156350123.jpgI get this complaint all the time:  “My mortgage company is not reporting that I am paying my mortgage payment on time each month because I did not reaffirm their loan.”  

Reaffirmation Agreements are documents that are signed in Chapter 7 with creditors for debts you want to keep. This is typically a home loan, a car loan or a furniture loan.  These loans are secured to the property that people want to keep, and the reaffirmation agreement basically pulls that debt out of the bankruptcy.   The agreement is voluntary, but most folks want to reaffirm the car and mortgage loans.

The problem is, most mortgage companies no longer offer reaffirmation agreements.  My guess is that the banks do not believe the reaffirmations are necessary since bankruptcy cancels the debt but not the mortgage lien.  Regardless of whether a bankruptcy is filed or not, if a person fails to pay the mortgage the bank has the right to foreclose.  Fifteen years ago mortgage companies sent us reaffirmation agreements on virtually every case, but now I rarely see the agreements even offered unless a debtor calls the bank to demand one.

Not reaffirming the mortgage loan creates a big problem when a person tries to refinance their mortgage.  Without a credit report showing that the payments are being made on time it is difficult to refinance.  When interest rates drop everyone wants to refinance their loan, but without proof that the loan is being paid on time this can be difficult. 

How can a person report that they are paying the mortgage on time after the bankruptcy case is closed if a reaffirmation agreement was not signed? 

One solution to this problem is to self-report the mortgage payment, sometimes called alternative credit reporting.  This can be done through organizations like PRBC that allow consumers to provide proof that they are paying mortgages, rent, utility bills, cell phone bills and other bills on time.  The National Credit Reporting Association (NCRA), the National Association of Mortgage Brokers (NAMB), the Mortgage Guaranty Insurance Corporation (MGIC) and Fair Issac (FICO) have agreements with PRBC to help homeowners report  their mortgage payments.  PRBC has reached an agreement with Fair Isaac to provide a FICO Expansion Score that helps lenders approve mortgage applications.

My hope is that we see an expansion on these types of alternative credit reporting options.  There are several benefits to not reaffirming a mortgage loan.  If you become unemployed or sick and cannot make future house payments, the benefit of not reaffirming the mortgage can be significant.  If self-reporting options improve over time, reaffirming a mortgage loan may become a thing of the past.

 

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According to affidavits signed by former Bank of America employees in a class action lawsuit filed in a Boston federal court, the bank regularly lied to customers seeking home loan modifications to deny their application.  The affidavits were filed last week in a multi-state class action lawsuit filed on behalf of homeowners who claim they were wrongfully denied a loan modification under the Home Affordable Modification Program (HAMP).  www.MakingHomeAffordable.gov

We were told to lie to customers and claim that Bank of America had not received documents it had requested, and that it had not received trial payments (when in fact it had).  We were told that admitting that the Bank received documents would ‘open a can of worms’ since the Bank was required to underwrite the loan modification within 30 days of receiving those documents, and it did not have sufficient underwriting staff to complete the underwriting in that time.”  Affidavit of Simon Gordon, Senior Collector of Loss Mitigation for of Bank of America from 2007 to 2012.

According to William Wilson Jr., a former Case Management Team manager for Bank of America, twice a month the bank would deny 600 to 1,500 modification applications at time in a procedure called a “blitz.”  Wilson states that Bank of America told its managers to “clean out” the backlog of HAMP applications even though all financial documents were received and Trial Payments had been made by the homeowners.   In addition, Wilson claims that homeowners were coerced to accept “in-house” modifications with 5% interest rates instead of the 2% rate provided under HAMP.

I personally reviewed hundreds of files in which the computer system showed that the homeowner had fulfilled a Trial Period Plan and was entitled to a permanent loan modification, but was nevertheless declined for a permanent modification during a blitz. . . . Employees who challenged or questioned the ethics of Bank of America’s practice of declining modifications for false and fraudulent reasons were often fired.”    Affidavit of William Wilson Jr.

