One of the mysteries of the universe (well, sorta) was answered for me this month when the UST’s office wanted to adjust the taxes incurred on the B-22 for taxes as they were projected to be in the future.

My position has been that current income is the only part of the means test calculation that was determined by looking backward.  By statute, Congress defined “current monthly income” to be backward looking. (Conclude what you will about Congress.)  Expenses remained forward looking.

So, if the debtor expected to surrender real estate and lose the interest deduction, their taxes should be calculated, not on what they might owe this year, when they still had the deduction, but looking forward to their tax obligation post surrender of the property.

Others have wondered whether the taxes ought to travel with the income in the look back period.  At some level, that’s logical, since it defines how much income the debtor has that is disposable, in the broadest sense.  [If you've followed my views on the means test, you will know that any argument about the means test based on logic is per se faulty!]

In my recent case, the UST stated clearly that taxes were a forward looking expense. Of course in my case, where I had increased the tax burden to reflect the fact that in 09 the debtors had not paid all of the mortgage interest due and would therefore have a smaller deduction than in past years, the UST wanted to look further forward to years in which they would be paying mortgage interest as it came due.

You had to know that any little victory would be diluted by the UST’s world view, didn’t you?

As befits a Moran, I got my Irish up at a 341 meeting when the UST’s representative announced that “we don’t allow retirement deductions on Schedule I”.  Huh?  Did she intend to utter fighting words?

First point, as far as I could see, she wasn’t wearing a black robe, so the issue of “allowance” was neither hers nor the UST’s.  Judges decide disputed questions and the UST is no more than a party in interest in a bankruptcy proceeding.

Second point, I’ve always thought that the schedules should reflect the facts.  My client has contributions to her 403(b) retirement plan deducted from her paycheck.  I duly show that on Schedule I, so that as far as possible, Schedule I reflects the current income and deduction situation.  Where does this person come from when she says we don’t “allow” scheduling of deductions?

Third point, if you want to argue that for purposes of the 707(b) analysis, retirement savings may not be an allowable deduction, make that argument, preferably not at the 341 meeting.  Think and speak precisely.

Then, there is the point that, in this case, the Income less Expenses calculation is $3400 underwater.  Is this exercise on the UST’s part a good use of scarce government resources?  Do they think there are $3400 worth of mistakes all of which cut in their favor?  Or is this just a matter of doing something so we justify our budget?  [Personally, I'm waiting to see the UST's professed interest in creditor abuse manifest itself.]

My suspicion is that the attitude of the UST’s office as being almighty slipped into this unfortunate’s choice of words.

I sat in a courtroom last week and watched dozens of  Chapter 13 cases get dismissed, often because the debtor had not taken seriously the requirement that all their tax returns be filed within 45 days of the commencement of the case.

Perhaps I shouldn’t be surprised that  folks who didn’t take filing tax returns seriously in the first place continue to blow it off when bankruptcy is filed.  But filing returns is mandatory and dismissal automatic under the provisions of bankruptcy reform.

What debtors need to understand is that bankruptcy is a benefit and to get the benefit, you need to play by the rules on the timeline created by the Bankruptcy Code.

It’s happened again:  there’s an email in Monday morning’s inbox from a client whom I first met weeks ago, who tells me they want to file before Wednesday’s mediation in state court!  I have no creditor information, representation agreement, money, or credit counseling certificate.   Just as inconvenient, I’m not sure I have staff who can drop everything (related to clients who planned ahead and played by our rules) to make this happen.

Clearly I’m not communicating to clients what is involved in getting even a skeleton petition on file.  Lots of clients seem to think that I may be able to file the petition without any involvement on their part beyond providing info and money.  Wrong.

The bankruptcy paperwork is filed with both the client’s signature and my signature.  We are both attesting to the accuracy of the information and the debtor’s eligibility for  bankruptcy relief.

The full filing is even more information intense:  budgets looking forward and backward; recent financial history; intentions with respect to secured debts.  All of it is doable, just not with a snap of the fingers.

Got to go:  got a skeleton to assemble before Wednesday.

Once again, a client told me that if she’d known before what she learned in the financial management class required to get her bankruptcy discharge, she probably wouldn’t have needed bankruptcy in the first place.

Pretty strong words, from someone who admitted that she approached the required class with low expectations.

She announced that she intended to get her child and her step children to watch the class as well, so they go out into the financial world well prepared to deal with money and credit.

The bankruptcy “reform” act of 2005 did little good for debtors or bankruptcy law or practice, but debtor education is a winner.

Dismissed and discharged. These two terms are at the opposite ends of the scale of results in bankruptcy, yet they are often confused.

