Bankruptcy Questions

General Bankruptcy Issues: Nuts & Bolts

Exemptions
Creditors: The Companies to which you owe money
Affect of Filing Bankruptcy
Discharge: What Debts are Discharged?
Exemptions and Dischargeability

Exemptions
Unsecured Debt: You are not going to lose your shirt. There are certain things that you cannot lose. The law lays out those things that you may keep.

Secured Debt: As long as you can afford to continue paying for them you will not lose your car or your house.
Creditors
Automatic Stay: Once you have filed for Bankruptcy the Creditors must stop calling, writing, suing, or any other action against you in order to make you pay them.

Notification: The court will notify all the Creditors that you have listed in your Bankruptcy Petition. This is why you must list ALL of your Creditors. If in doubt put them on the list!
Affect of Filing Bankruptcy
Public Information: Bankruptcy Information is available to the Public. It is, however, unusual for newspapers to list them.

Effect on Credit Rating: Chapter 7 Bankruptcy remains on your Credit listing for 10 years; Chapter 13 Bankrutpcy remains on your Credit listing for 7 years.

Effect on Credit: Filing Bankruptcy should not greatly affect your ability to obtain Credit. Many Creditors will recognize that after the Bankruptcy filing you will be able to add new payments to your budget.
Discharge
Definition: Discharge means that the Court has Eliminated your obligation to pay for the Debt.

Secured Debt: Secured debt will NOT be Discharged in a Chapter 7 Bankruptcy. In Chapter 13 Bankruptcy, however, secured debt can be significantly reduced.

Priority Debt: Priority debt will NOT be Discharged.

Unsecured Debt: All of your unsecured debt such as credit card, personal loans etc will be eliminated.
Exemptions and Dischargeability

Introduction to Exemptions
Discharge of Student Loans
Dischargeability of Taxes
Bankruptcy and Divorce
IRA/Retirement Exemptions
Parochial School not Exempt
Payment Demanded for a Vehicle in Bankruptcy
Income-Based Repayment Program for Federal Student Loans

I. Exemptions

A. State Exemptions

There are two statutory exemptions schemes available under the Bankruptcy Code. The federal exemptions, 11 U.S.C. Section 522, are available if permitted under state law. States are allowed to "opt - out" of the federal exemptions pursuant to Section 522(b) (1). Maine has chosen to use only state law exemptions in Bankruptcy proceedings. See 14 M.R.S.A. Section 4425, noting decision In re Hilder, 192 B.R. 790 (Bankr. D. Me. 1996) and Petit v. Fessenden, 182 B.R. 59 (D. Me. 1995).

Exempt property is property that is protected from creditors and trustee. Although exempt property is property of the bankruptcy estate under 11 U.S.C. Section 541, it is not available for liquidation or distribution to creditors. It is essential for a debtor and counsel to analyze the nature of his or her property to determine if an exemption is available. Without an exemption, the property is subject to the control of the trustee.

Occasionally, creditors will pressure a debtor to "waive" his or her exemption in certain property. Any "waiver" of an exemption is unenforceable under 11 U.S.C. Section 522(e)

States, like Maine, which have "opted-out", usually have several statutory sources of exemptions for various types of property. Most counsel know about 14 M.R.S.A. Sections 4422 et. seq., but there are other statutes with which careful debtor's counsel must be familiar in order to protect a debtor's property from assertive trustee. See 3 M.R.S.A. Section 703; 4 M.R.S.A. Section 1201; 5 M.R.S.A. Section 17001; 24-A M.R.S.A. Section 2428-2432. It is important to remember that the Bankruptcy Court will apply the exemptions liberally in many circumstances, but follow the exemptions according to the precise wording of the statutory language in other cases.

The First Circuit concluded that the federal exemption for personal injury claims only permitted a debtor to exempt one personal injury claim pursuant to 11 U.S.C. Section 522 (d)(11)(D). In re Christo, 192 F.3d 36 (1st Cir. 1999). The federal exemption for personal injury claims is remarkably similar to Maine's personal injury exemption. The Maine Bankruptcy Court recently decided that a pop-up camper did not fit under the definition of a household good under the Maine exemptions. In re Schreiber, 231 B.R. 17 (Bankr. D. Me. 1999). Such a ruling does not bode well for snowmobile and ATV enthusiasts hoping to protect those items of personal property from the trustee.

