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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
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Written by Craig D. Robins, Esq.
Businessman debtor denied bankruptcy discharge for failing to keep business records
As a consumer bankruptcy practitioner, I am often concerned with clients who fail to have sufficient paperwork to document their past finances. This often leads to the question: At what point can a consumer debtor be in jeopardy because he or she failed to keep financial documents?
I discussed this issue exactly four years ago in my monthly column in the Suffolk Lawyer when I reviewed an opinion by Judge Stong (sitting in the Brooklyn Bankruptcy Court in the Eastern District of New York), who held in that particular case that the debtor was entitled to a discharge even though she failed to keep a number of important financial documents. See: Recent Decision Summarizes Consumer Debtor’s Obligation to Retain Documents and Explain Pre-Petition Loss of Assets .
In that case the debtor had a good excuse for not being able to produce copies of bank and credit card statements.
However, a judge from the Bankruptcy Court for the Northern District of Ohio just addressed the same issue, although this time for a consumer with business debts, and determined that the debtor in that case was not entitled to a discharge.
In this month’s column I’ll discuss the recent Ohio decision and provide some insight as to when a consumer debtor can face difficulty for not having financial documents.
Businessman Fails to Keep Documents
In the Ohio case, In Re: Kim Wesley Michael, no. 09-3258, (Bankr. N.D.Ohio 2010), the debtor, a businessman, had been involved in at least a dozen different business enterprises over a thirty-year period, six of which he operated in the five-year pre-petition period.
Two of the businesses enabled the debtor to draw compensation in excess of $100,000 per year. The debtor had various roles in these business ventures including sales manager, freelance graphic designer, insurance salesman and concert promoter.
When the debtor ultimately defaulted on some business obligations, he sought Chapter 7 relief.
At the time the debtor filed for bankruptcy relief, he was not employed, no longer involved in any part of his business venture, and had no income.
One particular creditor, who the debtor borrowed $60,000 from for the purpose of financing his most recent business venture, filed an adversary proceeding objecting to discharge pursuant to Bankruptcy Code section 727(a)(3) for failure to keep adequate records.
As it turned out, the debtor failed to maintain any kind of records regarding his most recent business ventures, including the one for which the objecting creditor lent money. As such, the debtor had no check registers, accounting ledgers of any kind, or any other kind of financial records. In addition, the debtor hadn’t filed tax returns for several years.
The bankruptcy court held the debtor to a much higher standard than the average consumer debtor because of his business experience. Thus, the judge determined that the debtor’s inability to explain his financial affairs because he had not kept sufficient records warranted a denial of discharge.
In his decision, the judge explained some basic, but important principles. A bankruptcy discharge is an extraordinary remedy, and carries with it certain duties and obligations.
Only those debtors who are fully cooperative and honest are entitled to a discharge. In that way, a debtor who receives benefits under the Bankruptcy Code must also accept its burdens, and one of them is to be fully transparent with all matters regarding financial affairs.
The Bankruptcy Code Requires Debtors to Maintain Financial Documents
Bankruptcy Code Section 727(a)(3) provides that the court can deny a debtor his discharge if the debtor failed to keep or preserve any recorded information, including books, documents, records and papers. If a party objecting to discharge under this provision can establish that the debtor failed to keep or preserve the necessary information, and can also demonstrate that the lack of financial records makes it impossible to ascertain the debtor’s financial condition, then the objecting party has met its evidentiary burden.
The burden then shifts to the debtor who can still prevail and get a discharge if he can demonstrate that his failure to keep documents was justified under all circumstances of the case.
Some Debtors Are Held to Higher Standards than Others
The court pointed out that a debtor with primarily consumer debts should not generally be held to the same standard as a debtor with mostly business debts. As such, issues of this sort must be reviewed on a case-by-case basis
In this case, the court determined that it should examine the size, complexity and volume of a debtor’s business to ascertain the sufficiency of the debtor’s records. In addition, the court can consider the debtor’s expertise, experience, sophistication and any other circumstances.
Here, the court observed that the debtor had considerable business experience and earned substantial sums of money from the business. Thus, the court inferred that the debtor’s failure to produce any financial documents was because he was attempting to obfuscate his financial dealings.
