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“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Chapter 7 Bankruptcy
Protecting Frequent Flyer Miles If You Have to File Consumer Bankruptcy – The Complete Guide
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by Craig D. Robins, Esq.
Filing for Bankruptcy Usually Has No Effect on Frequent Flyer Miles and Rewards Points
Most consumers these days have an assortment of frequent flyer miles and credit card rewards points, whether they earn them from having flown on airlines, or acquired them from banks for credit card spending.
For consumers, these miles and rewards points can have a substantial value as they can be used to obtain expensive plane tickets or months of hotel lodging. They can also be used to purchase various goods, or gift certificates redeemable in a variety of retail stores.
I once represented an executive who previously earned six figures, but was now without a job. He had over 800,000 American Express Membership Rewards points – enough to redeem on airlines for several international first class trips, among other things. He could have also easily redeemed them for over $8,000 in retail gift certificates. What happens to these valuable points and miles when a consumer files for bankruptcy relief? Can they be protected?
You may have seen one of my favorite movies, Up In the Air, in which George Clooney, who had millions of air miles, flew around the country terminating executives and other employees. They probably had some air miles, too.
Frequent Flyer Miles and Rewards Points – Are They Even an Asset of Yours?
In deciding how to treat miles and points for bankruptcy purposes, we start by looking at what kind of assets they are.
A consumer who files for bankruptcy must list all assets in the bankruptcy petition. However, there is an issue as to whether frequent flyer miles are an asset that must be listed.
I would say that they do not have to be listed at all in a bankruptcy petition. Here’s why:
All frequent flyer programs have fairly comprehensive terms and conditions that uniformly indicate that the miles and award points have no monetary value whatsoever. These loyalty programs also state that miles are personal and cannot be assigned, traded, willed or otherwise transferred, except with consent of the program.
In addition, most programs state that membership terminates upon a member filing personal bankruptcy. Also, all airline programs vigorously prohibit the sale of award tickets.
Many frequent flyer loyalty programs and point programs, such as the popular American Express Membership Rewards program, expressly state that miles or points are not property of the member, and are not transferable by operation of law to any person or entity. Some actually state that the miles are owned by the program.
Although it can be argued that a consumer debtor has a legal or equitable interest in the miles or points, and that this interest must be reported in the bankruptcy schedules, that argument is defeated by the terms of the loyalty programs which state that the member does not have a property interest in them.
Thus, if a program states that the miles have no value and that they are not owned by the consumer, the reasonable conclusion is that the consumer does not have an asset that must be listed in the bankruptcy petition.
Even if, for the sake of argument, the miles and points were considered “assets of the bankruptcy estate,” most debtors would be able to exempt them under a wildcard exemption.
Bankruptcy Trustees Do Not Ask About Miles and Points
In my twenty-six years of practicing bankruptcy, and having attended many thousands of meetings of creditors in bankruptcy court, I have never once seen any case where a trustee has even asked about frequent flyer miles. There are two reasons for this:
First, trustees recognize that it would be very difficult to administer miles and points as an asset considering they are very illiquid, and secondly, even if they did have value, most consumers who file for bankruptcy, and who have frequent flyer miles, would have miles worth so little in relative terms, that it would not be viable for the trustee to administer them as an asset.
Can a Bankruptcy Trustee Compel a Consumer Debtor to Redeem Miles?
Let’s suppose a creative and aggressive Chapter 7 trustee did learn that a debtor had a substantial cache of miles. Keep in mind that a trustee certainly could not sell an airline ticket – every program clearly prohibits that. Could the trustee compel the debtor to redeem those miles for gift certificates, which the trustee could then try to sell?
I would argue that if the frequent flyer program stated that the miles were not the property of the debtor, then the miles never became an asset of the bankruptcy estate, and the trustee has no right to control that asset.
A trustee would also have great difficulty pursuing them because of the standard provision in most frequent flyer programs, that the debtor’s membership in the program terminates upon the filing of bankruptcy. Technically, upon filing bankruptcy, all miles would then be lost.
However, I believe the frequent flyer programs include this provision to protect the consumer from creditors, similar to a spendthrift provision, rather than punish a consumer for filing bankruptcy. Thus, it is unlikely that an airline’s frequent flyer program would terminate benefits to a consumer for filing bankruptcy, absent any meddling by a bankruptcy trustee. Frequent flyer programs have no incentive to become embroiled in a fight over miles.
