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It’s that time of year again! How Bankruptcy affects your tax refund

It’s tax time again and one of the most common questions practitioners get this time of year is how filing a chapter 7 will affect your tax refund. There is no simple answer however talk to you bankruptcy attorney about the applicable property exemptions that may cover not only your general refund but also parts of your refund attributable to child tax credit and/or earned income credit.

For those of you who are looking to file bankruptcy after you get your refund, it is very important to talk to a bankruptcy attorney before you get your refund to discuss the dos and don’ts of spending the money.

Are Obligations to Repay Tuition Credits Student Loans?

Are obligations to repay tuition credits student loans? That’s the question addressed in a recent case out of the Bankruptcy Court for the Northern District of California.

Determining whether or not a particular debt is a student loan has become incredibly important in recent years. Congress’s 2005 reworking of the bankruptcy laws (“BAPCPA”) made student loans almost impossible to discharge. In the meantime, total student loan debt load in this country has risen to over one trillion dollars.

How does the Bankruptcy Code currently define student loans? They are either:

• “Educational benefits or loans” made or backed by the government;
• “Obligations to repay funds received as an educational benefit, scholarship, or stipend”; or
• Debts incurred solely to pay the cost of attendance at a higher education institution eligible to participate in federal student aid programs.

The case (Institute of Imaginal Studies v. Christoff, No.13-10808, A.P. 13-3186 (Bankr. N.D. Cal. June 11, 2014)) involved a woman who had enrolled in a school in 2002. That year, the school agreed to give her a $6,000 tuition reduction, which she agreed to repay at $350/month upon completion of coursework or withdrawal from the school. In 2003 they entered into a similar agreement for a principal amount of $5,000. In 2009, she withdrew, having completed her coursework but not her dissertation. She filed her Chapter 7 bankruptcy case in 2013, and sought to determine the dischargeability of these debts. All parties agreed these were not loans made or backed by the government, and that the school was not a qualified higher education institution.  That left the second category as the only possible basis for exception from discharge.

The Court treated the matter as one of straightforward statutory interpretation: The Bankruptcy Code specifically mentions obligations to “repay funds received” (Section 523(a)(8)(ii)). Here, no funds were received; the school simply reduced its tuition. Previous cases had reached the opposite result, but the Court pointed out that they all dealt with the pre-BAPCPA law, which did not distinguish “funds received” from “loans”.

The decision has been appealed to the Ninth Circuit Bankruptcy Appellate Panel, but if it stands, it represents an exciting new way to chip away at the margins of the draconian student loan laws as they currently exist.

Will I lose my security clearance of I file bankruptcy?

I hope everyone had a great Fourth of July weekend. I wanted to repost this article from the bankruptcy law network because I think this answers a very big question for a lot of you with security clearance. This article confirms what I’ve experienced honesty is the best policy.

http://www.bankruptcylawnetwork.com/will-i-lose-my-security-clearance-if-i-file-bankruptcy/

Who Is the U.S. Trustee in the Bankruptcy Process?

Someone You Hope You Will Not Meet in Your Chapter 7 or Chapter 13 Case

The U.S. Trustee’s Office is a division of the U.S. Department of Justice tasked with overseeing the bankruptcy process in the United States. The Role of the U.S. Trustee encompasses a number of different tasks, but the primary focus tends to be on a couple of different areas of specific concern to you as a consumer considering filing for bankruptcy:

• “Safeguarding” Chapter 7 eligibility by scrutinizing the Means Tests and income and expenses of each Chapter 7 filed;
• Ensuring that the people who you pay to help you prepare your petition are doing so within the framework of the law;
• Appointing and supervising the Chapter 7 and Chapter 13 Trustees who you actually interface with in your bankruptcy proceedings; and
• Prosecuting criminal cases related to bankruptcy matters when required.

