I am curious if anyone has had success in having their Student Loans discharged through Bankruptcy. I know it is difficult to do, but it is possible? I’m looking at not being able to start a family, or buy a house, for the next 20+ years due to my student loan debt. (I’m 30 now). 

 

I have just over $110k in Student Loan debt, and just under 18k in CC debt. I make less than 42k a year at my job, and am finding I am struggling being able to make payments, while paying for rent, utilities etc.

 

Thank you in advance for any input I may receive. And again, I know it is difficult to have this student loan debt discharged.

Doesn’t this just break your heart?  Really, a person who is 30 years old is debating whether or not to start a family because of student loan debt. And yet, this feeling is SO common these days.  I can’t tell you how many young couples I meet who are afraid of getting married and starting families because they are worried about what student loan creditors will do to them.  They worry that they can never own a home or acquire retirement savings and that future wages will be garnished forever.  Something is seriously wrong in a country where young couples are afraid to start and expand families because of student loan debt.

“Does anyone have success in discharging student loan debt?”

The answer is almost no one has success in discharging student loan debt, and almost no one even bothers try. Under current bankruptcy law, student loans may not be discharged in bankruptcy unless paying such debts would impose an undue burden on the debtor.

The Nebraska bankruptcy court  applies a Totality of the Circumstances Test to determine whether student loans may be discharged.  The court will look at these factors when reviewing an application to discharge student loan debts:

  • Total present and future incapacity to pay debts for reasons not within the control of the debtor;
  • Whether the debtor has made a good faith effort to negotiate a deferment or forbearance of payment;
  • Whether the hardship will be long-term;
  • Whether the debtor has made payments on the student loan;
  • Whether there is permanent or long-term disability of the debtor;
  • The ability of the debtor to obtain gainful employment in the area of the study;
  • Whether the debtor has made a good faith effort to maximize income and minimize expenses;
  • Whether the dominant purpose of the bankruptcy petition was to discharge the student loan; and
  • The ratio of student loan debt to total indebtedness.

The problem I see with this young person’s situation is that he or she is not married, there are no dependents, and he or she earns a decent income and has no apparent disabilities.  Given those facts alone it is doubtful the loans would be discharged. In addition, it appears that no application for the income-based repayment plans offered by the US Department of Education has been made.

Under an income driven repayment plan, a borrower must pay what they can afford to pay over a 10 to 20 year period of time.  At the end of the payment program the unpaid portion of the student loans are forgiven.

Until a borrower has applied for an income-based repayment plan, bankruptcy courts are extremely reluctant to grant a discharge of the student loan.

The real problem: Credit Card Debt.

The real issue for this debtor is the $18,000 of credit card debt. That type of debt is dischargeable in bankruptcy and the debtor appears to qualify for Chapter 7 relief based on the income being below $42,000.  I suspect this debtor is paying his or her credit cards but is deferring student loan payments, and that is exactly the opposite of what should be done.

The likely best option for this person is to wipe out the credit card debt in Chapter 7 and then to enroll the student loans in an income based repayment plan. Life doesn’t wait, and at age 30 the time to start a family is running out. The student loans will be a burden, but they will be eliminated if a 20-year debt forgiveness program is started today. What is critical is to also start retirement savings through a 401(k) savings plan or an Individual Retirement Account while student loans are being paid.  And the presence of $18,000 of credit card debt makes that type of savings very difficult to achieve, so a hard examination of bankruptcy options is advisable.

Around the Corner Thinking

When it comes to money there is a tendency to engage in “around the corner” thinking.  As soon as I solve this problem then I can start to save. As soon as I get around that corner I can begin to plan for the future. The problem is, as soon as one problem is solved another appears, and so we are constantly trying to get around one corner after another and never really start to achieve our financial goals.  Enough!  Start achieving your financial and personal goals today. Start saving for retirement today. Start saving for the home down payment today. And when you are 30 years old, start that family today.

When you are trying to climb a mountain you need to reduce the weight on your back.  This debtor needs to take off 18k of credit card debt off their back so they can reach life’s summit.

Image courtesy of Flickr and StacyZ aka Adore_One

 

 

In today’s mailbag . . .

“70k in student loans–feeling lost

When I graduated high school, I felt invincible. I was a smart kid, so I thought I’d definitely find a good career someday. I had lots of dreams of becoming a roboticist, doctor, dentist, or anything challenging that I could feel proud of.

