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Dayton Bankruptcy Attorney Personalized Debt Relief Solutions If you are overwhelmed by debt, you may feel as though no one can help you. However, there is help available, and the sooner you take advantage of it, the sooner you will find debt relief solutions. Speaking with a knowledgeable bankruptcy attorney is an easy first step …

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Are My Student Loan Debts Dischargeable in an Ohio Bankruptcy?

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In re Myhre, 2013 W.L. 3872509 (Bankr. W.D. Wis. 2013)

Student loan debt is dischargeable in bankruptcy if repayment is an undue hardship.

Although this case is based out of Wisconsin, many of the principles outlined in this post apply to Ohio bankruptcy filers as well. Generally speaking, courts will not allow for discharge of student loan debt unless the debtor can prove undue hardship.

The amount of student loans outstanding in the United States is almost $1 trillion. College graduates today owe $26,000 on average and almost 20% of them aren’t making payments. Student loan debts are generally not dischargeable in bankruptcy, so if you have student loans and you’re not making enough money to cover the payments, there’s usually not much you can do about it.  The court will discharge your student debts only if there is no hope that you’ll ever be able to repay them.

What does this mean? Let’s use case law as an example.

Bradley worked as a laborer making hardwood trim. He wasn’t educated, but he worked hard and supported himself. In 1994, he slipped on a swimming pool ladder and broke his neck – he was paralyzed from the chest down. He had no use of his legs, limited mobility in his arms and almost no use of his hands and fingers. For the rest of his life, he would be confined to an electric wheelchair and require help with even the most basic tasks, including eating, dressing, and bathing. In re Myhre, 2013 W.L. 3872509 (Bankr. W.D. Wis. 2013)

Bradley received disability income from the government, but decided to attend college and find employment despite his disability. He earned an associate’s degree in computer programming and then spent five years applying for work without success. He took out about $14,000 worth of student loans and returned to school to earn his bachelor’s degree. While he was still in school, Workforce Connections hired him as a programmer. He finished the semester and then went to work as a database administrator and web developer. Id.

Bradley earned between $30,000 and $35,000 annually at Workforce Connections for a monthly income of around $2,000 after taxes. With his disability, however, his monthly expenses totaled more than $3,500. He survived with the help of a caretaker; she spent $1,500 each month out of her own pocket to cover Bradley’s basic expenses. Even then, Bradley had to use a credit card to cover some of his expenses. Bradley struggled to make ends meet, let alone repay his credit card debt and student loans.  In 2012, both he and his caretaker filed for bankruptcy. Id. Bradley sought discharge of his student loan.

Undue Hardship Analysis

Student loan debt is not dischargeable in bankruptcy unless it would impose an “undue hardship” on the debtor to repay the loan. The court looks at three factors when determining whether student loans impose an undue hardship on the debtor:

(1) that the debtor cannot maintain, based on current income and expense, a “minimal” standard of living for himself and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

Id. at 3, citing In re Roberson, 999 F.2d 1132, 1135 (7th Cir. 1993). In other words, there must be a “certainty of hopelessness” that the debtor will be able to repay his loans. Id., citing Roberson, 999 F.2d at 1136. This is a very high bar, and discharges of student loans are extremely rare.

First, the court noted that Bradley already couldn’t afford his expenses, which were dominated by the constant medical costs associated with quadriplegia. Second, his condition was not going to improve in the foreseeable future; he could only look forward to 2% annual salary increases at Workforce Connections. Given the difficulty he had in obtaining employment in the first place due to his disability, it was unlikely that he would be able to find a better position elsewhere. Third, Bradley deferred his loans every year and never made payments; however, the court noted that he found employment and gained independence from government support. By deferring the loans, he “indicated a willingness to work within the repayment framework and pay if funds became available.” Id. at 6.

In a Rare Ruling, Student Loans Discharged

Bradley met all three criteria for undue hardship and the bankruptcy court discharged his student loans. He would still struggle to make ends meet, but at least he was free from the looming specter of debt. Student loans are only dischargeable if repayment is hopeless; you have to make every effort to repay them or to put yourself in a position where you’ll be able to repay them in the future. Bradley, a quadriplegic who pursued an education and still struggled to find employment that would cover his expenses, was one of the few for whom the court saw no hope for repayment.

