Category Archives: Uncategorized

Ninth Circuit Bankruptcy Appellate Panel Affirms Decision That Tuition Credits Are Not Excepted From Discharge

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On July 15, 2014, my partner, Kitty J. Lin, wrote an article about tuition credits and a case of first impression since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) in the Ninth Circuit Bankruptcy Court for the Northern District of California regarding whether tuition credits are excepted from discharge or not discharged. On March 27, 2015, the Ninth Circuit Bankruptcy Appellate Panel affirmed bankruptcy court’s ruling that tuition credits are not excepted from discharge, BAP No. NC-14-1336-PaJuTa, and not excepted from discharge pursuant to Section 523(a)(8)(A)(ii). Ms. Christoff received tuition credits from a for-profit education company named Institute of Imaginal Studies dba Meridian University prior to filing for bankruptcy protection. This is a blow to the for-profit educator sector and a little consolation prize for students with tuition credits. Other for-profit colleges have come under fire recently for their lending practices and the job prospects of their students. At least a student with a tuition credit can discharge that part of their debt when filing for bankruptcy protection.

Procedural History

The debtor, Tarra Nichole Christoff, filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code on April 19, 2013, in the Northern District of California, Bankruptcy Case No. 13-10808-DM-7. As part of her petition Ms. Christoff listed a general unsecured debt of around $11,000 owed to Meridian. Meridian proceeded to file an adversary proceeding (lawsuit within the main bankruptcy case) to determine whether the tuition credits and resulting loan from Meridian to Ms. Christoff was excepted from discharge pursuant to Bankruptcy Code Section 523(a)(8)(A)(ii).

Section 523(a)(8)(A)(ii) of the Bankruptcy Code provides:
(a) A discharge under section 727, 1141, 1228 (a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt—
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend;

After Meridian filed a motion for summary judgment in the adversary proceeding the Bankruptcy Court denied the motion for summary judgment and entered a judgment in favor of Ms. Christoff. The Honorable Dennis Montali starts the memorandum of decision: “In addressing the issue court must consider two powerful competing principles: the need to give the honest debtor a fresh start and the seemingly endless desire of Congress to except more and more student loans from discharge absent undue hardship.” Meridian’s bankruptcy lawyers argued that Ms. Christoff received a loan from Meridian and the loan proceeds went directly to Meridian and Ms. Christoff then received the education. Ms. Christoff’s bankruptcy attorneys argued she never received any funds from Meridian or anyone else. The Honorable Judge Dennis Montali in the adversary proceeding held that no funds were received even though the transaction between Meridian and the Ms. Christoff resulted in loans for repayment of tuition credits to Meridian. Therefore, the tuition creditors are not excepted from discharge. The decision in the adversary case was immediately appealed to the Ninth Circuit Bankruptcy Appellate Panel for review.

Ninth Circuit Bankruptcy Appellant Panel Affirmation of the Bankruptcy Court’s Ruling

Ms. Christoff, the debtor, was awarded $6,000 in financial aid to pay for some of her tuition. She signed a promissory note. She did not actually receive any funds from Meridian though. Instead, what she received was a tuition credit. The terms of the note required her to pay back the funds at $350 per month after she finishes her coursework or she withdraws from Meridian along with 9% interest to be compounded monthly. She received another $5,000 in tuition credit the following year after signing a promissory note with the same terms. She withdrew from Meridian after completing all her coursework and clinical hours but before she completed her dissertation.
In interpreting the funds received requirement in Section 528(a)(8)(A)(ii), the Ninth Circuit Bankruptcy Appellate Panel agreed with the bankruptcy court and held Meridian simply agreed to be paid the tuition later and it did not receive any funds from a third party financing source. The key here is the language in Section 528(a)(8)(A)(ii) that grants exception to discharge for “an obligation to repay funds received.” That means funds received by the plain language of the Bankruptcy Code. The long stand principle is that exceptions to discharge should be confined to those plainly expressed. Hawkins v. Franchise Tax Bd. of Cal., 769 F.3d 662, 666 (9th Cir. 2014) The plain language of this prong of the statute (Section 523(a)(8)) requires that a debtor receive actual funds in order to obtain a nondischargeable educational benefit.” Cazenovia Coll. v. Renshaw (In re Renshaw), 229 B.R. 552, 555 n.5 (2d Cir. BAP 1999), aff’d, 222 F.3d 82 (2d Cir. 2000)) Again, no funds were received so Section 528(a)(8)(A)(ii) did not except from discharge the tuition credits Ms. Christoff received.

