As much as the means test is a pain in the neck, why don’t more bankruptcy attorneys skip it?

Finding that your client’s debts are not “primarily consumer” is an instant, get-out-of-jail-free card.

If you can check the B-22A box that the debts are not primarily consumer debts, you get to skip the rest of the miserable form.

Let’s revisit the statute:  §707(b)(1) starts out providing that the court may dismiss a case “filed by an individual debtor…whose debts are primarily consumer debts…”  That’s the foundation for the means test and B-22.

If the debts are not “primarily consumer” debts, then your client’s case can’t be dismissed under this section.  Pretty strong hand, right?

The Code  defines consumer debt as “debt incurred by an individual primarily for personal, family, or household purposes”.  Section 101(8).

For me, it’s easiest to list the things that aren’t consumer debts

• Taxes
• Business debts
• Debts in general incurred with a profit motive
• Tort debts

There are two theories operating here as to why a debt isn’t a consumer debt.  One is found in the tax debt cases, holding that one doesn’t decide to incur a tax, it’s imposed upon you.  Therefore, it isn’t a choice.

[Remember that the means test is a penalty to be inflicted only on the consumer who makes bad choices.  Somehow, those who fail in business or choose not to pay taxes aren't subject to the means test indignity.  But there, there, my ire is showing.]

The second discriminator is the presence of a profit motive:  investment property, trade debt, stock margin debt.

The character of the debt is determined when that debt is incurred, says the majority position on the issue.

So, the former family home, now a rental, is encumbered with consumer debt, since it was incurred, in the first place, for household purposes.  Consider, if you’re feeling argumentative, whether that character changes if the house has been refinanced after it became a rental.  I haven’t seen cases, but I haven’t yet looked.

In the case of the small business owner, this may require that you sort credit cards into those used for business and the personal cards.  If the client is undisciplined in the division, you may have to analyze the usage of each card, if finding more business debt is critical to your escape from means test jail.

Happy sorting.

Image courtesy of Mark Strozier.

Image courtesy of Umpire's Photographer.

The business bankruptcy version of “who’s on first” is the inquiry:  who is liable for this debt? 

Get a clear answer or get ready for trouble.

A small business owner and his business are often indivisible in his mind.

When a bankruptcy lawyer doesn’t work to  pull them apart, analytically, he should be charged with an error.

Seen at the courthouse

The debtor had been told:  don’t pay this loan after filing, your  liability will be discharged.

The prior bankruptcy lawyer didn’t dig deep enough to find out that the debt in question was contractually also a debt of the business entity.

The debtor dutifully didn’t pay it after the individual’s Chapter 7, and now the creditor secured by the assets of the corporation is foreclosing on the collateral essential to run the business.

Black letter law

The debtor’s discharge only protects the debtor personally from post discharge collection action:  no one else.  The obligations, and the exposure, of  any separate business entity the debtor owns and operates,  remain.

In practice

The action item from that black letter law is  that you create three piles of bills when dealing with an individual and a separate business entity that expects to operate after the debtor’s filing:

1. Debts for which only the individual is liable.
2. Debts for which only the entity is liable.
3. Debts for which both are liable.

It’s that third category that presents the problem, the intersection of  the circles of liability below.

When the entity has contractual liability, failure to pay may result in unpleasant consequences to the entity.

Start by looking for

• SBA loans
• payroll taxes
• premises leases
• equipment leases
• business lines of credit

Each of those kinds of debt are likely to be guaranteed by both the owner and his entity.

Do a UCC check under the business name.  Are there creditors asserting a security interest in the assets of the entity?

When you know what the obligations of the entity are, you can advise the debtor on what needs to be paid post filing to keep the entity in good standing.

Another time, we’ll talk about remedies for the debt of the entity.

After all the time I spend cajoling, suggesting, demanding that bankruptcy lawyer READ THE CODE, I was bitten by my own advice recently.

The youngish bankruptcy lawyer had read § 109, and leapt to a conclusion 180 degrees from correct.

He was utterly right that the words of the statute talk about debts the debtor owes.

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts ….

His client had a Chapter 7 discharge and therefore, he concluded, the client didn’t “owe” anything.  He reasoned from there to the assertion that there is no debt limit in a Chapter 20, despite the value of the encumbered collateral.

So here we have to  access  the Humpty Dumpty school of statutory interpretation:

`When _I_ use a word,’ Humpty Dumpty said in rather a scornful
tone, `it means just what I choose it to mean — neither more nor
less.’

Or more precisely, we need the Supreme Court’s take on what it means for  a debtor in a Chapter 13 to  owe a debt.

That was the issue in Johnson v. Home State Bank.

Farmer Johnson fell behind to the bank and filed Chapter 7, discharging his personal liability on the mortgage on the farm.  Before the bank could foreclose post discharge, Johnson filed a Chapter 13 to cure the mortgage arrears.

The bank opposed his eligibility to file 13, asserting that there was no debt to reorganize, in light of his discharge.

The Supreme Court held that the rights the creditor held in rem against the farmland constituted a claim.  The Justices hearkened back to a case in which they held that

‘right to payment’ [means] nothing more nor less than an enforceable obligation . . . .”