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Can I get a Repossessed Car Back by Filing Bankruptcy?

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Creditors must turn over property to the debtor as quickly as possible after learning that the debtor has filed for bankruptcy.

In re Makowski, __ B.R. __ (Bankr. D. Alaska 2013)

Cope Law Offices are located in Southern Ohio, but nonetheless, we thought this recent case out of Alaska would be of interest to our clients.

The automatic stay is “one of the most fundamental protections afforded a bankruptcy debtor.” In re Makowski, __ B.R. __ (Bankr. D. Alaska 2013). The automatic stay prohibits creditors from repossessing or foreclosing on the debtor’s property and stops all actions against the debtor in other courts. It gives the debtor time to organize his finances without creditors’ threats looming over him. Not only are creditors forbidden from taking possession of a debtor’s property, but they may be required to return property they have already taken repossessed.

Nathan’s Ford F150 Repossessed

Nathan purchased a Ford F150 pickup to travel to and from work, but times were hard and money was short. The Greater Nevada Credit Union held Nathan’s loan, which had an outstanding balance of almost $33,000. When Nathan defaulted on his payments, Greater Nevada repossessed his truck. He borrowed a vehicle to travel to and from work and filed for bankruptcy a week later.

Nathan’s Attorney Files Suit

The same day Nathan filed for bankruptcy, his attorney faxed a letter to both Greater Nevada and the tow yard where Nathan’s truck was held to inform them of the bankruptcy and request that they return the truck. After deliberating for a weekend, Greater Nevada informed Nathan that it would not return his vehicle. In response, Nathan’s attorney filed suit against the credit union for violating the automatic stay. The day after that, Greater Nevada returned the truck.

11 U.S.C.A. § 542(a)

When a debtor files for bankruptcy, any entity “in possession, custody, or control” of property of the debtor must deliver the property in question to the trustee. 11 U.S.C.A. § 542(a). According to the court, “the automatic stay prohibits both actions taken to obtain possession of property of the estate [and] actions that exercise control over the property of the estate.” Mikowski, __ B.R. at 2. A creditor may take a reasonable amount of time to seek legal counsel before turning over the property, but refusal to turn over property of the bankruptcy estate is a violation of the automatic stay. Id.

Despite the repossession, Nathan’s truck was property of his bankruptcy estate. He took ownership when he purchased it and then he used it as security for a loan. As soon as Greater Nevada learned of Nathan’s bankruptcy and consulted with its legal counsel, it should have returned the truck. When Greater Nevada told Nathan it wouldn’t return his vehicle, the credit union “exercised control over property of the estate.” Id. at 4. By refusing to return the truck, Greater Nevada violated the automatic stay.

Nathan’s Truck Was Returned

While Greater Nevada did eventually return Nathan’s truck, it still violated the automatic stay by threatening to withhold it. The automatic stay is one of the most important aspects of bankruptcy and the court takes it seriously. When you file for bankruptcy, you’re putting all creditors’ claims on hold. Any payments to creditors must be made through the bankruptcy estate by the bankruptcy trustee – they can no longer take matters into their own hand. Bankruptcy is meant to protect you as you reorganize your finances. It stands between you and your creditors.

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Chapter 13 Bankruptcy is Binding Once Approved

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The Binding Effect of Chapter 13 Confirmation

Under the legal doctrine of judicial estoppel, once a Chapter 13 bankruptcy plan has been confirmed, all issues relating to the confirmation of that plan have been resolved. 11 USC § 1327(a) states:

“The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”

This means that if a party neglects to raise an argument or make an objection relating to the bankruptcy prior to confirmation, then that party has forfeited the ability to later raise such an argument or objection. The case of In re Crum presents a nice illustration of how this rule functions, and also the effect it can have on your bankruptcy case.

In re Crum

In the case of In re Crum, 479 BR 734 (S.D. Ohio 2012), Mr. and Mrs. Crum were a husband and wife involved in bankruptcy. The Crum’s were both named on the mortgage of their home, which was issued by CitiMortgage. The mortgage was for approximately $113,000, and the home was valued at approximately $105,000. A mortgage is a form of secured debt, meaning that the house acts as collateral in the event the debtor defaults on payments. Thus, even in bankruptcy, a creditor can still foreclose the home if the debtor is unable to make timely payments.

