Sad news out of London today. The 10 year old Belgian stallion named London, ridden by Gerco Schroeder in the 2012 Olympics, and which took the silver in both team and individual show jumping has been seized due to bankruptcy proceedings by the owners. The horse, along with other horses owned by the same company was seized shortly after the conclusion of the jumping competition.
Sad news out of London today. The 10 year old Belgian stallion named London, ridden by Gerco Schroeder in the 2012 Olympics, and which took the silver in both team and individual show jumping has been seized due to bankruptcy proceedings by the owners. The horse, along with other horses owned by the same company was seized shortly after the conclusion of the jumping competition.
Affairs of the Checkbook: a Growing Problem…
When the word “infidelity” comes to mind, most people think of an extramarital affair, of a husband, wife or significant other cheating by sneaking around with another lover. In fact, America is so obsessed with the concept that there is an entire industry called daytime TV devoted to different versions of the issue. However, despite the fact that affairs of the heart receive most of the attention, affairs of the checkbook can be equally damaging and are rising in number. Financial infidelity can be defined as one member of a couple, who have consolidated their finances, lying about expenditures, credit card accounts, bank accounts and even earnings. According to Forbes, one in three Americans who have combined their finances admitted lying to their spouses about money, and another one-third of these adults said they’d been deceived.
A Personal Story
Although I have not had to deal with financial infidelity personally, the topic does remind me of a well-known story from my hometown. I grew up in Bloomfield Hills Michigan, an affluent suburb of Detroit. One of the Dads who coached my little sister’s soccer team was a well-liked and well-respected auto executive who outwardly appeared to have everything going for him. Unfortunately, this man, who we’ll call Jim, developed a gambling problem. At the time, Windsor, Canada, which is across the river from Detroit, housed the area’s only available casinos. Jim started to visit the casinos rather than going to work and eventually began to rack up large debts. His work suffered and he was fired. Rather than tell his family what happened, Jim woke up every morning, put on a suit and pretended to be heading off to work. However, rather than going to the office, Jim dutifully visited the casinos. Rumor has it that he gambled away most of his families savings before going on a spree of bank robberies to fuel his gambling habit. When he was eventually caught, the community was shocked and saddened. Jim’s family was devastated and put in dire financial straits. While this example is admittedly extreme, it provides an important lesson. The financial decisions of your spouse deeply affect you.
How a Financial Affair Can Lead to Bankruptcy
Other blogs and articles have covered the trust issues that are created by financial infidelity, so I won’t rehash them here. Instead, I want to delve into the ramifications that affairs of the checkbook can have on an innocent spouse. It is all too common in marriages for either the husband or wife to be solely responsible for managing finances. As a result, it’s not as difficult as you might imagine for one spouse to make expenditures that the other is unaware of. Similarly, large expenditures made over short period of time can fly under the radar. When joint credit is used, both parties to the loan are guarantors who are ultimately responsible for payment. If one spouse files for bankruptcy or cannot afford to make payments, the other will be solely liable. In situations where the breadwinner is the party sneaking around financially, poor decisions can wreak havoc on the more financially dependent party, especially in community property states. For example, if a wife who earns the majority of the household income spends lavishly on a joint credit card without telling her husband and the couple separates as a result, the husband will be on the hook for those purchases just as much as the wife. In community property states like California, the courts see the debts accrued over the course of the marriage as the responsibility of both parties. In the example above, the husband would have to take responsibility for his share of his ex-wife’s financial recklessness despite the fact that he earned far less money than his ex and did not spend the money himself. Situations like this often lead to one party being forced to pay the high cost associated with bankruptcy to get rid of the debt. In community property states, even if the wife were to have incurred the credit card bills on her own account, in her own name, the husband would still be liable for his portion. By contrast, in equitable distribution states, attorneys and a judge determine who owes what. In other words, in equitable distribution states, if your spouse racked up a lot of credit card debt in secret, you’re more likely to come out of your marriage not owing any of that money. Bankruptcy attorney can tell you where the story often ends: consumers who find themselves saddled with the debts of an ex-spouse are often forced to pay a bankruptcy lawyer to discharge the debt.
