File your tax returns before the IRS does a tax assessment, or you could lose your right to discharge taxes

Income taxes may sometimes be discharged in a personal bankruptcy without full payment of the tax. For example, this might be true if the return is timely filed and more than three years have gone by since the last due date for the return, or if the return were filed late and more than 2 years have gone by. But, waiting too long can have dire results as Thomas Giacchi found out the hard way.

Mr. Giacchi did not file his 2000-2002 federal tax returns until after the IRS had estimated and assessed his taxes for those years, without his help. Only then did he file late returns, which showed he owed less than what the IRS estimated. He filed a Chapter 7 bankruptcy more than 3 years after his returns were filed and got a discharge. He then went back to bankruptcy court and filed suit asking the bankruptcy court to rule that his taxes for those years were discharge. He lost, and on appeal the Third Circuit Court of Appeals agreed.

The problem for Mr. Giacchi is that for a bankruptcy discharge he had to have filed a return that represented “an honest and reasonable effort to comply with the tax law”. Following other circuit courts of appeal, the Third Circuit held that filing a return after the IRS had already gone to the trouble of calculating his tax did not meet this test. Under the tax laws, “the purpose of a tax return is for the taxpayer to provide information to the government regarding the amount of tax due”  and once the IRS has to calculate the tax due without this assistance, a later tax return is no longer an “honest and reasonable attempt to comply”

If only Mr. Giacchi had filed sooner, he might have been able to discharge the old tax liabilities.

A word to the wise: file before the IRS catches up to you.

While we are not tax attorneys or qualified to give tax advice, we recommend not ignoring tax obligations.

[IRS CIRCULAR 230 DISCLOSURE:  Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein]

Student loans-dealing with a system stacked against the borrower

We recently came across this old piece in the New York Times: NY Times, 10/9/2015 “A Student Loan System Stacked Against the Borrower” .

It shows how people get trapped by crushing student loan debt, then have to deal with abusive collectors. Lately, this issue has gotten more attention, including a major piece in this month’s Consumer Reports.

If you are one of the people contemplating student loans, or if you have them, there are some important things to remember:

  1. Be careful and meticulous in keeping your own records. This starts with all the loan documents. If you signed it, demand a copy of the signed document right then and there.  Keep all correspondence and notices. Keep proof of every payment in hard copy. Keep notes of all communications. If you send something out, keep your own copy, and if possible keep proof that it was received. Keep your own ledger of payments.
  2. Especially, keep careful records of your dealings with debt collectors. If you encounter abusive tactics, these collectors could be subject to suit under the Fair Debt Collection Practices Act.
  3. Know the type of debt you are getting into. Federal loans are the best, and have the most options for abatement or eventual discharge. Some student loan debt, like that offered by the State of New Jersey, has no such provision, and indeed the recent reports are that the State agency is remorseless and inflexible in dealing with collections.
  4. Ask, and investigate on your own if there are any programs for deferment or abatement. Don’t expect that others will tell you, or even get it right.
  5. Remember that if you defer payment on a loan, that does not necessarily mean the interest doesn’t continue to pile up. If this is not the case, confirm it in writing.
  6. Almost every type of student loan is non-dischargeable in bankruptcy unless you can prove extreme hardship. This is likely hard to prove. Having good records (see above) is very important.
  7. While a bankruptcy may not discharge student loans, we have successfully used Chapter 13 to force the loan creditors into a reasonable and affordable payment plan, and to stop collections while this is going on. When the plan is completed, the debt is still there, but at least you do not have to deal with impossible demands for payment or harsh collection methods.

We are looking forward to the day when the system is not so stacked against the borrower. In the meantime, these steps can only help.

The hidden hazards in failing to list every possible debt or claim in a bankruptcy- you might not be protected!

Recently I was confronted with a question as follows: This gentleman had a small business and filed personal bankruptcy. He neglected to list one of his disgrunteled business customers. The bankruptcy was concluded and he got a discharge.  A year later the customer sued him in state court. He claimed the bankruptcy discharge prevented his being sued but the state court judge had a trial anyway and hit him with treble damages for a violation of the Consumer Fraud Act. He is appealing, without a lawyer.

Here was my answer:

“There are several aspects of this. First, in a no asset case, the consequence of not listing a creditor whose debt arose before the bankruptcy filing is that the debt is still discharged, UNLESS the debt is one that arises from fraud or false pretenses, embezzlement, larcenty, or breach of fiduciary duty, or wilful and malicious intentional injury to another. See Third Circuit decision,  Judd v. Wolfe, 78 F.3d 110 (3d Cir.1996).

