Open season for shooting down old tax debts

huntingWith April 15th of 2014 in the rear view mirror, it is now open season on discharging 2010 income tax debts (both state and federal) in bankruptcy court.

Income taxes may not be usually dischargeable in bankruptcy, but the rules change once the debts get old. Debtors who filed a return on time, but who ended up owing money they couldn’t pay anyway, can eliminate the tax debt once three years have passed from the day the return was due.

So 2010 taxes were due on April 15th of 2011, and three years later, we have reached the point where the 2010 tax bills may be cashiered with a simple Chapter 7 bankruptcy case.

Counting time backwards in bankruptcy court

Big_ben_closeupIf you have had wages garnished by a creditor, you certainly might be interested in ways to get some of all of that money back so you can spend it.

Filing a bankruptcy case may do the trick, due to a technical portion of the Bankruptcy Code that deals with “preferences.” That, in turn, is bankruptcy court lingo for creditors who have received more than their share of payments right before a bankruptcy case is filed in court.

From the wage earner’s perspective, this means that you have a fighting chance to get back all of the garnished wages for ninety (that’s 90) days before you filed a bankruptcy case.

But what if the 90th day was one of your paydays?

According to bankruptcy code section 547 (b) (4) (A), you can get back wages attached or garnished “on or within 90 days before the filing of the petition.”

When counting backwards you don’t include the day you filed the case, but start counting at the day before. All weekends and holidays do have to be counted, however, according to bankruptcy rule 9006.

A couple of exceptions: this won’t work for attachments covering child support obligations, and it may or may not work for attachments for income tax arrears, depending on your particular circumstances.

by Doug Beaton

Trying to eliminate divorce lawyer’s fee in bankruptcy

couple arguingDebtors who have outstanding bills for legal fees at the time they file a bankruptcy case should include those bills on their bankruptcy schedules and seek to discharge them.

Almost always this works out fine. Your own bills for legal work already performed are usually considered perfectly dischargable. A typical scenario involves a debtor who has been divorced; his own outstanding legal bills from the divorce can be written off in the bankruptcy. It may not seem nice (at least to us lawyers, who are touchy about the subject of fees), but it usually goes down without a hitch.

But that certainly didn’t happen for one debtor in Massachusetts, who found himself being sued in bankruptcy court by his own divorce lawyer after he tried to discharge the lawyer’s $87,000 bill. The divorce lawyer struck back hard — claiming that her services were obtained through fraud.

The debtor in the Dougherty case (the long opinion can be downloaded by clicking here) hired a divorce attorney in 2005 to seek a modification in his divorce case. Sick of not getting paid, she tried to attach $116,000 in the debtor’s investment accounts through a state court lawsuit, but was foiled when the debtor switched funds out of the account before the garnishment (“trustee process” in Massachusetts lingo) could be completed.

The debtor filed for chapter 7, which would usually be the end of things, but the divorce lawyer wasn’t hearing it. She filed another lawsuit in the bankruptcy case, claiming that three types of fraud should prevent her fees from being discharged.

Ultimately, she based her case on section 523 (a) (6) of the bankruptcy code, which bans discharge for “willful and malicious injury by the debtor to another entity or to the property of another entity.”

That turned out to be too narrow of an argument, and the debtor prevailed, discharging the entire debt. But it couldn’t have been a pleasant experience — first a divorce, then a bankruptcy, and then a long (five years in this case) battle with your own divorce lawyer in the bankruptcy court. Ouch!

by Doug Beaton

Debtors get the benefit of rising real estate values..or do they?

triple deckerWhen you own a home, file a bankruptcy case, and then watch real estate prices rise, who gets the benefit of the new-found value in the property?

Traditionally, the rule has been the debtor benefits and gets to keep all the new equity that might accumulate after the date of filing, with the trustee and creditors unable to touch it.

However, that doesn’t mean an aggressive trustee would never try to change the rules. That’s what happened in Massachusetts in the Garajau case (click here for the text of the opinion), where the Chapter 13 trustee attempted to modify the debtor’s plan in order to attach post-petition equity.

Naturally, there was a twist in the case: before the bankruptcy, the debtor’s neighbor had erected a fence across her driveway, preventing her from parking in her own yard. This spawned a lawsuit which was still pending when the bankruptcy case was filed.

Although the driveway lawsuit was eventually settled in the debtor’s favor, the Chapter 13 trustee used it a lever to try to get at the increasing equity in the property.

