Why did this happen?  The retirement funds at issue were contained in a Merrill Lynch IRA that appeared to constitute a qualified retirement account by the IRS.  Merrill Lynch even provided the debtor with a letter from the IRS stating that IRA accounts of this type had been deemed qualified.  So far so good.  Qualified retirement accounts are “exempt assets” in Tennessee bankruptcy cases.

The problem was this – the fine print of the account contained two problems:

If the funds received are a gift, the funds would count as income for means test purposes and these funds (assuming they are not yet spent) would be an asset of your bankruptcy estate and potentially reachable by a bankruptcy trustee.

By contrast, if funds received are treated as a loan, these funds would not count as income for means test purposes, although cash still on hand would be an asset.

Mr. Markus also notes that if you pay back the lender before filing, the repayment could have bankruptcy implications.  He is referring to the issue of preferences, which are provisions of the Bankruptcy Code that allow trustees to recover money from lenders in certain situations.

Your lawyer can advise you regarding the preference issues and about the means test as well as exemptions that can allow you to protect cash and other property from the trustee’s reach.  However, as Mr. Markus points out a threshold question is whether funds received are a gift or a loan.  What are the differences?

The main distinction between a gift and a loan has to do with intent – do you and the lender  intend that the funds you now have are to be repaid.  Ideally, you are the lender will enter in to a written contract at the time the funds are released that sets out a repayment schedule, applicable interest and the consequences of default.

This type of formal contract can be essential to proving that you entered into a loan contract and you should create such a contract even when transacting with family members.

If no contract was entered into at the time of the money transfer, an oral agreement can be formalized later, but such a contract should be drafted by a lawyer to increase the chances that it will pass the scrutiny of a judge.

Judges will look at other transactions between the parties.  If your father has written you 15 checks over the past two years, and there is no contract and you have not paid anything back, it will be difficult to argue on the eve of bankruptcy that these payments are loans and not gifts.

If you have lent or received money and you are uncertain whether these transactions are loans or gifts in the eyes of the law, please contact our office.

• surrendering your property and walking away from any associated debt
• redeeming your property by paying the secured creditor the fair market value in one lump sum
• reaffirming your property by re-entering into a contract to pay the installment note
• continuing to pay the note but not signing a reaffirmation

There are pros and cons for each of these options.   In this blog post I want to discuss the good and bad of reaffirming your mortgage debt.

Many lawyers feel very strongly that you should never reaffirm your mortgage.   When you reaffirm, you are obligating yourself personally to pay your mortgage note.   This means that if you should default on this obligation and the value of your home is less than the outstanding balance (a very real possibility in current economic times) you could find yourself facing a deficiency claim in the tens of thousands of dollars.

A better option, according to the anti-reaffirmation argument, is to “stay and pay” – in other words, stay in your home, continue to make regular mortgage payments and continue to build equity.  If you should lose your job or your ability to pay your monthly mortgage obligation, you can simply walk away, since your Chapter 7 discharge will have discharged your personal liability to the mortgage company.

The mortgage company would still have the right to foreclose against your property since your bankruptcy discharge does not cancel the security note linking the property and the mortgage loan.

What is the argument in favor of reaffirmation?

In my view there are three reasons to consider reaffirming a mortgage obligation:

1. when you reaffirm, your timely payments will appear on your credit report and support your credit recovery.  If you do not reaffirm, you have no personal liability to pay the mortgage debt; thus all those payments you make will not positively impact your credit report
2. when you reaffirm, you will have certainty in your relationship with your mortgage company.  While it is true that mortgage companies currently would rather have your money than your property, this may not always be the case.  Technically, your bankruptcy filing constitutes a default of the promissory note associated with your mortgage and, in theory, at some point in the future, your lender could decide to pursue a foreclosure or demand a higher interest reate even if you have been making your payments.
3. technically the Bankruptcy Code does not permit “stay and pay.”   Section 521(a)(2) of the Code requires you to state your intention – surrender, reaffirm or redeem and fulfill that intention before your case is over.   Currently the Bankruptcy Courts are not enforcing this debtor obligation but a compelling Circuit Court or Supreme Court decision addressing this omission could drastically change the bankruptcy landscape.

Under provisions of the Bankruptcy Code, your lawyer is obligated to advise you regarding the pros and cons of reaffirmation.  Your lawyer will correctly be concerned about your capacity to make ongoing payments.  But current financial capacity is only one of the factors to discuss.   Your decision about whether to reaffirm ought to include a consideration of your short and long term financial prospects as well as the importance to you of the positive credit impact arising from reaffirmation.

an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Currently student loans would only be dischargeable if the debtor files an expensive “Adversary Proceeding” in bankruptcy court and successfully argues that repayment would present an “undue hardship.”  Statistically a finding of undue hardship has proven to be very, very difficult.

