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Protecting Frequent Flyer Miles If You Have to File Consumer Bankruptcy – The Complete Guide
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by Craig D. Robins, Esq.
Filing for Bankruptcy Usually Has No Effect on Frequent Flyer Miles and Rewards Points
Most consumers these days have an assortment of frequent flyer miles and credit card rewards points, whether they earn them from having flown on airlines, or acquired them from banks for credit card spending.
For consumers, these miles and rewards points can have a substantial value as they can be used to obtain expensive plane tickets or months of hotel lodging. They can also be used to purchase various goods, or gift certificates redeemable in a variety of retail stores.
I once represented an executive who previously earned six figures, but was now without a job. He had over 800,000 American Express Membership Rewards points – enough to redeem on airlines for several international first class trips, among other things. He could have also easily redeemed them for over $8,000 in retail gift certificates. What happens to these valuable points and miles when a consumer files for bankruptcy relief? Can they be protected?
You may have seen one of my favorite movies, Up In the Air, in which George Clooney, who had millions of air miles, flew around the country terminating executives and other employees. They probably had some air miles, too.
Frequent Flyer Miles and Rewards Points – Are They Even an Asset of Yours?
In deciding how to treat miles and points for bankruptcy purposes, we start by looking at what kind of assets they are.
A consumer who files for bankruptcy must list all assets in the bankruptcy petition. However, there is an issue as to whether frequent flyer miles are an asset that must be listed.
I would say that they do not have to be listed at all in a bankruptcy petition. Here’s why:
All frequent flyer programs have fairly comprehensive terms and conditions that uniformly indicate that the miles and award points have no monetary value whatsoever. These loyalty programs also state that miles are personal and cannot be assigned, traded, willed or otherwise transferred, except with consent of the program.
In addition, most programs state that membership terminates upon a member filing personal bankruptcy. Also, all airline programs vigorously prohibit the sale of award tickets.
Many frequent flyer loyalty programs and point programs, such as the popular American Express Membership Rewards program, expressly state that miles or points are not property of the member, and are not transferable by operation of law to any person or entity. Some actually state that the miles are owned by the program.
Although it can be argued that a consumer debtor has a legal or equitable interest in the miles or points, and that this interest must be reported in the bankruptcy schedules, that argument is defeated by the terms of the loyalty programs which state that the member does not have a property interest in them.
Thus, if a program states that the miles have no value and that they are not owned by the consumer, the reasonable conclusion is that the consumer does not have an asset that must be listed in the bankruptcy petition.
Even if, for the sake of argument, the miles and points were considered “assets of the bankruptcy estate,” most debtors would be able to exempt them under a wildcard exemption.
Bankruptcy Trustees Do Not Ask About Miles and Points
In my twenty-six years of practicing bankruptcy, and having attended many thousands of meetings of creditors in bankruptcy court, I have never once seen any case where a trustee has even asked about frequent flyer miles. There are two reasons for this:
First, trustees recognize that it would be very difficult to administer miles and points as an asset considering they are very illiquid, and secondly, even if they did have value, most consumers who file for bankruptcy, and who have frequent flyer miles, would have miles worth so little in relative terms, that it would not be viable for the trustee to administer them as an asset.
Can a Bankruptcy Trustee Compel a Consumer Debtor to Redeem Miles?
Let’s suppose a creative and aggressive Chapter 7 trustee did learn that a debtor had a substantial cache of miles. Keep in mind that a trustee certainly could not sell an airline ticket – every program clearly prohibits that. Could the trustee compel the debtor to redeem those miles for gift certificates, which the trustee could then try to sell?
I would argue that if the frequent flyer program stated that the miles were not the property of the debtor, then the miles never became an asset of the bankruptcy estate, and the trustee has no right to control that asset.
A trustee would also have great difficulty pursuing them because of the standard provision in most frequent flyer programs, that the debtor’s membership in the program terminates upon the filing of bankruptcy. Technically, upon filing bankruptcy, all miles would then be lost.
However, I believe the frequent flyer programs include this provision to protect the consumer from creditors, similar to a spendthrift provision, rather than punish a consumer for filing bankruptcy. Thus, it is unlikely that an airline’s frequent flyer program would terminate benefits to a consumer for filing bankruptcy, absent any meddling by a bankruptcy trustee. Frequent flyer programs have no incentive to become embroiled in a fight over miles.
Nevertheless, consumers should not be parading the fact that they filed for bankruptcy to the frequent flyer or loyalty program, nor do they have any obligation to do so.
Consumers should therefore be able to emerge from bankruptcy with their air miles in airline frequent flyer programs intact.
Advice for Protecting Rewards Points in a Credit Card Program If You Anticipate Filing for Bankruptcy
There is a major difference between airline or hotel loyalty programs and credit card rewards programs. With the credit card programs from banks such as American Express, Chase, Capital One and others, the likelihood is that the consumer owes the banks money. All such programs have provisions that freeze the points if the consumer falls behind with payments.