First, the trustee tried to get an order to force the debtor to modify her plan to pay out an additional $76,000 to creditors based on the home’s increased value.

No dice, said Boston bankruptcy judge Frank J. Bailey: there is nothing in section 1329 of the bankruptcy code that allows a trustee to force a debtor to modify a properly confirmed plan.

However, the code does allow other parties, including a trustee, to propose a modified plan after confirmation, so that was the trustee’s second gambit. Fortunately for this debtor, the judge ruled that the trustee’s proposal would create an unfeasible plan, since there was no explanation of how the $76K increase would be funded (the existence of a $500K homestead exemption in Massachusetts was no doubt also in the judge’s mind).

The lessons of the Garajau case appear to be two-fold: first, that confirmed plans will be respected by bankruptcy courts and should still give debtors at least a moderate amount of peace-of-mind.

The second lesson is that in a time of fewer bankruptcy filings, aggressive (and sometimes, perhaps over-aggressive) actions by trustees will be encountered far more frequently.

by Doug Beaton

When Dad dies broke: too many elderly are suffering with debt

elderly-poverty_1213788cAn excellent article by Rob Azevedo just appeared in the Boston Globe’s North section where the author describes how his father struggled with debt into his senior years.

Azevedo really hits the nail on the head: “But today, millions of seniors are drowning in debt, trying to heat their homes, pay for medications, eat some food, and keep themselves out of a retirement home, where they’ll absolutely go broke.”

“It didn’t matter how much money my father tried to sock away. It wasn’t enough to live out his years in peace.

My father was no street urchin, thumbing for nickels on a cold, dark winter’s night, and neither is Hank.

As one finance friend of mine told me: ‘‘You have no idea how broke so many people your father’s age are. And you would never know it.’’

And that’s no way to live, grieve, or die.”

It doesn’t have to be this way. If you know a senior citizen who is struggling, a trusted professional (and not a hack selling something with an 800 number) may be able to get rid of the debt. You will be doing them a great favor by pointing them in the right direction.

by Doug Beaton

Are casino liens really hardball?

casino floorTwo front page articles in the Boston Globe in three days has put in the news this fact: Foxwoods and Mohegan Sun, the two massive Connecticut casinos which are now seeking the first gaming licenses ever issued in Massachusetts, have sometimes gotten liens on gambler’s Massachusetts homes for unpaid advances.

First, the Sunday Globe “exposed” the practice with a front page story outlining how the casinos extended credit to there customers, and when it was not repaid, sought and obtained liens on the gamblers’ homes in Massachusetts.

In particular, the article follows a man from Revere who got in deep at both casinos, and ended up with over $80K of liens on his house. Revere just happens to be the proposed site for a new Mohegan Sun casino at the Suffolk Downs race track.

The article also outlines what happened to this debtor: he filed for bankruptcy in 2007, stripped off the liens with a motion, and died three years later. The property therefore passed to his heirs, and the casinos for once didn’t collect.

Two days after the first article comes the news that Massachusetts Attorney General Martha Coakley (also at this writing a candidate for governor) has “urged Massachusetts regulators on Monday to prohibit casinos from placing liens on the homes of patrons with unpaid gambling debts, calling the practice “deeply concerning” in a letter to the state gambling commission.”

Although the Globe claims, citing gaming experts, that it is unusual nationwide for casinos to place liens on their customer’s homes, in general this tactic is quite common through all of Massachusetts collection law.

Liens on homes by private organizations like casinos are never issued without court approval after a lawsuit. Although wage garnishment is possible in Massachusetts, until very recently it not been a favored collection tactic, and the casino’s customers are often retired persons anyways.

So in some way it makes sense that casinos as creditors would use the standard local collection tactic to collect debts.

What is important to realize is:

first, that the liens can often be removed in a bankruptcy case, so debtors need not suffer the loss of home equity, and

second, rather than sensationalize the casinos tactics, the real question to be asked is why are people of modest means being extended dangerous credit like high rollers in the first place?

by Doug Beaton

Massachusetts debtor discharges law school lawns in bankruptcy case

ivy leagueStudent loans are impossible to discharge in bankruptcy, right?

So goes a lot of street wisdom, but take a look at what actually happened in court in Massachusetts in January, 2014.

A disbarred lawyer with criminal convictions stemming from some wild incidents in his law practice (he was tossed from the bar after a mere five months) was able to secure a determination of undue hardship from bankruptcy judge Joan Feeney, and get all his law school student loans wiped out.

