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What Should a Potential Bankruptcy Debtor Do About a Potential Inheritance?

By Jonathan on January 15, 2007

My colleague, Florida bankruptcy lawyer Jonathan Alper, recently wrote a post on his Florida Bankruptcy Law blog about issues arising in the case of a debtor’s receipt of an inheritance within six (6) months of filing. Under the bankruptcy law, any inheritance received by the debtor within six months of filing becomes property of the estate and can be seized by the trustee and distributed like any other non-exempt asset.

Chapter 7 trustees typically question debtors about any expected inheritance at the 341 hearing. Jonathan posed the question of what might happen if a debtor, knowing that he was the beneficiary of a will, advised his a sick or dying relative about the bankruptcy and the relative thereupon decided to change the beneficiary so that the assets would not be seized.

Jonathan concludes that the debtor has no duty to advise the trustee about the "new" beneficiary’s inheritance. He reasons that the dying relative is not part of the bankruptcy and that the relative has the right under State law to change the beneficiary at any point.

I agree with Jonathan’s analysis….to a point. I think that if the numbers are big enough, an aggressive Chapter 7 trustee would go after the proceeds of the estate and argue that circumstantial evidence suggests fraud. I think it is unlikely that the original beneficiary or the new one would admit that there was a concerted effort to move assets out of the estate. However, just as in the case of a "fraudulent transfer" that would deny discharge under Section 727 of the Code, intent can be inferred from the action of the parties.

I think the bigger issue here may relate to the nature of advice that bankruptcy lawyers can give to their clients. As a zealous advocate, a bankruptcy lawyer can advise his client about the six month rule, and, if asked, about wills and estate rules that permit a testator to change his beneficiaries. I also think that that bankruptcy lawyer should advise his client about the potential risk of a claim by the trustee.

To a certain degree, therefore, the bankruptcy lawyer’s job is to help his client manage risk, while at the same time avoiding being backed into a situation where the lawyer has independent knowledge of a client’s plan to misrepresent statements on bankruptcy schedules. Jonathan Alper concludes that his hypothetical debtor has a "legitimate position." I think this is the right way to analyze this type of ethical dilemma.

As long as the debtor (and his lawyer) have a reasonable argument grounded in statute or case law, is there any reason why the lawyer ought not provide his client with information about a range of choices starting with the most aggressive position?

[tags] Chapter 7 and expected inheritance, inheritance as property of the estate, Jonathan Alper [/tags]

We’re #1 – Georgia Leads the Nation in Bankruptcy Filings

By Jonathan on December 29, 2006

Today’s Atlanta Journal-Constitution reports that Georgia now leads the nation in bankruptcy filings. More bankruptcies were filed in Georgia in 2006 than in any other State. Over 29,000 petitions were filed in Georgia during the first three quarters of 2006, surpassing California (27,000 petitions), Texas (almost 26,000 petitions) and Ohio (25,000 petitions).

Even more significant, Georgia ended up just behind Tennessee in the number of bankruptcy petitions filed per 1,000 residents.

Compared to 2005 – the last year of filing under the “old” law, bankruptcy filings throughout the country are way down. From January – September, 2006, 29,202 cases were filed. For the same time period in 2005, however, 60,143 cases were filed. Thus, filings in Georgia dropped 51% – almost 30,000 filings.

What exactly does this all mean?

From my perspective as a consumer bankruptcy lawyer, I can make several observations:

during the run-up to the new law – January through October 16, 2005 – a lot of people made the decision to file because of (legitimate) concerns about the impact of the new law. Thus, the “inventory” of potential filers in 2006 decreased greatly.
there is a perception in the general public that bankruptcy relief has become much harder to obtain. There is some anecdotal evidence that bill collectors perpetuate a number of inaccuracies about the availability of bankruptcy relief.
the bankruptcy process has become much more burdensome and expensive. From the useless requirement of credit counseling to the need to produce tax returns, pay stubs and expense receipts, many individuals who might benefit from filing continue to procrastinate because they do not want to spend the time gearing up for a filing. Similarly, the amount of work done in my office has easily doubled, and I have had to increase my fees to account for the added work.
as a practical matter, bankruptcy relief is no longer available to a significant slice of the population. Families with household income that slightly exceeds the State median (i.e. $65,000 for a family of 4) cannot qualify for Chapter 7 without a stressful and expensive fight, yet these same families cannot afford a Chapter 13 payment.
fewer lawyers are willing to brave the chilly waters of bankruptcy. Many experienced and capable attorneys are dropping the practice because they cannot find clients who can pay for their time and because the law has become so internally inconsistent as to make it all but impossible to offer clear advice. Most bankruptcy petitions will be filed by one or two high volume firms in a particular jurisdiction.
many debtors who have been forced into Chapter 13 because of the strict limitations on Chapter 7 will end up with failed repayment plans because their Chapter 13 plans are not feasible over the long term. Taken in combination with the limitations on refilings, we will soon see a class of “permanent debtors” who will live with the burden of constant wage garnishment and involuntary liens.

