Russ

August 7, 2013 by Russ Leave a Comment

Why Can My Bankruptcy Discharge Be Denied in Ohio?

In re Johnson 387 B.R. 728 (S.D. Ohio 2008)

Two for the Money: Embezzlement and Bankruptcy

General rule: Fraud is one of the most common reasons the court will deny a bankruptcy discharge, however, failure to keep accurate records can jeopardize the discharge as well.

Mr. and Mrs. Johnson drove a Land Rover, wore the latest designer fashions, and took regular exotic vacations. They lived in the lap of luxury. How did they manage this lavish lifestyle? Were they movie stars, investment bankers, or plastic surgeons? Well, Mrs. Johnson worked for a bank and Mr. Johnson worked in various industries, including computer repair and real estate. They earned a combined income of about $90,000. No, we’re not missing a zero. They made $90,000 a year and lived like rock stars. Did they discover the secret to the American dream?

Not quite. As it turns out, Mrs. Johnson was using her position at the bank to create phantom accounts and phantom lines of credit; she embezzled a grand total of more than $5,000,000. Eventually, the long arm of the law caught up with Mrs. Johnson. She pled guilty to criminal bank fraud, money laundering, and false statements on a tax return. In re Johnson, 387 B.R. 728 (S.D. Ohio 2008). She and Mr. Johnson consented to judgment against them to the tune of $2,000,000. As a part of her plea agreement, Mrs. Johnson waived her right to discharge her debt through bankruptcy. Mr. Johnson, however, made no such agreement. When the illicit funds stopped flowing, he declared bankruptcy. Id.

Mr. Johnson claimed to have no knowledge of his wife’s criminal misdeeds. He told the court he was under the impression that the bank had given them a loan so that he could flip real estate. Could his debts be discharged in bankruptcy?

The Bankruptcy Discharge is Only Available to Those Who Act in Good Faith

Bankruptcy law may “grant the honest debtor a discharge of his or her pre-petition debts.” Id. at 736. Its protection does not extend to those “who play fast and loose with their assets and the reality of their affairs.” Id. The bankruptcy trustee accused Mr. Johnson of destroying financial records, making false statements, failing to account for his assets, and intentionally transferring property that should have gone to the care of the trustee. If these allegations were true, Mr. Johnson would be denied discharge. The court recognized the severity of total denial of discharge and so construed the law and the facts in Mr. Johnson’s favor in determining whether to grant or deny the discharge of his debts.

11 U.S.C.A. § 727(a)(3)

Under 11 U.S.C.A. § 727(a)(3), discharge should be denied to a debtor who destroys or conceals financial records. The law is meant to guarantee fair treatment to creditors and prevent debtors from hiding assets. Mr. Johnson “had a reasonable grasp of practical and business matters” and “a working understanding of lines of credit, mortgages, leases, and real estate transactions.” Johnson, 387 B.R. at 738. So, he would be expected to have reasonable records of his personal and business-related finances.

When his wife was charged with embezzlement, Mr. Johnson claimed in his deposition to have just that sort of record. However, when his bankruptcy case commenced, the records were nowhere to be found – he claimed to have “disposed of” them. Id. at 739.

During the four-year course of Mrs. Johnson’s phantom-account joyride, Mr. Johnson purchased more than $1,000,000 in real estate, gambled heavily, and apparently spent almost $600,000 in cash. Id. Of course, without his records of any of these transactions, the court couldn’t tell precisely where that cash had gone. They could, of course, still determine how much cash the Johnsons had brought in. During the trial, the lawyer questioned Mr. Johnson about the checks he had written, some of which were for more than $40,000. He claimed that he simply couldn’t remember where he had spent the money. He suggested that he had spent it on construction workers on any number of his properties but couldn’t name a single project or a single worker. Many of his expenditures predated his real estate ventures completely. Id.

