livingston – Page 4 – Rochester Bankruptcy and Debt Relief

Bankruptcy Planning, Debt and 401(k)

Once in a while, I hear from debtors who tells me that they expended all or nearly all of their retirement savings trying to avoid bankruptcy. Unfortunately, if you spend your retirement funds trying to avoid bankruptcy, you cannot get it back. If, ultimately, the use of those retirement funds was insufficient to avoid bankruptcy, that money was simply wasted if the debtor still needs to file either Chapter 7 or Chapter 13 bankruptcy.

As I have written previously, 401(k) and most other retirement plans are exempt in bankruptcy. What that means is that if the debtor engaged in some bankruptcy planning and filed bankruptcy before withdrawing retirement funds, the debtor would be able to keep those retirement funds and discharge his or her debts.

I understand why debtors spend their retirement money on debts that would otherwise be dischargeable in bankruptcy. Usually, they want to repay their debts and they will employ any available means to do so. While most debtors are aware of bankruptcy as an option, most debtors try to avoid it.

Since bankruptcy gives you a chance to discharge your debt and protect the assets such as retirement funds, it may be foolish to spend all of your retirement money, and I advise debtors to explore their options before making these decisions. The most important question that the debtors should ask and answer is whether their necessary and reasonable living expenses and debt payments exceed their take home income on a regular basis. If so, is this going to change because of increased income or decreased expenses in the foreseeable future?

If the debtor is left with a permanent deficit and does not expect it to change, then it does not make sense to withdraw retirement funds to continue to pay down that deficit until there is no retirement money left. The bankruptcy system, both New York and federal exemptions, protects your retirement funds.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, New York, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Chapter 13 Discharge and Child Support Arrears

Chapter 13 Bankruptcy cases can take between 3 and 5 years to complete, and, in a current economy, as many as two thirds of all Chapter 13 plans fail. Thus, any debtor who has completed the plan should be proud of his or her accomplishments.

However, under some circumstances, even if all of the plan payments are made over a five year period, the debtor may not receive his Chapter 13 discharge. Specifically, Bankruptcy Code Section §1328, precludes the judge from issuing a discharge if you do not certify that all domestic support obligations that have come due during the pendency of your case have been paid. Additionally, if the debtor has child support arrears prior to filing of the case, those arrears must be paid in full during the term of the plan.

If domestic support (i.e. child support or alimony) were not paid, and that failure was not excusable, the case will be closed, and the debtor will not receive the discharge. In the case of child support in Chapter 13, the debtor cannot ignore the obligation, even if the custodial parent or child support enforcement is saying and doing nothing. Otherwise, the debtor may end up with a perfect payment history in Chapter 13, but no order of discharge.

If you are contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

New Bankruptcy Court Judge in Rochester

The uncertainty with regard to the next bankruptcy court judge in Rochester has finally been resolved. On March 15, 2012, Paul R. Warren, Esq., the Clerk of the Bankruptcy Court for the Western District of New York, was sworn in as the next Bankruptcy Judge for the Rochester Division of the Bankruptcy Court. Judge Warren replaced Judge Kaplan who was sitting in Rochester following Judge Ninfo’s retirement.

Mr. Warren received his undergraduate degree from St. John Fisher College and his law degree from the University of Dayton. He was admitted to practice in the Western District of New York in 1984. In the past, Mr. Warren served as a Chapter 7 panal trustee. A few years later, he was appointed the Clerk of the Bankruptcy Court. Based in Rochester, Mr. Warren had worked in both Rochester and Buffalo offices of the Clerk’s office.

While Judge Warren has been on the bench for only two days, I already heard positive feedback from fellow bankruptcy lawyers who appeared before him during the motion term last week. I look forward to having some first hand experience appearing before him, and I will post my own impressions on this blog.

Should 401k Loans Be Used to Avoid Bankruptcy?

Once in a while I am asked whether 401k loans should be used to pay off credit card debt and, therefore, avoid bankruptcy. In my opinion, it is a bad idea.

Filing for bankruptcy under either Chapter 7 or Chapter 13, is a difficult decision, and most of the time debtors will try to do just about anything to avoid filing. However, if you earn $50,000 in gross income, and you are $50,000 in debt, because of interest and other carrying costs, it is unlikely that you will be able to pay off that debt within a reasonable period of time. Thus, a debtor may think that whatever money he has in his 401k will save him from having to file bankruptcy. Unfortunately, for most people, this is unlikely to come true.

Initially, if 401k loan is used to pay off credit card debts, there is now a significant debt owed to the 401k plan. Usually, 401k loans carry lower interest rates than credit cards. However, while having a lower interest rate, 401k loans have to be paid back over a shorter period of time.

