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Nebraska is the 16th biggest state in the USA, but we rank 43rd in population density.  In fact, Nebraska has more cows than people by a ratio of 3 to 1.

Bankruptcy is a specialized area of laws these days, especially after enactment of the Bankruptcy Reform Act of 2005.  Attorneys in sparsely populated areas of the state generally do not handle bankruptcy cases, so our firm is routinely hired by clients throughout our big state.  (This is actually a wonderful aspect of practicing bankruptcy law since we get to know folks in every square inch of the state and learn about their communities.)

One challenge we face in a state that stretches 430 miles across is getting documents signed and returned in a timely fashion.  This is especially critical in bankruptcy cases since we must provide the court with a precise “snapshot” of a debtor’s financial situation on the day the case is filed.  Bank account balances change daily, average income calculations change monthly, and the list of debts owed changes constantly.

Like an astronomer looking at a distant galaxy through a telescope, we report of a scene that no longer exists.

Preparing bankruptcy petitions is like laying a foundation on moving soil or taking a vivid 35 mm snapshot of a speeding race car when the nearest camera is 3 days away.  It is hard to provide an accurate snapshot when the information is constantly in motion.  Like an astronomer looking at a distant galaxy through a telescope, we report of a scene that no longer exists.

The challenge is to get a list of debts, income and property signed and filed with the court before the information becomes outdated.  Bank account balances can vary by thousands of dollars in a matter of days and debtors may be penalized for providing the court with inaccurate information.  Receiving documents mailed to clients for signature may take up to two weeks.

Many clients do not have ready access to fax machines as that technology seems to be fading away.  To compound the problem, debtors demand their cases to be filed immediately to stop ongoing garnishments and foreclosure.  “Move fast!”, says the client.  “Be accurate!”, says the court.  It’s a tricky balance.

Once solution to this time/distance problem is to obtain electronic signatures.  Companies that offer digital signature services, such as DocuSign, allow attorneys to obtain virtually instantaneous signatures of any document.

Digital signatures are electronic signatures that are encrypted by computer technology, and encryption process protects the document from alteration.  A document that is signed digitally provides an assurance that it was signed by the sender and receiver without alteration.  Parties to a digitally signed document typically receive an executed copy of the document instantly.  A digital signature is similar to a notarized document or a document embossed with a seal to ensure authenticity.

Digital signatures have been authorized in the United States by the Electronic Signature in Global and International Commerce Act of 2000, (ESGICA). 11 U.S.C. 7001.  The Nebraska Digital Signatures Act was enacted in 1998.  In short, these laws give digital signatures the same legal effect as a penned ink signature on paper (sometimes called “wet” signatures).

MAY A DEBTOR DIGIGALLY SIGN A BANKRUPTCY PLEADING?

Federal Rule of Bankruptcy Procedure 9011 governs signatures on bankruptcy documents.  The Nebraska bankruptcy court has a local rule 9011-1 regarding signatures as well:

  1. Petitions, lists, schedules and statements, amendments, pleadings, affidavits, and other documents which must contain original signatures or which require verification under Fed. R. Bankr. P. 1008 or an unsworn declaration as provided in 28 U.S.C. § 1746, shall be filed electronically and may include, in lieu of the actual signature, the signature form described in subsection C.
  2. The attorney of record or the party originating the document shall maintain the original signed document for all bankruptcy cases at least one year after the case is closed. In adversary proceedings, the parties shall maintain the original document until after the case ends and all time periods for appeals have expired. Upon request, the original document must be provided to other parties or the Court for review (Fed. R. Bankr. P. 9011 applies).

May a digital signature qualify as an “original signature” under Nebraska Local Rule 9011-1?  May a bankruptcy petition be digitally signed in Nebraska?

Some bankruptcy courts appear to require “wet-ink” signatures on bankruptcy pleadings, including the Southern District of Indiana, the Northern District of Oklahoma, and the District of Maine.  However, even in in these districts it is not perfectly clear that the courts require “wet-ink” signatures on paper or if the courts are merely speaking to the requirement that bankruptcy attorneys retain originally signed documents, whether in ink or digital format, for a period of years.  Courts seem to use the term “wet” signatures to mean “original signatures” while overlooking the fact that digital signatures may also be used original signatures as well, thus causing confusion.