The court points out that Mr. Johnson must not have been completely ignorant of the fresh cash flows. He and Mrs. Johnson paid cash for a Land Rover, bought twelve parcels of real estate (some of which were also paid in cash), and took luxurious vacations. The court felt that as a businessperson, Mr. Johnson should have known to keep records of his expenditures and income, both for his business and himself. Unable to name a single specific business expense or gambling loss, he also “misplaced” a $4,000 leather suit and failed to mention $15,000 worth of expensive Italian furniture to the trustee. In the end, “his failure to keep and preserve records [was] fatal to his discharge.” Id. at 742.

The Trustee Moves For Dismissal Based on Fraud

The trustee also moved for the dismissal of Mr. Johnson’s case based on alleged fraud. A case merits dismissal if the debtor makes false statements under oath. 11 U.S.C.A. § 727(a)(4). Bankruptcy schedules are prepared under oath and meetings are held under oath – if Mr. Johnson knowingly made a false statement in either of those instances, his case could be dismissed. Because of his claimed cash usage, no outbound paper trail existed for the court to track and no one could tell if Mr. Johnson was intentionally lying or hiding his tracks. However, the court decided that “the aggregation of falsehoods and evasions as to the existence and status of assets and liabilities paint[ed] a picture of knowing falsehood and fraudulent intent.” Johnson, 387 B.R. at 750. In other words, the court would have forgiven an honest error, but there was “no credible defense” for Mr. Johnson’s egregious misstatements of his and his wife’s assets and expenditures. Id. The court simply didn’t believe (and who can blame them?) that you could spend several million dollars and have no idea what you spent it on.

As if Mr. Johnson’s utter disregard for recordkeeping and his false statements regarding his finances weren’t enough, he was also sufficiently brazen to transfer a piece of property into his own father’s name in order to protect it from foreclosure. Id. at 733. He didn’t report either the property or the transfer to the court – or to his father. In fact, he had asked his father if he could transfer the property and his father had said no. Id. Mr. Johnson did it anyway. In combination, all of Mr. Johnson’s omissions about his properties, assets, and expenditures, his blatantly false statements, and his vague excuses “paint a comprehensive picture of evasiveness and prevarication.” Id. at 734.

The Transcript

As damning as his lack of bookkeeping was, Mr. Johnson’s attitude was the final nail in the proverbial coffin. The court illustrates his “blatant obstructionism and contempt for the truth” with an excerpt from the transcript of the meeting of creditors (Mr. Beyer is the attorney for the bank):

MR. BEYER: You filed a 2005 income tax return, correct?

MR. JOHNSON: Are we done?

THE TRUSTEE: You have to answer his questions.

MR. JOHNSON: Well, I’ll plead the Fifth on everything he’s asking me.

THE TRUSTEE: I can’t make rulings because I’m not a judicial official.

MR. BEYER: I understand. Who filed your — who signed your 2005 income tax returns for you?

MR. JOHNSON: You have it right there. You tell us.

MR. BEYER: No, I’m asking you to tell me.

MR. JOHNSON: I don’t recall. I don’t recall.

* * *

MR. BEYER: Mr. Johnson, how much do you make at [your current job]?

MR. JOHNSON: I plead the Fifth, man.

MR. BEYER: The Fifth Amendment’s not implicated by how much money you’re earning today.

MR. JOHNSON: I’m not answering your question.

MRS. JOHNSON: Fifth.

MR. BEYER: When did you start working at [your current job]?

MR. JOHNSON: I’m not answering your questions.

MR. BEYER: Who’s your boss?

MR. JOHNSON: [Mrs.] Johnson.

MR. BEYER: Who’s your boss at [your current job]?

THE TRUSTEE: I’m going to instruct you — this is not funny.

MR. JOHNSON: I’m not being funny.

MRS. JOHNSON: Oh, he’s the one being funny.

MR. JOHNSON: He asked me who my boss was.

* * *

MR. BEYER: Do you – do they give you a check on Fridays?

MR. JOHNSON: Give it to her.

MR. BEYER: What?

MR. JOHNSON: They give it to her. They mail it to her.

MR. BEYER: They mail it to her. To your house?