In many ways, bankruptcy practice has become like tax problem practice. I can offer my clients relief, but not without significant pain. Bankruptcy is no longer about getting a fresh start – it is about managing pain.

401(k) Loan Repayments Not Allowed in Means Test Calculations

By Jonathan on December 19, 2006

Evidence continues to mount that Chapter 7 will not be a friendly place for debtors who end up in the means test. As you know, you can only qualify for Chapter 7 if (1) their household income falls below the average income for a similarly sized family in your State, or (2) if your household income exceeds the average income, but you pass the "means test."

The means test sets out a budget using expense numbers that the IRS has deemed "reasonable." If your actual expense for a particular category exceeds the IRS number, too bad.

For example, if the IRS budget says that a family of 4 in Fulton County, Georgia may spend $1,529 for housing and utilities. If that family of 4 actually spends $2,000 for housing and utilities, they can only use the $1,529 in the housing/utilities column. For bankruptcy calculation purposes, this family has $471 "left over" and available to pay creditors in a Chapter 13.

Now, we learn that 401(k) loan repayments cannot be included in a means test budget. If you are paying back a 401(k) loan at $200 per month, for example, the Bankruptcy Court says that this $200 is actually "disposable" and available for creditors in a Chapter 13. The Court does not care that if you defaulted on a 401(k) loan you would face tax problems and possibly lose your retirement investment. Thanks to my colleague, attorney Bernd Stittleburg, who forwarded to me an email about the Lenton case from Pennsylvania and the Nockerts case from Wisconsin.

Bernd Stittleburg and I have both noticed that every Chapter 7 case that involves a means test inevitably results in an objection from the U.S. Trustee. I am therefore much less inclined to pursue Chapter 7 relief for a debtor whose income exceeds the means test numbers, and if I do take a "means test" case, I have no choice but to charge a substantially higher fee.

Congress created this means test to limit access to Chapter 7, and that goal is certainly being met. Unfortunately, honest but unfortunate debtors now have very little place to turn since bankruptcy relief is become less and less available.

[tags] means test, 401(k) loan repayment in bankruptcy, median income test, Bernd Stittleburg [/tags]

Chapter 13 Plan Strategies for Self Employed Debtors

By Jonathan on December 17, 2006

With an increased emphasis in the new Bankruptcy Code upon a debtor’s income history, self-employed or commissioned sales debtors will find a hostile reception in Chapter 13. A recent case on which I have been working illustrates the problem.

My clients are self employed real estate agents, both in their 60’s. Residential real estate sales can be a good business, but it can also be cyclical – with some months yielding a nice income and other months completely dry. In this case my clients had close to $100,000 in credit card debt and close to $200,000 in income tax debt.

As an aside, real estate agents often have income tax problems because of the nature of their income. Funds are not always there when it comes time to pay quarterly estimates – the estimated payments are based on the previous year’s income. In addition, the sales cycle of listing to closing may be four to six months, which means that cash flow can be a problem.

In this particular case, we had to file earlier than I would have preferred because we were trying to beat the filing of a tax lien. Most of the tax debt in this case was "stale" for bankruptcy purposes, meaning that we could treat it as unsecured debt. Once a lien was filed, we would be stuck paying the entire amount as secured debt.

The problem we faced arose from my clients’ income in the six months prior to filing. The spring and summer months were realtively good for income purposes, resulting in an average monthly income that had no basis in current reality. This fall and winter had been very poor months for home sales, perhaps because of the rise in interest rates and tightening of mortgage underwriting standards.

When we ran a "means test," the calculations showed that my clients had close to $2,000 per month in disposable income. The problem – in November, my clients’ gross income was just short of $2,000.

I suggested that we consider a "step" plan that provided for a lower payment during "lean" months and a higher payment during spring and summer, which are traditionally better for real estate agents. At this point, my clients were wary about agreeing to this because of their concern that they could be digging a deeper hole for themselves.

We also discussed taking the case to the judge, but I really have no basis to argue that my clients’ income will not match that of 2005. I suspect that in this case, my clients are spending money for products and services that they are not completely documenting. I do not suspect any wrongdoing, but I do think that $20 here and $25 there are adding up, leaving them with no money at the end of the month.

We decided to leave the plan at the $2,000 per month figure for now. In six months, if the income situation has not improved, we will amend the plan and go for a reduction based on real life numbers. I have no doubt that this strategy will result in a great deal of hardship for my clients, but I don’t have any other ideas.

My conclusion – Chapter 13 has become even more unfriendly to self-employed and commision sales debtors.

