Blog

Means Test Musings

By Jonathan on May 22, 2006

Over the past few weeks, I have received objections in two Chapter 7 cases from the U.S. Trustee having to do with the median income/means test Form 22A.

Under the new law, debtors must fit within these tests in order to qualify for Chapter 7. The first part of the test is called the “median income” test. Under this (simple) test, if your household income is below the average income for a similarly sized family in your State, then you qualify for Chapter 7. The average income figures are built into my bankruptcy preparation program, but if you want to see these figures, you can look at them on the U.S. Trustee’s web site.

If your income exceeds the average, you can still qualify for Chapter 7 if you pass the “means test.” This is where we compare your monthly income (generated from an averaging of your gross income over the past 6 months) to a pro-forma budget using IRS derived budget numbers.

If your real life expense numbers are higher than the means test numbers, you are most likely out of luck. The means test does contain a small window where a Bankruptcy Judge can find that a particular expense is “reasonable.” The problem, of course, is that the U.S. Trustee is taking a very conservative approach and most debtors do not have the money to pay for research and litigation.

Two issues have come up recently – be aware of these if you are a lawyer or a debtor planning to file:

1. Reasonableness of supporting a college aged child – the U.S. Trustee will object if you include food, housing and transportation expenses for a college aged child. According to the trustee, these expenses are not necessary.

2. Vehicle leases – the U.S. Trustee contends that leased vehicles are not secured debts therefore the lease cost may not be an allowable expense in the pro forma budget. It seems to me that both leases and purchases are “ownership costs” such that it would be absurd to disallow lease payments, but it appears that is exactly what the trustee is doing.

I have a meeting scheduled for later this week to discuss these issues with an attorney in the trustee’s office – perhaps I will get some clarification.

Credit Card Company Loses a Discharge Action

By Jonathan on May 15, 2006

My friend, attorney Howard Rothbloom, recently emailed me about his victory over MBNA in a discharge complaint filed against his client. In the MBNA vs. Horrocks case, the debtor had charged over $2,400 on his MBNA credit card less than one month prior to filing Chapter 7 bankruptcy.

MBNA’s lawyers filed an Adversary Complaint against Mr. Horrocks alleging (1) that he committed “actual fraud” pursuant to Bankruptcy Code Section 523(a)(2) and (2) that these charges were made within the 60 day “presumption of non-dischargeability period” set out at Section 523(a)(2)(C). Howard smartly noted, however, that the Complaint filed by MBNA was lacking in detail. It contained a number of allegations, but offered no proof.

Howard challenged MBNA by filing discovery materials including requests for admissions, which MBNA failed to answer. When a party fails to answer requests for admissions, those admissions are deemed “admitted.” Further, Howard cited a Northern District of Georiga case which held that “actual fraud” means more than using the credit card. The creditor must present evidence showing that the debtor had actual, subjective fraudulent intent. It appears that MBNA and its counsel felt that they could win simply on the fact that the debtor used his credit card shortly before filing. And, more likely than not, if they had made the effort, they very well might have won. But Judge Bonapfel sent a message to MBNA and other creditors – creditors need to produce evidence to prove their cases. Congratulations to Howard for holding the line, especially in light of the many anti-debtor provisions of the new law.

UPDATE: Attorney Susan Gantt recently emailed to update me that Judge Bonapfel has issued his order awarding debtor’s counsel Howard Rothbloom over $3,000 in attorney’s fees pursuant to Bankruptcy Rule 9011. Because creditor’s counsel failed to respond to the debtor’s discovery motions or his motion for summary judgment, the Bankruptcy Code requires that the Court impose sanctions against the creditor (MBNA) and its local counsel.

Post Bankruptcy Credit Rebuilding Meeting With Jonathan

By Jonathan on May 12, 2006

This morning, I met with one of my former bankruptcy clients who wanted to discuss credit restoration. I thought it might be relevant to this blog to discuss what we found on her credit report and what I advised her to do.

My client brought me a copy of her Equifax report for review. The credit report showed that most of the debts included in her Chapter 7 had the indicia “included in bankruptcy” with a zero balance and no reference to any late pays. So, it appears that in most cases, bankruptcy has the effect of wiping out credit report references to outstanding debt as well as references to late pays. This is important because late pays are a major cause of credit damage. I was actually somewhat surprised to see that the late pays were deleted.

There was one account that we had included in the Chapter 7 that was still showing as an outstanding debt. This is obviously a mistake and I drafted a “challenge letter” disputing this account balance and the associated late pay.

There was one account that had the “included in bankruptcy” indicia but had the late pay information. I drafted a “challenge letter” disputing the late pays.

There were three student loans that had late pay references. There was one 60 day late and two 30 day late pays. I encouraged my client to make every effort to tender all student loan payments timely. I also drafted a “challenge letter” disputing the late pays.

My client wanted to know what she could do to re-establish credit. I suggested that she look into getting a gasoline credit card or a department store card. Unsecured credit that is properly managed is the quickest way to improve one’s credit score.

Finally, I noted to my client that we only had the Equifax report on hand and that she needed to request credit reports from Experian and Trans Union.

My client advised me that she and her husband hoped to be able to qualify for a house within the next year. I suggested that she contact a mortgage broker for more information about rates and credit scores in the current market.

Interestingly, my client advised me that her husband, who did not file bankruptcy, but participated in a payment plan with his creditors, actually had a lower credit score than she (the bankruptcy client) had. Interesting.

The bottom line is that we found one definite error and several areas ripe for challenge. I hope and expect that we can increase her credit score by 100 points within the next few months.