“However, the other consequence is that  ithe non listed creditor is never given a deadline to file an adversary proceeding to determine whether the debt was non-dischargeable. Since treble damages were awarded it sounds like the judgment in state court was based on the Consumer Fraud Act. If there was proof of actual fraud (and not just a violation of certain rules and regulations), AND had you listed the creditor in your bankruptcy,  her  claim would have been discharged unless she filed suit in the bankruptcy court to determine the issue within a short specified time. Since that did not happen, the state court could determine if the debt was dischargeable and finding a consumer fraud violation, determine it was not, IF there was actual fraud.  You need to consult with a qualified bankruptcy lawyer right away about this. You need to address this in your appeal.”

Poor guy. All this could have been avoided had he or his attorney been more careful. I always tell clients to list EVERYONE who MIGHT have a possible claim against you. If the client is a business owner, we list every business debt, even if the client thinks she is not personally liable.

Closing the First Meeting of Creditors- it is more important than you think

For anyone in bankruptcy the First Meeting is important. It is where the Trustee places the debtors under oath and asks questions to verify their bankruptcy disclosures, and sometimes to pursue a further investigation. What many people do not realize is that closing that  hearing is just as important. For the most part, the trustee has the discretion to keep the hearing open as long as he or she needs to continue investigating, but there are limits and procedures that must be followed.

Closing the hearing is important because it starts the clock running on the time for the trustee or creditors to object to a debtor’s claim of exemptions. One of the important protections available to individuals in bankruptcy is their right to claim certain types and amounts of property as “exempt”. The exemptions define what property the debtor gets to keep free of claims of most creditors. These exemptions become unchallengeable 30 days after the First Meeting of Creditors is closed, unless there is a written agreement or court order otherwise. F.R.Bankr.P. 4003

So establishing when the hearing is closed is very important. There was a time when trustees had the ability to keep the hearing open for an indefinite time,  simply by announcing that the hearing was being kept open without setting a new date. This left the debtor in limbo. Several courts then held that trustees could not keep the hearing open for an unreasonably long time. In December 2011, bankruptcy rule 2003(e) was amended to require that the notice of adjournment at the hearing include a specified date and time for the hearing. It also required the prompt court filing of a statement specifying the date and time to which the meeting is adjourned. .

So at the First Meeting of Creditors, it is important to ask the Trustee to advise on the record whether the hearing is closed, and if not when the new hearing date will be. Insist that the rule be complied with.

Leaving home? A bankruptcy discharge may not protect you from association dues or liability claims

We see many people who file bankruptcy but decide to move out of a home they cannot afford. As I have said elsewhere, this is not always as simple as it looks and there are traps that even a bankruptcy discharge will not protect you from.

A bankruptcy discharge only discharges those debts that arose before the bankruptcy filing. But consider this scenario. Homeowner H files a bankruptcy then moves out. The home is in foreclosure but it takes another year after the bankruptcy was filed before a Sheriff Sale. Until then, H still owns the home. The home is subject to a condominium or common area association (also called a homeowners association). While the bankrutpcy will discharge debts owed such an association as of the date the bankruptcy is filed, all the association dues, fees or assessments that arise after that filing until H is no longer the owner of record (ie until the Sheriff Sale) are still his obligation. And those “post-petition” debts are not discharged. H will get sued by the association. Any unpaid dues or fees incurred after the bankruptcy can be collected.

Another nasty surprise can arise from lack of insurance. We always tell homeowners to stay in the home even after a bankruptcy, as close to the date they have to move out as possible. Why? Because most homeowners insurance policies have clauses that can result in no coverage if the home is vacant for more than a specific period of time or if the homeowner does not notify the insurance company that the home is vacant (When they get this notice, a cancellation notice usually follows). Vacant properties can be insured, but such insurance is very expensive.

Why is this so important? Consider what would happen if the vacant home catches fire after H has moved out and when he has no insurance. All the neighboring homeowners whose homes were damaged will sue H. H did not discharge these claims in bankruptcy because they did not exist when the bankruptcy was filed. Without insurance H has to pay a lawyer to defend himself, and pay any verdict. Bad news!

Many people tell me that they are covered because the mortgage lender got insurance coverage. If this is not the normal homeowners policy, but instead is “force placed” insurance, it only covers loss of the property and is there to insure the lender gets paid if its collateral is destroyed or damaged. Such policies have no protection for the homeowner.

These are all examples how it pays to sweat the details and get the right advice. For those who live or work in New Jersey or Eastern Pennsylvania, Neuner and Ventura LLP is able to help. For more on related subjects, check out our website and blog.

Chapter 13 trap for the unwary: not listing a creditor in time could mean you still have that debt to pay when the case is over!

In every bankruptcy, a debtor is required to certify that all creditors have been listed. We always caution our clients to include everyone to whom they MIGHT owe money. That way everyone who could sue them to collect a debt gets notice of the bankruptcy and there is no question that all dischargeable debts in fact do get discharged.

