Law Offices Of Kenrick Young

The 11 U.S.C. § 707(b) Means Test Simplified

Kenrick Young — Sun, 26 Apr 2009 03:41:00 GMT

Here is a graphical way to see if you qualify for relief under Chapter 7 of the Bankruptcy Code. In summary, if you make more money than the median income in a given locality (but not too much money) then you might still be eligible to file for Chapter 7 bankruptcy if you pass the "means test." The means test is incredibly complicated for the average debtor. If there is any chance that you might need to undergo the means test analysis, it is highly recommended that you consult an attorney. Nonetheless, here is an illustration of how the § 707(b) means test works.

IN THE MATTER OF WARDROBE (9TH CIR. 2009) AND STRICT CONSTRUCTION OF RELIEF FROM STAY ORDERS

Kenrick Young — Thu, 16 Apr 2009 19:40:00 GMT

State-court civil litigation usually involve a breach of some sort of contract (lease, oral agreement, etc.). Then creditors start adding other causes of action (such as fraud, negligence, breach of some duty) to further increase the damages or bullet-proof the complaint from early dismissal. If the defendant files bankruptcy at any point in time prior to entry of judgment, the issue of what happens to the state court case is often litigated in bankruptcy court.

The automatic stay provides that all acts against the debtor that "was or could have been commenced" before the bankruptcy are stayed. 11 U.S.C. 362(a). The main idea is that any claim you had before should now be dealt with inside the context of bankruptcy. However, 11 U.S.C. 362(d) allows for a creditor to seek relief from stay for "cause." Some common examples of "cause" include relief from stay to allow a creditor to continue foreclosure proceedings, to allow a creditor to liquidate a claim and seek recovery from insurance, or to prevent some other risk to the creditor.

The Ninth Circuit recently held that any order granting relief from stay cannot extend to unforeseen causes of action that could be alleged against a debtor. In the matter of Wardrobe, (9th Cir. 2009). In Wardrobe, the bankruptcy court issued an order lifting stay "so that the Creditor may seek to compel the debtor, John Wardrobe, to participate in this trial as a witness and obtain judgment" against a bonding company. The state court case (although temporarily stayed) now proceeded. After the bankruptcy court issued the order, the creditor amended the state court complaint to allege intentional fraud. The creditor obtained default judgment in state court against the debtor and then argued that the elements for 11 U.S.C. 523(a)(2)(A) (nondischargeable claim for fraud) were already established. The debtor argued that the creditor was never authorized by the relief from stay order to obtain a judgment against the debtor for fraud from the state court. The Ninth Circuit Bankruptcy Appellate Panel agreed. The Ninth Circuit affirmed the BAP, but for a different reason.

The Ninth Circuit held that since the creditor never asked the bankruptcy court for permission to seek a judgment for fraud against the debtor, the bankruptcy court's order granting relief from stay could not extend to the fraud cause of action. The state court amendment and the judgment for fraud was in effect void. The Ninth Circuit held that the creditor would have to persuade the bankruptcy court in a separate trial whether or not she could establish the elements of fraud.

The long and the short is that orders granting relief from stay are strictly construed. If there is any doubt that an order for relief from stay covers a particular cause of action and you don't want to end up litigating the same matter twice, it is better to seek clarification from the bankruptcy court as to the scope of an order for relief from stay.

IN THE MATTER OF CATHY COLEMAN (9TH CIR. 2009) AND DEALING WITH STUDENT LOAN DEBT IN BANKRUPTCY

Kenrick Young — Thu, 16 Apr 2009 06:28:00 GMT

In 2006, the average graduating undergraduate owed $19,000, but it was not uncommon for many graduates to have debt exceeding $40,000. The original 1978 Bankruptcy Code provided that student loans could be discharged either if five years had passed from the time payment was first due or if the debtor provided for repayment during a 3-to-5 year Chapter 13 plan. The rationale was that while students might not be able to repay their loans immediately after graduation, they would likely be able to do so in a few years.

Under the recent variation of the Bankruptcy Code, student loan debt is permanently nondischargeable. 11 U.S.C. 523(a)(8). Even the post-petition interest on student loans are nondischargeable. Bruning, 376 U.S. 358 (1964); Pardee, 193 F.3d 1083 (9th Cir. 1999). It doesn't matter if the debtor files under Chapter 7 or Chapter 13. The only exception is to persuade the Bankruptcy Court that the debtor satisfies the Brunner test for "undue hardship." Many have characterized the "undue hardship" test itself as an "undue hardship." Briefly, the debtor must prove that “(1) that she cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment portion of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.” See Pena, 155 F.3d 1108 (9th Cir. 1998) (adopted the Brunner test in the 9th Cir.); In re Saxman, 325 F.3d 1168, 1172 (9th Cir. 2003).

Further, the debtor pretty much had to try to prove this difficult test without the benefit of an attorney since (1) if the debtor filed Chapter 7, the debtor probably couldn't afford an up-front payment for undue hardship litigation and (2) if the debtor filed Chapter 13, the debtor would be forced to commit all their disposable income to a Chapter 13 plan.

However, the Ninth Circuit case law has broadened the options for debtors with truly burdensome student loans. First, the Ninth Circuit Bankruptcy Appellate Panel recognized a partial discharge of student loans. In particular, so long as debtors have shown that their future income and expenses will not permit them to pay their entire student loan debt without undue hardship then the finding that a debtor's earning capacity will improve in the future will not bar a partial discharge. Carnduff, (9th Cir. BAP 2007).

Recently, the Ninth Circuit held in In the matter of Cathy Coleman (9th Cir. 2009) that it is acceptable to (1) pay a debtor's attorney for undue hardship litigation through a Chapter 13 plan and (2) litigate the issue of dischargeability of a student loan at the beginning of a Chapter 13 plan (even though the actual discharge doesn't occur until the end of the plan). In brief, a student loan debtor with a true hardship situation does not have to endure committing five years of their disposable income to a Chapter 13 plan just to find out that they don't qualify for an undue hardship discharge. A prudent lawyer could now include the cost of the undue hardship litigation in the Chapter 13 plan and obtain an early decision on whether student loan debt was dischargeable. The Ninth Circuit suggested in dicta that if the debtor won, it may be possible to convert to Chapter 7 (if the debtor qualifies for such relief) and obtain an immediate discharge. On the other hand, the Ninth Circuit suggested in dicta that if debtor lost, the Chapter 13 plan could be crafted to make greater payments to the nondischargeable student loan debt.

Welcome

Kenrick Young — Wed, 15 Apr 2009 05:33:31 GMT

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