As I write this blog post in December, the thermometer has climbed to a scorching 15 degrees Fahrenheit on the snow blown Nebraska plains.   It occurs to me that this may be a good time to discuss how filing bankruptcy in Nebraska can stop a utility shut-off.

Section 366 of the Bankruptcy Code provides that “a utility may not alter, refuse, or discontinue service to, or discriminate against . . . the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.”

Upon the filing of a bankruptcy case, the utility cannot shut off its service.  However, the utility will require the debtor to pay a new security deposit within 20 days to continue future service.

YOU MUST PROVIDE A NEW SECURITY DEPOSIT WITHIN 20 DAYS TO CONTINUE SERVICE.

After the bankruptcy case is filed the utility company will demand a new security deposit be paid within 20 days.  The security deposit is typically based on the average monthly utility bill over the last 12 months of service.  Failure to pay the new security deposit will result in a utility shut-off.

SHOULD YOU FILE BANKRUPTCY ON THE UTILITY COMPANY?

Sometimes it is a bad idea to list a utility company as a creditor in bankruptcy.  For example, if you owe $50 to the electric company and elect to list this debt in the bankruptcy case, you may have to pay a new security deposit of $200 within 20 days.  Or perhaps you have already worked out an arrangement with the utility to repay $25 of the past due bill each month and it is probably more affordable to pay that small amount each month than to come up with a new security deposit.

WATCH OUT FOR SERVICE AT OTHER PROPERTIES.

If you receive utility service at more than one location (perhaps you own a business or rental properties), listing the utility as a creditor for a bill owed by one of your properties may result in a new security deposit being demanding based on the service provided to all of your properties.

Tax Returns.     The bankruptcy trustee must review the last two (2) tax returns filed.  If you have lost your returns, complete IRS Form 4506.  If you have not filed your tax returns, do so now.  The bankruptcy case will automatically be dismissed if you fail to file any tax return due in the past four years.

Paycheck Stubs & Other Income Statements.  Six months of paycheck stubs or some type of report provided by your employer showing wages for the past six months.  Even though your most recent paystub tells us how much you have earned, bankruptcy attorneys must prepare a special report (called the “Means Test”) that shows your income for the past six months.  Child support or Social Security or Retirement income statements are also necessary.  In short, your attorney needs all documents proving your income.  If you are self-employed, then provide a Profit & Loss Statement for the past 6 months.

Bank Statements.    Six months of bank statements from every account you are on is required.

Credit Counseling Certificate.  Before you can file bankruptcy you must obtain a pre-bankruptcy credit counseling certificate.

Bills, Lawsuits, Collection Letters, etc.   Provide your attorney with copies of all your bills, collection letters, and lawsuits.  In short, we need the name and address of every creditor.  Write down the name and address of bills you are missing.  The basic power of bankruptcy is to notify your creditors that you filed and that they can no longer contact you.  If the creditor is not notified the bankruptcy is ineffective.

Divorce Decrees.  It is extremely important to provide your attorney with a copy of your divorce decree.  Special notice must be given to your ex-spouse if you are paying a Domestic Support Payment (i.e., child support or alimony).  If your ex-spouse owes you money, that is an asset that must be reported on the bankruptcy schedules.

Retirement Accounts.    Provide a recent statement showing the balances of your retirement accounts.

Claims Against Others.  List all claims for injuries, worker’s compensation, auto accidents, etc.  Warning:  If you fail to list a claim you have against someone else on the bankruptcy schedules, you may forfeit the claim.  If you can sue someone for any reason, tell your bankruptcy attorney and list the claim on your list of property.

Life Insurance.    If you have a life insurance policy that has a “cash surrender value” provide a statement of the surrender value.  Whole or Universal policies usually have a cash value.

Home Appraisals & Tax Statements.  Provide a copy of your most recent real estate tax assessment statement or home appraisal.

