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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Bankruptcy Practice
Written by Craig D. Robins, Esq.Some Debtors Who Have Primarily Business Debts Can Avoid Having to Do the Bankruptcy Means Test
The means test, which turned six-years old last month, was intended by Congress to create an objective standard for permitting only those consumers who are not “abusing” the privileges of bankruptcy to get Chapter 7 relief.
In general terms, if a consumer debtor has an income that is relatively high in relation to his or her expenses, the consumer will not pass the means test and will not be eligible to file Chapter 7 bankruptcy.
The Business Debt Exception to the Means Test
The means test only applies to individuals whose debts are “primarily” “consumer debts,” as opposed to business debts, as set forth in Bankruptcy Code §707(b).
A debtor can check a box on the first page of the means test to declare that his or her debts are primarily non-consumer debts, and then avoid the rest of the means test, also known as Form B22A. Click here to take a look at the actual Means Test form.
Congress could have told us what exactly “primarily” means, but they didn’t bother to, so we have to analyze this word. Webster’s Dictionary defines “primarily” as “for the most part.” Most courts have focused on this definition to mean “more than half.”
Thus, if more than 50% of the debtor’s debts are non-consumer debts, the debtor is automatically eligible for filing a Chapter 7 case without having to bother with the means test. There is no presumption of abuse for such cases.
Determining What “Consumer Debts” Are in Bankruptcy Cases
So what exactly is a consumer debt? The Bankruptcy Code defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.”
In analyzing whether a debt is a consumer debt or not, bankruptcy courts have developed a “profit motive” test: if the debt was incurred with an eye towards making a profit, then the debt should be classified as a business debt.
Thus, the mortgage on an individual’s home would clearly be a consumer debt, and the mortgage on a vacation home would also be a consumer debt. However, if that vacation home was also purchased as an investment and rented out, then the mortgage would qualify as a business debt.
One bankruptcy court permitted a debtor to deem one of the three mortgages on his home to be a non-consumer debt because the proceeds were used to fund a business venture.
One bankruptcy court permitted a debtor to deem one of the three mortgages on his home to be a non-consumer debt because the proceeds were used to fund a business venture.
Most credit card debts are obviously consumer debts. However, if an individual used a credit card for business purposes, then it could be reasonably argued that the resulting liability is a business debt.
Other examples of business debts include personal guaranties on business obligations, investment losses, and motor vehicle accident liabilities. Domestic support obligations such as child support and maintenance are generally considered consumer debts.
Some Varieties of Debt Are Neither a Business Debt Nor a Consumer Debt
According to conflicting bankruptcy court decisions, some debts are in limbo. For example, although some courts have held that student loans are not consumer debts, the Second Circuit has held that they are.
Any liability as a responsible person for taxes on a business is clearly business debt. However, there is no clear-cut answer in this jurisdiction as to whether personal income tax obligations are consumer debts or not. Courts outside of New York and the Second Circuit have reached different conclusions on income tax debt.
In one case in the Sixth Circuit, the court rejected the application of the profit motive test, concluding that income taxes can be distinguished from consumer debts for several reasons. Tax debts are not incurred like consumer debts as they are not incurred voluntarily.
Tax debt is assessed for the benefit of the general public whereas consumer debt is incurred for personal and household purposes. Finally, tax debt arises from income and earning money whereas consumer debt results from consumption and spending money. In re Westberry, 215 F.3d 589 (6th Cir. 2000).
Most of the debtors that I have represented in my Long Island bankruptcy practice who were able to make a means test business debt declaration were victims of a failed business who owed substantial sums — either directly or through personal guaranties — to various trade creditors, taxing authorities or business partners.
Most of the debtors that I have represented in my Long Island bankruptcy practice who were able to make a means test business debt declaration were victims of a failed business who owed substantial sums — either directly or through personal guaranties — to various trade creditors, taxing authorities or business partners.
Most individuals with a failed mom and pop business will not be able to take this shortcut as their mortgage debt alone will likely exceed their business debt.
The Business Debt Exception to the Means Test Has Limitations
Just because a debtor can by-pass the means test does not mean that a debtor can use it as a loophole to escape other good faith requirements.
In a Michigan decision from earlier this year, the bankruptcy court addressed a situation involving husband and wife debtors whose debts were genuinely primarily business debts. They had over six million dollars of unsecured debts from failed real estate investments.
However, both debtors were doctors whose budget showed that they were living on $42,000 of monthly expenses – what the court described as a very lavish and extravagant lifestyle. They each drove a Mercedes Benz and had a BMW in the garage.
The court commented that even though the debtors did not fail the means test, they nevertheless lacked good faith because they could have easily adjusted their budget while still maintaining a nice lifestyle, and paid their creditors a significant dividend through a Chapter 11 plan. In re Rahim and Abdulhussain, No.l 10-57557 (Bankr.E.D.Mich 12/16/10).
Practical Tips for Bankruptcy Attorneys to Help Their Clients
If the characterization of a particular debt that is not clear-cut in this jurisdiction, such as tax debt, enables your client to pass the means test, how should you tackle the situation?
That really depends on how aggressive you want to be. My recommendation is to take an aggressive position as long as it is reasonable and you have a good basis for taking your position.
That really depends on how aggressive you want to be. My recommendation is to take an aggressive position as long as it is reasonable and you have a good basis for taking your position.