Nevertheless, consumers should not be parading the fact that they filed for bankruptcy to the frequent flyer or loyalty program, nor do they have any obligation to do so.
Consumers should therefore be able to emerge from bankruptcy with their air miles in airline frequent flyer programs intact.
Advice for Protecting Rewards Points in a Credit Card Program If You Anticipate Filing for Bankruptcy
There is a major difference between airline or hotel loyalty programs and credit card rewards programs. With the credit card programs from banks such as American Express, Chase, Capital One and others, the likelihood is that the consumer owes the banks money. All such programs have provisions that freeze the points if the consumer falls behind with payments.
Let’s take a typical scenario where the consumer has points in a credit card program such as American Express Membership Rewards. The consumer cannot use those points if the account is in default. That would certainly be the case once the bankruptcy petition is filed if there is any balance owed on the account.
The issue in protecting the points is thus: If you think you need to file for bankruptcy, and you are current with your payments, should you quickly cash out the rewards points before you fall behind and the account goes into default?
The short answer is YES. Here’s why it should be OK to do so. Let’s first address the potential argument the credit card company can conceivably make. They can argue that if the debtor cashes in the points just prior to filing bankruptcy then they engaged in some kind of bad faith conduct.
However, the credit card company would have great difficulty proving this as the debtor should be able to argue successfully that the points were already earned, and that the debtor had the full right to use them regardless of any debt problems or future plans to file for bankruptcy.
When it comes to bankruptcy cases involving credit card debt, the real issue is not whether the consumer redeemed points, but whether the consumer incurred the underlying credit card debt at a time when the debtor knew or should have known that they would not be able to pay their debts.
Also, from a practical perspective, in my many thousands of consumer bankruptcy cases, I have never seen one instance of a credit card bank alleging an impropriety for redeeming rewards points. The value of points in relation to the amount of money that the consumer owes is so nominal, that banks will simply not go to any length at all to pursue a debtor who cashed them in.
Accordingly, I would feel comfortable advising a consumer debtor client to immediately redeem the points or transfer them to an airline’s frequent flyer program, assuming there was no larger issue that the consumer incurred the debt to the credit card company under fraudulent pretenses.
Another bit of advice: If you feel that you are about to fall behind with your minimum credit card payments, pull those rewards points out immediately. Otherwise, they will be frozen. You can transfer the points to airline or hotel loyalty programs, or redeem them for merchandise or gift certificates.
Keep in mind that if you redeem them for goods or gift certificates, you would now have assets that should be listed in your bankruptcy petition.
How One Savvy Consumer Lived on Miles and Points After Filing for Bankruptcy
Let me leave you with an anecdote. Jim Kennedy, a 46-year-old California man, lost his six-figure corporate development job. At the time, he had about a million frequent flyer miles and rewards points in various loyalty programs including 125,000 American Express Membership Rewards points, 85,000 Starwood Preferred Guest points, 400,000 Hilton Honors points, 100,000 Delta Sky Miles, 120,000 American AAdvantage miles, and 200,000 United Mileage Plus miles.
After running out of funds, losing his home to foreclosure, and having no luck finding a job, he filed for Chapter 7 bankruptcy. He emerged from bankruptcy with his miles intact. Thereafter, he lived for months in Holiday Inns and Motel 6’s by converting his frequent flyer miles into hotel points. This also helped his food budget because the motel provided free breakfast to its guests.
He regularly reported his plight on his blog and on Twitter. His story was publicized by a number of newspapers and TV stations on the West Coast. Last year, when he was down to just a month’s worth of free hotel nights, he found a job. The lesson is that frequent flyer miles can sometimes really help, even after bankruptcy.
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About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. A version of this article appeared in the February 2012 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
What is a Bankruptcy Discharge?
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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.Most of my Chapter 7 bankruptcy clients have rather large amounts of credit card debt. This comes from making purchases, incurring services charges and interest, and taking cash advances. Almost all credit card debts are dischargeable in bankruptcy. However, there are a few exceptions.
When it comes to cash advances, those about to file for bankruptcy should be careful. The Bankruptcy Code provides that any cash advance, or combination of cash advances from one lender, totaling more than $875 obtained within 70 days of the bankruptcy filing date are presumed to be non-dischargeable. This is contained in Bankruptcy Code section 523(a)(2)(C)(i)(II).