If you have been served with a court summons in Nebraska, it is imperative that you respond to the lawsuit correctly.  Here is what you need to do:

  • File a WRITTEN REPLY to the lawsuit with the Clerk of the Court.  The summons typically says that an “appropriate response” must be issued within 30 days.  What does that mean?  (No, calling up the plaintiff’s attorney office and giving them a piece of your mind is not enough.)   What this means is that you must file a written reply, you must sign the reply, and it file it with the Clerk of the Court within 30 days.
  •  A standard reply form is usually provided by the Clerk of the Court. (Here is a link to the Appearance & General Denial form.)  Write your name, address, phone number, the case number and then sign the form.  Have the Clerk of the Court then file your response in the court record.  You should also mail a copy to the creditor’s attorney.  An even better response form is found here.
  •  Demand an Accounting.  Send the attorney for the creditor a letter to demand a list of all the payments and charges to your account.
  • Request for Production of Documents.  Request all the documents relevant to the case, including the contract, billing statements, correspondence, etc.  Many creditors, especially credit card debt buyers, do not have the documents to prove you owe the debt.
  • Affirmative Defenses: You may want to assert certain affirmative defenses, such as the Statute of Limitations which bars claims that are too old.  In Nebraska the Statute of Limitations on a written contract is typically 5 years from the date of last payment and 4 years for an oral contract.
  • Countersuit: Perhaps you have a claim against the creditor.  If the doctor suing for unpaid medical bills committed malpractice, you should ask the court to give you compensation for the damages caused.
  • Seek Legal Advice:  Ask an attorney review your written reply.  Believe it or not, most attorneys are really nice people and they don’t mind taking a quick look at what you have written.
  • Negotiate the Debt.  One of the main benefits to filing a written response to a lawsuit is that it makes the creditor more willing to negotiate the debt.  Contact the creditor’s attorney (here is a link to find the attorney’s phone and email address) and make an offer.  Most creditors will accept a reasonable settlement offer.

Failure to respond to a court summons within the time allows will result in the creditor obtaining a “default judgment.”  A bill collector that obtains a Default Judgment has the power to garnish up to 25% of your paycheck and all of the money in your bank account.  Filing a written response with the Court will prevent a Default Judgment from being entered.

Across the State of Nebraska, you could have heard a collective groan of debtor attorneys as the Nebraska Bankruptcy Court issued a new ruling limiting the ability of debtors to avoid liens in motor vehicles.  In the case of In re Cardwell, the Court ruled that a debtor may not utilize the “Tool of the Trade” exemption of Nebraska statute 25-1556 to avoid such liens unless the vehicle is actually used in the debtor’s trade.

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The debtors owned a 2006 Pontiac Montana worth $1,200 and a 1992 Ford F-150 pickup truck worth $800, and they pledged both car titles to First State Bank for a new loan.  After the bankruptcy case was filed, their attorney filed a motion seeking to avoid the liens since Bankruptcy Code 522(f) allows debtors to void liens.

The problem in Cardwell is that neither debtor was self-employed and although they used the vehicles to commute to and from work, they did not use the vehicles to perform their jobs.  As the court noted, the vehicles were used solely for personal purposes and to commute to work.  Therefore, the Court ruled that the vehicles did not qualify as “tools of the trade.”

This is a devastating ruling for debtors who have pledged their vehicle to acquire high interest rate Title Loans.  For decades, Nebraska bankruptcy attorneys have used this statute to return car titles, but now they will have to limit this procedure to cases where a debtor can show the vehicle is actually used in their trade.

the Court did not state is how much a debtor must use a vehicle in their job to enable them to avoid these liens

At first glance it appeared the lien avoidance power was completely abolished for everyone but the self-employed, but a more careful reading of the opinion reveals that debtors may be able to avoid liens in many cases. It is important to note that the Court did not state is how much a debtor must use a vehicle in their job to enable them to avoid these liens.  For example, paralegals in our law firm frequently use their vehicles to make trips to the Post Office or to file documents in the courthouse.  Is that enough use to invoke the avoidance power?  Nebraska bankruptcy attorneys will need to emphasize how a debtor utilizes their vehicle in their job to gain access to the lien avoidance power.  