I will update this blog entry as we see what effect the challenge letters and my advice will have.

–Jonathan

What is the difference between a preference and a fraudulent transfer?

By Jonathan on May 2, 2006

I see a possible trap for the unwary in one of the October 17, 2005 changes to the Bankruptcy Code. I do not have a firm answer to this and I welcome any suggestions or thoughts.

Bankruptcy Code Section 547 empowers the trustee to avoid a transfer (preference) between the debtor and an insider on account of an antecedant (pre-existing) debt if the payment was for a debt incurred within one year of the bankruptcy filing.

Bankruptcy Code Section 548 empowers the trustee to avoid a “fraudulent” transfer to any party within two (2) years of the bankruptcy filing – fraudulent being defined in the Code Section as essentially a transfer made with actual intent to hinder a creditor or for less than full value and made when the debtor was insolvent. Prior to October 17, the lookback period in this section was one year, not two years.

Finally, Bankruptcy Code Section 727 authorizes the Court to deny a discharge to a debtor who, with the intent of defrauding creditors or the estate, has transferred property within one year of filing.

I have a case where my potential client had borrowed assets from an insider to use as security for a bank loan. He never took out the bank loan and therefore never made use of the loan of the assets. When it became obvious that he would not need the bank loan, he then transferred that property back to the insider a year and two months ago.

The insider had requested the return of the assets once it became clear that my client would not need them. The transfer was made when the debtor was insolvent.

Does it make a difference that the debtor’s transfer was in the form of a debt repayment (vs. an outright transfer)? Is there a different standard of review if a “preferential” transfer is outside the preference period but within the fraudulent transfer period? Would this return of assets be considered “ordinary course of business.” Should I list it on Question 10 of the Statement of Financial Affairs?

Thoughts?

Bankruptcy process to become even more burdensome to low income debtors?

By Jonathan on April 22, 2006

NACBA (National Association of Consumer Bankruptcy Attorneys) recently distributed a letter from Senators Chuck Grassley and Jeff Sessions to Justice John Roberts, the Chief Justice of the United States. The Chief Justice is the head of the Committee on Practice and Procedure of the Judicial Conference. This Committee is the organization that drafts and revises the official bankruptcy forms that must be used in the nation’s bankruptcy courts.

In this letter, Senators Grassley and Sessions express dismay that the forms created after the enactment of the new law do not require low income debtors to complete extensive financial disclosures.

Currently, debtors whose incomes fall below the average income for their State of residence do not need to fill out around 10 pages of forms – presumably if their income is below the State average, they are not abusing the process.

As a practicing lawyer who sees struggling debtors on a regular basis, I find this mean spirited letter by Senators Grassley and Sessions disturbing. In my view, the only impact that these proposed rule changes would have would be to drive up the cost of bankruptcy. We have already seen the filing fee jump from $194 to $299 in Chapter 7. Attorneys fees charged by most debtor’s lawyers have gone up dramatically because the new law imposes significant and burdensome filing requirements. And the credit counseling requirements of the new law require cash strapped debtors to spend at least an extra $100 to get their two certificates.

Fifteen years ago, I was charging $600 total for a Chapter 7, including the filing fee. Now, if you want a decent lawyer, you are looking at close to $2,000 for the same service.

I wonder if Senators Grassley or Sessions have ever spent a day with a debtor’s lawyer talking to the distraught families who have made the difficult decision to file for bankruptcy. Or have they spent a day in the 341 hearing room listening to debtor after debtor testify about financial hardship brought about by job loss, divorce or illness. Or have they watched a Motion for Relief calendar where bankruptcy judges have had to tell mothers and fathers that they will be losing their homes.

Every responsible lawyer and citizen should want honesty and integrity in the bankruptcy process. Study after study has shown that most bankruptcy debtors are not abusing the system. It strikes me as the epitome of hypocrisy that a Congress who squanders billions of our tax dollars would take such an interest in solving a problem that does not exist when its own house is not clean.

Interestingly, the Citizens Against Government Waste awarded Senator Grassley its Porker of the Month in May, 2005 for adding $11 billion to a transportation bill.

Using bankruptcy to re-negotiate secured debt balances

By Jonathan on April 5, 2006

Bankruptcy debtors often unaware that they frequently have an excellent opportunity to reduce balances and change payment terms on secured loan accounts.

This is especially true for furniture accounts, electronics, jewelry and sometimes automobiles.

If you think about it, it makes sense. What is a furniture retailer going to do with a room full of used furniture? Delivery, storage and re-sale costs would likely exceed any re-sale proceeds.

Here is an example of a deal I recently negotiated for one of my bankruptcy clients. About two years ago, he had purchased a computer system from CompUSA, financed by HRS, USA. The account was eventually purchased by a debt buyer, eCast Settlement. At the time we filed his Chapter 7 case the outstanding balance was $3,518.28.

At the first meeting of creditors, a paralegal from the law firm that was handling this account showed up and tried to encourage my client to reaffirm the account at the full balance. I told her that we could not make a decision now and that I wanted to speak to the supervising lawyer in her office.

I subsequently tried to call the lawyer, but ended up with a senior paralegal. After a bit of back and forth, we agreed to settle the account for $950. Thus, my client saved over $2,500 and kept his computer equipment.

I engage in this type of negotiation all the time – and in many cases, the savings exceed my attorney’s fees. What you should take from this – although you may not realize it, you have leverage, sometimes significant leverage, when you file bankruptcy.

Here is a video that discusses a more recent debt negotiation: