More and more we are seeing clients who make too much money to qualify for a Chapter 7 bankruptcy as a result of the “means test“.  (You can read more about the means test in our other blog postings).  For some of these individuals Chapter 13 appears to be their only option.  However, when we take a closer look at how much debt they have, some of them don’t qualify for a Chapter 13 case either.  Strange as it may seem, Congress has actually put a cap on the amount of debt you can have and still be eligible for a Chapter 13 bankruptcy.

Many of those same clients who didn’t qualify for a Chapter 7 bankruptcy had too much debt, either secured or unsecured to qualify for Chapter 13, leaving a more expensive, complicated Chapter 11 case as their best option.  However, some relief was recently offered when on April 1, 2010, the debt limits were increased.  Now, debtors can have up to $360,475 of unsecured debt and $1,081,400 of secured debt and still file Chapter 13.

You should still talk to an experienced bankruptcy attorney about your debts and whether they are counted toward these limits.  Not all obligations are included in the calculation and you may find that you thought you didn’t qualify for a Chapter 13 case, when in fact you do.  These issues are best addressed in a personal consultation with an attorney.  If you have questions about bankruptcy, please call us today or visit our website at www.bankruptcylawyeraz.com.

With the signing of the Financial Services Regulation Overhaul legislation, the Obama Administration will be turning its attention to its feeble job creation performance. Dr. Robert D. Manning, the nation’s leading scholar on consumer debt trends and founder of the nonprofit personal finance education company “DebtorWise Foundation,”, has been one of the nation’s most accurate forecasters of the housing market bubble and consumer-led recession, beginning with his Feb 2001 testimony against the bankruptcy reform legislation and May 2001 op-ed against the Federal Reserve’s easy credit policy. His recent research on the US housing market and recommended policy proposals, including a hybridized “Shared Equity Appreciation Plan,” are attracting increasing attention by national banks but not the Obama Administration.

According to Dr. Manning, “Wall Street has persuaded the President and his economic policy staff that mortgage write-downs are not feasible policy options. The current ineffectual interest rate reduction programs are simply creating a ’soft floor’ for housing prices and postponing inevitable downward market corrections–especially since banks are so reluctant to make loans today. The result is at least 5 million and as many as 7.5 million homes will be in foreclosure over the next 3-4 years.”

The inflexible and counterproductive policy of banks not to restructure mortgages closer to their market values is further eroding consumer confidence and providing financial incentives for homeowners to remain in their homes–rent free–until they are evicted. The consequences are significant to banks and bankruptcy service providers. First, consumers are catching up on secured and unsecured loans such as auto loans and credit cards since they are not paying the mortgage. This is providing a false sense of security to banks and policy-makers that the worst of the recession is over. Second, if millions of jobs are not created over the next three years, then millions of families will have no other choice but to file for bankruptcy after they are evicted from their homes and have to start paying for their housing. Hence, the relative stability of bankruptcy filings in 2010 may be the lull before the bankruptcy filing storm hits in mid-2011.

As Dr. Manning explains, “Housing is the key to the pace of the economic recovery and whether it will be widespread. By examining different categories of household expenditures such as auto and credit card payments, this fallacious approach provides an optimistic view of the health of the American family that defies the reality of the current recession. Unless banks begin more reasonable lending practices and the Obama Administration begins creating more jobs, 2011-12 could be a record period for consumer and commercial bankruptcies in the United States.”

COPYRIGHT (C) 2010 DebtorWise

DebtorWise Foundation is approved by the Office of the United States Trustee to issue certificates in compliance with the Bankruptcy Code. Approval does not endorse or assure the quality of an agency’s services.

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If you are considering bankruptcy, and would like to learn more, please call us today for a free initial consumer bankruptcy consultation, or attend one of our upcoming free bankruptcy seminars.  To learn more, visit us at www.McGuireGardner.com or www.freearizonabankruptcyseminar.com

Often debtors facing financial crisis have the ability to pay all or a large portion of their debts.  Yet, the cash available to pay these debts is tied up in illiquid investments (i.e. raw land, rental properties, etc.).  These debtors often utilized a Chapter 13 bankruptcy as a means of obtaining immediate relief from aggressive creditors while attempting to liquidate assets to satisfy their debts. These debtors need to beware of the potential capital gain tax consequences associated with selling appreciated assets.