 

 

 

How much does it cost to file Chapter 13?  I have answered that question for nearly 20 years, and it seems that about every 5 years the local court rules provide a different answer.  Well, the Nebraska Bankruptcy Court rolled out yet another compensation system for debtor’s attorneys effective December 1, and this time I think the Court got it right.

To start with, a $281 court fee is due when the case is filed.  If the debtor cannot afford to pay all of that fee at once, the Court will allow a debtor to pay $75 with the filing of the case and the remaining balance of $206 within 90 days typically.  In addition, most bankruptcy attorneys charge for credit reports they purchase.  However, attorney fees are usually paid out over the term of the 3 to 5 year payment plan, although some attorneys charge a portion of that fee up front.

Bankruptcy courts have used a variety of compensation systems over the years.  In the past attorney fees were determined by an itemized statement of time expended by the debtor’s attorney that was submitted to the Court for approval.  The problem with that system is that some attorneys were charging vastly different hourly rates and spending much more time to complete routine tasks.  As a result, some attorneys were being paid not on the basis of what they actually did for their client but rather on how well they could prepare billing statements.

Other courts have utilized a Flat Fee system that awarded a set amount of compensation at the beginning of the case and did not allow attorneys to apply for additional compensation when they performed new legal tasks, such as amending the payment plan when the debtor’s income changed or suspending payments when they became unemployed or injured.  The obvious problem with that system is that it does not encourage attorneys to provide ongoing support to their clients and some attorneys neglected the case after their fees were paid.

Nebraska has traditionally employed a hybrid system that allowed attorneys to choose whether they would bill hourly for their services or they could accept a flat fee.  Three years ago the Court created a system that allowed a flat fee upon approval of the Chapter 13 payment plan and then allow additional services to be billed out at an hourly rate.  However, I believe the Court has been administratively burdened by reviewing all these fee applications, so now there is a new system.  It is actually a system I recommended to the Court three years ago.

Appendix N of the Nebraska Local Rules not provides for a Flat Fee (what the Court calls a “No Look Fee”) upon approval of the payment plan.  Then, if additional services are provided later on in the case, the Court has provided a list of standard compensation awards for a variety of services, like amending the plans or suspending payments or filing motions to sell property.  At last I think the Court has achieved a good balance between creating a simple system to administer which provides standard compensation for standard services while at the same time providing attorneys a reward for providing ongoing services.   At last the interest of the Courts, the debtors and their attorneys are aligned.

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How much does it cost to file Chapter 13?  I have answered that question for nearly 20 years, and it seems that about every 5 years the local court rules provide a different answer.  Well, the Nebraska Bankruptcy Court rolled out yet another compensation system for debtor’s attorneys effective December 1, and this time I think the Court got it right.

To start with, a $281 court fee is due when the case is filed.  If the debtor cannot afford to pay all of that fee at once, the Court will allow a debtor to pay $75 with the filing of the case and the remaining balance of $206 within 90 days typically.  In addition, most bankruptcy attorneys charge for credit reports they purchase.  However, attorney fees are usually paid out over the term of the 3 to 5 year payment plan, although some attorneys charge a portion of that fee up front.

Bankruptcy courts have used a variety of compensation systems over the years.  In the past attorney fees were determined by an itemized statement of time expended by the debtor’s attorney that was submitted to the Court for approval.  The problem with that system is that some attorneys were charging vastly different hourly rates and spending much more time to complete routine tasks.  As a result, some attorneys were being paid not on the basis of what they actually did for their client but rather on how well they could prepare billing statements. 

Other courts have utilized a Flat Fee system that awarded a set amount of compensation at the beginning of the case and did not allow attorneys to apply for additional compensation when they performed new legal tasks, such as amending the payment plan when the debtor’s income changed or suspending payments when they became unemployed or injured.  The obvious problem with that system is that it does not encourage attorneys to provide ongoing support to their clients and some attorneys neglected the case after their fees were paid.

