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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.
Pro-Se Litigant Scores Victory Against Chapter 13 Trustee Over Tax Refund Issue
When it comes to post-petition tax refunds in Chapter 13 bankruptcy cases, the long-standing practice in this jurisdiction for debtors who propose to pay unsecured creditors less than 100%, is to surrender to the trustee all tax refunds the debtor receives during the pendency of the bankruptcy case.
Every experienced consumer bankruptcy practitioner who practices on Long Island is keenly aware of this “requirement.”
However, 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?
Recently, Chapter 13 trustee Michael Macco of Melville said “yes” to this question and threatened to dismiss a confirmed Chapter 13 plan filed only by the wife, unless the non-filing husband cooperated and turned over the entire joint tax refund.
The trustee argued that inherent in the debtor’s obligation to turn over all post-petition tax refunds, was an obligation by the non-debtor spouse to do the same, so that the debtor’s creditors would then receive a distribution from these funds.
The husband refused to do so, went to a law library, and then brought a pro se motion seeking a determination that his share of the tax refund should be protected. He did this two months after writing a letter to the judge expressing frustration over what he perceived to be an extremely unreasonable request from the trustee.
In an affidavit in opposition that was barely longer than one page, the Chapter 13 trustee argued that: a) the debtor chose to file a joint tax return; b) there is no mention in the Chapter 13 plan that there can be an exclusion for the non-debtor spouse’s tax refund if the debtor files a joint return; and c) the Bankruptcy Code requires the debtor to pledge all household income to pay unsecured creditors.
The husband and trustee had oral argument before Central Islip (Eastern District of New York) Bankruptcy Judge Robert E. Grossman in August, who reserved decision. The Judge delivered an oral decision at a subsequent hearing in September.
Judge Grossman then issued a detailed written decision last month, on November 4, 2010. It held that the trustee had no basis, either at law or under the terms of the plan, to compel the husband, as a non-filing spouse, to turn over his property to the trustee, or to hold the debtor in default for the husband’s failure to do so. In the Matter of Susan Malewicz, no. 09-74807-reg, (Bankr. E.D. New York 2010).
Why Do Debtors Have to Turn Over Tax Refunds?
Judge Grossman first addressed the concept of why Chapter 13 trustees require debtors to turn over their tax refunds. Apparently, Chapter 13 trustees claim that if a confirmed plan does not require a debtor to turn over tax refunds, debtors may manipulate deductions on their W-2 forms which would have the effect of reducing monthly income payable to creditors through the plan.
Mindful of the potential for abuse, bankruptcy courts have found that turnover of a debtor’s post-confirmation tax refunds is appropriate under the following situations: when they are property of the estate; when they are included in “projected disposable income” which means they must be committed to the Chapter 13 plan; and/or when the terms of the plan provide for such turnover.
Spouse’s Tax Refund Not Property of the Bankruptcy Estate
The Judge determined that Bankruptcy Code Section 541(a)(2) and 1306(a) are the relevant statutes that determine what is property of the estate in a Chapter 13 case. He then found that there is no provision in the Code that includes a non-debtor spouse’s property as being included in the debtor’s “property of the estate.”
Projected Disposable Income in Chapter 13 Bankruptcy Cases Does Not Include Non-Filing Spouse’s Income
Judge Grossman noted that other courts have permitted Chapter 13 trustees to require turnover of post-confirmation tax refunds under the theory that the refunds must be included in the calculation of the debtor’s “disposable income.”
Bankruptcy Code Section 1325(b) requires debtors to pledge all of “the debtor’s” projected disposable income in order for the plan to be confirmed. Here, the judge emphasized the wording which focused on “debtor” and ultimately found that a non-filing spouse’s entire income is not included in this analysis. “Nothing in the Code obligates anyone other than the Debtor to fulfill the requirements of the confirmed Plan.”
The Chapter 13 Plan Is Binding
Although the plan had the typical language that “the debtor shall pay tax refunds to the trustee,” the Judge found that this wording could not be interpreted to include the non-debtor spouse’s tax refunds.
The Judge also remarked that even though the husband signed an affidavit of contribution, indicating that he was contributing his income to the plan, it was not binding because it was not mentioned in the Chapter 13 plan.
Practical Tips – Don’t Be Steamrolled by a Trustee’s Argument
I actually called the debtor’s husband to get his take on what happened, as scoring a pro se victory over a Chapter 13 trustee is an impressive feat. He said that he felt very firmly that his position was correct and even went to a law library to do his homework.
As for bringing the motion, he said, “I was not afraid to go in and stand up for what was right. If I lose; I lose. I’m in no worse position than when I started.” No one can argue with that reasoning.
As I’ve indicated in some past articles, just because a trustee strongly and loudly enunciates a particular position does not mean the trustee is correct. Always consider presenting your issue to the Court if you believe you have a solid basis for doing so. As the debtor’s spouse said, you have nothing to lose. Congratulations to him!
Perhaps Debtors Do Not Have to Turn Over Tax Refunds — A Big Issue for Another Day
I was greatly intrigued by one particular statement that Judge Grossman inserted in the decision: “The parties have not raised, and this Memorandum Decision does not address, whether it is appropriate for the Trustee to require the turnover of the Debtor’s post-confirmation tax refunds.
This leads me to ponder if the Judge questions whether Chapter 13 debtors should uniformly commit their tax refunds to the plan. Perhaps there are some exceptions to our local practice. This would certainly be a major issue, but that is a subject for another day.
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 DECEMBER 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.
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Quick Links to Tax Week Blog Posts About Tax Refunds and Bankruptcy
This past January, for an entire week, I posted a series of articles every day about tax refunds and bankruptcy. Here are some quick links to these articles:
Written by Craig D. Robins, Esq.New Decision Says Avoiding the Lien is Not Dependant on Receiving the Chapter 13 Discharge
One of the extraordinary powers a consumer debtor has is the ability to avoid (eliminate) judicial liens in a bankruptcy case provided certain conditions are met.
