Why Is It So Difficult To Discharge Student Loans In Bankruptcy?

By Ryan C. Wood

Our media and politicians love to discuss and complain about student loan debt.  Student loan debt should be no different, better or worse, than home mortgages.  Home mortgages and student loans both allow someone to obtain something expensive now and pay for it later over a long period of time to make it affordable.  For homes it allows people who otherwise could not purchase a home purchase a home.  Student loans likewise allow someone to obtain an expensive education now that they cannot afford.  As long as the home appreciates in value the home loan is a good deal and there is a return on the investment.  Student loans are also supposed create a return on investment.  The problem is student loans are approved with no real analysis of the likelihood of the borrower paying them back.  What is the potential return on investment?  At the moment for student loans it does not matter.  Why scrutinize the borrower’s chances of paying the student loans back if the loan is federally subsidized and almost impossible to get rid of?  Why scrutinize the institution the borrower is attending.  

Brief Summary of the Problem Discharging Student Loans

Fake news and social media warps the truth. The truth is the Bankruptcy Code permits debtors showing undue hardship to discharge student loan debt when filing for bankruptcy. The problems is showing an undue hardship is dreadfully different depending upon what circuit you live in given the circuits are divided on how to determine whether undue hardship exists. The First Circuit and Eighth Circuit use the totality of the circumstances test. Many circuits, like the Ninth Circuit, use a three-part test developed by the Second Circuit in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987). Then there is the application of the three-part Brunner test by circuits that apply Brunner. Application and results vary widely. According to many bankruptcy lawyers the Fifth Circuit is needlessly harsh in its application of the Brunner test rendering it virtually impossible to satisfy. This is why the Bankruptcy Code’s language providing for the discharge of student loan debt is fake news for most bankruptcy filers even though

Money Matters Given You Have to Sue the Student Loan Company to Prove Undue Hardship and Discharge Student Loans

Money matters when speaking about attempting to discharge student loans when filing for bankruptcy. A typical Chapter 7 Bankruptcy filer in the State of California is living paycheck to paycheck and has less than $10,000 in assets, not including their car or retirement account. How can a bankruptcy attorney get paid for suing the bankruptcy filers student loan company? With no guarantee of success and a client with almost no ability to pay their attorney to litigate whether their student loans are an undue hardship what happens? Lawsuits or adversary proceedings to try and discharge student loans are rare on this basis alone. In California we have Civil Code Section 1717 awarding attorneys fees and expenses to the prevailing party. What about if you lose and the student loan company is awarded their fees/expenses for the litigation? That is going to be anywhere from $15,000 – $60,000 added to whatever student loans must paid back post-discharge. The cost benefit analysis almost always on balance results in not suing the student loan company.

Income Based Repayment (IBR) and The Supreme Court of the United States

There is an appeal before the Supreme Court of the United States from the United States Court of Appeals of the Fifth Circuit; Thelma G. McCoy, Petitioner, vs. United States, Case No. 20-886. The facts of this include income based repayment and the three prong Brunner Test. Ms. McCoy’s student loan payments were set at $0.00 at the time she filed for bankruptcy and sued here student loan company due to being enrolled in an income based repayment plan. If she did not obtain a higher paying job she would not have to make a higher student loan payment in the future. Begs the question how can student loans be an undue hardship if the monthly payment is limited to $0.00 each month? If your income increases you may have to pay more than $0.00 each month. What is also missing in the fake news and social media is a discussion or analysis about all the programs in real world for those having problems paying back student loans. Depending upon the IBR program, after 25 years in the IBR program and making the required payments, the remaining principal and interest are cancelled. See Code of Federal Regulations; 34 C.F.R. 685.221(f)(2).

People Interpreting The Law Is Always The Problem

The U.S. Constitution from day one provided we are all entitled to equal protection under the law and due process.  How has that worked out?  It comes down to human interpretation.  It is almost always human interpretation of the law that is problem and not the law itself.  The argument begins at the macro level [President, Vice President, Senator, Congressman, Supreme Court] when the real issue is the interpretation of the law at the micro level [Gov. Employee, Administrative Judge, Attorney, Corporation].  Who are the one or two human beings that will make the interpretation of the law you are addressing at your level?  It is not the Supreme Court of the United States.  Not the President of the United States or any part of your elected Congress.  You need to be concerned about the decision making person that was never appointed by the President of the United States or ever elected to office.  This person was hired to do a job and their interpretation and opinion is the most important at your micro level. 

