When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 28, 2020, nearly everyone had questions about what the act contained.  For bankruptcy professionals, there were two primary questions:

1. Would the money be counted in calculating a debtor’s income?
2. Would the money be part of the bankruptcy estate and subject to seizure by a Trustee?

See, income is one of the five pillars of consumer bankruptcy.  If you make a lot of money, you may be ineligible to file a Chapter 7 bankruptcy.  I’m talking about the Means Test, of course, which really requires its own article. 

But for the moment, understand that an influx of money, like bonuses, commissions, or lottery/gambling winnings, is something bankruptcy attorneys have to account for.  Naturally, we were curious about the rebate in the CARES Act.

Is the money considered income?

Fortunately, the Act answers the question and says, “No, any money received under this Act is NOT income under either chapter.”  As an aside, it’s so nice when a law or statute or act is so clear.  So, that’s that: any rebate (stimulus) you receive (or have received) will not be considered in your bankruptcy.

Awesome.  What about the title of the post: Will I lose my Coronavirus Rebate if I file bankruptcy?  What if you have the rebate money sitting in your bank account – will you have to give it to a bankruptcy Trustee?

Before I answer that question, let me briefly explain why this is important. When you file bankruptcy, you list all of your property – both real property (like your house) and personal property (like your household goods, cars, accounts, etc.).  You also list exemptions that are used to protect your assets.  In nearly all cases, the exemptions completely protect the individual’s assets.

But sometimes an asset can’t be protected – either because someone already has too many of them (e.g. 10 cars) or because the asset is just incredibly valuable (like a Picasso hanging on your wall). 

This is a rare situation (and a good bankruptcy attorney will identify it at your first meeting).  But if there is a non-exempt asset, a Chapter 7 Trustee might sell it, pay co-owners their share (if any), pay costs of sale, and then pay your creditors.  Fair enough. 

In a Chapter 13, you get to keep the asset, but your Chapter 13 plan must pay its value to your unsecured creditors. Think of it as buying the non-exempt asset back from the Trustee.

Again, this topic – assets and exemptions – deserves its own article, but for right now, just know that having a bunch of cash in your bank account could be an issue if you file bankruptcy.  And, again, be sure you meet with an experienced, hands on bankruptcy attorney, who can identify potential issues like this.

What about the rebates?

Back to the rebates: bankruptcy attorneys wanted to know if Trustees could take rebates from the CARES Act.  In this case, the Act doesn’t address this question, which means the rebates could be at risk of seizure by the Trustee.

 I’ll tell you something, though.  When the Act first came out and clients asked me about the rebates, I said, “Listen, there is nothing in the Act about this issue, whether the rebates are exempt or not.  But things are crazy right now – I’d be shocked if any Trustee made a move on this.”

And guess what!  Yesterday the Department of Justice, through the US Trustee (who oversees bankruptcies) issued a notice to Chapter 7 and Chapter 13 Trustees regarding these rebates.  The notice addressed both questions – about the rebate as income and about the rebate as an asset.

The notice said that regardless of whether that money is or is not property of the bankruptcy estate, the US Trustee expected it to be “highly unlikely that [a] trustee would [take] the payment after consideration of all relevant circumstances.”   The notice also said that trustees should notify the US Trustee directly if they were going to try to take a rebate.

 In other words, the US Trustee is saying, “Yes, we know the Act doesn’t provide a specific exemption for the rebate.  But don’t take it.  And if you are thinking about taking it, talk to us first (so we can tell you not to take it).”  I added that last part, but you get the idea.

The Answer-

There you have it, more or less.  What am I telling my clients?  I’m telling them that the Trustee is not going to take their refund, that this is an unprecedented situation and that they should keep or use it for themselves.  We’ll risk a rogue Trustee ignoring the US Trustee’s suggestion and fight that fight if need be.

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Apart from the actual health concerns, the financial impact of the coronavirus and the measures taken to combat it are having profound impacts on people.  Most people are not going to work and for many people, this means they are no longer earning any income.  Unfortunately, this may leave lots of people unable to pay their bills.

And even though the government and lenders are taking extraordinary efforts to lessen the effects of the coronavirus and the safer-at-home protocols – from direct taxpayer-payments to loaning money to businesses so they can make payroll to 60-day moratoriums on most foreclosures and evictions – the reality is that there are going to be bills that go unpaid.

Ideally, everyone will have the savings or other financial resources to weather this storm and stay current on their bills.  But I know that not everyone is fortunate enough to be in that position. 

And even if some people fall behind on their bills, many of them will be able to work things out to bring their accounts current once things return to normal– either through forgiveness, settlement, or extended-repayment terms, or combinations of all three. 

But some people will not be able to do either and their best option might be to file bankruptcy.

Should I file Bankruptcy

How do you know whether you should file bankruptcy?  That’s easy – talk to an experienced bankruptcy attorney who will take the time to listen, explain, and evaluate your options.

How do you find one of those attorneys?  That’s not so easy. 

See, even before the coronavirus, bankruptcy firms generally fell into two categories; let’s call them “volume firms” and “hands-on firms”. 