Recently, however, there comes word that Congress is considering a change in this law that would make some private student loans dischargeable.   San Francisco bankruptcy attorneys Jeena Cho and Jeff Curl report on their blog that H.R. 5043 entitled the Private Student Loan Bankruptcy Fairness Act, a bill co-sponsored by Tennessee representative Steve Cohen, is now making its way through Congress.

Why would Congress consider this change?  Perhaps this Congressional action arises from complaints from trade school students who get stuck with thousands and thousands of dollars of student loans, even when the trade school goes out of business or fails to provide the promised education.

As the bill’s sponsors note, private student loans are fundamentally different from government backed student loans.  Lenders issuing government backed loans must adhere to certain requirements – such as clearly disclosed fixed interest rates and limitations on “origination fees.”  Private student loans are not required to have any such limitations and borrowers frequently find themselves paying extremely high fees in exchange for limited benefit.   According to Rep. Cohen, permitting the discharge of private student loans would function as a form of needed consumer protection for borrowers.

The Private Student Loan Bankruptcy Fairness Act is not yet law, but it is encouraging to see Congress consider this legislation.

If you have any kind of claim that could produce money or property for you, it’s critical that you tell your bankruptcy attorney all about it.  Here’s why.

Everyone who files bankruptcy is required to file a set of schedules that list all their debts and all their property.  These schedules are filed under penalties of perjury.  Most people try to give accurate information because they want to be honest but also because failure to do so is a federal crime.  Rich and powerful people have gone to federal prison for hiding assets.

The Bankruptcy Code defines “property” very broadly.  It includes much more than obvious things like real estate, cars, jewelry, and bank accounts.  It also includes intangible assets like tax refunds, potential lawsuits, and claims for personal injury, workers compensation, social security, or child support.  So the simple reason you should disclose such claims is to be honest and to comply with the law.

There is also a more complicated but equally powerful reason.  Courts have developed a doctrine called judicial estoppel that can kill your claim if you do not disclose it.

Judicial estoppel is based on every court’s desire to maintain its own integrity.  Judges believe people should not be able to assert one set of facts in one court and completely opposite facts in another.  Because people who file bankruptcy swear that their schedules accurately disclose all their assets, failure to list a claim in effect tells the bankruptcy court that you do not have a claim.  Then, when you try to prosecute the claim in another court, or before an administrative agency, you are saying that you do have a claim – the exact opposite.

With every legal claim, there is someone on the opposite side – a defendant, an insurance company, or an employer – who has every reason to see the claim fail.  Defense lawyers regularly check to see whether claimants have filed bankruptcy and, if so, whether they disclosed their claim.  The defense lawyer will usually succeed in having any undisclosed claim dismissed.  It doesn’t matter how badly the claimant was hurt, how much money or work he has lost, or how deserving he is.  His claim is finished.

One final thing.  Many states have exemptions that protect most if not all of the proceeds of injury claims and the like. This means that you, and not your creditors, get the benefit of these funds.  But many bankruptcy courts will disallow an exemption if the debtor does not promptly disclose the corresponding asset.  So this is one more way that failing to disclose a claim can lead to a bad outcome.

Don’t let this happen to you.  If you have a claim of any kind at all, discuss it fully with your bankruptcy lawyer before you decide to file, whether or not you are asked about it.  And if you do file, make sure it is listed on your schedules.

Examples of ‘other property’ that can be repossessed include jewelry, furniture, electronics, home appliances, and cash. Here we will focus on your repossessed vehicle, however, which is the most common property repossessed, and how to get it back.

It is very important to act quickly to get your repossessed vehicle back because the law states you must file for bankruptcy within 90 days of the repossession in order to retrieve the vehicle. However, you should act right away – because the creditor can resell your vehicle and it is then extremely difficult to get back.

When you file for bankruptcy, the bankruptcy court can look at any payments and property transfers within the past 90 days and determine if they may hinder the repayment of creditors. Any payments or property transfers within 90 days before you filed for bankruptcy can be seen as a preferential transfer and can be reclaimed. When your vehicle is repossessed, the creditor is acquiring equity on it. Because of this, the vehicle can be seen as a preferential transfer and the creditor can be forced to return the vehicle to you.

Fortunately in this situation the law works in your favor, but the court must still be persuaded that the vehicle is rightfully yours and order the creditor to return it. Your attorney must file a bankruptcy petition and argue that the repossession of your vehicle is a preferential transfer.

If you are in this situation, speak with an experienced attorney to learn more about how to get your repossessed property back. The attorneys here at Clark and Washington have many years’ experience in helping debtors reclaim their repossessed vehicles, so we know how to use the law to your advantage.

Here are some ways the SCRA protects you from bankruptcy while you are serving in active duty in the military:

• All bankruptcy proceedings are frozen, eviction is prevented, and the court cannot enter into a judgment while members of the military are serving in active duty.
• Actions such as reducing interest rates on loans and debts that accumulated before active duty can be taken to assist the service person.
• If military reasons prevent a service person on active duty from appearing in court, an attorney can be appointed for the service person to protect them against default judgments such as bankruptcy proceedings.
• It is possible for court proceedings to be halted if the defendant is a member of the military and is not able to appear in court.