B. Procedure to Claim Exemptions

In order to claim an exemption, a debtor must provide a list of exempt property pursuant to 11 U.S.C. Section 522(1) within 15 days of filing the petition. Bankruptcy Rules 1007 and 4003(a). Failure to timely list exemptions may result in a loss of the exemptions and would require the debtor to file a motion with the Court for permission to file the exemption list. Petit v. Fessenden, 80 F.3d 29 (1st Cir. 1996). Court closely examine a debtor's asserted exemptions, since the exemptions claimed, but not object to by the trustee and creditors will be deemed valid and binding. Taylor v. Freeland & Kronz, 503 U.S. 638 (1992). Although Courts have attempted to minimize the seeming harshness of the Taylor decision, see Mercer v. Monzak, 53 F. 3d 1 (1st Cir. 1995), the necessity of a timely objection to a claimed exemption remains the law of the land.

Exemptions may be lost by a debtor by incorrectly characterizing the property as exempt and receiving an objection from the trustee or a creditor, or from other actions of the debtor. If a debtor fraudulently transfers exempt property, the trustee can retrieve the property and eliminate the debtor's exemption in the property as well. Howison v. Hanley, 141 F.3d. 384 (1st Cir. 1998). This double penalty should serve as a warning to potential debtors in the bankruptcy system who believe that transferring their interest in their house to their spouse or best friend prior to bankruptcy is a good mechanism to protect that asset from creditors.

C. Retirement Plans

14 M.R.S.A. Section 4422(13) protects stock bonus, pension, profit-sharing, annuity, individual retirement accounts or plans to the extent reasonably necessary for the support of the debtor or any dependent of the debtor. This provision requires a debtor to demonstrate his or her need for the retirement funds in the foreseeable future. Whether a debtor is entitled to the exemption, depends upon the debtor's age, education, health, dependents, employments prospects and nondishchargeable debts that the debtor might need to contend with in the future. In Re Bates, 176 B.R. 104 (Bankr. D. Me. 1994); In Re Yee, 147 B.R. 624 (Bankr. D. Mass. 1992).

Most conventional retirement plans, however, are not even considered property of the bankruptcy estate under 11 U.S.C. Section 541. After the Supreme Court decision in Patterson v. Schumate, 112 S. Ct. 2242 (1992), any retirement plan that was deemed "ERISA qualified" was automatically protected form the grasp of a bankruptcy trustee. Consequently, retirement plans of most major employers are not property of the estate. Trustees will still investigate the retirement plans of small businesses, especially ones in which the debtor was a corporate officer or principal shareholder to determine whether there were violations of ERISA requirements. Violations o the ERISA plan requirements could cause the plan to no longer be "qualified" and therefore become property of the trustee subject only to the 14 M.R.S.A. Section 4422 (13)(E) protections. Debtor's counsel representing a small business shareholder or officer should determine the risk of loss of the plan prior to filing a bankruptcy petition since the retirement funds may be the largest asset.

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II. Discharge of Student Loans

"Undue Hardship" is Mitigated by Partner's Income
Lorenz v. American Educational Services
Update: 2/1/2006

The First Circuit Bankruptcy Appellate Panel reversed a Bankrutpcy Court decision which had granted an undue hardship discharge of a student loan. The Panel held that the debtor’s life partner’s income had a substantial effect on the debtor’s actual and necessary expenses (since the debtor and his partner acknowledged having one financial household) and should have been taken into account in the undue hardship determination.

Certain Student Loans Not Dischargeable
Smith v. Educational Credit Management Corp
Update: 6/6/2005

The Bankruptcy Appellate Panel reversed a bankruptcy court decision that certain student loans were dischargeable. The Appellate Panel held that the bankruptcy court failed to conclude that the debtors met the “totality of circumstances” test or the In re Brunner test. Debtors did not show that both current and future income were insufficient to pay their student loans, so the bankruptcy court decision could not be upheld.

Answers about Bankruptcy and Student Loans

"Is an individual able to discharge (eliminate) student loan debt?"

11 U.S.C. Section 523(a)(8) reads in large part, as follows:

(The Bankruptcy Code) does not discharge an individual debtor from any debt for an educational benefit over payment or loan made, insured, or guaranteed by a governmental unit, or made by any program funded in whole or in part by a governmental unit or non profit institution, or for an obligation to repay funds received as an educational benefit, scholarship, or stipend, unless excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor's dependents.