The U.S. Trustee is tasked with policing not only the behavior of the real human beings actually filing bankruptcies in the U.S. but also the creditors responding to and filing claims for the debts they are allegedly owed within bankruptcy cases, but, as with Chapter 7 and Chapter 13 Trustee, the scrutiny laid upon creditors is very cursory relative to the amount of energy they spend policing the Means Test and the fees paid to debtors’ attorneys and (quite rightly) non-attorney “petition preparers.”

Should I Worry About the U.S. Trustee?

The vast majority of Chapter 7 and Chapter 13 cases filed do not involve any interaction with the U.S. Trustee. Although the staff and trial attorneys employed by the U.S. Trustee do review the transcripts of every 341 Meeting of Creditors meeting and Means Test and other petition Schedules filed in Chapter 7 cases, the reason that their role stops there in most cases is  because the filing debtor has hired a good bankruptcy attorney to assist them.

If you have retained an experienced bankruptcy attorney to assist you with your Chapter 7 or Chapter 13 filing, you will in all likelihood have little reason to be concerned about the U.S. Trustee. Your attorney will guide you through the assembly of the documentation required to accurately, honestly, and fully disclose all of the assets, debts, income, expenses, and other past and expected future financial transactions that are required to be disclosed in the bankruptcy petition. If you are eligible for Chapter 7 and it is the best option for you relative to other non-income considerations, your attorney will so advise you and guide you through that process. If you are not or Chapter 13 is the better option for you for a variety of reasons, your attorney will expertly guide you through that process.

The guidance of a knowledgeable bankruptcy lawyer is what will keep the U.S. Trustee away from your case. Attempting to draft your petition yourself or to calculate your own Means Test or paying a non-attorney “petition preparer” a few hundred bucks to “fill in the blanks” on the “bankruptcy forms” is a good way to put yourself in the cross-hairs of the U.S. Trustee.  It is potentially a good way to encounter Federal criminal charges, depending upon what you decide you don’t have to disclose.

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact  The Hilla Law Firm, PLLC at (866) 674-2317 or click the button below to schedule a free, initial consultation.

Schedule a Free Consultation

If you enjoyed reading “Who or What Is the U.S. Trustee,” please browse Attorney Hilla’s other articles on his main Michigan Bankruptcy Blog.

Bi-weekly does not equal semi-monthly: Why the difference matters so much

By Peter Bricks , a Cumming, Georgia bankruptcy attorney.

I recently was replaced another attorney in the middle of a Chapter 13 bankruptcy case in the Northern District of Georgia. My new client mentioned that she had trouble making the plan payments of her confirmed Chapter 13 plan, which were $560 per month.

This client had employer deduction order for her monthly trustee payments. This means the payments were essentially garnished out of her paycheck and mailed to her bankruptcy trustee, which is fairly typical of Chapter 13 plans.

After reviewing the deduction order, I noticed something odd. The deduction order called for the debtor to pay $280 per paycheck. Why was this wrong? The debtor’s employer pays her bi-weekly and not semi-monthly.

While debtors often use the term interchangeably, they mean vastly different things. Someone paid bi-weekly gets paid 13 times over 6 months (26 times in a year), whereas someone paid semi-monthly only gets paid 12 times over 6 months (24 times a year).

In reviewing the debtor’s account ledger, I realized the debtor had overpaid her trustee payments by over $1,000, because this mistake had been going on for over a year.

A similar problem I face is when reviewing people’s monthly budgets, they often tell me what they spend weekly and then multiply that amount by four to get a monthly figure. This is also incorrect, because there are 4.33 weeks in a month.

Math mistakes like this can lead to all sorts of problems, particularly incorrect figures on a means test. Additionally, it can cause great interference with a Chapter 13 trustee payment, because the debtor is going to struggle to make payments if the figures he is using are incorrect.

Peter Bricks is a member of the National Association of Consumer Bankruptcy Attorneys. He has bankruptcy attorney offices in Atlanta, Woodstock, Dunwoody, Cumming and Jonesboro, Georgia.