Theresa Terrelonge, a “collector” for Bank of America, provides more details on how the bank denied applications. 

One tactic Bank of America used to delay the modification process involved telling homeowners who applied for a HAMP modification or who were in a Trial Period Plan to resubmit financial information each time they called to inquire about a pending modification.  Bank of America then treated any change in financial information as a justification for considering the home owner to have restarted the HAMP process.  Even a small change to financial information or correcting an error that Bank of America made will cause Bank of America to restart the application process under the pretext of changed financial information.” Affidavit of Theresa Terrelonge.

It gets worse.  Terrelonge declares that managers received bonuses based on how many applications they denied. 

The production goals of Bank of America placed on its managers were based on how many accounts they could ‘close’—meaning how many homeowners they could reject for the loan modifications rather than how many modifications they could successfully complete.  Managers received bonuses if their teams met or exceeded production goals. . . . Employees were awarded incentives such as $25 in cash, or as a restaurant gift card based on the number of accounts they could close in a given day or week—meaning how many applications for modifications they could decline.

It gets even worse than that.  Terrelonge states she witnessed employees and managers change, falsify and delete information from Bank of America’s computer system to make it appear that the homeowner was ineligible for a loan modification.

Steven Cupples was employed by Bank America as an underwriter and Team Leader in Bank of America’s HAMP department.  He observed that due to poor training, Bank of America employees did not know how to find all the documents submitted to the bank.

Most underwriters did not know that they needed to look for documents in multiple systems and often assumed documents had not been sent.  As a result, many borrowers were declined loan modifications that should have been received.”  Affidavit of Steven Cupples.

The statements made by these Bank of America employees match the complaints I have heard from my clients over the past four years.  Banks losing documents.  Banks requesting that documents be submitted over and over again.  Banks denying the application for no apparent reason. 

Studies have shown, however, that loan modifications filed while a bankruptcy case is ongoing have a significantly higher success rate.  In states like Florida where the bankruptcy courts have established mediation programs to help homeowners in the modification process, the success rate is nearly 90%. 

It is clear that the modification process requires a third party to watch over the banks to ensure that the applications are properly administered. We have helped many of our clients successfully apply for the HAMP program, and I believe bankruptcy court oversight is essential to making this program work.

 

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A new court opinion issued by the 8th Circuit Court of Appeals declares that alimony is part of the bankruptcy estate and can be liquidated by the Chapter 7 Trustee unless a specific state exemption protecting the alimony award exists.  In re Mehlhaff, 2013 Bankr. LEXIS 944 (Bankr. D.S.D., Mar. 12, 2013).

Prior to filing bankruptcy in 2012, Laura Mehlhaff received an award of $200 per month alimony until her minor child reached age eighteen in 2014.  The opinion does not state whether the alimony would terminate upon the death of Laura or her ex-husband or upon the remarriage of Laura, but most alimony awards terminate upon the occurrence of either event.  However, it appears that South Dakota law provides that alimony is a property right and the Supreme Court of South Dakota in another case allowed a creditor to place a lien against an award of alimony.

if alimony is the kind of property right to which a lien can attach, it is the kind of property right that becomes property of the estate when a bankruptcy is filed.  In re Mehlhaff.

Worried, Concerned.jpgThe bad news is that Nebraska does not have a specific exemption law protecting alimony, and it appears that the 8th Circuit may have overruled a prior Nebraska bankruptcy opinion declaring that monthly alimony payments were not part of the bankruptcy estate.  In re Loftus, Nebraska case number 97-82311.  In that case Judge Mahoney ruled that:

A plain reading of the language of the divorce decree in question indicates that each month [the debtor] is entitled to the payments only if she is alive, her ex-husband is alive, and she is not remarried. . . .The Court finds that the alimony payments from [the debtor’s] ex-husband accrue each month.

In other words, since the alimony accrues each month, there is not a present right to receive the future payments and the alimony is not a property right. 

