TULSA OKLAHOMA BANKRUPTCY ATTORNEY » Case Law

SCOTUS To Decide If Chapter 13 Debtor Is Entitled To Vehicle Ownership Expense Deduction For A Vehicle Owned Free And Clear Of Liens

Dan Nunley — Wed, 21 Apr 2010 10:00:05 +0000

The United States Supreme Court (SCOTUS) has granted certiorari to decide whether, in calculating the “projected disposable income” that an above-median- income Chapter 13 debtor must devote to the payment of unsecured creditors, in order for the court to confirm, over an unsecured creditor’s objection, a plan that provides for less than 100% dividend on unsecured claims, a bankruptcy court may allow an ownership cost deduction for a vehicle even if the debtor is not actually making payments on the vehicle.

In the case below (In re Ransom, 577 F.3d 1026 (C.A.9 2009)), the Ninth Circuit Court of Appeals held that such a debtor was not entitled to a vehicle ownership expense deduction for a vehicle that he owned free and clear of liens. A Chapter 13 debtor’s “disposable income” is defined as “current monthly income received by the debtor … less amounts reasonably necessary to be expended … for the maintenance and support of the debtor…. ” For above-median income debtors, the “amounts reasonably necessary to be expended” is to be determined “in accordance with” the means test set forth in 11 U.S.C.A. 707(b)(2).

Under the “means test,” a debtor’s monthly expenses “shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides…. ” The IRS’s Local Standards include allowable transportation expenses, which are broken down into two categories: (1) operating costs and public transportation costs, and (2) “ownership costs.” At issue in the case at bar was whether the ownership cost deduction is “applicable” under 707(b)(2)(A)(ii)(I), and therefore allowed, to a debtor who owns his vehicle free and clear and thus does not have any loan or lease payments on his vehicle.

The statutory language, plainly read, does not allow a debtor to deduct an “ownership cost” (as distinct from an “operating cost”) that the debtor does not have, the Ninth Circuit determined. An “ownership cost” is not an “expense”-either actual or applicable-if it does not exist, period, the Court of Appeals reasoned, adding that it would be ironic to diminish payments to unsecured creditors in this context on the basis of a fictitious expense not incurred by a debtor. The ordinary, common meaning of “applicable” further supported the court’s conclusion. “Given the ordinary sense of the term ‘applicable,’ how is the vehicle ownership expense allowance capable of being applied to the debtor if he does not make any lease or loan payments on the vehicle?” the Court of Appeals asked.

There is “a significant split in authority” on this issue, the Ninth Circuit acknowledged. Some courts have allowed the deduction of an “ownership cost” for a vehicle that is subject to neither secured debt nor a lease, while other courts have not. Most recently, the Fifth and Seventh Circuits have joined the camp allowing the deduction, which put the Ninth Circuit “in the uncomfortable position” of disagreeing with them, the Court of Appeals noted.

In his petition for a writ of certiorari, the debtor argued that the plain language of the statute, as determined by the Fifth, Seventh, and Eighth Circuits, should prevail, and that a debtor should be allowed a deduction for the ownership costs of a vehicle regardless of whether the debtor is still making loan or lease payments. The petition criticized the Ninth Circuit for introducing an extrinsic standard, namely, the procedures of the IRS Manual, to determine the proper treatment of deductions under the Bankruptcy Code.

A decision is expected next term. When the Supreme Court releases its decision, I’ll post an update.

U.S. Supreme Court Hears Argument Regarding Student Loan Discharge

Dan Nunley — Wed, 02 Dec 2009 10:00:49 +0000

Yesterday, the U.S. Supreme Court heard argument in a bankruptcy case in which the confirmed Chapter 13 plan effectually discharged some of the debtor’s student loan debt when there had been no finding of “undue hardship” as required by bankruptcy law.

The heart of the matter in this case is this – when you have a confirmed Chapter 13 plan with language that violates a bankruptcy statute, which controls? The confirmed plan or the statute?

Student loans are one of several debts that cannot easily be discharged in bankruptcy. In order to discharge student loan debt, a debtor must prove that repaying the student loan would work an “undue hardship” upon the debtor and his family.

The case at issue, United Student Aid Funds Inc. v. Espinosa, involves a debtor who received some $13,250 in student loans to attend trade school. Mr. Espinosa filed for Chapter 13 bankruptcy and his Chapter 13 plan proposed paying $274 per month over five years to United Student Aid Funds Inc., an amount that would cover the principal but not some $4,000 in interest on the student loans. The lender did not object to the bankruptcy court’s confirmation of the plan.

And Espinosa never filed an adversary proceeding to prove undue hardship as federal bankruptcy statutes require for discharging student loan debt.