Congress imposed this provision because it felt that consumers who obtained significant cash advances relatively close to time they filed for bankruptcy knew or should have known that they would be seeking bankruptcy relief, and should not be able to eliminate such debts. It was also designed to prevent consumers from running out and taking cash advances on the eve of a bankruptcy filing.
Even if a recent cash advance is presumed to be non-dischargeable because of the above provision, the credit card bank must still file objections in the bankruptcy court in the form of an adversary proceeding. Such proceedings are rare.
If you are considering filing for bankruptcy it is important to tell your bankruptcy attorney about any recent large cash advances to make sure that the petition is not filed too soon.
The dollar amount of the cash advance, as set forth in Bankruptcy Code section 523(a)(2)(C)(i)(II) changes every three years. It is scheduled to change again in April 2013 and will probably increase about $50.
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.
by Craig D. Robins, Esq.
New Bankruptcy Means Test Criteria Going Into Effect November 1, 2011 Will Make It Harder for Some New York Consumers to Qualify for Chapter 7
The state median income figures that you need to use for the means test change periodically. The last change was on March 15, 2011, and the change before that went into effect exactly a year before that, on March 15, 2010. The change before that was November 1, 2009.
The means test median income figures usually change twice a year — in March and November.
The changes earlier this year in March 2011 actually made it slightly easier to qualify. However, the changes going into effect next month will make it slightly harder for most Long Island and New York consumers.
In order to automatically pass the bankruptcy means test your income must be less than the median income in the state where you live. For New York residents, it will be slightly harder for some families to qualify for Chapter 7 bankruptcy than earlier in the year.
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New Median Family Income Figures for New York Effective Nov. 1, 2011
(Effective for cases filed after 1/01/11)
Family Size Amount
1 $45,931
2 $56,113
3 $66,953
4 $81,212
Add $7,500 for each individual in excess of 4.
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New, New York Means Test Figures Compared to Current Means Test Figures
Family Size of One: If you are a single individual, which means that you have a “family size of one”, the New York median income has decreased, from $46,295 earlier this year to $45,931. This is a minor change of $364 per year, or about $30 per month.
Family Size of Two: For a family size of two, the new median income figure has decreased, from $57,777 earlier this year, to $56,113. This is a significant change of $1,664 per year, or about $139 per month.
Family Size of Three: For a family size of three, the new median income figure has decreased, from $68,396 earlier this year, to $66,953. This is a significant change of $1,443 per year, or about $120 per month.
Family Size of Four: For a family size of four, the new median income figure has decreased, from $83,942 earlier this year, to $81,212. This is a very significant change of $2,730 per year, or about $228 per month.
Why Bankruptcy Means Test Figures Routinely Change
The figures used for the each state’s median income are based on United States Census data, and adopted by the Office of the United States Trustee. These figures routinely change once or twice a year. Pursuant to 11 U.S.C. § 101(39A)(B), the means test median income data is regularly adjusted, based upon the Consumer Price Index (CPI) for All Urban Consumers.
Usually, income rises each and every year because of inflation, the cost of living, etc. When we were deep into the recession 18 months ago, income actually decreased slightly from the prior year. That resulted in lower median income figures which made it more difficult to qualify for Chapter 7. Although there was a little bit of inflation after that, we have since gone through another round of deflation.
It appears that we may not be heading out of the recession so fast, as median family income has decreased over the past six months. Accordingly, debtors will suffer.
Links to Official U.S. Trustee Sites Containing Means Test Data Charts
To see the CURRENT DATA STILL IN EFFECT UNTIL OCTOBER 31, 2011 of new median income data going into effect next week, go to Income Means Test Chart for cases filed beginning March 15, 2011.
To see the NEW DATA THAT WILL GO INTO EFFECT ON NOVEMBER 1, 2011 of new median income data going into effect next month, go to Income Means Test Chart for cases filed beginning November 1, 2011.
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To see the very old and now very obsolete median income data for each of the 50 states, go to the U.S. Trustee Census Bureau Median Income Means Test Chart for cases filed between November 1, 2009 to March 14, 2010.