California has three separate statutory provisions that prohibit a lender from obtaining a deficiency judgment after foreclosure. These provision are found at Cal. Civ. Proc. § 580b, Cal. Civ. Proc. § 580d in conjunction with Cal. Civ. Proc. § 726(a), and after July 15th, 2011, Cal. Civ. Proc. § 580e. A deficiency is simply the loss that a lender sustains after the property is foreclosed. The deficiency is measured by the difference between what is owed on the loan and what the bank collected from selling the property after foreclosure. A deficiency judgment after foreclosure may result in a wage garnishment, bank account levy, and a judgment lien against other property owned by the borrower. Because of the seriousness of a deficiency judgment sound legal advice should be sought out whenever foreclosure appears imminent.
If a borrower is facing an imminent foreclosure or has already had a property foreclosed and one of the California statutory provisions to be discussed below is not helpful a bankruptcy discharge may be the only means of averting the negative consequences of a deficiency judgment. In reviewing options with a client as a bankruptcy attorney, I always start with non-bankruptcy law. With that in mind I summarize the non-bankruptcy protections found in the California anti-deficiency provisions.
The first statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580b. Cal. Civ. Proc. § 580b protects a borrower from a deficiency after foreclosure where the property is occupied by the borrower as a personal residence and where the money borrowed from the lender was used for the purchase of the property. This provision does not protect a borrower where the property is not a dwelling occupied by the borrower or where the loan was not part of the financing used to buy the property. Specifically this provision does not protect a borrower if the loan was a refinance loan or an equity line of credit.
The specific language of Cal. Civ. Proc. § 580b reads as follows: “[n]o deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.
The second statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580d. Cal. Civ. Proc. § 580d in conjunction with Cal. Civ. Proc. § 726(a) is often referred to as the “Single Action Rule.” Basically what this means is if a lender non-judicially forecloses on the property (power of trust deed sale) they may not later seek a deficiency. Practically speaking this means that in over 99% of foreclosures by a senior lienholder (the holder of the first Trust Deed) the senior lienholder will not be able to collect a deficiency. However, note in rare cases where the property has very little value or no value and or if the borrower has independently very deep pockets the lender may choose judicial foreclosure and after the foreclosed property is sold obtain a money judgment for the balance of the loan. One of the reasons that judicial foreclosure is rare in California is that it can take the lender much longer to ultimately foreclose on the property.
Another problem with the “Single Action Rule” is that it does not protect the borrower from being sued by a junior lienholder who either waives their right to foreclosure or sues after the property is foreclosed by the senior lienholder. Very frequently, a borrower will wind up owing a deficiency to a junior lienholder after the senior forecloses where the junior lien arose out of a home equity line of credit or from a refinance that included a second. The term that is often associated with this a “deficiency from a sold out junior lienholder.” However where there is a “sold out junior lienholder” there is case law that may still prohibit them from collecting on the deficiency. One California appellate case holds if the senior lienholder and the junior lienholder are one in the same than the foreclosure by the senior lienholder precludes the collection of a deficiency by the junior. The junior lienholder is deemed to have sold itself out and elected its sole remedy on CCP 726(a). Simon vs. Superior Court, 4 Cal.App.4th 63, 5 Cal.Rptr.2d 428 (1992). Taking this one step further the California Court of Appeal recently held that where the senior and junior are owned by the same bank that an assignment to another lender of the junior after foreclosure does not allow the assignee to collect a deficiency. Bank of America vs. Mitchell, 2012 Westlaw 1177866 Cal.App. However the lender may circumvent the Simon and Bank of America vs. Mitchell results by assigning the junior trust deed prior to foreclosing on the senior trust deed. National Enterprises, Inc. v. Woods, 94 Cal.App.4th 1217, 115 Cal.Rptr.2d 37 (2001).
The last statutory provision that may protect a borrower from a deficiency is Cal. Civ. Proc. § 580e. Cal. Civ. Proc. § 580e only became effective July 15th, 2011. The provision expands anti-deficiency protection to all mortgages or deeds of trust if all lenders agree to a short sale. A short sale occurs when the lender allows homeowners to sell their property for less than the amount owed to the lender. Although the lender receives less than the full value of the loan in a short sale, the lender avoids the costs of both the foreclosure and resulting expenses of a property which would end up with the lender. All lenders still have to agree to a short sale process. The law also makes clear that the protections do not apply to commercial loans with multiple security which includes a security interest in residential property.