The Nebraska Supreme Court has spoken on the issue of whether alimony is a property right.  “This court on numerous occasions has held that alimony and allocation of property rights are distinguishable and have different purposes in marriage dissolution proceedings, but they are still closely related in the matter of determining the amount to be allowed.”  McBride v. McBride, 211 Neb. 459 (Neb. 1982). 

The question for Nebraska bankruptcy attorneys and Trustees is whether the 8th Circuit’s opinion in Mehlhaff overrules Judge Mahoney’s opinion in Loftus.  What was once settled law in Nebraska is now no longer clear until a new opinion is issued or until the Nebraska legislature provides an alimony specific exemption law. 

Until this issue is clarified, I would advise debtors holding significant alimony awards in Nebraska to avoid Chapter 7 and opt for the safer waters of Chapter 13. 

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Owning a home can be a burden, especially for those who wish to surrender a property the bank does not want.  Frequently the homeowner has vacated the premises and the property sits unoccupied for months or even years.   These “Zombie” homes impose significant burdens for debtors, even after a bankruptcy is completed and the underlying mortgage debt is discharged.  Regardless of whether the mortgage debt is discharged, the debtor owning a vacant home faces the following problems:

  • Insuring the Property:  As long as the home is in your name, you may be held liable for those who become injured on the property.  If there is a dangerous condition on the property or if snow covered sidewalks are not shoveled, you may be held responsible for the injuries suffered by others, and for this reason I advise my clients to maintain insurance coverage even if they move out of the home.  In addition, the insurance company must know the home is vacant since their policy may be conditional on the owner occupying the home.
  • Maintaining the Property:  Most local housing codes require the homeowner to cut the grass, shovel the sidewalks, and maintain the property.  Civil and criminal citations may be issued for failure to keep the property maintained.
  • Homeowner Association Dues:  Although filing bankruptcy may discharge the homeowner association dues that exist when the case is filed, future homeowner dues are not affected by the bankruptcy filing and debtors commonly get hit with paying these ongoing fees.
  • Vandalism:  A frequent complaint of the owners of abandoned homes is that thieves steal the copper piping, plumbing and electrical fixtures, and HVAC components. 

Why do mortgage lenders delay the foreclosure?  There are several reasons for the delay. 

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  • Too Many Loans. Banks can process only so many foreclosures at one time.  If they foreclosed all their bad loans at once they would inherit the burden of insuring the homes, shoveling the sidewalks, cutting the grass, etc. 
  • Title Defects.  It has been well documented that many banks struggle to produce all the required loan assignment documents necessary to begin the foreclosure process, and many banks have been found guilty of  manufacturing phony loan documents just prior to initiating the foreclosure.  In short, the bank may not foreclosure because it does not have the required loan documents.
  • Damaged Properties.  Banks do not want to take ownership of damaged properties.  If the home is viewed to be a liability, especially if it is located in a blighted neighborhood and substantial repairs are necessary to bring the property up to minimal building code standards, the bank may opt not to foreclose.

 

 

What should a homeowner do with a Zombie home?

  1. Live in the home rent free.  I frequently advise debtors not to vacate the home until the bank has scheduled the foreclosure sale.  In Nebraska the bank must advertise the sale in a newspaper for five consecutive weeks, and that should allow enough time to move to another home.  I also advise that a person save the money they would have paid to the mortgage company in a separate account so they have enough funds on hand to hire a moving company and pay the rent deposit on the next home.
  2. Rent the Home.  If you must move to another location, consider hiring a real estate management company to rent the home.  Renting a home is a burden, and it is advisable to find a company that can collect the rent, evict nonpaying tenants, cut the grass, etc.  As long as you can rent the home and pocket the cash, who cares if the bank ever forecloses?
  3. Sell the Home:  The basic problem facing homeowners is that they cannot sell the home for what they owe the bank.  However, individuals in bankruptcy have a special power to sell a home free and clear of the mortgage liens.  The sales proceeds are then deposited with the court.  So, if the bank will not take the home back with a Deed in Lieu of Foreclosure and if you cannot negotiate a Short Sale of the home, consider filing a request with the bankruptcy court to force the bank to accept the sale. 
  4. Quitclaim the Home to the Bank:  This option is somewhat questionable since many experts in real estate law say that forcing a deed on the bank is an “incomplete transfer.”
  5. Donate the Home:  You may not want to live in a home that will be sold at some uncertain time in the future, but other people may not have a problem with this reality.  Maybe you can find a homeless shelter or a friend who would love to own your home even if for a short period of time.

