Success Rate in Filing Bankruptcy
By Mark Markus | December 14, 2008
Recently a potential client asked me a question that, as a bankruptcy attorney, left me shaking my head. That question is: “What is your success rate in handling cases for your clients?”
The answer to this question depends on how one defines “success.” Does success mean that the client gets everything on his/her “wish list” despite negative facts to the contrary? Or does it mean a favorable outcome given the client’s fact situation? Often, one who asks a question like this has unrealistic expectations and wants a miracle. For example, is it a “success” in a murder case where the D.A’s office has nearly indisputable evidence of the crime and is likely to be able to show guilt beyond a reasonable doubt, and the defendant’s attorney bargains the jail time down from life to 10 years? Or is only acquittal considered a success? While bankruptcy doesn’t deal in the same terms as a criminal matter, this analogy is illustrative.
The goal of most (if not all) bankruptcy cases is to obtain a discharge of some or all of your debt, either without paying anything on it, such as in a Chapter 7 case, or by repaying a portion of it, such as in a Chapter 13 or Chapter 11 case. However, in any bankruptcy case there are many things that can occur to limit or even eliminate the discharge of some or all of ones debts. For example, creditors can object to the discharge of debts that were incurred through fraud, misrepresentation. Most tax debts are not dischargeable. Student Loan debts are usually not dischargeable. As the attorney, if the client’s facts show fraud, I can do my best to limit or minimize the chances of a creditor objecting, but I can’t change the facts, nor can I dictate which Judge will get the case or how the judge will rule.
Another thing that can happen is that the US Trustee’s Office can file a Motion to Dismiss a case for any number of reasons, the most common being if they can show the filing is an “abuse” of the bankruptcy system. This is usually shown if the debtor is showing an ability to repay their debts, either due to their current budget, or the means test analysis. Now, a good attorney will usually not file a Chapter 7 case that is showing a “presumption of abuse” on the means test, but there is enough vague language and uncertain law in this area, that sometimes it makes good sense to try. Does that mean that if the US Trustee objects and the the debtor decides to convert their case to a Chapter 13 repayment plan that it wasn’t a success? No, it means that a Chapter 13 was the most favorable outcome given that particular fact scenario.
The bottom line is, if you want to know a bankruptcy attorney’s “success rate”, you need to be prepared to define “success” as it relates to that case. It is likely best to define it as “the most favorable outcome given the facts of a particular case.” No attorney can guarantee ANY outcome (favorable or otherwise). In fact, it’s legally prohibited for an attorney to do so. That is because there are many variables in any legal case beyond the attorney’s control, not the least of which is….the Judge.
Topics: Bankruptcy Law, General Bankruptcy Issues | No Comments »
Get things in writing and get receipts
By Mark Markus | November 26, 2008
If there’s one thing lawyers in general repeatedly see from their clients–in any field of law–it’s the lack of proof or evidence necessary to properly represent them or assist in solving their problems. This is as true for a contracts attorney whose client insists is the victim of a breach of an oral contract with someone, but has nothing in writing showing the terms of the contract, giving rise to the old adage “an oral contract isn’t worth the paper it’s printed on.”
In bankruptcy, the common errors I see in this regard include the following: paying rent with cash (often to family or friends), not having a written rental agreement, paying childcare expenses (baby sitter) with cash (and usually not paying the required “nanny taxes“), making charitable contributions without getting receipts, selling assets without keeping records of the transactions, giving or receiving loans without a promissory note, etc.
Many times I have clients tell me that they are paying rent to their parents for allowing them to live there, but there is no rental agreement. It could look to the bankruptcy court and creditors as though the debtor in question is merely gifting money to relatives to keep it out of the reach of creditors which is a big “no-no” (known as a “fraudulent transfer“).
Failure to have these items can result in all kinds of problems in your bankruptcy case, from as minor as having the expenses disallowed in your budget (thereby making it look like you have more disposable income than you really do) to having your entire discharge denied for failure to keep adequate books and records from which your financial situation can be be determined (11 U.S.C. 727(a)(3)).
It is very important to have and maintain records of your financial transactions. If necessary, these can sometimes be created after the fact to properly memorialize the intent of the parties, but it’s obviously better (and more persuasive evidence) if they are done at the time the events take place.
Loans are particularly important. Many times clients receive assistance from family members prior to filing a bankruptcy case. Most assume they are going to repay it when they can, but since it’s family, there is nothing in writing. Big mistake. If it is not a loan, then the money received is income–at least as far as current monthly income is calculated for the means test. This can result in a debtor who is otherwise eligible to file a Chapter 7 case, having to file a Chapter 13 or Chapter 11 repayment plan case.
