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Bankruptcy Attorneys in Indianapolis Since 1980

Archives for November 2013

Restrictions on Debt Relief Agencies: Overview of Bankruptcy: Chapter 13, Section 526

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Series: #2 0f 13
As we mentioned in the first article of this series, “Chapter 7 and Chapter 13 Bankruptcy Code Overview: Introduction to Sections 526, 527 & 528“, Section 526 requires (among other things) debt relief agents to provide all services promised; properly advise the assisted person on benefits and risks associated with filing bankruptcy; refrain from advising assisted persons to make untrue or misleading statements; and may not advise the assisted person to incur more debt in contemplation of filing bankruptcy. While these issues seem clear and unambiguous on first reading, a closer understanding of this section shows the potential risks.
For example, is taking a retirement loan “incurring debt”? It would appear so as 11 U.S.C. § (12) defines “debt” as a “liability on a claim.” But see 11 U.S.C. § 362(b)(19)1 which states that there is no automatic stay in place for the withholding and collection of a retirement loan and that “nothing in this paragraph may be construed to provide that any loan made under a governmental plan under section 414(d), or a contract or account under section 403(b), of the Internal Revenue Code of 19861 constitutes a claim or debt under this title.” What advise can you give a debtor who needs a vehicle and asks you if it is advisable to purchase the vehicle prior to filing? Should an attorney stay silent in this regard?
Many of these questions were answered on March 8, 2010 by the United States Supreme Court in the case, Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. _____ (2010)2 on Writs of Certiorari to the United States Court of Appeals for the 8th Circuit. Justice Sotomayor delivered the Court’s opinion which held three tenants:
1) Attorneys who provide bankruptcy assistance to assisted persons are debt relief agents (“DRAs”) under BAPCPA. Milavetz relied on the fact that 11 U.S.C. § 101(12)(A)1 does not specifically include attorneys. The Justices brushed that issue aside easily stating that the only other group it would apply to would be petition preparers.
However, the definition includes both “any person” who provides bankruptcy assistance to an assisted person or who is a “bankruptcy petition preparer”. Accordingly the only “person” referred to would include attorneys;
2) Section 526(a)(4)1 prohibits a DRA from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose. The controlling question is whether the thought of bankruptcy was the impelling cause of the transaction. The DRA would be prohibited from advising the debtor to “load up” on debt with the expectation that debt would simply be discharged in bankruptcy. Does that answer the question?
What if a debtor, after completing the means test (Form B22) has disposable income available only because the debtor has no vehicle and would thus not qualify for a Chapter 7? Can the DRA advise the debtor to “load up” on an automobile payment for the purpose of qualifying for a Chapter 7?
3) Finally, the Court held that the notice requirements of Section 528 are valid and do not violate the First Amendment as the disclosure requirements are not unduly burdensome and are reasonably related to the government’s interest in preventing deception of consumers. Without such disclosures, consumers may believe that they are obtaining simple debt relief without the reference to the potential for filing bankruptcy which has inherent costs to consumers.
Section 526 continues by stating that any contract that does not comply with Sections 527 and 528 are void and may not be enforced by any person other than the assisted person. Further, a debt relief agent is liable for fees and charges paid for failure to comply with Sections 526-528.
Most importantly, Section 526 states that if the court, on its own motion or motion of the United States trustee or the debtor, finds that a person intentionally violated this section, or engaged in a pattern of violating this section, the court may enjoin the violation and impose a civil penalty on the debt relief agent. In other words, despite the “clarity” provided by the Supreme Court, the DRA must be cautious as to any advice regarding incurring debt prior to filing.
Next: Disclosure / Requirements for Debt Relief Agency: Section 527 / Section 528, Overview of Chapter 13 Bankruptcy

Sources:
(links open in new windows)
1. Cornell University Law School Legal Information Institute
2. United States Supreme Court

Chapter 7 and Chapter 13 Bankruptcy Code Overview: Introduction to Sections 526, 527 & 528

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Series: #1 0f 13
This series of articles will take a look at the three sections of the bankruptcy code related to debt relief agents, sections 526, 527 and 528, and the requirements and responsibilities they impose on attorneys that act as a debt relief agency. We will then take an in-depth look at primary reasons why filing Chapter 13 rather than Chapter 7 bankruptcy may be the better (or the only) option for your client.
Pursuant to 11 U.S.C. § 101(12A), a “debt relief agency” means any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration. Accordingly, if the attorney charges any fees whatsoever or receives any other valuable consideration in the area of bankruptcy assistance, that attorney is a “debt relief agent” and must comply with the requirements of Sections 526, 527 and 528.
Future articles in this overview of bankruptcy will discuss:

Chapter 13; Section 526: Debt Relief Agent Requirements

Section 526 requires (among other things) debt relief agents to:

  • Provide all services promised
  • Properly advise the assisted person on benefits and risks associated with filing bankruptcy
  • Refrain from advising assisted persons to make untrue or misleading statements
  • Not advise the assisted person to incur more debt in contemplation of filing bankruptcy

While these issues seem clear and unambiguous on first reading, a closer understanding of this section shows the potential risks. We will take a more in-depth look at Section 526 in our next post.

Chapter 13; Section 527: Disclosure

Basically, Section 527 requires a debt relief agency to provide very specific written notices to the assisted person “not later than 3 business days after the first date on which a debt relief agency first offers to provide any bankruptcy assistance services to an assisted person.” While this may appear clear on its face, it can be very tricky to follow in certain circumstances.

Chapter 13; Section 528: Compliance

Section 528 has the final list of requirements with which the attorney may or may not be able to comply. We will go into more details about both Sections 257 and 258 in the third article of the series.