In a typical bankruptcy filing the debtor can discharge the personal liability on most debts – both secured and unsecured. However, in rem liens on real estate, including mortgages and judicial liens obtained from judgments, remain protected.
The discharge prevents lien holders from pursuing the debtor personally to collect on the underlying obligation; however, the lien holder maintains the value of its security interest as a lien against the real estate.
Consumer debtors have the ability to avoid judicial liens to the extent that the lien impairs the debtor’s homestead exemption.
In this month’s Suffolk Lawyer column I will provide a brief background on judicial liens and the process to avoid them. I will then discuss an interesting recent decision by Judge Robert E. Grossman which holds that avoiding a judicial lien in a Chapter 13 case should be effective immediately, rather than years later when the debtor receives his discharge.
How do Creditors Obtain Judicial Liens?
When a creditor sues a consumer and obtains a judgment, the judgment can become a lien on real estate that the consumer owns. If the creditor obtains the judgment in Supreme Court, then it automatically becomes a lien on any real estate owned by the debtor in the county where the court is located.
If the creditor obtains the judgment in District Court, then the creditor must file a transcript of judgment with the County Clerk in order to obtain a lien on realty in that county. Judicial liens are always subordinate to any other liens of record such as existing mortgages.
The Debtor’s Right to Avoid Liens in Bankruptcy
When a consumer debtor files for bankruptcy relief – which is usually done under Chapter 7 or 13 – the debtor can avoid judicial liens which impair the debtor’s homestead exemption as long as the formula set forth in Bankruptcy Code Section 522(f) is satisfied.
If the lien only partially impairs the homestead exemption, the debtor can avoid that part of the lien, essentially reducing it.
Procedure for Avoiding Judicial Liens in Bankruptcy Cases
A debtor bringing an application to avoid a judicial lien must do so by motion, as opposed to adversary proceeding. This is usually done prior to discharge.
The debtor actually has the burden of filing the motion. If the debtor fails to do so, the lien remains on the property and survives bankruptcy, although the creditor is prevented by virtue of the automatic stay and order of discharge from pursuing the debtor personally.
Creditors can object to a motion to avoid a judicial lien. The most common ground is a dispute over the valuation of the real estate, thus creating an issue as to whether the debtor’s homestead exemption is actually impaired.
If the debtor is successful, the court will grant the motion and enter an order declaring the judgment to be void as a lien of record. The debtor must then file a certified copy of the order with the County Clerk to remove the judgment lien from the judgment roll.
Issue of the Day: When Should the Order Granting Lien Avoidance Become Effective in a Chapter 13 Case?
In Chapter 7 cases, the order is effective immediately. However, a unique issue exists in Chapter 13 cases. This is because a great number of Chapter 13 cases eventually fail, resulting in dismissal of the case and no discharge for the debtor. An argument can be made that a debtor should not be permitted to finalize the avoidance of a judicial lien by expunging it from the public records of the County Clerk if the Chapter 13 case can be dismissed for non-payment of Chapter 13 obligations a few months later.
So here’s the big question: Should a Chapter 13 debtor be able to avoid a judicial lien shortly after filing the case? Or should the effectiveness of the lien avoidance be dependant upon the debtor demonstrating 100% success with the bankruptcy, which means fulfilling all obligations under the Chapter 13 plan over a period that is three to five years?
Recent Decison: Lien Avoidance Not Subject to Entry of Discharge
In a case where there is no binding caselaw in the Second Circuit, Judge Robert E. Grossman, sitting in the Central Islip Bankruptcy Court in the Eastern District of New York, just issued a decision on October 26, 2010 in which he determined that a Chapter 13 debtor who avoids a judgment lien pursuant to Section 522(f) should not have to wait until discharge for the order to become effective. In re: Kathleen Mulder, no. 10-74217, (Bankr. E.D. New York 2010). In doing so, he reversed the Court’s policy of many years.
In the Mulder case, the debtor owned a home worth $255,000 at the time of filing. There were mortgages on the property totaling $220,000. Thus there was about $35,000 worth of equity. The debtor was entitled to exempt up to $50,000 worth of equity under her New York homestead exemption.
At the time of filing, there was a judgment lien in the sum of $160,000. The debtor, who was represented by my colleague, Donna M. Fiorelli of Garden City, filed a routine motion to avoid the judgment lien. The creditor filed a limited objection arguing that its rights would be severely prejudiced if the Court permitted the debtor to expunge the lien prior to discharge.
The sole issue before the Court was whether Section 522(f) lien avoidance is effective immediately or whether it must be conditioned upon the entry of a discharge in the case. (There was no dispute that the lien should be avoided).
The Court overruled the judgment creditor’s objection and permitted the debtor to immediately expunge the lien, finding nothing in the Code to prohibits this. In reaching this conclusion, the Court adopted the minority view in this country and essentially changed the policy of the Court in Central Islip (or at least those cases before Judge Grossman).
The Court pointed out that other provisions of the Code protect the creditor, in particular, Section 349 which provides that when a case is dismissed, all property rights are restored to the position in which they were found at the commencement of the case. Thus, Section 349 automatically reinstates liens avoided by Section 522(f).
However, as a practical matter, this is not automatic, and if the debtor expunges the lien and the case it later dismissed, it places a burden on the judgment creditor to immediately take steps to protect itself.
Judge Grossman pointed out that the minority view seeks to preserve the function of Section 349 if the case is dismissed. “Courts which condition lien avoidance on the entry of a discharge perceive a weakness in the Code that could adversely affect judgment lienholders. . .” However, he found good cause to part from this view because the Code does not explicitly provide for this.
It appears that Judge Grossman’s approach here greatly differs from his approach in other cases. Here he has taken a strict constructionist approach, stating, “the Court finds that the words of Section 522(f) are clear, and when reading a statute, if the meaning is clear, the analysis ends there.”
He also quoted another decision stating, “Congress ‘says in a statute what it means and means in a statute what is says there.’” He concluded, “While this Court shares a similar frustration with what appears to be drafting deficiencies of the Code, this Court is bound by the plain meaning of the statute.”