At of the time a bankruptcy petition is filed, all of the debtor’s assets become property of a “bankruptcy estate”.  See 11 U.S.C. § 541.  In a Chapter 13 case, the bankruptcy estate includes all of the debtor’s earnings from the date the bankruptcy is filed through the date the case is closed.  11 U.S.C. § 1306(a)(2).  To confirm a Chapter 13 plan of reorganization, the debtor must pay all “projected disposable income” into the Chapter 13 plan.  So, when an appreciated asset is sold to pay creditor and all of the debtor’s income is being paid to creditors; who pays the capital gain taxes?  From most people, the knee-jerk reactionary response would be: it only makes sense that the Chapter 13 Trustee should pay the taxes from the money paid through the Chapter 13 plan.  Unfortunately, in some cases, this may not be the correct answer.

In an unpublished but very detailed memorandum decision entered by Judge Joel B. Rosenthal, Bankruptcy Court Judge for the District of Massachusetts, In re Brown, 2006 WL 3370867 (2006), it was held that the tax liability can be satisfied from the amount paid into the Chapter 13 plan only if the taxing authority filed a post-petition proof of claim pursuant to 11 U.S.C. § 1305(a)(1).  Such a proof of claim enables the debtor to treat the claim as if it had been incurred prior to the date the bankruptcy was filed as opposed to being treated like every other post-petition debt.  The Brown court clarified that

The choice belongs to the creditor, however, as the effect of filing the proof of claim is to treat the postpetition claim as arising prepetition. If the creditor does not file a postpetition claim, a debtor may not file one for him. [citation omitted].  Instead the creditor may chose to await discharge and then pursue its claim against the debtor directly. [citation omitted]. The postpetition tax creditor does not have a choice between filing a proof of claim under § 1305 or receiving an administrative claim under § 503(b)(10(B). The result is no different if it is a debtor attempting to force the taxing authority into accepting treatment under the plan, even if the treatment is payment in full.

Brown, 2006 WL 3370867 at Pg. 2.

While the Brown decision is an unpublished memorandum decision, Bankruptcy Courts from the District of Arizona have seen the well-reasoned decision as authoritative.  See In re Hall, 376 B.R. 741, 745-47 (Bkrtcy.D.Ariz.,2007).  Accordingly, debtors seeking to liquidate appreciated assets to satisfy debt in a Chapter 13 bankruptcy need to be aware that if the IRS does not cooperate and file an appropriate post-petition proof of claim, the debtor may be responsible for the capital gain tax liability associated with the sale but lack the ability to pay the taxes from the sale proceeds or any income earned during the pendency of their Chapter 13 bankruptcy.

For more information, or to register for one of our free bankruptcy seminars, please visit www.mcguiregardner.com or www.freearizonabankruptcyseminar.com.

One question that often comes up in consumer bankruptcy cases in Arizona is:   When should I stop using my credit cards? Good advice would be to immediately stop using your credit cards as soon as you have talked with an attorney and decided to pursue bankruptcy.  Once you have decided to file for bankruptcy, using your credit cards may be (or at least appear to be) fraudulent, being that you are incurring debt that you do not intend to pay. The Trustee and the Court will look most closely at the 90 days before filing for bankruptcy. Trustees and creditors love to find cases in which the debtor consulted with an attorney, and then shortly thereafter went out and bought a big screen television or other large purchases. In these cases, the Creditor can ask the Court to deny the discharge of certain debts that were incurred fraudulently. In short, as soon as you decide to file for bankruptcy, STOP USING YOUR CREDIT CARDS. Stop making any payments to the credit cards, but stop using them. If you have made large charges or any charges that will appear to be for luxury items, you may want to discuss with your attorney waiting for at least 90 days before filing.

