issues:

1. the bankruptcy process has become significantly more complicated since October, 2005, when the BAPCPA changes to the bankruptcy laws were enacted. I know a number of lawyers who used to file the occasional Chapter 7 here in Atlanta, but who have now given up the practice because of the complications. In particular, you need to fully understand how the median income test and the means test works – if you do the calculations incorrectly, you could end up in a deposition at the United State’s trustee’s office, face a motion to dismiss or face a motion to convert to Chapter 13.

2. you need to understand about the pre-filing credit counseling requirement as well as the pre-discharge financial management course requirement

3. in order to actually file your case, you will need to go to the Clerk of Bankruptcy Court and scan your pages to get your case filed. I suspect that this process is not particularly complicated, but I have not used the scanning equipment at the Clerk’s office.

4. you cannot dismiss a Chapter 7 voluntarily if you change your mind. For example, if you file, but it turns out that you earn too much or own too many assets the judge may not let you out of your case, at least until after your assets are liquidated.

5. you need to understand how the Georgia exemption law works and how it applies in Chapter 7 to protect property that the law allows you to protect. If you don’t properly declare property as exempt even if the law would otherwise allow you to protect it, then you could lose your property anyway.

6. do not expect to receive advice from the Chapter 7 trustees or the U.S. Trustees. Their interest is to maximize the recovery of the estate (i.e. your creditors).

While folks contemplating bankruptcy obviously do not have a lot of money, I think that in most situations the complexity (which, no doubt is unnecessarily complex) makes a pro se filing a mistake.

“No Conversion from 7 to 13” U.S. Supreme Court Tells Debtor Who Hid Assets

By Jonathan on July 21, 2008

The United States Supreme Court does not frequently hear cases involving consumer bankruptcy law. However, this past February, the Supreme Court considered the case of Robert Marrama, a Chapter 7 debtor in Massachusetts.

Mr. Marrama filed a Chapter 7, but failed to disclose on his schedules that he had put title to a Maine vacation house into a trust. He also failed to disclose an income tax refund. Interestingly, it appears that Mr. Marrama did reveal the existence of the house, but listed his ownership interest (equity) as zero.

The Chapter 7 trustee checked property records and discovered the transfer (it is unclear to me when this transfer occurred, although the transfer itself does not seem to be an issue here). The trustee filed a motion to undo the transfer and take title to the house for the purpose of selling it.

Mr. Marrama then moved to convert his case from Chapter 7 to Chapter 13. The trustee objected and the bankruptcy judge ruled against Mr. Marrama as did several other appeals courts. The case eventually made its way to the Supreme Court, where Justice John Paul Stevens writing for the majority, stated that while honest debtors were entitled to convert their Chapter 7 cases to Chapter 13, a bankruptcy judge is entitled to take away that right because of “fraudulent conduct.”

The case will be sent back to Massachusetts where Mr. Marrama will no doubt lose all of his non-exempt property. Chapter 7 cases cannot be dismissed without permission of the court and this is clearly not a case where such permission will be granted.

The point here – it is vital that you reveal all of your assets and debts to your attorney and to the courts. Over the past few years, the United States trustee and Chapter 7 trustees have become much more vigilant in looking for assets. Recently one of the attorneys for the United States trustee told me that her office’s goal is to push people out of Chapter 7 and into Chapter 13. Chapter 7 trustees are being strongly encouraged to look closely for hidden assets.

Thanks to Scott Sagaria of the California Bankruptcy blog for writing about the Marrama case.

Michael Vick Files for Bankruptcy

By Jonathan on July 8, 2008

Not that it is any surprise, but disgraced Falcon’s quarterback Michael Vick has filed for bankruptcy. The case was filed as a Chapter 11 reorganization in the Eastern District of Virginia. Chapter 13 was not available to Vick because his debts far exceed the debt limits imposed by the Bankruptcy Code on Chapter 13 cases.

