Substantial Abuse issues

The United States Trustee's office oversees all consumer bankruptcy filings. In the past year or two, they have become more visible and active. The main reason for this is the change in the law that occurred in October 2005. Now, the Trustee audits a certain number of cases in an attempt to make sure that debtors' and their attorneys are properly listing assets and debts and to ensure that they are following the Bankruptcy Code. One of the issues that is gaining popularity with the Trustee's office is that of Substantial Abuse.

Even before the change in the law, substantial abuse was an issue. However, it is now becoming more popular as a means for the Trustee to either have Chapter 7 cases dismissed or converted to Chapter 13 cases. Basically, the Trustee looks at the "totality of the debtor's circumstances" in Chapter 7 cases. The Trustee is looking at the debtors' income and listed expenses to see if they find anything "unusual." I put the term "unusual" in quotes because, as far as I can tell, there are no standards that the Trustee uses to determine what expenses might be too high. Interestingly, the IRS publishes standards that the Trustee has adopted for use in the Means Test. However, in substantial abuse cases these standards are apparently not followed!

The purpose of the review is to see if some expenses are exaggerated or non-existent. If the Trustee can reduce some "unusual" expenses or refute the existence of some expenses, there may be enough income to pay unsecured creditors' claims. If that happens, the Trustee will file a Motion to Dismiss the Chapter 7 based on substantial abuse. In other words, if your budget is not accurate or lists some expenses that the Trustee deems "unusual", you may face a Motion to Dismiss your case unless you agree to convert your case to a Chapter 13 where you pay some of the unsecured debts back over a 3 to 5 year period. Recent caselaw shows that the ability to repay less than 25% of unsecured debt over a 5 year period is NOT substantial abuse. This law is constantly developing and changing.

Recently, I had the Trustee file a Motion based on substantial abuse where my clients could not produce evidence that they really spent $175 per month on diapers for 2 infants or that they actually spent $400 on groceries a month or $200 per month on clothing. The Trustee wanted to reduce those figures to what we could actually prove with checking account statements and cancelled checks. The Trustee claimed that some of these expenses were unusually high for a family of 4. The Trustee could not show any standard upon which they relied. They intended to go to the hearing with one of their accountants who would testify that she thought that the listed amounts were simply too much and the amounts were not supported by any receipts. Interestingly, the numbers used in the debtors' budget were significantly less than those used by the same Trustee based on figures from the IRS!

That case is still pending and I will update you on its outcome. In the meantime, it might be a good idea to keep receipts, even for standard things like groceries. I expect the Trustee's office will get more aggressive on this issue in the near future. If you can prove that your budget figures are completely accurate, you should do fine. If not, prepare to go to Court.

Great post about Foreclosures and Bankruptcy

My friend Jonathon Ginsberg, an Atlanta Consumer Bankruptcy lawyer, has a blog and recently made a fantastic post about Georgia Foreclosure law and Chapter 13. If you are in that situation, read it now and do something before its too late.

Jonathon's BK blog

One year into the reform

Sorry for the delay in posting, things have been pretty busy lately. As most of you know, the extensive Bankruptcy reform went into effect one year ago. The point of the reform was to "weed out" people who were taking advantage of the Bankruptcy laws and to increase the number of Chapter 13 cases by decreasing Chapter 7 cases. The government, no doubt encouraged by lobbyists for the credit and business industries, felt that the system was being abused. Many of us who practice primarily in the area of consumer bankruptcy felt, from our experience, that this was simply not true. Bankruptcy exists in our society because it is necessary. It is not immoral. It is not wrong. Neither is it fun or something that you want to brag about. The fact is, bad things happen to good people. Most of my clients are good people who lose a job or suffer a medical condition that prevents them from honoring the debts they incurred. Others simply incur more debt than they can handle. They are good people too who are often taken in by our society's "buy it now" and "easy credit" mentality. Regardless, very few of the people I have ever interviewed were in my office to abuse the system.

I saw a report recently that compiled figures from over 500,000 bankruptcy filings that occurred after the new reform went into effect. The average debtor was "upside down" by more than $11,000. In other words, they owed $11,000 more in unsecured debts than they earned in a year. The report showed that bankruptcy was their only option. Over 29% of debtors filed bankruptcy because of a loss of income. The majority filed because of poor money management skills. (This report was put together by the National Foundation for Credit Counseling!)

There were other interesting predictions in the report. Apparently the credit counselors are losing money. It is likely that they will raise their rates in the near future. The report predicted that bankruptcy filings will not stay as depressed as they were initaially. The reform laws were widely misrepresented in the media and were misunderstood by the general public. I agree that filings will get back to their earlier levels. I am proud to represent debtors and to help them through a difficult time in their lives. If you have a question please call me or send me an e-mail.

Lawyers can still give advice?

Another Court Says Bankruptcy Reform Law Violates Lawyer Rights
By MATTHEW C. MCNALLY, ESQ., Andrews Publications Staff Writer

A second federal judge in three weeks has ruled that a new bankruptcy law barring attorneys from telling clients to take on additional debt is unconstitutional on its face.