Let’s take a typical scenario where the consumer has points in a credit card program such as American Express Membership Rewards. The consumer cannot use those points if the account is in default. That would certainly be the case once the bankruptcy petition is filed if there is any balance owed on the account.
The issue in protecting the points is thus: If you think you need to file for bankruptcy, and you are current with your payments, should you quickly cash out the rewards points before you fall behind and the account goes into default?
The short answer is YES. Here’s why it should be OK to do so. Let’s first address the potential argument the credit card company can conceivably make. They can argue that if the debtor cashes in the points just prior to filing bankruptcy then they engaged in some kind of bad faith conduct.
However, the credit card company would have great difficulty proving this as the debtor should be able to argue successfully that the points were already earned, and that the debtor had the full right to use them regardless of any debt problems or future plans to file for bankruptcy.
When it comes to bankruptcy cases involving credit card debt, the real issue is not whether the consumer redeemed points, but whether the consumer incurred the underlying credit card debt at a time when the debtor knew or should have known that they would not be able to pay their debts.
Also, from a practical perspective, in my many thousands of consumer bankruptcy cases, I have never seen one instance of a credit card bank alleging an impropriety for redeeming rewards points. The value of points in relation to the amount of money that the consumer owes is so nominal, that banks will simply not go to any length at all to pursue a debtor who cashed them in.
Accordingly, I would feel comfortable advising a consumer debtor client to immediately redeem the points or transfer them to an airline’s frequent flyer program, assuming there was no larger issue that the consumer incurred the debt to the credit card company under fraudulent pretenses.
Another bit of advice: If you feel that you are about to fall behind with your minimum credit card payments, pull those rewards points out immediately. Otherwise, they will be frozen. You can transfer the points to airline or hotel loyalty programs, or redeem them for merchandise or gift certificates.
Keep in mind that if you redeem them for goods or gift certificates, you would now have assets that should be listed in your bankruptcy petition.
How One Savvy Consumer Lived on Miles and Points After Filing for Bankruptcy
Let me leave you with an anecdote. Jim Kennedy, a 46-year-old California man, lost his six-figure corporate development job. At the time, he had about a million frequent flyer miles and rewards points in various loyalty programs including 125,000 American Express Membership Rewards points, 85,000 Starwood Preferred Guest points, 400,000 Hilton Honors points, 100,000 Delta Sky Miles, 120,000 American AAdvantage miles, and 200,000 United Mileage Plus miles.
After running out of funds, losing his home to foreclosure, and having no luck finding a job, he filed for Chapter 7 bankruptcy. He emerged from bankruptcy with his miles intact. Thereafter, he lived for months in Holiday Inns and Motel 6’s by converting his frequent flyer miles into hotel points. This also helped his food budget because the motel provided free breakfast to its guests.
He regularly reported his plight on his blog and on Twitter. His story was publicized by a number of newspapers and TV stations on the West Coast. Last year, when he was down to just a month’s worth of free hotel nights, he found a job. The lesson is that frequent flyer miles can sometimes really help, even after bankruptcy.
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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. A version of this article appeared in the February 2012 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.The recent bankruptcy filing of American Airlines on November 29, 2012 got me thinking in several ways about the interplay between airlines, consumers and bankruptcy.
How does an airline seeking bankruptcy protection continue its frequent flyer programs and honor tickets? I’ll answer this question in this column.
What happens when a consumer, who has a cache of frequent flyer miles, files a consumer bankruptcy — can the consumer keep those miles? I’ll answer that question next month.
As a regular flyer on American Airlines, I get e-mails from AA almost daily. Within hours of the Chapter 11 bankruptcy filing, which AA commenced in the Southern District of New York under AA’s parent company, AMR Corporation, AA sent me an urgent e-mail assuring me that all would be OK and that it would be“business as usual” during the course of the bankruptcy.
As a regular flyer on American Airlines, I get e-mails from AA almost daily. Within hours of the Chapter 11 bankruptcy filing, which AA commenced in the Southern District of New York under AA’s parent company, AMR Corporation, AA sent me an urgent e-mail assuring me that all would be OK and that it would be“business as usual” during the course of the bankruptcy.
The e-mail stated that miles “you’ve earned are yours and will stay yours.”
AA’s spin doctors included verbiage that the bankruptcy proceeding was going to make the airline leaner and stronger, and better for its customers.
AA’s spin doctors included verbiage that the bankruptcy proceeding was going to make the airline leaner and stronger, and better for its customers.
As a bankruptcy attorney, I wondered what procedural path they would take in bankruptcy court to continue its business practices.
American Airlines Files a First-Day Application Seeking Special Bankruptcy Court Approval to Continue Certain Business Practices
On my own, I tracked down one of the first-day applications that AA filed, which sought an immediate order permitting AA to continue its customer programs and practices in the ordinary course of business and honor existing obligations to its customers.