Yet, most of Judge Grossman’s previous decisions have been more geared towards reaching a logical outcome, as opposed to citing strict constructionist grounds, something I addressed in my March 2010 column —Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts . In any event, this decision is a win for the consumer.
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 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.
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.
By Craig D. Robins, Esq.
Recent Appellate Decision Says Filing All Pay Stubs May Not Be Necessary
We all know that under the new bankruptcy laws, debtors are required to file copies of all pay stubs for income received during the 60-day period prior to filing.
To put teeth into this requirement, the law further provides that failure to do so will result in the automatic dismissal of the bankruptcy case – a scary thought. What happens if a debtor files just one pay stub, but otherwise documents the payments they received?
The Second Circuit Court of Appeals just decided a case last month, on August 9, 2010. It held that debtors do not need to file all of their pre-petition payment advices if they otherwise document all payment received from employers during the 60-day pre-petition period.
This case addressed for the first time in our circuit what obligations the Bankruptcy Code imposes upon a debtor with respect to the filing of payments advices. The bottom line is that debtors merely need to provide the necessary information on payments as opposed to the actual pay stubs themselves.
The Pay Stub Requirement in Chapter 7 and Chapter 13 Bankruptcy Filings
When Congress revised the bankruptcy laws in 2005, it imposed a new requirement under Bankruptcy Code section 521(a)(1)(B)(iv) that debtors provide written verification of their current income by filing “copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition, by the debtor from any employer of the debtor.” Payment advices are typically pay stubs.
Bankruptcy Rule 1007(c) requires debtors to fulfill this requirement within 14 days after filing the petition. However, if the debtor fails to file the payment advices within 45 days of the filing date, then Code section 521(i)(1) provides for automatic dismissal.
Bankruptcy counsel typically file pay stubs with the bankruptcy court by ECF, and send copies to the trustee, at the same time the petition is filed or shortly thereafter.
The Recent Riffle Case
Stephen Riffle and his wife filed a routine Chapter 13 case in the Western District of New York in 2008. His attorney only filed the debtor’s last pay stub during the 60-day pre-petition period because that was the only pay stub that the debtor retained.
The pay stub contained the debtor’s earnings and deductions for the pay period and also stated the debtor’s year-to-date earning and payroll deductions in various categories.
In addition to filing this one pay-stub, the debtor also filed a chart entitled “Sales Earnings Report,” which had been issued by the debtor’s employer and showed the debtor’s gross earnings for each pay period from the beginning of the year. Debtor’s counsel believed that these two documents satisfactorily disposed of the payment advice requirement.
However, an aggressive creditor, Community Bank, disagreed, and after 45 days filed a motion asking the bankruptcy court to confirm that the case was dismissed for non-compliance with the statute. The Chapter 13 trustee opposed the dismissal, arguing that the two documents that the debtor filed represented full compliance with the statutory requirement.
The bankruptcy court agreed with the debtor and trustee; the District Court affirmed, and so did the Second Circuit. Community Bank v. Riffle (In re Riffle), no. 08-4440-bk (2d Cir. 08/09/10).
The Relatively-New BAPCPA Statute that Provides for Filing Payment Advices Is Very Poorly Worded
The Court of Appeals noted that it had not previously decided what obligations 521(a)(1)(B)(iv) imposes upon a debtor and further stated that “the statute, to put it mildly, is not a model of syntactical clarity. At least two grammatically valid readings of the statute are possible, each of which would place a different requirement on the debtor.”
The Court determined that the statute was ambiguous and provided an analysis in which it dissected clauses and words, explored different grammatical meanings, discussed how certain words modified other words, and focused on how interpreting one participle could lead to two different grammatical conclusions – both of which would be technically correct.
“Other Evidence” of Payment is Acceptable
In the end, the Court chose “the payment-focused interpretation” over a “document-focused interpretation” and held that the statute requires a debtor to file either all payment advices received within 60 days pre-petition – or – other evidence of payment received during this period.
“Although neither reading is perfectly satisfying, we conclude that the payment-focused interpretation is superior,” the Court said.
The Court commented that the documents that the debtor filed “created a very clear picture as to the amount of income the debtor received in the 60 days pre-petition” and thus met his obligation under the statute.
What this Case Means to Long Island Bankruptcy Practitioners
The Second Circuit clearly indicated its desire to follow a more liberal, practical-sense approach in its interpretation of the statute. Basically, as long as a debtor provides all of the relevant information regarding payment received during the relevant period, as opposed to the actual “pieces of paper” the debtor received (pay stubs), then the debtor has complied with his statutory requirements.
Income Breakdown Not Required
The Court also commented that the Bankruptcy Code does not require a breakdown of gross and net income on a per-pay period basis. However, a debtor must identify monthly net income.
Practical Tip: What Do You Do If the Debtor Has Not Received Any Payment Advices During the 60-day Period?
When there are no payment advices, then there is nothing to file. However, the bankruptcy court clerk’s office does not know that there is no documentation, so it is prudent to prepare an affidavit for the debtor to sign indicating this fact, and file this “Affidavit in Lieu of Payment Advices” the same way you would ordinarily file the pay stubs.
Practical Tip: Have Debtor Request Info from Employer
Debtors often do a poor job of retaining papers, and frequently discard or misplace pay stubs. If a debtor has discarded or misplaced his pay stubs, then most employers will be able to print a report containing the same information, that should provide all of the necessary details to comply with the statute.
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 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.Many High-income Debtors with Significant Income Can File Chapter 7 Bankruptcy and Still Pass the Means Test
During the past few years I’ve noticed a fascinating trend: I’m counseling more and more bankruptcy clients with high income and high debt.
During the past few years I’ve noticed a fascinating trend: I’m counseling more and more bankruptcy clients with high income and high debt.
Representing such debtors requires addressing certain special issues which I will focus on in this article which was originally published in the June 2010 Issue of the Suffolk Lawyer, a Bar Association periodical.
Blame the Recession
Perhaps the current drawn-out recession is affecting an increasing number of consumers beyond the low and middle-class – long the bastion of typical bankruptcy filers.