[tags] Chapter 13, bankruptcy and commissioned sales debtor, real estate agents and bankruptcy, discharge tax in Chapter 13 bankruptcy, means test [/tags]

Comparison Shopping in the Sub-Prime Mortgage Market

By Jonathan on December 12, 2006

The Credit Slips blog regularly posts interesting commentary about credit and bankruptcy and I recommend that any reader of this blog take a look at it. The December 11, 2006 post by Kathleen Engel and Patricia McCoy about the nature of the sub-prime lending marketing is an insightful read. Professors Engel and McCoy note that in the sub-prime market, consumers with poor credit must submit detailed financial information and an application fee before being approved for a loan. By contrast, borrowers with good credit can usually get a free "good faith estimate" over the phone or by email.

Further, the actual cost of the loan – the loan origination fees, costs built into the balance, etc. – are not fully tallied until the actual closing. Further, Engel & McCoy note that Truth in Lending Disclosures permit sub-prime lenders to advertise a rate, but do not bind the lenders to that rate.

I know from speaking to several mortgage brokers whom I know that sub-prime loans are time consuming and difficult to place. Since the broker’s commission is a function of the size of the loan, most brokers are not going to spend a lot of time fighting for the best rate. Professors Engle & McCoy argue that the Truth in Lending laws need reform to address this situation.

I typically see sub-prime loans in Chapter 13 cases when the debtors miss a payment or two and the lender files a Motion for Relief from Stay. Usually, it is next to impossible to obtain a readable payment history or to identify the add-on fees.

[tags] sub-prime mortgage loans, subprime mortgage, loan origination fees, motion for relief from stay [/tags]

What Prompts a Dischargeability Objection by a Credit Card Lender?

By Jonathan on December 11, 2006

First, I think you have a very insightful blog about bankruptcy issues. I refer your blog to the bankruptcyforum.com sight to all the guest and members there. I’m just curious on your opinion to my following Bk Trip. I was working 2 full time jobs, making about 65g’s a year, I filed Bk13 (was in a no asset, unsecured cc debt/loans (unsecured) for about 65-70gs) My last cash advances were May 06 (minimal one for $500) in April 06 (big one for $4000-6000). Brief outline from the last cash advances to date of filing:

April – cash advance of about 4-6gs’
May – cash advance of about $500
July – filed Bk 13 end of July
Aug – Ch13 341 Meeting
* Trustee objected to my “good-faith,” payback of $250 a month *
The Median Test proved I was not in presumption of abuse and I had negative -$60 disposable income, Schedule I and J proved I had $800
October – Objection to confirmation goes Easter District, state of Virginia Judge
* Judge did not want say yay or nea and wanted me to re-submit another plan, Judge mentioned I was not forced to work 2 jobs, I could quit one and convert to Ch13, or I could resubmit a new plan * It only made sense for me to quit one job than have to payback $800 bucks for the next 5 years *
Oct – I quit one job, converted to Ch7
Nov – Ch7 341 meeting
Now I’m just waiting to discharge (hopefully by January) last day for creditor objections Jan 8, 2007

At the time I was in Ch13, I didn’t hear of any objections from creditors or even a peep about my recent cash advances from April-May. (due to being a gambler) I thought it my Bk would be a big issue. Not a peep about that either. Now that I’ve converted to Ch7 and another 60 day to objection starts over. My concern is what are the chances of objection/adversary’s coming up from creditors. My thoughts are this, I haven’t paid any of them since June/July its been IF you count from MAY until now (DEC) about 6-7 months since my last cash advance (I think its like 180 days one should wait if they’ve had heavy spending on their credit cards – and since mine were cash advances due to gambling – I would think it would be a big issue!)

What are your thoughts?

Thanks, Mickey aka Catchmeifyoucan

Jonathan Ginsberg responds: Mickey, thanks for the kind words. To answer your question….my experience has been that most credit card lenders will not object to dischargeability if the total debt owed to that particular creditor is $15,000 or less. I suspect that the cost of retaining counsel and pursuing smaller claims is too high. I also think that the more time between your use of the cards, the better. Here, you have a fairly large cash advance in April, but you do have a good faith payment in May, then a Chapter 13. You did not say how large your total balances are to any particular lender.

Under the old law, debts that were not dischargeable in a 7 would be dischargeable in a 13. That has now changed but I have not seen much of a change by the credit card lenders. Here, because your loans were most likely coded as a Chapter 13, you may slip through the cracks. This is even more likely if your case was filed in a busy filing district.

If the bankruptcy specialist at the credit card company wakes up, he would see that his company does have leverage to push you into some sort of a payback settlement. However, if you have not heard anything by now, you may be under the radar.

[tags] recent credit card use and bankruptcy, dischargeability action, credit card advance, Section 523(a), Chapter 7 discharge [/tags]