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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Chapter 13 Bankruptcy
Written by Craig D. Robins, Esq.Long Island bankruptcy judge pierces corporate veil to permit investor in movie about mafia member, to file claim against the individual debtor, even though the debtor had done business through a corporate entity
It is basic advice for individuals conducting business to set up a corporate entity to provide a mechanism to limit personal liability in the event the business is not successful.
However, as was demonstrated in this Long Island Chapter 13 bankruptcy case, when the corporate entity is used for illegitimate purposes, the individual should not be permitted to insulate himself from the consequences of his fraudulent conduct.
The debtor, Georgios Stamou, in 2009, filed an individual Chapter 13 bankruptcy in the United States Bankruptcy Court for the Eastern District of New York, located in Central Islip. The debtor’s 100% plan was thereafter confirmed.
The debtor probably thought everything was going well. It was not. A creditor of his corporate business entity was now seeking recourse on a business debt. Several years earlier, the debtor created a corporate entity to handle his business of producing television programs and movies. The debtor was the sole employee.
“Easy Street” Movie — A Troubled Child Drawn Into Life of Organized Crime
The wife of a self-proclaimed former member of an organized crime family wrote a script for a movie project, tentatively titled, “Easy Street,” about a troubled child who is drawn into a life of organized crime, based on her husband’s life.
She hired the debtor’s corporate entity to produce the movie and paid him more than $400,000. When the project failed, she sued him in state court, alleging that the debtor improperly diverted $343,000 for unrelated business and personal expenses.
The debtor did not even schedule the potential claim in the bankruptcy. The creditor learned of the bankruptcy filing during post-petition state court litigation against the corporate entity. The matter soon landed before Bankruptcy Judge Robert E. Grossman who had presided over the Chapter 13 case.
After an evidentiary hearing, Judge Grossman concluded that the corporate veil should be lifted and that the debtor should be responsible for the harm to the creditor. He then permitted the creditor to file a proof of claim in the individual case, although the decision did not address the amount of the claim or whether it should be dischargeable.
Corporate Veil Pierced by Bankruptcy Court
In a twenty-page decision that Judge Grossman issued on January 17, 2013, the Judge provided a detailed discussion with regard to piercing the corporate veil and stated that in order to succeed in piercing the corporate veil, the creditor must show that 1) the owner “exercised complete domination of the corporation in respect to the transaction attacked” and 2) “such domination was used to commit a fraud or wrong against the plaintiff which resulted in injury.” In re Georgios Stamou (8-09-78895, Bankr.E.D.N.Y.).
Here, the debtor disclosed that he used the funds to pay for groceries, hotels, pet supplies, doctor bills, meals and entertainment, income tax, and 100% of the costs of operating the corporate office, even though the corporate entity simultaneously had other ongoing projects with other clients.
He also used the money for travel, flying to three European countries, claiming that he was scouting movie locations for the film. Judge Grossman did not find the debtor to be credible with some of his explanations and determined that the corporate entity did not satisfy its implied duty of good faith and fair dealing under an oral agreement with the creditor.
Once the creditor files the proof of claim, the debtor will have to decide whether to object to it. In any event, he will need to modify his plan if he still has a feasible financial situation to cover the additional payments needed to satisfy the new claim.
Click here to see the actual In re Georgios Stamou decision by Judge Grossman.
Written by Craig D. Robins, Esq.Bankruptcy fees practically doubled when Congress drastically changed the bankruptcy laws eight years ago, making bankruptcy more complex by creating a new means test and imposing a much greater burden on the attorney to verify information and prepare the bankruptcy petition correctly and accurately.
Most of our Long Island bankruptcy clients are able to pay the fees as they are working, but we are always asked if the fees can be paid over time.
With the most common type of bankruptcy, which is Chapter 7, the Bankruptcy Code requires the attorney’s fee to be paid in full before the petition is filed.
Otherwise, any balance owed on the fee is technically discharged and the attorney is prohibited from collecting it. In addition, if the client still owes any funds to his or her attorney, there is a conflict of interest, as the attorney is now a creditor of the debtor as well.