All too often, after filing new potential creditors need to be added. But waiting too long to do this can be a serious mistake.

Not listing a creditor risks that later on, that creditor will pursue lawsuits or collection efforts. In the Third Circuit (where New Jersey and Pennsylvania are located), the typical “no asset” Chapter 7 case (where there is nothing distributed to creditors) results in a discharge of all debts that could have been listed and discharged.

But in Chapter 13 cases, it is not so easy. First, any debt not listed will not be discharged. Second, and potentially worse, not listing everyone accurately at the outset could mean that the omitted creditors cannot file a claim in the Chapter 13 case. This means the debtor will be left with this debt still having to be paid when the case is over.

This is a major trap for the unwary. It happens because in a Chapter 13 case, all claims must be filed by a “bar date” set at the start of the case. Late filed claims are not allowed, even if the creditor did not find out about the bankruptcy until after the deadline had passed. And if the creditor cannot file a claim to share in plan payment, then that creditor’s debt does not get discharged, unless the Chapter 13 case is converted to Chapter 7.

Note this could be the result of not listing the creditor, or not providing a proper address. As debtor’s counsel we urge all our clients to get us as accurate an address as possible so this does not happen.

On the other side of the coin, this rule can ensure some degree of fairness to the creditors who did not receive timely notice of the bankruptcy (either by official notice or from other sources of information). We always urge creditors to act right away and investigate as soon as they hear or learn about a bankruptcy filing by someone who owes them money. But if through no fault of their own, they did not learn about it in time to file a claim that will be allowed, there is some recourse.

Regulators report Homeowners Harmed by Loan Companies

Our experience with clients’ attempts to modify their mortgage loans has been disappointing. Neither we nor our colleagues have been able to make sense of the actions of mortgage servicers. Our experience has been confirmed by a recent spot check study of the Consumer Financial Protection Bureau, reported by Bloomberg on October 29, 2014. http://www.bloomberg.com/news/print/2014-10-29/consumer-bureau-finds-homeowners-harmed-by-loan-companies.html.

Back in January 2014, the CFPB implemented regulations covering how mortgage servicers handled these types of transactions. Recently it did a spot check of compliance. The findings?

1. Substantial delays in modifying loans resulting in negative consequences including higher mortgage payments and unjustified damage to borrower credit.

2. Failures to convert successful trial mortgage modifications into permanent ones. The delays meant unpaid interest charged at the old rate was added back into the loan raising the total loan cost.

3. One servicer reportedly sent permanent loan modification documents to borrowers, then after these were signed and returned, changed the terms in ways that were “materially different”

The CPFB and state regulators have already gone after and made settlements for substantial penalties against servicers including Flagstar Bank and Ocwen.  Others including Green Tree Servicing are under investigation.

The mortgage servicing industry handle over $9 trillion in mortgage payments. What the CFBP has found is no surprise to us.

For borrowers facing these types of difficulties, the results can be catastrophic. Aggressive regulation to ensure fairness is long overdue.

Anyone facing the possible loss of a home should seek qualified legal advice without delay, and recognize that loan modification is not always successful or even realistic.

How debt buyers and creditors get judgments when they do not have a right to sue, and what you can do about it

Most bad consumer debt is sold off to “debt buyers” who make a good living buying bad debt for pennies on the dollar then collecting it. As a recent New York Times article points out, these creditors have been able to get judgments on debts that are too old to sue on. Worse, when the judgment debtors tried to stop this practice by a class action lawsuit, they were thrown out of court because of a clause in the original loan agreement that forced all disputes into arbitration. Courts have rejected the argument that by going to court themselves, the debt buyers waived their right to rely on this clause.  “Sued Over Old Debt, and Blocked From Suing Back” 12-22-2015

There are some important take-aways here.