After Espinosa completed the payments required by his Chapter 13 plan and received his discharge order, United Student Aid Funds (USAF) began intercepting Espinosa’s income tax refunds to satisfy the unpaid interest from his student loans. So Espinosa reopened his bankruptcy case and petitioned the bankruptcy court for an order holding USAF in contempt for violating the discharge injunction. USAF cross-moved for relief from the bankruptcy court’s order confirming the plan, on the ground that the order had been entered in violation of USAF’s rights under the Bankruptcy Code and Rules.

The bankruptcy court rejected USAF’s argument. It held that USAF had violated the discharge injunction and ordered USAF to cease all collection activity against Espinosa. It also denied USAF’s motion for relief from the confirmed plan, holding that the plan became final when it was confirmed and that USAF should have objected to any procedural defect before confirmation.

USAF appealed to the district court, which reversed the bankruptcy court.

Then Espinosa appealed to the 9th Circuit Court of Appeals which reversed the district court. The 9th Circuit held that student loan debts can be discharged by way of a Chapter 13 plan if the creditor does not object after receiving notice of the proposed plan.

Therefore, at least in the 9th Circuit, the terms of a confirmed Chapter 13 plan control even though they conflict with the plain language of a bankruptcy statute.

In yesterday’s oral argument before the U.S. Supreme Court, lawyers for United Student Aid Funds and the Obama administration warned that upholding the 9th Circuit’s ruling would encourage many more debtors to try an end run around the statutory requirements for discharging student loans in bankruptcy.

A decision should be announced before the Supreme Court ends it’s term next July.

U.S. Supreme Court To Decide Whether Bankruptcy Lawyers Are Debt Relief Agencies

Dan Nunley — Tue, 01 Dec 2009 10:00:02 +0000

If like me, you’re a consumer bankruptcy lawyer who represents debtors, then listen up.

A very important case is being argued today before the U.S. Supreme Court regarding whether or not lawyers representing debtors must comply with the debt relief agency requirements mandated by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which was passed by Congress and signed into law by President Bush back in 2005.

Under BAPCPA, debt relief agencies are required to do certain things and prohibited from doing other things. And when these requirements and prohibitions are applied to bankruptcy lawyers, in my opinion they impair the attorney-client relationship and violate an attorney’s free speech rights.

And Alan Milavetz agrees with me.

Milavetz is a Minnesota lawyer who remembers how his mother, “in typical Jewish-mother fashion,” always urged him to be a doctor, lawyer or engineer when he grew up. “She didn’t say doctor, debt relief agency or engineer,” he recalls.

For Milavetz, the inclusion of lawyers in BAPCPA’s debt relief agency provisions is troubling. And while some of the provisions are merely irritating like a pair of ill-fitting shoes, other provisions are far more serious.

In particular, BAPCPA restricts the advice that a lawyer may give to someone contemplating bankruptcy. Specifically, BAPCPA prohibits a bankruptcy lawyer from advising persons of certain limited means to incur additional debt before filing bankruptcy. This restriction, together with the law’s advertisement and disclosure requirements, strikes at the heart of fundamental First Amendment values.

So Alan Milavetz has taken the issue all the way to the U.S. Supreme Court.

“It’s a huge challenge for any firm to litigate against the federal government, but especially for us,” says Milavetz, noting the firm has 10 lawyers. “But there comes a point when if you think you’re right — and we do — you move on it.”

Milavetz’s four-year odyssey culminates today when the Supreme Court justices hear arguments in Milavetz, Gallop & Milavetz v. U.S.

“This is an evil law prohibiting speech, and among the least powerful people, interfering with their right to get reasonable advice,” Milavetz said. “If we don’t get a judgment that this law is unconstitutional, I have said we will handle no more consumer bankruptcy cases, and we think no true lawyer can handle them as well.”

Source: Law.com

U.S. Supreme Court To Decide Issues Regarding Bankruptcy Lawyers, Debt Relief Agencies and Required Disclosures

Dan Nunley — Mon, 15 Jun 2009 10:00:38 +0000

In October 2005, Congress passed and President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Unfortunately, much of the law was poorly drafted leaving its various provisions open to multiple interpretations. Inevitably, bankruptcy attorneys filed legal challenges on many different fronts and the decisions by numerous bankruptcy judges and appellate courts have been all across the board.

Recently, the U.S. Supreme Court granted certiorari to determine the constitutionality of some of BAPCPA’s most controversial provisions. This fall, the Supreme Court will hear oral argument on two key provisions of the BAPCPA:

Is a debtor’s attorney a “debt relief agency”?
What disclosures are required to be given to a debtor by “debt relief agency”?