Are my Assets in my Revocable Living Trust Part of my Bankruptcy Estate?

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In general, all of the assets that you own are supposed to be disclosed as part of your bankruptcy estate when you file for bankruptcy (with certain exceptions of course). Are assets you transferred into a revocable living trust part of your bankruptcy estate as well? The answer is yes, they are part of the bankruptcy estate even though the trust is a separate legal entity.

A revocable living trust is normally used as a probate avoiding tool. All the assets included in the trust do not have to go through probate court. This may save significant time and money for the beneficiaries: they get their inheritance faster and they have more of the inheritance left over for them. Upon the passing of the settlor or grantor (person who transferred the asset into the trust to create the trust) the assets in the trust are distributed based upon the wishes of the settlor or grantor.

Although the revocable living trust is a great probate-avoiding tool it is not a great bankruptcy planning tool. That’s because a revocable living trust is revocable. The trust can be modified or revoked at any time. If the owner of the trust assets decides he or she no longer wants the asset to be in a trust, the owner can take the asset out of the trust. If the owner wants to sell the house he or she has the power to do so because it is still their property. It is this freedom that makes the trust a poor bankruptcy planning tool. The bankruptcy trustee steps into your shoes when you file for bankruptcy. Everything you have access to, the trustee and your creditors do as well. That means that the trustee may have the power to sell your house if it is not properly exempted. If you have assets in a revocable living trust you should consult with bankruptcy attorneys to determine if the assets can be protected or not before filing bankruptcy. It may be counter productive if you file for bankruptcy and end up losing your house or other significant assets you may have.

An example of the above situation is if you transferred your house worth $500,000 into a revocable living trust. You name yourself the trustee for the trust during your lifetime. The house has a $250,000 mortgage in your name that still needs to be paid off. If you file a Chapter 7 bankruptcy case without the advice of a lawyer it may be detrimental to your case. Some people may think that an asset in a revocable living trust does not need to be included in the bankruptcy estate because the trust is a separate legal entity. You may end up potentially losing your home if you do not have adequate legal counsel to guide you. That is because there is no bankruptcy exemption with a limit high enough to protect $250,000 in equity in your home (depending on the jurisdiction in which you live, a couple of states have unlimited homestead exemptions). Once you have filed a Chapter 7 case you cannot voluntarily dismiss it at any time either once you find out that it is detrimental to your finances. You will have to stick it out and abide by the orders of the court. This is why it is essential to consult with bankruptcy lawyers when you have any assets that may need protecting. There may be some types of irrevocable trusts that may be excluded from the bankruptcy estate. They may be excluded because you do not have access or control over the trust and therefore the bankruptcy trustee may not have access or control over these trusts. It is highly recommended that you seek the advice of competent legal counsel to advise you on such matters.

Can the Extra $200 IRS Deduction for Having A High Mileage Car or Old Car Still be Used? The Ninth Circuit BAP In Luedtke Say No

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If you have an old car chances are you are paying more in operational expenses for the old car than a newer one would cost. Most people would agree they have to pay more for repairs such as changing worn out brakes, needing new tires, may be needing a new transmission, timing belt, car engine and other maintenance and service needs for their old car. The bottom line is you need to put more money into your car for the wear and tear. For years bankruptcy attorneys have added an extra $200 pursuant to the IRS standards for old vehicles due to additional maintenance costs. The Ninth Circuit Bankruptcy Appellate Panel in Drummond v. Luedtke (In re Luedtke), BAP No. MT-13-1313, 9th Cir. BAP (Apr. 9, 2014), the 9th Circuit said this extra expense can no longer be used in Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Official Form 22C).