Even if a court proceeding started before you were serving in the military, the SCRA protections apply to any court proceedings taking place, including bankruptcy, once you begin to serve. Typically 90 days after you have been discharged from the military, SCRA protections end. However, you can be released from an agreement, such as a lease, without any consequences if you were stationed after the agreement was made.

There are several factors that determine SCRA protections and I recommend speaking with an experienced attorney if you are experiencing financial troubles.

When you file for Chapter 13 bankruptcy, you will be repaying all or a portion of your debt by making installments to the Chapter 13 Trustee that have been outlined in the payment plan and approved by the bankruptcy court. The Trustee is then responsible for paying the creditors that you owed. Sometimes debtors that have filed for Chapter 13 realize that they are unable to make their plan payments, or cannot make car or mortgage payments once the plan has begun.

If this is the case, as long as your bankruptcy case has not been converted before, it is your legal right to try and convert from a Chapter 13 to a Chapter 7 bankruptcy. Here are several things you will need to do in order to convert to a Chapter 7 bankruptcy.

You will need to take the “Means Test” again, which the court will use to determine if you qualify for Chapter 7 bankruptcy by evaluating your financial information such as your income, debts, and expenses. If you pass the means test you will need to then file a “Notice of Conversion,” which costs a fee, with the bankruptcy court. The Trustee will then be in charge of determining if you are eligible to convert to Chapter 7 bankruptcy.

Because bankruptcy laws are very complex and constantly changing, I recommend speaking with an experienced bankruptcy attorney to assist you through the Chapter 13 to Chapter 7 conversion process.

For example, payments change greatly if you have an adjustable mortgage, your energy bills are different every month, and/or if you need to surrender or purchase a home or a vehicle. All these scenarios will cause your Chapter 13 budget to be affected. Because your budget is constantly changing, your plan may be adjusted accordingly.

Under section 1329 of the Bankruptcy Code, the trustee, the debtor, or one of the unsecured creditors can ask for a change in the payment plan anytime during your Chapter 13 bankruptcy case. The amount that your budget needs to change before your plan is adjusted depends on who reviews your plan. While all bankruptcy courts follow the Bankruptcy Code, states and districts enforce it differently. Typically, if you have a change of 10% in your budget for three or more months, your plan may be adjusted. If your expenses increase, it may be determined that you owe your creditors less money. If your income increases, it may be determined that you owe your creditors more money.

I strongly recommend speaking with an attorney to understand your Chapter 13 payment plan and how it can fluctuate throughout the duration of your case. Because the Bankruptcy Code is enforced differently depending on location, an attorney can clarify how it will be enforced in your case. Also, make sure that you notify your attorney of changes in your budget throughout the duration of your case, because you can get in trouble for concealing such changes.

On this Tennessee Bankruptcy Blog, we regularly go over the most common types of personal bankruptcies, Chapter 7 and Chapter 13. However, there are less-known types of bankruptcy protections as well, such as Chapter 9, Chapter 11, and Chapter 12 bankruptcy. In this post, we will focus on Chapter 12 bankruptcy, which may help some of you Tennessee farmers out there. Commonly known as the Family Farmer Chapter, Chapter 12 is designed specifically to meet the needs of family farmers and fishermen.

To be defined as a family farmer for Chapter 12 bankruptcy, you must meet certain criteria. The farmer’s debts can not be over $1.5 million, which does not include debt owed on a home unless it is directly connected to the farming business. At least half of the farmer’s gross income must have been earned from farming in the year prior to the filing, and at least 80% of the debt must be farm related. Also, the farmer must make an income that is large enough to be able to make payments under a Chapter 12 plan, before the bankruptcy petition is approved.

The Basic Process: To file for Chapter 12 bankruptcy, the debtor must first file a bankruptcy petition at a cost of $200. Within 15 days after filing, the debtor must give a complete list of their liabilities and assets, and must pay a deposit of $500 to the appointed Chapter 12 trustee. Within 90 days the debtor needs to file a repayment plan telling how their creditors will be repaid. The debtor must also file a financial report every month which shows disbursements and receipts. Within 20 to 60 days after the bankruptcy petition is filed, the debtor must attend a meeting where they are questioned by the trustee and creditors and suggestions on the repayment plan are made. Within 45 days since the repayment plan was filed, the court will either approve or reject the plan.

Chapter 12 bankruptcy is very similar to Chapter 13, but has a higher debt ceiling than Chapter 13 because farmers and fishermen must sustain higher debts than workers with normal wages. Debtors must repay all or part of their debts within three years, or five years if they can persuade the court of extenuating circumstances.

Just like I would suggest to those thinking of filing a Chapter 13, I advise anyone that is considering filing bankruptcy under Chapter 12 to consult and with an experienced bankruptcy attorney.