New Year – Time to evaluate your financial state

With the wave of the holidays over, now is the perfect time to sit down with your finances and see what 2014 looks like.  I would encourage you if you are behind on your mortgage or very worried about the looming credit card bills to sit down with a skilled bankruptcy attorney to see if filing a bankruptcy may be the best option for you.

Today is the Day! – New Rules for Homeowner’s Take Effect courtesy of the Consumer Financial Protection Bureau

Happy New Year everyone!  I wanted to get this article from the Washington Post out there for everyone.  The Consumer Financial Protection Bureau has implemented new rules for all servicers that every homeowner should know.

http://www.washingtonpost.com/business/economy/new-mortgage-rules-aim-to-protect-home-buyers-owners/2014/01/09/f928ebaa-793e-11e3-b1c5-739e63e9c9a7_print.html

New mortgage rules aim to protect home buyers, owners

By Danielle Douglas, Friday, January 10, 12:01 AM

Six years after the housing meltdown exposed fissures in the system, new mortgage rules that will take effect Friday stand to remodel the market.

Housing groups worry that changes meant to shield Americans from abusive lending practices that contributed to the financial crisis will make it harder for many to buy homes. But experts say the rules will create sustainable homeownership by ensuring that borrowers can afford to repay their home loans.

“The rules may cut some credit [availability] at the margins, but as a whole they will ensure that borrowers have a product they can afford,” said Sam Khater, deputy chief economist at the housing data provider CoreLogic. “The terms of the debate are always about access to credit, but it’s also about access to sustainable homeownership.”

The reforms written by the Consumer Financial Protection Bureau aim to protect Americans in the process of buying a home and if they run into trouble paying their mortgages.

In prepared remarks for a field hearing in Phoenix on Friday, CFPB Director Richard Cordray said the bureau is taking a “back to basics approach to mortgage lending practices. No debt traps. No surprises. No runarounds.”

Lenders will have to verify borrowers’ income, assets and debt before signing them up for home loans. Such common-sense practices anchored the mortgage market for decades but were cast aside in the lead-up to the meltdown as banks relaxed standards to churn out more lucrative loans. The result was millions of homeowners who were unable to manage their mortgages once the market tanked.

In response, the CFPB has created a category of home loans that offer lenders broad legal protections against borrower lawsuits, provided they adhere to certain criteria. These “qualified mortgages” limit upfront fees and bar risky features such as no-interest periods that can leave homeowners stuck with unsustainable loans. The loans are available to consumers who have a debt burden that is no more than 43 percent of income.

In real estate markets such as Washington, where prices are high, prospective buyers could run up against the limit as they stretch their finances to buy homes. But some of the nation’s largest banks, including Wells Fargo, have said they will offer loans for high-priced homes that do not conform to the new standard.

David Stevens, chief executive of the Mortgage Bankers Association, is concerned that lower-income borrowers, who would fall outside the debt-to-income ratio requirements, will not fare as well as wealthier consumers.

“We’re seeing institutions building business models to take advantage of that side of the market, charging 8 percent to 9 percent interest rates,” he said. “We need clear consumer protections . . . but nobody wants to push middle-class families on the margins into a shadow industry of high-priced mortgages.”

In the year since the CFPB finalized the mortgage rules, the bureau has made tweaks for a smoother implementation. Stevens said he wants the bureau to relax the debt-to-income ratio, which he said may be unnecessary because regulators have eliminated risky loan features.

Lenders are under no obligation to issue only qualified mortgages; they just have to verify that borrowers have the ability to make their loan payments. However, banks, which have doled out billions in recent years to settle lawsuits related to mortgage abuses, are likely to gravitate toward the protections afforded under the new loan category, analysts said.

The qualified mortgage rule is part of a broader collection of reforms that include changes to the way borrowers interact with mortgage servicers. These firms that collect mortgage payments were criticized for mishandling borrowers’ requests for lower principle or interest payments during the meltdown.

Now, mortgage servicers will have to maintain accurate records, offer ongoing access to staff members and provide options for delinquent homeowners to avoid foreclosure or face enforcement from regulators.