MR. JOHNSON: No, man, a tree house. Come on, these crazy questions you’re asking me, man. Jesus man, come on.

Id. at 754-59. Every transcript read like that; he consistently refused to give information and cooperate with the trustee and counsel. The court doesn’t appreciate that sort of attitude, and decided that:

“his specific false statements and nondisclosures in the schedules, evasive and misleading testimony, and blatant attempts to thwart rather than cooperate with the discovery process are more than sufficient to justify denial of Mr. Johnson’s discharge.”

Id. at 760.

This is an example of what not to do in bankruptcy

Mr. Johnson serves as an excellent example of how not to handle your bankruptcy. He destroyed and concealed records, lied and omitted important material during his proceeding, and was rude to boot. Bankruptcy is intended to help honest debtors get their financial lives back on track. It’s not a way to clean your books when you’ve behaved badly. If Mr. Johnson had cooperated with the court and given honest answers, he might have been able to discharge some of his debts. Instead, he had to face his creditors outside of the protection of bankruptcy.

So, keep records of your financial history. Don’t try to hide anything from the court – money always leaves some sort of trail. And please, no matter why you’re in court, mind your p’s and q’s.

August 1, 2013 by Russ Leave a Comment

Will My Ohio Chapter 13 Bankruptcy Be Approved? The Lesson of In re Lofty

Living Paying for the Dream: In re Lofty, 437 BR 578 (S.D. Ohio 2010)

What does it mean to act in “good faith?” When evaluating whether to approve Chapter 13 bankruptcy plans, the court is forced to answer this question.

Does it matter if the chapter 13 debtors mean well? Is the main issue their personal intention or something else?

In the case of Chapter 13 bankruptcy, it’s the latter. Personal intention is nice, but in order to approve a plan, the court wants to see objective good faith. In bankruptcy court, a “reasonable person’s hypothetical state of mind” determines the good or bad faith of a plan. In re Lofty, 437 B.R. 578, 587 (S.D. Ohio 2010), quoting In re Mandalay Shores Coop. Hous. Assoc., Inc., 63 B.R. 842, 847-48 (N.D. Ill. 1986).

The Story of the Lofty’s

The Lofty’s, Ohio residents, were living their dream. They had worked hard, raised a family, and finally retired. They owned several pieces of property in Ohio and around the country. They purchased a motor home and spent half the year in Ohio with their daughter and her family and half in warmer climes such as Texas or Florida. Unfortunately, their finances were less idyllic than their lifestyle.

Expenses Force the Family into Bankruptcy

The Lofty’s purchased the property on which their daughter and her family lived because she didn’t have the credit to obtain a mortgage on her own. She did, however, pay for the mortgage, the taxes, and the insurance. So far, so good. The Lofty’s also purchased a piece of property for their son; he and their adult grandson lived there and paid $600 monthly rent. That property cost $1,100 monthly to maintain. Maintaining their own motor home cost about $2,000 monthly and they paid mortgages on other properties on top of that. With expenses piling up, their bills got the best of the Lofty’s and they filed for Chapter 13 bankruptcy.

Disposable Income in Chapter 13 Bankruptcy

Filing for Chapter 13 bankruptcy means filing a plan for repayment with the court. That plan usually lasts for five years. The value of the assets underlying secured claims, such as home mortgages and auto loans, must be paid in full. Debtors pay unsecured claims, like credit card debt, from their disposable income after paying secured creditors. Disposable income is defined as monthly income less reasonable expenses, including supporting dependents. 11 U.S.C.A. § 1325(b)(2).

Deduct the Cost of a Motor Home?

The Lofty’s earned almost $6,700 monthly in Social Security benefits, workers compensation, and retirement income. Their monthly expenses ran around $4,000. After several modifications, they proposed a plan in which they would pay about $2,700 toward their debts. They would surrender all of their real estate except those two lots on which their children lived and they would keep their car and motor home. Lofty, 437 B.R. at 582.