The bankruptcy laws were designed to give the debtor an absolute fresh, new financial start with no prior debts still outstanding, even those owed to bankruptcy counsel. Chapter 7 bankruptcy law does not contain any provision that provides for payment of part of the fee after the petition is filed.
Bankruptcy fees on Long Island — When we have a Chapter 7 bankruptcy client who doesn’t have the full bankruptcy legal fee easily available, we are very amenable to working out an informal payment plan over a reasonable period of time. We just need to make sure the full legal fee is paid before the petition is filed with the bankruptcy court.
With Chapter 13, a payment plan for legal fees can be entered into, as the essence of this type of case is having a payment plan to pay creditors. A Chapter 13 plan, in addition to providing for the distribution of payments to creditors, can also provide for the payment of part of the bankruptcy attorney’s legal fees.
Such payment plans are typically over a period of three to five years. One of the reasons such payments are permitted is that the court and trustee have the ability to review the balance owed for reasonableness.
Keep in mind that once you decide to seek bankruptcy relief, you will no longer be paying any of your credit card bills, so additional funds often become available.
Written by Craig D. Robins, Esq.
Recent Brooklyn Bankruptcy Court Decision Reviews Legal Fee Factors
What is a reasonable legal fee for a typical Chapter 13 bankruptcy case? That issue was addressed in a decision just released by Judge Jerome Feller, a bankruptcy judge in the Eastern District of New York, sitting in the Brooklyn Bankruptcy Court.
In that case, Chapter 13 trustee Marianne DeRosa objected to a $7,500 flat legal fee that the debtor’s attorney had charged. She insisted that the debtor’s attorney, Paul Hollender, of New York City, bring a formal fee application to approve his fee. She then filed opposition to his fee, arguing that it was in excess of the fees customarily charged for routine cases in this district.
Judge Feller issued a twelve-page decision on October 11, 2012 in which he concluded that reasonable compensation for a routine Chapter 13 filing in this jurisdiction is $5,000. In re: Nicholas Moukazis, (01-12-42200-jf, Bankr. E.D.N.Y.). (In her motion papers, Trustee Marianne DeRosa pointed out that the customary Chapter 13 legal fees in this jurisdiction are between $3,500 and $5,000.)
This is important news as Long Island bankruptcy attorneys have at times been at odds with the two Chapter 13 trustees in this district over what a reasonable fee is.
For a period of time, the other Chapter 13 trustee in our district, Michael J. Macco, insisted that every bankruptcy practitioner charging over $4,000 had to bring a fee application to seek approval of the fee. Now we have a current judicial determination indicating what is reasonable for routine Chapter 13 cases.
For those who are not familiar with Chapter 13 practice, these bankruptcy proceedings, which involve a payment plan, usually require several court appearances, and often involve at least twice as much work as a typical Chapter 7 case.
Factors In Determining What a Reasonable Bankruptcy Attorney Fee Is In a Consumer Case
Judge Feller began the legal analysis in his decision by reviewing the elementary bankruptcy law concept that the Bankruptcy Court not only has the authority, but the duty, to determine the reasonableness of compensation paid or agreed to be paid for representing a debtor in a bankruptcy case regardless of whether a party in interest objects to it.
The Judge then determined that the following factors were necessary to assess the reasonableness of the legal fee: the necessity of the services rendered, the benefit to the debtor, the time expended, the customary fees and reasonable hourly rates for the services performed, and public policy concerns.
Judge Feller observed that the Moukazis case was unexceptional and uncomplicated. The debtors’ income was about $150,000 per year. They owed about $92,000 in unsecured debt. Their mortgage was current. The plan proposed a distribution of about 44% to unsecured creditors.
The debtors retained their attorney about seven weeks before the petition was filed. There was only one meeting of creditors. The Court confirmed the Chapter 13 plan less than six weeks after that. The attorney performed the legal work well.
The retainer agreement the attorney used provided for the $7,500 flat legal fee, and also indicated that this was for the bare minimum of possible legal services in a Chapter 13 case.
The attorney also indicated that he reserved the right to charge additional fees for services such as amendments, attendance at additional meetings of creditors or hearings, and routine motion practice.