The court also pointed out that the debtor’s intent to hide or conceal information was irrelevant, nor was it necessary to show that the debtor intended to defraud a particular creditor or the trustee. Instead, the test for determining whether a debtor has adequately justified the lack of financial records is an objective one, focusing on whether others in like circumstances would ordinarily keep financial records.
Practical Tips for Bankruptcy Attorneys When Their Clients Don’t Have Prior Financial Documents
If a client comes to you and presents a problematic scenario because of a lack of prior financial documents, does that mean you should turn down the case or advise against filing? Not necessarily.
As long as you have sufficient documents to enable you to do your BAPCPA due diligence, then no one can fault you for filing the case. However, if the debtor does not even have sufficient written information to enable you to answer the mandatory questions in the petition, then perhaps you should turn down the case.
If a debtor with deficient past financial documents does file, then he can only get into trouble if the trustee or a creditor makes an issue of it. Then, even in a worse-case scenario, if the debtor’s discharge is denied, he would likely be in the same position he was in prior to filing.
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 OCTOBER 2010 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.
New Bankruptcy Means Test Criteria Goes Into Effect November 1, 2010
The figures that you need to use for the means test change periodically. The last change was on March 15, 2010. The recent changes actually make it slightly harder to qualify. However, the difference is relatively small so that it should hardly matter for most Long Island consumers.
In order to automtically pass the bankruptcy means test your income must be less than the median income in the state where you live. For New York residents, it will be slightly more difficult for some families to qualify for Chapter 7 bankruptcy than last year. For those seeking to file for Chapter 13 bankruptcy, some families will have to pay slightly more each month.
The figures used for the each state’s median income are based on United States Census data, and adopted by the Office of the United States Trustee. These figures routinely change once or twice a year.
Usually income rises each and every year because of inflation, the cost of living, etc. However, because we are currently in a recession, income has actually decreased slightly from the prior year. This started happening with just some family sizes last year.
The last time the median income figures were updated for the Means Test prior to the March 15, 2010 change was November 1, 2009.
To see the old and now obsolete median income data for each of the 50 states, go to the U.S. Trustee Census Bureau Median Income Means Test Chart for cases filed between November 1, 2009 to March 14, 2010.
To see the current median income data for each state, which is only good through the end of this week, go to Median Income Means Test Chart for cases filed between March 15, 2010 and October 31, 2010.
To see the new median income data going into effect next week, go to Income Means Test Chart for cases filed beginning November 1, 2010.
New Means Test Figures
Family Size of One: If you are a single individual, which means that you have a “family size of one”, the New York median income has decreased for the third time, from $46,320 earlier this year to $45,548. This is a minor but nevertheless significant change of $772 per year, or about $64 per month. However, chances are that very, very few potential Chapter 7 debtors will be adversely affected by such a small change.
Family Size of Two: For a family size of two, the new median income figure is $56,845.
Family Size of Three: For a family size of three, the new amount is $67,292.
Family Size of Four: For a family size of four, the new median income amount is $82,587.
The Bankruptcy Means Test
This is a comprehensive, very complex series of calculations that the federal government designed to ascertain whether someone qualifies for Chapter 7 filing.
Under the old bankruptcy law, almost anyone could seek to eliminate their debts by filing Chapter 7. The new laws changed that. Click here to take a look at the actual Means Test form.
The Means Test formula is designed to evaluate whether a debtor has the financial means to pay back a substantial portion of his or her debts. If the person does, then he or she may not be eligible to file Chapter 7 bankruptcy, and may instead have to file a payment plan bankruptcy under Chapter 13.
If debtor’s income is below the New York State median income for a family of that particular size, then passing the Means Test is virtually automatic. If not, the debtor must have a sufficient amount of acceptable deductions permitted by the Means Test.
Impact of New Means Test Figures on Consumers Filing Bankruptcy on Long Island
In my Long Island bankruptcy law practice, I estimate that at least 7 out of 8 clients now seeking to file for Chapter 7 bankruptcy relief do indeed qualify under the means test. However, the new numbers may just slightly hurt some couples or small families trying to qualify for Chapter 7 bankruptcy when the new criteria is used.
The new figures underscore the importance of meeting with an experienced New York bankruptcy attorney to ascertain eligibility for filing for bankruptcy relief.
New Median Family Income Figures for New York
(Effective for cases filed after 11/01/10)
Family Size Amount
1 $45,548
2 $56,845
3 $67,292
4 $82,587
Add $7,500 for each individual in excess of 4.