Brief History of Student Loans and Discharge When Filing Bankruptcy

The last major change to student loans and the ability to discharge student loans when filing bankruptcy was 2005.  The BAPCPA Bankruptcy A Protection Consumer Protection Act.

Section 523(a)(8) of the Bankruptcy Code provides:

(a)A discharge under section 727, 1141, 1192 [1] 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) (i)an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii)an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Debt Not Excepted From Discharge Under § 523(a)(8)(A)(ii) Because it was Not an Obligation For “Funds Received”

Prior to the Bankruptcy Consumer Protection Act of 2005, the language of Section 523(a)(8) was different. The words “funds changing hands” or “funds received” are now a separate category delinked from the phrases “educational benefit or loan.”

Except from discharge means not dischargeable or not discharged. Debts excepted from discharge and types of debts that would normally be discharge but for specific law providing certain types of debts are not discharged or excepted from discharge. Student loans are general unsecured debts and generally unsecured debts are dischargeable.

Section 523(a)(8) excepts from discharge four types of student debt: (1) 523(a)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit; or (2) made under any program fund in whole or in part by a governmental unit or nonprofit institution, or (3) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (4) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor that is an individual. Meridian concedes it is not a governmental unit and the credit is not a qualified education loan as defined by section 221(d)(1) of the Internal Revenue Code. So that leaves number (3) above. Christoff received two tuition credits totaling $11,000 and she signed a promissory note with interest of 9%. She agreed to repay the tuition credits upon graduation at $350 per month. Christoff did not receive any funds and did not complete the program and graduate.

In 2013, Christoff filed for bankruptcy protection under Chapter 7 and Meridian filed an adversary proceeding lawsuit to determine if the tuition credits are excepted from discharge under Section 523(a)(8). This case addresses the language of Section 523(a)(8)(A)(ii) which provides “an obligation to repay funds received as an educational benefit, scholarship or stipend” is excepted from discharge. Meridian argued that Christoff received a loan in the form of a tuition credit and received an education. Christoff’s bankruptcy attorney argued that she never received any funds from Meridian and Meridian did not receive any funds from a third-party financing source. Judge Montali focuses on the language “funds received” in Section 523(a)(8)(A)(ii). The Court analyzed a number of cases from other circuits and the Ninth Circuit regarding Section 523(a)(8). Again, the main distinction between the various cases and decisions is whether the debtor/student actually “received funds.”

In the Christoff case in the Northern District of California, Judge Montali ruled that because the debtor’s obligations arose from funds not received by the debtor or Meridian from any other source, the underlying debt is not covered by Section 523(a)(8)(ii) and eligible for discharge. On June 26, 2014, Meridian College appealed Judge Montali’s ruling to the Bankruptcy Appellate Panel, Case No. NC14-1336.

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.


3rd Prong of Brunner Test: Good Faith Effort to Repay the Student Loans


The main issue in the case was the 3rd prong of the Bruner Test, good faith effort to repay the loans. Whether someone has made a good faith effort to repay the student loans is more complicated and involves more issues that just making a monthly payment. A thorough conversation with your bankruptcy attorney should be had regarding these issues. Good faith can be measured by student loan holder’s efforts to obtain employment, the type of employment, the level of pay of the employment. The good faith prong also involves the student loan holder expenses. Did they minimize their expenses? Are their expenses for certain things too high given their income? The good faith prong also evaluates whether the student loan holder took advantage of payment plan options of the student loan company.

It was found that Hedlund was maximizing his employment income with his current employment in Klamath Falls. Heldund had also applied to two higher paying jobs. The Court noted that Hedlund had attempted to take the bar exam unsuccessfully three times. Not that passing the bar would have increased his income. Next the Court reviewed Hedlund’s expenses and found that his clothing, recreation and miscellaneous budgets including childcare and haircuts could be reduced.

Again, the District Court reviewed the original trial case de novo and found that Hedlund had not used his best efforts to maximize his income or minimize his expenses. The District Court notably criticized Hedlund for choosing to live as a single-income family, “a lifestyle that few today an afford.” Hedlund v. Educ. Res. Inst. Inc, 468 B.R. 901, 916 (D. Or. 2012). In the end the District Court should have reviewed the good faith prong of the test for clear error. The Ninth Circuit Court of Appeals found there was not clear error in the original bankruptcy court’s judgment to partially discharge Hedlund’s student loans.

Any Change In Internal Revenue Service Tax Liability Should Be Reported To The California Franchise Tax Board

By Ryan C. Wood

What is this madness?  No, this is not madness.  It is just the layer upon layer of law that exists.  Let me begin by informing you that filing for bankruptcy protection and owing the Internal Revenue Service or the California Franchise Tax Board unpaid taxes, fees or penalties is treacherous.  Taxes can be discharged when filing for bankruptcy protection under certain circumstances, or better put, the taxes owed fulfill the requirements to be discharged.  There are so many rules and layers upon layers of Tax Code versus Bankruptcy Code versus California State Law that it is treacherous.  One little obscure overlooked, previously not enforced or not known rule could result in the tax obligation not being discharged when filing for bankruptcy protection.  Or some rule not previously defined a certain way could be used to seek a different result not previously known.   That could be what happened to two bankruptcy filers in California and the subject of two recently published opinions by the Ninth Circuit Bankruptcy Appellate Panel.  The opinions were published given this issue had not yet been addressed at the appellate level.  That seems hard to believe so something must have changed.  The various laws below did not change so it must be how they are being enforced or used.  I think that change was the California Franchise Tax Board choosing to define or try and enforce California Revenue Tax Code Section 18622(a)(2) differently.  Unfortunately the lower Bankruptcy Court judges and then the Ninth Circuit Bankruptcy Appellate Panel agreed with the California Franchise Tax Board.  They are going to broadly defined “report” and “change” so that people seeking bankruptcy protection and a discharge pursuant to the Federal Bankruptcy Code cannot discharge unpaid taxes.  Another way to look at it is if you have not fulfilled your obligations to the taxing authorities then taxes owed should not be discharged when filing for bankruptcy protection.   Bankruptcy attorneys everywhere have an entire new set of questions to ask regarding unpaid taxes.         

See: In re: RUDOLF P. SIENEGA, BAP No. EC-19-1334-FLS

The Sienega bankruptcy case was originally filed in the Easter District of California and heard by Judge Christopher D. Jaime.  This case is distinguishable from the Voloshin case listed below.  In this case the bankruptcy filer notified the California Franchise Tax Board of the increased IRS assessments but admittedly he did not actually file “returns” with the California Franchise Tax Board for the same years he was seeking to discharge his tax liability.  See In re Hatton, 220 F.3d 1070 (9th Cir. 2000) regarding what is a “return.”  This case is a good example of arguably the proper application of RTC Section 18622(a) and Section 523(a)(1)(B) of the Bankruptcy Code.  You have to at least file a “return” to have a shot at discharge.   See In re Hatton, 220 F.3d 1070 (9th Cir. 2000).  How to you define what is “an honest and reasonable attempt to satisfy the requirements of the tax law?”


The Berkovich bankruptcy case was originally heard in the Central District of California and heard by Judge Maureen A. Tighe.  Now this case is far different.  The bankruptcy filers in this case had an increase in tax assessment by the IRS of $145,000 for a tax year but did not report to the California Franchise Tax Board of the change.  Eventually the California Franchise Tax Board did learn of the IRS change of assessment and increased the bankruptcy filers’ taxes owed by $45,000 for that tax year.  The taxes owed to the California Franchise Tax Board remained unpaid at the time the bankruptcy case was filed and the taxes met the requirements to be discharged notwithstanding RTC Section 18622(a) and Section 523(a)(1)(B) of the Bankruptcy Code. Unfortunately no [report] of the [change] was made.

When Must This [Report} of the [Change] Take Place?

California RTC Section 18622(a) provides within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous.

Wow, what a mess this temporal or time requirement will hopefully turn into for the sake of bankruptcy filers. When was the federal determination of the [change] final? Can it issue be reopened to as to not be final?

California Revenue and Tax Code Section 18622(a)

This section provides: “requires a taxpayer to make a [report] to the California Franchise Tax Board FTB if the Internal Revenue Service [changes] the taxpayer’s federal income tax liability.

There is actually no language that says increase or decrease. I suppose if there was a decrease in any tax liability that in theory would never create a larger tax liability with the California Franchise Tax Board so who cares. Section 18622(a) is about encompasses increases of tax liability with the IRS and then increasing the California Franchise Tax Board liability accordingly. What if the [change] that is supposed to be [reported] decreased the federal income tax liability of the filer and the bankruptcy filer failed to [report] this decrease to the California Franchise Tax Board? Would this result in some tax not being discharged as well? What if it is only a penny change?  Or a one hundred dollar change?  A tiny change that was not reported?  Would it still be equitable to not allow the discharge of $100,000 in unpaid taxes due to not [reporting] a $0.01 change of assessment by the IRS? It is never so simple and defining terms then applying them to real world circumstances becomes even more difficult.  

