The Sale of Debts and Bankruptcy – February 20, 2020
Clients often call confused about the sale of debts. A debt owed to a creditor is an asset to that creditor, just like a car or a couch is an asset. Therefore, the creditor can choose to sell the debt just like any other asset can be sold.
When debt has been delinquent for some time and a creditor thinks it may be noncollectable, that creditor will often bundle many of those debts together and sell them to another party. The purchasing party will typically pay a fraction – sometimes a small fraction – to the selling creditor for the debt. Nevertheless, the company purchasing the debt is now the creditor, and it may seek to collect the entire debt, regardless of the amount that it paid for the debt.
If you are going to be filing the bankruptcy, the sale of the debt is generally irrelevant to you. Whether it is the original creditor, or a successor creditor, the debt will be discharged with any discharge that is issued in the bankruptcy. You should, however, make sure that you keep a paper trail of all parties who claimed to hold the debt from the beginning until the day that you file for bankruptcy. That way you can be certain that the appropriate parties get notice of the bankruptcy, and of its ability to file a proof of claim if it is the type of bankruptcy where there might be a distribution to the creditors.
Discrimination After Bankruptcy – August 13, 2019
This law provides important protections for you after you have filed for bankruptcy. But it doesn’t protect debtors from all adverse consequences of filing for bankruptcy. So what is allowed?
Discrimination by the Government
Federal, state, and local governmental units may not:
deny, revoke, suspend, or refuse to renew a license, permit, charter, or franchise;
deny you a job or fire you;
deny you or terminate your public benefits;
evict you from public housing (although if you have a Section 8 voucher, you may not be protected);
deny you or refuse to renew your state liquor license;
withhold your college transcript;
deny you a driver’s license; or,
deny you a contract, such as a contract for a construction project.
In addition, private lenders may not exclude you from any government-backed guaranteed student loan program because of your bankruptcy filing.
In general, once any government-related debt has been discharged, all acts against you that arise out of that debt also must end. If, for example, you lost your driver’s license because you didn’t pay a court judgment that resulted from a car accident, you must be granted a license once the debt is discharged. If your license was also suspended because you didn’t have insurance, however, you probably won’t get your license back until you meet the requirements set forth in your state’s financial responsibility law.
Keep in mind that only government denials based on your bankruptcy are prohibited. You may be denied a loan or job, or an apartment for reasons unrelated to the bankruptcy. This includes denials for reasons related to your future creditworthiness – for example, because the government concludes you won’t be able to repay a SBA loan.
Discrimination by Private Entities
Whether a private entity can discriminate against you because you filed for bankruptcy depends on the context.
Private employers may not fire you or otherwise discriminate against you in your employment solely because you filed for bankruptcy. While the law expressly prohibits employers from firing you, it is unclear whether the act prohibits potential employers from refusing to hire you because you went through bankruptcy.
Other forms of discrimination in the private sector aren’t illegal. If you seek to rent an apartment and the landlord does a credit check, sees your bankruptcy, and refuses to rent to you, there’s not much you can do other than demonstrate factors that show you will pay your rent and be a responsible tenant. For instance, it can be helpful if you can prepay your rent for a few months, or, if it is permitted under your state’s laws, provide a bigger security deposit. (However, if you file for bankruptcy in the midst of a lease, your landlord generally cannot use this as grounds to evict you before the lease term is up.)
If a private employer refuses to hire you because of a poor credit history – not because you filed for bankruptcy – you probably have little recourse.
Recourse for Impermissible Discrimination
As you may have deduced, it can be difficult to show that an impermissible adverse action was based solely on bankruptcy (as opposed to a trumped up reason). If the evidence is there, however, that you suffered illegal discrimination because of your bankruptcy, you can sue in state court or in the bankruptcy court. You’ll probably need the assistance of an attorney.
Disability Income, Garnishment, and Bankruptcy – June 26, 2019
Generally speaking, there are two kinds of disability income: income through a private disability policy or otherwise by contract (for example, a union contract), and Social Security disability income. Each of these types has its own implications both outside of bankruptcy and inside of bankruptcy.