The Nebraska local rule 9011-1 does not use the term “wet” or “wet-ink” in reference to signatures, nor does Federal Rule 9011.  So, in the absence of local rule explicitly requiring wet ink signatures on paper, it would appear that digital signatures do qualify as original signatures in Nebraska bankruptcy cases since both federal and state law validate digital signatures.  However, a prudent attorney will seek out clarification on this topic from the court before utilizing digital signatures in bankruptcy pleadings.

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BANKRUPCY COURTS SHOULD ALLOW AND PREFER DIGITAL SIGNATURES TO WET INK SIGNATURES ON PAPER

There are several reasons why bankruptcy courts should encourage the use of digital signatures:

  • Documents signed digitally cannot be altered.  Each page of the digital document is encrypted and stamped electronically.  If altered, such a document will display an error code to warn that unauthorized changes were made to the document.
  • Every page of the document is verified.  Unlike wet ink signatures on paper, it is not possible to attach altered pages to the signature page.  A wet ink signature on paper may be attached to 60 or more pages of bankruptcy pleadings, and there is no guarantee that the attached paperwork has not been changed.
  • Digitally signed documents are instantly sent to all parties who signed.  If the document is altered each party has evidence of the alteration.
  • Allowing digital signatures encourages attorneys to improve the accuracy of bankruptcy documents since signatures may be obtained instantaneously if errors are discovered.
  • Debtors get immediate full copies of what they signed.  This makes it difficult for them to claim ignorance of what they signed.

In short, allowing digital signatures improves the integrity of court documents. It supplies debtors with full copies of what they signed immediately.  It encourages attorneys to make last minute corrections and improvements to the documents.  Digital signatures essentially provide something similar to a document where every page has been signed and notarized.

Selfishly I confess that digital signatures would be more convenient to use in our practice, but it is clear that they offer a superior level of transparency as well.  The notion that wet ink signatures are more trustworthy is simply not supported by the facts.  Hopefully Nebraska can adopt a local rule confirming the propriety of using digital signatures on bankruptcy pleadings.

Image courtesy of Flickr and Leszek Leszczynski

A few weeks ago I wrote an article to warn plaintiff attorneys to be careful to ensure that their clients who have previously filed bankruptcy to ensure that all claims they have against third parties are reported on the bankruptcy schedules.  (Plaintiff’s Attorneys Beware: Your Client’s Bankruptcy Case is About to Sock You Right Between the Eyes)  Well,  . . .  it just happened to a lady in Minnesota. (See Cover v J.C. Penny Corporation, Civ No 15-515, District of Minnesota).

The significant aspect of this case is that the debtor, April Cover, failed to report a discrimination claim on her bankruptcy schedules but she did verbally tell the bankruptcy trustee about the claim.

Not good enough says the Minnesota court.  Actual verbal notice of a claim is not enough.  Audio recordings of the court meeting between the trustee and the debtor disclose that the discrimination claim was reported to the trustee.  There is no question that the debtor disclosed her claim, but without formally amending the bankruptcy schedules a debtor is legally barred from pursuing recovery in subsequent litigation.

The only locations where Cover disclosed her EEOC claim—the audio file of the creditors’ meeting and communications between the trustee and her counsel— are unavailable to creditors. Hence, despite her later, oral disclosure, Cover failed to adequately amend her Petition, and she also failed to keep the trustee apprised of the status of her EEOC charge, or the existence of this action. In the Court’s view, Cover’s positions are clearly inconsistent.”

Given the court’s opinion, actual written notice to the trustee is also probably insufficient to protect a debtor from judicial estoppel in subsequent litigation.  It is not enough to send the trustee a letter to report claims not originally report or new claims occurring during the bankruptcy.  The Minnesota court declares that only formal amendments to the bankruptcy schedules are sufficient to protect a debtor’s claim.

This issue becomes confusing because the trustee, when informed of the claim, probably determined that the claim was exempt from creditor or trustee claims under Minnesota law.  However, even when a trustee is informed of the claim against a third party and elects not to claim it because of exemption laws, the claim must be formally reported on amended schedules to be preserved.

Plaintiff attorneys need to ask the following questions:

  • Has their client filed bankruptcy in the past?
  • Did the injury occur before, during or after the bankruptcy case?
  • If a claim occurred before or during the bankruptcy were the bankruptcy schedules amended?
  • Did the Chapter 7 trustee release his or her claim against the injury claim?
  • Was the PACER computer system checked to see if the client has filed bankruptcy?
  • Have you obtained a full copy of the bankruptcy schedules?
  • Is it too late to amend the bankruptcy schedules to report a missing claim?
  • Was the notice of the claim sufficiently detailed to put the trustee and creditors on notice?