Bankruptcy Code Section 523(a)(1)(B)

Section 523(a)(1)(B)1 of the Bankruptcy Code provides that if a taxpayer fails to file a required “return, or equivalent report or notice,” the relevant tax debt is not discharged.  So without knowing more this is about filing a tax return or an equivalent tax return report or notice.  It has nothing to do with informing the California Franchise Tax Board of a “change” in tax liability by the Internal Revenue Service.  Is the “change” an increase or decrease by the way? 

So Is This “Report” Required By California Revenue Tax Code Section 18622(a) What Section 523(a)(1)(B) of the Bankruptcy Code Encompasses?

Sadly the answer was yes in both of the published opinions referenced above. 

The Ninth Circuit Bankruptcy Appellate Panel held that the “report” required under RTC section 18622(a) is an “equivalent report” within the meaning of § 523(a)(1)(B).   So otherwise dischargeable taxes owed to the California Franchise Tax Board are not dischargeable unless a “report” of a change in the taxpayers’ federal income tax liability.

What qualified as fulfilling this obligation to report?  Can you call up the FTB and verbally “report” a change in federal income tax liability?  An email?  A facsimile?  What will fulfill the obligation of RTC Section 18662(a) be?   This is what will come next and how it works.  First a term is broadly defined to encompass something or create a circumstance that was never intended by the legislature then good faith compliance with the new interpretation is deemed not sufficient.  Someone will in fact “report” their change in federal income tax liability and how they chose to “report” will be deemed not a “report.”  This is how it works.  Oh by the way, RTC Section 18622(a) does not make the distinction between an increase in tax liability or decrease in tax liability.  It just says you need to “report” a change in federal income tax liability.  As the plain language of these words provides that is any change.  So you are telling me that a bankruptcy filers federal tax liability could be reduced by hundreds of thousands of dollars but fail to “report” this decrease or change to the California Franchise Tax Board and as it stands right now that failure to “report” would make a tax liability owed to the California Franchise Tax Board not dischargeable when seeking bankruptcy protection?  Is this not absurd?  When the language of a statute is plain, courts must enforce the statute according to its terms unless doing so would produce absurd results.  See Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004).  How is an absurd result defined as not absurd?  The court just says the result is not absurd.  

Section 523(a) Full Text

(a)A discharge under section 727, 1141, 1192 [1] 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(1)for a tax or a customs duty—

(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed;

(B)with respect to which a return, or equivalent report or notice, if required—

(i) was not filed or given; or

(ii) was filed or given after the date on which such return, report, or notice was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax;

California Revenue and Tax Code RTC § 18622

(a) If any item required to be shown on a federal tax return, including any gross income, deduction, penalty, credit, or tax for any year of any taxpayer is changed or corrected by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, or where a renegotiation of a contract or subcontract with the United States results in a change in gross income or deductions, that taxpayer shall report each change or correction, or the results of the renegotiation, within six months after the date of each final federal determination of the change or correction or renegotiation, or as required by the Franchise Tax Board, and shall concede the accuracy of the determination or state wherein it is erroneous.  For any individual subject to tax under Part 10 (commencing with Section 17001 ), changes or corrections need not be reported unless they increase the amount of tax payable under Part 10 (commencing with Section 17001 ) for any year.

(b) Any taxpayer filing an amended return with the Commissioner of Internal Revenue shall also file within six months thereafter an amended return with the Franchise Tax Board which shall contain any information as it shall require.  For any individual subject to tax under Part 10 (commencing with Section 17001 ), an amended return need not be filed unless the change therein would increase the amount of tax payable under Part 10 (commencing with Section 17001 ) for any year.

(c) Notification of a change or correction by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, or renegotiation of a contract or subcontract with the United States that results in a change in any item or the filing of an amended return must be sufficiently detailed to allow computation of the resulting California tax change and shall be reported in the form and manner as prescribed by the Franchise Tax Board.

(d) For purposes of this part, the date of each final federal determination shall be the date on which each adjustment or resolution resulting from an Internal Revenue Service examination is assessed pursuant to Section 6203 of the Internal Revenue Code . 

The real absurdity or tragedy is that bankruptcy attorneys that know such distinctions and actually properly represent their clients rarely get paid properly for this knowledge and expertise.  The lowest common denominator effect and advertising have ruined the market.  Any attorney can put up a website then use pay-per-click and have fake reviews placed on the internet and sadly it works.  Honest attorneys receive reviews organically over a period of time. Dishonest attorneys have a bunch of reviews with few words in a short period of time on one online platform and it is not organic. A ten out of ten rating on some online website is bought and paid for regardless of experience and knowledge. How can certain entities take money to recommend attorneys with absolutely ZERO knowledge of that attorney? Nothing is being done about this by any organization. Hopefully you read this article and my other articles to know what I am about and how I represent my clients. If you dare try and make things better you will be the nail that sticks out you will get hammered by all those on board with “the system.”