It is standard Chapter 11 practice for debtors to bring several “first day” applications seeking various types of immediate relief. This application was necessary because technically a Chapter 11 debtor is prohibited from honoring pre-existing debts and obligations.
It is standard Chapter 11 practice for debtors to bring several “first day” applications seeking various types of immediate relief. This application was necessary because technically a Chapter 11 debtor is prohibited from honoring pre-existing debts and obligations.
The 23-page application, which was prepared by the Manhattan bankruptcy powerhouse firm of Weil, Gotshal & Manges, sought authorization pursuant to Bankruptcy Code sections 105(a) and 363(c), to continue a multitude of programs including the AAdvantage frequent flyer program, as well as seek permission to honor pre-petition tickets, refunds, access to Admirals Club lounges, gift cards, etc.
Bankruptcy Caselaw and Statutory Authority for the Application
Section 105(a) is the Bankruptcy Code’s general catch-all provision that grants bankruptcy judges broad equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
Section 105(a) is the Bankruptcy Code’s general catch-all provision that grants bankruptcy judges broad equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
The application discussed how the airline’s customers were the lifeblood of their business, which is highly competitive, and that customer satisfaction is the key to survival.
Airlines routinely offer travel to many of the same locations as their competitors. The application discussed the concept that this competition makes retaining loyal customers and attracting new customers critically important.
AA argued that the Chapter 11 filing would negatively affect customers’ attitudes unless AA was able to continue its customer practices. The airline also argued that continuation of its customer programs on an uninterrupted basis is critical to maintaining this support and loyalty.
Incidentally, AA created the first frequent flyer program in 1981, by rewarding its loyal customers with frequent flyer miles. The application stated that there were 69 million members of their AAdvantage frequent flyer program.
There is precedent for granting such relief, as Eastern Airlines requested similar relief about two decades ago when it filed for reorganization and sought authority to continue its pre-petition obligations.
It has become well-established that bankruptcy courts have the power to permit the post-petition payment of pre-petition obligations where necessary to preserve or enhance the value of a debtor’s estate for the benefit of all creditors.
This is sometimes referred to as the “doctrine of necessity.” See the Eastern Airlines case, which is: In re Ionosphere Clubs, Inc., 98 B.R. 174, 176 (Bankr. S.D.N.Y. 1989).
The airline argued that if they could not get the requested approval, the consequences would be draconian. Their customers would lose confidence, question the airline’s ability to survive, and likely take their business elsewhere. All of the loyalty and customer goodwill that AA had engendered over years would be lost.
It was therefore no surprise that the bankruptcy court granted the application, thus permitting AA to continue its customer programs on an uninterrupted basis.
Thus, the experience of flying on American will likely stay the same for the short-term, but as the airline tries to reorganize itself through bankruptcy, it will probably make significant changes down the road.
Incidentally, most financial commentators suggest that AA will successfully emerge from bankruptcy, as several of its legacy competitors have done this past decade, and that AA is in no danger of liquidation at this time.
One industry analyst quipped, “Airlines do a better job at filing bankruptcy than delivering luggage.”
I personally have a boatload of American Airlines Aadvantage miles, some of which I earned traveling to conventions and workshops of the National Association of Consumer Bankruptcy Attorneys. It is therefore a relief to know that they will be protected!
The Effect of Consumer Bankruptcy on Frequent Flyer Miles
These days, most consumers have an assortment of frequent flyer miles, whether they earn them from flying or credit card spending.
These miles can have a substantial value to the consumer as they can be used to obtain tickets worth thousands of dollars or purchase goods or store gift certificates.
What happens to these valuable miles when a consumer files for bankruptcy relief? Can they be protected? I will cover this question next month.
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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 January 2012 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.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.For Those with Mortgage Problems, Bankruptcy Offers Options
This post was my monthly column that was published in the September 2011 issue of the Suffolk Lawyer. It was aimed at general practitioners and non-bankruptcy attorneys who may not be that familiar with how bankruptcy can be used to help clients with mortgage problems during these recessionary times.
This post should also be helpful to those consumers who are facing foreclosure and need to explore their bankruptcy options.
In the past two years I’ve helped a great deal of clients who were either in foreclosure or who owned homes that were very much underwater. I am also seeing a lot of clients who have been rejected after trying to modify their mortgages, such as under the HAMP program. Many consumers have found HAMP to be a dismal failure as I wrote in Problems with HAMP — Too Many to Count?
Also see my post: Warning: HAMP Can Drive Homeowners into Bankruptcy.
There are several bankruptcy options that can provide great relief for such clients.
Chapter 13 Bankruptcy
Consumers who have seriously fallen behind on their mortgages and who want to keep their homes, can use a Chapter 13 payment plan to cure mortgage arrears over a five-year period.