If a loan is taken out and not repaid, it is treated as income, and debtor will incur a 10% early withdrawal penalty since it is a distribution from a tax-deferred plan, and also will have to pay income taxes on the unpaid amount. Unpaid amount of the loan is treated as additional income, and it is likely to increase debtor’s income tax rates as well.

If you quit working or change employers, the loan must be paid back right away. It’s not uncommon for plans to require full repayment of a loan within 60 days of termination of employment. If you can’t repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal penalty if you are not at least age 59 ½.

However, if the debtor decides to file bankruptcy, under either Federal exemptions or New York exemptions, 401k is completely exempt. If you file for bankruptcy, the credit card debt will be gone, and you will be able to retain the money in your 401k plan.

Bankruptcy and Cash Advances

Most of my Chapter 7 bankruptcy clients have a lot of credit card debt that was accumulated over time. That debt may have come from making purchases, incurring services charges and interest, as well as taking cash advances on credit card. While most of credit card debts are dischargeable in bankruptcy, credit card cash advances may represent a significant problem for potential bankruptcy filer.

According to the Bankruptcy Code, any cash advance, or combination of cash advances from one lender, totaling more than $875, obtained within 70 days of the bankruptcy filing date is presumed to be non-dischargeable. This particular provision is included in Section 523(a)(2)(C)(i)(II). The dollar amount of the cash advance, changes every three years.

This provision was included in the Bankruptcy Code because the Congress was concerned that consumers, who obtained significant cash advances relatively close to time they filed for bankruptcy, knew or should have known that they would be seeking bankruptcy relief, and should not be able to eliminate such debts. Another reason for that provision was to prevent consumers from taking cash advances immediately prior to a bankruptcy filing.

However, in terms of procedural issues associated with cash advances taken out with 70 days prior to the filing, in order to have the court declare that the debt is non-dischargeable, the creditor must file objections in the bankruptcy court. Specifically, the creditor must file an adversary proceeding. Since there are filing fees and other expenses associated with such filings, if the amount of the cash advance is not particularly large, most creditors will not bother filing an adversarial proceeding.

However, since a cash advance may result in an adversary proceeding, I always ask my clients about them and, in appropriate situation, may ask the client to postpone the bankruptcy filing until after the expiration of the 70 day period.

Who Will Be the Next Bankruptcy Judge in Rochester?

At the end of the year, Judge John C. Ninfo II, who has been presiding over the bankruptcy court in Rochester since 1992, will be retiring. The Second Circuit Court of Appeals has been interviewing candidates to replace Judge Ninfo since early this fall.

However, since the Second Circuit has not made its selection so far, the Bankruptcy Court for the Western District of New York has established a contingency plan for January and February 2012. The Hon. Michael Kaplan, one of the two Buffalo bankruptcy judges, will be coming to Rochester and Watkins Glen to preside over motions and hearings.

The administrative order posted on the Court’s Website states that the motion calendars for Rochester in January and February will be held on Fridays rather than Wednesdays, but will not be changed otherwise. Since Judge Ninfo has presided over the bankruptcy court in Rochester for the last 20 years, Judge Kaplan may represent a significant change and Rochester bankruptcy lawyers will have to learn about his approach to bankruptcy cases and judicial philosophy.

Upcoming Changes in Bankruptcy Filing Fees

I have previously discussed fees associated with both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. As of November 1, 2011, those fees are going to increase for the first time in several years.

The filing fee for filing a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy will increase by $7. For Chapter 7, the filing fee will increase from $299 to $306. The Chapter 13 filing fee will rise from $274 to $281. The Court Clerk for the Western District of New York announced changes in the filing fees on the bankruptcy court’s website on October 17, 2011. The cost of filing an adversary proceeding and various motions is rising as well.

Upcoming Changes to the Means Test Figures

Once again, the means test figures for median income are changing as of November 1, 2011. In New York, it means that the amount of income that the debtor can have before being forced into a Chapter 13 Bankruptcy is going to decrease.

Through October 31, 2011, a single debtor in New York could have $46,295 in income in income and still be able to file Chapter 7 Bankruptcy. Starting November 1, 2011, that figure is decreasing to $45,931. Similar decreases will take place for all family sizes. The comparison of the existing and new income limits is below.

Old Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$46,295 $57,777 $68,396 $83,942

New Income Limits

FAMILY SIZE

1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *

$45,931 $56,113 $66,953 $81,212

* Add $7,500 for each individual in excess of 4.

While the decreases are not large, they are going to make it more difficult for some individuals and families to qualify for Chapter 7 bankruptcy.