See also: the automatic stay and corporations

The Crum’s Chapter 13 Payment Plan

Accordingly, as part of their Chapter 13 payment plan, the Crum’s agreed to surrender their home to the creditor, CitiMortgage. The Chapter 13 plan stated that the home would become the property of CitiMortgage, and that any remaining balance owed on the mortgage would become an unsecured claim. Secured claims take priority over unsecured claims, which means that the unsecured claims only get paid in bankruptcy if there is enough money left over after paying off the secured claims.

The Crum’s still owed $20,000 on the home. However, the Chapter 13 plan contemplated no money to be left over for unsecured claims. Thus, when the Chapter 13 plan was confirmed, the home became the property of CitiMortgage, and the $20,000 balance became an unsecured claim that CitiMortgage would be unable to recover. CitiMortgage then sold off the property with the intention of keeping the money as satisfaction of the debt owed.

The Trustee vs. CitiMortgage

Later, however, the trustee discovered that Mrs. Crum may not be a party to the mortgage after all. Yet, Mrs. Crum still held title to one-half interest of the property. Thus, the bankruptcy trustee hypothesized that Mrs. Crum’s one-half of the interest in the property was actually an unsecured debt that could not be taken by the creditor, CitiMortgage. Accordingly, the trustee initiated a lawsuit against CitiMortgage, arguing that because the home became a part of the bankruptcy estate upon confirmation, CitiMortgage is only entitled to one-half of the money raised by selling the home, with the other half remaining part of the bankruptcy estate. The half that remained with the estate could then be used to pay off other debts.

The Court’s Decision

The trustee, the Crum’s and CitiMortgage had already accepted the Chapter 13 payment plan, and the bankruptcy court had already confirmed the plan. Because confirmation of the Chapter 13 plan is binding on all parties, the only way that the trustee could now have Mrs. Crum’s one-half interest in the property reclassified as an unsecured debt would be to modify the Chapter 13 payment plan.

However, as the court noted, the Chapter 13 plan can only be modified in a limited number of situations, most of which involve redressing some form of fraud. In this case there was no such fraud. In looking to the above-mentioned doctrine of judicial estoppel, the court decided that once an issue has been determined, it cannot later be altered. The trustee sought to allege that Mrs. Crum’s debt was unsecured, but because the parties had failed to make such a demonstration prior to confirmation, they had lost their ability to make that claim now. Thus the plan in this case could not be modified because the parties had failed to object to the fact that Mrs. Crum was classified as a party to the mortgage.

See also: Ohio Foreclosure Laws: What You Need to Know

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Are Spousal Support Payments Dischargeable in Bankruptcy?

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Are Support Payments Dischargeable in Ohio?

A dischargeable debt is one that can be eliminated during bankruptcy, meaning that you are no longer required to pay it off. However, some debts are non-dischargeable, meaning that you will be responsible for them in full, even after bankruptcy. Under 11 USC § 523(a)(5), payments for spousal support are deemed a non-dischargeable debt, but what exactly constitutes a support payment is not always clear. The case of In re Norbut, explained below, sheds some light on this subject.

In re Norbut

In the case of In re Norbut, 387 BR 199 (S.D. Ohio 2008), the plaintiff-creditor, Theodore Norbut, was suing the debtor-defendant, Margaret Norbut, in order to ensure that he could collect on a debt that she owed to him. Margaret and Theodore were divorced, and as part of the divorce Margaret was to receive alimony from Theodore for 15 years leading up to his retirement, and then she would begin receiving alimony payments out of Theodore’s pension.

However, things got a bit dicey when Theodore accepted an offer for early retirement. As a result, Margaret was now receiving two alimony payments: the original payment that she was entitled to for the 15 year period; and now, in addition, the payment from Theodore’s pension.

Theodore then took Margaret to court, arguing that she was not supposed to receive the double payments. The dispute lasted for ten years, but eventually the court ruled in Theodore’s favor and ruled that Margaret owed him all of the extra alimony that she had been receiving over the years. The total debt that Margaret owed to Theodore was $72,000.