Chapter 13 Bankruptcy
Consumers who have seriously fallen behind on their mortgages and who want to keep their homes, can use a Chapter 13 payment plan to cure mortgage arrears over a five-year period.
However, this option is only available to those consumers who can not only afford to make their new post-petition mortgage payments, but can also make an additional monthly Chapter 13 plan payment approximately equal to 1/60th of the mortgage arrears.
A benefit of filing Chapter 13 is that the consumer can also resolve all credit card and medical debt as well, often paying just cents on the dollar.
There is a further significant benefit to those consumers who have a second mortgage that is totally underwater. In these situations where the house is worth less than the balance owed on the first mortgage, the consumer can bring a “cram-down” proceeding and effectively “strip-off” and totally eliminate the second mortgage. This benefit alone can often save the consumer over a hundred thousand dollars.
In order to qualify for Chapter 13 filing, the consumer must have a regular and steady source of income. Some clients who would like to save their home, unfortunately cannot do so if they do not have sufficient monthly income.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy enables a consumer to discharge most obligations including liability on a mortgage.
When I meet with a client who has significant mortgage arrears, and whose mortgage balances greatly exceed the value of their home, I discuss the concept that it may no longer be viable to save the home. Chapter 7 bankruptcy can provide a way out of bad, highly-leveraged real estate. A recent study indicated that one-fourth of all U.S. homes were underwater.
One of the judges in the Central Islip Bankruptcy Court permits Chapter 7 debtors to cram-down second mortgages.
Also see my post: What Happens to Your House if You File for Bankruptcy?
Walking Away from Real Estate
With these clients I often recommend a two-step process to extend their ability to remain in the home for a period of time, and to discharge their liability on the mortgage and ultimately any deficiency owed after a foreclosure sale. It is often possible to remain in the house for one to two years or more, without paying any mortgage or real estate tax payments.
Assuming that you can interpose one or more genuine, good faith defenses in a foreclosure proceeding in Supreme Court, you can then prevent a default judgment and take the foreclosure proceeding out of the automatic conveyor belt type of processing, effectively delaying the process by many months, or a year or more.
These days there are a host of possible foreclosure defenses. These include bringing shoddy or defective paperwork to the court’s attention; citing issues which may indicate that the lender may not have proper standing; and identifying improper mortgage assignments.
These days there are a host of possible foreclosure defenses. These include bringing shoddy or defective paperwork to the court’s attention; citing issues which may indicate that the lender may not have proper standing; and identifying improper mortgage assignments.
By defending a foreclosure proceeding, the foreclosure process can be greatly slowed down.
Strategic Default
Sometimes I come across a client who is current on his or her mortgage, but whose home is extremely underwater. In such instances I discuss the possibility of a “strategic default” which is when the consumer stops paying the mortgage, not because he or she can no longer afford it, but because keeping the house is no longer viable or financially worthwhile.
A Morgan Stanley report last year revealed that about 12 percent of all mortgage defaults are now “strategic,” which is a great increase from mid-2007, when the level was only 4 percent
A Morgan Stanley report last year revealed that about 12 percent of all mortgage defaults are now “strategic,” which is a great increase from mid-2007, when the level was only 4 percent
Bankruptcy Eliminates Recourse
By filing a bankruptcy and possibly engaging in foreclosure defense, the consumer will have to eventually walk away from the home, but they will probably be able to stay in it for several years without making any payments – all without financial recourse from the mortgage company.
There is also a strategy for timing the filing of the bankruptcy. Although the bankruptcy filing can be done at any time, doing so at the right time will get the homeowner a few extra months in the house, as the bankruptcy stay will stop the foreclosure proceeding until the lender can get permission to lift it.
Although most consumers are eligible for Chapter 7 filing, they must nevertheless pass the means test which Congress imposed about six years ago. As such, this approach should work for most consumers except those with high incomes or substantial non-exempt assets.
If the dream of home ownership has become a nightmare, then remember that there are bankruptcy options out there.
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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 October 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.Recent Long Island Bankruptcy Court Decision Addresses How to Allocate Non-filing Spouse’s Share of the Tax Refund
(This post was my monthly column that was published in the September 2011 issue of the Suffolk Lawyer.)
April may be tax time for most consumers, but bankruptcy judges seem to address bankruptcy tax issues year round. That’s because tax refunds have been a constant and significant source of potential funds for trustees, who are often quite willing to litigate the issues involved.
However, with the increased bankruptcy exemptions in New York, perhaps there will be fewer tax refund disputes.
In the past two years, I devoted many blog posts to issues concerning tax refunds and bankruptcy.
I also devoted two columns of my monthly articles published in the Suffolk Lawyer to the topic of tax refunds of non-filing spouses. A recent decision by Central Islip Bankruptcy Judge Robert E. Grossman here in the Eastern District of New York now requires that I write monthly third column on the subject. First, let me provide some background on the other two cases.
