Archive for the ‘v’ Category
Wednesday, May 25th, 2011
Because I handle both personal bankruptcy cases and Social Security disability cases, I frequently get questions about the interrelationship between these two areas of law. A question I get at least once a month has to do with whether a Social Security disability overpayment is dischargeable in bankruptcy.
The short answer to this is "yes," a Social Security overpayment is treated like any other unsecured debt. There are exceptions to the dischargeability of a particular debt under Section 523 of the Bankruptcy Code and exceptions to the discharge as a whole under Section 727 of the Code.
Specifically, this means, however, that fraudulent behavior can result in a finding that this Social Security debt is not dischargeable.
Overpayment issues typically arise in disability cases when a claimant continues to accept and receive disability payments even after returning to work. The question then becomes – "did the debtor/claimant knowingly and with intent to deceive the Social Security Administration continue to accept disability payments even when not entitled to do so?"
A 2009 case decided by Judge Joyce Bihary, chief judge of the Bankruptcy Court for the Northern District of Georgia offers helpful insight into how a bankruptcy judge will analyze this issue.
In the Rodriquez vs. United States of America case, debtor Diego Rodriquez collected over $70,000 of disability benefits after returning to work. Mr. Rodriquez filed Chapter 7, then asked the Bankruptcy Court to rule on his request for waiver of overpayment. Judge Bihary found that the Bankruptcy Court did not have jurisdiction over this issue and denied Mr. Rodriquez' motion about the waiver issue, but she took the unusual step of addressing some of the substantive issues arising from the overpayment problem.
In what is known as "dicta," the judge explained that under her understanding of the law, "an overpayment debt of Social Security benefits is dischargeable" and will be treated like any other unsecured debt. The judge cited a 1982 7th Circuit case called Neavear v. Schweiker as support for her conclusion. Since Social Security did not file a timely objection to discharge, the overpayment debt owed by Mr. Rodriquez is dischargeable.
What is interesting to me about this decision are the judge's discussion of the facts. Apparently, on several occasions, Mr. Rodriquez attempted to advise Social Security about his return to work, but all of these disclosures were ignored by SSA. Further, the judge noted that Social Security had put Mr. Rodriquez in limbo by failing to respond to his request for administrative review.
The judge devotes almost a page of her decision to suggestions about how SSA might appropriately satisfy its statutory obligations to Mr. Rodriquez. Reading between the lines, it seems apparent to me that the judge found Mr. Rodriquez' testimony credible about his efforts to report his employment income to Social Security, but she did not believe Social Security's assertions (apparently gleaned from documentation and perhaps testimony) that it had not received notice of employment from Mr. Rodriquez.
The judge references Social Security's ineptitude regarding file management. Mr. Rodriquez' deliquentcy grew so large because "SSA lost debtor's file for a period of five years."
In my mind, the obvious question in an overpayment case is this – how can a debtor not be guilty of fraudulent behavior if he accepts Social Security payments while at the same time he is working and earning money. Wearing my Social Security disability lawyer hat I can tell you that Social Security's rules about trial work periods, its Ticket to Work program and its extended period of disability and work that does not reach the level of "substantial activity" is by no means intuitive and even a sophisticated claimant would not necessarily know when he might be allowed to keep his disability check as well as his paycheck.
The judge in the Rodriquez case did not reach this issue (because Social Security did not raise it) but I get the sense that the judge felt that in this case at least, the debtor tried to play by the rules but received little cooperation from Social Security and that Social Security's "unclean hands" might very well be held against the agency in a dischargeability inquiry.
So, what can we learn from the Rodriquez case? I think that if you are attempting to discharge an overpayment you will need to show that you tried to engage Social Security to resolve the issue prior to filing bankruptcy. If you were confused by Social Security's rules it would not be a bad idea to explain your areas of confusion in your correspondence with Social Security. Finally I would make sure that you and your lawyer identify specific addresses where notice of your bankruptcy filing ought to go. Social Security is such a bloated bureaucracy that they will most likely not file an objection in time – there is no need to give them added life by not offering notice at the correct address.