Of the $7,500 fee, the debtors paid $2,000 prior to filing. In his fee application, the debtor’s attorney claimed he spent 12 hours devoted to the case, and that his paralegals expended a total of 23 hours.
The debtors were actually able to afford the higher fee; however, that did not sway the judge. He observed that they were paying a portion of the fee through the Chapter 13 plan, and that unless there is a 100% plan, unsecured creditors will effectively pay the fee while receiving a lower pro rata distribution.
Public Policy Considerations Come In To Play In Determining Reasonableness of Bankruptcy Legal Fee
The Judge also commented on the public policy considerations for ensuring that Chapter 13 legal fees are reasonable.
Empirical evidence shows that Chapter 13 cases are much more likely to succeed when debtors are represented by counsel. Accordingly, in order to ensure that debtors have access to counsel, they should not be overcharged.
Thus, a reasonable fee must be one which protects the debtor, while being generous enough to encourage lawyers to render the necessary and exacting services that bankruptcy cases often require.
Some districts in other parts of the country have “fee caps” in consumer cases which essentially permit bankruptcy counsel to charge any fee up to the cap without having to obtain court approval. Our district is not one of them.
Judge Feller, in the decision, expressly stated that “this Court is not hereby endorsing fee limits in Chapter 13 cases” and “does not intend to establish a fee cap in Chapter 13 cases.”
Looking back to other decisions which addressed Chapter 13 legal fees in this district, in 2010, Judge Robert E. Grossman, sitting in the Central Islip Bankruptcy Court, addressed the propriety of a $15,000 fee charged by an attorney who apparently was less than competent in representing the debtor.
In that case, Chapter 13 trustee Michael J. Macco objected to the fee and the Judge reduced it to $4,000 stating that “the bankruptcy proceeding was not complicated” and the attorney “performed at an incompetent level.”
In his decision (which is now several years old), Judge Grossman pointed out that experienced counsel charged between $4,000 and $4,500 for cases in the district. He therefore reduced the fee to $4,000 for this attorney and ordered him to disgorge the rest. The attorney appealed to the District Court, which affirmed. In re Arebelo, 2011 U.S. Dist. LEXIS 37449, 2011 WL 1336676.
The takeaway here is that an experienced Chapter 13 bankruptcy attorney, who does a proper and professional job, can charge as much as $5,000 for a typical Chapter 13 case, and more if unusual or additional legal work is necessary.
In addition, if the trustee or court challenges the legal fee, the bankruptcy attorney bears the burden of demonstrating the reasonableness of the fee.
Incidentally, this relatively high legal fee is indicative of the large amount of work that a bankruptcy attorney must put into a typical Chapter 13 case, which was made somewhat more complex and complicated by the significant changes to the bankruptcy laws in 2005 (BAPCPA).
To see a copy of the Mouzakis decision, click this link: In re: Nicholas Moukazis, (01-12-42200-jf, Bankr. E.D.N.Y.).
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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 December 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. Call (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.
Judge Rules That Debtor Engaged in Unfair Manipulation of Bankruptcy Code
Judge Alan S.Trust, sitting in the Long Island Bankruptcy Court in Central Islip, New York, just issued an interesting decision in a case which the Judge stated “tests the outer limits of how debtors may seek to utilize the Bankruptcy Code and Rules to obtain the maximum advantages of the process known as ‘Chapter 20′.” In re: Adam John Renz, No. 11-73471-ast, (Bankr. E.D.N.Y., Aug. 1, 2012).
What is a Chapter 20 Bankruptcy?
First, let’s discuss the concept of “Chapter 20.” There is no actual Chapter 20 of the Bankruptcy Code. Instead, this refers to the situation in which a consumer debtor files a Chapter 7 case and receives a discharge, and shortly thereafter files a Chapter 13 case.
There are several reasons why debtors may try to use a Chapter 20 strategy. The objective is to obtain more relief than filing for Chapter 7 or Chapter 13 alone.
One common reason why debtors will do so is to discharge their unsecured debts through the Chapter 7 filing and then cure mortgage arrears over an extended period of time with a Chapter 13 plan.
