The Means Test

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The Huffington Post is reporting today that David Adkins (aka “Sinbad”) filed for Chapter 7 bankruptcy in California. Sinbad’s case, in my view, completely underscores the unfairness of the 2005 amendments to the bankruptcy code known as the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA“).  Prior to these 2005 amendments  people of all incomes could file for bankruptcy under Chapter 7. BAPCPA, however, restricted the number of people that could declare Chapter 7 bankruptcy. The act sets out a method to calculate a person’s income, and compares this amount to the median income of the person’s state. If the income is above the median income amount of the debtor’s state, the debtor is subject to a “means test.” For people subject to the means test, the test is calculated as follows. The debtor’s “current monthly income” is reduced by a set of allowed deductions specified by the IRS. These deductions are not necessarily the actual expenses the debtor incurs on a monthly basis. Some commentators have referred to these deductions as “presumed expenses”. The deductions applicable in the “means test” are defined in 11 U.S.C. § 707(b)(2)(A) and include:

  • living expenses specified under the “collection standards of the Internal Revenue Service”,
  • actual expenses not provided by the Internal Revenue Standards including “reasonably necessary health insurance, disability insurance, and health savings account expenses”,
  • expenses for protection from family violence,
  • continued contributions to care of nondependent family members,
  • actual expenses of administering a chapter 13 plan,
  • expenses for grade and high school, up to $1,500 annually per minor child provided that the expenses are reasonable and necessary,
  • additional home energy costs in addition to those laid out in the IRS guidelines that are reasonable and necessary,
  • 1/60th of all secured debt that will become due in the five years after the filing of the bankruptcy case,
  • 1/60th of all priority debt, and
  • continued contributions to tax-exempt charities.

If a debtor cannot pass this “means test,” then there exists a ‘presumption of abuse,’ which essentially means that the person’s Chapter 7 case could be dismissed, or converted to a case under Chapter 13. Only a handful of people are immune from the means test: soldiers who have incurred their debt while in defense of this nation, people on social security, and some people in the reserves or national guard. And- wealthy people like Sinbad.

According to Sinbad’s bankruptcy schedules, he grossed over $1 million in the six months leading up to his bankruptcy filling. After all of his business expenses (which includes around $14,000 in monthly legal fees, $14,000 in travel expenses, and $6,800 in ‘personal expenses) Sinbad claims to make, on average, $16,000 per month.  After all of his expenses, Sinbad clams to have no money left over to pay his bills. According to the U.S. Census, the median income for a family of two (presumably Sinbad and his wife) in California is roughly $64,000.  So- the question I hope everyone is asking is “How come Sinbad, with his alleged $192,000 per year, is able to pass the means test?” The answer: Most of Sinbad’s debts are “nonconsumer” debts. Most U.S. courts have held that if greater than half of the dollar amount of a person’s debt is non-consumer or business, the means test does not apply. Essentially- in 2005 Congress made it more difficult for everyone to file for Chapter 7 bankruptcy- except for soldier’s in active duty, retired people with social security as the only source of income, and people with ‘business debt.’ Out of the dozens of clients I’ve represented that own their own small business, only a handful have been able to be exempted from the means test. Congress gave wealthy ‘business owners’ like Sinbad a huge break and ordinary Americans the shaft.  I don’t fault Sinbad for obtaining the relief that he is entitled to under the bankruptcy code. I fault Congress for letting people like Sinbad out of their debts but not letting the electrician, construction owner, and several employees of the United States Air Force at Hill Air Force Base obtain the same relief. My clients were obliged to file under Chapter 13 to repay a portion of their debts. Why is Sinbad immune? No doubt- the answer lies with campaign finance and those who can throw dollars behind their voice. This is why I have, do, and always will be a advocate for rigorous campaign finance reform. It is the problem that will solve all the other problems. 

Everyone is entitled to the relief provided for them by law. If you have business debt that is crushing your finances, then you should obtain relief! If you have a small business or not; if you are crushed under business or consumer debt- call my office for a free consultation. 

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Debtors Prison

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credit: http://philoforchange.wordpress.com

There was a great article in the Salt Lake Tribune today about small claims courts and bench warrants.