You should be prepared for presenting your arguments to the U.S. Trustee as they have the initial burden of proof to support a dismissal motion under Bankruptcy Code § 707(b).
You would also want to review the matter with your client before filing the petition and prepare a letter that the client signs, acknowledging the aggressive position and the potential risk of defending a dreaded Bankruptcy Code §707(b) motion that the U.S. Trustee brings. Defending Bankruptcy Code §707(b) motions will certainly be a topic for a future column.
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About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the November 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.
With relatively little notice, bankruptcy court filing fees have increased.
The Judicial Conference of the United States Bankruptcy Court voted to increase various bankruptcy court filing fees, including the fees to file bankruptcy petitions.
For most of us, the increase primarily affects the fees consumers pay to file their bankruptcy cases. They are increasing by $7.00.
Here are the New Filing Fees, Which Go Into Effect November 1, 2011:
Chapter 7 bankruptcy cases: The filing fee is increasing from $299 to $306.
Chapter 7 bankruptcy cases: The filing fee is increasing from $299 to $306.
Chapter 13 bankruptcy cases: The filing fee is increasing from $274 to $281.
Various Other Bankruptcy Filing Fees Are Increasing as Well:
Amending Schedules: Increase from $26 to $30
Filing Adversary Proceeding: Increase from $250 to $293
Filing Motion for Relief from Stay: Increase from $150 to $176
There are other miscellaneous fee increases as well: Full Schedule of Bankruptcy Court Fees and Charges Effective November 1, 2011.
When did the Bankruptcy Filing Fees Change Last?
In my Bankruptcy Update back in February 2006, I wrote that the filing fees were increasing again.
In February 1, 2006, the House of Representatives passed the Budget Reconciliation Act which included fee increases for various court filings, including bankruptcy filings. The Senate previously had approved the measure.
That fee increase, which went into affect on April 6, 2006, was strictly a revenue-raising measure.
The bill increased the Chapter 7 filing fee by $25 to $299, and increases the Chapter 13 filing fee by $85 to $274. The apparent purpose of the fee increases at that time was to balance the budget though payments from those who could least afford it.
Prior to that, on October 17, 2005, when the bankruptcy laws were reformed by BAPCPA, the filing fees increased for Chapter 7 cases from $209 to $274, and for Chapter 13 cases from $194 to $189.
Written by Craig D. Robins, Esq.Court Finds Mortgagee’s Appraiser Lacked Credibility in Chapter 13 Mortgage Cram-Down Proceeding
Over the past several years, the judges in the Central Islip Bankruptcy Court here in the Eastern District of New York have done an outstanding job issuing well-reasoned decisions covering a variety of issues.
These opinions are great practice tools and I truly look forward to reading new ones as soon as they come out. These decisions often explain a judge’s thinking, which can give clues as to how the judge may decide other issues down the road. They may explain a complex issue of law.
These opinions are great practice tools and I truly look forward to reading new ones as soon as they come out. These decisions often explain a judge’s thinking, which can give clues as to how the judge may decide other issues down the road. They may explain a complex issue of law.
They can also provide insight on some of the recent changes to the law and how counsel should interpret these new provisions. Sometimes the decisions are merely entertaining and an interesting read.
The decisions are easily accessible on the court’s website for free. I’ve found so many of the Court’s recent decisions important and interesting that I’ve devoted many of my columns to discussing them. This month’s column is no exception.
Last month, Judge Robert E. Grossman issued a fascinating decision which basically pointed out many things a real estate appraiser should NOT do. Joseph Lepage v. Bank of America, no. 8-10-08287-reg, (Bankr. E.D.N.Y. May 18, 2011).
Appraisals in Cram-Downs
Lepage was a Chapter 13 bankruptcy case which involved a routine adversary proceeding in which the debtor sought to cram down the second mortgage.
A Cram-down, also known as a “strip-off,” is when a debtor strips off and avoids the secured status of the second mortgage because there is insufficient value in the property to secure any part of it.
Debtors have the ability to cram down second mortgages in Chapter 13 bankruptcy cases pursuant to Bankruptcy Code § 1322(b)(2). One of our three Central Islip judges, Judge Dorothy T. Eisenberg, also permits Chapter 7 debtors to do this as well, something I’ve addressed in a prior column.
A debtor must bring a cram-down application by adversary proceeding, which is essentially a federal lawsuit brought within the bankruptcy case.
In order to cram down a second mortgage, the house must be underwater to the extent that there is no equity whatsoever covering the second mortgage. In other words, the value of the house must be less than the balance due on the first mortgage.
The debtor demonstrates this by supplying the Court with an appraisal. As such, the only defense that the second mortgagee can generally assert is that the debtor’s appraisal is inaccurate, and that the house is actually worth at least a dollar more than the balance due on the first mortgage.
The appraisal is therefore very important and, as you will see, using a highly experienced appraiser, at least in the event there is a trial, can be critical.
The Recent Lepage Case – The Only Issue Was Valuing the Property for Purposes of the Cram-Down
When a mortgagee challenges the appraisal, which is relatively rare, then the Bankruptcy Court ultimately schedules an evidentiary hearing in which the Court decides what the value of the property is. That was the sole issue in the Lepage case.