Different jurisdictions have different rulings when it comes to this issue. Some jurisdictions allow an additional $200 deduction for an “older vehicle operating expense” in the Official Form 22C because they acknowledge the fact that older cars do cost more to maintain. Some jurisdictions do not. Unfortunately for debtors, last week the Ninth Circuit Bankruptcy Appellate Panel moved the Ninth Circuit to the “not allowed” side.

Mr. & Mrs. Luedtke filed a Chapter 13 bankruptcy case in Montana. They had two cars and claimed an additional $200 deduction for an “older vehicle operating expense” on their Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income because one of their cars was a 1993 Ford Taurus with 118,000 miles. The trustee objected to the Chapter 13 plan the Luedtkes proposed because the trustee indicated that the additional $200 expense deduction could have been paid into the plan to benefit general unsecured creditors. The bankruptcy court overruled the trustee’s objection and the trustee appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.

According to 11 U.S.C. §1325(b)(1), all of the debtors’ projected disposable income (this figure is derived from the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, Line 59) needs to be paid to general unsecured creditors. What is this statement determining how much unsecured creditors should receive in the plan? The statement of disposable income takes into account your income averaged over the last six months and compares this average income with the median income for the number of people in your household in the county you live. If you are below the median income in your county then the commitment period can be 36 months. If you are above the median (meaning your income is higher than the median income for your county based on the number of people in your household) the minimum commitment period for the plan has to be 60 months and the statement of disposable income is filled out further. Most of the expenses or deductions from your income are based on IRS National Standards and Local Standards, not your own personal monthly expenses. If your personal expenses are higher than the IRS National Standards and Local Standards you still only receive the deductions calculated by the IRS and not what you actually spend. If you are spending more than the IRS standards, in theory it means you are spending above what you can afford. After all allowable expenses are deducted from your income you end up with the “projected disposable income” figure. This is the minimum amount the general unsecured creditors must receive in the Chapter 13 plan. If you need more help understanding this process you should speak with bankruptcy lawyers in your jurisdiction.

The Bankruptcy Appellate Panel in Luedtke case held that the additional $200 deduction for the older vehicle expense is not listed in the IRS’s Financial Analysis Handbook. The only place that references the extra $200 deduction is under a chapter that only dealt with compromise proposals from taxpayers that are late in paying their taxes. That chapter has to incorporate the chapter in the IRS manual that provides for the National Standards and Local Standards but it is not reciprocal, meaning the National Standards and Local Standards do not incorporate the $200 older vehicle expense. Therefore the court indicated the $200 additional deduction for an older vehicle expense is not allowed to be used in the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income to reduce bankruptcy filer’s monthly disposable income.

If There Is A Lien On Your Property There May Be A Way To Remove The Lien When Filing Bankruptcy

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If there is a lien on your property there may be a way for you to avoid (remove) the lien when you file for bankruptcy protection. It has to meet certain criteria of course. Only certain liens can be avoided: 1) judicial liens (except for judicial liens that secure domestic support obligations) and 2) non-possessory, non-purchase-money security interest liens. See 11 U.S.C. §522(f)(1).

What is a judicial lien? After a creditor sues you for money owed, you can get a judgment filed against you in several ways: you lose the court case because you really do owe the money or you did not defend the lawsuit (or chose to ignore it) and the creditor wins by default and obtains a default judgment against you. The creditor can then place a judgment lien on your property by recording an abstract of judgment with the county recorder’s office of your county. If there is a lien placed on your property due to a judgment, that lien could be avoided.

What about the non-possessory, non-purchase-money security interest lien? Those are basically any non-consensual liens. If you are not sure about what type of lien was recorded against your property consult a local bankruptcy lawyer in your area. Liens you did not voluntarily place on your property. Examples of a possessory or purchase-money security lien are things like your mortgage and car loans: you voluntarily use your house or your car as collateral to obtain a loan.