In short, this means no...

This statutory section was amended in October of 1998. Prior to October 1998, student loans that had been due and payable, not including deferment periods, for more than 7 years, could be discharged by the filing of a bankruptcy petition. After October 1998, that opportunity to discharge student loans was eliminated and the above provision enacted into law. It essentially means that student loans are never dischargeable unless the payment of such debt would impose an undue hardship on the debtor or the debtor's dependents.

What constitutes an undue hardship?

Undue hardship can depend upon the particular Bankruptcy Court ruling on that issue. In some Bankruptcy Courts, undue hardship essentially requires a debtor to not be able to provide a poverty level standard of living before the Court will discharge the debt. Other Courts will not find undue hardship unless a debtor is disabled (as that term is defined under Social Security law). In Maine, the leading decision is In re Kopf, 245 B.R. 731 (Bankr. D.M.e. 2000). This case can be found in the U.S. Bankruptcy Court's website, www.meb.uscourts.gov; check under "Judge's Corner" for the complete decision issued by Judge Haines. His analysis is likely to be followed in future cases where a hardship discharge of student loans is sought.

A debtor considering his or her prospects in discharging student loans should understand that the debtor's current and future income and expenses will be examined very closely by the Court and the lending institution. To the extent that the debtor can pay back a portion of the student loan debt, it is very possible that the Bankruptcy Court could discharge a portion of the student debt but not all of the debt. Some bankruptcy courts have concluded that multiple student loans can be broken into dischargeable and non-dischargeable student loans. The consolidation of many student loans into one may reduce the likelihood that the Bankruptcy Court will adopt a partial discharge of student loans.

Consider your Options

Student loans are often one aspect of a debt crisis. If you are in Maine and find yourself in a difficult financial situation, with persistent creditors calling or student loans unpaid, you should learn about all of your options before planning your debt relief. Don't fall prey to creditors or unreliable refinance companies.

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III. Dischargeability of Taxes

In a Chapter 7 case, Section 523 of the Code determines which tax debts are non-dischargeable. Included are:

Taxes entitled to priority under Section 507(a). See Section 523 (a) (1) (A).
A tax due upon filing a return, but the return is not filed. Section 523(a) (1) (B) (i).
A tax with respect to which a required return was filed after the due date including extensions, but within two years of the petition date. Section 523(a) (1) (B) (ii).
Taxes with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax. Section 523(a) (1) (C).

Priority taxes under Section 507 are always non-dischargeable, so it is critical to determine when the time periods run for taxes to fall under the priority umbrella. It is also important to understand which non-priority taxes are also non-dischargeable under Section 523(a).

Six types of taxes are entitled to priority under Section 507, the most common of which are income taxes which meet one of four tests. First, if the last due date of the income tax return, including extensions is within three years of the petition date, the tax is priority. Second, taxes assessed within 240 days of the petition date are priority taxes. Third, the 240 day rule is suspended for the time any offer in compromise is pending with respect to a tax assessment, plus 30 days, so taxes due within the time an offer in compromise is pending are priority. Fourth, taxes which are not assessed, but are assessable after the commencement of a case are priority taxes (such as when a notice of deficiency has been issued but the 90 day appeal period has not run).

The second type of priority taxes listed in Section 507(a) (8) is property taxes assessed before the commencement of the case and last payable without penalty after one year before the petition date. Third are taxes which are required to be withheld or collected and for the the debtor is liable in some capacity (such as sales, payroll, and trust fund taxes). The fourth type of priority taxes are employment taxes on priority wage claims. Fifth, certain excise taxes due or occurring within three years of the petition date. Finally, and sixth, penalties for actual pecuniary loss are priority taxes.

Certain non-priority taxes are also non-dischargeable. These taxes usually are non-dischargeable because the debtor has engaged in bad behavior, such as not filing a tax return, although the debtor is required to do so. If the debtor files a tax return late, and the return is within two years of the filing of the petition, the tax is non-dischargeable even though it may not be a priority debt. Of course, as one would expect, where a debtor files a fraudulent return, or willfully attempts to evade or defeat a tax, the tax is non-dischargeable. If there has not be a judicial determination of fraud prior to the bankruptcy filing, the tax authority may be required to litigate the fraud allegations in the Bankruptcy Court to succeed in making these taxes non-dischargeable. However, if there has been a Tax Court determination of fraud, the debtor may be collaterally estopped regarding the non-dischargeability of the debt. Grogan v. Garner, 498 U.S. 279, (1991).