I encourage Nebraska attorneys to contact this office if they have concerns about their client’s bankruptcy case.

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As a general rule, you are not responsible for the debts of your spouse. Also, if you marry someone you do not become obligated to pay the debts they incurred prior to the marriage.

But there is one major exception to these rules. You are liable for medical debts of your spouse under a legal theory called the Doctrine of Necessities. The necessities rule is not limited to medical bills. It could apply to utilities, rent, food, clothing and any other necessities, but the most common lawsuit utilizing this legal concept is in the collection of medical debts.

In Nebraska, when you marry someone you also marry their future medical debts.

If your spouse incurs medical debts during the marriage, you are liable for the debt.  Even if the bills only come in the name of your spouse.  Even if you did not sign for the debts.  Even if you did not authorize the treatment. Even if you are separated.  In Nebraska, when you marry someone you also marry their future medical debts.

This doctrine has been accepted in Nebraska courts.

At the common law the husband was liable for the expenses of the last sickness of his wife and for her proper burial as for necessaries furnished the family and . . . he continues to be so primarily liable. Therefore, unless the Legislature has, by statute, expressly relieved him thereof he continues to be so liable.

In re White’s Estate, 150 Neb. 167 (Neb. 1948). Nebraska, like most states, follows the old English common law and husbands are liable for the necessary good and services provided to his family.

But what about wives? Are they liable for their husband’s debts?  

Yes, wives are responsible for the medical debts of their husbands incurred during the marriage.

Nebraska Statute 42-201 provides the rule:

The property, real and personal, which any woman in the state may own at the time of her marriage, rents, issues, profits or proceeds thereof and real, personal or mixed property which shall come to her by descent, devise or the gift of any person except her husband or which she shall acquire by purchase or otherwise shall remain her sole and separate property, notwithstanding her marriage, and shall not be subject to disposal by her husband or liable for his debts; Provided, all property of a married woman, except ninety percent of her wages, not exempt by statute from sale on execution or attachment, regardless of when or how said property has been or may hereafter be acquired, shall be liable for the payment of all debts contracted for necessaries furnished the family of said married woman after execution against the husband for such indebtedness has been returned unsatisfied for want of goods and chattels, lands and tenements whereon to levy and make the same.

The Nebraska statute basically imposes the common law doctrine of necessaries on wives, although it is not a perfect match.

There are differences between the duties and obligations imposed on the husband under the common law as opposed to the duty imposed by Nebraska Statute 42-201. Does that make a difference?

IS THE DOCTRINE OF NECESSITIES CONSTITUTIONAL?

At least two states have declared the Doctrine of Necessities unconstitutional.

In the case of Emmanuel v Mcgriff, the Supreme Court of Alabama struct down the doctrine of necessities as being a violation of the Equal Protection Clause of the US Constitution.

The Supreme Court of Virginia has also struck down the necessities doctrine as a violation of equal protection in the case of Schilling v Bedford City Memorial Hospital.  In that case the court made the following observation:

The [U.S. Supreme] Court has numerous times stated that such a gender-based classification cannot be justified on the basis of “archaic and overbroad” generalizations, “old notions,” and “role typing” which conclude that the wife plays a dependent role, while it is the husband’s primary responsibility to provide for the family. Orr, 440 U.S. at 279-80, 99 S.Ct. at 1111-12; Califano, 430 U.S. at 207, 97 S.Ct. at 1027. “No longer is the female destined solely for the home and the rearing of the family, and only the male for the marketplace and the world of ideas.” Orr, 440 U.S. at 280, 99 S.Ct. at 1112, quoting Stanton v. Stanton, 421 U.S. 7, 14-15, 95 S.Ct. 1373, 1377-1378, 43 L.Ed.2d 688 (1975).

It is apparent the necessaries doctrine has its roots in the same, now outdated, assumptions as to the proper role of males and females in our society. It therefore creates a gender-based classification not substantially related to serving important governmental interests and is unconstitutional.

HARM CAUSED BY DOCTRINE OF NECESSITIES

The original purpose of the necessities doctrine was to help support wives and children by ensuring greater access to medical treatment and other necessities of life.  However, in modern times the doctrine is causing some horrible problems and inequities.

Married couples are sometimes divorcing for the sole reason of protecting a spouse from unbearable medical expenses.  Nicholas Kristof of the New York Times writes a heart-breaking story (Until Medical Bills Do Us Part) of elderly friends who were faced with filing divorce over medical bills.