Keep Your House, Protect Up To $600,000 In Equity, Discharge All Debts When Filing Bankruptcy in California

By Ryan C. Wood

California is finally about to increase the homestead exemption pursuant California Civil Procedure 704.  This is the exemption under California State law that protects equity in a primary residence when filing for bankruptcy.  It is almost a certainty that on or before September 30, 2020, Governor Newsome will sign into law this change. 


It apparently is not an “if” but “when” will AB 1885 become law.  AB 1885 will substantially increase the California Homestead exemption pursuant to CCP 704 to the greater of $300,000 or median sales price in the county where the single-family home is located in the prior year, though this cannot exceed $600,000.  Since median sale price in most Bay Area counties is over $1,000,000 Bay Area homeowners will get the full $600,000 exemption to protect equity.  This is great news for bankruptcy attorneys.  We will be able to use the law, the Bankruptcy Code, to obtain permanent relief for more homeowners with a lot of equity in their homes. 

What This Means For Homeowners in California?

It opens the door for so many people in the Bay Area that are cash poor but house rich to seek relief from their creditors under the Bankruptcy Code and not lose their home.  In the Bay Area the median house price in many counties, if not all of them, is above $1.2 million.  That means Bay Area homeowners will be permitted to exempt or protect up to $600,000  in equity in their home while still discharging 100% of their credit card debts or other general unsecured claims like medical debts or personal loans.

For Example

A homeowner in San Mateo County owns a home that is worth $1.4 million with a first mortgage that is owed $750,000.  The homeowner is struggling with various real world bills such as credit card payments, a vehicle loan and other normal living expenses.  They are current with their mortgage payments, property tax and property insurance though so there are no issue with the house.  Unfortunately due to COVID-19 or some other circumstance outside of their control their income decreased and things are too tight to continue each month.  Given the homestead exemption in their county, San Mateo County, is $600,000, the could file chapter 7 or chapter 13 bankruptcy and  their house is entirely safe.  $1.4 million – $750,000 = $$650,000.  Then you have to deduct the cost of sale of the house too, approximately $70,000, leaving $580,000 to the seller if they chose to sell/liquidate the house.  Again, we will now have a homestead exemption of $600,000 to protect the $580,000 so there is no issue under this example.  You can plug in your numbers to see how things might look like for you.  Also taxes on the gain should be also taken into account.

Issues to Consider Under CCP 704 In California

The single most troubling part of the California Homestead exemption to protect equity in a primary residence or dwelling is the reinvestment provision of CCP 704.720(b).  CCP 704.720(b) requires any exempted amount obtained from the sale of the property must be $been all kinds of litigation regarding this issue and if you want to hang your hat on reading between the lines or gambling with as much as $600,000 in equity in your home after you sell be  my guest.  I will not be part of that scenario.  As an experienced bankruptcy attorney I counsel clients to go down the road we know there is a bridge over the river that is solid so we can safely get across.  That does not mean there will not be bumps in the road.  Just that I rarely have clients that can afford to pay me to strengthen a flimsy bridge or build a bridge entirely so they can cross safely (argue for a different interpretation of the law or create new law).  We generally want to go down the road that is safe even if that road is longer, bumpier and there may be some other parts of that road that are unpleasant.  It just will not be the road to losing $600,000 in equity in a sold house.  To read more about this issue go to:


Another Example

You have $90,000 in various general unsecured such as credit cards, personal loans and medical debts.  Your gross monthly income is around $16,000 between yourself and your spouse.  You also have two children under the age of 18 for a total household of 4 people in San Mateo County.  Your house is worth $1.4 million and you owe $1,160,000 on the first and only mortgage.  Your monthly mortgage payment plus property tax and insurance is about $6,200 a month or 38% of your gross income.  The median income for a household of 4 people in the State of California is currently a gross of $101,315 for the year.  Your gross income is over the median income $90,685 a year.  That is okay; you just need to pass the means test to qualify for a Chapter 7 bankruptcy and discharge the $90,000 or in Chapter 13 determine if there is any obligation to general unsecured creditors, the $90,000, in the Chapter 13 Statement of Monthly Disposable Income.  After taking into account taxes, monthly mortgage payment it is highly likely someone with these general set of facts can discharge the entire $90,000 in general unsecured debt, keep their home and life will go on unchanged.  This is the law and filing for bankruptcy is just following the law to legally discharge debts and lead a happier life.