“It may seem silly that we need rules to tell servicers to answer the phone; not to lose people’s paperwork; to tell borrowers how much they owe,” Cordray said. “But we have lived through the financial crisis. We have seen with our own eyes the grave dysfunctions in the mortgage market.”

It is possible that the average borrower will not feel a major impact from the new rules, because lenders have become more conservative since the crisis, said Ghazale Johnston, managing director of Accenture Credit Services.

“In the last few years, a lot of these lenders have spent time strengthening their underwriting requirements and putting in place tighter internal controls,” she said. “The impact of that has been higher-quality loans being originated. The steps banks have taken to eliminate the risks have inadvertently helped them prepare for the rules.”

 

Where should you file bankruptcy if you are about to move states?

By Peter Bricks , an Atlanta bankruptcy attorney.

I sometimes get calls from debtors who are interested in filing bankruptcy and have either recently moved into town or are planning moving away. The first thing they need to decide is whether they should file bankruptcy in Atlanta or wherever they plan on moving next.

Bankruptcy venue is dictated by 11 USC 1408. That code section says “a case under title 11 may be commenced in the district court for the district—(1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is subject of such case have been located for the one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principle place of business, in the United States, or principal assets in the United States, of such person were located in any other district.

Therefore, the first thing we need to decide is whether the debtor is even eligible to file in his current location. He might have just moved into town several weeks ago and is only eligible to file in the city he just moved from. He also might be eligible to file in two cities because his principal assets might be a different place than his domicile.

Once it’s been established whether the debtor is eligible to file at the moment in his current location, he should determine whether to do so makes sense. Take the example of the debtor who wishes to file Chapter 13 and is moving away in two weeks. Does that debtor want to establish venue in a place he will no longer live and then have to return for the meeting of creditors, confirmation hearing and other miscellaneous court hearings that might take place over the course of the case?

On the other hand, maybe the debtor cannot wait to file because he needs to immediately stop a garnishment or repossession.

Conversely, the Chapter 7 debtor in the same position might be more open to filing in the city he is leaving because he is likely to only need to make one court appearance in his case.

The point is there are a variety of factors the debtor should consider if he is changing residences, and he needs to think it through with a competent attorney and pick the right court to file the case.

Peter Bricks is a member of the National Association of Consumer Bankruptcy Attorneys. He has bankruptcy attorney offices in Atlanta, Woodstock, Dunwoody, Cumming and Jonesboro, Georgia.

Federal Government Shutdown and Bankruptcy

You can’t go more than a few seconds and not hear something about the government shutdown on the radio or TV. So how is this going to effect bankruptcies?

Right now, it is having some effect. Both the IRS and the Department of Justice are involved in many bankruptcy cases. Both of their bankruptcy staffs have been reduced so they may need extra time to properly respond to bankruptcy cases.

The Federal Courts have announced that they have about 10 days of cash on hand and can stay open until those funds dry up. So right now, cases are being filed, hearings are being heard; business as usual. What will happen after the 10 days are up is anyone guess right now.

The “non-essential” Federal employees are in a more tenuous situation. They have no idea if they will receive any retro-active pay. This on top of the sequestration cuts may be the thing that pushes their finances over the edge.

USPS Employees, Free Pre-Bankruptcy Credit Counseling

The USPS isn’t the only one with financial problems, the cuts are tricking down to the lowest level mail carrier.

If you are a postal employee and a member of the American Postal Workers Union or the National Postal Mail Handlers Union, Money Management International offers fee pre-bankruptcy credit counseling as a union benefit.

So if you find yourself in a situation where you might need to file bankruptcy, contact Money Management International or call 866.279.7197 for credit counseling.

Is your state a recourse state? Why it’s important to know if you are facing foreclosure

By Peter Bricks , an Atlanta bankruptcy attorney.

The number one reason I consult with debtors about filing bankruptcy is due to underwater real estate. A lot of them have a home that previously had equity, but

does not currently.