Does it seem fair that married couples are burdened with each other’s medical debts but unmarried couples do not?  That hardly seems just.

What began as a legal doctrine to provide access to necessities has now become an incentive to terminate or avoid marriage.

Is it time to eliminate an outdated, archaic and potentially harmful necessaries doctrine?

Image courtesy of Flickr and Robert Kintner

Bomb

The more I think about the disastrous  consequences of two recent 8th Circuit Court of Appeals decisions regarding Judicial Estoppel the more alarmed I become.

This is a time bomb waiting to go off.  The 8th Circuit has ruled that debtors who fail to amend bankruptcy schedules to report claims against third parties that occur after the bankruptcy case was filed will not be able to recover damages in their future litigation.

Following the entry of a bankruptcy discharge, litigation related to unreported post-petition claims shall be subject to Summary Judgment dismissal under the legal theory of Judicial Estoppel.

Judicial estoppel is an equitable doctrine which “prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001).

The 8th Circuit has ruled that a debtor’s failure to report new claims arising after the bankruptcy case was filed is basically a statement that no such claim exists, and if a debtor is saying that no such claim exists in one legal proceeding (i.e., the bankruptcy case) then it is inconsistent to say one exists in a future case.

The court’s reasoning is deeply flawed.  There is no provision in the Bankruptcy Code requiring debtors to report new claims that occur after a bankruptcy is filed.  And not reporting such a claim is clearly not the same thing as making an affirmative statement that no such claim exists.  Silence is not a statement. Nevertheless, the 8th Circuit has taken a punitive approach and the failure to report new causes of action will be fatal to recovering a settlement in future legal proceedings.

This is a significant ruling.  There will be tragic consequences.  Uninformed debtors will be denied rightful recoveries and their attorneys are going to be sued.

Imagine the case of a Chapter 13 debtor who is seriously injured in an auto accident 6 months before the end of a 5-year bankruptcy plan.  Assume the bankruptcy attorney never learned of the accident and the debtor never knew of the requirement to report such claims.  Imagine a year or two after the bankruptcy is completed and the debtor’s injury attorney receives a Summary Judgment motion since the bankruptcy schedules were never amended.  This is the type of disaster that now awaits plaintiff attorneys who fail to verify if their client was in a bankruptcy case.

Can you smell the legal malpractice case?  Who gets sued?  The Plaintiff attorney?  Absolutely.  The bankruptcy attorney?  Very likely if they had any knowledge or should have known of the claim.

HOW CAN PLAINTIFF’S ATTORNEYS PEVENT THIS DISASTER?

There is a simple procedure plaintiff’s attorneys can utilize to avoid this nightmare:  Check the PACER computer system to verify if their client has filed bankruptcy, and check the system again before the lawsuit is filed. Update your quality checklist to verify whether a bankruptcy is filed.

My experience is that plaintiff’s attorneys are generally annoyed when a bankruptcy attorney contacts them about the need to report their case to the bankruptcy court.  They are fearful that they may somehow lose control of their case or that the bankruptcy court will interfere with the process.  The opposite is true.  Reporting the claim will preserve the right to proceed with the case and will protect them summary judgment motions.

WHAT BANKRUPTCY ATTORNEYS NEED TO DO TO PREVENT UNREPORTED CLAIMS.

My office is instituting the following procedures to protect our clients from losing recovery for new injuries suffering during the bankruptcy case:

  • We have updated our information disclosure forms to warn clients of the vital need to report new claims against third parties throughout the term of their bankruptcy case.
  • We are contacting all existing clients to warn of this danger.
  • We are sending out regular correspondence to clients to remind them to report new claims.
  • We will conduct an exit interview when cases are about to close to discover unreported claims.

Although there are some debtors who intentionally fail to report new claims because they fear they would have to pay the settlement over to the bankruptcy court, that is not the typical case.  The 8th Circuit’s decision to punish dishonest debtors will unfortunately be imposed on innocent debtors and plaintiff attorneys who are simply unaware of the duty to amend bankruptcy schedules.

Chapter 13 cases fade into the background of life once the payment plan is approved. It’s just another payment in our list of monthly bills.  Contact between debtors and their bankruptcy attorney commonly disappears once the payment plan is approved. Life resumes, and when bad things happen–like car accidents or work injuries–clients contact other attorneys to represent them in those matters. The need to report these new claims to a bankruptcy attorney they have not spoken to in 4 years is not obvious. This is what the 8th Circuit is not understanding. The failure to report new claims is generally not intentional. Why do I have to call my bankruptcy attorney when I get in a car accident? There is no obvious connection between the two events.