So, the rule is: Always get things in writing and get receipts for payments you make. It can save you lots of problems inside and outside of bankruptcy.
Topics: Bankruptcy Law, General Bankruptcy Issues, chapter 13, chapter 7 | No Comments »
repaying relatives and friends before bankruptcy
By Mark Markus | November 16, 2008
One of the most common mistakes my clients make is repaying debts to friends and family before filing their bankruptcy case. In many cases this leads to extremely undesirable results.
The basic law as stated in the bankruptcy code (and in many state laws as well) is that anything repaid to a relative or other “insider” within twelve (12) months prior to filing a bankruptcy case can be recovered by the Trustee in that case. That means that the Trustee can (and, depending on the amounts involved, will) sue that relative to recover the money or property repaid to them during that period. This is known in legal parlance as a “preferential transfer” and the bankruptcy statute is 11 U.S.C. 547.
The law is the same with respect to any other non-relative creditor, except that for them the lookback period is only 90 days prior to filing the bankruptcy case, so it’s usually easy to wait the 90 days before filing. But obviously much harder if a relative has been recently repaid.
There is nothing that prevents the repayment of ANY debt AFTER the bankruptcy case is completed, so if you want to repay anyone, just do it after the bankruptcy case is completed, then there’s no problems. However, I suspect many of you will be reading this blog or obtaining your legal advice after you’ve already repaid them.
Another related issue, which will not be covered here, is simply transferring assets or money to someone prior to filing a bankruptcy case. In California, any such transfers done without receiving equivalent value in return is considered a “fraudulent transfer” and is recoverable for up to 7 years following the transfer.
Topics: transfers | No Comments »
Reaffirmation Agreements in Chapter 7
By Mark Markus | November 16, 2008
Much has been written already about reaffirmation agreements and this blog will not cover any new ground, but will provide a quick explanation for potential bankruptcy clients.
A reaffirmation agreement is a contract entered into during the pendency of (usually) a Chapter 7 bankruptcy case which stops the particular debt from being discharged. In other words, it creates an obligation to repay that debt after the bankruptcy case is completed.
Is reaffirming a debt a ever a good idea? This is a tough question to answer.
Typically, only secured debts are reaffirmed in order to allow the debtor to retain the collateral. Under the amendments to the Bankruptcy Code which took effect in 2005 (BAPCPA), secured creditors can treat the filing of the bankruptcy as a default and use that as a basis to repossess their collateral (such as an automobile) after the bankruptcy case is over, if applicable state law allows it. As a result, the only sure way to keep a secured motor vehicle or other personal property is to enter into a reaffirmation agreement.
However, there is a big downside to reaffirmation agreements, namely that if you fail to make the required payments, not only can the creditor repossess its collateral, but the debtor will also owe whatever is left on the balance of the reaffirmed debt. It is for this reason, among many others, that most attorneys advise against doing reaffirmation agreements.
There are a few saving graces, however. First, as far as vehicles go, the majority of vehicle creditors will allow debtors to just stay current and maintain their payments without entering into a reaffirmation agreement. Second, there is at lease an argument to be made for merely attempting a reaffirmation agreement and if the judge denies it, then the debtor should be able to retain the collateral and make payments because they have done all that is required of them by the bankruptcy code.
There may be reasons to reaffirm smaller debts, such as with credit unions in order to retain future credit privileges with them, but as always you need to get advice on your specific situation from your bankruptcy attorney.
Topics: Bankruptcy Law, reaffirmation agreements | No Comments »
Means Test for Bankruptcy
By Mark Markus | October 11, 2008
The means test is a budget analysis created by Congress purportedly to determine whether one is ineligible to file for bankruptcy relief under Chapter 7, Chapter 11 or Chapter 13. I say “ineligible” as opposed to “eligible” because in most court districts, “passing” the means test is not conclusive on the issue of eligibility—meaning, that there are other eligibility factors that come into play even if the presumption of abuse does not arise on the means test. This will be discussed more below.
The means test only applies if one’s debts are primarily (i.e. more than 50%) consumer debts. Consumer debts include secured mortgage debt obligations on a personal residence, as well as most credit card-type debts. The means-test also only applies if the total income received in the 6 calendar months prior to filing the bankruptcy case (explained more fully below) is below the median income for your state, given your household size. See the means test flow chart created by Judge Maureen Tighe of the United States Bankruptcy Court, Central District of California, as presented in the informative blog of the Moran Law Group.