  1. Read the credit agreements and understand what you are agreeing to. Some credit cards give you a limited time to “opt out”. Arbitration looks simple and less expensive, but in fact you may be giving away important rights.
  2. Keep your own records of what you have paid or charged. You may need them later.
  3. When faced with collection, demand proof and keep good records of all contacts, letters or communications. Debt collectors are required to provide proof of the debt if you ask in writing. Because they have bought the debt in large bulk purchases, they likely do not have the original documents.
  4. Watch the statute of limitations. In New Jersey, creditors have 6 years from the date of the last payment after default in which to sue. Even a $1 payment after that time has passed could start the clock running all over again.
  5. If sued, seek legal advice and seriously consider filing an Answer IN WRITING, FILED WITH THE COURT. YOUR ANSWER MUST BE IN THE HANDS OF THE CLERK BEFORE THE STATED DEADLINE EXPIRES. Calling the collection attorney does not protect your rights. A qualified attorney can advise you about the rights and defenses you have. These might include
    1. Plaintiff does not own the debt and is not qualified to sue me.
    2. Plaintiff is not entitled to use the courts to sue me. (In New Jersey out of state businesses must file certain reports in order to sue in our courts)
    3. The statute of limitations has expired. (See above and check the law in your state)
    4. If Plaintiff is owed money, the amount claimed is wrong. (This will require production of account records and possibly the loan agreement. You need to carefully assemble your records to show what you think is due)
    5. NOTE,  THESE ARE ONLY EXAMPLES: you are entitled to demand proof, but you may not have a valid claim to the above defenses or you may have other rights and defenses. Always seek legal advice and assistance, even if it is only a consultation.
  6. When dealing with debt collectors, keep careful written records of who contacted you, when and how, and what they said. You may have a counterclaim against the debt collector, but again, proof is key. Do not hesitate to record the conversations, but be sure to tell them, at the beginning of the recording, that you are recording. Not doing this can result in criminal liability in your state or the state where the caller is at.

For many people, debt collection is more likely to be a symptom of bigger problems. You should consult with a qualified attorney about how you can use Chapter 7 bankruptcy to discharge debts you cannot afford to pay, or Chapter 13 to pay what you can afford over time.

Student loans-a $2.5 trillion debtload-will the Supreme Court provide some relief?

For many years now, bankruptcy has provided no relief for virtually all student loans. The Bankruptcy Code makes them non-dischargeable except in cases of “undue hardship”, but Congress chose not to explain or define what that test might entail. Decades ago, when student loans could be discharged after 5 years, the 2d Circuit Court Appeals created a very high barrier to proving “undue hardship” under the “Brunner test”. That test has been adopted in many but not all other Circuit Courts of Appeal. Under that test, one must show almost no future capacity to pay, and show a good faith attempt to pay in the past.

Now, Bloomberg Business reports that a court case challenging the Brunner Test as unconstitutional may be headed to the US Supreme Court. “The Supreme Court may weigh in on a student debt battle”, October 19, 2015. The case was brought by a 57 year old recovering alcoholic, saddled with debt after business and law school. He lives with his mother and has been unable to find work due to a criminal record.

As the author points out, “It would be hard to overstate the significance of this case for people struggling with student debt. Student loans are the largest source of consumer debt aside from mortgages. The total amount of outstanding student debt is expected to double to $2.5 trillion in the next decade. One in four borrowers is either delinquent or in default on his or her student loans. A ruling in their favor would offer an escape from a type of debt that, until now, has followed even the most destitute borrowers to their deaths. A change in how loans are handled in bankruptcy would open the possibility of a fresh start for defaulted borrowers, who may see their loan balances balloon with fees and penalties while they don’t make any progress toward paying down their debt.

For the government, the stakes are about as high. If bankruptcy becomes a real option for people with student loans, the Education Department will have to contend with the reality that a good chunk of the $1 trillion-plus in outstanding debt is not ever going to be recovered.”

The Supreme Court does not have to agree to hear the case, but  may well do so, as this long-simmering problem has now evolved into a “split between the Circuits”, and may appeal to justices who dislike judge-made rules which cannot be supported by the language, structure and history of a statute.

Stay tuned.

Bankruptcy courts: foreclosure is not time-barred until 6 years after last payment due date specified in the mortgage or note

Last year, one of our bankruptcy judges ruled that once a mortgage lender waited more than 6 years from declaring a default and demanding the entire balance due (“accelerating the loan”) the statute of limitations specified in the Fair Foreclosure Act barred any later foreclosure suit. At the time, many of us thought the result, contrary to the adage that “no one gets a free house”, was surprising.

Many thought this would provide a windfall as they escaped foreclosure. Alas, that ruling, in Specialized Loan Servicing LLC v Washington, was reversed on appeal. 2015 US LEXIS 105794. The District Court, in a persuasive and well-thought out opinion, showed that the statute setting 6 years to foreclose actually stated that the time began to run on the maturity date set out in the loan documents. Acceleration of the loan is not mentioned there or elsewhere in the Fair Foreclosure Act. Moreover, another statute, governing the time to sue on negotiable instruments, did specify that the time ran from default. From this, the District Court concluded that, since the New Jersey Legislature knew how to make a time period run from default, its choice not to do so in setting 6 years to sue under the Fair Foreclosure Act was deliberate.

More recently, another bankruptcy judge, newly-appointed Jack Sherwood, came to the same conclusion in another well-reasoned decision. Hartman v Wells Fargo Bank NA, 2015 Bankr. LEXIS 2783 (Bankr DNJ 2015)

Oh well, for those hoping for a free house it was nice while it lasted.

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