Flash forward to 2020, I’m 25 years old. I have a Bachelor’s degree in math from a small, unknown school, and I’m working as a behavior technician–bringing in about $1200/mo. My loan repayment is $650/mo and once I turn 26, I’ll have to get health insurance (approx. $450).

I feel so screwed.

Yes, I know I can set my loans to a longer-term plan to have smaller monthly payments. But even with that, I still need money for a new car. I have no savings. No retirement.

I’m smart, and I have big dreams, but I feel so crushed right now.

I’m about to apply to grad school in clinical psychology. Hopefully I can get into an affordable program. Wish me luck. I hope I don’t drown in this debt.”

 

Dear Feeling Lost:

You got used by the Industrial Educational Complex.  Yep, you wanted that college experience, and damned if you didn’t get one.  70k to get a generic degree in mathematics?  I’m pretty sure math today is still the same basic subject it was 100 years ago.  It’s a classic, and your knowledge could have been obtained for free just by reading library books and buying a few notepads.  But you got scammed into believing that if you went to that magical kingdom of a small college that you would come away as this shinning knight the world would embrace.  Yep, you got used. Welcome to life.

Okay, you have work to do, but it’s not that bad.  You’re 25.  (Dang, I’d pay you 70k cash if I could be 25 again, even with 70k of debt.) You are obviously a smart dude since math is no walk in the park. Your income is on the way up, and you now see the benefit of getting an advanced degree. But obviously you should be leery of taking on more student loan debt and I would advise that you try to pay for school without taking on additional debt.  You could have got your math degree cheaply at a community college and I see  no reason why your next degree should be expensive.  Honestly, in 25 years only a handful of clients every asked me where I got my degree.  It’s your personality and knowledge that matters, not where you got the diploma. Any accredited school will do.

 

OPTION #1: Refinance the Student Loan over 20 Years.

Most student loans are payable over 10 years. The name of the game is to keep the payment affordable. So, your best option is probably to consolidate all your loans into a Direct Loan issued by the Department of Education payable over 20 years.  As your career advances and your income increases you can always pay more each month, but for now the goal is to keep the loan affordable and reduce principal each month.

OPTION #2: Income-Based Plan (IBR).

If you have federal loans, a popular option is to apply for an Income-Based Payment plan.  In these programs all you to repay what you can afford over a 10 to 20 year period of time. At the end of the payment plan the unpaid balance is forgiven.  The benefit of this program is that the monthly payment is based on your income and household size, and if your income is really low the payment can be zero.  But, the danger of this program is that if you are not paying enough to cover monthly interest accruals, the balance of the debt actually goes up over time (what they call “negative amortization.”)  Also, the vast majority of folks who enter these programs never complete them and they default at some point and wind up owing more than when they started.  I’ve actually never met a person who completed this program, and the Department of Education has recently been involved in a scandal of not discharging loans for those who completed the 10-year Public Service program.  So, I’m not a big fan of this program and in your situation I would advise against it.

College Career Counselors make Used Car Salesmen look honest.

It took a few decades, but eventually trial lawyers took down the tobacco industry for their lies about the harm of smoking. But what about colleges and universities, can they be held liable for mispresenting the income a graduate will likely earn to be able to repay student loan debts?

With only minor exceptions, colleges and universities have not been held liable for misrepresenting the economic value of their degrees.  How long with this last? Courts have been slow to impose liability, but these schools are loading up young and naïve kids with debts they can never repay.

There is no underwriting in student loans (i.e., there is no standard analysis of whether the borrower can repay the loan.)  There is no risk analysis at all. No federal guideline exists to protect students from loans that they will be unlikely to repay. Why is that? Our federal banking regulations go to great length to protect borrowers from unwise mortgage loans (a loan backed up by collateral), but virtually no regulations to protect 18-year-old kids from unsecured loans that often greatly exceed the cost of buying a home! How does that make sense?

The educational industrial complex is ruining young lives and is lying to students and parents about the value of their product and danger of incurring large debts.

 

Image courtesy of Flickr and Yutaka Tsutano.

Payday loans have infiltrated every neighborhood and income level.  And what starts out as an emergency loan to cover a temporary cash shortage can turn into a cycle of obtaining new payday loans to pay off older loans.  And so it begins, a process of going from one payday lender to another.  An entire day can consist of making the rounds from one lender to another just to get by another week.

