Tuesday, June 19, 2012

Divorce and Personal Bankruptcy

Which comes first?

Published on by: Ian M. Falcone

The Falcone Law Firm is Experienced in Complicated Divorce and Bankruptcy Matters.
Bankruptcy and divorce cases are often intermingled.  Whether it is the divorce process that leads to the bankruptcy or the bankruptcy filing that leads to divorce is irrelevant.  The fact remains, that we are contacted on a regular basis to address “Which comes first, the divorce or the bankruptcy case?”  The short answer, as almost always is the answer, is, it depends.

There are times when, after full disclosure and waiver of potential conflicts of interest, it makes sense for the parties to file Chapter 7 together before the divorce is completed (a joint Chapter 13 case which obligates the parties to make payments over a 3 or 5-year period is not practical if the parties plan to divorce).  These are typically the cases where the debt is preventing the divorce (i.e. neither party can afford to pay the debts but if they could both walk away from their obligations, the divorce could be fairly easily resolved).  In these cases, the parties and the attorneys must be sure that no conflict exists.  The bankruptcy attorney cannot address what is best for either individual.  In fact, if these concerns arise, the individuals need to seek independent counsel. 

Chapter 7 (liquidation) debtors are “means test” limited by income and family size (these limitations are adjusted by state and county).  If the parties are married, or sometimes just living together, their combined incomes may be used in the eligibility calculations.  This can prevent a married couple from qualifying for chapter 7.

However, after the divorce, certain obligations incurred during the divorce can be helpful.  Assume that the husband is obligated, after the divorce case is completed, to pay child support and alimony.  These obligations are legitimate deductions from income when examining Chapter 7 eligibility under the means test.  Thus, oddly, an individual with a higher income that would not qualify for Chapter 7 bankruptcy when he was married, could become eligible for Chapter 7 after the divorce because of his child support and alimony obligations.  Incurring these debts solely for the purpose of passing the means test is improper.  However, if these debts are likely to be incurred and are helpful in the long run, an individual might benefit from agreeing to these obligations.

Another issue that often arises in our office is the “joint debt” problem.  Let’s assume that the husband and wife are jointly indebted on the mortgage.  In the divorce decree, the Court could determine that the Husband is responsible for the mortgage payments.  While the Husband could file bankruptcy and eliminate his obligation to the bank, he would still be obligated to his ex-wife for the same debt (divorce related debts are no longer dischargeable in Chapter 7 cases).  Let me say that another way, if there is joint debt and you are obligated to pay it in the divorce decree, filing a bankruptcy case may not get rid of the debt.  Anytime there is joint debt, the situation becomes more complicated and an experienced bankruptcy attorney, familiar with divorce issues, should be consulted.

Finally, the filing of a bankruptcy petition creates an automatic stay.  Although the stay does not prevent the parties from obtaining a divorce, it does prevent the division of assets.  Thus, as a practical matter, the bankruptcy stops the divorce and it may be necessary to obtain an order from the bankruptcy court before continuing with the divorce.

Divorce and personal bankruptcy can each be complicated, however the combination is almost certain to create a very complex matter. Because every situation is unique, the only way to accurately determine your options, opportunities and risks is to consult with an attorney who is experienced in complicated divorce and bankruptcy cases. The legal team at the Falcone Law Firm has extensive experience in divorce, bankruptcy and small business law. If you need answers, call 770-426-9359 to arrange for a consultation with an attorney.

Saturday, June 16, 2012

Using Tax Debt To Pass The Means Test

Tax Debt May Help You To Pass The Bankruptcy Means Test

Published on by: Ian M. Falcone

Tax Debt Can Help You To Pass The Bankruptcy Means Test One of the most challenging aspects of the revised Bankruptcy Code (BAPCPA) was the addition of the Means Test (11 USC §707(b)). When it first came out, practitioners were extremely concerned. No one likes a mechanical test that can determine a client’s fate under the Bankruptcy Code. To this day, more than six (6) years after BAPCPA’s implementation, we still get calls from potential clients claiming they are not eligible for to file for protection under Chapter 7 because they "have too much income." Most of these prospects, and very likely many attorneys with whom they have consulted, have looked only at the median income test to determine eligibility. Instead, they should be looking to see whether the test applies at all.