Under federal law, Social Security income is generally not subject to attachment by general creditors. This is true even after it makes its way into your bank account. Private disability plans, on the other hand, while they generally cannot be directly garnished by creditors, once the funds get into your bank account, they may be subject to garnishment. Various states have different laws as to whether those private disability funds are subject to seizure once they have reached a bank account.
In bankruptcy, private disability income is considered in the means test analysis. The means test is what is used to determine whether you qualify for Chapter 7, and, if you don’t, to roughly calculate what your Chapter 13 plan payment will be. In short, private disability income will be considered in the means test, and, if the means test requires a Chapter 13, will factor into what your ultimate payment will be under the Chapter 13 plan.
Social Security disability income is NOT considered when doing the means test calculation. Therefore, a means test objection to filing for Chapter 7 cannot be made based upon Social Security disability income. There is case law, however, including in Michigan, which indicates that Social Security income is still to be considered when a judge evaluates whether a filing under Chapter 7 would be an abuse of the provisions of Chapter 7, and there is case law that suggests that Social Security income is still to be considered in whether a Chapter 13 plan that does not account for Social Security income is filed in good faith, and therefore should be confirmed.
In short, each case is fact specific, and competent legal counsel should be consulted before any actions are taken by you regarding your disability income.
Contract Law – Get it in Writing – July 23, 2018
People want to think that their word is good, and that the word of those with whom they are dealing is good. And often it is. But sometimes it is not. And the latter instances cost people millions, and probably billions, of lost profits and attorney’s fees expense every year.
There is misconception that if a contract is not in writing, it is not enforceable. In most cases an oral contract is, indeed, enforceable (although CERTAIN types of contracts are not enforceable unless they are in writing). The problem in the cases of an oral contract is not whether there is an enforceable contract, but whether there is sufficient proof. The burden in court would be on the party claiming there was contract to prove its existence, and sufficiently specific terms so that it can be enforced. Sometimes this is a formidable task. Hence, the maxim of “Get it in writing.” If you have writing that both sides have signed, or assented to through exchanged e-mails, or the like, that task is much easier. If it is a complex business deal, you almost certainly will want a lawyer to draw up the contract, or at least to review your draft of the contract. In something simple and of modest value, you can take a crack at it yourself. Even then, you will want to be as detailed as possible. That will avoid disputes later about what was included in the deal.
I have witnessed numerous occasions in which deals worth hundreds of thousands of dollars ended up in litigation because of the lack of a writing, or an inadequate writing. The bottom line is, don’t be penny-wise and pound foolish.
Trust Fund Tax Liability and Bankruptcy Discharge – June 11, 2018
Bankruptcy treats “trust fund taxes” as a special case. Such a tax is never dischargeable in bankruptcy.
The most typical trust fund taxes are payroll taxes that are withheld from an employee’s paycheck by the employer for payment of the employee’s tax obligations. This is the employee’s income tax or the employee’s portion of the Social Security contribution. So this really involves the employee’s money that the employer is holding in trust for the government. Hence, the employer is treated as a fiduciary for those funds.
If the employer withholds the money from the employee’s paycheck but doesn’t turn it over to the correct taxing authority, the government has the ability to assess that tax against the person(s) responsible who should have paid the funds to the taxing authorities. This is sometimes called the “100 percent penalty” levied on a “responsible party” in the organization.
Liability for trust fund taxes is not dischargeable regardless of the age of the tax. Some people find that Chapter 13 is a good choice for individuals who have been assessed a trust fund tax liability because it can provide an interest free repayment plan over the life of the Chapter 13 case.
Signing to Guarantee the Debt of Another Person – March 19, 2018
I am occasionally called by potential clients who agreed to personal joint personal indebtedness on behalf of another person. This will generally be as a co-signor or as a guarantor. This can happen in many situations. For example, it can be parents guaranteeing or co-signing for a vehicle or a student loan for a child, it can be co-signing for a business loan for a sibling whose business needs a cash infusion, or it can be for a dear friend who is just going through a rough time. Four words: Just. Don’t. Do. It.
The reason that a co-signor or guarantor is necessary in the first place, of course, is because the primary person borrowing the money has been deemed non-credit worthy. Red flag. Whether these people should be borrowing money at all is a separate discussion. But, again, understand that the reason you are asked to be a co-signor or a guarantor is that these people are not credit-worthy.