Nobody intends on becoming caught in the high interest rate trap of payday loans, it just happens over time.  It’s a temporary thing to pay bills and fix the car until that cash comes in from a tax refund or the next paycheck.  Everyone knows that payday loans charge in excess of 400% interest and that they are bad deals, but it’s just temporary until the cash comes in.  No one intends on getting caught in the trap of not being able to repay the loans, it just happens.

And when it is clear that you cannot honor that loan, what do you do? Well, you find another payday lender.  And that solves the problem for another week.  But when that check comes due, you seek yet another, and then another, and still one more.

At some point you realize you are trapped in an interest rate cycle that will not stop, but what do you do? How do you get out of the trap?

A recent client came to me with $8,000 of payday loans with interest rates averaging 400%. It would cost $32,000 a year to just to pay accruing interest without reducing any principal.  He hit the wall and just could not continue the cycle.  He had no other debt–just payday loans that got out of hand. So what were his options?

1: STOP PAYING THE DEBT.

The truth is, payday lenders fully expect their customers to stop paying at some point.  And until they stop paying they will pressure and threaten their customers.  Threats of lawsuits and judgments and garnishments and even criminal prosecution for writing bad checks.  That’s how they make money.  By the time the customer quits paying they have fully paid every dollar borrowed many times over.

Payday lenders are fully prepared to work out reasonable payment terms with their customers, but not until the customer stops paying and makes it perfectly clear they will no longer be a victim.

2: BRACE FOR THE PHONE CALLS AND LIES.

When you stop paying the payday loan, you will get calls.  At first the calls are “did you forget to pay us?” and then later  they become “you are going to jail for writing a hot check!” and “the Sheriff is coming to your work to serve papers and arrest you!”

This is why it was so hard to stop paying, because you believed their lies and worried that you would go to jail.

Know this: it is not a crime to default on a payday loan. A post-dated check written to a payday lender is not the same thing as a check written to a grocery store.  When you buy groceries with a check you are representing to the store that there are funds in the account now, but when you give a post-dated check to a lender you are saying there are no funds in the account to honor the check today.  There is no representation that the check is good today, therefore there is no crime if the check bounces.  The post-dated check is a loan, not a representation of funds on hand.  That is the key difference. But payday lenders will lie to you and say you committed a crime when the check bounces so you panic and pay them. Ignore their empty threats.

3: DEMAND A REPAYMENT AGREEMENT.

When payday lenders call tell them you cannot honor the old agreement and that you want a new deal. You cannot and will not pay another dime unless you receive a written payment agreement that you can afford.

This step requires that you figure out what you can honestly pay each payday to pay off the debt. And you must figure out this answer not just for one debt, but for all the payday loans.  What is the total you can pay towards all the payday loans each payday?  How many paydays will it take to pay back the principal owed on each loan? Whatever that answer is, offer that and make no further payments until they agree.

4: EXPECT TO BE SUED.

More likely than not, you will be sued when you default on the payday loan.  Don’t look on that as a bad outcome. Why not? There are two good things about being sued. First, you can now deal with the lender’s attorney and offer to pay back the debt at a level you can afford. Those attorneys are often paid in commission and they generally favor any solution that results in a repayment of the debt.  Second, even if the payday lender obtains a judgment, the interest rate on a Nebraska judgment is usually less than 10%.  You will find it much easier to repay a judgment at 10% interest than to pay the original loan at 400%.

5: OFFER A CASH SETTLEMENT.

When you stop paying payday lenders the door to a cash settlement opens up. If you are able to tap into a source of cash (time for a garage sale?), offer the lender 50 cents on the dollar if they will send you a settlement letter.  NEVER pay a settlement until you receive a signed settlement letter.  At first the lender may balk and threaten to garnish wages.  Just smile and tell them to get in line with the other dozen creditors who called this morning.  Stand firm.  No settlement letter, no payment.  There is no need to raise your voice or to convince them of anything.  If they refuse just hang up and wait for their next call.  Eventually they will either sue or settle, and you shouldn’t care which option they choose since you win either way.  Act like you don’t care and they will take you seriously.