The Means Test applies only to debtors whose debts are "primarily consumer debts." The term "consumer debt" is defined at 11 USC §101(8) as a debt "incurred by an individual primarily for a personal, family or household purpose." This definition is crucial in determining whether the Means Test applies. Most debtor’s lawyers know to look for obvious business debts, some even inquire into the purpose of the credit card debt, but income taxes seem to be overlooked on a regular basis.

Although, at first glance, income taxes would seem to be "personal" and therefore "consumer debt", it is clear that they are not. The Sixth Circuit has examined this issued and concluded that income taxes are not consumer debt (at least for the purposes of determining whether the co-debtor stay applies to these types of debts). In re: Westberry, 215 F. 3d 589 (6th Cir, 2000).

In reaching its conclusion, the Court stated the following: "First, a tax debt is incurred differently from a consumer debt. . . .[Its] incurrence is not voluntary on the part of the taxpayer." The Court went on to note that a "consumer debt is incurred for personal or household purposes, as stated in the statute, while taxes are incurred for a public purpose." It would be hard to argue with this logic since, "The Supreme Court has long noted, in other contexts, the public purpose of the imposition of taxes. See, e.g. Loan Assoc. v. Topeka, 87 U.S. 655, 664, 22 L. Ed. 455 (1874) ("We have established . . . beyond civil that there can be no lawful tax which is not laid for a public purpose.")" Finally, the Court noted that "taxes arise from the earning of money, while consumer debt results from its consumption. See Greene, 157 B.R. at 497, Harrison, 82 B.R. at 558, Pressimone, 39 B.R. at 244."

Thus, if a prospective client comes to your office, depressed that they have plenty of tax debt, explain that this may be a blessing in disguise and could help them pass the Means Test and qualify for Chapter 7 treatment.

Tuesday, June 12, 2012

Chapter 7 - Removing An Unsecured Lien

Chapter 7 Debtors Can Now Strip Off A Wholly Unsecured Lien

Published on by: Ian M. Falcone

Bankruptcy Court - Northern District of Georgia Last month the 11th Circuit Court of Appeals decided that a Chapter 7 debtor can strip off a wholly unsecured second lien. See In McNeal v. GMAC Mortgage, LLC, et al, No. 11-11352 (11th Cir. May 11, 2012)

In Dewsnup v. Timm, 502 U.S. 410 (1992), the Supreme Court had rejected a Chapter 7 debtor’s argument to allow for the “strip down” of an undersecured lien. “The vast majority of courts have concluded that Dewsnup’s reasoning for not permitting a “strip down” of an undersecured lien in chapter 7 applies likewise to a chapter 7 debtor’s attempt to “strip off” a wholly unsecured lien. Talbert v. City Mortgage Services 344 F.3d 555 (6th Cir. 2003); Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Laskin v. First National Bank of Keystone (In re Laskin), 222 B.R. 872 (B.A.P. 9th Cir. 1998); In re Caliguri, 2010 WL 1027411 (Bankr. E.D.N.Y. Mar. 17, 2010); In re Grano, 422 B.R. 401 (Bankr. W.D.N.Y. 2010); In re Arrieta, 2009 WL 1789576 (Bankr. N.D. Ill. 2009). Contra, In re Lavelle, 2009 WL 4043089 (Bankr. E.D.N.Y. Nov. 25, 2009); Howard v. National Westminster Bank, U.S.A. (In re Howard), 184 B.R. 644 (Bankr. E.D.N.Y. 1995).”

In the McNeal case, the Chapter 7 debtor alleged that her home was worth less than the amount of the first mortgage. Debtor argued that § §506(a) and (d) required that the second mortgage, being wholly unsecured, should be determined to be void and the lien stripped off completely. Judge Bonapfel of the Bankruptcy Court of the Northern District of Georgia, Atlanta Division, disagreed, and ruled that the reasoning of Dewsnup applied and that a wholly unsecured lien could not be “stripped off” in a Chapter 7 case. The district court then affirmed. The National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amicus brief with the Court. The Eleventh Circuit then reversed the decison.