In addition, falling real estate values have wiped out the equity in many people’s homes. Many middle and upper-class Americans have thus lost their ultimate source of long-term savings.
Chapter 7 Bankruptcy Is Usually the Consumer’s Best Choice
Assuming that there’s no need to consider Chapter 13 to stop foreclosure, I always strive to file Chapter 7 bankruptcy petitions for all my clients – but doing so requires that they qualify under the means test. After all, if a Chapter 7 case goes smoothly, the debtor will discharge most or all debts and ideally keep all assets.
For high-income debtors, Chapter 7 eligibility has become rather challenging considering that under the 2005 Bankruptcy Amendment Act (BAPCPA), a consumer debtor will almost certainly face opposition to getting a discharge if he or she does not pass the means test. There is no salary cap for filing Chapter 7 Bankruptcy.
The U.S. Trustee is especially vigilant in reviewing any case that is deemed abusive, or that may even be close to being abusive.
Accordingly, analyzing the facts of a high-income debtor becomes critical and properly preparing the means test and other bankruptcy schedules becomes crucial.
How Much Income Is “High-income”?
Lately I’ve been regularly filing Chapter 7 bankruptcy petitions for families with incomes well over $100,000. I recently filed two Chapter 7 cases where the family income was over $200,000. I actually wrote a blog post a year ago entitled: Can You File Chapter 7 Bankruptcy on Long Island With a Family Income of $200,000 a Year?
Considering the perceived income limitations for seeking Chapter 7 relief under the new bankruptcy laws, such high-income filings seem difficult or impossible; yet in practice, they are not.
Generally, a high-income debtor is one who has income over $100,000 per year or $10,000 per month. In my bankruptcy practice, high-income debtors are often executives, doctors, assorted professionals, and families of double-income spouses.
General Principle for Filing High-income Cases
General Principle for Filing High-income Cases
A high-income debtor can file for Chapter 7 relief if the debtor a) passes the means test or conversely does not need to qualify for the means test; and b) passes a totality of circumstances test for filing in good faith – often meaning that all of their expenses are reasonable and necessary. See: If I Make Over $100,000 a Year, Can I Eliminate Credit Cards Debts in Bankruptcy?
Many high-income debtors also have relatively high levels of debt. A former executive previously earning several hundred thousand dollars per year can easily have as much credit card debt.
In such cases, the debt must have been incurred in good faith and must not be unreasonably high in relation to the debtor’s income at the time the debt was incurred. Counsel should devote extra time to reviewing the various debts in such cases.
The Business Debt Exception to the Means Test
Many high-income debtors have very substantial debt obligations from failed business ventures, often due to having signed a personal guarantee. A debtor is excused from preparing the means test if the debtor’s debts are not primarily “consumer debts”, and there is a box on the means test for this exclusion.
A “consumer debt” is defined as a debt incurred by an individual primarily for a personal, family or household purpose. On the other hand, some courts have defined “business debt” as debt that is incurred with a “profit motive.” I hope to devote a future column to a more involved discussion about how courts have defined debt as either business debt or consumer debt.
To see a more thorough discussion of this, please see my post: This Debtor Didn’t Have to Do the Bankruptcy Means Test .
Variables Making High-income Debtors More Eligible for Filing
Certain individuals are able to pass the means test much more easily than others. Those that have large families with multiple dependants, large mortgages, two car loans or leases, mortgage arrears and tax arrears are more likely to qualify under the means test because these items can all be used as means test deductions.
Since individuals with large famlies can benefit from increased means test deductions, consider issues in Determining Household Size for the Means Test .
Frequently, individuals with high income receive year-end bonuses. By timing the filing of the petition, the impact of year-end bonuses on the means test can be minimized or even reduced. See my prior post: Advance Planning: File Bankruptcy Before You Get a Year-End Bonus .
The Budget Must Be Reasonable
Even if the debtor passes the means test, that alone is not enough to demonstrate that the case is not abusive, and that it is filed in good faith. All budget items must be reasonable and necessary, based on the debtor’s actual income going forward. This requires a more subjective and equitable assessment of the debtor’s circumstances.
For example, the U.S. Trustee is likely to object to an expense of $2,000 per month for food for a family of four, but will not have any problem with an expense of $1,200, even though that is on the high side.
Some expenses will not pass muster. The U.S. Trustee will likely argue that an expensive summer camp is unreasonable, as sending the kids there is being done at the expense of the creditors.
Issues with Keeping Rental Property
Issues with Keeping Rental Property
High-income debtors are much more likely to have investment real estate in addition to their homes. In such cases, there is an issue as to whether keeping the rental property is reasonable. If the expenses of retaining the property exceed the amount of rental income, then keeping the property will result in a reduced amount of disposable income.
In such a case, the U.S. Trustee will argue that the debtor will have additional income each month to make payments to creditors if the investment property is abandoned.
In such a case, the U.S. Trustee will argue that the debtor will have additional income each month to make payments to creditors if the investment property is abandoned.
Maintaining a Luxury Residence
A high-income debtor is much more likely to have an expensive home. However, there are some cases across the country in which the U.S. Trustee argued that it is unreasonable for a debtor to keep a luxury home with a very high monthly mortgage at the expense of the creditors. This issue has not been addressed in our Circuit.
Alternatives If Debtor Isn’t Eligible for Chapter 7 Relief
If the debtor fails the means test or simply has too much disposable income, then there are still a number of options available. The debtor can file for Chapter 13 relief if his or her secured debts are less than $1,081,400 and unsecured debts are less than $360,475.
If the debt levels exceed these amounts, they can file for Chapter 11 relief. Debt Negotiation is also an option in which the attorney can negotiate settlements with the creditors. See my blog post: Options If You Fail the Bankruptcy Means Test .
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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 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.
I am currently in San Francisco where I just attended the annual convention of the National Association of Consumer Bankruptcy Attorneys (NACBA). I write this report from there on May 1, 2010.
[Note: this article was previously published in the May 2010 edition of the Suffolk Lawyer].