The rules have changed.  Beware.

Image courtesy of Flickr and Andrew Kuznetsov

Bird on Fence

In two recent cases the 8th Circuit Court of Appeals has sustained summary judgments against debtors who failed to report claims against third parties that arose after the bankruptcy case was filed.

In the case of Jones v. Bob Evans Farms Inc., the debtor failed to disclose an employment discrimination claim that occurred 3 years after the bankruptcy case was filed.  The bankruptcy case was filed in 2009 and in 2012 the debtor quit his job and filed a discrimination case with the Missouri Equal Opportunity Commission.  The employer filed a motion for Summary Judgment claiming that the debtor was judicially estopped from pursuing his claim because he failed to report the claim in his bankruptcy schedules.

The 8th Circuit court agreed with the employer and declared that a debtor who intentionally hides a post-petition claim by failing to amend the bankruptcy schedules lacks standing to assert such claims in future legal proceedings and is thereby judicially estopped from litigating such claims.

A month later the 8th Circuit issued another opinion on this same topic in the case of Van Horn v. Martin where a debtor filed Chapter 13 bankruptcy in 2007 but failed to amend schedules to report an employment discrimination claim that occurred in 2011.  After the debtor completed the chapter 13 case the employer was awarded a Summary Judgment because the debtor failed to report the new claim, and the 8th Circuit court sustained the summary judgment.

Judicial estoppel is an equitable doctrine which “prevents a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding.” New Hampshire v. Maine, 532 U.S. 742, 749 (2001).

The 8th Circuit applied a three-prong test to determine when judicial estoppel applies.

  1. A party’s later position must be clearly inconsistent with its prior position.  By not amending bankruptcy schedules to report a new claim the 8th Circuit declares that no such claim must exist, and that is a position deemed to be clearly inconsistent with the later litigation.
  2. Whether the party succeeded in persuading the first court to accept its position. Receiving a discharge in a chapter 13 case where new new claims are not disclosed is considered to cause the first court to accept the position that no claim truly exists.
  3. Whether the party seeking to assert an inconsistent position would derive an unfair advantage if not estopped.  Failure to disclose new claims arising during a chapter 13 gives the debtor an unfair advantage in that creditors may have benefited from increased payments derived from settlement of those claims.

The concept of Judicial Estoppel is widely understood by attorneys to require the disclosure of claims that exist prior to the filing of bankruptcy in both chapter 7 and chapter 13 proceedings, but many were surprised that the doctrine was extended to new claims arising after the bankruptcy was filed.

Attorneys for the debtors pointed out that the “bankruptcy estate” is not compromised of post-petition claims.  They claimed that there is no legal duty under the Bankruptcy Code to disclose post-petition claims.  However, the 8th Circuit responded that judicial estoppel may apply “regardless of whether he had independent legal duty to amend schedules.”

As a practical matter, these rulings will have a profound impact on debtors and their attorneys. First, many debtors are simply not aware of the requirement to report new claims to their bankruptcy attorneys.  Debtors are inundated with information at the beginning of a case and it is unreasonable to expect them to remember such fine legal details during a five year case. Also, once a chapter 13 payment plan is approved the case really just fades into the background of their life.  Payments are made the the court monthly, often through a payroll deduction, but there really is no ongoing contact with the court or their attorneys in many cases.

The 8th Circuit takes a drastic and dark view of debtors who fail to amend schedules to report new claims, but this omission is more common and innocent than the court understands.  I frequently learn of new claims that arise from clients who have no idea that such claims should be reported. Usually we learn of these claims when a debtor defaults on plan payments and responds that they were off work due to a car accident or job injury.

Very commonly I discover debtors who are in the middle of new lawsuits for worker compensation claims or auto accidents, and their personal injury attorney has no clue of the need to report the claim to the bankruptcy court. Contrary to the 8th Circuit’s concern over dishonest debtors who hide claims with the intent of misleading the bankruptcy court of their ability to pay debts, most debtors and their injury attorneys are completely clueless of the need to amend bankruptcy schedules to report new claims.  These rulings will cause a lot of unexpected grief when debtors realize they have lost their right to recover just compensation for injuries.

Bankruptcy attorneys will need to communicate with Chapter 13 debtors on an ongoing basis to ensure that new claims are reported.  I can envision scores of malpractice lawsuits being filed against attorneys who fail to report new claims. This is going to be a mess.