The Trustee Objects

Their bankruptcy trustee objected to this plan – he wanted to deny deductions for the cost of supporting their adult son and grandson. He also argued that the plan was proposed in bad faith – the Lofty’s should sell their motor home and live on one of their parcels of land. Without those costs, the Lofty’s would spend around $2,500 monthly supporting themselves. That would be an extra $1,500 monthly to pay to creditors. Id. at 590

Are Grown Children Dependents?

The Lofty’s only claimed their son and grandson as dependents in their bankruptcy plan, not on tax returns or other formal documentation. In legalese, a “dependent” has a very specific meaning. It does not include adult children of ordinary competence, especially when that person isn’t claimed as a dependent for the benefit of the IRS. The Lofty’s felt they had a moral obligation to support their descendants, but “more than a purely moral obligation is required to qualify as a dependent. Id. at 585. In Chapter 13 bankruptcy, all disposable income must be directed toward payment of debts or support of the debtors and their dependents. 11 U.S.C.A. § 1325(b)(1)(B). The Lofty’s violated this rule by attempting to continue supporting their son and grandson.

Objective Good Faith

In addition to the technical evaluation of allowable deductions and expenses, the court looks into the “good faith” of the plan. Different decisions have set out twelve- and fourteen-part tests to determine whether a plan is proposed in “good faith,” but the court “cannot here promulgate any precise formulae or measurements to be deployed in a mechanical good faith equation.” Lofty, 437 B.R. at 586, quoting In re Okoreeh-Baah, 836 F.2d 1030, 1033. Pedantism aside, the question of good faith is, as far as the law is concerned, an objective one. The court evaluates whether a reasonable person would propose a plan such as the debtors’ in good faith.

According to the court, the Lofty’s acted either in bad faith or unreasonably. A plan that kept the motor home did not qualify as “a sincerely-intended repayment of pre-petition debt.” A debtor acting in good faith would have sold the motor home, which only depreciated in value, and lived on one of the parcels of real estate. The court also rejected the Lofty’s attempt to “support family members at the expense of the nonpriority unsecured creditors.

Plan Rejected

Their plan was going to be rejected and the Lofty’s couldn’t resist throwing one last barb at the court. They threatened to stop all payments on unsecured loans. Ordinarily, that’s an empty threat. The Lofty’s, however, received all of their income from Social Security, worker’s compensation, and retirement income – they claimed that all of these are exempt from collections. The court chose to ignore this threat; nonpayment would be handled under nonbankruptcy law. Of course, they ruined their attempted argument for good faith by making such a claim. So, the court denied the Lofty’s plan.

The Lofty’s teach us several important lessons. First, “reasonable” living expenses are not necessarily the same as current living expenses. You may have to give up your dream of roaming the country in an Airstream if you can’t pay your bills. Second, only people who are legally dependent on you can be claimed as dependents for bankruptcy purposes. The Lofty’s son suffered from depression and their grandson was a firestarter; that didn’t make them dependent. Usually, only minor children and elderly parents may be claimed as dependents. Finally, don’t threaten the court. There’s no reason to create ill will by threatening to refuse to pay (or threatening anything at all). Whatever “good faith” is, it’s not that.

July 27, 2013 by Russ Leave a Comment

Absent Bad Faith, Credit Card Debt Can be Discharged in Chapter 13 Bankruptcy

Do You Pay Back All of Your Credit Card Debt in Chapter 13 Bankruptcy?

Many bankruptcy filers have a significant amount of credit card debt on their hands. Accordingly, one thing many Chapter 13 filers want to know is whether their credit card debts can be eliminated in a similar manner to Chapter 7. In a lot of cases, much of your credit card debt can be forgiven if you follow your repayment plan, and thus you do not have to pay back the full amount. However, it all really depends on how much money you have available to pay off your debts after expenses, and also how much of your debts are dischargeable.

First a brief primer on types of debt.