Chapter 20 also enables consumers who need Chapter 13 relief, but don’t qualify because they owe more unsecured debt than Chapter 13 jurisdictional requirements permit, to become eligible for Chapter 13 filing.
In the past several years, some savvy bankruptcy practitioners have utilized Chapter 20 in a more creative way – to cram down a second mortgage that they could not have done if the debtor only filed for Chapter 7 relief, as most judges do not permit debtors to strip off second mortgages in Chapter 7 cases.
This has become a controversial maneuver as some jurisdictions do not permit this, having concluded that a debtor cannot strip off a second mortgage that has already been discharged, or that the second filing was not done to further the purpose of Chapter 13 relief, which is to pay debts through a plan, but instead to seek cram-down relief.
It should be noted that once a debtor files for Chapter 7 relief and obtains a discharge, the debtor is not entitled to receive a Chapter 13 discharge unless more than four years have passed from the date of the first filing to the date of the second filing. Code section 1328(f)(1).
Thus, the objective in most Chapter 20 scenarios is not to discharge any debt, but instead, to use the payment plan features of Chapter 13 to cure mortgage arrears over a period of time.
Many debtors successfully cram down their second mortgages in Chapter 13 cases in this district and that has become a large part of consumer bankruptcy practice here during the past few years. To do so, the debtor brings an adversary proceeding against the mortgagee seeking to strip off the second mortgage.
The Renz Case – An unsuccessful Chapter 20 Bankruptcy
In the Renz case, the debtors filed for Chapter 7 relief in 2009 and received a discharge. Sixteen months later, they filed a Chapter 13 case.
Since less than four years passed from the date of the prior filing, they would not be entitled to a Chapter 13 discharge.
The debtor had a second mortgage on his home with with JPMorgan Chase for $100,000 that was clearly underwater. Chase did not file a proof of claim, so debtor’s counsel, before the bar date, filed one for them. (Bankruptcy Rule 3004 permits a debtor to file a proof of claim on behalf of a creditor). As it turned out, Chase failed to file any papers whatsoever in the entire case.
Bankruptcy counsel also filed a cram-down adversary proceeding against Chase seeking a determination that the second mortgage was wholly unsecured. Since Chase never responded to the adversary proceeding, the debtor obtained a default judgment.
The judgment specifically provided that “the claim held by Chase, secured by a mortgage lien on the Debtors’ real property . . . [shall] be deemed a wholly unsecured claim, and that the entire subordinate mortgage lien be declared null and void upon the filing by the Chapter 13 Trustee of a Certification of Completed Chapter 13 Plan.”
Here’s the kicker: two weeks later, debtor’s counsel filed a letter with the Court withdrawing the Chase claim. He also amended the Chapter 13 plan calling for a one hundred percent distribution to unsecured creditors. However, since the proof of claim had been withdrawn, Chase stood to receive no distribution whatsoever.
Chapter 13 Trustee Marianne DeRosa thereafter filed an objection to confirmation, arguing that the plan was not proposed in good faith, that the debtor did not have statutory authority to withdraw the proof of claim, and the debtor had sufficient income to satisfy the Chase claim in full.
Debtor’s counsel argued that the plan was proposed in good faith and that Chase’s failure to participate or file papers in any part of the proceedings was a tacit acceptance of debtor’s withdrawal of the Chase claim.
Judge Trust determined that the debtor’s actions here went too far and that the case “exemplifies an unfair manipulation of the Bankruptcy Code.”
The judge noted that while the debtor appeared to have sought bankruptcy protection in good faith, the circumstances concerning the Chase claim demonstrate an attempt to abuse the purpose and provisions of Chapter 13. As such, the Judge sustained the trustee’s objections to the plan.
Judge Trust held that the debtor did not have any cognizable basis for withdrawing the proof of claim and that it should be treated as an allowed unsecured claim. He also held that the debtor had the ability to pay the Chase claim in full.
Although debtor’s counsel argued that the Chase mortgage debt had been discharged by the prior Chapter 7 case, the Court held that the debtor was required to satisfy the terms of a proposed plan before the mortgage lien could be stripped off. Since the debtor’s gambit did not work, the case will likely be dismissed.