A debtor gets a discharge and is relieved of the legal liability for the dischargeable debts in the bankruptcy case.

A dismissal means the bankruptcy case was terminated short of the discharge.  It could be dismissed at the request of the debtor or upon the motion of the trustee or the court.  But it means that the case has been close without a discharge.

A case in which a discharge is entered will be closed by the court when all the legally necessary steps have been met, such as the trustee’s report.

Even if your creditor gets a judgment against you in California, the debt underlying that judgment remains just as dischargeable as it was before the case was filed.  And apparently differently from New York, a judgment in California does not automatically become a lien on the defendant’s property.

The discharge of a debt in bankruptcy depends on the nature of the debt, not whether a court has ruled on the merits of the claim.  So, child support is non dischargeable, whether or not there is a judgment.  Debts incurred by fraud are non dischargeable in bankruptcy.  Credit card debts honestly incurred are dischargeable, judgment or no.

Contrary to  what some dishonest debt collectors will tell you, judgments are just as dischargeable in bankruptcy as the underlying debt is.

What does change the dynamic is if/when the judgment creditor applies for an abstract of judgment or files a notice of judgment lien.  These documents do create a lien on the judgment debtor’s assets, the former on real property in the county in which it is filed, and the later on personal property located in the state.  If the lien cannot be avoided in bankruptcy, the judgment creditor has obtained an advantage.

What my friend Jay Fleischman’s post on BLN about  civil judgments in New York and their bankruptcy implications points out is the way in which state law impacts the operation of bankruptcy, which is federal law.  The rights that each party in a bankruptcy case brings to the bankruptcy case originate in state law.

It also  demonstrates why lawyers are licensed in each state and why my California law license does not entitle me to practice bankruptcy law in New York.

Logic and reality have been bouncing off my clients’ deflector shields recently on the issue of their houses.  Confronted with the gap between their income and even the payment on a modified loan, I get the refrain, “But keeping the house is the most important thing in my case!”

Yes, and how do you expect to do that?   I get no meaningful answer.

This house business has become so irrational and  embedded that I’m thinking it’s a resistant strain of something. (Is there a strain of “Home Flu”?)   “House” or “home” is like God or motherhood:  a positive one dare not challenge with words about economic reality.

What’s interesting about these reactions is that seldom are we talking about the long standing family home.  We’re talking about houses purchased in the past  five years or so.  Which of course corresponds to the frantic run up in Bay Area home prices.  So these homes were, from the beginning, never likely to be the family seat.

How do I persuade people that a home is simply housing, and what’s really important are the people who live there?

Can I keep a credit card out of my bankruptcy for future emergencies, clients routinely ask.  The short answer is that you can properly omit from your bankruptcy filing any card issuer with whom you don’t have a balance.  Those issuers are not creditors at this point.

The broader question is just how useful is plastic as a safety net?  With the wave of cancelled cards and lowered debt limits, joined with massive interest increases, I have my doubts that you can count on a credit card as the functional equivalent of cash in the bank.

Then there is the question of fraud:  use of a card when you know you may not be able to repay the charge may be fraud under bankruptcy law.  If the card issuer can prove fraud, the challenged charges survive the bankruptcy discharge.

So, my routine advice is not to pay more than a couple hundred dollars to pay off a card so you can exclude it from the bankruptcy filing.  More than that, put the money in  the bank as the start of  your rainy day fund of cash in the event of emergencies.

My clients this week had a number of rental properties on which they owned nearly as much as the properties were worth. The clients thought the properties had long-term appreciation potential and were just certain that filing Chapter 7 meant giving up the properties. Not so.
The bankruptcy trustee is charged with turning non exempt property of the bankruptcy debtor into cash for the benefit of the creditors. The trustee’s focus is on the bottom line. For each asset, the trustee asks:

1. What is the asset worth, today, in its present condition?
2. What are the costs of preserving the property pending sale?
3. What are the costs of selling the asset?
4. Are there tax consequences of the sale?

The trustee’s handbook is clear that the trustee should administer assets only if he expects to be able to make a meaningful distribution to creditors. Each trustee has a threshold that he sees as the minimum amount of money necessary to open a case.

So, for my clients, they are likely to emerge from Chapter 7 with title to these properties still in their portfolio. When you crunch the numbers, for each property, the costs of selling the properties, maintaining them in the interim, dealing with tax returns and possible tax consequences would consume all the sale proceeds.

A basic premise of bankruptcy law is that liens pass through bankruptcy unaltered. Post bankruptcy my clients will still have rentals encumbered to the extent of their value. They will still be subject to foreclosure if they fail to make the mortgage payment. But they don’t have to worry that the trustee will deprive them of the property simply because they filed bankruptcy.