Is a debtor’s attorney a “debt relief agency”?

Under 11 USC §526, a debt relief agency is defined as “any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer.”

Bankruptcy attorneys argue that they should not be considered debt relief agencies, but if they are, then the requirements under the statute violate their First Amendment rights.

What disclosures are required to be given to a debtor by “debt relief agency”?

Under 11 USC §528, debt relief agencies must disclose the following in all of their advertising materials: “We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code,” or a similar statement.

Again, attorneys argue that these requirements violate their First Amendment rights and amount to mandatory deceptive disclosures that confuse the public.

The Court will consider an 8th Circuit ruling that said a law firm representing debtors met the definition of debt relief agency, but that this provision of the law is unconstitutional. However the court said that law firms are still required to give the disclosures.

Alan Milavetz, a partner at the Minnesota firm of Milavetz, Gallop & Milavetz that was the plaintiff in the 8th Circuit case, said he plans to argue the case before the Court. “This case is really about what is so important about being a lawyer: that we are able to give our clients options and let them make their decisions within the boundaries of the law,” he said.

A decision from the Supreme Court can’t come soon enough for bankruptcy attorneys, who have experienced an increase in workload since the Act went into effect.

The questions involved in the case are “all the more important in these troubling economic times because our clients need lawful, accurate advice on financial matters in pre-bankruptcy litigation,” said Chad Schulze, a lawyer at the Milavetz firm who worked on the cert petition.

And the issues in the case go beyond bankruptcy practice, said Howard Marc Spector, a sole practitioner in Dallas who represented the plaintiff in similar case in the 5th Circuit. “It seems to me that all lawyers have to be very concerned about laws that prohibit them from giving legal advice to their clients,” he said.

Across the country, federal courts have reached different conclusions about the constitutionality of the Act.

Bankruptcy Courts and Appellate Courts are split as to whether bankruptcy attorneys are “debt relief agencies”

The 8th Circuit , U.S. District Courts in Connecticut , Minnesota , Oregon and Texas and a bankruptcy court in Virginia have all held that attorneys are debt relief agencies.

The 5th Circuit and bankruptcy courts in Florida and Georgia reached the opposite conclusion.

Every court that has found §526(a)(4) applicable to attorneys has held that the provision is unconstitutional. However, they have also held that the disclosure and advertising requirements do not impose an undue burden on attorneys.

In the 8th Circuit case, Milavetz, Gallop & Milavetz filed suit against the U.S. seeking a declaratory judgment that §526 and §528 were unconstitutional.

The 8th Circuit held that bankruptcy attorneys do fall within the Act’s definition of “debt relief agency,” noting that Congress had listed exclusions to the section’s application and that lawyers were not included.

It further held that §526(a)(4), which provides that “[a] debt relief agency shall not … advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title,” violated attorneys’ First Amendment rights.

Advising clients to take on more debt is commonplace, explained Marc Stern, a solo bankruptcy attorney in Seattle. “Telling a client it might be time to re-finance the mortgage, or to turn in the Cadillac and get a Hyundai, those are reasonable things to advise a client to do,” he said. “But the [Act] says that it is illegal for me to advise my clients to take on new debt.”

Ironically, such advice can sometimes prevent a client from filing bankruptcy, Stern noted.

Bankruptcy Courts and Appellate Courts are split as to “disclosure requirements”

The 8th Circuit went on to hold that the disclosure requirements of §§528(a)(4) and (b)(2) were constitutional.

“Section 528 requires debt relief agencies to disclose: ‘“We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.” or a substantially similar statement,’ in all of their bankruptcy-related advertising materials directed to the general public. The requirement does not prevent those attorneys meeting the definition of debt relief agencies ‘from conveying information to the public; it … only require[s] them to provide somewhat more information than they might otherwise be inclined to present,’” the court said.

Barbara Nevin, a bankruptcy attorney at Milavetz, Gallop & Milavetz, said that her clients are “very confused” when she gives them the required disclosures. “Now I have people come in an extra half hour early just to go through the disclosures and help them understand what it means and why I have to give it to them,” she said.

Predictions?

Bankruptcy attorneys are refusing to predict the outcome of the case, but Henry Sommer, a Supervising Attorney at the pro bono Consumer Bankruptcy Assistance Project in Philadelphia and former president of the National Association of Consumer Bankruptcy Attorneys, said he will be watching how Justice Antonin Scalia interprets the statute.

“It will be interesting to see whether Justice Scalia follows the plain language of the law, which he supposedly adheres to, since the Justice Department is suggesting that the Court not look at the plain language and should read [§526] much more narrowly than the plain language provides,” said Sommer.