The 50/50 Rule for Allocating Tax Refunds in Bankruptcy Cases has been the Previous Standard in New York
In my May 2009 column, I raised the issue: Who owns the non-filing spouse’s tax refund in a bankruptcy case, and how do you apportion it?
The Marciano case out of the Southern District of New York adopted the 50/50 Rule — a simple and straight-forward approach in which the refund is apportioned equally between the two spouses regardless of the source of income or tax withholding. In re Marciano, 372 B.R. 211 (S.D.N.Y. 2007). Local bankruptcy practice since that time has adopted that rule.
Non-Filing Spouses Do Not Have to Contribute Their Share of the Tax Refund into the Chapter 13 Plan
In December 2010, I focused my column on a decision by Judge Grossman which addressed this issue: What happens when only one spouse files for Chapter 13 relief? Does the non-filing spouse also have to surrender his or her tax refund to the trustee?
At the time, Judge Grossman held that a non-filing spouse is not obligated to devote his or her share of a joint tax refund to plan payments made to the Chapter 13 trustee.
In that case, In re Malewicz, No 8-09-74807-reg, 2010 WL 4613119 (Bankr. E.D.N.Y., Nov. 4, 2010), the Court ruled that a non-debtor spouse’s share of a joint tax refund received post-confirmation is not property of the debtor’s estate or part of the “projected disposable income.”
Therefore, unless the non-debtor spouse specifically consents to contribute the refund to the plan, the non-debtor spouse’s share of tax refunds received post-confirmation need not be turned over to the trustee.
Thus, the non-debtor spouse in that case was not required to devote his share of tax refunds to the Chapter 13 plan. The non-filing spouse’s share of the tax refund is not property of the estate and it should not be included in the calculation of Chapter 13 plan payments.
At the time, the Malewicz case seemed to be the end of the road on the issue. You had the 50/50 rule, so what else could come up?
The Duarte Decision Introduces New Standard for Allocating Tax Refund
In October 2010, Carlos Duarte, a typical consumer, filed for Chapter 13 relief individually, without his wife. Through his attorney, fellow Long Island bankruptcy lawyer Lawrence S. Lefkowitz, he offered 50% of the couple’s joint 2010 tax refund into the plan and asserted that the other 50% belonged to his wife, and was hers to keep.
After all, the 50/50 Rule, for determining each spouse’s respective rights to a tax refund, is a test employed by a majority of Bankruptcy Courts in New York.
The debtor also pointed out a 2009 decision by Judge Alan S. Trust which held that “spouses filing joint returns who equally share the liability for payment of the taxes, should equally share the benefit of any tax refund.” In re Spina, 416 B.R. 92 (Bankr. E.D.N.Y. 2009).
However, Long Island Chapter 13 bankruptcy trustee Michael J. Macco noticed an unusual aspect of the family’s tax situation: only the husband paid withholding tax during the 2010 tax year; the wife did not pay anything.
The trustee then objected to confirmation of the plan, arguing that the entire 2010 refund resulted from an overpayment made solely by the debtor-husband.
The trustee argued that there was only a presumption that the 50/50 Rule should be used, and that the facts of this case rebutted the presumption. He insisted that the debtor pay 100% of the tax refund into the Chapter 13 plan based on a different rule known as the “Withholding Rule.”
Under the Withholding Rule, which is considered the majority approach, the tax refund is divided based upon the extent to which the refund is attributable to the separate withholdings of each spouse.
At the confirmation hearing, Judge Grossman granted confirmation, but reserved decision as to whether the non-filing spouse was required to turn over 50% of the tax refund.
New “Separate Filings Rule” Now Governs Allocating Spouse’s Tax Refunds in Bankruptcy Cases
In a decision issued in July 2011, Judge Grossman ruled that neither the 50/50 Rule should be applied, nor the withholding Rule. Instead, he adopted a totally different formula known as the “Separate Filings Rule,” first enunciated by the Tenth Circuit in the case, In re Crowson, 431 B.R. 484 (10th Cir. BAP 2010). In re Carlos Duarte, no. 8-10-78606-reg, (Bankr. E.D.N.Y. July 12, 2011).
The Judge clarified the issue before the Court: since the debtor consented to turn over his share of the tax refund, the sole issue was determining how to calculate the debtor’s interest in the tax refund.
After reviewing in detail the considerations for rejecting the other rules (there are four of them), Judge Grossman held that it was necessary to use a formula based on a calculation of what each spouse’s tax obligation would have been if the spouses had filed separate tax returns.
Then, he said there should be a calculation of the contributions each spouse had actually made towards the total tax payment.
Unfortunately, this new method will be messy and the Judge even pointed out that this approach “is not a ‘bright-line rule’ and therefore it is not simple to understand or apply.”
The Judge stated that “This Court is not ruling that the Trustee, the debtor and the non-debtor spouse in each case must undertake this analysis in order to determine each parties’ interest in a joint income tax refund, but this formula shall be employed where the parties do not agree on the proper allocation.”