In a Chapter 13 case, the "super discharge" under Section 1328(a) can discharge more taxes than possible under Chapter 7. A Section 1328(a) discharge occurs when a debtor successfully completes his or her payments under the confirmed Chapter 13 plan. If a debtor can not complete the plan, but is nonetheless deserving of a "hardship" discharge based upon his or her efforts in the case, the discharge enters under Section 1328(b). A Section 1328(b) discharge is the same as a discharge under Section 727 in a Chapter 7 case.

Taxes which are priority debt must be paid in full during the course of the Chapter 13 case. However, for unsecured priority taxes, while the principal tax and interest up to the date of filing must be paid as a priority debt, any penalties on that debt are paid as general unsecured debt (just like credit cards). Since penalties can significantly increase the amount of pre-petition taxes facing a debtor, an analysis of the amount of penalties associated with tax debt is essential in determining whether a feasible Chapter 13 plan can be constructed to pay the priority portion of the taxes in full.

In addition, if the tax authority fails to timely file a proof of claim, the tax debt can be discharged in full without any payment of the taxes (whether they are priority or not). Unfortunately for debtors, both the IRS and MRS are very attentive to the deadlines for filing claims in recent years.

Chapter 13 can assist a debtor to strip down a tax lien to the value of the property upon which the lien attachs. Once the taxes are no longer secured, it is still necessary to determine whether the taxes are priority or general unsecured claims in order to properly categorize them for payment under the plan.

Most interestingly, in Chapter 13, a debtor is only required to pay income taxes and interest in full if they are less than three years old. If income taxes are older than three years and are unfiled as of the petition date, they are still dischargeable in Chapter 13 when the tax returns are filed post petition. In that circumstance, the income taxes are paid as general unsecured claims.

STRATEGIES FOR LITIGATING TAX ISSUES

The basic tool used in litigating tax issues is contained in Section 505(a) (1). That section permits the Bankruptcy Court to determine the amount or legality of any tax, a fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction. If, however, there was a judicial or administrative tribunal adjudication of a tax, fine, penalty, or addition to a tax, before the commencement of the bankruptcy case, the Bankruptcy Court may not determine these issues again under Section 505(a)(1). See Section 505(a) (2) (A).

The procedural vehicle to bring a Section 505 issue before the Court depends upon the relief sought by the debtor. If the debtor is seeking a determination of tax liability, that can be accomplished by an objection to the claim of the tax authority or by an independent motion to determine tax liability. Under either scenario, the Court will probably permit each party to engage in discovery similar to an adversary proceeding in an effort to fully air the underpinnings of the taxes assessed and the debtor's assertions that the taxes are not owed.

If the goal is a determination of the dischargeability of certain taxes, a complaint must be filed pursuant to Rule 7001(6). The full panoply of discovery devices is available to the parties through this form of litigation.

The burden of proof is upon the taxpayer that the tax authority's assessment is incorrect. See Raleigh v. Illinois Department of Revenue, 120 S. Ct. 1951 (2000). The official determinations of the IRS are entitled to a presumption of correctness. Delaney v. C.I.R., 99 F. 3d 20 (1st Cir. 1996); United States v. Kantaratos, 36 B.R. 928 (D. Me. 1984). But see 26 U.S.C. Section 7491, in which the taxpayer may have simply a burden of production while the IRS may have the ultimate burden of proof in certain circumstances (i.e. for tax periods after July 1998 where the taxpayer has maintained tax records and has cooperated with the IRS in providing documents as well as compliance with other requirements to substantiate the taxpayer's position).