You want to find a hands-on firm because they will take the time to listen, explain, and evaluate.  With a hands-on firm, the client feels welcomed, informed, and cared-for, from the minute they walk in the door to the day they receive the discharge of their debts   They will not feel rushed or that they are just a file-number.  Their case will get the individual attention each case deserves. This is the right way to do things and leads to better client results and satisfaction.

Volume firms, on the other hand, have a different approach: volume.  Their goal is to file as many cases as possible with less emphasis on considerate, honest advice.  Don’t get me wrong – we run a business, too, and we like it to be profitable.  But never at the expense of good client services. 

Do we offer consultations

 My free consultations are available over the phone or via video services like Zoom, FaceTime and Google Hangouts.  They are exclusively with me, the attorney, and last between 60 and 90 minutes depending on how complex your situation is.

The consultations at a volume firm, on the other hand, do not last nearly as long. They are usually only 20 – 25 minutes or roughly the amount of time it takes the paralegal (yep, you may not even meet with an attorney) to convince you to sign the fee agreement they prepared before the consult. 

While this assembly-line approach works ok for many bankruptcies, it doesn’t work very well to identify potential issues in a client’s case.  And once those potential issues become real issues, because they’ve been discovered by a Trustee or a Judge, it’s likely too late to do anything about it, and you find yourself playing defense trying to settle.

Here’s the deal: it’s not as if the attorneys and staff at the volume firms are bad people or bad at what they do.  On the contrary – they work really hard for their clients and get good results, given the situation.  But that situation simply does not allow for the up-front in-depth analysis and individual case attention that produces consistent great client representation and results. 

The fact of the matter is it takes time and explanations and questions to identify and thoroughly review potential issues in a bankruptcy.  You’ll get that with me; you likely won’t at a volume-firm. 

You may ask how I know this much about the volume firms.  I know because I’ve worked at a few of them, starting in the aftermath of the 2008 financial crisis.  I’ve seen them operate in normal times and in extraordinary times.  I like the way I do it and I think you will, too. It’s more predictable and less stressful, for me and my clients.

How do you identify the volume firms?  Start by seeing who’s spending the most on advertising.  Whose webpages show up first when you Google bankruptcy?  Whose webpages are ‘Sponsored’ on Google?  Whose banner ads stalk your browsing after you Google, bankruptcy? 

Those are the volume firms; advertising is one of their top priorities, if not the top.  I’m not saying advertising is bad; shoot, we’re a business, and we advertise.  I’m just saying this is a general way to identify the volume bankruptcy firms.

A Different Approach

And how do you find a hands-on firm?  Here are some clues:

• Look for attorneys who state they do only (or almost only) bankruptcy work, particularly consumer bankruptcy (Chapters 7/13).
• See how long they’ve been practicing bankruptcy by looking at their State Bar or LinkedIn profile.  This is especially important right now (See ‘CORONAVIRUS Update’).
• Does it seem like that attorney does most of the work or does he or she have other, less experienced associates do the work?  That would indicate a volume firm.
• Read reviews.  Read them critically.  Do they actually tell you what they liked about the attorney (hands on) or are they generic?
• Call a few and get a sense of whether they value polite, unrushed service or pressure you to set an appointment. 
• Finally, when you meet with the attorney, do they make you feel comfortable?  Are they explaining things to you?  Answering your questions?  Being realistic or just telling you what you probably want to hear?

In the end, hire whoever makes you feel comfortable, and you’ll probably have a good outcome.  Just make sure you know what’s going on in your case.  If you don’t, then ask your attorney.  If they can’t or won’t tell you, find a new attorney.

Warning in the time of Covid-19

I wanted to add something in light of the recent Coronavirus pandemic.

Lawyers and law firms are not immune to this situation and most, if not all, legal work has been severely reduced, if it hasn’t ground to a complete halt.  So, lawyers and law firms are looking pick up business in other areas. I don’t blame them one bit.

 Many of them are now going to start “offering” bankruptcy as a practice area.  It happened after the financial crisis of 2008; it’s happening now. 

Here’s the thing: they could be veteran lawyers with years of experience in areas of law I haven’t even heard of.  But bankruptcy is arcane i.e. you either know it or you don’t.  I think most areas of law are like that.

Which is why it’s so important that you find an experienced bankruptcy lawyer. 

Thing is, once you file a bankruptcy, it’s a little like right after you crest the first hill of a roller coaster: there’s no going back.  You do not want any surprises.  If there is an issue in your case, it should have been identified and discussed at the consultation.  Not after the case is filed, or when it’s been discovered by a Trustee or Court.  It doesn’t matter if it was an innocent mistake; it’s likely too late to do anything other than settle.

So, please, be wary of volume firms as their volume is only going to pick up.  And look out for attorneys touting a bankruptcy practice when they have little or no experience.  You don’t want to be their learning experience.