Nebraska has traditionally employed a hybrid system that allowed attorneys to choose whether they would bill hourly for their services or they could accept a flat fee.  Three years ago the Court created a system that allowed a flat fee upon approval of the Chapter 13 payment plan and then allow additional services to be billed out at an hourly rate.  However, I believe the Court has been administratively burdened by reviewing all these fee applications, so now there is a new system.  It is actually a system I recommended to the Court three years ago.

Appendix N of the Nebraska Local Rules not provides for a Flat Fee (what the Court calls a “No Look Fee”) upon approval of the payment plan.  Then, if additional services are provided later on in the case, the Court has provided a list of standard compensation awards for a variety of services, like amending the plans or suspending payments or filing motions to sell property.  At last I think the Court has achieved a good balance between creating a simple system to administer which provides standard compensation for standard services while at the same time providing attorneys a reward for providing ongoing services.   At last the interest of the Courts, the debtors and their attorneys are aligned. 

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The Nebraska Bankruptcy Court has ruled that a $40,913 federal student loan owed by a 67 year old debtor whose sole source of income was from Social Security retirement in the amount of $830 per month should be discharged.   In re Grimes, Case #06-81303 (2013).   In coming to its decision, the court applied the “Totality of the Circumstances Test” focusing on three factors:

 

  1. The debtor’s past, present and reasonably reliable future financial resources;
  2. A calculation of the debtor’s reasonable and necessary living expense; and
  3. All other relevant facts and circumstances.

The court noted that the debtor’s efforts to lower the student loan payment by applying for available Income Based Repayment (IBR) plans is a relevant factor in assessing whether the student loans place an undue burden on the debtor, but in this case the Court found that such payment options are merely one factor to consider and is not decisive.  In this case, the debtor’s income was below the Federal Poverty Guidelines and thus no payment would be required under an IBR plan. 

The most difficult defense raised by federal student loan creditors when seeking a discharge of student loans is the availability of the income-based payment plans.  Debtors seeking to discharge student loans in bankruptcy face an uphill battle unless they avail themselves of these programs prior to seeking a student loan hardship discharge in bankruptcy.   However, senior debtors living on a fixed retirement income may not have the same opportunities of younger debtors to secure supplemental employment and it appears that the Court is willing to look beyond the IBR defense when those programs appear futile.  

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There has been a definite change in the attitude of bankruptcy courts are taking towards the discharge of student loans in bankruptcy.  I am reading cases throughout the nation that indicate a greater willingness of the Courts to discharge these debts.  A case affecting debtors in Nebraska with student loan debt underscore this recent change in judicial attitude.

In the matter of Conway vs. National Collegiate Trust, 495 B.R. 416 (8th Cir BAP 2013), the Bankruptcy Appellate Panel for the 8th Circuit ruled that a single person with no dependants who graduated college in 2005 with a Bachelor of Arts degree in media communications was eligible to discharge her student loan debts even though she suffered from no physical or mental issues.   The debtor was never able to find work in her field of media communications and she had wage income that varied between $22,000 to $25,000 per year in the eight years since she graduated college.  She was employed in two part-time jobs as a server at local restaurants at the time her bankruptcy was filed.  The case involved $118,579.66  owed on 15 private student loans.  The debtor also owed another $18,000 of federally-guaranteed student loans that were not a part of this proceeding.

In the Eighth Circuit (which includes Nebraska), the courts utilize a Totality of the Circumstances Test to determine if a student loan may be discharged.