Dischargeable vs. Non-Dischargeable Debts

Some forms of debt are non-dischargeable, meaning that you will have to pay them off in full. Dischargeable debts are debts that can be forgiven by bankruptcy. Credit card debt is considered a dischargeable debt. Non-dischargeable debts take priority over dischargeable debts, and in bankruptcy, whatever money you have left over after paying off your non-dischargeable debts (like a mortgage) is put toward your dischargeable debts. If you do not have enough money left to pay your dischargeable debts, then the remainder of those debts are forgiven. 11 USC § 507. In many cases, Chapter 13 filers only pay a small percentage of their credit card debts, but good faith is always required if you plan to eliminate debt in Chapter 13.

For Example: In the case of In re Collier, discussed more thoroughly below, Mr. Collier had two “secured debts.” Secured debts are debts collateralized by your personal property, in this case, one debt was secured Mr. Collier’s mobile home, and his car secured the other. Because secured debts are non-dischargeable, Mr. Collier was required to continue paying them as he had been. Mr. Collier then sought to have his credit card debt discharged because he could not afford to pay the full amount.

Denial of Discharge for Credit Fraud

11 USC § 523(a)(2)(A) states that a debtor can be denied a discharge for:

“false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition”

Under bankruptcy law, if you have committed fraud or made any false representations relating to your credit card debt, then you can be denied a discharge, and you will be responsible for the full amount of your debt.

Example: In re Collier

In the bankruptcy case of In re Collier, after filing for bankruptcy, Mr. Collier’s credit card company, Citibank, filed a complaint with the bankruptcy court asking that the court deny him a discharge of his credit card debt. Mr. Collier held two credit cards with Citibank, both of which had balances owed of over $10,000. Almost all of the $20,000 in charges were made during a four-month span before the bankruptcy. Furthermore, many of these charges were from cash advances. Citibank intended to prove that Mr. Collier made false representations to his credit card company in the sense that he racked up his bills knowing that he would never pay them off.

In order to prove false representation, the court required that Citibank prove that Mr. Collier: (1) Made a representation; (2) that he knew was false; (3) that he intended to deceive Citibank; (4) that Citibank actually relied on Mr. Collier’s representation; and (5) that Citibank lost money as a result.

Obviously, Mr. Collier was unable to pay off his credit cards. The court decided that because Mr. Collier racked up these charges in such a short period of time, and made only small payments on his cards during that time, it appeared that Mr. Collier had made false representations because knew he would not be able to pay off his credit cards when he incurred the charges.

Every time a person uses a credit card they are essentially making a representation that they intend to pay off that credit card. Mr. Collier’s representation was false because each time he used his card; he knew that he would not be able to pay it off.

Understand Your Debt

What you can learn from Mr. Collier’s case is that things like fraud and false pretenses do not always take the form of elaborate heists designed to scam money from your credit card company. Mr. Collier was found to have committed fraud merely because he continued to rack up his credit card debt with no ability to pay it off.

Moreover, knowing what forms of debt take priority over others, and what forms can be discharged is not always easy and clear-cut. To understand your Chapter 13 bankruptcy case, and figure out how much debt you are fully responsible for, you should consult an experienced bankruptcy attorney.

July 16, 2013 by Russ Leave a Comment

Does the Automatic Stay Protect Non-Filing Corporations?

In re Saleh (OH) – In re Saleh, 427 B.R. 415 (S.D. Ohio, 2010)

Ali owned and operated a grocery store in Dayton, Ohio, and enjoyed reasonable success. The business was profitable and supported him and his family for many years. Looking to supplement his income from the grocery store, Ali decided to take out a loan and start a new business. Unfortunately, the new project never took off. Even more unfortunately, this failure coincided with the failure of the global financial markets. At the end of 2008, unable to keep up with their bills, Ali and his wife declared Chapter 13 bankruptcy. In re Saleh, 427 B.R. 415 (S.D. Ohio, 2010).

The Automatic Stay

Bankruptcy brings with it an automatic stay; this prevents creditors from pursuing action against debtors during the bankruptcy process. For Ali, this meant that his home and vehicles were safe from foreclosure.