So it was sufficient for eligibility purposes that there was right to payment, even if only enforceable against the debtor’s asset.

The debt limits weren’t at issue in Johnson, so there is no discussion about § 109(e).  And when I went looking for the killer case with the pithy statement that in Chapter 20, it’s the value of the collateral that defines the secured debts in the case, the pickings were thin.

Maybe after Johnson and a district court decision in Connecticut, Cavaliere v. Sapir, 208 B.R. 784, no one felt the need to challenge the idea.  Cavaliere stands for the proposition that the secured claims in the Chapter 7 survive only to the extent of the value of the collateral, or on the Cavaliere facts, to the balance of the first mortgage on the home, since it couldn’t be modified.  The balance of the secured claims, nearly a million dollars, ceased to exist for purposes of eligibility  in the subsequent Chapter 13.

So, the moral of this story is that reading the code isn’t enough:  you have to know what courts, outside the Humpty Dumpty Circuit, say the words in the statute mean.

Mountaineering image courtesy of jhf;  Humpty Dumpty courtesy of    dacotahsgirl

I’m just getting around to sharing with you my Chapter 13 trustee’s Wish List for 2012, which she announced  at our bankruptcy bar’s Christmas party.

The fact that she has to “ask” us to do what the Code says we must speaks volumes about the attention to detail (or lack thereof) in the bar.

And I would contend that we in the Northern District of California  have a bankruptcy bar that is generally capable, though a lot younger in average age than it was 5 years ago.

Here’s what Devin Derham-Burk wanted from debtor’s lawyers for Christmas:

• Provide 60 days pay stubs or a declaration at the time the petition is filed
• File the credit counseling certificate as soon as the class is taken
• Provide the most recently filed federal tax return at the time the petition is filed
• If the debt exceeds the Chapter 13 limits, choose a different chapter!
• Tell your clients when to pay their first Chapter 13 payment
• Prepare your clients for the questions that will be asked at the 341 meeting.

Nothing new, nothing complex in her list.

Yet the tone of voice in which the list was presented suggests that the attorneys were not managing….

So, make a trustee’s day, or year.  Pay attention to the little stuff.  Build some credit with the trustee so you can advocate from a position of credibility on the big issues.

They’re not “I love you” or even “I am sorry”.

They’re bequest, devise, and inheritance from §541(a)(5)(A).

Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—

(A) by bequest, devise, or inheritance;

This subsection is one of three exceptions to the idea that the bankruptcy estate consists of the  property interests the debtor has at filing.

The reason I mention this provision is that I’m watching lots of lawyers conflate those words “bequest, devise, or inheritance” into “acquire by reason of someone’s death”.

Don’t fall into that trap.  Those three little words have precise meanings, found in state law.  Surowitz, 94 BR 438;  Roth 289 BR 161. Roth held that devise and bequest involved transfer by way of will.

Most commonly, it becomes important to parse this language when our debtor is the beneficiary of someone who died within the 180 days after the commencement of the bankruptcy case, with a living trust as their testamentary instrument.

To keep your client’s share of that estate out of the bankruptcy estate, you need to know whether state law would bring acquisition by trust within either of those three, critical words.

In Zimmermann, 306 BR 328,  my clients and I are delighted to report that neither bequest, devise or inheritance describes the method by which a California  beneficiary participates in a revocable trust, become irrevocable by reason of a post petition death.

This distinction is not relevant if the debtor has an interest in the estate of someone who has died prior to the bankruptcy filing.  If the rights in the estate have become fixed before filing, you may be  stuck dealing with the value of the inheritance and perhaps sharing it with creditors.

Unless, of course, the debtor’s interest is held in a spendthrift trust, enforceable under state law.

As an issue of planning, the corollary from this discussion is clear:  if the debtor stands to inherit (in the broad sense of the word) from someone whose health is precarious, inquire about the nature of the testamentary instrument involved.  Consider whether it is possible to have the putative donor revise the will in question to put any gift to your client outside of the reach of bequest, devise or inheritance.

 Image courtesy of Clover_1.

OK, readers.  It’s time for a pop quiz.

How many non bankruptcy, federal exemptions can you name?

1.

2.

3.

If you didn’t get past the exemption for Social Security, read on.

Section 522 (b)(3)(a) provides that a debtor who elects the applicable state law exemptions can also exempt property under  federal, non bankruptcy exemptions.  Inconveniently, those exemptions are scattered all over the  U.S. Code.