In instances where the issue is whether the debtor is a "responsible person" by the tax authority for the payment of what was once called the "100% penalty" for corporate trust fund taxes (940, 941, or sales taxes), the First Circuit has simplified the test for determining who is a responsible person. 26 U.S.C. Section 6672 imposes trust fund tax liability upon a person, who willfully fails to collect, account for and pay for such tax if that person is "responsible" for the collecting, accounting, and paying of the taxes. In Vinick v. U.S., 205 F. 3d 1 (1st Cir. 2000), a.k.a. Vinick II, the First Circuit narrowed the scope of activities a person can engage in to be found a "responsible" person, by first acknowledging that there have been seven criteria generally followed by most Courts in making this determination:

is the taxpayer an officer or member of the board of directors;
does the taxpayer owns shares or possess an entrepreneurial stake in the company;
is the taxpayer active in the management of the day-to-day affairs of the company;
does the taxpayer have the ability to hire and fire employees;
does the taxpayer make decisions regarding which, when and in what order outstanding debts or taxes will be paid;
does the taxpayer exercise control over daily bank accounts and disbursement records; and
does the taxpayer have check signing authority?

The First Circuit, in Vinick II, concluded that the last three criteria were the most important. The Court reasoned that the crucial inquiry is whether the person has the "effective power" to pay taxes - that is, whether the person has the actual authority or ability in view of his or her status in the company, to pay the taxes owed. A careful examination of the factual circumstances under which a debtor has been assessed the "100% penalty" may result in sufficient grounds to litigate the issue with the tax authority in the Bankruptcy Court and eliminate the penalty or provide fertile ground for a compromise with the tax authority.

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IV. Bankruptcy and Divorce

There are many issues of law that can be explored in the intersection between bankruptcy law and divorce law. The purpose of this article is to summarize the state of the law regarding some of the most prominent issues that appear in consumer cases.

The effect of a divorce judgment on the division of marital debt. There is a common misperception by individuals who are getting divorced that if a divorce judgment requires one of the two people to be responsible for various marital debts, that the so-called responsible person is the only person obligated on that debt. For example, if a divorce judgment requires a husband to pay the Citibank Visa account, but if both husband and wife signed for the Citibank account prior to the divorce case, then both parties can be responsible for the account notwithstanding any language in the divorce judgment to the contrary. A divorce judgment does not require Citibank to look only to the husband for payment of that account. Citibank can look to either party for payment of the account. At best, the wife may have the right to insist that the husband reimburse her for any money that she pays to Citibank on the account.

A divorce judgment merely rules on the relationship between the husband and the wife. A divorce decree can not bind Citibank regarding from whom Citibank can collect money it is owed.

In short, it is a mistake to think that a divorce judgment protects either a husband or a wife from creditors if the husband or the wife signed personally on any of the premarital debt.
Alimony and support versus division of marital debt. The Bankruptcy Code makes a distinction between how alimony and support is addressed in bankruptcy versus simple division of marital debt. Alimony and support are non-dischargeable debts. The division of marital debt may be dischargeable in Chapter 7 cases. Frequently it is difficult to determine whether or not debt is alimony and support or whether it is simply a division of marital debt. Several important bankruptcy decisions that address these issues are In re Dressler, 194 B.R. 290 (Bankr. R.I. 1996); In re Warren, 160 B.R. 395 (Bankr. D.M.e. 1993); In re Marquis, 203 B.R. (Bankr. D.M.e. 1997). These decisions help determine the circumstances under which obligations under a divorce decree are either alimony and support or a simple division of marital debt. When the issue is an award of attorney's fees in a divorce judgment, the case of In re Whitney, 265 B.R. 1 (Bankr. D.M.e. 2001) is worthwhile reading to understand that an order to pay attorney's fees is usually considered in the nature of alimony and support.

The 2005 Bankruptcy Reform altered the relationship between debtors and their spouses in divorce. In Chapter 7, debtors must pay, as a non-dischargeable claim, any debt associated with a divorce judgment, whether it is in the nature of alimony or support (now known as a "domestic support obligation") or it is a property division. In Chapter 13, while domestic support obligations are non-dischargeable, property divisions are still dischargeable. Debtors with significant divorce property divisions should seriously consider the benefits of Chapter 13 to reduce his or her future financial obligations.

Should the non-filing spouse challenge the debtor spouse's ability to discharge certain marital debt? Is that debt alimony and support or division of marital debt? Would it be better to make that challenge in the Bankruptcy Court or later challenge the nature of the debt in Divorce Court (which has concurrent jurisdiction to make that determination if is not made in the Bankruptcy Court)? What is the cost associated with such a challenge in the Bankruptcy Court?

