If a debt is discovered after a bankruptcy petition has been filed, the critical question is whether the estate includes any nonexempt assets. If there are no assets in the case for a trustee to administer, listing another debt would be a waste of time. However, if there are assets to be liquidated, the debtor must make an accurate assessment of whether the creditor would be prejudiced by not being included in the bankruptcy petition. If the estate includes nonexempt assets, the next question is the timing of the discovery. If the debt is discovered after the time for filing a timely proof of claim the creditor cannot seek to recover any portion of the debt from the trustee and the unlisted debt will not be discharged. If the creditor is placed on notice of the bankruptcy filing with sufficient time to file a proof of claim, but after the 90-day deadline to commence an adversary action to contest whether the debt is dischargeable, the debtor may be able to use the discharge as a defense in a state court proceeding. In that event, the debtor may be able to limit the creditor’s claim to the types of debt listed above which cannot be discharged. If all else fails, a debtor can petition the court to reopen the bankruptcy case pursuant to 11 U.S.C. § 350.

The moral of the story is that it is important to carefully review your debts and credit report before filing for bankruptcy protection. Identifying all debts on the initial bankruptcy petition will avoid the unnecessary hassle of filing amendments and delaying the bankruptcy process.

- Richard V. Stokan, Jr.

For instance, you have defaulted on your car and jet ski payments and your creditors are ready to repossess both vehicles.  You proceed to file for bankruptcy, but you wish to keep the car because it is your only reliable source of transportation.  At this point you decide to sign a reaffirmation agreement with your car creditor which will allow you to keep the car as long as you promise to pay for the remaining debt by the new terms of the agreement.

On the other hand, since you have surrendered your jet ski, it will be repossessed and sold at market value.  The money made on the jet ski goes to the creditor, and whatever you still owe on the jet ski will be discharged through bankruptcy relief.

However, you can also sign a reaffirmation agreement if you wish to keep the jet ski as well.  But before signing any new agreement you may want to seek a bankruptcy attorney to go over the terms of the new contract or to inquire whether a reaffirmation agreement would be a practical option.

Trezza & Associates — Tucson Bankruptcy

- Richard V. Stokan, Jr.

Using the above example, redemption essentially allows you to make a lump sum payment of $3,600 to pay for your creditor’s secured debt.  By paying for the creditor’s secured debt, the creditor must release its lien on your motorcycle and you will be discharged from your personal obligation to pay for the remaining $3,400 of the total debt.

Before going forward with this option, you must remember that the redemption option is only available for the purchase of goods, such as motor vehicles, appliances, or furniture.  Second, redemption requires that you pay for the secured debt in one lump sum, which may possibly be a lot more than you can afford to pay.  However, redemption may be a sensible option if you have the money to pay for the current market value of the collateral in one lump sum because you can keep your personal property at a lower value than you originally purchased it for.  In any case, make sure to seek the advice of competent bankruptcy lawyer to check if redemption is the right thing for you.

Stephen Trezza — Bankruptcy Lawyer

In any case, a debt collector may not engage in any conduct which is meant to harass, oppress, or abuse any person in connection with the collection of a debt. So if your debt collector engages in the use or threat of violence, the use of obscene language, or calls you repeatedly with the intent to annoy, harass, or intimidate you, then you may have a case of harassment against your debt collector.  If it’s a serious case, you may want to consult or retain an attorney.

Trezza & Associates –  Bankruptcy

That means that the agent who is repossessing the unpaid vehicle cannot take forcible action against you to get a hold of the vehicle. For example, they cannot forcibly remove you from the vehicle or stop you on the street or highway while you are driving.  In other words, the “repo” agent must not act like a law enforcement officer or claim to be an officer of the law.

You are also protected from any form of trespass, which means that they cannot enter your home without your permission or break into your house.  Above all, repo agents must remain peaceful at all times, meaning that they cannot create a disturbance such as a fight or threaten you with any violent actions, physical or verbal.  In any case, if you have been victimized by a repossession agent or have experienced any of the actions above, you should immediately report the incident to law enforcement authorities and seek an attorney.