[I will soon post a number of photos that I took at the NACBA convention}
Many years ago I discovered how exciting it is to travel across the country to interact with fellow bankruptcy practitioners and learn the latest about strategies for protecting consumer bankruptcy debtors, and tips for running a bankruptcy law office.
Over the course of three days, some of the country’s leading bankruptcy attorneys as well as a number of bankruptcy judges, provide valuable insight at daily programs and seminars.
What I find just as important is trading notes and war stories with other bankruptcy attorneys from across the country and learning about new products and services at the accompanying trade show.
Here Are Some Highlights of the Bankruptcy Convention
New Trend in Interpreting the Means Test
In a half-day program which addressed the means test, the speakers concluded that both the United States Trustee and our country’s bankruptcy judges have become more lenient in interpreting the means test in Chapter 7 cases. There are three reasons for this trend.
Apparently, the current recessionary climate and sentiment against large banking institutions is resulting in the U.S. Trustee bringing fewer Section 707 motions alleging that the debtor filed an abusive case.
In addition, more and more debtors are providing information to the U.S. Trustee’s office in cases where there are means test issues. This enables the U.S. Trustee to evaluate the issue of abuse and reach a conclusion that the U.S. Trustee should not object.
Finally, there seems to be a greater number of experienced bankruptcy attorneys who know what red flags to look out for and consequently these experienced attorneys refrain from filing abusive cases.
Wide-Spread Concern Over Bankruptcy Judge Salaries
Judicial salaries are relatively low. It appears that we are losing a large number of bankruptcy judges because the level of judicial pay is so low. When there is a vacancy on the bench, this causes the bankruptcy court’s entire case load to slow down, which means unhappiness and dissatisfaction to litigants and all others involved.
This was indeed the case just two three years ago here, in the Eastern District of New York. Our Chief Bankruptcy Judge for the district, Hon. Melanie L. Cyganowski, left the bench to pursue a much more profitable position as a partner in a leading bankruptcy firm.
I interviewed Judge Cyganowski at that time and she clearly indicated that her reason for leaving the bench was because of her unreasonably low judicial salary. See: Chief Bankruptcy Judge Melanie Cyganowski Stepping Down.
HAMP Bankruptcy Update
There was ample discussion about President Obama’s Home Affordable Modification Program (HAMP) which seems to be rife with problems as an unusually small percentage of homeowners actually get permanent relief.
Here’s why:
a) there is a major lack of communication on the part of the lender;
b) lenders are continuing to threaten homeowners with foreclosure even as the lender is evaluating the homeowner for a modification, and even if the homeowner has been approved for a trial term; and
c) lenders are arbitrary in granting relief.
On a positive note, however, a new law is going into effect on June 1, 2010 that, among other things, makes it illegal for a lender to discriminate against a bankruptcy debtor because he or she is in the HAMP program.
The new law will also provide certain protections to Chapter 13 debtors as mortgagees will be precluded from objecting to discharge.
Lower Prices for Credit Counseling
When the 2005 Bankruptcy Amendment Act first went into effect in 2005, there were only four approved credit counseling agencies in our jurisdiction (E.D.N.Y.), and they all charged the same rate – $50 per credit counseling session.
There must have been about 20 credit counseling companies exhibiting at the trade show and many now charge fees as low as $15 per session.
In addition, they gave out so much shwag that my ten-year-old son, Max, will be delighted to receive from me upon my return a large number of squeeze toys, flashlights, keychains, fancy chocolates, playing cards, puzzles, T-shirts and what-not that I picked up from these exhibitors.
My hard-working office staff will also be the recipient of a good deal of this booty.
Emerging Technologies for Consumer Bankruptcy Practices
One of the most crowded exhibitor booths belonged to a OTB, an company that created BK Express, a comprehensive practice management system which is designed for consumer bankruptcy attorneys.
I actually just set up my office to use this software which is basically a special shell designed to work on top of LexisNexis’s Time Matters system.
Problems with MERS Mortgages and Foreclosure Defenses
In a very dynamic session, we were told that 50% of all residential mortgages in this country are nominally owned by MERS, which is Mortgage Electronic Registration Systems, a privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.
The problem with MERS-recorded mortgages is that MERS really does not own the mortgage, thereby creating an interesting argument that MERS does not have any standing in bankruptcy court.
I previously wrote about special defenses that a homeowner can assert to defend a foreclosure action involving a MERS mortgage. See: A New Powerful Mortgage Foreclosure Defense — Compliments of MERS.
If your client has a MERS mortgage, consider looking at the pooling and service agreement to make sure that there was a true and valid assignment at every link of the chain, including delivery and acceptance of assignment documents. If there was not, you may have a good objection to a MERS proof of claim or motion to lift the stay.
Few Bankruptcy Attorneys From New York
I was rather surprised the very small turn-out from our state. Out of about 1,600 bankruptcy attorneys who attended the convention, there must have been fewer than 20 from New York, and only one other member, I believe, from the Suffolk County Bar Association. That was Allison Shields, who was actually one of the speakers – she spoke on managing a successful bankruptcy practice.
Written by Craig D. Robins, Esq.
One Long Island Bankruptcy Judge Permits Cram-Down; Two Do Not
Several months ago I was excited to report that Central Islip Bankruptcy Judge Dorothy T. Eisenberg issued a decision permitting a Chapter 7 debtor to cram-down a second mortgage. (See my December Suffolk Lawyer article, “Chapter 7 Cram-Down of Second Mortgages”.)
That decision was very newsworthy, as it permitted homeowners whose homes were underwater to “strip-off” and remove a wholly-unsecured second mortgage.
However, we have since heard from our two other Long Island Bankruptcy Court judges.
Judge Eisenberg Permits Chapter 7 Cram-down
The decision granting this relief was In re Lavelle, No. 09-72389-478, 2009 WL 4043089 (E.D.N.Y. November 25, 2009). In that case, Judge Eisenberg determined that a Chapter 7 debtor may avoid a subordinate mortgage lien if that lien is wholly unsecured, based on an analysis of Bankruptcy Code section 506.