Posted in 1982, 7th, Bankruptcy, Creditor discharge actions, Lawyer, a, administration, and, bihary, called, case, cases, circuit, cited, continue, debt , deceive, disability, discharge of social security disability overpayments, earning, employment, handle, hat, intent, judge, money , mr, my, neavear, overpayment, overpayment , personal, references, rodriquez the, schweiker, security, social, social security overpayment and bankruptcy, the, treated, unsecured, v, waiver, wearing, working | Comments Off
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
Sunday, July 18th, 2010
Last month, I met several times with a potential Chapter 13 client who was facing a mortgage foreclosure. Over the course of the past few months he has been juggling his creditors and bills trying to stay afloat and during that time he fell behind to his mortgage company by more than four months, and found himself in the foreclosure process.
This individual earns over $100,000 annually, but, unfortunately he used to earn more than double this amount. His problem was not the mortgage, but his other bills, including a very high car payment and a mortgage payment arising from a failing real estate investment.
Not surprisingly the foreclosure notice got his attention. He immediately took action by calling me to discuss Chapter 13 bankruptcy and by contacting his mortgage company to discuss repayment options. By the Wednesday prior to the pending foreclosure sale scheduled for the following Tuesday, my client had provided me with enough information so that I could prepare a rough draft of a Chapter 13. In this case, by the way, my client and I entered into an agreement whereby he paid me around $300 to open a file and to start entering information into my petition preparation program.
On the pre-foreclosure Wednesday he called to say that after a lot of discussion he was expecting a decision the next day from his mortgage company but that if he did not hear from them by mid-day on Thursday, we would be proceeding with the Chapter 13. A few hours later he called back to say that his mortgage company had agreed to postpone the foreclosure until September and that the Chapter 13 was on hold for now.
Let's analyze what my client did right and what he did wrong.
On the positive side, he did the following right:
- he did not panic – he approached the problem as a business problem not as a personal, moral failure
- he began to address the problem early. His first contact with me was literally the day he received the foreclosure notice. He correctly guessed that the negotiation process with the lender would take several weeks
- he took a two step approach to the problem – he opened negotiations with his lender, and at the same time he started planning for a Chapter 13
- he retained me early on in the process and paid me a small sum ($300) to start the petition preparation process. He also obtained his credit counseling certificate shortly after our first meeting. Contrast that to some of the potential bankruptcy filers who call me on the Friday before foreclosure looking to start the process.
- he convinced his lender to delay the foreclosure by two months – a 2 month delay is preferable to a 1 month delay in that my client now has enough time to try and sell his home
Now, what did he do wrong?
- my main criticism is his failure to get a written confirmation of the suspension of the foreclosure. What if the lender's representative failed to communicate with the foreclosing attorney? What if the lender's representative is simply dishonest? Can a verbal promise by a lender's representative to delay a foreclosure be enforceable? What would the remedy be?
I am very wary of relying on verbal promises. In law school, my contracts professor once made the comment that "an oral contract is worth the paper it is written on," and I do not disagree.
I did find a California state appellate case in which an appeals court found that a homeowner who relied to his detriment on a broken promise by a lender to delay a foreclosure had a cause of action for money damages. However, even in this California case (which would not serve as binding precedent in Georgia) the foreclosure was not reversed and the only issue to be considered by the trial court on appeal was money damages. Add to this months and months of delay and I wonder if the homeowner in the California case felt that he won anything. (Thanks to Michael Renne and his San Francisco Bankruptcy Law blog for his post about Garcia v. World Savings.)
When your home is at risk, I would not rely on any verbal promises from your mortgage company. I would also not rely on an email as the admissability of emails as evidence is questionable. Instead I would suggest that you ask for a faxed letter from your lender or its attorney on letterhead, with the original mailed to you. Further, if you enter into an agreement with the lender directly, you should contact the foreclosing attorney's office (with a copy of the foreclosure suspension letter) to confirm that they are aware of the deal as well.