Often the person being asked to co-sign or guarantee the debt will engage in rationalizations, such as “But I am only secondary on the debt” or “I am only the guarantor.” It doesn’t matter. You should anticipate that if you sign such a document there is a significant likelihood that it may ultimately be collected from you. Remember, the person who is “primary” is not credit-worthy.
Depending on the precise language of the co-signing or guaranty, signing on the line will often give the creditor the right to pursue your personal assets if the person or company defaults, even before the assets of the “primary” are liquidated.
Finally, there is often a hidden toll of such scenarios. When you have to pay for a debt because of the default of a loved one or close friend, it tends to lead to bitterness in the relationship.
Unless you are emotionally and financially able and willing to lose the money without a problem, just don’t do it.
Estate Tax – January 2, 2018
The estate tax is a tax on property (cash, real estate, stock, or other assets) transferred from the deceased to their heirs. Only substantially wealthy estates pay the tax because it is levied only on the portion of an estate’s value that exceeds a specified exemption level. For instance, in 2018, under the tax “reform” bill recently signed, the exemption is about $11,200,000 per person and effectively $22,400,000 per married couple, and that is adjusted annually by the IRS for inflation. That means only the portion ABOVE that amount is taxed. Obviously most people don’t have that amount of assets, and therefore do not have an estate tax at all. Under the new figures, it appears that less than one tenth of one percent (only about 1 out every 2,000 estates) will be subject to the estate tax. So more than 99.9 percent of estates will owe no estate tax at all. It has, for political reasons, been improperly called a “death tax.” It is not a tax on death. Rather, there is only a tax if the deceased has substantial wealth.
The process consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “gross estate.” The property to be included may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Once you have accounted for the gross estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “taxable estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
After the net amount is computed, the value of lifetime taxable gifts (taxable gifts made during your lifetime is a different discussion, but I think that it is fair to say that most people will not run into that issue) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Most estates do not even require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $10,000,000 in 2018. See https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax
Independent Contractors or Employees? – October 13, 2017
The IRS requires businesses to correctly determine whether individuals providing work are employees or independent contractors. If they are properly classified as employees your business must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. If they are properly classified as independent contractors, your business does not generally have to withhold or pay any taxes on payments to the independent contractors.
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories:
“¢ Behavioral: Does your business control or have the right to control what the worker does and how the worker does his or her job?
“¢ Financial: Are the financial aspects of the worker’s job controlled by your business (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
“¢ Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
All these factors are weighed when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors may indicate that the worker is an independent contractor.
There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
If you wish, you may ask the IRS for a determination on status (IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).
Behavior During a Traffic Stop – April 8, 2017
I certainly don’t specialize in criminal law. Over the years of my practice, however, I have been involved in dozens of criminal cases, mostly misdemeanors. People greatly overestimate their capabilities in communications with the police.
The most important rule, if you’re pulled over, is to minimize the amount of interaction. In a traffic stop, other than providing your driver’s license, registration, and insurance, simply do not provide any substantive answers. You may politely say “I’m not going to answer any questions.” If they ask why, you can simply indicate “Because the constitution says I don’t have to.” When the purpose for the stop appears to be over, ask the officer if you are free to leave. If you are free to go, then leave. Do not give the officer permission to do anything else. Do not give them permission to search your vehicle. Do not give them the permission to bring a dog around to sniff the car. When an officer says “you’re free to go” during a traffic stop, you no longer have to listen to him/her or cooperate in any way. If an officer says, “You’re free to go, but do you mind if I ask: Is there anything in your vehicle that shouldn’t be there?,” the appropriate response is, “No, thank you. Have a nice day officer,” and drive away.
Many of the police reports in criminal cases I have seen originating from traffic stops contain the sentence “After I issued the ticket, the driver agreed to let me search the vehicle for contraband and I found . . .,” or something to that effect. Remember, in this setting, the police are not your friends.
So. Just. Don’t. Talk.
May I Collect Against a Person who has Filed for Bankruptcy? – April 23, 2016
A person who owes you money is called a debtor. If that person files for bankruptcy protection, may you still collect from them? Certainly the ability to collect in most cases is restricted, but there are limited circumstances in which you still may be able to collect.