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In a few weeks taxpayers will begin filing their 2012 tax returns, and for those taxpayers who are also filing bankruptcy at the same time a large number of them will forfeit the refund to the Chapter 7 Trustee. For nearly 20 years I have witnessed the Chapter 7 Trustee seize tax refunds from unsuspecting debtors. This happens every year, over and over again. The sad part is, this should almost never happen.

Are tax refunds protected in bankruptcy?

Tax refunds and other financial assets are protected in Nebraska, but there is a limit as to how much. The laws that protect property in bankruptcy are called exemption laws, and there are two Nebraska exemption laws that protect tax refunds:

  1. “Wild Card” Exemption (Nebraska Statute 25-1552). This exemption law protects up to $2,500 per debtor of any type of personal property, including tax refunds. Married couples filing a joint tax return may thus protect up to $5,000.
  2. Earned Income Credit (Nebraska Statute 25-1556). This exemption protects whatever amount of the tax refund that comes from the federal and state earned income credit. There is no dollar limit to this exemption.

 What happens if my tax refund exceeds the amount of exemptions?

If your tax refund exceeds the amount of available exemptions, then the Chapter 7 Trustee has the duty to claim the non-exempt portion of the tax refund and to pay that amount over to your creditors.

Losing a tax refund to the Chapter 7 Trustee should almost never happen, but it frequently occurs because the debtor’s attorney fails to conduct a thorough interview of the debtor and fails to properly estimate the amount of the tax refund.

Estimating the amount of a tax refund is tricky since tax laws change every year and the deductions or credits a person may claim change as well. The practice rule here is that if you are not 100% sure of what the tax refund will be, delay filing the case until the tax return is prepared.

Don’t pay back loans to relatives with the tax refund prior to filing bankruptcy!

Another nasty problem associated with tax refunds occurs when a person uses the refund to repay loans owed to family members and then files bankruptcy shortly thereafter. This is a big mistake. Because bankruptcy law is designed to ensure fair and equal treatment to creditors, any payment made to a family member or “insider” (such as a business partner) must be disclosed and the Chapter 7 Trustee may be able to reclaim the money to redistribute to all of your creditors on a pro rate basis.

Be prepared to tell the Trustee how you spent the tax refund.

If you received a large tax refund and then shortly thereafter file bankruptcy, the Trustee will ask you what you did with the money. Where did all that money go? A good bankruptcy attorney will anticipate this question and provide the answer within the bankruptcy papers (usually on the line where tax refunds are listed). If you received a $10,000 refund and then filed bankruptcy 3 days later, be prepared for a lot of questions at court about how you spent the money.

Divorce.jpgA recent ruling by the Nebraska Bankruptcy Court underscores one of the primary differences between the treatment of divorce debts in Chapter 7 and Chapter 13 cases.  (See In re Schulz, Nebraska Adversary Case #12-04070).

On August 30, 2011, the District Court for Buffalo County, Nebraska entered a divorce decree that included a division of marital property and debts requiring Cynthia Shultz to pay her ex-husband $25,000.  One year later Ms. Schultz filed Chapter 13 bankruptcy.  Although Mr. Shultz filed an unsecured Proof of Claim for $24,104.27, he failed to object to the Chapter 13 plan which was eventually confirmed by the Court on June 5, 2012.