Margaret Files Chapter 7

Margaret then fell on hard times, due in part to her sudden lifestyle improvements using the extra alimony, and eventually filed for Chapter 7 bankruptcy. During the bankruptcy, Margaret sought to have her debt to Theodore discharged. However, Theodore, as her creditor, objected to the court discharging the debt. Theodore argued that the debt owed to him was a support payment, which is non-dischargeable under 11 USC § 523(a)(5).

How Can I Know When a Debt is for Support?

Not all support payments are simply labeled “support payments,” and thus it can sometimes be unclear what exactly constitutes support. For this reason, bankruptcy courts have fashioned a four-part test to determine if a payment is actually a support payment, and also whether that payment is dischargeable.

Factors 1 and 2:

The first factor of the test merely asks whether the parties intended to create a support payment. The second factor is closely entwined with the first, and asks whether the payment actually functions as necessary support. These two factors are similar because the same analysis is used to assess both. The court looked at the financial position and lifestyle that the parties lived while married, and also at the lifestyle they lived after divorce. During their marriage, they lived a moderate, middle class lifestyle. After their divorce, both parties’ lifestyles declined. However, as soon as Margaret began collecting the second alimony payment from Theodore’s pension, her lifestyle improved dramatically, while Theodore’s declined to the level of poverty. Because Margaret’s lifestyle had become so lavish while Theodore struggled to make ends meet, the court determined that Margaret’s debt was intended for support, and was also necessary for support, thus satisfying the first two factors.

Factors 3 and 4:

The third factor requires the court to analyze whether the amount of the support payment is unreasonable in the sense that it is more than what is required for support. The fourth factor is dependent on the third, and merely instructs the court that if the payment is excessive, then the debt is dischargeable. If it is not overly excessive, then it is non-dischargeable. The court noted that it is rare to find a support debt dischargeable, and accordingly respected the decision of the Ohio State Courts to award Theodore the $72,000. Thus, the court ruled that the support payment was not excessive under the third factor, and therefore non-dischargeable under the fourth.

Conclusion

Because the court determined that the payment was for support, Margaret’s debt to Theodore was held non-dischargeable, and thus she is responsible for the entire $72,000. Courts are very reluctant to discharge a support payment, which emphasizes how important courts classify such payments. The goal of bankruptcy is to provide the debtor with a fresh start, but bankruptcy law also seeks to protect creditors, especially those who are reliant on a support payment for their everyday livelihood. In re Norbut demonstrates this exactly.

If you are divorced and are involved in bankruptcy, or otherwise receiving support payments from someone who is, you need to know what your rights are. To protect your interests, you should consult an experienced bankruptcy attorney who can help you explore your options.

To schedule a free consultation with a Dayton bankruptcy protection lawyer, contact Cope Law Offices, LLC.

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Debtor Uses Ohio Bankruptcy Exemptions Strategically to Protect Real Estate

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Using Ohio Bankruptcy Exemptions

Bankruptcy exemptions allow you to prevent certain amounts of your property from being sold off in order to satisfy your debts. Under Ohio bankruptcy law, the “wildcard” exemption allows you to exempt up to $1,150 in any property of your choice. This means that you can apply this $1,150 to any number of properties as you see fit. Oh. Rev. Code § 2329.66(A)(18).

See also: Intentions matter when filing bankruptcy in Ohio

Ohio courts have decided that the wildcard exemption may be used to avoid judicial liens that you have against you. A lien is where your creditor has an ownership interest in your property, allowing them to restrict how that property is used or sold. However, you may be able to avoid a lien if it is impairing an exemption. Avoiding a lien means that a court has decided that it is unenforceable and thus the restrictions on your property are lifted. Ohio Revised Code § 522(f)(2)(A) explains what it means for an exemption to be impaired:

a lien shall be considered to impair an exemption to the extent that the sum of –

(i)            the lien,

(ii)          all other liens on the property; and

(iii)         the amount of the exemption that the debtor could claim if there were no liens on the property;

exceeds the value that the debtor’s interest in the property would have in the absence of any liens.