Stephen Trezza–Tucson Bankruptcy Lawyer

First, you must prove that you cannot maintain a “minimal standard of living” for yourself, as well as your dependents, if you were obligated to repay your student debt. You should note that the minimal standard of living varies from state to state. Second, you must prove that you will not likely maintain a minimal standard of living over the course of the repayment plan. Last, you must prove that you have made good faith efforts to repay the loans. This means that you have made constant attempts to find employment or even minimize your living expenses.

In these harsh economic situations, there will undoubtedly be a lot of people who will not be able to maintain a minimal standard of living. For this reason, if more and more people wish to discharge their student loans, the standard on “undue hardship” might become more restrictive. In any case, if you feel that you are in fact in a grim financial situation you may want to consult an experienced bankruptcy attorney to further assist you.

Stephen Trezza–Tucson Bankruptcy Attorney

Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the 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). Michigan, where we practice, is part of the Sixth Circuit, which applies this test.  However, not all federal circuits use Brunner; some courts may actually be more flexible.  Because the standard for discharging student loans can be different in different parts of the country, you should talk to an experienced bankruptcy attorney in your jurisdiction if you are considering bankruptcy and hope to discharge a student loan debt.

The difficulty of discharging student loan debt in the Sixth Circuit is underscored by this recent opinion. In this case, after filing a voluntary Chapter 7 petition, the debtor initiated an adversary proceeding, seeking discharge of her student loans.  The creditors who held the student loans vigorously opposed the adversary proceeding.  The adversary proceeding went to trial – complete with witnesses and exhibits – and the debtor lost.

In finding that this particular debtor did not satisfy the Brunner test, the court engaged in a detailed analysis of the debtor’s financial situation and job prospects.  This included a review of (1) child support payments that the debtor, a single mother of four, was receiving,  (2)  tax refunds the debtor had received since 2004, which were between $3,200 and $4,400 per year, and (3) unemployment and food stamp benefits she was receiving from the government.  The court also that, until recently, the debtor had lived in “Section 8” federally subsidized housing.  The court further mentioned that the debtor apparently spent $100 per month on internet and cable access as well as $50 per month on a gym membership.  Additionally, the court questioned whether the debtor was trying hard enough to save money on food, as her credit card statements indicated that she ate out too frequently in the court’s view (even though the debtor testified that she usually ordered from the “value menu” at various fast foot establishments).  The court even went as far as to point out that the debtor had apparently spent $120.00 in the past year at a casino:  “Even accepting the relatively small amount of the gambling expenditures, the fact of such expenditures undercuts [the debtor's claim] that she has minimized extraneous expenses.”

With respect to the debtor’s job prospects, the court essentially saw no unusual circumstances – apart from Michigan’s economy as a whole – which would prevent her from finding work in her degree field.  The debtor must show a “certainty of hopelessness” that their financial situation would improve.  The court in this case rejected the argument “generalized economic turmoil may serve as a substitute for a more case-specific evaluation of a student loan debtor’s future prospects.”  Finally, the court found that the debtor had not made a good faith effort to repay her student loans because she had failed to take advantage of various loan restructuring plans which were available to her.

This recent opinion confirms that, at least in the Sixth Circuit, a debtor will not be able to discharge student loans if they have even a possibility of improving their financial situation.  In this case, the debtor was a single mother of four who had not been employed since September 2008.  However, the court essentially found that because she was healthy and apparently employable, her outlook was not sufficiently bleak to pass the Brunner test.

-Drew Broaddus

All is not lost if you fall into one of these exceptions.  You can still exempt these contributions under the wildcard exemption if sufficient amount is available.  Lesson learned – when contemplating bankruptcy contact a bankruptcy attorney before making any financial decisions.