What is the means test? It is extremely complex. The basic definition can be seen here. But essentially, it takes all income received (and this means ANY income, regardless of whether it’s taxable income, so that includes gifts, withdrawals from a 401k, and almost any other type of income EXCEPT social security income) in the 6 calendar months prior to filing the bankruptcy case–including that of your spouse, if any– and subtracting out certain allowed expenses. These “allowed expenses” are mostly IRS-based allowances for living expenses, food, clothing, shelter, etc. and have little connection with reality. There are specific allowances for secured debt payments, such as mortgages and car payments, but almost every aspect of the means test has been, is being, or will be challenged in the courts, because it is frequently nonsensical, internally inconsistent, and confusing. It is not as simple as determining that your income is below or above the median income for your area and household size (and determining your household size is another hotly contested issue). You need a qualified bankruptcy attorney familiar with the court decisions in your area, to properly evaluate your eligibility for bankruptcy. (For example, self-employment income is not analyzed exactly the same way as wage-earner income from a job)
Which brings me back to the point of eligibility. Passing the means test is just the first step. It is possible to pass the means test but still be showing–for example–a surplus in your current monthly income and expenses. For example, let’s say you were unemployed for the 6 months prior to filing your bankruptcy case, but you just landed a new job that pays you $100,000 per year. In that instance, you would likely pass the means test and show you are eligible to possibly file a Chapter 7 case. However, you would most certainly draw an objection (via a Motion to Dismiss your case) from the US Trustee’s Office as having too much income.
The means test and assessing eligibility to file bankruptcy is a field of land mines and evolving interpretations of law. As they say on television, “We are trained professionals. Don’t try this at home”
Topics: Los Angeles Bankruptcy Issues, debts in bankruptcy, means test | No Comments »
Bankruptcy Attorneys and Debt Relief Agencies
By Mark Markus | September 28, 2008
I write this post to clarify the definitions of a “bankruptcy attorney” and a “debt relief agency” (”DRA”) because, at least according to one recent client, there is a substantial amount of confusion over these terms.
A bankruptcy attorney is an attorney (or lawyer), licensed to practice in the courts of whatever jurisdiction he is practicing, who handles bankruptcy related cases. (click here for an explanation of the differences–if any–between an attorney and lawyer)
A debt relief agency is a made-up designation that our Congress created as part of the 2005 Bankruptcy Reform Act and is defined in 11 U.S.C. 101(12A). It includes “any person who provides any bankruptcy assistance to an ‘assisted person’ in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer…”. Without getting too detailed about who an assisted person is and other nuances, this basically includes a very wide variety of “people”, including credit counselors, unlicensed petition preparers, and it can be argued that it can extend to accountants or anyone else who provides any assistance in connection to the filing or possible filing of a bankruptcy case or even giving financial advice. It may be even broader than that.
Subject ultimately to rulings by the appellate courts in this country, all bankruptcy attorneys are debt relief agencies (although this is being appealed in many different circuits at this time). However, as you can see above, not all debt relief agencies are bankruptcy attorneys.
It has been argued that one of the reasons Congress added this definition was to cause the precise confusion experienced by my client. It was implemented to add additional disclosure and paperwork requirements, to add costs to the bankruptcy process and to cause confusion between who is licensed to practice bankruptcy and who is not, and (it has been argued) it was designed to take business away from licensed attorneys as a result of this confusion.
In any event, in order to represent you in a bankruptcy case (or any other legal proceeding, for that matter) an attorney must be licensed to practice law in whatever state your case is in. Whether or not he/she is also a “debt relief agency” depends on the rulings of the courts in that jurisdiction. Perhaps more importantly, it is virtually meaningless.
Topics: Uncategorized, new bankruptcy laws | 1 Comment »
Short Sales or Foreclosures: Which is Better?
By Mark Markus | September 18, 2008
There is an epidemic of people defaulting on their mortgage payments, as everyone knows. Real estate brokers are pushing hard to have people do “short sales” on their properties, instead of allowing them to go to foreclosure. In most circumstances, this is a very bad idea.
What is a short sale? A short sale occurs when you want to sell your property, but owe more to the lienholders (mortgages) on your property than a buyer is willing to pay to purchase the property. As a result, one (or more) of the lienholders secured by your property must agree to accept less than 100% of what is owed to them, in order to allow the sale to proceed. But who does this benefit? Certainly the mortgage broker, because he/she gets their commission.
Historically, a short sale was used in these circumstances in return for an elimination of any obligation that the seller has and an agreement that no negative marks will appear on their credit report as a result. NEITHER of these is true today. I am seeing increasing numbers of people who do these short sales, and then the lienholder who didn’t get paid in full seeks to collect from the seller for the deficiency amount. On top of that, the short sale appears on the credit report in the form of a negative defaulted loan mark.
Furthermore, doing a short sale can sometimes affect the ability to relieve the seller of certain tax burdens if they subsequently file a bankruptcy case.