In these scenarios, the client is worried about whether the bank will pursue a deficiency against him if he misses mortgage payments, and the bank does not agree to waive the deficiency through a short sale or a deed in lieu of foreclosure.

If you find yourself in that position, it is critical that you find out whether your state is a recourse or non-recourse state. What does this mean? It means you must learn whether the bank can pursue a deficiency balance after foreclosing. A full list of recourse states is available here; however, note that you need to check your state’s updated law to verify the information is still accurate.

To explain why this distinction is so important, consider these two scenarios. Let’s say two debtors who owe little to no unsecured debt, each have a home that is about $80,000 underwater and is facing foreclosure.

The debtor in a non-recourse state is possibly protected against the bank pursuing a deficiency and therefore will probably have no need for a bankruptcy to discharge a debt to the bank. However, the debtor in a recourse state can be pursued for a deficiency and thus might need or want to file bankruptcy to avoid this large debt.

Note that it is not as simple as knowing whether one’s home is located in a recourse state. There are nuances to consider and one should consult with a local attorney. Even in recourse states, the banks do not always pursue a deficiency for example. Georgia is a non-judicial foreclosure state, and the banks usually do not pursue deficiency judgments.

Also, even in a non-recourse state, that prohibition against pursuing a deficiency might very well apply only to the foreclosing bank. Therefore, if a second mortgage held a note as well, that bank can still pursue a deficiency. Also consider that even in a non-recourse state, the ban against collecting might only apply to purchase money loans. Therefore, if the debt originated from a refinance, the bank might still be able to collect against the debtor.

Peter Bricks is a member of the National Association of Consumer Bankruptcy Attorneys. He has bankruptcy attorney offices in Dunwoody, Woodstock, Cumming and Jonesboro, Georgia.

Beanie Babies and the Housing Bubble

Remember Beanie Babies? They were a big thing back the the 90s. So big that people though they were an investment. A bubble formed in the market for Beanie Babies, ending with some people losing a lot of money. Take a look at these people who lost money on Beanie Babies and try mentally replacing “Beanie Babies” with “real estate”. There are many similarities in those bubbles and probably future bubbles.

How Does Bankruptcy Affect the Filling of Income Taxes?

This is a very common question, with a very easy answer: it doesn’t. That’s not the end of the story as two other issues can pop up depending on when the bankruptcy is filed, whether you get a refund, and whether you get a 1099 for debt forgiveness.

If you file your income taxes prior to the filing of a bankruptcy and (1) you are due a refund but (2) you have not yet received the refund, it’s important to make your lawyer aware of your right to receive the refund. In many instances, you can protect the refund and keep it. In some instances you risk losing it and it may make sense to engage in some more planning prior to the filing of the bankruptcy.

If you receive a 1099 for debt forgiveness after you file for bankruptcy, it’s important to speak with a competent CPA. You should not have to pay tax on the forgiven debt because it’s highly likely that you meet the IRS’ definition of insolvency. If that’s the case, there’s a form that a CPA could help you fill out that will cancel any tax owed on the debt.

Generally speaking, your bankruptcy filing should not have a direct impact on how you go about filing your taxes other than the two instances mentioned above. If you have concerns, you should mention to your tax preparer that you filed bankruptcy and you will almost certainly learn that there is no effect.

If you’re looking for relief from debt or assistance with Chapter 7 bankruptcy, we are here to help. We offer a free confidential, no obligation consultation to discuss your personal situation. Please call (713) 961-9477 for immediate assistance or visit our website here.

Gay Couples and Bankruptcy in Texas

It’s a fact that Texas does not recognize gay marriage. It’s also a fact that there are countless gay couples in Texas. I have no idea how many of those couples are struggling financially, but I know our office has represented a fair amount of gay couples. The purpose of this article is to remove any mystery related to gay couples in Texas and their bankruptcy rights.