Here’s a list, culled from legal publications and annotated from input on the NACBA listserve

• 75% of earned but unpaid wages – 15 USC 1673
• CIA employees.  U.S.C. 50 § 403
• Civil Service retirement benefits. 5 U.S.C.A. § 8346; 5 U.S.C. §§ 729 and 2265
• Crop Insurance proceeds. 7 U.S.C. 1509.
• Debt Collection Improvement Act of 1996. 31 U.S.C.A. § 3716.
• FEMA benefits 44 CFR s 206.110(g)
• Benefits, annuities, or payments to survivors of foreign service employees. 22 U.S.C.A. § 4060(c).
• GAO Service Annuity.  31 U.S.C. 776.
• Federal homestead lands on debts contracted before issuance of the patent. 43 U.S.C. 175.
• Indian tribe exemptions. 25 U.S.C.A. § 410.
• Annuities paid to survivors of a Justice or judge of the United States, a Director of the Administrative Office of the United States Courts, a Director of the Federal Judicial Center, or an administrative assistant to the Chief Justice of the United States. 28 U.S.C.A. § 376(n)
• Klamath Indians Tribe – Oregon. U.S.C. 25 § 543, 25 § 545.
• Benefits for surviving spouses of Lighthouse Service personnel. 33 U.S.C.A. § 775.
• Death and disability benefits paid pursuant to the Longshoremen’s and Harbor Workers’ Compensation Act. 33 U.S.C.A. § 916.
• Special pensions awarded to persons on the Army, Navy, Air Force and Coast Guard Medal of Honor roll. 38 U.S.C.A. § 1562(c).
• Military survivor annuities paid pursuant to the Survivor Benefits Plan. 10 U.S.C.A. § 1450(i).
• Public Safety Officer Death Benefits. 42 U.S.C. § 3796
• Railroad Retirement Act annuities and pensions. 45 U.S.C.A. § 231m.
• Railroad workers’ unemployment insurance benefits. 45 U.S.C.A. § 352(e).
• Wages of fishermen, seamen, and apprentices. 46 U.S.C. 601; 46 U.S.C.A. § 11109(a).
• Benefits due or to become due under servicemen’s groups life insurance or veteran’s group life insurance. 38 U.S.C.A. § 1970(g) and 38 U.S.C. § 770(g).
• Social security benefits. 42 U.S.C.A. § 407. See also 42 U.S.C. § 659.
• Student Loan Proceeds  20 U.S.C. 1095a(d)
• Exempt benefits available under Supplemental Security insurance.  42 U.S.C. § 1383.
• Annuities paid to members of the armed services, based on retirement or retainer pay. 10 U.S.C.A. § 1440.
• United States service member’s deposits in a savings institution while the depositor is on permanent duty outside of the United States. 10 U.S.C.A. § 1035(d).
• Veterans’ benefits. 38 U.S.C.A. § 5301(a).
• Social Security Disability Benefits.  42 U.S.C. § 407.
• War Compensation – Hazard, Death, Injury. U.S.C. 42 § 1717.

Do you know of others that should be added to this list?

Image courtesy of inju.

Turning the focus around, I thought about what I wanted to do differently or better this year in my practice.  Here’s my list.

1. Communicate the bankruptcy grounds rules to clients more effectively.
2. Improve my work product retrieval system
3. Pay better attention earlier to fee applications in complex Chapter 13′s.

None of this is new or particularly startling.  But it is the nuts and bolts of making the practice run better.

Client communication

When you shuffle the client’s fact pattern with the messy provisions of BAPCPA, it’s no wonder you get unpredictable results.  Some debtors learn by reading, some by listening and some don’t learn at all.

I’ve done this long enough to know I won’t be able to achieve a Vulcan mind meld with stressed out laymen, but I’m going to continue trying.

I plan to review and revise the various hand outs we give clients.  I’ve got four years of my posts from Bankruptcy Law Network that I plan on making into an ebook.  I’ve rewritten our piece about our fees,  what’s included, and the frequent insufficiency of the no look fee.

Recycling

How often have I stood in the doorway of my partner’s office and asked, “what was the name of the case where we ……”  I’m not particularly good with names anyway, and put a couple of years between me and the event, and I can’t recall where to look for an example of a 522(f) lien avoidance or a motion to incur debt.

I resolve to at minimum save examples of motions and legal research in my research file under a subject matter heading, so I don’t have to reinvent the wheel when these issues come back around.

Better yet, I want to strip out the case specific stuff and create a template with prompts, so that a new lawyer or a paralegal could take the first pass at drafting.

Collect what I’ve earned

Whether it’s because few bankruptcy judges have practiced under BAPCPA, or practiced consumer bankruptcy law at all, the no look fees for Chapter 13′s are seldom equal to the value of the work necessary to prosecute the case.  And with hard times out there, we’re finding an increased number of our confirmed Chapter 13′s cratering.

So, like they say about Chicago voting, apply for fees early and often.  I hope to routinely look at fees at confirmation and see if our time justifies a fee application.

I want to make greater use of the no-notice, no hearing fee application (and pray for an increase in the $1000 cap on fees to be considered without a hearing).

We’re going to build an annual review of Chapter 13 cases into our calendar system, so we can monitor any changed circumstances in cases, and weigh our unapproved fees against the current posture of the case.

Prayer

Wherefore, movant seeks…Oops, wrong prayer, wrong place.

I pray that I don’t have to scramble for topics to write about this year.  If you  have issues, questions, or observations on learning to practice consumer bankruptcy law, leave me a comment.

It’s time to put this thinking about the practice of law behind me, and move on to doing it.