Compare this with the foreclosure process. You end up with the same liabilities and negative credit marks, but you can usually live rent-free in your home for months, if not years, while the lenders go through the foreclosure process. Most lenders will wait as long as possible to foreclose in today’s market.
This is an extremely complicated area of law involving both tax and bankruptcy law, but suffice it to say that the optimal strategy is that if you are going to file a bankruptcy, it is usually best to allow your property to go to foreclosure, and file your case before the foreclosure sale takes place (and, even better, have the foreclosure sale occur DURING the bankruptcy, but this is difficult to achieve).
Topics: Bankruptcy Law, foreclosures and short sales, means test, real estate issues | No Comments »
Will Obama Change the Bankruptcy Laws?
By Mark Markus | September 17, 2008
Of the many important issues in this year’s presidential race, bankruptcy laws still rank among them, at least in Barack Obama’s view.
For those who don’t know, the bankruptcy laws were dramatically complicated in 2005 after years of lobbying by the credit card industry, and numerous vetoes (or at least threatened) by President Clinton. The laws made it more difficult to be eligible to file bankruptcy, and made all bankruptcy cases more expensive to file. Click here to see more about the new bankruptcy laws.
During his campaign, both in the primaries and now, Obama has repeated that he intends to change the current bankruptcy laws, at least by modifying it to allow more eligibility for those with medical debts. How much further he would go remains to be seen.
One interesting note is that while Obama consistently voted against the Bankruptcy Reform Bill that passed in 2005, his vice presidential running mate, Joseph Biden, voted in favor of it. Biden, who is a senator from Delaware where most of the major credit card companies are incorporated, apparently voted to curry favor from this longtime lobby.
John McCain, on the other hand, has mentioned nothing about the bankruptcy laws in his campaign, nor is it expected that modifying it would be on his agenda as president. McCain voted in favor of the 2005 law change.
The point of the above is not a political endorsement, but rather to let you know that if you think that the current bankruptcy laws are unfair, at least on that issue there is a clear choice.
Topics: new bankruptcy laws | No Comments »
Debt Charge-offs: Do you still owe the money?
By Mark Markus | August 4, 2008
A common misconception people have regards charge-offs on their credit reports. Many people think that if a credit card company or other creditor “charges off” the debt, that it means they no longer owe the money, or they will no longer try to collect on that debt. This is simply not correct.
A charge-off is merely a bookkeeping entry. It has nothing to do with the legal status of the debt. Often, creditors will sell the accounts on which they are owed money to a third party collection company, who then owns all the rights to pursue the debt, just as the original creditor did. What ends up happening is that a debt you thought was long gone, suddenly resurfaces after several years, when the new owner of the debt commences a lawsuit to collect on it.
This can have an impact on your credit report as well, because if that creditor gets a judgment, then the judgment will be on your record for at least another 7 years.
It is important not to assume debts have gone away simply because they are “charged off.” More often than not, you will still have to deal with that debt whether through a bankruptcy or some other alternate means.
Topics: Bankruptcy Law, General Bankruptcy Issues | No Comments »
Non-Filing Spouse’s Income Must Be Included in Bankruptcy
By Mark Markus | July 17, 2008
The fact that a non-filing spouse’s income must be included in the bankruptcy case of the other spouse is one of the most difficult concepts for my clients to grasp. The common scenario is this:
One spouse has certain debts which are only in that spouse’s name and may have even been incurred entirely prior to the marriage. He (or she) wants to file a bankruptcy to deal with those debts without involving their spouse. That is no problem. A bankruptcy case can always be filed by one spouse without the other. However, when determining eligibility for bankruptcy, which includes the ability to repay debts, the other spouse’s income MUST be included in the analysis.
This has always been the case in community property states, such as California. But with the changes in the bankruptcy laws which became effective in October 2005 (see new bankruptcy laws) Congress stated specifically that unless the spouses are legally separated or living apart (and not just for the purpose of evading the bankruptcy laws) or have a valid prenuptial agreement, then the non-filing spouse’s income must be included in the means test analysis (which is one of the several eligibility tests now required). [11 U.S.C. 707(b)(7)(B)].
The reason for this in community property states is that every spouse has a community property interest in the income earned by their spouse (and vice versa).
These requirements have absolutely nothing to do with which spouse owes the debt, whose name is on the debts/accounts, or which spouse is filing the bankruptcy case.
This also does NOT mean that the non-filing spouse will be “affected” by filing the bankruptcy case. It merely means that their income must be factored into the eligibility analysis and may result in a Chapter 13 repayment plan needing to be filed instead of just a straight chapter 7 liquidation case.
Whether or not to include a non-filing spouse’s debts in the bankruptcy of the spouse that files is partially dependent on state law and is the topic for another discussion.
Topics: Bankruptcy Law, means test | No Comments »