When Ali and his wife filed for bankruptcy, their bank started to pursue the grocery store for loan collection. Ali sued the bank, claiming that the automatic stay from his bankruptcy extended to his business, not just his home and car. The store was his only source of income and he was the guarantor on all of the business’s loans. He was the sole owner. He believed that the grocery store should be considered a part of his estate in bankruptcy, enjoying all the protections of the automatic stay. The court disagreed.

Corporations are separate legal entities

A corporation is a complicated entity and the law treats it differently than an individual. There are two main types of corporations: S corporations and C corporations. A C corp is what you typically think of as a corporation; it’s an entity unto itself that pays its own taxes at the corporate rate. An S corp differs in one major respect: the owner(s) of the S corp treats the business’s profit as personal income, paying personal taxes on it, and the business itself pays no taxes. In either case, the law treats corporations as entities separate from their owners. Ali’s store was an S corp, meaning that Ali reported the business’s profit on his personal income tax statement and paid taxes at his personal rate on that income.

Ali Observed Necessary Formalities

Creating a corporation requires a lot of paperwork; running it requires even more. All of your t’s must be crossed and your i’s dotted or you might find yourself without the protection that a corporation lends its owners. Ali observed all of the necessary formalities in the creation and operation of his grocery store; it was an official corporate entity. Id. at 423. He followed the rules right down to accounting procedures; he was listed as an owner of equity in the grocery store but the store had its own assets and liabilities. The liquor license and the land were in the store’s name. Ali treated his business as a separate entity, so the court did, too.

Ali argued that his and the business’s affairs were so intertwined that they should be considered one and the same entity. He pointed to his tax returns, where the business’s income was listed on his personal return, but his accountant pointed out that such a listing is standard procedure for an S corp. Id. at 419. He argued that he had guarantied all of the store’s loans. That, according to the court, is also standard procedure. Id. at 424. Business owners commonly corporate loans, especially if the business is new. Ownership of a corporation is not ownership of the corporation’s property, and the automatic stay did not extend to Ali’s business. Under certain very limited circumstances, the automatic stay may apply to another person beside the primary debtor, but never to a corporation. In the words of the court, the law “cannot be read to extend the protections of the co-debtor stay to corporations and other non-individuals or non-consumer debts.” Id. at 420.

The Corporation must file in order to be protected by the stay

The grocery store was Ali’s sole source of income and the bank was pursuing judgment against it for a large loan. If he couldn’t include it in his personal bankruptcy, what were his options?

Filing bankruptcy on behalf of a corporation that has gone out of business is often unnecessary for a few reasons. First, only individuals are eligible for discharge. Next, the cost of filing a bankruptcy for the corporation can be high, it’s often better to wind down operations and file for dissolution.

As long as Ali’s personal liability was extinguished by his discharge, the threat of a judgment against his business entity was illusory.

July 12, 2013 by Russ Leave a Comment

How Do Payday Loans Work in Ohio? Can Bankruptcy Help?

How Do Payday Loans Work?

If you’ve ever run into a sudden, unexpected expense, you may have considered taking out a payday loan. Payday loans go by a variety of names, such as cash advance, payday advance, or deposit advance, but they all amount to the same thing; a quick and easy way to get that much needed cash in order to survive financially for another day.

However, payday loans can lead to further financial hardships that extend well beyond your initial need for cash. Payday lenders often prey on consumers with usurious rates of interest. In order to understand just what you’re getting yourself into, this article explains the truth about payday advances.

The Payday Loan Process

The typical payday loan is for a relatively small amount of money, but requires you to pay a large interest rate. Say, for example, you need to borrow $100. To secure the $100, you will be required to write a check for $115 that the lender will cash when you have the money in your checking account. You will agree to pay the $115 in a set period of time, usually a week or two.