As discussed earlier consulting with bankruptcy counsel early on may allow a distressed borrower to explore the greatest number of available options. Bankruptcy may be used not only to avert the negative consequences of a deficiency judgment but a Chapter 13 may sometimes be also be used proactively to get caught up on defaulted payments or to avoid/ strip a wholly unsecured junior lien from the property altogether. Please feel free to contact my office for assistance.
Most experts agree that financial difficulties rate highly among the leading causes for divorce. Not surprisingly, when couples are dissolving their marriage they will often seek my advice regarding bankruptcy. I often hear from clients who are referred by a family law attorney. I also sometimes see clients after a family court judge has advised them to seek counsel from a bankruptcy attorney. This article explores a few of the most frequently asked questions involving bankruptcy law as it pertains to marital dissolution.
The first and most common question that arises is whether or not bankruptcy removes an obligation to pay child or spousal support. The answer pure and simple is that bankruptcy does not remove these obligations. Bankruptcy Code Section 523(a)(5) excepts from discharge debts owed to a spouse, former spouse, or child of the debtor if such debt is in the nature of alimony, support, or maintenance and is in connection with a separation agreement, a determination made under state or territorial law by a governmental unit. In fact bankruptcy often helps a party meet their support obligations in freeing up needed resources by removing other burdensome debts.
This brings us to the second most common question. The question is whether or not bankruptcy discharges an obligation to pay property settlement obligations, spousal indemnities to pay common debts, or orders to reimburse for the other spouses attorney’s fees. This is a much more complicated question. First, the answer to the question depends on which chapter of bankruptcy is filed. In a Chapter 7 bankruptcy, 11 U.S.C. § 523(a)(15) excepts from discharge any debt that is to a spouse, former spouse or child of the debtor; that is in connection with a separation agreement, divorce decree, order of a court or record or determination made in accordance with state or territorial law by a governmental unit; and is not a support obligation. In other words, property settlements obligations are not within the gambit of Chapter 7 discharge.
On the other hand, 11 U.S.C. § 523(a)(15) is not applicable to a discharge in a Chapter 13 case under 11 U.S.C. § 1328(a)(2). Even with a Chapter 13 one must be careful to distinguish an obligation to make a non-support related payment from the mere division or partition of community property. A spouse or former spouse fully retains the right to their share from the division of the community property. This is not affected by a bankruptcy discharge.
Another consideration is that it is often the case that if both spouses agree to file bankruptcy, regardless of chapter choice, that an obligation to indemnify for the payment of third party debts is either avoided altogether or becomes moot upon the bankruptcy discharge of both spouses. So if both spouses obtain bankruptcy discharges, many times neither spouse will have to pay for the third party debt. This can amount to a win-win situation for both spouses. As a result it is often prudent for one spouse to offer to pay for the bankruptcy of the other.
The last common question for discussion has to do with the relative timing of bankruptcy relative to their divorce. Specifically, many clients ask whether it is advisable that they wait until the divorce is finalized before filing for bankruptcy. While there is no easy hard and fast answer to this question, several key points should be considered. The first key point has to do with urgency. If one needs to stop a wage garnishment or a pending foreclosure it probably is not advisable to wait. On the other hand waiting for a finalized divorce decree along with an attendant Marital Settlement Agreement (MSA) and order thereon might favorably affect property exemptions, controversy over what is and is not property of the debtor’s bankruptcy estate, and qualifications under the means test. Qualifications under the means test might affect whether the client can file a Chapter 7 bankruptcy or not and what the client is required to pay into a Chapter 13 bankruptcy plan. Each case will be unique and the pros and cons will need to be carefully weighed by an experienced bankruptcy attorney. With bankruptcy the timing of a case is crucial, so an early evaluation is recommended to insure the best outcome in a given case. Also, certain planning opportunities may require timely and close cooperation of the client’s family law and bankruptcy law attorneys.
For advice specific to the facts of your case please contact Attorney Raymond Schimmel at (619) 275-1250 or visit my website at http://endbillcollections.com/
The answer to whether or not unemployment benefits are dischargeable in bankruptcy hinges on the following: 1) whether the state receives adequate notice of the bankruptcy filing; 2) whether the state upon proper notice brings a timely complaint (adversarial proceeding) in the bankruptcy court, and 3) whether the state wins its complaint and proves that the debtor obtained the unemployment overpayment by fraud or theft as opposed to having made a reasonable mistake.