Judge Grossman’s “Separate Filings Rule” approach will certainly produce the fairest result to all concerned, but if the parties cannot reach a resolution, they’ll certainly have a fair amount of work on their hands and they’ll have to study the formula details set forth in the Duarte and Crowson cases.
I recently spoke with the debtor’s attorney who had just prepared the separate tax returns (for bankruptcy calculation purposes only), and he was optimistic that he and the Chapter 13 trustee would work out a resolution as to the actual numbers without the need for further litigation.
Future Bankruptcy Court Decisions on Tax Issues Ahead?
On a separate note, I anticipate we may see another bankruptcy tax case in the near future. The Court did not address whether the Bankruptcy Code requires a debtor to turn over pre-confirmation tax refunds as opposed to post-confirmation tax refunds. Judge Grossman went so far as to point this out in a footnote.
Since I have seen this issue arise several times recently, I wouldn’t be surprised to see this issue come before the Court in a case where the parties cannot reach a resolution on their own.
NOTE: You can review copies of some of the actual decisions I cited in this post by clicking on these links: In re Carlos Duarte, In re Spina, In re Malewicz.
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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 September 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.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.
By Craig D. Robins, Esq.
Second Circuit Decision Emphasizes Forward-Looking Approach to Protecting Claim for Wrongful Termination
Bankruptcy exemptions have been receiving a great deal of attention here in New York lately because of the recent dramatic changes to our state’s exemption statutes. These changes include giving debtors the option of using either the federal or New York State exemptions.
It is therefore an ideal time to discuss a recent, interesting Second Circuit decision involving a Connecticut bankruptcy case that addresses the federal exemption for protecting entitlement to a claim for lost post-petition earnings.
Debtors Had a Claim for Wrongful Termination
In Jackson v. Novak, 593 F.3d 171 (2d Cir. 2010), the husband and wife debtors, who were a psychiatrist and a psychologist, filed a typical Chapter 7 consumer bankruptcy petition in which they sought to discharge typical consumer debt. One of the assets that they sought to exempt consisted of the proceeds of a settlement for wrongful discharge.
Prior to filing, both debtors had been employed by a health insurance company in Connecticut. The company closed the local office and terminated the debtors’ employment about six months pre-petition. Also prior to filing, the debtors asserted claims against the company for wrongful termination, alleging they were fired in retaliation for challenging the way certain health insurance claims were treated.
In October 2003, the debtors filed their Chapter 7 bankruptcy petition, listing the cause of action for wrongful termination. Thereafter, the Chapter 7 trustee pursued the claims against the former employer and reached a settlement of $130,000 about a year after the bankruptcy was filed.
The settlement was “to satisfy claims for future lost earnings.” After attorney’s fees and expenses, the net proceeds to the debtors amounted to $83,000. In essence, the settlement essentially bought out the debtor-husband’s contract, paying him an amount equal to one year’s worth of salary. The debtor had stood to earn half of this amount prior to the time the bankruptcy was filed, and the other half, after the bankruptcy was filed.
Debtors and Trustee Litigate Over Exempting Proceeds From Claim
The debtors sought to exempt the settlement proceeds by amending their schedule of exemptions, stating that under Bankruptcy Code § 522 (d)(11)(E), which is one of the federal exemption provisions, these proceeds were exempt.
This section of the federal exemptions permits a debtor to exclude from the bankruptcy estate “a payment in compensation of loss of future earnings of the debtor to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.”
The trustee objected, arguing that the proceeds were not exempt under several different theories, and the matter landed before the bankruptcy court judge who held a trial.
Bankruptcy Court Utilizes Forward-Looking Approach
The court noted that the debtor’s schedules indicated monthly income of $10,000 and monthly expenses of $14,000, a monthly shortfall of $4,000. In addition, the court also noted that debtors retained post-petition, $6,200 in cash, and a boat and trailer; they had the use of four vehicles; they lived in a $435,000 house; they owned a one-third interest in 20 acres of land in Tennessee; and both debtors were working “without any mental or physical disabilities or restrictions.”
The bankruptcy court concluded that given the language of § 522(d)(11)(E), only earnings related to the period after the filing of the bankruptcy petition could be exempted. Property of the estate, and a debtor’s exemption therein, is determined as of the bankruptcy petition date. Section 522(d)(11)(E) refers only to post-petition loss of earnings, and the debtor may not exempt that portion of the settlement proceeds that provided compensation of his pre-petition loss of earnings.
In other words, the debtor was only able to protect that compensation which he stood to earn after the petition was filed. However, the court did not stop there. The statute states that debtors can only exempt such payments “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.”
Accordingly, the court conducted an computational analysis. Basically, since the debtors had a monthly shortfall of $4,000 a month, the court let the debtors keep that sum for the period of the settlement that covered the post-petition period. That amount was $16,550.