Here’s what I gleaned from this decision. In a Chapter 20 case before Judge Trust, the debtor must file it in good faith and for the purposes that Chapter 13 is intended for. In addition, the debtor can cram down the second mortgage, but should expect to pay it as an unsecured debt through the plan.
Creative lawyering and using novel theories to test the bounds of the law and to achieve extraordinary results is the mark of a smart attorney. Many great results have been obtained this way. After all, you don’t know where the limits are until you’ve exceeded them. However, counsel must be careful not to tread too far over the line, which may have been the case here.
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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 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. Call (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
What is a Bankruptcy Discharge?
Posted on
The bankruptcy discharge means freedom from debt. That's my son, Max.
Written by Craig D. Robins, Esq.
The general objective in filing a consumer bankruptcy is to eliminate debts. At the conclusion of a Chapter 7 or Chapter 13 bankruptcy case, the consumer receives a discharge.
The bankruptcy discharge releases the debtor from personal liability for most debts. That means the consumer is no longer legally required to pay these debts. Certain debts are non-dischargeable such as most taxes, student loans, alimony, child support and traffic tickets.
The discharge comes at the conclusion of the bankruptcy case. For Chapter 7 filers, that is typically about three and a half months after the bankruptcy petition is filed. For Chapter 13 filers, this typically occurs a month or two after the Chapter 13 payment plan is completed.
The actual discharge is in the form of a permanent court order, signed by the bankruptcy judge assigned to the case. The Bankruptcy Court sends a copy of it to the debtor and all creditors and parties listed in the petition.
The order of discharge prohibits creditors from taking any action to collect a debt. This means that it becomes forever illegal for creditors to phone the debtor, send collection letters, sue the debtor or take any other action to collect the debt.
If a creditor has a secured debt, such as a mortgage or car loan, the creditor is still prohibited from collecting the debt. However, the creditor has the right to recover the collateral.
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About the Photograph: This is one of my fine art shots of my son, Max.
Written by Craig D. Robins, Esq.In order to qualify for filing a Chapter 7 bankruptcy petition, you need to pass the means test, which is designed to prevent those individuals with relatively high incomes from easily eliminating their debts in a Chapter 7 proceeding..
The means test formula makes it easier for a larger family to be eligible for Chapter 7 relief than a smaller one. Each additional family member enables the debtors to take an additional, very significant deduction on the means test. These deductions are based on census tables and IRS charts of living expenses. See: New Changes to Means Test.
Most consumers will pass the means test and will not have any problem qualifying for Chapter 7 bankruptcy. However, some individuals, who are just barely failing the means test, can pass if they have the ability to add an additional family member to the calculation. The Means Test is Often the Key to a Successful Chapter 7 Bankruptcy Case .
Dealing with the Means Test If a Female Debtor is Expecting
If the wife is pregnant and expecting, can you include the unborn child as household member of the family to calculate family size for means test purposes? If you could, this might mean the difference between passing or not.
In at least one case, the United States Trustee has taken the position that an unborn child cannot be included as a family member for means test purposes. Some bankruptcy courts have adopted this position stating that a debtor may not rely on events which have not yet occurred.
That was the case in In re Pampas, 369 B.R. 290 (Bankr.M.D.La. 2007). In that case, the child had not been born as of the date of the bankruptcy filing, and the debtor was still carrying at the time the U.S. Trustee brought a motion do dismiss. The court dismissed the case, although the unborn child issue was just one of several concerns the court addressed.
However, this case and outcome does not necessarily spell doom for the debtor, and I do not think a similar result would have occurred if this situation had arisen here in New York.
Arguing “Special Circumstances” As a Way Around a Failing Means Test
A debtor who has filed with an unborn child, can argue “special circumstances” under Bankruptcy Code § 707(b)(2)(B).
This section enables a debtor to argue that a presumption of abuse, which is what happens if the debtor fails the means test, can be rebutted by demonstrating that there are special circumstances that justify additional expenses or adjustments to the current monthly income.