First, identify how and why your debtor owes you money. What was the basis for the debt? Is it an ordinary loan or service that you provided them? Or was there something more devious involved in this debt being incurred (e.g., embezzlement or falsification of loan application)? Do you have a judgment against your debtor? If you do have a judgment, is the judgment only against your debtor who has filed bankruptcy, or is the judgment against another individual or company that has not filed for bankruptcy?
Second, you need to know what Chapter of bankruptcy is being filed. Is it a liquidation (Chapter 7) or a reorganization (Chapter 13, Chapter 11, and Chapter 12)? Depending on the type of bankruptcy your debtor filed, there are different strategies that you can possibly use in order to recover the money owed.
Your knowledge about the debtor can be helpful in developing a strategy to maximize your collection possibilities. Do you know what kind of income and assets your debtor has? Does your debtor own a business? Do you have a sense of whether they are above-board regarding their assets and income?
Once a debtor files for bankruptcy, it is important that you immediately develop a strategy to determine whether there is a way to collect any funds legally available under the Bankruptcy Code. The Bankruptcy Code has strict deadlines, and if you miss those deadlines, any possible recourse may be forfeited.
This is a complicated topic, and this general discussion only scratches the surface. Be clear that you certainly should not attempt to collect against someone who has filed for bankruptcy without first consulting a competent attorney. The provisions of the Bankruptcy Code can be used aggressively against you if attempt such collection actions improperly.
If you have any questions, please call Tim Taylor Law to discuss.
Should I Set Up a Corporation or a Limited Liability Company (LLC) to Protect Me from Liability? – September 12, 2015
There are many radio and television advertisements suggesting that you should set up a corporation or a limited liability company (LLC) for your business to protect your personal assets from creditors, and that you can do it through a simple, self-help method. Does this work? Maybe.
A corporation or an LLC is a separate legal entity than the person(s) that owns it. Therefore, if, for instance, someone is driving a vehicle on behalf of the corporation or an LLC and injures somebody, the owner(s) of the corporation cannot be sued. The corporation can be sued under the legal theory of respondeat superior, and the actual individual who was driving can be sued. As you may have discerned, if you are the only person who works for the corporation or LLC, then you would have been the one driving, and the fact that a corporation or LLC was in place would not protect you – they could sue you individually because you were the one who was negligent.
The previous example was in the field of tort law. Another common scenario of personal liability is in the field of contract law. If you sign a contract solely in the name of the corporation or LLC, then you cannot be sued personally for any contract that the corporation or LLC breaches. With a single-owner or other small company, however, the owners are often required by the other party to sign in their individual capacity or to guarantee the contract. Again, in this situation, you would not be individually protected from liability.
Finally, there may be personal exposure to an owner if they do not, in their dealings, honor the separate legal status of the corporation or LLC. For instance, if there is no separate bank account that is used, or if money is regularly commingled between corporate and business accounts, it may be an indication that the separate legal status is not being honored. This is called “piercing the corporate veil.” While this is an exception to the general notion that corporations and LLCs have a separate legal status, it is still something that those entities must make sure they adhere to by treating them as distinct legal entities and not just an extension of the person running them.
There may be other reasons to set up a corporations or LLC unrelated to insulation from personal liability (for example, tax considerations). But, it should not be assumed that setting one up will always shield you from personal exposure. Feel free to call to discuss your personal circumstances, and whether it makes sense for you.
Misconceptions about Bankruptcy – February 17, 2014
Like many types of legal proceedings, there are many misconceptions that exist about bankruptcy. Sometimes they spring from a tidbit truth, but then get blown out of proportion. The following are a few of those misconceptions.
1. All debts are wiped out in Chapter 7 bankruptcy
For most people, all debts are discharged. There are certain types of debt, however, that typically are not discharged, such as child support, alimony, and student loans. Also, if you have secured debt (for instance, a mortgage on a house or a loan on a vehicle), that debt will only generally be discharged if you return the item to the creditor.
2. You will lose everything you have
The vast majority of clients I have had over the years have kept all of their assets. Bankruptcy law provides exemptions, which is what the law says you get to keep even though you are filing for bankruptcy. In many states, those exemptions are sufficiently generous to allow you to keep all of your assets.
