Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Changing view of when to file bankruptcy

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The Supreme Court’s recent decision in Lanning and the application of the infamous “means test” to a client’s changing income picture has changed my advice about when to file bankruptcy.

My standard advice to clients newly unemployed who see clearly they won’t be able to pay their existing bills has been to wait.

  • Wait until you can see things improving.
  • Wait til you have acquired something that a creditor with a judgment could take from you.
  • Wait til you have an income such that my fee doesn’t take food off the table.

The Kagenveama decision holding  that the means test was mechanical and meant what it said about how we measured ability to pay creditors.  The means test, after all, was the statute to end judicial discretion on this subject.  I knew that as long as we were measuring ability to pay by looking backward into a period of unemployment, my client would pass the means test.

Now, Lanning says the court can take into account, on ability-to- pay issues, changes that are virtually certain to occur in the future.  Bingo, the future income of my previously unemployed client now must be factored into the mix.

In the usual fashion of Supreme Court decisions, the justices don’t tell us how to do that.  Lanning dealt with a significant, one time payment in the look back period which distorted the current monthly income average.  In that case,  being decoupled from the mechanical means test meant the bonus could be excluded from the  calculation.  We aren’t told how to deal with a future of steady, level income replacing months of no income.  Does the means test become irrelevant on those facts?

Since I’m not anxious to have my clients be the next test case if I can help it, I’m changing my advice:  let’s consider filing sooner rather than later, so we are confident that finally getting reemployed isn’t going to doom the client to failure on the means test.

On doing the means test yourself.

What happened to encouraging Chapter 13

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Used to be, bankruptcy law was organized to encourage debtors to file Chapter 13 and repay some part of their debts. Some part of that encouragement came in the form of the Super Discharge: the ability to discharge debts incurred by bad acts; unfiled tax debt from long past tax years; and unfiled claims in the bankruptcy case. Most of that departed with BAPCPA.

I’ve adapted Chapter 13 became more like the alternative dumping ground if the means test closed off Chapter 7. Often, the differing allowable deductions on B-22C meant the debtor foreclosed from 7 made minimal payments in 13.

But what galls me these days is the impact of the 9th Circuit BAP decisions of Smith and Martinez which disallow deductions for debt contractually due in the upcoming 60 months on liens to be stripped in the Chapter 13 and for property to be surrendered. The result is that Chapter 7 becomes more attractive because there, the prevailing case law hews close to the statutory language that allows means test deduction for debts due over the life of a Chapter 13 plan. What a blow to the sponsors of BAPCPA who were intent on forcing more debtors into Chapter 13 repayment plans. (This has to be the only time I’ve mourned the thwarting of the intentions of the BAPCPA proponents. Remember the line from the Grinch Who Stole Christmas that the Grinch’s heart was just so many sizes too small)

Very soon after BAPCPA was effective, I argued the Pak case to the BAP concerning whether the statutory look back period in B-22 was conclusive when the debtor’s future income was not only different but larger. I argued that the law was to be applied the way it was written: that Congress, in its infinite wisdom (and I tried not to giggle) thought it could write a formula to find the “can pay” debtors and that it intended to cut off judicial discretion to assess the allowance of expenses or the income to be available to fund the plan. I lost and came away after oral argument with the sense that the judges on the panel wanted the old days back, when their judgment and good sense were the last word. That was a perfectly fine world, but not the world after enactment of BAPCPA.? (Kagenveama from the 9th Circuit some months later vindicated the argument I made unsuccessfully to the BAP.)

With Smith and Martinez, I again sense that the BAP is chafing at the idiocy found in BAPCPA.  I chafe too, but I don’t want to see a legal atmosphere where the words of the statute can be ignored if the judges see a way to “get” a debtor or to return to a world where their judgment is valued. I treasure predictability, and if BAPCPA gets applied as written(mean though it is), then I’ll figure out how to get my clients the best deal available under the law. If however we have courts finding interpretations that carry them back to preBAPCPA days, then I feel like the Light Brigade: ” canon to the right of them, canon to the left of them…” hoping I can ride boldly and well, into the mouth of hell,…

In the mean time, I’m filing more Chapter 7’s.

What if you choose an alternative to bankruptcy

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I’ve continued to think about my response to David Leibowitz’s discussion of getting out of debt without bankruptcy.  My first response focused on the choices inherent in paying off creditors outside of bankruptcy.

I forgot to point out the efficacy issue:  if you try to pay off your debts via settlement, it takes only one or two big creditors who won’t settle on tolerable terms to undermine the entire effort to repay creditors.  If you can’t get a big creditor to join the rest in compromise, you may have wasted everything you’ve paid out to compliant creditors in an effort to avoid filing bankruptcy.

My favorite story explaining why I don’t attempt debt settlements for clients involves a client who had only two creditors.  Her parents were willing to fund a 50 cents on the dollar settlement if I could get both creditors to agree.  It was obvious that the client could count on filing bankruptcy and discharging the debt.

Over a period of months, I was unable to get just two creditors to buy into a solution that got them half of their debt on the spot.  The client ended up filing Chapter 7; the creditors got nothing.

If you want to pay creditors and be assured of a resolution, file a Chapter 13.  Compel the creditor to accept partial payment.

In short, the weakness of an out of court settlement with creditors is that a real, non bankruptcy solution requires 100% participation of creditors and an absolutely assured stream of cash to pay creditors.

Too often, there are too many things that can go awry in such a scheme, and money is spent on some creditors before the approach craters.

Debt Debilitates

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The U.S. Armed Services recently disclosed that a significant number of service personnel cannot be deployed overseas because of their personal debts. The military says that excessive debt both distracts from job performance and makes the G.I. vulnerable to corruption.

Civilians buried in debt try, to their credit, to soldier on through debt, reluctant to recognize that they can’t ever pay off the debt they have.

They would do well to recognize, as the armed services do, that debt is debilitating. It impacts families. It sucks energy, optimism, and focus from the debtor.

It stands between the consumer and the savings necessary for a secure retirement.

 

IRS warns of credit counseling fraud

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The IRS’s list of its annual “Dirty Dozen” tax frauds includes credit counseling.

Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

The debt settlement model heads my personal list of scams, since it so seldom produces any meaningful settlement, provides no protection to the consumer while the money is accumulating, and lines the pockets of the organization in the meantime.

This is the industry that Congress made the gatekeeper to bankruptcy for individuals. Go figure.

Cathy Moran

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

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