Steven Striffler
Attorney At Law
21 McGrath Hwy, Suite 301
Quincy, MA 02169
617-290-1573
www.strifflerlaw.com

Practice is Focused on Bankruptcy & Construction Law

Pay Yourself First has an even greater effect on debt and wealth.  Simply put, Pay Yourself First means just that.  Make sure you pay yourself a reasonable salary, save for retirement and look out for Number One before paying others such as employees, creditors, vendors, etc.  Otherwise, you might never get around to paying yourself. 

Don’t believe me?  When was the last time you actually set aside money for your retirement or a “rainy day fund” before going shopping for groceries or filling up the gas tank or eating out.  If you can remember when, this blog isn’t for you.  But, if you’re like most people, the idea of setting aside precious money before you spend it on what most would consider required bills and other necessary expenses, you know what I mean. 

So, here is what I started doing in recent months.  Instead of worrying about how I was going to pay the bills (business and personal), I immediately maxed out my 401(k) contributions as well as a new health savings account (HSA).  These were easy ways to begin paying myself first and now it is done automatically with recurring contributions direct from my business accounts.  The best part is that I don’t even see the money but I know it’s there.  Between my 401(k) and the HSA, I’m setting aside roughly 20% of my pre-tax income leaving just 80% for everything else.  Before I did this, I can assure you that I was spending 100% of my after-tax income with nothing to show for it.

In addition to setting aside money in a 401(k) or HSA, you might also want to consider paying yourself first through contributions to your kids’ prepaid college tuition or 529 Plans, life insurance premiums, etc.  I already paid off my kids’ Florida Prepaid College Accounts and have yet to start 529 plans for them but that is on my list of things to do. 

By funding these accounts, I have assured myself that I will not play second fiddle to any other expenses.  Applying “Pay Yourself First” to debt is a huge but simple concept.  For many people, the question of saving for retirement (Pay Yourself First) or paying back debt (Pay Yourself Later or Never) really doesn’t come up.  The middle class has been brainwashed to believe that you must first pay your creditors with every last penny and then and only then should you think about your own wellbeing and retirement.  That is insane because that day never comes, does it?  Creditors want you to pay your debt back first even if you are left eating ramen noodles during your retirement years.  That’s the problem.  Not the noodles.  They taste just fine.  But, heading into retirement debt free and with no savings is not the solution.  The older you are the more important this lesson is.

Plus, another amazing thing happened as I started implementing these changes.  I found that not only was I able to start saving for retirement but I also had more money to pay down debt.  You may remember that I had roughly $25,000 in unsecured debt.  Today, I owe just $9,500 and most of that is to the IRS and my divorce attorney.  It’s strange but by focusing on myself and ways to cut out the fat in my law firm I was able to free up money to pay down debt faster than I thought I would or could.  As a result, I expect to have all of my unsecured debt paid off in the next few months and still eat more than ramen noodles.  Remember, I have a thing for Banana’s Foster.

Yes, my annual income is larger than most and my personal “nut” (i.e., monthly expenses) is relatively low due to having no car payments, for example.  I proudly drive a 2002 Lexus ES300.  It has more than 145,000 miles and runs great.  Potential clients ask me why I don’t drive a new, more expensive car but they miss the point.  Having the freedom to buy a new car if I want is more important to me than actually having the new car.  What you do with the money you have is far more important.  By paying myself first, everything I do from saving for retirement to paying down debt becomes second nature.  For me, it’s coming at a faster pace and that makes me want to keep the momentum going.

I haven’t even mentioned my mortgage debt.  I will save that for next week’s blog.  As most people know, housing expenses typically make up the largest chunk of a household budget.  Some say it should be no more than 31% of your gross income.  I would disagree.  That is too much, especially if your house is underwater and no longer your biggest asset.  More on that next week.

For now, here is my latest status report:  [220 lbs, -$9,500, 8]. I’m in a better mood because my new employee actually showed up to work today.  You know what they say—half of life is just showing up.  I’m glad she did.  So far, so good.

Until next time, Pay Yourself First or, as I tell potential clients:  Repay less.  Live again.