To see the old data from last year of median income data for each state, which is only good through the end of this week, go to Median Income Means Test Chart for cases filed between March 15, 2010 and October 31, 2010.
To see the old data from earlier this year of median income data for each state, which is only good through the end of next week, go to Median Income Means Test Chart for cases filed between November 1, 2010 and March 14, 2011.
The Bankruptcy Means Test
This is a comprehensive, very complex series of calculations that the federal government designed to ascertain whether someone qualifies for Chapter 7 filing.
Under the old bankruptcy law, almost anyone could seek to eliminate their debts by filing Chapter 7. The new laws changed that. Click here to take a look at the actual Means Test form.
The Means Test formula is designed to evaluate whether a debtor has the financial means to pay back a substantial portion of his or her debts. If the person does, then he or she may not be eligible to file Chapter 7 bankruptcy, and may instead have to file a payment plan bankruptcy under Chapter 13.
If debtor’s income is below the New York State median income for a family of that particular size, then passing the Means Test is virtually automatic. If not, the debtor must have a sufficient amount of acceptable deductions permitted by the Means Test.
Impact of New Means Test Figures on Consumers Filing Bankruptcy on Long Island
In my Long Island bankruptcy law practice, I estimate that at least 9 out of 10 clients now seeking to file for Chapter 7 bankruptcy relief do indeed qualify under the means test.
Making the most of qualifying under the means test and making the figures work for you requires that you meet with an experienced Long Island bankruptcy attorney to ascertain eligibility for filing for bankruptcy relief.
There Are Many Other Posts About Means Test Issues on this Blog
I’ve written several dozen articles on various issues concerning the bankruptcy means test. You can see them by clicking the category, Bankruptcy Means Test.
Here are some of the more popular posts:
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.
Filing for bankruptcy enables consumers to discharge most debts. However, when the bankruptcy laws were radically changed six years ago through BAPCPA, various homeowners associations lobbied Congress for special protection.
Accordingly, not all homeowners association fees can be eliminated through bankruptcy.
We regularly meet with clients who are seeking to walk away from their homes since the real estate is underwater and no longer worth keeping. (An underwater home is one in which the homeowner owes more on the home than what is owed to the bank). Filing a bankruptcy can enable a homeowner to eliminate any obligation on a mortgage — even for an eventual deficiency judgment after a foreclosure.
However, as Long Island is home to a number of co-ops and condominiums, we have to be especially careful with the advice we give such clients.
Homeowner association (HOA) dues and fees, commonly known as maintenance, CAN be discharged in a bankruptcy proceeding — BUT only those dues and fees owed up through the date the bankruptcy petition is filed.
Any homeowner association dues and fees that accrue AFTER the petition is filed CANNOT be discharged. This provision is set forth in Bankruptcy Code § 523(a)(16) which states that a consumer cannot discharge a debt:
(16) for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor’s interest in a unit that has condominium ownership , in a share of a cooperative corporation, or a lot in a homeowners association, for as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in such unit, such corporation, or such lot, but nothing in this paragraph shall except from discharge the debt of a debtor for a membership association fee or assessment for a period arising before entry of the order for relief in a pending or subsequent bankruptcy case.
Thus, as long as the consumer continues to own the co-op or condo, HOA fees will continue to accrue after filing, and the consumer will be responsible for those fees. This also applies to homeowners with townhouses in gated communities that have common areas and homeowners association dues.
This legal provision can create a difficult scenario if the consumer is seeking to walk away and abandon the home, especially since many lenders drag their feet with foreclosure process.
Basically, as long as the consumer continues to own the home, even if he or she does not reside there, the consumer is responsible for the post-petition HOA fees.
This means that the homeowners association can pursue the homeowner for these post-petition monthly charges, and sometimes that does happen. However, I believe most homeowners associations do not take such aggressive action and instead wait until the unit is sold at auction, at which time they deduct all outstanding HOA fees from the proceeds.
Written by Craig D. Robins, Esq.Recent Long Island Bankruptcy Court Decision Addresses How to Allocate Non-filing Spouse’s Share of the Tax Refund
(This post was my monthly column that was published in the September 2011 issue of the Suffolk Lawyer.)
April may be tax time for most consumers, but bankruptcy judges seem to address bankruptcy tax issues year round. That’s because tax refunds have been a constant and significant source of potential funds for trustees, who are often quite willing to litigate the issues involved.