Judge Eisenberg, in her decision, also commented on the seminal Supreme Court case of Dewsnup v. Timm, 502 U.S. 410 (1992), stating that she found no authority in it that prevents a Chapter 7 debtor from cramming down a second mortgage in a Chapter 7 case.
The Distinction Between ‘Strip-Down” and “Strip-Off”
Judge Eisenberg focused a large part of her decision on Dewsnup which held that a Chapter 7 debtor may not “strip down” a first mortgage to the fair market value of the property. However, she pointed out that there is a difference between “stripping down” a mortgage and “stripping off” a mortgage.
Stripping-down refers to removing that portion of a mortgage that is unsecured, which is done pursuant to § 506. On the other hand, “stripping off” is essentially cramming down a mortgage, which means removing its lien status altogether. She determined that stripping-off was permissible in Chapter 7 cases.
Our Two Other Bankruptcy Judges Have Since Held Differently
Once Judge Eisenberg released the Lavelle decision, the Long Island bankruptcy bar was abuzz about the possibility of being able to cram-down undersecured second mortgages for their Chapter 7 debtor clients. However, there was no guarantee that our other two bankruptcy judges would follow Lavelle. Now we know that they will not.
Judge Grossman Denies Cram-down
Just last month, Judge Robert E. Grossman issued a decision in a case involving a somewhat similar set of facts and denied the debtor’s application to cram-down and strip-off the second mortgage – even though the mortgage lender defaulted and failed to file any response whatsoever. In re Pomilio, —B.R.—, No. 09-72389-reg, 2010 WL 681300 (E.D.N.Y. February 23, 2010).
Judge Grossman discussed Judge Eisenberg’s Lavelle decision, stating that she set forth a “well reasoned argument which finds support in a number of scholarly articles.” However, he felt constrained to apply her argument to the facts of his case.
In Pomilio, Judge Grossman began his analysis with Bankruptcy Code Sections 506(a) and (d), and the Supreme Court’s holding in Dewsnup, that a Chapter 7 debtor cannot bifurcate a secured creditor’s claim into a secured claim to the extent of the fair market value of the subject real property, and an unsecured claim for the remaining balance
He reached a different conclusion than Judge Eisenberg, determining that the “stripping down” process was simply not available to a Chapter 7 debtor.
Judge Trust Adopts Judge Grossman’s Position Denying Cram-down
Last week, Judge Alan S. Trust issued the Caliguri decision in which he expressed his position against Chapter 7 cram-downs. In re Caliguri, No. 09-75657-ast, slip op. (E.D.N.Y. March 16, 2010). In that decision, Judge Trust referred to both the Lavelle and Pomilio decisions and stated, “This Court adopts the analysis in Pomilio and concludes that a Chapter 7 debtor may not avoid the lien of a wholly undersecured, consensual mortgage lien holder.”
Judge Trust pointed out that post-Dewsnup courts have generally interpreted Dewsnup to prohibit Chapter 7 debtors from avoiding (stripping off) liens which are wholly undersecured for the same reasons that a Chapter 7 debtor may not reduce a secured mortgage claim to the fair market value of the property.
He further pointed out that such a reading of Dewsnup is a proper and consistent application of Section 506.
Practical Tips
Practical Tips
A debtor has a one in three chance of having his or her case land in Judge Eisenberg’s Court, in which event, the debtor will likely be able to successfully bring a Chapter 7 cram-down proceeding. If the case is pending before Judges Trust or Grossman, their position is clear that the debtor cannot.
However, at some point down the road, there will certainly be a higher court decision establishing the issue for sure, at which point all of our judges will be obligated to follow it.
Get Copies of Bankruptcy Decisions Reported in this Article
Check back to view this post in a few days and I will have copies of the Long Island Bankruptcy Court decisions that I cited in this post.
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 APRIL 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 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.
In my regular monthly column in the Suffolk Lawyer last month I discussed the difficulties that Congress created by enacting a means test statute that is poorly worded and confusing. (Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts).
In this month’s column I will highlight some recent bankruptcy court decisions that shed light on interpreting what is “income” for means test purposes when a debtor receives bonuses, teachers’ salaries or unemployment insurance benefits.
Countering the Lopsided Results of the Means Test
The purpose of the means test is to create a projection of the debtor’s net income and expenses for a period of three to five years after the filing date to see if the debtor would have sufficient surplus funds to make some kind of payment to creditors. In doing so, the starting point is to ascertain what the debtor’s income was during the six-full-month pre-petition calendar period.
When you only look at a six-month period to project the next three to five years of income, you often get a lopsided result. For example, if the debtor received a bonus in the prior half-year, his means test would effectively double this income because the means test would assume that the bonus would be paid every six months.
Conversely, if the debtor waited more than six months after receiving the bonus, the debtor would not even have to count the bonus as income.
Because of this uneven result, bankruptcy attorneys would often have to engage in a strategy of timing the filing. However, it seems that some bankruptcy courts are becoming more logical in their approach to analyzing the statute to provide a more balanced result for all parties.
Annual Bonuses Shall be Pro-rated Over 12 Months for the Bankruptcy Means Test
A recent case from Virginia looked at a debtor who received an annual bonus in the six-month pre-petition means test period. The court held that the bonus should be pro-rated over a 12-month period to determine the amount necessary to calculate the debtor’s “current monthly income.” In re Meade, —— B.R. ——, 2009 WL 4456211 (Bankr. W.D. Va., Nov. 13, 2009).
The court concluded that the language “average monthly income,” which is found in Bankruptcy Code section 101(10A)(A) is susceptible to two interpretations. One of them is the mechanical example I gave above, which can result in either a harsh result to the debtor or a windfall.
However, the court adopted a different, more realistic “common sense” interpretation, which the court said was more in keeping with what appeared to be the overarching purpose of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, namely, to require debtors to make meaningful payments to their creditors if they have the funds to do so.
The court felt that Congress intended for there to be some connection between the compensation received and the period of time in which the applicable services for such compensation were rendered.