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In the Eastern District of Texas, the Chapter 13 Trustee will allow a debtor to keep a tax refund if it is for $2,000 or less.  If the refund is more than $2,000 then the Trustee will take the entire refund and pay it to the general unsecured creditors in the bankruptcy case.  In the Northern District of Texas, the Chapter 13 Trustee will allow the debtor to keep the first $2,000 they receive from their tax refund.  Any additional amounts received will be paid to the general unsecured creditors.  However, in both districts, if the debtor owes back taxes the IRS may elect to offset a pre-petition refund, meaning they may keep it and apply it to any back taxes the debtor owes to the Internal Revenue Service.

The rules affecting tax refunds are just one example of how bankruptcy cases affect debtors differently depending on where they live.  Before you file bankruptcy, it is important that you speak with a local bankruptcy attorney with experience filing cases in the same district in which you will file.

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There’s a story buzzing around the internet that a 3 year-old recently got an American Express Gold Card application in the mail. Also, there are many report of dogs and cats getting credit card offers. If that’s the case, why is it so hard for qualified folks to get the applications??

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In some states politicians are taking steps to “prohibit the use of credit information in most employment decisions.”  In Tennessee, a bill has been proposed to prohibit consideration of credit score in employment decisions, and Hawaii and Washington already have similar laws in place.

(Source:  MSN.com)

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Avoiding liens is limited to two different types of liens in bankruptcy.  The first is judicial liens.  A judicial lien is created when a debtor is sued, the plaintiff receives a judgment, and then attaches that judgment to the debtor’s property in the form of a judicial lien.  In bankruptcy, judicial liens can be avoided, with one exception.  Judicial liens resulting from a domestic support obligation owed by the debtor cannot be avoided.  The second type of lien that can be avoided in bankruptcy is a nonpossessory, nonpurchase-money security interest in household furnishings, household goods, wearing apparel, appliances, books, and about ten other types of assets.  For the complete list, take a look at 11 U.S.C. § 522(f)(1) which can be found in The Bankruptcy Code.  The key thing to pay attention to here is that the security interest must be nonpossessory and nonpurchase-money.  Nonpossessory means that the creditor has a lien based upon the fact that they have possession of the property.  Nonpurchase-money means that the debt cannot have been accrued as a result of the purchase of the collateral.

The ability to avoid liens is a powerful tool for preserving debtor’s property and reducing their payments in bankruptcy plans.  Unfortunately the ability to avoid nonpossessory, nonpurchase-money security interests does not apply to liens on motor vehicles.  If a debtor uses their vehicle as collateral for a nonpurchase-money loan, the lien cannot be avoided.

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Avoiding liens is limited to two different types of liens in bankruptcy.  The first is judicial liens.  A judicial lien is created when a debtor is sued, the plaintiff receives a judgment, and then attaches that judgment to the debtor’s property in the form of a judicial lien.  In bankruptcy, judicial liens can be avoided, with one exception.  Judicial liens resulting from a domestic support obligation owed by the debtor cannot be avoided.  The second type of lien that can be avoided in bankruptcy is a nonpossessory, nonpurchase-money security interest in household furnishings, household goods, wearing apparel, appliances, books, and about ten other types of assets.  For the complete list, take a look at 11 U.S.C. § 522(f)(1) which can be found in The Bankruptcy Code.  The key thing to pay attention to here is that the security interest must be nonpossessory and nonpurchase-money.  Nonpossessory means that the creditor has a lien based upon the fact that they have possession of the property.  Nonpurchase-money means that the debt cannot have been accrued as a result of the purchase of the collateral.

The ability to avoid liens is a powerful tool for preserving debtor’s property and reducing their payments in bankruptcy plans.  Unfortunately the ability to avoid nonpossessory, nonpurchase-money security interests does not apply to liens on motor vehicles.  If a debtor uses their vehicle as collateral for a nonpurchase-money loan, the lien cannot be avoided.

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To have a debt determined to be nondischargeable due to fraud, a creditor must show:

1. The debtor made false representations to the creditor;
2. The debtor knew the representations were false;
3. The debtor made the representations with the intent of deceiving the creditor;
4. The creditor relied on the representations; and
5. The creditor sustained a loss as a result of the debtor’s misrepresentations.

It appears from the list above that fraud should be difficult to prove.  It’s actually surprisingly simple in cases involving credit card debt.  Debtor’s use of a credit card is often treated as an implied representation to the credit card company that the cardholder intends to pay the charges incurred.  AT&T Universal Card Servs v. Mercer 246 F.3d 391, 404 (5^th Cir. 2001).  Since the debtor’s use of the credit card is a representation to the company that the cardholder intends to pay the charges, the biggest hurdle for the creditor to proving fraud is establishing that the debtor had no intention of repaying the debt.  Courts will consider many factors when determining if a debtor had no intention of repaying the debt, including the time between use of the card and the bankruptcy filing, debtor’s financial condition when the card was used, whether the card was used for luxuries or necessities, and whether the debtor consulted with an attorney about bankruptcy before incurring the debt.

As a general rule, debtors should not use a credit card during the six month period prior to filing bankruptcy.  Additionally,  debtors should not use a credit card once they make a decision to file bankruptcy or realize they will not be able to repay the debt.  Debtors who do not follow this advice risk being sued in bankruptcy court and having their debts declared nondischargeable.

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