Monday, October 11th, 2010
The Case Ransom v. MNBA appeared before the Supreme Court last week and raised interesting questions about the role of the means test bankruptcy filers must pass in order to qualify for protection under Chapter 7 of the U.S. Bankruptcy Code. Here's a look at what's involved in the case and what it might mean for future bankruptcy filers.
Car Payments and Income in the Means Test
The court case involves the bankruptcy petition of man named Jason Ransom.
- No car loan: Sources note that Ransom has a car that he owns fully – that is, he is no longer making payments on the vehicle.
- Ownership deduction: In his bankruptcy petition, Ransom reportedly claimed an ownership deduction of $471 per month for his vehicle.
- Court rejection: Because he had no car payment, though, the bankruptcy court rejected this deduction in his initial case filing. An appellate court upheld the decision. The Supreme Court must make a final decision.
- IRS definition: Apparently, both the district court and the appellate court denied Ransom's deduction claim based on the Internal Revenue Service's definition of an allowable deduction for car owners, which limits such deductions to people who are currently making payments on their vehicles.
So the issue at hand is whether or not a Chapter 13 filer (that is, a bankruptcy petitioner who has above-median-income levels and so does not pass the Chapter 7 means test) can keep money each month (instead of paying it to creditors) under the car ownership deduction if he or she is not currently making payments on a car.
Why It Matters: Your Money in Chapter 13 Bankruptcy
The issue may sound fuzzy, but the Supreme Court's decision could have real impact on future bankruptcy cases. Here's a look at why and how.
- The language of the Bankruptcy Code: While the language of the U.S. tax code is clear that an ownership deduction is only available to those still making payments on a vehicle, the language of the U.S. Bankruptcy Code is a bit fuzzier.
- The cost of owning a car: As Ransom's lawyers are reportedly arguing, the "ownership deduction" should be available to those who own their cars outright because such vehicles require maintenance and repairs – especially if they're older.
- The expensive car loan argument: One of the reasons that this issue is so interesting is because it essentially rewards people who have expensive car loans and newer cars and punishes those who are (perhaps more fiscally responsibly) driving older vehicles they've already paid for.
- The freedom of extra money: If the Supreme Court decides to grant the ownership deduction to people who own their cars outright, it could mean greater financial independence for car owners who file for bankruptcy. Because they'd be able to save more money each month, they could potentially catch up on other payments more easily and possibly even build savings, thus preparing themselves more fully for post-bankruptcy life.
Posted in Bankruptcy Courts, Bankruptcy Filing Requirements, Bankruptcy Law, Bankruptcy News and Events, Chapter 13, Chapter 7, Means Test, Supreme Court | Comments Off
Friday, March 12th, 2010
A case decided by the Supreme Court this week settles a question of attorneys' free speech rights raised by a Minnesota law firm concerned about restriction in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), according to the Washington Post.
Here are the pertinent details:
- The law states that bankruptcy lawyers are prohibited from advising clients to take on more debt before filing for bankruptcy. In theory, the restriction is meant to prevent advice that would lead to actions that might constitute fraud under U.S. bankruptcy laws.
- The question raised by the Minnesota law firm was one of free speech for lawyers. Apparently, the firm suggested that the aforementioned restriction amounted to an unconstitutional violation of the free speech rights of bankruptcy lawyers.
- The court decided that the law was not, in fact, unconstitutional, and that lawyers can give their clients any advice that does not promote defrauding the bankruptcy court.
- Filing incomplete or inaccurate information
- Attempting to pay a "favorite" creditor in full before filing for bankruptcy
- Failing to disclose assets or expected income
- Attempting to “give away” assets before filing
The Broader Issue
While the law firm’s concern with free speech may seem piddling here, in the context of bankruptcy cases, it has merit. In some cases, as the WSJ article points out, taking on certain kinds of debt immediately before a bankruptcy filing could benefit both the filer and his or her creditors.
For example, refinancing a troublesome mortgage to better allow a debtor to make payments could benefit all parties. The Supreme Court Justices reportedly acknowledged the truth of this and agreed that taking on more debt can, at times, be the wisest decision for a potential bankruptcy filer.
But, the court noted, the law can be read to mean that bankruptcy lawyers are restricted only from giving their clients advice that would lead to bankruptcy fraud.
What Constitutes Bankruptcy Fraud?
Bankruptcy fraud is a serious matter – in fact, it can lead a court to throw out your case (and thus eliminate your chances at receiving a debt discharge) and earn you fines and jail time. This is one reason why working with a bankruptcy lawyer can be helpful.
Bankruptcy fraud includes:
Posted in Bankruptcy Law, Bankruptcy Lawyers, Filing Bankruptcy, Setting the Record Straight about Bankruptcy, Supreme Court | Comments Off
Tuesday, December 1st, 2009
The U.S. Supreme Court began hearing today the case involving a debtor whose student loans were discharged in a Chapter 13 bankruptcy—though possibly against the U.S. Bankruptcy Code.
Student loans are notorious for being difficult to discharge in bankruptcy, even in a Chapter 13 bankruptcy. In order to have student loan debt eliminated, a debtor must prove undue hardship.
In the case before the Supreme Court, the debtor, Francisco Espinosa, was allowed to enter a Chapter 13 plan without ever proving undue hardship to the bankruptcy court, according to a story on National Public Radio.
The Bankruptcy Case
In 1988, Espinosa was a baggage handler for America West Airlines when he began taking computer drafting classes at a technical school. Espinosa took out four student loans totaling over $13,000 from United Student Aid Funds.
After earning his degree, Espinosa was unable to find work in the computers field, and continued working at America West. However, that company was facing its own financial strain, and began cutting salaries. In 1992, Espinosa, a college graduate earning $6 an hour, filed bankruptcy.
According to the NPR story, Espinosa agreed to repay the full amount of the student loan debt through a three-to-five year Chapter 13 plan—but not the $4,000 of interest accrued on the loan. USAF was notified several times of the terms of the plan, and never objected to the case.
In 1997, the bankruptcy court declared Espinosa's debt repaid, and issued him a debt discharge.
However, two years later, USAF issued a lien on Espinosa's tax return for the unpaid interest. USAF claimed that the bankruptcy plan was illegal—11 years after the court confirmed it—because of the undue hardship requirement.
Undue Hardship Hearing Never Held
The student loan company argues that the bankruptcy court should have held a special hearing to determine whether Espinosa's situation qualified as an undue hardship, and should have summonsed USAF to appear in court. Because the hearing was never held, undue hardship was never established, and the loan should not have been dischargeable, USAF argued.
Espinosa's attorney has argued that USAF was properly notified and did not raise any objections at the time. A federal appeals court agreed.
Now it's up to the Supreme Court to decide just when a creditor can raise objection to a Chapter 13 bankruptcy plan—and when the can still collect on debts.
Posted in Bankruptcy, Bankruptcy News and Events, Chapter 13 Bankruptcy, Student Loans, Supreme Court | Comments Off