A debt that is discharged in bankruptcy is a debt that is no longer enforceable. The general rule is that a debt is dischargeable at the conclusion of a Chapter 7 or a Chapter 13 bankruptcy case absent some specific statutory provision to the contrary. The exceptions to discharge are primarily enumerated in sections 523, 727, 1228 and 1328 of the United States Bankruptcy Code.
Some of the provisions of the Bankruptcy Code are “self-executing” excluding a debt from discharge automatically even if the creditor does not challenge the dischargeability of the underlying debt. Specifically these sections include, 11U.S.C. §523(a)(1), (3), (5), (7), (8), (9), (10), (11), (12), (13), (14), (16), (17), (18), or (19). However, other provisions of the bankruptcy code require that the creditor file a separate complaint known as an adversarial proceeding within a strict time frame otherwise the underlying debt is discharged. The provisions of the Bankruptcy Code that might bar the discharge of an overpayment of state unemployment benefits are not self-executing. These three provisions fall under 11 U.S.C. § 523(a)(2), (4), (6), and (15). Of these provisions only 523(a)(2) and (a)(4) would seem applicable. These two provisions are known as the “fraud” provisions. Accordingly in order for the state to prevail in excluding unemployment overpayments from discharge, they must prevail in a timely filed fraud complaint brought in the U.S. Bankruptcy Court.
In general, a complaint to determine the dischargeability of debt under § 523(a)(2), or (4), must be filed not later than sixty days after the first date set for the creditors meeting. Parties must have at least thirty days’ notice of this deadline. Fed. R. Bankr. P. 4007(c). However the state would need to be given proper notice so that they would have the opportunity to file a complaint and challenge the dischargeability of the overpayment pursuant to 11 U.S.C. §523(a)(3). This is why it is extremely important that all creditors be properly listed on the debtor’s bankruptcy schedules.
Again, there are two provisions of Bankruptcy Code Section 523 that if successfully brought by the state seeking to recover an unemployment overpayment claim would bar the discharge of the debt under the Bankruptcy Code. The first such provision is found under 523(a)(2).
Section 523(a)(2) excepts from discharge debts incurred in obtaining money, property, or services by false pretense or fraud. Accordingly, the debtor who knowingly made a false statement on his unemployment application or continuing unemployment forms would be excepted from discharge under this provision provided the state timely brought and proved their complaint. A debtor who could prove that they reasonably believed that they were entitled to the overpayment money would prevail and be entitled to discharge the debt.
The other applicable exception would come under Bankruptcy Code Section 523(a)(4). This provision bars a discharge where the plaintiff proves fraud or defalcation while the defendant was acting in a fiduciary capacity, or committed embezzlement, or larceny. These provisions would be applicable if the state were able to prove that you received an unemployment benefit by means of what is commonly known as theft. Again, the state would have to timely file their complaint and prove that that is what happened.
In conclusion, at least in California in my experience rarely does the state when properly notified challenge the overpayment by timely bringing an adversarial complaint. Accordingly, it is critically important that the overpayment claim be listed on the debtor’s bankruptcy schedules and that notice to the state be properly addressed. For California overpayments you would want to notice Employment Development Department, State of California, Bankruptcy Unit – MIC 92E, P.O. Box 826880, Sacramento, CA 94280. In the event that the state brings a timely complaint, the debtor/ defendant in consultation with his bankruptcy attorney must decide if reasonable defenses exist to the state’s claim and the costs and benefits of defending the claim. Unless the facts tilt in favor of debtor / defendant it may be advisable to work out a settlement with a repayment plan. For more information contact San Diego bankruptcy attorney Raymond Schimmel at (619) 275-1250 or at http://www.endbillcollections.com.
When you file for Chapter 7 bankruptcy, an automatic stay is put in place. This is the legal mechanism that stops foreclosure, repossession and collection efforts including wage garnishments. This can be a great relief for you. You can take a breath and work on reorganizing your priorities and assets.
However, under certain circumstances, creditors can ask the court to allow them to go ahead with collections in spite of the bankruptcy filing. This is called a Motion for Relief from Automatic Stay, and a successful one often negates the whole purpose of filing for Chapter 7 bankruptcy in the first place.