Posted in Alternatives To Bankruptcy, Debt negotiation, Foreclosure, Foreclosure issues, Garcia v. World Savings, Michael Renne, Petition, a, chapter 13 and foreclosure, delay, estate, failing, foreclosure negotiations, garcia, georgia foreclosure, investment not, letter, my, notice, pending, post, pre foreclosure, preparation, program on, promise, promises , real, representative, sale, savings, scheduled, surprisingly, suspension, the, v, verbal, verbal agreement to stop foreclosure, wednesday, world | Comments Off
Wednesday, July 14th, 2010
The United States Supreme Court rarely accepts cases that affect consumer bankruptcy debtors. Recently, however, the Court considered an issue that potentially impacts all debtors – the treatment of exemptions.
The term "exemptions" refers to property you own that is protected from the reach of the trustee or creditors. For example, every state provides for exemptions that include your clothes, a certain amount of household goods, a certain amount of equity your car, and a certain amount of equity in your home. Georgia has fairly stingy exemptions – you can read the Georgia exemption law by clicking on the link.
When property is declared as exempt, it does not count for purposes of counting up your assets. If you own property that exceeds the exemption available to you, that property could be seized and sold by a Chapter 7 trustee or it could force you to pay back a higher percentage of your unsecured debt in a Chapter 13. Exemption planning and exemption calculation are important functions for consumer bankruptcy lawyers.
The Supreme Court decision in Schwab v. Reilly requires debtors and their attorneys to be more exact when identifying exemptions, and applies to cases filed in Georgia and everywhere else in the United States. The article that follows is a guest post written for this blog by Brandon Moreno, Vice President of the Utah Bankruptcy Hotline. The Utah Bankruptcy Hotline maintains a network of unaffiliated Utah bankruptcy lawyers who provide debt relief and bankruptcy counsel to consumers in Utah.
On June 17, in Schwab v. Reilly, the U.S. Supreme Court issued a decision that limits the extent to which individuals filing under Chapter 7 can exempt their property from the bankruptcy estate. The case arose out of the interplay between two important rules. One imposes dollar-value limits on the extent to which a debtor can exempt certain types of property. The other requires interested parties to object to a debtor's claimed exemptions within 30 days after the conclusion of the creditors' meeting, or else lose the ability to retain any of that property for the bankruptcy estate.
The question in Schwab was, what happens when a debtor both reports an asset with an estimated market value and claims an exemption for the asset equal to the market value, the trustee does not object because the claimed exemption falls within the applicable-dollar value limit, and it later becomes apparent that the asset's true market value exceeds the claimed value and the applicable dollar-value limit? According to some lower courts, the trustee's failure to object entitled the debtor to an exemption equal to the entire market value, regardless of whether that value exceeded the limit imposed by the rules. In Schwab, however, the Supreme Court rejected that approach. According to the Court, the trustee need not have objected to the exemption to preserve the estate's ability to recover value in the asset beyond the value the debtor declared exempt. The rationale for this conclusion was that the trustee had no basis for objecting in the first place–on its face, the exemption appeared to comply with the limit imposed by the rules, and there was no way of knowing beforehand that the asset would appreciate in value beyond the limit.
The Court's analysis was somewhat complex, but an example helps to illustrate the effect of the ruling. Imagine that an individual files for Chapter 7 protection and reports an asset–in this example, office equipment–to which he assigns an estimated market value of $5,000, that he claims a $5,000 exemption for the equipment, and that the applicable dollar-value limit on office equipment exemptions is also $5,000. Given the dollar-value limit, the trustee concludes that the claimed exemption is appropriate and therefore does not object. The thirty-day objection period then passes, and a third-party appraises the equipment and assigns a market value of $8,000. Under the prior approach of some lower courts, the trustee's failure to object would have entitled the debtor to an $8,000 exemption for the equipment. But Schwab invalidates that approach and establishes that the debtor will be entitled to an office equipment exemption of $5,000, even though the true value of the equipment exceeds that amount by $3,000. The $3,000 remainder goes to the bankruptcy estate, to be distributed among the creditors.