Generally, to support a claim of special circumstances, the debtor must itemize each additional expense or adjustment of income, and provide documentation and a detailed explanation of the special circumstances that make those expenses or income adjustments necessary and reasonable.
Perhaps the U.S. Trustee Would Be Reasonable
I would like to think that most local offices of the U.S. Trustee would be reasonable under such situations and keep the case in abeyance, pending the birth of the child. It would seem unlikely that a US Trustee would put much effort into seeking dismissal of a case, when shortly after the dismissal the debtor would qualify anyway because of the increased family size after the baby is born.
I personally represented a debtor last year where this became an issue. I did not include unborn children in the family size at the time of filing. However, the Chapter 7 trustee questioned the propriety of some of the other deductions on the means test and debated whether to refer the matter to the U.S. Trustee for further review as to whether the meanst test meant that this was an abusive filing.
My response to the Chapter 7 trustee was that it didn’t matter because the debtor was several months pregnant with twins, and even if the trustee was able to disallow some of the debtor’s means test deductions, the debtor would still quickly qualify in any event because of the increased family size. After some back-and-forth discussion, and proof that the debtor was pregnant, the trustee let the matter go, and the debtor received her discharge.
I also find that communicating in advance with the U.S. Trustee is very important. If I had to file a case in which the debtors had to rely on an unborn child to pass the means test, I would disclose the information early on.
If the U.S. Trustee believes that the debtor has filed in good faith, then it is much more likely that they will evaluate the case in a fair and equitable manner and give due consideration to the debtor’s special circumstances.
An Objection by the U.S. Trustee Can Be Politically Charged
In parts of the country, the U.S. Trustee might want to avoid raising controversy over the potential for politically-charged issues which can result in Roe v. Wade type arguments that are used in debates over the right to abortion.
There’s Always Waiting a Few Months so the Unborn Child Can Undisputedly Be Included in the Bankruptcy Means Test
If debtors want to play it safe, they can wait until the baby is born before filing. That way, there would not be any controversy of dispute over family size. However, sometimes debtors need immediate bankruptcy relief and simply cannot wait.
In a worse-case scenario, if the U.S. Trustee brought a motion to dismiss the case, refusing to accept the unborn child as a member of the household for means test purposes, the debtor could always let the case be dismissed, and then re-file after the child is born.
Also see my post: Options If You Fail the Bankruptcy Means Test .
Other Issues Concerning Family Size for Bankruptcy Means Test Purposes
Calculating family size for the means test can be tricky. This subject seems to be a never-ending source of issues and bankruptcy court decisions. See my post: Determining Household Size for the Means Test .
Unborn Children in Chapter 13 Bankruptcy Cases
In Chapter 13 cases, a debtor will often pay less into a monthly Chapter 13 plan if there is another member of the household. This savings is usually many hundreds of dollars a month. Therefore, an expected child could make a great impact as to the affordability of a Chapter 13 plan.
If the issue of an unborn child arose in the context of a Chapter 13 filing, I would argue that confirmation should be delayed until the child is born if the Chapter 13 trustee is not willing to count the unborn child right away. Then, assuming the child is indeed born, the baby should be included in the household size.
Most Bankruptcy judges, at least in New York, are forward-thinking judges who want the means test in Chapter 13 cases to be based on realistic events going forward, as opposed to looking backward. I explored this concept in my post: Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts .
In one Colorado case, the bankruptcy court stated that a debtor had the right to amend schedules to show an increase or decrease to household size prior to plan confirmation, to reflect changed circumstances. In that case, the unborn child was delivered just days after the Chapter 13 trustee filed a pre-confirmation motion to dismiss. In re Baker, (Bankr. Court, ND Illinois 2009).
In the Baker case, the court interpreted Bankruptcy Code § 1325(b)(1) (which states that the applicable commitment period should be determined as of the plan’s effective date), as meaning the date when the plan is confirmed. Thus, the Baker court permitted the debtors to include the unborn child in the means test over the objections of the Chapter 13 trustee.