With regard to the concept that under any different interpretation, debtors’ attorneys would want to time the filing of their clients’ cases, the judge said, “It is difficult to believe that Congress intended such a result or desired to encourage such tactics.”
A Teacher’s Income Is Not Pro-rated for the Bankruptcy Means Test
The Meade case also addressed the wife’s income, who, as a public school teacher, received her annual salary over a ten-month period.
Here the court took a totally different approach by refusing to pro-rate the wife’s income. The court said that this situation was well within the framework provided by Congress of looking to the income actually received during the six month period prior to bankruptcy as the best measure of a debtor’s ability to pay creditors.
Unemployment Benefits Are Income for the Bankruptcy Means Test
The means test enables a debtor to exclude from income unemployment benefits that are received under the Social Security Act. A recent Illinois case held that unemployment benefits should not be included in this exception to income, and should thus be treated as income for the means test. In re Kucharz, 418 B.R. 635 (Bankr. C.D. Ill., Oct. 28, 2009).
To complicate matters, the court, after provided a highly detailed history of unemployment benefits in this country, cited two cases from 2007 that held to the contrary.
However, the court concluded that unemployment benefits are designed to replace wages, and since wages must be reported on the means test, then so to must unemployment benefits be reported. The court also highlighted the aim of the means test, which is to include income from all possible sources.
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 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 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.When I sat down to write this month’s column for the Suffolk Lawyer, I was prepared to discuss several recent cases interpreting the means test. However, I could not get over the great number of splits of authority over almost every single issue.
The Means Test is the focal point of the drastic revisions that Congress made to the Bankruptcy Code in 2005. That was when the legislature thought it was necessary to tighten the existing bankruptcy law and make it more difficult for consumers to eliminate debt, especially for those who Congress thought could afford to pay something to their creditors.
Unfortunately for bench and bar, the statutory wording of the Code provisions underlying the means test is anything but clear and unambiguous.
Congress Failed in Drafting a Clear-Cut Means Test Statute
Ironically, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) was intended “to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.”
Yet, when the new law was enacted in 2005, Bankruptcy scholars across the land declared that so many of the provisions of BAPCPA were so poorly worded that bankruptcy court judges would be perpetually perplexed as they tried to interpret them. They were right. The relatively new statute contains typos, sloppy choices of words, hanging paragraphs, and inconsistencies.
We now have bankruptcy courts, U.S. District Courts, and U.S. Courts of Appeal issuing decisions almost daily in an effort to make heads and tails over what Congress intended. The worst part? There are minority and majority views to almost every possible issue, and even a few hybrid views to boot.
Here’s more irony: BAPCPA was supposed to limit judicial discretion. Instead, the legislation, which leaves a great deal to be desired, actually requires significant judicial discretion simply to interpret the statute. Congress failed to create the “bright line” which it intended, a concept Long Island Bankruptcy Court Judge Robert E. Grossman cited in one of his recent opinions.
This confusion has led to a spate of law review articles with deriding, mocking and skewering titles such as “BAPCPA: Trying to Make Sense Out of Nonsense.” I can come up with some of my own: “BAPCPA is Bupkis” and “Mean Streets to the Means Test – An Ugly Road to Bankruptcy Court.”
The Ambiguity of the New Laws Makes Bankruptcy Challenging
The Ambiguity of the New Laws Makes Bankruptcy Challenging
What all this means is that if an issue has not yet been decided in your jurisdiction, counsel has little guidance as to how the local bankruptcy court will rule. So imagine the challenge of trying to advise clients when a judge in Connecticut has held one way, a judge in New Jersey has reached a decision that is totally opposite, and our jurisdiction has not even addressed the issue yet. And then, most issues are also finding their way up to the appellate courts.
BAPCPA has created a wide split among courts, not only upon the interpretation of whether a consumer has too much income to qualify for Chapter 7 relief, but upon the methodology used to calculate what income really is.
Courts seem to be debating endlessly concepts such as whether projected disposable income requires either an “anticipated” or “historical” calculation of income. In other words, do you use a backwards-looking approach or a forwards-looking approach? Judge Grossman has already written a number of decisions seeking to make this distinction. (FYI, he’s a forward-looker.)
The Strict Constructionist Verses the Logical Originalist in Bankruptcy Court
Inconsistencies in BAPCPA language have created two approaches to addressing conflicting interpretations. You have the strict constructionists who believe a statute should be interpreted on its face, regardless of the result, and those who believe that maintaining a logical outcome based on the legislature’s original intent is paramount.
We’ve come to learn that Judge Grossman is of the school of thought “supported by reason.” He recently wrote in one of his decisions interpreting the means test: “Absent clear binding authority in this Circuit, this Court will not adopt a reading of the statute which does not make any sense.”
As Judge Grossman wrote just last week in In re: Rabener, “this Court does not share the view that a rigid application. . . is required because the 2005 BAPCPA amendments were intended to blindly reduce judicial discretion. This Court does not believe that it is required to reach a decision that is absurd on its face merely to satisfy an unsupported argument that eliminating or reducing judicial discretion is more important than reaching a sound conclusion consistent with reason.” In re Rabener, No. 809-75719, slip op. (E.D.N.Y. January 21, 2010).
Do you look at the “plain meaning of the statute” or do you try to ascertain “what Congress originally intended?” Perhaps that depends on which side you’re on.
So what can the bankruptcy practitioner do when courts across the country are divided on issues? Hope for the best. Such uncertainty makes practicing bankruptcy law post-2005 daunting to say the least. But all those divergent decisions sure make for good reading.
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 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 Patchogue, Commack, 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 like bankruptcy so much, they come back for more, and more, and even more. . . sometimes using multiple bankruptcy filings to delay foreclosure proceedings for years. But when is enough, enough?
What Can Mortgagees and the Bankruptcy Court Do in Situations Involving Extreme Serial Filings?
In the past three months, Judge Alan S. Trust, sitting in the Central Islip Bankruptcy Court on Long Island, addressed this issue in several cases. The most recent one caught my eye based on the incredible number of related bankruptcy filings, as well as the unbelievable amount of time the debtors were able to thwart the system and delay foreclosure.