In fact, the parties agreed that the only issue to be litigated was the value of the house. It was agreed that if the Court determined that the house was worth less then the amount due on the first mortgage, then the debtor would prevail on the cram-down proceeding.
In Lepage, the debtor asserted that the house, a 900-square foot ranch located in Brentwood, was worth $175,000, which was less than the balance due on the first mortgage.
The second mortgagee, however, argued the house was worth much more – $205,000. The balance due on the first mortgage was $181,000.
Thus, as long as the Court determined that the property was worth less than that amount, the debtor would be successful with the cram-down application.
The debtor used an appraiser who has been an active appraiser for 31 years, and has been licensed for the past 15 years. There was evidence that he had testified extensively in Federal and state courts. He even held a law degree.
The mortgagee’s appraiser, on the other hand, had only been appraising for eight years, and had only been licensed for four years. He testified that he had never testified as an expert in any court.
Both appraisers testified that they employed the “direct sales comparison” method of valuation in determining the value of the property.
As the debtor’s appraiser explained, this method involves inspecting the property and reviewing Multiple Listing Service reports for sales comparisons. The appraiser then takes into consideration a number of factors and adjusts the comparable sales to the property.
The court stated that this approach constitutes the best evidence of market value.
The debtor’s appraiser also considered a downward “time adjustment” of two percent per month to account for the decline in sales prices as the Long Island residential real estate market has been in decline since 2007, which was important as Brentwood has experienced a steeper than average decline in home prices.
The debtor’s appraiser also considered a downward “time adjustment” of two percent per month to account for the decline in sales prices as the Long Island residential real estate market has been in decline since 2007, which was important as Brentwood has experienced a steeper than average decline in home prices.
He estimated this decline to be 25% per year. In addition, he stated that Brentwood contains many properties that have been foreclosed, and are now “REO”– real estate owned by the bank. Since banks typically sell REO properties for less than market value, this has the effect of depressing all sales of homes in the area.
Appraiser Made Serious Mistakes in Bankruptcy Court Proceeding
Appraiser Made Serious Mistakes in Bankruptcy Court Proceeding
During cross-examination, debtor’s counsel was able to demonstrate that the approach taken by the mortgagee’s appraiser contained three significant and ultimately fatal deficiencies.
First deficiency: The mortgagee’s appraisal contained valuations based on the fact that the house did not have a garage. However, during cross-examination, the mortgagee’s appraiser was caught admitting that he did not know whether the premises had a garage or not – a significant factor that affects valuation. In fact, the house did have one. That certainly shot down this appraiser’s credibility.
Second deficiency: The mortgagee’s appraiser used some comparable properties that were listings and not sales. A listing is not an accurate indicator of a property’s value and usually has no place in an appraisal.
Third deficiency: The debtor’s appraiser took into consideration the effect of REOs in the neighborhood, whereas the mortgagee’s appraiser neglected to do so. The Court pointed out that this constraint made his report less accurate.
Judge Grossman adopted the debtor’s appraiser’s valuation of the property in its entirety, commenting that his methodology was consistent with industry standards and his testimony was credible.
In stark contrast, the Judge described the mortgagee’s appraiser’s methodology as flawed, and his testimony as less credible. Indeed, the mortgagee’s appraiser even admitted that his omission of REO sales in his calculations rendered his valuation less accurate.
In citing caselaw, Judge Grossman pointed out that valuing assets is not an exact science and that the Court must look to the accuracy, credibility and methodology employed by the appraisers. Courts are not bound by appraisals submitted by the parties and may form their own opinions as to the value.
The burden is on the debtor as the moving party to establish that “there is not even one dollar of value” in the property to support the lien which the debtor seeks to avoid. Once the debtor has met this burden, it is up to the challenging party to submit evidence to overcome the debtor’s valuation.
The burden is on the debtor as the moving party to establish that “there is not even one dollar of value” in the property to support the lien which the debtor seeks to avoid. Once the debtor has met this burden, it is up to the challenging party to submit evidence to overcome the debtor’s valuation.
Accordingly, the debtor prevailed and was successful in cramming down the second mortgage to his house. Kudos go to bankruptcy attorney Alan C. Stein of Plainview, who represented the debtor, and his appraiser, John Breslin, of Huntington.
Practice Pointers for Bringing Mortgage Cram-Down Proceedings in Bankruptcy Cases
Most cram-down applications are unopposed. However, if the mortgagee contests your valuation, hire a highly experienced appraiser who will testify in court.
Also, keep in mind that if you have a hearing on valuation, you will either be totally successful or totally unsuccessful – all depending on how the court weighs the competing valuations. Therefore, it may be wise to play it safe and negotiate a settlement with the mortgagee, for example, by agreeing to reduce the balance on the mortgage substantially.
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About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the June 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.EDNY Bankruptcy Courts Are Reluctant to Permit Untimely Reaffirmations After Bankruptcy Cases Are Closed
(This article originally appeared in the April 2011 Edition of the Suffolk Lawyer. Since readers of this blog are both consumers as well as fellow attorneys, I will provide some basic info about reaffirmation agreements and then discuss several recent decisions).
Here in the Eastern District of New York, we’ve seen a year’s worth of caselaw in the past four months about retaining vehicles after bankruptcy through either reaffirmation or assumption of lease agreements.
Yet all of them had to do with one issue – all involved an application made by the debtor’s attorney to reopen a consumer case to reaffirm a vehicle loan (or assume a vehicle lease) which had not been done on a timely basis while the case was open.