You may or may not want to trade places with this particular debtor, whose tale is told in the Ablavsky case, who put himself through college and law school, but who struggled all his life with crippling mental health problems, and had criminal convictions from some escapades when he was in manic states.

Although all those bad facts were thrown back at him at his trial, this debtor was able to persevere and all of his school loans were erased in bankruptcy on the grounds of undue hardship.

One of the more interesting facts hidden in this opinion is that four lenders named as defendants didn’t even answer the charge, and so were defaulted by the judge. That wiped out over $109,000 in supposedly non-dischargable student debt automatically, without a fight.

Sometimes, when crushing student loan debt is involved, it’s worth the gamble of going to bankruptcy court.

by Doug Beaton

Three bankruptcy cases in a year does not bode well for debtors

three strikesIn the world of bankruptcy, filing three Chapter 13 cases in a single year is not a sign things are going to turn out well for the debtor.

And in the James case in the district of New Hampshire, it indeed did not go well.

The basic problem is that by the time a debtor gets to three filings in a year, he no longer gets ANY automatic stay upon filing, so that collection activity may proceed apace despite the filing.

A secondary problem is that the debtor’s good will with the bankruptcy system is shot. In fact, a three time filer has to face a presumption that his case is an abuse of the system that is better broomed away quickly. It is up to the debtor to show how his situation has changed so that the new plan is feasible and likely to be completed.

In the James case (released January 17, 2014), bankruptcy judge J. Michael Deasy shot down a debtor’s attempt to do this. The debtor, an attorney who was married to another attorney and both operating their own law offices, tried to show his wife’s practice was sufficient to fund a Chapter 13 plan, but the judge found the wife’s own financial statements belied any real change in circumstances since the first two cases.

The motivation for the multiple filings here appears to be an attempt to avoid a large out-of-state child support order that was due in a lump sum payment; but with the debtor’s good-will shot, it appears to be a case of three strikes and you’re out.

by Doug Beaton

Using Zillow in bankruptcy court still a standoff

Zillow-LogoSince writing in the spring of 2013 that use of the real estate information service was starting to gain some traction in the nation’s bankruptcy courts, only three new opinions mentioning the term “Zillow” have been issued, all in August of 2013.

First, some background: back in 2010, Melvin Hoffman, the bankruptcy judge for Worcester, Massachusetts, went public in the Darosa case with his view that Zillow printouts were worthless evidence in bankruptcy cases — the first published opinion in the country that even addressed the idea of dot com valuation sites.

Since then, there have been a bunch of judge’s who have essentially followed Judge Hoffman’s view and backed him up, and a few (especially in Illinois for some reason) who have bucked the trend and appeared to accept Zillow values, at least in individual cases.

The courtroom action from last summer perpetuated the split in opinion: out in Sacramento, California, in the Cocreham case, bankruptcy judge bankruptcy judge Michael McManus basically went along with Darosa, and shot down the effort of two parties to use values provided by Zillow as violation of the hearsay rules.

Zillow fared better down the road in San Francisco, however, where bankruptcy judge Dennis Montali emphasized the use of a Zillow printout’s “Rent Zestimate” for determining the rental value of an apartment in the Walker case. Go figure.

And back closer to home, in the Harris case, Joan Feeney, the most prolific writer of the Massachusetts bankruptcy judges, mentioned a Zillow value without negative comment, although that value wasn’t critical to determining the motion in her case. But at least she didn’t blast the party who mentioned it (a bank in a foreclosure).

Where does all this leave those who would like to use Zillow and its imitators to establish real estate values in a bankruptcy case. Still up in the air for now would probably be the best way to put it!

by Doug Beaton

More options for debtors buried in private student loans?

wingsGetting out from under a load of privately held student loans is no easy trick, even in bankruptcy court.

Debtors may have a new weapon soon, however, as the idea of re-financing these loans at lower rates is just getting started.

According to Sheryl Harris in the Cleveland Plain Dealer, Charter One Bank in Ohio ha joined a small group of lenders willing to take a chance on these kinds of loans. Ms. Harris reports Charter One is offering graduate debtors either a 5.24% fixed rate or a variable rate that is currently about 3% to refinance.

No word on whether anything like this will be available in Massachusetts, but according to Harris, “as a result of steady pressure from the Consumer Financial Protection Board, college graduates can expect to see other banks and credit unions roll these products out.”

By Doug Beaton

(Artwork by Cleveland Plain Dealer)