6.  SPEAK TO A DEBT MANAGEMENT PROFESSIONAL.

The way you look at a financial problem and the way I review them is completely different. You are trying solve the immediate chronic pain you are facing, but I’m taking a much wider and longer perspective.  If you owe one $500 payday loan, that is small problem that goes away, even if you are freaking out about it now.  I want to know the larger problem. It’s not just about today’s problem but a question of your trajectory.  My office is a supply house of financial band aids along with an intensive care unit. When you are hurting you lose perspective, and what we do is to measure the severity of the problem and recommend the correct course of action.

Payday loans are usually the tip of the financial iceberg that reveals a much deeper problem. Payday loans are usually obtained when other sources of credit have run out, so we need to look at ALL of the debt, not just the payday loans.

Payday lenders may spook you, but not us. In fact, we tend to spook them since we discharge their debts in bankruptcy and know how to defend against their collection lawsuits.

Okay, it’s your turn.  Let’s light up this article with good comments. When you ask questions on this blog it not only helps you but it helps other readers.  I love questions. Fire away.

 

Image courtesy of Flickr and Jason Comely.

 

 

 

 

It has never been more dangerous for business owners to file Chapter 7 bankruptcy in Nebraska.

New rules now require that business owners prepare special valuation reports to provide more information about the assets of their business.  Chapter 7 Trustees have the power to sell unprotected assets, and they are demanding special reports showing the annual revenue of the business and the value of the business inventory, equipment, real estate and accounts receivable.

Companies with significant revenue and assets will be put under the microscope, even if the net value of those companies is negative.

In short, the trustees want to know the scope and size of the business. How many employees and contractors are employed? What is the the gross monthly revenue? Are there any liens on the company assets? If the company liquidated all its property, how much cash would exist?

These new business reports will help the trustees to identify possible targets. Companies with significant revenue and assets will be put under the microscope, even if the net value of those companies is negative.

REPORTING THE VALUE OF A BUSINESS INTEREST ON BANKRUPTCY SCHEDULES:

What is the value of a business? In most cases, the value a debtor’s business is based on a balance sheet approach. If the debts of a company exceed the assets, the company is normally valued at zero. Conversely, if the assets exceed the liabilities the company is valued at the net difference. In most cases a debtor’s business corporation has debts greatly exceeding company assets and the ownership interest is zero. The general feeling is that a company with a negative net worth is protected in Chapter 7, but that concept may not always be true.

NEW CONCEPTS IN BUSINESS VALUATION:

Assume a debtor owns a small business corporation with $50,000 of assets and $100,000 of liabilities.  Traditional thinking is that the company ownership is safe in Chapter 7 since the company has a negative net worth.

But net value concepts may be lacking. Nebraska law only protects up to a maximum of $5,000 of stock ownership.  You would think that stock in a company with a negative net worth is therefore protected, but that is not how stock is valued.  The price of stock ownership is based on what an investor is willing to pay for its ownership, not necessarily what the net value of a company is. In fact, many companies listed on the New York Stock Exchange sell for prices greatly exceeding the stock’s net value per share price.

Value to Competitors:

Assume the above company is based in a smaller community with only one other significant business competitor.  How much would the competitor be willing to pay to own the debtor’s stock? More than the $5,000 protected exemption limit?  Chances are a competitor would be willing to buy the company’s stock to take over ownership of its main competitor and its customer list.  Clearly the company stock is worth more to that investor than just the mere net asset value.

Value to Liquidators:

Assume the $50,000 of business assets above are free of liens.  The company is still insolvent since total debts exceed total assets, but the assets can be sold to generate cash since no lien is present.  What would an investor pay to own stock in a company that could be liquidated for $50,000 in cash? Yes, that cash would have to be applied to the $100,000 of company debt, but administrative expenses–wages of corporate officers in particular–are paid before general creditors.  So the new owner could pay a generous executive salary greatly exceeding the stock purchase price to handle the task of closing down the company. In addition, perhaps the new owner could negotiate with creditors to pay them, say, 25 cents on the dollar for their debt, thus generating a positive $25,000 net asset value for the company.

Value of Company Name, Customer Lists, Customer Contracts & Phone Numbers:

Although a company may have a negative net asset value, there is an independent value to the company’s name, customer list, customer contracts and telephone numbers. Any company that has been existence for a long period of time develops a reputation in the community and probably has a long customer list. The company may have value beyond the auction value of its assets.