The figures used for the each state’s median income are based on United States Census data, and adopted by the Office of the United States Trustee. Usually, these figures are adjusted based upon the Consumer Price Index (CPI) for All Urban Consumers once or twice per year.

When the economy is growing, typically income rises because of the cost of living increases, inflation and other reasons. When the economy is not growing, income actually decreased from the prior year. As a result, the means test is adjusted and lower median income figures are used which make it more difficult for debtors to qualify for Chapter 7 Bankruptcy.

Failure to Compete Financial Management Course and Denial of Discharge

Sometimes debtor’s bankruptcy case ban be closed without a discharge. The most likely reason for this the debtor’s failure to complete the financial management course. As a part of BAPCPA, the Congress required that every debtor to complete a financial management course before receiving a discharge in bankruptcy. This requirement applies to both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy cases. The class completion certificate must be filed with the court no later than 60 days following debtor’s meeting of creditors (otherwise known as 341 meeting). The certificate is usually filed with Form 23 which provides additional information to the court regarding completion of the course. If the debtor does not complete the course on time, and the bankruptcy attorney could not file the certificate, the bankruptcy court will close the case without discharge.

This is really the worst outcome possible in a bankruptcy case since the petition and all of the work done on the case was done for nothing. When the court closes the case without discharge, the automatic stay ends, and there is no discharge protecting debtor and his income and assets from his creditors. If the case is closed without discharge, creditors can begin calling and sending letters once again.

However, if the court closes the case without discharge, this problem can be solved. The debtor need to immediately do the following: complete the financial management course and then have his attorney prepare Form 23, and file it with the court. Additionally, debtor’s bankruptcy attorney will need to prepare and file a motion to reopen the bankruptcy case. The debtor and his attorney will need to appear at the motion. Once the motion is granted by the judge, bankruptcy attorney will have to submit an order for the judge to sign granting reopening of the case.

If the error in not filing the certificate of debtor education is on the part of the bankruptcy attorney, then the attorney should pay the filing fee and assume the fees for the motion and the hearing. If the mistake was on the part of the debtor, the debtor should be prepared to pay the filing fee, fees to the attorney for drafting and filing the motion to reopen the case, and for his time to attend the motion.

In my experience, this is one problem that is extremely easy to avoid. In my practice, I calendar the 60 day deadline and start calling my clients who have not provided me with a certificate within 45 days after the meeting of the creditors. Debtors should not wait until the last minute to complete the financial management course since they can do it anytime after the case is filed. That way you avoid the notice that you had your bankruptcy case closed without discharge.

Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and Creditors’ Chain of Title

It is fairly common for Chapter 7 and Chapter 13 debtors to have credit cards that went into default some time ago. It is also common for credit card issuers to sell of delinquent credit card accounts.

In Chapter 7 and Chapter 13 Bankruptcy, all creditors are notified of the bankruptcy filing and can file claims. It is common for a new entity to file a proof of claim as successor or assignee of the original credit card issuer, but often such proof of claim does not include any evidence that the claim was, in fact, assigned. This situation is commonly referred to as a missing chain of title, missing proof that the claim has been legally transferred or assigned to the new owner.

Here in Rochester, United States Bankruptcy Court Judge John C. Ninfo II has issued several decisions addressing this issue. In one of them, In re Doherty and In re Benedetti, he held that in Chapter 7 Bankruptcy, the successor creditor was obligated to prove it was the legal holder of the claim.

In Doherty, Chapter 7 Bankruptcy Trustee filed his objection to the successor creditor’s claim arguing that (1) successor creditor was not scheduled as a creditor in the petition; (2) although the debtors had scheduled the creditors that the successor creditor alleged originally held the claims, there was no breakdown in the proofs of claim to support the amounts alleged to be due,which differed from the amounts the debtors had scheduled; and (3) there was no assignment or bill of sale produced to demonstrate that the successor creditor was the current holder of any of the claims that were alleged to have been sold and assigned to it.

Judge Ninfo held that the successor has failed to produce a chain of title from the alleged original holders of the claims to it by either a series of assignments or bills of sale, or by any other acceptable proof of ownership. As a result, he disallowed successor creditor’s claims, since there was no proof that it was a proper creditor entitled to file a proof of claim under Section 501 of the Bankruptcy Code.

This issue can be extremely important in Chapter 13 Bankruptcy cases where it may impact duration of the plan as well as the amount of money paid by debtors under the plan. In Chapter 7 Bankruptcy, this issue becomes particularly significant in asset cases, i.e., situations where debtors have nonexempt assets that the bankruptcy trustee may sell to pay the creditors.