These motions are most often filed by mortgage companies and car loan lenders, but any creditor can file a Motion for Relief if they have a compelling reason to resume collection efforts before your Chapter 7 bankruptcy case is otherwise completed.
The Court may grant creditors relief from the stay if they can produce evidence that you will be putting their collateral at risk or that you are unable to continue satisfactory payments on the collateral. If you defaulted on your mortgage seem unable to cure past due payments or continue making payments, the mortgage company may decide to file a Motion for Relief from the Automatic Stay. Automobile lenders who feel you are putting the vehicle at risk, such as failing to maintain insurance coverage or purposely putting the vehicle at risk of damage, would file for relief in order to repossess the car and protect their collateral.
In a Chapter 7 bankruptcy, the creditor typically wants to be sure that it will get full value for the asset when the repossess it. The major concern is that you’re holding onto a car (for example) and not paying for it – if you crack it up during the Chapter 7 bankruptcy process then the bank is going to get stuck with a worthless car and you’re going to walk away from the debt once the discharge is issued.
The motion for relief, therefore, is the creditor’s way of getting things moving forward quickly rather than having to wait until the Chapter 7 bankruptcy discharge is issued. It’s a means of evening the scales and making things are fair to both parties as possible.
If the Bankruptcy Court grants the motion, then the company is allowed to pursue collection action against you to claim the asset, such as initiating a foreclosure proceeding or repossessing an automobile. However, there are ways of avoiding foreclosure of your home or repossession of your vehicle, even after that process has begun and whether you are in bankruptcy or not. Your attorney should be able to help you.
Jay S. Fleischman is a consumer bankruptcy lawyer who sues creditors and bill collectors for harassment after bankruptcy. When not helping people with bill problems, he works with attorneys to help improve their law firm marketing efforts.
The simplistic answer to the question of whether you have to file bankruptcy jointly when you are married is no. You can choose to bankruptcy individually. However, whether or not this is the best decision depends on a number of factors and often involves detailed legal and factual analysis tailored to the individual situation.
First off, my discussion of this topic is limited strictly to California bankruptcy filings. California is a community property state with unique exemption laws. My analysis would not necessarily be appropriate in states that have different property and exemption laws.
Whether you decide to file bankruptcy with your spouse or not will depend on a number of factors as follows:
1) were the debts incurred jointly;
2) does one of the spouses have separate vs. community property;
3) are there issues because one spouse is ineligible for a bankruptcy discharge;
4) is an objective of the bankruptcy junior lien avoidance on a jointly owned property;
5) is it possible for one spouse to preserve a good credit rating;
6) particularly with regard to Chapter 13 bankruptcy are the spouses amicable with one another;
7) must one spouse maintain a security clearance;
8) Will an exemption waiver create a problem;
9) and what are the attributes and characteristics of each spouses obligations and liabilities
Let me start by saying that when you are married and you file for bankruptcy without your spouse your spouse will still be involved in the process to some extent. If you are living with a non-filing spouse their income is still considered in the means test determination for the filing spouse. For Chapter 7 the non-filing spouse’s income is generally combined with the filing spouse to arrive at current monthly income. If the combined income exceeds the median income for your household size, and you and your spouse don’t have the right mix of necessary expenses, you may not qualify for Chapter 7 bankruptcy. In a Chapter 13 bankruptcy your ability to repay is based on your household budget. So even if only one spouse files for bankruptcy, the other spouse’s income and expenses are considered in determining the repayment obligation of the spouse who has filed for bankruptcy. In addition the filing spouses exemption choices are limited if the non-filing spouse does not file an exemption wavier. For the issues involving spousal waivers and how they may affect a non-filing spouse see my blog post on this issue.
The benefit of having one spouse filing without the other may come from the fact that the non-filing spouse can preserve their credit (assuming that it is not already shot) and even make credit purchases for the household solely in their name that might not otherwise be possible. In addition the non-filing spouse may in the future have their own individual need to file for bankruptcy and unavoidable future debts from an illness or loss of a job. If they are not a party to the bankruptcy all of their separate bankruptcy options are kept open.
