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

Certain debts to a spouse or former spouse may be discharged in a bankruptcy. However, the rules are quite complicated and you should carefully discuss the debts with a knowledgeable attorney.

Certain debts to a spouse or former spouse cannot be discharged in bankruptcy under the recent bankruptcy changes.  These include debts closely related to the support or maintenance of a spouse or children, including child support and spousal maintenance.

Other debts, usually debts to even out or equalize a property division in a divorce, may be dischargeable, but only in a Chapter 13 Bankruptcy.

Occasionally these distinctions can be significantly blurred.  If payments to a former spouse are not clearly designated as either maintenance or equalization of property, the fight avoided in the divorce case may re-erupt in a non-dischargeability action in the subsequently filed bankruptcy case.

To speak with an attorney about your divorce or bankruptcy questions, please contact McGuire Gardner today.

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

Unfortunately, this will not slow down consumer bankruptcies, based upon past trends.  Bankruptcies generally lag the economy one to two years, as consumers fight to hold on through the recession and eventually realize that their only hope is to file for bankruptcy relief.

For many of our clients, it takes hitting the bottom or at least nearing the bottom before they realize that filing for bankruptcy may be their best option.  Most consumers do not hit the bottom as soon as they loose their job or as soon as they go through a divorce or as soon as they experience serious medical problems or some other financial crisis.  Generally, they hit the bottom when the return to full employment or get back on the normal track and realize that the voluminous debts incurred during their crisis are overwhelming them and preventing them from getting back into the financial groove that they previously held.  They realize that only with a fresh start from a bankruptcy can they get back their life.

Many of our clients are confused by the fact that they now have a new job, or that they have resumed full health, or otherwise are now doing well, but they just cannot pull ahead financially.

While the economy is showing signs that it may beginning a recovery, it will be quite some time before the consumers that have been hurt so badly in this economic wreck overcome all of the baggage that they have picked up through the last few years.

If you are still struggling financially, do not let the beginnings of economic recovery prevent you from speaking with one of our bankruptcy attorneys about what a bankruptcy can do for you in providing you with a fresh start so that you can enjoy this economic recovery with the rest of the country.

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

The article, found at http://www.nytimes.com/2010/02/03/business/03walk.html?em, suggests that the psychological threshold is often 75%, meaning that when the value of the house falls below 75% of the amount owed on the house, homeowners quickly decide to walk away.  At this point, it becomes much easier to overcome any emotional attachment to the home, and much more difficult to rationalize that the home may eventually go up in value.

Homeowners are faced with the difficult decision of continuing to flush money down the toilet for an estimated 10-40 years waiting for the market to recover to the point that the homeowner breaks even, or walking away from the property and renting for much less while they rebuild their credit.

The article, published nationally, did not include the consideration relevant to Arizona, that in many cases the homeowner is protected by anti-deficiency laws which preclude the mortgage company from seeking to collect the deficiency.  Even when the anti deficiency laws do not apply, the homeowner can file for bankruptcy and have any deficiency or potential deficiency discharged along with credit card debt, medical debt, and other unsecured debts.

The article estimated that 4.5 million homeowners had home values that were at or less than 75% of the value of the home, and it was projected to climb to 5.1 million by the middle of this year.  In other words, 10 percent of all homeowners would have homes valued at or less than 75% of the amount owed on the mortgage or mortgages.

If you find yourself in a situation where you are under “house arrest” because you are unable to sell your house for what is owed, please contact our office to discuss your options, including bankruptcy, and determine a strategy to get you back on your feet.  www.mcguiregardner.com.

I recently met with a potential client that had seen three prior bankruptcy attorneys.  One of these had suggested to the potential client that she sell a valuable piece of property that she owned free and clear, and use the proceeds from the sale to pay off the mortgage on her home here in Arizona.  Then, he recommended she file bankruptcy and “protect” the equity in her home.  As few as five years ago, this may have been an acceptable strategy, and under the right circumstances MIGHT, and I emphasize might, still be possible today. 

However, the prior attorney failed to mention that major changes to the Bankruptcy Code in 2005, severely limit a debtors ability to engage in this form of “pre-bankruptcy planning.”  The specific code provision in question is Section 522(o).  This section limits the homestead exemption in the context of “pre-bankruptcy planning.”  It requires the deduction of the value attributable to fraudulent conversions made within 10 years of filing, to the extent that such value could not have been exempted if the disposition had not been made.  In plain English, if you sell an asset that you were going to lose in bankruptcy for $100,000, (like a brick of gold, vacant land you were going to build on some day, or any number of other items), and you use the money to pay down the mortgage, you are in for a rude awakening when the trustee objects to your claimed $150,000 homestead exemption.  

The statute speaks of “value… attributable to… property that the debtor disposed of… with the intent to hinder, delay, or defraud a creditor.” The language is strikingly similar to that used in Section 548(a)(1)(A), which authorizes the avoidance of transfers made with actual fraudulent intent, and in Code § 727(a)(2), which bars a Chapter 7 discharge for such conduct. The similarities may suggest parallel analysis, although there is not yet a Ninth Circuit case setting forth the precise standard to be used to determine whether the transaction was done with “intent” to defraud, hinder or delay.  However, there are lower court cases that state the Trustee (or objecting creditor) need only show fraud by a preponderance of evidence, rather than the higher, “clear and convincing evidence” standard that is sometimes used. 