Following confirmation of the plan, Ms. Shultz filed an Adversary Proceeding to seek a determination that the property settlement agreement was dischargeable upon completion of the payment plan.   Both parties agreed that the $25,000 debt was property settlement and not intended for support of Mr. Shultz.  Although Mr. Shultz argued that his ex-wife had the ability to pay the debt and that the harm to him caused by a discharge of the debt would outweigh the benefit of the discharge to his ex-wife, the bankruptcy court was compelled to rule in favor of the debtor.  Since enactment of the bankruptcy reform act of 2005, bankruptcy courts no longer conduct a “balancing test” to determine if property settlement agreements are dischargeable in Chapter 13.  They just plain are discharged every time as long as a debtor successfully completes the payment plan. 

The real issue in Chapter 13 cases since 2005 is to determine whether a provision in a divorce decree is in fact a property settlement provision or a support provision. Importantly, this issue only pertains to Chapter 13 cases. 

In chapter 7 cases neither property settlement nor support obligations are dischargeable in bankruptcy.  So, the challenge of the bankruptcy attorney in Chapter 13 cases is to characterize the relevant divorce decree provision.

Courts look at several factors when determining whether a provision is a Support provision or a Property Settlement provision:

  1. Labels in the Divorce Decree:  Although the bankruptcy court can look beyond the labels contained in a divorce decree to determine the true nature of a provision, labels do matter.  A thing tends to be what it says it is.
  2. Income Needs of the Parties:  The bankruptcy court will look to see if the party receiving the settlement was in need of the funds to meet basic living expenses at the time the divorce decree was entered.
  3. Analysis of Property Divided: The bankruptcy court will review the property divided prior to the entry of the divorce decree and will consider the nature of the property divided.  For example, the division of the sales proceeds of a yacht is probably more in the nature of a property settlement than an award of a10-year old minivan.
  4. Does the obligation to pay terminate upon remarriage or the emancipation of a child?  If so the provision tends to be considered a support payment.
  5. Number of Payments:  If the amount to be paid is in a lump-sum or in a few large payments, it tends to be considered property settlement.  Smaller payments spread out over a longer period of time are usually deemed support.

Divorce attorneys need to pay particular attention when the ex-spouse of their client files bankruptcy. If a chapter 7 case is filed the divorce decree is generally secure.  However, if the ex-spouse files a Chapter 13 a Red Alert should be sounded.  Important consideration must be paid to how a proof of claim is filed and the relevant deadlines to challenge confirmation of the plan and the deadline to object to the dischargeability of the divorce decree obligation. 

The 8th Circuit Bankruptcy Appellate Panel has ruled that a Chapter 13 debtor may not create a special class of unsecured creditors for nonpriority, nondischargeable tax debts at the expense of other unsecured creditors.  In the case of Shawn & Lauren Copeland v. Richard V. Fink, the debtors sought to create a separate class of unsecured creditors for claims of income tax debts that were not considered a priority debt (i.e., the debt became due more than 3 years prior to the filing of the bankruptcy case) but were nevertheless non dischargeable since the tax returns were filed within 2 years of the bankruptcy case.

This situation only occurs when a debtor fails to file their income taxes when due.  Income tax debts are considered “priority” when they become due within 3 years of the bankruptcy filing.  The consequences of being a priority tax debt is that the debt must be paid in full through a chapter 13 plan before anything is paid to general unsecured creditors.  Income tax debts may be discharged in Chapter 7 or Chapter 13 if the debtor files the return and more than 3 years have expired since the return was due or 2 years after a late return is filed, whichever date is later.   But what if the return was due more than 3 years before the bankruptcy was filed and the tax return was filed within two years of the bankruptcy filing?  That is the circumstance of the Copeland case.  The debt is not discharged, but it is also not a priority tax debt.  The debt survives bankruptcy.