In other words, a lien is impairing an exemption when the value of all liens and mortgages, plus the amount of the exemption, is greater than the actual value of the property. The value of the property is determined by an appraisal of what the property is worth at the time of filing for bankruptcy. The case of In re Oglesby, discussed below, illustrates the function of this legal rule.

In re Oglesby

In the bankruptcy case of In re Oglesby, the debtor, Mr. Oglesby, used his homestead exemption to exempt $5,000 of one parcel of property, and used his wildcard exemption to exempt only $1 on each of five other parcels of property that he owned. Mr. Oglesby’s creditor, Queen City Drywall, Inc., had a lien on all six parcels of property.

The court ruled that if that $1 added to the total amount of the liens held on each parcel of property exceeds the value of the properties themselves, then Mr. Oglesby has successfully avoided the liens that his creditors held against him. The court then crunched the numbers for each piece of property in turn:

Property # 1: The first property at issue was valued at $75,000. Mr. Oglesby had two mortgages on the property that totaled $256,000. Queen City Drywall had a lien on the property for $23,456.52, and Mr. Oglesby had a $1 wildcard exemption on the property. Adding the lien, the mortgage, and the exemption gives you $279,457.52. Because $279,457.52 is greater than the $75,000 value of the parcel, Mr. Oglesby’s exemption is considered impaired, and thus he can avoid the entire lien.

Property # 2: Mr. Oglesby applied his $5,000 homestead exemption to the second property, which was valued at $145,000. He had two mortgages that totaled $130,510, Queen City had a lien for $23,456.52, the I.R.S. had a tax lien for $45,065.05, and the State of Ohio had a lien for $868. Since the liens and the mortgages end up at $204,899.57, they are greater than the $145,000 value of the parcel, meaning that the exemption is impaired and thus the entire lien can be avoided.

Property # 3: The third parcel was valued at $320,000.  Mr. Oglesby applied $1 of his wildcard exemption to the parcel. There was a mortgage and a delinquent real-estate tax lien on this parcel that for $319,500, an I.R.S. tax lien for $45,065.05, a lien from the State for $868, and again a lien by Queen City for $23,456.52. The mortgages, liens, and exemption added up to $388,890.57, meaning that the third parcel was impaired by $68,890.57 ($388,890.57 – $320,000). Hence, Mr. Oglesby was able to avoid the lien on the third parcel as well.

Property # 4: Mr. Oglesby’s fourth property had a $30,000 value. The liens and mortgage added up to $95,689.57, and Mr. Oglesby again applied a $1 wildcard exemption for a grand total of $95,690.57. Thus, the fourth property was impaired by $65,690.57, and Mr. Oglesby was able to avoid the lien.

Property #5: The fifth parcel was worth $78,000. As with the other properties, Mr. Oglesby applied his $1 wildcard exemption, and the amount of the liens plus the exemption equaled $139,112.57; impairing the loan by $61,112.57, and allowing Mr. Oglesby to avoid the lien on this property.

Property # 6: The final property was valued at $40,000. As you may have guessed, Mr. Oglesby added a $1 wildcard exemption to the existing liens and mortgages, for a total of $96,420.57. Therefore, the final lien was avoided as well because it was impaired by $56,420.57.

Conclusion

Mr. Oglesby’s financial condition was obviously poor, but some creative use of his wildcard exemption was able to assist him in getting the fresh start that bankruptcy is designed to provide. Exemptions are a tool designed to help you get to your new beginning without losing the shirt on your back. Accordingly, it pays to understand your unique financial situation in order to make the most of your exemptions. To better understand your bankruptcy, you should consult an experienced attorney who can help you through these difficult times.

See also: What Property Can I keep in Chapter 7?

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Intentions Matter When Filing Bankruptcy in Ohio

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In re Weixel, 2013 WL 3243563 (U.S. Bankr. App. Ct. 6th Cir. 2013)

General rule: intentions matter when filing bankruptcy in Ohio, courts will give increased scrutiny to cases that appear to have been filed in bad faith.

It’s hard to give up a life of luxury. You get used to fine dining, flying first class, and living in an expansive home with a beautifully manicured lawn or a spacious apartment downtown. You love your country club membership and attend all the events hosted there. Your children go to the right schools and wear the right clothes. That way of life is easy to love and tough to afford. If you live too close to your means, a small hiccup can topple you into a pit of financial ruin. What happens when economic calamity strikes and you face giving up the luxury life?