The article discusses several cases where debtors were locked up in handcuffs upon entering the court house to argue their case. I understand that the Court needs to enforce its orders and ensure people show up to court. However- standards of due process in most small claims courts are atrocious. They are not required to follow standard rules of civil procedure and courts often send court notices out in the mail to the debtor’s home- whether the respective debtor lives there or not. Its difficult to show up to court when you find out about it months later. I have practiced in ten small claims courts around Utah and none of them use proper service as outlined by Rule 4 of the Utah Rules of Civil Procedure.

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One of best way to avoid bench warrants, debt lawsuits, collections, and ruthless and relentless creditors is by filing for bankruptcy protection. The automatic stay that comes into place when you file bankruptcy breaks the chains of the debtor’s prisons. It not only stops lawsuits, garnishments, and collections- but it also stops most creditors from even calling you on the phone.

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Utah legislature increasing bankruptcy exemptions

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The Utah Legislature is about the pass a bill that increases the following exemption amounts for personal bankruptcy:

  • Increases homestead exemption from $20,000 to $30,000 per individual;
  • Increases vehicle exemption from $2500 to $3000 per individual;
  • Increases furniture and other items of personal property exemption from $500 to $1000;
  • Creates an exemption for firearms and ammunition up to $250 per individual;
  • Creates an exemption for unpaid earnings;
  • Creates an exemption for a motor vehicle used by an individual in the individual’s business, trade, or profession;
  • Permits certain nonresidents to use the federal exemptions.

Read more about the bill here. Expanding the bill to cover firearms and ammunition is a positive step. In my opinion, this bill does not go far enough to provide an exemption for home owners with a reasonable amount of equity in their home. Exemptions vary by state, and although Utah’s exemption will now be greater than the federal exemption, it is still far below neighbor states Idaho ($50,000 per individual), Colorado ($45,000), and Nevada ($350,000). That said, increasing the homestead exemption to $30,000 will help a huge number of Utahns in protecting their hard-earned money. 

Nobody wants to go through bankruptcy. Just like nobody wants to have their tonsils out. But- bankruptcy can be the tool that allows you to finally be able to step back and breathe again. Increasing bankruptcy exemptions is a positive step that will give people the opportunity to come out of bankruptcy with the tools necessary to build a successful and happy life. 

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The Personal Guarantee

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Stop the presses- the porn industry is suffering. The Los Angeles Times is reporting that the porn icon “Girls Gone Wild” (“GGW”) is filing for Chapter 11 bankruptcy protection in order to protect its assets against one of its bigest creditors: Steve Wynn– the casino mogul  Most of the biggest hotels around Vegas and around the world are owned and controlled by Wynn. Somehow, over the last few years, GGW founder Joe Francis has incurred over $30 million in debt to Wynn. According to the times, Wynn will continue to go after Francis because their judgments are against him- not his business. “Our judgments are not against Joe Francis’ companies, but rather against Mr. Francis personally,” Michael Weaver, Wynn Las Vegas’ senior vice president of marketing, said in a statement. “Consequently, these recent bankruptcy filings by the GGW companies will not slow our efforts to collect on our judgments against Mr. Francis.”

The Personal Guarantee

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This problem is not uncommon, though for most people its in reverse. Every week I have a small-business owner come into my office because their business creditors are surrounding them like vultures. As most of you probably know, most small business loans or lines of credit often come with the catch all provision: the personal guarantee. If you have personally guaranteed your business loans- then a “business bankruptcy” won’t help you. If your business has no assets and has become insolvent- a personal bankruptcy may be what you need to get a fresh start. If your personal obligations to your business debt exceeds your ‘consumer debt‘ then you may be exempt from the Means Test- meaning that you can qualify for a Chapter 7, no matter how high your income may be. 

If you are you burdened by personal obligations to business debt- then call today to see if bankruptcy is right for you. We have extensive experience in helping small business owners get back on their feet again. 

 

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Bankrupt Apologies?