Written by Craig D. Robins, Esq.
This is a continuation of my previous article: Bankruptcy Issues Involving HAMP (Home Affordable Modification Program) — Part One , that I wrote after attending a seminar of the National Association of Chapter 13 Trustees.
WARNING: HAMP (Home Affordable Modification Program) Can Actually Drive Homeowners Into Bankruptcy
Here are two types of horror stories I’ve been hearing from some recent clients about their HAMP experiences.
First, the homeowner applies for HAMP relief but does not receive a timely response from their mortgage servicer. In the meantime, their debt situation becomes worse and worse as they struggle to remain current on their obligations. This then puts them into an untenable financial situation that they cannot get out of.
Second, some other homeowners have reported to me that they applied for HAMP relief and were granted a temporary modification. However, several months later, after the trial period ended, they were turned down for permanent relief, leaving them immediately on the hook for catching up with thousands and thousands of dollars in payments that they didn’t make (and now cannot afford to make).
Can I Seek HAMP If I am Defending a Mortgage Foreclosure Proceeding?
You cannot be turned down just because you are actively involved in foreclosure litigation.
What Happens to the Money Saved With Reduced HAMP Mortgage Payments?
There is no “cram-down” on the unpaid principal balance. In other words, the savings do not disappear.
Even though the homeowner will be saving money by having a reduced monthly mortgage payment, these savings are not forgiven. The amount of savings is actually set aside as a non-interest-bearing balloon that the homeowner must pay upon sale, refinance or the maturity of the loan.
Apparently, many homeowners are unaware of this aspect.
What Happens to Mortgage Arrears at the Time of a HAMP Modification?
All arrears up to the time the HAMP offer is made, are capitalized into the balance of the modified loan. They, too, are not eliminated.
How Long do HAMP Reduced Mortgage Payments Last?
The reduced monthly payments are only good for five years. For each year after that, the interest rate increases by one percent each year until it reaches a certain Freddie Mac cap rate.
New Documentation Program Starts June 1, 2010
One of the existing problems was that a homeowner would apply for a HAMP modification and quickly enter into a trial period of reduced monthly mortgage payments — before complying with all of the document requirements.
Many homeowners would then fail to fulfill the document requirements and, for that reason alone, be turned down for a permanent HAMP modification.
Accordingly, effective June 1, 2010, a HAMP trial modification cannot start until the document requirements have been totally satisfied.
What Are Some HAMP Alternatives?
I wrote about this recently. See my post: One-Fourth of All U.S. Homeowners Are Underwater. What Should These Homeowners Do?, for a discussion of alternatives.
Seeking Hamp Relief While In Bankruptcy — What Are the Issues?
This topic will be the final part of this series. I will post it later this week.
Chapter 11 Bankruptcy on Long Island
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Craig D. Robins, a Chapter 11 bankruptcy attorney on Long Island, provides summaries of all Chapter 11 bankruptcy cases filed in the Long Island Bankruptcy Court, on his Long Island Bankruptcy Blog.
Click here to access these summaries: Chapter 11 bankruptcy cases filed on Long Island.
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Click here to see information about filing Chapter 11 bankruptcy on Long Island.
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If you have a business that is considering Chapter 11, please feel free to contact my office to arrange a free, confidential consultation.
Nassau County Bankruptcy Attorneys
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We have two offices in Nassau County, New York, to help consumers resolve their debt problems with bankruptcy, debt negotiation or foreclosure defense — Woodbury and Valley Stream.
For over 20 years we have been helping consumers file bankruptcy on Long Island and get debt relief.
If you have serious debt issues, please consider giving our office a call to discuss how we can help you.
Please see our Long Island bankruptcy website for full information about setting an appointment to discuss eliminating debt or stopping foreclosure.
Long Island Bankruptcy Law, Practice and Procedure
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For the benefit of new readers, this blog contains numerous posts about Long Island bankruptcy practice, law and procedure. Consumers will be be most interested in some of the categories on the left, such as Bankruptcy Tips Consumers Should Know, Chapter 7 Bankruptcy, and Chapter 13 Bankruptcy.
Long Island bankruptcy attorneys will be interested in the practice-oriented articles that I’ve written for various Long Island bar associations, found in the Suffolk Lawyer, Nassau Lawyer and Attorney of Nassau.