3. Everyone will know if you have filed for bankruptcy
It is true that bankruptcy records are public documents. Rarely does anybody have motivation, however, to regularly monitor bankruptcy filings. While if you owe money to a family member or friend who would tell others, or if you are a prominent person in the community, it might become more widely known, for many people who file for bankruptcy nobody else in their life ever finds out about it.
4. You will never get credit again
The law says that a bankruptcy may stay on your credit record for up to 10 years from the date of Discharge. My experience is that people are able to get credit much sooner than that. Whether that will be the case for any particular person will depend on a variety of factors, including, for instance, their income, what the economy is like in the country at the time, whether they have paid their bills since bankruptcy, and so forth. I generally do not advise people to use credit for anything but purchasing a house because of the toxic effect credit can have on a person’s life. But generally bankruptcy does not permanently preclude you from getting credit.
5. If you’re married, both spouses have to file for bankruptcy
Nothing in the law requires both spouses to file. Often it is advantageous for both spouses to file if one is going to file, but not in all cases.
6. You can leave certain debts out because you want to pay them back some day
The law requires that you list all of your creditors, even if they are family or friends. But that doesn’t mean you can’t pay them back after the bankruptcy is completed. You may. You are just not legally obligated to do so.
7. You can’t get rid of back taxes through bankruptcy
Sometimes you can, and sometimes you can’t. That depends on a number of factors such as what type of taxes they are, when you filed the return, and how old the taxes are.
8. Only dishonest people or deadbeats file for bankruptcy
My experience is that most people file for bankruptcy after a life-changing experience, such as a divorce, the loss of a job or a serious illness, and have made an honest effort to pay their debts. They file for bankruptcy either when they have been forced into it (for example, a creditor is garnishing their wages), or they can see no reasonably feasible way to pay off their creditors within a reasonable period of time.
Bankruptcy Exemptions – October 9, 2013
A common misconception is that if you file for bankruptcy you will lose all of your property. That typically is not true. I would estimate that more than 90 percent people who file for a Chapter 7 bankruptcy do not lose any of their property.
The ability to keep property in bankruptcy is due to the exemptions provided by the Bankruptcy Code. In short, “exemptions” are what you get to keep even though you have filed for bankruptcy. Most exemptions are expressed in dollar amounts. There is a long list of exempt items, but, for example, under one set of exemptions, you get to keep $12,250 worth of household goods, clothing, books, etc., you get to keep $3,675 in equity in a motor vehicle, and you get to keep $1,550 in jewelry. If a husband and wife file together, then each of them can claim that dollar amount in their items. Some items are generally entirely exempt in bankruptcy. Among other things, this includes pension plans, 401(K) plans, and Individual Retirement Accounts.
If filing for bankruptcy in Michigan, there are two sets of exemptions, the federal exemptions and the Michigan exemptions. You must choose one or the other. I find it generally preferable to choose the federal exemptions, but there are circumstances in which the Michigan exemptions make sense. This would depend entirely on your unique circumstances.
If you are in the small minority of cases where you might lose some of your assets in a Chapter 7, and that is not acceptable to you, then Chapter 13 will likely be an option for you. In the course of three to five years, you can, among other things, pay to the Chapter 13 Trustee (who, in turn, pays it to creditors) the value of assets you would have lost in a Chapter 7.
Disability Income and Bankruptcy – October 7, 2013
Broadly speaking, there are two kinds of disability income; income through a private disability policy or otherwise by contract (e.g., a union contract), and Social Security disability income. Each as its own implications outside of bankruptcy and concerning bankruptcy.
Social Security income is generally not subject to attachment by creditors, even after it makes its way into your bank account. While most disability plans have provisions that shield them from direct attachment by creditors, once the funds get into your bank account, they may be subject to garnishment. The various states have different laws as to whether those private disability funds are subject to seizure.
In bankruptcy, private disability income is considered in the means test analysis. The means test is what is used to determine whether you qualify for Chapter 7, and, if you don’t, to roughly calculate what your Chapter 13 plan payment will be. In short, private disability income will be considered in the means test, and, if the means test requires a Chapter 13, in what your ultimate payment will be under the Chapter 13 plan.