If you are considering bankruptcy, and would like to learn more about a Chapter 7 or Chapter 13 case, please call us today for a free initial consumer bankruptcy consultation, or attend one of our upcoming free bankruptcy seminars.  To learn more, visit us at www.McGuireGardner.com or www.freearizonabankruptcyseminar.com

Many individuals seeking debt relief by filing for bankruptcy discover that the “Means Test”, found in 11 U.S.C. §§ 707(b)(2) and 1325(b)(2), requires them to file a Chapter 13 reorganization bankruptcy rather than the more commonly employed Chapter 7 liquidation bankruptcy.  When determining the amount an individual will have to pay each month through a Chapter 13 plan of reorganization, 11 U.S.C. § 1325(b)(1)(B) mandates that:

If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—

The plan provides that all of the debtor’s projected disposable income be received in the applicable commitment period [determined by 11 U.S.C. § 1325(b)(4)]…

Naturally, those seeking bankruptcy relief desire to minimize both their “projected disposable income” and the “applicable commitment period”.  Unfortunately, the Bankruptcy Code fails to define the term “projected disposable income”; but the Code does define the term “disposable income” as

[The debtor’s] current monthly income … less amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, … and for charitable contributions … in an amount not to exceed 15 percent of the gross income of the debtor for the year in which the contributions are made, and if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.

11 U.S.C. §1325(b)(2).  Thus, courts have been trying to grapple with the question of: What is the interplay between a debtor’s “disposable income” and “projected disposable income”? The Bankruptcy Code clarifies that an individual’s “disposable income” begins with that individuals “current monthly income” derived by averaging the debtor’s income received within the six months prior to filing bankruptcy (not including the month the case is filed).  See 11 U.S.C. § 101(10A).  However, if an individual’s “projected disposable income” is mechanically determined by simply multiplying the individual’s “disposable income” by the “applicable commitment period”, those experiencing a significant increase or, more commonly, a significant decrease in income immediately prior to filing for bankruptcy would either receive a windfall or be stuck in a plan of reorganization which the individual cannot feasibly fund.

The 9^th Circuit held in In re Kagenveama, 541 F.3d 868 (9^th Cir., 2008), that there is a direct link between a debtor’s “disposable income” and “projected disposable income”.  The Kagenveama Court held that the “plain meaning” of the Bankruptcy Code requires bankruptcy courts located within the 9^th Circuit (including federal courts located in Arizona, California, Nevada, Oregon, Idaho, Washington, Montana, Alaska, Hawaii, Guam, and the Northern Mariana Islands) to take a mechanical approach to the determination of a Chapter 13 debtor’s “projected disposable income”.  In so holding, the Kagenveama Court stated: “we will not de-couple ‘disposable income’ from the ‘projected disposable income’ calculation simply to arrive at a more favorable result for unsecured creditors, especially when the plain text and precedent dictate the linkage of the two terms.” Kagenveama, 541 F.3d at 875. Thus, “[t]o get from the statutorily defined ‘disposable income’ to ‘projected disposable income,’ ‘one simply takes the calculation … and does the math.’”  Id. at 874.  The Kagenveama Court further analyzed the meaning and context of “applicable commitment period” and held that “[w]hen read together, only ‘projected disposable income’ has to be paid out over the ‘applicable commitment period.’ When there is no ‘projected disposable income,’ there is no ‘applicable commitment period.’”  Id. at 876.

As of June 7, 2010, the U.S. Supreme Court effectively overruled at least the first portion of the Kagenveama Court’s ruling by adopting the “forward-looking approach”, in In re Lanning, 2010 WL 2243704 (U.S.,2010).  Despite the major changes to the Bankruptcy Code in 2005, the Supreme Court took a historical approach in interpreting the term “projected disposable income” to find: “Congress did not amend the term ‘projected disposable income’ in 2005, and pre-BAPCPA bankruptcy practice reflected a widely acknowledged and well-documented view that courts may take into account known or virtually certain changes to debtors’ income or expenses when projecting disposable income.” Lanning, 2010 WL 2243704 at pg. 7.  As a result, the Supreme Court held “a court taking the forward-looking approach should begin by calculating disposable income, and in most cases, nothing more is required. It is only in unusual cases that a court may go further and take into account other known or virtually certain information about the debtor’s future income or expenses.” Id. at pg. 9.