Will I Lose My Car In Chapter 7?

By Ryan C. Wood

In most chapter 7 bankruptcy cases your vehicles are protected or exempted from the bankruptcy estate created at the time the bankruptcy petition for relief is filed.  Each state has exemptions to protect your property, including your vehicles, so you will not lose your car in chapter 7.  If your car is worth a lot of money though the applicable exemption may not protect the entire value of the vehicle.  If you have a vehicle loan you need to continue to make the normal monthly loan payment so you will not lose your car in chapter 7.

State or Federal Exemptions Protect Assets

There are state and federal exemptions to protect your stuff like a car.  Depending upon your jurisdiction you may have to your state’s exemptions or choose the federal exemptions.  There are limits to the dollar amount of the different categories of exemptions though.  So if you have a vehicle with a loan and still have a lot of equity in the car the car exemption in your jurisdiction may not protect or exempt the entire value of the car.  For example the vehicle exemptions under the California set of exemptions, CCP 703 is a total of $5,850.  It can be applied to any number of vehicles.  In California under CCP 703 exemptions we also have what is called the Wildcard Exemption totaling $30,825 to apply to any asset if none of it is used to protect equity in real property or a burial plot.  So between the vehicle exemption of $5,850 and $30,825 your vehicle or vehicles can be pretty valuable and still be entirely exempted or protect so you will not lose your car in chapter 7.  Make sure you accurately disclose the vehicles you own and then discuss the value of your vehicles with your bankruptcy attorney prior to ever filing a petition under chapter 7 of the Bankruptcy Code.    

Deduct Vehicle Loan From Value of Car

Something that you may not initially remember is to deduct the amount of the loan from the value of your vehicles.  If your vehicle is worth $10,000 with a loan of $9,000 then there is only $1,000 of value or equity to be protected by the exemptions discussed above.  So you could have five cars all with loans and the amount of value or equity to protect could be very little after deducting the loans.

Vehicle Loans

In 2005, the last major reform of the Bankruptcy Code, the treatment of vehicles loans was supposed to change.  You are supposed to be able to only do three things: reaffirm the loan and continue to make the loan payments and keep the vehicle, or redeem the vehicle for its fair market value, or surrender the vehicle and any balance owed on the loan is discharged in the bankruptcy case along with your other dischargeable debts.  In the real world this is not exactly happening depending upon your jurisdiction.  Reaffirming the loan means signing a new loan agreement after the chapter 7 is filed agreeing to the same loan terms or better terms.  You will then be liable for the loan again and in the event you miss payments and the vehicle is repossessed you may owe the loan company money on the loan.  Traditionally and prior to 2005 you could just continue to make your normal loan payment each month and life goes on.  If you do not make the loan payment the loan company can repossess the vehicle.  This is true whether you reaffirm the loan or not.

The reality is most Courts, or good judges, do not believe the reaffirmation of the vehicle loan is in your best interests and they would prefer you to just continue to make the normal monthly vehicle loan payment without reaffirming the loan.  The catch is the Bankruptcy Code was changed in 2005 to allow a vehicle loan lender to repossess the vehicle even if you are current on the loan payments when filing a chapter 7 bankruptcy case.  This quandary puts us bankruptcy attorneys in a tough spot on what advice to give clients.  Most Courts and judges believe as long as you pay the monthly vehicle loan payment the lender will not repossess the vehicle.  The problem is the Court or judge will not be the party having to clean up that mess and generally chapter  7 clients do not have the funds to pay for such services.  If you do choose to reaffirm a vehicle loan there should be a hearing on the reaffirmation agreement and be prepared to tell the judge why you believe it is in your best interest to reaffirm this debt.  The leading reasons are for the monthly payments to be reported to the credit bureaus to help rebuild credit after filing the chapter 7.  The vehicle may be worth a lot more than what the loan balance is so you do not want to any chances with the vehicle being repossesses and possibly losing out on the equity you have in the car.  You have a co-signor and you want to make sure nothing bad can happen to the person that was nice enough to help you get the loan and co-signed with you.  You were able to negotiate better loan terms as part of the reaffirmation agreement so you are paying a lower interest rate, lower principal balance or both and therefore the monthly vehicle loan payment is less.