In a recent ruling U.S. District Judge Michael R. Hogan of the District of Oregon agreed with a Texas federal judge who last month said the law violated lawyers' free-speech rights.



Several similar cases fighting the new law are pending in federal courts across the country.

The provision is part of the Bankruptcy Abuse Prevention and Consumer Protection Act, which took effect last October.

The new law prohibits so-called "debt-relief agencies" from giving certain kinds of advice, like counseling debtors to incur more debt, and prescribes the wording of mandatory disclosures to people seeking bankruptcy advice.

The mandates have piqued bankruptcy lawyers, who say Congress intended only to restrict credit-counseling businesses not already governed by ethics standards.

On the day the law took effect, Chief Judge Lamar W. Davis of the U.S. Bankruptcy Court for the Southern District of Georgia declared the law inapplicable to attorneys practicing in his court.

But like U.S. District Judge David C. Godbey of the Northern District of Texas, Judge Hogan rejected the claim that debt-relief agencies did not include lawyers. He also upheld the constitutionality of the new law's disclosure provisions.

Nevertheless, the law does stifle legal advice in violation of constitutional free-speech standards, Judge Hogan said.

He specifically noted that the definition of "debt-relief agency" excludes nonprofit companies, exposing a loophole in a law's abuse-prevention aim.

"Debtors in bankruptcy can still get advice [from nonprofits] that suggests the abuses the regulation was designed to prevent," the judge said.

He agreed with Judge Godbey that mortgage refinancing and auto loans are examples of borrowing that could make financial sense before filing for bankruptcy.

"Other legitimate reasons for incurring debt may be taking out a loan to obtain the services of a bankruptcy attorney, to pay the filing fee in a bankruptcy case or the conversion of a non-exempt asset to an exempt asset which is still allowed under the Bankruptcy Code," Judge Hogan added.

An exempt asset is excluded by law from a debtor's estate and thus is out of the reach of creditors.

Can you change my car payments?

The short answer, and the one most lawyers give to most questions is - Maybe. This is a regular issue in a bankruptcy case. Many clients come to me and are "upside down" on their car. This means that they owe more than the car is worth. My job as their attorney is to guide them through the maze that is Bankruptcy Court and to help them get into the best possible financial situation during and after their case. I want to help find a way to save them money so that they can get through their case quicker and be better off after it is over.

Before October 17, 2005, the issue was a fairly clear cut. Creditors in Chapter 13 cases were only generally to recieve an amount equal to what they would get in a Chapter 7 or liquidation case. That is, they got the value of their collateral. For instance, consider that Mr. Jones had a 2004 car worth $12,500 but he owed the bank $17,500. In a Chapter 7 case, the creditor would get the car back and basically only recieve $12,500. In a Chapter 13 case PRIOR to October 17, 2006, a creditor would get $12,500 plus interest in a plan. The $5000 difference was discharged. All that changed with the new law, BAPCPA.

Now, the timing of the case is important. If the car was purchased more than 910 days ago (2 1/2 years), the same approach could be taken. If Mr. Jones had bought his 2004 car 911 days before he files his Chapter 13, he is only required to pay the creditor the value of the car. We say he "crams down" the debt because he pays less than he owes. However, under the new law, if the car was recently purchased (within the last 910 days) Mr. Jones must pay the entire debt back. This modified rule appears in the Bankruptcy Code at 11 U.S.C. 1325(a).

The good news for consumers and potential bankruptcy debtors is that interest rates can still be modified. Assume that Mr. Jones' car was financed only 700 days ago but at an interest rate of 15%. Because the vehicle was recently purchased, he must pay the entire $17,500 to the creditor through his Chapter 13 plan. However, he can get a plan approved whereby he pays the debt at 8% rather than the 15%.

So, can you still save money on a vehicle note. Maybe -- if you purchased the vehicle more than 910 days ago or if your interest rate is high. Consult with me to see if I can help you.

Creditor's Meetings

After you have signed the completed Bankruptcy petition, the next important event is usually the Creditor's Meeting, also known as the §341 meeting. This meeting is scheduled in all cases, both Chapter 7 and 13 cases, usually within about a month of the date your case is filed with the Court. It is a meeting required by the Bankruptcy Code. I know that many clients are afraid of this meeting and worry about what might happen. Most people are not very happy to even be in Bankruptcy Court, much less having to sit in front of strangers to discuss your financial situation. In an effort to relieve some of the stress of this meeting, I would like to discuss what happens and why some of it happens.

First, the meeting is NOT before a Judge. It is scheduled before a trustee, generally a lawyer appointed by the United States Trustee's office, who will review your petition to make sure it is in compliance with certain parts of the Bankruptcy Code. When your case is called, you will come to the front of the room to be sworn in. Basically, you agree to answer the questions truthfully. The trustee will ask to see a picture identification and some document with your Social Security number on it. This is done to make sure that you are who you say you are and to make sure that the Social Security number listed in your bankruptcy petition is correct. The trustee will review your petition. They look to see that all schedules have been filed. They look to see if you have any excess equity in real estate. If you are buying your house, you will likely be asked when it was purchased, the purchase price, whether any improvements have been made, and whether it has been refinanced or appraised recently.