However, with the increased bankruptcy exemptions in New York, perhaps there will be fewer tax refund disputes.
In the past two years, I devoted many blog posts to issues concerning tax refunds and bankruptcy.
I also devoted two columns of my monthly articles published in the Suffolk Lawyer to the topic of tax refunds of non-filing spouses. A recent decision by Central Islip Bankruptcy Judge Robert E. Grossman here in the Eastern District of New York now requires that I write monthly third column on the subject. First, let me provide some background on the other two cases.
The 50/50 Rule for Allocating Tax Refunds in Bankruptcy Cases has been the Previous Standard in New York
In my May 2009 column, I raised the issue: Who owns the non-filing spouse’s tax refund in a bankruptcy case, and how do you apportion it?
The Marciano case out of the Southern District of New York adopted the 50/50 Rule — a simple and straight-forward approach in which the refund is apportioned equally between the two spouses regardless of the source of income or tax withholding. In re Marciano, 372 B.R. 211 (S.D.N.Y. 2007). Local bankruptcy practice since that time has adopted that rule.
Non-Filing Spouses Do Not Have to Contribute Their Share of the Tax Refund into the Chapter 13 Plan
In December 2010, I focused my column on a decision by Judge Grossman which addressed this issue: What happens when only one spouse files for Chapter 13 relief? Does the non-filing spouse also have to surrender his or her tax refund to the trustee?
At the time, Judge Grossman held that a non-filing spouse is not obligated to devote his or her share of a joint tax refund to plan payments made to the Chapter 13 trustee.
In that case, In re Malewicz, No 8-09-74807-reg, 2010 WL 4613119 (Bankr. E.D.N.Y., Nov. 4, 2010), the Court ruled that a non-debtor spouse’s share of a joint tax refund received post-confirmation is not property of the debtor’s estate or part of the “projected disposable income.”
Therefore, unless the non-debtor spouse specifically consents to contribute the refund to the plan, the non-debtor spouse’s share of tax refunds received post-confirmation need not be turned over to the trustee.
Thus, the non-debtor spouse in that case was not required to devote his share of tax refunds to the Chapter 13 plan. The non-filing spouse’s share of the tax refund is not property of the estate and it should not be included in the calculation of Chapter 13 plan payments.
At the time, the Malewicz case seemed to be the end of the road on the issue. You had the 50/50 rule, so what else could come up?
The Duarte Decision Introduces New Standard for Allocating Tax Refund
In October 2010, Carlos Duarte, a typical consumer, filed for Chapter 13 relief individually, without his wife. Through his attorney, fellow Long Island bankruptcy lawyer Lawrence S. Lefkowitz, he offered 50% of the couple’s joint 2010 tax refund into the plan and asserted that the other 50% belonged to his wife, and was hers to keep.
After all, the 50/50 Rule, for determining each spouse’s respective rights to a tax refund, is a test employed by a majority of Bankruptcy Courts in New York.
The debtor also pointed out a 2009 decision by Judge Alan S. Trust which held that “spouses filing joint returns who equally share the liability for payment of the taxes, should equally share the benefit of any tax refund.” In re Spina, 416 B.R. 92 (Bankr. E.D.N.Y. 2009).
However, Long Island Chapter 13 bankruptcy trustee Michael J. Macco noticed an unusual aspect of the family’s tax situation: only the husband paid withholding tax during the 2010 tax year; the wife did not pay anything.
The trustee then objected to confirmation of the plan, arguing that the entire 2010 refund resulted from an overpayment made solely by the debtor-husband.
The trustee argued that there was only a presumption that the 50/50 Rule should be used, and that the facts of this case rebutted the presumption. He insisted that the debtor pay 100% of the tax refund into the Chapter 13 plan based on a different rule known as the “Withholding Rule.”
Under the Withholding Rule, which is considered the majority approach, the tax refund is divided based upon the extent to which the refund is attributable to the separate withholdings of each spouse.
At the confirmation hearing, Judge Grossman granted confirmation, but reserved decision as to whether the non-filing spouse was required to turn over 50% of the tax refund.
