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.
Posted in 13, Bankruptcy budgets, Creditor, Filers, Means Test issues, Obama, Ransom, Ransom v. Fia Card Services, a, afford, appointee, automobile operation expense, automobile ownership expense, card, case, chapter, court, decision, dissent, elena, emergencies the, encourages, fia, friendly, issued, kagan, lone, means test budgets, month, mr, owned, ownership in, plan in, problem, repayment, services , supreme, the, u s, v, yesterday, | Comments Off
Friday, January 22nd, 2010
According to a recent article regarding Georgia bankruptcy published in the Atlanta Journal Constitution, it is nothing new that Georgia has one of the highest bankruptcy rates in the nation. What is new, suggests the AJC article, is who is filing: large numbers of people who have not previously had problems with financial instability.
With unemployment exceeding 10 percent, a real estate market in shambles, and many laws in place which 
support creditors, Georgia has had one of the highest bankruptcy rates for years. In 2009, and even here in early 2010, the numbers of people in Georgia filing personal bankruptcy continue to increase. These increasing numbers are partially the result of the large numbers of filers who are experiencing financial instability for the first time.
Richard Thomson, a partner at the Atlanta-based bankruptcy law firm Clark & Washington, said his firm is taking on an increasing number of higher-income professionals as clients. These higher-income filers simply can’t pay for all of their assets and possessions – boats, expensive cars, etc. As a result, they are filing bankruptcy as a means to start over, and their possessions are often given up as part of the process. According to Thomson, “They’re just saying ‘Take it. It’s not worth the effort anymore. I can’t keep up with it.”
Susan Blum and I are seeing the same trends here at Ginsberg Law Offices. While our firm has regularly handled cases for formerly high earners and individuals with substantial assets, we are seeing more and more people who start our meetings by saying "I never in a million years thought I would ever end up talking to a bankruptcy lawyer…." In many cases, clients who had previously enjoyed a comfortable lifestyle wait until disaster is about to strike before calling our office, perhaps in the expectation that their situations will improve. And more and more of these clients are turning to a Chapter 7 liquidation rather than a Chapter 13 reorganization.
More Chapter 7 Cases Being Filed
According to the National Bankruptcy Research Center, over half of Georgians filing between January and November 2009 filed Chapter 7 Bankruptcy. In a Chapter 7, most debts are wiped out, but so are assets that aren’t protected by exemptions – second cars or vacation homes, for example. 47 percent filed Chapter 13 Bankruptcy, which allows consumers to hold on to a house and car but requires that they repay a portion of their debts generally over a five year period. A Chapter 13 is more or less a reorganization of debt.
These percentages are new for Georgia, which traditionally has been dominated by Chapter 13 filings, as debtors were most concerned about holding onto a house and accumulated equity. Currently, many homeowners have little equity or owe more than their houses are worth, which may be one reason for the spike in Chapter 7 filings.
According to Consumer Credit Counseling Service of Greater Atlanta, one in five consumers receiving recent pre-bankruptcy counseling said avoiding foreclosure was the primary reason for seeking bankruptcy protection. Georgia’s foreclosure process is the fastest in the nation, as it occurs without court or government supervision and takes only a week. A bankruptcy filing is the only realistic option for most Georgians seeking to delay a public auction of their homes.
I (Jonathan) have been representing individuals in Chapter 7 and Chapter 13 cases for over 20 years and I can only remember two or three times when the demand for our services was so high. The Congressional Budget Office says that the recession is over but I am not seeing any indication that this is true.
Posted in 10, Amp, Assets, Bankruptcy, Chapter 7 Bankruptcy Filings in Georgia, Filers, Foreclosure, General consumer bankruptcy info, Georgia Bankruptcy, Georgia bankruptcy rates, Law, Possessions, and, atlanta based, boats, can’t, clark, clients, exceeding, expect, experiencing, financial, firm, georgia bankruptcy filings, georgia’s, higher income, homes jack, instability, instability with, numbers, pay, percent, problems, process, protection, recent bankruptcy trends in Georgia, seeking, simply, the, unemployment, williams, – | Comments Off