Voluntary Surrender of Car

If you want to get rid of your vehicle loan and car then you may voluntarily surrender the vehicle and then you are choosing to lose your car in chapter 7.  If you can no longer afford the monthly vehicle loan payment or it is a struggle each month you may file chapter 7 and surrender the vehicle or vehicles back to the lenders.  Any balance owed on the loans after surrender is discharged along with you other dischargeable debts in the chapter 7 bankruptcy case.

The bottom line is generally it is very rare to lose your vehicle when filing a chapter 7 case unless it is you choosing to surrender the vehicle to the lender.

Can I Keep An Increase In Income Inheritance and Increases In Equity In My House After Filing Chapter 13 Bankruptcy?

By Ryan C. Wood

Maybe, maybe and yes are the short answers.  Whether the chapter 13 is confirmed or approved is very important.  Below is the relevant law and Bankruptcy Code sections governing these issues when filing a chapter 13 bankruptcy case. 

Income Increases or Windfall of Income After You Confirm Your Chapter 13 Plan

A recent Ninth Circuit Bankruptcy Appellate Panel decision was published addressing this issue. 

In re Steven William Berkeley, BAP No. NC-19-1197-FBTa (April 17, 2020) 

Like many things in life timing is everything.  For Mr. Berkeley he was blessed with owning stock and then receiving $3.8 million from the stock when the company he worked for was purchased. In the real world how wonderful. In the bankruptcy world wait a minute.  The problem was the $3.8 million was received around the 57 month of the 60 month chapter 13 plan.  Mr. Berkeley only had 3 months to go and in theory he could have kept the entire $3.8 million from the stock; in theory. When the chapter 13 case was filed he was getting paid $50,000 a year.  After the chapter 13 plan was confirmed or approved by the Court he received stock options in the company he worked for.  That company was bought out resulting in Mr. Berkeley receiving the $3.8 million.  When something like this comes up notifying the chapter 13 trustee is generally recommended for proper disclosure even if you believe the windfall is not part of the bankruptcy estate.  The trustee’s office in this case argued this increase of income, or windfall, should to go the benefit of his creditors while Mr. Berkeley argued he should not have to pay any of the $3.8 million to creditors.  The lower Bankruptcy Court agreed with the chapter 13 trustee and Mr. Berkeley appealed.  The Ninth Circuit BAP affirmed the lower Bankruptcy Court’s holding that the income derived from the stock options was an increase in income and a change in circumstances.  This means the chapter 13 plan can be modified post-confirmation pursuant to Section 1329 of the Bankruptcy Code to increase the chapter 13 plan payout to creditors.  In this case Mr. Berkeley will have to pay $202,000 into the chapter 13 plan and pay 100% of his debt now.  Prior to this windfall Mr. Berkeley was paying back 1% of his nonpriority general unsecured debts.

Section 1329(a) provides that, “[a]t any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified” to “increase or reduce the amount of payments on claims of a particular class provided for by the plan[.]” § 1329(a) of the Bankruptcy Code.

Increases in income can be captured by creditors by filing a motion to modify the confirmed chapter 13 plan.  Danielson v. Flores (In re Flores), 735 F.3d 855 (9th Cir. 2013) 

Of course the motion to modify can be opposed by the bankruptcy filer and their bankruptcy attorney.  It is within the Court’s discretion whether the motion to modify is granted or not.  In this appeal Mr. Berkeley was arguing the Bankruptcy Court abused its discretion by granting the motion to modify to include the $3.8 million. 

A wrinkle is the revesting of property of the bankruptcy estate upon confirmation of the chapter 13 plan.  The revesting of the bankruptcy estate to the debtor terminates the bankruptcy estate.  This is true, but

Increase In Value of Houses or Real Property During A Chapter 13 Bankruptcy Case 

In a recent Ninth Circuit Bankruptcy Appellate decision, Black v. Leavitt (In re Black), 609 B.R. 518 (9th Cir. BAP 2019), the Ninth Circuit BAP held and reaffirmed that the estate terminates at confirmation.  The Court provide that “the revesting provision of the confirmed plan means that the debtor owns the property outright and that the debtor is entitled to any post-petition appreciation.”  This means a chapter 13 bankruptcy filer can after confirmation of their chapter 13 plan sell their house, keep the equity, and continue with the chapter 13 plan payments to fulfill their obligation under the confirmed terms of the plan or payoff the chapter 13 plan and receive their discharge early.  This issue has been more of a problem when a chapter 13 is converted to chapter 7.  Section 348 of the Bankruptcy Code, Effect of Conversion, governs this issues though and the plain language of Section 348(f)(2) is not ambiguous regarding this issues.  Section 348(f)(2) provides: (2) “If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion.”  If for some reason it is determine the conversion from chapter 13 to chapter 7 is in bad faith, then and only then, is the property of the estate what exists at the time of conversion.  Otherwise property of the bankruptcy reverts back to the original date the chapter 13 case was filed.  This has been a major issue when converting from chapter 13 to chapter 7 and overzealous chapter 7 trustees seeking to sell homes upon conversion to chapter 7. 