Social Security disability income is NOT considered when doing the means test calculation. Therefore, a means test objection to filing for Chapter 7 cannot be made based upon Social Security disability income. There is case law, however, including in Michigan, which indicates that Social Security income is still to be considered when a judge evaluates whether a filing under Chapter 7 would be an abuse of the provisions of Chapter 7, and in considering whether a Chapter 13 plan that does account for Social Security income is not in good faith.
Payments to Creditors Prior to Filing Bankruptcy (Preferential Transfers) – April 15, 2013
An important intent of the Bankruptcy Code is that all creditors who are similarly situated are treated equally. Debtors sometimes try to avoid this. There are two ways that are the most prevalent, and can be problematic.
The first way Debtors may try to avoid this is by not listing all of their creditors in their bankruptcy papers. This is a terrible idea. It is also a federal felony. Both in the papers, and at the meeting of creditors, you are stating under oath that the information is accurate and complete. That does not mean that mistakes cannot be made. Amendments can be made to rectify honest mistakes. But it does mean that you cannot intentionally leave someone out.
The second way Debtors may try to avoid this is by making payments to some creditors leading up to the bankruptcy. This also can be a bad idea, and can lead to significant unintended consequences. In many of these cases, the Trustee can obtain the disgorgement of funds that have been paid. And the money does not get paid back to the Debtors, it gets paid to the bankruptcy estate. For “insiders” (typically family members), the look-back period is one year. For other creditors, it is 90 days. This does not mean that you cannot have made your house payment or your vehicle payment. There are exceptions to this “preferential transfer” rule for transactions made “in the ordinary course of business or financial affairs of the debtor.” This means that if you make your regular monthly car or mortgage payments, the trustee assigned to your case will not be able to avoid that transfer. However, if you had made multi-month payments, they are potentially at risk.
In short, before you make any payments prior to filing for bankruptcy, you should consult your bankruptcy lawyer. If you have made any such payments before seeing a lawyer, you should inform them. Often, the timing of the filing for bankruptcy can be tailored to avoid those pre-bankruptcy payments having to be disgorged.
Stripping Off a Second Mortgage in Bankruptcy – May 16, 2012
In a Chapter 13 case, if a second or subsequent mortgage is completely unsecured (i.e., there is NO value in the property above the amount of the first mortgage), the mortgage can be stripped off the property as part of your Chapter 13 plan and the creditor holding the second or subsequent mortgage becomes an unsecured creditor.
In Chapter 7, it has been assumed that is not possible under the 1992 U.S. Supreme Court case of Dewsnup v. Timm, 502 U.S. 410, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992). While Dewsnup involved an undersecured mortgage (i.e., there was some value in the property above the first mortgage, but not enough to secure the entire indebtedness), it has been held by most courts that the ruling would also apply where the value of the property was such so that the mortgage was effectively wholly unsecured. The Sixth Circuit (which controls the federal courts in Michigan, Ohio, Kentucky and Tennessee) has held that no such stripping is possible in Chapter 7 even if the mortgage is wholly unsecured. In re Talbert, 344 F3d 555 (6th Cir. 2003). The Eleventh Circuit has recently held, however, that such stripping is allowed in the Chapter 7 context of a wholly unsecured mortgage. In re McNeal, WL 1649853 (11th Cir. 2012) . It remains to be seen whether the U.S. Supreme Court will review the case to resolve the conflict among the Circuits of the U.S. Court of Appeals.