With five children, you’d think it would be hard to ever put financial worries out of your mind, no matter how much money you make. Raising kids is expensive, especially if you expect to maintain a lavish lifestyle. At first, the Weixels brought in well over $200,000 every year (between his mortgage brokerage company and her fitness center) and had no trouble affording their expensive tastes. When the financial crisis hit, thousands across the country lost their homes and their livelihoods. Millions felt the pinch and tightened their belts.

The Weixels were no exception to the devastation. His mortgage brokerage company fell to pieces and he had to take a job as a loan officer. His income fell from more than $200,000 to about $50,000 in two years. His wife’s fitness center was slightly less affected. Combined, they earned about $10,000 each month. In re Weixel, 2013 WL 3243563 (U.S. Bankr. App. Ct. 6th Cir. 2013).

Net income of $120,000 a year is nothing to scoff at – unless, of course, you spend almost $2 million on a luxurious house, frequent travel, and fine dining. Even with a six-figure income, that’s difficult to manage. It helps if you don’t file income taxes for a few years and refuse to make your $5,500 monthly mortgage payments, but even with that extra cash, you’ll end up under a mountain of debt. Unsurprisingly, the Weixels learned this the hard way. In re Weixel, 2013 WL 3243563 (U.S. Bankr. App. Ct. 6th Cir. 2013).

When you find yourself in debt up to your eyeballs, you probably want to tighten your belt a notch. Move into a more modest house, eat at home more often, and take fewer vacations. The Weixels, however, would brook no austerity. To save their massive house, they filed for bankruptcy the day before it was sold at auction and continued to live their lavish lifestyle. They ate at restaurants and shopped for new clothes. When their bank accounts were overdrawn they continued to spend money on entertainment and Mr. Weixel traveled to play in poker tournaments around the country.

The bankruptcy court looked at their case, their spending, and their income, and dismissed the case. The Weixels, faced with terrible debts and foreclosure, appealed. The lower court accused them of filing “in bad faith” for failing to curb an unnecessarily extravagant lifestyle. The appellate court reviewed this decision to make sure the lower court had used the correct standard for bad faith in bankruptcy.

The court may dismiss a bankruptcy case based on a finding of bad faith or abuse of the Chapter 7 process. Id. at 5. A debtor who files dishonestly or when bankruptcy is not actually necessary is considered abusive. 11 U.S.C.A. §707(b)(3). Courts consider a debtor’s honesty (or lack thereof) by investigating the “forthrightness in preparing and filling his schedules,… whether he has made substantial purchases on the eve of bankruptcy,… and whether the Chapter 7 filing was caused by unforeseen or catastrophic events.” Weixel, 2013 Westlaw at 5. In other words, “a debtor living beyond his means and refusing to adjust his budget and change his lifestyle support dismissal for abuse under §707(b)(3).” Id.

The Weixels purchased a house worth about $600,000 and financed it entirely, later borrowing another $50,000 against their home. Mr. Weixel continued to travel and play poker; when he won money, he spent it on further poker opportunities rather than using it to pay off his bills. The Weixels neglected to pay taxes for several years and allowed their expensive house to fall into foreclosure. No catastrophic event caused their bankruptcy; they still had ample means and simply refused to adapt accordingly. The appellate court determined that “the Weixels appeared to have made no adjustment to their lifestyle despite their economic distress.” Id. at 6. The court upheld the lower court’s decision and dismissed the Weixel’s case. They would have to face their debts outside the protective umbrella of bankruptcy.

Bankruptcy does not shield dishonest debtors. If you accrued your debts through gambling, lavish vacations, and luxurious tastes, the court will have very little pity on you. Bankruptcy is meant to help those deserving of another financial chance, not those who have ample means but choose to overspend them anyway. Make a good faith effort to cure your own financial situation before you turn to bankruptcy. The court will appreciate your genuine intention to pay off your debts.

See also: Why Can My Bankruptcy Discharge Be Denied in Ohio?; Absent Bad Faith

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