The High Court indicated that the “forward-looking approach” will address the inequity in cases where there is a significant increase or decrease in the debtor’s income immediately prior to filing for bankruptcy.

In cases in which a debtor’s disposable income during the 6-month look-back period is either substantially lower or higher than the debtor’s disposable income during the plan period, the mechanical approach would produce senseless results that we do not think Congress intended. In cases in which the debtor’s disposable income is higher during the plan period, the mechanical approach would deny creditors payments that the debtor could easily make. And where, as in the present case, the debtor’s disposable income during the plan period is substantially lower, the mechanical approach would deny the protection of Chapter 13 to debtors who meet the chapter’s main eligibility requirements.

Id. at pg. 10.

Consequently, the Lanning Court held: “Consistent with the text of § 1325 and pre-BAPCPA practice, we hold that when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.” Id. at pg. 11.  However, the High Court failed to address the second portion of the Kagenveama decision regarding whether there an “applicable commitment period” when both the “mechanical approach” and “forward-looking approach” result in no “projected disposable income.”  As such, it appears that certain Chapter 13 debtors may still be able to confirm a plan of reorganization with a duration less than the three to five year “applicable commitment period” required in most Chapter 13 cases.

If you are considering bankruptcy, and would like to learn more about a Chapter 7 or Chapter 13 case, please call us today for a free initial consumer bankruptcy consultation, or attend one of our upcoming free bankruptcy seminars.  To learn more, visit us at www.McGuireGardner.com or www.freearizonabankruptcyseminar.com

For many people struggling with their finances, the threat of losing a vehicle through repossession may be the final straw that drives them to discuss their case with a bankruptcy attorney.

Vehicles that are repossessed without a bankruptcy being filed, typically result in the vehicle being sold, and the lender then continuing to try to collect against the former owner for the “deficiency” which is the amount owed after providing credit for the amount that the vehicle sold for.  Because of the tacked on attorneys fees and repossession fees, in many cases the amount owed is close to what was owed before the vehicle was repossessed.

Bankruptcy can help.  By filing bankruptcy, whether before or after the vehicle is repossessed or voluntarily turned back over to the lender, this deficiency or potential remaining debt on the vehicle can be included in the bankruptcy and discharged (eliminated) along with the other debts that a person may have.

An advantage of filing for bankruptcy before the repossession is that doing so will slow down the repossession until the creditor receives permission from the Court to pursue the repossession.  Generally, repossessions after filing bankruptcy are coordinated and scheduled ahead of time rather than having your vehicle just disappear when you least expect it.

If you are struggling with debt, and you are concerned about possibly having a vehicle repossessed, please call us for a free bankruptcy consultation.

For more information, or to register for one of our free bankruptcy seminars, please visit www.mcguiregardner.com or www.freearizonabankruptcyseminar.com

Similarly, foreclosure rates have increased during the first quarter of this year. Realty Trac recently reported that more than 900,000 homes of 1 out of every 138 homes in the country has received a foreclosure related notice.  In Arizona, the Associated Press has reported that 1 in every 49 homes has received a foreclosure related notice during the quarter.

These trends are often times because people do not know that there are laws and programs available that can help them keep their homes or even allow them to remove second and third mortgage payments.  Bankruptcy and the Federal Government’s modification programs can work hand in hand to make life manageable again.

Arizona Bankruptcy Courts are part of the 9^th Circuit Federal Courts.  Some individuals within the 9^th Circuit recently found how bankruptcy and a loan modification can go hand in hand.  Their story might sound familiar to those attempting a modification on their own.  The individuals had initiated loan modification negotiations with Wells Fargo months before they eventually filed for bankruptcy.  Bankruptcy laws do not allow a bank to foreclose or sell someone’s home while they are in bankruptcy without first getting the Court’s permission.