On the other hand if the debts are incurred jointly the creditors may go after the non-filing spouse for the balances that were discharged by the bankruptcy. With that said, the creditors remedies may be limited to levy against the non-filing spouses separate property with the analysis of that issue being outside the scope of this discussion. Even so, the debt collectors can continue to call to demand money from the non-filing spouse for the joint debt or his or her separate debts. This in itself can be quite disconcerting for a couple looking for a fresh start. I also will leave for a future discussion the situation where the spouses are living apart. This creates a whole variety of unique issues and problems. Even with this situation, under the right conditions and careful consideration a joint bankruptcy might be possible and advisable. I touch on some of these issues in my blog article about spousal waivers.
In the end careful legal analysis tailored to the facts and an individual couple’s needs and objectives is required. You should discuss with qualified counsel your objectives and the respective consequences of filing jointly or not given your family’s specific circumstances.
For more information contact San Diego Attorney Raymond Schimmel
Bankruptcy mills are high volume law practices that advertise aggressively and provide poor quality legal services. Typical attributes of a bankruptcy mill are as follows:
a) rely heavily on poorly supervised non-attorney staff; b) lack adequate controls over workflow (correspondence to 3rd parties & clients) and court deadlines; c) cut corners both ethically and substantively; d) minimal attorney involvement; e) routinely fail to file necessary documents, and frequently show up to hearings unprepared, and f) Have usually been admonished by the court on more than one occasion.
Unfortunately, with bankruptcy filings soaring, many unaware consumers have turned to “bankruptcy mills” for help with their financial difficulties. Most “bankruptcy mills” advertise heavily on television and radio while flooding homeowners in foreclosure with direct mail. When a consumer chooses a “bankruptcy mill” they assume that they will be working closely with a lawyer on their case. However, with bankruptcy mills, this is often not the case. The economics are such that with a mill they have a very high ratio of cases to attorneys. I have seen “bankruptcy mills” that literally have hundreds of open cases for each attorney working at the firm.
While the consumer might initially meet with an “attorney intake coordinator” who will sign them up, the intake coordinator rarely spends more than a few minutes with the client. Rather their focus is to get a down payment with a signed retainer agreement. Once the retainer agreement has been signed the client is handed off to a “prep team.” The “prep” team usually consists of poorly supervised staff consisting of paralegals, law clerks and secretaries.
The “prep team” will gather necessary documents (usually with little or no attorney review) and prepare the bankruptcy petition and schedules to be filed in a cookie cutter fashion often omitting important disclosures and details. The client will then be asked to come in and sign the often deficient papers. Frequently the final signing is not supervised by an attorney. This means that last minute questions or issues brought up by the client often go unaddressed.
The case is then filed and assigned to an attorney. Often the attorney assigned to the case has never met the client. Frequently, In a Chapter 7 case the client goes to their 341 meeting of creditors only to find that they and their assigned attorney are playing “blind man’s bluff.” In other words, the “bankruptcy mill” attorney will wander through the crowded hearing room trying to figure out which of the attendees are his or her clients. Similarly, the “bankruptcy mill” clients will be looking for the attorney that they have never met while wondering whether they have been abandoned. When the case is called, often the trustee is asking questions for which the assigned “mill” attorney is completely unfamiliar. Many of these cases are continued for no other reason than the client was poorly prepped for the hearing or that their assigned attorney is unprepared to answer obvious questions that should have been apparent if there had been continuity from the start of the case. In other cases, clients lose their property or wind up charged with nondisclosure and felony bankruptcy fraud because of a break-down of communication with their attorney. For an example of serious problems that arise from inadequate bankruptcy representation see my blog article “I Wish I had a Time Machine.”
As problems frequently arise with “bankruptcy mill” attorneys in Chapter 7, similar problems also arise in Chapter 13. In a Chapter 13 case the problems and objections also often arise because of the lack of continuity in the way the case was prepared. Inherently, without adequate communication between attorney and client the “bankruptcy mill” staff will have made many assumptions (often cookie cutter) rather than annoying a hopelessly over-burdened “mill” boss. These assumptions along with an improper application of the law will often prompt a Chapter 13 trustee’s objection to confirmation of the client’s bankruptcy plan. In some cases these problems can be fixed causing only inexcusable anxiety for the client and in other cases they cause the case to be dismissed with serious consequences for the client.
In conclusion it is important that you hire a firm where you can reasonably expect that you can get to know your attorney. Your attorney should be reasonably available to answer your questions, review your documents and the preparation of your case, and to represent you at all trustee and court hearings. In many cases a consumer in need of personal bankruptcy case will get better representation with a well experienced attorney with a strong reputation and a manageable volume of cases.