Image courtesy of Flickr and The U.S. National Archives

My family has a Health Savings Account (HSA) so we can pay for out-of-pocket medical expenses not covered by insurance, although it would be more accurate to call it a health Spending account since we never seem to save much in that account.

The basic idea of an HSA is to give consumers a tax benefit to purchase a high-deductible health insurance plan. Such plans do not cover any medical expenses until the high deductible amount is reached and this is supposed to make consumers more leery of rushing to the doctor to treat minor problems.

Money deposited into a HSA grows tax-free and can be withdrawn tax-free for qualified medical expenses. Individuals may invest up to $3,350 and families may invest $6,750 into an HSA each year.

If the family stays healthy and contributions are made automatically, it is possible to save up a decent pile of money in an HSA.

ARE HEALTH SAVINGS ACCOUNTS PROTECTED IN NEBRASKA BANKRUPTCY CASES?

Unfortunately, there are no court rulings on this topic yet.  However, there are some good arguments to make that the funds should be protected.

Nebraska Statute 25-1563.01 provides the following protection:

In bankruptcy and in the collection of a money judgment, the following benefits shall be exempt from attachment, garnishment, or other legal or equitable process and from all claims of creditors: To the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service unless:

(1) Within two years prior to bankruptcy or to entry against the individual of a money judgment which thereafter becomes final, such plan or contract was established or was amended to increase contributions by or under the auspices of the individual or of an insider that employed the individual at the time the individual’s rights under such plan or contract arose; or

(2) Such plan or contract does not qualify under section 401(a), 403(a), 403(b), 408, or 408A of the Internal Revenue Code.

Clearly the funds in an HSA are payable on account of illness, so it would seem that the funds should be protected.

How about the 2nd condition that the plan qualify under the Internal Revenue Code sections 401(a), 403(a), 408 or 408A?

The tax qualification of Health Savings Accounts are created in Internal Revenue Code Section 223, but that code section references IRC 408.  Is referring to Section 408 enough to meet the requirement of this protection?  It is impossible to say, but as a general rule exemption laws are to be interpreted liberally.

If an HSA is not protected by 25-1563.01 the funds would certainly be protected under the Wildcard exemption of 25-1552, but that exemption is limited to $2,500.

Until we have a written court opinion on this topic, I would recommend great caution when filing bankruptcy when there are substantial funds on deposit in an HSA.

Image courtesy of Flickr and GotCredit.

Keeping a vehicle in bankruptcy is mission critical.  Clients often ask if their car is safe in bankruptcy or if they have to list the debt.

When it comes to vehicle leases that concern intensifies since a consumer has fewer rights.  Buying a car is similar to marriage, but leases are more like friends with benefits.

AUTO LEASES IN CHAPTER 7:

There are basically two options for car leases in Chapter 7: the lease may be assumed or rejected.  Most clients elect to continue the lease agreement, and as long as the vehicle loan is paid current and insurance is in place, the leasing company usually agrees to continue the contract.

If the lease is a burden to the debtor it may be rejected.  This can be done formally with written notice to the creditor or it may be accomplished by not signing an assumption agreement.  A lease agreement is deemed rejected unless a agreement to continue the lease is filed with the bankruptcy court within 60 days after the case is filed.

Keep in mind that assuming a vehicle lease in Chapter 7 is voluntary on the part of the debtor and the bank.  The bank is not required to offer a lease assumption agreement, but they generally do if the loan is current.

AUTO LEASES IN CHAPTER 13:

Auto leases may be retained in a Chapter 13 case or rejected.  Generally speaking, a debtor has more power to keep a lease agreement in Chapter 13, especially if the payments are in default.

Assuming a lease in Chapter 13 requires that delinquent payments be cured in short period of time.  The debtor must file a payment plan with the court that formally assumes or rejects the lease.  If the plan is silent on whether the agreement is being continued, it is deemed rejected 60 days after the case is filed.

The tougher question is whether it is wise to keep a lease that will expire in the middle of the chapter 13 case. When the lease is over the vehicle must be returned and the debtor must find a replacement. It can be very difficult to find a bank willing to extend credit in the middle of chapter 13, and if they do extend credit it is generally at a higher rate of interest.

You need to plan for what happens when the lease expires in the middle of the chapter 13 case.  Do you throw the dice and gamble that you can get financing for a replacement vehicle when the lease expires, or do you surrender the vehicle at the beginning of the bankruptcy?  This is a key item to plan.