To determine whether such an allowed -- but wholly unsecured -- claim is voidable, we must then look to section 506(d), which provides that “[t]o the extent that a lien secures a claim against a debtor that is not an allowed secured claim, such lien is void.” See 11 U.S.C. § 506(d). Several courts have determined that the United States Supreme Court’s decision in Dewsnup v. Timm, 112 S. Ct. 773 (1992) -- which concluded that a Chapter 7 debtor could not “strip down” a partially secured lien under section 506(d) -- also precludes a Chapter 7 debtor from “stripping off” a wholly unsecured junior lien such as the lien at issue in this appeal. See, e.g., Ryan v. Homecomings Fin. Network, 253 F.3d 778 (4th Cir. 2001); Talbert v. City Mortgage Services., 344 F.3d 555 (6th Cir. 2003); Laskin v. First National Bank of Keystone, 222 B.R. 872 (B.A.P. 9th Cir. 1998). But the present controlling precedent in the Eleventh Circuit remains our decision in Folendore v. United States Small Business Administration, 862 F.2d 1537 (11th Cir. 1989). In Folendore, we concluded that an allowed claim that was wholly unsecured -- just as GMAC’s claim is here -- was voidable under the plain language of section 506(d). 862 F.2d at 1538-39.

The Court then explained although several Courts had treated Folendore as having been abrogated by Dewsnup, departure from a prior panel’s ruling was only appropriate only when an intervening Supreme Court decision is “clearly on point.”

Although the Supreme Court’s reasoning in Dewsnup seems to reject the plain language analysis that we used in Folendore, “‘[t]here is, of course, an important difference between the holding in a case and the reasoning that supports that holding.’” Atlanta Sounding Co., Inc., 496 F.3d at 1284 (citing Crawford-El v. Britton, 118 S. Ct. 1584, 1590 (1998)). “[T]hat the reasoning of an intervening high court decision is at odds with that of our prior decision is no basis for a panel to depart from our prior decision.” Id. “As we have stated, ‘[o]bedience to a Supreme Court decision is one thing, extrapolating from its implications a holding on an issue that was not before that Court in order to upend settled circuit law is another thing.” Id. In fact, the Supreme Court -- noting the ambiguities in the bankruptcy code and the “the difficulty of interpreting the statute in a single opinion that would apply to all possible fact situations” -- limited its Dewsnup decision expressly to the precise issue raised by the facts of the case. 112 S. Ct. at 778.

The Court reversed the District Court's opinion. Thus, at least in the 11th Circuit, a wholly unsecured lien may now be stripped in a Chapter 7 case.

Saturday, June 9, 2012

New Georgia Homestead Exemption 2012

Published on by: Ian M. Falcone
In May 2012, Governor Deal signed legislation that increased the homestead exemption from $10,000 to $21,500 per person ($43,000 per married couple). While this is a welcome change, unfortunately the new legislation did not amend the amount of the wildcard exemption (which remains at a maximum of $5600).
Previously, debtors with more than $10,000 of equity in their homes ($20,000 per married couple) were often forced to file a Chapter 13 case simply to save their residence. The new law will allow Chapter 7 debtors an opportunity to protect more equity in their homes, and will improve the chances for meeting the (Means Test) qualifications for filing Chapter 7 bankruptcy.
While this change will probably not have any major impact during the current economic recession, it will likely have a substantial impact as home prices recover down the road.

About Homestead Exemptions in Georgia

Generally, a homeowner is entitled to a homestead exemption on their home and land underneath provided the home was owned by the homeowner and was their legal residence as of January 1 of the taxable year. (O.C.G.A. § 48-5-40)
Application for Homestead Exemption
To be granted a homestead exemption, a person must actually occupy the home, and the home is considered their legal residence for all purposes. Persons that are away from their home because of health reasons will not be denied homestead exemption. A family member or friend can notify the tax receiver or tax commissioner and the homestead exemption will be granted. (O.C.G.A. § 48-5-40)
Application for homestead exemption must be filed with the tax commissioner's office, or in some counties the tax assessor's office has been delegated to receive applications for homestead exemption.
A homeowner can file an application for homestead exemption for their home and land any time during the calendar year. To receive the homestead exemption for the current tax year, the homeowner must have owned the property on January 1 and filed the homestead application by the same date property tax returns are due in the county. Property tax returns are required to be filed by April 1. Homestead applications that are filed after this date will not be granted until the next calendar year. (O.C.G.A. § 48-5-45)
Failure to apply by the deadline will result in loss of the exemption for that year. (O.C.G.A. § 48-5-45) Click this link for more information on when homestead applications should be filed in the county.