A new Chapter 13 controversy is brewing over whether a debtor can take an additional $200 “Old Car” operating allowance on the means test for paid-off vehicles that are more than six (6) model years old or that have more than 75,000 miles. While the United States Trustee has generally conceded the issue, a number of Chapter 13 trustees have not. In the Southern District of California where I practice, one of our Chapter 13 trustees has joined the new trend in trying to challenge the extra “Old Car” operating allowance.
Recently this issue has increased in significance since the Supreme Court had decided Ransom v. FIA Card Services. In Ransom the Supreme Court of the United States (“SCOTUS”) held that a debtor may not take an ownership allowance on a paid-off vehicle. Ransom v. FIA Card Services, 562 U. S. ____ (2011). So if you are not able to take the “Old Car” allowance it’s a double whammy. You cannot set aside an expense for replacement (“ownership allowance”) and you probably have a vehicle that is out of warranty and more costly in repairs and maintenance.
Prior to the Ransom decision there was a split of authority between the federal circuit courts as to whether a debtor could take an ownership allowance (currently $496) on a vehicle that had already been paid-off prior to their filing for bankruptcy. The Fifth, Seventh, and Eighth Circuits said that you could take the allowance and the majority of the other circuits did not so permit.
In an effort to be fair to debtors with older model paid cars the Executive Office of the United States Trustee (“EOUST”) has had a policy in place to allow an additional “old car” operating allowance of $200. This policy was not derived from the direct language of the bankruptcy law but in reference to Internal Revenue Collection Standards from which the “Means Test” expense standards were drawn. In furtherance of the Internal Revenue Collection Standards, and to help guide field collection agents, the Internal Revenue Agency distributes an Internal Revenue Manual (“IRM”) to its field offices. The IRM is not a legally binding document but is generally followed by the IRS and carries some persuasive authority with the courts. Similarly, the EOUST has a “Statement of the U.S. Trustee’s Position on Legal Issues Arising Under the Chapter 13 Disposable Income Test,” that is their guiding policy guidance to the Regional United States Trustees but is not legally binding
The IRM states as follows:
I.R.M. 126.96.36.199.3 (10-22-2010)
- Transportation expenses are considered necessary when they are used by taxpayers and their families to provide for their health and welfare and/or the production of income. Employees investigating OICs are expected to exercise appropriate judgment in determining whether claimed transportation expenses meet these standards. Expenses that appear excessive should be questioned and, in appropriate situations, disallowed.
- The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership costs and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls.
- Ownership Expenses – Expenses are allowed for purchase or lease of a vehicle. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Generally, auto loan or lease payments will not continue as allowed expenses after the terms of the loan/lease have been satisfied. However, depending on the age or condition of the vehicle, the complete disallowance of the ownership expense may result in a transportation expense allowance that does not adequately meet the necessary expenses of the taxpayer. See paragraph (5) below for the definition and allowances of an older vehicle.
- Operating Expenses – Allow the full operating costs portion of the local transportation standard, or the amount actually claimed by the taxpayer, whichever is less, unless the taxpayer provides documentation to verify and substantiate that the higher expenses are necessary. Substantiation for this allowance is not required.
- In situations where the taxpayer has a vehicle that is currently over six years old or has reported mileage of 75,000 miles or more, an additional monthly operating expense of $200 will generally be allowed per vehicle.
(1) The taxpayer who has a 1998 Chevrolet Cavalier with 50,000 miles, will be allowed the standard of $231 per month plus $200 per month operating expense (because of the age of the vehicle), for a total operating expense allowance of $431 per month.
(2) The taxpayer has a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid; i.e., $300 plus the allowable operating expense of $231 per month, for a total transportation allowance of $531 per month. After the auto loan is “retired” in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.
- If a taxpayer claims higher amounts of operating costs because he commutes long distances to reach his place of employment, he may be allowed greater than the standard. The additional operating expense would generally meet the production of income test and therefore be allowed if the taxpayer provides substantiation.
- If the amount claimed is more than the total allowed by any of the transportation standards, the taxpayer must provide documentation to verify and substantiate that those expenses are necessary. All deviations from the transportation standards must be verified, reasonable and documented in the case history.