Section 1322(b)(1)  of the Bankruptcy Code allows a Chapter 13 plan to “designate a class or classes of unsecured claims, as provided in section 1122 of [the Bankruptcy Code], but [it] may not discriminate unfairly against any class so designated.  A classic example of a separate class of unsecured creditors is where a debtor must make a restitution payment arising out of a criminal sentence.  Since the debtor would wind up in jail if the restitution is not paid, the bankruptcy code permits the debtor to pay those unsecured debts in full before paying other general unsecured claims. 

To determine when a debtor may create a separate class of unsecured debts, the 8th Circuit applies a four-part test:

  1. Does the discrimination have a reasonable basis?
  2. Can the debtor can carry out a plan without the discrimination?
  3. Is the discrimination is proposed in good faith?
  4. Is the degree of discrimination directly related to the basis or rationale for the discrimination?

Unlike the necessity of paying a criminal restitution a child support debt, the court indicated that the failure to file tax returns in a timely manner did not meet the requirements of this test.

Standing alone, the non-dischargeability of a debt is not a proper basis for discrimination against other unsecured non-priority claims. . .

By asking for special treatment of their tax claims, the Debtors ask their other
unsecured non-priority creditors to pay for the Debtors’ failure to file timely tax
returns.

The key practice point with this case is that bankruptcy attorneys should be very careful to determine the precise date that income taxes are assessed prior to filing the Chapter 13 case if the attorney knows the returns were filed late.  This can be accomplished by obtaining an Account Transcript by submitting Form 4506 to the IRS prior to filing the case. 

Scale of Justice.jpgReading the opinion just issued by the Bankruptcy Appellate Panel for the 8th Circuit in the case of Shaffer vs. Iowa Student Loan Liquidity Corporation, I am wondering if we are now witnessing a greater willingness of the bankruptcy courts to discharge student loans. 

Susan Shaffer is a single woman in her 30s with no dependants. She apparently suffers from mental health issues including eating disorders, depression, anxiety and self-harm (cutting).  She acquired $204,525 of student loans while obtaining a degree in psychology in 2002 and attending chiropractic school before dropping out in 2008.  She worked for a time as a revenue specialist before leaving that job after suffering bouts of depression.  After filing bankruptcy she found employment in the radiation oncology department at the University of Iowa.

Student loans are not dischargeable in bankruptcy unless they would impose an undue hardship on the debtor or the debtor’s family. (Bankruptcy Code Section 523(a)(8)).  The debtor must file an Adversary Proceeding against the student loan provider in the bankruptcy case and has the burden of proving the hardship by a preponderance of the evidence. 

Bankruptcy courts in the 8th Circuit apply a Totality of the Circumstances Test and look at several factors in considering whether the debt imposes an undue burden.  These factors include:

  • The debtor’s past, present and reasonably reliable future financial resources.
  • A calculation of the reasonable living expenses of the debtor and his or her dependants.
  • The age of the debtor.
  • The mental and physical health of the debtor.
  • Whether the debtor has participated in an Income Contingent Repayment Program (ICRP).
  • Whether the debtor has retirement accounts or equity in a home or other assets.

What is odd about the Shaffer decision is that this debtor was relatively young, well educated, had no dependants, and despite her problems with depression, she had no significant physical disability.  In addition, the debtor did not participate in any type of income contingent repayment program, and she had only been out of school for a short period of time before filing bankruptcy.  Wasn’t it a bit premature for the court to declare that the debtor would never be able to repay any of the debt when she still has about 30 to 40 more working years ahead of her?

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Contract the Shaffer case with the opinion issued in the Erik and Kathryn Nielsen case issue by the 8th Circuit BAP court in July of 2012.  In that case a couple with four young children were denied a discharge of $48,361of student loan debt despite an annual income of $30,000.  The Nielsen’s received $316 of monthly Food Stamps and about $8,000 of taxes refunds.  Erik Nielson suffered from a variety of work injuries including two broken wrists and was unable to work outside in cold weather or to handle large ladders in his job as a service technician.  The appeals court dwelled on the fact that the debtors had not applied for the income contingent repayment program and Kathryn Nielsen was not employed outside the home despite having a masters degree.  The court noted that under an ICRP the debtors would have to make no payment on the student loans until their income increased to over $55,000 per year. 