In this month’s column, I will review this year’s caselaw in our district concerning reaffirmation agreements and briefly touch upon some basics about reaffirmation agreements as they apply to motor vehicles.
What is a Reaffirmation Agreement?
Filing bankruptcy has the effect of discharging most debts including obligations on car loans and leases. In a reaffirmation agreement, the debtor voluntarily agrees to remain obligated on a debt that would have otherwise been discharged. In a lease assumption agreement, the debtor agrees to be obligated on the lease.
Under the 2005 Bankruptcy Amendment Act (BAPCPA), car financing companies, after some aggressive lobbying, obtained extra protections that they had not previously enjoyed.
Prior to 2005, debtors enjoyed a “ride-through” in which they could ride through the bankruptcy and keep their vehicles without reaffirming them as long as they stayed current on their vehicle loan payments.
However, under BAPCPA, if a debtor does not redeem or reaffirm a car loan pursuant to Bankruptcy Code § 524, the lender can eventually repossess the vehicle.
That’s because almost all car loan agreements contain boilerplate language that deem bankruptcy as a default under state law, even if the car owner is current with payments. When there is a default, a lender, under state law, can repossess.
Should a Debtor Reaffirm a Car Loan?
The general answer is: only when absolutely necessary to enable the client to keep the vehicle. When BAPCPA went into effect, we bankruptcy attorneys routinely advised our clients to reaffirm all car loans.
After all, we did not want our clients’ cars to be repossessed. However, as the years went by, we learned that most car lenders informally permitted a ride-through. In other words, they permitted debtors to keep their secured vehicles, even if the debtors did not enter into a reaffirmation agreement.
However, a select few, most notably and notoriously Ford Motor Credit, adopted unusually harsh policies in which they actively threatened to repossess vehicles that debtors failed to reaffirm or assume, and sometimes actually went so far as to repossess those vehicles thereafter.
However, a select few, most notably and notoriously Ford Motor Credit, adopted unusually harsh policies in which they actively threatened to repossess vehicles that debtors failed to reaffirm or assume, and sometimes actually went so far as to repossess those vehicles thereafter.
The lesson learned was always reaffirm or assume a vehicle financed by Ford Motor Credit.
Statutory Obligation for Reaffirming Car Loan
The Bankruptcy Code provisions for reaffirming a debt are set forth in § 521(a)(2).
This provision requires the debtor to indicate on the Statement of Intention whether he intends to retain or surrender the vehicle, and if the intent is to retain, the debtor must state whether he will redeem (which means to immediately pay the full loan balance, up to the value of the car, in a lump sum payment) or reaffirm pursuant to § 524.
In addition, Bankruptcy Code Rule 4008(a) basically requires the debtor to perform his stated intention within 60 days after the date first set for the meeting of creditors. In other words, a debtor has approximately 90 days from the date of the bankruptcy filing to file a reaffirmation agreement with the court.
Here’s the kicker: the Code provides under § 524 (c) that the stay is automatically lifted if these requirements are not timely met, meaning that the car loan lender is then free to exercise its rights to repossess the collateral if there is a default under state law.
Judge Grossman Refuses to Permit Late-Filed Reaffirmation Agreement
In the case of In re Barry R. Clark, no. 8-10-73746-reg, 2010 WL 5348721, (Bankr. E.D.N.Y. Dec. 21, 2010), the debtor and his attorney neglected to reaffirm the car loan with lender Ford Motor Credit.
When Ford actually repossessed the vehicle after the bankruptcy case was closed, the debtor’s attorney essentially said to them: “Wait. I will re-open the case, seek to vacate the discharge as it applies to Ford, and file a reaffirmation agreement.”
Debtor’s counsel, who also happens to be a Chapter 7 trustee in our jurisdiction, then brought a motion to do just that, and it was unopposed. However, Judge Robert E. Grossman refused to grant it, saying that there is no basis in the Code that permits him to do so.
Judge Grossman explained that both BAPCPA and caselaw mandate a process for reaffirming debts that requires strict compliance by the debtor. He stated that we have this process to protect debtors from the pressure that could otherwise be exerted by overly aggressive creditors to force debtors to pay discharged debts.
Debtors obtain very powerful protections through bankruptcy such as being able to discharge debts, and they shouldn’t be able to jeopardize those protections at a time when they are most vulnerable.
Judge Grossman concluded that permitting a reaffirmation after the case is closed would undermine the integrity of the bankruptcy process – even though it would mean, as in this case, that debtors could lose their vehicles.
So despite arguments by the debtor’s attorney that this case involved “special circumstances” because the debtors needed a car to get to work, and couldn’t earn an income without one, Judge Grossman was insistent that he could not grant the requested relief.
The decision also pointed out that both the statute and case law make it clear that a reaffirmation agreement will be unenforceable if it is not made before the granting of the discharge.
Congress made it clear that once a debt is discharged, the debtor should not be pressured in any way to repay it.
However, upon carefully reading the decision, it appears that if the debtor had entered the reaffirmation agreement prior to the date of discharge, even if it was not filed as required, then the debtor might have been successful with the application.