The debtors, who had hoped for much more, appealed to both the District Court and the Second Circuit Court of Appeals, arguing that the bankruptcy court had improperly calculated the amount. Both appellate courts affirmed the decision of the bankruptcy court.
The Second Circuit emphasized that the provisions of § 522(d)(11)(E) apply only to post-petition earnings and defined the term “future” as “looking forward from the date of the bankruptcy filing” and not from some previous point in time, as the debtors had argued.
The Court of Appeals found no error in the lower courts’ reasoning that considered such factors as the debtors’ needs, including present and anticipated expenses, their assets, present and anticipated income, training and education, and “ability to earn a living” in arriving at the $16,550 figure that represented a shortfall in their income.
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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 March 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.
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.
By Craig D. Robins
Biggest Bankruptcy News in Years Is a Boon to Debtors
For New York consumers considering bankruptcy, the biggest bankruptcy news in five years dropped like a bombshell on December 23, 2010 when then-Governor Paterson unexpectedly signed legislation greatly increasing the state law exemptions.
Exemptions are those statutes that permit consumer debtors in bankruptcy to keep and protect assets. The new law will become effective on January 22, 2011.
This will certainly cause an increase in the number of consumer bankruptcy cases we will see next year as more financially burdened consumers will be able to eliminate their debts while keeping and protecting all of their assets.
Homestead Exemption Increases to $150,000 per Person for Those on Long Island
The old homestead exemption statute, which went into effect in 2005, increased the amount of equity each debtor could protect in their home from $10,000 to $50,000. For Long Islanders and those in the five boroughs, the new homestead exemption for 2011 triples that amount to an incredible $150,000. Since a husband and wife can pool their homestead exemption, that means that a married couple will be able to protect a whopping $300,000 worth of equity in their home.
Homestead Exemption Increases to $150,000 per Person for Those on Long Island
The old homestead exemption statute, which went into effect in 2005, increased the amount of equity each debtor could protect in their home from $10,000 to $50,000. For Long Islanders and those in the five boroughs, the new homestead exemption for 2011 triples that amount to an incredible $150,000. Since a husband and wife can pool their homestead exemption, that means that a married couple will be able to protect a whopping $300,000 worth of equity in their home.
This will enable almost any typical Long Island middle class family to file a Chapter 7 bankruptcy and eliminate their credit card debts while fully protecting their home. Of course, consumers must still pass the means test; the new exemption law has no impact on that.
The new law also means that many individuals who previously filed for Chapter 13 relief because they had too much equity in their homes, and are currently part-way through their Chapter 13 plan, will likely be able to convert their cases to Chapter 7 and not have to make any further payments. In order to do so, they would also need to demonstrate that their new budget has no disposable income, despite previously filing a budget that had enough funds left over to enable them to make their monthly Chapter 13 plan payment.
Incidentally, the amount of the new homestead exemption will be based on what county the debtor’s home is in. For most downstate counties the homestead exemption will be $150,000 per person; for upstate counties, it will be $75,000 per person.
Previously, most states had more generous homestead exemptions than New York; now it will have one of the best.
Amounts for Almost All Other Exemptions Categories Are Being Increased and New Categories Are Being Added
The new bill also increases the exemptions for a great deal of other assets like cars, and adds some new categories like home computers and vehicles for the handicapped.
Amounts for Almost All Other Exemptions Categories Are Being Increased and New Categories Are Being Added
The new bill also increases the exemptions for a great deal of other assets like cars, and adds some new categories like home computers and vehicles for the handicapped.
The exemption for cars is being increased from $2,400 to $4,000. Vehicles equipped for the handicapped will be exempt for up to $10,000.
A new exemption enables homeowners who claim the homestead exemption to also exempt up to $1,000 in cash. Previously, homeowners could not exempt cash if they claimed the homestead exemption. This will enable homeowners to protect a larger amount of their tax refund which is considered cash for exemption purposes.
Another new category permits consumers to protect up to $1,000 worth of jewelry and art. The tools of trade exemption, which permit debtors to protect the tools and implements of their profession, is being increased from $600 to a more respectable $3,000.
There are also increased protections for cell phones, health aids, food, heating equipment, religious books, etc. However, I have never seen a trustee previously raise an issue with any of these types of assets, nor do trustees seem to have any interest in a used home computer. Nevertheless, it’s nice to see increased exemption amounts.
New Law Will Permit Debtors To Chose Between the New State Exemptions and the Federal Exemptions
Perhaps the biggest change to the law, other than the increase to the homestead exemption, is that debtors may now chose either the federal exemptions or the New York State law exemptions.
Perhaps the biggest change to the law, other than the increase to the homestead exemption, is that debtors may now chose either the federal exemptions or the New York State law exemptions.
