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Bankruptcy Cases in the News

Bankruptcy Cases in the News

Early in August 2012, local Bankruptcy Court Judge Walter Shapero decided an interesting case that sheds light for lay-persons interested in debt relief and for local practitioners, too. This case is In re Kenneth C. Farkas and may be found at Case No.: 11-59772.

In this case a young-ish debtor with a sizeable 401(k) had taken loans against his 401(k) which required payments of around $850.00 to repay the 401(k) loans. On his Schedule I, debtor scheduled monthly loan repayment and that the net income after this and other expenses was less than $20.00. According to debtor therefore he was qualified for Chapter 7 relief – but, the Trustee objected and argued that under 11 USC 707(b)(3) and the totality of the circumstances that this deduction was unfair and should be considered disposable income to be shared with all creditors. Judge Shapero on the facts of this case agreed with the United States Trustee, noting:

    “Disposable income” is defined under the Bankruptcy Code as income received by the debtor which is not reasonably necessary for the maintenance or support of the debtor or a dependent of the debtor. 11 U.S.C. §1325(b)(2)(A)(i). This Court has explicitly rejected adopting a per se rule requiring the inclusion of 401(k) contributions in disposable income. In re Beckerman, 381 B.R. 841, 848 (Bankr. E.D. Mich. 2008). Instead, as is required by the plain language of §707 (b)(3) and this Court’s interpretation of the Sixth Circuit precedent, the reasonableness of the debtor’s expenses, including payments made into a 401(k), must be determined on a case-by-case basis looking at the totality of the debtor’s individual circumstances. Id at 848. In this case, the amount of Debtor’s existing retirement savings, as well as his age and time left until retirement, persuades the Court that his 401(k) loan repayments are not reasonably necessary for his maintenance or support, and are therefore includable in his disposable income.

Since the debtor had a sizeable retirement account and many years before his retirement the inclusion of the loan as a form of monthly disposable income was determined to be unfair to other creditors. Judge Shapero calculated that in a Chapter 13 plan the creditors would be more fairly treated and would receive about an 18% dividend. He noted that the Sixth Circuit Court of Appeals in re Behlke, 358 F.3d 429, 434 (6th Cir. 2004) had earlier determined that even a 14% dividend was a meaningful dividend.

Therefore, it was determined that the case must be dismissed – for ability to pay – or converted to a Chapter 13. It, again, bears nothing that the Bankruptcy Rules are designed to provide equitable treatment to all the actors. Therefore, where disposable income is being spent is fanciful ways or ways which discriminate against other creditors a discharge may be challenged as abusive. In such ceases, the debtor’s fresh start and discharge may be conditioned upon providing some disposable income via a Chapter 13 plan to all unsecured creditors over a period of 60 months.

[Guy Vining, a bankruptcy attorney, in metro-Detroit, maintains his office in Taylor, Michigan, where he serves the downriver communities of Monroe, South Rockwood, Gibraltar, Brownstown Township, Grosse Ile, Woodhaven, Trenton, Southgate, Riverview, Allen Park, Lincoln Park, Dearborn, Dearborn Heights, Westland, Wayne, and Ecorse. If you or a family member of friend would like a no-obligation no cost consultation/financial analysis, just call or E-mail Guy Vining of Vining Law Group, P.L.C to schedule a meeting.]

Top Ten Bankruptcy Mistakes: Payment from Exempt Assets

TOP TEN BANKRUPTCY MISTAKES

# 4

Paying from Exempt Assets

The Bankruptcy Code in keeping with equitable treatment of creditors and fresh start considerations for debtors provides a comprehensive set of exemptions. Exemptions in Michigan are also provided under state laws so that the debtor may choose that set — either Federal or State — which are the most favorable.

Upon the filing of a petition in bankruptcy, 11 USC 541 states that all of the debtor’s property – legal or equitable – and wherever situated, becomes the property of the estate. The exemptions determine what property a debtor may keep for his fresh start. It is therefore critical to determine, based in the facts of each case, which set of exemptions to choose and whether the filing may proceed or should be delayed.

Competent advice on these issues is essential. When debts start to appear overwhelming get immediate advice. Otherwise, you may with good intentions hurt your family by paying dischargeable bills from exempt assets, which you could otherwise keep. For instance, it may be foolish to borrow from your 401-K (an exempt asset), with tax penalties, and use the money to pay a bill which could be eliminated by a Chapter 7 discharge. Before you make a major mistake make sure to talk to a bankruptcy lawyer so that your family is best protected.

[Guy Vining, a bankruptcy attorney, in metro-Detroit, maintains his office in Taylor, Michigan, where he serves the downriver communities of Monroe, South Rockwood, Gibraltar, Brownstown Township, Grosse Ile, Woodhaven, Trenton, Southgate, Riverview, Allen Park, Lincoln Park, Dearborn, Dearborn Heights, Westland, Wayne, and Ecorse. If you or a family member of friend would like a no-obligation no cost consultation/financial analysis, just call or E-mail Guy Vining of Vining Law Group, P.L.C to schedule a meeting.]