Second Decision Distinguishes Car Leases
Just one month after In re Clark, Judge Grossman decided a similar case involving a leased car, as opposed to a car with a loan. In re Linda J. Mortensen, no. 8-10-75234-reg,( Bankr. E.D.N.Y. Jan. 19, 2011).
Here, Monster Gorilla Ford Motor Credit was a lessor and threatened to repo the vehicle since the debtor did not assume the lease.
Judge Grossman permitted the debtor to re-open the case to enter into a lease assumption agreement.
He stated that reaffirmation of a car loan pursuant to § 524(c) is not equivalent to assumption of a lease for personal property owned by a creditor under § 365(p), and each undertaking imposes different steps and confers different rights upon the parties to the respective agreements.
The decision did not indicate whether the assumption agreement had been executed before or after the date of discharge.
Unlike In re Clark, the entry of the debtor’s discharge is not an impediment to the debtor’s assumption of the lease pursuant to § 365(p) which is the section that deals with assumptions of lease.
Assumptions of lease are not subject to the discharge or the post-discharge injunction granted under § 524.
Judge Trust Reaches Same Conclusion
Three months after Judge Grossman issued the In re Clark decision, Judge Alan S. Trust reached the same holding in a case that was very similar in fact. In re Polyner Mardy, no. 8-10-73819-ast, (Bankr. E.D.N.Y. March 15, 2011). By now you can guess who the lender was: Ford Motor Credit, of course.
In that case, the debtor and his attorney also failed to reaffirm a vehicle loan, and the court entertained an unopposed application to reopen the case to extend the time to file the reaffirmation agreement.
Sometimes when one judge reaches one conclusion on a legal issue, another judge in the same court can reach a different conclusion. However, that was not the case here.
Judge Trust held that the court lacked authority to reopen a closed chapter 7 case in which a debtor has received a discharge to allow the late filing of a reaffirmation agreement.
So even though the debtor used the vehicle as a taxi, which was his main source of income, the rule of law prevailed over equity. “Because these reaffirmation agreements are contrary to the stated goal of a debtor receiving a fresh start, they are subject to intense judicial scrutiny and must comply with all statutory requirements.“
The debtor’s attorney, who is a highly-experienced Suffolk County bankruptcy lawyer, didn’t help things much as he failed to show up for the hearing on his own motion, and consequently the court marked the application off the calendar.
The attorney re-filed the motion a month later. Inexplicably, he failed to show for the second hearing, although his clients showed up without him!
In addition, the Judge criticized the attorney for submitting a sloppy motion, stating that it was “devoid of factual content and legal authority.”
The attorney did not include a copy of the proposed reaffirmation agreement, so the court was unable to ascertain if it had been executed prior to discharge.
Judge Trust issued a separate order directing the debtor’s attorney to disgorge any fees that he charged for bringing the motions. Perhaps more importantly, speaking in terms of future credibility, this attorney may have devalued his currency with the court.
Judge Trust further clarified that not only must the reaffirmation agreement be executed prior to discharge, but any hearing to approve the agreement shall be concluded prior to discharge as well, according to § 524(m)(1).
“The timing of entering into the agreement and court approval thereof, therefore, are critical. Further, any delay in seeking approval once discharge is granted is fatal, and prevents any enforcement of the agreement.”
Thus, it appears that Judge Trust may address such situations in a stricter sense than Judge Grossman, whose decision left the door open for cases in which the non-filed agreement had been signed before discharge.
Practical Tips
Ascertain early on if you need to reaffirm a vehicle loan or assume a lease. If so, calender the deadlines which would be 60 days from date of the meeting of creditors. Then, make sure the creditor forwards you the proposed agreement. Those lenders that insist on reaffirmation or assumption agreements will certainly send you one.
Do not reaffirm a vehicle if the lender permits a ride-through. Doing so will not bring any benefit to your client unless the lender is willing to modify the terms of the loan by reducing the interest rate, principal balance, or monthly payment.
If you definitely need to reaffirm a car loan and need more time to file it, bring an application to extend the time pursuant to §521(a)(2)(B).
If you entered into a reaffirmation agreement and neglected to file it prior to discharge, you might be successful in bringing an application to reopen, to file it late, but only if the agreement was truly signed prior to the date of discharge, and probably only if the Judge is not Judge Trust.
If you need to file a lease assumption agreement late, you may be successful, based on the In re Mortensen decision. Also note that lack of opposition to a motion does not guarantee success. Finally, if you bring any motion, provide the statutory or caselaw authority for doing so, and definitely show up for your hearing.
Written by Craig D. Robins, Esq.Losing money in a Ponzi Scheme is bad enough. Being forced to file for bankruptcy relief because of these losses is even worse. But how about getting your bankruptcy discharge, and then being sued by the bankruptcy trustee overseeing the failed Ponzi business?
That’s exactly what happened to one of our clients last month.
Agape World, Inc. Lands in Bankruptcy Because of Ponzi Fraud
In February 2009, several creditors forced Agape World into an involuntary Chapter 7 bankruptcy in the Central Islip Bankruptcy Court, here on Long Island in the Eastern District of New York.
I previously wrote that Ken Silverman was Appointed Chapter 7 Trustee in Agape World Case . Around that time, it was discovered that Agape president Nicholas Cosmo perpetrated a Ponzi scheme involving several hundred million dollars.
Many Long Island consumers lost their life savings after falling victim to his scheme. As a result, many of them filed bankruptcy cases themselves.