Initial Interview & Deciding Which Chapter to Use

Most debtors who walk into your office only know about Chapter 7 bankruptcy and have some common misconceptions about how a Chapter 7 works, how it differs from a Chapter 13 bankruptcy, and how much paperwork they will need to provide to properly prepare and advise the Chapter 7 trustee and the court.
Additionally, a debtor may not qualify for Chapter 7 protection due to any of a number of factors, which we will discuss later in this series.
Even though a debtor may not qualify for a Chapter 7 due to a prior filing or because the debtor has excess income, there are many reasons in which a debtor may find as much or more “stress-relief” in a Chapter 13 reorganization. The attorney must be careful to analyze all the benefits and risks (as required by 11 U.S.C. § 526*(a)(3)(B) and rules of professional responsibility before making such a determination as to which chapter is appropriate.
Next: Restrictions on Debt Relief Agencies: Overview of Bankruptcy: Chapter 13, Section 526

* Source: Cornell University Law School Legal Information Institute

Liquidating Tax Debt / Protecting Co-Debtors: Basics of Bankruptcy – Chapter 13 vs. Chapter 7 – Part 4

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The previous installment of our series “Basics of Bankruptcy” discussed some of the reasons to file a Chapter 13 bankruptcy vs. Chapter 7 as they relate to cars and other personal collateral. This last installment looks at reasons why Chapter 13 might be the better choice for personal bankruptcy than Chapter 7 when it comes to liquidating tax debt and protecting co-debtors.

Liquidating Tax Debts

Summary: Chapter 13 is an effective tool for liquidating large tax and other obligations, as it can provide the debtor with more time than a non-bankruptcy setting would allow.
A chapter 13 is a very effective tool for liquidating large tax and other priority obligations, as it sometimes provides the debtor with more time than a non-bankruptcy setting would allow.

  • Generally, we see large income and trust fund taxes paid through the plan, and in the last few years, child support cures have become more common.
  • Also, if the debtor is self-employed, part of the confirmation order may include the requirement that the debtor make regular ongoing monthly estimated tax payments to the IRS.
  • If this becomes part of a confirmation order and is later breached, the IRS can move for dismissal for breach of the order.

a) Secured tax claims: A tax liability is secured to the extent that the debtor has equity in property if the taxing agency has filed a lien in the debtor’s county of residence.

  • One should always verify that the lien was recorded in the correct county.
  • In determining the amount of the secured claim, the equity that the debtor lists in schedules A and B is totaled.

Special note: the IRS asserts that their claims are also secured to the extent that the debtor has any interest in a retirement fund or a 401k, even though this is an asset that is generally excluded from, or exempted out of the bankruptcy estate. See In re Wesche, 193 B.R. 76 (Bankr. M.D. Fla. 1996) stating that federal tax lien attaches to all interests in pension, not just current benefits.
This is very important because if the debtor has a retirement fund, the IRS secured claim that may have appeared to be minimal based on the equity in personal property can become unmanageable, even in a 13. To the extent that the secured claim extends beyond the equity available to support it, the balance will fall to priority or general under the §507(a)(8)* analysis. Also remember, that the equity is applied to oldest liabilities first.
Secured real estate taxes are paid through the plan. Generally only the pre-petition amount due is paid, but if the next semi-annual installment is due shortly, and the taxing agency agrees, that post-petition obligation may also be included. Real estate taxes are paid with interest of 8%.
b) Priority tax claims: Again, taxes are prioritized in §507(a)(8), but briefly they include income taxes due within the prior three years, trust fund taxes and some personal property taxes. One thing to be aware of in determining the priority afforded personal income tax liabilities is the term of art “tolling”, which has now been codified at the end of §507(a)(8).
Tolling is a rule that provides that any time spent in a prior bankruptcy (any chapter) or when the government unit was prohibited from collecting a tax under applicable non-bankruptcy law will extend the reach back period for pulling tax years into priority status; an additional 90 days is added to time period.
Tolling applies only to pre-petition debt, but you need to be aware of any previous bankruptcies, as it can be a rude surprise to find that taxes due in 2003 retain their priority status in a 2009 filing.
As an example: The debtor previously filed a chapter 13 bankruptcy in April, 2004. In this bankruptcy, 2002 taxes (due April 15, 2003) are priority under §507(a)(8)(A)(i) due three years before the date of the filing of the petition.

  • If the 2004 bankruptcy was dismissed in April 2007 (the debtor was in the bankruptcy for 36 months). So, taxes originally due April 15, 2003 would retain priority status for three years, plus three years that the debtor was in the bankruptcy plus an additional 90 days.
  • Starting from the due date of April 15, 2003 the 2002 tax year retains priority status until July 16, 2009! So, a bankruptcy filed anytime before July 16, 2009 will pull the 2002 debt into priority status.
  • Furthermore, if the debtor asked for an extension until October 15, 2003, theses tax debts would be a priority claim until January 16, 2010. These facts may be confusing, but remain extremely important.
  • Other priority taxes that must be fully paid inside the plan include trust fund taxes (that portion that the employer withheld but did not remit to the taxing agency), and personal property taxes due within one year prior to the current bankruptcy filing.

A word about trust fund taxes — they are attributable to the responsible party of the employer. This determination is made by the IRS.
c) General unsecured taxes: ”Stale taxes”, those that are older than three years, and the penalty portion of priority taxes are general unsecured liabilities and are paid with the pro rata distribution afforded to other general creditors.

Protecting a Co-debtor

11 U.S.C. Section 1301* is otherwise known as the “co-debtor stay”, and prevents a creditor from pursuing a co-debtor on a consumer debt. In order to prevent the creditor from seeking relief from stay, the Debtor must propose in his or her Chapter 13 plan to pay the co-signed debt in full. There is no equivalent provision in Chapter 11 or Chapter 7.

* Source: Cornell University Law School Legal Information Institute (opens in new windows)