When the current version of the Bankruptcy Code was created several decades ago, it included certain federal exemptions as well as a provision that permitted each state to either adopt them or “opt out,” in which case the state can chose their own exemption scheme. From day one, the New York legislature chose to opt out and use its own exemption statutes which have primarily been contained in the C.P.L.R. and Debtor and Creditor Law.
Some Debtors Will Be Wild over the New Wildcard Federal Exemption
The federal exemptions should provide some tremendous protections for consumers who do not need the generous New York state homestead exemption. This is because the federal exemptions contain a miscellaneous “wildcard” exemption that permits consumers to protect $12,000 worth of miscellaneous assets including cash and tax refunds. Since the wildcard exemption provides a great deal of flexibility, consumers will greatly benefit from now being able to use this provision.
In addition, the federal exemptions have a $20,200 personal injury exemption, compared to New York’s much-smaller $7,500 P.I. exemption.
New York attorneys, trustees and bankruptcy judges, all of whom have little or no idea what the federal exemptions are about, as they have never had to use them (or haven’t used them since the early 1980’s when the federal exemptions were last available in New York), will have an interesting and very exciting time during the next several years as they race to come up to date learning about them and applying them. We will also begin to see some New York bankruptcy court decisions for the first time in many decades interpreting the use of the federal exemptions in this state.
Proposed Legislation to Expand New York’s Exemptions Has Been Periodically Submitted in Albany for Years
For years, legislation was proposed each and every year in Albany that sought to increase exemption amounts. This legislation never received any publicity because it was periodically struck down and nobody ever expected it to pass.
In years past, when I would discuss this with some of my colleagues, they were surprised to hear that there was pending legislation considering that it wasn’t publicized at all.
Despite reaching various stages in Albany each year for the past decade, such legislation has never found its way into law except once, when the homestead exemption was increased in September 2005.
The Governor’s Signing of the Bankruptcy Legislation Today Was Totally Unexpected
In July of this year we seemed to get closer than ever before to seeing a change in New York’s woefully inadequate exemption laws.
The Governor’s Signing of the Bankruptcy Legislation Today Was Totally Unexpected
In July of this year we seemed to get closer than ever before to seeing a change in New York’s woefully inadequate exemption laws.
At that time, both houses of the New York State Legislature passed legislation to increase bankruptcy exemptions in New York State. However, the banking industry, which has an extremely large presence in New York, vigorously lobbied Governor Paterson to veto the bill.
Very few people thought there was any chance that Governor Paterson would sign the legislation into law. For that reason, no one was holding their breath about its passage because nobody expected it to happen.
The Bankers carry a lot of power, even with Democrats. They argued that many consumers owe taxes to New York State, and with the bill’s added protections for debtors, both in and outside of bankruptcy, New York State’s tax collections would suffer.
New York City officials also opposed the legislation, arguing that it would impair the City’s ability to tow and auction cars for outstanding parking violations.
For a period of time, the bankruptcy legislation, which was signed by both houses, just sat on the Governor’s desk, and we all assumed it would die there.
Yet, Gov. Paterson, who is leaving office in just one week, signed the bill during his last week in office — with no advance notice and no fanfare of any kind, catching me, as well as all other bankruptcy practitioners, by surprise. And a very nice surprise at that! The only hint came a day before when his staff circulated a memo to asking for input on the pending bill.
Perhaps the Governor, who apparently does not see public service in his future, was upset at the damage wrought by the financial sector which drove the economy into a recession, and used this opportunity to give something back to his constituents.
Governor Paterson Issued Press Release Discussing Why He Signed New Exemption Law
The Governor announced his signing of the bill by sending out a press release the day he signed it. He stated that the bill “would provide a much-needed update to the exemptions law in New York as many provisions of State’s exemptions law are antiquated or have not been amended since the 1980’s.
Governor Paterson Issued Press Release Discussing Why He Signed New Exemption Law
The Governor announced his signing of the bill by sending out a press release the day he signed it. He stated that the bill “would provide a much-needed update to the exemptions law in New York as many provisions of State’s exemptions law are antiquated or have not been amended since the 1980’s.
The purpose of such exemptions is to permit debtors in bankruptcy to retain a modest amount of personal property and equity in their homes so that they can continue to maintain their lives, and to protect them from becoming homeless, unemployed, or otherwise dependent on the State.”
The New and Increased Exemptions Will Help Future Bankruptcy Debtors in Many Ways
Not only will more consumers be able to file for Chapter 7 bankruptcy, but many of those who seek Chapter 13 protection instead will end up paying substantially less through their monthly Chapter 13 plan.
The New and Increased Exemptions Will Help Future Bankruptcy Debtors in Many Ways
Not only will more consumers be able to file for Chapter 7 bankruptcy, but many of those who seek Chapter 13 protection instead will end up paying substantially less through their monthly Chapter 13 plan.
Also, many existing Chapter 13 debtors may be able to convert there cases to one under Chapter 7 and eliminate all further monthly payments.
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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 JANUARY 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.