401(k) Contributions and Loan Payments While in Chapter 13 – May 11, 2012
Monthly disposable income that is required to paid into a Chapter 13 plan takes into account continuing payroll deductions necessary to re-pay 401(k) loans that you may have through your employer-sponsored to 401(k) plan. That is to say, those 401(k) repayments are not treated as disposable income, and your monthly Chapter 13 payments to the Chapter 13 trustee recognizes that those 401(k) payments as a necessary monthly expense. The U.S. Court of Appeals for the Sixth Circuit (which covers courts in Michigan, Ohio, Kentucky and Tennessee) recently held, however, that once such a loan has been paid off, the monthly amount that was going to the 401(k) loan must then be paid to the Chapter 13 trustee for the duration of the Chapter 13 plan, and cannot be re-directed into voluntary 401(k) contributions. The Court also raised in a footnote, but did not answer, the issue of whether a Chapter 13 debtor may continue to make ongoing voluntary retirement contributions that were occurring at the time of the Chapter 13 filing. In other words, stay tuned for a decision about whether ongoing contributions are permitted, or whether those ongoing contributions must be stopped during the Chapter 13 plan, with that additional money going to the Chapter 13 trustee in plan payments. See Seafort v. Burden (In re Seafort), 669 F.3d 662 (6th Cir. 2012)
Postscript: As of January 2017 there has not been a dispositive statement following Seafort v. Burden (In re Seafort) about continued voluntary contributions into 401(k) during a Chapter 13. In the Western District of Michigan, however, where I primarily practice, the assumption, and the way the Chapter 13 Trustees operate, is that such continued contributions may not occur during the pendency of the Chapter 13 Plan.
Qualifying for Chapter 7 – April 19, 2012
I get the question quite a bit about whether it is harder to file for bankruptcy than it used to be. The answer is “yes and no.”
In 2005, Congress passed a law that was largely written for it by the credit card companies. As you might guess, it was not friendly to consumers. It did push some people who previously would have been able to file for a Chapter 7 to file under Chapter 13 instead. For those of you who do not know, a Chapter 13 requires monthly payments of your disposable income (as defined by the Bankruptcy Court) to a trustee for three to five years. The Chapter 13 Trustee then distributes that to creditors. At the end of the Chapter 13 Plan, whether you have paid the creditors in full, or only 10 cents on the dollar, you then get your discharge.
Even though a Chapter 13 is not the end of the world, if possible, it is preferable to most people to file a Chapter 7. In a Chapter 7 you get your discharge in four or five months, and generally do not lose any property or have to pay anything to the trustee. Whether you qualify for a Chapter 7 is principally determined by a “means test.”
The “means test” compares your income to the median income for a family of your size in your state. This is determined by your average income over the last six months before you file. If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, there are some deductions that can be taken to determine whether you still qualify for Chapter 7.
My experience is that about 80 percent of the people who filed for Chapter 7 before the change in the law in 2005 still qualify for Chapter 7. Therefore, even though Congress put more hurdles in place, and made it more expensive and time-consuming, the notion that it is “harder to file for bankruptcy” should not discourage you from exploring this options if your circumstances justify it.
Covenants Not to Compete in an Employment Agreement – March 2, 2012
It is not unusual that I encounter a case where someone has been terminated from a job, or has quit, and they bring in their employment agreement from that job and it has a non-competition clause in it. They want to know, of course, whether they must live up to that clause. The definite answer is “maybe.”
Non-competition clauses in employment agreements were not allowed in Michigan until the Legislature, in its infinite (?) wisdom, enacted a statute in 1985 that permitted them. This law allows such agreements:
“so long as they are reasonable as to its duration, geographical area, and the type of employment or line of business. To the extent any such agreement or covenant is found to be unreasonable in any respect, a court may limit the agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited.”
With this statutory language, you can see why I say “maybe.” As a practical matter, the courts will enforce them to the extent they are reasonable in relation to an employer’s competitive business interest. In other words, such a covenant must protect against the former employee’s having gained some unfair advantage in competition with his former employer, but not prohibit the former employee from using their general knowledge or skill. My experience is that courts are also diligent that the time-frame and the geographic scope of the covenants are reasonable.
This whole area of the law is decided on a case-by-case basis. If you are facing such a situation, I invite you to contact me to discuss it.
Student Loans and Bankruptcy – March 1, 2012
The vast majority of student loans are not dischargeable in bankruptcy. This also generally applies to non-student debtors who are co-signers on the student loans (see Cockels v. Mae, 414 B.R. 149, 153-155 (E.D.Mich. 2009)). Typically you would have to show that the loans not being discharged would “impose an undue hardship on you and your dependents.” If this is determination is to be made, it must be done in a separate lawsuit inside the bankruptcy called an adversary proceeding.
Most courts, including those in Michigan, have adopted the so-called Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987)).
As it has been applied, this is a difficult test to meet. Under the right circumstances, however, it can make sense to incur the additional costs to bring this adversary proceeding, because if you are successful, your student loans will be completely canceled.