The Importance of Consulting with Experienced Bankruptcy Counsel When There Are Means Test Issues
When unusual issues arise that can mean the difference between qualifying or not for bankruptcy relief, it becomes that much more important to seek out experienced bankruptcy counsel.
The means test is rather complex and complicated. Retaining an experienced Long Island bankruptcy attorney is your best way to ascertain whether you qualify for Chapter 7 bankruptcy filing, and if not, to learn what your other options are.
Written by Craig D. Robins, Esq.
With relatively little notice, bankruptcy court filing fees have increased.
The Judicial Conference of the United States Bankruptcy Court voted to increase various bankruptcy court filing fees, including the fees to file bankruptcy petitions.
For most of us, the increase primarily affects the fees consumers pay to file their bankruptcy cases. They are increasing by $7.00.
Here are the New Filing Fees, Which Go Into Effect November 1, 2011:
Chapter 7 bankruptcy cases: The filing fee is increasing from $299 to $306.
Chapter 7 bankruptcy cases: The filing fee is increasing from $299 to $306.
Chapter 13 bankruptcy cases: The filing fee is increasing from $274 to $281.
Various Other Bankruptcy Filing Fees Are Increasing as Well:
Amending Schedules: Increase from $26 to $30
Filing Adversary Proceeding: Increase from $250 to $293
Filing Motion for Relief from Stay: Increase from $150 to $176
There are other miscellaneous fee increases as well: Full Schedule of Bankruptcy Court Fees and Charges Effective November 1, 2011.
When did the Bankruptcy Filing Fees Change Last?
In my Bankruptcy Update back in February 2006, I wrote that the filing fees were increasing again.
In February 1, 2006, the House of Representatives passed the Budget Reconciliation Act which included fee increases for various court filings, including bankruptcy filings. The Senate previously had approved the measure.
That fee increase, which went into affect on April 6, 2006, was strictly a revenue-raising measure.
The bill increased the Chapter 7 filing fee by $25 to $299, and increases the Chapter 13 filing fee by $85 to $274. The apparent purpose of the fee increases at that time was to balance the budget though payments from those who could least afford it.
Prior to that, on October 17, 2005, when the bankruptcy laws were reformed by BAPCPA, the filing fees increased for Chapter 7 cases from $209 to $274, and for Chapter 13 cases from $194 to $189.
Written by Craig D. Robins, Esq.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.One of the most important features of any bankruptcy filing is the automatic bankruptcy stay. This is the very powerful federal law that prevents any creditor from taking any action to collect a debt once any bankruptcy case is filed. It goes into effect immediately upon the filing of any bankruptcy case.
When it comes to tax debt, the automatic stay requires tax authorities to stop collection activity and release any tax levies.
The Co-Debtor Bankruptcy Stay
When a consumer files for Chapter 13 bankruptcy relief, the stay also protects any other individuals who are also obligated on the debt, even if they did not seek bankruptcy relief. This is set forth in Bankruptcy Code section 1301.
Thus, if a husband files for Chapter 13 protection and the wife does not, and the husband listed a credit card debt that they both signed for, then the bankruptcy stay protects both of them from collection efforts — even though the wife did not file.
The co-debtor stay only exists in Chapter 13 cases — not in Chapter 7 cases.
Co-Debtor Stay Only Applies to “Consumer Debts”
However, this protection only applies to “consumer debts.” Fortunately, the definition of consumer debts include almost all debts that the typical consumer would schedule in their bankruptcy petition — credit card obligations, car loans, mortgages, and medical debts.
The Bankruptcy Code does not define consumer debts to include tax debts. A consumer debt is a debt “incurred by an individual primarily for a personal, family, or household purpose.” Most bankruptcy court decisions have held that tax debts are not consumer debts.
Thus, the co-debtor stay does not protect a non-filing spouse from efforts of the IRS or New York State Department of Taxation to collect the tax debt. Of course, the bankruptcy stay does protect the party who files for bankruptcy relief; it just does not protect anyone else from collections on joint tax debt.
Since taxes are not considered consumer debt and there is no co-debtor stay for tax debt, serious thought should be given to including both spouses in a Chapter 13 filing when the joint tax debt is substantial.
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.