For individuals contemplating Chapter 7 bankruptcy, the lesson of Schwab is twofold: First, even if you accurately report an asset's value and claim a valid exemption equal to that value, you cannot later capture any serendipitous increase in value beyond the limits imposed by the rules. Second, if for some reason it is important to you to exempt the full market value of an asset or the asset itself, rather than a particular monetized interest in the asset, Schwab suggests that it might be appropriate to claim an exemption for "full fair market value (FMV)" or "100% of FMV." Thus, going back to the example above, the debtor might try to claim an exemption of "100% of FMV" for his office equipment, rather than $5,000. A court could reject this claim if it later became apparent that fair market value exceeds the $5,000 limit. But Schwab also suggests that phrasing an exemption claim in this manner effectively places other parties on notice that the debtor seeks to exempt the entirety of the asset's value. If a debtor provides this notice and others nevertheless fail to object, the debtor may be able to keep a subsequent increase in market value beyond the otherwise applicable dollar limit.
Posted in 13 , Bankruptcy, Chapter 7, Chapter 7 issues, Debtors, Exempt Property, Protected property issues, a, accepts, an, and, appraises, assigns, bankruptcy exemptions, calculation, cases, chapter, claimed, court, entitled, equipment, exemption, falls, hotline, hotline , maintains, market, network, object, office, passes, planning, rarely, reilly, rejected, requires, schwab, states, supreme, the, third party, united, united states supreme court bankruptcy decision, utah, v, the | Comments Off
Sunday, July 4th, 2010
On June 7, 2010, the United States Supreme Court released its decision in the case of Hamilton, Chapter 13 Trustee v. Lanning. The Supreme Court rarely hears argument in consumer bankruptcy cases so the Lanning decision is big news to consumer bankruptcy lawyers.
The issue in Lanning is one that has troubled bankruptcy lawyers since 2005, when the "means test" was added to the Bankruptcy Code. The means test functions as a test – do you have the "means" or disposable income to fund a Chapter 13 repayment plan? If the means test shows that you do not have sufficient disposable income to make a Chapter 13 work, then you qualify for Chapter 7.
As one of the assistant United States trustees once told me – the purpose of the means test is to disqualify as many people as possible from Chapter 7, and to force them into Chapter 13.
In practice, the means test does not work very well in predicting who can make a Chapter 13 work. One of the biggest complaints has to do with the mechanical nature of means testing. To run a means test, I have to gather pay stubs from the past 6 months. I then create a monthly average, which represents available income. Next I prepare a means test budget, but I do not use actual expense amounts. Instead, the means test tells me how much my clients are allowed to spend for food, medicine, utilities, etc. And where do these budget numbers come from? Means test numbers are based on IRS budgets used in delinquent tax repayment plans. In other words, the means test budget allocations are not especially generous.
This explanation of the means test is somewhat oversimplified, but you get the main idea – every bankruptcy debtor's income and expense numbers have to be run through the means test, and not surprisingly this somewhat mechanical test produces some absurd results.
The classic example of absurd results occurs when a debtor has received a Christmas bonus or a one time payment. That bonus/one time payment has to be included in the monthly income numbers even if it is not guaranteed or likely to happen again. In other situations a debtor may have earned a comfortable income but has now lost his job – under a strict reading of the means test, he earns too much money to file Chapter 7. And he can't afford to file a Chapter 13 because he now has no income.
The Supreme Court has injected some common sense into this situation. In the Lemming case, which was filed in Topeka, Kansas, the debtor's 6 month average was skewed by a one time payment arising from a buyout from her former employer. The debtor filed a Chapter 13 plan that called for a payment that the debtor could afford based on her actual, current income. The trustee objected on the grounds that the means test dictated a higher number (that the debtor clearly could not afford based on his actual income).
The Topeka bankruptcy judge agreed with the debtor and approved a plan that Ms. Lemming could afford. The trustee appealed and lost in the 10th Circuit Court of Appeals. The trustee appealed again and the Supreme Court granted certiorari.
The Supreme Court affirmed the decision of the 10th Circuit Court of Appeals and held that bankruptcy judges need not apply a "mechanical approach" to means testing in Chapter 13 cases. Instead, judges should "take into account other known or virtually known certain information about the debtor's future income or expenses." Rather than looking backwards, judges can take a forward looking approach and consider the realities of a debtor's income. This forward looking approach should be considered in cases with unusual facts and the Lemming decision should not be construed as an invalidation of the means testing formula.