Katy Stech of the The Wall Street Journal wrote an interesting piece today regarding Apologies in Bankruptcy. (Find the article here)

In the article, she cites a study done by two law professors wherein they study the effectiveness of debtors going through bankruptcy who apologize to the Bankruptcy Judge for having to file for bankruptcy. The results, from my opinion, really don’t show any difference at all if debtors apologize or not. 

I have long said that filing for bankruptcy protection, whether you are General Motors, Donald Trump, or Mr. and Mrs. Smith from Layton is a financial decision, not a moral one. Filing for bankruptcy says nothing about you as a person or the worth of your soul. 

By a large majority, most of the people I represent who file for bankruptcy have 1. lost a job, 2. faced huge medical bills, or 3. have been recently divorced or suffered the loss of a spouse. Life can, and will, throw curve balls at us as we journey on. Sometimes bankruptcy is the only thing that can help you and your family stay afloat. Bankruptcy has existed in some form or another for centuries. Our Founding Fathers included language in our Constitution for the establishment of Bankruptcy Courts. 

If you are wondering if bankruptcy is the right decision for you, call today for a free consultation. What do you have to lose? 

 

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Bankruptcy filings decline in 2012

Bankruptcy filings decline in 2012

U.S. Bankruptcy Court for Utah Clerk David Sime reported that Utahns filed 16,263 bankruptcies last year, a 12 percent decline from 2011, and first drop since shortly after Congress revamped the nation’s bankruptcy law in late 2005 to make it tougher for individuals to get relief from their debts.

This decline is indicative of Utah’s economy, which is stronger than the rest of the nation. 

However- this doesn’t necessarily mean that everyone is doing better than they were a year ago. 

Ginette Bott with the Utah Food Bank stated that “things are a little different from our perspective. We distributed more food in 2012 than we did in the previous year.”

Although she knows that more Utahns have gone back to work, she thinks that many have found jobs that pay far less than their previous employment.

“We see a lot of people whose standard of living has gone down drastically, and many who are only one step away from [financial] trouble. All it might take is a transmission going out on their car or maybe a kid breaks a leg and they don’t have insurance.”

Despite the decline in bankruptcy filings, Utah’s numbers remain comparatively high nationally, with the state claiming the fifth-highest filings per capita during the year — 5.76 filings for every 1,000 residents, according to the American Bankruptcy Institute. Nationally, there were an average 3.86 bankruptcy filings for every 1,000 people.

Bankruptcy is typically a last ditch resort when you are facing daunting financial circumstances. That said, waiting for your paychecks to be garnished or your property to be seized is never the right time to file bankruptcy. Filing for bankruptcy can actually help you protect your assets from your creditors and should be done before garnishments are in place. Call today for a free consultation and let us help you obtain financial independence. 

 

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Protecting co-debtors in bankruptcy

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At some point in our lives, we usually need somebody to co-sign on a loan with us. In 2003 I returned home from a two year mission with my church in India. When I got home, I had no car, no job, and no credit. After a few months of looking I finally found a job- but I had no way to get there. Fortunately, my mom agreed to co-sign on a vehicle loan with me. This not only helped me find a reliable source of transportation- but also helped me to successfully build my credit.

A cosigner (sometimes referred as a ‘co-debtor’ in bankruptcy) is usually a friend or family member who agrees to be responsible for another person’s debt, which involves a legal obligation made by the cosigner to make payment on the other person’s debt should that person default.

Whether you are the cosigner of the debt, or a debtor intending to file for bankruptcy protection, know that a bankruptcy filing ultimately affects both of you. In a Chapter 7 case, eligible debts are discharged and the debtor is protected from creditors by the bankruptcy filing. Unfortunately, the cosigner is not protected by the debtor’s bankruptcy filing. The creditor can still contact, make demands, and even file suit against the co-signer. It is important to let family members know how this will impact them.

Cases filed under Chapter 13 also provides protection for cosigners of consumer debts. As you may know, when you file bankruptcy, the Bankruptcy Court enters an Order of Relief forbidding creditors to continue to collect or even contact the debtor. When filed under Chapter 13, this stay protects the debtor and the cosigner. While the automatic stay is in place, creditors will be prohibited from trying to collect on the co-signed debt from either party. The only catch is that the debtor must propose terms to pay back the creditor as a part of their Chapter 13 Plan, or the creditor can ask the Bankruptcy Court to allow them to start collecting from the co-signer.