Under a Chapter 11, Vick will propose a repayment plan for creditors. Generally, plans in Chapter 11 cases are filed within the first year after filing. Here, I don’t see that Michael Vick can possibly know about his future earnings. If he gets past state charges, if the NFL reinstates him and if a team is willing to pay him for his services, then a Chapter 11 would be feasible.

If there was ever any question that a debt crisis can happen to anyone, Michael’s story shows that bad choices and bad luck can land anyone in bankruptcy court. Until the money starts rolling again, however, Michael Vick has just created on-going employment for a lot of lawyers on both the debtor and creditor side.

Thanks to my friend Scott Riddle for reporting the Vick filing on his excellent Georgia Bankruptcy blog.

Conversion to Chapter 7 and Divorce Issues

By Jonathan on July 2, 2008

Whenever I file a Chapter 13 on behalf of a client, I remind my client that five years is a long time, and that a lot can happen during the term of a Chapter 13. Marriage counselors reguarly opine that financial stress often leads to marital discord, so it should come as no surprise that the stresses inherent in a Chapter 13 will result in marital problems.

What should you do if your marriage begins to unravel during the course of your Chapter 13. There are obviously many scenarios that I could discuss, but I am going to start with a real life example that I am watching develop currently.

The case study I am presenting involves a Chapter 13 client who was married at the time we filed over two years ago. Because the debts at issue were hers alone, she filed individually. Over the course of the past two years, her marriage has floundered and she has been separated from her husband for well over 6 months. She advises me that there is no hope for rehabilitation.

My client has primary physical custody of her children, and she has moved into a rental home. Her estanged husband lives in the former marital domicile. As best I can tell, there is a small amount of equity in the home – perhaps $10,000 to $15,000.

My client is also struggling financially. Although she receives child support, she is having a difficult time making ends meet. Gas prices, of course, are through the roof, as are the costs of other essentials like food and clothing.

The only secured debt in our case was a vehicle loan, but now the vehicle is non-operational and she is prepared to surrender it. There is a small amount of outstanding tax debt and around $25,000 or unsecured debt.

If there was no divorce issue, this would clearly be a case that is appropriate for conversion to Chapter 7. My client’s income is below the median income for a 3 person household and all of her debts are now unsecured.

The problem, of course, has to do with the pending divorce issues. If my client was to convert to Chapter 7, it would be in her best interest – in a bankruptcy context – to surrender all interest in her house. She is not living there and it does not make any sense for her to reaffirm a financial obligation on someone else’s house. After all she has no control over whether her soon-to-be ex-husband will make payments regularly or even maintain insurance on the property. If the property insurance should lapse and the house burns down, my client could find herself with hundreds of thousands of dollars of liability, not to mention devastating derogatory marks on her credit.

From a divorce perspective, however, the decision is not so clear. Right now, the ex-husband is living in the house and presumably wants to stay there. If there was no bankruptcy complication, my client could use her title and equitable interest in the house as a negotiation point. Ever dollar that the ex-husband spends to pay down the mortgage is creating equity that my client may have a claim against. Arguably, my client could ask a divorce court judge to award her possession of the house, so as to provide a stable living environment for her kids. The estranged husband most likely does not want to live with the uncertainty. My client could bargain away her equitable interest in the house in exchange for a larger property settlement or perhaps for some other concession.

If my client was to convert to a Chapter 7 now and surrender all interest in her house, she would be giving up that leverage. In addition, the estranged husband could use the bankruptcy filing against my client – perhaps questionning her financial stability or arguing that his credit has been damaged if the mortgage lender forces him to refinance.

Everything else being equal, my advice to my client is to consult with her divorce lawyer as soon as possible and to get that process moving. The bankruptcy trustee and judge usually will not have a problem with a property transfer in a Chapter 13 that is pursuant to a divorce. If she is going to convert to Chapter 7 – and she really does need to do so – she should wait until her divorce case is more settled.

Ideally, she should not have waited to finalize the divorce, but she did. Now she may have to wait several months, but, in my view, this is her best course of action.