During the modification negotiations the lender directed them to stop making their payments.  When they did stop the Bank had an attorney try and get the Court’s permission to foreclose because they had failed to make payments.  Outside of the bankruptcy they may have been able to foreclose but now they first had to get the Court’s permission.  The Court set a hearing where both sides were heard and the Court decided not to allow the foreclosure to happen but wanted the Bank to follow up with the Loan Modification and let the Court know what was happening.  The hearing was set 2 months later.  The bank didn’t have answers then either.  The judge reset the hearing again for 6 weeks later , then finally for 6 months later.  The Court stated “Nearly one year after it began the process Wells Fargo was still having difficulty determining whether it had a completed loan modification application upon which it could act.”  In re, 20 CBN 594 (Bankr. E.D. Cal. 2010)  During this time the individuals stayed in their home free from the worry that it would be foreclosed upon at anytime because of the bankruptcy laws.  Again, they may have lost the home had they not been in a bankruptcy which did not allow the bank to foreclose.

Many banks are doing their best to assist those who qualify for a loan modification.  But many banks are large and it is difficult for them to make changes that work with new laws or, in this case modification programs.  Loan Modification are not new but the extent to which they are now being utilized is unprecedented.  Federal Programs provide specific requirements that may allow you to keep your home and reduce payments to something more manageable.  If for some reason you don’t qualify now, a bankruptcy may be of help and may stop foreclosures while working with a bank.

For many people, bankruptcy is not the best option, for others modifications may not be the best option either but for some one or both might help them get on top of their finances and allow them to stay in their home.  What is most important it that people know their options and know how current laws and programs can be a tool they use to reign in finances during this difficult time.

For more information, or to register for one of our free bankruptcy seminars, please visit www.mcguiregardner.com or www.freearizonabankruptcyseminar.com.

So long as the client continues to remain current on any debts or obligations to ABC  Bank, there should be no problem.  However, if the client stops making some of the payments, ABC Bank may have a right to set off (or offset) the debts owed to them with the funds from the savings account until the bankruptcy is filed.  Once the bankruptcy is filed, any new funds added to the account should not be used as an offset by the bank.

Accordingly, if a client intends to stop making payments to ABC Bank for any reason, client should also zero out the savings and/or checking account. 

It may be a good idea to leave the account open, and use the account after the bankruptcy is filed, as longevity at a financial institution is one factor considered in evaluating a person’s credit.

For more information, please visit our website at www.mcguiregardner.com.

However, creditors fail to inform you that there are major exceptions to the general rule that debt forgiveness is taxable income.  Two major exceptions to this general rule are 1) if the debt is forgiven while the individual is in a bankruptcy case; and 2) if the debt is forgiven when the individual is insolvent.  See 26 U.S.C. § 108(a)(1)(A) and (B), (“Exclusion from gross income.–… In general.–Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if– (A) the discharge occurs in a [bankruptcy] case, [or] (B) the discharge occurs when the taxpayer is insolvent.”)  As is readily seen from the fact that there is one exception for those in bankruptcy and a separate exception for “insolvency”, an individual does not necessarily have to be in bankruptcy to be insolvent.  Bankruptcy is simply a safe-harbor which creates a bright-line rule. 

Yet, it is important to know that those desiring to raise the insolvency defense may have a fight on their hands.  Insolvency is determined on a case by case basis and must be assessed as of the time the debt is forgiven.  So if an individual is considered “solvent” at the time the debt was forgiven and that individual later becomes insolvent, the debt forgiveness is considered taxable income for which the individual will be liable. Unfortunately,  any such taxes are probably not dischargeable in a subsequent bankruptcy.  Before you attempt to negotiate with creditors or seek debt reduction/forgiveness, it would be well worth your while to seek the advice of a competent attorney.