Reviewing courts must consider the debtor’s past, present, and reasonably reliable future financial resources, the debtor’s reasonable and necessary living expense, and “any other relevant facts and circumstances.”  The debtor has the burden of proving undue hardship by a preponderance of the evidence.  The burden is rigorous.  “Simply put, if the debtor’s reasonable future financial resources will sufficiently cover payment of the student loan debt—while still allowing for a minimal standard of living—then the debt should not be discharged.  Long. v. Educ. Credit Mgmt. Corp, 322 F.3d 549,554-55 (8th Cir. 2003)

The remarkable facts of Conway case is that the debtor was single, relatively young with no dependants, healthy, college educated and had only been out of school for 8 years.  The court refused to consider the argument that the debtor had the “possibility” of earning higher income in the future.  The court focused on her real income history and concluded that it was unlikely to change in the future.  With the better part of 30 working years left in her career, the court focused on the actual income history of the past 8 years rather than a speculative future income.  This represents a real change in how courts are to review student loan discharges in Nebraska.

The second remarkable feature of the Conway case is the court’s requirement that the lower court review each of the 15 student loans separately and complete a loan-by-loan analysis to see which loans should be discharged.  Although the 8th Circuit does not permit a “partial discharge” of a single student loan (See Andresen v. Nebraska Student Loan Program Inc., 232 B.R.127 (B.A.P. 8th Cir 1999), the Andresen decision actually requires that each separate loan be reviewed for discharge independently. 

It appears that the courts are taking a more realistic approach to the student loan problem these days.  Debtors with multiple student loans, especially private student loans that do not provide for Income-Based Repayment plans (IBRs), should consider their rights to discharge these debts in bankruptcy.

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Whether a business is incorporated or not can have a dramatic impact on the outcome of a bankruptcy case, especially in Chapter 7 cases where the bankruptcy trustee has the power to sell non-exempt assets.  Successfully filing a business bankruptcy in Nebraska depends on understanding the important difference between incorporated and unincorporated business assets. 

Let’s assume a debtor owns a paint store that has $100,000 of liabilities and $25,000 of inventory and another $25,000 of receivables.  Looking at the business as a whole it is apparent that the business is insolvent—it has $50,000 of assets (the inventory plus the receivables) but $100,000 of debt.  If I were to ask you what the business is worth you might be tempted to reply that it is worth nothing since there is twice as much debt as there are assets.  Nothing could be further from the truth.

If the paint store is not incorporated, the bankruptcy trustee will see $50,000 of assets to liquidate and will probably order the debtor to cease business operations and demand immediate possession of the store.  In an unincorporated business entity the business assets are not connected to the liabilities—they are separate and distinct things.  To the business owner they are connected, but not to the bankruptcy trustee.  The trustee has the power to sell the assets and to pay a pro-rata distribution to all of the debtor’s creditors, not just the business creditors.  In the process of liquidating the assets, the business is destroyed and the debtor is left to find another career.

In an unincorporated business entity the business assets are not connected to the liabilities—they are separate and distinct things.

Quite a different outcome is achieved by the debtor who incorporated the business.  In the above example, the debtor does not own the inventory or receivables.   Rather, the debtor owns stock in a company that owns $50,000 of assets and owes $100,000 of debt.  The stock of the company is worthless in this example and the trustee will not liquidate the business. 

So, does this mean that a debtor should immediately incorporate their business before filing bankruptcy?  The answer is probably yes, but incorporating a business to protect the assets does not automatically fix the problem.   First, transferring $50,000 of free and clear assets to a new corporation merely creates another non-exempt asset, namely, stock in a company worth $50,000.  The assets may have been transferred, but the liabilities were not.  Creating liabilities in the new company takes time as old debts get paid off and new debts are created in the new company.  This can be a slow process.  Also, the Chapter 7 Trustee is empowered to undo transactions through what we call the Fraudulent Conveyance Act—defined as a transfer of assets from one person or entity to another without receiving equivalent consideration in return.  So, if assets are not carefully transferred and new debts are not correctly incurred by the new company, the Trustee may claim the entire transfer to be a sham and go after the assets. 

The point of this discussion is not to advise debtors how to transfer assets to evade the long reach of the bankruptcy trustee, but rather to warn potential debtors of the inherent danger of taking an unincorporated business into Chapter 7.  Careful planning is required, and unincorporated business debtors may want to consider filing a Chapter 13 payment plan instead of risking income generating assets in the Chapter 7 liquidation process.