Chapter 7 Bankruptcy

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.

Image from Flickr user meddygarnet

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

Image from Flickr user lavocado@sbcglobal.net

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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.

See also: Intentions Matter When Filing Bankruptcy in Ohio

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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).

See also: How do payday loans work in Ohio?

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.

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