We recently represented one of them and filed his Chapter 7 bankruptcy petition last year. The unfortunate debtor lost hundreds of thousands of dollars. Our client’s bankruptcy case itself was unremarkable and was routinely processed and closed as a no-asset case. The client got his discharge last month.
Out of the blue, Ken Silverman, the Agape World trustee, brought an adversary proceeding in the Agape World bankruptcy case against our client. He alleged that our client had received some distributions from Agape shortly before Agape was put into an involuntary bankruptcy, and that these payments now had to be returned to the Agape bankruptcy estate under several different legal theories.
We had not even scheduled Agape as a creditor in our client’s bankruptcy as we had no idea that there was any potential liability to them.
Trustee Recognizes Bankruptcy Discharge
In response to the adversary proceeding, we contacted an attorney in the trustee’s office and explained the circumstances of our client’s bankruptcy filing. It appeared that the trustee was totally unaware of our client’s prior bankruptcy as we had not included Agape or its trustee as a potential creditor.
We were concerned that the trustee would nevertheless seek to go forward with the adversary proceeding because the debtor had not listed Agape in the schedule of creditors.
However, we advised the trustee that failure to schedule a creditor in a no-asset Chapter 7 case does not, in and by itself, prevent the debtor from discharging that debt. I previously wrote about Inadvertently-Omitted Creditors in Chapter 7 Bankruptcy Cases.
Much to the trustee’s credit, he acknowledged that any possible liability of our client to Agape was discharged by virtue of the prior bankruptcy, and within 24 hours of advising his office of our client’s bankruptcy discharge, he withdrew the adversary proceeding.
Written by Craig D. Robins, Esq.
How to Use the New Open-Ended Federal Exemption
Last month I wrote about some bombshell news for New York bankruptcy debtors: outgoing-Governor Paterson unexpectedly signed legislation greatly increasing the New York state law exemptions, which are the statutes debtors can use to protect assets while seeking bankruptcy relief. The new law became effective on January 22, 2011.
See the January 2011 Suffolk Lawyer article — Bankruptcy Exemptions for New York Suddenly Increased for 2011 .
Not only does the new law increase existing exemption amounts for various assets, but it also permits debtors to use the federal exemptions – something that New York debtors (and their attorneys) never had to consider in the past.
It is therefore exciting that we will now be able to protect our consumer bankruptcy clients with a set of exemption statutes that open the door to all sorts of new possibilities. The most intriguing federal exemption is the wildcard exemption. It’s as if we’re playing poker and we’ve been dealt a new “wild” card that will enable us to win.
The wildcard exemption should permit most Long Island debtors to keep all of their assets in a typical Chapter 7 case. Previously, assets such as cars, bank accounts, personal injury causes of action, and tax refunds were at times difficult to fully protect for some clients.
First, a little about choosing the exemption scheme. A debtor can choose either the federal exemptions or the state exemptions, whichever is more favorable, but a debtor cannot use a combination of the two. If a married couple files a joint case, both spouses must use the same exemption scheme.
Next, here’s a very general outline of some of the most common federal exemptions that each debtor can claim:
Homestead Exemption $21,625
Motor Vehicle $3,450
Tools of Trade $2,175
Jewelry $1,450
Cash $1,150
Personal Injury $21,625
Household Goods $11,525
Motor Vehicle $3,450
Tools of Trade $2,175
Jewelry $1,450
Cash $1,150
Personal Injury $21,625
Household Goods $11,525
If you’ve read any older material referring to these federal exemptions, you’ll notice that all of the above amounts are different. They changed in April 2010, and they will change again in a few years. We New Yorkers are not used to that, as the federal exemptions have barely changed in two decades.
The Federal Wildcard Exemption
The Federal Wildcard Exemption
The federal exemptions are set forth in Bankruptcy Code Section 522(d) which states, in relevant part:
The following property may be exempted [...]
(1) The debtor’s aggregate interest, not to exceed $21,625 in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor. [....]
(5) The debtor’s aggregate interest in any property, not to exceed in value $1,150 plus up to $10,825 of any unused amount of the exemption provided under paragraph (1) of this subsection.
Sub-section 522(5) is the wildcard exemption. This sub-section works together with section 522(1) to enable a debtor who does not use the federal homestead exemption to exempt $10,825 in “any property”.
Stacking and Flexibility with the WIldcard Exemption
Thus, one great thing about the wildcard exemption is its flexibility which enables a debtor to split the wildcard exemption amount over multiple items and stack it on top of other exemptions as needed to protect any exposed equity.
This, coupled with the other asset-specific exemptions found elsewhere in section 522, usually allows a debtor to exempt all of his or her property in a Chapter 7 bankruptcy.
Learning About the New, New York Bankruptcy Exemption Law
So how does one learn more about the new federal exemptions? Here’s my plan of action. Since I am not used to them, I will need to commit them to memory and determine how to employ them in a strategic manner.
Therefore, I plan to read and re-read section 522 a dozen times until they sink in. This section is lengthy and will require some dedicated concentration.
I will review various bankruptcy treatises like my favorite, Consumer Bankruptcy Law and Practice, published by National Consumer Law Center. I will also begin reading recent cases from other parts of the country that interpret various aspects of the federal exemptions – cases that I conveniently ignored for years because they did not mean anything to me; but now they are ever so important.