In opposition to the IRM and the Statement of the U.S. Trustee’s Position on Legal Issues Arising Under the Chapter 13 Disposable Income Test guidance some Chapter 13 trustees’ are still arguing against the “Old Car” allowance. The Chapter 13 trustees in large part are relying on three post Ransom cases.
In the first of these cases, In re Hargis, the court denied the claim on the basis that this additional allowance is not in the standards table incorporated by 11 U.S.C. § 707(b)(2). The court noted that an additional $200 vehicle operating expense deduction is neither in the Local Standards nor in the Collection Financial Standards. The court therefore concluded that “as a matter of statutory interpretation… the $200 additional operating expense is not an expense specified under the …Local Standards with the meaning of § 707(b)(2)(A)(ii)(I). In re Hargis, ___ B.R._____, 2011 WL 165123 (Bankr. D. Utah 2011).
In a similar case, Van Dyke, the court disallowed the additional operating expense deduction in part for the reason that the amount referred to in the guideline is not an applicable monthly expense amount specified under the Local Standards as required by the statute. For that reason the court held that the allowance of this additional amount set forth in the guidelines would be inconsistent with the statute. Making reference to the Supreme Court’s observation in Ransom about the role of the guidelines, the court concluded that “allowance of an additional amount as set forth in the IRS guidelines is not a matter of interpretation of the Local Standards for transportation, but one of its revision.” Van Dyke, 2011 WL1833186.
In the final case, In re Schultz, the court reasons that even if it were to utilize the guidance contained in the IRM, it would not necessarily produce the result that the Debtors would urge. The court noted that the additional expense is generally, but not universally allowed. Accordingly, it is discretionary. Additionally the IRS applies Local Standards as caps on expenditures asserted by taxpayers, not as allowances. Accordingly, the Debtors would only be entitled to the amount specified in the standard or their actual expenses, whichever is less. The court went on to conclude since the amount was less on Schedule J for operating expenses than on Form B22C that the Debtors were only eligible for the lesser amount on Schedule J. In re Schultz Case No. 11-40490-JWV-13, (W.D. of Missouri, June 2011).
In support of the IRM and the Statement of the U.S. Trustee’s Position on Legal Issues Arising Under the Chapter 13 Disposable Income Test guidance some debtors counsel have successfully argued in favor of the “Old Car” allowance in the following cases.
In the case of 10-61317_In_Re_Baker, the court supports its decision to allow the “old car” allowance based on the Justice Kagan’s response to Justice Scalia’s dissent in Ransom. Justice Kagan for writing for the majority states, “Because the dissent appears to misunderstand our use of the Collection Financial Standards, and because it may be important for future cases to be clear on this point [emphasis and underlining added], we emphasize again that the statute does not “incorporate” or otherwise “import” the IRS guidance. Post, at 730, 732 (opinion of Scalia, J.). The dissent questions what possible basis except incorporation could justify our consulting the IRS’s view, post, at 732, n., but we think that basis obvious: The IRS creates the National and Local Standards referenced in the statute, revises them as it deems necessary, and uses them every day. The agency might, therefore, have something insightful and persuasive (albeit not controlling) to say about them.” In re Baker, Case No. 10-61317-13 (D. Montana, February 9, 2011).
Other cases that have found the IRM as persuasive in finding for special circumstances and allowance of the expense are as follows: In re Slusher, 359 B.R. 290, 310 (Bankr. D. Nev. 2007), In re O’Conner, No. 08-60641-13, 2008 WL 4516374, at *13 (Bankr. D. Mont. September 30, 2008), In re Carlin, 348 B.R. 795, 798 (Bankr. D. Or., 2006), In re Wilson, 383 B.R. 729, 734 (8th Cir. Bap 2008).
In conclusion, the extra $200 “Old Car” allowance should not be considered a given in a Chapter 13 case. In reviewing the appropriateness of the expense courts are looking to see whether or not the extra expense is a special circumstance. While the IRM may be have some persuasive value, debtor’s counsel should also be prepared to substantiate their estimation of why the allowance accurately reflects the anticipated additional operating expenses for an older high mileage car that in all likelihood is out of warranty. Counsel should also know that where there is a discrepancy between the B22 allowance and the actual Schedule J expense many courts are disinclined to allow the extra expense. If the expense is claimed on B22C, the additional operating expense as expected should also be properly reflected on Schedule J.