Piercing the Corporate Veil in Reverse:

The legal concept of a corporation is that it has a separate legal identity from its owner. But creditors may disregard the corporate form and pursue its owner for a debt if the formalities of operating as a company are not followed. Were corporate tax returns filed and paid? Did the company conduct annual stockholder and board of director meetings to elect new officers? Does the company use a separate taxpayer identification number? Are company assets and funds comingled with the debtor’s personal funds? In short, was the company really operated as a company? If not, there are cases in Nebraska courts where the company fiction is disregarded and creditors were able to reach the assets of the company.

The takeaway here is that Chapter 7 Trustees are looking intently for companies with hidden value and net asset value is not the only measure of a company’s worth. Debtors who own a substantial business may be well advised to consider the safer options of Chapter 13 or Chapter 11 bankruptcy to protect their business operations in Nebraska.

Image courtesy of Flickr and Kevin Dooley.

In finance, and in life generally, there are steps and elevators.

Steps and elevators take us to where we want to go.

When it comes to money, eventually we want to wind up in a nice place. A paid home. A retirement fund. An opportunity to slow down and enjoy the fruits of our work. An opportunity to help others financially.

Money elevators are rare. You receive an inheritance, or win the lottery, or marry that rich person. Few people get to ride money elevators.

Most of us climb the steps. And the financial steps of our lives are called paychecks.

We normally are paid twice a month, or about 25 times a year.

Each decade has 250 paychecks.  250 steps.

Today you are here.  Tomorrow you want to wind up there.  How many steps are left?

This is why it is critical to know what “there” is in great detail. Because if you don’t know how much “there” costs, then you don’t know how much of today’s paycheck must be set aside for that goal.

When you know the price of the home you want paid in 20 years–in 500 steps–then you are informed about what you must do today.

Knowing where you want to be in the future informs you of what you must to do today.

But when you do not know where you want to wind up–when your goal is not specific–you wander. You try this and taste that. You go in circles.

Identify where you want to wind up being. Measure the paycheck steps left in your life. Make every step count.

The more steps you have left, the smaller each step is.

Paychecks are steps towards your future. Make every step count.

 

Image courtesy of Flickr and ~jar[]

 

 

Business owners filing Chapter 7 beware!  You may have to close your business until the Chapter 7 Trustee surrenders any claim to it.

That is the nightmare that potentially awaits unincorporated business owners who file Chapter 7.  Why is that?  And why does this only happen to unincorporated business owners?

The problem occurs because the moment a Chapter 7 case is filed all property of the debtor becomes vested in the Chapter 7 Trustee and the Trustee is charged with the duty of preserving the bankruptcy estate.  A debtor who continues to operate a sole proprietorship after the case is filed is diminishing the assets of the business by spending funds in a checking account and collecting accounts receivables and using business equipment.  And in the eyes of the trustee appointed to the case, many debtors do not run their business very well so they may direct the debtor to stop all business activity until they decide if any assets are worth claiming.

You can imagine the nightmare this presents.  Chapter 7 trustee’s don’t meet with debtors until at least a month after the case is filed, and they may wait even longer to decide if they will claim a business asset or surrender them back to the debtor.  In the meantime, a debtor may be forbidden to earn an income.

How can this be prevented?

SOLUTION #1: Incorporate the Business

The least expensive and most effective solution to the sole proprietorship dilemma is to incorporate. It has never been easier or less expensive than now to incorporate a business. Services such as LegalZoom will incorporate a business for as little as $150 plus filing fees. After the business is incorporated–a process that can be completed in a few days–the next step is to transfer assets into the new company.  Then, when the bankruptcy is filed, the debtor is not operating a business but is rather the owner of stock in a company running a business.

SOLUTION #2: Motion to Abandon Property

In the alternative, a business owner could opt to file a motion in the bankruptcy court to compel the trustee to abandon the business assets and to ask for an expedited hearing on the motion. This is an expensive option that will basically double the cost of the bankruptcy case, and there will still be a delay in business activity until the expedited hearing takes place.  In addition, the outcome of such a hearing is uncertain and it may require additional hearings to settle the matter thus causing the business to be shut down for an extended time.

A cold wind is blowing out there and it is impossible to say who will be told to shut down.

SOLUTION #3: Do nothing.

In 25 years of bankruptcy practice, I have seen few cases where a trustee actually compelled a debtor to cease business. However, in recent weeks we have seen a trustee pick up this issue and threaten debtors with penalties for dissipating business assets and operating businesses without trustee approval. In fact, the trustees have a point: the continued operation of an unincorporated business potentially reduces assets of the bankruptcy estate.  But it is rare for a trustee to make a shutdown demand, so perhaps this is much to do about nothing. The problem is, a cold wind is blowing out there and it is impossible to say who will be told to shut down.