Example and information provided by the FTC, http://www.consumer.ftc.gov/articles/0097-payday-loans

The scenario above is hypothetical. The typical interest rate for a 2 week payday loan is anywhere between 15% and 30%. The example above is calculated with a 15% interest rate. However, that is the 2-week interest rate. Spread that percentage out over a year, and you get the Annual Percentage Rate (APR). The Federal Trade Commission (FTC) estimates that the APR for a payday loan often approaches 390%. This is not such a good deal. For most bank loans, the APR will not exceed 18%. Hence, payday loans are something that should be avoided when possible.

What Happens If I Do Not Pay Back on Time?

Failing to pay back on time is where most people run into trouble. If you can’t pay back, then you might elect to extend the loan through a “roll over,” which means you must pay another fee. Hence, in the above example, you would probably have to pay an additional $15 to extend the $100 loan for another 2 weeks. Assuming you can get the money to pay back your extended loan, you have now paid $130 in order to get a $100 loan.

Example and information provided by the FTC, http://www.consumer.ftc.gov/articles/0097-payday-loans

Unfortunately, studies have shown that 99% people who take out one payday loan will take out at least one more in the course of a year. This means that the fees keep adding up, and that these borrowers are paying significantly more than they can afford to obtain the cash that they need.

Information provided by eHow, http://www.ehow.com/how-does_4911429_payday-loans-work.html

Thus, you are merely digging yourself a deeper hole. If this trend continues, the lender can take legal action, i.e. the lender can sue you, and take whatever property of yours necessary to satisfy your debt. If you are unable to pay back a payday loan, and the lender has threatened to take legal action, you should speak with an attorney.

Are Payday Loans Safe?

Not always. The FTC has stated that many payday lenders engage in illegal lending and debt collection practices. The FTC reports:

“Some collectors harass and threaten consumers, demand larger payments than the law allows, refuse to verify disputed debts, and disclose debts to consumers’ employers, co-workers, family members, and friends. Debt collection abuses cause harms that financially vulnerable consumers can ill afford. Many consumers pay collectors money they do not owe and fall deeper into debt, while others suffer invasions of their privacy, job loss, and domestic instability.”

Information provided by the FTC, http://www.ftc.gov/opa/reporter/finance/debtcollection.shtml

Thus, if you are being hounded about an outstanding debt by a payday lender that has used any such tactics, you should speak with an attorney to know your rights.

Are Payday Loans from My Bank Safe?

Probably not, but obviously you should see what sort of fees your bank charges first. If you are going to take out a payday loan, it’s worth shopping around for the best deal. However, banks aren’t likely to offer much better deals. In fact, if you take out a loan from your bank, then your bank may be able to take the money you owe directly out of your accounts, leaving you nothing for other expenses.

Payday Loans Should be a Last Resort. If possible, avoid taking out a payday loan, and do whatever you can to avoid taking out more in the future. Do whatever possible to improve your credit rating. This way, you might be able to secure a bank loan at a much more manageable interest rate. Moreover, you should consider taking out a credit advance loan from your credit card company if it offers a better interest rate. Basically, if your short on cash, explore all of your options to be sure you’re not overpaying.

Can Bankruptcy Help?

Not every type of debt is discharged in a bankruptcy filing, can you get rid of your payday loans? Yes. Since payday loans are an unsecured debt, they can be eliminated by filing for Chapter 7 bankruptcy. If you’re seriously indebted to a payday lender andlive in Southern Ohio, give our offices a call. We’ll be happy to review your case free of charge. To schedule a free initial consultation with a Dayton bankruptcy lawyer, please call 937-401-5000, or contact us online.

July 10, 2013 by Russ Leave a Comment

Do I Qualify for Chapter 7 Bankruptcy in Ohio?

Janice Didn’t Choose Chapter 13, Chapter 13 Chose Janice

Janice, an Ohio resident and a thirty-year employee of the US Postal Service, was in a bind. She had more than $115,000 in secured debt and more than $70,000 in unsecured debt; her credit card had gotten the better of her. She surrendered her house to the mortgage company and moved into an apartment. She was approaching retirement age with a mountain of debt. In re Phillips, 417 B.R. 30, 34 (Bankr. S.D. Ohio, 2009).