Now that you know what types of liens can be avoided on your property your next step is to determine if your bankruptcy attorney can help you avoid the lien. Remember, if there is a lien on your property there may be a way to remove the lien by filing bankruptcy. When filing for bankruptcy protection the lien can be avoided if it impairs an exemption that you are entitled to. 11 U.S.C. §522(f). How do you determine if the lien impairs an exemption? According to 11 U.S.C. §522(f)(2)(A), the lien will impair an exemption to the extent that the sum of the lien, all other liens on the property and the amount of the exemption that you could claim if there were no liens on your property exceed the value of your interest in the property in the absence of any liens.

So what does that even mean? §522(f)(2)(A) is essentially saying that if you add up all your liens plus your exemptions and if it exceeds the fair market value of your property then it impairs an exemption. The best way to explain is to provide you with an example. Let’s say you have a house that is worth $400,000. You have a mortgage on the property for $380,000. You have a $25,000 exemption available for your house. You have a judgment lien on your house for $10,000. Can you avoid this $10,000 lien? Let’s work out the math. If we add up all the liens on the house plus exemptions, we get $415,000 ($380,000 + $10,000 + $25,000). Since the house is worth $400,000, and the mortgage of $380,000 (non-avoidable lien) plus the exemption of $25,000 = $405,000, the entire $10,000 lien would impair your exemptions. In another scenario, if you only have a $370,000 mortgage on your property plus the $25,000 exemption, it totals $395,000. If your house is worth $400,000, then the $10,000 lien would impair an exemption only up to $5,000. This means that you can avoid lien up to $5,000. Depending upon the circumstances, if there is a lien on your property there may be a way to remove the lien when filing bankruptcy.

How Does Filing Bankruptcy in the U.S. Affect My Foreign Debt?

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In today’s world traveling and living in different countries is not very difficult.  It is no surprise that people may owe debts in different countries as well since credit can be obtained easily.  What do you do when you owe debts in different countries and you need to file bankruptcy with our bankruptcy lawyers in Union City?

First of all, if you live in the United States, it would be difficult for a foreign creditor to enforce their debts against you.  Different states have different rules about whether or not a foreign creditor can collect or enforce a judgment of a foreign debt.  In order for a debt to be recognized and enforceable, the foreign creditor would need to “domesticate” their debts.  Different states have different rules regarding domestication of debt.  In some states a foreign creditor can enforce their debts against you if they meet the requirements of the Uniform Foreign Money Judgments Recognition Act (“UFMJRA”).  In addition to meeting the requirements of UFMJRA the foreign creditor must have had personal jurisdiction over you or subject matter jurisdiction over the matter.  The in most states courts have a lot of discretion over whether to allow enforcement of these debts even if the foreign creditor met all the requirements.  Therefore, a lot of foreign creditors may not go through all these steps to try to enforce their judgment against you unless it is was worth their effort to do so.

Regardless of whether or not a foreign creditor domesticates their debt, all creditors are subject to the automatic stay that is in place when you file for bankruptcy in the United States with a bankruptcy attorneys in Fremont.  It does not matter if the debt is from the United States or from another country.  This means that if the foreign creditors try to collect from you or file a lawsuit against you after you have filed for bankruptcy protection they are subject to sanctions as applicable under the Bankruptcy Code.

This does not mean you are home free however.  Filing for bankruptcy protection in the U.S. only protects you from the collection of the debt while you are in the U.S.  As soon as you return to the foreign country the foreign creditors may still pursue the collection of the debt.  For example, if you lived in Canada and moved to the U.S. and filed for bankruptcy protection in the U.S., the Canadian creditor cannot collect from you in the U.S., but if you return to Canada, the Canadian creditor can still pursue you for the Canadian debt unless you file for bankruptcy protection in Canada.