Image courtesy of Flickr and Hannah Rosen.

In today’s email inbox came this message:

Message from UST Regarding Necessary Documentation for Chapter 7 Section 341 Meetings of Creditors

The Chapter 7 Panel Trustees for the District of Nebraska have standardized the documents that they will request in every chapter 7 case. The following documents must be submitted to the appointed trustee prior to the section 341 meeting of creditors by email or the trustee’s system for receiving documents:

  1. The most recently filed Federal and State Tax Return with all schedules. Tax transcripts will not be accepted. Social Security Numbers should not be redacted from the tax return provided to the trustee. If the debtor is not required to file tax returns, counsel shall notify the trustee by email. Tax returns are required to be sent to the trustee at least seven days prior to the scheduled meeting of creditors.
  2. Bank statements and electronic debit card statements covering ninety days (90) of activity up to and including the petition filing date on all accounts listed in the schedules, including checking and savings accounts. Bank statements should be provided to the trustee at least seven days prior to the scheduled meeting of creditors.
  3. If the debtor is a business or owns an interest in a business (corporation, LLC, PC, partnership etc.), the debtor shall provide a current Balance Sheet and Profit and Loss Statement and detailed inventory and accounts receivable lists at least seven days prior to the scheduled meeting of creditors.

In any given case, the appointed trustee may request additional information.  The list above, however, pertains to all cases.

Every person who files bankruptcy must attend a court meeting before the Trustee appointed to review their case. We call these “341 Meetings” because they are required under Section 341 of the Bankruptcy Code, and they are also called “creditor meetings” because creditors may attend the meetings (although creditors rarely attend).

Over time the amount of information requested by the Trustees to supplement the bankruptcy petition has grown larger, and this notice is largest demand for documents yet. At some point the Trustees will probably demand a video of a person’s home! (Shoot, they already look at Google Earth and Maps to get pictures of the outside.)

  • Tax Returns:  We already send Trustees copies of a debtor’s last two tax returns, but what is different about this request is that the trustees will no longer accept Tax Transcripts provided by the IRS.  This is strange.  How exactly are we to supply tax returns that have been lost? Providing trustees with an official tax transcript from the IRS which contains all the information that appears on the tax return itself appears to meet the trustee’s requirements.  What does a debtor do if there is no available copy of an electronically filed return?  I would guess they will have to get a transcript, prepare the return again, and print a copy of the copy.  Yeah, this is a stupid rule.  There is no valid reason for trustee to refuse to accept tax transcripts when a copy is not available. Good grief, tax transcripts are provided by the federal government. Does the US Trustee not trust the records of its own government?
  • Bank Statements and Debit Card Statements: Years ago we provided no bank statements to the trustee unless requested. Then, a few years ago we had to start providing statements showing the balance on the day the case was filed. Recently we had to start supplying statements for the past 90 days so the trustee’s could track down Preference Payments.  (A preference payment is a payment made to a creditor in excess of $600 made within 90 days of filing bankruptcy, and trustees have special powers to reclaim those payments.)  Now they are adding the requirement to provide Debit Card statements for the past 90 days.  Many debtors do not use traditional bank accounts and rely on the use of prepaid debit cards, and those same debtors generally lack access to their online accounts.  This is going to be a nightmare to produce all these records.  It’s already a mess, but at least this requirement makes sense.
  • Balance Sheets, Profit & Loss Statements and Accounts Receivable Lists.  Self-employed debtors and their attorneys will be faced with additional paperwork production burdens. The trustees are trying to figure out what a business is worth, and these documents will help inform them of the business value.  But what is also true is that this almost requires the preparation of two bankruptcy cases–one for the individual debtor and one for their business–and that extra burden will significantly increase the cost of filing bankruptcy for the business owner. No guidelines have been provided for the preparation of these financial statements.  Are these statements submitted under penalties of perjury as are the bankruptcy schedules? Is the debtor’s attorney liable for the accuracy of the business schedules?

Bankruptcy Rule 9011

Debtor attorneys must verify the accuracy of the documents they submit to the court. Bankruptcy rule 9011 provides the following:

By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,—

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;

(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and

(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.