If a challenge is made to the discharge or certain marital debts, the burden of proof is on the party filing the complaint. Whether or not the debtor can afford to pay for the marital debt or whether or not the burden is greater on the debtor than the non-filing spouse to pay the support is determined under the circumstances of the parties as of the time of the trial of the Bankruptcy Court. It is important to note, that whether or not the debt is dischargeable or nondischargeable becomes a very fact intensive inquiry notwithstanding the labels placed upon the nature of the debt by the Divorce Court. See Werthen v. Werthen, (2002 Bankr. LEXIS 972).
The Automatic Stay and pending divorce actions. If a bankruptcy case is filed at the time that a divorce case is pending, the Automatic Stay prevents the Divorce Court from continuing to consider any divorce issues unless one of the parties to the divorce gets permission from the Bankruptcy Court for relief from the Automatic Stay. If the Bankruptcy Court grants relief from the Automatic Stay, then the divorce can proceed. Without such relief, the bankruptcy case must be stayed like any other pending court action against the debtor. Although parties to a divorce may forget that a pending divorce is stopped in its tracks by a bankruptcy filing, divorce courts are very sensitive to that event. Most divorce courts will refuse to take any action on pending divorces since a divorce court's orders or judgments could be void if they violate the Automatic Stay.
Davis v. Cox. The most influential recent decision by the First Circuit Court of Appeals arising from the Maine Bankruptcy Court regarding the intersection of bankruptcy and divorce law is Davis v. Cox, 356 F. 3d 76 (1st Cir. 2004). This case is found on the 1st Circuit's website and the underlying decision from the U.S. Bankruptcy Court is located on the U.S. Bankruptcy Court of Maine's website, both of which is linked to this website.

In essence, the Bankruptcy Court, in Cox, attempted to delineate the role that bankruptcy plays on ongoing divorce actions and the effect, if any, a bankruptcy has on the determination of the parties' property rights and the division of debts. Any person who is in the midst of a pending divorce action and who may be obligated to pay significant marital debt while losing significant property should consider the holding in the Cox case to determine whether or not a bankruptcy filing may be of assistance in evening the playing field between the two divorcing parties. The Cox decision was upheld on appeal to the Federal District Court for the District of Maine. The First Circuit Court of Appeals overturned the decision of the Bankruptcy Court. The Court of Appeals held a certain property, which the Divorce Court had awarded to the non-debtor spouse, was held in a constructive or resulting trust for that spouse. The First Circuit's decision affords the Divorce Court more authority to determine property interests of non-debtor spouse. This case has been the subject of seminars between bankruptcy and divorce attorneys and is likely to guide attorneys in both areas of the law for years to come. If an individual contemplating bankruptcy is in the situation outlined above, he or she should make sure that their divorce counsel and bankruptcy counsel work together closely to be sure to provide the person filing bankruptcy the best counsel in both forms. Only by both divorce and bankruptcy counsel working together can a party be sure that the legal mine field described in the Cox case can be successfully navigated.

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V. IRA/Retirement Exemptions

Rousey v. Jacoway, U.S. Supreme Court.
Decision dated April 4, 2005

The Supreme Court determined that in individual’s IRA was exempt under federal exemption laws when that individual files bankruptcy. Before this decision, most courts had concluded that IRAs were available to bankruptcy trustees and the proceeds to those accounts distributed to creditors. This decision represents a major victory for individuals filing bankruptcy, and will help protect that very important asset for retirement

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VI. Parochial School not Exempt

Watson v. Boyajian, First Circuit Court of Appeals
Decision dated March 25, 2005

The Watsons had minor children who attended a parochial school. The Watsons filed a Chapter 13 case and proposed to continue paying for parochial school for their children while also proposing a Chapter 13 payment plan for their creditors. The Chapter 13 Trustee objected to the Watsons’ Chapter 13 plan on the grounds that not all of the Watsons’ disposable income was to be paid into the payment plan.

The First Circuit Court of Appeals held that the Watsons’ payments for parochial school were not reasonably necessary for their budget and that they should contribute those funds into their payment plan for the benefit of creditors. The result of this decision is that parents filing bankruptcy will no longer be able to pay for their children to attend parochial school, an expense previously considered reasonable by many courts provided that the expense was not excessively large on a monthly basis. This decision demonstrates the necessity of careful preparation of a budget when parents file bankruptcy.

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VII. Payment Demanded for a Vehicle in Bankruptcy

On September 1, 2006, the First Circuit Court of Appeals reversed the Maine Bankruptcy Court decision in Pratt v. GMAC.