The problem is the misunderstood language in Section 348(f)(1)(B).

Section 348(f)(1) provides: Except as provided in paragraph (2), when a case under chapter 13 of this title is converted to a case under another chapter under this title—

(A) property of the estate in the converted case shall consist of property of the estate, as of the date of filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion; (B) valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under chapter 11 or 12, but not in a case converted to a case under chapter 7, with allowed secured claims in cases under chapters 11 and 12 reduced to the extent that they have been paid in accordance with the chapter 13 plan; and

So 348(f)(1)(A) first provides the property of the estate consists of property of the estate, as of the date of the filing of the petition, original petition, that remains of or is under the control of the debtor on the date of conversion; consistent and the same as 348(f)(2).  The wrinkle and misunderstood language is underlined above regarding valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under Chapter 11  or Chapter 12, but not in a case converted to a case under chapter 7.  Valuations mean valuations of purposes of reducing the amount a secured creditors claim as part of the plan of reorganization.  In plans of reorganization a secured creditors claim is only secured up to the value of the collateral.  We routinely file motions to value property pursuant to Section 506 of the Bankruptcy Code to reduce the amount of a secured claim to the value of the collateral, not what was owed at the time the case was filed.  A motion to value a car results in a valuation of the car paid via the plan of reorganization.  If the valuation is ordered before the conversion to another chapter that is a reorganization chapter, such as chapter 11 or chapter 12, naturally and according to 348(f)(1)(B) above you would not have to file another motion to value the same collateral.  The valuation already determined would be applicable for purposes of the chapter 11 plan or chapter 12 plan.  However, chapter 7 is not reorganization of debts but liquidation.  So the valuation previously obtained would not be apply in the chapter 7 liquidation.  This unfortunately is mistakenly interpreted as the value of a house in a chapter 13 case is not the value to be used in a case converted from chapter 13 to a chapter 7.  The value of a house  reverts back to when the case was filed when a chapter 13 plan is confirmed and then the case is converted to chapter 7, unless pursuant to Section 348(f)(2) the conversion was in bad faith.  It is all there and makes perfect sense.  Many bankruptcy attorneys fail to understand this dynamic and chapter 7 and judges do not given understand given they have not practiced chapter 13 bankruptcy prior to becoming a chapter 7 trustee or judge.  It is a huge problem.

Inheritance Received After Chapter 13 Case Commenced 

First we must start with the Bankruptcy Code.

Section 541(a)(5) provides in relevant part: (a) The commencement of a case under . . . this title creates an estate.  Such estate is comprised of all the following property, wherever located and by whomever held: . . . . (5) 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.

But then in addition for Chapter 13 case we have Section 1306(a)(1) to consider which provides: (a) Property of the estate includes, in addition to the property specified in section 541 of this title (1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.

So does the language in Section 1306 expand the 180 day limitation provided in Section 541(a)(5)?  Courts have overwhelming said yes based upon the legislative history.  So property of the estate in a chapter 13 case is expanded to include property specified in section 541 but without any of the timing limitations.  In a chapter 13 case property of the estate includes property of the kind specified in Section 541 after the commencement of the chapter 13 case but before the chapter 13 case is closed, dismissed or converted to chapter 7, 11 or 12; whichever occurs first as provided above in Section 1306(a).

This issues boils down to statutory interpretation as well.  Section 541 is a general provision governing bankruptcy case while Section 1306 is a specific section dedicated to chapter 13 bankruptcy cases.  If the big umbrella of Section 541 already blocks the rain, the 180 day period, how does the Section 1306 umbrella even get rain that is already blocked and become relevant as to this issue?  I argue that Section 1306 incorporates the 180 day limitation.  So Section 1306 makes the limitation in Section 541 meaningless.  The 180 day limitation and other such limitations are to prevent bankruptcy filers from gaming the system or timing the bankruptcy filing to not include an asset such as inheritance.  If someone knows they have a sick family member and they will receive inheritance timing the bankruptcy is difficult or not possible given the 180 day limitation.  The 180 day limitation is to prevent abuse.  This goal of Section 541 is now rendered meaningless in chapter 13 cases?