I also like Consumer Bankruptcy News, published by LRP Publications – a nice bi-weekly review of new bankruptcy cases combined with news and some articles about bankruptcy practice.
I will be looking forward to the next CLE about the subject. Suffolk Academy of Law Dean and Chapter 7 Trustee Richard L. Stern will be moderating a Lunch ‘n Learn Seminar about the new federal exemptions at the Suffolk County Bar Association on Wednesday, March 9, 2011.
Finally, I will be eagerly anticipating the first few decisions from our very own bankruptcy judges in the Eastern District of New York, as debtors’ counsel and trustees really try to see how these new laws work.
About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the FEBRUARY 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800 (516) 496-0800 (516) 496-0800 (516) 496-0800 (516) 496-0800 (516) 496-0800 (516) 496-0800 (516) 496-0800 (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.This morning I reviewed a proof of claim filed in one of our Chapter 13 bankruptcy cases. It was filed by American General Financial Services, LLC for a $7,000 debt that was incurred two years ago for an in-ground swimming pool. The local merchant was Island Recreational. They filed the claim as “secured.”
Here’s the problem: The proof of claim contained an attachment that consisted of the one-page quicky credit application my clients filled out at the time they purchased the pool and applied for financing.
Attaching this document was not the problem; the creditor’s failure to remove or redact my clients’ Social Security numbers was.
Social Security Numbers Are Sacred and Confidential in Bankruptcy Proceedings
With identify theft becoming a significant concern this past decade, the bankruptcy courts adopted a new privacy rule that was made part of the official Bankruptcy Rules.
Bankruptcy Rule 9037 requires any party filing a document to ensure that any references to Social Security numbers and other sensitive data are deleted or redacted.
I previously wrote about this: Maintaining Privacy in Bankruptcy Court Filings .
Getting the Creditor to Immediately Rectify the Situation
I immediately e-mailed the creditor’s “Bankruptcy Specialist” who had prepared the proof of claim and advised her that not only did she violate the law, but she was exposing my client to the possibility of identity theft.
Technically the creditor was in contempt of court for violating Rule 9037.
I also considered bringing a motion seeking sanctions against the creditor. However, doing some quick research, I learned that some courts have refused to award sanctions in such instances, stating that Rule 9037 does not provide a private cause of action to do so.
Rebecca Rose, a law student on the St. John’s Law Review, recently wrote a summary of of the Matthys case which held that Disclosure of Social Security Number Does Not Give Debtors a Private Right of Action.
Meanwhile, other courts have stated that sanctions are necessary to deter this type of conduct and have indeed awarded them. I found a great article in the ABI Journal about this — Rule 9037: Consequences of Failure to Redact “Personal Data Identifiers” However, the link is only available to ABI members.
However, since the Second Circuit did not have any case law on the subject, I decided it would probably not be worthwhile to test the waters on this.
In any event, I tend to be a pragmatist, and I was mostly concerned about achieving a quick resolution and an appropriate disposition of the problem for my clients.
The Offensive Proof of Claim was Removed and Amended
The creditor’s Bankruptcy Specialist, within minutes of receiving my e-mail, contacted me and agreed to resolve the problem — and she did so in a very pleasant and apologetic manner.
Within an hour, she had gotten the Bankruptcy Court Clerk to permanently remove the offensive document from the court’s records.
This was fortunate because some bankruptcy courts in other jurisdictions handle such matters differently — they will only block the offensive material temporarily while requiring counsel to bring a motion for a protective order, a significant amount of work.
She then filed an amended proof of claim, now treating the debt as unsecured, rather than secured. This will save us a little time later when we need to reconcile the filed claims in preparation for proceeding towards confirmation of the Chapter 13 plan.
Sure, I could have been meaner and more aggressive. I could have fought for some sanctions or attorney’s fees. However, I resolved the problem rather quickly, and the creditor made my life a little easier by amending the proof of claim. I think I did OK for my client.
Had the creditor’s Bankruptcy Specialist been nasty or unresponsive or not conciliatory, I would have handled the matter most differently.
Of course there was a possibility that someone paid the government an ECF fee to view the proof of claim, but I think the possibility that a person with illicit intent did so within a relatively-short period is exceptionally unlikely.
Central Islip Bankruptcy Judges Alan S. Trust, Robert E. Grossman and Dorothy T. Eisenberg at Bankruptcy Roundtable 2010
Written by Craig D. Robins, Esq.
Comment by Bankruptcy Judge Grossman at Annual Update Seminar Hints at How the Central Islip Bankruptcy Court Will Address Future Decisions Involving Means Test Issues
All three Bankruptcy Court judges from the Central Islip Courthouse in the Eastern District of New York attended the Annual Bankruptcy Roundtable panel discussion last night, which was held at the Nassau County Bar Association.
Over one hundred bankruptcy practitioners from Nassau and Suffolk Counties attended the event.
Of course, the presentation included the annual wrap-up of notable Supreme Court bankruptcy decisions and noteworthy local decisions, as well as some nice presentations by some of our local bankruptcy attorneys about substantive law issues.
What I found most significant, however, was not the typical presentation material, but instead, the substance of a two-minute comment that Judge Robert E. Grossman contributed during a review of the Lanning Supreme Court case.
The Comment from Judge Grossman. . .