Despite the Supreme Court's warning that a "forward looking" approach should only be used in limited situations, I suspect that bankruptcy judges will use "Lemming arguments" mitigate some of the harsh results of Chapter 13 in general. Bankruptcy judges recognize that Chapter 13 cases often do not work because means testing and aggressive trustee arguments force debtors to agree to plans that commit debtors to pay every last dime to the trustee. Unfortunately, family emergencies and unexpected things happen over the course of a five year bankruptcy plan and many plans will fail – not because the debtor did anything wrong, but because there is no "give" in the plan.
I predict that judges will use the rationale of Lemming to reduce some of the harsh results of the means test and help debtors improve their chances at success in Chapter 13.
If you want to read the Lemming decision, click on the link. I also found a nice summary of Lemming in attorney Jordan Bublick's fine South Florida bankruptcy blog.
Posted in 13, 2010, Chapter 13 issues, Debtors, Hamilton Chapter 13 trustee v. Lemming, Means Test issues, Trustee, Trustee objections in Chapter 13, affirmed, aggressive, and, argument, arguments, cases, certiorari the, chapter, chapter 13 plans, court, decision, facts, force, formula despite, granted, hamilton, hears, lanning , lemming, means, means testing, rarely, read, released, states, supreme, testing, the, trustee objections to chapter 13, united, unusual, v, work | Comments Off
Wednesday, June 30th, 2010
Not surprisingly, I get calls from small business owners who are contemplating personal bankruptcy when their businesses fail. There are many issues that arise in these types of cases but I would like to focus on one problem that, more than any other, can force the business owner into bankruptcy.
Generally when the owner of a small business leases retail space, the landlord will demand a personal guarantee. This means, of course, that in the event of a default, the business (which may be a corporation or LLC) faces liability and the business owner personally faces liability.
Given this reality, every small business owner should seek counsel to discussion asset protection options before starting his business, but that is a topic for another day.
If the business fails you might be surprised to learn that the landlord does not necessarily have to take any steps to "mitigate damages" by releasing the retail space. Instead, the landlord can demand payment for the full value of the lease from the business owner personally. If the business owner has a house with $100,000 of equity, that equity is therefore at risk, and given that Georgia's bankruptcy exemption statute is stingy ($10,000 for an individual or $20,000 for a married couple filing jointly), bankruptcy may not offer much protection.
I ran across two helpful resources that go into more detail about the landlord's obligations or lack thereof. The first is a blog post from Atlanta lawyer David Pardue in his Georgia Real Estate Litigation blog. In his post, David discusses a recent Georgia Court of Appeals case called Sirdah v. North Springs Assocs., LLLP, which was decided by the Court of Appeals in June, 2010. In the Sirdah case, the Court restated its previous holding that a landlord is under no duty to mitigate damages unless (1) the landlord accepts the tenant's surrender, or (2) the tenant successfully terminates the lease. In the Sirdah case, the tenant returned his keys to the landlord and argued that by accepting the keys, the landlord accepted the tenant's surrender. The Court said that accepting the keys did not constitute an acceptance of the surrender.
Another helpful resource is a more extensive article written by attorney Stephanie Everett of the Bloom Law Firm in Atlanta. In this paper, Stephanie examines the various scenarios that could arise when a tenant breaches a lease and the resulting consequences. Although Stephanie's article is written for the benefit of landlords, tenants will find the information very helpful as well.
As the law in this area could change, you should not rely on these resources in the absence of counsel. If you are a small business owner and you are coming to the realization that your business may not survive, you would be wise to consult with a lawyer to discuss your options both in business and in terms of bankruptcy. I have seen far too many business owners who simply left and discovered after the fact that their bankruptcy options were limited, or too painful.
Posted in 1, Business, David Pardue, General consumer bankruptcy info, Georgia Bankruptcy, Protected property issues, Sirdah v. North Springs Associates, a, accepted, accepts, and, appeals, assocs, breach of lease, breaches, called, case, consequences , damages, duty, faces, landlord, lease, lease , leases, liability, liability given, llc, mitigate, mitigation of damages, north, owner, personally, resulting, retail, retail lease and personal liability, sirdah, small, space, springs, successfully, tenant, terminates, the, v | Comments Off