New “Separate Filings Rule” Now Governs Allocating Spouse’s Tax Refunds in Bankruptcy Cases
In a decision issued in July 2011, Judge Grossman ruled that neither the 50/50 Rule should be applied, nor the withholding Rule. Instead, he adopted a totally different formula known as the “Separate Filings Rule,” first enunciated by the Tenth Circuit in the case, In re Crowson, 431 B.R. 484 (10th Cir. BAP 2010). In re Carlos Duarte, no. 8-10-78606-reg, (Bankr. E.D.N.Y. July 12, 2011).
The Judge clarified the issue before the Court: since the debtor consented to turn over his share of the tax refund, the sole issue was determining how to calculate the debtor’s interest in the tax refund.
After reviewing in detail the considerations for rejecting the other rules (there are four of them), Judge Grossman held that it was necessary to use a formula based on a calculation of what each spouse’s tax obligation would have been if the spouses had filed separate tax returns.
Then, he said there should be a calculation of the contributions each spouse had actually made towards the total tax payment.
Unfortunately, this new method will be messy and the Judge even pointed out that this approach “is not a ‘bright-line rule’ and therefore it is not simple to understand or apply.”
The Judge stated that “This Court is not ruling that the Trustee, the debtor and the non-debtor spouse in each case must undertake this analysis in order to determine each parties’ interest in a joint income tax refund, but this formula shall be employed where the parties do not agree on the proper allocation.”
Judge Grossman’s “Separate Filings Rule” approach will certainly produce the fairest result to all concerned, but if the parties cannot reach a resolution, they’ll certainly have a fair amount of work on their hands and they’ll have to study the formula details set forth in the Duarte and Crowson cases.
I recently spoke with the debtor’s attorney who had just prepared the separate tax returns (for bankruptcy calculation purposes only), and he was optimistic that he and the Chapter 13 trustee would work out a resolution as to the actual numbers without the need for further litigation.
Future Bankruptcy Court Decisions on Tax Issues Ahead?
On a separate note, I anticipate we may see another bankruptcy tax case in the near future. The Court did not address whether the Bankruptcy Code requires a debtor to turn over pre-confirmation tax refunds as opposed to post-confirmation tax refunds. Judge Grossman went so far as to point this out in a footnote.
Since I have seen this issue arise several times recently, I wouldn’t be surprised to see this issue come before the Court in a case where the parties cannot reach a resolution on their own.
NOTE: You can review copies of some of the actual decisions I cited in this post by clicking on these links: In re Carlos Duarte, In re Spina, In re Malewicz.
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About the Author. Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the September 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.
Written by Craig D. Robins, Esq.EDNY Bankruptcy Courts Are Reluctant to Permit Untimely Reaffirmations After Bankruptcy Cases Are Closed
(This article originally appeared in the April 2011 Edition of the Suffolk Lawyer. Since readers of this blog are both consumers as well as fellow attorneys, I will provide some basic info about reaffirmation agreements and then discuss several recent decisions).
Here in the Eastern District of New York, we’ve seen a year’s worth of caselaw in the past four months about retaining vehicles after bankruptcy through either reaffirmation or assumption of lease agreements.
Yet all of them had to do with one issue – all involved an application made by the debtor’s attorney to reopen a consumer case to reaffirm a vehicle loan (or assume a vehicle lease) which had not been done on a timely basis while the case was open.
In this month’s column, I will review this year’s caselaw in our district concerning reaffirmation agreements and briefly touch upon some basics about reaffirmation agreements as they apply to motor vehicles.
What is a Reaffirmation Agreement?
Filing bankruptcy has the effect of discharging most debts including obligations on car loans and leases. In a reaffirmation agreement, the debtor voluntarily agrees to remain obligated on a debt that would have otherwise been discharged. In a lease assumption agreement, the debtor agrees to be obligated on the lease.
Under the 2005 Bankruptcy Amendment Act (BAPCPA), car financing companies, after some aggressive lobbying, obtained extra protections that they had not previously enjoyed.
Prior to 2005, debtors enjoyed a “ride-through” in which they could ride through the bankruptcy and keep their vehicles without reaffirming them as long as they stayed current on their vehicle loan payments.
However, under BAPCPA, if a debtor does not redeem or reaffirm a car loan pursuant to Bankruptcy Code § 524, the lender can eventually repossess the vehicle.
That’s because almost all car loan agreements contain boilerplate language that deem bankruptcy as a default under state law, even if the car owner is current with payments. When there is a default, a lender, under state law, can repossess.