The trustee will look at the personal property you listed in your schedules to see if there is anything unusual. She may ask you how the cars are titled. She wants to know if the cars are titled under both names, in the case of married debtors, or just one spouse's name. Most of her inquiries deal with exemptions. The Chapter 7 trustee is paid a small fee on every case and can earn a higher fee if they find some asset that a debtor can not keep or exempt. The Chapter 13 trustee is paid a percentage of each debt that is paid through her office. Usually the trustee's inspection of your petition is done fairly quickly.

You will be asked to verify that you read a Bankruptcy Information sheet, that you signed the petition and schedules, that the schedules were completed when you signed them, and that you have listed all of your assets and all of your debts. These questions are just to confirm that you are not hiding any assets and that you were truthful in your disclosures. The trustee will ask if you filed your tax returns for the 4 years prior to filing bankruptcy. Your attorney will have provided copies of the last tax return and 60 days worth of paystubs. The trustee will look over these documents and usually, they will return these to you at the hearing. The trustee will then allow your creditors to ask you questions.

In many cases, no creditors attend the meeting. If you have financed a vehicle or other asset and are keeping it, the creditor might be there to present you and your attorney with a reaffirmation agreement and to make sure that you have insurance. They might ask for the name of your insurance company and your agent so that they can verify that you have full coverage. A creditor might attend the meeting to see if you will agree that their collateral is worth more than what you listed on your petition. This will usually be discussed with you and your attorney before the meeting.

Most creditor's meetings last only about 10 minutes. The purpose is not to embarrass you and no one will harrass you about why you filed bankruptcy. No one will ask you why you don't just pay your debts or pressure you to get a second or third job to avoid bankruptcy. The purpose is basically just to confirm that your current income is not enough to satisy your current debts and to make sure the petition is correctly completed. While I can understand a client's apprehension before these meetings, there is really nothing to be worried about as long as you have been honest with your attorney. Please call or write me if you have any questions.

What do I need to bring to my attorney?

One of the most common questions I get when speaking to a prospective client by phone is "What do I need to bring with me?" We have a fairly standard answer to this question although it really depends on each situation. Here is a list of what a client would bring in a "perfect" situation:

1. Last two bills from each creditor. The new Code allows a creditor to supply a particular address at which it wants to recieve correspondence or notices. If the creditor does so, the debtor must use that address to initiate all of the automatic stay provisions. As a practical matter, the most recent bill is usually sufficient.

2. Pay stubs from the last 60 days. This is a must! The Trustees in every case now want to see actual pay stubs before the §341 creditors meetings. Keep in mind too that you will have to provide these for the 60 days prior to filing. So, if you meet with your attorney but do not file your case for several weeks, you will have to provide updated paystubs. The best practice, and what I prefer, is a printout of the last 6 months of earnings. This helps me to properly complete the Means Test described in earlier posts.

3. Bank statements from every open account. Bring these even though they may not be necessary if you are filing a Chapter 7 case. These include checking accounts, savings accounts, investment accounts, and even educational IRA accounts. In Chapter 13 cases, these have to be provided to the Trustee prior to your §341 creditors meeting.

4. Tax returns. At a minimum, you need to bring the last tax return that you filed. In all cases, these have to be provided to the Trustee prior to the §341 creditors meeting. I like to see the returns for 3 years prior. This information helps me to complete the Statement of Financial Affairs. Additionally, it is helpful to me in joint cases to have copies of the W-2s so that I can show which spouse earned what.

5. Proof of spouse's income. Even if only one spouse is filing bankruptcy, I need to see what the other spouse earns. This information is included in the petition and is used to complete the Means Test. I need information showing what each spouse earned over the prior 6 months.

6. Certificate from the credit counseling agency. In reality, I don't need this at our first meeting. However, I must have it before I can file your case. I described the process in prior entries. Its fairly simple and quick. The sooner you get me this information, the sooner I can file your case.

7. Any documents relating to a prior case. If you have filed a bankruptcy before and are considering another case, I need some information about your prior case. The laws have changed about subsequent cases and the filing and discharge dates are very important. I can now search online to get most of this information but a prior case number is helpful.

8. Any documents relating to other court actions. If you are considering bankruptcy because of a lawsuit against you, I will need all documents relating to that suit. Specifically, I need something showing where the case was filed, its case number, the name of the creditor, the name and address of the creditor's attorney, and the disposition. This will help me get the suit dismissed or the judgment lien removed.

9. Credit Report. It is always helpful to get a current credit report. This helps me to be sure that we have listed all of your debts. Sometimes, creditors who have not been paid will have stopped (at least temporarily) collection efforts. The credit report will remind you about those debts and help me to get them properly listed. You can get your credit report free at this website www.annualcreditreport.com

Sometimes you will not be able to get all of the information before our first meeting. That is OK and I suggest that you do not cancel for that reason. Often I can get the information while you are in my office. Usually, I will give you a list of additional documents I need at our first meeting. The new Code makes the process more difficult for the consumer and the attorney. It is rare that I have everything I need to evaluate a situation at our first meeting so do not be discouraged if you get "homework" and another appointment! Call me or write me if you have questions.