If you are thinking about bankruptcy and the impact it will have on your family members, it is important to talk to an experienced bankruptcy attorney to assess your options. Chapter 13 may be a way for you to get the relief you are seeking, and also protect your family members from the effects of your bankruptcy.

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Sorry, Cupcake

 

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Job Losses in Ogden

The Deseret News is reporting today that Hostess may be forced to close its doors at its factory location in Ogden. Due to a dispute between the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and company officials, the company may be forced to liquidate the entire company through bankruptcy. It is estimated that if a deal is not reached, over 600 workers in Ogden will lose their jobs. 

I have had several clients and friends who have worked for Hostess, some for over 20 years. The idea of losing their jobs is terrifying. If Hostess shuts down and sells off its eight brands and 36 factories, it could result in the loss of nearly 18,000 jobs nationwide. Liquidation would affect more than just the iconic snacks we typically think of like Twinkies, Ding Dongs and Zingers. Hostess has eight brands including Wonder Bread, Natures Pride, Home Pride and Dolly. 

Hostess is currently going through a Chapter 11 bankruptcy reorganization in New York. This is the second time in three years that Hostess has filed for bankruptcy- but it is still having insolvency issues. 

One of the main benefits of Chapter 11 bankruptcy is the ability for a company to reorganize and restructure its debt so that it may remain profitable for shareholders and employees. Chapter 11- or more likely, Chapter 13 can be a great tool for individuals and businesses to get their financial house in order. 

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Let Detroit Go Bankrupt!

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If you have been paying attention to the presidential campaign here in the United States the past few weeks, or have even watched a television commercial in the past few months, chances are you have heard President Obama attack Mitt Romney for his position on the auto companies. In the past 7 days at the gym I have seen over 100 campaign ads and more than half of them quote Romney as saying “Let Detroit Go Bankrupt.”

When the financial panic began in 2008, both Romney and Obama stated that they wanted the auto industry to go through a managed bankruptcy in order to remain competitive, viable companies. In fact, Obama actually did take the companies through a managed bankruptcy and provided substantial government loans to help them through it. The only difference between Obama’s plans and Romney’s, is that Romney would have had private companies issue the loans, rather than the government. Either way- the bankruptcy was extremely effective, the government loans were quickly repaid, and the auto industry is back on its feet again.

There are two different things that come to mind when I read the stories from the campaigns about “letting Detroit go bankrupt.” First- is the stigma that still follows the word “bankruptcy” and second- the reality of bankruptcy being an amazing financial tool for companies and individuals to get back on their feet.

A few months ago, I blogged about ‘the sigma’ that filing bankruptcy seems to create. It is a complete myth. See the article here: The Stigma.

Millions of people file for bankruptcy every year. Many famous people (my hero- Abraham Lincoln included) at some point in their life file for bankruptcy protection. The point- bankruptcy is a financial decision, not a moral one. Filing for bankruptcy says nothing about you as a person or the value you have to the people around you. In fact, for many people, filing for bankruptcy is the last step they have to protect their ability to provide for their family.

The most important lesson we can learn about the auto industry filing for bankruptcy is that bankruptcy can rescue you from financial ruin, just like it did the auto industry. Bankruptcy gives you the ability to discharge your debts and to get a fresh start. If its good enough for the American car- then why not you and your family?

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Free Legal Clinic

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Our office is sponsoring a free legal clinic at the Action Recovery Group. Action Recovery Group is a treatment center for chemical dependency located in South Ogden. Read more about the center here. Rick Visser is the main counselor there and he is one of the best in Utah. I recommend him to all my clients and friends going through problems with addiction. 

Our next session of our legal clinic will be tomorrow (10/17/2012) at 8:00pm. The clinic will run for an hour and you will have the opportunity to seek free legal advice. The areas of law that will be discussed is bankruptcy, criminal defense, and family law (divorce/custody). The location is 1708 E. 5500 S. Ogden, UT 84403. It is right above Starbucks off of Harrison and Combe Road. Call (801) 781-2026 with any questions.

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