Judge Grossman, clearly expressing his frustration and dissatisfaction over the poorly-formulated wording in the BAPCPA means test statute, remarked vehemently, “we can’t figure out what this miserably written statute means!”
He then suggested that we seem to be entering a new judicial period in which Bankruptcy Court judges will have more discretion in reviewing means test issues, especially those concerning a debtor’s expenses.
He remarked that we will likely see “less absolutes,” as he predicted that the appellate courts will focus their holdings by utilizing a “plain language” approach.
I found this comment most important as it clearly shows that Judge Grossman, and likely his fellow colleagues on the bench in Central Islip, will be focusing their analysis of means test issues by using a common sense approach as opposed to a strict constructionist approach that can produce a technically-correct, but absurd and unintended result.
Judge’s Comment Underscores Position Judge Will Take with Analyzing Means Test Issues
I have previously written how BAPCPA was designed to essentially remove judicial discretion from interpreting means test results, and I even commented on the ”plain meaning” approach that Judge Grossman took in some of his decisions (see my post, Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts).
Judge Grossman also referred to his year-old Rabener decision, which I also commented on in my post, Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts . In that decision the Judge made clear that he does not believe that the Court should blindly use a rigid application to reduce judicial discretion when reviewing means test issues. He stated that a sound conclusion consistent with reason is paramount.
Now, with comments such as those from Judge Grossman yesterday, it is becoming more and more clear that our Bankruptcy Court will be emphasizing a logical, forward-looking, common sense, plain language approach to analyzing and resolving means test issues.
As an active consumer bankruptcy practitioner who needs to know where his clients stand with the means test, and when to butt heads with a Chapter 13 trustee who takes a nonsensical, yet strict constructionist view of the means test law, today’s comment cements what we are already know — that the Court will most certainly be guided by a common sense approach.
What’s even more important is that in utilizing a common sense approach, the bankrutpcy judges will likely use increased amounts of discretion to reach a reasonable and sound result. So when the Chapter 13 trustee insists that you amend a plan because BAPCPA says so even though it produces a ridiculous result, consider getting an opinion from the judge instead — if the result is reasonable, you now know how the judge will likely rule.
Written by Craig D. Robins, Esq.The website for the Bankruptcy Court for the E.D.N.Y. has been updated again. This website covers the bankruptcy courts in Central Islip and Brooklyn.
According to a release from the Court, the goal of redesign was to provide Court information to visitors in a more accessible format. Maybe I was more used to it, but I liked the general look and feel of the old website.
Once I become more acustomed to the new site, however, it should be more efficient to use. The new Bankruptcy Court website now has separate sections for the various types of individuals who will be visiting the site. There is an attorney section, a pro se section, a trustee section and a creditor section.
The Court has indicated a desire to further customize the attorney section to make it more user friendly for bankruptcy counsel.
To Access Bankruptcy Court Website for Central Islip and Brooklyn, Click This Link:
Written by Craig D. Robins, Esq.Some Recommendations for the “Strategic Planning Program” of the Bankruptcy Court for the Eastern District of New York
I write this while attending the National Association of Consumer Bankruptcy Attorneys Annual Workshop in Puerto Rico. I flew down here with my associate, Jason Leibowitz, and my good friend, Kerie Stone, who is the Chairperson of the Bankruptcy Committee of the Suffolk County Bar Association.
In between attending workshop sessions, Kerie and I chatted about her participation in a Strategic Planning Program which is designed to improve the efficiency of our bankruptcy courts in Central Islip and Brooklyn.
She said that upon her return to New York, she will be attending meetings with a committee of our bankruptcy judges, an efficiency expert being flown in from Washington, some of the court clerks, and some of the trustees — all in an effort to make our court run better.
Since I am an active and proactive Long Island bankruptcy attorney, Kerie asked me to come up with my own suggestions that she can relay to the Committee. I quickly came up with two. Here they are:
The Judges Should Unify Courtroom Practices and Procedures
We currently have seven different bankruptcy judges. Unfortunately, that means we have seven different sets of chambers rules, seven different sets of calendar procedures, and seven different sets of protocols.
For example, for the same type of court application, some judges permit counsel to submit notices of presentment whereas other judges require motions accompanied by court appearances. Also, different judges have different requirements (or permit their trustees to have different requirements) for the provisions they want contained in a Chapter 13 plan. It simply does not make sense that we do not have a uniform Chapter 13 plan for our district.
It would therefore be great if the judges could work together to unify their chamber rules and procedures.
Judges Should Improve Communications with the Bankruptcy Bar as to Expectations from Counsel
Attorneys would be able to practice much more efficiently if they knew what the judges expect from them. In addition, court practice would be much smoother if a larger percentage of attorneys handled matters in the manner the court would prefer.
As such, perhaps the judges can hold annual presentations to the bankruptcy bar during which time they can review how they would like counsel to handle or address various matters.
Many of our judges periodically provide presentations at continuing legal education seminars where attorneys can attend for a fee. However, my experience has been that most judges concentrate their discussions on substantive law issues, as opposed to procedural aspects that would make court practice more efficient.
What we need are periodic presentations at no cost where the sole purpose would be for the judges to discuss the court’s policies and procedures with the bankruptcy bar in an effort to make bankruptcy court practice more efficient. The judges could also consider other methods to educate the bar as to their expectations for bankruptcy practice.