LEASE OPTION TO PURCHASE VEHICLE:

Most lease agreements allow the debtor to buy the vehicle at the end of the lease.  The purchase price is usually set at the vehicle’s estimated value at the end of the lease.  However, most lease options provide that the purchase price must be paid in full immediately in one lump-sum payment.

Outside of bankruptcy, most banks will finance the lease option balloon payment, but that is not the case in the middle of chapter 13.  In the middle of Chapter 13 cases banks rarely finance the balloon payment. So, the debtor has to be prepared to deal with this problem.

CAN THE LEASE PURCHASE OPTION PRICE BE PAID THROUGH A CHAPTER 13 PLAN?

May a debtor finance the lease purchase option through the Chapter 13 Plan?  In a word, no.  Although I have seen this done once in a Nebraska bankruptcy case and once in a Florida case, this only worked because the creditors did not pay attention to the chapter 13 plan and it got approved.  A debtor cannot force the lender to accept payments on the lease option purchase price.

WHAT HAPPENS IF THERE IS A LEASE PAYMENT DEFAULT DURING THE CHAPTER 13 PLAN?

If a debtor defaults on the chapter 13 payment then the bankruptcy trustee will not be able to pay the regular car lease payment as well.  Such a default will give the lender the ability to repossess the vehicle during the chapter 13 case after obtaining court permission.  This can be quite a problem since a debtor must continue to pay the unpaid lease balance even if the vehicle is repossessed.  (See In re Masek).  Once a debtor agrees to assume a lease in a chapter 13 case they must pay off the lease in full, whether the car is repossessed or not.  For this reason, one has to be very careful about assuming a lease in chapter 13.

 

Image courtesy of Flickr and Spanish Coches.

Working with clients who fall into debt traps has made me cautious about using credit cards. That’s an understatement. I’m paranoid when it comes to debt. I pay off all personal and business credit card debts in full and never carry a balance.  In fact, I pay the accounts weekly so I don’t carry a balance on my credit report.  (That actually helps boost a credit score.)

So, I was surprised when the folks at the Debt Reduction Center sent me this advertisement letter.

Debt Reduction Center Letter

How this company estimated that I might owe $25,000 of creditor balances is beyond me, but I’m sure it has something to do with what I could owe if I decided to maximize my lines of credit. However, as I said before, I don’t carry a balance and I never pay late, so it was surprising to get the letter.

I can only assume that everyone in America with a credit card is getting these letters, whether or not they are experiencing debt problems.

But even if I was $25,000 in credit card debt, is it really true that I could settle my way out of the problem for only $375 per month over 36 months?  Gosh, that seems hard to believe.  To pay off $25,000 of credit card debt with an average interest rate of 19% would require a $916 payment over 37 months.  I can see where many folks would find this offer attractive.

Will this settlement plan actually work?  Can you settle $25,000 of debt for $375 per month over 36 months?  In my professional opinion, not a chance!

WHY SETTLEMENT PLANS ALMOST NEVER WORK

  • You don’t have 36 months to settle debts.  These programs require that you stop paying the credit card account and start paying into their settlement escrow account. After 6 to 12 months of no payments, banks file collection lawsuits or they sell the accounts to aggressive junk debt buyers.
  • Settlement Fees:  Debt settlement companies typically charge a 15% to 20% settlement fee, so not only do you have to save up for the settlement but you need to save up to pay the settlement fees.
  • Accruing Penalties & Fees:  While you are paying money into the debt settlement escrow account, interest and penalties are racking up on the debt.  So even if you settle the debt for 50 cents on the dollar, you are settling a higher account balance.
  • Tax Consequenses:  When credit card companies settle debts they usually issue a 1099-C tax form to the IRS to report what you did not pay. That can result in additional income taxes you must pay.
  • Garnishments:   When the banks obtain judgments they may garnish up to 25% of your paycheck.  That’s commonly when I meet new customers–when their paychecks get garnished and it becomes painfully obvious that the debt settlement program has failed.

 

SUCCESS RATE OF DEBT SETTLEMENT

You will never find a debt settlement company that publishes its success rate.   There is no standard for measuring success, no auditing of cases, no public records available to audit, and no public reporting requirement at all.  It is commonly believed that the success rate of debt settlement is below 10%.  Some have said the success rate is as low as 1%.