Spector said the justices will have to grapple with what level of First Amendment protection legal advice should receive.

Another issue that will be relevant to the Court’s analysis, said Stern, is a separation of powers problem. The law “invades the attorney-client relationship by limiting how you represent your clients and the advice you can give them, which puts the federal government in direct conflict with the state governments,” he said.

A decision from the Court is expected next term.

Source: LawyersUSAOnline.com

Can I file bankruptcy on the same day I take the credit counseling class?

Dan Nunley — Mon, 01 Jun 2009 10:00:38 +0000

Here in Oklahoma the answer is “Yes you can.” You can file bankruptcy on the same day that you take your credit counseling class. However, if you live in another state, you may be required to wait to file bankruptcy until the day after you complete the credit counseling class.

Why the difference depending on where you live? Well, the new bankruptcy law of 2005 (BAPCPA) brought many changes to the world of consumer bankruptcy. And unfortunately, Congress did a poor job of drafting the new law which has resulted in much confusion. Much of the new bankruptcy law is unclear and subject to differing interpretations. This has resulted in bankruptcy judges having to decide exactly what the new law means. And many times we receive diametrically opposite rulings from different bankruptcy judges on the exact same issue. That is what has happened with the question of whether or not a person can file bankruptcy on the same day he or she completes the credit counseling class.

The credit counseling requirement is a result of the new bankruptcy law of 2005. Previously, a person filing bankruptcy was not required to take a credit counseling course.

11 USC 109(h)(1), which was added to the Bankruptcy Code by the BAPCPA amendments of 2005, provides as follows:

Subject to paragraphs (2) and (3), and notwithstanding any other provision of this section, an individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis. (Emphasis added.)

The effort to define “during the 180-day period preceding the date of filing of the petition by such individual” has resulted in two distinct lines of case law.

The first line of cases (“Plain Language”) holds that the phrase “the 180-day period preceding the date of filing” requires that the credit counseling be obtained no later than the calendar day prior to the day on which the petition is filed.

The second line of cases (“Bright Line”) holds that § 109(h)(1) is satisfied so long as the credit counseling precedes the filing of the petition, even if both events occur on the same calendar day.

Here in Oklahoma, we follow the “Bright Line” approach due to the case of In re Francisco, BAP No. NM-08-019. (B.A.P. 10th Cir. 7/2/2008) (B.A.P. 10th Cir., 2008). In this case, the debtor completed the required credit counseling class in the morning and later that same day filed bankruptcy. Shortly thereafter, the bankruptcy judge, sua sponte, issued an Order directing the Debtor to show cause why her case should not be dismissed pursuant to § 109(h)(1). A hearing was held and the bankruptcy judge dismissed the case. The debtor appealed and the appellate court reversed the bankruptcy judge’s decision by holding that a debtor qualifies as a debtor under § 109(h) so long as he or she completes the required credit counseling at any time between 180 days before, and the moment of, filing the petition.

If you have are struggling with debt problems and have questions about how bankruptcy ma be able to help, contact Tulsa bankruptcy lawyer Dan Nunley today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. I would count it a privilege to be able to visit with you in a relaxed and confidential environment where I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.

U.S. Supreme Court To Decide Bankruptcy Exemption Issues

Dan Nunley — Tue, 05 May 2009 10:00:47 +0000

Last week the United States Supreme Court granted certiorari in Schwab v. Reilly (08-538), a case from the Third Circuit Court of Appeals. The case will be argued next term and the Supreme Court is limiting its review to the two following questions:

1. When a debtor claims an exemption using a specific dollar amount that is equal to the value placed on the asset by the debtor, is the exemption limited to the specific amount claimed, or do the numbers being equal operate to “fully exempt” the asset, regardless of its true value?

2. When a debtor claims an exemption using a specific dollar amount that is equal to the value placed on the asset by the debtor, must a trustee who wishes to sell the asset object to the exemptions within the thirty day period of Rule 4003, even though the amount claimed as exempt and the type of property are within the exemption statute?

The Third Circuit Court of Appeals ruled for the debtor saying:

“We decide whether a Chapter 7 trustee who does not lodge a timely objection to a debtor’s exemption of personal property may nevertheless move to sell the property if he later learns that the property value exceeds the amount of the claimed exemption. Where, as here, the debtor indicates the intent to exempt her entire interest in a given property by claiming an exemption of its full value and the trustee does not object in a timely manner, we hold that the debtor is entitled to the property in its entirety.”

When the Supreme Court releases its decision, I’ll post an update.

Source: SCOTUS Blog and BankruptcyProf Blog.