Which set of debtors had the greater hardship?  The married debtors earning $30,000 per year with four young children or the single debtor with similar income and no kids and no physical limitations but who suffers from depression?  It is hard to reconcile this difference.

Last year the 8th Circuit discharged $300,000 of student loans for a married couple in their mid 40s with five minor children, two of whom were diagnosed with autism.  In re Walker, 650 F.3d 1227 (2011).  Mrs. Walker had attended medical school but never passed the state licensing exam and later went on to obtain a degree in school psychology.  Mr. Walker was employed as a police officer earning about $60,000 per year.  Despite their eligibility for an ICRP payment of $593.98 per month and despite obtaining a $40,000 Chevrolet Suburban SUV loan costing $850 per month and obtaining a $48,000 second mortgage to install a screened deck costing $373.52 per month just shortly before filing bankruptcy, the 8th Circuit discharged the student loan debt.  The court stated that the “apparent contradictions in this case are troubling” but finally concluded that the reality of the situation is that special needs of the two autistic children would endure for many years to come and therefore discharged the debt.  

The single greatest obstacle to discharging student loan debts is the availability of income contingent repayment plans.  In the absence of physical or mental health issues in the debtor’s family, the courts tend to deny applications to discharge student loan debts when debtors have failed to exercise their ICRP options.  However, when physical and mental disabilities are present, I sense that the courts are more willing to weigh those factors into consideration as the Walker and Shaffer opinions demonstrate.

 

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Two new court opinions were recently handed down by the 5th and 10th Circuit Court of Appeals on the issue of whether Social Security income is considered “projected disposable income” under the Bankruptcy Code.  Projected disposable income is income that must be paid over to creditors during a 3 to 5 year Chapter 13 payment plan.

In the Matter of Benjamin Ragos, the 5th Circuit Court of Appeals upheld the ruling of a Louisiana bankruptcy court which ruled that, pursuant to Section 407 of the Social Security Act, income from Social Security is not projected disposable income in calculating the chapter 13 payment.  The court rejected the Chapter 13 Trustee’s argument that such income should be included and further rejected the Trustee’s argument that the failure to include such income constituted bad faith thus preventing confirmation of the debtor’s payment plan. 

We cannot square Trustee’s argument with the apparent intent of Congress. If Congress excluded social security income from current monthly income and disposable income, it makes little sense to circumvent that prohibition by allowing social security income to be included in projected disposable income.”

Section 407(a) of the Social Security Act provides that “none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.”

In the case of Fred Fayette Cramer, the 10th Circuit Court of Appeals also ruled that Social Security payments should not be considered as projected disposable income in Chapter 13 cases as well, and the court also ruled that the failure to pay such income to creditors does equal bad faith in confirming the plan.  

When a Chapter 13 debtor calculates his repayment plan payments exactly as the Bankruptcy Code  and the Social Security Act allow him to, and thereby excludes SSI, that exclusion cannot constitute a lack of good faith.”

How is Social Security income treated in Nebraska bankruptcy cases?  The answer was given in the case of Fink v Thompson by the 8thCircuit Bankruptcy Appellate Panel (In re Thompson), 439 B.R. 140, 144 (B.A.P. 8th Cir. 2010).  The 8thCircuit stated that “[t]he plain language of the Bankruptcy Code specifically excludes Social Security income from a debtor’s  required payments in a Chapter 13 plan.”   (see also Carpenter v. Ries (In re Carpenter), 614 F.3d 930, 936-37 (8th Cir. 2010) (“§ 407 operates as a complete bar to the forced inclusion of past and future social security proceeds in the bankruptcy estate.”)

It is now very clear that neither the monthly income received by a retired or disabled debtor nor the lump sum payments typically associated with disability claims are at risk in either Chapter 7 or Chapter 13 cases.