Should a Debtor Reaffirm a Car Loan?
The general answer is: only when absolutely necessary to enable the client to keep the vehicle. When BAPCPA went into effect, we bankruptcy attorneys routinely advised our clients to reaffirm all car loans.
After all, we did not want our clients’ cars to be repossessed. However, as the years went by, we learned that most car lenders informally permitted a ride-through. In other words, they permitted debtors to keep their secured vehicles, even if the debtors did not enter into a reaffirmation agreement.
However, a select few, most notably and notoriously Ford Motor Credit, adopted unusually harsh policies in which they actively threatened to repossess vehicles that debtors failed to reaffirm or assume, and sometimes actually went so far as to repossess those vehicles thereafter.
However, a select few, most notably and notoriously Ford Motor Credit, adopted unusually harsh policies in which they actively threatened to repossess vehicles that debtors failed to reaffirm or assume, and sometimes actually went so far as to repossess those vehicles thereafter.
The lesson learned was always reaffirm or assume a vehicle financed by Ford Motor Credit.
Statutory Obligation for Reaffirming Car Loan
The Bankruptcy Code provisions for reaffirming a debt are set forth in § 521(a)(2).
This provision requires the debtor to indicate on the Statement of Intention whether he intends to retain or surrender the vehicle, and if the intent is to retain, the debtor must state whether he will redeem (which means to immediately pay the full loan balance, up to the value of the car, in a lump sum payment) or reaffirm pursuant to § 524.
In addition, Bankruptcy Code Rule 4008(a) basically requires the debtor to perform his stated intention within 60 days after the date first set for the meeting of creditors. In other words, a debtor has approximately 90 days from the date of the bankruptcy filing to file a reaffirmation agreement with the court.
Here’s the kicker: the Code provides under § 524 (c) that the stay is automatically lifted if these requirements are not timely met, meaning that the car loan lender is then free to exercise its rights to repossess the collateral if there is a default under state law.
Judge Grossman Refuses to Permit Late-Filed Reaffirmation Agreement
In the case of In re Barry R. Clark, no. 8-10-73746-reg, 2010 WL 5348721, (Bankr. E.D.N.Y. Dec. 21, 2010), the debtor and his attorney neglected to reaffirm the car loan with lender Ford Motor Credit.
When Ford actually repossessed the vehicle after the bankruptcy case was closed, the debtor’s attorney essentially said to them: “Wait. I will re-open the case, seek to vacate the discharge as it applies to Ford, and file a reaffirmation agreement.”
Debtor’s counsel, who also happens to be a Chapter 7 trustee in our jurisdiction, then brought a motion to do just that, and it was unopposed. However, Judge Robert E. Grossman refused to grant it, saying that there is no basis in the Code that permits him to do so.
Judge Grossman explained that both BAPCPA and caselaw mandate a process for reaffirming debts that requires strict compliance by the debtor. He stated that we have this process to protect debtors from the pressure that could otherwise be exerted by overly aggressive creditors to force debtors to pay discharged debts.
Debtors obtain very powerful protections through bankruptcy such as being able to discharge debts, and they shouldn’t be able to jeopardize those protections at a time when they are most vulnerable.
Judge Grossman concluded that permitting a reaffirmation after the case is closed would undermine the integrity of the bankruptcy process – even though it would mean, as in this case, that debtors could lose their vehicles.
So despite arguments by the debtor’s attorney that this case involved “special circumstances” because the debtors needed a car to get to work, and couldn’t earn an income without one, Judge Grossman was insistent that he could not grant the requested relief.
The decision also pointed out that both the statute and case law make it clear that a reaffirmation agreement will be unenforceable if it is not made before the granting of the discharge.
Congress made it clear that once a debt is discharged, the debtor should not be pressured in any way to repay it.
However, upon carefully reading the decision, it appears that if the debtor had entered the reaffirmation agreement prior to the date of discharge, even if it was not filed as required, then the debtor might have been successful with the application.
Second Decision Distinguishes Car Leases
Just one month after In re Clark, Judge Grossman decided a similar case involving a leased car, as opposed to a car with a loan. In re Linda J. Mortensen, no. 8-10-75234-reg,( Bankr. E.D.N.Y. Jan. 19, 2011).
