Wednesday, January 12th, 2011
Yesterday, the U.S. Supreme Court issued a creditor friendly decision in the case of Ransom v. Fia Card Services. At issues was the "ownership expense" deduction in the means test.
The means test is a calculation used to determine whether a debtor has enough "disposable income" to afford a Chapter 13 repayment plan.
In the Ransom case, the debtor (Jason Ransom) claimed a means test deduction for both operation of a vehicle ($338 per month) and for ownership ($471 per month). The problem – Mr. Ransom owned his vehicle free and clear.
In an 8-1 decision written by Obama appointee Elena Kagan (the lone dissent issued by conservative Justice Scalia), the Supreme Court held that a debtor who owns his vehicle free and clear can only claim a deduction for vehicle operation but not a deduction for ownership.
In Mr. Ransom's case, this means that for bankruptcy calculation purposes, he has an extra $471 sitting around that he can use to pay credit card companies in a Chapter 13.
At first blush, the Supreme Court's decision would seem to make sense – why should a debtor get to claim an ownership deduction if he does not have a car payment?
Here is the issue: Chapter 13 cases last 5 years. Assuming that Mr. Ransom has a paid off car, it is likely that his car is not new. What happens when Mr. Ransom needs to replace his car? He will have no funds to do so because any funds that he might have left over are being used to fund his Chapter 13.
Further, the means test budget is derived from IRS numbers that are used in tax settlement cases. These means test budgets are a little better than a "rice and beans" budget but there is very little else. Is it reasonable to expect that a debtor will have no emergencies during the next five years – a funeral to attend? a roof to fix? a major car repair?
The Supreme Court's decision ignores the realities of life. In the immediate near term the debtor may have $471 to pay towards his Chapter 13, but is it reasonable to expect that this "disposable" money will be there month after month? The Chapter 13 trustee will expect it, and these funds will come out in a payroll deduction. But I fear that even more Chapter 13 cases will fail when debtors lose their jobs because they do not have transportation or checks for mortgages will bounce because the funds were used for plumbing repairs or other emergencies.
The Ransom decision also sends a very strange message to debtors entering the bankruptcy process. Instead of encouraging people to avoid debt, the Ransom decision encourages filers to incur more debt prior to filing. In this upside down logic, a debtor would benefit from taking out a car title loan prior to bankruptcy since having debt owned on a car will allow that debtor to claim an ownership expense.
Creditors like credit card companies are concerned about getting as much as they can as quickly as they can, and such an position makes sense in a business context. But who loses when court supervised repayment plans (Chapter 13) are doomed to fail because there are no accommodations for emergencies or other likely needs during a looming 5 year time span.
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Sunday, October 3rd, 2010
Most of the clients who I represent in Chapter 7 or Chapter 13 cases view bankruptcy as their absolute last resort. Usually, by the time they get to me, these clients have exhausted every other alternative – they have borrowed money from relatives and friends, sold possessions on eBay and cashed out or borrowed against retirement plans.
All of these choices, by the way, create unintended consequences – if you are reaching that point of desperation where you are thinking about selling things, cashing out retirement plans, etc., I would rather that you call me before taking any action because of the risk that you might unknowingly lose some of the benefit from your bankruptcy filing, or possibly disqualify yourself altogether.
Retirement plan loans such as 401(k) loans create a variety of issues and are almost always a bad idea in a bankruptcy context. Presumably you borrow against your 401(k) because you need cash now, you expect to repay that loan in the near term, you want to preserve your 401(k) account for the future, and because you do not want the tax consequences associated with cashing out your 401(k).
Bankruptcy trustees, however, look at 401(k) loans in a different light. They see any allocation to repay a 401(k) loan (and sometimes any ongoing contribution to a 401(k) plan) as an unnecessary reduction of disposable income that would otherwise be available to pay creditors. 401(k) loan payments cannot be counted as allowable deductions in your means test calculations. And both Chapter 7 and Chapter 13 trustees and/or creditors will often object if you include a 401(k) loan repayment allocation in your Schedule I and J budget in either a Chapter 7 or Chapter 13.
Since 401(k) plan funds are generally considered "exempt" or sheltered property in a Georgia Chapter 7 or Chapter 13, your best choice often means not using your 401(k) as a last gasp source of cash.
401(k) loans and on-going 401(k) contributions do not make bankruptcy impossible, but they do complicate matters. If you are in financial trouble and are thinking about raiding your 401(k) or retirement plan but have not done so, you should not take any action until you have spoken to a bankruptcy lawyer. If you have already cashed out or borrowed against your 401(k), make sure that your attorney is aware of this fact.
Posted in 401 k, 401(k) loans in bankruptcy, Bankruptcy budgets, Consequences, General consumer bankruptcy info, Georgia Bankruptcy, Loans, Retirement, Trustee objections in Chapter 13, allocation, allowable, altogether retirement, borrowed, cashed, cashing, counted, create, deductions, loan, plan, plans, plans all, repayment, trustee objections, unintended | Comments Off
Friday, February 5th, 2010
There are many reasons that bankruptcy filing rates are so high. Clearly an unexpected job loss or reduction in earnings can lead many honest, hardworking people into a bankruptcy lawyer's office. When a job loss is coupled with a divorce, I think that the likelihood of bankruptcy by husband or wife goes up exponentially.