What could she do? She filed for Chapter 7 bankruptcy

As part of the bankruptcy process, the court examined Janice’s finances. She was making both mandatory and voluntary contributions to her retirement plan. She was also working to pay back two retirement account loans. Between the payments toward her mortgage (which she was still contractually obligated to make when she filed), the payments to her retirement plan, and her living expenses, Janice believed she qualified for Chapter 7 Bankruptcy. Her bankruptcy trustee disagreed.

The trustee objected claiming Janice’s income was too high to file for chapter 7 in Ohio

If your income is less than the median for a household of similar size in your state, you automatically qualify for Chapter 7 bankruptcy. The median income in Ohio for a single person is $42,814, or $3,568 per month. Janice made more than $4,000 each month, so she could not automatically qualify. If, like Janice, your income is above the median, you must pass the means test to qualify for Chapter 7. The means test is reminiscent of a high school math test, so sharpen your pencil. Take your monthly income, take out the allowable deductions, and multiply that amount by 60. Generally, if the result is greater than 25% of the non-priority unsecured claims or more than $10,950, you fail the means test. Unfortunately for Janet, she failed. Failing the means test results in a presumption of abuse; that means the court will assume that you have sufficient funds to pay something back to unsecured creditors. 11 U.S.C.A. § 707(b)(2). A presumption of abuse is not the end of the road for your Chapter 7 hopes; the court will then evaluate your case based on the “totality of the circumstances” test.

Mortgage payments as a deduction

First, the trustee objected to Janice counting her mortgage payments as a deduction since she had surrendered the property. The court said that the payments were allowable expenses because her contractual obligation to pay her mortgage had not yet been extinguished as of the date she filed. In other words, she had surrendered her house but she and the mortgage company had not yet leveled. So, Janice’s case went forward.

Totality of the circumstances argument

Then, the trustee argued that Janice’s Chapter 7 case was abusive under the “totality of the circumstances” test. This is the second hurdle an above-median-income filer must clear to go forward under Chapter 7. For this test, the court examines whether a debtor will be able to pay debts going forward, whether she has a stable source of income, what other remedies are available to her, and whether her expenses are reasonable. It basically amounts to a calculation of whether a debtor would be able to make substantial payments toward a Chapter 13 plan.

Why Janice’s case was converted to chapter 13

Sharpen your pencils again, and let’s look at what happened to Janice. The trustee pointed to her payments into her retirement account as an unnecessary expense, but current bankruptcy law allows such payments in order to encourage the use of retirement plans. However, both of Janice’s retirement account loans would be paid off within the span of a Chapter 13 plan – one in 7 months and one in 36 months. Additionally, Janice’s payments to her life insurance plans were ending and she admitted to overestimating her medical expenses by $50. That gave her a disposable income of $132 per month; the expiration of her retirement account loans could result in total payments of more than $13,000 to creditors. With the two combined, Janice would have been able to pay more than $21,000, which is about 30% of her debt. Does that qualify as “substantial”? In other cases, filers who could pay around 10% of their debts have been considered abusive. At 30%, Janice was well past that mark. She had to convert her case to Chapter 13 or be dismissed. In re Phillips, 417 B.R. 30, 44 (Bankr. S.D. Ohio, 2009).

Lessons from In re Phillips

Janice’s case teaches us a few useful things. Retirement plan contributions and repayments of retirement account loans are allowable deductions in Ohio. Id. at 43. Even voluntary contributions to retirement plans are allowable deductions. Id. In addition, mortgage payments (or payments for other secured loans) are deductible even if the property was surrendered prior to filing for bankruptcy. Id. at 37-8. Even though Janice surrendered her house, she was still contractually obligated to pay her mortgage. The court will allow deductions for payments as long as the contract is still in effect at the time of filing. Id. These deductions may help you pass the means test and qualify for Chapter 7.

Be sure to meet with a qualified bankruptcy lawyer who can help you crunch the numbers and pass the means test.