Section 727(a)(2) prohibits the grant of a discharge to a Chapter 7 debtor that engaged in fraudulent asset conversion in the year prior to filing bankruptcy.  Seciton 522(o) now adds loss of the homestead exemption to the price the debtor will pay, and more troubling, extends the look back time for an astonishing 10 years.  Furthermore, section 522(o) not only applies in Chapter 7 cases, but across the bankruptcy code. 

While pre-bankruptcy planning, and the conversion of nonexempt property into exempt property, without more, is allowable, the intent to hinder or delay creditors is fraudulent under the code.  Whether a particular transaction is fraudulent is a fact intensive question, and the objecting creditor or the Trustee bears the burden of proof.  However, if you are considering bankruptcy, and you are thinking about selling, giving away, or otherwise disposing of any assets prior to filing, you should speak to a competent bankruptcy attorney first.

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

First, the debtor and his or her attorney must determine if the debtor is eligible to file for a Chapter 7.  The 2005 law changes included a means test, that requires the debtor to determine eligibility to file for a Chapter 7.  Our office can help you understand the means test and determine if you qualify.

One consideration is that voluntary retirement contributions and retirement loan repayments are deductible in a Chapter 13, but not in a Chapter 7 case when determining disposable income.

Another consideration is eligibility for a discharge.  If the debtor filed a bankruptcy within the last eight years, the debtor cannot receive a Chapter 7 discharge, but can receive a Chapter 13 discharge so long as it has been at least four years since filing for a bankruptcy that resulted in a discharge.

The debtor must also determine if it is likely that he or she will incur additional debts in the near future.  A Chapter 13 may be voluntarily dismissed by the debtor much more easily than a Chapter 7, allowing the case to be refilled to include subsequent debts if necessary.

A Chapter 13 allows a debtor to retain a vehicle without reaffirming the debt. The problem with reaffirming a debt in a Chapter 7 case is that the debtor may be responsible for the deficiency if the vehicle is later repossessed, or totaled in an accident when the vehicle has negative equity.

Many debtors have assets that exceed the permitted exemptions.  Filing a Chapter 13 provides an opportunity for the debtor to keep un-exempt assets. 

Debtors that own a sole proprietorship should strongly consider a Chapter 13, which would allow for the continued operation of the business with much less interruption and interference than would result from a Chapter 7 case.

Certain non-dischargeable debts are more easily handled in a Chapter 13 case, including non-dischargeable taxes, secured debts, real property arrearages, etc.

Finally, in many cases we can assist the debtor in stripping off second or third mortgages on real property, and/or cramming down the amount that must be paid on a vehicle to the value of the vehicle, not the greater amount still owing on the loan. 

On the other hand, Chapter 13 cases cost more, though the additional cost is generally paid through the bankruptcy plan.  There is additional paperwork and the case remains open for years, not just months. 

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

Similar legislation passed the House earlier this year on a 224-191 vote. Today, 50 Democrats who had voted in favor of H.R. 1106 switched their position and voted against the judicial mortgage modification amendment.  This is especially baffling, given all the evidence that the voluntary program is not working …and the escalating foreclosure crisis.

If you want to know how your Member of Congress voted today, go to http://clerk.house.gov/evs/2009/roll963.xml.  If you want to compare your Representative’s vote today with that on H.R. 1106, go to http://clerk.house.gov/evs/2009/roll104.xml to see their earlier vote. 

Of course, there were a number of variables associated with the vote that were not a factor in the earlier vote, particularly given that Members also were being asked to vote against the banks by supporting the creation of a Consumer Financial Protection Agency (CFPA).  As hard as it may be to believe, some Members just could not vote twice in the same day against the interests of the financial services industry.  It is just that simple.

In many of these medical bankruptcies, the debtor had medical insurance, but the large deductibles and co-pays, the uninsured expenses, and in many cases the 20% that the insured is required to pay is simply more than the debtor can afford to pay.

In one Harvard study, the conclusion was drawn that 62 percent of bankruptcies had medical bills as a contributing factor in 2007.

If you are overwhelmed by medical debts or other debts, please call us to schedule a free consumer bankruptcy consultation with an attorney, or to reserve your seat at one of our upcoming free bankruptcy seminars around Arizona. To learn more visit us at www.FreeArizonaBankruptcySeminar.com.

To view the New York Times Article, go to: http://www.nytimes.com/2009/11/25/health/policy/25bankruptcy.html?_r=1&th&emc=th.

The seminars are meant to educate individuals and business owners about bankruptcy issues, arming you with the information you need to determine if bankruptcy can help you in your current situation.

One must ask his/her self -  if the site is spending over fifty million dollars ($50,000,000.00) per year to advertise, are they really giving away their credit reports for free- just to help you out? 

Much of the confusion arises because the federal government (the F.T.C.) has mandated that consumers be allowed to access their credit report for free at least once every 12 months.  As there are three major credit reporting agencies, a smart consumer can get a free credit report from one of the major credit reporting agencies every four months. 

The government’s website for a truly free credit report is:  www.annualcreditreport.com.  For more information regarding the battle between the F.T.C. and sites that mislead consumers about a free credit report, see the New York Times article from  November 2, 2009, by Ron Lieber, entitled:  “A Free Credit Score Followed by a Monthly Bill” at http://www.nytimes.com/2009/11/03/your-money/credit-scores/03scores.html?th&emc=th. 

For more information visit our websites at www.mcguiregardner.com and www.bankruptcylawyeraz.com.  For a list of upcoming seminars, visit www.freearizonabankruptcyseminar.com.