I recently read a column written by attorney John Mayoue, a divorce lawyer here in Atlanta who is known for his representation of celebrities and other high profile clients. John notes that in the domestic relations legal community, Atlanta is known as the "divorce belt." In the bankruptcy lawyer community, Atlanta is known for having one of the highest bankruptcy filing rates per capita. I do not think that this is a coincidence.
Just as an ethical bankruptcy lawyer will advise you to search for alternatives to Chapter 7 or Chapter 13, a thoughtful family law attorney will advise you to search for alternatives to divorce. Bankruptcy or divorce may be inevitable, but when you seek legal counsel, look for a lawyer who does not offer "one size fits all" solutions and recommends alternatives – this would be a good sign that you are talking with a lawyer who has your best interests at heart.
John was gracious enough to give me permission to reprint his thoughtful article about why couples struggling in their marriages ought to consider alternatives to divorce. I recommend that you take his message to heart.
Divorce Lawyer John Mayoue Offers Advice to Couples Contemplating Divorce
The divorce rates in the United States are some of the highest in the world. Increased financial pressure brought on by the current economy is fueling the fire for marriages already in jeopardy, and the rapidly increasing number of homeforeclosures further demonstrates the severe consequences these pressures can produce.
According to Atlanta, Georgia based divorce attorney John C. Mayoue, who has been counseling couples through divorce cases for more than thirty years, the approaching holiday season will cause these numbers to spike further and will also be a busy time for lawyers specializing in divorce cases, as the holiday season often proves to be a breaking point for marriages in crisis.
“During the holidays, people’s pent-up thoughts about relationships and careers and where they are with life become intensified,” Mayoue says. “In December, for example, we have the highest number of suicides, divorce filings and bankruptcies of any month. It's just a very difficult time for people.”
Although our society makes divorce seem to be an easy and acceptable way out for couples who aren’t quite happy in their situation, Mayoue cautions couples not to be too hasty to start the divorce process. Divorces that make it to trial are painful and embarrassing, and the results are often not fair for both parties involved. If you are considering divorce, Mayoue suggest taking the following steps first.
1. Try to work out your differences
Ask yourself why you want a divorce. Are you just responding to life’s pressures? Are you looking for a way out of a stressful situation and not just your marriage? Or do you have legitimate concerns that are truly irreconcilable?
Ask yourself if this is your only option. Have you made every effort to communicate with your spouse and work things out together? Have you tried counseling or outside help?
More importantly, consider all of the consequences of divorce. Are there children involved? How will this affect them? Would the divorce be the best solution for everyone in the family or only the adults involved? Will the family be financially ruined by the process in the forms of home foreclosure, credit crises or worse?
Before you drag your family through a process that can make existing rifts even deeper and harder to overcome, make sure that you really want to go through with this life changing and emotionally taxing process.
2. If you can’t find a resolution, try to settle out of court
If at all possible, try to settle your case outside of court with the help of your attorneys. When you do take your case to trial, you lose control over important aspects of your case to the decision of the judge or jury, depending on your state. This can lead to painful custody rulings, alimony or settlement decisions and more.
Even if you feel like you are right in your claims, in a courtroom, your case is only as solid as the evidence you can produce. Judges tend to have biases and not all states will send divorce cases to a jury trial. Truth may not always win out, and oftentimes these proceedings become incredibly painful and embarrassing.
“I am always going to make every reasonable effort to get a case settled first,” Mayoue says, “because settlement is something that the parties can control. They can basically control things such as custody, visitation and the allocation of assets and debts. And the courtroom is a risky environment for anyone.”
3. Educate yourself before going to trial
Before you do anything, make sure to get educated. Use your attorney’s knowledge to understand the proceedings, possible outcomes and unexpected or painful events that you need to be prepared for.
“Divorce is hell for the vast majority of people,” Mayoue says. “People get angry, people get lost in the process of the courts and they lose everything. This can be avoided if they are calm and are educated about the process.”
Mayoue’s law practice is based in Atlanta, in the heart of the new “divorce belt,” a name which the South has recently earned by having the highest divorce rates in the country. Given the environment in which he operates, he says that his goals as a divorce attorney are to educate people about their options and the process and to help people who have thoroughly thought through their options and have decided divorce is the only answer for them.
“I really do think that we lawyers have an obligation to educate the public,” Mayoue says, “and it seems to me to be not very good consumerism to walk into a lawyer's office knowing absolutely nothing, before paying someone several hundred dollars. I've always found it peculiar that people do not get educated in a legal matter that affects 50-plus percent of all people who get married. Yet if you had an illness, you would certainly read up about it, if you had a business you were interested in getting involved in, you would certainly read about it.”
Posted in Advice, Alternatives To Bankruptcy, Attorney, Avoiding Bankruptcy, Bankruptcy budgets, Divorce, Divorce and bankruptcy issues, John Mayoue, Lawyer, alternatives to divorce, and, atlanta, avoiding divorce, bankruptcy and divorce, based, c, cautions, contemplating, couples, divorce the, earned, embarrassing “i, georgia, heart divorce, highest, incredibly, john, mayoue, message, offers, painful, proceedings, rates, suggest, the | Comments Off