Married Couples and Bankruptcy

We often get asked from one spouse in a married couple if both spouses have to file for bankruptcy. It’s a common myth (read the other bankruptcy myths here) that both spouses in a married couple are required to file even if only one spouse wants to file. The truth is that only one spouse is required to file bankruptcy. When we quote a fee, that fee is usually the same whether one or both spouses file. It usually makes sense for both spouses to file when they are jointly and severally liable for a significant portion of the debt. These issues of “who files” and joint and several liability directly relate to a gay couple’s bankruptcy rights.

Gay Couples and Household Income

Even though only one spouse in a Texas-recognized marriage is required to file a bankruptcy, the law requires that we analyze a married couple’s bankruptcy rights based on the entire household income, not just the income of the spouse that is filing. This can sometimes negatively impact the analysis we provide to people. For example, if it only makes sense for one spouse to file, because he or she owes most of the debt, we still have to consider the non-filing spouse’s income. If the person who hopes to file earns nothing, but the non-filing spouse earns $100,000 per year, we have to base our analysis on the family income of $100,000 per year. There are arguable exceptions to this but that’s the general rule.

This household income analysis is not the same for a gay couple. Imagine the scenario in the previous paragraph, where one spouse owes most of the debt and receives no income. Because Texas does not recognize a gay marriage, we are NOT required to include the non-filing partner’s income. We are only required to consider the non-filing partner’s regular contributions to household expenses. This can have a huge impact on our analysis and it’s usually quite beneficial to our client to only include regular contributions to household expenses as income.

Gay Couples and Joint and Several Liability

Gay couples are no different than heterosexual couples when it comes to incurring debt. They have credit cards and houses together, buy cars together, etc. We’ve seen countless situations where it makes sense for the couple to file because of joint and several liability. What does it mean to be jointly and severally liable? It means that each person who has agreed to pay the debt (e.g. they signed the credit card agreement or promissory note) is responsible for 100% of the debt. If any responsible party dies or successfully completes a bankruptcy, the remaining signers are still responsible for 100% of the debt.

How does this impact a gay couple? Since they are not legally married does it mean they cannot file bankruptcy? Not at all. If each partner is jointly and severally liable for most of the family debt, such that it would make sense for them to file bankruptcy as a couple if it was allowed, they can each file their own individual bankruptcy and get relief.

How Does It Work?

Helping a gay couple understand their bankruptcy rights is really no different than helping a heterosexual couple. We still need to know everything we possibly can about the family finances in terms of income, expenses, creditors, property, etc. We have to take an extra step of signing something called a “conflicts waiver”. If there is joint and several liability on a debt and a lawyer meets with both responsible partners, the potential exists that only one partner will file bankruptcy. Only the partner who filed the bankruptcy will be absolved of the liability. The partner who did not file would now be solely responsible and the argument could be made that the partner who filed bankruptcy harmed the non-filing partner. When this potential for harm exists, a lawyer is required to explain the possibility and it’s best to put it in writing and have each potential client sign an acknowledgement–that’s the conflicts waiver. This is almost never a big deal as most gay couples, like most heterosexual couples, are in alignment as to what to do about their debt issues.

Once the conflicts waiver is reviewed and signed, everything else is the same. If the couple determines that bankruptcy is in their best interest, they would be required to file two separate bankruptcies. At our firm, we usually lower the fee for each partner’s case to make the total fees more manageable. We still have to do the same amount of labor in each case because they are totally separate.

Summing up

All of the above boils down to a couple of simple ideas:
1. Gay couples can file bankruptcy, they just can’t file one bankruptcy together as a couple
2. If one partner in the gay couple is not liable for much of the debt, it probably does not make sense for that partner to file bankruptcy
3. If both partners are jointly and severally liable for most of the debt, it would likely make sense for each partner to file his or her own separate bankruptcy.

Adam Schachter is a board certified bankruptcy lawyer serving Houston Texas and surrounding areas since 1999. For a free, confidential, no obligation consultation to discuss your personal situation please call (713) 961-9477 for immediate assistance or use the form on our website.