This is one of the most significant decisions in consumer bankruptcy in recent years, and represents a recognition by the First Circuit that creditors have been engaging in inappropriate behavior in attempting to collect money.

In April 2005, the Maine Bankruptcy Court ruled that GMAC was within its rights to refuse to release its lien on a worthless motor vehicle after the owner of the car filed bankruptcy, received his bankruptcy discharge, and the owner surrendered the car to GMAC. GMAC refused to accept the surrender and insisted upon the owner paying GMAC all the money owed on the car in exchange for the lien release. Without the lien release, the owner could not junk the vehicle or otherwise dispose of it. The Bankruptcy Court held that GMAC was only protecting its lien rights, and that GMAC did not violate the discharge injunction.

This author argued the case before the First Circuit. The First Circuit's reversal of the Bankruptcy Court decision was stunning in its sweeping conclusions that a debtor has the absolute right to surrender a vehicle in this circumstance, and that the creditor must accept the vehicle. Before this decision by the First Circuit, both GMAC and Ford Motor Credit had attempted to collect on discharged debts by refusing to issue lien releases not only in Maine, but across the country according to members of NACBA (National Association of Consumer Bankruptcy Attorneys). In addition, the First Circuit held that GMAC's behvior objectively violated the discharge injunction, causing GMAC to be liable to the debtor for actual and consequential damages.

Original Decision

Pratt v. GMAC, Maine Bankruptcy Court
Decision dated April 15, 2005

The Maine Bankruptcy court recently ruled that the General Motors Acceptance Corporation (GMAC) was entitled to insist upon payment of its lien in a motor vehicle which a debtor attempted to surrender to GMAC and which GMAC refused to accept. The import of this decision could adversely affect any debtor’s ability to surrender a motor vehicle to a car lender in bankruptcy and avoid paying for the vehicle. The decision is currently on appeal to either the Bankruptcy Appellate Panel or the U.S. District Court.

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VIII. Income-Based Repayment Program for Federal Student Loans

Long Awaited Help for Federal Student Loan Debtors

For federal student loan borrowers, repaying loans has become more and more difficult with the increased costs of post-secondary education and the down-turn in the economy. Student loan debt is almost never dischargeable in bankruptcy, although there is a very narrow exception for undue hardship 11 U.S.C. §523(a) (8). The effect has been that many borrowers fall into default. The effects of default are serious including wage garnishment and income tax refund withholding by the IRS. Many students who are entering the workforce are unable to afford their student loan obligations even though they very much want to repay the educational debts.

As of July 1, 2009, student loan debtors may now opt for the Income-Based Repayment Program (IBR). IBR differs from income sensitive repayment programs in that it caps a debtor's monthly repayment at 15% of disposable income. Other programs offer graduated payments that do not take into consideration a person's ability to pay or a debtor's income availability. Upon 25 years of IBR payments, the remaining balance is forgiven.

The new IBR programs are a breath of fresh air for federal student loan borrowers. Some borrowers in the program may have monthly payment requirements of as low as zero since the payment plans are based on disposable income. These programs have strict guidelines for the determination of income.

Pros of the Income-Based Repayment Program (IBR)

Students struggling to make payments may now qualify for much lower monthly payments.

Students who are successful in the program may enjoy significant forgiveness of the balances of federal student loans at the end of a 25 year period.

Payment plans are based on individual income as opposed to a percentage of the loan balance and term of repayment.

Cons of the Income-Based Repayment Program (IBR)

Currently, loan balances forgiven at the end of the 25 year period are subject to taxation but legislation in Congress may remedy this problem.

Payment plans are calculated based on loan balances when the student entered repayment as opposed to the current balance on loans; this is problematic for student borrowers whose loan balances have increased over time due to the accrual of interest. However, the Department of Education has agreed to fix this issue but the changes will not go into effect until July, 2010.

Do I Qualify For IBR?

Student borrowers may access IBR calculators by going to their respective student loan lender websites. A borrower must not be in default of their loan obligations. Loans must be federal in nature - private loans are not eligible for IBR. Students must certify their income on an annual basis for continued participation in IBR.

Helpful IBR Links:

If you are current on your loan obligations but are looking for more affordable ways of keeping your payments current, you should contact your student loan lender and inquire about IBR.

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