Here, Monster Gorilla Ford Motor Credit was a lessor and threatened to repo the vehicle since the debtor did not assume the lease.
Judge Grossman permitted the debtor to re-open the case to enter into a lease assumption agreement.
He stated that reaffirmation of a car loan pursuant to § 524(c) is not equivalent to assumption of a lease for personal property owned by a creditor under § 365(p), and each undertaking imposes different steps and confers different rights upon the parties to the respective agreements.
The decision did not indicate whether the assumption agreement had been executed before or after the date of discharge.
Unlike In re Clark, the entry of the debtor’s discharge is not an impediment to the debtor’s assumption of the lease pursuant to § 365(p) which is the section that deals with assumptions of lease.
Assumptions of lease are not subject to the discharge or the post-discharge injunction granted under § 524.
Judge Trust Reaches Same Conclusion
Three months after Judge Grossman issued the In re Clark decision, Judge Alan S. Trust reached the same holding in a case that was very similar in fact. In re Polyner Mardy, no. 8-10-73819-ast, (Bankr. E.D.N.Y. March 15, 2011). By now you can guess who the lender was: Ford Motor Credit, of course.
In that case, the debtor and his attorney also failed to reaffirm a vehicle loan, and the court entertained an unopposed application to reopen the case to extend the time to file the reaffirmation agreement.
Sometimes when one judge reaches one conclusion on a legal issue, another judge in the same court can reach a different conclusion. However, that was not the case here.
Judge Trust held that the court lacked authority to reopen a closed chapter 7 case in which a debtor has received a discharge to allow the late filing of a reaffirmation agreement.
So even though the debtor used the vehicle as a taxi, which was his main source of income, the rule of law prevailed over equity. “Because these reaffirmation agreements are contrary to the stated goal of a debtor receiving a fresh start, they are subject to intense judicial scrutiny and must comply with all statutory requirements.“
The debtor’s attorney, who is a highly-experienced Suffolk County bankruptcy lawyer, didn’t help things much as he failed to show up for the hearing on his own motion, and consequently the court marked the application off the calendar.
The attorney re-filed the motion a month later. Inexplicably, he failed to show for the second hearing, although his clients showed up without him!
In addition, the Judge criticized the attorney for submitting a sloppy motion, stating that it was “devoid of factual content and legal authority.”
The attorney did not include a copy of the proposed reaffirmation agreement, so the court was unable to ascertain if it had been executed prior to discharge.
Judge Trust issued a separate order directing the debtor’s attorney to disgorge any fees that he charged for bringing the motions. Perhaps more importantly, speaking in terms of future credibility, this attorney may have devalued his currency with the court.
Judge Trust further clarified that not only must the reaffirmation agreement be executed prior to discharge, but any hearing to approve the agreement shall be concluded prior to discharge as well, according to § 524(m)(1).
“The timing of entering into the agreement and court approval thereof, therefore, are critical. Further, any delay in seeking approval once discharge is granted is fatal, and prevents any enforcement of the agreement.”
Thus, it appears that Judge Trust may address such situations in a stricter sense than Judge Grossman, whose decision left the door open for cases in which the non-filed agreement had been signed before discharge.
Practical Tips
Ascertain early on if you need to reaffirm a vehicle loan or assume a lease. If so, calender the deadlines which would be 60 days from date of the meeting of creditors. Then, make sure the creditor forwards you the proposed agreement. Those lenders that insist on reaffirmation or assumption agreements will certainly send you one.
Do not reaffirm a vehicle if the lender permits a ride-through. Doing so will not bring any benefit to your client unless the lender is willing to modify the terms of the loan by reducing the interest rate, principal balance, or monthly payment.
If you definitely need to reaffirm a car loan and need more time to file it, bring an application to extend the time pursuant to §521(a)(2)(B).
If you entered into a reaffirmation agreement and neglected to file it prior to discharge, you might be successful in bringing an application to reopen, to file it late, but only if the agreement was truly signed prior to the date of discharge, and probably only if the Judge is not Judge Trust.
If you need to file a lease assumption agreement late, you may be successful, based on the In re Mortensen decision. Also note that lack of opposition to a motion does not guarantee success. Finally, if you bring any motion, provide the statutory or caselaw authority for doing so, and definitely show up for your hearing.