Serial Filings in Bankruptcy Cases
Some debtors file successive Chapter 13 petitions because each time they file, they get the benefit of the stay, which stops a foreclosure proceeding dead in its tracks.
Technically, Bankruptcy Code section 109(e) prohibits a debtor from refiling another case for 180 days, if the prior case was dismissed because the debtor neglected to make necessary payments or maintain other debtor responsibilities.
However the bankruptcy court has become rather liberal in permitting debtors to engage in repeated filings and will typically give the debtor the benefit of the doubt as long as the debtor can demonstrate a change of circumstances.
Nevertheless, some debtors clearly take advantage of the system, and by their sheer audacity (and desperation), give bankruptcy a bad name for those who file in good faith. The vast majority of bad faith serial filings are done by pro se debtors.
Any experienced bankruptcy attorney knows that judges will not hesitate to sanction counsel for filing a case in bad faith. The law is very clear that a case cannot be filed for the sole purpose of delay, without any good faith intent to follow through with a Chapter 13 plan.
Bankruptcy Amendment Act Made Serial Filings More Difficult
When Congress overhauled the bankruptcy laws in 2005 (BAPCPA), it imposed several new provisions designed to stop the problem of bad faith serial filers. I wrote about some of these changes in my Suffolk Lawyer column in November 2005: Consumer Bankruptcy Debtors Face New Limitations for Repeat Filings .
In particular, there are new exceptions to the automatic stay. For example, if a debtor had one pending bankruptcy case in the preceding year, then the automatic stay only lasts 30 days, effectively shifting the burden to the debtor to make an application to extend the stay. If there was more than one filing in the prior year, then the debtor is not entitled to any automatic stay at the time of filing.
Even with these provisions, debtors soon learned to game the system. After one spouse’s bankruptcy was dismissed, the other spouse would then file, and then this “tag team” filing approach would go on for years. Although this conduct was nothing new, Congress addressed this problem too, with an “in rem” provision in BAPCPA.
Debtors Filed 10 Cases to Delay Foreclosure
Debtors Filed 10 Cases to Delay Foreclosure
On December 21, 2009, Judge Trust issued companion decisions in two separate, but related cases, outlining the excessive measures taken by two Long Island debtors who filed a total of ten bankruptcy petitions over a 12-year period to stop foreclosure on their jointly-owned home. In re Janet Blair (Case No. 09-76150-ast) and In re Allen Gary Smith (Case No. 09-77562-ast).
The decision was precipitated by a motion brought by the mortgagee, seeking “in rem” relief against the premises. Most of these filings were Chapter 13 cases filed over a four-year period between 2005 and 2009. Almost all of them were filed on the eve of a scheduled foreclosure sale.
“In Rem” Relief in Bankruptcy Proceedings Stops Foreclosure Delaying Tactics
“In Rem” Relief in Bankruptcy Proceedings Stops Foreclosure Delaying Tactics
“In rem” relief is when the bankruptcy court grants an order indicating that a particular piece of property will not be affected by any future bankruptcy stays, effectively eliminating any benefit of the “tag-team” filing approach. “In rem” originates from the Latin phrase for a lawsuit directed against property, rather than a person.
In the Blair / Smith cases, the judge immediately lifted the stay and subsequently granted in rem relief, stating that the serial filings were evidence of the debtors’ bad faith, and also evidence of the fact that the debtors were abusing the bankruptcy process for several years.
Statutory Authority for In Rem Relief. In his decision, Judge Trust, delivered a well-written and detailed analysis behind the statutory authority providing for in rem relief. In doing so, the judge essentially reiterated his holding in a two-month-old similar decision, which has since been published. In re Montalvo (416 B.R. 381).
Statutory Authority for In Rem Relief. In his decision, Judge Trust, delivered a well-written and detailed analysis behind the statutory authority providing for in rem relief. In doing so, the judge essentially reiterated his holding in a two-month-old similar decision, which has since been published. In re Montalvo (416 B.R. 381).
One of BAPCPA’s amendments was the addition of Section 362(d)(4) which provides the statutory authority to grant in rem relief. Pursuant to Section 362(d)(4), the Court can grant in rem relief from the stay as to a mortagee’s interest in the property, such that any and all future filings by any person or entity with an interest in the property will not operate as an automatic stay against the owner and its successors and/or assigns for a period of two years after the date of the entry of such an order.
To obtain this relief, the mortgagee bears the burden of showing that the various petitions filed by debtors are part of a scheme to hinder, delay and defraud the mortgagee.
A key issue in such cases is whether the court can infer an intent to hinder, delay and defraud creditors when it appears that there have been multiple, strategically timed bankruptcy filings. Judge Trust took the established view that holds that the mere timing and filing of several bankruptcy cases is an adequate basis from which a court can draw a permissible inference.
However, Judge Trust also observed that the debtors demonstrated no intent to make the bankruptcy work. They did not make plan payments, show up in court, or provide the trustee with required documents.
Standard of Proof in In Rem Litigation
Judge Robert E. Grossman also addressed this issue just over a year ago, and wrote about the standard of proof necessary to obtain in rem relief. In re Lemma (394 B.B. 315 (Bank.E.D.N.Y. 2008).
In that case, which involved a third Chapter 13 filing (with debtor representation by my friend, Babylon bankruptcy attorney Michael A. Kinzer), the judge concluded that the mortgagee was not entitled to in rem relief (and not even entitled to dismiss the case).
The reason why Judge Grossman denied the mortgagee’s application was because the mortgagee, as the party seeking in rem relief, had the burden of proving that the current filing was part of a scheme; that the scheme involved the transfer of real property, or multiple bankruptcy filings; and that the object of the scheme was to hinder, delay and defraud the mortgagee.
The mortgagee in that case was unable to provide the court with any evidence other than the fact that the debtors filed three petitions.
Thus, multiple filings, alone, are not adequate to find intent to hinder, delay and defraud.
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 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 Patchogue, Commack, 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.