Does Rule 9011 apply to Balance Sheets, Profit & Loss Statements and Account Receivables Lists emailed to the trustees? If so, it would appear that the debtor’s attorney now must undertake the burden of verifying the accuracy of the balance sheets, profit and loss statements and accounts receivable lists of the non-debtor business entity, and that burden is going to be very, very expensive.

Bankruptcy Code 707(b)(4)(C)

Section 707(b)(4)(C) of the Bankruptcy Code states that “[t]he signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has – (i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading or written motion; and (ii) determined that the petition, pleading, or written motion – (I) is well grounded in fact; and (II) is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law and does not constitute an abuse under paragraph (1), [i.e., an abuse of the provisions of Chapter 7 of the Bankruptcy Code]”.

Does Section 707(b)(4)(C) apply to this new rule of emailing the trustee the business records of a non-debtor corporation? Must the debtor’s attorney now perform a “reasonable investigation” into the debtor’s corporations?

 

These new rules were promulgated without seeking any input from the attorneys who prepare the cases. What are debtors to do if they cannot reproduce copies of the electronic tax returns they actually filed?  Are they prohibited from filing bankruptcy even though they fulfilled their legal duty to file returns and even though the Internal Revenue Service can provide detailed transcripts of what they actually filed? And why do Chapter 7 trustees believe that an unverified copy of a tax return is superior to a transcript provided by the federal government? What is the duty of a debtor’s attorney to verify the accuracy of corporate records of a company owned by the debtor that is not actually involved in the bankruptcy case? Does Bankruptcy Rule 9011 and Bankruptcy Code Section 707(b)(4)(C) apply?  Gosh, I wonder if this rule might have benefited from just a little bit of input by the people who actually prepare the cases? Are debtor attorneys the enemy?

 

Image courtesy of Flickr and Alexander Baxevanis.

 

 

 

 

Are trailer homes, pull-behind campers, and RVs protected in Nebraska bankruptcy cases?

Homes are protected in bankruptcy by a law called the Homestead exemption, and traditionally that exemption applies to homes built on land a debtor owns. But what about portable homes and RVs sitting on rented lots?

Case #1: Foley: A Tent of Cloth

In a 1951 court opinion (In re Foley) the debtor and his family lived in a Glider trailer house parked on a lot rented from the Garden Valley Trailer Court.  The question in that case was whether a debtor could claim a Homestead exemption when the ground the trailer home sat upon was merely leased by the debtor.

If a tent of cloth can have the essential attributes of a homestead, there is no apparent reason why a trailer house cannot.

The Nebraska bankruptcy court ruled that a debtor need not be the absolute owner in fee in order to establish a homestead right in land, but that any interest in land, coupled with the requisite occupancy by the debtor and his family, is sufficient to support a homestead exemption. The court in Foley ruled that an oral month-to-month lot rent agreement was enough to invoke the homestead exemption, but the court pointed out that a Tenancy at Will was not sufficient. (A Tenancy at Will is where there is no agreement to pay rent or a situation where someone is basically a squatter.)

The Foley opinion makes it clear that a debtor does not have to own land to claim a homestead exemption. But what about the nature of the home?  Does it have to be a home built on a foundation or can it be a movable home, camper or RV?  The Foley court answered that question as well.  “It may be a ‘brown stone front,’ all of which is occupied for residence purposes, or it may be a building part of which is used for banking or business purposes, or it may be a tent of cloth. If a tent of cloth can have the essential attributes of a homestead, there is no apparent reason why a trailer house cannot.”

Case #2: McGinnis: A Trailer on Wheels

In the case of In re McGinnis decided in 2000, the Nebraska court was faced with an objection to the debtor’s claim of a homestead exemption in a 5th Wheel trailer. The debtor had an oral month-to-month lot lease in a trailer home park. The Chapter 13 Trustee objected to the homestead exemption because the trailer was not permanently annexed to the real estate–that is, the trailer sat on wheels and could be moved at any time. The debtor countered that the trailer was sufficiently connected to the land because it was connected to city water, sewer and electrical systems.

The Court observed that while the home was on the leased lot the trailer was not hooked up to any vehicle and the trailer was held in place by various braces in addition to being connected to utility services.  “The Trailer in the present case was permanently annexed to the land following the liberal construction encouraged in Foley. The Trailer was held in place by braces to the land and was connected to electricity, plumbing, sewer and water service. Therefore, according to the analysis in Foley , the Trailer was permanently annexed to the land.”