Jeff Meeks, a former Vice President of Recovery Operations for WaMu Card Services, had this to say about the debt settlement industry:

I have had numerous DSC’s admit they have no intention of settling debt and in fact it is counter productive to their purpose to do so; their main purpose being to enroll consumers, collect fees, and provide such poor customer service and results that most consumers drop from the program and thereby leave the DSC with thousands of dollars in unearned benefit.

The Federal Trade Commission has also written a great article warning consumers about the risks of debt settlement. An important FTC study showed that the success rate of debt settlement is less than 10%.

NEBRASKA DECEPTIVE TRADE ACT

The Nebraska Deceptive Trade Act states that a person engages in a deceptive trade practice when they make “false or misleading statements of fact concerning the reasons for, existence of, or amounts of price reductions.”  Neb. Rev. Stat. 87-302.

It is a also deceptive when a business “represents that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have.”

Debt settlement advertisements make false representations about price reductions.  They represent the ability to achieve results they clearly do not obtain.  The advertisements are misleading.  Representing that $25,000 of credit card debt can be settled for 36 monthly payments of $375 monthly is misleading.  Representing that these programs work when the success rate is less than 10% is misleading.

If you have been mislead by a debt settlement company about the success rate of their program you may have a claim for damages under the Nebraska Deceptive Trade Act, including a claim for attorney fees.

 

In re Barrett, ND California 2016, lawyer debtor

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The United States Bankruptcy Court for the Northern District of California issued an interesting ruling that discharged over a quarter millions dollars of federal student loan debt for a 56-year-old securities law attorney (In re Barrett, Case No 14-43516).

Kevin Barrett is a single man who has been a licensed attorney since 1987.  He is in good health and has no dependents.  At one point he earned as much as $165,000 per year as a securities lawyer, but that income ended in 2007.  He earned very little for the next 4 years.  In 2011 he was hired for $98,000 per year by another firm until August of 2013 when he was terminated.  Since that time he has struggled to earn more than $10,000 per year in his own practice.

The debtor did not live extravagantly. He paid $750 per month for rent and drove an older car. He had no savings or retirement account.

The debtor had paid nearly $40,000 in student loan payments over the years.

The Department of Education objected to the discharge since Barrett never applied for one of their Income Based Repayment (“IBR”) plans. Under such plans a debtor’s payment is pegged to their actual current income level, and in Barrett’s present condition the payment would have been zero. However, the bankruptcy court rejected this argument.

While the DOE correctly argues that this court must consider [the debtor’s] failure to apply for one of its income-based repayment plans, such inaction is insufficient, standing alone, for this court to find against him.

Given the debtor’s age and present lack of income to make a meaningful payment of any amount and the significant income tax consequence of forgiving such a large debt, the California bankruptcy court considered the income-based  payment plan to be impractical.

When seeking to discharge student loans in bankruptcy it is helpful and appropriate to have a record of applying for the various Income-Based Repayment plans available. Such applications demonstrate the good faith courts generally demand as a prerequisite to entertaining  a hardship discharge. However, when it comes to older debtors who have in good faith attempted to improve their circumstances while paying what they can on school debts over an extended period of time, the failure to apply for an IBR is not always conclusive.

Image courtesy of Flickr and Harvard Law Record.

 

Sen Lyndia Brasch

Senator Lyndia Brasch has sponsored a bill in the Nebraska legislature to increase the amount of personal property protected in Nebraska bankruptcy cases.

According to Brasch it is necessary to update Nebraska property exemptions to keep pace with the higher cost of living.

The statute governing exemptions has not been updated in 17 years. Mandating a larger amount for exemptions allows individuals filing bankruptcy to get back on their feet.

Legislative Bill 757 would make the following changes to Nebraska personal property exemptions:

  • Wild Card Exemption: Increase the “Wild Card” exemption of 25.1552 from $2,500 per debtor to $5,000.  The wildcard exemption protects any type of personal property including bank account deposits, tax refunds, motor vehicles, etc.
  • Household Goods: Protection for household goods and furnishings increases from $1,500 per debtor to $3,000.
  • Tools of the Trade: Implements, tools or professional books or supplies protection increases from $2,400 to $5,000.
  • Motor Vehicle: A brand new provision would protect up to $5,000 per debtor in a motor vehicle.  Unlike the current version of this law, the protection would not be limited to vehicles used in a trade or driven to and from work.  This new exemption can be used in combination with the wildcard exemption to protect up to $10,000 of equity in a vehicle.

17 years is a long time to update exemptions that have been eroded with the normal cost of living increases.  Let’s hope Senator Brasch’s proposal gets approved this year.