Case #3: Zeleny: Vehicles Pulling a Living Space

In 2006 the Nebraska Bankruptcy Court decided the case of In re Zeleny involving whether a debtor could claim a homestead exemption in the vehicle that pulled a 5th Wheel Trailer. In Zeleny the debtor had traded a motor home for a 5th Wheel Trailer and a pickup truck that pulled it. The debtor attempted to claim that both the trailer and the pickup truck were homestead protected since they were both purchased from the proceeds of selling an exempt motor home.

That power unit/pickup truck can be used for other transportation . . . I decline to stretch the statutory definition to fit the facts of this case.”

This time the bankruptcy court limited application of the homestead exemption an denied protection of the vehicle pulling the trailer. “The Nebraska homestead exemption statute at Neb. Rev. Stat. § 40-101, et seq., does not provide for a claim of a homestead exemption in a vehicle that pulls the living space, whether it be a fifth-wheeler or some other type of trailer. The power unit/pickup truck cannot be permanently affixed to the real estate and was not in this case. That power unit/pickup truck can be used for other transportation, in addition to its use as a tow vehicle for the fifth-wheeler. Considering the Nebraska statutory exemption for a homestead and the type of units claimed in this case as eligible for the homestead exemption, I decline to stretch the statutory definition to fit the facts of this case.”

Case #4: Bernhardt: A Temporary Home

In 2008 the court issued an opinion in the matter of Bernhardt regarding whether a debtor could claim a homestead exemption when they rented a motor home as a temporary residence on his farmland while repairs to his permanent home were being made. The debtor owned two traditional homes on his 160 acre farm but could not live in either since there were in a state of disrepair. In Bernhardt the issue was not whether the motor home was exempt since it was not owned by the debtor but merely leased.  Rather, the issue was whether the requirement that a debtor “reside” on the property was satisfied.

The Nebraska homestead law says the following: “A homestead not exceeding sixty thousand dollars in value shall consist of the dwelling house in which the claimant resides, its appurtenances, and the land on which the same is situated, not exceeding one hundred and sixty acres of land . . . .”

The bankruptcy trustee objected to the homestead exemption because the motor home was a “recreational vehicle” and the debtor was only temporarily residing in the motor home.

The court disagreed with the trustee and pointed to the fact that the motor home was connected to electrical and water systems and further stated that “given the homestead statute’s liberal construction, I find that Debtors’ actual occupancy on the Farm property in which they own an undivided one-fourth interest, coupled with their intent to occupy the dwelling house upon its repair, is sufficient to support their claim of a homestead exemption.”

SUMMARY

The case law makes it very clear that trailer homes, pull-behind campers and recreational vehicles may be protected under the Nebraska homestead law, but important questions need to be asked.

  • Is the mobile home your primary residence?  If you live in a trailer home and pay lot rent or own the land it sits on, there is a good chance the home is protected by Nebraska’s homestead exemption, but you must live in the home full time and this cannot be a trailer used for a few months each year. This must be your full-time home on the day the bankruptcy is filed.
  • Is the trailer home connected to real estate?  A portable home that is pulled by a truck and is not connected to the ground will not be considered a homestead under Nebraska law.  The home must be connected to the ground and be somewhat immovable because of those connections.  The home should be  connected to utility services for electricity, water and sewers.  The presence of braces connecting the home to the ground is a strong indicator that the home is sufficiently affixed to the ground to qualify for the homestead exemption.
  • Does the home sit on land you rent or own?  To qualify for Nebraska’s homestead exemption, the debtor must have some legal interest in the land the home sits upon.  A month-to-month written lease agreement is sufficient to claim an “interest” in the real estate and outright ownership of the land is not required, but a Tenancy at Will is not sufficient.
  • Vehicles pulling a camper are not protected by the homestead exemption.  Although a pull behind camper may be protected by the homestead exemption, the truck pulling it is not.
  • RVs have questionable protection.  It is likely that a trustee will question whether a RV qualifies for the homestead exemption unless you reside in the RV full time and the RV must be connected to utility services and perhaps braces should be present. If a RV is unhooked from utility services frequently and is driven on a routine basis, it starts to resemble a vehicle more and a homestead less.

 

Image courtesy of Flickr and Albuquerque Film Office.

 

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